Chapter 7 Developments in Countries Exporting Primary Products

International Monetary Fund
Published Date:
September 1966
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Commodity Prices

THE disparity in movement between the prices of agricultural products and those of minerals and metals has been a conspicuous feature in the most recent experience of major commodity price fluctuations, which set in with the upsurge in agricultural prices early in 1963. The price index for minerals and metals did not begin to rise significantly until the first quarter of 1964. The indices for agricultural products had then leveled off, and during the rest of that year and the early part of 1965 they moved rapidly downward (see Chart 19). By mid-1965, when the decline in agricultural prices flattened out, quotations for several nonferrous metals had reached levels not experienced since the Korean conflict, and their index continued to rise vigorously into 1966. However, although a number of countries derive a significant proportion of their export earnings from the extraction and primary processing of minerals and metals, only four or five are heavily dependent on such earnings. If petroleum is excluded, as in Chart 19, the prices for the products of extractive industries do not weigh heavily in the over-all index, as these products, even at the higher unit values realized in 1965, probably account for only some 20 per cent of the total value of world trade in primary products; in consequence, the over-all commodity index reflects primarily changes in agricultural prices.

Chart 19.Primary Producing Countries: Prices of Commodities Exported (Excluding Petroleum), 1962-First Quarter 1966

(1961 = 100)

Agricultural Products

For agricultural prices, the recession which followed the 1963 boom appeared to have worked itself out by the middle of 1965, and there was a tendency toward greater firmness at the turn of the year. For a number of commodities, stocks and exportable supplies from the 1964/65 crops had been sufficiently large to continue to exert a depressing influence on prices, and, during the first half of 1965, prices for several major foods-tuffs were still rapidly depreciating. The substantial extent of such reductions for cocoa, African coffees of the robusta type, and both rice and sugar traded in “free” markets may be seen in Chart 20. In contrast, firm or improving prices were recorded for the larger volumes of rice and sugar which move under bilateral and multilateral contracts, and for other coffees, tea, and edible oils. The effects of a strong supply situation were also conspicuous for wheat, and export prices lost during the first quarter of the year all their 1964 gains. Prices for other major temperate products (cereals, meat, and dairy products) remained comparatively high. Quotations for agricultural raw materials generally steadied during the first half of 1965, wool, long-staple cotton, and sisal being important exceptions.

Chart 20.Selected Primary Products: Average Prices in 1963-First Quarter 1966

(1961 = 100)

Wool prices recovered after mid-1965, and the decline in long-staple cotton prices was arrested at what was still a relatively high level, as a result of stockbuilding in producing countries. The sisal market has continued to weaken, being oversupplied. Growing substitution by synthetic products more than offset whatever effects the political tensions in several of the major producing areas in the Far East might have had on the rubber market. In contrast, however, similar tensions strengthened quotations for jute and burlap during the last quarter of the year.

Among foodstuffs, the second half of 1965 also brought sharp recoveries for cocoa and robusta coffee; more generally, the price situation stabilized or improved for many commodities, tropical and temperate, as supply and demand prospects for the 1965/66 marketing season became clearer. Special factors on the demand side, which were principally reflected in wheat prices, included larger contracts with the Soviet countries and Mainland China, stock replenishment in some industrial countries, the political situation in a number of rice producing countries, and the critical food shortage in India. It is possible that, on the supply side, the cocoa market may be influenced in the course of 1966 by concerted international action. Within the framework of the International Coffee Agreement, the coffee market was beginning toward the end of 1965 to be affected by increases in shipments from Brazil, as that country filled more of its quota than it had done in previous seasons. (In 1964 a short crop had restricted the supplies available for export.)

Prices for food products, which make up about half of the trade in primary products if petroleum is excluded, have fluctuated more violently during the recent cycle than those of agricultural raw materials. The index shown for food in Chart 19 does not include the important and relatively stable U.S. import price for sugar, but the degree of fluctuation is still large if allowance is made for this omission. While the course of manufacturing activity in industrial countries may have had some bearing on the prices of a few agricultural raw materials, notably those of textile fibers, no such link is likely to exist with the movements in food prices, whose response to moderate changes in activity in industrial importing areas is negligible. For agricultural raw materials, the smaller fluctuations in prices in 1963-65 are explained mainly by the resistance of consumers to large price increases through substitution or stock adjustment and, to a lesser extent, by the management of supply.

The results of these years demonstrate the inherent instability of commodity market prices more clearly than those of any other part of the postwar period. The principal causes were apparently the susceptibility of supply to changes in natural conditions, combined with overadjustment in both output and import demand to temporary imbalance. Thus the downturn was brought about by larger world crops in the 1964/65 season, partly in response to the higher prices of 1963-64 and partly in the course of natural recovery. These influences were sometimes complemented by an appreciable slackening of demand due to the inventory position, or, where the competition of substitutes was important, in reaction to higher prices. The price levels ruling at the beginning of 1966 retained a moderate part of the gains made during the upswing, but these gains were generally smaller for those raw materials with ready substitutes.

Minerals and Metals

Sharply increased expenditures on nonferrous metals in 1964-65, in marked contrast to the stable or declining import trends which prevailed in all industrial countries except Japan during the early 1960’s, caused a situation of relative scarcity to emerge for these raw materials, and consequently a strong pressure on prices. The stimulus given to demand by the faster rate of growth of world industrial activity since 1963 was supplemented by a widespread tendency to build up precautionary inventories in importing countries, in anticipation of supply interruptions, further price increases, or a worsening of the international political situation.

