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 Pakistan.

1. Export of Primary or Semi Manufactured goods: Developing countries like Pakistan are exporting primary or semi manufactured goods like cotton and rice. These commodities do not get high prices in the international market. Near about 40% of total earning of foreign exchange is had by the export of primary or semi-manufactured goods.

2. Import of Capital Goods: Developing countries like Pakistan are importing capital goods to industrialise the economy. Due to this reason balance of payment remains unfavourable.

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 Pakistan the import unit values are higher than export unit values. So a decline in terms of trade causes imbalance in the balance of payments.

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 U.S.A. and U.K. have put many restrictions on imports from Pakistan. They have fixed quotas against the cloth of Pakistan.

7. Inflation: Due to inflation in developing countries like Pakistan the price of exportable goods are very high. Their goods face difficulties to compete in international market and balance of payment remain unfavourable.

8. Political Uncertainty: Developing countries like Pakistan are facing political uncertainty which is the main cause of low production as well as balance of payment remain unfavourable.

9. Devaluation: Devaluation is also cause which increases the deficit in the balance of payment. In 1975 Pakistan devalue her currency and in 1982 Pakistan delink her currency with dollar which also increased the deficit in the balance of payment.

10. Import of Oil and Fertilizer: Import of oil and fertilizer is also cause of deficit in the balance of payment of Pakistan.

11. Developing Economy: Developing countries like Pakistan is undertaking huge programmes of development of industry, agriculture, transport, education, communication, irrigation and electricity. For this purpose various kinds of raw material and machinery are needed. So balance of payment remains unfavourable.

12. Repayment of Debt and Interest: Developing countries like Pakistan are paying the debt and interest of the debt which they borrow for development purpose. It is a great burden which affects the balance of payment badly.

13. Huge Import of Invisible Goods: Due to import of invisible goods the balance of payment remains unfavourable of developing countries like Pakistan.

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 Pakistan, they have rich manpower and real resources. If they are properly exploited and utilized, there can be significant improvement in exports and foreign exchange earnings. We suggest the following measures to be adopted for increasing exports and alleviating the balance of payments problems.

(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 Pakistan have been showing heavy concentration on a few primary commodities. If there is a recession in international market for cotton and rice of Nature is not kind, the production declines and exports are greatly reduced and have a damaging effect on the balance of payments. They should therefore diversify their exports and produce value added goods for gaining competitive strength in the international market.

(3) Development of Industries having low capital output ratio: Developing countries like Pakistan with low foreign exchange earning cannot afford to import heavy machinery. If they like Korea, Taiwan, Hong Kong, Singapore, take up lines of production having a low capital output ratio it can lead to fast growing export.

(4) Decrease in Consumption: Inspite of rapid rise in prices there is a greater increase in national consumption of developing countries like Pakistan. The higher consumption of locally manufactured goods is reducing the exportable surplus and consequently the foreign earning to them. The people should be motivated to adopt simple living and austerity for bridging the resource gap.

(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 Pakistan should reduce the import of consumer goods. Similarly raw material which can be produced in the country at a cheaper cost should not be imported. The decline in imports of consumer goods and industrial raw material can greatly reduce the deficit gap.

(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 Pakistan. These payments should be curtailed down.

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