Chapter

Chapter 7. World Trade, Payments, and Reserves

Author(s):
International Monetary Fund
Published Date:
September 1967
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Mainly because of differences in the rates of economic expansion in the industrial countries, several countries experienced substantial shifts in the current account of the balance of payments in 1966. The changes in capital accounts induced by the varying impact of cyclical forces and by the financial policies adopted to restrain or encourage domestic expansion were no less striking than those on current account. The acute tensions that arose in financial markets, resulting in part from the industrial countries’ generally heavy reliance on monetary policies to restrain internal demand pressure, not only led to sharp changes in the flow of funds between developed countries, but also had important repercussions on the movement of official and private capital to the less developed countries.

Chart 17.Developed Areas and Countries: Seasonally Adjusted Industrial Production and Value of Imports, 1963-First Quarter 1967

(1960=100)

The slowing down of economic expansion in many of the developed countries during 1966 was reflected in a marked deceleration in the growth of export receipts of less developed countries in the second half of the year, and in declining commodity prices as well. These developments presaged further weakness in the export receipts of less developed countries in 1967.

Table 28.Growth in Value of Exports from Major Areas, 1965-66(In percentage changes from preceding year or from preceding half year, the latter based on seasonally adjusted data and expressed as annual rates)
19651966
Value in 196519651966First halfSecond halfFirst halfSecond half
Billion
U.S. dollarsPer cent
World 1,21659991197
Industrial Countries 211810101012108
United States 22759−11686
Other 39112101311119
More Developed Primary Producing
Countries11410510914
European countries 46101310171213
Australia, New Zealand, and
South Africa5−274616
Less Developed Primary Producing
Countries 536675963
Sources: International Monetary Fund, International Financial Statistics; OECD, Main Economic Indicators; and staff estimates.

Main Trends in World Trade

World industrial production and international trade expanded at approximately the same substantial rates, year over year, in 1966 as in 1965. Whereas the expansion had accelerated in the course of 1965, however, there was a marked slackening during 1966. Throughout most of 1966, as in 1965, output was rising much more rapidly in the United States and Canada than in Western Europe. While the growth of industrial production in Europe leveled out in the second quarter of 1966, and the value of imports rose very little after the first quarter of the year, output expansion in the United States did not flatten out until the final months of the year, and imports increased steeply until the last quarter (Chart 17). In the first quarter of 1967, over-all industrial production in the industrial countries, which had risen at a decelerating rate after the first quarter of 1966, showed very little change (Table 1, p. 4). This slowdown in output was reflected in a reduced rate of import growth into the industrial countries, and in a cessation of rise in the exports of less developed countries in the six months ended March 1967 (Table 2, p. 4).

The value of world trade rose by about 9 per cent in both 1965 and 1966; the expansion in the total exports of industrial countries (10 per cent) and of less developed countries (7 per cent) was also similar in the two years (Table 28). The exports of the more developed primary producing countries, however, increased considerably more in 1966 than in the previous year. The exports of the United States also rose somewhat faster in 1966—a development reflecting in part the hindrance to U.S. trade caused by the 1965 maritime strikes, but also the more marked growth of demand in 1966 in such important U.S. export markets as Canada, France, Italy, Japan, and Latin America.

The major stimulus to the expansion of world trade from 1965 to 1966 was the growth of output and income in the United States. U.S. industrial output rose by 9 per cent, and U.S. imports by 19 per cent; these increases were more than twice as large as those for other developed countries as a group (Table 29). While imports also rose rapidly during 1966 in France, Italy, and Japan, where domestic activity was increasing after slowdowns in 1964-65, there was only a slight expansion of imports during 1966 for the EFTA countries and for the Netherlands. Imports into Germany, which had been increasing steeply since early 1964, declined after the first quarter of 1966 (Chart 18). Imports into Australia, New Zealand, and South Africa recovered in the second half of 1966 after having declined for about a year.

The value of trade between industrial countries again rose faster than world trade as a whole in 1966, and nearly twice as fast as trade between less developed countries—which increased by about 5 per cent per annum over the last five years (Table 30). There was a very sharp increase in the industrial countries’ exports to the Soviet countries and Mainland China and, as in 1965, industrial countries’ imports from that area rose considerably faster than world trade in general. Although the data for the less developed countries’ trade are still incomplete for 1966, there appears to have been a marked slowing down in the growth of exports from primary producing countries to the Soviet countries and Mainland China, following a rapid expansion in 1963-65.

Table 29.Industrial Countries and More Developed Primary Producing Countries: Growth of Industrial Production and Growth in Value of Imports, 1965-66(In percentage changes from preceding year or from preceding half year, the latter based on seasonally adjusted data and expressed as annual rates)
Percentage Share of Total Production or of Imports, 196519651966
19651966First halfSecond halfFirst halfSecond half
Industrial Production
Industrial countries
United States509997125
Canada48881093
Japan7512321220
EFTA countries1342513−1
EEC countries22456661
of which, Germany1062634−5
More developed primary
producing countries
European countries210311993
Australia, New Zealand,
and South Africa 13748327
Total100777694
Imports
Industrial countries
United States 217151912192017
Canada6151414231113
Japan6317441922
EFTA countries23554762
EEC countries369981777
of which, Germany1320319142−4
More developed primary
producing countries
European countries716131815148
Australia, New Zealand,
and South Africa613−317−2−1112
Total100101091399
Sources: International Monetary Fund, International Financial Statististics; OECD, Main Economic Indicators; and staff estimates.

In 1965 trade between industrial countries made up 47 per cent of the total trade of the world, excluding the exports of Soviet countries and Mainland China, compared with 44 per cent in 1961 (Table 31). While trade between industrial countries and primary producing countries had declined from 45 to 43 per cent of this total over the period, trade between industrial countries and the more developed primary producing countries had risen slightly in importance, to 12 per cent of the total. Trade among primary producing countries accounted for only about 6 per cent of the total in 1965.

Table 30.Growth in Value of Exports from Major Areas, by Major Areas of Destination, 1962-66(In percentage changes from preceding year)
Exports to
Primary producing countriesSoviet countries and Mainland China
Exports fromIndustrial countriesMore developedLess developedWorld
Industrial Countries 1196286−255
19631013559
1964131692913
196511157210
196611482210
Primary Producing Countries
More developed1962435−44
1963101533211
19641219131413
1965810224
1966121018−410
Less developed 2196278496
19639155199
1964968299
1965674166
196677637
World, Excluding Soviet Countries
and Mainland China196276−145
196310145129
1964121592712
1965913799
19661058139
Soviet Countries and Mainland
China 31962418191111
19639231557
19641519778
196515101147
19661720926
World19627786
19631014579
1964131691212
1965913769
1966115859
Sources: International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade; International Monetary Fund, International Financial Statistics; United Nations, Monthly Bulletin of Statistics, June 1967; and staff estimates.

