According to Investopedia, Balance of Payments (BoP) is briefly defined as a summary of all transactions that a country’s individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country. These transactions consist of imports and exports of goods, services, and capital, as well as transfer payments such as foreign aid and remittances. BoP is also known as the balance of international payments.
When countries couldn’t fund their imports through exports of capital, they will be forced to deplete their foreign currency reserves. This situation is often referred to as a Balance of Payment Deficit. On the contrary, there can be situation where a surplus in the Balance of Payment be registered. A surplus in BoP occurs when a country’s total value of exports are greater that the value of its total imports. This is also known as a favorable BoP and it helps a country to generate capital to fund its domestic productions.
There are a number of factors that cause a deficit in the Balance of Payments (BoP). A higher rate of inflation, developmental activities, effects of a fluctuation in business cycle, a change in demand and higher level of imports are among the economic factors that would lead to a deficit (disequilibrium) in BoP. When the rate of inflation is higher, consumers tend to buy foreign products since their prices will be relatively lower than the domestic products. Thus, import would increase and this will lead to a deficit in BoP.
Developing and Least Developing Countries (LDCs) often depend on imports of heavy machineries, technologies on advanced nations. The import of such machineries and technologies leads to a depletion of foreign currency reserve which finally would result in a deficit in the BoP. In some cases due to an economic boom, domestic products won’t be enough to satisfy an increased demand and goods have to be imported to fill the demand gap. Keep other things constant, an increase in import then leads to a deficit in BoP. On the other hand, if the demand for the country’s export in the international market falls, that particular country would lose revenue from its exports and this in return affects the BoP negatively. Besides to the machineries and other goods, LDCs import services from the advanced economies. The more they import, the more it would adversely affect the BoP.
Besides to the economic factors, the BoP is also affected by the political conditions of a country. When countries are politically unstable, capitals tend to outflow and the inflow of capital tends to decrease. This would further aggravate the deficit in the Balance of Payments (BoP). Social factors also account for changes in BoP. For instance, when the number of the Diaspora community increases, demand for domestic products might increase since they Diaspora community’s taste and preference and consumption pattern goes along with them. The export of Injera, Shiro, Berebere (Ethiopian traditional food items) for instance has shown increment following the increase in the number of the Diaspora community living in the West and other Arab countries.
The factors that cause a deficit in the BoP are many, so are the solutions. The desired effects are however to increase the value of our exports and decrease the value of our imports. There are countless articles written on the necessity of increasing export and decreasing import in order to narrow the deficit in the BoP. In our country Ethiopia, a number of efforts have been made to implement export promotion strategy on one hand and import substitution strategy on the other. To be fair, though not significant, it has proved to be the right strategy.
Basically, import substitution is substituting the imported goods with the locally produced goods in order to meet the internal demand. As some experts say, a protection is needed to achieve this strategy. The institution that will make this protection is of course the government. In general terms, this is a government intervention to the market. The government can do this not only via tariffs, quotas but also via exchange rate, prices of the factors of production and interest rate. In short, import substitution is a strategy that appreciates the local production via government intervention to the whole economy. In doing so, a country can save its foreign currency reserve from depletion.
I once visited the Customs Authority website to look into the items that we import and I was shocked upon seeing thousands of import items that we could have easily produced locally. Most of the business men we have around are more interested in imported and distributed products than producing them locally. Engaging in the manufacturing sector takes courage and knowledge in addition to taking the idea of economic patriotism into once heart. The absence of these is costing the country a huge amount of foreign exchange.
Most people especially the city dwellers tend to associate the consumption of imported products with prestige, which of course is not a source of pride. It is the lack of knowledge of the modern sense of patriotism, which is economic patriotism. You may find it amusing how ignorant we are in this aspect when you watch one particular TV advert. It is about advertising Italian produced pasta. It goes like this. Few guys come and tell an old man sitting on the verandah wearing a tradition patriot’s cloth. And they say to the old man, “Father, father Italy is coming.” And the old man reacted with a ‘heroic’ gesture and said a war cry. Those guys told the old man, “No father, it is as such Italy that is coming, it is its pasta.” Then the old man cooled down and even sang, “Please let it in”. This advert simply shows our ignorance on the very interest of Italy while it came to invade us back in the 1890s.
