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Two recent investigations of the 1967 devaluation of the pound sterling concluded that the benefits of that devaluation were delayed in timing and were relatively small in magnitude. If confirmed, their conclusion would clearly tend to undermine the case for exchange rate changes as a means of promoting current account adjustment; it would also refute the previous consensus on the size of international trade elasticities. It is therefore of the greatest importance to scrutinize the devaluation experience of the United Kingdom more closely, so that the right lessons may be drawn from it. A further and more detailed investigation of the U. K. devaluation is presented here. Its conclusion differs sharply from that reached in the recent investigations by the National Institute of Economic and Social Research (NIESR, 1972) and the London Business School (LBS, by Ball, Burns, and Miller, 1972). It is estimated in the present study that positive benefits from the devaluation occurred relatively rapidly and were large in their magnitude.

Jacques R. Artus

This paper reviews the increasing private capital flows to less developed countries. The share of developing countries in the foreign direct investment is small, perhaps less than 30 percent of the total. The effects of this decline in the volume of foreign investment and the continued problem of capital flight have been aggravated by the serious fall in commercial bank lending to developing countries as a group and by a decline in official development assistance.

Michèle Guerard

IN 1967 THE BRAZILIAN STATES abolished the heterogeneous turnover taxes that they had levied for 30 years and replaced them with a unified sales tax of the value-added type. The reform was designed to overcome the defects of turnover taxation and to secure a greater degree of tax coordination among the states of the Federation.


This paper uses a Ricardian framework to clarify the role of micro–economic and macroeconomic factors governing the time–series and cross–sectional behavior of sectoral trade balances. Unit labor costs and trade balances are calculated for several sectors for the seven major industrial countries. The time–series and cross-sectional variation in sectoral unit labor costs is decomposed into relative productivity, wage differentials, and exchange rate variations. The main findings are that changes over time in sectoral trade balances, especially for the United States and Japan, are quite well explained by the evolution of unit labor cost, suggesting that trade patterns conform to comparative advantage. The cross–sectional results are, however, less conclusive.


This paper examines the sources of disturbances to output in the United States and a set of European Union countries and analyzes labor market adjustment mechanisms in these two economic areas. Comparable data sets comprising one-digit sectoral data for eight U.S. regions and eight European countries are constructed and used to compare the degree of industrial diversification and the relative importance of different sources of shocks to output growth. Both economic areas are found to be subject to similar overall disturbances although a disaggregated perspective reveals some important differences. The major difference, however, is in labor market adjustment. Interregional labor mobility appears to be a much more important adjustment mechanism in the United States, which has a more integrated labor market than the European Union.

Edward V.K. Jaycox and Clifford Hardy

A healthy construction industry is essential to a healthy developing economy. The authors describe how government can promote construction.

Ta-Chung Liu

THE NATIONAL SECURITY program of the United States, as outlined in the July 1951 report of the President’s Council of Economic Advisers, envisaged that total defense expenditures would reach, at mid-1952, an annual rate of about 19 per cent of gross national product, which was expected to be at the level of $345 billion (in terms of prices in the first half of 1951). The probable level of civilian employment in the United States, when the current program reaches its planned “peak,” is obviously of direct importance to the stabilization policies not only of the United States but also of other nations. An estimate of this level is provided by an analysis of the relationships between output and employment in the United States during the past two decades—for the economy as a whole and, as far as possible, for important industrial divisions.1

Paul S. Armington

THE DISTRIBUTION of any country’s export and import trade, by destination and by origin, differs substantially from the corresponding distributions for many other countries. Such differences, as well as the differences in size of over-all trade, have an important bearing on the way in which trade flows respond to price changes. For example, if country A expands its exports as a result of a reduction in its price level, the change in value of exports from some other country, B, will naturally depend on the size of B’s total exports, but also on the extent to which B trades with country A and on the extent to which A supplies foreign markets that are important outlets for B’s products. Or, for another example, suppose that A’s trade balance deteriorates as a result of a loss in price competitiveness. The extent to which country B will share in the offsetting improvement in the collective trade balance of other countries will depend on such factors as the importance of A’s products in B’s imports, on the importance of imports in B’s total expenditure, and on the extent to which B’s exports depend on markets that are heavily supplied by A. These structural variables are ratios of recorded trade flows.

International Monetary Fund
This paper examines the development of general government finances in Norway during 1988–96. The paper looks at general government revenue and expenditure in detail, examines the importance of revenue from the petroleum sector for general government finances, and reviews developments in the general government balance sheet. The paper also analyzes the conduct of fiscal policy over 1988–96, and compares the development of the authorities’ estimates of the state budget’s fiscal impulse with the development of the IMF staff’s estimates of changes in the non-petroleum, general government structural balance.
International Monetary Fund
This Selected Issues paper examines the competitiveness of the Irish manufacturing sector. The paper highlights that in 2001, production cuts and accelerating wage growth arrested the trend improvement in external competitiveness, but the level remains high. The paper presents some medium-term fiscal scenarios. It discusses indicators of financial system soundness based on official data and publications, as well as discussions with the authorities. The paper also examines indicators on the vulnerability and solvency of the financial system and presents a brief description of supervision arrangements.