Chapter

Chapter 1 Developments in the World Economy

Author(s):
International Monetary Fund
Published Date:
September 1977
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Introduction

At the present juncture, mid-1977, economic and financial conditions in many parts of the world are distinctly better than those of one or two years ago. Nevertheless, the great majority of the Fund’s member countries are still in the process of attempting to restore order to their economies in the wake of the serious and unprecedented disturbances of 1973–75—disturbances that included a rapid upsurge of prices and costs, the most severe and prolonged recession of the postwar period, and the international oil crisis.

Essentially because of those disturbances, the international economic scene in 1977 is still unsatisfactory by past standards. Economic growth rates are generally subnormal in a setting of high unemployment, excess plant capacity, and lagging investment. Inflation is also a widespread problem, and in a number of countries it is coupled with weakness of the external position. In many cases, added to these general features are related problems, such as the presence of inflationary psychology and expectations, a lack of business and consumer confidence, and significant distortions in the structure of the economy.

In the short run, the scope for improvement in this situation is limited. Most member countries—indeed, almost all—have little room for maneuver in their policies of demand management. Because of the constraints imposed by inflation or balance of payments difficulties, fiscal and monetary policies must be kept under restraint. Moreover, measures that are supplementary to demand management policies, on which there is now an unusual degree of reliance because of the complexity of current problems, generally take time to establish and to have effect. These measures cover a wide variety of efforts in the field of incomes policy to affect the movement of wages and prices in the public interest; diverse types of specific programs to deal directly with the problem of unemployment; and various policies to deal with “structural” problems involving supply conditions, cost pressures, and levels of saving and investment.

Clearly, economic policies in the industrial countries, and in most other countries as well, are now placing a primary emphasis on medium-term objectives. The central aim is to combat inflation and, where necessary, strengthen the external position during the next few years, in the firm belief that such an approach will yield the best results for economic growth and employment in the longer run.

Implementation of policies with an emphasis on medium-term objectives—involving a gradual approach to reduction of inflation, absorption of the unemployed, and adjustment of the external position—is likely to prove difficult. It will require skill, patience, and courage on the part of the authorities, together with a substantial measure of continuity. However, despite the problems that might attend the gradual or moderate approach that has been generally adopted, it would not appear that any better or more promising approach is available.

While it is true, as indicated above, that the situation of the world economy is generally unsatisfactory by past standards, countries show a wide variation as regards economic progress in the past few years and, therefore, the severity of current problems. Within the industrial world, the countries that have been most successful in holding down inflation—including the United States, the Federal Republic of Germany, and Japan—are now in a relatively good economic position. In the group of more developed primary producing countries, there is a prevalence of double-digit inflation, low rates of economic growth, and some of the more difficult cases of external imbalance. With respect to the non-oil developing group, perhaps the most striking feature of developments in recent years is the wide disparity among countries, with the character of the economic record rather clearly related to the timing and effectiveness of adjustment efforts following the onset of the recession and the oil price increase at the beginning of 1974.

The domestic and external economic difficulties being experienced by many countries, particularly with respect to the problem of unemployment, have given rise to pressures for protectionist measures. On the whole, such pressures have been resisted, and there have been relatively few instances of recourse to trade restrictions by major trading nations. Nevertheless, the persistence of such pressures, as evident from rising protectionist sentiments in particular industries in some industrial countries, continues to be cause for serious concern. If the forces of protectionism are not resisted, the resort to restrictions on trade would harm the open international trading system; it would not provide any real solution to the economic problems confronting the industrial economies and could have effects destructive of prosperity in the world economy. In this situation, it is encouraging that strong antiprotectionist statements were included in the communiqués issued after the recent meetings of the Interim Committee of the Fund’s Board of Governors (in Washington, April 28–29), the leaders of seven industrial countries (in London, May 8–9), and the OECD Ministers (in Paris, June 23–24).

This chapter focuses mainly on developments in the world economy during 1976 and 1977, but with frequent reference to longer-term comparisons in order to provide background perspective. Three broad subjects are covered: domestic activity and policies, trends in world trade, and the functioning of the international adjustment process. Closely related to this discussion of the adjustment process are several sections of Chapter 2, particularly those dealing with the role of the exchange rate in the adjustment process and factors affecting the adequacy of reserves.

Domestic Activity and Policies

Industrial Countries

Output and prices.—After a cessation of economic growth in 1974 and an unusual decline (of 1 per cent) in 1975, real gross national product (GNP) in the industrial countries expanded by almost 5½ per cent in 1976. Increases in the range of 5–6½ per cent occurred in all of the larger industrial countries except the United Kingdom (1 ½ per cent); the group of smaller industrial countries experienced a combined increase of 3½ per cent. (See Table 1.)

Table 1.Industrial Countries: Changes in Output and Prices, 1962–76(In per cent)
Annual

Average 1

1962–72
Change from Preceding YearChange from Preceding Half Year 2
197419751976
1973197419751976First

Half
Second

Half
First

Half
Second

Half
First

Half
Second

Half
Real GNP
Canada5.57.53.71.14.95.4–0.90.54.37.8
United States3.95.5–1.4–1.36.0–1.9–3.1–4.88.06.43.5
Japan10.39.8–1.32.46.3–5.13.70.74.88.82.8
France6.05.42.30.15.23.6–0.8–1.43.97.32.2
Germany, Fed. Rep.4.54.90.4–2.55.72.1–2.9–6.94.57.33.1
Italy4.66.93.9–3.55.65.1–6.7–3.30.78.93.9
United Kingdom 32.46.1–1.61.5–2.74.8–3.8–2.93.71.8
Other countries 44.64.73.1–2.03.46.7–1.3–3.70.65.03.2
All industrial countries4.66.0–0.95.4–0.2–1.6–3.74.86.83.0
Of which,
Seven larger countries 54.66.2–0.3–0.85.6–1.0–1.6–3.75.37.03.0
European countries4.45.41.8–1.94.43.1–1.5–4.41.66.32.9
GNP deflator
Canada3.69.114.911.29.516.514.79.810.69.87.8
United States3.55.89.79.65.39.511.810.06.74.84.9
Japan4.911.520.77.46.426.414.06.05.26.58.0
France4.47.611.612.99.711.114.713.99.59.011.2
Germany, Fed. Rep.4.06.16.97.13.16.010.68.64.42.04.0
Italy5.011.917.717.317.819.123.318.59.021.220.0
United Kingdom 35.77.613.628.315.110.623.831.925.312.611.6
Other countries 45.28.09.511.27.89.311.712.39.17.17.7
All industrial countries4.17.411.910.97.312.413.511.38.16.77.1
Of which,
Seven larger countries 54.07.312.110.97.212.813.711.28.06.67.0
European countries4.87.810.813.69.210.014.915.510.48.59.1
Sources: National statistical publications, IMF Data Fund, and Fund staff estimates.

Compound annual rates of change.

Seasonally adjusted changes, at annual rate.

Expenditure-based estimate of gross domestic product.

Includes Austria, Belgium, Denmark, the Netherlands, Norway, Sweden, and Switzerland.

As listed separately above.

Sources: National statistical publications, IMF Data Fund, and Fund staff estimates.

Compound annual rates of change.

Seasonally adjusted changes, at annual rate.

Expenditure-based estimate of gross domestic product.

Includes Austria, Belgium, Denmark, the Netherlands, Norway, Sweden, and Switzerland.

As listed separately above.

Changes in output on an annual basis mask the extent of irregularity that has characterized the course of economic activity in the industrial world during the past few years. The deep and prolonged international recession that started late in 1973 reached its low point in the first half of 1975, when real GNP in the industrial countries declined at an average annual rate of 4 per cent. However, an upturn occurred in most of the major countries in the second half of 1975, and by the first half of 1976 the resumption of output expansion was widespread. Annual rates of increase from the second half of 1975 to the first half of 1976 ranged as high as 6½-9 per cent for the three largest economies (those of the United States, the Federal Republic of Germany, and Japan), as well as for the Canadian, French, and Italian economies, and averaged close to 7 per cent for the whole group of industrial countries (Table 1).

At mid-1976, it was generally anticipated that cyclical recovery in the industrial countries would continue at a satisfactory pace in the latter part of the year. Moderation in the rate of economic expansion during the second half of 1976 was to be expected as the inevitable product of a further working of cyclical forces, but the degree of moderation that actually occurred was surprising. The rate of increase in real GNP from the first to the second half of 1976 fell off substantially throughout the industrial world, averaging only 3 per cent.

A major factor in this outturn was the disappointing behavior of private gross fixed investment, which had been showing its customary cyclical lag behind the rise in general economic activity but was expected to help sustain this rise in the second half of 1976 and beyond. The unusual behavior of private investment must in general be attributed to investors’ cautiousness in the face of inflation and other economic or political uncertainties, together with influences such as the effect of cost-price relationships on the profitability of investment, a desire to go further in the improvement of business balance sheets, and the relatively low rates of capacity utilization.

Another factor in the slowdown of economic activity in the second half of 1976 was that fiscal policies in a number of the industrial countries were evidently less stimulative than had been expected. However, generalizations about this economic slowdown cannot be carried very far. Among countries, it reflected a variety of developments and had a diverse impact on the immediate economic outlook. In France, Italy, and the United Kingdom, the slowdown was accompanied by continuing high inflation and weakness of the external payments position, demonstrating the need for programs of economic stabilization; in the United States, the Federal Republic of Germany, Japan, and some other countries, developments in the latter part of 1976 apparently signified only a “pause” in the cyclical recovery and expansion.

It is estimated that real GNP increased at an average annual rate of 5 per cent in the industrial countries from the second half of 1976 to the first half of 1977, with the size of increases differing markedly among individual countries. (See Chart 1.) If overall growth in the second half of 1977 were to continue at a 5 per cent rate, which does not seem implausible, the increase for the year as a whole (in comparison with 1976) would be some 4½ per cent. Like the 5½ per cent increase in 1976, this would reflect for most countries a moderate rate of recovery in comparison with prior cyclical experience in the postwar period, especially when allowance is made for the severity of the 1974–75 recession.

Chart 1.Semiannual Changes in Output and Prices in Industrial Countries, First Half 1973–First Half 1977

(Percentage changes in real GNP and GNP deflators from preceding half year, seasonally adjusted, at annual rates)

1 Include, in addition to the countries shown separately in the chart, Austria, Belgium, Denmark, Luxembourg, the Netherlands, Norway, Sweden, and Switzerland.

The depressed conditions of 1974 and 1975, together with the moderateness of the ensuing recovery, have led to improvement on the inflation front. From a peak annual rate of 13½ per cent in the second half of 1974 (nearly a full year after the crest of the 1972–73 boom), the overall rate of price increase in the industrial countries dropped to 6½–7 per cent in each half of 1976 and the first half of 1977 (Chart 1). However, an inflation rate of this magnitude is still substantially above the average annual rise of 4 per cent over the period 1962–72 (Table 1) and of 2½ per cent in the first half of the 1960s. In general, current rates of inflation in the industrial countries are much too high to be considered acceptable.

