International Monetary Fund
Published Date:
September 1964
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A. International Money and Security Markets

SINCE the acceptance of nonresident convertibility for the major international currencies at the end of 1958, there has been an extensive integration of the international market for short-term funds. This has been marked by a rather rapid re-emergence of the London money market as a true international center accepting large deposits in foreign currencies as well as sterling deposits. The relative freedom of this market from exchange restrictions contributes to its effectiveness as a center for short-term capital movements. Similar operations, although generally on a smaller scale, have developed in a number of other countries. Although some countries still maintain, and others have introduced, certain restrictions on movements of short-term capital, such movements are in fact difficult to control and, in practice, existing restrictions have not proved to be a major obstacle to the internationalization of money markets.

In contrast, the long-term security markets have tended to become, if anything, more isolated from each other during 1963, as a result of the policies described in Chapter 5. The New York market traditionally serves not only as a source of U.S. capital for borrowers from other countries but also as an outlet through which non-U.S. lenders may employ their resources internationally. A substantial proportion of many European, Canadian, and other foreign issues made on the New York market has in fact been subscribed by investors who are not U.S. residents; the continuing quotation of non-U.S. issues on this market gives fluidity to international investment. The relatively large scale of this market, and the substantial flow of U.S. funds to it, gives it a breadth which has enabled it to act as a world center for the settlement of long-term capital flows. The importance of the New York market has been enhanced in the postwar period by the failure of the London capital market—the only other large international capital market—to re-emerge as an international center to the same extent as the London market for short-term funds. This is a consequence of the continued restrictions on long-term capital transactions in the United Kingdom.

In the course of 1963, however, the New York capital market became a less active world center for international investment, because of the uncertainty created by the proposed interest equalization tax. This uncertainty has resulted in a marked, though in part temporary, decline in U.S. demand for issues by borrowers in the industrial countries and some narrowing of the market generally. In consequence, there is strengthened interest in the development of alternative markets, particularly in Europe. This interest has been reflected in the flotation of several foreign currency issues on the London market late in 1963 and early in 1964, and in the offer to European investors of several issues denominated in alternative currencies.

If a security carrying a reasonable yield is to be a satisfactory medium for investment, there must be a fairly broad market to ensure its salability. That is, it must be attractive to those buyers who deploy the essentially national flows of savings which provide stability in the major national markets. The demand for issues denominated in currencies other than that of the market on which they are traded is likely to be relatively small. The objection of certain countries (e.g., Switzerland) to the flotation in foreign markets of securities denominated in their currencies is an additional obstacle to large sales of foreign currency issues. The problems arising from differing levels of interest rates in a number of markets will need to be overcome, and the potential transfer of securities of any multiple currency issue from market to market might make its supply on any single market uncertain. Thus, a number of difficulties will need to be surmounted. At this stage, judgment should be reserved concerning the usefulness of these efforts to develop issues tailored predominantly to a purely international demand. But improvements in the basic institutional structure of national security markets may make a greater contribution to the evolution of European capital markets.

In several countries, including Belgium, Canada, France, and the United Kingdom, official bodies have recently examined the structure of financial markets. At present, security markets in continental Europe play a decidedly limited role in the financing of economic development, both internal and external. Self-financing by private businesses and direct borrowing on a short-term basis are more important than in North America and the United Kingdom; the issue of securities has been a residual source of funds. This is partly due to the relatively high level of profits in most European countries until recently and the conservative dividend policies followed by most European companies. These have tended to strengthen the traditions of self-financing and to restrict the supply of industrial long-term securities to the markets. At the same time, there is a relatively small demand by investors for long-term securities. As a consequence, the organized long-term financial markets tend to be thin. Trading in securities is carried out by a few institutions; the markets, indeed, are often dominated by the banks. Security prices fluctuate disproportionately to the volume of securities traded, and the variety of securities traded tends to be limited. Continental markets are also dominated by fixed-interest bond issues and government securities; indeed, in some countries, the security market is purely a bond market. Hence, the capital markets often tend to be unstable and somewhat unattractive both to investors and to borrowers.

The small demand for securities is partly explained by the fact that, until recently, personal savings were low. Until 1959, household savings rarely exceeded 5 per cent of disposable income, although since then the proportion has risen substantially. Hitherto, also, financial assets held by European households have been predominantly in the form of highly liquid assets (bank deposits or other short-term claims on financial institutions). In turn, this preference for claims on financial institutions rather than for obligations of private businesses is partly a product of the European tradition of publishing a minimum of information about the affairs of individual companies. As a result, private placements of securities with, and long-term industrial loans by, financial institutions are much more prevalent in continental Europe than in London or New York. (For example, such borrowings from banks by German nonfinancial enterprises over the last five years have been approximately 3½ times as large as the amounts obtained by them through the issue of securities on the market.) In turn, there are perhaps more individuals without access to sufficient knowledge who prefer to entrust their savings to financial institutions with reputations for prudent investment.

The European preference for relatively liquid claims on financial institutions also reflects a fear of attrition of immobilized assets fixed in money terms, arising from the experience which the last two generations of savers have had with the depreciating purchasing power of currencies. Given this dislike for long-term debt instruments, it is rather surprising that most industrial issues made publicly on European markets (with the exception of the Federal Republic of Germany and the Netherlands) consist of bonds rather than equities. Even so, the yields on bonds have generally been above the return on equities, and capital gains have not always compensated for the sometimes extremely low return on equities. From the private borrowers’ point of view there are strong reasons for preferring to issue bonds rather than equities. First, there is a firm tradition of retaining close control of individual enterprises, which runs counter to a spreading of shareholdings in a number of concerns. Second, most European tax systems offer fiscal advantages to the issue of bonds rather than equities. Finally, the inflation of the last half century has created a preference for borrowing in fixed money terms, the real burden of which may well decline.

Throughout the postwar period, the most important borrowers on the European capital markets have been national governments or public enterprises. They have, of course, had priority in raising funds through the issue of securities; in some cases, the market has been largely restricted to their needs. In part, this reflects the important role of European governments as financial intermediaries in the savings-investment process. In many countries (e.g., France and Italy), the government collects savings by the acceptance of deposits from the public (either directly or through official financial entities) or by issuing short-term securities. At the same time, most of the governments in these countries are important lenders, not only to nationalized industries but also to privately owned businesses, through direct participations or loans or by financing through official financial institutions. In Sweden, the establishment in 1959 of a Supplementary National Pensions Fund has substantially increased the supply of long-term funds available for investment on the capital market and for lending to other credit institutions and to local authorities.

