Chapter 7 Developments in Countries Exporting Primary Products
Author:
International Monetary Fund
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Language:
English
Print Publication Date:
01 Sep 1965
Keywords:
AR; AREA; sc; balance of payments position; aggregate balance of payments; wage-price spiral; balance of payments development; export receipts; Exports; Imports; Agricultural commodities; Export earnings; Monetary expansion; Africa
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Abstract

THE international demand conditions that countries exporting primary products faced during 1964 and the early part of 1965 were, on the whole, more favorable than they had been for a number of years. The prices of most basic commodities rose late in 1963 and early in 1964 and then remained at, or close to, the levels reached at that time. These relatively high prices reflected generally strong international demand. Consequently, the export receipts of primary product exporting countries tended to rise in the early part of 1964 and to remain relatively stable. Capital flows and grants to the developing countries continued on the same scale, so that the total exchange receipts of these countries were high; as a group, these countries achieved a small increase in international reserves. Most of their increased foreign receipts, however, were directed toward an expansion of imports. This reflected the strong need for these countries to raise their living standards, both directly through higher present consumption and indirectly by more rapid capital investment for future increases in domestic output. In some countries, however, the demand for imports was stimulated by excessive monetary expansion.

THE international demand conditions that countries exporting primary products faced during 1964 and the early part of 1965 were, on the whole, more favorable than they had been for a number of years. The prices of most basic commodities rose late in 1963 and early in 1964 and then remained at, or close to, the levels reached at that time. These relatively high prices reflected generally strong international demand. Consequently, the export receipts of primary product exporting countries tended to rise in the early part of 1964 and to remain relatively stable. Capital flows and grants to the developing countries continued on the same scale, so that the total exchange receipts of these countries were high; as a group, these countries achieved a small increase in international reserves. Most of their increased foreign receipts, however, were directed toward an expansion of imports. This reflected the strong need for these countries to raise their living standards, both directly through higher present consumption and indirectly by more rapid capital investment for future increases in domestic output. In some countries, however, the demand for imports was stimulated by excessive monetary expansion.

Prices

On the average, the prices of primary products in 1964 were 5 per cent higher than in 1963 and, in general, higher than they had been in any of the eight previous years. On the other hand, because of rising import prices, the terms of trade of primary producing countries improved only slightly. If sugar prices, which fell sharply after their steep advance in 1963, are excluded, the increase over the 1963 average was as much as 7 per cent, against 4 per cent between 1962 and 1963. However, as indicated in Table 27 and Chart 24, this rise in the average in 1964 resulted from rather sharp increases starting in late 1963 and continuing into early 1964, followed by relative stability and even some declines, which were most marked for agricultural raw materials. Metal and mineral prices continued to rise during the year. As shown in Chart 25, 1964 was marked by widespread price increases; however, in the latter half of the year they were generally less dramatic than they had been earlier.

Table 27.

Countries Exporting Primary Products: Indices of Commodity Prices1

(1957 = 100)

article image
Source: Based on data from National Institute Economic Review (London), adjusted for copper by substituting producers’ export prices for quotations on the London Metal Exchange.

Excluding petroleum.

Prices for foodstuffs, excluding sugar but including the beverage crops, reached a peak in the first half of 1964 and declined thereafter. These movements resulted primarily from variations in actual or anticipated supply, caused chiefly by variations in crops and, to a lesser extent, by support policies in the exporting countries. The sharp downturn in sugar prices in 1964 reflected the recovery of output in 1963-64 and expectations of a further substantial rise in production in the current season. Developments on the cocoa market followed a similar pattern, although they were considerably less pronounced. The advance in most coffee prices early in 1964 reflected anticipation of a serious crop failure in Brazil; later on, prices were strengthened by the withholding of supplies by some major exporting countries within the framework of the coffee agreement. The price pattern for agricultural raw materials also largely reflected crop variations; for example, a poor crop in the Sudan has been largely responsible for the rise in the prices of long-staple cotton. However, these raw materials—which include textile fibers and rubber—have been affected by the rapidly increasing use of synthetics, which had a dampening effect on the demand for natural products. Metal prices followed a different course; they were largely dominated by a sustained increase in demand, which could not be adequately met by the slow rise in output. The rise in prices started later than that for foods and raw materials but gained momentum and continued through most of the year and into 1965, when continued political tensions served to strengthen demand further. The index quoted in Table 27 reflects prices charged by producers, which for some commodities (most notably copper) were held well below market quotations. This policy, adopted primarily in order to avoid a shift to substitutes, may also prevent a possibly short-lived boom from inducing overexpansion of capacity.

Chart 24.
Chart 24.