Rates of price increase in the industrial countries during recent years have also exhibited great disparity; this has tended to generate special problems for economic policy, particularly as regards the management of balance of payments positions. Considerable disparity was still evident in the first half of 1977, when the estimated rates of price inflation ranged from 3½ per cent for the Federal Republic of Germany to 13½ per cent for the United Kingdom and 21 per cent for Italy. However, on the basis of the comprehensive stabilization programs that have been established, the U.K. and Italian inflation rates are expected to show significant declines in the period ahead.

From the standpoint of the world economy, it is fortunate that recent price performance in the industrial world has been relatively favorable among the three largest countries, whose record has such a profound effect on the price experience and policies of other countries. The United States, the Federal Republic of Germany, and Japan have also shown the best growth records during the period of economic recovery, unhampered by policy constraints because of the balance of payments.

Unemployment.—The foregoing developments with respect to output and prices have been accompanied by persistently high unemployment. The overall rate of reported unemployment1 in the industrial countries amounted to 5.3 per cent in the first half of 1977—historically a very high rate, close to the recession-induced peak of 5.5 per cent in the second half of 1975 and substantially above the rates, varying between 2.5 and 3.8 per cent, that prevailed during the 1960s and early 1970s.

Numerous reasons may be adduced for this unsatisfactory situation. For instance, it is clear that changes in the composition of the labor force have tended to raise unemployment levels. In particular, the increasing proportions of women and young persons—who tend, on average, to be less firmly attached to specific jobs and, therefore, to have relatively high rates of unemployment—have contributed to the upward drift of unemployment rates in the industrial countries since the first part of the 1960s. Similarly, it is also apparent that large increases in unemployment benefits and the trend toward multiple-income-earning families have reduced the “costs” of unemployment and job search and, correspondingly, have raised the average duration of unemployment.

Such “structural” factors have undoubtedly been important. But the escalation of unemployment rates that occurred during 1975 was primarily a cyclical phenomenon, and the lack of any significant overall decline since then is attributable mainly to the moderate pace of output growth, which has barely offset the combined effects of (any reasonable estimate of) trend productivity growth and increases in the labor force. This growth record, in turn, is rooted in the constraints imposed upon demand management policy by the virulent inflationary momentum of the mid-1970s.

To the extent that the unemployment problem is “structural,” it is not susceptible to solution through the expansion of aggregate demand. To the extent that the current unemployment is “cyclical,” it can be absorbed only gradually because of the need for demand management policies to be cautious until inflation is brought under better control. Thus, in general, the immediate situation calls for use of (a) incomes policies in order to alleviate employment-inhibiting distortions in the cost-price structure (particularly in wage-profit relationships), as well as to restrain the growth of claims by competing groups on the national product; and (b) various types of specific policies to deal with the unemployment situation more directly.

Stance of economic policy.—Several generalizations may be made about the stance of economic policy in the industrial countries, with the purpose of indicating how policies are being adapted to meet the issues confronting national authorities.

—Fiscal and monetary policies are generally cautious or restrained. Important differences in the degree of restraint are attributable to the severity of inflation, as well as to balance of payments difficulties.

—The complexity of current problems has led to an unusual degree of reliance on measures supplementary to fiscal and monetary policies; such measures fall into three main categories, (a) Because of the prevailing high rates of unemployment, there has been widespread adoption of specific programs intended to reduce particular types of unemployment, to relieve hardships associated with it, or to provide compensation for costs incurred in reducing it. Governments have instituted diverse types of measures to absorb part of the cost of hiring new employees, together with programs to provide manpower training and to expand public sector employment, (b) With very few exceptions, the industrial countries have also engaged in a wide variety of efforts in the general field of incomes policy in order to influence wage bargaining, rates of payment or accrual of other forms of income, and the development of prices. The efforts classifiable under the heading of incomes policy have varied markedly from country to country, depending on each nation’s own institutions, traditions, and climate for wage bargaining and price setting. Mandatory controls of various types are in effect in some countries, whereas others rely on voluntary arrangements or guidelines; blends of compulsory and voluntary techniques are not uncommon. In the Federal Republic of Germany and in Japan, support of the management of aggregate demand through efforts to rationalize the claims of business and labor on the national product has remained on an even more informal plane, (c) Partly overlapping the unemployment measures just described under (a), policies aimed at various types of “structural” problems have been instituted in a number of the industrial countries. Such policies, as indicated earlier, are intended in general to improve supply conditions, alleviate cost pressures, and achieve higher levels of saving and investment. In this last regard, restraining the growth of the public sector over the medium term is considered to be a major policy requirement in some countries.

—Economic policies in the industrial countries have taken on a medium-term cast. They are directed toward combating inflation (and/or strengthening the external position) during the next few years in the conviction that such emphasis of policies will make for a better record of growth and employment over time. The importance of continuing to reduce inflation, together with the link between this and the reduction of unemployment, was stressed in the communiqué of the Interim Committee after its April 1977 meeting in Washington and in the communiqué of the leaders of seven industrial countries after their conference in London during May.

This greater emphasis of policies on medium-term considerations has been accompanied by an evident parallel change in the strategy of short-term demand management. On the whole, the industrial countries reacted cautiously to the slowdown or “pause” in activity that developed in the second half of 1976, apparently being reluctant to provide significantly more stimulus to aggregate demand in the prevailing environment of high inflation and continuing inflationary expectations.

From this and other behavior in the recent period, it would appear that these countries have adopted a rather patient and even-handed approach to the short-term conduct of fiscal and monetary policies, in contrast to the frequent changes of policy undertaken in the late 1960s and early 1970s. More than in the past, the current approach involves the steering of a general course toward medium-term growth objectives judged to be compatible with objectives for employment and prices and with the strength of the balance of payments. It is this apparently greater tendency to gear short-term demand management to a set of interrelated objectives over the medium term that distinguishes current practice from that of the earlier period, when the primary emphasis was on short-term growth targets that frequently proved to be overly ambitious.

Sharper differentiation of the fiscal and monetary policies pursued by individual industrial countries has emerged during 1976 and 1977, following a period of broadly parallel actions during the closing stages of the 1974–75 recession and the early part of the recovery period. Since about the middle of 1976, contrasts geared to differences in domestic situations and external positions have become more apparent.

As regards fiscal policy, shifts toward withdrawal of at least part of the stimulus provided in 1975 occurred in most of the industrial countries in 1976, and sizable further shifts in the same direction are occurring in some of them during 1977. However, the degree of reversal witnessed in 1976 was quite uneven, and contrasts among national fiscal policy stances are now sharper. In general, the large industrial countries with relatively low rates of inflation and freedom from balance of payments constraints—i.e., the Federal Republic of Germany, Japan, and the United States—withdrew in 1976 only small or moderate proportions of the expansionary fiscal impulses imparted in 1975, while the major countries whose rates of inflation were by far the highest in 1975—the United Kingdom and Italy—undertook larger withdrawals of fiscal stimulus in 1976. For each of those countries, as well as France, the net contractionary shift, apart from purely cyclical changes, was of the order of 2–3 per cent of GNP, whereas none of the corresponding shifts in the first three countries was equivalent to more than about 1 per cent of GNP. The shift was also small in Canada, where the rate of inflation was above the weighted average for the industrial countries, but the external position was not viewed as a constraint.

For 1977, further shifts toward fiscal restraint are expected in France, Italy, and the United Kingdom. Central government fiscal balances in Canada, the Federal Republic of Germany, Japan, and the United States, on the other hand, are expected to show roughly neutral or slightly expansionary changes in 1977.

With respect to monetary policy, too, there is a notable difference between the low-inflation countries with relatively strong external positions and the other major industrial countries. In the United States, the Federal Republic of Germany, and Japan, monetary policies are cautious but are considered by the authorities to be consistent with the attainment of satisfactory economic growth. Although stocks of money in these three countries were expanding much less rapidly in relation to real output during 1976 than those of the other large industrial countries (except Canada), interest rates were also much lower, and current demands for credit have been, in general, readily accommodated. In France, Italy, and the United Kingdom, the financing of large deficits in the current account has required sizable capital inflows during the past year or two, but relatively high rates of price increase (and their effects on exchange rate expectations) have tended to undermine the attraction of domestic yields on financial assets. Even though nominal interest rates in all three of these higher-inflation countries have been pushed considerably above those prevailing in the three low-inflation countries, private capital movements have sometimes fallen short of external financing requirements. In these circumstances, much of the U.K. and French external borrowing has been conducted by public agencies or enterprises; and the Italian authorities also borrowed heavily from foreign official sources during the first half of 1976, although the resultant debts were largely repaid in the second half.

The pursuit of publicly announced targets or target ranges for growth of various monetary aggregates is a notable feature of monetary policy implementation in a number of the industrial countries (including Canada, France, the Federal Republic of Germany, the United States, and the United Kingdom). It would appear that utilization of such targets has proved helpful in conducting central banking operations and in gaining public understanding and acceptance of the economic policies being followed.

Primary Producing Countries

The statistical picture of the current economic situation is much less complete for the primary producing countries than for the industrial world. However, the available figures on output and prices (summarized in Tables 2 and 3) may serve to indicate the main features of the recent economic experience of this large and heterogeneous group of member countries.

Table 2.Primary Producing Countries: Growth of Real Output, 1967–76(Percentage changes in real GNP or GDP)
Average 1

1967–72
Change from Preceding Year
1973197419751976
Major oil exporters 29.010.78.73.011.7
Non-oil primary producing countries
More developed6.16.34.32.03.1
In Europe 36.77.34.72.53.3
Australia, New Zealand, and South Africa5.14.63.31.12.5
Less developed 46.16.75.23.45.1
In Africa5.12.95.92.24.6
In Asia 54.97.02.65.46.3
In the Middle East6.44.73.14.54.1
In Latin America and the Caribbean6.87.57.22.24.6
Sources: National statistical publications, IMF Data Fund, IBRD, and Fund staff estimates.

Compound annual rates of change.

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Romania, Spain, Turkey, and Yugoslavia.

Comprise Fund member countries not listed in Table 1, or as being major oil exporters (footnote 2) or “more developed” primary producing countries (as listed above and in footnote 3). The regional subgroups of less developed countries listed here correspond to the groupings shown in International Financial Statistics, except that Afghanistan, Ethiopia, Pakistan, and the Sudan are included in the Middle East. (See also footnote 5.)

Includes estimates for South Viet Nam for the period 1967–74 and for the whole of Viet Nam for the period 1975–77. Estimates for Hong Kong, which is a nonmember country, are also included.

Sources: National statistical publications, IMF Data Fund, IBRD, and Fund staff estimates.

Compound annual rates of change.

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Romania, Spain, Turkey, and Yugoslavia.

Comprise Fund member countries not listed in Table 1, or as being major oil exporters (footnote 2) or “more developed” primary producing countries (as listed above and in footnote 3). The regional subgroups of less developed countries listed here correspond to the groupings shown in International Financial Statistics, except that Afghanistan, Ethiopia, Pakistan, and the Sudan are included in the Middle East. (See also footnote 5.)

Includes estimates for South Viet Nam for the period 1967–74 and for the whole of Viet Nam for the period 1975–77. Estimates for Hong Kong, which is a nonmember country, are also included.

