II: World Payments Developments in 1955

International Monetary Fund
Published Date:
September 1956
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Main Trends in World Trade

World industrial output outside the Soviet area, which in 1954 had been roughly the same as in 1953, rose by 10 per cent in 1955. This great increase was achieved with relatively little inflation in most industrial countries. Prices of finished products entering into international trade remained fairly stable from 1954 to 1955, while those of primary products showed, on balance, a slight decline.

In the United States, industrial production rose by 11 per cent; the average increase in the United Kingdom and continental European industrial countries was somewhat less, 9 per cent. The expansion was made possible not only by an increase in employment, which set the stage for substantial wage increases, but also by an increase in productivity, which helped to moderate the effect of these increases on prices. In the United States, output was recovering from the level to which it had been reduced by the 1953–54 recession, and the recovery was relatively unhampered by supply difficulties. In Western Europe, the expansion was a continuation of an already flourishing boom, and in several sectors tended to come up against limitations of productive capacity necessitating greater reliance on imports.

The volume of imports in industrial countries as a whole 1 rose between 1954 and 1955 by 12½ per cent, i.e., rather more than in proportion to industrial production. For the United States, however, the rise was slightly less (10½ per cent), and for Western Europe it was considerably more (almost 14 per cent), than the rise in industrial output. This divergence is easily explained by the high degree of demand pressure and the lessening severity of import restrictions in the OEEC countries, whereas in the United States there was more slack to be taken up internally and demand for coffee, other foodstuffs, and certain crude materials recovered slowly.

At a time of rising production and incomes it is to be expected that manufactured imports will rise more sharply, and imports of foodstuffs less sharply, than imports in general. For U. S. imports, this contrast has recently been accentuated. From 1954 to 1955, the volume of U. S. imports of manufactures increased by 20 per cent, of semimanufactures and crude materials by 11 per cent, and of foodstuffs by only 4 per cent. There appear to have been similar, though less radical, changes in the composition of the imports of other industrial countries.

Altogether, the volume of the industrial countries’ imports of manufactured goods may have risen by 16–18 per cent, and their imports of other goods by 10–11 per cent, from 1954 to 1955; in terms of value (f.o.b.) the increases are estimated at 15–18 per cent and 8–10 per cent, respectively. Moreover, there was some tendency for the industrial countries to supply a higher proportion of each other’s needs of semimanufactures and foodstuffs. These factors together account for the fact that, whereas the value of trade between industrial countries increased by some 18–19 per cent, imports of industrial countries from primary producing countries rose by only 6–7 per cent (Table 1). Exports from industrial to primary producing countries rose, as one might expect, in a similar proportion. The primary producers’ total exports rose in much the same proportion as their exports to industrial countries; the percentage increase in the industrial countries’ total exports was about halfway between the increase in their exports to each other and the increase in their exports to the primary producers.

Table 1.Value of World Trade, 1950 and 1953–551(Value figures in billions of U. S. dollars)


1954 to 1955
World exports (f.o.b.) 255.870.674.582.010
Exports of industrial countries 329.038.541.747.013
Exports of nonindustrial countries26.832.132.835.0
Trade between industrial countries12.116.117.821.118½
Between industrial OEEC countries7.710.511.914.017½
Between industrial OEEC countries and United States3.
Exports from industrial to primary producing countries16.922.523.825.78
Imports (f.o.b.) 1 of industrial countries from primary producing countries18.423.723.525.0
Sources: Based on data from International Monetary Fund, International Financial Statistics, and Statistical Office of the United Nations. International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Except for the last row, these data are export figures. The data in the last row have been estimated by reducing imports (c.i.f.) by 11, 12, 13, and 16 per cent, respectively, for the four years.

Excluding Soviet area exports and U. S. special category exports.

Industrial countries include the United States, the United Kingdom, Austria, Belgium-Luxembourg, France, Federal Republic of Germany, Italy, the Netherlands, Norway, Portugal, Sweden, Switzerland, and Japan.

Sources: Based on data from International Monetary Fund, International Financial Statistics, and Statistical Office of the United Nations. International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Except for the last row, these data are export figures. The data in the last row have been estimated by reducing imports (c.i.f.) by 11, 12, 13, and 16 per cent, respectively, for the four years.

Excluding Soviet area exports and U. S. special category exports.