While 1966 was on the whole a rather favorable year for primary producing countries’ trade, in the latter part of the year commodity prices were declining and there was a marked slowing down in the expansion of export earnings. Prices of metals and minerals rose sharply in the spring, and remained well above the relatively high level at which they stood at the end of 1965; over the year they were on average 20 per cent higher than in 1965. Agricultural prices were on balance slightly higher in 1966 than in 1965, but prices of both foodstuffs and agricultural raw materials were distinctly lower at the end of 1966 than a year earlier (Chart 23, p. 94).

As a consequence of divergent price trends and other factors, there were great contrasts in the development of various primary producing countries’ export receipts in 1966. In 1965 the more developed primary producing countries, the oil exporting countries, and the less developed countries exporting mainly agricultural products had achieved fairly similar increases, of from 4 to 6 per cent, in their export earnings (Table 45, p. 96). The somewhat faster growth in the total export receipts of primary producing countries in 1966 than in 1965 was, however, wholly due to a much greater expansion in the export receipts of the more developed countries, and of those less developed countries exporting mainly minerals other than petroleum and other nonagricultural products. The exports of the oil producing countries rose at about the same rate as in 1965, but the exports of countries mainly dependent on agricultural exports rose much less than in 1965 or other recent years. Since the import prices of less developed countries rose on the average by 2 per cent from 1965 to 1966, there was almost no increase in the total import purchasing power of this large group of less developed countries.

Table 31.Shares in World Exports, by Major Areas, 1961 and 1965(In per cent)
Exports to
Primary producing countriesSoviet countries and Mainland China
Exports fromIndustrial countriesMore developedLess developedWorld
Industrial Countries196144.16.418.22.371.0
196547.07.415.62.472.4
Primary Producing Countries
More developed19615.20.41.00.67.2
19654.70.41.00.86.9
Less developed196115.71.24.20.721.8
196514.91.23.61.020.7
World, Excluding Soviet Countries
and Mainland China 1196165.08.023.43.6100.0
196566.69.020.24.2100.0
Sources: As for Table 30.
Table 32.Export Unit Values of Industrial and Primary Producing Countries, 1964-66(1963 = 100)
19651966
196419651966First halfSecond halfFirst halfSecond half
Export Unit Values
World102103105103103104.5105
Industrial Countries102104106104104105106
United States and Canada101103104103104
EEC countries102103104102104104104
EFTA countries103105108105106107109
Japan101100101100.5100100101.5
More Developed Primary Producing
Countries
European countries103106109104.5108107.5109.5
Australia, New Zealand, and
South Africa105.510010499101104.5103
Less Developed Primary Producing
Countries102102104102.5102104104
of which
Latin American countries108108109107108109109
Asian countries100103103101101104102
Middle Eastern countries1001001001009910099
Central African countries105102112101.5103110114
Sources: United Nations, Monthly Bulletin of Statistics, July 1967; International Monetary Fund, International Financial Statistics; and staff estimates.

Chart 18.Industrial Countries: Seasonally Adjusted Exports and Imports, 1963-First Quarter 1967

(1963 = 100)

Balance of Payments Developments

Over-All Payments Balances

In spite of the disequilibrating tendencies in certain countries’ current or capital account positions in 1966 referred to earlier, the aggregate of disequilibria in the over-all balances1 of developed countries matched by their official settlements was nevertheless somewhat smaller than in 1965.

Some indication of how far the changes in the developed countries’ payments positions in 1966 may be judged to have been equilibrating or disequilibrating is given in Chart 19. It shows that the reduction in the U.S. over-all deficit in 1966 occurred in spite of a deterioration in the current account position. This deterioration did not add to pressures on the international payments system during 1966; indeed, the rapid increase in U.S. imports underlying the reduction in the U.S. current surplus, at a time when there were tendencies toward a slowdown in the imports of several industrial countries, was a favorable factor particularly for many less developed countries. On the other hand, the sharp reduction in the U.S. net outflow of capital imposed severe pressure upon financial markets throughout the world. Some countries, notably Italy and Japan, did not resist the withdrawal of funds, allowing such movements to offset their large surpluses on current account. (See Tables 34 and 35.) In other countries, however, especially within the European Economic Community, such movements of funds tended to be discouraged by the high levels of interest rates. France, Belgium-Luxemborg, and the Netherlands had larger net inflows of capital in 1966 than in 1965; Germany, which relied heavily on monetary policy to counter domestic inflationary pressures during the first part of 1966, would have experienced a net inflow for the year as a whole had it not been for the advance payment of $250 million for defense equipment from the United States. Thus the moderate deterioration in the capital balance of the EEC countries as a whole was accounted for by the increased net outflow of capital from Italy. As a consequence of these developments, a great deal of the adjustment in the U.S. capital account was borne by the United Kingdom, the over-all position of which worsened markedly from 1965 to 1966.

Chart 19.Developed Areas and Countries: Current, Capital, and Over-All Balances, 1962-66

(In millions of U.S. dollars)

1 Austria, Denmark, Norway, Sweden, and Switzerland.

Table 33.Major Countries and Areas: Summary of Over-All Balances of Payments, 1965-661(In millions of U.S. dollars)
19651966
19651966Change 1965-66First halfSecond halfFirst halfSecond half
Industrial Countries
United States−1,557−2341,32380−1,6377−241
United Kingdom−344−1,567−1,223−36016−594−973
Germany−4527901,242−429−23−18808
Other industrial countries2,416646−1,7705421,874−156802
Total63−365−428−167230−761396
More Developed Primary Producing Countries
Australia, New Zealand, and South Africa−581226807−420−161364−138
Spain−105−203−98−62−43−21613
Other primary producing countries in Europe−90138228−15565−80218
Total−776161937−637−1396893
Less Developed Primary Producing Countries 2
Oil exporters 3236226−10331−95269−43
Primary producing countries in Asia 4150376226−58208380−4
Other primary producing countries689−149−838196493−57−92
Total1,075453−622469606592−139
Balance of Recorded Surpluses and Deficits362249−113−335697−101350
Recorded Change in World Monetary Gold240−90−330−3527540−130
Resulting Balance Due to Asymmetries and Errors and
Omissions122339217−300422−141480
Source: Data reported to the International Monetary Fund.

