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History of balance of payments issues

Pre-1820: Mercantilism

Up until the early 19th century, measures to promote a trade surplus such as tariffs were

generally favoured. Power was associated with wealth, and with low levels of growth, nationswere best able to accumulate funds either by running trade surpluses or by forcefullyconfiscating the wealth of others.

This era saw low levels of economic growth. With very low levels of financial integrationbetween nations and with international trade generally making up a low proportion of individual

nations GDP, BOP crises were very rare[23]

[edit] 18201914: Free trade

Gold was the primary reserve asset during the gold standard era.

From the late 18th century, mercantilism was challenged by the ideas ofAdam Smith and other

economic thinkers favouring free trade. Hoarding of gold was no longer encouraged. 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.

A gold standard enjoyed wide international participation especially from 1870, further

contributing to close economic integration between nations. The period saw substantial globalgrowth. From 1880 - 1914, there were approximately [46] 8 BOP crises and 8 twin crises - a twin

crises being a BOP crises that coincides with a banking crises.[23]

[edit] 19141945: Deglobalisation

Deficit nations such as Great Britain found it harder to adjust by deflation as workers were moreenfranchised and unions in particular were able to resist downwards pressure on wages. There

was a return to mercantilist type "beggar thy neighbour" policies, with countries competitivelydevaluing 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 bankingcrises.[23]

[edit] 19451971: Bretton Woods

The Bretton Woods institutions (the International Monetary Fund and World Bank) were set up

to support an international monetary system designed to encourage free trade. The systemushered 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 effectivecapital controls

[48]and due to instabilities related to the central role of the dollar. The 1945 - 71

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era saw approximately 24 BOP crises and no twin crises for advanced economies, with emergingeconomies seeing 16 BOP crises and just one twin crises.

[23]

[edit] 19712009: Transition, Washington Consensus

The panic among foreign creditors and investors that preceded the crises in this period wasusually triggered by concerns over excess borrowing by the private sector, rather than by agovernment deficit. For advanced economies, there were 30 BOP crises and 6 banking crises.

A turning point was the 1997 Asian BOP Crisis, where unsympathetic responses by western

powers caused policy makers in emerging economies to re-assess the wisdom of relying on thefree market. 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, ratherthan allowing the value to freely float.