Industrial countries include the United States, the United Kingdom, Austria, Belgium-Luxembourg, France, Federal Republic of Germany, Italy, the Netherlands, Norway, Portugal, Sweden, Switzerland, and Japan.

The share of primary producing countries in the value, and to a less extent in the volume, of world trade has been tending to fall for some years. Both from 1950 to 1953 and from 1953 to 1955 the growth in the exports of industrial countries exceeded that of the primary producing countries; the difference between the two, however, was considerably greater in the later than in the earlier period. This trend is due mainly to such factors as the declining importance of food in aggregate consumption, the substitution of synthetic for primary raw materials, and the expansion of agricultural production in industrial countries.

Trade of Various Classes of Primary Producing Countries

The wide variations in the price movements of particular categories of primary product are illustrated by Chart 1. These variations reinforced the influence of volume changes in determining how much by value the industrial countries imported from different groups of primary producing countries. From 1954 to 1955 the f.o.b. unit value of imported foodstuffs appears to have fallen by some 8 per cent in OEEC countries, and by 10 per cent in the United States, the latter being affected chiefly by the steep decline in the price of coffee. Unit values of industrial raw materials in general rose by some 4 per cent in Europe and by 7 per cent in the United States.2

Chart 1.Indices of Prices of Certain Primary Products, Quarterly, 1953–551

(1953 = 100)

1 Data are from International Monetary Fund, International Financial Statistics; United Nations, Monthly Bulletin of Statistics; Organization for European Economic Cooperation, Statistical Bulletin; and U. S. Department of Agriculture, The Cotton Situation.

Coffee, Santos No. 4, f.o.b. New York; sugar, Cuba, f.o.b. price to countries other than the United States; copra, Philippines, f.o.b. Manila; cereals, OEEC index; wool, Australia, average price at Sydney auctions; cotton, Mexican Matamaros, f.o.b. Brownsville, Texas; rubber, Malaya, No. 1, ribbed smoked sheets, f.o.b. Singapore; nonferrous metals, OEEC index; crude oil, Saudi Arabia, f.o.b. Ras Tanura.

The wide variations in the price movement of industrial raw materials are illustrated by the European figures for import prices of metals and ores, which rose by more than 20 per cent, and those of textile materials, which fell by 6 per cent. Broadly speaking, prices of foodstuffs and textile materials fell from 1954 to 1955, while those of rubber and nonferrous metals rose.

Larger crops of coffee, cacao, and tea, which ended or eased the shortages of these three commodities, brought their prices down from the high levels of 1954. The decline in the price of coffee was particularly severe. Import demand for grains and sugar was higher in 1955 than in 1954 because of less favorable European harvests. Grain surpluses, however, continued to accumulate, and prices remained below those in 1954. Sugar prices fell less, as supplies were controlled by the International Sugar Agreement.

Among important commodities, the largest increase in price—70 per cent-was in rubber, for which there was a sharp rise in demand linked with booming automobile production in both the United States and Europe. The expansion in durable goods industries generally raised demand and prices for nonferrous metals, especially for copper, the supply of which was severely limited by a series of strikes in nearly all the producing countries.

These developments help to explain the differences between the expansion of export earnings from 1954 to 1955 in various primary producing countries. The more important primary producing countries (outside the Soviet area and excluding the United States) may be grouped in five categories, according to the character of their principal export products (Table 2). Although world demand grew rapidly during the year, the export proceeds of the countries exporting tropical foodstuffs actually declined, while those of countries exporting other agricultural products increased only slightly. The exports of oil producing countries and of countries of diversified exports expanded roughly in proportion to world industrial production and world trade, while the growth of the exports of countries exporting rubber and nonferrous metals was greater than that of any but the most exceptional industrial countries.

Table 2.Trade of Primary Producing Areas, 1954 and 1955(Value figures in billions of U. S. dollars)
Exports f.o.b.Imports c.i.f.


Major countries exporting
Tropical foods 15.665.45-45.945.920
Other agricultural products 27.067.26+37.958.68+9
Rubber and metals3.153.77+202.843.13+10
Major countries with diversified exports8.199.04+109.2410.40+13
Source: Based on data from Statistical Office of the United Nations, International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Coffee and cacao; other tropical foods; oilseeds and vegetable oils.

Textile fibers, livestock products, grains, and tobacco.

Source: Based on data from Statistical Office of the United Nations, International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Coffee and cacao; other tropical foods; oilseeds and vegetable oils.