The supply of nonferrous metals was short because the level of prices in previous years had been considered unsatisfactory by producers, and had led to the modification of plans for expansion. These curtailments were in some instances arranged through a formal international agreement (tin) or by less formal collaboration between major producers (copper, zinc), and their effects were still being felt during 1965. For some metals, losses of output owing to recurring industrial disturbances were also a contributory factor.

The coincidence of restrictions on output with the emergence of markets of unforeseen strength in 1964 thus raised prices more than was anticipated by producers. The dangers of a too violent upward price fluctuation were recognized by some of them (although the fact that the prices for all major metals rose together did narrow the scope for economic substitution), and agreement was reached in certain instances on price administration as had earlier been done on the management of supply. Exporters of zinc undertook trading operations on the commodity exchanges, and those of copper offered to regular users fixed prices at lower levels than were being realized on the exchanges. Lead and tin continued, however, to be traded without intervention, and with some variation in prices; the buffer stock held under the international agreement for tin had been inoperative since 1963. Exceptionally, in the United States, the actual or threatened use of nonferrous metal stockpiles, together with action on trade controls, pegged the prices for most such metals. These various price control efforts led to a marked divergence between pegged prices and open market values, whose fluctuations during the first half of 1965 account for the behavior of the index shown in Chart 19. There was apparently some growth in the relatively small volume of copper which moves in the open market.

Copper provides the most striking example of the unusually volatile situation which developed in most nonferrous metal markets. Although world output advanced to record levels in 1964 and 1965, the market appeared to be increasingly seriously undersupplied. By the beginning of the second quarter of 1966, the prices quoted by producers outside the United States had more than doubled since 1963, and quotations in the open market, though quite unsteady, exceeded all producers’ prices by a substantial margin.

Although extractive industries are not atomistic, as are agricultural industries, the experience of 1963-65 demonstrates that the possibility of destabilizing interactions between responses to supply and demand, which characterizes agricultural commodity cycles, also exists for minerals and metals. The risk of overadjustment to the current boom for these raw materials cannot therefore be excluded. While the restraint exercised in some price policies should encourage continuing growth in the use of these metals, especially if this is taken as an indication that the industries concerned or their governments will continue to cooperate in administering prices, it may be significant that for the first time in the 1960’s world consumption of lead, zinc, and copper showed little or no gain last year over the previous year.


In assessing the significance of the recent fluctuations in commodity prices for the earnings of countries exporting primary products, it is important to bear in mind the substantial difference which may arise, at any rate in the short run, between the unit values of exports and quotations on commodity exchanges. The possibility of such a difference arises most clearly, of course, in connection with products such as sugar, rice, and a number of minerals and metals, for which the bulk of the output is traded under bilateral or multilateral contracts, so that the open market may be comparatively unimportant. Such contractual trade provides an important reason for the greater stability exhibited by unit value indices than by market prices. Moreover, the exports of primary producing countries include certain goods, e.g., some manufactures or items in border trade, whose prices are more stable than those covered by indices of primary product prices. More generally, however, disparities in movements between market prices and unit values are accounted for in large measure by the fact that, for most primary commodities, trade flows are not constant through the year. The bulk of some producing countries’ sales for export may for various reasons be concentrated within short periods, so that their receipts may not reflect more than marginally whatever price movements may occur, as a result of changes in international demand and supply, during the periods between sales.

Terms of Trade

These considerations are less relevant to the more developed primary producing countries, exporting mainly temperate agricultural products (see Table 27), for which the marketing system is such that export unit values and market prices move closely together. These countries suffered serious fluctuations in export unit values in the course of 1963-65, and their terms of trade moved accordingly, the unit value of their imports showing much less change. Export unit values were much more stable for the less developed primary producing countries taken as a whole; by mid-1964 they had steadied at a level some 5-6 per cent above values in 1962, and, with minor fluctuations, remained there through 1965. Meanwhile the unit values of these countries’ imports had risen by some 4 per cent, so that the less developed countries in general emerged from the recent commodity price cycle with an improvement in their terms of trade of 1-2 per cent.

Table 27.Primary Producing Countries: Trade, 1964 and 1965(Value in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
Percentage change

from previous year
Percentage change

from previous year
Countries exporting mainly
Others675703134665748 11712
Mixed tropical foodstuffs
China, Republic of4334503044285561830
Others2,3292,26017−32,8382,987 1115
Fibers and rubber
United Arab Republic5396053129538754−8
Others846829 1−1−21,000880 14−12
Mixed and mainly temperate
agricultural products
New Zealand1,0741,00718−69611,05269
Other mixed agricultural
Others1,4121,519 11982,3642,578119
Mixed minerals and
agricultural products
South Africa1,4901,48642,3502,6962715
Metals and minerals
Others663724 1169631744 11318
Kuwait1,2181,243102322350 1−19
Saudi Arabia1,1801,3881218394400 1232
Others3,2293,430 11462,4332,499 193
Other major exporters
Hong Kong1,0121,14316131,4961,569155
All other primary producing3,013 13,418 112134,391 14,688 167
Grand Total43,86046,35010649,48053,220118
Source: Based on data from International Monetary Fund, International Financial Statistics.

Data are partly estimated.

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

Data are partly estimated.

