Chapter 1 General Survey
- International Monetary Fund
- Published Date:
- September 1964
THE past year was marked by economic progress shared more evenly than for a long time among the different parts of the world. The rise in output in the industrial countries was generally more rapid than during 1962, and the trend in production, which had been hesitant in several key countries in late 1962 and early 1963, was clearly upward a year later. A particularly encouraging aspect was that the primary producing countries participated in the general economic improvement through an unusually large rise in their export earnings.
In contrast to other recent years, when there were significant exceptions, output expanded during 1963 at a satisfactory rate in all the industrial countries. In North America, the economic upswing that began more than three years ago continued through 1963 and appeared to be accelerating in early 1964. In the United Kingdom, recovery early in 1963, following several years of limited growth, was stimulated by expansionary policies, and gained momentum during the course of the year. While scarcity of labor continued to hamper economic expansion in continental Europe, industrial production in that area rose more rapidly than during the two preceding years. In Japan, a vigorous upswing followed the slowdown of 1962 that had arisen from measures to deal with the 1961 balance of payments crisis. The general rise in output in the industrial countries was also accompanied by a larger expansion in world trade than had been experienced for some years, and the value of exports of the primary producing countries rose in line with world trade, i.e., by about 9 per cent.
The rise in the exports of the primary producing countries was about equally attributable to higher volume and higher prices. Prices of primary products, after several years in which they had declined or remained low, rose markedly during 1963, and by early in 1964 had almost returned to their level prior to the general downturn that began in 1957. The improvement in export earnings was widespread and was shared by an increasing number of countries as the year progressed. Since price increases for a number of products came late in 1963, their effect on export receipts will in part be felt only in 1964. This and the further rise in prices in the first months of 1964 made the immediate prospects of primary producing countries more favorable than for many years, although problems of securing better access to export markets for their products persist.
Largely as a result of the rise in their export earnings, together with some increase in foreign aid, the balance of payments of the less industrialized primary producing countries as a group improved by $1.5 billion, changing from deficit to surplus. This was perhaps the most helpful development in international transactions in 1963. There was, however, also some evidence of a tendency toward a reduction in imbalances among the industrial countries, even though new situations of external disequilibrium arose in the course of the year.
The balance of payments deficit of the United States continued to run at a high rate in the first half of the year, but it fell sharply in the second half, and U.S. international transactions were in approximate balance in the first quarter of 1964. Although the improvement was in part due to transitory factors—including exceptional exports of agricultural commodities related to bad harvests in Eastern and Western Europe and the impact of the proposal for an interest equalization tax on certain outflows of capital—some basic influences were also at work. There are signs that three years of sustained growth of the U.S. economy under conditions of price stability, in combination with rising costs and falling profit margins in many of the other industrial countries, have tended to make foreign investments relatively less attractive than domestic investments. Recent trade developments also appear to reflect the increased international competitiveness that the United States has gradually been acquiring over the past few years, although firm evidence of this cannot, in the nature of things, be easily provided.
The balance of payments of the United Kingdom remained in surplus on current account throughout 1963. There was, however, some deterioration of the current balance in the course of the year, in part related to a rebuilding of inventories under the impact of rising activity and rising import prices. After the third quarter of 1963, an appreciable over-all deficit developed, financed, however, mainly by an accumulation of sterling balances, rather than by a decline in reserves.
In Japan, the very high rate of economic expansion has put some strains on the balance of payments; however, in part because the Japanese authorities have taken action earlier than on similar occasions in the past to prevent the boom from getting out of hand, and in part because of the high degree of prosperity in Japan’s main markets, the balance of payments deficit on current account that developed was smaller than the inflow of capital.
In continental Europe, balance of payments developments showed conflicting tendencies. The over-all surplus of the area as a whole was largely unchanged from 1962 to 1963, remaining at about $2 billion; but it was lower in the second half of 1963 than in the same period of 1962, with signs of a further decline in early 1964. There was, moreover, a reduction of $0.8 billion from 1962 to 1963 in the area’s balance on current account, which was thereby brought into approximate equilibrium. These developments were the product of marked changes in the positions of individual countries. A large German surplus re-emerged progressively in the course of 1963, after a year of near balance. The change was predominantly a reflection of rising demand pressures in the rest of the Common Market area, which in some cases reflected inflationary conditions. Such pressures were particularly strong in Italy where, after several years of substantial surplus, a large balance of payments deficit on current account was accompanied by an outflow of capital. Late in 1963, it became evident that strong demand pressures in France were causing a sizable reduction in the large and hitherto persistent French balance of payments surplus. Since mid-1963, both Italy and France have adopted measures aimed at restoring stability, and more recently attention has been given by the Common Market countries to the problem of inflation in the area as a whole. These efforts should help to reduce imbalances within the area and, although they may also slow down the progress toward solving the problem of the area’s surplus position vis-à-vis the rest of the world, it was apparent by early 1964 that this latter problem had in any case come much nearer to its solution.