Textile fibers, livestock products, grains, and tobacco.

For primary producing countries as a whole, exports and imports increased in about the same proportion, 6–7 per cent. This, of course, is not true of individual countries or groups. While the tropical food exporters maintained their imports in spite of the decline in their export receipts, and the livestock and grain exporters expanded their imports much more than was warranted by the modest increase in their exports, the rubber and metal exporters, and above all the petroleum exporters, increased imports by amounts that were comparatively small in relation to the increase in their exports. Such divergences are to be expected in view of the normal time lag between the movements of exports and of imports in primary producing countries, and because of differences in the impact of variations in export receipts upon domestic incomes. The imports of some of the agricultural exporters, however, were also influenced by internal inflationary developments, the effects of which are evident in the trade movements of individual countries described elsewhere in this Report.

East-West Trade

Trade between the U.S.S.R., the European countries associated with the U.S.S.R., and Mainland China, on the one hand, and the rest of the world, on the other, expanded considerably from 1954 to 1955, largely within a framework of bilateral arrangements. According to the available trade statistics of the non-Soviet countries, the exports of the Soviet area rose by 25 per cent, to about $1.8 billion, and imports by 10 per cent, to some $1.6 billion–a rate of growth more closely resembling that of the industrial countries than that of the primary producing countries.

The greater part of these increases resulted from an intensification of trade between the Soviet area and industrial Western Europe. European imports from that area rose by almost one third, while exports to it expanded by some 20 per cent. There resulted an increase in the European trade deficit with the Soviet area, a deficit which, in the case of the United Kingdom, was already large. The trade of the Soviet area with the primary producing countries changed much less. For the primary producing countries as a whole, there appears to have been a small trade surplus with the Soviet area in 1954. In 1955 there was a small deficit, imports from that area rising by some 15 per cent while exports appear to have fallen slightly.

Exports of Industrial Countries

Variations in the imports of the primary producing countries tend to follow changes in export earnings with a longer or shorter time lag. The growth of the exports of industrial countries as a whole is therefore dependent to a large extent upon the growth of their aggregate imports. The growth of the exports of individual countries in total export markets depends, on the other hand, largely on changes in their relative competitive strength, as well as on changes in the relative importance of different markets, in the relative demand for different types of product, and in the commercial policies of importing countries.

There were rather large changes from 1954 to 1955 in the relative positions in world markets of the main countries exporting manufactured products, and in their competitiveness as indicated by price data (Table 3). There appears to have been a broad, though far from perfect, inverse correlation between changes in the shares of these countries in the total exports of important industrial countries and changes in their relative export prices. In certain countries, demand factors or elements of competitive strength other than price appear to have exerted some influence. Thus West Germany, Austria, and Belgium probably benefited from the sharp increase in world demand for the products of the metal industries, which constituted a large part of their total exports, while Italy suffered from the comparative slackness of demand for textiles. Japan probably benefited from the fact that the proportion of its exports that went to the United States-where the increase between 1954 and 1955 in demand for imports from industrial countries exceeded the increase in any other major area—was far greater than the proportion of exports of other countries to the United States; in addition, disinflationary conditions in Japan may have not only made prices more competitive, but also made more goods available for export. French exports benefited from a sharp increase in domestic supplies of foodstuffs, coal, and steel, all of which were in great demand abroad. U.K. exports, on the other hand, suffered because of high pressure of internal demand, which drew resources and effort from the export trade, and also perhaps from some relaxation in certain markets of restrictions on competing imports from the dollar area and other countries. It is, at first sight, surprising that U. S. exports did not increase more than their price competitiveness alone would seem to warrant, for they also benefited from special demand factors as well as from reduced adverse discrimination in Europe and the sterling area. The explanation appears to lie partly in a decline in the relative importance (as measured by total imports) of certain markets (for example, in Latin America and Japan) where the United States is a predominant supplier, partly in a decline in the U. S. share of the Japanese market, and partly in the fact that there can be no U. S. exports to the most favorable major market for industrial exports in 1955, the United States itself.

Table 3.Percentage Changes from 1954 to 1955 in Export Volumes and Export Prices of Major Industrial Countries
Japan+24-41United States: Nonmilitary+10+1
France: Total+120Finished manufactures+7+2
To foreign countries+25-4Netherlands+10+1
Italy+15-2United Kingdom+8+2
Germany, Federal Republic of+15+2Sweden+4+4
Sources: Based on data from International Monetary Fund, International Financial Statistics, and Institut National de la Statistique et des Etudes Economiques, Bulletin Mensuel de Statistique.

