Jorge Del Canto
IN THE INTERNATIONAL cooperative efforts in the field of finance that began in the 1940’s, the Latin American governments participated rather passively and with some skepticism. Fortunately the policies of the leading industrial countries in the postwar years have led to a revival of Latin American confidence in the benefits to be derived from a closer relationship between the industrial and the developing countries.
Mr. Del Canto joined the Fund in 1946 and is now Director of the Western Hemisphere Department. After graduating, with high honors, from the University of Chile, he pursued graduate studies at the University of California and specialized in Latin America, an area which he now visits for four to five months every year in the course of his official duties.
Along with the World Bank and other international financial agencies, the Fund has played its part in the new phase of cooperation. The Fund is deeply concerned with providing the solid foundation of monetary stability that economic development needs. The recognition that such a foundation is essential for optimum economic growth is universal; sound financial policies are the aim of countries with socialist economies as much as of countries with liberal economies.
The creation of an equable financial climate to assist economic growth, however, is not enough to increase growth. Economic development arises from an increase in the rate of capital formation, the assimilation of technology, the attitudes of the community toward development, and, particularly, good administration. Of course the political, social, and cultural factors affecting development must not be ignored, but the economic growth of our societies fundamentally requires capital, and this has to be obtained from local resources, through conditions that will encourage capital formation, and also from the transfer of foreign savings, both public and private, to the developing countries. It is a historical fact that the transfer of capital and technology from the more developed countries to the developing countries has contributed to the economic transformation of our societies. This certainly has been true of the United States, Canada, Australia, and, in Latin America, of countries such as Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela, to mention only a few.
It is the difficulties that Latin American countries confront in their public finance that have been the greatest deterrent to the stabilization efforts now being made with the Fund’s support. In the Fund we do not believe that there is anything “structural” (i.e., irremediably built into the economy) that prevents member countries from improving the management of their public finances so as to increase the availability of public savings for investment. Neither do we share the fatalistic view that excessive monetary expansion is essential to the making of structural changes which would accelerate economic development. On the contrary, we believe that a reasonable degree of monetary stability is necessary, not because the Fund says so, but because a climate of confidence associated with financial stability is most conducive to structural gains and more orderly growth, as well as to a more tolerable external equilibrium.
Yet there are, of course, serious faults in the Latin American economies, and it is vital that these should be remedied. To succeed in this endeavor we need to create, where it does not exist, or to maintain elsewhere, the proper climate for financial stability. We must promote exports and develop conditions which will accelerate the process of domestic capital formation. We must encourage a greater inflow of foreign capital, of both public and private origin. We, in the Fund, consistently urge the Latin American governments to give the highest priority to sound financial policies and to improvements in the administrative machinery of governments. We do not see how either the government or private individuals and enterprises can plan development on a rational basis, with a meaningful cost accounting system, if a country is going through a long-continued and accelerating inflation.
Latin America and the Fund
Latin American membership in the Fund is represented by 19 countries of the Western Hemisphere. (Jamaica joined the Fund on February 21, 1963, and Trinidad and Tobago on September 16, 1963, but for the purposes of this study these countries are not considered part of Latin America.) The initial quota of the Latin American countries was $484.5 million, but with the admission of Argentina in 1956, and subsequent quota increases, these quotas increased to $1,364.2 million at April 30, 1964. This represents almost 10 per cent of the total quotas (currently over $15½ billion) of the members of the Fund.
The terms of the Fund Agreement require the Latin American countries to contribute 25 per cent of their quotas, or $341 million, in gold, the balance being credited to the Fund in local currency. The use of this local currency by the Fund is for the time being very unlikely, since the Latin American currencies are not widely used internationally, and the Fund would in any case not expect to draw on one less developed country in order to make an advance to another. At April 30, 1964, the Latin American countries had made a total disbursement in gold to the Fund of $323.5 million. At the same date they had made total gross drawings of $1,566.1 million. During the same period, Latin American repurchases from the Fund amounted to $879.8 million. The total net indebtedness of Latin America to the Fund on April 30, 1964, amounted to $686.3 million.
From the beginning of operations until April 30, 1964, the Fund has negotiated 76 stand-by arrangements with Latin American countries for a gross total of nearly $2 billion. Many of the successive stand-by arrangements with some countries have not been used or have been used only moderately—this is probably the best test of a successful stand-by, that it was actually not used, and that the country was able, through its own internal policies, to correct the payments imbalance. On December 31, 1963, the Fund had in force 9 stand-by arrangements with Latin American countries, for a total of $166.25 million. New stand-by arrangements with Chile, Colombia, Peru, and Nicaragua, aggregating $76.25 million, were undertaken by the Fund in the first quarter of 1964. It is clear that the Latin American countries have made—and continue to make—the most active use of the Fund’s resources.