This over-all result, however, masks rather dissimilar patterns from area to area. The terms of trade of Latin America countries as a group, after improving sharply in 1963-64, stayed at a level some 16 per cent above that of 1962, if petroleum is excluded from exports. (If petroleum is included, the mild secular decline in its unit value reduces the gain in terms of trade to 11 per cent.) This favorable development at a time of general recession in agricultural prices can be accounted for by the upswing for metals and minerals—on which Chile and Bolivia are heavily dependent, and which provide a significant proportion of the earnings of other countries—and by the support of coffee prices through the international agreement. In contrast, the terms of trade of African countries, which followed quite closely the price cycle for tropical foods, showed little or no gain over 1962 by the end of 1965; and the same pattern was exhibited by a number of Asian, principally non-sterling, countries. The terms of trade of the sterling area countries of Asia, while also showing only a small improvement over 1962 at the end of 1965, moved quite differently in the interval, depending as they do on a number of disparate commodities (tea, jute, copra, rubber, and tin) whose prices fluctuated in reverse to the general cycle.

Value of Exports

The growth of the value of exports in 1965 followed a very different pattern in the less developed primary producing countries from that in the more developed countries. The latter’s exports, after two years of high growth (11 per cent from 1962 to 1963 and 13 per cent from 1963 to 1964), increased by only 3 per cent in 1965 (Table 5, page 45). Virtually the whole of this increase was concentrated in the second half of the year (Table 3, page 41). The rate of growth in the less developed countries fell off by much less. Preliminary figures suggest increases of 8 per cent from 1962 to 1963, 9 per cent from 1963 to 1964, and 6 per cent from 1964 to 1965, and growth appears to have been fairly steady throughout 1965. From country to country, however, there were rather more variations among the less developed than among the more developed countries.

For the less developed countries as a group, practically all the increase in exports in 1965 appears to have resulted from increases in volume. In Asia, however—mainly because of the reverse cycle observed in the terms of trade of sterling area countries—more of the rise in earnings was accounted for by increased unit values than by volume. For the more developed primary producers, for Latin America, and particularly for Africa, the increase in volume more than offset the decline in unit values.


A similar difference in pattern between the more developed and the less developed countries occurred in 1965 in relation to imports. As a result partly of movements in the terms of trade, the importing power of the exports of the more developed countries rose from its 1964 level by less than 1 per cent. Their imports, however, rose by almost 16 per cent, and this growth was rather faster during the first half of the year than in the second half (Table 4, page 42). Since the importing power of their exports was falling particularly sharply in the first six months, their trade deficit was larger then than in the second half of the year.

In contrast, preliminary figures indicate that the less developed countries’ imports rose by only some 4 per cent, whereas the importing power of their exports increased by over 5 per cent. However, just as for the more advanced group, the less developed countries’ imports grew rather faster during the first half of the year than during the second half. As a result, the trade balance of all primary producers taken together improved considerably after mid-year, although the improvement was concentrated in the less developed countries.

A geographical analysis, based on preliminary figures, shows that the pattern of import growth for the less developed countries was dominated in 1965 by the situation in Latin America, where the importing power of exports rose by some 4 per cent while total imports increased by less than 2½ per cent, and in the Middle East, where these two rates of increase were of over 6 per cent and under 3 per cent, respectively. In Asia, the growth of imports appears to have matched the rise in importing power (both increased by some 5 per cent); only for Africa did the increase in total imports (9 per cent) exceed that in importing power (6½ per cent).

Trade Balances

Within these areas, however, the balances of trade for individual countries differed widely, as will be seen from Table 27. These balances were influenced not only by differing market conditions for the countries’ principal exports and by these countries’ own role within those markets, but also—mostly on the import side—by domestic developments. The most conspicuous improvements in trade balances emerged in the countries exporting either coffee or fibers and rubber. It should, however, be noted that in the second of these groups the sizable advance of Malaysian exports was due much more to the booming market for tin than to any growth in its principal export, rubber. Pakistan benefited from shortfalls in other cotton producing countries in order to increase its earnings markedly in a market not characterized by strength. The improved trade balance of the United Arab Republic is explained by an increase in its receipts from long-staple cotton exports on a strong market early in the year, and by the severity of restrictions on imports.

Among the countries exporting coffee, the continued decline in Brazil’s imports, due in part to the exchange reforms introduced under the stabilization program of 1964, contributed to a sizable improvement in its trade balance. So did the sharp downturn in the imports of Colombia, owing principally to the very tight restrictions maintained until the exchange reform late in the year. Earnings from coffee exports declined for most major producers from 1964 to 1965. In Brazil, however, in contrast to other countries, this was much more than made up by a sharp rise in other exports, including manufactures, so that its exports as a whole grew more strongly than those of the other coffee exporting countries. This was a reversal of the situation in the previous year. In Yugoslavia the devaluation of the exchange rate both stimulated exports and reduced imports conspicuously. In Nigeria the important factor was the contribution of surging oil exports, offsetting weakening prices for some agricultural exports.

Developments in Ghana, India, Korea, and Peru are discussed in Chapter 8.

The countries relying on metals and minerals did not experience as much improvement in their trade balances as might have been expected, as imports rose sharply everywhere except in Chile, where the measures of stabilization undertaken in the course of the year were reflected in reduced import demand. Preliminary figures suggest that it was still mainly strong import demand in Iran and Venezuela that reduced the surpluses in their balance of trade, as receipts from petroleum exports remained close to their level in 1964.

The effect of domestic conditions was most prominent in countries exporting temperate agricultural products—that is, in the more developed primary producers. Their export receipts, like those of many of the less developed countries producing tropical foodstuffs, showed either declines or only small gains in 1965. In contrast, however, to many tropical producers, whose imports rather rapidly adjusted to this situation, imports in many of the more developed countries continued to boom during most of 1965, under conditions of excess demand. A large trade deficit resulted.