Index of Ministry of Finance.

Sources: Based on data from International Monetary Fund, International Financial Statistics, and Institut National de la Statistique et des Etudes Economiques, Bulletin Mensuel de Statistique.

Index of Ministry of Finance.

Balance of Payments Developments

The general changes in reserves produced by the balance of payments developments in recent years are summarized in Table 4. There was a further increase in 1955 of $1.7 billion in gold and dollar reserves outside the United States and the Soviet area, but the rate of accumulation was less than in 1953 or 1954. Other developments from 1953 to 1955 include the large and expanding payments surplus of continental Europe, the shift from increasing to decreasing reserves in the United Kingdom, balanced, however, by equivalent movements in sterling liabilities, and the deteriorating payments balance of the primary producing countries included in the category “all other countries.”

Table 4.Official Reserves Outside the United States and the Soviet Area, 1952–55(Value figures in billions of U. S. dollars)
As Per Cent
End of YearChangesof Imports (c.i.f.)
United Kingdom1.962.16+0.59+0.25-0.6420273020
Continental OEEC countries and Japan9.6614.29+1.29+1.48+1.8641464848
All other countries 111.5112.04+0.67+0.10–0.2443514945
Gold and dollar reserves 215.7321.66+2.41+1.82+1.70
U.K. sterling liabilities (except to U.K. colonies)6.726.89+0.57+0.21-0.61
U.K. sterling liabilities to colonies2.893.59+0.19+0.35+0.16
Sources: Based on data from International Monetary Fund, International Financial Statistics, and Board of Governors of Federal Reserve System, Federal Reserve Bulletin, July 1956.

Excluding United States, countries of the Soviet area, and dependent territories.

Including estimated official holdings of U. S. Government securities.

Sources: Based on data from International Monetary Fund, International Financial Statistics, and Board of Governors of Federal Reserve System, Federal Reserve Bulletin, July 1956.

Excluding United States, countries of the Soviet area, and dependent territories.

Including estimated official holdings of U. S. Government securities.

The accumulation of official gold and dollar reserves by countries outside the United States and the Soviet area is affected not only by their balance of payments with the United States, but also by current gold production, private hoarding or dishoarding, sales or purchases of gold or dollars from international organizations, and sales of gold by Soviet area countries. These latter factors on balance contributed rather more to reserves in 1955 than in 1953, and the decline in gold and dollar reserve accumulation was somewhat less than the decline (from almost $2 billion to slightly under $1.2 billion) in the transfer of gold and dollars by the United States to official holders in other countries. The underlying cause of this decline in the payments surplus of the rest of the world with the United States lies in the fact that from 1953 to 1955 output and income elsewhere expanded much more rapidly than in the United States. For industrial production, the increase in non-dollar countries was probably some 18 per cent, compared with only 4 per cent in the United States. As a result of these divergent income developments, U. S. imports rose by only 5 per cent while U. S. exports rose by 16 per cent. Although there was a widespread decline in the severity of dollar restrictions, the expansion of U. S. exports was probably limited by the growth of the fundamental competitive strength of other industrial countries vis-à-vis the United States. The answer to the question whether a “dollar problem” may be said to have persisted in 1955 is, to a large extent, a matter of definition. The increase of $1.2 billion in 1955 in the gold and dollar holdings of other countries as a result of transactions with the United States falls short of the sums provided by the U. S. Government to the rest of the world by way of grants ($1.9 billion) and loans ($0.7 billion). Probably, however, only a small proportion of these sums is of the nature of balance of payments assistance and, while some of the remainder may also be temporary, an abrupt decline in the aggregate amount received by the rest of the world as a whole is probably not to be expected. Moreover, a reduction of some of the U. S. special payments to other countries might involve a more or less corresponding reduction of their imports. On the other hand, discriminatory restrictions maintained, though in greatly reduced intensity, on dollar imports probably still have a considerable effect upon U. S. transactions with the rest of the world, the magnitude of which cannot, however, be precisely estimated.

The changes from 1953 to 1955 in total reserves in countries outside the United States and the Soviet area are broadly similar to the changes in their gold and dollar reserves alone. Although total reserves rose by more than $2.8 billion from the end of 1953 to the end of 1955, the increase was insufficient to maintain the end-1953 ratio of reserves to trade.