All colonizers came to Africa not looking for its sunshine; it is for resources to satisfy their economic interest. The Italy that failed in political colonization has finally succeeded in the economic colonization which of course has been among its very interest back then. Most products’ advert reflects a ‘pride’ upon importing ‘Turkey made’ ‘German made’ ‘UK made’ ‘US made’ products. This however shows our inability and hypocrite tendencies.
On the other hand, an export promotion strategy is an essential component of a state competitiveness agenda in the 21st century and a critical element of job growth in the immediate term. Exports are just as critical to state economies, but Ethiopia’s export promotion efforts often suffer from several shortcomings. Research documents indicate that we do not have the data to understand our own export strengths, nor the effectiveness of our existing export programs. Our export efforts are reactive, fragmented, and inconsistently funded. The export sector hasn’t been that effective in promoting our unique brand internationally. The export promotion programs here in Ethiopia are often merely reactive, dealing with the businesses that approach them. They also tend to view export promotion in a limited way, ignoring the fact that exporting companies require an efficient transportation system that allows them to better connect with their clients abroad and state innovation and education policies that help firms maintain their competitive advantage in the world.
In line with the education policy, for instance, the major sources of export revenue for Ethiopia are coffee, oilseeds, cut flower, Khat, skin and leather; and yet our universities (the higher education curricula) don’t engage in Research and Development programs to bolster the productivity of these items nor in training the farmers and the industries that produce these export goods. The education strategy is oftentimes criticized for its inability to produce knowledge that fits to the country’s need.
In Japan, the Toyota Company has opened the University of Toyota that specializes on the production of Toyota vehicles and teaching the organization’s culture and work ethic for its employees. Toyota Company did this because it is the main source of export revenue for the Japanese economy. Here in Ethiopia, it might not be economically feasible (at least in the short term) to open such specialized learning institutions, however inculcation of our export culture, performance, and strategy within the curricula of higher education institutions would be a commendable thought.
The other related issue that our export strategy should focus on is the diversification of exports. Export diversification reflects the degree to which a country’s exports are spread across a large number of products and/or trading partners. This contrasts with export concentration where a greater focus of trade is on a small number of commodities and/or trading partners.
Experts also advise that as a remedy to these shortcomings and to augment our economy and create jobs in a way, the export sector needs to a) be efficient in assessing exports and the performance of the export promotion activities, b) be able to create a well-organized export strategy, and c) organize trained economic diplomats and exploit the potential of public diplomacy through the millions of Diaspora and build and strengthen new trading partners.
With regard to the relationship between export and employment, several researches have been conducted. And most of them concluded that there is a positive correlation between them. One of the prominent economists in the world, and the advisor for the late Prime Minister Meles Zenawi, Joseph Stiglitz, on his book, “The Price of Inequality”, succinctly mentions how ‘export creates jobs and imports destroy jobs’. As more goods and services are produced it leads to an increased employment. In addition to the number of job opportunities export creates, more exports mean more and better paid jobs.
However, care must be taken while considering the items and the status of the items we export. Export of raw materials and semi-finished products has detrimental impact. In the short run, it may seem that we generate revenue from the export of the raw material (such as a skin), but after a while the skin we exported comes back in a form of shoes, belt, jacket etc and make us pay more than what we have received from the export. Exporting finished products solves this puzzle and boosts the foreign exchange earnings. Export promotion strategy of course depends on external demand. We need to analyze the demand for the item we have a comparative advantage on before engaging in the international market and mould the good or service according to the customers’ taste and preferences.
It is therefore to take these various factors into account and look into our local potential and engage in producing most of the imported items locally on one hand and consciously take part in the export market so as to narrow the gap in the Balance of Payments.
BY WOSSENSEGED ASSEFA
The Ethiopian Herald 23 July 2021