The European Economic Community’s continuing large payments surplus from 1963 to 1966 stemmed to an increasing degree from a rising surplus on current account. In both 1965 and 1966 this was partly offset by a net outflow of capital and official transfers, including large transfers for indemnification payments by Germany. Nevertheless, there is a contrast between the EEC countries, on the one hand, and Canada, Japan, and the other country groupings shown, on the other; for the latter, changes in the current and capital balances in recent years have tended to be mutually offsetting and have resulted in the maintenance of a high degree of payments equilibrium. Canada’s continued access to the U.S. capital market as a consequence of agreement between the U.S. and Canadian authorities has played an important role in this respect, and in Japan short-term capital movements have helped to smooth out cyclical payments imbalances perhaps more than in any other industrial country. Details of the balances of payments in 1965 and 1966 of ten industrial countries are given in Supplementary Note B.

Table 34.Industrial Countries: Summary of Current, Capital, and Over-All Balances, 1965 and 1966(In millions of U.S. dollars)
Current BalanceCapital BalanceOver-All BalanceChanges in Balances
196519661965196619651966CurrentCapitalOver-all
Industrial Countries 1
United States5,9204,092−7,477−4,326−1,557−234−1,8283,1511,323
EEC countries2,5133,042−1,021−1,4571,4921,585529−43693
Germany−650892198−102−4527901,542−3001,242
Italy2,3332,248−1,364−1,962969286−85−598−683
Other EEC countries830−98145607975509−928462−466
United Kingdom164332−508−1,899−344−1,567168−1,391−1,223
Canada−917−7551,062420145−335162−642−480
Japan1,0251,380−892−1,413133−33355−521−166
Other Countries 2−638−675832894194219−376225
Total8,0677,416−8,004−7,78163−365−651223−428
Source: Data reported to the International Monetary Fund.

The industrial countries together had a combined over-all payments deficit equivalent to approximately $350 million in 1966, compared with a closely balanced position in 1965 (Table 33). However, the deterioration is probably understated.2 The change in the aggregate payments position of the industrial countries was accompanied by an improvement in that of the more developed primary producing countries, which taken together were in surplus in 1966 after having sustained a deficit approaching $800 million in 1965. At the same time, the aggregate net surplus of the less developed countries was reduced considerably.

Marked changes took place in the payments positions of a number of industrial countries from 1965 to 1966. Germany and the United States were in opposite phases of the trade cycle, but each secured a substantial improvement in the over-all balance (Table 34). In Germany, where demand pressure was considerably reduced in the latter part of 1966, large current account and over-all surpluses developed; these were in part the cause of a more or less marked deterioration in the current account and over-all positions of the other EEC countries, which unlike Germany were generally in the expansive phase of the trade cycle. While the capital balance of the United States improved greatly, its current account worsened by $1.8 billion as domestic activity expanded at close to the capacity ceiling and, consequently, imports rose sharply. Despite a further improvement in the current account position of the United Kingdom from 1965 to 1966, its over-all balance worsened substantially.

Table 35.Industrial Countries: Summary of Current, Capital, and Over-All Balances, First Half 1965-Second Half 1966(In millions of U.S. dollars)
Current BalanceCapital BalanceOver-All Balance
196519661965196619651966
First

half
Second

half
First

half
Second

half
First

half
Second

half
First

half
Second

half
First

half
Second

half
First

half
Second

half
Industrial Countries 1
United States3,4042,5162,6811,411−3,324−4,153−2,674−1,65280−1,6377−241
EEC countries1,1121,4018952,147−765−256−602−8553471,1452931,292
Germany−191−45944848−238436−62−40−429−23−18808
Italy8761,4578581,390−599−765−859−1,103277692−1287
Other EEC countries427403−7−917273319288499476312197
United Kingdom15113−20352−5113−574−1,325−36016−594−973
Canada−658−259−636−11959147139723−67212−239−96
Japan1468793321,048−140−752−335−1,0786127−3−30
Other countries 2−569−69−452−223396436227667−173367−225444
Total3,5864,4812,8004,616−3,753−4,251−3,561−4,220−167230−761396
Source: Data reported to the International Monetary Fund.
Table 36.More Developed Primary Producing Countries: Summary of Current, Capital, and Over-All Balances, 1965 and 19661(In millions of U.S. dollars)
Current BalanceCapital BalanceOver-All BalanceChanges in Balances
196519661965196619651966CurrentCapitalOver-all
More Developed Primary
Producing Countries
In Europe
Finland−193−20499103−94−101−114−7
Greece−277−238246260−3122391453
Iceland5−8512104−137−6
Ireland−116−4380126−36837346119
Portugal−355590585511390−3258
Spain−489−628384425−105−203−13941−98
Turkey−9−98218912−9−8968−21
Yugoslavia35−32−4158−626−679932
Total−1,079−1,1968841,131−195−65−117247130
Australia, New Zealand,
and South Africa
Australia−954−535596555−35820419−41378
New Zealand−135−12235120−100−2138598
South Africa−421−24298232−123208397−66331
Total−1,510−681929907−581226829−22807
Grand Total−2,589−1,8771,8132,038−776161712225937
Source: Data reported to the International Monetary Fund and staff estimates.

Among the more developed primary producing countries, Australia, Ireland, and South Africa experienced a large improvement in their current account balances from 1965 to 1966 (Table 36). Exports expanded, whereas imports declined in the year ended mid-1966 as a consequence of the slower expansion of domestic demand and, in the case of South Africa, of the imposition of more restrictive import controls. The inflow of capital into South Africa declined from its unusually high rate of the previous year, and there was also a moderate reduction in Australia’s capital inflow. The strengthening of New Zealand’s reserves was largely due to official short-term borrowing. Of the other countries in the group, Spain, Turkey, and Yugoslavia sustained a marked worsening on current account from 1965 to 1966, there was little change in the current account position of Finland, and there was a slight improvement in that of Greece. The substantial improvement in Portugal’s current balance stemmed from increases in receipts from tourism and remittances. The economic developments underlying the changes in the balance of payments of more developed primary producing countries are described in Chapter 8.

With the notable exception of oil exporting countries and a few countries in the Far East, less developed countries tended to experience smaller surpluses or larger deficits than in the preceding year. As Chart 20 shows, apart from seasonal fluctuations, there was no marked change in the payments position of the major oil producers, taken as a group, from 1965 to 1966. In the Far Eastern region, Korea, Thailand, and Viet-Nam experienced a marked strengthening of their payments positions mainly as a consequence of increased receipts for goods and services, and official transfers connected with the hostilities in Viet-Nam. China also benefited to a lesser extent. These four countries had a combined surplus equivalent to $450 million, compared with $130 million in 1965.

