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The Balance of Payments in the 1980s

Author

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  • Warren Tease

    (Reserve Bank of Australia)

Abstract

This paper examines the behaviour of the balance of payments in the 1980s. In particular, it identifies the factors that underpinned the persistently high current account deficits experienced during the decade. In doing so, it attempts to reconcile two approaches to analysing the current account. The first, partial equilibrium approach, focuses on imports and exports and their proximate causes, expenditure and relative prices. The second approach considers the current account in a general setting with it being a reflection of domestic investment and saving. The paper also considers the issue of longer term adjustment. In particular, it examines the role of the exchange rate in that adjustment process. The paper argues that the factors influencing the current account deficit shifted over the course of the decade. The low level of national saving (which was largely due to the decline in public asving) underpinned the deficit in the first half of the decade. This was exacerbated by two shocks. The first, in 1981/82, being the investment phase of the resources boom following OPEC II. The second being the fall in the terms of trade commencing in 1985. Despite a large depreciation of the exchange rate, a sunstantial contraction of fiscal policy and subsequently a large rise in the terms of trade, the current account showed little sustained narrowing in the second half of the decade. This can largely be explained by a rise in private investment associated with the increased profitability of the corporate sector. The rise in the terms of trade was not reflected in increased saving and therefore an improvement in the current account. These factors placed upward pressure on income, expenditure and the real exchange rate. The monetary policy tightening, commencing in early 1988, may have exacerbated this exchange rate rise. This tightening was necessary, nevertheless, for domestic anti-inflationary objectives. The rise in the current account deficit and external debt during the decade was facilitated by Australia’s more complete integration into world financial markets. The abolition of exchange controls and the development of offshore markets in $A denominated securities gave domestic residents greater recourse to foreign savings to finance their expenditures. Also, the abolition of exchange controls led to a switch to debt rather than equity finance. This directly contributed to the rise in foreign debt.

Suggested Citation

  • Warren Tease, 1990. "The Balance of Payments in the 1980s," RBA Research Discussion Papers rdp9003, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9003
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    File URL: https://www.rba.gov.au/publications/rdp/1990/9003.html
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    Cited by:

    1. Adrian Blundell-Wignall & Jerome Fahrer & Alexandra Heath, 1993. "Major Influences on the Australian Dollar Exchange Rate," RBA Annual Conference Volume (Discontinued), in: Adrian Blundell-Wignall (ed.),The Exchange Rate, International Trade and the Balance of Payments, Reserve Bank of Australia.
    2. Susan Black & Joshua Kirkwood & Thomas Williams & Alan Rai, 2013. "A History of Australian Corporate Bonds," Australian Economic History Review, Economic History Society of Australia and New Zealand, vol. 53(3), pages 292-317, November.
    3. repec:bla:ecorec:v:72:y:1996:i:218:p:201-13 is not listed on IDEAS
    4. Hogan, Lindsay I. & Sterland, Barry, 1991. "Inflation, Monetary Policy and Australia's Primary Industries," 1991 Conference (35th), February 11-14, 1991, Armidale, Australia 145905, Australian Agricultural and Resource Economics Society.
    5. Nigel Dews & John Hawkins & Tracey Horton, 1992. "Measuring the Cost of Capital in Australia," RBA Research Discussion Papers rdp9205, Reserve Bank of Australia.
    6. Susan Collins, 1994. "Experiences with Current Account Deficits Among Asian Economies: Lessons for Australia?," RBA Annual Conference Volume (Discontinued), in: Philip Lowe & Jacqueline Dwyer (ed.),International Intergration of the Australian Economy, Reserve Bank of Australia.

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