Regulations also serve to limit the flexibility of European capital markets. The issue of nongovernment securities is controlled rather tightly in most countries of continental Western Europe (with the notable exception of Belgium and the Federal Republic of Germany). The policy of governmental control over the new issues market has been aimed partly at facilitating the issue of government bonds but partly at implementing monetary policy. In the Netherlands, for example, the excess liquidity in the market in 1962 and 1963 was partly offset by the issue of government debt, but it also induced the authorities to relax restrictions on the issue of private securities. These policies have had the consequence of stabilizing long-term rates, albeit at a relatively low level. Switzerland has also recently eased its controls on capital issues for similar reasons. In France and some other countries, controls are used to influence the direction of investment, as well as to ration new issues of bonds so as to prevent overburdening the capital market. Government fiscal policy also often affects the demand for securities by imposing restraints on dividends, by changing the level of taxation on distributed dividends, or by granting fiscal exemptions on income from government securities. Such fiscal imposts lower the demand for private securities at a given price, or, alternatively, raise the costs of issue to the borrower. Both effects restrict the volume of private securities on the capital market.

The demand for nongovernment securities is also affected by restrictions imposed on institutional investors (e.g., insurance companies and pension funds). In New York and London, these investors are the mainstays of the capital markets; but in most continental markets, insurance companies and pension funds tend to be relatively small and their investment policies are much more closely controlled than in London and New York. The consequence is that (for example, in Germany) the institutional investors are an important source of direct credit rather than heavy purchasers of nongovernment securities.

Finally, the fact that continental capital markets are rather small tends to increase the costs of access to them. The thinness of the market makes it difficult and expensive to distribute a new issue. In some cases this cost is increased by relatively heavy taxes on capital issues or transfers. These other costs, expressed as an annual charge, are likely to be above 1 per cent per annum in many European countries and may even approach or exceed 2 per cent (e.g., in Belgium, France, and Italy). In the United States or the United Kingdom, they are not greatly in excess of ¼ per cent. This high level of costs tends to restrict the market and thereby to weaken the forces that might lead to their reduction. Any broadening of the markets should make it possible to increase participation in them and encourage more active competition among intermediaries. This should lead in turn to a lowering of costs and create incentives to a further enlargement of the markets.

However, a rapid growth of the markets is likely to depend on important institutional changes being effected, and on investment patterns changing, particularly those of private households. The European capital markets have played a relatively small role in post-1945 European economic development because the demand for such facilities has been low and little has been done to encourage the markets to develop. This situation is now changing, and the demand for finance from European capital markets is rising. This is partly because of changes in financial practices, partly because of a sharp rise in household savings, and partly because the volume of funds needed to finance expansion is rising, as is evidenced by an increase in the average size of new issues. Greater new issue activity will tend to build upon itself, especially by making the markets more attractive to both institutional and private investors. The change in monetary habits resulting from the long period of monetary stability in Europe will probably give rise to a change in investors’ preferences, especially in the direction of less liquid monetary assets. For their part, borrowers in the market should be prepared to extend, to a greater extent than hitherto, the range of paper traded within the market, especially by issuing more equities. They will also need to meet the demands of investors for more information regarding company operations. Extended use of the markets and larger-sized issues should also tend to reduce the costs of issues. Markets could be further broadened by such institutional reforms as fiscal amendments which would make the issue and transfer of securities easier and cheaper and which would allow greater participation by institutional investors.

Such changes in the structure of capital markets will, of course, take time. In due course, however, they should enable the main European countries not only to organize the financing of their domestic capital formation more effectively but also to assume a role as net providers of private capital to the rest of the world.

B. Incomes Policies

RECENT developments have led to renewed interest in the broad range of measures commonly referred to as “incomes policies.” These are measures specifically aimed at preventing money incomes from rising excessively in relation to the growth in real national output, and so influencing the process of price formation; they are intended to supplement the traditional instruments of monetary and fiscal policy. The new interest in them has been aroused in a number of different ways. In countries where nearly full employment has prevailed, it has been occasioned by a desire to mitigate upward pressures on wages and prices. In countries seeking to attain a higher rate of economic growth, it has stemmed from a wish to forestall a possible increase of such pressures as expansion got under way. In countries in actual or prospective deficit in their international transactions, balance of payments considerations have provided the immediate stimulus. The maintenance of price stability has been seen as a key requirement if economic growth is not to be jeopardized by a deterioration in the payments position in the course of expansion.

It is too early to judge the effectiveness of the measures in the field of incomes policy that have so far been tried, but it is generally agreed that they cannot be successful unless applied in the context of an appropriate mix of other policies aimed at preventing excessive demand pressures from developing. Their degree of success will vary from country to country with the institutional framework and with the support given by social groups to the objective of price stability, which to some extent depends on the recent experience of the countries concerned as well as on traditional attitudes. Ceteris paribus, they are likely to encounter the greatest obstacles in countries where strong domestic demand pressures originate in a booming export sector. On the other hand, they may encounter less opposition where it is apparent that rising costs would result in, or aggravate, a deficit in the balance of payments that would pose a threat to the maintenance of employment at a satisfactory level over the long run. It seems likely that, although incomes policies have clear limitations at this time, this additional instrument as it is further developed and becomes more effectively applied, can contribute, along with other policy instruments, to the reconciliation of the objectives of monetary stability, high levels of employment, and a satisfactory rate of economic growth, the attainment of which is a joint interest of all countries.

* * *

Present incomes policies should not be regarded as a movement toward the introduction of a comprehensive regulation of wages and prices, or dividend and profit controls, such as were applied in certain countries in Europe for varying periods soon after World War II. In general, recent policies have been directed (1) to securing the cooperation of entrepreneurs and trade unions in limiting inflationary pressures by appropriate wage and price decisions; (2) to informing all those concerned with such decisions about the issues involved, and to mobilizing the forces of public opinion against undue increases in wages, salaries, or profits; and (3) to establishing, or strengthening, specific checks and balances to reduce cost pressures in particular areas of the economy under full employment conditions. The action taken has ranged from efforts to encourage a favorable evolution in the existing institutions governing wage negotiations, to stricter enforcement of the law concerning labor disputes, price fixing, restrictive policies, and monopoly power or the adoption of new legislation.

