Chapter

Chapter 1 Developments in the World Economy

Author(s):
International Monetary Fund
Published Date:
September 1983
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Introduction

The recession in economic activity intensified in most parts of the world during 1982. At the same time, however, further progress in curbing inflation was recorded in several of the major industrial countries. This progress had favorable implications for the real incomes of consumers, and the accompanying decline in interest rates improved business incentives and reduced inventory carrying costs. By early 1983, the better outlook for inflation appeared to have improved confidence sufficiently to set the stage for an upswing in production and trade. Indeed, signs of such an upswing were already evident in a number of industrial countries, and especially in the United States. The task now confronting national authorities and the international community is to build a sustainable recovery on the foundation that is emerging.

Total output of the industrial countries declined in 1982 for the first time since 1975, and unemployment rose to the highest levels since before the Second World War. These developments, following two years of weak and uneven growth, created unfavorable conditions for the expansion of world trade, the volume of which declined by 2½ per cent in 1982. Falling prices of primary commodities further undermined the export earnings of most developing countries. The resultant difficulties faced by some of those countries in meeting debt service commitments led to a reappraisal of their creditworthiness by commercial lenders and an abrupt cutback in private financing flows. This posed the threat that cessation of financing would result in a disorderly contraction of world demand. This threat was averted only through concerted measures undertaken cooperatively by the authorities of countries most concerned, the international banking community, and international institutions, in particular the Fund.

The stagnation of world trade and the high rates of unemployment generated by the recession have also provoked an increase in protectionist pressures. These now present an additional obstacle to a renewal of growth in world trade and a hazard to the achievement of higher levels of output and productivity in the world economy.

The non-oil developing countries have been hit particularly hard by the international recession. With continuing weakness in their principal export markets and a further substantial deterioration in their terms of trade, they have had no alternative but to intensify their adjustment efforts. This has resulted in a further moderation of growth in gross national product (GNP) and an outright decline in per capita income levels for the non-oil developing countries taken as a group. Even countries which had previously been partially shielded from the consequences of declining export receipts by their access to international capital markets faced, in late 1982, the need for a particularly sharp measure of external adjustment. Confronted with much more cautious attitudes on the part of international lenders, these countries have had to adopt policies that give their creditors grounds for confidence in their capacity to bring their external obligations and resources into better alignment. The adoption of prudent fiscal and monetary policies, although entailing restraint on demand in the short term, offers the best prospect of sustainable expansion over the medium and longer term. Moreover, the timely adoption of such policies, particularly when they form part of programs that enable the country concerned to gain access to the resources of the Fund and other lenders, can, in fact, involve less restraint than would otherwise be necessary.

The oil exporting countries have also undertaken a major reassessment of their fiscal and development programs in line with the sharp reduction in their oil revenues.

Despite the numerous unsatisfactory aspects of the current situation, various developments of a distinctly encouraging character have also emerged. The most important of these is the progress that has been made in reducing inflation in the industrial countries. This progress, although partly due to the severity of the recession and to declines in oil and other commodity prices, must be attributed in considerable part to the effectiveness of official policies in several key countries. With growing recognition of the firmness of anti-inflationary policies, interest rates in major financial markets dropped substantially during 1982. The inventory liquidation that characterized the recession period seems to have run its course, and the real purchasing power of personal incomes has been enhanced by the decline in inflation. The recent reduction in oil prices, although having some negative effects, is another factor that should, on balance, contribute to world economic recovery.

For all developing countries, economic prospects now depend crucially on the progress of recovery in the industrial world. The need for an early upturn in the industrial countries is therefore very pressing; but there is also a vital need that renewed growth be non-inflationary and sustainable. The durability of the recovery will depend in no small part on the continuing credibility of anti-inflationary policies, which remains somewhat fragile even in several of the industrial countries where inflation rates have been brought down to the vicinity of 5 per cent or lower. Moreover, the still high inflation rates prevailing in a number of other industrial countries do not allow room for any more rapid expansion of nominal demand than is now foreseen. In most of these latter countries, there is a continuing need for firm fiscal and monetary policies. And in all of the industrial countries, avoidance of measures that might generate harmful expectations regarding inflation remains a cardinal requirement in dealing with the present situation.

From this perspective, it will be essential to keep monetary expansion at rates consistent with consolidating the recent trend toward lower inflation. It will also be vital to bring fiscal situations in the larger industrial countries, and particularly in the United States, into better balance. For the economic recovery to be well sustained, it will be essential that government demands for credit be prevented from competing unduly with rising private needs for credit and thus forcing up interest rates.

For growth in nominal demand to be reflected in higher output, rather than in renewed inflationary pressures, one of the most helpful developments would be a reduction of structural rigidities that handicap the efficiency of most industrial economies. Among the most important of these rigidities, apart from excessive fiscal deficits of a structural nature in some countries, are those involving inflexibilities in the wage formation process; the current distribution of income among factors of production, particularly the weakness of profits; inadequate incentives for saving and investment; and, in some cases, inappropriate regulation of economic activity. In addition, the existence of direct and indirect support for declining industries, and an education and training system in some countries that is not fully suited to their economic needs, has hampered the process of dynamic adjustment to technological and social change.

Concerning exchange rates, close international cooperation is needed to reduce volatility, and is especially important at the present time to take advantage of recent and prospective progress toward convergence of economic policies and conditions in the larger industrial countries. Other areas of vital need for international cooperation include the difficult international debt situation, the provision of adequate official development assistance to the low-income countries, and the avoidance of protectionist trade policies, both in industrial and in developing countries.

Restrictions by industrial countries on their imports from the developing world have particularly serious adverse implications for the economies of developing countries. In the near term, continued access to world markets by debtor countries is essential if they are to be in a position to service their external debt and maintain an adequate level of imports. In a longer-term perspective, restrictions against the exports of developing countries penalize most severely those countries that have adopted outward-looking growth strategies and the liberalization of their domestic economies advocated by the Fund. Many of these countries have borrowed abroad to finance export-oriented industrial development. Uncertainty about future continued access to export markets can have serious detrimental effects on this type of growth strategy.

The following sections of the chapter provide a review of developments in the world economy under three general headings. The first section deals with domestic activities and policies in major groups of countries; the second focuses on international trade and payments, both from a global point of view and from the standpoint of each major group of countries. Against this background, the third section of the chapter presents a discussion of current policy issues.

Domestic Activity and Policies

Industrial Countries

Stance of policies.—Confronted by the continuing recession and rising levels of unemployment, authorities in the industrial countries continued in 1982 to seek to establish the conditions necessary for a resumption of sustained economic growth. In general, there was agreement that a lasting solution to unemployment and other problems stemming from the prolonged recession could not be found in short-term stimulus, but rather required a determined effort to reduce inflation and eliminate structural rigidities. In this sense, policy can be said to have been focused on longer-term objectives, although the desire not to exacerbate short-term difficulties led to a certain flexibility in the manner in which financial policies were implemented in most countries.

The Interim Committee, in the communiqué issued following its meeting in Toronto in September 1982 (reproduced in Appendix III) “recognized that the goals of steady expansion of output and reduction of unemployment could only be achieved if there were a sustained reduction in inflation and inflationary expectations, in nominal and real interest rates, and in other impediments.” Following its meeting in February 1983 in Washington, the Committee reaffirmed the belief “that successful handling of the inflation problem is a necessary—albeit not sufficient—condition for sustained growth over the medium term.”

A number of industrial countries have now achieved considerable success in combating inflation and laying the foundation for a durable improvement in economic performance. Evidence of such improvement is already apparent in several of them, and is expected to spread to others in the course of 1983. However, progress toward greater financial stability has been uneven, and in some countries high inflation continues to hamper restoration of conditions conducive to the longer-term goals of growth and increased employment.

As noted in previous Annual Reports, monetary policy has borne the main burden of counterinflationary policy in most countries during the past few years, in large part because fiscal policies have tended to be less restrictive in their implementation than in their initial design. In the absence of adequate support from fiscal policy, monetary and credit conditions have had to be more restrictive than would otherwise be the case. The resulting pressure on financial markets has led to the record high interest rates of recent years. These high interest rates, in turn, have distorted the pattern of demand and increased the severity of the recession.

Although there has been an easing of monetary conditions since about mid-1982, there is no doubt that until that point they had been decidedly more restrictive than in the late 1970s. While developments have differed significantly from country to country, this tendency toward restraint can be seen from trends in both the growth rates of the principal monetary aggregates and the level of interest rates. A weighted composite of annual growth rates of the narrowly defined money supply (M1) in the seven major industrial countries, which averaged 10 per cent per annum during the period 1976–78, fell to 6½ per cent during 1979–81. A rise to 8½ per cent in 1982 was influenced to a significant extent by the jump in the growth rate of Ml in the United States, which in part may have reflected institutional changes in the U.S. financial system. A similarly calculated composite of growth rates of the broadly defined money supply (M2), which apparently was less affected by institutional changes, shows the annual pace of expansion declining from an average of 12 per cent in the period 1976–78 to 10 per cent in 1979–81, and to 9½ per cent during 1982.