Primary Producing Countries: Prices of Commodities Exported (Excluding Petroluem), 1962-First Quarter 1965

(1957 = 100)

Trade

As indicated in Table 28 (see also Chart 19, p. 58), the export earnings of the primary product exporting countries as a group expanded during 1964 by a larger percentage than in 1963. However, for the countries exporting mainly coffee, other tropical foods, and other agricultural products, the percentage growth in export earnings, although large, was smaller in 1964 than in 1963.

Among individual countries, particularly large gains were made by Canada, Chile, Colombia, Finland, Hong Kong, Morocco, New Zealand, Nigeria, Peru, Saudi Arabia, Spain, and Thailand. In most of these countries, the increases followed relatively large increases in export earnings during 1963. However, for some (e.g., Chile, Peru, Spain, and ^Thailand) the increases represented a contrast to the small or nominal increases achieved in 1963. For Ceylon and Colombia, the expansion of export earnings in 1964 represented in part a recovery from the contraction suffered in 1963.

During the course of the year, the rate of expansion tended to fall. While the exports of the entire group of countries during the first quarter of 1964 were 16 per cent higher than their exports in the corresponding quarter of 1963, they were only 13 per cent, 8 per cent, and 7 per cent higher in the second, third, and fourth quarters, respectively. This deceleration in the rate of advance was primarily the obverse of a deceleration in imports by the industrial countries (see also Chart 19). It is unlikely that the value of exports of primary products will rise as rapidly during 1965 as it did in the preceding two years.

The continued increase in the exports of the primary product exporting countries induced greater economic activity in these countries in 1964, which in turn resulted in a further expansion in their imports. For most of these countries, the expansion in 1964 was in addition to, and even larger than, the expansion in imports in the previous year. Part of this increase was the result of rising export prices in the industrial countries. In the few countries where the 1964 expansion was smaller than that of 1963, it was usually because imports had increased rather sharply in 1963, as in Kuwait and the United Arab Republic. However, imports contracted in a few countries during 1964.

Chart 25.
Chart 25.

Selected Primary Products: Changes in Average Prices in 1963 and 1964

(In per cent)

Balance of Payments

The change in the over-all balance of payments position of the primary producing countries from 1963 to 1964 was in large part a reflection of developments in their exports and imports, reviewed in the previous section. The fact that exports continued to rise during 1964 at a substantial, although declining, rate helped to moderate the effect of the rise in imports. Preliminary trade statistics suggest that the aggregate trade deficit of the primary producing countries increased by more than $0.6 billion from 1963 to 1964, while preliminary balance of payments statistics indicate an increase of some $1.1 billion in their aggregate deficit on account of goods and services and private transfer payments. This latter increase is apparently attributable in part to higher net payments on account of services. An increase of $0.6 billion in the inflow on account of economic aid and private capital (including unrecorded transactions) partly offset the deterioration on current transactions, so that the group’s aggregate over-all surplus fell from about $1.6 billion to $1.1 billion.

As in other recent years, the aggregate balance of payments in 1964 of a limited number of more industrialized countries (Group A of Table 29) differed markedly from that of the other countries (see last line of Table 29). The more industrialized group had an over-all surplus of almost $900 million, not much lower than in 1963, whereas the aggregate surplus of the less industrialized countries, which had reached $700 million in 1963, amounted to less than $300 million in 1964. Even within the latter group, some countries—in particular, certain oil exporting countries—remained in relatively comfortable balance of payments positions, but a number of the less industrialized countries were experiencing increasing strains in their international transactions. Such strains are not always apparent from the statistics, since heavy debt servicing burdens may force countries to restrict deficits or even to run surpluses in other segments of the balance of payments.

More Industrialized Countries

Both exports and imports of the more industrialized group of countries rose rapidly (by 16 per cent and 17 per cent, respectively) between 1963 and 1964. These rates of increase were even higher than those of the manufacturing countries. But since their aggregate imports rose more than exports, there was a substantial rise in their combined deficit on account of goods, services, and private transfers. The increase in the current deficit of the group was for the most part offset by larger net inflows of both long-term and short-term capital, so that the over-all position remained comfortable. Much of the deterioration in the goods and services account was concentrated in Australia and South Africa; all the other countries in the group improved their over-all balance of payments position from 1963 to 1964.

