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foreign investment) triggered by factors such as
short-term interest rates. Hot money, being likely to
depart as rapidly as it comes, tends to destabilize a
country's balance of payments. Governments may
seek to control these flows by the use of currency
controls.
The `visible' current account �sometimes termed
the balance of trade) reflects flows of cash in and
out of the national economy in respect of purchases
and sales �imports and exports) of visible goods.
This includes flows relating to long-lived assets
�such as ships and aircraft) which in micro
accounting would be treated as capital expenditure.
The `invisible' current account reflects a
heterogeneous set of flows of cash including those
for exports and imports of services such as banking,
insurance and tourism �an increasingly important
component, which it would be more logical to
include in the balance of trade) as well as payments
and receipts of returns on investment �interest
and dividends), and private and intergovernmental
transfers other than those on capital account.
Among the service industries, tourism gives rise to
very significant invisible export and import flows.
The term `tourism balance of payments' is used to
indicate the balance between these flows. For
example, France is a country with a large positive
tourism balance of payments, as its inflows �tourist
expenditure by foreigners in France) greatly exceed
its outflows �tourism expenditure by French people
abroad).
A country's balance of payments is important
for the maintenance of the value of its currency in
foreign exchange. Continuing balance of payments
deficits for a country normally lead to an
imbalance between the international supply of
that country's currency and the international
demand for it, in the direction of an excess
supply. This in turn leads to the value �or parity) of
the country's currency, in terms of the currencies of
other countries' currencies, tending to fall; this is
known as the country's currency `weakening'. The
converse is true if the imbalance is in the direction
of an excess demand; the country's currency tends
to `strengthen'. Because a weakening currency
makes imports more expensive and exports
cheaper or more profitable, it tends to have an
inflationary effect on the country's economy; prices
in the domestic economy tend to rise. Conversely, a
balance of payments 49
strengthening currency tends to have a deflationary
effect, with domestic prices tending to fall or at
least to remain stable. The inflationary effect may
be countered by increasing the country's interest
rates so as to attract foreign capital while restraining
domestic demand. However, one consequence
of using interest rates for this purpose may be to
attract `hot money'. Similarly, the deflationary
effect of a strengthening currency may be countered
by reducing the country's interest rates. A
hard currency is one which has tended to
strengthen and is not expected to weaken. This
fluctuation would have immediate influence on the
number of international tourist arrivals to a given
country �see inbound), as well as on the number of
its residents going abroad �see outbound).
However, even strong currencies may be subject
to slight inflation; they are strong because other
countries' currencies are subject to higher inflation.
One reason for this inflationary tendency even in
countries with strong currencies is public expenditure
deficits, with government receipts from taxes
and other sources being insufficient to meet public
sector and other government expenditure. Bridging
this deficit leads the government to increase the
money supply, which in turn leads to the imbalance
of `too much money chasing too few goods and
services'. In the short term, this imbalance is
corrected by some combination of prices increase
in the country's economy �i.e., inflation); the
shortfall of goods and services is made good by
imports, leading to a deterioration in the country's
balance of payments.
One strategy which may be used in developing
countries in the hope of improving their balance of
payments on current account is import substitution.
However, this strategy is likely to frustrate
longer term economic development if it ignores
the principle of comparative advantage. Another
strategy which may be adopted for similar
purposes is the development of tourism as an
invisible export. The success of the latter strategy
depends on a number of factors, including the
extent to which imports of goods and services
required for tourism development �such as building
materials and construction services) can be kept to
a minimum, and �for longer term economic
development) the multiplier effect. Such a