Table 3.Primary Producing Countries: Price Increases, 1967–76

(Percentage changes in consumer prices)1

Average 3

1967–72
Change from Preceding Year
Groupings 21973197419751976
Major oil exporters8.011.016.017.514.5
Non-oil primary producing countries
More developed6.011.816.716.615.0
In Europe6.813.518.718.016.0
Australia, New Zealand, and South Africa4.69.313.614.613.2
Less developed 410.121.730.330.231.3
In Africa5.09.019.117.819.7
In Asia5.414.226.58.2–1.9
In the Middle East4.013.721.418.914.5
In Latin America and the Caribbean 415.931.637.353.668.4
Sources: IMF Data Fund and Fund staff estimates.

Average inflation rates for groups of countries are calculated from weighted geometric means of country indices expressed in terms of local currency. Weights are proportional to GDP (in U.S. dollars) in 1970.

For classification of countries in groupings shown here, see Table 2.

Compound annual rates of change.

Excluding Argentina, Chile, and Uruguay, the figures for less developed non-oil countries in the last three columns are 24 per cent, 16 per cent, and 14 per cent, respectively; with a similar exclusion, the figures for Latin America and the Caribbean in the last three columns would be 25 per cent, 22 per cent, and 26 per cent, respectively.

Sources: IMF Data Fund and Fund staff estimates.

Average inflation rates for groups of countries are calculated from weighted geometric means of country indices expressed in terms of local currency. Weights are proportional to GDP (in U.S. dollars) in 1970.

For classification of countries in groupings shown here, see Table 2.

Compound annual rates of change.

Excluding Argentina, Chile, and Uruguay, the figures for less developed non-oil countries in the last three columns are 24 per cent, 16 per cent, and 14 per cent, respectively; with a similar exclusion, the figures for Latin America and the Caribbean in the last three columns would be 25 per cent, 22 per cent, and 26 per cent, respectively.

Major oil exporting countries.—Beginning in the latter part of 1975, the major oil exporting countries reoriented their economic policies toward reducing demand pressures and combating inflation. As a result mainly of curtailment in the growth of government expenditures, coupled with efforts to improve the supply situation, the estimated average increase in domestic prices was reduced from 18 per cent in 1975 to about 15 per cent in 1976 (Table 3). The slower advance of import prices and, in a few instances, direct measures of control over wages and prices also contributed to this development.

Despite the prevalence of tighter demand policies, economic activity in the non-oil sectors of the oil exporting group remained relatively high in 1976 and may increase at a faster rate in several countries in 1977. Oil production, however, is likely to rise much less rapidly in 1977 than in the cyclical rebound of 1976. The average rate of growth in total output of the oil exporting countries (Table 2) is therefore expected to decline considerably in 1977 from the exceptionally high level reached in 1976.

More developed countries.—As a group, the more developed primary producing countries were less affected by the international recession than the industrial countries. In the current recovery, they are lagging far behind the performance of the industrial group and have made much less progress in reducing the extraordinary levels of inflation reached in 1974 and 1975. The average increase in consumer prices experienced by the more developed primary producers in 1976, estimated at 15 per cent (Table 3), was about twice as large as the average for the industrial group; if this rate does not change much in 1977, as seems likely, most of these countries will have experienced double-digit inflation for five years in a row.

The linkage of high inflation and slow recovery in real economic activity among the more developed primary producers is by no means coincidental. A number of the countries in this group sought, during the initial downturn in the industrial countries, to maintain their own levels of activity in the face of slackening export demands and increased import costs; as discussed later, they were able to sustain imports and consumption through heavy external borrowing. These efforts, along with deterioration in the terms of trade, quickly led to enlarged deficits on the current account and, in most cases, also to higher budgetary deficits and rapid domestic credit expansion. The resultant upsurge of prices—averaging 17 per cent in 1974 and 1975—generated a need for application of restrictive fiscal and monetary policies.

By the latter part of 1976 or early 1977, most countries in the more developed group were applying measures of demand restraint. The only countries not following restrictive policies by then were those where political uncertainty or insecurity prevented decisive actions by the authorities. A number of the countries were also utilizing some form of incomes policy in efforts to contain inflation. However, progress on that front remained slow and difficult, partly because of the momentum of the wage-price spiral and partly in some cases because of the initial effects on domestic prices of exchange depreciations undertaken during the past year or two to deal with external adjustment problems.

Non-oil developing countries.—By and large, the domestic economies of the non-oil developing countries appear to have been less affected by the global recession than have the economies of other major groups of oil importing countries. The average rate of expansion in total output dropped from 6½ per cent in 1973 to 3½ Per cent in 1975, but subsequently recovered to about 5 per cent in 1976 (Table 2) and should move somewhat higher in 1977.

Nevertheless, the slowing of growth from 1973 to 1975 was obviously a blow to the developmental aspirations of the countries affected. Moreover, the terms of trade of the non-oil developing countries in 1977 are appreciably worse than they were in the period 1967–72 (when cyclical conditions were roughly neutral) and the estimated loss in export purchasing power implied by this deterioration is equivalent to somewhat more than 1 per cent of their total gross product. This loss must be added to the shortfall in growth of real output in any assessment of the impact of global developments of the mid-1970s on supplies available for consumption and investment in the non-oil developing countries.

The record of the non-oil developing countries with respect to inflation in recent years (Table 3) is quite mixed. In Asia, it is better than that of the more developed group of primary producers, and in Africa and the Middle East it is roughly similar. In Latin America and the Caribbean, the composite average of consumer price increases has been affected substantially by the particularly virulent inflation in a few South American countries; excluding these, the average is still the highest among regions because of the experience of a few large countries, with the inflation rates in a number of the smaller countries being relatively quite low. Most of the non-oil developing countries enjoyed some success in cutting back their rates of inflation during 1975 and 1976, but a partial reversal of this progress appears to have occurred during the first part of 1977 because of the domestic income and liquidity effects of the upsurge in export prices.

The Asian countries, having adopted some of the earliest and most effective stabilization programs following the onset of the recession and the oil price increase of 1974, regained forward momentum in 1976 and are generally in position to continue moving ahead in 1977. As a group, they have by far the lowest inflation rates of any major developing area, and most of them have eliminated or greatly mitigated the external imbalances confronting them in 1974 and 1975 (as discussed below). In both the containment of inflation and the improvement of the external position, generally prudent financial policies were reinforced in the large countries of South Asia by good harvests, which helped to hold down food prices and to reduce demand for imports of foodgrains.

Economic activity in the Latin American and Caribbean area also has displayed considerable resiliency. After falling to about 2 per cent in 1975, the area’s increase in real output rose to 4½ per cent in 1976 and should rise further in 1977.

The initial policy response of Latin American and Caribbean members to the onset of the recession and suddenly enlarged import bills in 1974 was generally an attempt to sustain domestic activity through expansionary fiscal and monetary policies. These led to more rapid inflation and further deterioration of the balance of payments on current account. Widespread adoption of more restrictive fiscal and monetary policies then brought substantial improvement in current account balances, but the pace of inflation as measured by consumer price indices did not, in general, slow down significantly.

Economic expansion in the African region increased somewhat in 1976, although remaining below the pre-1973 trend rate. Marked fluctuations of export earnings, the shifting impact of such natural factors as droughts and floods, and political uncertainties in some parts of the African continent have all contributed to the hesitancy of the current expansion.

During 1975 and 1976, the average rate of inflation in Africa remained about the 20 per cent level to which it had been pushed in 1974. The principal factor in this development was the sharply expansionary impact of the 1973–74 commodity price boom on government expenditures, and hence on monetary and credit developments. However, because of the recent adoption of sound demand management policies in a number of countries, the weighted average of consumer price increases for the region is expected to decline appreciably in 1977.

Among the non-oil developing countries of the Middle East, the average rate of price inflation receded somewhat from the 1974 peak (more than 20 per cent) during 1975 and 1976. However, further deceleration in 1977 seems unlikely in view of the strong demands and political pressures for increases in nominal incomes in several of the larger countries of the area.

In general, the non-oil countries of the Middle Eastern region were not severely affected by the international recession, mainly because of the overflow of demand pressures and other secondary benefits emanating from oil producing countries in the area. Nevertheless, growth of output in 1976 was still below the pre-1973 trend. In the period immediately ahead, the expansion of real economic activity will be retarded by policy measures to reduce inflationary pressures and by foreign exchange constraints in some countries.

Trends in World Trade

After four years of extremely uneven developments, dominated for the most part by cyclical influences, world trade seems to be settling into a more sustainable pace of moderate expansion during 1977. Its volume is growing less rapidly than in 1976, when the first stages of the cyclical recovery brought a resurgence of import demands in key areas. However, the present rate of expansion is fairly satisfactory. It is not much below the average for the whole period since 1960.

In general, foreign trade prices appear to be rising a little faster in 1977 than in 1976, partly because of a marked upsurge of primary commodity prices from early 1976 through April 1977. In the next two months, however, the index of such prices showed sizable declines. Although the bulge in late 1976 and early 1977 virtually assures a sharper upward movement (on an annual average basis) for the current year than for 1976, a marked tapering or flattening of the trend now seems to be in prospect for the second half of 1977.

Volume of Trade

The current upswing in the volume of world trade began in the second half of 1975, when demand in the industrial countries first turned upward from its recession trough. A resurgence of world trade then accompanied the accelerating recovery of demand in the industrial countries during the first half of 1976 and continued during the second half, despite the “pause” in expansion of economic activity that occurred in those countries. For the year as a whole, world trade volume is estimated to have exceeded the depressed level of 1975 by 11 ½ per cent. (See Table 4.)

Table 4.World Trade Summary, 1962–76 1(Percentage changes in volume and in unit value of foreign trade)
1962–722Change from Preceding Year
1973197419751976
World trade 3Volume9135–4½11½
Unit value (U.S. dollar terms)23½412
(SDR terms)4212½407
Volume of tradeImportsIndustrial countries12½1–7½14½
Other developed countries166–6½
Major oil exporters921½38½42½18½
Other developing countries158–6
ExportsIndustrial countries9148–4½10½
Other developed countries8½111½
Major oil exporters913–1–11½13
Other developing countries813
Unit value of tradeImportsIndustrial countries211½3986
in SDR terms 4Other developed countries210½46½7
Major oil exporters210288
Other developing countries212½48½
ExportsIndustrial countries223½11
Other developed countries223252
Major oil exporters326½20512
Other developing countries2436½–413
Sources: National economic reports, IMF Data Fund, and Fund staff estimates.

For classification of countries in groupings shown here, see Tables 1 and 2.

Compound annual rates of change.

Sum of the groupings shown separately; based on approximate averages of growth rates for world exports and world imports.

For years prior to 1970, an imputed value of US$1.00 has been assigned to the SDR.

Sources: National economic reports, IMF Data Fund, and Fund staff estimates.

For classification of countries in groupings shown here, see Tables 1 and 2.

Compound annual rates of change.

Sum of the groupings shown separately; based on approximate averages of growth rates for world exports and world imports.

