Transfer Problem
The transfer problem is the difficulty a country faces in converting a large payment owed abroad from its own currency into foreign exchange. Raising the money at home is one task; earning the foreign currency to deliver it is another.
Also called: reparations transfer problem · Keynes-Ohlin debate · German transfer problem
A government can raise any sum in its own currency through taxes or borrowing. A foreign creditor, though, wants to be paid in its own currency or in gold. To deliver that, the paying country has to earn foreign exchange, which in the long run means exporting more than it imports. The budget burden and the transfer burden are separate, and solving the first does not solve the second.
The term comes from the debate over German reparations. In 1929 John Maynard Keynes argued in the Economic Journal that Germany would have to cut its prices sharply to generate the export surplus needed, a cost on top of the reparations themselves. Bertil Ohlin replied that the payment itself shifts spending power: income leaves the payer and arrives at the recipient, so demand for the payer's exports rises and the required surplus partly creates itself. Economists still argue over how much each was right.
In practice Germany paid much of what it owed in the 1920s with money borrowed from abroad, mostly American, so the transfer was financed rather than earned. When foreign lending stopped, the arrangement collapsed.
The idea applies well beyond war debts. Any country servicing large foreign-currency debt faces the same balance of payments constraint, and when export earnings and reserves fall short, the result is rationed foreign currency, capital controls and delayed outward payments. For a payments business, a transfer problem shows up as dollars that are unavailable at any reasonable rate.
In practice
The transfer problem is about the foreign-currency side of a payment. A country with a strong budget can still face it, and a country with a weak budget may not if it has ample export earnings.
Example
A country owes US$5 billion a year abroad. Its government can tax the local-currency equivalent, but the economy earns only US$3 billion more from exports than it spends on imports. The remaining US$2 billion has to come from reserves, new borrowing or a squeeze on imports.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Transfer Problem, with more detail and background.
See also
- War ReparationsWar reparations are payments a defeated state is required to make to the victors for losses and damage caused by a war. They are usually fixed by treaty or by a commission, and are paid in money, goods or services over many years.
- Balance of PaymentsThe balance of payments is the statistical record of all economic transactions between a country's residents and the rest of the world over a period. It is split into the current account, the capital account and the financial account.
- Current Account BalanceThe current account balance is the net of what a country earns from and pays to the rest of the world for goods, services, investment income and transfers such as remittances. A deficit must be financed by borrowing, investment inflows or reserves.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- Hard CurrencyA hard currency is one that is widely accepted for international payment, freely convertible and expected to hold its value, such as the US dollar, euro, yen, pound sterling or Swiss franc. Suppliers abroad generally insist on being paid in one.