The over-all payments position of less developed areas was broadly favorable in 1965 and the first half of 1966. The first signs of a general worsening did not become apparent until the second half of the year. The slackening in the expansion of industrial countries’ output which occured at that time appears to have had an important impact upon the export receipts of less developed countries. Although the slower rise in their export receipts did not have much effect on the less developed countries’ growth of imports in 1966, the cessation of reserve accumulation by most of these countries during the year seems likely to be reflected in lower import growth during 1967.

Chart 20.Primary Producing Countries: Over-All Balances of Payments, 1964-66

(In millions of U.S. dollars)

1 Iran, Iraq, Kuwait, Libya, Saudi Arabia, and Venezuela.

In the aggregate, the current account surplus of industrial countries showed a decline equivalent to approximately $700 million from 1965 to 1966, and there was a similar improvement in the current account position of the more developed primary producing countries. The consequent slight change in the aggregate current account balance of developed countries suggests that there was a correspondingly small increase in the collective current account deficit of the less developed countries. Their combined current account position was stronger in the first half of 1966 than in the same period of 1965. In the second half year, however, with the exception of the oil producing countries and the Far Eastern countries noted above, the current accounts of less developed countries were generally weaker than a year earlier.

Because of the incompleteness of the data now available, it is difficult to gauge how the capital balance of the industrial and more developed primary producing countries as a group changed from 1965 to 1966. It would seem, however, that there was some reduction in the net flow of capital (including transfers and the balance of unrecorded transactions) from these countries to the less developed countries. One factor in this change was an apparent increase in capital outflows to industrial countries from the oil exporting countries of the Middle East. There also seems to have been a reduction in the net inflow of private capital into Latin America and Africa; the increased demands on the financial markets in both Europe and North America probably contributed to this development.

The generalizations made here necessarily do not take account of the many important changes that occured in the balances of payments of individual less developed countries. During 1966 a number of exceptional events influenced the external payments of such countries; these are described in Chapter 8.

Current Accounts and Basic Balances of Industrial Countries

The largest improvement in the current account in 1966, apart from that of Germany, accrued to Japan. The continued acceleration of the Japanese economic expansion in the course of 1966 was influenced by the fiscal measures taken to stimulate the economy and by a rapid rise in exports. There were signs of a cyclical worsening of Japan’s current account position in the early months of 1967.

The improvement in the U.K. current account balance was less striking than that which occurred from 1964 to 1965. In the first half of 1966 the economy was still somewhat overstrained, impeding improvement of the current position. Favorable trade results in the final quarter of 1966, however, resulted in a reduction equivalent to $360 million in the trade deficit for the year as a whole (Table 37). The balance on other current transactions in 1966 was exceptionally unfavorable, however, owing to the loss of shipping earnings caused by the seamen’s strike, heavier tax payments to a number of oil producing countries, and a marked reduction in net insurance earnings, as well as the resumption of interest payments on the postwar North American loans.

Table 37.Industrial Countries: Balances on Trade, Other Current Transactions, and Current Account, 1965 and 1966(In millions of U.S. dollars)
TradeServices and Private TransfersCurrent AccountChanges in Balances
196519661965196619651966TradeServices and private transfersCurrent account
United States4,7723,6581,1484345,9204,092−1,114−714−1,828
Canada235468−1,152−1,223−917−755233−71162
Japan1,9012,273−876−8931,0251,380372−17355
EEC countries
Germany1,2732,916−1,923−2,024−6508921,643−1011,542
France388−38193140581102−426−53−479
Italy6683491,6651,8992,3332,248−319234−85
Belgium-Luxembourg104−949644200−50−198−52−250
Netherlands−500−59454944449−150−94−105−199
EFTA countries
United Kingdom−787−423951755164332364−196168
Austria−413−602361393−52−209−18932−157
Denmark−361−405194210−167−195−4416−28
Norway−704−768612619−92−149−647−57
Sweden−402−29614493−258−203106−5155
Switzerland−710−650641731−69816090150
Source: Data reported to the International Monetary Fund.

Well over half of the deterioration in the U.S. current balance from 1965 to 1966 occurred on merchandise trade. The balance on other current transactions (which in 1965 accounted for about one fifth of the current account surplus) worsened substantially as a consequence of the increase (almost $800 million) in net military expenditures. This interrupted a trend toward improvement that had been evident for some years mainly in consequence of rising investment income from abroad. In the fourth quarter of 1966 the deterioration of the current account virtually halted. There was a further improvement in the trade balance in the first quarter of 1967, doubtless associated with the softening of domestic economic activity.

While France and the Benelux countries experience a marked deterioration in their current account balances from 1965 to 1966, Italy’s current account surplus remained almost as large as in 1965, owing to a continued improvement in its substantial surplus on services, especially tourist earnings.

Changes in the current account positions of other industrial countries were less sizable. Canada’s current balance continued to benefit from expanding wheat shipments and from the rapid growth of U.S. imports. Among the smaller EFTA countries, the deterioration in the trade and current balances of Austria, Denmark, and Norway was in part due to the heavy dependence of those countries on exporting to certain markets (Germany, Sweden and the United Kingdom) where demand rose comparatively little in 1966.

Countries’ basic balances,3 given in Chart 21, indicate their surplus or deficit positions in respect of all items other than those of a highly volatile nature. For each country the comparison between the current and basic balances shows how far a deficit (or surplus) on current account has or has not been financed by net inflows (or outflows) on account of elements of a generally recurrent nature, such as official transfer payments and capital and private long-term capital movements.

In 1965 and still more in 1966, there was substantial divergence in the development of current and basic balances for a number of industrial countries. As a major example, the worsening of the U.S. current balance was not reflected in any deterioration in its basic balance; nor was the improvement in Japan’s and the EEC current accounts accompanied by any rise in their basic balances.

Chart 21.Selected Industrial Areas and Countries: Current and Basic Balances of Payments, 1959-66

(In billions of U.S. dollars)

1 Austria, Denmark, Norway, Sweden, and Switzerland.

Marked changes in private long-term capital movements gave rise to these divergencies. The reduction in the net outflow of private long-term capital from the United States greatly outweighed increases in government transfer payments and in the outflow of official capital. As a consequence of this reduction, the basic balance was lower in relation to the current account position than in 1965 for Japan and each of the EEC countries except the Netherlands, where changes in current and basic balances were similar. The change to a net outflow of private long-term capital from the European Economic Community was to a large extent accounted for by Italy. The net inflow of official and private long-term capital into Germany declined between 1965 and 1966 partly because of increased German portfolio investment abroad, but government transfers were somewhat smaller.