For years prior to 1970, an imputed value of US$1.00 has been assigned to the SDR.

However, the rise during 1976 was rather unevenly distributed among groups of importing countries, and was caused in considerable part by temporary factors. Strong import demands came only from the industrial countries and the oil exporting countries, while imports of the non-oil primary producing countries—both the more developed and the less developed—remained relatively flat and depressed. The sluggish demand for imports in those countries during most of 1976 reflected not only a cyclical lag in import growth behind the upturn in exports, as is customary during a stage of the international business cycle characterized by restoration of reserve positions and curbing of growth in external debt; it also reflected the efforts of many primary producing countries to restrain the expansion of domestic demand in order to contain inflationary pressures and strengthen balance of payments positions.

Both in the industrial countries and in the oil exporting countries, the pace of import growth during 1976 was rather uneven. In the former group, it was particularly rapid in the first half of the year, when the cyclical resurgence of aggregate demand and output was strongest. By the second half, a subsidence of the inventory rebuilding that had accompanied the initial upturn of final demand, coupled with the more general influence of the pause in growth of industrial output, was already tending to slow the rise in demand for most classes of imports. However, total imports of the industrial countries were bolstered in the latter part of 1976 by a substantial rise in oil imports, partly in anticipation of a decision by the Organization of Petroleum Exporting Countries (OPEC) to raise the price of crude petroleum at the beginning of 1977. Among the major oil exporting countries themselves, semiannual changes in the pace of import expansion followed a different course; such expansion slowed from about mid-1975 through mid-1976 as port congestion and internal distribution problems arose and more restrained demand management policies were instituted in some countries, but it accelerated in the second half of 1976 and early 1977, when some of the earlier constraints were relieved.

Export volume changes from 1975 to 1976 were much more evenly distributed among the various major groups of countries than were the changes on the import side of the respective trade accounts. For each of the broad groups under review here, the 1976 increase in export volume was within the range of 10½-13 per cent. In 1977, rates of export expansion seem likely to be considerably more moderate (perhaps about 7 per cent on average), partly because the potentials for cyclical rebounds were largely realized before the end of 1976 and partly because import demands of many countries, including several of the larger industrial countries, will probably be constrained by economic policies aimed at control of domestic inflation and/or restoration of external balance.

The pattern of import volume growth expected in 1977 differs from that of 1976. Imports of the industrial countries are clearly rising much less rapidly in real terms in 1977 than in 1976, while those of the non-oil developing countries will probably show a much stronger rise. For the other two major groups, continuation of 1976 import trends seems more likely. This would mean that the largest percentage increase would again be recorded by the major oil exporting countries, and that the imports of the more developed primary producing countries would remain relatively flat.

Foreign Trade Prices

The increase in foreign trade prices, after subsiding markedly in 1975 from the highly inflationary rate of 1974, moderated further in 1976. In U.S. dollar terms, the unit value of goods moving in international trade rose by only 2 per cent in 1976, compared with 8½ per cent in 1975. In SDR terms, however, the degree of additional moderation was slight, reflecting the 1976 depreciation of the SDR against the U.S. dollar. (See Table 4.)

Both in 1976 and in the first half of 1977, the main impetus for higher foreign trade unit values came from increases in the prices of primary commodities. In the case of oil, these stemmed mainly from an increase of 10 per cent in the U.S. dollar price of the OPEC “marker crude” on October 1, 1975 and from further increases of 5 per cent for two members of the OPEC and 10 per cent for the others on January 1, 1977. The upsurge of export prices for other primary commodities (Chart 2) involved a wide range of foods, agricultural raw materials, and metals, very unevenly distributed among products and exporting countries. Soaring prices for coffee, cocoa, and tea, as well as for various vegetable oils and oilseeds, contributed disproportionately to the rise, while prices for several important food products, including grains and sugar, declined throughout 1976 and the first half of 1977. Differences in the supply situation—ranging from severe impairment of Brazilian coffee production by frost damage to abundant harvests of foodgrains among leading suppliers of world markets—lay behind these contrasts. Increases in market prices of metals and agricultural materials over the past year have been much more moderate than those of foodstuffs and more nearly aligned with the somewhat irregular upswing of demand in the importing countries. The fact that the resurgence of demand occurred in a climate of still highly inflationary expectations contributed to the sensitivity of market reactions.

Chart 2.Indices of Prices of Commodities, Except Oil, Exported by Primary Producing Countries, 1972–June 1977

(Expressed in U.S. dollars; 1968–70=100)

The particular mix of commodities exported by the more developed primary producing countries showed a much smaller average increase in unit value in 1976 and the first half of 1977 than did the exports of the less developed primary producing countries. In part, the difference reflected the fact that members of the former group are not exporters of any of the products—particularly tropical beverage products—that were subject to the largest increases in the recent commodity price bulge. It must also have reflected a higher proportion of manufactured goods in the exports of the more developed primary producers, together with the relatively smaller rise in prices of such goods.

For the industrial countries, the average rate of increase in SDR-denominated export unit values dropped from 11 per cent in 1975 to 5½ per cent in 1976 (with the drop in terms of U.S. dollar prices being much sharper, from about 12 per cent to virtually no increase at all). Movements of these export unit values were particularly depressed in the first half of 1976 (as well as in the second half of 1975), for two principal reasons. First, the lagged effects of the 1975 recession were depressing raw material prices and sharpening competitive pricing practices. Second, the upward impetus stemming from trends in unit labor costs was temporarily quite modest in a period when marked declines in rates of wage increase coincided with large cyclical gains in productivity.

However, these influences on export prices of the industrial countries were reversed during the second half of 1976 and are tending to push those prices up somewhat faster in 1977. Raw materials prices responded to the brisk recovery of economic activity and trade in the first half of 1976, while the need for competitive pricing may have been somewhat attenuated by the revival of demand. Moreover, many producers were anxious to restore eroded profit margins. Meanwhile, the deceleration in the rate of increase in hourly remuneration of manufacturing employees in the industrial countries tapered off after mid-1976, and productivity gains diminished sharply. Consequently, the upward influence of unit labor cost pressures upon export unit values for manufactured goods was considerably stronger during the period from mid-1976 to mid-1977 than it had been during the preceding year.

The sharp differentials in export unit value movements during 1976 and the first half of 1977 have had a marked impact on the terms of trade. For the non-oil developing countries as a group, these improved by 4 per cent in 1976 (Table 5) and will probably show a larger improvement in 1977, thus regaining about half of the sharp deterioration suffered in 1974 and 1975. On the other hand, the terms of trade of the more developed primary producers continued to deteriorate somewhat in 1976, and this trend appears to have extended into the current year. In the case of the industrial countries as a group, a small decline in the terms of trade appears to have occurred during the recent period. For the major oil exporting countries, the terms of trade are now close to the level established in 1974, after receding moderately in 1975 and recovering in 1976.

Table 5.Terms of Trade Developments, 1962–76 1(Percentage changes)
Annual Average

1962–722
Change from Preceding Year
1973197419751976
Industrial countries–2–113–1
Primary producing countries
More developed countries10–14–6–2
Major oil exporters114138–55
Non-oil developing countries—½10–8–134
Sources: National economic reports, IMF Data Fund, and Fund staff estimates.

For classification of countries in groupings shown here, see Tables 1 and 2.

Compound annual rates of change.

Sources: National economic reports, IMF Data Fund, and Fund staff estimates.

For classification of countries in groupings shown here, see Tables 1 and 2.

Compound annual rates of change.

International Adjustment Process

Background Considerations

The large and sudden changes in the structure of international payments caused by the raising of oil prices at the beginning of 1974, as well as the problems thus posed for the functioning of the adjustment process, have been analyzed in earlier Annual Reports. Here, it may be helpful to single out a few salient developments during the period 1974–76, prior to describing the review of the international adjustment process that has been conducted by the Fund during recent months.

First, it will be recalled that very early in 1974, at the meeting of the Committee of Twenty in Rome, it was agreed that oil importing countries should avoid policies that would serve only to shift payments problems among members of the group and would be detrimental to world trade and economic activity. However, this decision to “accept,” for the time being, oil-induced deficits in the aggregate did not mean that individual oil importing countries should not make payments adjustments in relation to each other.

From 1973 to 1976, there were two major developments in the field of international payments, (a) The combined current account surplus of the major oil exporting countries increased from $6 billion to more than $40 billion. The latter figure was some $25 billion below the suddenly enlarged oil surplus in 1974, primarily because of rapid import expansion, but it was concentrated in a small number of countries whose capacity to expand their imports is comparatively low in relation to the size of their export earnings, (b) The United States, the Federal Republic of Germany, and Japan were particularly resolute in fighting the severe inflationary pressures that emerged during 1974, and the impact of anti-inflation policies and other factors on their current account balances was quite dramatic. In these three large countries, oil-related deficits were rapidly offset by positive changes (totaling more than $30 billion in 1974) elsewhere in the current account, although these changes were not in themselves an objective of policies. At the same time, it was evident that many other oil importing countries had been quite willing to postpone adjustment; in the aggregate, the current account balance of oil importing countries other than the United States, the Federal Republic of Germany, and Japan shifted from a deficit of $8 billion in 1973 to deficits of $64 billion in 1974 and some $55 billion in 1975 and in 1976.

At the Annual Meeting in Manila in 1976, the Managing Director of the Fund observed that the world economy was moving into a situation where the main danger was no longer a deepening of recession but a worsening of inflation. For this reason, he said, the time had come to lay “more stress on the adjustment of external positions and less emphasis on the mere financing of deficits.” He spoke of the “additional urgency” that was lent to this need by the buildup of short-term and medium-term debt, which was beginning to affect the creditworthiness of some borrowers and to create the possibility of economic and financial difficulties.

At its meeting in Manila, the Interim Committee discussed the international adjustment process on the basis of a paper submitted by the Managing Director. The conclusions reached by the Committee, as spelled out in its press communiqué, included the following general principles: (a) Adjustment of external payments positions should be symmetrical as between deficit and surplus countries, (b) To this end, deficit countries should arrange their domestic policies so as to restrain domestic demand and to permit the shift of resources to the external sector, to the extent necessary to bring the deficit on current account in line with a sustainable flow of capital imports and aid. (c) Industrial countries in strong payments positions should ensure continued adequate expansion in domestic demand, within the limits set by effective anti-inflation policies, (d) Exchange rate policies should be allowed to play their proper role in the adjustment process.

In the period immediately following the meetings in Manila, renewed concern about the prospective strength of international trade and about the functioning of the adjustment process was engendered by developments in the industrial world, including both the “pause” in some countries and the demonstrated need for programs of economic stabilization in others. These developments were accompanied by continuing debate as to how the adjustment process should be viewed and analyzed in the changed circumstances of recent years stemming primarily from the oil price increase.

Reference has been made to the review of the adjustment process conducted by the Fund in recent months. The approach adopted in this review had two main elements: (1) an analysis of major shifts in the global pattern of current account balances; and (2) a case-by-case analysis of individual countries’ positions.

