Chapter

Chapter 5: Economic Policies and Balance of Payments Adjustment

Author(s):
International Monetary Fund
Published Date:
September 1971
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Introduction

THE financial policies of the industrial countries, which had been generally restrictive during 1969, became more restrictive in several countries during the first half of 1970. The latter period, however, was one of cautious policy relaxation in the countries where activity had been most severely retarded during 1969 or early 1970 in the effort to combat inflation. These countries included the United States, Canada, and the United Kingdom. In the two North American countries, where relatively high unemployment rates prevailed during 1970 and early 1971, economic policies shifted progressively away from restraint and toward revival of business expansion. This was particularly evident in the evolution of monetary policies but also characterized the shifts in fiscal positions.

On the continent of Europe most industrial countries were forced or induced to tighten credit conditions and raise interest rates during 1969, first in defense against the attraction of high U.S. interest rates for European funds (moving chiefly through the Euro-dollar market) and then, as Europe’s own economic expansion gained momentum, increasingly in defense against domestic inflationary developments. Pressures on resources remained relatively strong in continental Europe during 1970 and early 1971, and most countries had not yet shifted out of a phase of policy restraint.

In the situation of a stringent U.S. monetary policy and of strong demands for funds on both sides of the Atlantic, there was a virtually universal escalation of interest rates during 1969. (See Charts 18 and 20.) The partial relaxation of U.S. monetary restraint shortly after the beginning of 1970 brought a somewhat irregular, but progressive, decline in U.S. money market rates and in Euro-dollar deposit rates. In the event, the whole structure of international interest rate relationships prevailing in the latter part of 1969 was radically altered during the course of 1970. Whereas the 1969 pattern had tended to draw funds toward the United States, the pattern that emerged in 1970 tended to reverse that flow of funds. In several of the European countries, and especially in Germany, the resultant short-term capital inflows created major problems for maintenance of the desired degree of domestic credit stringency, and the year was marked by a number of special monetary measures designed to achieve partial insulation of domestic liquidity and credit conditions against what would otherwise have been the impact of the capital inflows induced by international differences in the cost and availability of credit.

Global balance of payments developments in 1970, as summarized in Table 24,1 featured some extraordinarily wide swings in overall balances of individual major countries (Table 25). By far the largest swing was that for the United States, which showed a deterioration of $13 billion, from a surplus of about $3 billion in 1969 to a deficit of $10 billion in 1970 (after allowance for the SDR allocation). The balances of all of the other larger industrial countries moved sharply in the opposite direction, but the bulk of this counterpart movement was concentrated in the German accounts, where the change was $9 billion, from a deficit of about $3 billion in 1969 to a surplus of $6 billion in 1970. (See Chart 13.)

The swings in overall payments balances of most industrial countries from 1969 to 1970 stemmed primarily from huge movements of yield-sensitive capital—mainly short-term (Table 26)—and were generally coupled with much smaller changes in most of the other principal elements of the international payments structure. The trade and service accounts (Chart 14) of most of the major industrial countries were marked by an absence of dramatic changes, and movements of long-term capital (Table 27) proceeded, with some important exceptions, along paths generally not far out of line with medium-term historical experience. A feature of the historical experience that persisted in 1970 was a sizable U.S. deficit on basic transactions (Table 28); mainly because of the long-standing deficit for the United States, the underlying pattern of balances in the recent period was not a satisfactory one.

The general structure of the combined balance of payments transactions of the primary producing countries, comprising a large excess of current account deficits over surpluses and a still larger excess of net capital inflows over outflows, also remained essentially unchanged in 1970 (Table 24). Most of these countries were relatively little affected by the ebb and flow of short-term capital among industrial countries became markets.

In the early months of 1971, flows of short-term capital among industrial countries became even larger than they had been during most of 1970 and thus continued to dominate the pattern of changes in overall payments balances. Through March, the salient shifts of funds conformed essentially to the 1970 pattern. The outflow of short-term capital from the United States remained very large 2 and continued to take the form primarily of reductions in Euro-dollar liabilities of U.S. banks to their branches abroad, while short-term external liabilities of German borrowers continued to mount.

Toward the end of the first quarter and increasingly during April 1971, it became evident that the inflows of short-term capital into Germany and certain other countries included a new component. Whereas the inflows throughout 1970 and into the opening months of 1971 appear to have been motivated largely by international differences in yields and availability of funds, the more recent flows tended to be induced to a progressively greater extent by expectations of changes in exchange rate relationships among major currencies. Consequently, the effects of a considerable degree of convergence of short-term interest rates in the principal international financial markets during April, induced to a large extent by official monetary policy actions, were overridden by a surge of purely speculative pressures. The result was a further rush of funds into Germany and several other countries in the first week of May, inducing national authorities to close some of the major official exchange markets in continental Europe pending decisions on measures for dealing with the situation.

On May 9 the German authorities informed the Fund that, in view of the recent situation in the foreign exchange markets, including large capital movements, Germany would not for the time being maintain the exchange rates for its currency within the established margins. On the same date, the Netherlands authorities took similar action, and the Austrian and Swiss Governments revalued their currencies by approximately 5 per cent and 7 per cent, respectively. Concurrently, the Government of Belgium modified the regulations concerning the free and the official exchange markets in that country in such fashion as to permit the value of the Belgian franc in the free market to appreciate above that in the official market and thus to discourage unwanted inflows of capital.

For the primary producing countries, available data indicate a substantial 1969—70 increase in the aggregate of payments balances, even apart from receipts of SDR allocations. This was true of both the more developed and the less developed countries as separate groups. The combined surplus of the less developed countries (including SDR allocations totaling $0.9 billion) approximated $3.0 billion in 1970, compared with about $1½ billion in 1969 and less than $1 billion in 1968. The corresponding surpluses for the more developed primary producing countries were $1.2 billion (including SDR allocations of $0.3 billion) in 1970 and $0.1 billion in 1969, after an exceptional peak of $1½ billion in 1968.

In 1970, as indicated above, the primary producing countries as a group continued to be large net importers of goods and services and even larger net recipients of capital and official transfers from the industrial countries. The combined current account deficit of the primary producing countries rose substantially as their imports increased faster, under conditions of rising import prices and of widespread strength in domestic demands, than their exports. Concurrently, flows of capital to those countries, facilitated in part by the prevalence of easier credit conditions in the major international financial centers, apparently rose more than enough to cover the enlarged aggregate of current account deficits.3

The distorted pattern of international payments balances during 1970 and the first quarter of 1971 resulted in an unprecedentedly large increase in total reserve holdings, as well as in a substantial shift in their distribution among countries. This development is reviewed in Chapter 2. Here, attention may be called to the record magnitude of the reserve gains of less developed countries in 1969 and 1970. (See Table 6.) The rate of increase in the combined reserves of this large group of countries during the past two years more than matched that in the value of their imports, despite the unusually rapid pace of the import expansion. The reserve gains were unevenly distributed, as indicated in the discussion of overall payments balances of the less developed countries later in this chapter; but it is encouraging that most developing countries have realized an increase in the ratio of reserves to imports since the early 1960s.

Developments in Industrial Countries

United States

Economic activity in the United States traced an irregular, though essentially sluggish, course from the latter part of 1969 to the early months of 1971. Total real gross national product (GNP) in the first quarter of 1971 was scarcely any higher than in the third quarter of 1969, and over this period the rate of unemployment rose from about 3½ per cent to 6 per cent (Chart 15).4 Despite the progressive elimination of excess demand through fiscal and monetary restraints, the inflationary forces built up over several years continued to exert strong upward pressure on costs and prices.

In anticipation of the lag in response of private spending to shifts in demand management, monetary policy was relaxed early in 1970 and fiscal policy also became moderately easier in the course of the year. Thus, it was hoped to mitigate the economic decline that had begun late in 1969 and to generate a renewed growth of activity in the latter part of 1970. The substantial easing on the monetary side, to which private demand was slow to respond, resulted in a sharp reduction in the cost of funds in the U.S. domestic financial market, especially after midyear. The fall in U.S. interest rates, which persisted into 1971, led to the release by U.S. banks of the Euro-dollar borrowings taken up in the earlier period of credit stringency. These outflows were a prime factor behind the turnaround of the balance of payments on an official settlements basis from the moderate surpluses registered in 1968 and 1969 to very large deficits in 1970 and early 1971.

After two consecutive quarters of modest gains, real GNP declined in the fourth quarter of 1970 because of a prolonged strike in the automotive industry and then rose substantially in the first quarter of 1971 largely in recovery from the strike. The distorting effects of the strike made it difficult to assess the economy’s performance, but it was evident in the spring of 1971 that a recovery from the 1969-70 recession was under way.5 It was still too early to form a reliable judgment concerning the pace or strength of this recovery, which, it was also evident, had not yet served to eliminate any of the economic slack that had developed during the period since late 1969.

Costs and prices registered pronounced increases in 1970 that showed at best only a moderate response to the rising margin of unused resources in the economy. While wage gains in the non-unionized sector of industry tended to slow in 1970, those in the unionized sector accelerated further. Price increases in industrial commodity markets showed only faint signs of easing from the high rates registered in the second half of 1969 and the early months of 1970. While productivity grew more than in 1969, this development was not sufficient to retard the pace of rise in the general price level; as measured by the GNP deflator, the rise in prices from 1969 to 1970 was 5½ per cent—the largest calendar-year advance in virtually two decades. In the first quarter of 1971, the annual rate of increase in the GNP deflator over the fourth quarter of 1970 was 5.3 per cent for total GNP (a figure inflated by a government pay raise) and 4.5 per cent for private GNP. In the second quarter the annual rate of increase in the deflator—both for total GNP and private GNP—declined to 4.2 per cent, although the rise in wholesale industrial prices continued to be comparatively rapid.

The authorities in 1970 declined to adopt comprehensive “incomes policy” measures, such as general wage and price guidelines, to combat cost and price increases. Nonetheless, direct action supplementary to fiscal and monetary policies was taken with a view both to improving the responsiveness of markets to the general demand situation, e.g., through a relaxation of restrictions on the importation and production of crude oil, and to help publicize the kinds of wage and price behavior that would be conducive to a moderation of inflation, through the release by the Council of Economic Advisers of a periodic “Inflation Alert.” 6

Although fiscal and monetary policies moved toward ease in 1970, the degree of relaxation of the fiscal stance was relatively modest. While the Federal Government’s budget position shifted from a substantial surplus in 1969 to a large deficit in 1970, the major part of this change reflected the automatic response of revenue collections to the sluggishness of the economy when measured against the full-employment growth path. The overall fiscal position on a national accounts basis changed by $21 billion, moving from a surplus of $7½ billion in 1969 to a deficit of $13½ billion in 1970, but the corresponding balance on a full-employment basis is estimated to have declined by only some $5 billion from 1969 to 1970, and was still 7½ billion in surplus for 1970 as a whole.

The stance of monetary policy shifted from one of stringency in 1969 to promotion of financial ease in 1970. With the turnaround in policy dating from early in the year, in each of the first three quarters of 1970 the money stock rose at an annual rate of 6 per cent, compared with an expansion of only 3 per cent in the preceding calendar year. In the final quarter the growth of the money stock dipped somewhat, probably in association with the impact of the automotive strike on economic activity, but strong expansion (at an annual rate of 9 per cent) resumed in the first quarter of 1971. Acceleration in the growth of bank credit and total deposit liabilities of the commercial banks in 1970 was even more pronounced, largely reflecting the reflux of time deposit funds into the banks after midyear. This reflux stemmed initially from the suspension in June 1970 of the maximum interest rates payable by banks on certain classes of large-denomination time deposits.7 Subsequently, however, money market rates eased to such a degree that the banks would have been competitive for such funds even without the June 1970 action.

In these changed conditions, U.S. banks were prompt to set about liquidating the large volume of Euro-dollar liabilities that they had acquired to support domestic lending during the previous period of credit stringency. Already in the first half of 1970, liquid liabilities of U.S. banks to commercial banks abroad were reduced by nearly $2 billion, and in the remainder of the year the rundown was more than $4½ billion. Moves by the monetary authorities in late November to raise the potential cost to banks—in terms of reserve requirements—of reductions in their Euro-dollar borrowings had no visible effect on the pace of decline.

Accordingly, just as the balance of payments outturn in 1969 on an official settlements basis had received a powerful boost from inflows of liquid banking funds, registering a surplus of $2.9 billion, the reverse outflow in 1970 was a major influence in the $10.1 billion overall deficit. In terms of the basic accounts, a moderate recovery in the current account surplus in 1970 was offset by increased outflows of U.S. private investment capital and a reduced inflow of foreign capital, and the persistent basic deficit was unchanged at a level of about $2½ billion (Table 28). This result, however, was swamped by the outflows of private foreign capital in liquid forms in response to the gap that was opening up between monetary conditions in the United States and in some other industrial countries, notably Germany.

With U.S. monetary conditions continuing to ease, and with U.S. banks running down their Euro-dollar liabilities at a still faster pace, the balance of payments recorded another large deficit—$5.5 billion, seasonally adjusted—in the first quarter of 1971. In January and February, and again in early April 1971, the U.S. authorities undertook special placements of short-term dollar securities with the foreign branches of U.S. banks in order to mitigate the impact of Euro-dollar flows on the U.S. payments position. By the middle of May liabilities of U.S. banks to their branches abroad had fallen back from the peak of $15 billion reached in the latter part of 1969 to only $1½ billion, about the same level as in early 1966; they remained at that level in June.

Monetary conditions in the second quarter of 1971 were marked by rapid expansion in the money supply (at an annual rate of 12 per cent), as well as by considerable increases in bond yields and interest rates. In mid-July the Federal Reserve discount rate, after having been lowered twice earlier in the year, was raised from 4¾ per cent to 5 per cent—an action which was intended to bring the discount rate into better alignment with short-term rates generally. The move also reflected the Federal Reserve Board’s concern over the continuation of substantial cost-push inflation in the economy.

Canada

The year 1970 opened with a dramatic change in Canada’s balance of payments position. The current account, which had been in sizable deficit throughout 1969, moved into heavy surplus (seasonally adjusted) in the first quarter of 1970 as merchandise exports rose sharply and imports declined. Added to the upsurge in the current account was a continued heavy inflow of long-term capital.

Since an important element in the export boom was a post-strike recovery in exports of mining products, there was reason to believe that the extraordinary strength shown by the export sector might be short lived. However, exports continued strong after the first three months of 1970, while imports remained weak and the rapid easing of financial conditions in the United States and in the Euro-dollar market began to manifest itself in a net inflow of short-term capital to Canada. Beginning in March, Canadian monetary policy became more expansive, and direct steps were also taken to encourage outflows of funds through the removal of the ceiling on the amounts that banks could receive in the form of swapped deposits. By May 1970 interest rates in Canada were generally well below those prevailing at the turn of the year, and differentials between Canadian and U.S. rates had narrowed appreciably, after more than two years of unusually wide average spreads in favor of Canada.

Nonetheless, the accumulation of foreign reserves continued at an accelerated pace. In the first four months of 1970, official reserves, including an allocation of SDR 124 million, had risen by more than US$700 million, and in May there was a further increase of US$260 million. In addition, as a result of official swaps and forward transactions, US$360 million was acquired by the authorities in May for future delivery. In these circumstances the Canadian authorities decided, effective May 31, that they would not for the time being maintain the exchange rate of the Canadian dollar within the prescribed margins around the parity established with the Fund.

Despite the weakness in 1970 of the U.S. economy, the major external market for Canadian goods, and despite the appreciation of the Canadian dollar after May, Canada’s exports continued at the high level attained in the spring of the year. Also, imports changed little. Consequently, the current account balance soared to a surplus of $1.4 billion in 1970, the largest on record and contrasting with a deficit of $0.6 billion in 1969. The inflow of long-term capital subsided markedly after the first quarter, reflecting improved conditions in the Canadian capital market and the effects of requests by the Canadian authorities, from mid-1970 onward, that Canadian borrowers explore fully the availability of funds in Canada before floating issues abroad. The short-term capital account again turned negative in the latter half of 1970 after a heavy inflow in the second quarter.

After the May 31 exchange rate decision, the value of the Canadian dollar in the exchange market immediately rose well above its established par value of US$0.925 = Can$l. However, after the first days of adjustment to the new market conditions, the external value of the Canadian dollar moved generally within a narrow range, although showing a tendency to drift somewhat irregularly upward. By the end of 1970, the exchange rate was touching US$0.99 = Can$l, compared with the US$0.96-0.97 range in which it had settled in the second half of the previous June. Through the first five months of 1971, the Canadian dollar generally remained a little above US$0.99 = Can$l, but its value declined in June and was just under US$0.98 at midyear.

While the easing of monetary policy early in 1970 was motivated in part by exchange market exigencies, the shift was also attributable to domestic considerations. The tight fiscal and monetary policies pursued since late 1968 had brought about a marked economic slowdown, which by the winter of 1969-70 was beginning to be reflected in rapidly rising unemployment. A pronounced shift in fiscal policy was signaled in March with the tabling of the federal budget for the 1970/71 fiscal year 8—which contemplated an overall cash deficit (apart from foreign exchange operations) of $0.5 billion, compared with a surplus of $0.2 billion in fiscal 1969/70. Throughout the balance of 1970, fiscal and monetary policies continued on an expansionary path, largely in response to the mounting joblessness, which rose to 6.8 per cent of the labor force in September. Additions to federal spending introduced at various times throughout the year led to a realized overall cash deficit for fiscal 1970/71 of $1.2 billion. Aided by the reflow of term deposits, as rates paid by banks again became competitive in early 1970, the total of currency and private Canadian dollar deposits in banks rose at an annual rate of about 13 per cent in the last three quarters of 1970, compared with an annual rate of growth averaging less than 4 per cent over the preceding 15 months. Monetary expansion continued to be rapid in the first months of 1971.

Under the stimulus of rapidly rising government spending and monetary ease, domestic demand began gradually to pick up after the first quarter of 1970, thus replacing export demand as the major expansionary element. This sequence of foreign and domestic demand forces meant that, while the growth of real GNP in Canada did not begin to show any pronounced strength until the final quarter, the economy continued to expand moderately throughout the period. Thus, in 1970 real output averaged nearly 3Vi per cent higher than in 1969.

The slowing of economic activity in 1970 was accompanied by a significant moderation of price increases. From the fourth quarter of 1969 to the fourth quarter of 1970, the consumer price index rose by only 2.1 per cent. The GNP deflator for the year rose by 4.1 per cent over 1969, compared with an increase of 4.7 per cent from 1968 to 1969. However, besides the impact on prices of the general easing of demand pressures, certain nonrecurrent factors contributed to the slowdown, namely, a favorable turn in food prices, the appreciation in the external value of the Canadian dollar, and the effect on domestic pricing decisions of the agreement of businessmen with the Prices and Incomes Commission to limit price increases in 1970 to less than would have been necessary to cover the full increase in costs. But while profits slumped in 1970, the size of negotiated wage settlements and the change in hourly earnings remained as high as in 1969.

With the commitment secured from business leaders, in June 1970 the Prices and Incomes Commission proposed a guideline of 6 per cent as a desirable upper limit for first-year increases in wages and salaries in the current circumstances. However, representatives of labor found such constraints unacceptable. In this situation, the Commission announced in December that it would not seek an extension of the pricing agreements with businessmen beyond the end of 1970.

The authorities characterized unemployment—still well over 6 per cent of the labor force—as the most serious of Canada’s economic problems in the first part of 1971. The degree of slack in the economy was believed sufficient to permit pursuit of expansionary fiscal and monetary policies without too much risk of generating new inflationary pressures. Accordingly, the budget for the fiscal year 1971/72, presented in June 1971, was aimed at providing some additional stimulus to the economy, chiefly in the form of income and sales tax reductions, as insurance against the emergence of a pause in the economic expansion. Along with the 1971/72 budget, the Minister of Finance also presented basic tax reform proposals that would begin taking effect in 1972. These were intended to have the effect of redistributing the existing overall tax burden in such a way as to improve the equity of the system and to make it more neutral in its treatment of different kinds of income.