Balance of payments developments in Australia and Canada are reviewed in Chapter 8. Finland’s current account deteriorated in 1964, as the increase in imports far exceeded that of exports. There was, however, a large inflow of capital, mainly in the form of bond issues abroad, and the reserves showed a further increase. South Africa’s balance of payments changed from surplus to deficit because of a sharp rise in imports, associated mainly with boom conditions in the domestic economy but also influenced by a relaxation of import controls. There was only a modest rise in exports, owing in part to adverse seasonal conditions. The decline in reserves accelerated in the early months of 1965, and during that period the authorities took measures to moderate the domestic expansion of credit, which had been substantial during 1964. Spain increased its surplus from 1963 to 1964 as exports rose sharply because of an exceptionally favorable citrus crop, following a relatively poor one in 1963, and increased exports of manufactured products; net tourist receipts continued to climb rapidly. There was also a substantial inflow of capital, particularly of a long-term nature, throughout the year. Since the latter part of 1964, rising internal inflationary pressures have led to a leveling off in the growth of Spain’s exports and a rise in imports. There has consequently been a slowing down in the rise of reserves, which at the end of 1964 amounted to more than $1.5 billion.

Table 28.

Primary Producing Countries: Trade in 1963 and 19641

(Value figures in millions of U.S.dollars)

article image
Source: Based on data from International Monetary Fund, International Financial Statistics.

Data in parentheses are partly estimated.

Consolidated data for the trade of Malaysia are not available.

This total differs slightly from that for the two groups of primary producing countries shown in Table 13, owing principally to adjustments for internal transport charges in the figures shown for certain countries in this table.

Less Industrialized Countries

The deterioration from 1963 to 1964 in the balance of payments position of the less industrialized group of countries arose mainly from an increased trade deficit. The deterioration was 1 progressive during 1964, as the rise in exports slowed down while that in imports appeared to be maintained. There was, according to the preliminary figures shown in Table 29, an increase of about $100 million in the net inflow of private capital (including unrecorded transactions) and an increase of about $200 million in official capital and aid. The deterioration in the over-all position was, therefore, somewhat less than the rise in the goods and services deficit.

The collective position of the less industrialized countries in the overseas sterling area changed little, although there was. a marked deterioration in the balance of payments of Pakistan, while for India a greatly increased current deficit was offset by heavily expanded foreign aid. The balance of payments of India is reviewed in Chapter 8. The change from surplus to deficit in Pakistan’s balance of payments was brought about by a sharp rise in imports (see Table 28) under the impact of a strong monetary expansion in the economy, combined with some liberalization of the import regime. Exports rose only slightly from 1963 to 1964, while apparently foreign aid increased somewhat. The Government of Pakistan has taken steps to limit the increase in bank credit and other measures to curtail the rise in imports; in March it concluded a stand-by arrangement with the Fund for $37.5 million. The deficit in Malaysia’s balance of payments was due in part to a further decline in rubber prices, the embargo imposed by Indonesia, and a considerable increase in expenditure for development and, to a lesser extent, for defense. When Malaysia’s high reserves are taken into account, the deficit was moderate. Ghana’s balance of payments is discussed in Chapter 8.

More than half the Latin American Republics were in over-all surplus in 1963, and again in 1964, although in 1964 their aggregate surplus was slightly reduced. There was a considerable deterioration in the over-all position of Argentina, which in 1963 had been in surplus. (For a discussion of developments in Argentina’s balance of payments during 1963, see the Annual Report, 1964, page 96.) Argentina’s exports rose slightly beyond the substantial total attained in 1963, and the current account remained in surplus. Reserves declined because of net repayments on foreign debt and remained under pressure because of a heavy debt repayment schedule. The foreign reserves of Argentina are lower than the foreign liabilities of the Central Bank. Exchange controls were introduced in April 1964, and the Argentine peso was progressively devalued from M$N 133 = US$1 at the end of 1963 to M$N 172 = US$1 at the end of May 1965. Developments in Brazil’s balance of payments are reviewed in Chapter 8.

Within the last group of countries in Table 29, much of the deterioration in the aggregate balance of payments is accounted for by a reduction in the surplus of Saudi Arabia, whose balance of payments and reserve position nevertheless remained comfortable. Other major changes were an increase in China’s surplus—in part influenced by high receipts for sugar during the first half of the year—and shifts from surplus to deficit in both Iran and Iraq. Iran’s deficit arose mainly from net capital outflows resulting from net disinvestment by the Petroleum Consortium and net repayments on government loans. Early in 1965, extraordinary receipts of about $185 million in connection with the exploration of new oilfields replenished its reserves. For Iraq, the unfavorable change in the underlying balance of payments was less than the change in the over-all balance. The Iraqi Government had received a loan of $84 million from Kuwait late in 1963, without which its reserves would have risen by only $15 million during that year. In 1964, an increase in government expenditures added to import demand, but this was in part offset by an improvement in the trade accounts owing to a better harvest than in 1963.

Table 29.