Balance of Payments

In 1965 the balance of trade was again the key to the balance of payments of the primary producing countries. Table 28 shows that the deterioration in 1965 of the trade balance for the whole group resulted from a slowdown in the rate of growth of exports not wholly matched on the import side. In this general result, however, some improvement in the balance of trade of the less developed countries was overshadowed by a deterioration in that of the more developed ones. The $1.2 billion swing into deficit in the latter countries’ aggregate over-all balance was more than accounted for by an increase of nearly $1.7 billion in their trade deficit (the difference being made up, in roughly equal parts, by increased receipts from services and transfers and by larger capital inflows). In contrast, the less developed countries’ trade balance appears, on preliminary figures, to have improved by some $0.4 billion in 1965, and their over-all surplus by $0.9 billion. The difference between these figures stemmed from a favorable change in short-term capital and unrecorded transactions, which, together with some increase in net inflows of government capital and aid, more than offset the decline in recorded inflows of private long-term capital and the increase in net payments on services and transfers.

Table 28.Primary Producing Countries: Balance of Payments Summaries, 1964 and 19651(In millions of U.S. dollars)
TradeandTransferGovern-PrivateBalanceand Net
BalancePrivatePaymentsmentLong-(Cols. 5ErrorsTotal4
f.o.b.f.o.b.31 + 2)Payments3+4)and AidCapital7)Omissions8 + 9)
A. More Developed
Primary Producers
Australia2,999−2,829170−546−376−116555 663
Finland1,292−1,510 5−21843−1756881−267246
Greece308−882 5−574362−21280120−122−10
Ireland595−948 5−353254−99−5103−14241
New Zealand1,093−908185−1832−828 622
Portugal636−818 5−1821981661381152117
South Africa2,547−2,226321−426−10525−52−13266−66
Spain1,004−2,081 5−1,0771,10528−2026727599374
Yugoslavia907−1,342 5−435210−225105−120−15−135
Total, Group A11,925−14,139−2,214973−1,2412861,03580426506
B. Less Developed
Primary Producers
Latin America
Argentina1,411−1,078 5333−2993470−2777−2849
Chile591−623 5−32−106−138946319120
Costa Rica113−125−12−14−267223−10−7
Dominican Republic180−191−11−47−5822−3623−13
El Salvador176−192 5−16−11−27714−61711
Mexico1,071−1,499 5−42810−418649987−3552
Subtotal, Latin
China, Republic of433−40033−151823155647103
India1,720−2,920 5−1,20030−1,1701,320−125 625
Thailand585−679 5−9441−534266552984
Viet-Nam50−325 5−27537−238202−36−3−39
Subtotal, Asia5,864−8,004−2,140−43−2,1832,332328477−42057
Middle East
Iran1,130−661 5469−515−46−1926−39−12−51
Iraq840−409 5431−3755629−3946−92−46
Israel350−731 5−381163−2188317439−2118
Jordan24−138 5−11451−6390128−1414
Saudi Arabia1,016−374642−50313941−11169−7495
Syrian Arab Rep.176−235 5−5953−6−12191−5−4
United Arab Rep.524−927 5−403117−286267−7−26−20−6
Subtotal, Middle
Ivory Coast303−261 542−53−11151923−26−3
Libya620−295 5325−341−16144947451
Nigeria591−687 5−96−172−26884174−104535
Sierra Leone88−88−28−28121931417
Sudan201−252 5−51−39−90322−567−49
Subtotal, Africa3,725−3,274451−1,086−63537629536−50−14
Total, Group B23,636−23,150486−4,419−3,9333,7541,5951,416−936480
C. Total Primary Producers35,561−37,289−1,728−3,446−5,1744,0402,6301,496−510986
Source: Based on data reported to the International Monetary Fund.

No sign indicates credit; minus sign indicates debit.

Preliminary and including Fund staff estimates.

F.o.b. unless otherwise noted.

Represents net official reserve movements, including changes in reserve position in the Fund. No sign indicates an over-all surplus; minus sign indicates an over-all deficit.


Including private long-term capital, an estimate for which is included in the area totals for columns (7) and (8).

Including government capital, an estimate for which is included in the area total for column (6).

1965 2
TradeandTransferGovern-PrivateBalanceand Net
ExportsBalancePrivatePaymentsmentLong-(Cols. 5ErrorsTotal4
f.o.b.f.o.b. 31+2)Payments3 + 4)and AidCapital7)Omissions8 + 9)
A. More Developed
Primary Producers
Australia2,932−3,302−370−636−1,006−43693 6−356
Finland1,427−1,651 5−22437−187−234−15582−73
Greece331−1,031 5−700423−27742171−6431−33
Ireland630−1,040 5−410270−14070−7030−40
New Zealand1,064−99668−201−13343−10 6−100
Portugal626−933 5−307291−1629‘27401252
South Africa2,587−2,54047−479−4329984−24994−155
Spain995−2,760 5−1,7651,300−465350 7−11511−104
Yugoslavia1,121−1,320 5−199229304272−2349
Total, Group A12,316−16,204−3,8881,246−2,6423511,387−904219−685
B. Less Developed
Primary Producers
Latin America
Argentina1,488−1,195 5293−11118283−5260−85175
Chile680−620 560−110−501102080−3545
Costa Rica112−159−47−19−663530−132
Dominican Republic120−9030−40−102010−10
El Salvador189−201 5−12−15−27271212−12
Mexico1,159−1,577 5−41854−36421117−226189−37
Subtotal, Latin
China, Republic of451−530−79−14−935022−21309
India1,678−2,932 5−1,254−111−1,3651,15840−16764−103
Thailand612−723 5−11170−41804079483
Viet-Nam41−357 5−31693−22326138−137
Subtotal, Asia6,207−8,369−2,162−40−2,2022,248189235−20827
Middle East
Iran1,233−847 5386−557−171−16331144−8262
Iraq884−428 5456−390669−4035−332
Israel403−733 5−330128−202155128811091
Jordan28−155 5−12758−69801125163
Saudi Arabia1,200−460740−60014040−10170−40130
Syrian Arab Rep.170−210 5−40401010−10
United Arab Rep.590−850 5−260110−150150−10−1010
Subtotal, Middle
Ivory Coast285−255 530−64−341319−253
Libya800−320 5480−420603090−2070
Nigeria738−744 5−6−186−1929517174−6014
Sierra Leone80−100−20−30−502020−1010
Sudan209−213 5−4−38−42257−10−13−23
Subtotal, Africa4,100−3,609491−1,285−794520457l83−9687
Total, Group B25,195−24,290905−4,716−3,8114,0041,4761,669−2581,411
C. Total Primary Producers37,511−40,494−2,983−3,470−6,4534,3552,863765−39726
Source: Based on data reported to the International Monetary Fund.