Japan

The Japanese economic boom that commenced in late 1965 continued into the first part of 1970. The rate of output growth declined markedly after midyear, and evidently dropped further in the first half of 1971. For 1970 as a whole, real GNP expanded by 11 per cent over 1969—a rate appreciably below the exceptionally rapid advances of 12 to 14 per cent in the previous three years.

The slowdown in economic activity was induced by the restrictive monetary policy adopted by the authorities in the fall of 1969. During the two years to mid-1969, Japanese economic expansion had preceded without endangering domestic stability, but in the course of 1969 price advances began to accelerate and policies were shifted in order to control the rapid rise in demand before inflationary expectations became deeply rooted. The impact of the restraining monetary measures introduced in September was reinforced by the downward pressure on private investment plans created by the rapidity of capacity growth in steel and some other key industries that became evident by mid-1970.

Besides restricting the growth of output, the official restraints and the spontaneous weakening in investment demand caused a near cessation of wholesale price increases after the spring of 1970. Increases in consumer prices, which (like those in wholesale prices) had accelerated during 1969 and early 1970, slowed down only briefly; by the end of 1970, consumer prices were 8½ per cent higher than a year earlier. The cyclical demand-supply development thus had little apparent effect in retarding the consumer price advance, which reflected the tendency for the distributive and service industries to raise their charges to consumers as wage increases outstripped productivity gains by a wide margin. In the innovating and high-investment manufacturing sector, increased wage costs were absorbed to a much greater extent by continuing advances in productivity, and partly for that reason the expansion of Japanese exports in 1970 was once again substantially larger than the growth in export markets. (See Table 16.)

For most of 1970 the Bank of Japan continued to pursue a cautious monetary policy and the Government maintained a neutral budgetary position for the fiscal year 1970/71.9 However, the economic slowdown led the Bank of Japan to lower the official discount rate by 0.25 percentage point in October and to end its guidance over commercial bank lending in the last quarter of 1970; as the slowdown continued, further reductions of 0.25 percentage point in the discount rate were made in January, May, and July 1971, bringing the rate to 5.25 per cent. On the fiscal side, increases in expenditures were undertaken in the budget for the fiscal year 1971/72 in order to stimulate the economy.

With respect to the balance of payments, developments in 1970 were marked by another current account surplus of more than $2 billion and by a record overall surplus of $1.1 billion (including an SDR allocation of $122 million). The balance on long-term capital account moved to a large deficit in 1970 (Table 27), in part because of withdrawal of foreign portfolio investments, but the short-term capital balance swung sharply from deficit into surplus, despite official measures to replace foreign financing of imports with domestic financing.

The current account balance apparently became even stronger in the first quarter of 1971, when more of the effects of the economic slowdown may have been felt in the foreign trade sector through restraint of import demand and of export price increases. Along with this strengthening of the current account, there was a positive shift in the capital account as foreign purchases of Japanese securities were resumed and as lower interest rates abroad led to a large inflow of short-term capital. The resultant balance of payments surplus brought a further $ 1 billion increase in reserves, with additional increases occurring in April-June 1971. Total official reserves had expanded by the end of June to $7.8 billion (including two SDR allocations totaling $250 million), compared with $2.0 billion at the end of 1967 and $3.7 billion at the end of 1969.

Several special measures affecting the capital account were taken by the authorities in the first months of 1971 for the purpose of stemming the influx of reserves. In June, the Japanese Cabinet decided to broaden and intensify efforts to achieve a better external and internal equilibrium by means of an eight-point program that included tariff reductions, acceleration of import liberalization, gradual abolition of tax concessions to exporters, removal of the limit on outward direct investments, promotion of development aid, and the flexible operation of fiscal and monetary policies so as to remove the effects of slack domestic demand on the trade surplus.

United Kingdom

The striking recovery in the United Kingdom’s external accounts that occurred in 1969 continued during the period under review. The overall balance registered a surplus of $3 billion in 1970, following a surplus of $1 billion in 1969 and a deficit of $3 billion in 1968.10 Although the current account surplus increased, the further improvement of the payments position in 1970 was due chiefly to a large inflow of short-term capital. The overall surplus continued large in the first quarter of 1971, particularly because the relative decline in foreign interest rates diverted short-term capital to the United Kingdom. More recently, short-term inflows have declined, partly as a result of measures taken by the authorities, while the current account has continued in surplus. With the huge improvement in the balance of payments that began in 1969, the authorities were able to repay international debts in very large amounts; during the two and one-third years to the end of April 1971, short-term and medium-term obligations were reduced from more than $8 billion to $1.6 billion, the latter figure representing the outstanding balance of net drawings from the Fund.

The favorable development of the U. K. external accounts in the past year reflected a number of diverse factors. First, maintenance and enlargement of a substantial surplus on current account was mainly the result of a swing in the U. K. terms of trade, as U. K. exporters increased prices roughly in line with those of their competitors from 1969 to 1970 (Chart 9), while U. K. import prices showed almost no change. In volume terms, imports went up more than exports from 1969 to 1970. Second, continuation of tight financial policies in the recent period—although somewhat relaxed from those in 1969—clearly was beneficial to the balance of payments. These policies restrained the growth of domestic demand, thereby dampening the rise in imports, and they improved the capital balance in the external accounts by attracting the large inflows experienced in late 1970 and early 1971. In this connection, an important contributing factor was the heavy reflux of funds from the United States to the Euro-dollar market. Third, the potentially serious damage to the U. K. international competitive position that might have resulted from the rapid advances in domestic prices and costs was averted by continuing inflation in other industrial countries. Chart 9 indicates that, nonetheless, the United Kingdom experienced some loss of price and cost competitiveness during 1970, although the competitive position in the final quarter had not markedly deteriorated from that in the second half of 1968, when the effects of devaluation are thought to have worked fully through to prices.

While it was immediately favorable to the balance of payments, the weakness of demand and activity in the domestic economy 11 was accompanied by rising unemployment, which by the spring of 1971 had reached the highest level in many years. This situation led the authorities, in the budget presented in March, to propose measures aimed at achieving a moderate increase in activity.

During 1970 the U. K. budget had continued to reflect the general policy of restraint established earlier, although the realized surplus was not as large as planned. The impact of the further reduction of fiscal restraint adopted in the 1971/72 budget announced at the end of March 1971 was officially estimated to raise the growth of real GNP by 1 per cent in the course of the next year.

The monetary part of policy restraint in 1970—including a guideline on the expansion of credit to the private sector and continuance of historically high interest rates in the face of declining rates abroad—may have been hampered to some extent by the inflows of short-term capital, particularly of Euro-dollar credits to domestic business. Total domestic credit, which had declined by 1 per cent in 1969, rose by nearly 6 per cent. Money supply increased by about 10 per cent during 1970—roughly in line with the growth of GNP in current prices. In early 1971 borrowing of foreign currencies for domestic use or to finance current payments to nonresidents at maturities of less than five years was prohibited, while the effects of capital inflows were counterbalanced by heavy sales of government securities to the nonbank public.

Some further easing of monetary policy, the 1971/72 budget indicated, would be undertaken to reinforce the measures of fiscal relaxation. The objective of monetary policy would be to keep demand at a level required to achieve a growth of output in line with the growth of productive potential, without imparting any further impetus to the rise in costs and prices. Accordingly, the official guideline on credit expansion would be raised so as to permit a 2½ per cent quarterly rate of growth in the restricted segment of bank lending in the earlier part of the year, while the money supply would be allowed to rise at a quarterly rate of about 3 per cent, although as the rise in costs and prices moderated the aim would be to slow down the rate of growth. The authorities considered these rates of expansion in the monetary aggregates to be consistent with the maintenance of a surplus in the balance of payments position.12

The Government’s plan to pursue a more expansionary economic policy should be viewed in conjunction with the fact that the current account surplus was high in 1970 only because the decline in the trade balance in real terms was counteracted by an improvement in the U.K. terms of trade. Against this background, it is readily apparent that arresting the cost-price spiral is of crucial importance from the stand-point of the balance of payments as well as of the domestic economy. The problem is especially serious inasmuch as one cannot distinguish any pronounced effects of either financial restraint or economic slack on the level of wage settlements in the United Kingdom during the past few years.

France

Rapid and pronounced improvement in the French balance of payments followed the devaluation of the franc in August 1969 and the concurrent reinforcement of restrictive financial policies already in effect since late 1968. Largely as a result of the liquidation of speculative imports that had been accumulated in anticipation of the parity change, together with a new spurt in exports, the current account of the balance of payments recovered quickly and swung into surplus early in 1970.13 The outflow of speculative short-term funds was interrupted shortly after the devaluation of the franc and was sharply reversed when the deutsche mark was revalued in October 1969. The overall payments balance moved into surplus in the fourth quarter of 1969 and continued to benefit from substantial capital inflows in the first half of 1970; by midyear the authorities had repaid all official short-term external debts (except for the outstanding balance of $985 million arising from drawings on the Fund), as well as the foreign exchange borrowed from the French commercial banks.

In the domestic field, a notable development after the devaluation was the prolonged sluggishness of consumer demand; this reflected both the impact of the policies of restraint and a natural subsiding of private expenditures after a period of high consumer spending induced by political and currency uncertainties. Domestic production, however, continued to expand rather vigorously through the first months of 1970 under the stimulus of a rapid increase in investment outlays, the continuing strong growth of exports, and the rebuilding of inventories at the production and distribution levels. Thus, while overall demand pressures tended to subside, pressures persisted in some important sectors of the economy, particularly in the capital-goods and export-oriented industries. Against this background, and in view of the continuing rapid advance of wages and prices, the attitude of the authorities toward relaxation of policies remained cautious in the early part of 1970 and only selective measures of relaxation were taken.

As the year progressed, the economic climate became more uncertain. With private consumption still sluggish, the growth of industrial production was interrupted in the spring of 1970 and unemployment began rising markedly. The expansionary impact of inventory demand gradually diminished as stocks were restored to normal levels. Imports picked up in the second quarter of 1970 and then continued to expand at a normal rate, while the growth of exports showed a clear tendency to decelerate after midyear as external demand weakened considerably. Thus, despite the early rapid improvement, the current account balance for 1970 as a whole was less satisfactory than anticipated at the time of the devaluation. The net inflow of capital continued in the second half of 1970, although on a much reduced scale in comparison with the last few months of 1969 and the first half of 1970. Gross outflows increased as a result of the gradual liberalization of restrictions on capital exports for direct investment abroad, while the imposition of restrictions on short-term foreign borrowing by French enterprises in the summer of 1970 limited the size of the net inflow of short-term capital. However, the overall balance of payments surplus for 1970 as a whole was sizable ($2.0 billion, in contrast to a deficit of $1.1 billion in 1969), and at the end of 1970 the net official reserve position was about three times as large as at the time of the devaluation.

When the signs of a slowdown in the domestic economy were confirmed, and with the balance of payments showing some strength, the French authorities began to take more decisive measures to stimulate activity and arrest the rise in unemployment. In July 1970 and again in January 1971, some funds were released from the Government’s contracyclical fund, mainly for housing and education projects. Hire-purchase restrictions were substantially relaxed at the end of September 1970, and in October the system of direct credit controls was abolished. At the same time the French authorities announced a new obligatory reserve requirement based on credits, complementing the existing ones based on the banks’ liabilities; it was put into effect in March 1971. Finally, in line with developments in other countries, the discount rate was progressively reduced from 8 per cent during the first seven months of 1970 to 6.5 per cent in January 1971. The easier monetary conditions in 1970 were reflected in the rates of growth of money and of bank credit to the private sector, all of which expanded much more rapidly than in 1969.

Partly in response to such policy measures, consumer demand revived somewhat during the summer of 1970 and picked up markedly in the fourth quarter. While initially the recovery of consumption was met chiefly by the running down of stocks, which had increased to above-normal levels, industrial production resumed an upward trend around the end of the year and more recently unemployment tended to taper off. Toward mid-May 1971 the French monetary authorities announced increases in the discount rate and the obligatory reserve ratios. The modest rise in the discount rate, from 6.5 per cent to 6.75 per cent, was explained as part of an overall strategy aimed at checking inflationary pressures; the authorities stated that it was to be regarded mainly as an indication of the direction that they were planning to give to their policy.

The economic adjustments in the aftermath of the devaluation occurred without much apparent effect in terms of foregone output. Real GNP expanded by 8 per cent in 1969 (over 1968) and by 6 per cent in 1970, compared with an average annual rate of just under 6 per cent for the decade of the 1960s. The increase in the price level (as measured by the GNP deflator) accelerated to 7 per cent in 1969 but fell back to a little over 5 per cent in 1970—a figure that was half a percentage point below the average for all industrial countries and a full percentage point below the average for the countries of the European Economic Community.

In the field of prices, the French authorities maintained a system of surveillance under which, from the time of devaluation, enterprises wishing to raise prices had to submit new price lists one month before these were to become effective. In authorizing price increases, the authorities were prepared to make allowance for rising costs resulting from the devaluation but not, in principle, for cost increases deriving from unduly large wage settlements. This system probably had some effect in moderating the rise in prices.

Germany

The German economy embarked on a strong and prolonged boom after the sharp recession of 1966-67 (Chart 16). Real GNP expanded by 7 to 8 per cent in both 1968 and 1969 and by 5 per cent in 1970. Growth of output slowed to an annual rate of 3 per cent in the second half of 1970, but this slackening in the pace of real activity was less than had been anticipated by the Government. Moreover, the increase in prices during 1970 was much larger than expected. By the end of the year, labor market conditions had eased only slightly, the economy was still running at a high level of capacity, and inflationary pressures remained strong.

The upward movement of prices in Germany was sharper in 1970 than in any year since the Korean War period. The general price level as measured by the GNP deflator rose by per cent from 1969 to 1970, more than twice as much as the highest rate recorded in the boom of 1965-66. Consumer prices rose less than other prices—partly because of the favorable effect of the October 1969 revaluation on food prices—but showed an accelerated advance in late 1970 and early 1971. In the main, these inflationary trends are attributable to the continued rapid expansion of wages and salaries; unit labor costs in industry rose by 13 per cent from 1969 to 1970 (by more than 20 per cent in terms of U.S. dollars).14

To complement the price stabilization effects of the revaluation, the Government in January 1970 adopted new fiscal measures—including limitation or deferment of planned government outlays and accumulation of “business cycle equalization” deposits at the central bank—in order to reduce the overheating of the economy. These fiscal steps were followed in March by increases in the discount rate and related interest rates and in April by the reimposition of special marginal reserve requirements on external liabilities of banks to discourage them from turning to foreign sources to replenish their liquidity. With effect from July, minimum reserve requirements were raised by 15 per cent. To dampen the still overheated economy, new restrictive tax measures were announced in early July; they included a temporary refundable surcharge on income and corporation taxes and a temporary suspension of the prevailing system of accelerated depreciation allowances.15 In light of these measures, and partly also to reduce the incentive to borrow abroad, the Bundesbank cut its discount rate by 0.5 percentage point in July, in November, and again in December. However, these cuts were accompanied by measures designed for the double purpose of restraining the rise in bank liquidity caused by the large inflows of foreign funds and of demonstrating to the public that the change in the discount rate was not to be taken as an indication that monetary policy was to be relaxed or that the Bundesbank was giving up its fight against inflation.16 In order to supplement the general fiscal and monetary restraints, the German authorities endeavored to counter the sharply rising wage claims by intensifying their efforts to define an acceptable framework for wage bargaining and price setting, chiefly through the “concerted action” programs involving representatives of the trade unions, the employers’ associations, and the Government.

The overall balance of payments swung from a deficit of $3 billion in 1969 to a surplus of $6 billion in 1970. This movement was the net result of two developments: a decline in the surplus on current account and a huge inward swing in capital movements. (1) The impact on the balance of payments of a sharper rise in the volume of imports than of exports—attributable in part to the effects of the revaluation 17—was offset by an improvement in the terms of trade, and Germany continued to run a surplus of about $5½ billion on trade account in 1970. However, the revaluation also had a significant effect on the balance of services and transfers, in particular on tourist expenditures and workers’ remittances, and the total current account surplus 18 fell from $2.7 billion in 1969 to $1.7 billion in 1970. (2) Because of much tighter liquidity conditions in Germany, there was an abrupt fall during 1970 in the purchases of foreign securities and lending abroad, particularly by German banks. In addition, long-term borrowing abroad increased. But most notably there were very large inflows of foreign funds, including more than $4 billion of short-term borrowing abroad by German enterprises and an increase of $2 billion in the liabilities of commercial banks. The net short-term capital inflow of banks and enterprises in 1970 more than accounted for the increase in official reserves, which rose by more than $6 billion.

In the first three months of 1971, Germany’s external payments position was approximately in balance on the basic account, but the dominating influence was a massive influx of short-term funds. While the banks reduced their net short-term foreign liabilities quite substantially, this reduction was more than offset by continued heavy foreign borrowing by enterprises, amounting to over $3 billion. Official reserves in the first quarter of 1971 rose by $2.2 billion (including the second allocation of SDR 171 million). Official intervention in the forward exchange market, through both the Federal Reserve Bank of New York and the Bundesbank, attempted to stem the flow and, after persistent further inflows, the Bundesbank reduced its discount rate by a full percentage point to 5 per cent, effective April 1. Money market rates in Germany declined and moved much closer to those quoted in the Eurodollar market; rates in that market had risen in the last days of March and increased further at the beginning of April. Despite the reduction in interest rates, some $3 billion (including official forward dollar purchases of $2.2 billion) flowed into Germany in April. Further substantial sums—reflecting a surge of speculative pressures—entered Germany in the first days of May, raising the official reserves to almost $19 billion by May 5, when the official exchange market was closed. On May 9 the German authorities informed the Fund that the Federal Republic would not for the time being maintain the exchange rates for its currency within the established margins.

This decision to float the deutsche mark was accompanied by a number of policy measures aimed at stabilizing the economy and warding off short-term capital inflows. Fiscal policy, which had been expected to be somewhat more expansionary in 1971, was now to be made more restrictive, and new regulations were introduced in the field of foreign exchange policy to discourage certain types of borrowing from nonresidents. On June 2 the Bundesbank announced that minimum reserve requirements on domestic liabilities would be raised by 15 per cent, that the reserve ratios for foreign liabilities would be raised to double the amount of the new domestic ratios, and that the existing marginal reserve requirements on foreign liabilities would remain unchanged at 30 per cent; it was estimated that the change in reserve requirements would immobilize approximately DM 5 billion.

Italy

After a wave of major labor disputes had seriously interrupted Italian economic expansion in late 1969, the short-term prospect was one of considerable buoyancy. In the event, however, developments in 1970 and the first part of 1971 were marked by the persistence of disruptive strikes, supply bottlenecks, impairment of business and consumer confidence, and various signs of weakness in domestic demand. The growth of total output from 1969 to 1970—estimated at 5 per cent—thus proved to be considerably smaller than had been expected, whereas the increase in GNP prices accelerated to 6½ per cent. In early 1971 economic activity was sluggish, while the upward pressure on prices continued unabated; the balance of payments was in substantial surplus, the large deficit that emerged in 1969 because of capital outflow having been eliminated in the course of 1970.

It was also evident by early 1971 that a considerable degree of slack had developed in the Italian economy.19 This, of course, created a potential for faster economic growth and for sizable productivity gains that might serve to alleviate cost pressures stemming from continued large increases in average wages. Realization of this potential would require a return to more normal working conditions.