An important role has been played by the publication of official reports on the state of the economy, including guidelines indicating the average scale of increases in income which the authorities judge to be consistent with their estimates of the growth of per capita productivity in the economy. The framework of ideas set forth in the United States, in the 1962 Economic Report of the President has served as a model for similar publications in some other countries. Although wage pressures have been moderate in the United States during the last three years, the guidelines given there and repeated in the 1963 and 1964 reports are officially regarded as being a helpful means of setting a standard of what may be regarded as a “fair” wage or price increase.

In the United Kingdom, the Government announced its intention in December 1961 to try to work out a policy with both sides of industry to keep increases in money incomes in line with the long-term growth in national production. The official guideline for wages, salaries, and other incomes, adopted early in 1962, called for increases not to exceed the 2-2½ per cent growth in average per capita productivity in recent years. This was subsequently raised to 3-3½ per cent as a corollary to the acceptance by the Government of a target of 4 per cent a year for the growth of the gross domestic product over the period to 1966.

Such a target had been regarded as feasible in the report in February 1963 of the National Economic Development Council (NEDC), which had been set up by the Government in 1962 to examine the practicability of achieving a faster rate of economic growth. The members of NEDC include the Chancellor of the Exchequer, other Government Ministers, prominent union leaders, industrialists, and independent persons. In its search for methods by which the U.K. growth rate could be sustained at the 4 per cent level, NEDC took an active interest in studying concomitant policies for money incomes and prices. Indeed, NEDC was the setting for a constructive interchange of views between influential trade unionists and industrialists concerning incomes questions during 1963 and the early part of 1964. The work of the Council and its Secretariat has inspired exploratory moves by both sides of industry toward the evolution of a system of wage negotiation more appropriate to a full employment economy than the existing, haphazardly developed processes of wage bargaining and machinery for coordinating the policies of the employers’ associations on the one hand, and of the trade unions on the other. Proposals have been made for the unification of the three central organizations of industrialists and for measures to secure a greater coordination of their policies; a reorganization of the unions along industrial demarcation lines is under study by a Committee of the Trades Union Congress (TUC). The General Council of TUC presented a report advocating a wages policy at the annual Congress in September 1963. General agreement to such a policy was not, however, reached, and the committee studying changes in union structure has so far failed to reach an agreed solution.

NEDC also discussed the role of incomes policy in relation to profits, and the responsibilities of management for achieving the price and income objective. Difficulties were foreseen as a result of fluctuations in profits in the course of the trade cycle and the likelihood that profits would rise in relation to wages and salaries toward the end of 1963. Late in 1963, the Federation of British Industries set up a joint working party with representatives of other employers’ organizations to consider certain proposals for restraining profits and prices which, if they proved practicable, might serve as the counterpart to a policy of wage restraint on the part of the trade unions. No firm conclusions have as yet been drawn from NEDC’s intensive study of incomes policy questions between December 1963 and February 1964, and it is unlikely that further progress will be made in this respect before the General Election later in 1964.

In its attempt to establish a favorable institutional framework for an incomes policy, the Government also set up in 1962 a National Incomes Commission (NIC). This is a standing Royal Commission, with independent members drawn from various professions, to which the Government may refer any pay settlement for retrospective examination, or any current question concerning pay or conditions of service, the cost of which will be met by the Exchequer. A current pay claim may also be referred to the Commission by the parties concerned, but so far all references have been by the Government. NIC is also required to have regard to the Government’s pledge to restrain any undue growth in aggregate profits that may result from restraint in earned income, and to report from time to time on the need, if any, for such action to be taken. The Commission is an advisory body without power to enforce its suggestions, but it can recommend that the Government undertake surveys, for example, of prices, profit margins, and dividends. In general terms, NIC has provided a forum for discussion of the issues involved in determining how far particular wage or price decisions may be in the national interest. It has been suggested that the wish to avoid the substantial work and publicity involved in an investigation by NIC exerts a considerable influence upon employers, making them unwilling to offer pay increases substantially in excess of the guideline.

At its establishment, NIC was widely criticized for its lack of powers and of expertise. Nevertheless, the publication of its first two reports in 1963 seemed to have had an influence in moderating wage settlements in subsequent months and in encouraging agreements covering more than one year. However, at the end of 1963 several important wage settlements exceeded the official guidelines, and the Government referred to NIC the agreements providing for increases in wage rates in the engineering and shipbuilding industries of more than 5 per cent. A recent report on university salaries has underlined the value of the Commission as a means of establishing the existence of an exceptional situation justifying increases above the national guideline, and thereby indicating the areas where exceptions to the general rule ought to be admitted.

In the Federal Republic of Germany, employers are relatively strongly organized and the trade unions, which were disbanded in 1933, have been reconstituted since World War II in a few very large unions, covering industries or related groups of industries. A growing interest in incomes policies is a recent development. It reflects the stronger bargaining power of the trade unions in a full employment situation, and the realization that the public does not favor reliance on restriction of over-all demand as the sole means of countering wage pressures. This interest has been reinforced by the context of slower growth in the gainfully employed population and stronger demands for reductions in working hours.

An initial attempt at official guidance in 1960 was rather unsuccessful, and no similar moves were attempted in 1961 or 1962. Renewed attempts to influence the rise in wages early in 1963 promised to be more successful in the more restrained demand situation then prevailing. The authorities sought to inform and mobilize public opinion, and to promote informal contacts between employers, trade unions, and the economic departments of the Government, in order to facilitate making decisions on money incomes which would be consistent with the long-term growth of the economy. Two Economic Reports, presented by the Federal Government to Parliament in February and December 1963, suggested guidelines of 3-3½ per cent and 5-5½ per cent as justifiable rates of increase in money wages in 1963 and 1964, respectively Early in 1964, a group of independent experts was appointed to prepare similar reports annually.

The Economic Reports were fairly well received by the public and may have helped to moderate the increase in wages and prices as compared with recent years. The upward tendency of wages eased during much of 1963. Wage bargains concluded in the spring, though above the guideline, provided for more moderate increases than those concluded earlier in the year, several of which resulted in increases of 8-9 per cent. The guideline for wages encouraged a unity of view among employers. The slower rise in wages undoubtedly reflected a greater resistance to wage claims, mainly attributable to the squeeze on profits. However, with economic activity now expanding more rapidly and with improved prospects for profit, there may be less resistance to wage pressures among entrepreneurs.

