The Balance of Payments as a Structural Problem

The UK balance of payments has acted as a serious constraint on the attainment of other macroeconomic goals since the Second World War, particularly the achievement of faster, investment-led growth. As the economy has expanded towards its capacity level, bottlenecks in particular sectors of the economy have raised the aggregate level of imports in excess of the demand for exports, necessitating contraction of the economy. Likewise, attempts to grow faster in order to match the growth rates of other European countries have resulted in imports growing more rapidly than exports, and experiments of domestic demand-led growth have had to be abandoned. In the last two chapters the prime importance of the growth of exports, and the income elasticity of demand for imports, as determinants of domestic economic performance have been stressed. Nevertheless a strong body of opinion has traditionally argued that the fundamental problem of the UK balance of payments has been a lack of price competitiveness in world markets, because unit costs of production in the United Kingdom have risen faster than elsewhere, and that the most appropriate solution to this problem is to let the currency depreciate. Since 1972 the pound sterling has in fact depreciated substantially against the dollar and other major currencies, as shown in Figure 9.1, p. 246.