Some Misconceptions on the Sharing of the Burden of Adjustment between Deficit and Surplus Countries
This chapter discusses that the problem as it arises today and attempt to destroy the myth that deficit countries are the martyrs of the international economy. The idea that the burden of balance-of-payments adjustment falls more heavily on deficit than on surplus countries is commonly found in economic literature. Those who condemn this sharing of the burden of adjustment as inequitable usually see as its source the limited supply of international liquidity. Classical theory can help eliminate misconceptions concerning the purported need to modify the distribution of the burden of readjustment. Adjustment is nevertheless possible, since a decrease in income produces a fall in imports; however, the fall in income and product is a multiple of the fall in imports. The depression that accompanies adjustment in deficit countries may be intolerable. The role of international liquidity is to permit stabilisation of exchange rates until adjustment policies–monetary or fiscal–have taken hold.