No sign indicates credit; minus sign indicates debit.

Preliminary and including Fund staff estimates.

F.o.b. unless otherwise noted.

Represents net official reserve movements, including changes in reserve position in the Fund. No sign indicates an over-all surplus; minus sign indicates an over-all deficit.


Including private long-term capital, an estimate for which is included in the area totals for columns (7) and (8).

Including government capital, an estimate for which is included in the area total for column (6).

Source: Based on data reported to the International Monetary Fund.

No sign indicates credit; minus sign indicates debit.

Preliminary and including Fund staff estimates.

F.o.b. unless otherwise noted.

Represents net official reserve movements, including changes in reserve position in the Fund. No sign indicates an over-all surplus; minus sign indicates an over-all deficit.


Including private long-term capital, an estimate for which is included in the area totals for columns (7) and (8).

Including government capital, an estimate for which is included in the area total for column (6).

The rise in the less developed countries’ overall surplus during 1965 was hardly less spectacular than the downswing into deficit for the more developed countries, even though the latter were in general more affected by the decline in primary product prices. The more developed countries as a group used $0.7 billion in reserves, but the less developed countries added some $1.2 billion to theirs (virtually all in foreign exchange), in contrast to a negligible change in 1964. Broadly speaking, the much more comfortable reserve position of many of the more developed countries allows them more time to ride out a deterioration in their payments position. The experience of the less developed countries showed greater variations from country to country, but, as was suggested in Chapter 5, their more precarious reserve position and the rising level of their foreign debt obligations may have prompted them to take measures of adjustment more rapidly. The results were the more striking since a reduction in the rate of growth of exports may easily result in a deficit where an economy has become geared to rising receipts; and it may be that in some instances there was an element of overadjustment. In other countries, however, the improvement in the external position may have been related to measures designed to correct the external effects of domestic imbalance, rather than an adjustment to lower export receipts. Such measures may have brought about not only a fall in the rate of growth of imports but also an interruption of capital flight and perhaps a reflux. This may explain some part of the swing of $0.7 million in “other short-term capital and errors and omissions,” which is an important element in the improvement of the less developed countries’ over-all position in 1965. In contrast, preliminary and still incomplete reports from the less developed countries indicate that their receipts of foreign long-term private capital, although they remained above their 1962 and 1963 levels, declined from their 1964 peak. This decline appears particularly pronounced if the special capital receipts, accruing to a number of oil producing countries in 1965 from the renegotiation of contracts, are excluded.

More Developed Countries

Except for two countries, the over-all balance of all more developed primary producers worsened from 1964 to 1965; in most countries it swung from surplus into deficit (Group A in Table 28). This was in striking contrast to the improvement which these countries, again with two exceptions, recorded from 1963 to 1964. But from 1963 to 1964 the two exceptions (Australia and South Africa) dominated the outcome for the group as a whole, while from 1964 to 1965 the improvement in Turkey and Yugoslavia did little to modify that outcome. In Turkey it was mostly connected with services and private transfer payments. The improvement in Yugoslavia’s position was conspicuous not only because its trade deficit was halved, primarily as a result of the devaluation of the dinar in July 1965, which raised the value of other currencies by 67 per cent, but also because the inflow of capital was reduced, in contrast to the experience of many of the other countries.

The year’s outcome for the group as a whole was dominated by Australia, New Zealand, South Africa, and Spain. In these countries exports either failed to improve or fell, and imports continued to soar for the greater part of the year. In the first three of these countries, net payments on services and private transfers contributed to the worsening of the current account, while inflows of capital both on government and private long-term account were an important offset to this. (The different experience of Spain is described in Chapter 8.)

The experience of the other countries in Group A was rather more varied. For most of them, however, exports did show some increase in 1965, and in this respect they differed from the four countries just discussed. But, again, the increase in their imports substantially outstripped that of exports, except in Iceland, Turkey, and, of course, Yugoslavia, so that, with these exceptions, their trade surpluses shrank or their trade deficits widened considerably from 1964 to 1965. A sizable increase in receipts from tourism and in remittances from workers abroad provided an important offset to this for the Mediterranean countries. The role of capital movements, and their distribution between government and private account, varied from country to country. On the whole, however, such movements were of the same order of magnitude and direction as in 1964, and generally acted as an offset to the deterioration in the current account. The experience of Finland was, however, conspicuously different in this respect; its swing from 1964 to 1965 of almost $120 million into over-all deficit was due primarily to its inability to borrow as much abroad in 1965 as in 1964, and hardly at all to the slight increase in its current account deficit.