The periodic work stoppages in 1970, as well as in the latter part of 1969, had a marked impact on Italy’s external trade performance, as many domestic demands were met by drawing on foreign supplies and export capabilities were impaired. Contrary to the past tendency for Italy to acquire a substantially increasing share of the export trade of industrial countries, the rise in its exports from 1969 to 1970 fell considerably below the growth of its export markets (12½ per cent versus 11½ per cent) while imports expanded rapidly (20 per cent). The further decline of the trade balance in 1970 led to a deficit of $0.3 billion, in contrast to a surplus of $1.0 billion in 1968; the surplus on current account dropped from $2.9 billion in 1968 to $1.3 billion in 1970.

This change in the current account was more than counterbalanced by a sharp curtailment in the capital outflow and its replacement by an inflow during the course of 1970. The overall payments position was approximately in balance during 1968, but in the first half of 1969 the current account surplus was outweighed by exceptionally large outflows of nonbank capital; these reflected the emergence of a sizable differential between Italian interest rates and those abroad, as well as persistent institutional or structural characteristics of Italy’s capital market and fiscal situation, such as widespread tax evasion and lack of an adequate range of readily negotiable domestic financial instruments.20 With the unprecedented 1969 upsurge of interest rates in the Euro-dollar market and elsewhere, the Italian monetary authorities adopted defensive measures beginning at midyear. These were not particularly effective in stemming the capital outflow but, when the lira again came under heavy pressure in the first months of 1970 and the outflow accelerated, the authorities took further measures that proved strikingly successful and led to a pronounced strengthening of the balance of payments. These measures included a sharp increase in interest rates to a level above those in international markets, the encouragement of government-controlled enterprises to meet their needs for long-term finance by borrowing abroad, and the tightening of capital controls. The gain in confidence resulting from the solution of a brief political crisis and the formation of a new Government in August 1970 was probably also helpful in this context. The degree to which the external payments position was strengthened is indicated by the fact that from the end of August 1970 to the end of April 1971 gross official reserves increased by more than $1.9 billion, including the second allocation of SDR 107 million in January 1971.

The Italian authorities began to ease monetary policy gradually in the summer of 1970. This shift was prompted by the leveling off in economic activity and was facilitated by a decline in interest rates abroad and the improvement in the balance of payments. As an indication of the stance of policy in April 1971, the announcement by the Governor of the Bank of Italy of a discount rate reduction made mention of the need to give “additional support to the revival of internal activity,” as well as of the need to keep domestic interest rates in line with the evolution of rates in foreign markets.

In August 1970 the Government introduced a series of measures designed to achieve a shift in the utilization of resources from consumption to investment. These measures included increases in indirect taxes and social security contributions equivalent to more than 1 per cent of GNP on an annual basis, together with incentives for productive investment. While the tax increases became effective immediately, Parliament delayed enactment of the investment incentives until late December. Consequently, there are clear indications that fiscal policy had a restrictive impact on the economy in the second half of 1970. When account is taken of the slow impact of the measures to stimulate investment, fiscal policy may well have remained restrictive in early 1971.

Other Industrial Countries

Developments during 1970 in the smaller industrial countries of Europe were characterized by an intensification of inflationary pressures, a marked deterioration in the current account position, and capital inflows that not only led to an improvement in the overall balance of payments but also, in certain instances, injected substantial amounts of liquidity that weakened domestic policy restraints. Most of these countries had suffered relatively large outflows of short-term capital during 1969 before the German revaluation in October, and all had reacted by tightening monetary conditions and raising interest rates. As noted earlier, four of the countries in this group—Austria, Belgium, the Netherlands, and Switzerland—were directly engulfed in the international monetary crisis of May 1971 and, as a result of the surge of speculative funds into European exchange markets, changed their exchange rate policies.

In general, the smaller industrial countries shared the experience of the seven major countries in 1970 of having larger increases in prices than in output. (See Tables 13 and 19.) Fast economic expansion in the major industrial countries after the 1966-67 slowdown had created strong and uninterrupted demands for the smaller countries’ exports; in combination with burgeoning domestic demand, this led to the emergence of strains on resources during late 1969 and 1970 and to rapid increases in imports.21 The lag in response of the smaller countries to external developments was apparent by early 1971 in one central fact: excess demand was still prevalent in those countries, whereas it clearly had been eliminated in nearly all the larger industrial countries.

In Belgium economic performance in 1970 included the continued expansion of real GNP at an above-trend rate (5½ per cent), the lowest increase in overall prices (somewhat more than 4 per cent) among industrial countries, and a very large surplus on the external current account. These results were all due in some measure to the fact that cyclical recovery from the 1966-67 recession had started rather late, with exports leading the upswing in overall demand. The Belgian economy was able to benefit from important gains in productivity in 1969, as well as in the first part of 1970, and to improve its relative cost position in both years. By early 1971, although demand pressures were easing, the rate of wage increases was accelerating and the Government also faced the problem of containing upward pressures on prices stemming from the introduction of a value-added tax at the beginning of January.

Economic policies in Belgium had remained strongly expansionary until early 1969, when monetary policy was tightened to help safeguard official reserves. Further restrictive actions, including a tightening of credit and rediscount ceilings, were taken in the last quarter of 1969 in order to dampen the expansion of aggregate demand. The central bank maintained these ceilings throughout 1970 and into 1971, and fiscal policy operated in a moderately countercyclical fashion. By the end of 1970 the influx of reserves was clearly counteracting monetary policy, and in May 1971 the Government acted, as indicated earlier, to modify its dual system of exchange markets so as to render the free market an instrument for containing capital inflows. In addition, the National Bank had advised the commercial banks in March 1971 not to increase further their net foreign indebtedness.

The economy of the Netherlands, which had been operating more or less continuously under boom conditions since the end of 1967, showed further strong expansion in 1970. Bottlenecks developed in some sectors, unemployment declined to very low levels, and unit labor costs increased substantially. The pace of wage and price increases accelerated during the course of 1970, and at the end of the year the Government established a six-month wage pause. Demand pressures were intense throughout the year, as the moderating influence of fiscal policy was limited by a greater-than-intended rise in government expenditures and as the effects of domestic monetary restraint were weakened by an expansion of liquidity deriving from the increase in foreign assets of the central bank.

Dutch imports expanded rapidly during 1970 in response to the very high domestic demand, and the terms of trade deteriorated by 3 per cent; mainly for these reasons, a current account deficit of unprecedented magnitude developed. However, there was also a huge capital inflow and the overall balance of payments registered a very substantial surplus (Table 25). The exchange rate decision of the authorities in May 1971 was taken in the light of continuing large-scale inflows of capital and of the exchange action by Germany.

The economy of Austria, after a strong recovery in 1968, achieved high rates of growth in 1969 and 1970. Increased pressure on domestic resources began to develop in 1969, and the revaluation of the deutsche mark in October was expected to reinforce the tendencies toward faster price increases. The authorities then put into effect a program of anti-inflation measures that included reduction of import duties, abolition or reduction of import equalization taxes, and more liberal licensing of certain imports.

In spite of increasing strains on domestic resources, cost and price increases in Austria during recent years were less marked than in most other European countries and its underlying balance of payments position remained strong. The exchange rate action by the German authorities in May 1971 might—without any protective move on the part of Austria—have threatened price stability in Austria, strengthened its external position still further, and stimulated unwanted inflows of speculative capital. The decision by the Austrian authorities to revalue the schilling was taken in view of such considerations.

In Switzerland, which maintained a relatively high degree of price stability in 1969 despite the attainment of full-capacity utilization, inflationary pressures intensified during 1970. Foreign demand provided a strong stimulus to the Swiss economy, but delivery delays caused by boom conditions, together with a surge in imports, led to elimination of the surplus on current account. However, as in the Netherlands, a sharp swing in the capital account produced a large overall surplus in the balance of payments. According to the Swiss authorities, the revaluation of the franc in May 1971 was necessary to prevent a vast inflow of funds into Switzerland. The move, it was emphasized, would not be sufficient to combat domestic inflation, and it was planned to introduce an anti-inflation program in the near future.

Economic policy in Denmark during 1970 was greatly influenced by the aftermath of the foreign exchange crisis in May 1969, when interest rates were raised to exceptionally high levels following a sharp deterioration in the current account position and outflows of short-term capital for arbitrage or speculative reasons. However, late in 1969 it was evident that both the increasing current account deficit and the strong upward pressure on wages and prices required restraining action additional to that emanating from the introduction of a pay-as-you-earn tax in January 1970. The additional measures adopted in the spring of 1970 included the imposition of ceilings on bank advances and increases in indirect taxes, as well as cutbacks in planned government expenditures. A general price freeze was introduced in September 1970; the Government decided to pursue an incomes policy aimed at ensuring that wage rates would not rise more than 3½ to 4 per cent per annum after the expiration of wage agreements at the end of February 1971; and interest rates were continuously maintained at extraordinarily high levels. Despite the tightness of economic policy, the current account deficit increased again in 1970—to about $550 million, or some 3 per cent of GNP; this was offset by capital inflows, and the overall payments position was in approximate balance.

The year 1970 was one of unusually strong demand pressure in Norway, along with substantial increases in prices and costs. Introduction of a value-added tax in January 1970 22 had a pronounced effect on the general price level, accounting for 6 percentage points of the 11½ per cent increase in the GNP deflator from 1969 to 1970. In spite of the need for restrictive economic policies in 1970, fiscal policy was more expansionary than in the previous year. Monetary policy in 1970 was aimed at neutralizing the increase in liquidity resulting from the tax reform and ensuring sufficient long-term credits for high-priority investments. Although the authorities successively tightened the rules on liquidity reserves held by the banks during 1970, the supply of bank credit was not kept within the limits originally envisaged. Toward the end of the year the authorities introduced a series of measures, including increases in some indirect taxes, postponement of public investments, and a price freeze, in order to ease demand pressures and check the rise in costs and prices. Norway’s reserve position remained strong in 1970 as a large increase in net imports of ships was more than offset by capital inflows.

In Sweden the economy passed through a strongly expansionary phase in 1969 to an overheated condition in 1970. This occurred despite a considerable tightening of monetary policy in 1969, in part to stem a drain on the official reserves, and the introduction in April 1970 of ceilings on commercial bank advances other than for housing. The pressure on resources was high throughout 1970, although it eased somewhat after the spring of the year. Wage increases in manufacturing accelerated, but productivity growth remained high and unit labor costs in Sweden went up somewhat less than those in competitor countries. Domestic prices increased at a considerably faster pace in 1970, with the GNP deflator rising by 5½ per cent, compared with 2½ to 3 per cent in the previous two years. In October 1970 the Government imposed a general freeze on prices of goods and services, and this was extended in March 1971 in view of the protracted wage negotiations.

Notwithstanding a strong export performance, Sweden’s current account deficit increased appreciably in 1970. However, the deficit was considerably exceeded by a net capital inflow stemming from the continued tight credit policy and the fall in international interest rates. At the end of May 1971, official reserves of Sweden, at $933 million, were about $125 million lower than at their peak level in April 1965.

International Financial Markets

In the 1970 Annual Report,23 attention was drawn to several key financial policy issues raised by the existence and rapid growth of the Eurocurrency market and the international bond market. In particular, it was noted that the impact of these relatively new markets, and especially of the Euro-currency market, on the mobility of capital flows among countries had brought a high degree of integration to the international credit market as a whole, and that this had presented challenges to both the effectiveness and the independence of national monetary policies. With closer financial integration, the effects of changes in monetary policy by the larger industrial countries, and predominantly by the United States, are quickly transmitted to other industrial countries, with wide repercussions throughout the world. Difficulties can thus be created for countries whose own policy requirements are different from those of the main financial centers. These and related problems, as well as a number of possible measures for dealing with them, have been discussed in Chapter 1 (pages 14-16).

Policy problems arising from conflicting domestic and external pressures or objectives have presented themselves in a particularly acute form during recent years, as the severe tightening of U.S. monetary policy in 1969 and the veering of such policy toward ease in 1970 were quickly reflected in Euro-dollar interest rates. As last year’s Annual Report observed, in 1969 many countries reacted partly by raising domestic interest rates and partly by resorting to special measures to restrict the outflows of capital. In the pages that follow, there is a brief description of how countries desiring to maintain a restrictive monetary policy for domestic purposes responded to the situation posed by declining Euro-dollar interest rates in 1970 and early 1971.

The international bond market, which grew principally as a result of U.S. restraints on capital outflows, contributed importantly to the integration of capital markets in Europe. Borrowers seeking long-term funds may float issues in individual countries outside their national boundaries or in several countries simultaneously. Although this has probably brought greater uniformity of long-term interest rates in the industrial countries, it has not created problems for national monetary policies on anything like the scale posed by the Eurocurrency market.

In 1970, it may be noted, the Euro-currency and international bond markets were brought closer together by the phenomenal growth of medium-term bank lending by Euro-banks.24 As Euro-dollar prime lending rates declined below the yields on Euro-bonds floated on European capital markets, it became advantageous for large corporations to borrow at medium term on the Eurocurrency market. This development in effect meant that medium-term Euro-dollar loans and medium-term Euro-bond issues had become very close substitutes. Another development in 1970 linking the two markets was the flotation of several bond issues at variable interest rates that were tied to rates in the Euro-dollar market.

The Euro-Currency Market

The main features of the Euro-currency market in 1970 were the somewhat slower rate of growth of the market (more particularly its Euro-dollar component) than in 1969, the drop in liabilities of U.S. banks to their foreign branches, the sharp fall in Euro-dollar interest rates, and the increased placements in the market by central banks (directly or through the Bank for International Settlements) of some of their reserve accruals. The fall in interest rates, almost exactly reversing their steep climb during 1969, created new and serious strains for industrial countries other than the United States and contributed to the dramatic reversal in the U.S. balance of payments from a surplus in 1969 to a massive deficit in 1970. Increased placements by central banks posed new questions concerning possibilities of reserve creation through the depositing of reserves in the Euro-dollar market. (See Chapter 2.)

After a growth of nearly 50 per cent during 1969, the Euro-currency market expanded by 30 per cent during 1970. As measured by total banking liabilities denominated in currency other than that of the country of residence of the banking institution, there was an increase from about $44 billion at the end of 1969 to about $57 billion at the end of 197025. The Euro-dollar component of this total rose from $37.5 billion to $46 billion during 1970, while the non-dollar component (comprised mainly of deutsche mark and Swiss francs) rose from the equivalent of $6.5 billion to the equivalent of $11 billion; during 1969 the dollar component had grown by $12.5 billion and the non-dollar component by $1.5 billion. The growing importance of the non-dollar component, which in 1970 absorbed about one third of the growth of the market as a whole, was a noteworthy development in the recent period.

Whereas in 1969 the main factor behind the spectacular growth in the Euro-dollar market was the huge increase in borrowing by U.S. banks from their overseas branches, in 1970 the growth of the market was slowed by the repayment of most of this borrowing. Because of such repayment, there was a reduction during 1970 in the net indebtedness of the United States to the Eurodollar market, but this was more than offset by increased Euro-dollar borrowing by Europe and by the rest of the world. Whereas U.S. indebtedness to the market fell by about $3.8 billion, outstanding borrowings by eight European countries as a group26 increased by $5.8 billion, while borrowings by the rest of the world increased by $6.5 billion. Nearly all the additional funds supplied to the market came from outside the United States. An important development on the supply side was that at least $5.5 billion came from placements of official dollar reserves in the Euro-dollar market; more than three fifths of the increase in the Euro-dollar market during 1970 is thus attributable to such placements.

Short-term interest rates in the United States had risen sharply during 1969; in 1970, because of an expansionary monetary policy as well as some deceleration in the demand for funds, money market rates fell even more sharply and by the end of the year were substantially below their levels at the beginning of 1969. Euro-dollar rates followed the general pattern of U.S. rates fairly closely, with Euro-dollar rates consistently above their U.S. counterparts by a margin that fluctuated from month to month from very little to about 4 percentage points. (See Charts 17 and 18.)

The parallel movements in U.S. and Eurodollar rates over time can be explained in terms of the close links between the two markets. A major link is provided by the intimate working relationship between U.S. banks and their U. K. branches. U.S. banks determine their borrowings and repayments on the basis of availability of domestic funds and the relative effective costs of alternative sources, taking account of reserve requirements, assessments by the Federal Deposit Insurance Corporation, etc. Although Euro-dollar rates may, at least from month to month, move independently of U.S. rates, influences from the United States tend to be fairly dominant in the determination of interest rates in the Euro-dollar market, with pressures from Europe tending to be relatively less important and more transient.

Fluctuations in the Euro-dollar rate during 1969 and 1970, following trends in the United States, created a number of difficult policy questions for other industrial countries with capital markets that are closely integrated with the Eurodollar market. During 1969, when Euro-dollar rates rose very sharply (indeed in several months more sharply than corresponding rates in the United States), all these industrial countries allowed their interest rates to rise, primarily to fight domestic inflationary conditions but also, in a number of instances, to moderate the outflow of capital. In addition, in many of those countries, special measures were taken to discourage capital outflows. For example, central banks in Italy, France, the Netherlands, Denmark, and Belgium (through the controlled market) all directed their banks to reduce their net foreign asset positions, and in Italy enterprises were encouraged to borrow abroad.

During 1970 and the first several months of 1971, when Euro-dollar rates dropped sharply, discount rates in industrial countries outside the United States responded, but with varying lags. The United Kingdom (in March) and Canada (in May) were the first to lower their discount rates in 1970. Germany (in July), France (in August), and Belgium and Japan (in October) followed during the year. Others responded in 1971: Denmark (in January), Sweden (in March), and Italy and the Netherlands (in April). In several countries discount rates were lowered more than once from January 1970 to May 1971 (Denmark twice, Japan and the United Kingdom three times, France and Germany four times, and Canada six times). In some instances the reduction in discount rate was prompted at least in part by external considerations, but in others (notably in Canada, France, Italy, and the United Kingdom) domestic considerations were also clearly important. Only Germany, Italy, and Austria resisted the trends in interest rates in the Euro-dollar market in the early months of 1970 by actually raising their discount rates; Germany and Italy both raised them by as much as 1.5 percentage points during March.

Rates of interest in national short-term credit markets, which are more directly relevant than discount rates for capital movements, also followed the general trends in Euro-dollar rates-—sometimes preceding, sometimes following, the changes in discount rates. In general, national market rates did not fall as sharply as Euro-dollar rates, with the result that the interest differentials between national and Euro-dollar rates shifted generally in favor of the former in the course of 1970 and early 1971. For nearly all industrial countries, the average yield spreads for those periods were noticeably more favorable (or less unfavorable) to placement (or retention) of funds in national markets than they had been in 1969. Table 29 documents this point. During 1969 the average interest rate in the Euro-dollar market exceeded rates on claims of comparable maturity in nearly all countries—in some of them (notably Belgium, Canada, Germany, Italy, and the Netherlands) by large margins. During 1970 the differential in favor of the Euro-dollar market fell sharply in Belgium and the Netherlands and was reversed in Denmark, France, Germany, Italy, and Japan. This trend, toward yield relationships more favorable (or less unfavorable) to domestic investments, continued into the early months of 1971.

Covered yield differentials—i.e., differences in relevant interest rates after adjustment for forward cover to hedge against exchange-rate changes—are also relevant to investment decisions. The behavior of these differentials in selected industrial countries (vis-à-vis the Euro-dollar market) is shown in Chart 19. The contrast between 1969 and 1970-71 is less striking than it is for the uncovered differentials; nevertheless, in most countries there is a distinct swing toward comparatively more favorable (or less unfavorable) rates on domestic investments. In Germany and the Netherlands, this swing brought a covered differential favoring those countries during most of 1970 and early 1971; in the United Kingdom and Switzerland, however, the covered differentials, while narrowing, continued in favor of the Euro-dollar market through the early months of 1971.

