Journal Issue
Finance … Development September 1979

Developments in the world economy: A selection from Chapter 1 of the Fund’s Annual Report, 1979

International Monetary Fund. External Relations Dept.
Published Date:
September 1979
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The performance of the world economy during 1978 and the first half of 1979 was characterized by a mixture of gains and disappointments. On the one hand, the evolution of domestic demand in several of the largest industrial countries proceeded broadly along the lines of a strategy of policy that had been agreed in various international forums, and this development was beneficial to the distribution of external current account balances among individual countries within the industrial group. The sizable changes in exchange rates for major currencies that occurred during 1978 also made for a better pattern of international payments relationships among the principal industrial countries, and a substantial improvement in the pattern of their current account balances did, indeed, emerge in the first half of 1979. Further, the more orderly conditions prevailing in foreign exchange markets during the current year to date attest to the calming impact of the internationally coordinated measures taken, in combination with adjustments of domestic policy, in the latter part of 1978.

On the other hand, with respect to several of the most fundamental economic problems, little visible progress has been made in the period since the 1978 Annual Report. Both inflation and unemployment remain much too high in most member countries, and the efforts of national authorities to deal with these persistent problems have proved less effective than might have been hoped. Indeed, a rather general renewal of upward momentum in rates of inflation was apparent during the first half of 1979, and the oil price increases introduced at midyear will bring further upward pressures on prices. Many structural problems affecting the supply capabilities of member countries have not yet been adequately treated, and it has become progressively clearer that such problems must be addressed through measures other than general demand management policies.

Another disturbing development emerging during the current year is a sharp resurgence of the combined current account deficit of the non-oil developing countries. At a time when they cannot expect buoyant growth of demand in the industrial world to facilitate expansion of their export earnings, and when costs of imports are rising rapidly, many of the non-oil developing countries—and particularly the poorer ones—may face difficulty in attaining desirable growth rates because of insufficient financing for the volume of imports of goods and services that such growth rates would imply.

Chart 1Industrial countries: changes in output and prices, 1973-78

(Percentage changes from preceding year)

Citation: 16, 3; 10.5089/9781616353384.022.A003

Sources National statistical publications, IMF Data Fund, and Fund staff estimates.

1 Include, in addition to the countries shown separately in the chart, Austria, Belgium, Denmark, the Netherlands, Norway, Sweden, and Switzerland.

2 GDP (at market prices).

Table 1Primary producing countries: changes in output and prices, 1967-78

(Percentage changes)



Change from preceding year
Real GDP
More developed primary producing countries6.
Australia, New Zealand, South Africa5.
Major oil exporting countries39.010.78.0-0.312.86.22.6
Non-oil developing countries46.
Latin America and the Caribbean6.
Middle East8.84.8-
Consumer prices
More developed primary producing countries6.011.816.716.914.417.816.6
Australia, New Zealand, South Africa4.69.313.614.613.212.28.7
Major oil exporting countries38.011.317.018.816.415.19.9
Non-oil developing countries410.
Latin America and the Caribbean15.930.840.954.662.451.643.1
Middle East4.312.721.820.320.219.221.7

Compound annual rates of change.

Comprises Finland, Greece, Iceland, Ireland, Malta, Portugal, Romania, Spain, Turkey, and Yugoslavia.

Comprise Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Include all Fund members not mentioned above, or in Chart 1, plus certain essentially autonomous dependent territories (Hong Kong and the Netherlands Antilles) for which adequate statistics are available. The regional subgroups correspond to the groupings shown in International Financial Statistics.

Compound annual rates of change.

Comprises Finland, Greece, Iceland, Ireland, Malta, Portugal, Romania, Spain, Turkey, and Yugoslavia.

Comprise Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Include all Fund members not mentioned above, or in Chart 1, plus certain essentially autonomous dependent territories (Hong Kong and the Netherlands Antilles) for which adequate statistics are available. The regional subgroups correspond to the groupings shown in International Financial Statistics.