Less Developed Countries

Looking at the geographical divisions of Group B in Table 28, it is apparent that the most conspicuous change from 1964 to 1965 in the overall balances of the less developed countries was the $0.5 billion increase in the surplus recorded for Latin America. This seems to have resulted, in equal parts, from a decrease in the deficit on current account and an increase in the surplus on capital account. As to the latter, it may be seen from the preliminary figures set out in the table, which include some estimates by the Fund staff, that most of the net movement can be ascribed to a swing in the residual item (consisting of the outflow of private short-term capital and transactions unrecorded elsewhere). The increased inflow on government account was more than offset by a fall in inflows of private long-term capital—which is in striking contrast to developments in 1964. Similarly favorable, though less pronounced, swings occurred in the residual item for the Middle Eastern and Asian countries; only for those African countries covered in Table 28 did the total net outflow on this item increase. An increase of $0.3 billion was recorded in the overall surplus of those Middle Eastern countries for which balance of payments statistics are available. This stemmed largely from an increased private capital inflow resulting from the renegotiation of some oil contracts, as the current account balance showed almost no change, and inflows of official capital some decline, in comparison with 1964. The slight decrease in the over-all surplus of the Asian group, to a position of near balance, reflects developments on current account (specifically on the trade balance); the favorable swing in the residual item was matched by a decline in recorded capital inflows, both official and private. In the African countries a small improvement in the trade balance was more than offset by an increase in net payments on services and private transfers and the swing into over-all surplus was the result of a conspicuous increase in capital inflows.

This broad picture is, however, the result of rather disparate movements in individual countries, and of different factors within each country. In Latin America, the improvement in the trade balance was by no means general; the increase of imports combined with almost unchanged exports experienced by Costa Rica, Peru, and Venezuela was as conspicuous as the reverse combination in Brazil, Chile, and Uruguay. In the Dominican Republic a severe curtailment of imports more than made up for the fall in exports. A decrease in net payments on services and private transfers, sometimes associated with a decrease in imports, contributed to the current account improvement in many countries, with the conspicuous exception of Brazil. The balance on capital account improved rather generally; in the majority of countries net receipts of government capital and aid were also greater. The inflow of private long-term capital appears at first sight to have fallen off substantially in many countries in 1965. However, when using preliminary figures, it is usually necessary to examine at the same time the residual item covering short-term capital and unrecorded transactions, where the largest decreases in private long-term capital inflows are found in 1965 to have been offset to some extent. The swing into surplus on this residual item may, for instance in Brazil, be related to a decrease in the rate of capital flight, and some reflux.

Exports showed substantial increases from 1964 to 1965 in most of the Middle Eastern countries covered in Table 28, and the trade balances rather generally improved, with Iran as a notable exception. For this country, however, special receipts arising out of the renegotiation of contracts with foreign oil companies turned an over-all deficit into a sizable surplus in spite of the outcome on current account. In contrast, only the severe restriction of imports into the United Arab Republic enabled that country to maintain over-all balance in the face of a very large drop in the inflow on account of official capital and aid.

The small increase in the trade deficit of the Asian countries, as a group, was the result of unchanging or declining exports combined with increasing imports in some countries (particularly China, India, and Viet-Nam) not being fully offset by the improvement in other countries (notably Malaysia and Pakistan). A decline in the current account deficit in Korea, and an increased surplus on this account in the Philippines, were due entirely to higher net receipts on services and transfer payments. No generalization is possible about the countries’ capital accounts. However, in Burma a net outflow on account of official capital, replacing an inflow, was almost entirely responsible for the increased over-all deficit, while in China, the Philippines, and Thailand larger inflows on official account more than offset the decline in private inflows (including those implicit in the residual item).

The moderate improvement recorded in the trade balance of the group of African countries covered in Table 28 is, as elsewhere, the result of much variation from country to country. Strikingly enough, one of the largest quantitative improvements in this balance was recorded in a country whose exports were unchanged from 1964 to 1965, namely Morocco. Exports failed to rise in Ghana while imports soared. Here, and also in Zambia, an increased inflow of capital was an important offset to the deterioration in the current account. In Ivory Coast exports fell by more than imports, but this setback was more than made up on transactions as yet unidentifiable. An upsurge in exports from Libya and Nigeria was combined with only a moderate increase in imports.

Data for the primary producing countries over a number of years, as a whole and in certain subgroups, are shown in Chart 21, where balances on account of goods, services, and private transfers are compared with balances on basic account. For the two main groups of primary producers, Chart 22 compares the over-all balances (including movements of short-term capital and errors and omissions, in addition to the transactions entering the basic accounts) with the basic balances for the years 1958-65.

Chart 21.Primary Producing Countries: Balances of Payments, 1958–65

(In billions of U.S. dollars)

Chart 22.Primary Producing Countries: Basic and Over-All Balances, 1958–65

(In billions of U.S. dollars)

In contrast to the experience of the less developed countries, the outcome of the basic balance for the more developed countries has since 1961 been determined by the current account, as the level of capital inflow has shown no definite tendency to rise. In the less developed countries, and particularly in areas other than Latin America, rising capital inflows have made possible the gradual accumulation of larger reserves. In Latin America similar improvements in the net foreign position have been more closely related to the current account.

Chart 22 shows that, while the movements in the basic balance and in the over-all balance have in general been similar, there has been in each year since 1960 an inflow on account of short-term capital and unrecorded transactions for the more developed countries and an outflow for the less developed countries. The size of these flows widened substantially in 1964, but in 1965 appears to have reverted to that of earlier years.

