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| '''Balance of payments''' ('''BoP''') accounts are an accounting record of all monetary transactions between a country and the rest of the world.<ref name = "Sloman">{{Cite book
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| | last = Sloman
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| | first = John
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| | title = Economics
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| | year = 2004
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| | pages = 516, 517, 555–559
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| | publisher=Penguin }}</ref>
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| These transactions include payments for the country's [[exports]] and [[imports]] of [[Good (economics and accounting)|goods]], [[Service (economics)|services]], [[financial capital]], and [[Transfer payments|financial transfers]]. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of [[loans]] and [[investments]], are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
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| When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.
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| While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the [[current account]], the [[capital account]] excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a specific amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter.
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| Under a [[fixed exchange rate]] system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the [[foreign exchange market]] to match any international outflow of funds, thus preventing the funds flows from affecting the [[exchange rate]] between the country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a [[Managed float regime|managed float]] where some changes of exchange rates are allowed, or at the other extreme a purely [[floating exchange rate]] (also known as a purely ''flexible'' exchange rate). With a pure float the central bank does not intervene at all to protect or devalue its [[currency]], allowing the rate to be set by the [[market]], and the [[Foreign-exchange reserves|central bank's foreign exchange reserves]] do not change.
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| Historically there have been different approaches to the question of how or even whether to eliminate current account or trade imbalances. With record trade imbalances held up as one of the contributing factors to the [[financial crisis of 2007–2010]], plans to address global imbalances have been high on the agenda of policy makers since 2009.
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| ==Composition of the balance of payments sheet==
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| BOP
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| The two principal parts of the BOP accounts are the [[current account]] and the [[capital account]].
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| The ''current account'' shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the [[balance of trade]] (net earnings on exports minus payments for imports), [[factor income]] (earnings on foreign investments minus payments made to foreign investors) and cash transfers. It is called the ''current'' account as it covers transactions in the "here and now" – those that don't give rise to future claims.<ref name = "Copeland">
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| {{Cite book
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| |author = adam antiam
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| |title= Exchange Rates and International Finance
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| |edition= 4th
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| |pages = 10–35
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| |isbn=0-273-68306-3
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| |publisher= Prentice Hall
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| }}</ref>
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| The ''[[Capital account|Capital Account]]'' records the net change in ownership of foreign assets. It includes the [[Capital account#Central Bank operations and the reserve account|reserve account]] (the foreign exchange market operations of a nation's [[central bank]]), along with loans and investments between the country and the rest of world (but not the future regular repayments/dividends that the loans and investments yield; those are earnings and will be recorded in the current account). The term "capital account" is also used in the narrower sense that excludes central bank foreign exchange market operations: Sometimes the reserve account is classified as "below the line" and so not reported as part of the capital account.<ref name = "IFM">{{Cite book
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| | last = Orlin
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| | first = Crabbe
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| | title = International Financial Markets
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| | year = 1996
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| | edition =3rd
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| | pages = 430–452
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| | isbn = 0-13-206988-1
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| | publisher = Prentice Hall}}</ref>
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| Expressed with the broader meaning for the ''capital account'', the BOP [[Accounting identity|identity]] assumes that any current account surplus will be balanced by a capital account deficit of equal size – or alternatively a current account deficit will be balanced by a corresponding capital account surplus:
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| : <math> \text{current account} + \text{ broadly defined capital account} + \text{balancing item} = 0. \,</math>
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| The ''balancing item'', which may be positive or negative, is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero. By the principles of [[double entry accounting]], an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts automatically balance. A balance isn't always reflected in reported figures for the current and capital accounts, which might, for example, report a surplus for both accounts, but when this happens it always means something has been missed – most commonly, the operations of the country's central bank – and what has been missed is recorded in the statistical discrepancy term (the balancing item).<ref name = "IFM"/>
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| An actual balance sheet will typically have numerous sub headings under the principal divisions. For example, entries under '''Current account''' might include:
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| * ''Trade'' – buying and selling of goods and services
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| ** ''Exports'' – a credit entry
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| ** ''Imports'' – a debit entry
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| *** ''Trade balance'' – the sum of Exports and Imports
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| * ''Factor income'' – repayments and dividends from loans and investments
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| ** ''Factor earnings'' – a credit entry
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| ** ''Factor payments'' – a debit entry
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| *** ''Factor income balance'' – the sum of earnings and payments.
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| Especially in older balance sheets, a common division was between visible and invisible entries. Visible trade recorded imports and exports of physical goods (entries for trade in physical goods excluding services is now often called the ''merchandise balance''). Invisible trade would record international buying and selling of services, and sometimes would be grouped with transfer and factor income as invisible earnings.<ref name = "Sloman"/>
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| The term "balance of payments surplus" (or deficit – a deficit is simply a negative surplus) refers to the sum of the surpluses in the current account and the narrowly defined capital account (excluding changes in central bank reserves). Denoting the balance of payments surplus as BOP surplus, the relevant identity is
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| : <math> BOP surplus = \text{current account surplus} + \text{narrowly defined capital account surplus}. \,</math>
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| ===Variations in the use of term "balance of payments"===
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| Economics writer [[James Orlin Grabbe|J. Orlin Grabbe]] warns the term ''balance of payments'' can be a source of misunderstanding due to divergent expectations about what the term denotes. Grabbe says the term is sometimes misused by people who aren't aware of the accepted meaning, not only in general conversation but in financial publications and the economic literature.<ref name="IFM"/>
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| A common source of confusion arises from whether or not the ''reserve account'' entry, part of the ''capital account'', is included in the BOP accounts. The reserve account records the activity of the nation's central bank. If it is excluded, the BOP can be in surplus (which implies the central bank is building up foreign exchange reserves) or in deficit (which implies the central bank is running down its reserves or borrowing from abroad).<ref name = "Sloman"/><ref name = "IFM"/>
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| The term "balance of payments" is sometimes misused by non-economists to mean just relatively narrow parts of the BOP such as the [[trade deficit]],<ref name = "IFM"/> which means excluding parts of the current account and the entire capital account.
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| Another cause of confusion is the different naming conventions in use.<ref>
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| {{Cite web
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| |url=http://faculty.washington.edu/danby/bls324/macro/categories.html
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| |title= Balance of Payments: Categories and Definitions
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| |accessdate=2009-12-11
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| |author = Colin Danby
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| |publisher=[[University of Washington]]}}
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| </ref> Before 1973 there was no standard way to break down the BOP sheet, with the separation into invisible and visible payments sometimes being the principal divisions. The IMF have their own standards for BOP accounting which is equivalent to the standard definition but uses different nomenclature, in particular with respect to the meaning given to the term ''capital account''.
