Causes of persistent   balance of payment problems   (Deficits)  in Developing   countries

Persistent   balance   of  payment   deficits   are  experienced   by  the  country   when  its  foreign   exchange expenditure   exceeds   its  foreign  exchange   earnings   year  after  year.  Balance   of payment   deficits   are caused by factors which;

(a)  Reduce foreign exchange   earnings and increase foreign exchange expenditure.

(b)  Increase capital outflow and reduce capital inflow. These factors include:

1. High levels of inflation in developing countries. Inflation increases production costs and discourages   exports by making   them expensive. This leads to low demand for exports hence low foreign exchange earnings.
2. Low export prices. Since developing   countries   mainly export primary   products   where prices are low on the world market,   they get less foreign   exchange   earnings   hence   balance   of payment.
3. Excessive reliance on imports in form of consumer and capital goods. Developing    countries import   expensive   manufactured    products   leading   to high foreign   exchange   expenditure    hence balance of payment deficits.
4. Low productive capacities in developing countries. This is due to limited co-operant factors used in the production   process   like limited capital, use of poor technology,   unskilled   man power etc. This leads to low output for export purposes hence balance of payment   deficits.
5. Excessive capital out flow in forms of profit repatriation, public debt servicing   and capital flight by the nationals.
6. Wide spread political instabilities in developing countries. Political   instabilities    discourage investments   and production   which leads to a decline in exports.  In addition   political   instabilities increase expenditure on military equipments   which leads to borrowing   hence balance   of payment deficits.
7. Poor and inadequate social and economic infrastructures .The existing infrastructure is in a bad state.   For   example,   there   exists   poor   transport,   storage   and   communication     facilities    which greatly   discourage   the production    and distribution   of commodities    for export   purposes    hence balance of payment deficits.
8. Use of poor technology. This results into inefficiency in resource use and the production   of low quantity and poor quality exports which fetch low prices on the world market.
9. Protectionism by developed countries.   The  high   tariff   and   non-tariff   barriers    imposed    by developed   countries  against  exports  from  developing  countries   lead to a reduction   in exports  and foreign  exchange  earnings  hence  balance  of payment  deficits.
10. Discovery of synthetic fibers by developed countries. Synthetic fibers like Nylon,   Rayon,   silk and  the  use  of raw  material   saving   technology   by  developed   countries   have  led  to  a decline   in demand   for  agricultural   raw  materials    from  developing    countries   hence   a  decline   in  foreign exchange  earnings.
11. 11. High population growth rates and dependence burdens. These force developing    countries   to import more foodstuffs and medical   services in order to support the rapidly growing   In addition,   a rapidly  growing  population   has led to an increase  in consumption    of commodities which  would  otherwise  be exported  hence  balance  of payment  deficits.
12. Existence of natural disasters. These   include   floods.,  drought,    pests    and   diseases    which adversely  affect  the agricultural   sector  hence  a decline  in agriculture   export  and export  earnings.
13. High levels of corruption and embezzlement of scarce economic resources. Resources meant for domestic and export production   and embezzled for personal gain.  This  increases   government expenditure   on  un  productive   public   enterprises   forcing  the  government    to  keep  on  importing hence  balance  of payment  deficits.
14. Limited economic diversification   by developing countries.   Developing     countries    tend   to concentrate    on   the   production     and   exportation    a   few   traditional    cash   crops    which    face unfavorable   terms of trade on the world market hence balance of payment deficits.