The major disequilibrium between the United States and the continent of Europe, which has disturbed international payments relationships for several years, appears now to have been sharply reduced. This has been accomplished without contractionary action in the major deficit country that might have had harmful repercussions in many parts of the world. The international monetary system has been able to meet the challenges to which it has been exposed, with a more intimate and effective international cooperation in monetary matters than at any time in history. It should be noted, however, that even after three years of continued expansion, unemployment remained high in the United States, and that the sharp rises in prices and costs in those countries which are still or have until recently been in surplus have created new problems of internal or external balance, or both. The existing rigidities of price systems and cost structures make it difficult for price reductions in deficit countries to play a major role in the adjustment of payments positions, and, with prices remaining stable in the United States, much of the adjustment in relative costs and prices has occurred through increases in the surplus countries. Once set in motion, however, an upward movement of prices and wages may continue after the international imbalance that it helped to correct has been eliminated.
At the same time, the recent sharp increases in costs and prices in the present or former surplus countries are not merely the effect of “imported inflation,” i.e., an automatic or deliberate response to the balance of payments situation. Other factors have also been at work. For example, there were countries in which the rise in wages had lagged behind that in productivity, and this situation had built up pressure toward a redistribution of income shares between wage earners and entrepreneurs. The success of the continental European industrial countries and Japan in reaching their goals of full employment and a high rate of growth has also created pressures on wages and prices, whether or not they were, in any country at any particular time, accompanied by balance of payments surpluses.
Incomes policies have been given growing consideration as a possible means of mitigating tendencies toward cost inflation under full employment. Such policies seem likely to be used increasingly to supplement other instruments, although, even if they are generally adopted, there is no guarantee that they will be most effective in the countries chiefly prone to cost pressures. Nevertheless, an incomes policy can contribute to the adjustment process. In a deficit country, it can help to overcome a relatively unfavorable trend of costs and prices. A surplus country, confident in the effectiveness of its incomes policy in holding wage and price movements within appropriate limits, may be more willing to allow the expansionary tendencies of the surplus to have an impact on the economy.
The role of capital movements in facilitating balance of payments adjustment has also attracted increasing attention, focused on possibilities for improving the structure of capital markets in Europe. One point of emphasis has been a desire to correct the existing payments disequilibrium by limiting the outflow of capital from the United States and stimulating a net outflow of capital from continental Europe. The sharp rise in real income in continental Europe would seem to make it natural for that area to become once again a net exporter of capital, although the United States, with a very large part of the world’s savings, must be expected to continue to be the most important net supplier of capital to the rest of the world. A revival of European capital markets has been given further impetus during the past year by the proposal for an interest equalization tax in the United States, which has led to some experimentation with new forms of international borrowing in Europe. It has to be borne in mind, however, that the flow of international capital is not always influenced by considerations of balance of payments equilibrium, which will vary over time; and that the removal of imperfections in the mechanism of capital markets cannot be counted upon at all times to ease international payments problems.
The potential role of private capital in assisting more effectively in the process of economic development also needs attention. The flow of private capital to the less developed countries has been discouraged in recent years by a number of phenomena that have accompanied the slow growth of the exports of these countries; these include weak payments and reserve positions, intensive use of payments restrictions, and inflationary developments in many countries brought about by efforts to reach development goals not compatible with the available real and financial resources. The new rise and higher level of prices for primary products, if they prove to be more than temporary, should improve investment opportunities in the less developed countries and also encourage the inflow of foreign capital where the climate for foreign investment is favorable. The movements of private capital are quite sensitive to political developments and attitudes, and actions taken against foreign investments in one country may seriously affect prospects for a flow of capital not only to that country, but also to other countries. But even where conditions are favorable, a substantial flow of private capital to some of the less developed countries will undoubtedly require a willingness, on the part of both investors and developing countries, to adopt new attitudes. It is, of course, equally important that the industrial countries should consider doing anything in their power, by fiscal or other means, to stimulate capital exports to the less developed countries.