The balance of payments of the industrial countries as a whole (excluding the United States) showed little net change from 1953 to 1955. As a result of a rapid growth in productivity and competitiveness and also, in Japan, of various internal measures tending to discourage imports, the continental OEEC countries as a whole and Japan actually increased the already substantial surplus recorded in 1953. This improvement, however, was exceeded by the deterioration in the balance of payments of the United Kingdom.

The shares of different countries in the continental OEEC surplus changed considerably over the period. In 1953, the West German surplus had amounted to some two thirds of the total, and there appeared to be a danger that this might exercise an adverse pressure on the balance of payments of other countries. The German surplus has declined from year to year, however, not because of any falling off in exports-which indeed have continued to expand rapidly-but because of a growth of imports attributable both to increased employment and domestic demand and to progressive import liberalization and tariff reduction. On the other hand, France, though still a relatively high cost country, had in-creasing surpluses as a result partly of increased competitiveness, but mainly of temporary factors described below.

The movement of U.K. reserves, which broadly reflects the balance of payments of the entire sterling area with non-sterling countries, changed substantially for the worse from 1953 to 1955. While U.K. exports increased only half as much as those of continental European countries, U.K. imports rose by three fourths as much. For the period as a whole, the exports of the overseas sterling area fared about as well as those of other primary producing areas, suffering more than the latter from the U. S. recession of 1953–54 but recovering more sharply afterward; the imports of the overseas sterling area, however, increased more than those of other primary producing areas. Both in the United Kingdom and in the southern Dominions, high demand pressures played an important role. In addition, an important factor contributing to the 1955 deficit was the running down of sterling balances by holders residing outside the sterling area, which was due to a temporary impairment of confidence in sterling. The parallelism shown in Table 4 between the directions of movement of U.K. reserves and of U.K. sterling liabilities (other than to the colonies) is striking, but at least to some extent fortuitous, the decline in overseas sterling area balances in 1955 being much influenced by the steep decline in the net capital outflow to the overseas sterling area, which had no direct effect on the movement of U.K. reserves.

The balance of payments of primary producing countries as a whole deteriorated in both 1954 and 1955. From 1953 to 1954, this reflected an increased aggregate trade deficit, as exports rose little and imports expanded more. From 1954 to 1955, however, imports and exports expanded by roughly the same amount, and most of the deterioration was probably due to a decline in net capital imports, particularly a decline in the movement of capital from the United Kingdom to the rest of the sterling area.

The positions and trends of the balance of payments of individual primary producing countries naturally varied widely, and this was also true, though to a somewhat lesser degree, of industrial countries. To a large extent, the character of the balance of payments trends of individual countries, though influenced by such general factors as world market conditions for their exports, has been decisively determined by factors special to them or within their control; for this reason, developments in the more important countries are treated individually, though briefly, in later sections of this Report.

Among the industrial countries, the factors most important in determining balance of payments trends have been the rate of growth in productivity, the extent of wage adjustments, harvest or other developments affecting import competing or export industries, and, above all, the intensity of internal demand pressures as affecting both imports and exports.

Among the primary producers, the differences between individual countries might have been expected to correspond more or less to differences in the growth of their export proceeds as determined by world market conditions. In fact, however, the most severe deterioration from 1954 to 1955 occurred not among the exporters of tropical products, which were forced by shortages of reserves to curtail their imports, but rather among the livestock and grain exporters and some of the diversified exporters, whose imports were allowed to expand substantially, or which were affected, as in South Africa, by adverse changes on capital account. Here too, as with the industrial countries, the dominating factor determining the course of the balance of payments of individual countries was the presence or absence of internal inflationary pressures.

The Equilibrating Role of Capital Movements

The experience of 1955 is not very encouraging to hopes that private capital movements might be relied upon in present circumstances to offset or to mitigate short-term disequilibria in international payments. The reason appears to be partly that the monetary policies of surplus and deficit countries are not always such as to bring about an appropriate differential between the interest rates in the two groups of countries, and partly that considerations of profitability are often outweighed by considerations of exchange risk which are a deterrent to the movement of funds to countries in weak payments positions.