As just noted, monetary conditions in many of the major industrial countries have tended to ease over the past year, in part because unexpectedly low rates of growth of nominal gross national product have caused the established objectives for the growth of monetary and credit aggregates to become less restrictive. An offsetting factor in some countries has been an apparent increase in the demand for money (even after allowance for the effect of falling interest rates), attributable partly to institutional innovations and partly to the effect of recession-induced uncertainties on liquidity preference. Where these factors seemed to be particularly important, for example, in the United States, the authorities have acted to accommodate such exogenously induced shifts in money demand by allowing the monetary aggregates most affected to exceed their target ranges, at least temporarily. In some other countries, responding to the severity of the recession, the authorities have permitted monetary expansion to proceed at rates corresponding to the upper end of the target range.

The implications of these various developments for the real money stock and velocity have been quite substantial. For the seven major industrial countries, the weighted average annual growth rate of real M1 (i.e., M1 deflated by the GNP deflator) fell from 2½ per cent during the period 1976–78 to a negative 2 per cent during 1979–81, before rising to 2½ per cent in 1982. A similar composite of deflated M2 growth rates indicates an average annual increase of 4½ per cent in the period 1976–78, declining to less than 1½ per cent in 1979–81, and then rising again to 3½ per cent during 1982. Since the most recent rise in the real money stock has occurred at a time when output was stagnant or falling, there has been a sizable decline in the velocity of circulation, the largest, in fact, for several years.

The changes in monetary conditions that have taken place over the past few years have had a parallel in shifts in the manner in which monetary policy has been conducted. During the period 1979–81, increased emphasis was placed on adhering to quantitative targets for the main monetary aggregates as the central focus of monetary policy. More recently, however, while the importance of monetary aggregates continues to be recognized, difficulties in interpreting the significance of shifts in their growth rates, particularly when institutional circumstances and economic conditions are changing, have become apparent. For this reason, the monetary authorities in a number of industrial countries have broadened the range of indicators they use to monitor monetary conditions, and some have adjusted the target bands for the monetary aggregates used as indicators. They have emphasized, however, that such adaptations in the implementation of policy did not imply any shift in the basic counterinflationary objectives of policy.

Reflecting declining inflation, the weakness of economic activity, and the easing of monetary conditions in several major countries, nominal interest rates declined quite rapidly in the second half of 1982 (Chart 1). However, it would seem that fears concerning the evolution of financial market conditions (and especially the effect on them of continued large budget deficits in some countries) prevented this decline in rates going as far as might have been expected on the basis of developments in inflation rates and in real economic activity. Thus, as far as it is possible to judge, real interest rates remained high, particularly in comparison with similar stages of earlier business cycles.

Chart 1.Major Industrial Countries: Short-Term Interest Rates, 1978–June 1983 1

(In per cent per annum)

1 Data are monthly averages of daily rates on money market instruments of about 90 days’ maturity.

The average of nominal interest rates in the major industrial countries, for both short and long maturities, which had reached 14—15 per cent during 1981, had fallen to about 13 per cent by mid-1982. Thereafter, rates fell quite sharply in the second half of 1982, before stabilizing in the first several months of 1983. In real terms, however, the decline probably has been much less. The conversion of interest rates from nominal to real terms requires assumptions about expected inflation rates that are, by their nature, highly uncertain. Nevertheless, it is significant that while both short and long rates exceeded the current inflation rate by almost 5 per cent, on average, in 1981, the gap for short-term rates had fallen only to about 4 per cent in early 1983, and for long-term rates, had even increased slightly.

Moreover, since underlying circumstances and the stance of policy have varied considerably from country to country, changes in financial market conditions have been far from uniform. In 1980, for example, annual averages of real short-term interest rates among the seven major industrial countries differed by as much as almost 12 per cent. Such differentials, and the rapid changes that have occurred in them, have at times contributed to disruptive capital flows and pressures on exchange markets that have constrained the policy options of the authorities. During 1982, however, there was a significant convergence of real short-term interest rates in the industrial countries, with the differential between the highest and lowest average rates among the seven largest countries falling to less than 3½ per cent.

For 1983 the monetary targets being pursued in the main industrial countries, combined with the inflation outlook, imply a continuation of the financial market trends that have been in evidence since mid-1982. With the targeted growth rates of the nominal monetary aggregates in most countries set at approximately the same level as in 1982, and taking into account the success that has been achieved in containing inflation, the provision of real liquidity to the economy should continue to be somewhat greater than during the period 1979–81.

Fiscal policy in the industrial countries in recent years has generally been framed with the objective of reducing structural budget deficits, and thus facilitating the task of monetary policy in bringing down inflation and inflationary expectations. In the event, however, structural rigidities, and difficulties in policy implementation, have considerably reduced the role that fiscal policy has actually played in this connection. At the same time, the weakening trend of economic activity has caused a cyclical deterioration in governments’ financial positions.

In 1982, the net changes in underlying budgetary positions of the seven major industrial countries are estimated by the Fund staff to have been broadly neutral in their impact—with an expansionary impulse in Canada, the United States, and Italy having been largely offset by the withdrawal of stimulus elsewhere. However, reflecting the worsening of the recession, the actual deficit in the central government budget for the seven major countries as a group widened from some 3¾ per cent of GNP in 1981 to some 4¾ per cent in 1982. Over the four years since 1978, even though budgetary shifts amounting to a withdrawal of stimulus of about 1 per cent of GNP have occurred, cyclical developments have more than offset this, causing the actual budget deficit of these countries, taken as a group, to widen by about 1 per cent of GNP.

Changes in the overall budgetary position of the major industrial countries conceal quite wide divergences in fiscal performance among them. At one extreme, the United Kingdom achieved a reduction in its fiscal deficit, between 1978 and 1982, equivalent to some 2½ per cent of GNP, despite strong cyclical pressures tending to increase the deficit. Japan also improved its fiscal position between 1979 and 1982, but all the other major countries have experienced increases in their deficits.

Projections for 1983, based on proposed—and in some cases approved—budgets, point toward a divergence in fiscal policy stance between, on the one hand, Canada and the United States, and, on the other, most of the other major countries. In the United States, the implementation of a further income tax cut on July 1, 1983 is likely to have a significant expansionary impact. In the major European economies and Japan, in contrast, a further withdrawal of stimulus equivalent to about ½ per cent of GNP, on average, is expected.

Budget deficits are a source of concern, not only because of their absolute magnitude but because of their size in relation to available savings. According to staff estimates, the weighted-average share of gross private savings absorbed by central governments in the seven major industrial countries in 1982 was 23 per cent, more than half as large again as in 1979. Among individual countries, this percentage ranged from 12 per cent to as much as 56 per cent. As recovery proceeds, it is to be expected that governments’ financial positions will tend to strengthen, while pools of available national savings may increase. However, in most of the major industrial countries, a significant portion of the present deficit is structural in nature.

The rather modest withdrawals of fiscal stimulus in recent years, at a time when monetary policies in most of the major industrial countries have been quite restrictive, are indicative of the difficulties that have been encountered in redirecting fiscal policy toward anti-inflationary objectives. In some countries, tax cuts have been regarded as essential to encourage work, saving, and investment, and these cuts have proved easier to implement than cuts in government expenditure. The growth in the relative importance of subsidy and entitlement (transfer) programs, the costs of which have a tendency to increase independently of direct action by the authorities, has complicated the task of reducing the growth of spending. The same can be said about interest payments on the national debt. It is these types of expenditure, rather than direct purchases of goods and services, that have accounted for most of the substantial increase in the ratio of total government expenditures to GNP in the industrial countries since the mid-1960s.

Output and demand.—After a prolonged period of slow or negative growth, the sharp declines in inflation and interest rates that have been experienced in the industrial world since mid-1982 appear to have significantly improved prospects for economic recovery. Output began to rise in the United States around the end of 1982, and indicators of real growth gathered strength in the second quarter of 1983; a better outlook is now evident in a number of other countries also.

Reflecting, inter alia, the restrictive financial policies that were adopted to restrain the renewed upsurge of inflationary pressures in 1979–80, aggregate real GNP in the industrial countries grew by only about 1¼ per cent per annum in 1980 and 1981 (Table 1). A recovery had been quite widely expected for 1982, but in the event, output actually declined by ¼ per cent in that year. Inventories were reduced at a more rapid pace than had been foreseen, and both business fixed investment and consumers’ expenditure were weaker than expected. At the same time, economic conditions in the developing countries worsened, and they were forced to cut back sharply on their imports.