1. Key features of the international payments structure were assessed with the aid of some statistical estimates that are reproduced here in Table 6. These estimates involve a comparison of the Fund staff’s 1977 projections of current account balances for major groups of countries with annual averages of corresponding balances for the years 1967–72 (a period of little bias in cyclical conditions), after scaling up the 1967–72 figures to 1977 levels of world trade prices and of real economic activity in the respective groups of countries.

Table 6.Global Structure of Current Account Balances 1(In billions of U.S. dollars)
Groupings 21967–72

Average
19731974197519761977

Projections
1967–72 Average

Rescaled to 1977

Prices and Levels

of Real Output 3
Major oil exporting countries0.76673541373
Industrial countries10.212–1019–1–131
Other non-oil countries
More developed–1.71–14–15–14–12–6
Less developed–8.1–11–30–38–26–25–28
Total 41.1814–15
Sources: Data reported to the International Monetary Fund and Fund staff estimates.

On goods, services, and private transfers.

For classification of countries in groups shown here, see Tables 1 and 2.

Scale factors for prices are based on a general index of world trade prices; scale factors for growth are based on average rates of increase in real GNP (or GDP) in each of the respective groups of countries.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics, plus balance of listed groups with other countries.

In rescaled version of 1967–72 average, this residual figure is primarily a reflection of asymmetries in the treatment of listed groups, and thus does not lend itself to meaningful interpretation.

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

On goods, services, and private transfers.

For classification of countries in groups shown here, see Tables 1 and 2.

Scale factors for prices are based on a general index of world trade prices; scale factors for growth are based on average rates of increase in real GNP (or GDP) in each of the respective groups of countries.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics, plus balance of listed groups with other countries.

In rescaled version of 1967–72 average, this residual figure is primarily a reflection of asymmetries in the treatment of listed groups, and thus does not lend itself to meaningful interpretation.

The table shows that the main shift in the global pattern of current account balances during recent years has been twofold: (a) emergence of the oil exporting countries as the principal surplus group; and (b) disappearance of the formerly large current account surplus of the industrial countries, which have been markedly affected by the oil price increase. The table also shows that the combined current account deficit of the non-oil developing countries as projected for 1977 is about the same as the rescaled deficit for the 1967–72 period. These countries, as well as the more developed primary producing group, thus remain—as they were for many years before the oil price increase—large-scale net recipients of capital and foreign aid, and hence net importers of goods and services.

Although the industrial countries (as a group) are no longer net suppliers of either real resources or financing, they remain the direct source of most of the financing needed to cover the current account deficits (and reserve accumulations) of the non-oil primary producing countries. However, the industrial lenders are obtaining the funds in question not from national saving within the industrial group, as formerly, but directly or indirectly from placements of the surplus funds accruing to the major oil exporting countries. In effect, the industrial countries have reduced their national savings so as to pay for their “share” of the oil deficit; and national savings of the oil exporting countries have displaced those of the industrial countries (mainly through the “recycling” process in international financial markets) as the ultimate net source of funds flowing in various forms to the non-oil primary producing countries.

The perspective on the international payments structure afforded by Table 6 can be helpful in assessing the role of an autonomous source of saving, amounting to about $40 billion a year, that is provided by the current account surplus of a limited number of oil exporting countries. Since most of this saving has been offset by the disappearance of the combined current account surplus of the industrial countries, the global level of international saving is not unduly high on the basis of a proper comparison with the pre-1974 experience and in light of the emphasis generally placed on an increased flow of real resources to the developing countries; and it should not, of itself, be a significant factor inhibiting attainment of a reasonably high level of employment in the world economy, although maldistribution of surpluses and deficits among individual oil importing countries could have such inhibiting effects. In the main, the subnormal performance of the world economy since 1974 can be attributed not to an excessive volume of international saving but to the restraint that national authorities have had to maintain over monetary and fiscal policies because of the severity of the inflation problem, and to the concern in some countries over the balance of payments as the need for individual adjustment made itself felt.

2. While analytical judgments can be formed on the basis of broad aggregative statistics for groups of countries, the positions of individual countries within the groups are diverse. Moreover, the necessary adjustments must of course be made by individual countries. Accordingly, the Fund staff proceeded on a case-by-case basis (with due regard for mutual consistency of the results) and appraised the external structure and prospects of individual member countries. In this assessment, the current account balance projected for each country for 1977 was analyzed in the context of expected domestic economic conditions and of developments on capital account, with a view to ascertaining whether the current account balance had become out of line with sustainable financing, whether its movement represented progress toward balance of payments adjustment, and whether additional measures of adjustment were likely to be necessary beyond 1977.

Although this individual country material is both detailed and sensitive, a brief review of the current adjustment picture can be provided within the framework of the four major groups of countries utilized in the earlier sections of this chapter. After this review, a final subsection presents some conclusions.

Major Oil Exporting Countries

One of the sizable shifts in the global pattern of current account balances in 1976 was a $6 billion increase in the surplus of the major oil exporting countries, to an estimated $41 billion. It may be recalled that this surplus, after rising—under the impetus of OPEC-determined price increases—from $6 billion in 1973 (and much less in earlier years) to $67 billion in 1974, had then subsided to $35 billion in 1975. (See Table 7.) Both the downward movement in 1975 and the rebound in 1976 can be attributed in large degree to cyclical factors affecting primarily the volume of oil exports.

Table 7.Global Balance of Payments Summary, 1973–76(In billions of U.S. dollars)
Balance onCapital

Account

Balance 1
Change in

Liabilities

to Foreign

Official

Agencies 2
Balance

Financed by

Transactions in

Reserve Assets
TradeServices

and private

transfers
Current

account
Industrial countries 3197312.4–1.311.1–12.5 45.44.0
1974–10.1–1.1–11.2–3.6418.33.5
197521.3–2.518.6–19.245.24.6
1976–6.24.8–1.4–3.2415.410.8
Major oil exporters 3197318.6–12.46.2–2.24.0
197481.7–14.367.4–21.40.146.1
197552.5–17.834.7–17.3–0.217.2
197663.5–22.541.0–24.017.0
Other primary producing countries 31973–11.41.8–9.619.50.110.0
1974–41.8–2.1–43.840.61.8–1.4
1975–48.1–4.9–53.045.05.6–2.4
1976–32.3–7.8–40.145.76.412.0
More developed areas1973–4.86.21.31.0–0.12.3
1974–19.14.8–14.310.00.4–3.9
1975–19.04.2–14.810.12.4–2.3
1976–16.82.5–14.311.13.2
Less developed areas1973–6.6–4.4–10.918.50.17.7
1974–22.8–6.8–29.530.61.42.5
1975–29.1–9.1–38.234.93.2–0.1
1976–15.5–10.3–25.834.63.212.0
In Africa19730.5–2.3–1.92.10.10.3
19740.7–3.0–2.32.30.20.2
1975–2.0–3.1–5.14.80.3
1976–1.3–3.9–5.24.90.50.2
In Asia1973–2.40.1–2.34.32.0
1974–9.10.5–8.69.80.92.1
1975–9.20.7–8.69.10.51.0
1976–2.80.1–2.78.40.36.0
In the Middle East1973–4.32.1–2.23.60.11.5
1974–7.01.4–5.65.70.20.3
1975–9.11.0–8.26.91.80.5
1976–8.21.6–6.76.21.00.5
In Latin America and the Caribbean1973–0.3–4.2–4.58.43.9
1974–7.4–5.7–13.112.90.1–0.1
1975–8.7–7.6–16.314.10.5–1.7
1976–3.1–8.1–11.215.01.45.3
Total, all countries 5197319.6–11.87.84.85.418.0
197429.8–17.512.315.720.248.2
197525.7–25.30.48.410.619.4
197625.0–25.5–0.518.521.839.8
Sources: Data reported to the International Monetary Fund and Fund staff estimates.

This balance is computed residually as the difference between the balance financed by transactions in reserve assets and the sum of the current account balance and the change in liabilities to foreign official agencies; it includes net errors and omissions, as well as reported capital movements, government transfers, and gold monetization. (See also footnote 2.)

The concept of “liabilities to foreign official agencies” used in this table encompasses use of Fund credit and short-term balance of payments financing transactions in which the liabilities of the borrowing country are presumably treated as reserve assets by the creditor country.

For classification of countries in groups shown here, see Tables 1 and 2.

See footnote 5.

Global balance of payments aggregations inevitably contain many asymmetries arising from discrepancies of coverage or classification, timing, and valuation in the recording of individual transactions by the countries involved. A major area of asymmetrical classification during recent years concerns the recording of official claims placed in Eurocurrency markets. These transactions, although treated as changes in reserve assets by the investing countries, are recorded as capital inflows by the recipient countries (mainly, the industrial countries). Had such transactions been recorded symmetrically, the global summations would show both a larger net capital outflow and a larger aggregate change in liabilities to foreign official agencies. If identified Eurocurrency reserve placements (shown in terms of SDRs in Table 12 of this Report) were assumed to have been placed in industrial countries, then the adjusted net capital outflows from those countries would amount to $20.6 billion, $17.7 billion, $26.7 billion, and $11.3 billion over the years 1973, 1974, 1975, and 1976, respectively.

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

This balance is computed residually as the difference between the balance financed by transactions in reserve assets and the sum of the current account balance and the change in liabilities to foreign official agencies; it includes net errors and omissions, as well as reported capital movements, government transfers, and gold monetization. (See also footnote 2.)

The concept of “liabilities to foreign official agencies” used in this table encompasses use of Fund credit and short-term balance of payments financing transactions in which the liabilities of the borrowing country are presumably treated as reserve assets by the creditor country.

For classification of countries in groups shown here, see Tables 1 and 2.

See footnote 5.

Global balance of payments aggregations inevitably contain many asymmetries arising from discrepancies of coverage or classification, timing, and valuation in the recording of individual transactions by the countries involved. A major area of asymmetrical classification during recent years concerns the recording of official claims placed in Eurocurrency markets. These transactions, although treated as changes in reserve assets by the investing countries, are recorded as capital inflows by the recipient countries (mainly, the industrial countries). Had such transactions been recorded symmetrically, the global summations would show both a larger net capital outflow and a larger aggregate change in liabilities to foreign official agencies. If identified Eurocurrency reserve placements (shown in terms of SDRs in Table 12 of this Report) were assumed to have been placed in industrial countries, then the adjusted net capital outflows from those countries would amount to $20.6 billion, $17.7 billion, $26.7 billion, and $11.3 billion over the years 1973, 1974, 1975, and 1976, respectively.

Such factors, together with short-run swings in oil inventories, have distorted the continuity of calendar-year time series and obscured the expected underlying tendency of the oil exporters’ surplus to shrink gradually as their imports rise. This surplus is expected to recede somewhat in 1977; the projected decline is generally in line with the notion that, given their scope for expansion in imports of goods and services, the oil exporters’ current account surplus will tend, for some time to come, to decline gradually during any period for which their terms of trade do not rise significantly.

Reference was made earlier to the fact that the combined surplus of the major oil exporters is concentrated in countries of low absorptive capacity. Such a concentration tends, of course, to slow the rate at which rising imports may be expected to eat into the aggregate surplus for the whole oil exporting group, and means that this surplus will probably remain large for some years to come.