Domestic Developments

It has been suggested in the preceding section that in 1965, as in earlier years, the state of the domestic economy was at least as important an influence on the external position of many primary producing countries as the changes which occurred in export earnings. In the domestic situation the joint or separate operation of three factors can usually be pinpointed, with consequent implications for policy: on the demand side, the fiscal position of the public sector and the growth of credit to the private sector; and on the supply side, the level of agricultural production.

In 1965 agricultural output played a particularly significant role in determining the degree of imbalance between the generation of incomes and the supply of goods and services. In some countries chronic shortages suggested the need for policies to stimulate agriculture, in addition to whatever short-run measures were necessary, in the absence of adequate imports, to restrain demand. In other countries, where shortages were of a temporary character, such short-run measures might have been sufficient, but they were not always taken. It is true that, up to a point, the efficacy of such measures is limited in the less developed countries because of the high proportion of income spent on food. However, their application is made all the more important because effective domestic mechanisms to stabilize food prices in the short run are absent and because such stabilization can be wrought through imports only to a limited extent, given the level of reserves. An increase in food prices (such as results from the pronounced cycles to which output is subject in many less developed countries) can be readily translated into a permanent, step-like increase in the cost of living. This is particularly likely to occur where a history of inflation has made the whole cost structure (while rigid in a downward direction) very sensitive to what would otherwise be only temporary increases in the cost of living.

Broadly speaking, however, domestic imbalances in 1965 could again be traced to two leading causes on the demand side: in the more developed primary producers to the expansion of credit to the private sector, and in the less developed countries to budget deficits.

More Developed Countries

In the majority of the more developed countries output continued to grow during most of 1965 at high rates, close to those prevailing in other recent years. But such growth was rather generally associated with increasing internal strains and symptoms of excess demand; the rapid expansion of nonagricultural sectors under relatively easy credit conditions coincided almost everywhere with weakness in the agricultural sector, ranging from chronic difficulties in Mediterranean countries to severe drought in Australia and South Africa. These strains were for the most part quickly reflected in the deterioration of the trade balance discussed above. Surges of imports combined with unchanging exports did contribute to price stability, particularly in Australia, New Zealand, and South Africa. However, it was felt in a number of countries that a situation of excess demand could not continue unchecked without eventually reducing reserves, in a few instances already low, to an inadequate level. Accordingly, corrective measures, mainly more restrictive credit policies, were widely taken in the second half of the year, and there was evidence of some weakening in the expansionary forces and the rate of growth toward the end of the year, notably in Australia and South Africa. The trade balance began to show some improvement, particularly on the import side. In New Zealand, however, corrective action was slow to be taken, although when the expansion of recent years began there was already full employment of resources and low international reserves. Here, and also to some extent in South Africa, where an inflow of short-term capital had partly offset the effect of tighter credit, the reimposition or tightening of import controls contributed to the improvement in the trade balance, while the underlying domestic situation continued in some imbalance.

One of the more encouraging aspects of the New Zealand expansion, as it affects long-term export growth, has been the sharp increase in farm investment. In a number of other countries, however, notably Greece, Portugal, and South Africa, an attempt was made to coordinate measures to stimulate investment in the agricultural sector with restrictive credit policies for the rest of the economy and in particular for the importing sector. The recovery of agricultural output in Portugal is the key to the sharp improvement in growth rates which this country, alone among the more developed primary producers, showed in 1965.

Although the trade balance has responded quite readily to variations in domestic conditions in Iceland, Ireland, and the Mediterranean countries, the rapid growth of incomes in these countries in recent years has resulted in pronounced changes in the pattern of demand, which in certain sectors (for instance, housing construction) have strained resources for which imports cannot be substituted. The price level has thus reflected domestic imbalance to a greater extent in these countries than in Australia, New Zealand, and South Africa. Furthermore, while there remains widespread underemployment in the rural areas of Spain, Greece, and Portugal, and a high rate of unemployment in Finland and Ireland, emigration had begun by 1965 to cause a shortage of skilled labor and, consequently, an upward pressure on costs in all these countries, as wages responded to the higher levels prevailing in other European countries.

The measures taken during 1965 to contain excess demand in these countries did succeed, in varying degrees, in slowing down the rate of increase in the price level. Exceptionally, the cost of living in Yugoslavia increased sharply toward the end of the year, as the price structure adjusted to the higher cost of imports resulting from a substantial devaluation. There remains for many of these countries a longer-term problem of achieving simultaneously a diversification of output and a strengthening of the agricultural sector. The attempt, mentioned above, to prevent the tighter credit in 1965 from discouraging agricultural investment is a step toward its solution in some countries.

Less Developed Countries

It appears that, in a majority of the less developed countries, output may have expanded somewhat more slowly in 1965 than in the previous year. However, preliminary information suggests that the rates of growth, and the domestic conditions within which such growth was achieved, varied considerably from country to country. In some—for instance, Peru and the United Arab Republic—the maintenance or resumption of a high growth rate was achieved against a background of worsening domestic balance, combined with a weakening of the external position. In others, where a process of readjustment was under way (as in Colombia and Morocco) the rate of growth suffered in consequence, though after a period of consolidation a basis for balanced growth should have been restored.