However, the larger part of the inflow of foreign finance into the less developed countries will undoubtedly continue to take the form of bilateral or multilateral aid, the net flow of which in 1963 made up about four fifths of the total inflow of foreign financial resources. This may be the only form of foreign finance available, for instance, for some infrastructure projects and other social programs that yield a financial return only indirectly and in the long run. Much of official loans and aid continues to be tied to purchases in the country providing them. In order that aid can be utilized as effectively as possible, this limitation should not be resorted to unless there are compelling justifications for it.
The financial support which the Fund provides to countries in balance of payments difficulties—including that extended under the special compensatory financing facility for countries experiencing a temporary shortfall in export receipts—contributes to the process of economic growth. It does so by helping countries to avoid or reduce wasteful disruptions to economic development by tiding them over their temporary difficulties, or by assisting them to carry out stabilization plans. The Fund is vitally interested in the strengthening of national and international programs for development assistance. During the past year, it has continued to participate in an advisory capacity in the work of a number of consortia and consultative groups that have been set up to coordinate national and international efforts to extend aid to particular countries.
The Fund also warmly supports the efforts that are being made at the international level to improve international trading opportunities and, in particular, the access to markets in the advanced countries for the products of the less developed countries. It attaches great importance to current efforts to diversify these products. Nothing could contribute more to the balanced growth of the less developed countries than a steady rise in their export receipts. This would also help materially in achieving the guiding purposes of the Fund as set out in the Articles of Agreement—not only by promoting exchange stability and facilitating the expansion of international trade in all parts of the world, but also by contributing “to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members.”
In two fields which are of special interest to it, the Fund has this year continued to evolve the programs of technical assistance that were outlined in last year’s Annual Report. First, it has established a Fiscal Affairs Department, and is recruiting experts in such fields as tax policy, tax systems, tax administration, budgeting and revenues, and expenditure control. It is intended that the services of this Department will be made available as appropriate in the course of the ordinary consultations procedure and, when requested by member countries, by special assignments of technical advisors. Second, the Fund has established a Central Banking Service to assist those member countries that are planning to organize new central banks or to improve or strengthen existing ones. This Service will undertake to engage experts from older central banks to serve in executive or advisory capacities in the central bank requesting the assistance. The Fund has already provided a number of experts through this Service. The two new services, which are described more at length in Chapter 2, should, as they become increasingly effective, prove particularly useful to the large number of newly independent countries that have recently joined the Fund.
The regular consultations continue to provide a valuable opportunity for reviewing member countries’ problems and, particularly in the newly independent countries, for communicating technical advice. In addition to the consultations that take place in accordance with Article XIV, the Fund is finding the consultations with member countries that have assumed the obligations of Article VIII increasingly useful. Consultations of both types enable the Fund to inform itself of policy problems and attitudes in all parts of the world, and to have them considered in a world context by the Executive Directors. At the same time, this procedure, together with the more informal staff contacts, permits the Fund to anticipate payments problems encountered by individual countries and, supported by special staff studies, to keep abreast of major trends in international payments in the world as a whole.
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The pattern of international transactions that evolved during 1963 resulted in a substantial increase in international liquidity. Total official reserves of all countries, which had increased by $1 billion during 1962, rose by about $3.4 billion, or more than in any other postwar year. A major factor was the sharp improvement in the balance of payments position of the primary producing countries as a whole. Since these countries generally keep a high proportion of their international reserves in foreign exchange, their $1.6 billion over-all balance of payments surplus in 1963 brought about a nearly equivalent increase in their sterling and dollar holdings. Another factor was a greater increase in world monetary gold holdings than in any postwar year. Both production and Soviet gold sales increased, and there was also less hoarding than in 1962, which was itself a reflection of increased confidence in the international monetary system.
The relative calm in foreign exchange markets during the past year, combined with a further substantial increase in reserves, has created a favorable background for the studies of international liquidity over the longer run that have proceeded both at the Fund and in the group set up by the ten participants in the General Arrangements to Borrow. These conditions permit the problems to be thoroughly explored without the urgency which would otherwise stem from a need for early action. This subject is dealt with in Part II of this Report.