In contrast to developments in Japan and the EEC countries, the basic balances of the United Kingdom and Canada strengthened somewhat more than their current accounts. The net outflow of private long-term capital from the United Kingdom was again reduced in 1966 as a result of government exchange control measures taken in the last two years and of higher investments in the United Kingdom by foreign oil companies connected with exploration for natural gas. The balance on official capital transactions remained almost unchanged. There was a substantial increase in long-term direct investment in Canada, mainly by U.S. concerns. On the other hand, official transfer payments by Canada rose to a record level with the provision of increased food aid to India.

Table 38.Industrial Countries: Growth of Industrial Output and Growth of Imports Relative to Growth of Industrial Output, 1964-65, 1965-66, and Second Half 1965-Second Half 1966(In percentage changes)
1964 to 19651965 to 1966Second Half 1965 to Second Half 1966
Growth of

industrial

output1
Relative

growth of

imports2
Growth of

industrial

output1
Relative

growth

of imports2
Growth

of industrial

output1
Relative

growth of

imports2
All Industrial Countries5.2 33.5All Industrial Countries5.6 35.15.3 33.9
Countries of Above-AverageCountries of Above-Average
Growth in Output fromGrowth in Output from
1964 to 19651965 to 1966
Canada86Japan125174
Sweden86Italy115123
United States86United States91099
Norway 473Canada8665
Denmark63France7768
Germany613Netherlands616−3
Netherlands6−1
Countries of Average orCountries of Below-Average
Below-Average Growth inGrowth in Output from
Output from 1964 to 19651965 to 1966
Japan5−2Austria4732
Austria48Norway 44759
Italy4−3Sweden3121
Switzerland4−2Switzerland3334
United Kingdom3−1Denmark 52445
Belgium-Luxembourg27Germany22−1
France12United Kingdom222
Belgium-Luxembourg288
Sources: International Monetary Fund, International Financial Statistics; and OECD, Main Economic Indicators.

Changes in Trade Balances of Industrial Countries

Changes in the trade balances of particular industrial countries from 1965 to 1966 were strongly influenced by the relation between the rates of increase of domestic output and the rates of output expansion in other industrial countries, since this relationship influenced that between the growth of demand for imports and the average growth in each country’s export markets.

There was a quite close relation between increases in industrial output and in the value of imports from 1965 to 1966 (Tables 38 and 39). In the six countries where output rose faster than the import-weighted average for all fourteen countries, imports also increased more than the average except in the Netherlands, where imports leveled off early in 1966. Of the eight economies in which output increased relatively little from 1965 to 1966, imports increased markedly less fast than the average in all but three. There was also some tendency for import growth to be high (or low) in relation to output growth in countries where output was rising more (or less) rapidly than the average.

Table 39.Industrial Countries: Growth of Output, Imports, Export Markets, and Exports, 1965-66 and Second Half 1965-Second Half 1966(Percentage changes from preceding year or from corresponding period of preceding year)
1966Second Half 1966
Industrial

output
ImportsExport

markets 1
ExportsIndustrial

output
ImportsExport

markets 1
Exports
All Industrial Countries5.611.010.310.35.39.49.29.2
Countries of Above-Average
Growth in Output from
1965 to 1966
Japan1217131616221418
Italy11179111215710
United States 29201111918117
Canada81417186111416
France7158861465
Netherlands68866254
Countries of Below-Average
Growth in Output from
1965 to 1966
Austria411853563
Norway 34126851436
Sweden35982277
Switzerland3711113799
Denmark 4267641043
Germany231113−11114
United Kingdom2497297
Belgium-Luxembourg21097875
Sources: International Monetary Fund, International Financial Statistics; International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade; and OECD, Main Economic Indicators.

The growth of output, and of imports relative to it, was high in the United States and Canada, as had been the case in 1964-65, and also in France, where import growth in 1965-66 apparently reflected the influences of a cyclical upswing. However, in the fastest growing economies, Italy and Japan, generally elastic supply conditions appear to have moderated the growth of imports relative to output, offsetting the effect of any build-up in inventories of imported raw materials and semimanufactures which may have been associated with the increased rate of expansion in those countries. Among the slower growing economies, the 1965-66 increases in imports relative to output were low, by comparison with the average for all industrial countries, in Germany, Sweden, and the United Kingdom—countries where output expansion was decelerating in response to a marked moderation in demand pressures, especially in the second half of 1966. The relative growth of imports was low for Denmark and Switzerland also. By contrast, imports increased exceptionally fast relative to output in Austria and Belgium-Luxembourg, both from 1965 to 1966 and from 1964 to 1965, suggesting that the low growth of output in those countries in recent years has been associated with limitations on the supply side. In Austria, however, the situation seems to have changed during 1966, as indicated by the figures for the second half of the year. In Norway the high growth of imports relative to output (excluding imports of ships, which do not respond to short-term influences) appears to have reflected an intensification of pressures during 1966.

During periods in which the pace of business activity differs widely from country to country, the average rates of growth of various countries’ export markets tend to diverge, because of the differing dependence of particular countries on particular markets. From 1965 to 1966 the average rates of growth in industrial countries’ export markets varied from 17 per cent for Canada to 6 per cent for Norway. The high figure for Canada reflected its exceptional dependence on the U.S. market and the large increase in its exports to the Soviet countries and Mainland China (as explained in Table 39, footnote 1). Japan also benefited from its high dependence on the U.S. market. For the United Kingdom, however, this factor was more than offset by the unfavorable market trends in Australia, South Africa, other African countries, and in the Nordic countries. The average growth of U.S. export markets was higher than that for all industrial countries as a group, owing mainly to the rapid expansion of the Canadian, Japanese, and Latin American markets. The pattern of expansion was highly unfavorable, however, for Norway and Denmark, and somewhat unfavorable for Austria, France, and the Netherlands. The growth of demand for these countries’ exports was influenced by the slow pace of expansion in Germany, Sweden, and the United Kingdom.

The importance of market factors in conditioning the growth of countries’ exports is indicated by the fact that the actual rate of export growth was generally quite similar to the average growth in each country’s export markets. Four countries—Italy, Japan, Germany, and Norway—achieved a growth of exports from 1965 to 1966 considerably exceeding the average growth in their respective export markets, by increasing their shares of exports to particular markets. Germany’s export performance appears to have been especially strong in the second half of 1966. On the other hand, the increases in exports from Austria, Belgium-Luxembourg, the Netherlands, and the United Kingdom were less than those in their respective export markets. Canada, France, Sweden, Switzerland, and the United States broadly maintained their market shares from 1965 to 1966; however, the share of the United States was markedly lower in the second half of 1966 than in the comparable months of 1965. For the United States this comparison is more meaningful than that for the whole years, which is distorted by the effects of the maritime strike in limiting U.S. exports in the first half of 1965. French exports to Germany, Belgium-Luxembourg, the Netherlands, and the United Kingdom were larger in the first half of 1966 than in the first half of 1965, but were little higher or even lower in the second half than they had been 12 months earlier. Canada’s export performance was influenced favorably by the automotive agreement with the United States.