Since wage settlements in 1963 were generally concluded for periods of more than one year—as recommended by the authorities—no sharp upsurge of wage rates may be expected until late in 1964. When the agreements come up for renewal, the trade unions may press for substantial wage increases, against the background of the marked rise in profits and other incomes in recent months, upward wage movements in other countries, and increases in the cost of living (especially those resulting from government decisions to decontrol certain rents, to raise railway and postal charges, and to raise the prices of certain foodstuffs as part of the support to the agricultural sector). The authorities are seeking to limit price increases by strengthening anti-cartel legislation through a reform of the Law on Restrictive Policies, by the provision of better consumer information, and possibly by reducing tariffs.

In France, the preparation of the Fourth Development Plan led to much discussion over the sharing of “the fruits of expansion.” The term “incomes policies” has come to signify planning and policies to secure a desired allocation of real income among various groups. However, the need for an incomes policy in the narrower sense suggested at the opening of this section is less generally accepted by employers or trade unionists in France than in the United Kingdom or Germany. There is also far less agreement on the relevant statistics. A pressing need for an accepted incomes policy in this sense stems particularly from the Government’s widespread involvement in decisions on money incomes. In France, government policy exerts a strong influence upon the level of money incomes owing to the importance of the public and nationalized sectors, the role played by the Government in determining income in the large agricultural sector, and the relatively high share of total personal income comprised by social security payments and pensions. Moreover, the 1960 Act on the Orientation of Agriculture had accepted the achievement of “parity” between the average level of incomes in agriculture and in industry as an objective of government policy. This has led to widespread demands for “parity” of incomes in other sectors of the economy.

The critical question of comparative wage levels in the public and private sectors came to a head with a strike in the coal mines in the spring of 1963. In their report, the experts appointed to study the whole question of wages in the nationalized sector emphasized the need for a generally agreed policy on government-determined incomes and drew attention to some of the underlying problems of incomes policy. The settlement proposed in the report was that workers in nationalized undertakings should be guaranteed minimum wage increases each year, subject to the achievement of the objectives set for the sector in the Development Plan concerned. There should be an annual review, at which this minimum increase could be augmented by a variable addition depending on the general economic situation and the particular circumstances of each undertaking. The guaranteed minimum increase should be below the target increase set by the Plan, so as to leave scope for negotiation between management and unions.

The Government accepted the principle of an annual review as well as the experts’ assessment of the extent to which earnings in the coal mines, public utilities, and railways had lagged behind those in the private sector. It agreed that this past lag should be made good in two stages, half by immediate wage increases, half at the beginning of 1964. The question of the increases currently needed to preserve parity was to be discussed at the annual review agreed to earlier. The Government also agreed, in the interests of greater flexibility, to publish guidelines showing the average rate of wage increase which it regards as permissible each year.

The second stage of the wage increases promised in the spring and the proposed annual review were, however, delayed by the Government when price stabilization was undertaken in September 1963. The stabilization measures were intended to limit wage pressures by keeping down the prices of key items in private consumption. A “wage pause” was imposed on the public sector, wages being permitted to rise by not more than 1 per cent a quarter. This decision was strongly opposed by the trade unions and resulted in strikes.

General questions of income distribution again came to the forefront with the presentation to the Social and Economic Council of a report showing that disparities in real wages had widened between 1956 and 1963. In February 1964, the chairman of a special committee representing labor, employers, and the Government recommended that the Government indicate permissible or desired rates of increase for different categories of income each year, and the measures it might propose to secure these increases. The Social and Economic Council would review these proposals, and a panel of independent experts would be charged with following their implementation. The Government is considering this recommendation. It was also recommended that future Development Plans should include indicative figures for the growth, in money terms, of the main categories of income. This proposal is being studied by the planning authorities.

In the Netherlands, wage rates are legally established for each worker by a system of differentials for skill and urban or rural location related to a national minimum rate. Until 1959, whenever wages were raised (whether to meet changes in the cost of living or to allocate the gains of rising national productivity), practically uniform increases were granted to all workers, in all sectors.

This system came under increasing attack from both sides of industry, and in 1959 a new policy was introduced under which collective bargaining took place within individual sectors, the growth of productivity in each sector serving as a guideline for the permissible wage increases there. If strictly applied, this scheme should have obviated the possibility of price increases due to wage increases. However, in order to permit some increases in wages, and therefore in prices, in sectors where the growth of productivity was slowest, while maintaining over-all price stability, it was the aim to secure price reductions in sectors where the growth of productivity was most rapid.

This arrangement (which at the end of 1961 was modified so as to give some weight to the expected increase in productivity throughout the economy) did not fulfill expectations. Entrepreneurs were disappointed that it did not leave room for changes in the market situation to influence wage developments in different industries. Large wage increases in some sectors where productivity was rising rapidly inevitably gave rise to wage claims elsewhere and to the tendency for wage increases on average to exceed the over-all growth of productivity. Because of increasing labor shortages, which were partly due to the greater number of Netherlands workers going to neighboring countries, individual employers were ready to pay “black wages”—i.e., wages above those negotiated under the productivity formula.

After prolonged negotiations between the Government and organized management and labor, a revised system of wage determination was introduced in January 1963. Seminannual surveys of the economy, prepared by the Central Planning Bureau and including an account of the balance of payments position, are to be discussed by the Social and Economic Council (in which one third of the members represent the unions, one third represent management, and one third are independent members appointed by the Crown). Discussions, which are to take place at least once a year between the Government and the Labor Foundation—the highest negotiating committee of management and labor—are to center round the report of the Social and Economic Council. The outcome of these discussions is to serve as a guideline for collective bargaining by industries. The Labor Foundation, and no longer the government-appointed Board of Mediators, now approves collective agreements. However, the Government may suspend collective agreements which it considers contrary to the general interest, or not in line with the outcome of the discussions with the Labor Foundation. It may also promulgate a “wage freeze” in order to reconsider the situation with the Labor Foundation. The Minister of Social Affairs can convey the powers of the Labor Foundation temporarily to the Board of Mediators, in case there exists a fundamental difference of view between the Government and the Labor Foundation and the latter is not willing to follow the Minister’s views.