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| ===The IMF definition===
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| The [[International Monetary Fund]] (IMF) use a particular set of definitions for the BOP accounts, which is also used by the [[Organisation for Economic Co-operation and Development]] (OECD), and the [[United Nations System of National Accounts]] (SNA).<ref name="BOP_Overview">[[IMF Balance of Payments Manual]], Chapter 2 "Overview of the Framework", Paragraph 2.15 [http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm]</ref>
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| The main difference in the IMF's terminology is that it uses the term "financial account" to capture transactions that would under alternative definitions be recorded in the ''capital account''. The IMF uses the term ''capital account'' to designate a subset of transactions that, according to other usage, form a small part of the overall capital account.<ref>The IMF Capital account records mainly capital transfers, the amounts involved are usually very small compared to other BOP transactions, except in rare cases where a country is the beneficiary of substantial debt forgiveness.</ref> The IMF separates these transactions out to form an additional top level division of the BOP accounts. Expressed with the IMF definition, the BOP identity can be written:
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| : <math> \text{current account} \, + \, \text{financial account}\, + \, \text{capital account} \, + \, \text{balancing item} \, = \, 0. \,</math>
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| The IMF uses the term ''current account'' with the same meaning as that used by other organizations, although it has its own names for its three leading sub-divisions, which are:
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| * The ''goods and services account'' (the overall trade balance)
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| * The ''primary income account'' (factor income such as from loans and investments)
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| * The ''secondary income account'' (transfer payments)
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| ==Imbalances==
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| While the BOP has to balance overall,<ref>This is not strictly true unless the nation is running a fixed exchange rate regime. Understood in the tangible sense to refer not to an accounting balance sheet, but to the actual international monetary transactions undertook by a nation in a given period, it's not always necessary for there to be an overall balance. If however a current account surplus or deficit isn't matched by an equal and offsetting deficit or surplus in the capital account, then exchange rates will tend to automatically adjust in such a way as to resolve the disequilibria. For example : if a nation has current account deficit which isn't being fully financed by an equal surplus in the capital account, this will usually mean that the supply of the nation's currency increases in the foreign exchange markets without a corresponding increase in demand, and hence the nation's currency will depreciate. A cheaper currency makes a nation's exports more competitive which will tend to decrease the current account deficit. And for slightly more complex reasons a cheaper currency also tends to increase the capital account surplus. So the two accounts are brought into balance. (cf Sloman (2004) pp. 555–65) Note that this type of imbalance is not generally a matter of concern – the Imbalances section refers generally to a different type of imbalances which are not self-correcting and involve the long term build up of debt.</ref> surpluses or deficits on its individual elements can lead to imbalances between countries. In general there is concern over deficits in the current account.<ref>{{Cite web|url=http://wdi.umich.edu/files/publications/workingpapers/wp827.pdf |title=The Determinants & Excessiveness of Current Account Deficits in Eastern Europe & the Former Soviet Union, |publisher=Aleksander Aristovnik, William Davidson Institute at the University of Michigan |date=19 July 2006 |accessdate=2010-07-05}}</ref>
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| Countries with deficits in their current accounts will build up increasing debt and/or see increased foreign ownership of their assets. The types of deficits that typically raise concern are<ref name = "Sloman"/>
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| * A ''visible trade deficit'' where a nation is importing more physical goods than it exports (even if this is balanced by the other components of the current account.)
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| * An overall ''current account deficit''.
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| * A ''basic deficit'' which is the current account plus foreign direct investment (but excluding other elements of the capital account like short terms loans and the reserve account.)
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| As discussed in the history section below, the ''Washington Consensus'' period saw a swing of opinion towards the view that there is no need to worry about imbalances. Opinion swung back in the opposite direction in the wake of ''financial crisis of 2007–2009''. Mainstream opinion expressed by the leading financial press and economists, international bodies like the IMF – as well as leaders of surplus and deficit countries – has returned to the view that large current account imbalances do matter.<ref>Though there is difference of opinion on how to resolve the issue with the major surplus countries apart from Japan resisting pressure to lower their own surpluses.</ref> Some economists do, however, remain relatively unconcerned about imbalances<ref name = "unclear">{{Cite web
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| |url= http://www.ft.com/cms/s/0/e764b33c-d923-11de-b2d5-00144feabdc0.html
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| |title= Recovery takes an unclear path
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| |publisher= [[The Financial Times]]
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| |author= Krishna Guha
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| |date= 24 October 2009
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| |accessdate=2010-01-10| archiveurl= https://web.archive.org/web/20091203030057/http://www.ft.com/cms/s/0/e764b33c-d923-11de-b2d5-00144feabdc0.html| archivedate= 3 December 2009 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| and there have been assertions, such as by Michael P. Dooley, David Folkerts-Landau and Peter Garber, that nations need to avoid temptation to switch to protectionism as a means to correct imbalances.<ref name ="BrettonWoodsII">{{Cite web
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| |url=http://ideas.repec.org/p/nbr/nberwo/14731.html
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| |title=Bretton Woods II Still Defines the International Monetary System
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| |author= Michael P. Dooley, David Folkerts-Landau, Peter Garber
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| |publisher=[[National Bureau of Economic Research]]
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| |date=February 2009}}</ref>
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| ===Causes of BOP imbalances===
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| There are conflicting views as to the primary cause of BOP imbalances, with much attention on the US which currently has by far the biggest deficit. The conventional view is that current account factors are the primary cause<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/a7d7335a-d008-11dc-9309-0000779fd2ac.html
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| |title= Buyers, not savers, caused America’s deficit
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| |publisher= [[The Financial Times]]
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| |author= Richard Duncan
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| |date = 31 January 2008
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| |accessdate=2010-01-13| archiveurl= https://web.archive.org/web/20100226041133/http://www.ft.com/cms/s/0/a7d7335a-d008-11dc-9309-0000779fd2ac.html| archivedate= 26 February 2010 <!--DASHBot-->| deadurl= no}}
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| </ref> – these include the exchange rate, the government's fiscal deficit, business competitiveness, and private behaviour such as the willingness of consumers to go into debt to finance extra consumption.<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/b08d980c-c8e2-11de-8f9d-00144feabdc0.html
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| |title= Private behaviour will shape our path to fiscal stability
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| |publisher= [[The Financial Times]]
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| |author= Martin Wolf
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| |date = 4 November 2009
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| |accessdate=2010-01-13}}
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| </ref>
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| An alternative view, argued at length in a 2005 paper by [[Ben Bernanke]], is that the primary driver is the capital account, where a [[Global saving glut|global savings glut]] caused by savers in surplus countries, runs ahead of the available investment opportunities, and is pushed into the US resulting in excess consumption and asset price inflation.<ref>
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| {{Cite web
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| |url=http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm
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| |title=Governor Ben S. Bernanke, The Global Saving Glut and the U.S. Current Account Deficit |publisher=Federalreserve.gov
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| |date = March 2005|accessdate=2010-01-13}}</ref>
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| ===Reserve asset===
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| {{Main| Reserve currency}}
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| [[File:Hundred dollar bill 03.jpg|thumb| The US dollar has been the leading reserve asset since the end of the gold standard.]]
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| In the context of BOP and international monetary systems, the reserve asset is the currency or other store of value that is primarily used by nations for their foreign reserves.<ref>However individual states may choose to keep some of their reserves in the form of whatever currency is used by nations they buy most of their imports from (providing mechanisms are available to settle trades in that currency, which isn't always the case).</ref> BOP imbalances tend to manifest as hoards of the reserve asset being amassed by surplus countries, with deficit countries building debts denominated in the reserve asset or at least depleting their supply. Under a gold standard, the reserve asset for all members of the standard is gold. In the Bretton Woods system, either gold or the [[U.S. dollar]] could serve as the reserve asset, though its smooth operation depended on countries apart from the US choosing to keep most of their holdings in dollars.
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| Following the ending of Bretton Woods, there has been no ''[[de jure]]'' reserve asset, but the US dollar has remained by far the principal ''[[de facto]]'' reserve. Global reserves rose sharply in the first decade of the 21st century, partly as a result of the [[1997 Asian Financial Crisis]], where several nations ran out of foreign currency needed for essential imports and thus had to accept deals on unfavourable terms. The [[International Monetary Fund]] (IMF) estimates that between 2000 to mid-2009, official reserves rose from $1,900bn to $6,800bn.<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/4e3951f2-cf2a-11de-8a4b-00144feabdc0.html
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| |title= Decline but no fall
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| |publisher= [[The Financial Times]]
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| |author= John Plender
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| |date = 11 November 2009
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| |accessdate=2010-01-19}}
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| </ref>
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| Global reserves had peaked at about $7,500bn in mid-2008, then declined by about $430bn as countries without their own reserve currency used them to shield themselves from the worst effects of the [[financial crisis of 2007–2010|financial crisis]]. From Feb 2009 global reserves began increasing again to reach close to $9,200bn by the end of 2010.<ref name = "new age">{{Cite web
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| |url= http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html
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| |title= Currencies clash in new age of beggar-my-neighbour
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| |publisher= [[The Financial Times]]
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| |author= [[Martin Wolf]]
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| |date = 29 September 2010
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| |accessdate=2010-09-29| archiveurl= https://web.archive.org/web/20100929043503/http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html| archivedate= 29 September 2010 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| <ref name = "waiting">{{Cite web
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| |url= http://www.ft.com/cms/s/0/8c965926-5fb7-11e0-a718-00144feab49a.html#axzz1NADJeDt5
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| |title= Waiting for the great rebalancing
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| |publisher= [[The Financial Times]]
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| |author= [[Martin Wolf]]
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| |date = 5 April 2011
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| |accessdate=2011-05-23| archiveurl= https://web.archive.org/web/20110520043601/http://www.ft.com/cms/s/0/8c965926-5fb7-11e0-a718-00144feab49a.html| archivedate= 20 May 2011 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| {{As of|2009}}, approximately 65% of the world's $6,800bn total is held in U.S. dollars and approximately 25% in [[euro]]s. The [[UK pound]], [[Japanese yen]], IMF [[special drawing rights]] (SDRs), and precious metals<ref>Mainly gold, but also silver, platinum and palladium.</ref> also play a role.