Available information on placements of the financial surpluses accruing to the oil exporters indicates a trend toward diversification of investments and shifts into less liquid forms. Placements in bank deposits (mainly in the Eurocurrency market) and short-term government securities are estimated to have absorbed only a little more than one fourth of the net cash inflow available for disposition by the major oil exporting countries in 1976, compared with about two thirds in 1974, while the proportion going into other investments in developed countries (including marketable long-term government securities) has risen from about two tenths to one half. Grants and loans extended to developing countries (directly or through multilateral development agencies) represented one seventh of the total in 1976, about the same proportion as in 1975 but substantially larger than in 1974.

Because of the rather uncertain dividing line between reserves and other officially held external financial assets of the oil exporting countries, together with the improbability of any early net drawing down of their total holdings of external claims, distinctions with respect to the maturity structure of these claims may be somewhat less significant at the present time than corresponding distinctions for most other groups of countries. Nevertheless, the shift just described can be regarded as one tending to increase the stability of international capital movements.

Industrial Countries

Following the oil price increase of 1974, which swung the current account balances of most industrial countries into substantial deficit, annual changes in the combined balance for that group of countries were mainly cyclical in origin. From 1975 to 1976, the response of import demands to the rebound of economic activity was the major element in a downward shift of $20 billion in the group’s current account balance, from a surplus of $19 billion to a small deficit. (These balances are defined in terms of goods, services, and private transfers; see Table 8, which also shows current account balances inclusive of official transfers.)

Table 8.Industrial Countries: Balance of Payments Summaries, 1973–76(In billions of U.S. dollars)
Balance onCapital

Account

Balance 1
Change in

Liabilities

to Foreign

Official

Agencies 2
Balance

Financed by

Transactions

in Reserve

Assets
Memo:

Current

Account

Including

Official

Transfers
TradeServices

and

private

transfers
Current

account

United States19730.91.62.5–7.85.1–0.2–0.4
1974–5.46.81.4–10.310.31.4–5.03
19759.06.515.5–20.25.30.611.6
1976–9.212.33.1–13.513.02.5–1.3
United Kingdom1973–5.44.2–1.21.40.30.5–2.1
1974–12.04.1–7.84.93.10.2–8.6
1975–7.14.3–2.82.8–1.4–1.4–3.6
1976–6.45.3–1.10.2–0.5–1.4–2.5
Canada19732.7–2.7–0.5–0.50.1
19741.7–3.4–1.61.6–1.5
1975–0.5–4.1–4.74.30.4–4.7
19761.1–5.4–4.24.80.5–4.2
France19730.8–0.8–0.1–1.80.1–1.8–0.7
1974–3.9–1.0–4.84.50.3–0.1–5.9
19751.5–0.41.12.40.5.4.0
1976–4.7–0.3–5.02.3–0.1–2.9–6.0
Germany, Fed. Rep.197314.9–8.26.72.5–0.58.74.3
197421.9–9.612.3–13.00.1–0.69.6
197517.6–10.27.5–8.3–0.2–1.03.9
197616.4–9.66.8–3.40.33.73.0
Italy1973–4.02.8–1.21.00.30.1–2.5
1974–8.51.9–6.62.05.30.7–7.8
1975–1.12.10.9–3.61.0–1.7–0.5
1976–4.02.3–1.71.72.62.6–2.9
Japan19733.7–3.60.1–6.4–6.3–0.1
19741.4–5.9–4.55.71.2–4.7
19755.0–5.4–0.4–0.2–0.6–0.7
19769.9–6.03.9–0.13.83.7
Other industrial countries 41973–1.35.54.2–0.93.43.8
1974–5.55.90.40.8–0.70.5–0.4
1975–3.24.81.63.65.2
1976–9.26.2–3.05.00.12.1–4.1
Total, industrial countries197312.4–1.311.1–12.555.44.02.5
1974–10.1–1.1–11.2–3.6518.33.5–24.33
197521.3–2.518.6–19.2 55.24.65.9
1976–6.24.8–1.4–3.2515.410.8–14.3
Sources: Data reported to the International Monetary Fund and Fund staff estimates.

See Table 7, footnote 1.

See Table 7, footnote 2.

Includes the effect of a revision of the terms of the disposition of economic assistance loans made by the United States to India and repayable in rupees, and of rupees already acquired by the U.S. Government in repayment of such loans. The revision has the effect of increasing U.S. Government transfer payments by about $2 billion, with an offset in net official loans.

Austria, Belgium-Luxembourg, Denmark, the Netherlands, Norway, Sweden, and Switzerland.

See Table 7, footnote 5.

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

See Table 7, footnote 1.

See Table 7, footnote 2.

Includes the effect of a revision of the terms of the disposition of economic assistance loans made by the United States to India and repayable in rupees, and of rupees already acquired by the U.S. Government in repayment of such loans. The revision has the effect of increasing U.S. Government transfer payments by about $2 billion, with an offset in net official loans.

Austria, Belgium-Luxembourg, Denmark, the Netherlands, Norway, Sweden, and Switzerland.

See Table 7, footnote 5.

Cyclical considerations aside, it is sometimes contended that each of the industrial countries (and other oil importing countries as well) should have some “fair share” of the collective current account deficit that is the inevitable counterpart, for the time being, of the combined current account surplus of the major oil exporting countries. This simplistic notion, however, overlooks the wide differences among countries in balance of payments structure as between current account transactions and capital flows—such differences reflecting primarily national differences in saving propensities and investment requirements. Nevertheless, given the fact that many countries throughout the world have current account deficits that are too large to be sustained in light of the available financing or the burden of external indebtedness, the working of the international adjustment process would be facilitated by declines in the current account surpluses that still prevail in certain of the industrial countries. Realization of such declines would require not only internationally cooperative policies on the part of the surplus countries themselves, but also firm implementation of adjustment measures by their trading partners with current account deficits.

Current accounts and capital flows.—The industrial countries with current account deficits in 1976 included Austria, Canada, Denmark, France, Italy, Norway, Sweden, and the United Kingdom. Among the larger countries, the deficits of Italy and the United Kingdom were in excess of amounts considered acceptable by the authorities, but each country experienced a major exchange rate depreciation and a gain in international price competitiveness during 1976 that should improve its export prospects. Similar developments occurred in France, where the 1976 deficit on current account was due in considerable part to special factors, such as the summer drought. All three of these countries, as well as most of the other deficit countries, are now pursuing policy measures that should improve their current account balances within the year. In the case both of the United Kingdom, which will benefit from the North Sea oil fields, and of Italy, the expected improvement may carry the current account into balance or surplus.

In the financing of current account deficits of industrial countries, only France and the United Kingdom made any substantial use of reserve assets in 1976. Most of the deficit countries have relied mainly on capital inflows, and a number of them have encouraged private or semiofficial enterprises to borrow abroad. National governments themselves have entered the international capital market in some instances. Policies to encourage external borrowing, partly through maintenance of high domestic interest rates and restraint on domestic credit, continued to be followed in France and the Nordic countries. The Swedish Government borrowed directly on the international market for the first time in February 1977, and it is anticipated that as much as half of the financing for this year’s current account deficit may be obtained through that channel. Much of Denmark’s overall borrowing abroad has continued to be done by the authorities.

Some of the larger current account deficits among the industrial countries do not appear to be of a character that poses constraints on overall economic policy. The Canadian and Norwegian deficits fall in this category. The structure of Canada’s balance of payments has traditionally been one of a current account deficit offset by inflows of long-term capital; this pattern was evident in 1976 and may be expected to continue in the period ahead. The Norwegian current account has been in substantial deficit since 1974, partly as a consequence of heavy importation of equipment for the exploration and exploitation of the North Sea oil resources. As the oil sector imports taper off and the share of fuels in the exports of Norway grows, a shift into surplus is expected.

The current account positions that were strongest in 1975 and 1976 remained strong through the first half of 1977. The surplus of the Federal Republic of Germany is clearly a reflection of the continuing strength of that country’s exports and the ability of its exporters to hold or raise their market shares despite the loss in price competitiveness experienced in the early 1970s. In view of its external strength, and in line with its policy stance, the Federal Republic of Germany should maintain an adequate rate of expansion in domestic demand, consistent with its anti-inflation objective, and should accept any appreciation of its currency that may result from the operation of market forces. However, eventual adjustment of that country’s current account position will also depend importantly on success of anti-inflation policies in the deficit countries, coupled with willingness of those countries to allow exchange rate flexibility.

In the Netherlands, the persistent current account surplus of recent years reflects in large part the increasing importance of exports of natural gas. Not wishing to count on continuation of recent levels of export earnings from depletable reserves of this product, the authorities are endeavoring to promote capital exports, with the objective of offsetting the current account surplus. The size of the Swiss current account surplus is partly a manifestation of the severity of the recession in Switzerland, which has resulted in low capacity utilization along with almost full employment in the labor market because of a permanent reduction in the number of foreign workers; also, the strong export orientation of several Swiss industries has enabled them to maintain the stability of their foreign market shares, in volume terms, despite the pricing handicaps imposed by appreciation of the Swiss franc. These circumstances signal a structural imbalance calling for additional measures of adjustment. Meanwhile, the Swiss authorities are pursuing a policy of discouraging capital inflows and encouraging outflows.

Japan’s current account balance, although pushed into substantial deficit by the oil price rise in 1974, has swung back into surplus. Rapid restoration of export price competitiveness after the onset of severe inflationary pressures in 1974 contributed to an increase in Japan’s share of world markets, allowing its exports to rise slightly in volume despite the global recession. By the first half of 1977, the Japanese surplus on current account was very large, and realization of the authorities’ intention to reduce it in the period ahead will depend crucially on achievement of a satisfactory rate of expansion of domestic demand. The recent appreciation of the yen and the stated willingness of the authorities to let the exchange rate be determined by market forces, with official intervention only for the purpose of assuring orderly short-run movements, should help in due course to contain upward pressures on the current account balance. Meanwhile, steps may be needed to promote the net outflow of long-term capital, which contracted sharply after the oil crisis and provided only a relatively small offset to the current account surplus in 1976.

The large shrinkage of the current account surplus of the United States from 1975 to 1976, reversing a cyclical movement of similar size in the opposite direction in 1975, reflected primarily the fact that economic activity was recovering at a faster rate in the United States than in its trading partners, with inventories rising strongly. Net capital outflows from the United States greatly exceeded the small current account surplus in 1976—a development that illustrates the role of the U.S. money and capital markets as intermediaries on an international scale. In the main, the counterpart of the recorded net outflows of capital (as usually defined for balance of payments purposes) was to be found in changes in foreign official assets held in the United States. These have accounted for one third to one half of the total inward movement of funds (both capital and reserves) in the past three years, with the investments of oil exporting countries representing the bulk of the official inflow over the period as a whole. In effect, inflows of foreign capital and official reserves, rather than U.S. national savings, have represented the main source of financing for investments in assets abroad by U.S. residents in recent years.