The continued prevalence of high unemployment in most industrial countries has reflected growth rates since 1976 that (with the conspicuous exception of the United States) have been insufficient to absorb any significant degree of slack in the labor force, even with productivity growing at a markedly slower rate than in the 1960s. In a number of countries, a combination of unsatisfactory growth rates (even with the slower growth of potential output), rising labor costs, and high inflation have impeded the restoration of satisfactory levels of profitability and cash flow of business firms and depressed incentives for additions to the capital stock. Although the pattern of economic growth within the industrial world has shifted during recent years, featuring a progressive deceleration in the United States after 1976 and some acceleration in Europe and Japan during 1978, the average rate of output expansion for all industrial countries remained more or less unchanged at 4 per cent in 1977 and 1978. However, this rate dropped to less than 3 per cent in the first half of 1979. By midyear, signs of a likely recession in the United States had multiplied as real gross national product (GNP) rose only slightly in the first quarter and declined appreciably in the second.

During most of 1978, domestic imbalances continued to generate imbalances in world trade and payments relationships, culminating in a major currency crisis in October. Actions undertaken by authorities of several large industrial countries, and particularly by those of the United States at the beginning of November, were successful in arresting the precipitate movements of exchange rates and of private capital that characterized the later stages of the currency disorder. Restoration of more orderly conditions in exchange markets was followed, after the turn of the year, by reversal of many of the earlier movements of short-term capital, as well as (in part) some of the principal changes in exchange rates that had occurred during the first ten months of 1978.

With respect to the broad global pattern of current account balances, several years of progressive reduction in the disequilibrium between oil importing and oil exporting countries came to an end in the first half of 1979. Largely through increased imports of goods and services by the major oil exporters, the current account surplus of that group had been cut back from $68 billion in 1974 to about $6 billion in 1978. However, the previous trend toward reduction of the oil exporters’ surplus was sharply reversed by the succession of oil price increases during the first six months of 1979 that culminated in the decision taken by members of the Organization of Petroleum Exporting Countries (OPEC) toward the end of June, by which further large price increases were put into effect under a complex system in which official export prices for most crude oils exported by OPEC members range from $18 a barrel to $23.50 a barrel (compared with a weighted average of less than $13 a barrel in 1978). These price changes occurred against a background of rising demand for oil and the impact of the Iranian situation on the supply of oil, which together pushed up spot market prices early in 1979; and they have been accompanied by similar changes in the pricing of oil exported from other countries.

Although the exact implications of the new OPEC prices depend on a number of still uncertain factors regarding the shares of various producing countries and types of oil in total exports, it is estimated that the average price charged by the major oil exporting countries under the arrangements announced at the conclusion of the June 1979 OPEC meeting will be about $20.50 a barrel. With such an average price (60 per cent above the 1978 level), the current account surplus of the major oil exporting countries will be raised to an estimated $43 billion in the calendar year 1979 and to more than $50 billion for a full year beginning in July 1979.

These estimates are predicated on the rough assumption that, in the year ahead, additional outlays for imports of goods and services might absorb between two fifths and one half of the incremental export earnings of the major oil exporting countries as a group. On the volume of oil that they exported in 1978, the price increase (over the 1978 average) would add some $75 billion to the aggregate value of their exports.

A corresponding addition to the aggregate import bill of countries other than the major oil exporters is, of course, in prospect. On a full-year basis, this would mean about $70 billion for developed countries and a net total of some $5 billion for developing countries that are not major exporters of oil. Within the latter group of “non-oil” developing countries, however, net oil importers may face an additional annual import cost of about $12 billion, while a small number of other countries that are net exporters (but not “major” exporters) of oil will gain some $7 billion in net export earnings. For many countries in the subgroup of net oil importers, the financing of such large incremental payments for imports may pose problems, in view of their existing external debt and the heavy borrowing in prospect even before the latest rise in oil prices.