Let us see how the Fund has achieved this record of intense operational activity in Latin America. When it began operations, in 1946, the Latin American countries had emerged from World War II with an improved international reserve position, so that in the first five years the Fund’s financial activity in Latin America was limited. The Latin American countries began to experience balance of payments difficulties in 1949 and 1950, but then saw their external economic situation suddenly improve, particularly since their raw material exports expanded with the Korean war. However, in the mid-1950’s, following the end of the Korean conflict, there was a decline in prices of raw materials, particularly of coffee, which affects the economy of so many countries. Yet at the same time the countries were arriving at a new determination to achieve economic development. These circumstances united to lead the Fund, in 1957, to a sharp increase in its activities in the Latin American countries.
In order to appreciate better the present Fund activity in Latin America it is desirable to distinguish two types of economic disequilibrium to which, in my opinion, these countries are constantly being exposed. These are basically: (a) the instability “exported” to them through cyclical fluctuations in the demand and prices for their export products in industrial centers; and (b) instability of internal origin resulting from inadequate means of dealing with monetary and fiscal problems.
Individual Country Experiences
It is difficult to generalize about the experience of the Fund in the various countries of Latin America. It is, however, possible to distinguish between the role of the Fund in (a) countries that have consistently followed domestic stabilization policies, and that have had a favorable record of exchange stability and free convertibility of their currencies, (b) countries that have made substantial progress in the same direction in recent years, and (c) countries where domestic inflation and continued payments difficulties are still a problem.
The northern countries of Latin America (Mexico, Central America, Venezuela, and also the Caribbean members of the Fund) have had a remarkable record of exchange stability and economic growth; of the 25 member countries of the Fund that maintain full convertibility under Article VIII of the Fund Agreement, 10 countries are in this area.
Mexico has had ten years of exchange stability, and economic growth has been satisfactory. Real gross national product more than doubled in the period 1950–62; the rate of growth was 6.3 per cent in 1963. Mexico used the Fund’s resources in 1947 and 1954, and in March 1959 entered into a six-month $90 million stand-by arrangement. The country’s payments position has strengthened, and international reserves are now above $500 million, the highest in Mexican history.
The five countries of Central America (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) have had an excellent record of growth, associated with increased exports, exchange stability, and, more recently, an accelerated rate of economic integration. Central America experienced rapid economic growth in the postwar years through the mid-1950’s; from 1948 through 1957 exports nearly doubled. Growth in exports and income stimulated the expansion of other sectors of the economy and made available savings to support an increase in private and public investment. The situation changed after 1957, as the prices of coffee and cotton declined; during 1958–61, the volume of exports increased, but prices for exports declined at a faster rate. Growth in the value of exports resumed in 1962 and 1963, improving the payments position of these countries. Four of the countries in the region (El Salvador, Guatemala, Honduras and Nicaragua) have accepted the obligations of Article VIII of the Fund Agreement, involving the convertibility of their currencies; the other country (Costa Rica), which has not done so, nevertheless in fact maintains convertibility.
For many years the Fund has provided financial and technical assistance to help maintain financial stability and stimulate development in Central America. Since the beginning of Fund operations, 21 stand-by arrangements have been negotiated in the area for a gross total of $186 million. The Fund’s assistance was particularly valuable during the difficult years 1958–61, when international reserves declined in the area from more than $150 million to less than $100 million. Gross international reserves have recovered now to about $130 million, and, in addition, these countries know that they can rely on their quotas in the Fund, aggregating $76.75 million, as a second line of reserves.
The Fund has also played an active role in Venezuela in support of its Article VIII status, and the country has become increasingly active. From a token initial figure of $15 million in 1946, Venezuela’s quota rose to $150 million in 1960. During a crisis that occurred in that year Venezuela entered into a $100 million stand-by arrangement, but it had no need to use the Fund’s resources. In the last two years the country has recovered from its difficulties and now enjoys a comfortable level of over $800 million of international reserves, a high income per capita ($800), and an increasing rate of economic growth and diversification.
West Coast Countries
Of the West Coast countries of South America, Peru has the longest record of financial operations with the Fund. Eleven stand-by arrangements, totaling $228 million, have been negotiated since 1954. Peru has seldom needed to use these stand-bys, but they have provided a valuable support for its stabilization policies. The record of economic growth has been dramatic; during the period 1950–63, real gross national product doubled. The rate of growth has been particularly encouraging in the last four years, averaging 6 per cent per annum.