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| In 2009, [[Zhou Xiaochuan]], governor of the [[People's Bank of China]], proposed a gradual move towards increased use of SDRs, and also for the national currencies backing SDRs to be expanded to include the currencies of all major economies.<ref>{{Cite news
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| |url=http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html
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| |title=China calls for new reserve currency
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| |author=Jamil Anderlini in Beijing
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| |publisher=[[Financial Times]]
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| |date=23 March 2009
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| |accessdate=2009-04-13| archiveurl= https://web.archive.org/web/20090414014750/http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html| archivedate= 14 April 2009 <!--DASHBot-->| deadurl= no}}</ref>
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| <ref>{{Cite web
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| |url=http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178
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| |title=Reform the International Monetary System
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| |author=[[Zhou Xiaochuan]]
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| |publisher=[[People's Bank of China]]
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| |date=23 March 2009
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| |accessdate=2009-04-13
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| |archiveurl=https://web.archive.org/web/20090407034457/http://www.pbc.gov.cn/english/detail.asp?col=6500&ID=178 <!--Added by H3llBot-->
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| |archivedate=7 April 2009}}</ref>
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| Dr Zhou's proposal has been described as one of the most significant ideas expressed in 2009.<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/671a76ec-a950-11de-9b7f-00144feabdc0.html?catid=176&SID=google
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| |title= The dragon stirs
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| |publisher= [[The Financial Times]]
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| |author= Geoff Dyer in Beijing
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| |date = 24 August 2009
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| |accessdate=2009-09-18}}
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| </ref>
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| While the current central role of the dollar does give the US some advantages, such as lower cost of borrowings, it also contributes to the pressure causing the U.S. to run a current account deficit, due to the [[Triffin dilemma]]. In a November 2009 article published in ''[[Foreign Affairs]]'' magazine, economist [[C. Fred Bergsten]] argued that Dr Zhou's suggestion or a similar change to the international monetary system would be in the United States' best interests as well as the rest of the world's.<ref name = "Bersten">{{Cite web
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| |url= http://www.foreignaffairs.com/articles/65446/c-fred-bergsten/the-dollar-and-the-deficits
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| |title= The Dollar and the Deficits
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| |publisher= [[Foreign Affairs]]
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| |author= [[C. Fred Bergsten]]
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| |date = November 2009
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| |accessdate=2009-12-15| archiveurl= https://web.archive.org/web/20091201013051/http://www.foreignaffairs.com/articles/65446/c-fred-bergsten/the-dollar-and-the-deficits| archivedate= 1 December 2009 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| Since 2009 there has been a notable increase in the number of new bilateral agreements which enable international trades to be transacted using a currency that isn't a traditional reserve asset, such as the renminbi, as the [[Settlement currency]].
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| <ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/5d3377f0-5206-11df-a2a2-00144feab49a.html
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| |title= China is undermining the dollar by the back-door
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| |publisher= [[The Financial Times]]
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| |author= Gerard Lyons
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| |date = 27 April 2010
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| |accessdate=2010-05-01| archiveurl= https://web.archive.org/web/20100430191038/http://www.ft.com/cms/s/0/5d3377f0-5206-11df-a2a2-00144feab49a.html| archivedate= 30 April 2010 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| ===Balance of payments crisis===
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| {{Main| Currency crisis}}
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| A BOP crisis, also called a ''currency crisis'', occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth.<ref name = "GPE"/> However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds.<ref>It sometimes takes only one or two big investors pulling out to trigger a mass panic due to herd effects.</ref> The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency. This causes issues for firms of the affected nation who have received the inbound investments and loans, as the revenue of those firms is typically mostly derived domestically but their debts are often denominated in a reserve currency. Once the nation's government has exhausted its foreign reserves trying to support the value of the domestic currency, its policy options are very limited. It can raise its interest rates to try to prevent further declines in the value of its currency, but while this can help those with debts denominated in foreign currencies, it generally further depresses the local economy.<ref name = "GPE"/>
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| <ref name = "wolfFix">{{Cite book
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| | last = Wolf
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| | first = Martin
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| | title = Fixing Global Finance
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| | year = 2009
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| | chapter= 3
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| | pages = 31–39
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| | publisher= Yale University Press}}</ref>
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| <ref name = "thenAndNow">{{Cite web
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| |url= http://www.econ.berkeley.edu/~eichengr/research/goodhartfestschriftjan9.pdf
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| |title= Crises Now and Then
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| |publisher= Berkeley
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| |author= [[Barry Eichengreen]] and Michael D Bordo
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| |date = 11 November 2001
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| |accessdate=2010-05-17}}
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| </ref>
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| ==Balancing mechanisms==
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| One of the three fundamental functions of an [[international monetary systems|international monetary system]] is to provide mechanisms to correct imbalances.<ref name = "inside">{{Cite book
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| | last = Roberts
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| | first = Richard
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| | title = Inside International Finance
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| | year = 1999
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| | pages = 1–27
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| | isbn = 0-7528-2070-2
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| | publisher = Orion}}</ref><ref>Scores of other text books old and new also give this definition, see for example ''International monetary relations: theory, history, and policy'' (1976), p611 By Leland B. Yeager. The other two basic functions are to provide liquidity and to impart confidence. While during the Washington Consensus period less emphases was placed on the need for balance, in the main a requirement for correction was still accepted, though many argued that governments should leave such correction to the markets.</ref>
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| Broadly speaking, there are three possible methods to correct BOP imbalances, though in practice a mixture including some degree of at least the first two methods tends to be used. These methods are adjustments of exchange rates; adjustment of a nations internal prices along with its levels of demand; and rules based adjustment.<ref>Following the collapse of the Bretton Woods system, rules based adjustment is mostly theoretical.</ref> Improving productivity and hence competitiveness can also help, as can increasing the desirability of exports through other means, though it is generally assumed a nation is always trying to develop and sell its products to the best of its abilities.
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| ===Rebalancing by changing the exchange rate===
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| An upwards shift in the value of a nation's currency relative to others will make a nation's exports less competitive and make imports cheaper and so will tend to correct a current account surplus. It also tends to make investment flows into the capital account less attractive so will help with a surplus there too. Conversely a downward shift in the value of a nation's currency makes it more expensive for its citizens to buy imports and increases the competitiveness of their exports, thus helping to correct a deficit (though the solution often doesn't have a positive impact immediately due to the [[Marshall–Lerner condition]]).<ref name = "solution">
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| {{Cite book
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| |author= Paul Davidson
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| |title= The Keynes Solution: The Path to Global Economic Prosperity
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| |year= 2009
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| |pages = 123–138
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| |isbn= 978-0-230-61920-3
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| |publisher= Palgrave Macmillan
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| |authorlink= Paul Davidson (economist)
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| }}</ref>
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| Exchange rates can be adjusted by government<ref>Though except in the early years of the Bretton Woods System when international markets were heavily constrained by capital controls, managing the exchange rate has often been problematic as the markets often want the currency to move in the opposite direction to governments. Developing countries in particular would often experience difficulties, though even advanced economies like Britain had issues, with [[Black Wednesday]] an example when she had insufficient reserves to counter the market.</ref> in a rules based or managed currency regime, and when left to [[Floating exchange rate|float freely]] in the market they also tend to change in the direction that will restore balance. When a country is selling more than it imports, the demand for its currency will tend to increase as other countries ultimately<ref>There are commonly used financial instruments that allow importers to pay with their domestic currency, and the reserve asset will often play an intermediary role, but ultimately exporters require paying in their own currency.</ref> need the selling country's currency to make payments for the exports. The extra demand tends to cause a rise of the currency's price relative to others. When a country is importing more than it exports, the supply of its own currency on the international market tends to increase as it tries to exchange it for foreign currency to pay for its imports, and this extra supply tends to cause the price to fall. BOP effects are not the only market influence on exchange rates however, they are also influenced by differences in national interest rates and by speculation.