Along with its marked effects on international payments positions, both of individual countries and of major groups, the 1979 oil price increase will have an adverse impact on rates of inflation and on the pace of economic activity in oil importing countries. On the assumption that prices for much, but not all, of the oil produced outside the major oil exporting countries and the Sino-Soviet countries will move upward in broad parallel with the price of OPEC oil (by far the most important exception is oil produced in the United States, for which price increases are not expected to parallel those in the world market), it can be calculated that the direct addition to the level of prices in the world economy outside the areas just mentioned will be on the order of 1½ per cent. Additional effects of an indirect character, although highly uncertain and dependent in great part on the policies adopted by the affected countries, could be quite substantial.

Table 2Summary of current account balances, 1973-791

(In billions of U.S. dollars)

primaryMajor oilNon-oil

On goods, services, and private transfers. For classification of countries in groups shown here, see Chart 1 and Table 1.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics, plus balance of listed groups with other countries.

Fund staff projections.

On goods, services, and private transfers. For classification of countries in groups shown here, see Chart 1 and Table 1.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics, plus balance of listed groups with other countries.

Fund staff projections.

Chart 2World trade. 1962-781

(Percentage changes from preceding year in volume and in unit value of foreign trade)

Citation: 16, 3; 10.5089/9781616353384.022.A003

Sources: National economic reports, IMF Data Fund, and Fund staff estimates.

1 Based on averages for world exports and world imports.

Compound annual rates of changes. For years prior to 1970, an imputed value of US$1.00 has been assigned to the SDR.

While the diversion of purchasing power into imports of OPEC oil will be gradually offset, at least in part, by the feedback of additional exports of goods and services to the major oil exporting countries, the deflationary effects of this diversion in the short run may also be substantial. For the whole group of industrial countries and non-oil primary producing countries, the direct deflationary impact is calculated at ⅔ to ¾ of 1 per cent of GNP before allowance for any “multiplier” effects or for any possible offsets to such effects induced by policy measures on the part of national authorities.

An issue commanding immediate attention concerns the question of how the policies of oil importing countries should respond to the 1979 increases in oil prices. Actually, this response has several aspects. First, and of fundamental importance, is the need to conserve energy and develop additional sources of supply. For both purposes, realistic pricing policies for energy are a prime requisite. Second, with wage earners trying to prevent or recoup losses in real earnings, governments face the difficult task of limiting the indirect effects of the oil price increase on the general level of prices. Third, the policy reaction to the deflationary impact is bound to vary widely among countries, but many with relatively high rates of inflation or weak external positions will doubtless find it advisable to accept—not to offset—it. Fourth, in many oil importing countries the authorities will have to contend with a deterioration in the current account position, with the policy reaction depending on individual circumstances.

Key issues of policy

At the end of 1978, worries were being felt in many quarters about the international energy picture over the longer term and about fundamental aspects of economic performance, including high inflation, sluggish economic growth, underutilization of resources, periodic instability of foreign exchange markets, the difficult situation of the non-oil developing countries, and the spread of protectionist trade measures. To these factors has been added the steep run-up in oil prices during 1979. The current environment of great uncertainty clearly foreshadows a period of severe strains in the world economy, emphasizing the need for policies to deal with them.

Of key importance in this regard will be the character of domestic economic policies pursued in the industrial countries. The present array of problems confronting national authorities in the industrial world precludes simple prescriptions offering promise of early success, but rather points to the need for pursuit of a many-sided strategy of policy in a medium-term framework. Similar in this regard is the position of a number of more developed primary producing countries.

As suggested earlier in this chapter, the basic approach must be a “gradual” one, but not “too gradual.” It calls for determined and skillful use of the traditional monetary and fiscal instruments, combined with the application of suitable incomes policies (for example, to prevent oil price increases and other external cost pressures from entering into the indexation, formal or de facto, of wages and other incomes) and increased emphasis on measures to effect structural adjustments and improve supply capabilities, including adaptation to the lower availability and higher price of energy. Obviously, a strategy of policy along these lines will be difficult to implement; it will require courage and perseverance so as to elicit public support for national economic policies and, above all, to reduce inflationary expectations.

