developed countries for import of commodities, capital and technology. Export potential is low and import intensity is high. So the LDCs suffer from adverse BoP. - - International Economics .
Consumerism: Balance of payments position of a country is adversely affected by a huge increase in consumption. This increases the need for imports and decreases the capacity to export. . Demonstration Effect: Deficit in the balance of payments of developing countries is also caused by demonstration effect which influences the people in UDCs to imitate western styled goods.
This will raise the propensity to import causing adverse balance of payments. This is good for the developed countries. . Borrowing: International borrowing and investment may cause a deficit in the balance of payments.
When the international borrowing is heavy, a country’s balance of payments will be adverse since it repays loans with interest. Servicing of debt is a huge burden. That is why the UDCs are forced to borrow more. .
Technological Backwardness: Due to technological backwardness, the people (Indians) are unable to use the energy (Solar) available with them. As a result they import huge petroleum products from foreign countries, increasing the trade deficit. . Global Politics: The rich countries (Eg.
USA) need to sell their weapons to promote their economy and generate employment. Hence, wars between countries (for example Iran and Iraq, Pakistan and India) are stimulated In order to win the wars, the poor countries are forced to buy the weapons from weapon – rich countries, using their export earnings and creating trade deficit. Thus UDCs are trapped forever. .
. . Measures to Correct BOP Disequilibrium There are a number of measures available for correcting the balance of payments disequilibrium. They are divided into two broad groups, namely, (i) automatic correction and (ii) deliberate measures.
I. Automatic Correction If the market forces of demand and supply are allowed to play freely, equilibrium will be automatically restored in course of time. Under the free exchange rate system, the automatic adjustments of the balance of payments can take place through changes in the variables like price, interest, income