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| ===Rebalancing by adjusting internal prices and demand===
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| When exchange rates are fixed by a rigid gold standard,<ref>In practice there is typically still a small degree of [[exchange rate flexibility]] due to the cost of shipping gold between nations.</ref> or when imbalances exist between members of a currency union such as the Eurozone, the standard approach to correct imbalances is by making changes to the domestic economy. To a large degree, the change is optional for the surplus country, but compulsory for the deficit country. In the case of a gold standard, the mechanism is largely automatic. When a country has a favourable trade balance, as a consequence of selling more than it buys it will experience a net inflow of gold. The natural effect of this will be to increase the money supply, which leads to inflation and an increase in prices, which then tends to make its goods less competitive and so will decrease its trade surplus. However the nation has the option of taking the gold out of economy (sterilising the inflationary effect) thus building up a hoard of gold and retaining its favourable balance of payments. On the other hand, if a country has an adverse BOP it will experience a net loss of gold, which will automatically have a deflationary effect, unless it chooses to leave the gold standard. Prices will be reduced, making its exports more competitive, and thus correcting the imbalance. While the gold standard is generally considered to have been successful<ref>Though not problem free, see [http://www.bankofcanada.ca/en/speeches/2009/sp191109.html Paper from the Bank of Canada on current imbalances in context of international monetary system history]
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| </ref> up until 1914, correction by deflation to the degree required by the large imbalances that arose after WWI proved painful, with deflationary policies contributing to prolonged unemployment but not re-establishing balance. Apart from the US most former members had left the gold standard by the mid-1930s.
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| A possible method for surplus countries such as Germany to contribute to re-balancing efforts when exchange rate adjustment is not suitable, is to increase its level of internal demand (i.e. its spending on goods). While a current account surplus is commonly understood as the excess of earnings over spending, an alternative expression is that it is the excess of savings over investment.<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/5901f960-538b-11de-be08-00144feabdc0.html
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| |title= Down and out for the long term in Germany
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| |publisher= [[The Financial Times]]
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| |author= Wolfgang Munchau
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| |date = 7 June 2009
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| |accessdate=2010-01-10}}
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| </ref>
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| That is:
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| : <math>\text{CA} = \text{NS} - \text{NI} \,</math>
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| where ''CA'' = current account, ''NS'' = national savings (private plus government sector), ''NI'' = national investment.
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| If a nation is earning more than it spends the net effect will be to build up savings, except to the extent that those savings are being used for investment. If consumers can be encouraged to spend more instead of saving; or if the government runs a [[fiscal deficit]] to offset private savings; or if the corporate sector divert more of their profits to investment, then any current account surplus will tend to be reduced. However in 2009 Germany amended its constitution to prohibit running a deficit greater than 0.35% of its GDP<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/424a1d04-4c4e-11de-a6c5-00144feabdc0.html
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| |title= Berlin vote heralds big spending cuts
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| |publisher= [[The Financial Times]]
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| |author= Bertrand Benoit
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| |date = 29 May 2009
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| |accessdate=2010-01-12| archiveurl= https://web.archive.org/web/20100113015055/http://www.ft.com/cms/s/0/424a1d04-4c4e-11de-a6c5-00144feabdc0.html?| archivedate= 13 January 2010 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| and calls to reduce its surplus by increasing demand have not been welcome by officials,<ref>{{Cite web
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| |url= http://blogs.ft.com/money-supply/2009/09/30/the-bundesbank-and-global-imbalances/
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| |title= The Bundesbank and global imbalances
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| |publisher= [[The Financial Times]]
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| |author= Ralph Atkins
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| |date = 30 September 2009
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| |accessdate=2010-01-12}}
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| </ref>
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| adding to fears that the 2010s will not be an easy decade for the eurozone.<ref>{{Cite web
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| |url= http://www.ft.com/cms/s/0/19da1d26-fa2f-11de-beed-00144feab49a.html
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| |title= The eurozones next decade will be tough
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| |publisher= [[The Financial Times]]
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| |author= Martin Wolf
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| |date = 5 January 2010
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| |accessdate=2010-01-12| archiveurl= https://web.archive.org/web/20100115060516/http://www.ft.com/cms/s/0/19da1d26-fa2f-11de-beed-00144feab49a.html| archivedate= 15 January 2010 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| In their [[IMF world economic outlook report (April 2010)|April 2010 world economic outlook report]], the IMF presented a study showing how with the right choice of policy options governments can transition out of a sustained current account surplus with no negative effect on growth and with a positive impact on unemployment.<ref>{{Cite web
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| |url= http://www.imf.org/external/pubs/ft/weo/2010/01/pdf/c4.pdf
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| |title= Getting the balance right.
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| |publisher= [[International Monetary Fund]]
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| |date = 18 April 2010
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| |accessdate=2010-05-17}}
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| </ref>
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| ===Rules based rebalancing mechanisms===
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| Nations can agree to fix their exchange rates against each other, and then correct any imbalances that arise by rules based and negotiated exchange rate changes and other methods. The Bretton Woods system of fixed but adjustable exchange rates was an example of a rules based system, though it still
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| . [[John Maynard Keynes]], one of the architects of the Bretton Woods system had wanted additional rules to encourage surplus countries to share the burden of rebalancing, as he argued that they were in a stronger position to do so and as he regarded their surpluses as negative [[Externality|externalities]] imposed on the global economy.<ref>{{Cite web
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| |url= http://www.project-syndicate.org/commentary/stiglitz125/English
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| |title= Can the Euro be Saved?
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| |publisher= [[Project Syndicate]]
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| |author= [[Joseph Stiglitz]]
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| |date = 5 May 2010
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| |accessdate=2010-05-17| archiveurl= https://web.archive.org/web/20100509224007/http://www.project-syndicate.org/commentary/stiglitz125/English| archivedate= 9 May 2010 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| Keynes suggested that traditional balancing mechanisms should be supplemented by the threat of confiscation of a portion of excess revenue if the surplus country did not choose to spend it on additional imports. However his ideas were not accepted by the Americans at the time. In 2008 and 2009, American economist [[Paul Davidson (economist)|Paul Davidson]] had been promoting his revamped form of Keynes's plan as a possible solution to global imbalances which in his opinion would expand growth all round without the downside risk of other rebalancing methods.<ref name = "solution"/><ref>[http://econ.bus.utk.edu/november%20newsschool.pdf Reforming the worlds international money (pdf)] (2008) by Paul Davidson</ref><ref name="global_imbalances">{{cite web|url=http://www.voxeu.org/reports/global_imbalances.pdf |title=Rebalancing the global economy: A Primer for Policymaking (p.174 et seq.) |format=PDF |publisher=[[Centre for Economic Policy Research]] (CEPR) |year=2010 |accessdate=2011-12-01}}</ref>
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| ==History of balance of payments issues==
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| Historically, accurate balance of payments figures were not generally available. However, this did not prevent a number of switches in opinion on questions relating to whether or not a nations government should use policy to encourage a favourable balance.
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| ===Pre-1820: mercantilism===
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| Up until the early 19th century, international trade was generally very small in comparison with national output, and was often heavily regulated. In the Middle Ages, European trade was typically regulated at municipal level in the interests of security for local industry and for established merchants.<ref>Annual fairs would sometimes allow exceptions to the standard regulations.</ref> From about the 16th century, [[mercantilism]] became the dominant economic theory influencing European rulers, which saw local regulation replaced by national rules aiming to harness the countries' economic output.<ref>{{Cite book
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| | author = [[Karl Polanyi]]
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| | title = The Great Transformation
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| | year = 2002
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| | isbn = 978-0-8070-5643-1
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| | publisher=Beacon Press }}</ref>
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| Measures to promote a trade surplus such as tariffs were generally favoured. Power was associated with wealth, and with low levels of growth, nations were best able to accumulate funds either by running trade surpluses or by forcefully confiscating the wealth of others. Rulers sometimes strove to have their countries outsell competitors and so build up a "war chest" of gold.<ref>Silver and other precious commodities were also important sometimes, acting along with gold as part of a nation's ''de facto'' reserve asset.</ref>
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| This era saw low levels of economic growth; average global per capita income is not considered to have significantly risen in the whole 800 years leading up to 1820, and is estimated to have increased on average by less than 0.1% per year between 1700 and 1820.<ref name = "GPE"/> With very low levels of financial integration between nations and with international trade generally making up a low proportion of individual nations' GDP, BOP crises were very rare.<ref name = "GPE"/>
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| ===1820–1914: free trade===
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| [[File:Gold bullion 1.jpg|thumb|Gold was the primary reserve asset during the gold standard era.]]