Primary Producing Countries: Balance ofPayments Summaries, 1963 and 19641

(In millions of U.S. dollars)

article image

The progress of the primary producing countries as a whole and of certain subgroups over a period of years is illustrated by Chart 26, where balances on account of goods, services, and private transfers are compared with balances on basic account (i.e., current account plus government and private long-term capital). For the two main groups of primary producers, Chart 27 compares the over-all balances (including movements of short-term capital and errors and omissions, in addition to the transactions entering the basic accounts) with the basic balances for the years 1957-64. In each of the last four years, the inflow of capital into the more industrialized primary producing countries has considerably exceeded the current account deficit, resulting in sizable additions to reserves. But although over-all surpluses were achieved in both 1963 and 1964 by the less industrialized countries, between 1957 and the end of 1962 these countries had an over-all surplus in only one year—1959. Chart 27 also shows that, while the movements in the basic and in the over-all balances have in general been similar, there has in each year been an inflow on account of short-term capital and unrecorded transactions for the more industrialized countries and an outflow from the less industrialized ones.

Chart 26.
Chart 26.

Primary Producing Countries: Balances of Payments, 1957–64

(In billions of U.S. dollars)

Domestic Developments

Rising export incomes and increases in foreign reserves permitted the majority of the countries exporting primary products to expand domestic bank credit more rapidly in 1964 than in earlier years. This domestic expansion provided finance for rising imports consistent with increased export receipts and, in most countries, was part of the normal adjustment process. There are grounds for thinking, however, that in some, even though large foreign receipts permitted a rise in domestic credit, this monetary expansion may have gone too far.

Chart 27.
Chart 27.

Primary Producing Countries: Basic and Over-All Balances of Payments, 1957–64

(In billions of U.S. dollars)

A number of countries were not able to prevent their international reserves from falling, despite a rise in export earnings. In others, the failure of exports to respond to the high level of world demand can be explained, in part at least, by the pressures of domestic demand encouraged by expansive domestic monetary policies. Relatively easy monetary policies, usually associated with budget deficits, prevailed in a number of countries, including Argentina, Chile, Indonesia, Iran, Mali, Mauritania, Nigeria, and Uruguay; and the financing of government requirements also induced pressures, for example, in Greece and the United Arab Republic. In Brazil, the high level of the budget deficit was reduced during the year.

Among the more important of the developing countries, the domestic situation in India, where there was a sharp rise in prices during 1964, gave ground for special concern. Undoubtedly, a series of bad harvests and the requirements of increased defense expenditures contributed to its difficulties, and gave increased justification for a stand-by arrangement with the Fund, but these adverse circumstances were aggravated by monetary expansion. However, as the rather rapid price increases have been under way for only a relatively short period, it may be less difficult to contain the situation than it is in some other countries where inflation has persisted for some time. It is to be hoped that the corrective measures introduced early in 1965 will prove to be effective in meeting the situation.

A number of other countries took advantage of the rather favorable conditions in 1964 and the early part of 1965 to halt actual or incipient inflations. In Africa, stabilization programs were inaugurated by Burundi, Somalia, and Tunisia. Israel and the Philippines were successful in reducing existing inflationary pressures by limiting the size of government deficits, which made the control of monetary policy easier. But the more severe inflationary situations in Argentina, Brazil, Chile, Indonesia, Korea, and Uruguay persisted. Of these countries, Argentina, Brazil, Chile, and Korea announced plans toward the end of 1964 or early in 1965 to bring their domestic financial situations under control. These plans include measures to restrain increases in wages in order to damp down the wage-price spiral.

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Cover International Monetary Fund Annual Report 1965
International Monetary Fund Annual Report 1965
ISBN:
9781616351779
ISSN:
2227-8915
Publication Date:
01 Sep 1965
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781616351779.011
Pages:
174
  • Chart 24.
    View in gallery
    Chart 24.

    Primary Producing Countries: Prices of Commodities Exported (Excluding Petroluem), 1962-First Quarter 1965

    (1957 = 100)

  • Chart 25.
    View in gallery
    Chart 25.

    Selected Primary Products: Changes in Average Prices in 1963 and 1964

    (In per cent)

  • Chart 26.
    View in gallery
    Chart 26.

    Primary Producing Countries: Balances of Payments, 1957–64

    (In billions of U.S. dollars)

  • Chart 27.
    View in gallery
    Chart 27.

    Primary Producing Countries: Basic and Over-All Balances of Payments, 1957–64

    (In billions of U.S. dollars)

Chart 24.

Primary Producing Countries: Prices of Commodities Exported (Excluding Petroluem), 1962-First Quarter 1965

(1957 = 100)
Chart 25.

Selected Primary Products: Changes in Average Prices in 1963 and 1964

(In per cent)
Chart 26.

Primary Producing Countries: Balances of Payments, 1957–64

(In billions of U.S. dollars)
Chart 27.

Primary Producing Countries: Basic and Over-All Balances of Payments, 1957–64

(In billions of U.S. dollars)