Table 1.Industrial Countries: Changes in Output and Prices, 1963–821(In per cent)
Average

1963–72 2
Change from Preceding Year
1973197419751976197719781979198019811982
Real GNP
Canada5.57.63.61.25.82.03.63.21.03.4–4.4
United States4.05.8–0.6–1.25.45.55.02.8–0.41.9–1.7
Japan10.58.8–1.22.45.35.35.15.24.83.83.0
France 35.55.43.20.25.23.03.73.41.10.41.6
Germany, Fed. Rep. of4.54.60.5–1.65.62.83.54.01.8–0.2–1.1
Italy 34.67.04.1–3.65.91.92.74.93.90.1–0.3
United Kingdom 32.87.2–1.8–1.13.41.63.92.0–2.1–2.20.7
Other industrial countries 45.05.53.4–0.23.62.42.13.02.10.60.2
All industrial countries4.76.10.5–0.65.04.04.13.41.31.2–0.3
Of which,
Seven larger countries above4.76.20.1–0.75.34.34.53.51.11.5–0.4
European countries4.45.82.0–1.24.62.63.03.41.5–0.20.2
GNP deflator
Canada3.69.115.310.89.67.46.710.511.110.610.1
United States3.55.78.89.35.25.87.48.69.39.46.0
Japan4.711.720.68.16.45.74.62.62.82.62.0
France 34.87.811.213.39.99.09.510.311.812.012.1
Germany, Fed. Rep. of4.16.56.86.13.43.74.24.04.44.24.8
Italy 35.211.618.517.518.019.113.915.920.718.417.5
United Kingdom 35.27.014.926.914.614.110.915.019.212.28.0
Other industrial countries 45.49.412.213.310.59.79.18.08.89.19.7
All industrial countries4.27.511.511.17.67.57.68.09.08.67.2
Of which,
Seven larger countries above4.07.211.510.87.17.17.38.09.18.56.7
European countries5.08.211.713.89.89.68.89.010.79.99.5

Composites for the country groups are averages of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPs over the previous three years.

Compound annual rates of change.

GDP at market prices.

Comprise Australia, Austria, Belgium, Denmark, Finland, Iceland, Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden, and Switzerland.

Composites for the country groups are averages of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPs over the previous three years.

Compound annual rates of change.

GDP at market prices.

Comprise Australia, Austria, Belgium, Denmark, Finland, Iceland, Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden, and Switzerland.

The long duration of the slowdown in economic activity that now appears to have come to an end has been due to several factors. Chief among them has been the inherent difficulty of restoring financial stability after an extended period in which economic agents have come to expect a continuation of inflationary conditions. Following its upsurge in 1973–74, inflation remained high in many countries and was given further impetus by the second round of oil price rises in 1979–80. On the latter occasion, however, the authorities of most of the industrial countries recognized that restoration of sustainable economic growth required firm action to curtail the secondary price effects of the initial inflationary impulse. Against a background of entrenched inflationary expectations and associated structural rigidities, policies of demand restraint led to a significant increase in economic slack. In a more medium-term context, however, the disinflationary process, painful as it has been, is recognized to be a necessary precondition for sustainable economic growth.

The general pattern of a prolonged period of economic weakness, intensifying in 1982, holds for most of the major industrial countries. There have, however, been some important differences in timing and degree. Fluctuations in activity in the European economies have taken a rather different course from those in the United States and Canada, while Japan has succeeded in maintaining a relatively smooth, though by its own historical standards modest, growth in output.

In the United States, total output fell by 1¾ per cent in 1982, with the decline being particularly pronounced in the early part of the year. More recently, however, the performance of the U.S. economy has improved considerably, with a significant expansion of demand in the housing and automobile sectors, and a fairly substantial increase in industrial production in the early months of 1983. A similar pattern is evident in Canada, where output contracted even more sharply in 1982, but also seems to be recovering more rapidly during the current year. The major European economies, by contrast, realized a small increase in aggregate output in 1982, after a decline in 1981; better growth rates were recorded in France and the United Kingdom, offsetting decreases in real GNP in the Federal Republic of Germany and Italy. As the year proceeded, however, activity in continental Europe tended to slow down; and in the first part of 1983 signs of economic recovery have been less apparent than in the United States and Canada.

Among the smaller industrial countries, the decline in output growth from 1981 to 1982 was less marked than for the major seven. In both years, however, the growth rate for the group as a whole was under 1 per cent. Developments in the early months of 1983 do not yet reveal much of an improvement in this rate.

The direction of trends in overall economic activity in the seven major industrial countries in recent years is depicted in Chart 2, which also shows developments in industrial output alone. This chart highlights the generally greater impact of cyclical developments on the industrial sector, and indicates that, except in Japan, the past three years of poor economic performance have left industrial production far below its previous peaks. For the seven countries as a group, industrial output in 1982 was 4 per cent below its level in 1979.

Chart 2.Major Industrial Countries: Real GNP and Industrial Production, 1978–June 1983

(Indices, 1980 = 100) 1

1 Seasonally adjusted.

2 Three-month moving average.

The poor output performance of the industrial economies has reflected the difficulties of economic adjustment in circumstances where demand restraint is confronted by entrenched inflationary expectations. In the period that is needed for anti-inflation policy to acquire credibility and for expectations to be revised, a relatively greater proportion of the reduction in the growth of aggregate demand is felt in real demand than in prices. For the industrial countries as a group, the rate of expansion of real domestic demand dropped from 3¾ per cent per annum on average in 1977–79 to ¼ of 1 per cent per annum in 1980–82. Through 1981, the impact of declining domestic demand was moderated by increases in foreign demand, particularly in the oil exporting countries but also in the non-oil developing countries. In 1982, however, with the slump in the international oil market and the severe financial difficulties experienced by a number of the larger non-oil developing countries, this support to the growth of output in the industrial world was withdrawn.

The overriding influence on the slowdown in the expansion of aggregate domestic demand in the industrial countries in recent years has been the sharp deceleration in private consumption expenditure (see accompanying tabulation). This has resulted mainly from the impact of inflation and restrictive financial policies on the growth of household real disposable income. Earned income has been adversely affected by rising unemployment and by the more moderate real wage gains of employed workers. At the same time, the savings ratio has remained high in many countries, and fiscal support for the growth of household disposable income (through changes in taxes and transfers) has been quite moderate except in the United States.

Industrial Countries: Changes in Real GNP and Components of Aggregate Demand, 1977–82 1(In per cent)
1977–79

Average
198019811982
Private consumption expenditure3.71.00.91.1
Government current expenditure2.52.31.91.6
Gross fixed investment5.3–1.2–0.1–3.3
Final domestic demand3.70.90.90.3
Stock building 20.1–0.5–0.2–0.4
Foreign balance 20.10.80.7–0.2
GNP3.81.31.2–0.3

Averages of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPs over the previous three years.

Changes expressed as a percentage of GNP in the previous year.

Averages of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPs over the previous three years.

Changes expressed as a percentage of GNP in the previous year.

The weakness of consumer spending in the past few years has tended to depress fixed capital formation, which has also been adversely affected by continued high levels of production costs and interest rates. In real terms, gross fixed investment in the industrial countries actually declined in each year from 1979 to 1982. Inventory investment has also been undermined by poor final sales prospects and high carrying costs. As a result, aggregate output in the industrial countries has lagged even the slow growth of final demand.

Inflation.—In 1982 and the first half of 1983 there has been further encouraging progress in reducing inflation. This has extended the gains that were already apparent in 1981. Not all countries have been equally successful, however, and in several, rates of price increase remain disturbingly high. Moreover, transitory influences, such as developments in the price of oil and basic foodstuffs, have been a factor helping to dampen consumer price inflation. Nevertheless, it is noteworthy that in many countries indicators of underlying inflationary pressures, such as rates of increase of wage costs or the GNP deflator, are at their lowest levels of the past decade.

As measured by a weighted average of increases in consumer price indices, inflation in the industrial countries as a group, which had reached a peak of some 13 per cent in the first quarter of 1980, declined steadily to an annual rate of 5 per cent in the first quarter of 1983 (Chart 3). This progress has been the result of several factors. In the first place, as indicated above, economic activity in the industrial countries in the last few years has been increasingly subdued. In such an environment, and with rising unemployment, workers have become more willing to make wage concessions. Moreover, energy and interest costs were falling rather than rising during much of 1982 and early 1983. By lowering cost of living adjustments and encouraging a downward revision of inflationary expectations, the deceleration in the rate of increase of the consumer price index associated with these developments exerted a moderating influence on the pattern of wage settlements. In addition, official commitments to anti-inflationary policy have become increasingly credible. Reduced wage settlements in the public sector have had a direct impact on the cost of public services, as well as demonstration effects for private wage negotiations, and tight monetary conditions have added to the pressure on businessmen to control labor and other costs.