A further downward movement in the current account balance of the United States occurred in the first half of 1977, carrying it into substantial deficit. This movement was perhaps less wholly attributable to international cyclical factors (i.e., the stronger growth of domestic demand in the United States than in other countries) than was the 1975–76 swing, although such factors were still operating in the same direction. Other influences, such as the sharp rise in prices of many imported primary commodities and the impact of an exceptionally severe winter on requirements for imported oil, were also important. Although oil imports accounted for a considerable part of the total change in the U.S. trade balance from 1975 to the first half of 1977, the change in the balance of other trade transactions was more substantial, serving to facilitate the external adjustment efforts of many other countries.

Exchange rate developments.—Following a period of relative stability in 1975, the effective exchange rates of Italy, the United Kingdom, and France came under pressure in 1976, at different times, and depreciated sharply. (See Chart 3.) In each case, the depreciation occurred despite official efforts to resist it through intervention, large increases in domestic short-term interest rates to influence capital movements, or heavy borrowings abroad by public or semipublic entities. During the first half of 1977, however, there were only small changes in the effective exchange rates of these three countries.

Chart 3.Industrial Countries: Effective Exchange Rates, 1975–June 1977

(Indices, 1975 = 100)

In contrast, the Japanese yen appreciated by 5 per cent in effective-rate terms during 1976 and by 10 per cent during the first half of 1977. The increase in Japan’s current account surplus was apparently the major factor behind this development.

Both the deutsche mark and the dollar appreciated in effective-rate terms during 1976, and the former continued to do so in the first half of 1977. The US$/DM rate itself, which had fluctuated rather widely from early 1973 to mid-1975, was quite stable from August 1975 to June 1976, but then rose sharply in the second half of 1976 and continued upward in the first half of 1977. Monetary developments—epitomized by the fall in short-term interest rates in the United States and the rise in the interbank rate in Frankfurt during the second half of 1976 (Chart 4)—can be seen as the key factors behind the deutsche mark appreciation during that period.

Chart 4.Industrial Countries: Short-Term Interest Rates, 1974–June 19771

(In per cent per annum)

1 The rates shown are monthly averages of daily rates on money market instruments of about 90 days’ maturity (the call money rate for Japan).

2 The United States, the Federal Republic of Germany, the United Kingdom, France, and Japan, with use of weights specified in Section J, Remuneration and Interest Rate on Special Drawing Rights, Appendix II, Annual Report, 1976, page 118.

Tensions within the European common margins arrangement (the “snake”) were frequent during 1976 and at times became extreme, leading to adjustments within the snake in mid-October. Prior to that realignment, the spread of 4–5 percentage points between inflation rates in the Federal Republic of Germany and those in the other “snake” countries, together with the weakening of some of the current account balances, had encouraged speculation in anticipation of a realignment. Official interventions to maintain the established currency relationships were sizable, and several countries resorted to stringent monetary policies for defense of their currencies. After the realignment, however, tensions within the snake abated and remained limited during the first half of 1977. In April, the Nordic countries, although no speculation against their currencies had been evident, made another adjustment in their intervention limits for exchange transactions within the snake, chiefly because of the weakness of Sweden’s current account and the loss in competitiveness of Swedish exports.

On the whole, exchange rate movements were relatively small during the first half of 1977 despite the persistence of wide differentials in rates of inflation and of sizable current account imbalances. Although direct official intervention in exchange markets did not, on balance, figure prominently in this relative stability, official financing transactions of the various kinds noted above contributed. The major stabilizing factors, however, were probably the pursuit of restrictive demand management policies in deficit countries and of moderately expansionary demand policies in the United States and the Federal Republic of Germany that were broadly similar to each other, resulting in a relatively narrow interest rate differential between those two countries (Chart 4).

Recent developments appear to confirm that there is no close correlation between differences in inflation rates and those in exchange rate movements over short periods. With respect to the past four years, however, differences in relative inflation rates among major industrial countries and changes in exchange rates for their currencies have been, by and large, mutually offsetting. (See Chapter 2, page 28.)

More Developed Primary Producing Countries

The more developed primary producing countries were still generally in the backwash of the international recession in 1976. As noted earlier, rates of inflation remained high despite continued Weakness of domestic growth rates; and the group’s external deficit on current account was still at approximately the high level reached in 1974 and 1975.

These countries are predominantly net importers of capital, and their current account balances are ordinarily in substantial deficit. Their collective deficit rose sharply with the onset of the global recession and the oil crisis, and many countries in the group borrowed heavily abroad, in addition to drawing down their reserves, to maintain the inflow of real resources. Most of the countries have ready access to international financial markets, and they were apparently willing to utilize this access to postpone downward adjustments of their imports and current account deficits.

In any event, the price and volume changes discussed in the foregoing review of trends in world trade made it difficult for the more developed primary producers to carry out major adjustments of that sort. The cumulative deterioration of their terms of trade since 1973 has been substantially greater than that for any other major group of countries (Table 5). Consequently, even though the exports of this group have been responsive in volume terms to the cyclical upswing in world demand, and might have brought a substantial improvement of the combined trade balance in a setting of more favorable price developments, the trade deficit declined only moderately from 1974 to 1976; moreover, most of the improvement that occurred was offset by a decline in net receipts from services and private transfers.

For 1977, a partial reversal of the recent decline in the service and private transfers account should supplement some further shrinkage of the trade deficit to produce a moderately lower current account balance. As indicated in Table 6, however, the estimated 1977 deficit of the more developed primary producing countries on current account ($12 billion) will remain about twice as large as the average current account deficit of the same group over the period 1967–72 after allowance for the effects of growth and inflation. This observation suggests that the group includes a disproportionate number of countries whose adjustments to the international disturbances of recent years remain relatively incomplete.

In general, this characterization is most applicable to the more developed primary producers of southern Europe. In several cases, internal problems have impaired the ability and willingness of countries in that area to implement meaningful stabilization programs. Delays in the application of restraints on demand have permitted rates of inflation to accelerate or remain unduly high, and the continuation of relatively high inflation, in turn, has contributed to the maintenance of current account deficits at the high levels to which they had risen in 1974 and 1975. The heavy foreign borrowing to finance these large deficits has included substantial flows of an official compensatory character.

From 1974 to 1976, most of the improvement in the combined current account balance of the more developed primary producing countries was centered in the accounts of the non-European members of the group (Australia, New Zealand, and South Africa) and of Finland. These same countries will probably account for the bulk of the further improvement expected in 1977. In all four countries, measures of restraint on aggregate demand have been instrumental in bringing about recent adjustments of balance of payments positions, and the authorities in each case appear determined to persevere with such policies in 1977. This group of countries pursuing restrictive fiscal and monetary policies to curb domestic inflation and adjust external balances has recently been joined by Portugal, where tighter financial policies have been adopted in connection with a Fund stand-by arrangement.

Less Developed Primary Producing Countries

Mainly in reflection of the world trade developments reviewed above, the current account deficit of the non-oil developing countries, which had risen to unprecedented size in 1974 and 1975, showed a substantial reduction in 1976 and may be expected to hold at about the same level in 1977. The estimated deficits for those two years, each about $25 billion, are some $12–13 billion below the 1975 peak. (See Table 6.)

The current account deficit and its financing.—Despite its sharp decline in 1976, the aggregate current account deficit of the non-oil developing countries remains three times as large, in nominal terms, as it was during the late 1960s and early 1970s. However, as noted earlier (and shown in Table 6), this nominal difference is chiefly a reflection of growth and inflation in the world economy over the intervening years. After allowance for those factors, the estimated current account deficit of the non-oil developing countries in 1977 is similar to the annual average for 1967–72.

In this connection, maintenance of perspective requires recognition that these countries have long been—and should continue to be—major net importers of goods and services. As a group, they are making developmental investments substantially in excess of their own national savings, and are enabled to do so by a persistent net inflow of capital and aid from abroad. While the degree to which national resources can be supplemented on a sustainable basis in the prevailing global environment is a difficult issue for judgment, there is general agreement that it is appropriate for the non-oil developing countries to continue sizable current account deficits as long as they are able and willing to use borrowed resources to promote economic development.

Nevertheless, the question of degree remains crucial from the standpoint of balance of payments adjustment. It is clear that the upsurge of current account imbalances among the non-oil developing countries from 1973 to 1975 overshot the mark. In meeting the emergency pressures of that period, when a strongly adverse cyclical swing was compounded by the increased costs of energy and foods, many of these countries relied on external borrowing at rates and costs that were not sustainable, either from their own standpoint or from that of their creditors. However, a considerable proportion of the countries in the group have already made sizable adjustments.

As far as sheer size is concerned, the “scale” considerations cited above (i.e., considerations relating to the record of growth and inflation in the world economy) would suggest that the combined current account deficit for the non-oil developing countries is no longer a source of serious concern. Its financing would not require total capital flows on an extraordinary scale in relation to relevant flows of income, saving, and investment in either the lending countries or the borrowing countries. However, this generalized condition does not imply an absence of need for further balance of payments adjustments by individual countries. The distribution of current account deficits within the non-oil developing countries is extremely uneven, and in a number of cases it is not well matched with the distribution of access to external financing on a readily sustainable basis, nor with debt servicing capabilities.

The overhang of external indebtedness built up during the initial surge of borrowing to finance the 1974 and 1975 deficits constitutes a special problem in some developing countries. A major feature of this surge was heavy reliance on borrowing in international financial markets, and especially on credits (both long-term and short-term) from commercial banks. (See Table 9 and Charts 5 and 6.) An important aspect of the shift toward such sources of funds was the shortening of maturity schedules and the rise in interest costs (by comparison with those involved in traditional developmental financing) that are associated with typical market borrowings. These factors make for disproportionate increases in debt service payments to be charged against receipts from export earnings and from new inflows of capital.

Table 9.Non-Oil Developing Countries: Current Account Financing, 1973–76(In billions of U.S. dollars)
1973197419751976
Current account deficit110.929.538.225.8
Financing through transactions that do not affect net debt positions8.210.8 211.110.4
Net unrequited transfers received by governments of non-oil developing countries4.66.2 26.26.0
Direct investment flows, net3.64.64.94.4
Net borrowing and use of reserves 32.718.7 227.215.4
Reduction of reserve assets (accumulation,—)–7.7–2.50.1–12.0
Net external borrowing 410.421.2227.127.4
Long-term loans received by governments from official sources, net5.67.8 210.611.7
Other long-term borrowing from nonresidents, net4.78.110.011.2
From private banks abroad4.16.38.08.4
Through suppliers’ credits0.30.50.71.2
Other sources50.31.31.31.6
Use of reserve-related credit facilities, net 60.11.43.23.2
Other short-term borrowing, net0.64.14.8
1.3
Residual errors and omissions 7–0.7–0.1–1.5
Sources: Fund balance of payments records and Fund staff estimates.

Balance on goods, services, and private transfers (with sign reversed).

Excludes the effect of a revision of the terms of the disposition of economic assistance loans made by the United States to India and repayable in rupees, and of rupees already acquired by the U.S. Government in repayment of such loans. The revision has the effect of increasing government transfers by about US$2 billion with an offset in net official loans.

I.e., financing through changes in net debt positions (net borrowing, less net accumulation—or plus net liquidation—of official reserve assets).