Relative demand pressures, export availabilities, and prices can be seen to have had an important effect upon the trade balances of most industrial countries—on the one side by enhancing or diminishing the growth of imports relative to the increase in industrial output; and, on the other side, by influencing the growth of exports in relation to the average growth in the country’s export markets. Austria, Belgium-Luxembourg, France, and the United States were countries where imports increased rapidly relative to output and where average export shares declined from 1965 to 1966 or as between the second halves of the two years. The price, wage, and unemployment data for these five countries broadly suggest high or increasing demand pressures over the two-year period. On the other hand, Germany’s low import growth relative to output was combined with faster growth in exports than in export markets, and the same would apply for Sweden if exports of ships were excluded. In the United Kingdom, the low growth of imports in relation to output was associated with a loss in average export share of 2 per cent from 1965 to 1966, whereas the loss had been 6 per cent from 1964 to 1965 and 8 per cent from 1963 to 1964. The easy supply conditions in Japan and Italy, which moderated the growth of their imports relative to output from 1965 to 1966, also permitted exports to increase somewhat more than export markets. In the Netherlands the apparent moderation of pressures in the course of 1966, indicated by both price and unemployment data, was more clearly reflected in imports than in export performance. The Netherlands virtually maintained its export share in the second half of 1966, however, after marked losses in 1965 and early 1966.

In sum, of the six countries whose output increased more than the average from 1965 to 1966, four—France, Italy, the Netherlands, and the United States—experienced a deterioration of the trade balance. Canada experienced an improvement, largely owing to the exceptionally favorable development of its export markets, while Japan’s balance improved both as a consequence of its favorable market situation and of its success in increasing its share of export markets. The deterioration in Italy’s trade balance was apparently moderated by a further strengthening in the competitiveness of export and import-competing products.

Of the eight countries whose output increased less than average, four—Germany, Sweden, Switzerland, and the United Kingdom—experienced an improvement in their trade balance, reflecting a considerably lower growth of their imports than of their export markets. Three countries—Austria, Belgium-Luxembourg, and Norway—experienced a deterioration in the trade balance jnainly associated with the rapid growth of their imports relative to output, combined in the ease of Austria and Norway with a relatively unfavorable growth in their export markets. The deterioration in Denmark’s trade balance was also associated with unfavorable export markets.

International Private Capital Movements

The pattern of international private capital flows shifted radically in the course of 1966 (Table 40). The net outflow from the United States was sharply reduced for the year (there was a large net inflow in the third quarter). The U.K. credit balance on capital account in 1965 was replaced by a debit balance in 1966. The 1966 increase in the net outflow from Italy more than offset the increased inflows into Belgium, France, and the Netherlands and the continuing large receipts by Germany, so that the European Economic Community as a whole had small net payments in 1966 rather than the important net receipts of most recent years. The inflow into Canada continued to be large, although lower than in 1965. On the other hand, Japan, which has been a net importer of capital in most recent years, had larger net payments than in 1965. Finally, there is some indication that there was a moderate decline in the volume of private financial resources becoming available to the less developed countries during 1966.

Short-Term and Banking Capital

The influence of monetary policies on international private capital movements is indicated by the large shifts in the pattern of short-term and other banking capital movements during 1966, which were consistent with the important changes in the international pattern of interest rates. (See pp. 66-69 in Chapter 6, above.) The continued confidence in the dollar shown by private holders and official intervention in the market kept the forward exchange margin within limits so that, even on a covered basis, investment in short-term U.S. paper became more attractive (Chart 14, p. 67) until New York rates declined at the end of the year by more than the reductions in European rates.

These movements in interest rates had an immediate impact on the Euro-currency markets. Some of the statistics on commercial banks’ foreign currency net positions (largely changes in the Euro-currency markets) are presented in Table 41. These data underline the continued growth of the U.K. market as a center for Eurodollar deposits. In 1966 the transfers of funds to their head offices by the London branches of U.S. banks, which are important members of this market, are reflected in the growth of the foreign currency assets of U.K. banks. In addition to these transfers from the United Kingdom, Eurodollar balances with Canadian banks were run down in the first three quarters of 1966. In early 1966 the Canadian banks met a part of these withdrawals by reducing their foreign assets, albeit by less than the decline in their deposits, but later in the year they placed funds in the market. The easing of monetary conditions in the United States in the fourth quarter of the year was accompanied by a return of some of the funds that had been withdrawn from this market earlier in the year. Hence, at the end of the year the structure of asset/liability positions in the market was closer to that prevailing at end-1965 than in mid-1966. The largest source of funds to meet all these demands came from Italian banks, mainly in response to higher interest rates abroad than at home.

Table 40.Net International Private Capital Movements, 1960-66*(In millions of U.S. dollars)
19651966
Average

