APPENDIX: How Can the Asymmetry of Concepts of Imbalance Affect Stability of Payments?
To analyze the effect on world payments which asymmetries between countries in concepts of surplus or deficit can have, we shall first examine the effect of conflicting national balance of payments targets under simplified hypothetical conditions. Suppose, first, that all payments imbalances among countries are settled in gold by the monetary authorities and that the world supply of monetary gold is constant. If, under these conditions, all countries pursue a policy of avoiding disequilibrium in their balance of payments, deficit as well as surplus, then any imbalance in international transactions would give rise to measures to restore equilibrium in both surplus and deficit countries. Such symmetry in the policy reactions to payments disturbances would make the payments structure fairly stable.
Now suppose that, while the majority of countries are satisfied merely to avoid a balance of payments deficit, some countries are taking measures to run a surplus in order to increase their international reserves. Under these circumstances, there is a conflict among the national balance of payments targets. By algebraic necessity, the sum of surpluses and deficits of all countries must be zero, but their policy targets imply an aggregate net surplus. Ex-ante surpluses will exceed ex-ante deficits, whereas ex-post surpluses and deficits must be equal; therefore, for all countries the aggregate ex-ante surplus (which is positive) exceeds the aggregate ex-post surplus (which is zero). In this situation, countries in general will experience a balance which is less favorable than they consider desirable, and there will be a tendency for contractionary or restrictive measures of balance of payments adjustments to gain the upper hand over expansionary or “derestrictive” ones.
A similar situation will exist where all countries aim at mere equilibrium in their balance of payments, if for some reason (e.g., as a result of private hoarding) there is a reduction in world gold reserves. Also, in that situation, there will be an excess of the aggregate ex-ante surplus (zero) over the aggregate ex-post surplus (negative) for all countries taken together. The opposite situation will exist if all countries, as before, are aiming at a mere equilibrium in their balance of payments, but there is an addition to the world supply of monetary gold. In this situation there is also a conflict among national balance of payments targets, but one that tends to ease rather than strain international payments. In general, countries will experience a more favorable balance of payments than they plan, and there will be a tendency for expansionary and “derestrictive” measures of balance of payments adjustment to gain the upper hand over contractionary and restrictive ones. A similar situation will exist even if all countries taken together are aiming at increasing their reserves (are planning an aggregate balance of payments surplus), if the increase in world gold reserves (the aggregate ex-post surplus) exceeds the planned aggregate (ex-ante) surplus of all countries; or, with constant world gold reserves, if some countries with ample reserves plan to run balance of payments deficits, but other countries aim at mere equilibrium. In all these situations, there is an excess of the aggregate ex-post surplus over the aggregate ex-ante surplus.
In recent years, the major asymmetries among countries in the definitions of surplus or deficit have tended to create (ex-post) an excess of deficits over surpluses, or to reduce the aggregate balance of payments surplus of all countries taken together below the increase in world monetary gold holdings. If the policy targets for all countries imply an aggregate surplus at least as large as the increase in these holdings (which seems a reasonable assumption), the tendency toward a smaller aggregate surplus, or toward an aggregate deficit, imposes strains on the payments system of the type discussed above. The situation is similar to that in which countries aim at maintaining gold reserves unchanged, although there is a reduction in world monetary gold holdings.
Mr. Høst-Madsen, Chief of the Balance of Payments Division, is a graduate of the University of Copenhagen. Before joining the Fund staff in 1946, he was with the Danmarks Nationalbank.
The paper is part of a study on “measures of imbalance in world payments,” the purpose of which is to reconcile the statistics of aggregate balance of payments surpluses and deficits of all countries in accordance with various concepts. While the reconciliation poses rather few problems for the postwar period up to and including 1958, major changes in international payments since 1958—in particular, the emergence of large-scale flows of private short-term capital—have considerably complicated both the statistical and conceptual problems of reconciling the figures for recent periods. To make the larger study more manageable, this paper takes up separately some of the main conceptual problems that have arisen in connection with the study. The paper is exploratory and should not be regarded as an expression either of the views of the Fund or of the definitive position of the author. A second part of the study will appear in the next issue of Staff Papers.
In this paper, for simplicity of exposition, the expressions “surplus” and “deficit” refer (unless otherwise noted) to the statistical measures applied by countries in appraising their own general “balance of payments position.” Similarly, “surplus country” (“deficit country”) should be interpreted, unless there is some indication to the contrary, as a country that is in balance of payments surplus (deficit) according to its own statistical measure of surplus or deficit.
For this reason, the appropriateness of the term “basic” surplus or deficit can be called in question. It is used here in the absence of an alternative term that would be equally convenient and expressive.
If countries do not include their positions with the IMF in reserves in calculating balance of payments surplus or deficit, gold subscriptions to the IMF will reduce correspondingly the combined surplus of all countries (or increase their combined deficit).
An increase in world monetary gold holdings may, of course, under certain conditions stimulate inflationary pressures in the world economy, which, apart from any other undesirable effects, may eliminate its initial impact on international liquidity. However, the increases in world gold holdings during the postwar period cannot be regarded as a substantial source of inflation.
See footnote 5.
In the Netherlands, the measure of surplus or deficit (below the line) excludes loans extended and received by the commercial banks; such loans are treated as movements of private capital above the line.
See Department of Commerce, Survey of Current Business, March 1962.