Of the larger industrial countries outside the United States, Germany, France, the United Kingdom, and Japan all took special measures to discourage capital inflows, in addition to allowing their interest rates to drop. Germany reinvoked a number of devices: special marginal reserve requirements were imposed on increases in foreign liabilities; spot rates were kept at or close to the upper intervention points; and there was some intervention in the forward market designed to increase the forward discount on the deutsche mark. In May 1971, when the Bundesbank ceased to maintain the exchange rates for the deutsche mark within the established margins, this action was supplemented by the prohibition of interest payments on deposits held by nonresidents (in excess of a specific amount) and by the placing of limitations on the sales of money market paper to nonresidents. In France the foreign currency position of the banks was made no longer subject to control in July 1970, and the banks were free to reduce their net liabilities abroad; in addition, some further controls were imposed on foreign borrowing by French enterprises. In the United Kingdom the authorities as of January 1971 restricted the borrowing of foreign currency for conversion into sterling for domestic use to medium- and longer-term finance taken for at least five years (but permission was given to complete borrowings already arranged); and the spot rate was allowed to move virtually to its upper intervention point. In Japan yen shift operations were resumed in June 1970, when the authorities started supplying yen funds to foreign exchange banks for import financing purposes at official discount and loan rates that were lower than the prevailing market rates.

Banks in the United Kingdom are the main intermediaries in the Euro-dollar market, accounting for about one half of all nondomestic assets and liabilities of banks in the European countries for which data are reported regularly to the Bank for International Settlements (BIS). Table 30 shows the geographic breakdown of external liabilities and claims, denominated in non-sterling currencies, of U. K. banks27 for the period 1967-70. It provides a detailed, though limited, guide as to sources and uses of funds by individual countries through the intermediation of the U. K. banks.28

As Table 30 indicates, the United States was easily the major net borrower in the Eurocurrency market during the years 1967-70, with Western Europe providing most of the funds. The last columns of the table, which record changes in the net asset positions of the various countries, reveal that the most dramatic change during 1970 occurred in the U.S. position, where an inflow through the U. K. banks of $5.78 billion in 1969 was converted into an outflow of $3.55 billion in 1970. This outflow was due to a large reduction in borrowings from the market by the United States (from about $13.5 billion to about $10 billion), with supplies from the United States increasing by only a negligible amount. Germany ($1.64 billion) and the United Kingdom ($1.13 billion) experienced the largest inflows during 1970. Developments in the United Kingdom are particularly interesting, in that the U. K. banks, which during the period 1967-69 had had a negligible net external position in foreign currencies, in 1970 built up a liability of over $1 billion. This did not signify any change in the U. K. banks’ role as intermediaries in this market but rather that they had lent a larger proportion of their foreign currency resources than usual to other U. K. residents (who either switched these funds into sterling for domestic use or kept them in foreign currency for overseas investment). Apart from Switzerland (data for which include the BIS position), the Western European industrial countries, taken together, had a net inflow of $2.73 billion. Japan, too, experienced a substantial net inflow ($0.72 billion), while in Canada there was a small net outflow ($0.17 billion).

In 1969 nearly all the increase in the gross borrowings from the market by the United States ($6.1 billion) was absorbed by the increase in liabilities of U.S. banks to their foreign branches. In 1970 these liabilities fell by more than $5 billion, yet the decrease in the borrowings from the market by the United States was on the order of $3.5 billion. The discrepancy can probably be accounted for by increased borrowing from Euro-dollar sources by U.S. companies domiciled in the United States; something like $1.5 billion was absorbed through the intermediation of U. K. banks. One reason for the increase in borrowing by U.S. companies on the Euro-dollar market was the fact that they borrowed less in the Euro-bond market, interest rate differentials (for borrowers) between the two markets having swung sharply in favor of the Euro-dollar market in 1970.

In the United States during 1969, with rates an certificates of deposit held down by Regulation Q ceilings at the same time that market rates were advancing, the large city banks experienced a sharp fall in deposits. Given the strong demand for loans, the banks responded by seeking funds from nondepository sources, mainly the Eurodollar market. To counteract the effects of these borrowings on Euro-dollar rates and on the outflows of short-term capital from Europe, the Federal Reserve Board introduced, with effect from September, a 10 per cent reserve requirement on U.S. bank liabilities to their foreign branches above the average outstanding in the four weeks ended May 28, 1969. This curtailed the growth of such liabilities, and late in the year they began to decline. After rising again in January 1970 to about $14 billion, the liabilities of U.S. banks to foreign branches fell by more than $2½ billion by late July (Table 31). During this period the banks relied increasingly on lower-cost sources of funds, primarily commercial paper and certificates of deposit, on which Regulation Q interest rate ceilings had been raised in January 1970.

In June 1970 the Federal Reserve Board suspended Regulation Q ceilings on certain 30-day to 89-day large certificates of deposit. As a result the banks were able to compete successfully for funds, especially in a market characterized by falling yields on short-term securities. In September bank-related commercial paper became subject to reserve requirements equal to those on deposits of the same maturity. The volume of this paper had reached a peak of some $7.8 billion in July, from what had been a negligible figure a year earlier, but after September the volume fell sharply and by the end of February 1971 was below $2 billion (Table 31). At the same time, after the suspension of Regulation Q, the volume of large certificates of deposit expanded rapidly—from $13 billion at the end of June 1970 to more than $27 billion at the end of January 1971. Some of the funds absorbed in this way were used to repay the higher-cost Eurodollar borrowings. From about early October some of the large banks had found it profitable to go below their reserve-free base, which for the banks as a group was around $10 billion.

Concerned over the continuing repayments of Euro-dollar borrowings and the effects of these on Euro-dollar rates and on capital outflows from the United States, the Federal Reserve Board took measures in November to moderate the pace of such repayments. With effect from January 1971, in respect to the four-week reserve period ended December 23, reserve requirements on Eurodollar borrowings from branches, above a reserve-free base, were raised from 10 per cent to 20 per cent; at the same time, a new reserve-free base was established at the average level of Euro-dollar liabilities in the four-week period ended November 25 or at 3 per cent of a bank’s total deposits, whichever was the higher. The objective was to raise the cost of future reborrowings over the reserve-free base, which automatically adjusted downward as the level of liabilities fell below the newly established base. Some incentive was also provided to certain banks to increase their use of the Euro-dollar market so as to acquire larger reserve-free quotas. But with the differential cost in favor of domestic funds and banks’ excess liquidity both continuing high, the increase in reserve requirements proved ineffective and banks continued their repayments, again going below the new reserve-free base. Then, in January 1971, in a further step to check repayments of Euro-dollar borrowings, banks were permitted to include in their reserve-free base funds invested by their overseas branches in the securities of the Export-Import Bank; by early March that Bank had sold $1.5 billion of special securities to the branches. In March 1971 the U.S. banks were also permitted to include in their reserve-free base funds invested by their branches in U.S. Treasury securities; in April the Treasury announced a $1.5 billion offer to such branches of three-month certificates of indebtedness at 5⅜ per cent, which was the then prevailing rate for three-month Euro-dollar deposits. Repayment of U.S. banks’ liabilities to their branches continued at a rapid rate in the first several months of 1971, and by the middle of May such liabilities were down to a figure of about $1½ billion.

By observation of the changes in assets and liabilities to nonresidents in foreign currency of the commercial banks in individual industrial countries, an estimate can be made of the extent to which, in a particular period, the banks were net borrowers or lenders in the Euro-currency market. During 1970 banks in a number of countries were net borrowers of Euro-dollars: in the United Kingdom, by about $1.6 billion; in Belgium, by nearly $0.7 billion; in Italy, by about $0.4 billion; in Germany, by something like $0.3 billion; and in France, by nearly $0.2 billion. In contrast, banks in Switzerland 29 were net lenders to the Euro-dollar market by about $3.6 billion; those in Japan, by about $0.5 billion; those in the Netherlands, by $0.3 billion; and those in Canada by $0.1 billion. While no comparable data are available for nonbanks by individual country, the BIS has estimated that for 1970 nonbanks as a group in the eight reporting countries were heavy net borrowers in the Euro-dollar market;30 the swing in their position, from net assets of $4.2 billion to net liabilities of $0.4 billion, indicated a net inflow of $4.6 billion during the year. This was in sharp contrast to developments during 1969, when nonbanks increased their net asset position from $0.5 billion to $4.2 billion, thus experiencing a net outflow of $3.7 billion.

The International Bond Market

New issues of international bonds 31 placed on all capital markets amounted to $6.0 billion during 1970 (Table 32). This total was slightly less than in 1969 and $1.7 billion less than in 1968. The cumulative volume of new issues over the past six years amounted to $32 billion. About two thirds of these issues were in Europe, and more than 70 per cent of the European issues were Euro-bonds.

Flotations of foreign bonds in the United States during 1970 amounted to $1.3 billion, about the same as in 1969. However, the geographical distribution of borrowers was different in 1970. International institutions, which did not borrow in the United States during 1969, reappeared in 1970 with issues amounting to $300 million. Flotations by the less developed countries declined by some $50 million and were just under $200 million in 1970. Canada’s flotations fell from $1.1 billion in 1969 to $800 million in 1970. Canadian borrowing on the European markets also declined, to half of the preceding year’s total. This drop in Canadian borrowings in the two areas reflected substantial improvement in domestic capital market conditions, as well as policies oriented toward discouraging capital inflows at a time when the balance of payments position was strong.

As in 1969, European companies and other European institutions were major borrowers on the international bond markets in Europe. Although total issues on these markets declined somewhat in 1970, borrowing by Europeans increased. By country, the most important European borrowers in 1970 were Italy, the Netherlands, France, the United Kingdom, and the Scandinavian countries as a group. Borrowing by U.S. corporations continued to decline from the peak reached in 1968; such borrowing fell from 42 per cent of total European issues in 1968 to 23 per cent in 1970 and continued to decline in the first half of 1971. In contrast, the percentage of European borrowing doubled from 1968 to 1970 and reached almost 50 per cent in the first half of 1971 (Table 33). It should be pointed out, however, that more than two thirds of the funds borrowed in the European capital markets by U.S. corporations were spent in Europe.

In the first half of 1970 the volume of new issues of international bonds was considerably lower than in the same period in 1968 and 1969. Revaluation of the deutsche mark in the fall of 1969 had re-established confidence in the structure of exchange rates and released sizable liquid funds held in Germany by foreign corporations, thus permitting some postponement of borrowing in the early part of 1970. Moreover, the spread between declining 12-month Euro-dollar rates and Euro-bond yields was still sufficiently in favor of the Euro-dollar market in early 1970 to divert some short-term lending to that market. In Germany the Central Capital Market Committee, concerned over the outflows of short-term and long-term capital in the first quarter of 1970, advised against new foreign deutsche mark issues in this period. In Switzerland, controls over the access of foreign borrowers to its bond market were made more restrictive in the first half of the year.

Toward the middle of 1970 conditions for the flotation of international bonds improved noticeably. In most industrial countries domestic long-term interest rates started declining in the summer of 1970. Improving conditions on stock exchanges also contributed to more buoyant activity in international issues. The fall in Euro-dollar rates below yields on Euro-bonds induced some switching of funds from Euro-dollar deposits to foreign and Euro-bond issues. After September, continued balance of payments surpluses in Germany led to a marked easing of the attitude of the Central Capital Market Committee toward new foreign bond issues. Thus, flotations of foreign bonds and Euro-bonds in Europe in the last four months of 1970 accounted for almost 50 per cent of the year’s total. These flotations were larger than those during the corresponding periods of 1969 and 1968.

The resurgence of international bond market activity in the fall of 1970 continued into 1971. The volume of issues during the first half of this year even exceeded the volume in the first half of 1968. Flotations of international bonds were mainly concentrated in Europe. In the first six months of 1971 a total of $3.2 billion was floated; this amounted to 68 per cent of flotations in the area during all of 1970. However, the exchange rate crisis in the spring of 1971 reduced activity on the international bond markets. International bond issues in Europe in the second quarter amounted to only $1.1 billion, after exceeding $2 billion in the first quarter.

Yields on Euro-bonds were influenced in 1970 by the long-term interest rate developments in countries in whose currencies issues are denominated. Yields on Euro-bonds denominated in deutsche mark, floated by U.S. corporations, moved fairly closely with the yields of domestic corporate bonds in Germany (Chart 20). Similar movements can be observed in yields of dollar-denominated Euro-bonds and U.S. corporate bonds. A comparison of yields between Eurobonds denominated in dollars and in deutsche mark shows that international competitive forces in the Euro-bond market tend to keep the movement of these yields together. However, during the period prior to the revaluation of the mark in October 1969 and again in the summer of 1970, a substantial spread developed between Eurobonds denominated in these two currencies, a spread which probably reflected expectations of an adjustment in the German exchange rate. In periods of relative absence of speculative forces, such as in the first part of 1970 and during the last months of that year, this differential between the yields fell considerably. The spread reappeared again in the early months of 1971 so that in April and May the average yield of DM-denominated issues was about a full percentage point below that of the Euro-bonds denominated in dollars.

More Developed Primary Producing Countries

The aggregate overall payments surplus of the more developed primary producing countries rose considerably in 1970 after having fallen in 1969. One quarter of the 1969-70 rise was attributable to SDR allocations. Aside from that factor, it reflected an upward movement in the net capital inflow (both long-term and short-term) about twice as large as that in the current account deficit for this group of countries as a whole. (See Tables 24 and 34.)

The resurgence of capital inflows in 1970 was particularly marked in the more developed primary producing countries in the Southern Hemisphere. Along with other capital-importing countries, they had easier access to international capital markets after the credit squeeze of 1969 had been relaxed. In the Southern Hemisphere group, Australia was the only country whose current account balance showed any improvement from 1969 to 1970. The current account deficit of South Africa almost tripled and the New Zealand balance on current account shifted into deficit.

Most of the primary producing countries in Europe experienced strong domestic economic expansion during much or all of 1969 and at least the first part of 1970. A number of them undertook to apply or tighten various measures of fiscal or monetary restraint, and some of them also made significant use of incomes policy. While some of these measures were effective in curbing the expansion of demand, especially in the second half of 1970, this generally did not occur in time to prevent another large increase in the value of imports, which reflected the sharp rise in import prices, as well as expansion in volume terms. Consequently, most of the European primary producing countries were confronted with larger trade deficits in 1970 than in 1969.

For a number of these countries, however, the increase in the trade deficit was more or less fully offset by a rise in net receipts from travel expenditures, emigrants’ remittances, or both (Chart 21 and Table 35). These receipts had begun to rise again in 1969 after two years of relatively sluggish movements associated with the 1967 slowdown in European economic activity, and the advance became quite rapid in 1970. This acceleration reflected not only the 1968-70 upsurge of European production and incomes but also the liberalization by France and the United Kingdom of travel allowances for their respective nationals.

Among the larger primary producing countries in Europe, several different combinations of domestic and external problems were confronted in 1970. In Finland, a strong expansion of the domestic economy was accompanied by strength in the external position, so that demand management policies equally suitable for both domestic and balance of payments stabilization were not easy to devise or apply. In Yugoslavia, however, a deterioration of the external position as demand pressures rose during 1970 made it appropriate for the authorities to attack both sets of problems through a comprehensive stabilization program. The Spanish situation also featured domestic demand pressures and a deteriorating external account during late 1969 and early 1970, but shifted thereafter, under the impact of fiscal and monetary restraints, toward a combination of domestic slack (but with unduly rapid price increases) and renewed strength in the balance of payments.

The Finnish economy was operating at full capacity throughout 1970, with shortages of skilled labor apparent in some sectors. In order to moderate the increase in domestic demand, central bank credit was made progressively tighter and hire-purchase regulations were also tightened. Fiscal policy, while somewhat restrictive in its net effect, was limited in scope by a government commitment not to increase taxes, which had been undertaken in connection with the comprehensive incomes policy adopted for 1969. This threw the major burden of active restraint on monetary policy, despite the inclusion in a second incomes policy agreement for 1970 of provisions for countercyclical deposits by both industries and the Government.

The incomes policy arrangements, comprising centralized wage agreements, price controls, and abolition of previous index linkages, as well as the commitment against tax increases, had been adopted originally in order to preserve the realignment of domestic and foreign price relationships resulting from the October 1967 devaluation of the markka. Through 1970 the contribution of the incomes policy agreements toward that objective appeared to have been substantial. Partly because of the moderate size of the contractual wage increases (5 per cent) and partly because of the price controls, Finnish consumer prices rose at a rate of less than 3 per cent during both 1969 and 1970. Wholesale prices rose slightly faster, but unit labor costs in industry remained virtually unchanged in 1970, permitting an improvement in Finland’s external cost competitiveness.

Despite that improvement, merchandise imports, under the impetus of strong domestic demand, rose almost twice as fast as exports in 1970. The resulting increase in the current account deficit, however, was more than offset by a substantial rise in foreign borrowing, induced by the stringency of domestic credit conditions. The inflow of foreign capital and the accompanying increase in official reserves tended, in turn, to undermine the maintenance of the desired degree of restrictiveness of monetary policy. With demand pressures mounting, the third set of Finnish incomes policy agreements, relating to 1971, was accepted only after difficult negotiations and prolonged strikes in the metal and construction industries. Under these agreements, contractual wages are to be increased by some 8 per cent in the current year.

In Yugoslavia real output of nonagricultural goods rose rapidly (by about 9 per cent) in 1970 but personal incomes of industrial employees rose considerably faster, pushing up unit labor costs and prices. The rise in unit costs accelerated from 8 per cent in 1969 to 12 per cent in 1970, and the acceleration of retail price increases was almost equally sharp. Strong domestic demands led to an increase in imports much larger than that in exports, so that there was a sizable rise in the current external deficit despite a large increase in emigrant workers’ remittances. Although the net inflow of capital increased slightly in 1970, the widening of the current account deficit resulted in a drain on both convertible reserves and bilateral balances.

To cope with both the reserve drain and the domestic inflationary pressures, the Yugoslav authorities introduced more restrictive financial policies during the course of 1970. Monetary policy was tightened by increases both in compulsory reserve deposits and in the minimum free liquidity ratio that the banks were obliged to maintain. In addition, the overall rediscount ceiling of the National Bank was lowered and limits were placed on the expansion of short-term credit by the business banks. In the fiscal field, federal turnover taxes were raised in April 1970 and an import surcharge of 5 per cent was imposed in July.

When the foregoing measures proved inadequate, the authorities embarked on a more comprehensive stabilization program. This involved a freeze on all prices, together with tightened administration of the price control system, further shifts toward monetary restraint including another reduction of the rediscount ceiling and a cutback in consumer credit, and the institution of an import deposit scheme. In December 1970 still further measures of monetary and fiscal restraint were announced, along with a limitation of personal income payments in the first four months of 1971. These steps were followed by a 16.7 per cent devaluation of the dinar in January 1971, at which time the import deposit scheme was abolished and the import surcharge reduced to 2 per cent.

The Spanish economy underwent a somewhat analogous period of domestic inflationary pressures and balance of payments weakness during 1969. By the second quarter of 1970, however, the situation was changing markedly. The domestic economy was moving ahead at a more moderate pace, and a remarkable improvement in the balance of payments was in progress. Both these developments stemmed in large part from measures of fiscal and monetary restraint instituted in the second half of 1969 and the early months of 1970. These measures, including a 20 per cent import deposit requirement and increases in interest rates to bring them into better alignment with the high rates prevailing abroad, were instrumental in reversing earlier outflows of short-term capital and in raising the inflow of long-term capital. In combination with sharply rising receipts from tourism and emigrants’ remittances, plus the balance of payments effects of strong foreign demand and good agricultural crops, these shifts in capital flows led to an unprecedented rise in Spain’s official reserves during 1970.