The international setting in which industrial countries will be conducting their domestic economic policies is in the process of changing substantially. At the beginning of 1979, the growth of total output in these countries, after proceeding at a pace of 4 per cent in each of the past two years, was expected to decline moderately because of an economic slowdown in the United States—a slowdown that was sought by the U.S. authorities, and welcomed internationally, in view of the need to curb domestic inflationary pressures. Now, it seems clear that the decline of output growth in the industrial world will prove to be much sharper than had been generally expected.

Two developments are important in this respect. First, the oil price increases since the end of 1978 may be expected to have a generally depressive effect on economic growth, both directly through their deflationary impact and indirectly through their intensification of the inflationary process. Second, the course of real GNP in the United States during the first half of 1979—very little increase in the first quarter and a decline in the second—has turned out to be quite weak. At the present juncture, U.S. economic indicators available through June are inconclusive; but, with allowance also for the strength of the current inflationary spiral and for the probable effects of the shortage of oil, it seems likely that a U.S. recession is now under way—a view in line with statements by U.S. officials, who expect the recession to be short-lived and mild.

Such a situation raises a number of important policy issues. In the first place, a U.S. recession (whatever its duration or severity) could not be “offset” in the other industrial countries; in general, their economies are not buoyant and, because of either the fact or the threat of inflation, they would not be in a position to adopt significantly more expansionary policies in the endeavor to compensate for a recessionary development in the United States, although they could reasonably be expected to maintain their growth rates as much as possible. As for the United States itself, a “cooling off” period of very low growth of output or of declining output would serve to dampen inflationary pressures, but it would not permit any lowering of the priority that has been accorded by the U.S. authorities to the reduction of inflation in a medium-term context. Indeed, policies to counter recession would need to be very cautious, with primary reliance placed on built-in (“automatic”) fiscal stabilizers to support the economy. On the external side, a flattening out or decline in U.S. economic activity would have a positive impact on the current account balance through an easing of the demand for imports. However, the impact on the overall U.S. balance of payments and on the effective exchange rate for the dollar would depend also on the extent to which changes in relative monetary conditions affected capital account positions.

A more general point of significance is that exchange rates for the major currencies would be subject to different influences in a setting of weaker demand conditions, coupled with the higher oil prices and continuing inflation. Whether the relative calm that has characterized the exchange markets in recent months would be extended would depend to a large extent on policies. The larger industrial countries, while keeping their policies attuned to fundamental objectives, might well find it necessary to coordinate their actions regarding exchange market intervention and, at least to some extent, their monetary policies.

A softening in the pace of economic activity in the industrial world could have markedly adverse effects on the primary producing countries. Within this very large and heterogeneous group, conditions and policies differ widely but particular attention needs to be paid to the situation of the non-oil developing countries. Most of these countries have been experiencing growth rates in recent years not commensurate with their developmental needs, and an increasing number of them are struggling with balance of payments problems stemming from recently enlarged current account deficits and mounting burdens of external indebtedness—all of which will be exacerbated, in the year or so ahead, by effects of the recent oil price increases and of the continuing slowdown of economic activity in the industrial countries. Among the non-oil less developed countries, conditions and prospects are particularly unsatisfactory in many of the poorest countries that have been singled out for special attention in this chapter. The economic performance of the low-income group of developing countries, which contain more than two fifths of the population of all Fund members, is clearly a major cause for concern in terms of human welfare.

Many of the non-oil developing countries need to adopt better domestic policies in order to deal with the very difficult situation that they now face, as well as to establish an environment attractive to foreign investment and financing. But their problems could be eased by actions on the part of industrial countries. One such problem derives from the fact, already noted, that the bulk of new indebtedness incurred by the non-oil less developed countries in the past five years came from borrowing in international financial markets on terms less favorable than those associated with traditional development financing, so that debt service charges are now rising faster than the debt itself, and faster than export earnings. Particularly in the case of many low-income, low-growth developing countries, the debts contracted since 1974 represent—from the standpoint of such borrowers—a costly and ill-adapted way of transferring savings internationally.

