Causes and Measures of Disequilibrium!
Overall account of BOP is always in equilibrium. This balance or equilibrium is only in accounting sense because deficit or surplus is restored with the help of capital account.
In fact, when we talk of disequilibrium, it refers to current account of balance of payment. If autonomous receipts are less than autonomous payments, the balance of payment is in deficit reflecting disequilibrium in balance of payment.
1. Causes of disequilibrium in BOP:
There are several factors which cause disequilibrium in the BOP indicating either surplus or deficit.
Such causes for disequilibrium in BOP are listed below:
(i) Economic Factors:
(a) Imbalance between exports and imports. (It is the main cause of disequilibrium in BOR), (b) Large scale development expenditure which causes large imports, (c) High domestic prices which lead to imports, (d) Cyclical fluctuations (like recession or depression) in general business activity, (e) New sources of supply and new substitutes.
(ii) Political Factors:
Experience shows that political instability and disturbances cause large capital outflows and hinder Inflows of foreign capital.
(iii) Social Factors:
(a) Changes in fashions, tastes and preferences of the people bring disequilibrium in BOP by influencing imports and exports; (b) High population growth in poor countries adversely affects their BOP because it increases the needs of the countries for imports and decreases their capacity to export.
2. Measures to correct disequilibrium in BOP:
Sustained or prolonged deficit has to be settled by short term loans or depletion of capital reserve of foreign exchange and gold.
Following remedial measures are recommended:
(i) Export promotion:
Exports should be encouraged by granting various bounties to manufacturers and exporters. At the same time, imports should be discouraged by undertaking import substitution and imposing reasonable tariffs.
Restrictions and Import Substitution are other measures of correcting disequilibrium.
(iii) Reducing inflation:
Inflation (continuous rise in prices) discourages exports and encourages imports. Therefore, government should check inflation and lower the prices in the country.
(iv) Exchange control:
Government should control foreign exchange by ordering all exporters to surrender their foreign exchange to the central bank and then ration out among licensed importers.
(v) Devaluation of domestic currency:
It means fall in the external (exchange) value of domestic currency in terms of a unit of foreign exchange which makes domestic goods cheaper for the foreigners. Devaluation is done by a government order when a country has adopted a fixed exchange rate system. Care should be taken that devaluation should not cause rise in internal price level.
Like devaluation, depreciation leads to fall in external purchasing power of home currency. Depreciation occurs in a free market system wherein demand for foreign exchange far exceeds the supply of foreign exchange in foreign exchange market of a country (Mind, devaluation is done in fixed exchange rate system.)