This paper describes that in developing countries, the moves toward more flexible exchange rate arrangements and liberalization of exchange controls often occurred in the context of comprehensive macroeconomic adjustment programs supported by the IMF. These programs featured a broad range of policy actions, including an increasing emphasis on structural reforms aimed at improving resource allocation and enhancing the supply response of the economy. With respect to restrictive systems, the trend toward liberalization of nontrade current and capital transactions continues, primarily because it is seen as ineffective, even counterproductive, to try to control such financial flows. This trend contrasts with trade where it appears that some major participants have been awaiting the outcome of the Uruguay Round before further reducing restrictions. A single currency peg has been the exchange arrangement most frequently used by developing countries, of which over one third currently have such an arrangement. This type of peg has the merit of being easy to administer and is generally chosen by countries that have a large share of foreign exchange transactions in the currency chosen as the peg.
América Central ha concitado creciente atención como una región que se está integrando exitosamente a la economía mundial. Este estudio examina -entre otras cosas- las implicaciones macroeconómicas y fiscales del Acuerdo de Libre Comercio con Estados Unidos (CAFTA-RD), y se destaca que este acuerdo impulsará el proceso de integración. Sin embargo, a fin de potenciar al máximo los beneficios en términos de un crecimiento sostenible más acelerado, reducción de la pobreza y progreso social, la región también debe llevar adelante ambiciosas reformas estructurales que consoliden la estabilidad macroeconómica y aseguren condiciones atractivas para la inversión, a la vez que se intensifica la cooperación regional en materia de recaudación y administración de impuestos, sistemas financieros y estadísticas.
Central America has received growing attention as a region that is integrating successfully into the global economy. This paper examines—among other things—the macroeconomic and fiscal implications of the Free Trade Agreement with the United States (CAFTA-DR), noting that the agreement will provide a boost to the integration process. To maximize the benefits in terms of faster sustainable growth, poverty reduction, and social progress, however, the region also needs to press ahead with ambitious structural reforms to entrench macroeconomic stability and ensure an attractive environment for investment, while stepping up regional cooperation in the areas of taxes and tax administration, financial systems, and statistics.
Central America has received growing attention in recent years as a region that is integrating successfully into the global economy. A decade and a half after the end of civil conflicts and serious economic dislocation in parts of the region, Central America has seen great progress on many fronts: peace and democracy have been firmly established, economies have stabilized and important market-oriented reforms have been implemented, and trade and financial openness have increased notably. As a result, growth has returned and social indicators have improved. At the same time, the glass can also be seen as half empty: poverty is still widespread in most countries; economic and social progress remains constrained by weak institutions and political difficulties; and the institutional framework of regional cooperation and integration is still at an early stage. There is concern that these problems, if unaddressed, could inhibit sustained growth and therefore undermine domestic consensus on the stability and market-oriented policy frameworks now being followed throughout the region. The key task facing policymakers in Central America is thus how to entrench and strengthen the virtuous cycle of good policies and strong institutions, solid growth that is more widely shared across societies, and domestic consensus on the policy framework. The vigorous embrace by the Central American countries and the Dominican Republic of the Free Trade Agreement with the United States (CAFTA-DR) is clear testimony of their commitment to a strategy of outward-looking and market-oriented integration to meet these challenges. This paper looks at the progress that has been made, the challenges ahead, and the region’s efforts to meet them.
AT THE beginning of 1957, the world economy was still dominated by boom conditions generated by an intense world-wide wave of private and public investment which was reflected in a large demand for capital. Already in some countries there were signs that a period of readjustment was not far off, but most of the payments problems that called for treatment during the first three quarters of the year had their origin in the inflationary methods, involving an excessive expansion of bank credit, which were often used to satisfy this demand. As always at the top of the boom, there was everywhere a dearth of loanable funds, especially for international financing, and a growing tension in the money markets, with each country at the same time feeling the impact of some forces peculiar to itself. In the work of the International Monetary Fund during the last year these factors played a large role.