Includes any net use of nonreserve claims on nonresidents, errors and omissions in reported balance of payments statements for individual countries, and minor deficiences in coverage.

Including errors and residuals that arise from the mismatching of data taken from creditor and debtor records.

Comprises use of Fund credit and short-term borrowing by monetary authorities from other monetary authorities.

Errors and omissions in reported balance of payments statements for individual countries, plus minor omissions in coverage.

Sources: Fund balance of payments records and Fund staff estimates.

Balance on goods, services, and private transfers (with sign reversed).

Excludes the effect of a revision of the terms of the disposition of economic assistance loans made by the United States to India and repayable in rupees, and of rupees already acquired by the U.S. Government in repayment of such loans. The revision has the effect of increasing government transfers by about US$2 billion with an offset in net official loans.

I.e., financing through changes in net debt positions (net borrowing, less net accumulation—or plus net liquidation—of official reserve assets).

Includes any net use of nonreserve claims on nonresidents, errors and omissions in reported balance of payments statements for individual countries, and minor deficiences in coverage.

Including errors and residuals that arise from the mismatching of data taken from creditor and debtor records.

Comprises use of Fund credit and short-term borrowing by monetary authorities from other monetary authorities.

Errors and omissions in reported balance of payments statements for individual countries, plus minor omissions in coverage.

Chart 5.Non-Oil Developing Countries: Debt and Debt Service Ratios, 1969–77 1

Sources: IBRD Debtor Reporting System and Fund staff estimates.

1 The debt and debt service figures plotted in this chart relate only to medium-term and long-term external public, or publicly guaranteed, debt, as defined in the Debt Reporting Statistics of the IBRD.

2 Fund staff projections.

Chart 6.Non-Oil Developing Countries: Share of External Debt1 Owed to Various Groups of Creditors, End 1967–End 1976

(Per cent of total debt outstanding)

1 Public and publicly guaranteed medium-term and long-term external debt.

From time to time in recent years, some concern about the sustainability of flows of funds to the non-oil developing countries from commercial market sources has arisen. Through mid-1977, however, such concern did not prove justified for these countries as a group. Indeed, they continued to borrow as heavily in 1976 as in 1975, despite the sharp reduction in their combined current account deficit. It is now clear that many countries borrowed abroad substantially more than was needed for current account financing and added the difference to their reserve holdings, which had been considerably reduced in real terms during 1974 and 1975. However, the magnitude of the reserve replenishment that actually occurred considerably exceeded the expectations of most observers; the equivalent of nearly $12 billion was added to gross reserve assets in 1976, and the rate of increase slackened only moderately after the turn of the year.

Financing of another year’s current account deficit at approximately the 1976 level should present no problem in the aggregate. Even with some slackening of external borrowing, the financing of such a deficit could be accommodated through a moderate slowing of the buildup in reserves. Some slackening of external borrowing in 1977 does seem likely, and it will probably be centered in credit from commercial banks. Although the outstanding amount of such credit rose disproportionately for several years through 1976, its growth appears to be tapering off somewhat during the current year. A number of countries are attempting to curb the expansion of external debt and of related debt service charges, while some of the banks supplying these funds have moved to limit the rate of increase in their “exposure” in particular countries.

Regional differences.—The sharp downward adjustment of the aggregate current account deficit of the non-oil developing countries from 1975 to 1976 was concentrated mainly in two regions—Asia and the Latin American and Caribbean area (Table 7). The decline recorded for the small group of non-oil countries in the Middle East was relatively moderate, while there was no decline at all in the current account deficit of the African region.

For 1977, the virtually unchanged aggregate deficit now in prospect for the non-oil developing countries as a group seems likely to result from contrasting regional changes. These are expected to comprise an appreciable further downward adjustment in Latin America and the Caribbean and a small reduction in Africa, largely offset by considerable slippage in the Middle East and a minor upturn in the collective current account deficit of less developed countries in Asia. If these prospects materialize, the Asian deficit will remain only about one third as large as it was at its peak in 1975, while the Latin American and Caribbean deficit might amount to about one half of the corresponding 1975 figure. On the other hand, the deficits now visualized for the African and Middle Eastern regions are both close to their 1975 levels, suggesting that only relatively minor adjustments have as yet been carried out in those areas.

The large decline in the Asian current account deficit since 1975 has stemmed mainly from three factors: the impact on import demands of the restrained financial policies pursued by several of the larger countries; the prevalence, especially in South Asia, of favorable weather conditions, which combined with the easing of world market prices for foodgrains to reduce food import bills; and the strong revival of export earnings stemming from the cyclical recovery in the industrial countries, as well as from the recent bulge in world prices for a number of primary commodities important in Asian export trade.

For some of the major Asian countries, the process of external adjustment to the international disturbances of 1974 and 1975 was largely completed in 1976, and domestic development programs are proceeding without critical balance of payments constraints in 1977. Other Asian countries appear to require only moderate further adjustments, and some of those whose adjustments remain incomplete are nevertheless making satisfactory progress toward adjustment goals under existing programs. However, the Asian area also includes a few countries that remain afflicted with basically weak balance of payments positions, although some of these have been masked by unusually favorable harvests in 1976 or suppressed by the application of restrictive trade and payments policies and domestic controls.

The balance of payments record of the Latin American and Caribbean area, even more than that of the Asian area, has been dominated in recent years by striking changes in the current account balances of a few large countries. Having strong access to international financial markets, the Latin American and Caribbean countries were able to borrow heavily in 1974 and 1975, especially from commercial banks, to finance a large increase in their deficits on current account, and they also drew down reserves. Their combined deficit rose to a peak of more than $16 billion in 1975, compared with only $4½ billion in 1973 (Table 7).

Although most national authorities in the Latin American and Caribbean region had initially attempted to sustain domestic activity through expansionary fiscal and monetary policies during 1974 and much of 1975, there was a widespread swing toward tighter policies as the effects of unrestrained demands on imports and external payments balances became apparent. During 1976, this swing was instrumental in bringing a substantial reduction in the aggregate current account deficit of the region; a further reduction seems to be in process in 1977, in major part because of increases in export prices, especially for coffee. Lowering of exchange rates and more restrained wage policies have also been widely used to facilitate improvements in current account balances.

The scale of external borrowing by Latin American and Caribbean countries was not cut back in step with the reduction of current account deficits in 1976. Consequently, some rebuilding of international reserves took place, and this tendency has continued in the first half of 1977.

For a number of Latin American and Caribbean countries, issues relating to external debt management have come to be important because of the relatively heavy reliance on private market financing, and especially on commercial bank credit. Debt service ratios have risen to historically high levels in a number of countries, and the need to restrain the growth of debt service charges has been taken into account by most of the national authorities concerned in devising their adjustment programs.

In Africa, most non-oil developing countries seized the opportunity created by the commodity boom of 1973–74 to expand development efforts, but found it difficult to modify their policies quickly when the global environment changed. Through most of 1976, balance of payments adjustment measures were confined to a relatively few countries. For the African region as a whole, the current account deficit remained as high in 1976 as in 1975, and the improvement now in prospect for 1977 is quite moderate.

Adjustment measures are needed in a considerable number of African countries. Financing through net inflows of capital and official transfers at their recent rates does not appear to be fully sustainable in the medium term. Increases in medium-term and long-term official and officially guaranteed debt since 1974 have occurred mainly in obligations of relatively short maturities, and annual debt service charges have been rising steeply, leaving about a dozen countries in the African area with severe debt service problems.

In many African countries, the main prerequisite for progress toward satisfactory external adjustment is correction of domestic financial imbalances. Improved budgetary policies are essential to permit lower rates of inflation and to reduce reliance on external financing. In the absence of appropriate stabilization measures, tendencies toward increasing resort to trade and payments restrictions, and to disorderly external financing through arrears on external payments, could become more widespread. Meanwhile, a continuing flow of official external finance will be necessary, since the process of achieving equilibrium at acceptable rates of growth is bound to be slow.

For the Middle Eastern countries that are not major exporters of oil, there was some decline in the current account deficit in 1976 from the swollen level of 1975, but prospects for 1977 are not good. The regional current account deficit seems likely to rise again, and could well exceed even the 1975 figure. This expectation stems largely from the fact that several of the larger countries in this group face deep-rooted imbalances in both internal and external positions. Programs to deal with these imbalances have been designed, but implementation has been hampered or delayed by domestic social and political difficulties.

External financing problems in the Middle Eastern non-oil countries thus remain substantial, but no major difficulties in financing are expected in view of the availability of substantial flows of external assistance. In a few cases, increases in official reserves may well be realized by countries in this group during 1977.

Conclusions

A few broad conclusions from the Fund’s recent review of the international adjustment process may be noted.

1. A substantial number of countries experienced improvements in respect of their external accounts during the past year or so in the sense that they moved into positions that could be said to be more nearly sustainable. However, there were also numerous instances in 1976 where countries’ external positions worsened or existing weaknesses became more apparent. Progress in respect of international adjustment in the period immediately ahead will depend mainly on the degree of success experienced by the larger countries (both developed and developing) that either have adopted financial arrangements with the Fund or otherwise are embarked on programs to strengthen their external positions. At the same time, many developing countries that have postponed adjustment are likely to experience a prolongation or worsening of their positions in the short run, and such a prospect also applies to several of the more developed primary producing countries. All in all, despite the evident progress, adjustment needs remain large; as experience shows, delays in dealing with them could be very costly.

2. Strategies of adjustment must vary with the nature and position of the adjusting country, with different guidelines or responsibilities in this regard applicable to the oil exporting countries and to surplus and deficit countries within the oil importing group. Despite a number of problems and difficulties, substantial improvement in the working of the international adjustment process over the next several years should be feasible provided that certain conditions are met. The most important of these conditions—which hinge primarily on the effectiveness with which countries exercise their international responsibilities—are satisfactory growth in the volume of world trade; reasonable adherence to the principles of adjustment by surplus and deficit countries as recently developed in the Fund, and summarized in the communiqué of the Interim Committee after its 1976 meeting in Manila; pursuit of demand, pricing, and investment policies by the major oil exporting countries that contribute to international adjustment and to the financing needs of oil importing countries; and greater efforts by the oil importing countries to conserve energy and to develop additional sources of supply.

3. In the financing of the current account deficits of non-oil primary producing countries, the process of “recycling” the savings of oil countries into international financial markets has been reasonably effective. Nevertheless, this recycling has not been accompanied by an appropriate amount of adjustment.

4. Given the persistence of large payments imbalances, heavy demands for use of the Fund’s resources might well materialize. Programs of adjustment are clearly needed in a number of countries, and expansion of the Fund’s capacity to supply financial assistance, subject to adequate conditionality, could contribute significantly to the promotion of international adjustment and to maintenance of confidence in the international monetary system. It is this central belief that underlies the Fund’s current plans for establishment of a supplementary credit facility. (See Chapter 3, page 47.)

This is a weighted average (with weights proportionate to labor forces) of reported national rates of unemployment. These differ in definition, with more significance attaching to changes in the calculated overall rate of unemployment than to its level.

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