By the spring of 1970, with manufacturers’ order books shortened and capacity utilization falling, Spanish economic policy shifted progressively toward a supportive role rather than a restraining one. Previously frozen budget allocations were released in May 1970, and the rediscount ceilings for the banks were raised in July. Subsequently, with effect from the beginning of 1971, the import deposit requirement was made less stringent (and by midyear it had been phased out), However, part of the liquidity thus released was frozen by the imposition of a new minimum cash reserve requirement for the commercial banks.

Despite the shift toward more expansionary policies, the Spanish economy remained sluggish and the balance of payments position strong at the beginning of 1971. (The cumulative increase in Spain’s net international reserves from the beginning of 1970 through mid-1971 was $1.5 billion.) Although the 1969-70 increase in real GNP had amounted to some 6 per cent, industrial output had increased little after the second quarter of 1970, and some sectors, including the steel and automobile industries, were experiencing serious difficulties. In these circumstances, even though a rapid rate of increase in prices had persisted, raising the January 1971 cost of living index 7 per cent above the January 1970 index, the Spanish authorities announced further measures designed to reactivate the economy. These included a discount rate reduction, removal of restrictions on installment credit imposed in December 1969, and other credit measures intended to stimulate investment and keep interest rates in line with the reduced rates prevailing abroad.

In Turkey also, the external balance on current account improved from 1969 to 1970 primarily because of nontrade receipts. A near doubling of emigrants’ remittances to that country, mostly from Germany, was the main factor tending to produce this result in the face of an increase in the trade deficit. In addition, the overall payments balance was bolstered by capital inflows in the form of official loans arranged in support of the devaluation of the Turkish lira in August 1970.

Prior to the devaluation, relatively tight credit conditions and shortages of imports had hampered the expansion of industrial production, and agricultural output had been held down by unfavorable weather. Partly for these reasons, expansion of real GNP in Turkey was slightly smaller for the full year 1970 than for 1969. After the devaluation, there was a marked expansion in domestic liquidity because of the balance of payments surplus and the decline of import deposits. In addition, government expenditures for the fiscal year that began in March 1971 were raised sharply, chiefly to pay salary increases for government employees. Nevertheless, mainly because of non-economic factors, industrial production remained weak through the early months of 1971, and the economy’s response to more stimulative policies had not yet become evident.

The balance of payments structures of the more developed primary producing countries outside Europe do not feature sizable receipts from such nontrade current account sources as tourism or emigrants’ remittances. On the contrary, these countries tend to run substantial deficits on non-trade current account transactions (Chart 22), in considerable part because of the investment income payments arising from their heavy reliance on foreign capital to develop their economies. In 1970 their combined current account deficit deepened because of the sharp rise in imports and trade deficits of South Africa and New Zealand. Although capital inflows into both these countries also increased, their overall payments balances showed negative changes. However, there was a sizable swing from deficit to surplus in the overall balance of Australia, where larger capital inflows were associated with a reduced current account deficit.

For Australia 1970 was the fourth successive year of strong economic growth. Signs that demand was tending to outrun the supply of resources emerged during the year. The labor market was tight throughout the year and the rate of increase in wages was about the same as the rather high rate of 1969. The rate of increase in prices tended to accelerate. However, imports rose only moderately and exports again increased strongly. Capital inflows were significantly higher than in the previous year and the overall balance of payments showed a surplus that was large by historical standards.

Seeking to forestall an acceleration in the rate of price increases, the Australian authorities tightened financial conditions in March and April 1970. They avoided taking steps to alleviate the impact of a large government budget surplus, and a substantial contraction of liquidity occurred. Bank interest rates and government security yields rose quite sharply. Following these developments, the rate of increase in private investment slowed, labor market pressures eased, and the growth in private consumption steadied. The easing in domestic demand pressures did not, however, result in any deceleration of the rise in average earnings, and the rate of increase in prices flattened out only temporarily. By the end of 1970 there were some indications that strong demand pressures were re-emerging. Although monetary policy remained restrictive, public expenditures were rising more rapidly than had been anticipated, and an unusually (and unexpectedly) large National Wage Award in December gave new upward momentum to wages and prices.

Early in 1971, the Government took steps to cut back the rate of increase in public expenditure and suspended the taxation allowance for new investment in manufacturing equipment. The stance of monetary policy remained restrictive. On external account, a large trade surplus was achieved in the first half of 1971 and this, combined with exceptionally large capital inflows, more -than offset the traditional deficit on current invisibles, resulting in a steep rise in official international reserves to the highest levels ever recorded.

South Africa’s overall payments situation, unlike that of Australia, worsened markedly in 1970, chiefly because of a sharp increase in imports resulting from the rapid expansion of domestic demand that began in 1969 and a considerable increase in inventories. Moreover, smaller export crops and depressed prices for some important export commodities led to an absolute decline in export receipts. In 1970 demand expansion far exceeded the 5 per cent growth of gross domestic product. It reflected a revival of private manufacturing investment after three years of decline, as well as sharp increases in private consumption and public investment expenditures. The intensified pressure on resources was manifested not only in the growth of imports but also in shortages of certain types of skilled labor, in the bottlenecks that developed in transportation and some lines of production, and in an accelerated rise in wages and prices.

During 1970 a number of tax and credit measures were taken to restrain the expansion of demand in South Africa, while the operation of the interest rate mechanism was improved to encourage savings and to adjust imbalances in the capital markets. In March 1971 the new budget for the fiscal year 1971/72 was aimed at further restraint of demand. Both direct and indirect taxes were increased and interest rates on new issues of government debt were allowed to rise to relatively high levels. The authorities anticipated that these measures would in due course cool off the economy, thus bringing about a lower level of imports and a better overall balance of payments.

Less Developed Primary Producing Countries

Overall Balance of Payments Developments

The general improvement in the balance of payments position of the less developed countries that had become apparent by 1969 was broadly sustained in 1970. The aggregate of overall balances of countries in this group rose in the latter year to $3.0 billion, including $0.9 billion obtained through allocations of special drawing rights. (See Table 24.) Even aside from the latter element, the collective overall surplus of these countries compared favorably with the $1.5 billion recorded for 1969, and more so with corresponding annual surpluses in the range of $0.7-0.9 billion in each of the three preceding years (Chart 23).

The overall surpluses of recent years have not been uniformly distributed among the less developed countries, but have been disproportionately concentrated among certain major exporters of petroleum, metals, and manufactured products (Chart 24). The three groups of countries primarily associated with each of those classes of exports 32 have together accounted in the past three years for about half of the aggregate surplus 33 for all less developed countries (Table 36). Consequently, their share of total reserve holdings of less developed countries rose to about 36 per cent at the end of 1970, compared with 32 per cent at the end of 1967.

Despite the unevenness of reserve gains in 1970, the combined net overall surplus for less developed countries outside the three groups mentioned—i.e., mainly for countries exporting principally agricultural products—was also high in historical perspective. In absolute terms, it exceeded $1 billion, even apart from some $0.7 billion of SDR allocations, and substantially exceeded the 1968 and 1969 reserve gains for this large group of countries. The 1968-69 figures were themselves well above the annual average for the four preceding years. However, the reserve positions of many individual developing countries remained precarious, and some of the reserve gains reported by others were achieved only through foregoing or postponing expenditures needed to support development.

Part of the increase in the aggregate overall balance of payments surplus of less developed countries in recent years stemmed from a change in their combined trade balance. As shown in Table 23 on the basis of customs returns, their trade deficit dropped from more than $2.5 billion a year in 1967 and 1968 to $1.5 billion in 1969 and then rose only slightly, to $1.7 billion, in 1970. However, because of rising net payments for services, including interest on external debt, the last year was one of somewhat sharper increases in the total current account deficit of the less developed countries as a group.

Both in 1970 and more generally over a longer period since the mid-1960s, the rise in the current account deficit of the less developed countries was more than offset by an increase in the inflow of capital. Some of that inflow came in short-term forms, but the private long-term component is estimated to have risen by some $1½-2 billion from 1966 to 1970, sustaining an advance in the combined total of capital and aid flowing to the less developed countries during a period of only moderate increase in the flow of official loans and grants to those countries.

Within the rather slow-growing overall flow of official capital and aid in recent years, some significant shifts in composition have occurred. One feature, according to data compiled by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development,34 has been a rising trend of loans through multilateral agencies and of bilateral development loans at concessional terms, in contrast to declining annual flows of bilateral grants. In conjunction with the general rise in interest rates through 1969, the increase in the proportion of loans among the financial resources made available to less developed countries raised the cost to them of development financing.

Data on short-term capital flows into or out of less developed countries are highly uncertain and can scarcely be examined except in a mixture of statistical series also including residual errors and omissions in national balance of payments statistics. Among these, of course, unrecorded capital movements represent only one element. To the extent that such movements may have been the dominant element in recent annual changes, the 1969 and 1970 changes in the aggregate of short-term capital movements and unidentified items suggest that flows of funds from (or to) many less developed countries may have been responsive to high short-term yields in international money markets in 1969 and to the overall easing of international credit conditions in 1970.

Regionally, the net inflow of capital and aid into the less developed areas in recent years appears to have been concentrated in the Western Hemisphere and in the Far East and Southeast Asia. The aggregate amount of such resources received by countries in those areas was about three times as high during the period 1969-70 as it had been five years earlier, while capital and aid received by the countries in South Asia, the Middle East, and Africa fluctuated irregularly from year to year and showed no upward trend over the same period. The growth of capital and aid inflows into less developed areas of the Western Hemisphere and Southeast Asia took the form mainly of direct investments and other private long-term capital, but the flows into South Asia and the Middle East consisted chiefly of official capital and aid. For a number of years, both the Middle East and South Asia appear to have been persistent sources of net outflow of short-term capital.

A new factor affecting overall payments balances, reserve holdings, and imports of the less developed countries has been the allocation of special drawing rights. Within the group of less developed countries, almost seven eighths of the 1970 allocation accrued to countries whose main reliance for export earnings is on agricultural products and whose share of the total reserve gain, even inclusive of SDR allocations, was much lower in 1970 than their share of the outstanding stock of reserves. These are also countries whose reserves, on the average, are much lower in relation to imports than those of the less developed countries exporting chiefly petroleum, metals, or manufactures. Consequently, the 1970 SDR allocations proved a timely supplement to the reserves of a group of countries that might otherwise have found it more difficult to maintain their foreign purchases without sacrifice of their reserve positions. This was particularly true of the South Asian countries, whose overall balance of payments surplus in 1970 barely exceeded their receipts of SDR allocations.

External Adjustment and Stabilization Efforts

Underlying the overall payments developments summarized in the preceding paragraphs were wide variations in the experience of individual countries (Tables 37 and 76). These variations stemmed, of course, from differences in such factors as export commodity composition, internal demand and supply conditions, movements of short-term capital, and policy actions.

The elements of the external accounts that contributed most to recent changes in overall payments balances differed considerably from country to country. The improvement of trade and current account balances was an important factor in the overall surpluses of China, the Philippines, Ghana, the Libyan Arab Republic, Argentina, and Peru, either through expansion of exports (China and Ghana), slower growth of imports (Argentina and the Libyan Arab Republic), or a combination of both. In Korea, Iran, the Libyan Arab Republic, and various other countries having large foreign investments in their export sectors, the expansion of exports was accompanied by an increase in the outward payment of investment income earned by foreign companies operating in the country, so that the improvement in the whole current account balance was not as great as that in the trade balance. Instances of a converse character, however, can also be cited. In Chile and Malaysia, for example, deteriorations of trade balances caused by the downturns in copper and rubber export earnings were cushioned to some extent by declines in the outward payment of foreign investment income.

In a number of countries, including Brazil, Indonesia, Mexico, Nigeria, and Tunisia, the overall payments surpluses of 1970 stemmed from capital inflows large enough to offset stationary or even widening current account deficits. Sustained high levels of long-term private investment were important in several, and into some of them there were sizable flows of short-term capital, generally through the commercial banks, in contrast to the small or even negative movements of such capital in 1969. In addition, special factors accounted for enlarged inflows of private capital in a few instances. In Zambia, for example, such inflows in 1970 reflected the repatriation of export proceeds previously retained abroad by the copper companies. In Peru, compulsory repatriation of Peruvian private funds held abroad offset declines in both official foreign borrowing and the use of short-term trade credits.

Among the countries whose overall balances of payments deteriorated in 1970, the widening of current deficits dominated the changes in Pakistan and the United Arab Republic. Reductions in net inflows of capital, however, were important factors in India and Iran.

In a great many of the less developed countries, the occurrence of a payments surplus or deficit tends to generate a large expansion or contraction of domestic liquidity, along with serious problems in managing it, because of the relatively large size of external transactions in relation to domestic output and incomes. Examples of problems arising in this fashion have been furnished in recent years by two African countries—Zambia and the Democratic Republic of Congo.

For Zambia, where the copper industry accounts for about half of the country’s gross domestic product (GDP) and most of its export earnings, the exceptionally high level of world market prices for copper in 1969 and the first five months of 1970, coupled with a sizable increase in domestic production, resulted in a rapid expansion of total output and export earnings. The resultant increase in domestic demand exerted considerable pressure on wages and prices, but the Government followed a restrictive budgetary policy, as well as policies of restraint with respect to wages and credit, in order to contain the growth of domestic demand. This containment contributed to the maintenance of a large surplus in the balance of payments, which was reinforced in the first half of 1970 by repatriation of liquid balances held abroad by the mining companies. Throughout the period of substantial external surplus, however, the authorities aimed at counteracting some of the expansionary effects of that surplus on private liquidity by accumulating large government deposits with the central bank and applying some restrictions on commercial bank credit to the private sector.

During the last seven months of 1970, Zambia’s export earnings were substantially reduced by a sharp decline in copper export prices and a reduction of copper production resulting from the flooding of a major mine in September. Under the impact of the decline in copper export values, budgetary receipts also fell and the Government began to draw down its cash balances. Meanwhile, private sector credit was allowed to continue increasing during the last several months of 1970 at about the rate prevailing in previous months. The external balance remained generally satisfactory as further repatriation of balances held abroad by the mining companies cushioned the decline in export receipts.

A bulge in copper export earnings also had repercussions on financial conditions in the Democratic Republic of Congo. The rise in copper exports in 1969 had led to a 45 per cent increase in budget revenue, permitting the Government’s expenditure to rise by nearly 30 per cent without straining its financial resources. At the beginning of 1970, however, the Government turned to more expansionary financial policies, and credit to the private sector was allowed to expand substantially during the first half of the year. Moreover, the expansion of private sector liquidity was facilitated by the abolition of an import prepayment requirement, resulting in the release of a substantial amount of blocked deposits. Underlying all these actions were expectations that both the balance of payments and fiscal operations would continue to be in surplus. During the second half of 1970, however, the downturn in copper export earnings slowed the growth of budgetary revenue while government expenditures were continuing to increase, and the Government’s net borrowing from the banking system, which had declined during the first half of the year, rose substantially during the second half. The expansion of aggregate demand resulted in a rise of one fourth in import payments and an overall balance of payments deficit for the full year 1970. Consumer prices, however, remained stable through that year, partly because of the higher imports and partly because of rapid expansion in domestic production.

An example of compensatory changes in domestic demand that served to offset an unfavorable change in external markets is found in the economy of Malaysia, which during 1970 adjusted to a substantial decline in world rubber prices. The drop in Malaysia’s rubber export earnings in 1970 was equivalent to about 2.6 per cent of GNP, but a substantial acceleration in government expenditures, together with a revival of private investment (which had been depressed since the political unrest of May 1969), provided an offsetting internal stimulus to the economy.

The increase in the budget deficit that resulted from the rise in government spending was financed partly by nonbank borrowing and partly by sales of government-held foreign assets to the banking system. Total domestic credit expanded sharply in 1970, and imports increased by about one fifth, sharply reducing the overall balance of payments surplus. Its decline was cushioned somewhat, however, by a substantial reduction in outward payments of profits to foreign investors in the rubber plantations. With a continued rise in quasi-money deposits financing much of the credit expansion and with increased imports helping to satisfy demand, consumer prices rose by only about 1 per cent in 1970.

In Thailand slow expansion of total exports was a feature of balance of payments developments in 1970. While the increase in imports was also small, the overall balance of payments deficit rose because of a decline in receipts from U.S. military expenditures in Thailand. Although official reserves remained relatively high through early 1971, the authorities were making efforts to reduce the balance of payments deficit by encouraging exports and moderating the level of imports. Subsidies and tax incentives were among the means used to foster increased production of exportable goods, while increases in customs duties and other taxes were employed in mid-1970 to restrict nonessential imports. In spite of the tax increases, there was a shift toward larger cash deficits in the government budget because of the rise in expenditures on national security and economic development. This shift appeared to pose a threat to the internal and external stability, with rising international reserves, which had helped the Thai economy to maintain a high rate of growth for a number of years through 1969.

In contrast to the diminished external stimulus under which the economies exporting rubber and rice operated in 1970, strong export markets dominated balance of payments developments in the coffee and cocoa exporting countries of the Western Hemisphere and Africa. For several major Latin American countries, the stimulative effects of export expansion were compounded by large capital inflows. These, while contributing to the financing of higher imports and domestic economic development, added complications to the demand management problems confronting the national authorities.

A notable example of such experience is that of Colombia, where real national output rose by about 7 per cent in 1970, as domestic demand was stimulated by the sharp increase in coffee sector incomes. While the increase in coffee exports lent considerable strength to the balance of payments, it was also responsible in part for a sharp slowdown in the growth and diversification of other exports, as rising domestic demand cut into the exportable surplus of products other than coffee.

The Colombian authorities took advantage of the high export earnings to carry out a significant relaxation of the restrictive system applicable to imports, and they continued the policy of frequent adjustments of the exchange rate. The easing of restrictions made possible a 22 per cent increase in imports in 1970. The rise in imports helped to slow the advance in domestic prices during a year of accelerated expansion of aggregate demand, and the short-term foreign borrowing, together with the authorities’ continued success in obtaining a large inflow of long-term development assistance, kept the balance of payments in moderate overall surplus. Domestically, the Colombian authorities were able during most of 1970 to pursue a cautious credit policy, facilitated by the Central Government’s avoidance of net recourse to central bank financing. In the last quarter, however, following an unforeseen downturn in world coffee prices, central bank credit expanded sharply to provide financing for the purchase by the National Coffee Growers’ Federation of a large part of the domestic crop before the minimum support price was realigned with world prices in February 1971.

Brazil’s balance of payments performance was unusually strong in 1969 and 1970, reflecting both rapid expansion of exports and massive inflows of foreign capital. The expansion of exports stemmed not only from the rise in coffee prices, but also from equally marked increases in exports of manufactured goods, partly in response to the application of fiscal incentives. These, featuring exemption of exports from certain indirect taxes and favorable financing for export production, were broadly similar to the export incentives used successfully during the 1960s by several developing countries of the Far East. Improvement of the trade balance was also fostered by the new exchange rate policy noted in Chapter 4.

The strengthening of Brazil’s balance of payments was accompanied by a notable speeding up of growth in real output, which in 1970 was about 9 per cent. Preliminary figures indicate continuation of this strong performance in the first quarter of 1971. However, difficulties on the price front continued to characterize the Brazilian economy. Although inflation had been substantially reduced from about 85 per cent in 1964 to 25 per cent in 1967, subsequent progress was slow, and the first few months of 1971 showed some renewed, though moderate, acceleration of price increases. One obstacle to further slowing of inflation in the past few years was the high degree to which economic decisions and expectations were adjusted to accommodate the current rate of inflation. Periodic adjustments in wages, prices, rents, savings accounts, and credit instruments, as well as in the exchange rate, have apparently made inflation easier to endure but harder to bring down. Wage policy, which once played an important role in Brazil’s fight against inflation, no longer constitutes a strong anti-inflationary force. However, the tight fiscal policy, which for several years carried the main thrust of the stabilization program, was continued in 1970, when the Government’s small budget deficit was not a significant source of inflationary pressure and the overall balance of the public sector was in surplus. Maintenance of that fiscal policy was accompanied during the past two years by a moderate tightening of credit policy, partly through open market operations formally established in 1970 with the use of short-term government securities created especially for that purpose.