Chart 3.Major Industrial Countries: Consumer Prices, 1978–June 1983

(Percentage changes) 1

1 Over corresponding month of previous year.

2 Average for the seven major industrial countries.

Although often receiving less public attention than the consumer price index, changes in the GNP deflator are a more reliable indicator of the underlying rate of inflation. As a comprehensive measure of domestic unit costs of production (including profits), the GNP deflator is not directly affected by changes in the costs of imported commodities, or by fluctuations in exchange rates. For the industrial countries as a group, the weighted-average rate of increase in the GNP deflator rose only from 7½ per cent in 1978 to 9 per cent in 1980, reflecting the considerable success achieved in containing the secondary price effects of the 1979–80 round of oil price increases. By the same token, however, the subsidence of inflation as measured by the GNP deflator has been somewhat slower. The rate of increase fell to 8½ per cent in 1981 and 7¼ per cent in 1982.

The relationship between weighted changes in the consumer price index and corresponding changes in the GNP deflator in the seven major industrial countries in recent years is shown in Chart 4. The consumer price index was rising at about the same rate as the GNP deflator in 1978, but accelerated much more sharply in 1979 and 1980 under the impetus mainly of rising import prices. Subsequently, the rate of increase in the consumer price index fell back more sharply than did that of the GNP deflator, and since late 1981, the two indices have risen at broadly the same rate.

Chart 4.Major Industrial Countries: Consumer Prices and GNP Deflators, 1978–First Quarter 1983

(Percentage changes)1

1 In seasonally adjusted quarterly data at annual rates.

2 Averages of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPs over the previous three years.

As regards individual country inflation experience, Japan and the Federal Republic of Germany have been the most successful among the major countries in containing domestic price increases throughout the past several years. In Japan the annual rise in the GNP deflator has remained between 2 and 3 per cent, whereas in Germany it has been between 4 and 5 per cent. As a result, inflationary expectations in these two countries are probably fairly stable at these relatively low rates.

The United States and the United Kingdom are alike in having achieved very substantial reductions in inflation over the past two years. The progress that has been made in the United Kingdom is especially noteworthy, with the rate of increase in the GNP deflator falling from almost 20 per cent in 1980 to about 5 per cent at the beginning of 1983. In the United States, inflation according to this measure has been reduced from over 9 per cent in 1980 to less than 5 per cent in the year ended in the first quarter of 1983. Canada has also achieved a significant moderation of inflation since the middle of 1982, though the impact of this success on expectations will probably not be fully felt until it has been sustained for a longer period.

The other two countries in the major industrial group—France and Italy—have experienced more difficulty in counteracting inflationary forces. By 1982 the GNP deflators in these countries were still increasing at rates close to their recent peaks. Incomes policies have been introduced in France in the past year, and wage indexing provisions have recently been modified in Italy. Nevertheless, inflationary pressures in both countries appear to have remained strong in the first half of 1983.

The smaller industrial countries, with some exceptions, have generally achieved less progress against inflation than the group of larger countries. On a year-over-year basis, the weighted-average increase in the GNP deflator for these countries actually accelerated by about ½ percentage point between 1981 and 1982. While the trend in the second half of 1982 and early 1983 appears to be more favorable, the gap in inflation rates between the larger and the smaller industrial countries has nevertheless been widening.

Unemployment.—Reflecting the poor growth performance of the industrial countries during the past several years, underutilization of economic resources has increased. Unemployment, with its serious social repercussions, has become an increasingly urgent problem. As a proportion of the combined labor force of the seven major industrial countries, unemployment has risen from 5 per cent in 1979 to about 9 per cent in mid-1983. In fact, unemployment rates in all of these countries except Japan have recently been close to or above 10 per cent. Only Japan, with its more satisfactory rate of output growth and traditional emphasis on continuity of employment, has avoided extensive shedding of labor, although even in that country the unemployment rate increased from 2 per cent in 1979 to 2¾ per cent in mid-1983.

The growth of unemployment was particularly rapid in 1982, mainly reflecting the actual decline in aggregate output in the major industrial countries that occurred in that year. Not surprisingly, the most serious increases in unemployment were recorded in those countries (Canada, the United States, and the Federal Republic of Germany) where activity was the weakest. By December 1982, unemployment rates in all three of these countries were 2 or more percentage points higher than they had been a year earlier. Since the end of 1982, however, unemployment rates have tended to decline in the United States and Canada and to rise at less rapid rates in the other major industrial countries.

The recent increase in unemployment has occurred despite a slowing down in the growth rate of the labor force in the industrial countries as a group. The rate of increase in the labor force in the seven major industrial countries decelerated continuously from 1¾ per cent in 1979 to less than 1 per cent in 1982. The causes of this decline were both demographic and economic, namely a tapering off in the growth of population of working age and the negative effects of the recession on participation rates. Since the net result has been fewer people seeking work than would otherwise have been the case, the high unemployment rates of recent years, if anything, understate the extent of the deterioration that has occurred in employment opportunities.

Employment in the major industrial countries actually declined in 1982 (by 1 per cent), after its growth rate had weakened in each of the preceding three years. In several countries (France, the Federal Republic of Germany, and the United Kingdom), declines in employment had also occurred in 1980 or 1981, so that the cumulative loss of jobs has been substantial (in the case of the United Kingdom, employment in 1982 was more than 8 per cent lower than in 1979). The only country which has succeeded in maintaining employment growth throughout this period has been Japan.

The severity of the recession has had its reflection in the character as well as the extent of unemployment. Youths and minorities have experienced record high rates of unemployment, although in proportionate terms some of the largest increases have been among categories such as male heads of household, which traditionally have had unemployment rates much lower and more stable than average. The range of occupations afflicted by high unemployment has also widened, as the recession has spread well beyond the more cyclical activities such as manufacturing. Furthermore, the average duration of unemployment has increased considerably.

While the current unemployment problem is to a considerable extent cyclical in nature, it has been superimposed on a secular rise in unemployment in the major industrial countries that has been occurring since the end of the 1960s (Chart 5). Unemployment rates have tended to increase in a step-like fashion over this period, with cyclical downturns bringing sharp jumps that have not been fully reversed in the ensuing upturn. This pattern has been most pronounced in the European economies, perhaps because of the steep rise in real wages that took place in the early 1970s. As a result, unemployment rates in these countries, which traditionally had been low relative to those in the United States and Canada, were by 1982 no longer very different from the latter, with the highest rate among the major industrial countries being that for the United Kingdom.

Chart 5.Major Industrial Countries: Unemployment, 1965–First Quarter 1983 1

(In per cent of labor force)

1 National unemployment rates weighted by labor force in the respective countries.

2 France, the Federal Republic of Germany, Italy, and the United Kingdom.

Developing Countries—Oil Exporting Group

The 12 countries included in the group of oil exporting developing countries exhibit considerable diversity. Differences in income levels, population, factor endowment, and level of development have conditioned the way in which their economies have responded to recent developments in the world economy. All of them, however, have been heavily influenced by declining receipts from oil. This decline began in 1981, and gathered pace in 1982. It was caused in the first instance by a significant cutback in global demand for oil, which resulted mainly from the prolonged recession and from the large change in the relative price of oil. This cutback had a disproportionate effect on the main group of oil exporting countries as production in other countries continued to increase. Adding to the downward pressure on export revenues, effective export prices also began to decline after the first quarter of 1981. In the first quarter of 1983, continued weakness in the oil market led to a more substantial downward adjustment in prices, including a 15 per cent reduction in the benchmark price of the Organization of Petroleum Exporting Countries.

These developments have resulted in a growing weakness in the fiscal and balance of payments positions of many oil exporting countries. Although the main share of the cutback in oil production was borne by countries in the strongest financial positions, virtually all members of the group shared in it to some extent. Even among those countries whose financial positions were strong, the size of the decline in revenues was such that firm adjustment policies became necessary. By 1982, two thirds of the gain in real oil export earnings that had taken place from 1978 to 1980 had been reversed. This compares with a decline in such earnings of only 14 per cent during the 1975–78 period. With the further decline in price and volume of oil exports that took place in the early part of 1983, the level of oil receipts in the oil exporting countries was in the first half of 1983 actually lower in real terms (i.e., when deflated by import prices of these countries) than five years earlier, before the second round of oil price increases.

Given the substantial growth in government expenditures and in imports that had taken place in the intervening period, it was inevitable that strong adjustment measures would be required to deal with the consequences of declining revenues. In all of the oil exporting countries there has been a significant shift toward budgetary restraint, in an effort to redress growing domestic and external financial imbalances. The growth in government spending, which had averaged more than 25 per cent in 1980, and had been scaled back to an estimated 20 per cent in 1981, was further curtailed, to only about 5 per cent in 1982. With restraint intensifying as the year proceeded, it seems likely that average expenditures in these countries in the second half of 1982 and the first half of 1983 were actually somewhat lower than a year earlier.

Shifts in monetary and credit expansion have generally been in the same direction as those in fiscal policy, though somewhat less marked. When government expenditure was rising most rapidly (in 1980), the rate of increase in broad money is estimated to have averaged 30 per cent in the oil exporting countries as a group. By 1982, the rate of increase of broad money had fallen to 15 per cent, and it receded somewhat further in the first half of 1983.

