International Payments

Background

International payments are transactions between residents of different countries or between residents and international institutions. These payments encompass a wide range of economic interactions, from trade in goods and services to financial investments and transfers of foreign exchange reserves.

Historical Context

With the advent of globalization and the liberalization of world economies, the flow of international payments has multiplied, driven by trade expansion, foreign direct investment, and financial market integration. Historically, the system of international payments has evolved from bilateral agreements and gold standards to sophisticated mechanisms involving various currencies and internationally recognized financial instruments.

Definitions and Concepts

International payments cover three primary types of transactions:

1. Current Account Transactions:

   • Exports and Imports: Payment for goods and services traded internationally.
   • Income from Property: Payments of interest, dividends, and other returns on investments.
   • International Transfers: Financial gifts, aid, and worker remittances.

2. Capital Account Transactions:

   • Securities: Buying and selling financial assets like stocks and bonds across borders.
   • Loans: International lending and repayment.

3. Official Reserves Transactions: Transfers of foreign reserves managed by central banks and governments.

Payments can be made in a country’s own currency or in widely accepted currencies such as the euro or the US dollar. Additionally, instruments like Special Drawing Rights (SDRs) issued by the International Monetary Fund are part of the international payment system.

Major Analytical Frameworks

Classical Economics

Classical economists focused on free trade and the benefits of international trade, assuming that such transactions would lead to an efficient allocation of resources globally.

Neoclassical Economics

Neoclassical models emphasize the comparative advantage and the gains from trade, analyzing the impact of international payments through supply and demand for currencies and predicting exchange rate fluctuations.

Keynesian Economics

Keynesians highlight effective demand in analyzing international payments, considering how cross-border transactions affect aggregate demand and the potential need for governmental intervention to manage balance of payments.

Marxian Economics

Marxian theories reflect on how international payments perpetuate global inequalities and economic dependencies through capital transactions and uneven exchange terms.

Institutional Economics

This framework examines how institutions, policies, and norms influence international payments, emphasizing the role of international bodies like the World Bank and IMF in shaping payment flows.

Behavioral Economics

Behavioral approaches explore how psychological factors and acceptability of currencies affect the willingness of parties to engage in international transactions.

Post-Keynesian Economics

Post-Keynesians discuss the implications of structural imbalances in international payments and argue for policy measures to manage these discrepancies, such as capital controls and exchange rate adjustments.

Austrian Economics

Austrians advocate for minimal government intervention and emphasize spontaneous order in international payments through free-market mechanisms.

Development Economics

This branch looks at the impact of international payments on developing countries, exploring how trade and financial flows can support or hinder economic development.

Monetarism

Monetarism emphasizes the role of money supply in international payments, exploring how variations in domestic and foreign money supplies affect exchange rates and payment balances.

Comparative Analysis

An analysis of international payments across different economies reveals diverse impacts based on currency stability, political context, and economic policies. Trends such as ‘dollarization’ show a preference for stable currencies in volatile economic scenarios.

Case Studies

• European Union: Use of a common currency (euro) to simplify intra-region payments.
• Developing Economies: Challenges faced due to dependence on foreign aid and remittances.
• United States: As a global financial hub, examining the role of the US dollar in international transactions.

Suggested Books for Further Studies

1. “The International Economy” by Peter B. Kenen.
2. “Balance of Payments Adjustment: Macro Facets of International Finance Revisited” by Augustine C. Arize.
3. “Cross-Border Transactions in International Payments: Patients and Goods” by J.F. Maurer.

Related Terms with Definitions

• Exchange Rate: The rate at which one currency can be exchanged for another.
• Foreign Direct Investment (FDI): Investments made by a firm or individual in one country into business interests in another country.
• Special Drawing Rights (SDRs): International monetary resources in the IMF that operate as supplementary foreign exchange reserves.
• Balance of Payments: A comprehensive record of all economic transactions between residents of a country and the rest of the world.