As in Brazil, large inflows of official and private capital were a feature of the external accounts of Mexico in recent years. Mexico’s export performance, however, was less favorable. In 1970, with exports declining by 2 per cent and imports rising by 18 per cent, the large increase in capital inflows preserved an overall surplus in the balance of payments. The rise in imports occurred under demand conditions that remained strong despite maintenance of fiscal and monetary restraint. Public spending grew at a slower pace than in 1969, although still substantially faster than total domestic demand; and a tight rein was kept on the central bank’s domestic credit expansion in 1970. However, domestic demands for financing were met partly from external sources, as reflected in the large inflow of private short-term capital, together with an increase in the outstanding balance of external public debt. Domestic costs were boosted by an increase in the minimum wage at the beginning of the year, by the introduction of a new Labor Code in May, and by a spillover via import prices of inflation elsewhere; but no signs of an autonomous wage-push problem emerged. Nevertheless, domestic prices rose at an accelerated rate in 1970, so that the year’s increase in the GDP deflator (5½ per cent) was the largest recorded for a number of years.

In Argentina, after two years of rapid economic growth accompanied by relative price stability, economic activity during 1970 decelerated progressively, while the rate of inflation increased. Further price increases in the first quarter of 1971 brought the rise in consumer prices for the 12 months ended in March to about 30 per cent, compared with less than 7 per cent during the calendar year 1969.

Two major factors in the deterioration of the economic situation were the development of a crisis in the beef sector and the political and social instability reflected in recurring labor disturbances and frequent changes in the administration. Sharp increases in the price of beef early in 1970, in response to strong foreign demand, were followed late that year and in the first quarter of 1971 by a fall in beef exports. Meanwhile, the beef price rise had contributed both directly and through secondary effects on prices of competing foodstuffs to the rise in the cost of living. The social unrest contributed to a marked decline in business confidence and a slowdown in private investment during 1970. By late that year, the upsurge of inflation and labor disturbances had led to a loosening of wage policies and a renewal of cost pressures.

Through the first half of 1970, the major emphasis of economic policy had continued to be placed on financial stability. Later, however, as signs of an economic downturn emerged, policies shifted increasingly toward stimulation of lagging output. Monetary policies were progressively eased in the second half, after having been very tight in the first half, and business enterprises, particularly foreign companies, were encouraged to bring in capital from abroad, both through the provision of exchange guarantees by the central bank and by means of special restrictions on domestic borrowing.

The external accounts of Argentina, which had strengthened in early 1970, remained strong until the final quarter of the year. This reflected an improved current account and the large inflow of short-term capital induced during the first three quarters by tight monetary policies and a 12½ per cent depreciation of the peso in June. However, as economic and political uncertainties intensified in the first quarter of 1971, the balance of payments position deteriorated under the influence of low beef and grain shipments and a swing toward outflows of capital. In April the Government introduced, with an initial depreciation of 1 per cent, a new system of small periodic exchange rate adjustments. By the end of June, the cumulative total of four changes under this system amounted to about 9 per cent.

In a number of countries, the external accounts have recently been burdened by large foreign debts accumulated in the past. In such countries the expansion of effective import demand is often heavily conditioned by the scheduling of debt repayments, as well as by the growth of export earnings and the inflow of capital and aid. The capital inflow itself, of course, sometimes depends in considerable part on foreign investors’ views regarding the management of outstanding debt. In several of the less developed countries, successful efforts to restructure external debt obligations were important factors in the balance of payments developments of 1970. Some of these efforts—e.g., by Indonesia and Ghana—involved formal multilateral agreements with official creditors abroad, while others, such as those of the Philippines, were less formalized. The rearrangements of debt burdens were generally accompanied by extensive stabilization programs designed to avoid recurrence of earlier difficulties in meeting repayment obligations.

In the Philippines, where interest payments on foreign debt amounted to almost $100 million in 1970, the burden of servicing such debt was exerting considerable pressure on the country’s reserve position. Late in the year, however, a substantial amount of official short-term and medium-term liabilities was converted into longer-term debt. While the conversion did not greatly lighten the burden of debt payments for 1971, it did prevent that burden from becoming more acute.

The Philippine balance of payments, after two years of deficits, swung into overall surplus in 1970. This turnaround reflected a number of favorable factors, including the adoption of a comprehensive stabilization program in February 1970. In conjunction with that program, a fluctuating exchange rate for the Philippine peso was established, and the substantial depreciation of the peso that quickly occurred (from 3.9 pesos = US$1 to 6 pesos = US$1 within a week) was a significant influence in curbing the demand for imports. The lessening of demand for imports also stemmed in part from a marked slowdown in monetary expansion, which was greatly facilitated by a sharp improvement in the Government’s fiscal position. A new export tax system was introduced and customs tariff rates were increased, while the rise in government spending was limited. The restraint of domestic demand resulted in a slowdown of economic growth to about 4½ per cent in 1970, compared with more than 6 per cent in 1969, and consumer prices rose sharply (25 per cent from February 1970 to February 1971) under the influence of both the depreciation of the currency and the severe typhoon damage in November 1970. The authorities, however, expect a tapering off of the price rise during 1971, along with an early recovery of the growth rate and its restoration to a level above 6 per cent in due course.

For Indonesia the conclusion of agreements on the long-term repayment of external debts incurred prior to July 1966 was an important feature of economic and financial developments during 1970. Such agreements—reached with Western creditor nations and Japan in April and with the U.S. S. R. in August—helped to secure an increase in receipts of official loans and grants, which rose from $315 million in 1969 to more than $400 million in 1971. Thanks to this large inflow and to the allocation of special drawing rights, a small overall surplus in the balance of payments was achieved in 1970. Reserves, however, remained quite low in relation to imports.

The achievement of a satisfactory balance of payments position, as well as the considerable progress recorded in many important sectors of the domestic economy during 1970, attest to the continuation of a generally successful implementation of the Government’s stabilization program. A reform of the exchange and trade system in April 1970 seems to have been instrumental in promoting stability of the exchange rate and rapid growth of exports, and both fiscal and monetary policies were directed toward fostering better resource utilization and facilitating the growth of priority sectors without jeopardizing the degree of relative price stability attained in the previous year or placing undue pressures on the balance of payments. The marked reduction in the price rise (to an annual rate of about 10 per cent, as measured by the Djakarta consumer price index) enabled the authorities to shift the focus of policy increasingly to the development effort. A balanced overall budgetary position permitted a considerable proportion of local development expenditures to be financed from the surplus in the routine budget, and the combination of high interest rates on time deposits with increased public confidence in the rupiah induced a large increase in the volume of domestic saving. This permitted a sharp expansion of total bank credit, important to the rapid growth of the modern sector of the economy, without inflationary repercussions.

A new agreement between Ghana and its major creditors in mid-1970 resulted in an easing of that country’s external debt burden through partial postponement of amounts due. For several previous years, the large foreign indebtedness accumulated during the early 1960s had constituted a serious problem in the management of Ghana’s finances. Other economic problems of the years prior to 1970 included a slow rate of growth, budget deficits, price inflation, persistent balance of payments deficits, and shortages of essential supplies of both consumer goods and capital goods. In 1970, however, the Government introduced a number of major policy changes with a view to accelerating growth and curbing inflation. Apart from the external debt relief, these measures included (1) a liberalization of the import regime in March, through which the scope of open general licenses was expanded to cover some three fifths of imports; (2) the imposition of substantial import surcharges on more than half of total imports; (3) restraint on the growth of the Government’s current expenditures, coupled with a sharp increase in its development outlays; (4) the initiation of an investment reserve fund into which part of the receipts from cocoa tax revenue, temporarily swollen as a result of the unusually high world prices for cocoa in late 1969, were to be deposited to insulate the fiscal position against possible shortfalls of such tax receipts in years of relatively low prices for cocoa; and (5) an increase, early in 1970, in the minimum cash ratio of the commercial banks, together with the setting of restrictive ceilings on expansion of bank credit to the private sector, and especially to nonpriority enterprises within it.

In the South Asian region, 1970 was a year of deteriorating balance of payments positions for India and Pakistan and of substantially reduced domestic economic expansion for Pakistan and Ceylon. In India the growth of national output was sustained in 1970 at a rate of about 5 per cent, considerably above the long-term average for that country (Table 38). The principal expansionary thrust behind this growth continued to come from the agricultural sector, which was given preferential treatment, along with small-scale industries, exporters, and certain cooperative credit societies, by new guidelines for allocation of bank credit that became fully operative during 1970. More generally, monetary policy shifted in the direction of restraint in 1970 after more than two years of selective liberalization of credit aimed chiefly at assisting industrial expansion. The more restrictive policy, inspired by growing concern with inflation, was continued throughout 1970 and into 1971 by such means as raising the bank rate and instituting successive increases in the minimum net liquidity ratio governing the structure of penal interest rates on borrowings from the central bank by commercial banks in excess of their eligibility for accommodation at the bank rate. On the external side, India’s balance of payments surplus declined somewhat in 1970 after a bulge arising chiefly from reduced need for imports of foodgrains. The 1970 decline in India’s overall surplus stemmed partly from a fall in the net inflow of capital and aid and partly from a deterioration in the current account.

In Pakistan a sharp deterioration of the economic situation marked the year 1970, particularly its second half. Economic activity slowed down in the latter period, while the budget deficit and expansion of credit to the private sector increased considerably. There were appreciable advances in wages and probably also in prices, although the available price indices do not fully reflect the upward movement believed to have occurred. A large balance of payments deficit was registered, and import restrictions were intensified in an effort to deal with it. This unfavorable combination of developments was due in part to the extensive physical destruction wrought in East Pakistan by a series of natural disasters culminating in the November tidal wave and flood. Other” contributory causes included rising pressure on the Government to accelerate social welfare expenditures, as well as political uncertainties and capital flight.

The expansion of economic activity also slowed down in Ceylon in 1970, reflecting uncertainties with respect to the future course of government policy regarding private industries, as well as supply problems posed by reimposition of severe import restrictions aimed at arresting the previous year’s deterioration of the external balance on current account. Partly because of the import restrictions and partly because of a temporary recovery in the prices received for tea in world markets, Ceylon’s overall balance of payments swung into surplus in 1970. However, the year was one of unusual turbulence as far as fiscal and monetary developments were concerned. The budget deficit requiring bank financing in the fiscal year ended September 30, 1970 was the largest on record, as government expenditures were permitted to exceed the budgeted amounts despite shortfalls of actual receipts below those expected from both domestic resources and foreign assistance. Reflecting the expansionary pressure emanating from these fiscal developments, the money supply rose at an exceptionally rapid rate in the first three quarters of 1970. In the last quarter of the year, however, the money supply declined sharply as a result of an unusual operation conducted by the authorities in connection with the substitution of new currency notes for outstanding notes of certain high denominations. This operation involved compulsory retention in special deposits, pending tax clearance for the depositors, of cash balances arising from presentation of the old notes in exchange for the new ones. It was the most drastic of several resource mobilization measures introduced with the Government’s budget for the fiscal year 1970/71.

A different form of compulsory mobilization of financial resources took place in Peru, where residents were required by a decree-law enacted in May 1970 to repatriate deposits held with foreign banks and to surrender all foreign currency assets held domestically. The forced repatriation resulting from this action brought a small increase in the total net capital inflow, despite declines in official foreign borrowing and in short-term trade credits from abroad. Together with a large increase in export earnings and a depressed level of imports, this development resulted in a sizable overall surplus in Peru’s balance of payments. The favorable current account balance and the forced repatriation of short-term assets were also reflected in a sharp rise in private savings held domestically, both through the banking system and outside it. This considerably facilitated fiscal and monetary management, permitting the Government to finance a substantial increase in its investment expenditures through placement of treasury bonds with private nonbank lenders while the banks were using their increased depository resources to expand credit to the private sector. The existence of substantial excess capacity and unemployed labor facilitated the maintenance of relative price stability (with the cost of living index rising about 5 per cent), despite the Government’s additional expenditures.

Strenuous actions to transfer resources to the public sector and to enlarge its scope were taken by the Government of Uganda. Its actions, initiated in May 1970, followed somewhat similar moves during recent years by other East African countries, including Tanzania and Zambia. The measures adopted in Uganda included nationalization of all export and import trade, acquisition of majority public participation in a large number of private companies, both foreign-owned and domestic, and extension of exchange controls (on capital transactions) to cover transactions with Kenya and Tanzania, Uganda’s partners in the East African Community. The uncertainties resulting from the nationalization measures had the effect of reducing capital inflows and stimulating capital flight. However, another effect was curtailment of imports as traders ran down their stocks. In addition, a large increase in the value of exports, plus receipt of the initial allocation of special drawing rights, helped to produce a small overall payments surplus in 1970. The central bank endeavored to moderate the rate of increase in domestic credit during the year, and expansion of credit to the private sector was virtually halted through the influence of the nationalization measures. Nevertheless, total domestic credit expansion considerably exceeded the average for several preceding years because of the rise in the Government’s borrowing associated with its development expenditures.

Several less developed countries were seriously affected in recent years by military activities or national defense preparations. Two notable examples (outside Southeast Asia) are Nigeria and the United Arab Republic. In Nigeria, the formal ending of a 30-month civil war in January 1970 left the authorities confronted with great tasks of reconstruction. Among the critical problems faced were the need for restoration of facilities damaged by the war, high unemployment, especially in urban areas, inflationary pressures caused by disruption of normal production and deficit financing of government expenditures during the period of active hostilities, and a deteriorating foreign exchange position featuring relatively low official reserves and large arrears in current payments. These problems were attacked under a four-year national development plan inaugurated in 1970. In the application of coordinated fiscal, monetary, and balance of payments policies within the framework of that plan, the authorities were greatly assisted by the rapid resumption of oil production and a 40 per cent rise in export earnings in 1970, chiefly through oil exports. Together with a substantial increase in capital inflows, these permitted an increase of some 50 per cent in imports, which helped to relieve shortages and dampen the rise in prices after the middle of 1970.

The sharp rise in imports, which followed relaxation of severe trade and exchange controls, also boosted the Nigerian Government’s receipts from tariffs and excise taxes, thus contributing importantly to improvement of the fiscal position in the 1970/71 budgetary year. Further liberalization of import and exchange controls took place in April 1971. Despite the steep rise in imports in 1970, the balance of payments remained in overall surplus. Indeed, the surplus was much larger in that year than in 1969. Total domestic credit increased by nearly 40 per cent during 1970, with the increase evenly divided between the government and the private sectors. The money supply expanded by more than 40 per cent during the year, but part of this rise served the essential purpose of remonetizing the formerly rebel-held areas.

In recent years, the authorities of the United Arab Republic undertook the difficult tasks of developing and stabilizing the economy while devoting a substantial part of the national budget to military expenditures. During most of this period, the economy was characterized by a relatively slow tempo of domestic productive activity, a low rate of investment, and a weak external position except in one year of particularly high cotton production and exportation. In general, balance of payments difficulties constituted a severe constraint on development, and official aid, including that from the Arab oil-exporting countries, played an important role in financing the persistently large current account deficit. At the beginning of the fiscal year 1970/71 (ended June 30), foreign obligations in the form of medium-term and long-term loans and suppliers’ credits amounted to some $2 billion, and the authorities were also confronted with liabilities under bilateral payments arrangements and military credits, in addition to their outstanding use of Fund credit. Altogether, debt repayments scheduled for the fiscal year 1970/71 were equivalent to more than one third of estimated export earnings.

For several years through 1969, the United Arab Republic pursued basically noninflationary monetary policies. Toward the end of fiscal 1969/70, however, a temporary increase in defense spending raised the Government’s recourse to the banking system, and with it the overall rate of credit expansion. This development extended into the first few months of the fiscal year 1970/71, but recently was succeeded by a slower monetary expansion. Measures aimed directly at improving the balance of payments situation have included a number of subsidies on nontraditional export commodities, as well as a more recent allowance of a uniform exchange premium on exports sold for convertible currencies.

A Middle Eastern economy presenting a sharp contrast with that of the United Arab Republic in recent years is that of Iran. The growth of the Iranian economy has been rapid, averaging 9 to 10 per cent per annum in real terms for several years through 1969 and apparently continuing at a similar rate in the fiscal year ended in March 1971. This high rate was sustained by rapidly increasing oil production and revenue. However, it was accompanied by a sharp rise in bank credit to both the private and the public sectors, and increasing inflationary pressures became apparent during 1970. These were reflected mainly in the re-emergence of a sizable overall balance of payments deficit (after a small surplus in 1969) and in a sharp rise in the external debt burden. The rate of increase in prices remained moderate, as a considerable part of the rising demand pressure was absorbed by the large increase in imports. Because of the sharp rise in oil earnings taking place under the new oil agreements of November 1970 and February 1971, the prospects for an Iranian balance of payments surplus in the current year seem unusually good.

Table 24.Balance of Payments Summary, 1968-70 1(In billions of U.S. dollars)
Current Balance 2Capital Balance 3Overall Balance 4
196819691970196819691970196819691970 5
Industrial countries8.88.410.2-11.5-8.1-6.0-2.70.36.5
Primary producing countries-8.8-9.0-11.311.210.614.32.41.64.2
More developed areas
European countries-0.8-1.1-1.11.51.42.00.70.31.1
Australia, New Zealand, and South Africa-1.1-1.1-1.81.80.91.80.8-0.20.1
Total, more developed areas-1.8-2.2-2.93.32.33.81.50.11.2
Less developed areas
Western Hemisphere-2.4-2.4-2.82.83.03.80.40.61.3
Middle East-0.9-1.3-1.41.01.01.40.1-0.30.1
Asia-3.2-3.1-3.83.33.74.10.10.70.6
Africa-0.5-0.40.80.61.30.30.61.1
Total, less developed areas-7.0-6.8-8.47.98.310.50.91.53.0
Excess of surpluses--0.6-1.1-0.32.58.3-0.31.910.7
Change in monetary gold-0.70.10.3
SDR allocations3.4
Asymmetries and errors 60.41.87.0
Sources: Data reported to the International Monetary Fund and staff estimates.

For balance of payments details, see Supplementary Note B.

Balances on goods, services, and private transfers; unrequited government transfers are included in the capital account.

This balance is computed residually, as the difference between the overall balance (less SDR allocations) and the current balance; it includes unrequited official transfers and net errors and omissions, as well as recorded capital movements.

Overall balances are measured here by changes in official gold holdings, in SDRs, in reserve positions in the Fund, in foreign exchange assets, in use of Fund credit, and, where data are available, in liabilities to foreign monetary authorities, including those arising from “swap” transactions. Advance debt repayments by governments are also treated as a financing item.

Includes SDR allocations totaling $3.4 billion, which are not included in the components. Allocations, by groupings, were as follows: industrial countries, $2.3 billion; more developed primary producing countries, $0.3 billion; and less developed countries, $0.9 billion.

Includes official reserves held in the Euro-currency market; see footnote 1, page 82.

Sources: Data reported to the International Monetary Fund and staff estimates.

For balance of payments details, see Supplementary Note B.

Balances on goods, services, and private transfers; unrequited government transfers are included in the capital account.

This balance is computed residually, as the difference between the overall balance (less SDR allocations) and the current balance; it includes unrequited official transfers and net errors and omissions, as well as recorded capital movements.