Economic activity in the non-oil sectors of these economies has, of course, been significantly influenced by the shifts in policy stance just described. These shifts, however, were somewhat less marked than those that occurred following the first round of oil price increases in 1973–74. This fact, together with the growing diversification in the economies of the oil exporting countries, has made the swings in the level of economic activity less pronounced in the past few years than in the mid-1970s. The average annual increase in non-oil GNP reached about 5 per cent in 1980 and 1981 and then fell back to about 3½ per cent in 1982. The initial rise, and subsequent fall, in the growth rate would have been greater were it not for the inclusion in the figures of the Islamic Republic of Iran. This country has a relatively large weight in the non-oil output of the oil exporting countries, and developments there have been affected by economic dislocations in 1980–81 and subsequent recovery.

If oil sector output is also taken into account, the oil exporting countries have suffered a decline in overall GNP in each of the three years 1980–82. The decline in the volume of oil output has averaged some 15 per cent per annum during these three years, and has actually gathered pace over the period. This decline, combined with the deceleration in growth rates in the non-oil sector, led to a contraction in total output of almost 5 per cent in 1982.

The weakness of economic activity in oil exporting countries has been accompanied by a reduction in the rate of consumer price inflation. This measure of inflation increased in 1979–81, fueled partly by a general move toward more expansionary economic policies and partly by factors specific to individual countries. By 1982, however, when the effects of more restrained economic policies were more widely felt, the average rate of increase in consumer prices for the 12 countries in the group fell to less than 10 per cent, compared with almost 13 per cent in the previous year. Another factor contributing to the moderation of price pressures was the greater stability of import prices. These are estimated to have declined slightly in U.S. dollar terms, while the currencies of most oil exporting countries depreciated little, if at all, against the U.S. dollar.

Developing Countries—Non-Oil Group

The non-oil developing countries, though differing in their economic structures, were virtually all severely affected by the intensification of the worldwide recession in 1982. The growing weakness in their principal export markets, and the continuing decline in commodity prices, led to a sharp cutback in the growth of their export receipts in SDR terms, and an outright decline in U.S. dollar terms. This reduction in foreign exchange earnings necessitated adjustment measures involving further restraints on the growth of domestic demand, in a situation already characterized by low levels of activity. For those countries which had previously relied heavily on borrowing in international capital markets, the problem of export weakness was compounded by growing difficulties in their access to such sources of finance. A reappraisal by lenders of the capacity of borrowing countries to service their debt resulted in a severe curtailment of capital flows, mainly to countries whose adjustment efforts were judged inadequate by banks, in the second half of 1982. Thus, nearly all of the developing countries had to intensify their adjustment efforts, and for many this acted as a constraint on their rates of economic growth.

The growth of real output in the non-oil developing countries slowed further in 1982, to some 1½ per cent for the group as a whole (Table 2). This outturn represented the fourth consecutive year of decelerating growth for these countries, from a rate of over 6 per cent in 1978, a reasonably normal year by past standards, to rates of 2½ and 1½ per cent in 1981 and 1982, respectively. In part, this marked deceleration was due to even more substantial declines in the growth rates of some of the larger countries—notably Argentina, Brazil, and Mexico—all of which had enjoyed vigorous growth in 1978, but have more recently had to adopt restrictive policies aimed at restoring internal and external balance. But the slowdown has been much more general than that, as can be seen when statistics on growth are disaggregated by analytic subgroup and geographic region. In 1982, the growth rate recorded in each of the principal regions, and for each of the analytic subgroups distinguished in Table 2, was substantially less than in 1978.

Table 2.Developing Countries: Changes in Output, 1968–82 1(In per cent)
Average

1968–722
Change from Preceding Year
1973197419751976197719781979198019811982
Oil exporting countries 39.010.78.0–0.312.36.12.03.1–2.3–4.3–4.8
Oil sector13.2–1.0–11.113.51.9–4.23.3–12.1–15.2–16.5
Other sectors9.712.312.411.39.16.03.04.95.13.6
Non-oil developing countries
Weighted average 45.66.35.04.82.51.7
Excluding China6.06.15.43.36.05.25.44.64.32.40.9
Median4.94.65.73.85.55.05.64.53.53.02.2
By analytical group
Weighted averages 4
Net oil exporters 57.08.36.56.26.73.56.27.37.36.40.8
Net oil importers5.96.44.64.51.91.9
Excluding China5.85.75.22.75.95.55.24.23.81.70.9
Major exporters of manufactures 68.09.56.51.36.75.74.96.44.5–0.20.2
Low-income countries 76.58.63.35.53.75.1
Excluding China3.42.03.05.44.45.25.5–0.13.24.43.0
Other net oil importers 85.44.15.52.75.95.45.53.43.03.10.5
Medians
Net oil exporters 55.46.47.76.18.04.96.65.14.94.41.8
Net oil importers4.74.15.53.35.25.05.34.43.02.72.4
Major exporters of manufactures 68.611.26.22.26.96.46.76.84.94.20.3
Low-income countries 73.91.65.13.15.03.94.74.02.23.03.0
Other net oil importers 85.04.75.74.74.95.55.94.73.02.31.9
By area
Weighted averages 4
Africa4.83.06.62.64.21.82.22.34.42.91.1
Asia7.19.54.75.14.75.0
Excluding China4.55.03.84.97.56.67.93.33.45.83.7
Europe6.05.84.20.86.85.45.43.91.52.22.0
Middle East7.54.94.88.78.44.37.44.37.34.72.7
Western Hemisphere7.68.46.93.15.55.04.56.76.0–0.1–1.5
Medians
Africa4.22.55.53.65.33.53.53.42.43.03.0
Asia4.85.35.73.35.75.86.76.15.45.43.9
Europe6.65.45.75.87.36.66.85.82.62.22.0
Middle East6.44.96.37.49.65.68.24.55.34.82.0
Western Hemisphere5.05.05.73.84.65.36.44.73.51.4

Data in this table cover all Fund members except those listed in Table 1, together with a few territories for which output statistics are readily available. The main groups of “oil exporting countries” and “non-oil developing countries,” as well as each of the regional subgroups of non-oil developing countries, conform to the classification used in the Fund’s International Financial Statistics.

Compound annual rates of change.

This group comprises only countries meeting both of the following criteria (applied at present to 1977–79 averages): that oil exports (net of any imports of crude oil) account for at least two thirds of the country’s total exports; and that such net exports are at least 100 million barrels a year (roughly equivalent to 1 per cent of annual world exports of oil).

Arithmetic averages of country growth rates weighted by the average U.S. dollar value of GDPs over the previous three years.

Comprise Bahrain, Bolivia, People’s Republic of the Congo, Ecuador, Egypt, Gabon, Malaysia, Mexico, Peru, the Syrian Arab Republic, Trinidad and Tobago, and Tunisia. Although these countries export more oil than they import, none of them satisfies both of the criteria mentioned in footnote 3.

Include Argentina, Brazil, Greece, Hong Kong, Israel, Korea, Portugal, Singapore, South Africa, and Yugoslavia.

Comprise 43 countries whose per capita GDP, as estimated by the World Bank, did not exceed the equivalent of US$350 in 1978.

Middle-income countries that, in general, export mainly primary commodities.

Data in this table cover all Fund members except those listed in Table 1, together with a few territories for which output statistics are readily available. The main groups of “oil exporting countries” and “non-oil developing countries,” as well as each of the regional subgroups of non-oil developing countries, conform to the classification used in the Fund’s International Financial Statistics.

Compound annual rates of change.

This group comprises only countries meeting both of the following criteria (applied at present to 1977–79 averages): that oil exports (net of any imports of crude oil) account for at least two thirds of the country’s total exports; and that such net exports are at least 100 million barrels a year (roughly equivalent to 1 per cent of annual world exports of oil).

Arithmetic averages of country growth rates weighted by the average U.S. dollar value of GDPs over the previous three years.

Comprise Bahrain, Bolivia, People’s Republic of the Congo, Ecuador, Egypt, Gabon, Malaysia, Mexico, Peru, the Syrian Arab Republic, Trinidad and Tobago, and Tunisia. Although these countries export more oil than they import, none of them satisfies both of the criteria mentioned in footnote 3.

Include Argentina, Brazil, Greece, Hong Kong, Israel, Korea, Portugal, Singapore, South Africa, and Yugoslavia.

Comprise 43 countries whose per capita GDP, as estimated by the World Bank, did not exceed the equivalent of US$350 in 1978.

Middle-income countries that, in general, export mainly primary commodities.