1960-63
1964TotalFirst

half
Second

half
TotalFirst

quarter
Second

quarter
Third

quarter
Fourth

quarter
United States−3,768−5,351−3,879−1,442−2,437−451−128−5011,134−956
United Kingdom 1332−414107−91198−1,123107−246−693−291
Continental Europe2,8403,6431,729
EEC countries1,4011,59519612076−110−137267−40−200
Belgium-Luxembourg1242461246064184−301086046
France 243854916912742245−49118238−62
Germany6076001,14435479095499338239278
Italy205−234−1,296−514−782−1,755−341−374−568−472
Netherlands274345593−3826218477−910
Other1,4392,0481,533
Switzerland492521148−95
Nordic countries406638582395187699414285
Other countries541889803
Canada9827281,150626524588250199−179318
Japan554457−683−56−627−1,164−25−188−520−431
Australia, New Zealand,
and South Africa2994817283244041,005625380
Less Developed Countries8451,0451,127
Discrepancy *−2,084−589−279
Source: International Monetary Fund, Balance of Payments Yearbook.
Table 41.Selected Countries: Commercial Banks’ Foreign Currency Liabilities to, and Claims on, Nonresidents, 1964-66(In millions of U.S. dollars)
196419651966
Dec.Mar.Dec.Mar.JuneSept.Dec.
Liabilities 1
Belgium-Luxembourg9409701,1601,3301,3201,3801,610
Canada2,6102,4002,4022,0701,9761,8402,159
France 21,3701,2801,6001,5201,5201,8101,960
Germany520290440340350390380
Italy1,8901,7902,1501,7201,6902,1202,520
Japan2,7372,8662,9072,9102,9382,8032,850
Netherlands 35105107408609609801,140
Switzerland 41,9201,7902,0601,8502,0201,9402,100
United Kingdom4,9005,1105,8006,0606,7207,5308,270
Assets 1
Belgium-Luxembourg6807308501,0209901,0001,180
Canada3,3792,9622,7682,5592,4542,5702,968
France 21,5201,4801,8601,9001,9302,1802,460
Germany560630610540580760520
Italy1,1901,0602,0401,8401,8102,5102,730
Japan2,6102,6903,0002,9402,9703,1903,250
Netherlands 36807208208609708901,060
Switzerland 42,7442,7803,2103,0802,9202,7803,220
United Kingdom4,3304,1305,3405,7306,5207,3108,210
Net Position
Belgium-Luxembourg−260−240−310−310−330−380−430
Canada769562366489478730809
France150200260380410370500
Germany40340170200230370140
Italy−700−730−110120120390210
Japan−127−176933032387400
Netherlands1702108010−90−80
Switzerland8249901,1501,2309008401,120
United Kingdom−570−980−460−330−200−220−60
Sources: Bank for International Settlements and national sources.

Monetary policy in the United States had a pronounced impact on the international accounts of U.S. banks. Changes in the balances on these accounts provided a net inflow in the first half of 1966 of almost $1 billion (compared with an average annual outflow of approximately the same amount in the preceding five years). In the third quarter these receipts jumped to a net of $1.5 billion. More than $1 billion of this represented an increase in deposits and other liabilities to nonresidents, practically all of it due to commercial banks, in many cases to foreign branches of U.S. banks. In the final quarter U.S. banks continued to obtain funds from foreign commercial banks but their acquisition of claims on foreigners was renewed. On balance, U.S. banks gained almost $0.5 billion in these three months. For the year as a whole U.S. banks increased their liabilities to foreign commercial banks by $2.7 billion.

The guidelines for the foreign lending activity of U.S. financial institutions announced in February 1965, and discussed in Chapter 6, were intended to direct the restraint on bank credits to foreigners primarily against the flow of funds to the more developed countries. In the second quarter of 1965 the banks responded to the new program by withdrawing credit from both the developed and less developed countries (Table 42).

Table 42.Changes in Claims on Foreigners Reported by Banks in the United States, 1964-66(In millions of U.S. dollars)
Changes 1 in Claims on
Less

developed

countries
Developed

countries
All countries
19648651,5992,464
1965
I201237438
II−93−284−377
III15−234−219
IV250−18664
Total373−467−94
1966
I−147−125−272
II471158
III94−425−331
IV2848−292
Total278−531−253
Source: U.S. Department of Commerce.

Thereafter, the flow to the less developed countries was resumed while there were continued reductions of the advances to the developed countries that had been rising quite rapidly prior to the introduction of the program. This withdrawal of credit from the developed countries reached a peak in the third quarter of 1966. In the first quarter of 1966, the less developed countries reduced their total indebtedness to U.S. banks, but over the year as a whole these liabilities rose by almost $300 million. A part of the reduction in the first quarter represented voluntary repayments by Latin American traders during the coffee exporting season and was followed by normal recourse to U.S. banking credit. Yet, a part undoubtedly reflected restraint on foreign loans by U.S. banks in response to domestic monetary pressures.

A portion of the inflow of banking and other short-term credit to the United States had a counterpart in the outflow from the United Kingdom. The continued decline in the net foreign currency liabilities of the U.K. banks largely reflected the pressure of foreign demand for Euro-dollars. By the end of June 1966 the Euro-dollar and other foreign currency positions of these institutions was almost balanced, as foreign currency funds previously employed in the United Kingdom were relent abroad. In the third quarter, particularly in July, the outflow of funds on short-term account, concentrated in withdrawals of sterling balances, reached crisis proportions. The net outflow equivalent to almost $750 million on all short-term transactions was greater than in the “crisis quarter” of October-December 1964, and was the largest for any three-month period since quarterly data have been compiled. By the end of September the rundown of U.K. sterling liabilities had gone far enough to make London a net creditor on short-term sterling account vis-à-vis individuals and institutions other than central monetary institutions in countries outside the sterling area. The pattern of U.K. short-term capital movements in the first half of the year was largely consistent with the international structure of interest rates. While the influence of this interest rate structure continued into the third quarter, speculative influences became stronger and probably were the dominant force inducing movements of funds out of the United Kingdom. With the return of confidence in sterling, this speculation abated in the final quarter of 1966 and the outflow of short-term capital was stemmed.

Table 43.Distribution of U.S. Direct Investment Abroad, 1964-66 1(In millions of U.S. dollars)
19651966
1964TotalFirst

half
Second

half
TotalFirst

quarter
Second

quarter
Third

quarter
Fourth

quarter
Developed Countries
United Kingdom2063241901343521006917166
Other Western Europe1,1621,1087683401,311175425159552
Canada2398953875081,071208169304390
Japan78218133611325−3
Australia, New Zealand, and
South Africa13617114328159497040
Subtotal1,8212,5191,4961,0232,9295437365051,145
Less Developed Countries
Western Hemisphere2682601639722853795640
Asia, Middle East, and Africa247549437112253182669−40
Other (unallocated)8043−1255−579−287−45
Subtotal5958525882644248031772−45
Total Direct Investment2,4163,3712,0841,2873,3536231,0535871,100
Source: U.S. Department of Commerce.

The slight deterioration in the Canadian capital account in the first half of 1966 reflected a shift from net inflow to net outflow on short-term account, largely offset by a marked increase in long-term receipts (even if the $150 million postponement of new issues in New York from 1965 to 1966 is ignored). The withdrawal of Euro-dollar balances from Canadian banks (the second most important group of institutions in the market) accounted for practically all of the outflow of short-term funds in the first half of the year. In the third quarter Canadian banks accumulated balances in the United States despite a continued withdrawal of Euro-dollar balances. Hence, despite continued receipts of long-term funds, Canada was a net exporter of capital for the first time since the third quarter of 1964. In large part these transfers reflected the rise of U.S. short-term interest rates to higher levels than those prevailing in Canada (even on a covered basis). With a return to the more traditional pattern of higher short-term rates in Canada than in the United States, there was a reflux of short-term funds to Canada in the final months of the year.