Ecuador has also had a record of close cooperation with the Fund, although financial operations have become significant only in recent years. From 1950 to 1963 real national income in Ecuador rose at an average rate of 5 per cent per annum. Exports during the same period nearly doubled, in spite of an adverse movement in Ecuador’s terms of trade. The country has a tradition of price stability; over the decade 1950–60, prices rose by less than 5 per cent. From late 1960 to 1961, some inflation took place, leading to a devaluation of the sucre, but in 1961 Ecuador returned to a policy of financial stabilization, with support from the Fund, and this checked the price rise, restored balance in the payments position, and rebuilt the reserves. New stand-by arrangements were entered into in 1962 and 1963, and the country’s financial position has improved substantially.
Colombia initiated stabilization policies in 1957, with Fund financial support. But where Peru benefited from external developments during the initiation of stabilization policies, Colombia did not. The price of the country’s leading export—coffee—began to decline in 1954, and fell by more than one third in the three years after stabilization policies were initiated in 1957. This 1957 stabilization program included measures designed to increase government revenues, cut government spending, and widen the use of the tools of modern central banking. The exchange rate was also arrested at a more adequate level. These policies contributed to substantial balance of payments surpluses in 1957 and 1958, permitting the reduction by nearly $200 million of short-term liabilities arising from import arrears, and, in addition, a moderate increase in reserves. There was a deterioration in the country’s financial position during 1961 and 1962, but a new effort was made early in 1963, with the support of a $52.5 million stand-by arrangement with the Fund. This effort has contributed to an improvement in the payments position, and this year the Fund has entered into a new stand-by arrangement with Colombia to support the continuation of these policies. The exchange rate adjustments of 1963, plus a generous wage policy, led to an increase in prices of 33 per cent in 1963, and 2 per cent in the first two months of 1964, but now that the outlook for coffee prices has improved, the Colombian efforts appear more likely to be rewarded with success. Altogether Colombia has negotiated six stand-by arrangements with the Fund, for a gross total of $213.75 million.
Bolivia is another country that has had active financial relations with the Fund; eight standby arrangements aggregating $36.5 million have been negotiated. The country was confronted by serious financial difficulties in the period that followed the Revolution in 1952, but, beginning in 1956, Bolivia initiated stabilization policies that brought to an end the rapid inflation of the period 1953–56. There was a transition from 1956–59, but beginning in 1958, the boliviano was stabilized at the level of about $b 11,885 per U.S. dollar and (subject to the introduction of the Bolivian peso equal to 1,000 bolivianos) it has remained at that level ever since. Economic expansion has recently been gaining momentum; the gross national product in real terms expanded by 7 per cent in 1962, and the Bolivian Government is now embarking on a Ten-Year Development Program.
In 1959 a serious attempt was launched to stabilize the economy in Chile. It met with some success, as measured by the price increase, which declined from a 39 per cent increase in 1959 to an 11.6 per cent increase in 1960, and one of 7.7 per cent in 1961. But the exchange rate was pegged for too long at an artificial level, leading to an overvaluation of the escudo that resulted in a gradual depletion of international reserves and acute payments difficulties. Fiscal difficulties were aggravated by the disastrous earthquake of May 1960. The authorities have been unable to overhaul the social security system of Chile, which is, according to experts in this field, beyond the capacity of the economy. Nor was there, at first, enough emphasis on promoting exports. In 1962, corrective policies were restarted, but the unavoidable devaluation of the escudo, combined with continued budgetary difficulties, led to a revival of inflationary pressures, so that prices increased by 14 per cent in 1962 and 45 per cent in 1963. Determined efforts are being continued, however, to deal with these pressures and carry on the Ten-Year Development Program. Encouraging results are being achieved in expanding public works and low-cost housing, and in increasing industrial production. Agrarian tax reforms are being implemented. The Fund has negotiated five stand-by arrangements with Chile for a gross total of $183.1 million.
East Coast Countries
Among the East Coast countries, Paraguay and Uruguay have followed stabilization policies. From causes somewhat similar to those operating in Chile, the Uruguayan economy stagnated in the late 1950’s. Serious difficulties were met in 1959, with an aggravation of the inflationary situation and the physical complication of devastating floods. Uruguay initiated stabilization policies in 1960, and the annual increase in prices was reduced from 48.6 per cent in 1959 to 36.3 per cent in 1960, to 10 per cent in 1961, and to 11.2 per cent in 1962. An improvement in production, particularly for export, and also in the payments position, resulted from these efforts. However, as in Chile, the prolonged maintenance of an overvalued exchange rate and a revival of budgetary difficulties led to a worsening of Uruguay’s position in late 1962 and early 1963, when the Uruguayan peso was drastically devalued. The devaluation and improved price outlook for Uruguayan exports have strengthened the payments position, but there are still budgetary difficulties. The Fund has negotiated two stand-by arrangements with Uruguay, aggregating $60 million.