In October 1962, the Social and Economic Council stated that it would be economically justifiable to increase by 2.7 per cent the wages of those workers whose contracts were renewable in 1963. However, the extreme tightness of the labor market situation led to increasing payment of “black wages.” At the end of October, agreement was reached in the Labor Foundation for wage rates to be increased by 5 per cent on January 1, 1964, and by a further 5 per cent as collective agreements for particular industries are renewed during the year. In addition, individual enterprises are to be permitted to raise official wage rates by 4 per cent, i.e., to legalize “black wages” already being paid. Recent estimates put the rise in total wage costs per worker in 1964 at 15 per cent, compared with 8 per cent in 1963 and 7½ per cent in 1962. The Government had no reason to avail itself of its powers, and backed the agreement, which had also been supported by the Social and Economic Council. As a temporary exception to the price policy, the wage increase of 5 per cent was allowed to be reflected in prices from January 1, 1964.

In Austria, the Price-Wage Commission, in which the Chambers of Commerce and Industry, of Agriculture, and of Labor, and the Federation of Trade Unions are represented, has scrutinized applications for price and wage increases since 1957. In October 1963, the Government created an Economic and Social Council within the framework of the Price-Wage Commission to advise the Government on general economic policy. Among other tasks, this Council is required to provide the Government with reliable data regarding the economy and its prospective growth on which to base an incomes policy. In March 1964, the Council submitted to the Government a comprehensive stabilization program, which included an appeal for a cautious price and wage policy and measures to improve the supply situation, such as further liberalization of imports and temporary tariff reductions.

Among the other European countries, Norway and Denmark intervened more actively in 1963 and growing interest in incomes policies was expressed in Italy. In Norway, the Government succeeded in bringing together representatives of various groups in order to coordinate agreements on industrial wages and incomes in agriculture and fisheries. In Denmark, the tightening of fiscal policies in 1962 did not seem likely to halt the rise of prices, as many wage contracts fell due for renewal early in 1963. In March 1963 the Parliament enacted a set of laws prolonging for two years the existing labor market agreements and introducing a prohibition on increases in prices and profits; the latter was, however, abolished in October 1963. The strengthening of inflationary pressures in Italy prompted a suggestion by the Governor of the central bank that an incomes policy be considered, and the Prime Minister held a series of informal meetings with trade union leaders to explain the need for wage restraint. Institutional factors, and the almost universal application of sliding scales for wage increases, are not, however, conducive to the implementation of incomes policies in Italy.

C. Export Performance of Manufacturing Countries

THIS note compares the growth in each manufacturing country’s exports in recent years with the average growth in the markets to which it exports. It is found that the slower than average growth in certain countries’ exports from 1960 to 1961, and from 1961 to 1962, was associated with a smaller than average growth in their export markets. From 1962 to 1963, however, all the manufacturing countries faced a broadly similar rate of expansion in their export markets, although there was still wide variation in the actual growth of their exports. In what follows, an attempt is made to review the causes of the differences observed between the actual growth of a country’s exports and the estimated growth of its markets, including changes in relative export prices.

Growth of Export Markets

For the purpose of this analysis the world has been divided into 23 markets, consisting of the 13 manufacturing countries, 9 groups of primary producing countries,1 and the Sino-Soviet Area. The rate of growth in the market confronting each exporting country is taken to be the growth in each market (as defined below) weighted according to the share of the country’s exports taken by each market in the preceding year. For the 13 markets in manufacturing countries, the growth in the market is taken to be the growth in exports to that country from manufacturing countries. For the 9 markets in primary producing countries, the growth in the market is taken to be the growth in exports to that area both from the manufacturing countries and from the Sino-Soviet Area (which is also an important supplier of manufactured goods to primary producing countries). Finally, the actual growth in each country’s exports to the Sino-Soviet Area has been included as a factor in the average growth of its export markets.

The rate of growth in the markets confronting manufacturing countries, measured in this way, tended to increase slightly over the last three years. The arithmetic average of the market growth for each of the 13 countries was a little over 6 per cent from 1960 to 1961, a little over 7 per cent from 1961 to 1962, and about 9 per cent from 1962 to 1963. At the same time, the dispersion of the rates of growth was considerably reduced. As Table 35 shows, from 1960 to 1961 only about half the countries experienced the roughly average growth of 6-8 per cent in their export markets; four countries (Denmark, Japan, Norway, and the United Kingdom) experienced a much smaller than average growth in their markets, and two countries (Austria and Switzerland) experienced a much larger than average growth. From 1961 to 1962, about two thirds of the countries experienced a growth of 8-10 per cent in their export markets, but two countries (the United States and France) experienced a much smaller growth in their markets, and two others (Norway and the United Kingdom) were somewhat below this range. From 1962 to 1963, by contrast, there were no marked divergencies from the main range, and every manufacturing country’s export market expanded by 8-10 per cent.

Table 35.Actual Growth in Each Manufacturing Country’s Exports Related to Average Growth in Its Export Markets, 1961–63 1(Percentage change from preceding year)









France551 22810
United Kingdom447397
United States3633487
Sources: Based on data in International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade and in United Nations, Monthly Bulletin of Statistics.

For methods of calculation, see text.

See text above.

Nonmilitary exports.

Sources: Based on data in International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade and in United Nations, Monthly Bulletin of Statistics.

For methods of calculation, see text.

See text above.

Nonmilitary exports.

There were two principal reasons why the growth of various manufacturing countries’ export markets was more similar in 1962-63 than in the preceding periods. In the first place, the expansion of markets in primary producing countries differed less from the average growth of markets in manufacturing countries. As Chart 26 shows, from 1962 to 1963 the growth of markets in the more industrialized primary producing countries (Group I in Tables 13 and 14, p. 72) was commensurate with that in manufacturing countries, whereas from 1961 to 1962 it had been only about half as large. Markets in less industrialized countries (Group II in Tables 13 and 14) expanded by 3-4 per cent, on average, from 1962 to 1963. There had been no increase from 1961 to 1962, owing to the sharp decline in French exports to Africa. From 1960 to 1961 exports to certain primary producing areas had expanded comparatively rapidly, but there had been almost no expansion of exports to the more industrialized primary producing countries because of a sharp decline in exports to Australia, New Zealand, and South Africa.

