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PROBLEMS OF DEVELOPING COUNTRIES BOP DISEQUIlBRIA REMINDER A record of all transactions with foreign countries Inflows = credit (positive) Outflows = debit (negative) Includes current and capital account Current Account Records income and expenditure flows e.g. from trade and profits, interest and dividends on foreign owned assets Capital Account Records international flows of financial capital such as cross-border loans and investments in stocks and shares The UK Zambia Why is it a problem? Disequilibria – usually refers to a current account deficit. If it is persistent then it is a problem- a country consumes more than it produces and has to do so by borrowing or running down foreign currency reserves. Imagine… If you went further and further into debt, would a bank lend you money? NO – you will no longer be regarded as credit-worthy The same happens to countries Why a deficit in DC’s? Specialising in primary products (agricultural prices are highly volatile) Net importers of manufactured goods If they do pursue industrialisation they come up against the protectionism of the 1st world Therefore they face a long run decline in their terms of trade (Prebisch-Singer hypothesis) The evaluation If GDP is not growing as fast as interest repayments then this eats further and further into National Income. Problems have been made worse by unwise borrowing into finance projects which haven’t proved productive.