Capital funds move most freely in response to interest differentials between the United States and Canada and between the United Kingdom and other sterling countries. There are also other international capital movements of this kind, but their scope is limited by exchange controls and other considerations. The sharp decline in the apparent net capital outflow from the United Kingdom to the overseas sterling area in 1955 stands out as the clearest example of a capital movement tending to offset the deterioration in a current account balance. This movement, however, because it occurred within the sterling area, could do little in the short run to relieve the pressure on U.K. reserves, while, on the other hand, it tended to accentuate the payments difficulties of some other sterling area countries. Such interest differentials as were created between London on the one hand and New York and continental financial centers on the other were usually insufficient to offset the cost of covering the exchange risk, and the movement of short-term funds between London and those centers in 1955 tended to add to the decline of U.K. reserves.

In the first half of 1955, the continuance of easy credit conditions in Canada at a time when U. S. credit policy had already become firmer tended to reduce capital imports and thus to allow the adverse current balance to express itself in some pressure on the Canadian exchange rate. In the second half of the year, however, Canadian credit policy tightened, leading-along with the fall in the exchange rate-to an equilibrating inflow of funds which was in part responsible, particularly in the fourth quarter, for the rate remaining close to its new level.

Policies Applied to Correct Disequilibria

Internal and external financial policies, including in the latter category the adjustment of exchange rates, continue to be used increasingly, in preference to commercial or exchange restrictions, to correct balance of payments disequilibria. This, however, has applied primarily to countries in deficit, rather than to countries in surplus. Of the countries in a strong or improving payment position, both the United States and West Germany during the past year permitted a degree of monetary expansion enabling production and employment to expand substantially, thus encouraging imports, but both took steps to prevent this expansion from exceeding the bounds deemed desirable from an internal standpoint. France and Italy which had large, though somewhat precarious, payments surpluses did not, for various reasons, join in the general European tendency to raise interest rates. In both West Germany and France, advantage was taken of the favorable payments situation to push somewhat further their liberalization of imports, though in France the effects of liberalization were to some extent offset by compensatory taxes. The United States continued to offset its surplus on private account by large and increasing government expenditures abroad (including grants and credits). Part of this increase, however, was linked to additional exports under surplus disposal programs, and such linked transactions, while easing the balance of payments difficulties of the recipient countries, tended to intensify those of some competing agricultural exporters.

Most of the countries in adverse payments situations in 1955 were suffering at the same time from internal inflationary pressure. Since foreign markets were sufficiently buoyant to absorb easily any resources released by internal disinflation, conditions were in general favorable for the application of corrective measures of internal financing. The outstanding instance of the use of disinflationary measures in preference to renewed recourse to import restriction to meet a drain on reserves is provided by the United Kingdom. The measures adopted there in 1955 and 1956 to curtail credit and public and private expenditure are described elsewhere. There was no resort to intensified restriction on either trade or capital movements, but, at most, merely a slowing down of progress toward convertibility and liberalization. Norway and Sweden also showed increased reliance on financial restraints, and Denmark continued to apply a restrictive financial policy for payments reasons, at some cost to domestic production and employment.

Among the primary producing countries, there was less disposition to rely exclusively on disinfiationary policies as a means of securing extenal balance. But there was also a tendency to resort less to intensification of import restrictions and more to adjustments in the exchange structure or changes in export or import taxes, sometimes supplemented by internal monetary or fiscal measures. Some countries, notably Australia, but also Burma and, to a lesser extent, New Zealand, used import restrictions in conjunction with disinfiationary measures. In South Africa, where difficulties arose in the capital account, a moderate increase in the cost of credit was followed by certain measures to restrict capital export. In some other countries, where chronic inflation had led to a highly overvalued currency and an increasingly severe degree of import restriction, an attempt was made to escape from the vicious circle by adjusting the exchange rates applicable to import and export transactions by depreciated and sometimes flexible rates of exchange. Outstanding examples are provided by the Argentine devaluation of October 1955, and the adoption of a new and more flexible exchange regime in Chile in April 1956, supplemented in both countries by measures of internal monetary discipline. Paraguay followed a similar course. Less comprehensive adjustments were made in the rate structure, with a view to raising the cost of imports and/or promoting exports, by a large number of Latin American and other countries where inflationary pressure of varying degrees had been the cause of extenal imbalance. In Pakistan, where there was a substantial devaluation in July 1955, the disequilibrium which had to be corrected had only to a limited extent been caused by previous inflation. In Canada the flexible exchange rate system permitted a slight depreciation in 1955, in response to trends in the foreign exchange market.