Despite the downward trend in world trade that became evident early in 1952, the world payments position for the year as a whole showed a much better balance than in 1951. The progress toward a better balance, which could be observed in 1950 prior to the outbreak of hostilities in Korea, had appeared to be seriously threatened by the series of events which was then initiated. Many countries then again found themselves in serious disequilibrium and their foreign exchange reserves were falling rapidly. In the latter part of 1952, however, there was a significant recovery, and by the beginning of 1953 many countries had again achieved balance, or at least had substantially reduced their deficits. While some countries still had considerable deficits in their balances of payments, these were to a large extent the result of special factors—sometimes defects of policy—affecting individual countries.
ONE of the most powerful motives for the foundation of the International Monetary Fund was the desire to avoid the disruptive effects of conflicting national monetary and exchange policies adopted with little or no regard to their repercussions in other countries. The world had had a memorable experience of such policies and their consequences during the interwar period. The Fund can now help to avoid any repetition of these conflicts by providing its members with an instrument for the mutual adjustment of monetary and exchange policies, at the same time as it makes available financial support to which they may turn when faced with threats of balance of payments disequilibrium. During the past year, the developments in the world economy, which are summarized later in this Report, provided further opportunities for extending these closely related Fund activities. Despite many difficulties, Fund members were increasingly willing to support its work in the promotion of freer transferability of currencies, and thus to increase its effectiveness as an agent of international policy. Fund transactions, at nearly US$666 million, did not reach the high level of more than US$1,114 million recorded in the preceding year, when sales of currency to members equaled about one quarter of the Fund’s original holdings of gold and convertible currency. However, they exceeded transactions in any other Activities and Policies of the Fund in 1957-58 previous financial year. And in no other year were there such useful contacts between the Fund and its individual members in relation to policy issues. Some members have taken the initiative in seeking the Fund’s advice, and the technical services of members of the Fund staff have been made available to them for prolonged periods. Specific opportunities for useful contacts also occur when a situation arises in which it is appropriate for a member to draw upon the Fund’s resources, or in the course of the regular consultations between the Fund and those members which maintain exchange restrictions, or when a member makes a significant change in its exchange system.
M. Ayhan Kose, Mr. Alessandro Rebucci, and Mr. Alfred Schipke
Five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the United States signed the Central American Free Trade Agreement (CAFTA) in May 2004. The Dominican Republic (DR) joined the negotiations at the beginning of 2004 and signed the agreement (CAFTA-DR) in August 2004. The agreement will go into effect after the respective legislative bodies have ratified it.1
The persistent tendency toward a surplus in the United States balance of payments has been one of the main preoccupations in the field of international finance since the end of World War II. According to the official U.S. balance of payments statistics, the surplus had disappeared in the second half of 1952, when the United States had a small deficit with the rest of the world in respect of commodities (excluding specially financed military-end items), services, private donations, and U.S. private capital movements. It is particularly noteworthy that the regions which had been the main recipients of U.S. aid in the postwar period—the United Kingdom, the countries on the continent of Europe, and their dependencies—showed a small surplus with the United States (Table IV).
The improvement in the general payments position described in the preceding chapters was in large measure the result of the return to active monetary policies. This movement, which in some cases had begun in 1951 or earlier, continued in 1952; and some countries which had taken effective action comparatively early have since been able to relax their credit policies somewhat. In general, however, interest rate levels were rising throughout 1952. Even immediately after the war, monetary measures of various kinds were already regarded in some countries as a weapon of major importance in the fight against inflationary pressures. But in many countries a minor role was allotted to monetary policy. Much more reliance was often placed upon a combination of fiscal policies which aimed at substantial budget surpluses on current account, direct controls covering prices and sometimes wages, and the allocation of consumers’ and producers’ goods. The revival of monetary policy has taken a form somewhat different from the form that was familiar before World War II. Its operation is still sometimes buttressed by more direct controls; in addition to using the classical techniques of discount rate changes and open market operations, many central banks have used such instruments of policy as variations in reserve requirements and credit rationing in one form or another, in much more varied and complex combinations than in the past. The effects of higher interest rates are, moreover, sometimes offset in part by such devices as special subsidies for residential construction. In general, however, recent developments indicate a sharp and significant reversal of a policy trend that had been dominant since the end of World War II.