To assist developing countries with their external financing, industrial countries in a strong position on current account should take all feasible steps to improve their position as capital exporters. An important area of such improvement must be to ensure a larger stabilizing flow of private capital—something that inevitably takes time to achieve but that can be influenced by additional governmental measures to encourage capital outflows, both directly and through changes in institutional arrangements and practices in the private sector. In addition, and here immediate action could be taken, there is a strong case for all industrial countries—surplus and deficit alike—to increase their official development assistance. Such assistance amounts to only about ⅓ of 1 per cent of GNP for industrial donor countries combined, with several of the large countries—including those in a surplus position—having even lower percentages. Expanded flows of capital and aid to the developing countries—along with measures to improve market access for their exports—are essential for their economic development, and also for the proper functioning of the international monetary system.

As a general proposition, each country should contribute to world economic growth in relation to the strength of its external position and to its price performance.

Considerable scope for improvement of economic conditions around the world lies in a better working of the international adjustment process. The wide differences that characterize the current positions of member countries call for adjustment policies on a broad scale, carefully differentiated on an individual country basis. As a general proposition, each country should contribute to world economic growth in relation to the strength of its external position and to its price performance. The implications of such an approach—if carried out effectively—are that countries in a relatively strong external position would act to support growth to the extent that it would not jeopardize their anti-inflation programs, while countries in a relatively weak external position and with high inflation would adopt corrective measures of a fundamental nature to deal with their problems.

In this context, the industrial countries could make a particularly important contribution by coordinating their growth objectives and policies over the medium term. Such a process could serve to bolster economic growth, to safeguard the recent improvement in the distribution of current account balances, and thus to promote the maintenance of orderly exchange markets and of reasonable stability in the exchange rates for major currencies. Important in this connection is the finding that seemingly moderate differences in growth rates among the major industrial countries could lead to substantial differences in their current account balances, with possibly severe impact on the functioning of the international adjustment process. It is clear that the rest of the world has a strong stake in the pursuit of policies by the major industrial countries directed toward coordinated growth and payments adjustment.

It must be stressed that the preceding brief sketch of how the functioning of the international adjustment process could be improved involves issues that are very controversial, as well as complex. Yet, hope for further progress in this area is to be found in the widespread recognition that—given the interdependence among countries in a world of serious economic and financial problems—no country can afford to ignore international influences in the management of its economy.

The very difficult conditions now confronting the authorities of most member countries also portray a large, and probably difficult, task for the International Monetary Fund. The role of the Fund is a very broad one, ranging from the conduct of a worldwide forum on economic and financial problems to the provision of financial, consultative, and technical services to individual countries. In the exercise of all its functions, such as those involving the principles of conditionality or of surveillance over exchange rate policies, the Fund must act fairly and evenhandedly—an assurance given by the Managing Director in his concluding remarks at the 1978 Annual Meeting of the Board of Governors.

It seems evident that, under the conditions that loom ahead, the Fund must be prepared to assist many of its member countries in dealing with their economic and financial problems. But, notwithstanding the high priority that has to be given to adjustment, it would appear that claims on the Fund’s resources in the next few years could be large. The Fund has endeavored to adapt its policies and facilities to the needs of member countries in the changing circumstances of recent years, and it is continuing to assess the adequacy of improvements that have been, or are being, introduced. In addition, in view of the uncertainty that characterizes the international economic situation, it would be highly desirable for member countries to expedite their acceptance of quota increases under the Seventh General Review of Quotas. If all members accepted quota increases to the maximum amounts proposed, total quotas in the Fund would rise as a result of the Seventh General Review from the current level of SDR 39.0 billion to SDR 58.6 billion—thus placing the Fund in a much better financial position to meet potential needs for use of its resources.

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