Friday, August 28, 2009
Factors Responsible for Balance of Payment Disequilibrium
Balance of payments is a record of economic transactions between the residents of one country and the rest of the world during the course of one year. The items which lead to an inflow of foreign earnings are placed on credit side of the balance sheet, where as the items which give rise to an outflow of foreign currency are placed on the debt side.
Causes of Disequilibrium in Balance of Payment:
Following are the major causes of disequilibrium in balance of payment in developing countries like
1. Export of Primary or Semi Manufactured goods: Developing countries like
2. Import of Capital Goods: Developing countries like
3. Import Oriented Industries: The imports of industrial raw material in the aggregate import are placed at 50%.
4. Consumption Oriented Society: Developing countries are mostly consumption oriented. Due to this reason most of the goods which are produced within country are consumed locally. The exportable surplus is on the decline.
5. Deterioration in Terms of Trade: In developing counties like
6. Unfavourable altitude of Developed Countries: Due to unfavourable altitude of developed countries our balance of payment is unfavourable. For example the developed countries like
7. Inflation: Due to inflation in developing countries like
8. Political Uncertainty: Developing countries like
9. Devaluation: Devaluation is also cause which increases the deficit in the balance of payment. In 1975
10. Import of Oil and Fertilizer: Import of oil and fertilizer is also cause of deficit in the balance of payment of
11. Developing Economy: Developing countries like
12. Repayment of Debt and Interest: Developing countries like
13. Huge Import of Invisible Goods: Due to import of invisible goods the balance of payment remains unfavourable of developing countries like
14. Variations in Trade: There may be temporary disequilibrium caused by random variations in trade due to seasonal fluctuations, the effects of weather on agriculture production etc. Deficits in balance of payment due to variations in trade are expected to correct with in short time.
15. Fundamental Disequilibrium: They may arise due to fundamental changes in the economic conditions of a country. They may be due to changes in consumer tastes with in the country or abroad there by affecting the country’s import or export. Due to this reason balance of payment remains unfavourable.
16. Technological Changes in Method of Production: Due to this reason in the domestic industries or in the industries of the other countries may affect the country’s ability to compete in the home or foreign market. This may be due to changes in costs and prices and the quality of products following technological improvement.
17. Changes in Country’s National Income: If the national income of a country increases it will lead to an increase in imports whereby creating a deficit in its balance of payment, other things remaining the same.
Measures To Correct Disequilibrium in Balance of Payment:
The disequilibrium of balance of payments can be corrected in three ways.
A: The foreign earning should be increased by export led growth.
B: The imports should be curtailed to essential items only.
C: The expenditure on invisible imports should be minimized.
We now briefly describe the above three methods.
(A) Export Led Growth:
Export plays an important role in the growth of the economy. It is regarded as key factor in the economic development. As regards the developing countries like
(1) Promotion of Labour Intensive Industries: Promotion of labour intensive industries should be established because in such countries labour is cheaper. The cheap labour can give a comparative advantage in the production and export of commodities. The export earnings, therefore can increase and help in restring equilibrium in balance of payments problem.
(2) Diversification of exports: The developing countries like
(3) Development of Industries having low capital output ratio: Developing countries like
(4) Decrease in Consumption: Inspite of rapid rise in prices there is a greater increase in national consumption of developing countries like
(5) Restoration of Sick Industries: The sick industries in the nationalized public sector should be restored and handed over the private sector. The private sector has the capacity to reactivate the dying industrial units and increase the production for use at home. It can thus increase exports to earn the much needed foreign exchange.
(6) Reduction in export duties: Reduction in export duties, publicity of locally manufactured goods in the foreign markets, adequate provision of credit to the private sector for development of industries etc earn greatly help in increasing export earnings and relieving the pressure on balance of payments.
(7) High quality goods: In order to capture foreign markets, it is necessary that high quality goods at minimum cost should be produced.
(8) Pricing of goods: For increasing exports, it is necessary that goods should produced under optimal conditions and offered a competitive price in international market.
(9) Packing: For promoting exports, high quality packing is essential. If packing is not attractive and durable it will not capture foreign markets.
(10) Creation of export agency: For break through in exports export agencies should be created in private sector.
(11) Joint Venture: The exports can also be pushed up by establishing industries with joint ventures of foreign investors. The producers of these industries can be sold in the foreign markets and the country can earn sizeable foreign exchange.
(B) Reduction in Imports:
In order to correct disequilibrium in balance of payment, the governments of developing countries like
(C) Reduction in Invisible Imports:The payments on invisible imports like shipping, insurance, banking, services, payments of technocrat working in various establishments, expenses on diplomats etc are on increase in developing countries like
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