Chart 26.Manufacturing Countries: Growth of Export Markets, 1960–63

(Percentage increase over previous year)

1 Growth measured by increase in total exports of manufacturing countries to markets shown.

2 Excluding Portugal.

3 Growth measured by increase in total exports of manufacturing countries and of Sino-Soviet Area to markets shown.

4 The increase in 1962 shows the trend of exports excluding France’s exports to Africa.

The second reason was that there was much less divergence in expansion between the markets in the manufacturing countries themselves (see Chart 26). There was, in fact, a marked expansion from 1962 to 1963 in all the main markets in manufacturing countries. This contrasted with their development from 1961 to 1962, when there was a sharp reduction in the market in Japan and little increase in that in the United Kingdom, and from 1960 to 1961, when there was a contraction of the markets in the United Kingdom and the United States and a disproportionate increase in the market in Japan.

As a result of the development outlined in the last two paragraphs, from 1962 to 1963 the large differences in the dependence of particular countries on various markets (Chart 27) had comparatively little effect in causing differences between the rates of export growth which particular countries would have achieved if they had maintained their respective shares in each market.

Chart 27.Manufacturing Countries: Relative Importance of Different Export Markets for Japan, United States, United Kingdom, Germany, Other EEC Countries, and Other EFTA Countries

(In per cent of countries’ total exports)

1 Nonmilitary exports.

2 Excluding Portugal.

3 Exports to Africa accounted for 19 per cent of exports of France and about 4 per cent of those of the other four EEC countries.

The more favorable trend of markets in primary producing countries from 1962 to 1963 was of particular importance to the United States, the United Kingdom, and Japan. These markets account for about 60 per cent of their exports, compared with about 30 per cent of those of Germany, the other EEC countries, and other EFTA countries. Despite the more favorable trend of markets in less industrialized primary producing countries, however, Japan’s export market expanded somewhat less from 1962 to 1963 than from 1961 to 1962. This was principally a reflection of the smaller expansion in the U.S. market, which accounts for 28 per cent of Japan’s exports. The more industrialized primary producing countries are of special importance as markets for the United States and the United Kingdom. A major factor underlying the faster growth in the export market of the United Kingdom than from 1961 to 1962 was the rapid expansion of the market in Australia, New Zealand, and South Africa. The faster expansion in the export market of the United States (by 8 per cent compared with only 3 per cent from 1961 to 1962) reflected not only the more favorable development in certain primary producing markets, but also the rapid expansion of trade with Japan, following the decline from 1961 to 1962, and the greater expansion in the United Kingdom. This last was also a major factor in the more nearly average growth of Norway’s export market from 1962 to 1963 compared with the two preceding periods. The less than average growth in France’s export market from 1961 to 1962 reflects the sharp decline in exports to former French territories in Africa, especially Algeria, which has been treated as a market factor peculiar to France.

Market Growth and Actual Exports

Comparison of the two columns for each year in Table 35 suggests that the smaller than average growth in their export markets was a factor in causing the lower than average actual expansion of the exports of Denmark, Japan, and the United Kingdom in 1961, but did not apparently underlie the comparatively slight actual expansion in the exports of Belgium-Luxembourg or the United States. Similarly, the slight growth in their export markets was apparently a factor in the lower than average expansion of the exports of France and the United States in 1962, but not in the comparatively low rate of expansion in the exports of Austria, Germany, Norway, and the United Kingdom in that year, or in the continued slow growth of Austrian exports in 1963.

Table 36 summarizes the relation between the estimated growth in various countries’ markets and the actual growth in their exports in these three years. It distinguishes countries whose exports actually grew broadly in line with the estimated growth of their markets—i.e., those countries which on balance roughly maintained their shares in the 23 markets (16 cases)—from those which on balance succeeded in substantially increasing their shares (13 cases) or those which experienced a considerable decline in their shares (10 cases). It would be surprising if the actual growth in countries’ exports did not often exceed, or fall below, the average growth in their export markets, for a wide variety of reasons. Nevertheless, such a comparison of the actual growth with the growth in exports which each country would have experienced in each period if it had maintained its shares of various markets, provides a much better indication of changes in the export performance of particular countries than the straight comparison of the actual rates of growth in their exports.

Table 36.Summary of the Comparison Between the Actual Growth in Countries’ Exports and the Estimated Growth in Their Markets, 1960–63
I. Actual export growth broadly in line with estimated market growth SwedenDenmarkBelgium-LuxembourgGermany
United KingdomSwedenUnited States
United States
II. Actual export growth considerably higher than estimated market growth, i.e., marked increase on balance in share of all marketsGermanyItalyBelgium-Luxembourg
III. Actual export growth considerably below estimated market growth, i.e., marked decline on balance in share of all marketsAustriaAustriaAustria
Belgium-LuxembourgGermanyUnited Kingdom
United StatesUnited Kingdom
Source: Derived from Table 35.
Source: Derived from Table 35.

There are, of course, many reasons why certain countries may find it difficult to maintain their shares as markets expand while others are able to achieve a faster than average growth in particular markets. One obvious factor is the influence of differences in the composition of countries’ exports. A country (such as the United States) whose exports comprise a relatively large proportion of basic foodstuffs, raw materials, and semimanufactures, the demand for which has been tending to rise less rapidly than that for more highly finished goods, may be at a consequent disadvantage in most years. On the other hand, its exports to manufacturing countries may tend to rise faster than average when agricultural conditions in Western Europe are unfavorable. (A more refined calculation of the growth of markets, distinguishing between broad commodity groupings, would be desirable, but unfortunately the statistical data for such a calculation are not available for several years after the developments occur.) Again, countries may find it difficult to maintain their shares in particular markets owing to the impact of changes in tariffs under regional arrangements, or to a weakening of special preferences which in the past led one country (such as the United Kingdom) to gain an abnormally large proportion of exports to particular areas. Furthermore, a country’s exports may vary with the value of the goods it is providing under a foreign aid program or in the form of equipment for investment in the foreign branches and subsidiaries of its business enterprises, irrespective of the general growth in demand for exports in particular markets.