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| From the late 18th century, mercantilism was challenged by the ideas of [[Adam Smith]] and other economic thinkers favouring free trade. After victory in the [[Napoleonic wars]] Great Britain began promoting free trade, unilaterally reducing her trade tariffs. Hoarding of gold was no longer encouraged, and in fact Britain exported more capital as a percentage of her [[national income]] than any other creditor nation has since.<ref>{{Cite book
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| |url=http://books.google.com/?id=SnXDHXz-DPQC&dq=The+end+of+globalization:+lessons+from+the+great+depression&printsec=frontcover#PPA12,M1
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| |title= The End of Globalization
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| |publisher= Harvard University Press / google books
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| |author= Harold James
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| |page = page 12
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| |accessdate=2009-03-17
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| |isbn=9780674039087
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| |date=2009-06-30}}</ref> Great Britain's capital exports further helped to correct global imbalances as they tended to be counter cyclical, rising when Britain's economy went into recession, thus compensating other states for income lost from export of goods.<ref name = "GPE">{{Cite book
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| | author = Eirc Helleiner , Louis W Pauly , et al
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| | editor = John Ravenhill
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| | title = Global Political Economy
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| | year = 2005
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| | pages = 7–15, 154, 177–204
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| | publisher= Oxford University Press}}</ref>
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| According to historian [[Carroll Quigley]], Great Britain could afford to act benevolently<ref>However, some, like [[Otto von Bismarck]], viewed Great Britain's promotion of free trade as a way to maintain its dominant position [http://www.ft.com/cms/s/0/a90945e4-fc91-11de-bc51-00144feab49a.html FT article]</ref> in the 19th century due to the advantages of her geographical location, its naval power and economic ascendancy as the first nation to enjoy an [[industrial revolution]].<ref name = "Hope">
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| {{Cite book
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| |author = Carroll Quigley
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| |title= Tragedy and Hope
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| |year= 1995
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| |pages = 243, 263
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| |isbn= 0-945001-10-X
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| |publisher= GSG & Associates, Inc
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| }}</ref>
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| A view advanced by economists such as [[Barry Eichengreen]] is that the first age of [[Globalization]] began with the laying of transatlantic cables in the 1860s, which facilitated a rapid increase in the already growing trade between Britain and America.<ref name = "thenAndNow"/>
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| Though Current Account controls were still widely used (in fact all industrial nations apart from Great Britain and the Netherlands actually increased their tariffs and quotas in the decades leading up to 1914, though this was motivated more by a desire to protect "infant industries" than to encourage a trade surplus<ref name = "GPE"/>), [[Capital account#Capital controls|capital controls]] were largely absent, and people were generally free to cross international borders without requiring passports.
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| A [[gold standard]] enjoyed wide international participation especially from 1870, further contributing to close economic integration between nations. The period saw substantial global growth, in particular for the volume of international trade which grew tenfold between 1820 and 1870 and then by about 4% annually from 1870 to 1914. BOP crises began to occur, though less frequently than was to be the case for the remainder of the 20th century. From 1880 to 1914, there were approximately <ref>Different economic historians don't always classify the same events as a BOP or twin crises</ref> 8 BOP crises and 8 ''[[Twin Crises|twin crises]]'' – a twin crises being a BOP crises that coincides with a banking crises.<ref name = "GPE"/>
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| ===1914–1945: deglobalisation===
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| The favorable economic conditions that had prevailed up until 1914 were shattered by the first world war, and efforts to re-establish them in the 1920s were not successful. Several countries rejoined the gold standard around 1925. But surplus countries didn't "play by the rules",<ref name = "GPE"/><ref>One of the informal rules during the gold standard era was that countries running a trade surplus ought to allow the net inflow of gold they receive to increase their domestic money supply. This would have an expansionary and possibly inflationary effect on their economies, helping to reverse the earlier trade surplus and thus correct the imbalance. However central banks of surplus countries could choice not to allow the extra gold to circulate in their domestic economies, hoarding it in their vaults , and thus the burden of rebalancing would fall entirely on the deficit countries which may need to deflate their economies in order to reduce prices and regain competitiveness.</ref> [[Capital account#Central Bank operations and the reserve account|sterilising]] gold inflows to a much greater degree than had been the case in the pre-war period. Deficit nations such as Great Britain found it harder to adjust by deflation as workers were more enfranchised and unions in particular were able to resist downwards pressure on wages. During the [[Great Depression]] most countries abandoned the gold standard, but imbalances remained an issue and international trade declined sharply. There was a return to mercantilist type "beggar thy neighbour" policies, with countries competitively devaluing their exchange rates, thus effectively competing to export unemployment. There were approximately 16 BOP crises and 15 twin crises (and a comparatively very high level of banking crises.)<ref name = "GPE"/>
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| ===1945–1971: Bretton Woods===
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| {{Main|Bretton Woods system}}
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| Following World War II, the Bretton Woods institutions (the [[International Monetary Fund]] and [[Bank for International Settlements|World Bank]]) were set up to support an [[international monetary systems|international monetary system]] designed to encourage free trade while also offering states options to correct imbalances without having to deflate their economies. Fixed but flexible exchange rates were established, with the system anchored by the dollar which alone remained convertible into gold. The Bretton Woods system ushered in a period of high global growth, known as the [[Golden Age of Capitalism]], however it came under pressure due to the inability or unwillingness of governments to maintain effective capital controls <ref>{{Cite web
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| |url= http://www.project-syndicate.org/commentary/rodrik43/English
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| |title= Greek Lessons for the World Economy
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| |publisher= [[Project Syndicate]]
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| |author= [[Dani Rodrik]]
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| |date = 11 May 2010
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| |accessdate=2010-05-19}}
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| </ref>
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| and due to instabilities related to the central role of the dollar.
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| Imbalances caused gold to flow out of the US and a loss of confidence in the United States ability to supply gold for all future claims by dollar holders resulted in escalating demands to convert dollars, ultimately causing the US to end the convertibility of the dollar into gold, thus ending the Bretton Woods system.<ref name = "GPE"/> The 1945–71 era saw approximately 24 BOP crises and no twin crises for advanced economies, with emerging economies seeing 16 BOP crises and just one twin crises.<ref name = "GPE"/>
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| ===1971–2009: transition, Washington Consensus, Bretton Woods II===
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| {{Main|Washington Consensus}}
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| [[File:Manmohansingh04052007.jpg|thumb|upright|[[Manmohan Singh]], currently PM of India, showed that the challenges caused by imbalances can be an opportunity when he led his country's successful economic reform programme after the [[1991 India economic crisis|1991 crisis]]. ]]
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| The Bretton Woods system came to an end between 1971 and 1973. There were attempts to repair the system of fixed exchanged rates over the next few years, but these were soon abandoned, as were determined efforts for the U.S. to avoid BOP imbalances. Part of the reason was [[Post-war displacement of Keynesianism|displacement]] of the previous dominant economic paradigm – [[Keynesianism]] – by the Washington Consensus, with economists and economics writers such as [[Murray Rothbard]] and [[Milton Friedman]]<ref>e.g., in his influential ''[[Free to Choose]]'' TV series</ref> arguing that there was no great need to be concerned about BOP issues.