As noted above, an important factor in the widespread slowing of growth among the non-oil developing countries was the pronounced deceleration in the growth of their exports in real terms. For the group as a whole, the growth in the volume of merchandise exports slowed from 9 per cent per annum in the 1976–80 period to 6 per cent in 1981, and to less than 1 per cent in 1982. For the most part, this deceleration simply paralleled the deceleration in world trade generally. It is possible, however, that the slowing of developing country exports also reflected increasing resistance in the industrial countries—generally plagued by falling industrial output—to gains in market share by some of the more advanced developing countries, especially those in the group of major exporters of manufactures. For that group, the slowdown in export growth from 12 per cent per annum in 1976–80 (implying large and sustained share gains) to a negative 2½ per cent in 1982 (implying share losses), while mainly accounted for by the particular product and market characteristics of their trade, may have been partly due to some specific cases of increased protectionism.

Given that exports account for about one sixth of the non-oil developing countries’ aggregate output, the slowdown in export volume growth directly accounts for a significant part of the decline in the rate of increase of overall output. However, the influence of international developments on these economies reaches well beyond their impact on the volume of exports. Indeed, movements in the terms of trade and in international interest rates have probably been a more important source of disturbance to growth in the non-oil developing countries even than the deceleration in the volume of their exports. Increases in import prices and interest rates had the effect of diverting spending power abroad, while the sharp decline in commodity prices drastically lowered the incomes generated by these commodities in the producing countries. As a result of these exogenously determined price changes, major leakages from the spending stream occurred. For those countries that are net importers of oil, these leakages are estimated to have increased by some $85 billion (or over 5 per cent of their combined gross domestic product—GDP) from 1978 to 1982 (see section on International Trade and Payments, below).

The strains on developing countries imposed by these adverse external developments were met by a combination of adjustment measures and sharply increased external borrowing. With the continued delay in recovery in the industrial world, however, the higher level of borrowing became widely perceived as unsustainable. As a result, capital inflows (inclusive of official transfers), which had gradually increased from about 4 per cent of GDP in 1978 to over 5 per cent in 1981, slowed sharply to less than 3 per cent in 1982. The payments difficulties which this cutback in lending precipitated in a number of countries necessitated further sharp measures of adjustment, thus exacerbating the decline of output growth that was already under way.

The slowing of the growth of demand in these countries has been even more marked than that of output. For the group as a whole, the rate of increase in domestic demand in real terms declined continuously from over 6 per cent in 1978 (i.e., in line with GDP), to 1½ per cent in 1981 (significantly less than the growth in GDP), and ceased altogether in 1982. These developments imply declines in real per capita expenditure in the non-oil developing countries in both 1981 and 1982—an unprecedented development in the postwar period.

A broader perspective on domestic absorption in these countries is provided by Chart 6, which plots, for the group as a whole, the growth of output, exports, and domestic demand. Besides the deceleration evident in each of these elements over the past four years, the chart highlights the extent to which countries have attempted, or, because of financing constraints, have been forced, to curb the growth of domestic demand to a rate well below that of output—an effort which, of course, has been an additional source of drag on the growth of output itself.

Chart 6.Non-Oil Developing Countries: GDP, Domestic Demand, and Exports, 1968–82 1

(Annual percentage changes in volume)

1 Estimates for domestic demand were computed from data on GDP and on exports and imports of goods and services. Services were assumed to have the same evolution, in volume terms, as the corresponding merchandise transactions.

The more or less parallel development of domestic demand and exports beginning in 1980 is in marked contrast to the pattern that prevailed for most of the 1970s. During those earlier years, accelerations and decelerations in the growth of domestic demand were usually counteracted, insofar as their implications for GDP were concerned, by offsetting (or at least not compounding) variations in the pace of export growth. Only in 1976 did the rate of increase of exports and of domestic demand move in the same direction. By contrast, in each of the three years since 1979 the variations in the growth of domestic demand and exports have been in the same direction (downward) and hence have reinforced the deceleration of output growth.

This change in the relationship between domestic and foreign demand expansion is probably due largely to the protracted nature of the present slowdown in the world economy. In the earlier years, swings in foreign demand were of relatively short duration—roughly two years from peak to trough and vice versa; and domestic demand in the developing countries reacted to these swings only with a lag. As a result, overall output followed a smoother growth path than either domestic demand or exports. During the present recession, however, with the continuation and indeed intensification of economic weakness in the industrial world, developing countries have been led to introduce adjustment policies involving domestic demand restraint just at the time when external conditions were least favorable. This phenomenon is probably responsible for the much closer link, commented on in last year’s Report, between industrial and developing country growth rates over the past several years.

Another factor contributing to the closeness of such a link is the sharp reduction in developing countries’ imports to which the prolonged weakness in their external position has led. In many cases, this cutback has extended to imports required for the production process, with severe consequences for the level of current and potential future output.

While recent developments have adversely affected the growth prospects of all non-oil developing countries, the extent and timing of these effects have varied considerably across countries. An important distinction to be made in this respect is the one between those members of the non-oil group that are net importers and those that are net exporters of oil. Among the former, the pressures discussed above had already prompted a fairly marked deceleration in the growth of output in 1980 and 1981—to about 2 per cent in the latter year. The further deceleration of growth in 1982 was therefore relatively small—about ½ of a percentage point. Among the net oil exporters, on the other hand, the more comfortable external position enabled growth to be sustained at a rate of above 6 per cent through 1981. It was not until 1982 that continued weakness in the oil market, together with the near cessation of private international lending in the second half of the year, contributed to a slowdown of output growth to under 1 per cent.

These differences across countries in the timing of the economic slowdown are illustrated in Chart 7, the top panel of which presents indices of real GDP for each of the analytic subgroups of countries. While this chart highlights the particularly marked impact which recent developments have had on the net oil exporters and the major exporters of manufactures, the chart also shows that growth in these countries has, in a longer time frame, been much stronger than in the low-income and middle-income primary exporters.

Chart 7.Non-Oil Developing Countries: Real GDP, 1972–82

(Indices, 1972 = 100)

1 Middle-income countries that, in general, export mainly primary commodities

2 Excluding China.

A somewhat different perspective on growth rates among the non-oil developing countries is provided by the regional real GDP data also shown in Chart 7. While each region has experienced some deceleration in output growth, a more than proportionate amount of the adjustment has been concentrated in the Western Hemisphere countries, where output actually fell in both 1981 and 1982. A disturbing aspect of the developments depicted in this chart is the sustained low rate of growth in Africa over virtually the whole of the past decade. African countries generally have lower absolute income levels and a higher rate of population increase, so that the welfare implications of a slow growth of output are particularly serious.

Notwithstanding the pronounced weakness of economic activity in the non-oil developing countries in 1982, consumer price inflation (on a weighted-average basis) remained above 30 per cent for the third successive year (Table 3). Moreover, there was a tendency for price increases to accelerate in late 1982 and early 1983. This poor price performance is due largely to trends in the Western Hemisphere region where, primarily because of developments in the larger countries, the weighted-average inflation rate has accelerated markedly in each of the past four years. A somewhat different picture of inflationary trends is revealed by movements in median inflation rates (i.e., the rate for which it can be said that half the countries in the group have more rapid inflation and half less rapid). There has recently been a steady reduction in the median inflation rate of developing countries, from about 15 per cent in 1980 to 11½ per cent in 1982. Interestingly, this reduction has been most pronounced in the Western Hemisphere, because the few large countries that have had accelerating inflation have been outnumbered by those whose inflation rates have been declining. There has also been a noteworthy reduction in median inflation rates in the Asian region over the past three years, although elsewhere progress has been less significant.

Table 3.Developing Countries: Changes in Consumer Prices, 1968–82 1(In per cent)
Average

1968–72 2
Change from Preceding Year
1973197419751976197719781979198019811982
Oil exporting countries Weighted average 38.011.317.118.816.815.59.810.912.712.99.8
Non-oil developing countries Weighted average 322.619.824.631.831.032.8
Excluding China9.121.928.527.627.326.523.428.836.536.538.3
Median4.210.418.414.69.711.29.412.215.013.511.4
By analytical group
Weighted averages 3
Net oil exporters4.111.120.614.614.922.817.717.724.224.344.0
Net oil importers22.620.225.733.032.031.0
Excluding China10.023.829.930.129.727.324.531.038.838.937.3
Major exporters of manufactures14.121.324.940.155.740.637.444.954.162.162.9
Low-income countries6.93.66.711.79.08.6
Excluding China6.521.929.713.4–0.210.76.811.315.918.213.6
Other net oil importers 48.430.438.827.318.819.618.623.931.519.616.3
Medians
Net oil exporters3.811.218.715.510.512.310.69.015.114.615.5
Net oil importers4.210.318.414.49.610.69.112.615.013.410.5
Major exporters of manufactures7.618.224.315.213.312.214.419.024.922.621.0
Low-income countries4.310.017.418.18.39.69.110.513.813.611.9
Other net oil importers 43.910.618.413.29.311.28.312.914.412.49.7
By area
Weighted averages 3
Africa4.69.715.015.014.619.415.919.320.122.015.8
Asia5.53.76.712.69.96.8
Excluding China6.521.530.113.20.57.35.69.815.914.89.9
Europe6.112.517.613.711.815.119.725.937.824.323.8
Middle East4.312.723.321.718.620.121.726.043.435.337.6
Western Hemisphere15.332.137.552.066.151.242.449.658.265.478.0
Medians
Africa4.29.315.515.510.612.010.112.213.813.013.5
Asia3.814.023.18.85.95.06.07.713.413.47.9
Europe3.812.917.311.18.311.19.914.316.215.719.4
Middle East4.417.122.214.113.914.312.014.015.211.211.8
Western Hemisphere4.312.923.317.09.711.510.215.618.114.89.4

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

Compound annual rates of change.