Most Central American countries continued in 1965 to achieve very favorable rates of growth in an atmosphere of price stability. In contrast, the rate of development in many African countries did not show much advance. In some, this was the consequence of a serious shortage of resources, while in others, particularly Ghana and Mali, continuing price inflation and balance of payments difficulties have depressed the rate of growth of output and investment. There have been conspicuous exceptions among the countries benefiting from petroleum exports. Even in Libya, however, the extraordinary rise in incomes following the upsurge in oil exports has resulted in such pronounced changes in the pattern of demand that the rapid expansion of imports has not prevented substantial price increases. In the majority of Asian primary producing countries, the rate of growth appears to have fallen off appreciably, but Korea and Thailand stand out as exceptions.

During 1965 a recovery in agricultural output was at least in part responsible for the improvement in the trade balance, affecting both imports and exports, of a number of less developed countries, particularly in the Middle East. In a number of Latin American countries, however—notably Chile and Colombia—food supplies have continued to expand only sluggishly, and in some African and Asian countries the production of export crops was adversely affected by both temporary and structural factors. Conditions in India became particularly alarming: during the second half of the year the worst drought in several decades caused a drop of more than 15 per cent in the already inadequate output of foodgrains; there were widespread power shortages; and the existing inflationary gap was further widened.

The economic problems of primary producing countries can be persistent, and sometimes intractable, unless full and balanced use is made of the relatively few effective instruments of direction and control at the disposal of the authorities. During 1965 the management of credit to the private sector appears on the whole to have improved. In a number of countries, however, a tight monetary policy reflected a worsening fiscal situation, squeezing credit to the private sector. In a few others, the stagnation or decline in the private sector’s demand for credit was evidence of a level of public investment which, by providing only inadequate services to the rest of the economy, failed to create the conditions necessary to stimulate private investment (though such a low level of public investment was associated with mounting current expenditures).

The public finances remained in a precarious condition in a majority of less developed countries. The reasons for fiscal weakness were more often than not to be found on the side of current expenditures, while the remedy applied was all too frequently a cut in investment expenditures. Expenditures for defense increased substantially during 1965 in several countries. In addition, the financing which the central government or central bank has had to provide to states, local authorities, and public enterprises, whose budgets are often not subject to central control, continued to be a major weakness in a number of fiscal systems, particularly those of Latin American countries and of India. In Argentina, the deficit of the railways, which worsened again in 1965, can be singled out among the foremost fiscal problems.

The rapidly increasing level of current expenditures which results from an inflationary situation (and which contributes to its aggravation) has again proved to be troublesome. It is often difficult to control increases in the public sector’s wage bill; in this respect, however, the application of wage restraint in Brazil during 1965 is noteworthy as a key element in the strengthening of that country’s fiscal position (though it was doubtless made easier by the substantial readjustments granted in the previous year). In a number of other countries, the attempt to reduce inflationary pressures (and in particular to restrain wage demands) by holding down the cost of living continued to involve a rapidly rising degree of subsidization for both food and services. In the United Arab Republic more realistic pricing policies were introduced at the end of the year.

Elsewhere, a number of marketing boards and similar entities incurred substantial losses (usually covered by transfers from the central government or by loans from the central bank) either by maintaining prices to growers as the export price for their crops declined (as in Ghana for a large part of the year), or by covering the cost of the stockbuilding necessary to maintain the export price (as in Brazil and Ivory Coast). The management of a similar situation in the Colombian coffee sector improved markedly in the course of the year.

On the side of revenues, the government, states, and other public entities in many primary product exporting countries have become heavily dependent on the fiscal receipts from international trade. Under such circumstances the effect of a fluctuation in export earnings (both directly and through its effect on imports and so on customs duties) can seldom readily be offset by alternative fiscal policies. This close link between the fiscal and payments positions was again widely demonstrated by events in 1965, particularly in the Sudan (where both continued to deteriorate together) and in Afghanistan and Korea (where increased exports and imports were a major factor in fiscal improvement). In Colombia, a substantial improvement in the fiscal situation is expected for 1966, to which the relaxation of import restrictions late in 1965 should contribute markedly. In a number of countries the government is also dependent on foreign aid for an important part of its budget support, and this may sometimes be a factor in fiscal imbalance. Thus, in Jordan the emergence in 1965 of a cash deficit in the budget was related to a sharp decline in foreign aid.

A further difficulty created by too great a reliance on international trade for revenue is that changes in the constitution of imports may react adversely on the fiscal position. Where, as in a number of less developed countries, imports of consumer goods are being replaced by domestically manufactured substitutes so that imports comprise to an increasing extent capital goods and raw materials, the tariff structure becomes an increasingly inadequate means of taxing consumer expenditures. The introduction of some new sales and excise taxes in Pakistan during 1965 represents an important step toward broadening the tax base in response to such a change.

Finally, in countries for which the link is close between the payments and fiscal positions, fluctuations in export earnings may be particularly damaging to sustained development, through important secondary effects, unless some compensatory action can be taken. While the best course of adjustment will, of course, be found to vary according to the circumstances of individual countries, it is usually desirable, in the interests of steady growth, for the public sector to moderate the impact of a fluctuation in export earnings on the rest of the economy by maintaining a reasonable and consistent level of expenditures in the face of the related fluctuation in revenues from trade. If such a course is not to jeopardize the balance between the generation of incomes and the supply of goods and services available to the economy, some variation in the level of international reserves and use of short-term credit is, however, called for. Thus, an upswing in export earnings, and consequently in revenues, should not be entirely absorbed by a change in public sector investment plans leading to an increase in imports but should result in some reserve accumulation or restoration of lines of credit. In the event of a decline in export earnings, primary producing countries would then have access to the use of more adequate reserves and credit facilities to moderate the effect on the flow of imports and the growth of incomes. It is gratifying to observe that this sort of adjustment was rather widely at work during the 1963-65 commodity price cycle.

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