Thus it cannot be assumed that the actual growth in countries’ exports would always correspond closely to the estimated growth in their export markets, even if there were no marked changes in their competitive strength. On the other hand, it is natural to suppose that marked changes in the competitive position of particular countries will be reflected in gains or losses of market shares. Changes in competitive power may take many forms. The wage cost factor has been discussed in Chapter 5. The competitive power of a country in export markets will generally tend to improve if labor costs per unit of output, which constitute the largest element in unit costs of manufactures, rise less than in competing countries. This may be reflected in a more favorable movement of export prices than in other countries. Even if all export prices were to remain unchanged, however, the slower rise in unit costs would lead to a more favorable development of profits in the export sector than in other countries, which in turn might tend to encourage greater efforts to promote export expansion. Similarly, a marked reduction in a severe pressure of demand on the home market, such as was brought about in Denmark in 1963, is likely to strengthen the country’s competitive position on export markets, whether by encouraging a more favorable trend of its export prices or by increasing the quantities and range of goods offered, expediting delivery, or increasing the sales effort devoted to exports.

Export Performance and Relative Price Changes

Unfortunately, it is virtually impossible to devise any adequate indication of changes in the over-all competitive strength of different countries in export markets. In general, there would seem reason to expect marked changes in competitiveness of the kinds referred to in the preceding paragraph to be associated with significant changes in relative export prices. Entrepreneurs with an increased incentive to expand export sales may well be prepared to lower prices, or not to increase them when others do, in order to increase their share of the market. Entrepreneurs whose profit margins are being squeezed are more likely to raise prices. However, complications arise in practice. It is possible to conceive of the case where, because of the composition of its exports, the average unit value of a country’s exports declines (or rises) relative to those of other countries merely because it is strongly influenced by depressed (or boom) conditions in the market for specific goods (for instance, steel or other commodities subject to marked price fluctuations). Again, average export unit values only include the effects of prices charged for goods sold, and may understate the actual increase in prices of goods offered to the extent that goods which could not be sold because their prices were uncompetitive are automatically excluded. It would be surprising, however, if this were a significant factor when there was no tendency for the price of goods sold to rise in relation to those of other exporting countries. In default of any other suitable indicator, there is some interest in comparing countries’ export performance as revealed in Table 36 with the changes in their relative unit values for manufactured exports. These changes are presented in a comparable form in Table 37 for the nine countries for which such unit values are available.

Table 37.Summary of the Changes in the Relation Between Each Country’s Export Unit Value and the Average Unit Value of Other Manufacturing Countries’ Exports, 1961–63 1

(Percentage change over preceding 12 months)2

196119621963Second Half

1963 3
I. Little change in relationFrance+Belgium-Lux.GermanyFrance+
(less than 1 per cent change)4SwedenFranceNetherlandsGermany
United Kingdom+SwedenUnited StatesJapan
United StatesUnited KingdomNetherlands
United States
II. Marked improvementBelgium-Lux.–2Italy–4Belgium-Lux.–1United States–1
(lowering of export unit valueItaly–4Japan–4Japan—2
relative to the average for otherJapan–4
III. Marked worseningGermany2.5Germany4France1Belgium-Lux.1
(rise of export unit value relativeNetherlands1Netherlands1Italy1Italy4
to the average for other countries)United Kingdom2United Kingdom3
Source: Based on unit value indices for manufactured goods published in United Nations, Monthly Bulletin of Statistics.

Percentage change in ratio of each country’s index of unit value of manufactured goods exports (in dollars) to the combined index for other manufacturing countries for which such data are available. No figures are available for Austria, Denmark, Norway, or Switzerland, or for Sweden in 1963.

In order to allow for a time lag, the changes relate to years ended in June; i.e., the figures for 1963 show changes in ratio for the year ended June 1963 compared with the year ended June 1962.

These figures show the change in the ratio for the second half of 1963 compared with that for the 12 months ended June 1963.

Signs show direction of changes of more than 0.5 per cent; increase in export unit value relative to that of other countries + (reduction—).

Source: Based on unit value indices for manufactured goods published in United Nations, Monthly Bulletin of Statistics.

Percentage change in ratio of each country’s index of unit value of manufactured goods exports (in dollars) to the combined index for other manufacturing countries for which such data are available. No figures are available for Austria, Denmark, Norway, or Switzerland, or for Sweden in 1963.

In order to allow for a time lag, the changes relate to years ended in June; i.e., the figures for 1963 show changes in ratio for the year ended June 1963 compared with the year ended June 1962.

These figures show the change in the ratio for the second half of 1963 compared with that for the 12 months ended June 1963.

Signs show direction of changes of more than 0.5 per cent; increase in export unit value relative to that of other countries + (reduction—).

This comparison indicates a fair degree of correspondence between countries’ success in maintaining or expanding their shares of export markets, and the maintenance or improvement of their relative export prices as indicated by their unit value figures. However, losses of market shares are less clearly associated with increases in countries’ export prices relative to those of their competitors. The position may be summarized as follows. The unit value comparison can be made in 13 of the 16 instances in which countries on balance approximately maintained their shares in the 23 markets. In 10 of these 13 instances there was less than 1 per cent change in the relation between the country’s export unit value and the average for the other 8 manufacturing countries. The unit value comparison can be made in 8 of. the 13 cases of countries which substantially increased their market shares. In 6 of these 8 cases, there was a reduction of more than 1 per cent in the ratio of the country’s export unit value to the average for the other manufacturing countries. The unit value comparison can be made for 5 of the 10 instances in which countries experienced a considerable decline in their export shares. In 2 of these 5 cases, there was an increase of more than 1 per cent in the ratio of the country’s export unit value to the average for other manufacturing countries.

The two instances in which countries substantially increased their market shares, apparently without an improvement in their export prices relative to the average for the other eight countries, were those of Germany in 1961 and France in 1963. In the former instance, which was actually associated with a marked relative rise in the unit value of German exports, the greater part of the increase in shares occurred in trade with the other EEC countries. There was also a marked increase in Germany’s share of exports to the United Kingdom, Switzerland, and Austria, possibly connected with the high level of investment activity in those countries. In 1963, the faster growth in France’s exports than in its estimated market seems to have occurred principally in exports to Italy, Switzerland, and primary producing countries in Western Europe. It may have reflected an improvement in the relation of prices, delivery dates, etc., to those of Italian products, since Italy is France’s closest competitor in these markets.