Overall balances are measured here by changes in official gold holdings, in SDRs, in reserve positions in the Fund, in foreign exchange assets, in use of Fund credit, and, where data are available, in liabilities to foreign monetary authorities, including those arising from “swap” transactions. Advance debt repayments by governments are also treated as a financing item.

Includes SDR allocations totaling $3.4 billion, which are not included in the components. Allocations, by groupings, were as follows: industrial countries, $2.3 billion; more developed primary producing countries, $0.3 billion; and less developed countries, $0.9 billion.

Includes official reserves held in the Euro-currency market; see footnote 1, page 82.

Table 25.Industrial Countries: Balance of Payments Summaries, 1968-70 1(In billions of U.S. dollars)
Current BalanceCapital BalanceOverall Balance
196819691970196819691970196819691970 2
Belgium-Luxembourg0.10.20.9-0.5-0.5-0.40.20.5
France-0.8-1.5-2.90.41.9-3.7-1.12.0
Germany3.82.71.7-2.1-5.74.31.7-2.96.2
Italy2.92.61.3-3.0-3.2-1.0-0.1-0.60.4
Netherlands0.1-0.5-0.30.11.1-0.20.10.7
Total, EEC countries6.14.13.3-8.8-8.45.9-2.7-4.49.8
Austria-0.10.10.1-0.10.20.2
Denmark-0.2-0.4-0.50.10.40.6-0.1
Norway0.20.2-0.1-0.1-0.20.20.1
Sweden-0.1-0.20.3-0.10.1
Switzerland0.60.60.1-0.2-0.40.60.40.10.7
Total, other continental
European countries0.40.3-0.8-0.1-0.31.80.31.1
Total, continental
European countries6.54.52.4-8.8-8.77.8-2.4-4.410.8
United Kingdom-0.31.51.9-2.6-0.50.7-3.01.03.0
Japan1.22.32.1-0.3-1.5-1.20.90.81.1
Canada-0.61.40.30.60.30.11.6
United States1.40.82.32.1 --13.31.42.9-10.1
Total, all industrial
countries8.88.410.2-11.5-8.1-6.0-2.70.36.5
Sources: Data reported to the International Monetary Fund and staff estimates.

The classification of items differs in some instances from that used in national publications and other sources. For definitions of “current,” “capital,” and “overall” balances, see notes to Table 24. Detailed balance of payments statements are given in Supplementary Note B.

Includes SDR allocations totaling $2,276 million, which are not included in the components. Allocations, by country, were as follows: Belgium-Luxembourg, $74 million; France, $166 million; Germany, $202 million; Italy, $105 million; Netherlands, $87 million; Austria, $29 million; Denmark, $27 million; Norway, $25 million; Sweden, $38 million; United Kingdom, $410 million; Japan, $122 million; Canada, $124 million; and United States, $867 million.

Sources: Data reported to the International Monetary Fund and staff estimates.

The classification of items differs in some instances from that used in national publications and other sources. For definitions of “current,” “capital,” and “overall” balances, see notes to Table 24. Detailed balance of payments statements are given in Supplementary Note B.

Includes SDR allocations totaling $2,276 million, which are not included in the components. Allocations, by country, were as follows: Belgium-Luxembourg, $74 million; France, $166 million; Germany, $202 million; Italy, $105 million; Netherlands, $87 million; Austria, $29 million; Denmark, $27 million; Norway, $25 million; Sweden, $38 million; United Kingdom, $410 million; Japan, $122 million; Canada, $124 million; and United States, $867 million.

Table 26.Industrial Countries: Private Short-Term Capital Flows (Including Errors and Omissions), 1968-First Quarter 1971(In billions of U.S. dollars)
196919701971
FourthFirstSecondThirdFourthFirst
196819691970QuarterQuarterQuarterQuarterQuarterQuarter
France-1.60.71.40.40.10.50.4
of which
Commercial banks-0.60.50.5-0.10.2-0.30.30.4
Germany 11.91.56.5-2.81.21.72.21.52.1
of which
Commercial banks0.61.22.21.20.40.30.31.1-1.2
Italy-2.4-1.9-1.0-0.2-0.2-0.3-0.60.10.2
of which
Commercial banks-0.70.70.2-0.1-0.20.30.3
Banknotes-1.1-2.3-1.0-0.6-0.4-0.2-0.1-0.1-0.2
Switzerland0.60.81.2
of which
Commercial banks-0.7-0.1-0.5
Other continental Europe-0.60.20.70.5-0.20.30.10.3
of which
Commercial banks-0.50.10.3-0.2-0.1-0.10.4
United Kingdom 2-2.01.70.71.3-0.1-0.30.91.4
of which
Commercial banks-0.9-0.71.50.10.70.3-0.20.7
Japan0.1-1.20.6-0.20.70.1-0.40.30.5
of which
Commercial banks-0.2-1.5-0.4-0.30.3-0.80.10.2
Canada-1.1-1.3-0.6-0.2-0.30.5-0.4-0.4-0.4
of which
Commercial banks-0.4-0.50.10.20.2-0.2-0.30.7
United States3.05.6-8.4-0.7-1.6-1.6-1.0-4.2-4.3
of which
Commercial banks3.77.8-7.3-1.0-1.4-0.7-0.9-4.2-2.7
Total-2.24.22.4
of which
Commercial banks0.47.4-4.4
Sources: International Monetary Fund, Balance of Payments Yearbook, and staff estimates; Bank of England, Quarterly Bulletin; and U.S. Department of Commerce, Survey of Current Business.

Includes some official short-term capital flows.

Includes exchange adjustments for 1968.

Sources: International Monetary Fund, Balance of Payments Yearbook, and staff estimates; Bank of England, Quarterly Bulletin; and U.S. Department of Commerce, Survey of Current Business.

Includes some official short-term capital flows.

Includes exchange adjustments for 1968.

Table 27.Industrial Countries: Balances on Long-Term Capital Account, 1968-70(In billions of U.S. dollars)
PrivateOfficial1Total
196819691970196819691970196819691970
Belgium-Luxembourg-0.10.3-0.3-0.2-0.2-0.2-0.30.1-0.5
France-0.80.30.9-0.5-0.5-0.4-1.3-0.20.5
Germany-2.5-5.5-0.5-1.4-1.7-1.7-4.0-7.1-2.2
Italy-0.1-1.0-0.2-0.5-0.30.2-0.6-1.3
Netherlands-0.10.6-0.1-0.20.6
Total, EEC countries-3.7-5.80.4-2.7-2.7-2.0-6.3-8.5-1.6
Austria0.10.20.2
Denmark0.10.20.40.10.10.10.20.5
Norway-0.10.1-0.1-0.1-0.20.1
Sweden0.10.2-0.1-0.2-0.1-0.10.1
Switzerland-0.8-1.2-0;5-0.1-0.8-1.2-0.6
Total, other continental
European countries-0.5-1.20.10.1-0.2-0.2-0.4-1.4
Total, continental
European countries-4.1-7.00.6-2.6-2.9-2.2-6.7-9.9-1.6
United Kingdom-0.30.2-0.1-0.4-0.7-0.9-0.7-0.5-1.0
Japan-0.10.3-0.8-0.3-0.6-1.0-0.4-0.3-1.8
Canada1.52.11.0-0.1-0.2-0.41.42.00.6
United States1.20.6-1.4-4.2-4.0-3.5-3.0-3.4-4.9
Total, all industrial
countries-1.9-3.8-0.7-7.5-8.3-7.9-9.3-12.1-8.7
Sources: Data reported to the International Monetary Fund and staff estimates.

Includes aid and other central government transfers.

Sources: Data reported to the International Monetary Fund and staff estimates.

Includes aid and other central government transfers.

Table 28.Industrial Countries: Basic Balances, 1968-70 1(In billions of U.S. dollars)
196819691970
Belgium-Luxembourg-0.10.30.4
France-2.1-1.60.5
Germany-0.2-4.4-0.6
Italy2.31.41.3
Netherlands-0.10.1
Total, EEC countries-0.2-4.41.7
Austria0.10.1
Denmark-0.1-0.2-0.1
Norway0.2-0.1
Sweden-0.2-0.2
Switzerland-0.2-0.7-0.6
Total, other continental European countries-1.0-0.9
Total, continental European countries-0.2-5.40.8
United Kingdom 2-1.01.00.9
Japan0.82.00.4
Canada1.41.42.0
United States-1.6-2.7-2.6
Total, all industrial countries-0.6-3.71.5
Source: Data reported to the International Monetary Fund.

The basic balance as shown here is the sum of the current balance (Table 25) and long-term capital flows (Table 27).

Includes exchange adjustments for 1968.

Source: Data reported to the International Monetary Fund.

The basic balance as shown here is the sum of the current balance (Table 25) and long-term capital flows (Table 27).

Includes exchange adjustments for 1968.

Table 29.Selected Industrial Countries: Short-Term Interest Rate Differentials, 1969-March 1971(Domestic rate less corresponding Euro-dollar rate, in per cent per annum)
Uncovered Differentials (Mean)1
196919701971
First halfSecond halfFirst halfSecond halfJanuary-March
Belgium-2.83-2.45-0.75-0.10+0.95
Canada-2.23-3.07-2.17-2.71-1.67 2
Denmark-0.18+0.02+1.62+2.94+4.60
France-1.60-1.09+0.60+0.83+1.11
Germany-4.51-3.56+0.32+1.14+1.89
Italy-2.32-3.00-0.24+2.29+2.09
Japan-1.64-1.44-0.85+0.31+1.73
Netherlands-4.62-4.06-2.11-1.03-1.22
United Kingdom-0.18-1.37-0.52-0.42+1.05 2
Sources: International Financial Statistics and national statistics. Belgium, four-month Fonds des Rentes certificates; Canada, three-month treasury bill rate; Denmark, commercial bank lending rates; France, call money rate; Germany, three-month interbank deposit rate; Italy, commercial bank lending rates; Japan, call money rate; Netherlands, call money rate; United Kingdom, three-month local authority deposit rate.

Positive sign indicates a domestic rate higher, on average, than the corresponding Euro-dollar rate, while negative sign indicates the reverse.

January-April.

Sources: International Financial Statistics and national statistics. Belgium, four-month Fonds des Rentes certificates; Canada, three-month treasury bill rate; Denmark, commercial bank lending rates; France, call money rate; Germany, three-month interbank deposit rate; Italy, commercial bank lending rates; Japan, call money rate; Netherlands, call money rate; United Kingdom, three-month local authority deposit rate.

Positive sign indicates a domestic rate higher, on average, than the corresponding Euro-dollar rate, while negative sign indicates the reverse.

January-April.

Table 30.Geographic Breakdown of External Liabilities and Claims, Denominated in Non-Sterling Currencies, of Banks in the United Kingdom, 1967-70(In billions of U.S. dollars; end of year)
LiabilitiesAssetsNet Position

(Liability -)
Change in Net Position

During Year1
196719681969197019671968196919701967196819691970196819691970
Western Europe
Austria0.380.340.340.580.160.220.180.27-0.22-0.12-0.16-0.310.10-0.04-0.15
Belgium-Luxemb ourg0.340.731.401.430.340.491.021.53-0.24-0.380.10-0.24-0.140.48
France0.741.061.771.920.330.581.351.84-0.41-0.48-0.42-0.08-0.070.060.34
Germany0.640.810.971.650.520.961.553.87-0.120.150.582.220.270.431.64
Italy0.771.592.373.190.460.691.482.91-0.31-0.90-0.89-0.28-0.590.010.61
Netherlands0.270.521.241.770.310.360.491.010.04-0.16-0.75-0.76-0.20-0.59-0.01
Switzerland (including BIS)1.983.176.298.420.390.691.081.35-1.59-2.48-5.21-7.07-0.89-2.73-1.86
Other0.671.191.722.750.981.191.422.270.31-0.30-0.48-0.31-0.30-0.18
Subtotal5.799.4116.1021.713.495.188.5715.05-2.30-4.23-7.53-6.66-1.93-3.300.87
United States1.412.693.053.084.107.3413.489.962.694.6510.436.881.965.78-3.55
Canada0.781.212.613.040.350.480.640.90-0.43-0.73-1.97-2.14-0.30-1.24-0.17
Japan0.040.060.300.411.081.671.622.451.041.611.322.040.57-0.290.72
Latin America0.480.661.381.760.420.821.482.16-0.060.160.100.400.22-0.060.30
Middle East0.550.560.691.100.210.300.310.51-0.34-0.26-0.38-0.590.08-0.12-0.21
Overseas sterling area0.731.302.523.080.230.431.332.26-0.50-0.87-1.19-0.82-0.37-0.320.37
Other20.741.222.142.190.610.841.381.97-0.13-0.38-0.76-0.22-0.25-0.380.54
Total10.5217.1128.7936.3710.4917.0628.8135.26-0.03-0.050.02-1.11-0.020.07-1.13
of which
U.S. dollars9.6915.3625.7531.419.2114.9825.2329.25-0.48-0.38-0.52-2.160.10-0.14-1.64
Other non-sterling (Euro
currencies)0.831.753.044.961.282.083.586.010.450.330.541.05-0.120.210.51
Source: Bank of England, Quarterly Bulletin.

From the standpoint of countries or areas listed in the stubs, positive sign indicates net inflow from U.K. banks, while negative sign indicates outflow to them. For the United Kingdom, the signs have the opposite meanings.

Other non-sterling countries, nonterritorial organizations, and unallocated.

Source: Bank of England, Quarterly Bulletin.

From the standpoint of countries or areas listed in the stubs, positive sign indicates net inflow from U.K. banks, while negative sign indicates outflow to them. For the United Kingdom, the signs have the opposite meanings.

Other non-sterling countries, nonterritorial organizations, and unallocated.

Table 31.Selected Liabilities of Large U.S. Banks, December 1968-June 1971(In millions of U.S. dollars)
YearsLarge Negotiable

Time Certificates

of Deposit
Liabilities

to Foreign

Branches
Bank-Related

Commercial

Paper
1968
December 2523,4746,948
1969
December 3110,91912,8224,298
1970
January 2810,46913,6235,528
February 2510,86413,0866,052
March 2511,82011,8856,518
April 2913,04612,4896,627
May 2713,00313,0367,550
June 2413,01912,7017,553
July 2917,90110,8967,770
August 2620,17410,7337,257
September 3022,2409,7874,586
October 2823,5619,4393,671
November 2525,2268,5853,127
December 3026,0757,6692,349
1971
January 2727,1906,5372,030
February 2427,4895,6671,901
March 3127,5232,8581,692
April 2827,2192,1581,794
May 2628,1371,5721,735
June 3028,5101,5481,733
Source: U.S. Federal Reserve Board, Federal Reserve Bulletin.
Source: U.S. Federal Reserve Board, Federal Reserve Bulletin.
Table 32.New Issues of International Bonds in North America and Europe, 1963-First Half 1971 1(In millions of U.S. dollars)
1971 2
Borrower19631964196519661967196819691970First half
Issued in the United States1,3921,3101,6891,6542,1702,0141,3361,293809
Canada7918501,0641,2391,3441,2591,091795277
Other developed countries53610120336426010
Less developed countries6520822220427422523519882
International institutions150200175510470300450
Issued in Canada43037171
Total issued in North America1.3921,3141,7191,6922,1702,0311,3371,293809
Issued in Europe
Developed countries4778311,0771,3321,8864,2743,7593,4092,490
EEC1871902502804074319351,138583
Belgium-Luxembourg54826852743119019
France33204227157124186267225
Germany4937337958922912764
Italy405080607384119433136
Netherlands116286244184210292158
United Kingdom1615485214149284258266
Scandinavian countries7532221093210246238300283
Canada1648633517877
Japan591993517926112070
Other developed countries11885168215456316429308481
Europe29433510719013821992198
Australia, New Zealand, and
South Africa9042133109266178210217283
U.S. companies93416295982,4331,2571,092687
Multinational corporations 31322246212534201543
Less developed countries24161574173307154144
International institutions1734344286586191,1179701.178707
International development institutions100223312372345908 4865962 5462 6
Multilateral European institutions72210116285274209105216245
Total issued in Europe6751,2801,5192,0642,6785,6984,8834,7313,197
of which
Foreign bonds2696006406275391,7631,6011,011
Euro-bonds4056808791,4362,1383,9353,2723,720
Grand Total2,0672,5943,2383,7554,8487.7296,2206,0244,006
Source: International Bank for Reconstruction and Development.

Includes issues both publicly offered and privately placed.

Preliminary.

Includes the following corporations: Acieries Réunies de Burbach-Eich-Dudelange, Ameribas Holding S.A., BEC Finance N.V., N.V. Rotterdam-Rijn Pijpleiding, Shell Finance Company N.V., Shell International Finance N.V., Société Financière Européene, and Transalpine Finance Holdings.

Includes the following issues by the IBRD: one issue of KD 15.0 million publicly offered in Kuwait and two issues totaling $30.0 million privately placed in Saudi Arabia.

Includes the following issues: one issue of LL 10.0 million privately placed in the Libyan Arab Republic by the IBRD, one issue of ¥ 6.0 billion publicly offered in Japan by the Asian Development Bank, and two issues totaling ¥ 72.0 billion privately placed in Japan by the IBRD.

Includes the following issues by the IBRD: one issue of ¥ 11.0 billion publicly offered in Japan and three issues totaling ¥ 79.0 billion privately placed in Japan.

Source: International Bank for Reconstruction and Development.

Includes issues both publicly offered and privately placed.

Preliminary.

Includes the following corporations: Acieries Réunies de Burbach-Eich-Dudelange, Ameribas Holding S.A., BEC Finance N.V., N.V. Rotterdam-Rijn Pijpleiding, Shell Finance Company N.V., Shell International Finance N.V., Société Financière Européene, and Transalpine Finance Holdings.

Includes the following issues by the IBRD: one issue of KD 15.0 million publicly offered in Kuwait and two issues totaling $30.0 million privately placed in Saudi Arabia.

Includes the following issues: one issue of LL 10.0 million privately placed in the Libyan Arab Republic by the IBRD, one issue of ¥ 6.0 billion publicly offered in Japan by the Asian Development Bank, and two issues totaling ¥ 72.0 billion privately placed in Japan by the IBRD.

Includes the following issues by the IBRD: one issue of ¥ 11.0 billion publicly offered in Japan and three issues totaling ¥ 79.0 billion privately placed in Japan.

Table 33.International Bond Issues in Europe by Borrowing Region or Entity, 1968-First Half 1971(Per cent of borrowing)
1971 1
Borrowers196819691970First half
Europe21364249
United States42262321
International development
institutions16182014
Others 221201516
Source: Table 32.

Preliminary.

Including multinational corporations.

Source: Table 32.

Preliminary.

Including multinational corporations.

Table 34.More Developed Primary Producing Countries: Balance of Payments Summaries, 1960-70(In millions of U.S. dollars)
Current

Balance 1
Long-Term

Capital

and Aid 2
Short-Term

Capital and

Net Errors

and Omissions
Allo-

cation

of SDRs
Overall

Balance3
AustraliaAverage 1960-67-50544011144
1968-1,1871,04722178
1969-756615-40-181
1970-64267231684431
FinlandAverage 1960-67-1186039-19
19686811153232
1969-144-385
1970-2211730421121
South AfricaAverage 1960-67-15223239
19685658354693
1969-40928946-74
1970-1,14856016834-386
SpainAverage 1960-67-145274-17112
1968-241580-28950
1969-410494-311—.-227
1970806745842854
TurkeyAverage 1960-67-119142-24-1
1968-187222-58-23
1969-158368-77133
1970-110519-27818149
YugoslaviaAverage 1960-67-113159 4-52-6
1968-106243-6770
1969-65345-121159
1970-347262225-58
OtherAverage 1960-67-30934979120
1968-231436149354
1969-393345296248
1970-53537122061117
TotalAverage 1960-67-1,3241,446168289
1968-1,8283,222631,454
1969-2,1922,500-24563
1970-2,9233,0757902851,228
Sources: Data reported to the International Monetary Fund and staff estimates.