Balance of Payments Prospects

The following considerations suggest that, in looking to the future, a broad distinction should be drawn between the payments prospects for industrial countries and those of the primary producing countries.

There is probably more scope for noninflationary expansion of demand in the United States than in Europe. If inflationary pressure is held in check in Europe and expansion continues in the United States, the consequent movements of income and output in the two areas would tend to bring about a greater proportionate expansion of U. S. than of European imports, and thus at least to prevent any further deterioration in Europe’s current balance on private account with the dollar area.

The question is whether there will in fact be internal monetary stability in Europe and an advance of production and income in the United States. For the most part because of a recession in automobile production and some decline in residential construction, there was little net increase in economic activity in the United States in the fourth quarter of 1955 and the first quarter of 1956. Private investment plans, however, are encouraging, and it would be premature to assume that the North American economy as a whole will fail to use its expansion potential. In several countries in Europe, early steps to curb inflationary pressures have been taken, and in others, while disinflationary monetary policies have been slower in taking effect than was originally expected, it is reasonable to hope that 1956 will see a diminution in excess demand.

Any reduction of the backlog of unfilled orders now existing in various sectors of European industry would of itself promote greater competitiveness with North American industry. However, relative wage movements, which cannot be easily predicted, are also an important factor in competitiveness.

The balances of payments of non-dollar industrial countries are still dependent on U. S. Government expenditure to the extent of over $3 billion per annum. While the total amount of this expenditure is not likely to show any very great decrease over the next year or two, since the military expenditures which are its principal constituent are based on the requirements of U. S. troops stationed abroad, individual countries, such as France and, to a lesser extent, Japan, will have to reckon with a serious decline in receipts from this source.

On balance-and apart from the possible trend of primary product prices, discussed below-these considerations suggest that it would not be surprising if non-dollar industrial countries as a whole were able to avoid any substantial deterioration in their present reasonably favorable balance of payments positions. The United Kingdom is beset by more serious difficulties than those of most of the other industrial countries, but in this case, too, there is no reason to doubt that a continuation of prudent domestic policies would enable gradual progress to be made. The prospect for some of the primary producing countries may be somewhat less assured.

While output and incomes are likely to continue to grow in industrial countries on both sides of the Atlantic, it would be too much to expect the extraordinary rate of growth which has prevailed since mid-1954 to be maintained. A slackening in this rate of growth in industrial countries would tend to bring about some slackening in the rate of growth of exports from primary producing to industrial countries. Since the over-all level of primary product prices has declined slightly, despite the recent abnormal rate of growth of manufacturing production, a decrease in the rate of growth seems likely to accelerate the decline in such prices, unless there are compensatory changes in the export supply conditions for primary products. There is already evidence of weakening in the price of rubber, which advanced sharply from 1954 to 1955.

For a time at any rate, the effects of these factors might be outweighed by changes in the rate of inventory accumulation in industrial countries. Cotton stocks have declined in most importing countries. Supply shortages have compelled some reduction in inventories of copper. These movements make it probable that import demand for cotton will rise and that copper may also be sought for stock replenishment. In general, however, inventories of primary products appear to have risen in the United States and the United Kingdom-and possibly in continental Europe as well-in 1955, and they continued to rise during the early months of 1956. There is therefore little reason to expect any general support for primary product prices from an acceleration of inventory accumulation.

There is more reason to anticipate an acceleration than a slackening over the next year or two in the rate of expansion of the supply of some foodstuffs and raw materials. For example, at current rubber prices, an increase is expected in the U. S. output of synthetic rubber. Prices of nonferrous metals, especially copper, are well above the cost of production in important exporting countries. Surpluses of cotton and wheat continue to accumulate but, despite these surpluses and weakening world prices, agricultural production outside the United States is likely to continue to expand. In many areas, prices received by producers are insulated against world price movements by taxes and subsidies; and in others, lack of alternative occupations tends to render output inelastic. Only for a few commodities, notably wheat, sugar, and tin, may international arrangements prevent prices from falling below certain agreed levels.

The industrial countries included in the subsequent analysis are listed in footnote 3 to Table 1. The basis of classification is the structure of export trade. Some countries with a considerable volume of industrial production are classified as “primary producing countries” because their export trade consists predominantly of primary products.

These comparisons are based on the unit values available for various categories of U. S. imports and estimates for similar categories of OEEC imports based on market price data with the assumption of a time lag of three months.

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