The balance of payment constraint on growth

Balance of Payment Constraint on Growth

The Balance of Payments Constraint on Growth

Growth rates vary among different countries. If a company has more money going out than coming in, it is unbalanced. The balance of payment plays a large part in the economic rate of growth of a country. There are several different theories on how countries can boost their economy, but sometimes this is easier said than done. If it were easy, all countries would experience growth at a steady pace. However, some countries may be at an economic disadvantage. But there are things that disadvantaged countries can do to improve the balance of payments. The situation is ideal when current account balance shows a deficit and the capital and financial account shows a surplus in the same amount. This results in zero balance of payments.

The rate of growth can suffer if demand is high because it forces supply to adjust, which it cannot always do. Domestic output can lead to a deficit in the balance of payments. Also, if imports grow faster than imports, the country will need to borrow money to avoid a deficit. When less advanced companies are involved with more advanced companies, they should expect significant growth rates. Thirlwall states that in order for growth to take place, a healthy balance of payments is necessary. He says that if a country can increase demand up to their current supply with no balance of payment troubles that the growth rate is sure to rise (1979).

We have to wonder how struggling countries begin to experience growth if their economy is already struggling. There are several suggestions on what countries should do in order to attain economic growth. Thirlwall sums it up to the fact if a country is having difficulties experiencing growth, then whatever it is they are producing is not in high demand (1979). This answer may not be scientific and does not require many different formulas to determine ways to increase growth. In the case of some countries, they can only work with what their country is supplying them naturally. So, the rate of growth may continue to falter leading them to depend on other countries for some type of financial investment.

Baja-Rubio and Diaz-Roldan state that increasing outputs by increasing imports can lead to the balance of payments being unbalanced. This could lead in a decrease in the exchange rate which makes it even more difficult to trade. When this happens, any further output must discontinue until this issue can be corrected (2009). Countries experiencing a slow growth rate should know that there are ways to get out of this situation and that it is not impossible. There are countries that experienced a slow growth rate for years and managed to overcome their situation by applying smart business strategies to improve their countries' situation. Ireland is a country that in the past dealt with a slow growing economy. However, in recent years the country has experience economic growth by changing the old way that it did business and moving to more modern techniques.

Ireland was able to transform its sluggish economy by moving away from the industrial base that it was used to for so many years to high-technology specialization (Garcimartin et al., 2008). This shows that there is truth to Thirlwall statement tying slow growth to a low demand in whatever the country is producing. We live in a world where technology has become necessary. Those that refuse to jump on the wagon will get left behind and this is exactly what was happening to Ireland until they decided to change their base.

Changing from an industrial base to one that specializes in technology wasn't the only thing that saved Ireland's slow economy. Garcimartin et al., state that the economy also experience growth because of the outward-oriented economic policy they adopted; the increase in foreign direct investment; and, by its social partnerships which compensated low wages with income tax cuts (2008, p. 410). Ireland went several steps further in that they not only learned to produce goods that are in high demand (as Thirlwall suggests), but they also were smart enough to gain foreign investors and give income tax breaks as an incentive.

Countries must still pay attention to the balance of payments and the constraint it can have on economic growth. Supply must always keep up with demand in order to achieve equilibrium. For some countries, economic growth may seem like an unattainable goal because if the demand for domestic output is high, they will certainly experience a deficit. The way to maintain the balance of payments seems to be for countries to do what Ireland did. If demand is high and supply cannot keep up, there must be incentives involved in order entice foreign investment. If wages are low, there should be income tax incentives.