Paths to International Political Economy (Routledge Revivals) by Susan Strange

Author:Susan Strange [Strange, Susan]
Language: eng
Format: epub
ISBN: 9780415578738
Google: E-_JzQEACAAJ
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Publisher: Taylor & Francis
Published: 2011-01-07T00:00:00+00:00

Approaches to Analysing a Deficit

The complexities of measuring a balance are amply reflected in the explanation for a persistent imbalance. Two broad approaches are common among policy-makers.4 One is an item-by-item approach, the other a monetarist approach. The item-by-item approach looks at the specific elements in the balance of payments and tries to assign the cause for disequilibrium to some particular item or group of items. Implied is some notion of a normal set of trade, capital and governmental flows. Anything that seems exceptional is suspected. Measures to curb particular outflows or augment particular inflows seem the obvious prescription. Mercantilist countries where the banking system is highly integrated and controlled, like Japan and Italy, often have remarkable success in using such specific measures to regulate their balance of payments. Trade too can often be manipulated with considerable success by such specific mercantilist measures (Allen and Stevenson, 1974; Suzuki, 1980).

The monetarist approach, by contrast, traces a deficit not to any particular items in the balance of payments, but to the general management of the domestic economy, management of the money supply in particular. A balance-of-payments deficit is taken as prima facie evidence that the national money supply is expanding too rapidly. Money is being created that cannot be absorbed by growth in real economic activity. Depending on the circumstances, this excessive creation of money will either cause domestic price inflation, as too much money chases too few goods, or else flow outward and cause a balance-ofpayments deficit. Some combination of both external deficits and internal rising prices is normal. In the postwar period with some degree of inflation nearly everywhere, and a high degree of freedom for international capital movements, countries that suffer balance-of-payments deficits are, in effect, those that inflate their money supplies more than the norm. In the monetarist view a payments deficit will occur from excess money creation regardless of whether the money is needed for either foreign or domestic expenditures. Hence the item-by-item figures of the basic balance are of no great interest to monetarist analysis. Nor does it matter in what fashion the excess money is created. Central banks may print money to finance government deficits and stimulate the economy, or private banks may pyramid credit in response to demand, at home or abroad.

Public and private analysis of the American payments deficit has in the past used both item-by-item and monetarist approaches. Official American analysis tended to be item-by-item until the later 1960s, when it began to turn monetarist, but often with very different practical conclusions from the European variety. A brief survey of the various analytical approaches will help focus the real issues involved in the payments question.

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