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| In the immediate aftermath of the Bretton Woods collapse, countries generally tried to retain some control over their exchange rate by independently managing it, or by intervening in the [[foreign exchange market]] as part of a regional bloc, such as [[Snake in the tunnel|the Snake]] which formed in 1971.<ref name = "inside"/> ''The Snake'' was a group of European countries who tried to retain stable rates at least with each other; the group eventually evolved into the [[European Exchange Rate Mechanism]] (ERM) by 1979. From the mid-1970s however, and especially in the 1980s and early 1990s, many other countries followed the US in liberalising controls on both their capital and current accounts, in adopting a somewhat relaxed attitude to their balance of payments and in allowing the value of their currency to float relatively freely with exchange rates determined mostly by the market.<ref name = "GPE"/><ref name = "inside"/>
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| Developing countries who chose to allow the market to determine their exchange rates would often develop sizeable current account deficits, financed by capital account inflows such as loans and investments,<ref>In the 1970s and 1980s a significant part of the capital flowing into developing countries was re-cycled petro dollars, the oil producing countries were among the few to have large surpluses but at that time the US wasn't issuing many bonds so the capital tended to flow to developing countries via the intermediary of western investment banks.</ref> though this often ended in crises when investors lost confidence.<ref name = "GPE"/><ref name = "Heakal">
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| {{Cite web
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| |url=http://www.investopedia.com/articles/03/070203.asp
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| |title= Understanding Capital And Financial Accounts In The Balance Of Payments
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| |accessdate=2009-12-11
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| |author = Heakal, Reem
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| |publisher=[[Investopedia]]}}
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| </ref>
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| <ref name = "Subra">{{Cite web
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| |url= http://www.petersoninstitute.org/publications/papers/subramanian0407.pdf
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| |title= Foreign Capital and Economic Growth
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| |publisher= [[Peterson Institute for International Economics|Peterson Institute]]
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| |author= Eswar S. Prasad, Raghuram G. Rajan, and Arvind Subramanian
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| |date = 16 April 2007
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| |accessdate=2009-12-15| archiveurl= https://web.archive.org/web/20091214144148/http://www.petersoninstitute.org/publications/papers/subramanian0407.pdf| archivedate= 14 December 2009 <!--DASHBot-->| deadurl= no}}
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| </ref>
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| The frequency of crises was especially high for developing economies in this era – from 1973 to 1997 emerging economies suffered 57 BOP crises and 21 twin crises. Typically but not always the panic among foreign creditors and investors that preceded the crises in this period was usually triggered by concerns over excess borrowing by the private sector, rather than by a government deficit. For advanced economies, there were 30 BOP crises and 6 banking crises.
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| A turning point was the [[1997 Asian Financial Crisis|1997 Asian BOP Crisis]], where unsympathetic responses by western powers caused policy makers in emerging economies to re-assess the wisdom of relying on the free market; by 1999 the developing world as a whole stopped running current account deficits <ref name = "wolfFix"/> while the U.S. current account deficit began to rise sharply.<ref>[http://www.census.gov/foreign-trade/statistics/historical/gands.txt U.S. Trade in Goods and Services – Balance of Payments 1960 thru 2008]</ref>
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| <ref>[http://webnet.oecd.org/pgdexplorer/ Data visualization from ''OECD''], select 'Current account imbalances' or 'Reserve Accumalation' on the stories tab, then move the date slider to see how imbalances developed between 1990–2008.</ref>
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| This new form of imbalance began to develop in part due to the increasing practice of emerging economies, principally China, in pegging their currency against the dollar, rather than allowing the value to freely float. The resulting state of affairs has been referred to as [[Bretton Woods II]].<ref name ="BrettonWoodsII"/> According to Alaistair Chan, "At the heart of the imbalance is China's desire to keep the value of the [[Chinese yuan|yuan]] stable against the dollar. Usually, a rising trade surplus leads to a rising value of the currency. A rising currency would make exports more expensive, imports less so, and push the trade surplus towards balance. China circumvents the process by intervening in exchange markets and keeping the value of the yuan depressed."<ref>{{cite web|last=Chan|first=Alaistair|title=The U.S. – China Balance of Payments Relationship|url=http://www.economy.com/dismal/article_free.asp?cid=112578|publisher=Moody's Analytics|accessdate=2011-02-23}}</ref>
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| According to economics writer [[Martin Wolf]], in the eight years leading up to 2007, "three-quarters of the foreign currency reserves accumulated since the beginning of time have been piled up".<ref name="revenge">{{Cite web
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| |url=http://www.ft.com/cms/s/0/fba32c1e-9565-11dd-aedd-000077b07658.html
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| |title= Asia's Revenge
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| |publisher= [[The Financial Times]]
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| |author= [[Martin Wolf]]
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| |date =8 October 2008
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| |accessdate=2010-01-10}}
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| </ref>
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| In contrast to the changed approach within the emerging economies, US policy makers and economists remained relatively unconcerned about BOP imbalances. In the early to mid-1990s, many free market economists and policy makers such as U.S. Treasury secretary [[Paul O'Neill (Secretary of the Treasury)|Paul O'Neill]] and Fed Chairman [[Alan Greenspan]] went on record suggesting the growing US deficit was not a major concern. While several emerging economies had intervening to boost their reserves and assist their exporters from the late 1980s, they only began running a net current account surplus after 1999. This was mirrored in the faster growth for the US current account deficit from the same year, with surpluses, deficits and the associated build up of reserves by the surplus countries reaching record levels by the early 2000s and growing year by year. Some economists such as [[Kenneth Rogoff]] and [[Maurice Obstfeld]] began warning that the record imbalances would soon need to be addressed from as early as 2001, joined by [[Nouriel Roubini]] in 2004, but it was not until about 2007 that their concerns began to be accepted by the majority of economists.<ref name = "wolfFix">{{Cite book
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| | last = Wolf
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| | first = Martin
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| | title = Fixing Global Finance
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| | year = 2009
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| | pages = 41 , 82, 114–116
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| | isbn = 0-300-14277-3
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| | publisher= Yale University Press}}</ref><ref name = "differentBook">{{cite book
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| | author = [[Carmen Reinhart]] and [[Kenneth Rogoff]]
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| | title = This Time Is Different: Eight Centuries of Financial Folly
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| | year = 2010
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| | pages = 208–212
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| | publisher = Princeton University Press
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| | isbn = 0-19-926584-4
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| }}</ref>
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| ===2009 and later: post Washington Consensus===
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| Speaking after the [[2009 G-20 London summit]], Gordon Brown announced "the Washington Consensus is over".<ref>{{Cite news| url=http://news.sky.com/skynews/Home/Politics/Prime-Minister-Gordon-Brown-G20-Will-Pump-One-Trillion-Dollars-Into-World-Economy/Article/200904115254629| title=Prime Minister Gordon Brown: G20 Will Pump Trillion Dollars Into World Economy| date=2 April 2009| publisher=''[[Sky News]]''}}</ref>
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| There is now broad agreement that large imbalances between different countries do matter; for example mainstream U.S. economist [[C. Fred Bergsten]] has argued the U.S. deficit and the associated large inbound capital flows into the U.S. was one of the causes of the [[financial crisis of 2007–2010]].<ref name="Bersten"/>
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| Since the crisis, government intervention in BOP areas such as the imposition of [[capital control]]s or foreign exchange market intervention has become more common and in general attracts less disapproval from economists, international institutions like the IMF and other governments.<ref>{{Cite web
| |
| |url= http://www.project-syndicate.org/commentary/rodrik41/English
| |
| |title= The End of an Era in Finance
| |
| |publisher= [[Project Syndicate]]
| |
| |author= [[Dani Rodrik]]
| |
| |date = 11 March 2010
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| |accessdate=2010-05-24}}
| |
| </ref>
| |
| <ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/00d3c340-c635-11df-9cda-00144feab49a.html
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| |title= Towards a new era of currency intervention
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| |publisher= [[The Financial Times]]
| |
| |author= Mansoor Mohi-Uddin
| |
| |date = 22 September 2010
| |
| |accessdate=2010-09-23}}
| |
| </ref>
| |
| | |
| In 2007, when the crises began, the global total of yearly BOP imbalances was $1680 billion. On the credit side, the biggest current account surplus was China with approx. $362 billion, followed by Japan at $213bn and Germany at £185 billion, with oil producing countries such as Saudi Arabia also having large surpluses.
| |
| On the debit side, the US had the biggest current account deficit at over $1100 billion, with the UK, Spain and Australia together accounting for close to a further $300 billion.<ref name = "revenge"/>
| |
| | |
| While there have been warnings of future cuts in public spending, deficit countries on the whole did not make these in 2009, in fact the opposite happened with increased public spending contributing to recovery as part of [[2008–2009 Keynesian resurgence|global efforts to increase demand]].<ref>The public spending did not however make the imbalances worse as they were offset by reduced private sector demand and debt in the deficit countries.</ref> The emphases has instead been on the surplus countries, with the IMF, EU and nations such as the U.S., Brazil and Russia asking them to assist with the adjustments to correct the imbalances.