Paraguay has maintained a close and constructive relationship with the Fund. After a period of acute inflation, the Government initiated stabilization policies in 1957 with the Fund’s financial and technical support. The success of these policies was gradual, but, beginning in 1959, it has gained momentum. After a depression in 1959–60, economic activity has begun to recover, and the export position is improving.
Following upon a period of very slow growth of production, accelerating inflation, and increasing exchange difficulties, Argentina at the end of 1958 decided to undertake a comprehensive stabilization program. The year 1959 was one of transition and difficulty, but there after the depreciation of the exchange rate was checked, price increases were controlled, investment rose, and production began to grow. Then, particularly toward the end of 1961, weaknesses again developed. State enterprises were not brought under effective budgetary control, and they contracted an undue amount of foreign debt in the form of suppliers’ credits. Substantial wage increases in excess of price increases were granted, and the exchange market deteriorated. Political problems mounted, confidence was undermined, and a period of severe difficulties began.
In 1962 and 1963 Argentina had very heavy external debt commitments. Negotiations to reduce the payments were undertaken with its creditors and some relief was obtained, but the country’s economic difficulties remained severe and, together with continuing political uncertainty, caused a prolonged depression that lowered Argentine production, while prices increased sharply. However, the monetary authorities were eventually able to moderate the inflation and to stabilize the exchange rate. Exports rose sharply and production began to recover in the middle of 1963.
Financial transactions between the Fund and Argentina have been quite substantial. A drawing of $75 million, 50 per cent of the original quota, took place soon after Argentina joined the Fund. In recent years, five stand-by arrangements have been negotiated with a gross total of $475 million.
Brazil, as is well known, has been going through a period of great economic difficulty. The deterioration has been shown by an accelerating rate of price increase, periodic exchange crises, and a gradual reduction in the rate of growth. In part, the problems of Brazil have derived from gradually worsening terms of trade as coffee prices declined from the high level reached in 1953–54. But a continued weakening in the finances of the Central Government was a more important cause of trouble. Beginning in 1956, the budget deficit grew rapidly, until in 1963 it reached a level equivalent to about 30 per cent of the money supply at the beginning of the year. The growing inflation caused continuous balance of payments strains, relieved by periodic devaluation and compensatory loans. The growth of foreign indebtedness produced such a burden of debt service that, despite substantial improvement in the price of coffee, attempts to renegotiate terms began early in 1964. The new Government which took office in April 1964 is confronted with extremely difficult economic problems, and a relatively short period in which to solve them before the forthcoming presidential election. Brazil has used the Fund’s resources intensively, with total gross drawings of $428.5 million. Two stand-by arrangements have been negotiated totaling $197.5 million.
Benefit From Fund Transactions
It will be seen that the postwar financial history of Latin America offers a rich variety of experiences, with examples ranging from remarkable financial stability to chronic difficulty and acute crisis. Out of all the variety of experience, however, one interesting constant emerges: the importance to the area as a whole of its transactions with the Fund. The chart on page 73 gives the exact figures, but it is instructive to consider them here in round terms.
At the end of April last, Latin America’s quotas in the Fund added up to less than one tenth of total quotas. The quotas of the ten leading industrial countries amounted to something approaching two thirds of all quotas. Yet over the 17 years that the Fund has been operating, Latin American countries have accounted for one fifth of all drawings. Allowing for the fact that Fund rules call for only a small part of the quota to be paid in gold or U.S. dollars, this means that Latin America has drawn more than 4.5 times its gold and dollar contribution. The Ten, by contrast, have drawn less than half their combined quotas, so that Latin America may be said, relatively, to have received something like nine times the benefit that the industrial countries have received from Fund transactions.
If, instead of looking at the results over a period, we consider the position as it happened to be at a particular month-end (April 1964), then Latin America’s holdings of the Fund’s resources were over 40 per cent of the total of members’ holdings—well over twice as much as was held by the Ten, and almost the same amount as was held by the Fund’s 73 other member countries combined. The chart on page 73 thus shows clearly that it is the developing countries that benefit most from the Fund’s resources, and that within the class of developing countries it is Latin America which has had the greatest advantage.
For Latin America as a whole, the recent improved outlook for the price of exports provides a new opportunity to reconcile financial stability with economic growth. Now that broader objectives of social reform are being pursued under the Alliance for Progress, “financial stabilization” has become a more complex concept and a less simple objective, but the Fund is encouraged by the fact that in all the Latin American countries the authorities responsible for financial policies are showing a greater concern, a better understanding, and a more decisive frame of mind about the need for eliminating inflation and arriving at a stable economy as the best foundation for economic growth and social transformation.