The stringency in the German financial markets was reflected in continued short-term borrowing abroad by German nonfinancial institutions and individuals through the third quarter. On the other hand, in response to the Bundesbank policies which, in fact, enabled German banks to earn about an extra 1 per cent per annum profit on holdings of foreign assets, these institutions continued to transfer short-term capital abroad, so that the inflow on account of trade credit4 was offset, in part, by banking transactions. This “compensation privilege” was discontinued as of January 1, 1967, but the banks have continued to export short-term capital.

Attention has already been drawn to the important easing of strains in the short-term capital markets consequent on the outflows from Italy and from France (in the first part of the year). In the third quarter of 1966 Japanese borrowers repaid almost $300 million to U.S. banks.

Long-Term Capital Transactions

International private capital flows on long-term account in 1966 and early 1967 continued to be largely dominated by the flow of direct investment funds from the United States, and a continued movement of capital to the less developed countries.

The flow of direct investment funds from the United States has continued (Table 43).

Among the other aspects of long-term capital movements during 1966, attention should be drawn to the continued apparent stability in the over-all flow of investment funds (other than for petroleum development) to the less developed countries. U.S. direct investments in these areas were close to their 1965 levels, if oil investment in some wealthy Middle East countries is excluded from the totals. The relatively small volume of new issues in New York declined somewhat (Table 18, p. 33).5 The flow of direct investment from the United Kingdom to the less developed countries evidently rose. Some of the rising volume of Italian investment presumably went to these countries. There is little sign of any marked increase in the flow of private development funds, but, at least, there are no apparent signs of decline. The decrease in the volume of funds apparently made available to less developed countries was almost entirely a decline in short-term finance.

Changes in International Reserves

The various payments developments reviewed here contributed to the changes in gross international reserves during 1966, which are summarized in Table 3, page 12. As might be expected, the geographic pattern of these changes is, in many respects, similar to that of over-all balances of payments summarized in Table 33. The relatively small increase during 1966 in the total of international reserves, as well as the role of increases in reserve positions in the Fund, the importance of claims on each other by the reserve centers in the rise of the foreign exchange component of international reserves, and the decline in countries’ gold holdings, are reviewed in Chapter 2.

The United States and the United Kingdom experienced declines in their gold holdings equivalent to $830 million and $325 million, respectively, which were concentrated in the first half of 1966. These losses were approximately equal to the sum of the excess of nonmonetary use of gold and gold hoarding over available supplies plus the accumulations of gold by certain countries (mainly France and South Africa). In these two countries changes in reserve positions in recent years have been financed primarily by changes in gold holdings. France moved into balance in the course of 1966, so that its reserve position was practically unchanged after August while South Africa has lost reserves since that month. Changes in the gold holdings of other countries tended to be small.

In 1966 and early 1967, the U.S. loss of reserves continued. In the first half of 1966 official U.K. reserves declined6 primarily because of the repayment of the outstanding central banking credit. Renewed recourse was made to central banking credits in the summer. In September reserves began to increase and by the end of April 1967 at $3,405 million they were the equivalent of $252 million higher than they had been at the end of August 1966. Net repayments of the central bank credits were made from October onward and were very substantial in the first quarter of 1966. By March, payments equivalent to $1,296 million over the preceding six months had discharged all the short-term debt. In May the equivalent of $485 million was repaid to the Fund and Switzerland. These repayments were associated with a decline of $451 million of reserves. In June, as a result of the Middle East crisis, they fell by the equivalent of $120 million.

Germany added more to its official reserves in 1966 than it had lost in 1965. Reserve gains in Italy were kept down by the measures indicated above. The reserve loss of $0.3 billion by Canada reflected deliberate policies, including direct measures such as a repatriation of Canadian securities held abroad. Japanese reserves were stable in 1966 and early 1967.

The primary producing countries as a whole tended to fall into three categories in 1966. The more developed countries—other than Spain—tended to gain reserves. The gains of the non-European countries in this group were equivalent to $0.2 billion, compared with losses equivalent to $0.6 billion in 1965; by the latter half of the year, however, the reserve positions of Australia, South Africa, and New Zealand were all deteriorating.

Among the less developed countries, the outstanding feature of 1966 was the reserve gain by six countries in the Far East that have received an important share of increased U.S. military expenditures (Viet-Nam, China, Korea, Malaysia, the Philippines, and Thailand). For these countries as a group, the increase in their reserves (equivalent to $0.5 billion) was slightly less than twice as large as that experienced in 1965, and they have continued to accumulate reserves in 1967. The 1966 increase in the reserves of this Far East group of countries was almost double that of the Middle East oil producers. The total reserves of these two groups together, equivalent to $4.5 billion, amounted at the end of 1966 to some two fifths of the reserves of less developed countries as a whole.7 By comparison, these two groups account for less than one fourth of the imports of all less developed countries.

Among other groups of less developed countries, the decline in the reserves of the countries in Africa (excluding Libya and the United Arab Republic) that began in 1961 and was temporarily checked in 1965 was again resumed. The Caribbean countries showed the first fall in reserves since 1961, partly as a result of a sharp downturn of those in Venezuela, which was, however, checked in the last quarter of the year. The other Latin American countries showed a renewed fall in reserves following the substantial gain equivalent to $0.4 billion in 1965; for many of these countries, however, movements in gross reserves are of limited significance in view of the importance of credit transactions, both with the Fund and with commercial institutions.

A country’s over-all balance of payments position measures changes in the balance financed by “official settlements,” i.e., changes in official gold and foreign exchange assets, net IMF positions, liabilities resulting from swap transactions with the United States, and other liabilities to foreign monetary authorities. The current balance is defined as the balance on goods, services, and private transfer payments. The capital balance is taken to be the difference between the over-all balance and the current balance, and therefore includes the errors and omissions in the balance of payments accounts.

As Table 33 shows, the excess of recorded surpluses over recorded deficits not accounted for by increased monetary holdings of gold, but due to inconsistencies in the treatment of swap transactions between central banks and other official institutions and other asymmetries and errors and omissions, was substantially larger in 1966 than in 1965.

The basic balance is defined as the balance on account of current transactions, government aid, and government and private long-term capital transactions, excluding advance repayments of government debt.

Reflected in errors and omissions.

Including IBRD and IDB issues as finance for developing countries.

After allowance is made for the $885 million of U.S. securities which were taken into the reserves in February.

If the foreign exchange holdings of some Middle East oil producers for whom data are not available (e.g., Abu Dhabi, Bahrain, and Qatar) and of the Kuwait and Malaysian Governments were included, this share would exceed one half.

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