The three instances of countries experiencing a marked decline in their export shares without any marked increase in their relative export unit values were those of Belgium-Luxembourg and the United States in 1961 and the United Kingdom in 1962. The growth of Belgian exports in this instance was limited by strikes. The decline in the U.S. share appears to have been largely the counterpart of the increase in Germany’s share of exports to certain markets referred to in the preceding paragraph. The decline in the United Kingdom’s share in 1962 occurred entirely in trade with primary producing countries, while its share in exports to the 13 manufacturing countries actually increased. A major factor in the decline seems to have been the marked increase in U.S. aid to primary producing countries in Africa and Asia. There was also a marked decline in the United Kingdom’s share of exports to Canada and to Australia, New Zealand, and South Africa. This seems, in part, to have reflected liberalization of imports from Japan. The improvement in U.S. export performance in 1962 compared with 1961, shown in Table 36, was strongly influenced by the increase in aid just referred to.

The three instances in which there was no marked change in countries’ shares of markets although their export unit values rose by more than 1 per cent in relation to those of other manufacturing countries occurred in similar circumstances. They comprise the Netherlands in 1961 and 1962 and Italy in 1962. It may be suggested that in each of these cases the comparative level of export prices was initially very favorable and a moderate deterioration in export prices relative to those of other countries was therefore perhaps unlikely to have an immediate effect on market shares.

Of the four countries for which no unit value data are available, Austria’s exports each year rose less than its estimated market. The decline in its share appears to have reflected the increasing difficulty in Austria’s position outside the European Economic Community, in which its principal markets lie. The rise in Switzerland’s share of markets in 1962 appears to have reflected an improvement in the relation of its prices vis-à-vis those of Germany, following the appreciation of the deutsche mark. Changes in Norway’s share in markets are particularly liable to be influenced by the comparatively narrow range of its major exports. As mentioned, the marked increase in Denmark’s share in markets in 1963 appears to have been strongly influenced by steps taken to restrain the pressure of internal demand.

The preceding discussion of the recent development of manufacturing countries’ exports represents no more than an initial attempt to compare the actual growth of various countries’ exports with the average growth of their markets, and to see whether changes in their performance, as measured by this criterion, were associated with the changes in the relation of their export prices to those of other countries. It is not, of course, in any sense a comprehensive explanation of the development of these countries’ exports. In order to understand this fully it would be necessary to undertake a far more thorough study of the diverse factors involved, which have been discussed briefly in the earlier part of this note.

D. The Gold Pool

THE Gold Pool has been described as a kind of gentlemen’s agreement which has been evolved on an experimental basis after consultation between certain European central banks and the Federal Reserve Bank of New York. The arrangement, which remains flexible and informal, has the underlying objective of avoiding unnecessary fluctuations in the price of gold in the free market, such as might undermine the stability of the exchanges. Knowledge that the monetary authorities are working together in this way helps to maintain confidence in the existing international monetary structure.

The origin of the Gold Pool goes back to the crisis in the gold markets in the autumn of 1960, when the price of gold was forced up to about $40 a fine ounce. This crisis was resolved by large-scale selling by the Bank of England, with the backing of the U.S. monetary authorities. The concern of the monetary authorities at the events in October 1960 led to discussions between the representatives of the European central banks and of the Federal Reserve Bank of New York at the time of the regular Board meetings of the Bank for International Settlements in Basle. It was recognized that as central banks can buy gold from the U.S. Treasury at $35.0875 a fine ounce, there was no financial reason why any central bank should pay more for the metal in London than this price, plus an allowance for the cost of shipment from New York to London.

In the early part of 1961, conditions in the gold markets were easy, but by the end of August increasing demand had pushed the price up to about $35.20 a fine ounce. At this price, which was slightly above that at which gold could be bought in New York and shipped to London, none of the important continental central banks was a buyer in London. In October 1961, the U.S. monetary authorities proposed to those of the United Kingdom and the European continent an informal arrangement to share the burden of intervention in the London market to keep price fluctuations within a reasonable range. This proposal was accepted and the central banks of Belgium, France, the Federal Republic of Germany, Italy, the Netherlands, Switzerland, and the United Kingdom agreed, in case of need, to cooperate with the Federal Reserve Bank of New York in a sales consortium for the purpose of stabilizing the gold market. The Bank of England was appointed operating agent, with authority to draw on the pool of gold contributed according to agreed quotas, the United States taking a 50 per cent share in the arrangement. In November 1961, the arrangement was given a trial run and then put back into suspense. Thereafter, the trend in the market changed and purchases became possible; the gold used in November was accordingly repaid to those concerned by the end of February 1962.

At the beginning of 1962, the price was tending downward, and it appeared that on balance gold might be offered in the market. This situation gave rise to a second proposal from the United States, that there should be coordinated buying. After some experimentation in February 1962, this arrangement was confirmed in April. Separate purchases of gold by the individual members of the pool were obviated by the Bank of England’s buying, on behalf of the group, any gold available at or below the U.S. selling price, its purchases being distributed among the interested participants from time to time.

By the late spring of 1962, total purchases on behalf of the pool had reached $80 million; but before this was distributed demand increased, as a result of the break in U.S. stock market prices and the speculation against the Canadian dollar. The pool’s gains were then used by the Bank of England in its efforts to stabilize the market. As the demand continued, the consortium’s sales agreement was reactivated, and by September gold equivalent to nearly $50 million had been sold, despite the stabilizing effects of President Kennedy’s Telstar broadcast on July 23. In October 1962, the Cuban crisis led to a short-lived but enormously increased demand for gold in London; however, sales by the U.S.S.R. offset this demand, and the price did not rise above $35.20 a fine ounce. By the end of October, the pool had made net sales of well under $100 million; but by the end of the calendar year, the Bank of England was able to reacquire this amount of gold, and the participants in the pool recovered their earlier contributions. The sales consortium was again put into suspense, and it is believed not to have been reactivated; it remains, however, ready for use in case of need.

In 1963, industrial demand continued to increase, and private buying persisted from some quarters. However, increased production, the liquidation of positions taken up at the time of the Cuban crisis, and sales by the U.S.S.R. in connection with its wheat purchases made conditions in the market much more favorable. No contributions had to be made to the pool during the year, and some $600 million of gold was shared out to the participating central banks.

The Gold Pool operates, therefore, in two parts—as a selling consortium which is not in operation all the time, and as a buying syndicate which represents coordinated rather than independent action.

These include 5 of the 7 groups shown in Charts 26 and 27 (viz., Canada; Australia, New Zealand, and South Africa; European primary producing countries; less industrialized countries in Africa; Far East). The other 4 markets are subdivisions of the 2 others on the charts, viz., Venezuela, other Latin America, other oil producing countries, and other primary producing countries (excluding oil producing countries).

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