Geometric averages of country indices, weighted by the average U.S. dollar value of GDPs over the previous three years.

Middle-income countries that, in general, export mainly primary commodities.

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

Compound annual rates of change.

Geometric averages of country indices, weighted by the average U.S. dollar value of GDPs over the previous three years.

Middle-income countries that, in general, export mainly primary commodities.

A major factor accounting for the continuing high rates of inflation in the non-oil developing countries has been the accommodative financial policies of the past several years. For the group as a whole, the rate of expansion of the broadly defined money stock accelerated from 30 to 35 per cent per annum in the 1976–80 period to over 40 per cent in both 1981 and 1982. Rates of domestic credit expansion accelerated even more sharply and were in the range of 50–55 per cent in 1981 and 1982. The resulting pressures on domestic prices, coupled with the need to intensify external adjustment efforts, have required many developing countries to depreciate their currencies more substantially, or more promptly, than in the past. Such action should ultimately have beneficial effects in bringing the supply of and demand for traded goods into better balance, but its initial impact is to raise the price level and worsen the recorded inflation statistics. The importance of this factor for non-oil developing countries can be judged from the fact that the weighted-average rate of currency depreciation against the U.S. dollar, which was 8½ per cent from 1978 to 1979, was three times as great (26 per cent) from 1981 to 1982.

To a significant extent, the acceleration in the rate of money and credit growth in non-oil developing countries has reflected a weakening in fiscal performance. For the group as a whole, the average fiscal deficit widened from 3 per cent of GDP over the years 1976–80 to over 4 per cent in 1981–82. Especially troubling in this connection is the extent to which this deterioration has been due to an acceleration in the growth of expenditure, which will inevitably be hard to reverse.

There is, therefore, reason for concern in the evolution of financial policies in the non-oil developing countries. At the same time, it should also be recognized that steps toward restraint have been taken by a number of these countries, especially in the 12 to 18 months ended in mid-1983. This is perhaps most evident in the reduction in the median rate of monetary growth, from 19–20 per cent in each of the years 1977–81 to some 15 per cent in 1982. Plans for 1983 involve a further move toward restraint in the financial policies of the non-oil developing countries, taken as a group. While these announced intentions need to be interpreted cautiously, the magnitude of the shift that is envisaged and the fact that these plans are often necessitated by financing constraints, or are embedded in Fund programs, lend some credence to the view that a significant change in the stance of financial policies is under way in many countries.

Not surprisingly, policy developments among the large number of countries in the non-oil developing group have been sharply differentiated. In some countries these differences have reflected divergences in economic circumstances, while in others they have resulted from deliberate policy choices. Given the differences in policy stances found among the non-oil developing countries, the question naturally arises as to whether matching differences in economic performance can also be found. This is a very complex question and one not amenable to definitive answers. Nevertheless, it is noteworthy that a staff study 1 found that countries where financial developments over the past several years were consistent with a policy of domestic demand restraint and the preservation of external competitiveness typically registered significantly better current account outturns, without incurring disproportionate reductions in growth rates, than did “non-adjusting” countries. It appears, therefore, that countries that have followed sound policies from the start have been better able to cope with the adversities of the past four-five years than countries where a less disciplined approach to financial policies was allowed to hold sway.

International Trade and Payments

Overview

Changes in world trade flows and shifts in the pattern of international payments balances in 1982 stemmed primarily from the prolongation and deepening of the global recession, the further slackening of demand pressures in the world oil market, and the rather abrupt slowdown in the flow of private bank credit to developing countries. The influence of the recession was reflected in a declining volume of imports into the industrial countries and was especially evident in the marked drop in export prices and terms of trade of the developing countries. The easing of demand for oil stemmed not only from the general cyclical weakness of economic activity, but also from price-induced conservation and fuel substitution efforts. The slowdown in international bank lending contributed importantly to a sharp drop in real imports of the non-oil developing countries. That development, in combination with a small decline in the real imports of the industrial countries and a marked slowing of import growth in the oil exporting countries, brought the first year-to-year decline in the volume of world trade since 1975.

The external accounts most strongly and visibly affected by the foregoing major influences were those of the oil exporting countries. The current account surplus of that group, already roughly halved in 1981 after the upsurge of the preceding two years, was eliminated in 1982 (Table 4). The combined current account deficit of the non-oil developing countries was reduced significantly in 1982 despite the marked weakness of their export earnings. However, the recorded current account balance of the industrial countries as a group showed little change, remaining near zero, exclusive of official transfers. For reasons explained in the May 1983 World Economic Outlook (pages 161–67), it seems likely that net receipts of both the industrial countries and the oil exporting countries may be appreciably understated in the statistics compiled by the respective national statistical authorities. Considerable caution in interpreting these combined balances for the various major groups of countries is therefore in order.

Table 4.Summary of Payments Balances on Current Account, 1973–83 1(In billions of U.S. dollars)
197319741975197619771978197919801981198219832
Industrial countries20.3–10.819.80.5–2.232.7–5.5–40.2–0.3–3.616.0
Seven larger countries14.8–2.724.910.110.436.26.9–13.615.410.520.5
Other industrial countries5.5–8.1–5.1–9.6–12.6–3.5–12.4–26.6–15.7–14.1–4.5
Developing countries
Oil exporting countries6.768.335.440.330.22.268.6114.365.0–2.2–27.0
Non-oil developing countries 3–11.3–37.0–46.3–32.6–28.9–41.3–61.0–89.0 -–107.7–86.8–68.0
By area
Africa 4–1.9–3.2–6.6–6.1–6.6–9.4–9.9–12.9–14.0–13.2–13.5
Asia 3–2.6–9.9–8.9–2.7–0.8–7.2–14.8–24.3–22.2–15.6–17.5
Europe0.6–4.4–4.9–4.7–8.4–6.7–9.9–12.5–10.5–7.1–4.0
Middle East–2.6–4.5–6.9–5.4–5.1–6.2–8.5–9.4–11.1–12.9–12.0
Western Hemisphere–4.7–13.5–16.3–11.8–8.5–13.3–21.4–33.4–45.4–34.9–21.5
Total 515.720.58.98.2–0.9–6.42.1–14.9–43.0–92.6–79.0

On goods, services, and private transfers. For the industrial countries, alternative current account balances including official transfers are given for the years 1979–82 in Table 8. Projected 1983 balances including official transfers are –$7.5 billion for the industrial countries as a group, $1 billion for the larger countries, and –$8.5 billion for the other industrial countries. For classification of countries in groups shown here, see Tables 1 and 2.

Fund staff projections. Figures are rounded to the nearest $0.5 billion.

Excludes data for China prior to 1977.

Excluding South Africa.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics on current account, plus balance of listed groups with other countries (mainly the Union of Soviet Socialist Republics and other nonmember countries of Eastern Europe and, for years prior to 1977, China). The large increase in this statistical asymmetry from 1979 to 1983—a matter of concern—is discussed in the Fund staff’s 1983 World Economic Outlook, Appendix A-11, pages 161–67.

On goods, services, and private transfers. For the industrial countries, alternative current account balances including official transfers are given for the years 1979–82 in Table 8. Projected 1983 balances including official transfers are –$7.5 billion for the industrial countries as a group, $1 billion for the larger countries, and –$8.5 billion for the other industrial countries. For classification of countries in groups shown here, see Tables 1 and 2.

Fund staff projections. Figures are rounded to the nearest $0.5 billion.

Excludes data for China prior to 1977.

Excluding South Africa.

Reflects errors, omissions, and asymmetries in reported balance of payments statistics on current account, plus balance of listed groups with other countries (mainly the Union of Soviet Socialist Republics and other nonmember countries of Eastern Europe and, for years prior to 1977, China). The large increase in this statistical asymmetry from 1979 to 1983—a matter of concern—is discussed in the Fund staff’s 1983 World Economic Outlook, Appendix A-11, pages 161–67.

The shifts in current account balances since 1981 have been accompanied, of course, by commensurate shifts in financing flows, featuring a sharp change in the sources of funds supplied to international financial markets. Since mid-1982, another notable feature of shifts in financing patterns has been a reduction in the proportion of international capital flows moving through the private banking system.