Balance on goods, services, and private transfers; unrequited government transfers are included in long-term capital and aid.

While all of the more developed primary producing countries have been consistent net importers of long-term capital for a number of years, some of them have been donors, rather than recipients, of official foreign aid. For these countries, the figures shown here represent long-term capital inflows, net of official aid outflows.

See footnote 4 to Table 24 for an explanation of the derivation of overall balance.

Includes short-term capital for 1960-65.

Sources: Data reported to the International Monetary Fund and staff estimates.

Balance on goods, services, and private transfers; unrequited government transfers are included in long-term capital and aid.

While all of the more developed primary producing countries have been consistent net importers of long-term capital for a number of years, some of them have been donors, rather than recipients, of official foreign aid. For these countries, the figures shown here represent long-term capital inflows, net of official aid outflows.

See footnote 4 to Table 24 for an explanation of the derivation of overall balance.

Includes short-term capital for 1960-65.

Table 35.European Primary Producing Countries: Receipts for Services and Private Transfers, 1968-70(In millions of U.S. dollars)
Net Travel ReceiptsReceipts of Emigrants’

Remittances (Gross)
Total Net Services and

Private Unrequited Transfers1
196819691970196819691970196819691970
Greece78102139231268343405409509
Ireland9497115515256206200222
Portugal 2144101134178274332450514655
Spain1,1101,1951,4693244034901,3331,4611,960
Turkey-9-174107141273331152
Yugoslavia136168146122206440246381561
European primary
producing countries 31,5641,6682,0671,0461,3911,9852,6643,0104,128
Sources: Balance of Payments Yearbook and Fund staff estimates.

Includes deduction for the freight component of imports for those countries which record imports in their balance of payments statistics on a c.i.f. basis. (See Table 75.)

Escudo area.

Includes data for Finland, Iceland, and Malta.

Sources: Balance of Payments Yearbook and Fund staff estimates.

Includes deduction for the freight component of imports for those countries which record imports in their balance of payments statistics on a c.i.f. basis. (See Table 75.)

Escudo area.

Includes data for Finland, Iceland, and Malta.

Table 36.Less Developed Countries: Overall Balances of International Payments, by Regions and Selected Groups, 1964-70 1(In billions of U.S. dollars)
1964196519661967196819691970 2
Total, less developed countries0.211.120.750.690.901.533.04 (2.19)
Bv regions
Asia0.040.220.360.030.090.660.56 (0.28)
Middle East0.050.440.210.350.05-0.280.07 (—)
Africa-0.080.040.17-0.020.330.591.13 (0.96)
Western Hemisphere0.200.430.010.330.440.571.28 (0.95)
By groups of countries whose exports
consist chiefly of
Oil 30.120.260.200.250.200.380.72 (0.65)
Metals and minerals 40.030.050.06-0.020.170.370.26 (0.21)
Manufactures 50.080.010.140.190.220.24 (0.23)
Other products-0.020.810.350.280.530.551.82 (1.09)
Source: Fund staff estimates based on data in International Financial Statistics.

Overall balances are here equal to changes in gross reserves minus changes in use of Fund credit. Changes in central monetary authorities’ other liabilities are not included.

Parenthetical figures exclude the allocation of SDRs.

Iran, Iraq, Kuwait, Saudi Arabia, Libyan Arab Republic, Venezuela, and Trinidad and Tobago.

Bolivia, Chile, Democratic Republic of Congo, Sierra Leone, and, from 1966, Zambia.

Republic of China and Republic of Korea only.

Source: Fund staff estimates based on data in International Financial Statistics.

Overall balances are here equal to changes in gross reserves minus changes in use of Fund credit. Changes in central monetary authorities’ other liabilities are not included.

Parenthetical figures exclude the allocation of SDRs.

Iran, Iraq, Kuwait, Saudi Arabia, Libyan Arab Republic, Venezuela, and Trinidad and Tobago.

Bolivia, Chile, Democratic Republic of Congo, Sierra Leone, and, from 1966, Zambia.

Republic of China and Republic of Korea only.

Table 37.Selected Less Developed Countries: Balance of Payments Summaries, 1968-70(In millions of U.S. dollars)
Ratio of
CentralShort-TermYear-End
GovernmentPrivateCapital andReserves
CurrentCapitalLong-TermNet ErrorsOverallto
Balance 1and AidCapital 2and OmissionsBalance 3Imports
Cases of improvement in both current balance and overall balance4 from 1969 to 1970
Argentina1968-17-75-201453365
1969-220-1858-42-22234
1970-134-5297164134(75)40
Ceylon1968-6443-2-10-3314
1969-142128-24-129
1970-7983-116(3)11
Ghana1968-56251419237
1969-504510-25-2025
1970-282221-252(-10)17
Peru1968-234825-68-1818
1969-57729-703128
197012595-7828184(170)48
Philippines1968-3044910279-7413
1969-2831289025-4010
1970-34114125-107116(98)21
Cases of improvement in overall balance4 from 1969 to 1970 despite deterioration or lack of improvement in current
account
Brazil1968-520142053717012
1969-353-3255722739929
1970-502142377453529(470)43
Indonesia1968-25121338-15-15
1969-3612364334-48
1970-401305561712(-23)
Mexico1968-7381204412487134
1969-7299061430532
1970-1,03523245438682(37)30
Nigeria1968-2744316371323
1969-17629139211320
1970-17956187586(69)21
Cases of deterioration or lack of substantial improvement in overall balance4 from 1969 to 1970 despite current account
improvement
Iran1968-36640771-125-1320
1969-540515102-581918
1970-376425111-283-102(-123)12
Uganda1968-817-381426
1969-921-3-6327
197010225-3354(-1)31
Cases of deterioration or lack of improvement in both current balance and overall balance4 from 1969 to 1970
Colombia1968-18811388566927
1969-210118158-125432
1970-2841061246936(15)25
Congo, Democratic
Republic of1968-38827197038
1969-155—.-153942
1970-6154-17-4-13(-28)32
India1968-680970-17-17010327
1969-287736-37-3637645
1970-444684-23-33310(184)47
Malaysia1968101682-495944
19692165657-16216758
1970652167-12450(29)53
Pakistan1968-44245355-115725
1969-41332314696532
1970-69832119940-106(-138)17
Thailand1968-2059682391289
1969-2756610568-3679
1970-31945105100-69(-69)73
United Arab Republic1968-245270-17-34-2620
1969-296246-1563-215
1970-458432-103-8(-33)12
Zambia1968-264956-601939
1969321185-170 516975
1970155-34516 5145(137)105
Sources: Balance of Payments Yearbook and Fund staff estimates.

Balance on goods, services, and private transfers.

Capital transactions by local governments are included in private long-term capital to the extent identifiable.

See footnote 4 to Table 24 for definition of overall balance. For 1970, numbers in parentheses exclude the SDR allocations.

Exclusive of SDR allocations.

Data on private long-term capital movements are not available ; any such movements are therefore included in the residual figure shown in the fourth data column.

Sources: Balance of Payments Yearbook and Fund staff estimates.

Balance on goods, services, and private transfers.

Capital transactions by local governments are included in private long-term capital to the extent identifiable.

See footnote 4 to Table 24 for definition of overall balance. For 1970, numbers in parentheses exclude the SDR allocations.

Exclusive of SDR allocations.

Data on private long-term capital movements are not available ; any such movements are therefore included in the residual figure shown in the fourth data column.

Table 38.Selected Less Developed Countries: Growth Rates of GNP at Constant Prices, 1960-70
1965Annual Compound Rates

(Per cent)
Changes From Previous Year

(Per cent)
(Billion U.S.
dollars11960-701960-651965-70196819691970 2
Far East and Southeast Asia36.7
China, Republic of2.89.810.09.710.08.810.0
Korea, Republic of3.09.36.512.113.315.99.7
Philippines7.85.77.35.96.26.24.4
Thailand3.68.15.68.89.19.47.9
Malaysia2.96.35.86.94.910.25.2
Indonesia8.93.32.04.76.66.56.5
South Asia66.5
India50.23.83.34.43.15.34.9
Pakistan11.15.65.95.23.85.34.0
Ceylon1.74.73.85.66.36.54.3
Middle East25.2
Iran6.27.96.79.27.911.48.8
Israel3.68.910.07.515.410.99.5
United Arab Republic 35.54.06.21.35.8
Africa31.9
Libyan Arab Republic1.321.829.516.329.110.4
Morocco2.64.13.74.611.61.54.7
Ethiopia1.44.84.94.73.73.75.0
Kenya1.08.08.36.07.5
Tanzania0.85.76.93.55.9
Congo, Democratic Republic of1.55.27.67.87.5
Zambia0.81.51.98.44.110.3
Ghana2.22.42.91.90.43.43.6
Central America, Mexico, and Caribbean31.5
Mexico19.47.17.17.28.47.37.5
Central American Common Market3.85.55.75.35.55.25.1
Dominican Republic0.93.70.96.64.47.66.2
South America62.2
Argentina19.03.83.73.84.66.75.7
Brazil19.16.04.57.58.49.09.5
Chile4.54.14.93.42.92.93.0
Colombia5.25.14.55.75.96.56.9
Ecuador1.15.14.26.15.15.59.0
Peru3.04.76.62.90.71.45.0
Venezuela7.65.97.74.25.13.85.0
Subtotal, selected countries 4204.95.34.95.86.26.56.2
Total, less developed areas255.04.655.85
Source: U.S. Agency for International Development, Gross National Product (1970); United Nations, Yearbook of National Accounts Statistics (1969), Vol. II; and national sources.

Values in national currency units are converted into U.S. dollar equivalents by using par value or averages of fluctuating or multiple exchange rates.

Estimated.

Rates of change for the United Arab Republic are based on GDP at factor costs for fiscal years 1960/61-1968/69 inclusive.

In addition to countries listed separately in the table, also includes Cyprus, Tunisia, Uganda, Panama, Paraguay, and Uruguay.

Based on GDP at factor cost.

Source: U.S. Agency for International Development, Gross National Product (1970); United Nations, Yearbook of National Accounts Statistics (1969), Vol. II; and national sources.

Values in national currency units are converted into U.S. dollar equivalents by using par value or averages of fluctuating or multiple exchange rates.

Estimated.

Rates of change for the United Arab Republic are based on GDP at factor costs for fiscal years 1960/61-1968/69 inclusive.

In addition to countries listed separately in the table, also includes Cyprus, Tunisia, Uganda, Panama, Paraguay, and Uruguay.

Based on GDP at factor cost.

Chart 13.Major Industrial Countries: Overall and Basic Payments Balances, 1961-70

(In billions of U.S. dollars)

Chart 14.Major Industrial Countries: Selected Components of Payments Balances, 1961-70

(In billions of U.S. dollars)

Chart 15.United States: Economic and Policy Indicators, 1965-First Half 1971

(Seasonally adjusted quarterly data at annual rates)

Chart 16.Federal Republic of Germany: Economic and Policy Indicators, 1965-First Half 1971

(Seasonally adjusted half-yearly data at annual rates)

Chart 17.Interest Differentials, Euro-Dollar and U.S. Rates, 1968-May 1971

(In per cent per annum)

Chart 18.Selected Countries: Short-Term Interest Rates, 1966-May 19711

(In per cent per annum)

1 Switzerland and France—call money rates; Canada, Germany, the United Kingdom, and the United States—treasury bill rates; Euro-dollar—three-month rate.

Chart 19.Covered Interest Differentials Between Three-Month Euro-Dollar Deposits and Local Short-Term Investments, March 1969-June 1971 1,2

(In per cent per annum)

1 United Kingdom: Euro-dollar deposits in London less covered U.K. local authority rate. Switzerland: Euro-dollar deposits in London less covered Swiss interbank loans. Italy: Euro-dollar deposits in London less covered Italian advance loans. Netherlands: Euro-dollar deposits in London less covered Dutch advance loans. Germany: Euro-dollar deposits in London on market swap basis less covered German interbank lending. All data refer to first week of month.

2 Positive sign indicates excess of Euro-dollar rate over national market rate, while negative sign indicates the reverse.

3 On official swap, September 2, 1969.

Chart 20.Selected Countries: Long-Term Bond Yields, 1967-May 1971

(In per cent per annum)

1 Long-term bonds issued by U.S. companies.

Chart 21.Primary Producing Countries in Europe: Selected Components of Balance of Payments, 1968-70

(In billions of U.S. dollars)

1 Net balances on items not shown separately are close to zero in these years.

Chart 22.More Developed Primary Producing Countries Outside Europe: Selected Components of Balance of Payments, 1968-70

(In billions of U.S. dollars)

Chart 23.Less Developed Countries: Balance of Payments Summary, 1960-70

(In billions of U.S. dollars)

Chart 24.Selected Groups of Less Developed Countries: Combined Overall Balances of Payments, 1964-70

(In billions of U.S. dollars)

A significant statistical aspect of this table is the degree to which the sum of reported balance of payments surpluses in 1970 exceeded the sum of reported deficits. Of the $10.7 billion excess of surpluses in 1970, $3.4 billion can be accounted for by SDR allocations and $0.3 billion by additions to the global stock of monetary gold. The remaining $7.0 billion is attributed in Table 24 to “asymmetries and errors.”

Although the available information on this residual item is naturally incomplete, the explanation for the bulk of the asymmetry in 1970 was a sizable increase in the volume of official foreign exchange reserves placed directly or indirectly (through the Bank for International Settlements) in the Euro-dollar market. According to the somewhat incomplete data compiled in Table 2, the identified amount of this increase was $5.5 billion. Still another factor in the asymmetry—presumably of relatively minor importance—may have been an increase in the current account balance of reporting countries in transactions with the CMEA countries, mainland China, and other areas not reporting balance of payments statistics to the Fund.

Placement of official reserves of a country in the Euro-dollar market tends to generate capital inflows and reserve gains in other countries—or capital inflows and reductions in liabilities to foreign official holders in the case of the United States—without the recording of either a capital outflow or a reserve loss by the placing country. Hence, net outflows of capital from the industrial countries are understated as a result of this process. Such an understatement, it is apparent, accounts for the large rise from 1969 to 1970 in the global “excess of surpluses” on capital account shown in Table 24. In light of these considerations, it seems probable that the level and movement of capital flows between the industrial countries and the primary producing countries in 1970 are indicated much more accurately by the records of the latter (as summarized in the second line of Table 24) than those of the former (summarized in the first line).

It was chiefly for that reason that the U.S. balance of payments deficit in the first quarter of 1971—at $5.5 billion (seasonally adjusted) on the official settlements basis—was exceptionally large, much larger than in any quarter of 1970.

The size of the increase in capital inflows to primary producing countries in 1970 is a matter of some uncertainty statistically; and it is not possible to estimate at all reliably the breakdown of the increase into long-term and short-term forms. (See footnote 1, page 82.)

The unemployment rate (total unemployment as a percentage of the civilian labor force) still averaged 6 per cent in the second quarter of 1971. An unemployment level of 4 per cent, or a little less, has for some years been regarded by U.S. officials as a feasible, noninflationary target of U.S. economic policy over the longer term.

According to preliminary data, real GNP rose by 3½ per cent (at an annual rate) from the first to the second quarter. Also to be noted, the index of industrial production increased in six of the seven months ended June 1971.

These initiatives have continued to be pursued in 1971. In March potentially important measures were adopted with regard to the construction industry, the net result of which was the establishment of a review procedure for collective bargaining contracts in that industry.

Under Federal Reserve Regulation Q.

Ended March 31, 1971.

Beginning April 1, 1970.

See footnote 4 to Table 24 for definition of this balance, which differs from that used in U. K. publications.

Real GNP rose by less than 2 per cent in 1970, about the same as in 1969. Further, the performance of the economy in the first part of 1971 was much weaker than had been expected.

Significant modification of the techniques of U. K. monetary management were announced in May 1971. These affect both the way in which the Bank of England exerts its influence on bank lending to the private sector and the role of official intervention in the government securities market. Instead of applying quantitative ceilings on bank lending, the Bank of England will in the course of the current fiscal year move to a system under which such lending will be influenced through a more flexible interest rate policy and through variations in reserve asset ratios applying uniformly to all banking institutions, rather than only to certain large ones as in the past. The new approach to the government securities market involves limiting the role of the Bank of England as a buyer of such securities.

Because restrictive policies had been in force for a number of months, the pressure of domestic demand had probably begun to subside by the time of the devaluation. This development thus created room for an early improvement in the external current account.

There was, therefore, a significant deterioration in Germany’s cost position compared with that of most other industrial countries.

This was a system of declining-balance depreciation allowances, involving high initial rates of amortization of most investments for tax purposes.

Although there was a noticeable acceleration in the rate of increase in the money supply, from 6 per cent during 1969 to nearly 9 per cent during 1970, the rates of increase in money and quasi-money, taken together, were virtually the same (about 11 per cent) in these two years. During the first four months of 1971, the annual rate of increase in the money supply was almost 16 per cent.

The revaluation thus helped in some measure to relieve demand pressures in Germany by reducing the export surplus when measured in real terms.

As defined in Table 24—i.e., the balance on goods, services, and private transfers.

Real GNP in the fourth quarter of 1970 was at about the same level as in the first quarter, when losses of output in the strike-ridden second half of 1969 had been recouped only in part. Also noteworthy, the index of industrial production in the first quarter of 1971 was 2 per cent lower than in the corresponding period a year earlier.

The financing of the nonbank capital outflow required, in addition to an officially requested liquidation of net foreign assets of the Italian banking system, a substantial drain on official reserves.

Mainly because of higher imports, the external trade and current account positions of this group of countries deteriorated sharply from 1969 to 1970. In only Belgium-Luxembourg did the current account balance increase—and very substantially—from 1969 to 1970.

This replaced the sales tax, and was part of a tax reform that also included reduction of direct taxation.

Pages 90-92

For definition, see footnote 7 on page 24.

Estimates of the net size of the Euro-currency market are taken from the Forty-First Annual Report of the Bank for International Settlements (BIS). They are based on data for eight European countries: Belgium-Luxembourg, France, Germany, Italy, the Netherlands, Sweden, Switzerland, and the United Kingdom. These estimates are net of inter-bank deposits to the extent that they are held by banks within the group of reporting countries.

These are the countries reporting to the BIS. (See footnote 25, above.)

Including branches of U.S. banks in the United Kingdom.

The table shows only immediate sources and uses of funds, not original sources or final users, and it represents only a partial picture, since a sizable part of the Euro-currency business is conducted outside the United Kingdom.

Including BIS position.

Bank for International Settlements, Forty-First Annual Report (Basle, 1971), Chapter 5.

International bonds are bonds sold outside the country in which the borrower is domiciled; they consist of two main types: Euro-bonds and foreign bonds. Euro-bond issues are underwritten by an international syndicate and sold in a number of countries. Foreign bond issues are generally underwritten by a national banking syndicate outside the issuer’s country and sold mainly in the country to which that syndicate belongs.

The 14 countries in these three groups accounted in 1970 for 34 per cent of the total merchandise exports of less developed countries and 23 per cent of their total merchandise imports.

Excluding SDR allocations in 1970.

These DAC statistics, having been compiled from sources other than national balance of payments statistics, may not be fully consistent with the combined balance of payments data underlying most of the present discussion of capital and aid flows to the less developed countries. However, with respect to official long-term capital and aid, the level and movement of the series reported by the DAC are broadly similar to those of the series compiled from balance of payments data reported to the Fund, warranting reliance on the DAC statistics for compositional details not available from the balance of payments reports.

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