| |
| <ref name= "IMFbaton">{{Cite web
| |
| |url= http://cachef.ft.com/cms/s/0/ceeff158-ade6-11de-87e7-00144feabdc0,s01=1.html
| |
| |title= Surplus nations urged by IMF to take up baton
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| |publisher= [[The Financial Times]]
| |
| |author= Chris Giles
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| |date =11 January 2009
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| |accessdate=2010-01-10}}
| |
| </ref>
| |
| <ref name = "dismiss">{{Cite web
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| |url= http://www.ft.com/cms/s/0/229a96b4-f351-11de-a888-00144feab49a.html
| |
| |title= Wen dismisses currency pressure
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| |publisher= [[The Financial Times]]
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| |author= Geoff Dyer
| |
| |date = 29 December 2009
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| |accessdate=2010-01-10}}
| |
| </ref>
| |
| | |
| Economists such as [[Gregor Irwin]] and [[Philip R. Lane]] have suggested that increased use of pooled reserves could help emerging economies not to require such large reserves and thus have less need for current account surpluses.
| |
| <ref>
| |
| {{Cite web
| |
| |url=http://www.cepr.org/MEETS/LTM/2399/Lane.pdf
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| |title= Global Imbalances and Global Governance
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| |accessdate=2009-12-11
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| |author = [[Philip R. Lane]]
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| |publisher=[[Centre for Economic Policy Research|CEPR]]}}
| |
| </ref>
| |
| Writing for the FT in Jan 2009, Gillian Tett says she expects to see policy makers becoming increasingly concerned about exchange rates over the coming year.<ref>{{Cite news
| |
| |url=http://www.ft.com/cms/s/0/56dbb854-0c0b-11df-96b9-00144feabdc0.html
| |
| |title=Calls for a new Bretton Woods not so mad
| |
| |author = Gillian Tett
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| |publisher=[[Financial Times]]
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| |date=28 January 2010
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| |accessdate=2010-01-29
| |
| | archiveurl= https://web.archive.org/web/20100129052330/http://www.ft.com/cms/s/0/56dbb854-0c0b-11df-96b9-00144feabdc0.html| archivedate= 29 January 2010 <!--DASHBot-->| deadurl= no}}</ref>
| |
| In June 2009, [[Olivier Blanchard]] the chief economist of the IMF wrote that rebalancing the world economy by reducing both sizeable surpluses and deficits will be a requirement for sustained recovery.<ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/e8bcc516-5c33-11de-aea3-00144feabdc0.html
| |
| |title= What is needed for a lasting recovery
| |
| |publisher= [[The Financial Times]]
| |
| |author= [[Olivier Blanchard]]
| |
| |date = 18 June 2009
| |
| |accessdate=2010-05-17}}
| |
| </ref>
| |
| | |
| In 2008 and 2009, there was some reduction in imbalances, but early indications towards the end of 2009 were that major imbalances such as the U.S. current account deficit are set to begin increasing again.<ref name = "unclear"/>
| |
| <ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/a8486284-fee9-11de-a677-00144feab49a.html
| |
| |title= Bankruptcy could be good for America
| |
| |publisher= [[The Financial Times]]
| |
| |author= Gideon Rachman
| |
| |date = 12 January 2010
| |
| |accessdate=2010-01-12| archiveurl= https://web.archive.org/web/20100112052015/http://www.ft.com/cms/s/0/a8486284-fee9-11de-a677-00144feab49a.html| archivedate= 12 January 2010 <!--DASHBot-->| deadurl= no}}
| |
| </ref>
| |
| | |
| Japan had allowed her currency to appreciate through 2009, but has only limited scope to contribute to the rebalancing efforts thanks in part to her aging population. The euro used by Germany is allowed to float fairly freely in value, however further appreciation would be problematic for other members of the currency union such as Spain, Greece and Ireland who run large deficits. Therefore Germany has instead been asked to contribute by further promoting internal demand, but this hasn't been welcomed by German officials.<ref name = "IMFbaton"/>
| |
| | |
| China has been requested to allow the [[renminbi]] to appreciate but until 2010 had refused, the position expressed by her premier [[Wen Jiabao]] being that by keeping the value of the renmimbi stable against the dollar China has been helping the global recovery, and that calls to let her currency rise in value have been motivated by a desire to hold back China's development.<ref name = "dismiss"/> After China reported favourable results for her December 2009 exports however, the Financial Times reported that analysts are optimistic that China will allow some appreciation of her currency around mid-2010.<ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/049644ee-fdb3-11de-9340-00144feab49a.html
| |
| |title= China's exports rise as economy picks up
| |
| |publisher= [[The Financial Times]]
| |
| |author= Patti Waldmeir
| |
| |date = 10 January 2010
| |
| |accessdate=2010-01-10| archiveurl= https://web.archive.org/web/20100111051805/http://www.ft.com/cms/s/0/049644ee-fdb3-11de-9340-00144feab49a.html| archivedate= 11 January 2010 <!--DASHBot-->| deadurl= no}}
| |
| </ref>
| |
| | |
| In April 2010 a Chinese official signalled the government is considering allowing the renminbi to appreciate,
| |
| <ref>{{Cite news
| |
| |url=http://www.ft.com/cms/s/0/24a3588c-3e98-11df-a706-00144feabdc0.html
| |
| |title=Beijing lays ground for renminbi shift
| |
| |author = Jamil Anderlini in Beijing
| |
| |publisher=[[Financial Times]]
| |
| |date=6 April 2010
| |
| |accessdate=2010-04-08
| |
| | archiveurl= https://web.archive.org/web/20100406143750/http://www.ft.com/cms/s/0/24a3588c-3e98-11df-a706-00144feabdc0.html?| archivedate= 6 April 2010 <!--DASHBot-->| deadurl= no}}</ref>
| |
| but by May analysts were widely reporting the appreciation would likely be delayed due to the falling value of the Euro following the [[2010 European sovereign debt crisis]].<ref>{{Cite news
| |
| |url=http://www.ft.com/cms/s/0/2daae3f2-63df-11df-ad7c-00144feab49a.html
| |
| |title=Asian exporters rattled by eurozone turmoil
| |
| |author = Kevin Brown in Kuala Lumpur, Jamil Anderlini in Beijing and Robin Harding in Tokyo
| |
| |publisher=[[Financial Times]]
| |
| |date=20 May 2010
| |
| |accessdate=2010-05-21
| |
| | archiveurl= https://web.archive.org/web/20100521102044/http://www.ft.com/cms/s/0/2daae3f2-63df-11df-ad7c-00144feab49a.html| archivedate= 21 May 2010 <!--DASHBot-->| deadurl= no}}</ref>
| |
| China announced the end of the renminbi's peg to the dollar in June 2010; the move was widely welcomed by markets and helped defuse tension over imbalances prior to the [[2010 G-20 Toronto summit]]. However the renminbi remains managed and the new flexibility means it can move down as well as up in value; two months after the peg ended the renminbi had only appreciated against the dollar by about 0.8%.<ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/0d5d0d32-a43f-11df-abf7-00144feabdc0.html
| |
| |title= China trade surplus widens
| |
| |publisher= [[The Financial Times]]
| |
| |author= Geoff Dyer
| |
| |date = 10 August 2010
| |
| |accessdate=2010-08-24| archiveurl= https://web.archive.org/web/20100819054805/http://www.ft.com/cms/s/0/0d5d0d32-a43f-11df-abf7-00144feabdc0.html| archivedate= 19 August 2010 <!--DASHBot-->| deadurl= no}}
| |
| </ref>
| |
| | |
| By January 2011, the renminbi had appreciated against the dollar by 3.7%, which means it's on track to appreciate in nominal terms by 6% per year. As this reflects a real appreciation of 10% when China's higher inflation is accounted for, the U.S. Treasury once again declined to label China a currency manipulator in their February 2011 report to Congress. However Treasury officials did advise the rate of appreciation was still too slow for the best interests of the global economy.<ref name ="Feb11USTreport">{{Cite web
| |
| |url= http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Foreign%20Exchange%20Report%20February%204%202011.pdf
| |
