Biz/ed - Balance of Payments Policies [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. There are a series of field trips available looking at different issues connected with economic development. This tour is the trade tour, and this page looks at policies for dealing with balance of payments problems.

Theories

Balance of Payments Policies

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In the case of an overall balance of payments deficit i.e. where the current and capital accounts are in deficit, LDCs such as Zambia have a number of policy options open to them.

Improve the current account balance by promoting export expansion or limiting imports or both.
These objectives can be brought about by a number of measures:
- Expand the export of copper and other primary commodities
- Expand the export of secondary goods through adopting policies of import substitution
- Introduce protectionist measures such as quotas, tariffs and other non-tariff barriers
- Changing the value of the exchange rate through a devaluation or allow the currency to float and depreciate
- Follow restrictive deflationary monetary and fiscal policy that reduces domestic demand and hence imports and reduces inflationary pressures in the economy
Improve the capital account balance by encouraging capital inflows.
Again a number of possible measures are open to the government:
- private foreign direct or portfolio investment
- borrowing from foreign commercial banks
- borrowing from foreign governments
- borrowing from multilateral agencies such as the IMF

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