| |title= Report to Congress on International Economic and Exchange Rate Policies
| |
| |publisher= [[United States Department of the Treasury]]
| |
| |author = Treasury staffers
| |
| |date = 4 February 2011
| |
| |accessdate=2011-02-25}}
| |
| </ref><ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/0e2fba6c-30bb-11e0-9de3-00144feabdc0,dwp_uuid=cc46dd96-caea-11df-bf36-00144feab49a.html#axzz1DHtjg6WG
| |
| |title= US retreats from attack on renminbi
| |
| |publisher= [[The Financial Times]]
| |
| |author= Robin Harding
| |
| |date = 5 February 2011
| |
| |accessdate=2011-02-07}}
| |
| </ref>
| |
| | |
| In February 2011, [[Moody's]] analyst Alaistair Chan has predicted that despite a strong case for an upward revaluation, an increased rate of appreciation against the dollar is unlikely in the short term.<ref>{{cite web|last=Chan|first=Alaistair|title=The U.S. – China Balance of Payments Relationship|url=http://www.economy.com/dismal/article_free.asp?cid=112578|accessdate=2011-02-22}}</ref> And as of February 2012, China's currency had been continuing to appreciate for a year and a half, while drawing remarkably little notice.<ref>{{Cite web
| |
| |url= http://www.nytimes.com/2012/02/16/business/global/appreciation-in-chinas-currency-goes-largely-unnoted.html
| |
| |title= Appreciation in China's Currency Goes Largely Unnoted
| |
| |publisher= [[The New York Times]]
| |
| |author= David Leonhardt
| |
| |date = 15 February 2012
| |
| |accessdate=2012-03-16}}
| |
| </ref>
| |
| | |
| While some leading surplus countries including China have been taking steps to boost domestic demand, these have not yet been sufficient to rebalance out of their current account surpluses. By June 2010, the U.S. monthly current account deficit had risen back to $50 billion, a level not seen since mid-2008. With the US currently suffering from high unemployment and concerned about taking on additional debt, fears are rising that the US may resort to [[Protectionism|protectionist]] measures.<ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/a8486284-fee9-11de-a677-00144feab49a.html
| |
| |title= The last chance to avoid a global trade war
| |
| |publisher= [[The Financial Times]]
| |
| |author= Michael Pettis
| |
| |date = 22 August 2010
| |
| |accessdate=2010-08-24| archiveurl= https://web.archive.org/web/20100808175749/http://www.ft.com/cms/s/0/a8486284-fee9-11de-a677-00144feab49a.html| archivedate= 8 August 2010 <!--DASHBot-->| deadurl= no}}
| |
| </ref>
| |
| | |
| ====Competitive devaluation after 2009====
| |
| {{Main|Currency war}}
| |
| By September 2010, international tensions relating to imbalances had further increased. Brazil's finance minister [[Guido Mantega]] declared that an "international currency war" has broken out, with countries competitively trying to devalue their currency so as to boost exports. Brazil has been one of the few major economies lacking a reserve currency to abstain from significant [[currency intervention]], with the [[Brazilian real|real]] rising by 25% against the dollar since January 2009. Some economists such as Barry Eichengreen have argued that competitive devaluation may be a good thing as the net result will effectively be equivalent to expansionary global monetary policy. Others such as Martin Wolf saw risks of tensions further escalating and advocated that coordinated action for addressing imbalances should be agreed on at the November G20 summit.<ref name = "new age"/><ref>{{Cite web
| |
| |url= http://www.ft.com/cms/s/0/33ff9624-ca48-11df-a860-00144feab49a.html
| |
| |title= Brazil in ‘currency war’ alert
| |
| |publisher= [[The Financial Times]]
| |
| |author= Jonathan Wheatley in São Paulo and Peter Garnham in London
| |
| |date = 27 September 2010
| |
| |accessdate=2010-09-29| archiveurl= https://web.archive.org/web/20100929040016/http://www.ft.com/cms/s/0/33ff9624-ca48-11df-a860-00144feab49a.html| archivedate= 29 September 2010 <!--DASHBot-->| deadurl= no}}
| |
| </ref><ref>{{Cite web | |
| |url= http://www.ft.com/cms/s/0/8beeb262-ca56-11df-a860-00144feab49a.html
| |
| |title= Hostilities escalate to hidden currency war
| |
| |publisher= [[The Financial Times]]
| |
| |author= Alan Beattie
| |
| |date = 27 September 2010
| |
| |accessdate=2010-09-29| archiveurl= https://web.archive.org/web/20100929065213/http://www.ft.com/cms/s/0/8beeb262-ca56-11df-a860-00144feab49a.html| archivedate= 29 September 2010 <!--DASHBot-->| deadurl= no}}
| |
| </ref>
| |
| | |
| Commentators largely agreed that little substantive progress was made on imbalances at the [[2010 G-20 Seoul summit|November 2010 G20]]. An IMF report released after the summit warned that without additional progress there is a risk of imbalances approximately doubling to reach pre-crises levels by 2014.<ref>{{Cite web
| |
| |url= http://www.imf.org/external/np/g20/pdf/111210.pdf
| |
| |title= G-20 Mutual Assessment Process – IMF Staff Assessment of G-20 Policies1
| |
| |publisher= [[International Monetary Fund]]
| |
| |date = 12 November 2010
| |
| |author = IMF staffers
| |
| |accessdate=2010-11-19}}
| |
| </ref>
| |
| | |
| ==See also==
| |
| * [[Currency crisis]]
| |
| * [[Exchange rate regime]]
| |
| * [[Foreign exchange reserves]]
| |
| * [[History of money]]
| |
| * [[IMF Balance of Payments Manual]]
| |
| * [[Sovereign default]]
| |
| * [[Sterilization (economics)]]
| |
| * [[Sudden stop (economics)]]
| |
| | |
| ==Notes and citations==
| |
| {{Reflist|colwidth=30em}}
| |
| The Alternative Trader by Vladimir Petropoljac
| |
| | |
| ==Further reading==
| |
| {{Refbegin}}
| |
| * {{cite encyclopedia |last1= Stein |first1=Herbert |authorlink1= Herbert Stein |editor= [[David R. Henderson]] (ed.) |encyclopedia=[[Concise Encyclopedia of Economics]] |title=Balance of Payments |url=http://www.econlib.org/library/Enc/BalanceofPayments.html |year=2008 |edition= 2nd |publisher=[[Library of Economics and Liberty]] |location=Indianapolis |isbn=978-0865976658 |oclc=237794267}}
| |
| * Economics 8th Edition by David Begg, Stanley Fischer and Rudiger Dornbusch, McGraw-Hill
| |
| * Economics Third Edition by Alain Anderton, Causeway Press
| |
| {{Refend}}
| |
| | |
| ==External links==
| |
| | |
| ===Data===
| |
| * [http://www.imf.org/external/np/sta/bop/bop.htm/ Comprehensive international BOP statistics from the IMF]
| |
| * [http://www.censtatd.gov.hk/hong_kong_statistics/statistics_by_subject/index.jsp? BOP for Hong Kong]
| |
| * [http://www.fedstats.gov/ US statistics ] (See "External Sector")
| |
| * [http://www.bea.gov/international/bp_web/list.cfm?anon=71®istered=0 Detailed historical BOP data from the US Bureau of Economic Analyses]
| |
| | |
| ===Analysis===
| |
| * [http://www.dollarsandsense.org/archives/2004/0304dollar.html Where Do U.S. Dollars Go When the United States Runs a Trade Deficit?] from [[Dollars & Sense]] magazine
| |
| * [http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Foreign%20Exchange%20Report%20February%204%202011.pdf Report to Congress on International Economic and Exchange Rate Policies] Feb 2011 US treasury report with sections on BOP issues for major trading blocs and countries.
| |
| * [http://www.bankofcanada.ca/en/speeches/2009/sp191109.html Paper from the Bank of Canada on challenges for 2010 regarding current imbalances, in context of international monetary system history]
| |
| * [http://www.ecb.int/pub/pdf/scpops/ecbocp73.pdf European Central Bank paper on the accumulation of reserves and imbalances since 1995]
| |
| * [http://henryckliu.com/page2.html Dollar hegemony] – analysis on BOP issues from a progressive Chinese perspective.
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| | |
| {{Trade|state=expanded}}
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| {{economics}}
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| {{DEFAULTSORT:Balance Of Payments}}
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| [[Category:Economic indicators]]
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| [[Category:International finance]]
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| [[Category:International macroeconomics]]
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| [[Category:National accounts]]
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