The oil exporting countries, which had been the principal net suppliers of funds in 1979 and 1980, particularly through banking channels, had become net users of international banking funds by 1982 (mainly through drawdowns of earlier deposits rather than through borrowing—but also with a significant rise in net borrowing by some countries in the group). On the other hand, the industrial countries, whose borrowings from the international commercial banking system had exceeded their deposits in 1979 and almost equaled them in 1980, have resumed during the past two years their more traditional role as major suppliers of funds to banking markets. Their net placements in those markets exceeded $40 billion both in 1981 and in 1982. Taken as a group, the non-oil developing countries, in keeping with their need for capital imports, continued to borrow several times as much from the international commercial banking system as they deposited there. However, their borrowing from private banks was interrupted in the third quarter of 1982 and for the year as a whole was only about half as large as in 1981.

The sharp slowdown in net bank lending to non-oil developing countries reflected a growing realization in the international banking community that the unexpected prolongation of the recession had serious implications for the debt-servicing capabilities of major borrowers among the developing countries. Recognizing that export earnings of a number of these countries were falling far short of those to which their policies had been geared, and that outstanding loans and debt service obligations were becoming extremely large in relation to actual export earnings, the lenders became intensely concerned and reluctant to make new credit commitments to some of the largest borrowers. The virtual stoppage of credit expansion that ensued posed a broader threat that inability of some major borrowers to “roll over” or refinance maturing loans might generate a major crisis of confidence and a cumulative contraction of credit-financed import demands, to the general detriment of world trade and global prospects for economic recovery.

In this setting, several of the major borrowing countries turned to the Fund for assistance, and large amounts of new credit were made available to them. These credits came not only from the Fund but also from private banks and other sources, under cooperative arrangements involving the authorities of the countries directly concerned, either as borrowers or as lenders, the private banking community, and other international institutions. These arrangements—described in more detail in Chapter 2—appear to have averted the threat of a crippling cessation of international credit flows and to have brought about a considerable easing of tensions in international financial markets. The borrowing countries engaged in these arrangements—most notably Mexico, Brazil, and Argentina—have all adopted comprehensive programs worked out in close consultation with the Fund and calculated to restore satisfactory payments positions over a period of time. These arrangements are intended to provide assurance—within the context of the agreed programs—of sufficient inflows of credit to permit orderly and gradual adjustment.

Although aggregate external borrowing by the non-oil developing countries subsided somewhat in 1982 and appears to be subsiding further in 1983, the debt situations of many countries in the group remain precarious. The drop in interest rates during 1982 was helpful, but its effects on current payments balances to date have been offset by the continuing rise in outstanding external debt. Moreover, the appreciation of the U.S. dollar since 1980 has for many countries effectively increased the burden of debt denominated in that currency. A number of countries met their external financing requirements in 1982 only by drawing down their reserves or making use of Fund credit. These sources of financing are by their nature limited. Since the capacity of developing countries to acquire and service additional debt is strictly circumscribed in present conditions, further adjustment of current account positions will be required. Such adjustments are bound to be difficult, especially until some buoyancy is restored to their export markets.

Table 5.World Trade Summary, 1963–82 1(Percentage changes)
Average

1963–72 2
Change from Preceding Year
1973197419751976197719781979198019811982
World trade 3
Volume8.512.04.5–3.511.05.05.56.52.00.5–2.5
Unit value
(in U.S. dollar terms)3.023.540.09.51.58.510.018.520.0–1.0–4.0
(in SDR terms) 42.012.539.08.57.07.52.514.519.09.02.5
Volume of trade
Exports
Industrial countries9.013.27.0–4.210.65.26.06.74.82.5–2.5
Developing countries
Oil exporting countries9.114.2–1.6–11.714.30.4–4.32.8–12.3–16.0–19.1
Non-oil developing countries6.79.3–0.1–0.311.34.98.79.69.06.30.8
Imports
Industrial countries9.011.51.4–8.113.34.55.18.5–1.5–2.4–0.5
Developing countries
Oil exporting countries8.320.638.541.420.616.04.8–12.315.319.95.7
Non-oil developing countries6.211.57.6–4.14.57.28.510.34.72.6–7.7
Unit value of trade (in SDR terms) 4
Exports
Industrial countries2.110.123.810.85.66.55.711.911.96.33.3
Developing countries
Oil exporting countries2.627.5204.44.311.88.6–6.042.657.320.81.8
Non-oil developing countries1.220.037.0–1.212.312.7–1.614.015.19.31.5
Imports
Industrial countries1.812.039.68.16.67.72.614.921.47.20.9
Developing countries
Oil exporting countries2.112.526.99.95.77.74.910.511.28.73.1
Non-oil developing countries1.114.045.68.06.06.52.214.322.713.74.3

For classification of countries in groups shown here, see Tables 1 and 2. Excludes data for China prior to 1978.

Compound annual rates of change.

Averages based on data for the three groups of countries shown separately below and on partly estimated data for other countries (mainly the Union of Soviet Socialist Republics and other nonmember countries of Eastern Europe and, for years prior to 1978, China). Figures are rounded to the nearest 0.5 per cent.

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

For classification of countries in groups shown here, see Tables 1 and 2. Excludes data for China prior to 1978.

Compound annual rates of change.

Averages based on data for the three groups of countries shown separately below and on partly estimated data for other countries (mainly the Union of Soviet Socialist Republics and other nonmember countries of Eastern Europe and, for years prior to 1978, China). Figures are rounded to the nearest 0.5 per cent.

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

Table 6.Summary of Terms of Trade and World Prices, 1963–82 1(Percentage changes)
Average

1963–72 2
Change from Preceding Year
1973197419751976197719781979198019811982
Terms of trade
Industrial countries0.3–1.8–10.62.5–1.0–1.12.7–2.4–7.4–0.82.5
Developing countries
Oil exporting countries0.513.3140.0–5.15.80.8–10.429.141.511.1–1.3
Non-oil developing countries0.35.3–5.9–8.55.95.9–3.7–0.3–6.2–3.9–2.7
Net oil exporters–0.215.415.7–14.18.16.1–3.016.86.6–6.3–8.2
Net oil importers0.54.0–8.7–7.55.65.8–3.8–3.0–8.4–3.4–1.6
Major exporters of manufactures0.72.2–9.4–6.05.33.2–1.7–3.6–7.7–2.6–0.8
Low-income countries 3–0.26.9–5.6–16.315.616.6–9.1–1.5–12.7–10.3–3.2
Other net oil importers 40.36.7–7.3–7.64.35.9–4.7–2.1–9.8–5.1–4.0
World trade prices (in U.S. dollar terms) for major commodity groups5
Manufactures3.017.721.812.39.014.715.310.5–5.1–2.0
Oil3.040.0225.85.16.39.30.148.762.010.1–4.6
Non-oil primary commodities (market prices)2.553.228.0–18.213.320.7–4.716.59.7–14.8–12.1

Based on foreign trade unit values except where indicated. For classification of countries in groups shown here, see Tables 1 and 2. Excludes data for China prior to 1978.

Compound annual rates of change.

Excluding China and India.

Middle-income countries that, in general, export mainly primary commodities.

As represented, respectively, by (a) the United Nations export unit value index for the manufactures of the developed countries; (b) the oil export unit values of the oil exporting countries; and (c) the Fund’s International Financial Statistics index of market quotations for non-oil primary commodities.

Based on foreign trade unit values except where indicated. For classification of countries in groups shown here, see Tables 1 and 2. Excludes data for China prior to 1978.

Compound annual rates of change.

Excluding China and India.

Middle-income countries that, in general, export mainly primary commodities.

As represented, respectively, by (a) the United Nations export unit value index for the manufactures of the developed countries; (b) the oil export unit values of the oil exporting countries; and (c) the Fund’s International Financial Statistics index of market quotations for non-oil primary commodities.

A few countries in the oil exporting group are now encountering balance of payments problems broadly similar to those already faced for some time by many of the non-oil developing countries. Although most of the oil exporting countries have not incurred external debts on a scale approaching that of the heavier borrowers in the non-oil developing group, a number of them have already borrowed substantial amounts and have financed recent current account deficits partly by drawing on stocks of external financial assets accumulated earlier. In only a few countries of the group are such stocks large enough to cover any prolonged reliance on this form of financing.

Within the group of industrial countries, individual current account balances showed more movement in 1982 than did the combined balance for the group as a whole. As noted in greater detail below, sharply negative swings in the U.S., French, and U.K. balances were largely matched by positive swings in the balances of the other four major industrial countries, and especially in those of the Federal Republic of Germany and Canada. (See Table 8.)

Table 7.Global Balance of Payments Summary, 1979–82 1(In billions of U.S. dollars)
Balance on
TradeServices and private transfersCurrent account excluding official transfersCapital Account Balance 2Change in Liabilities to Foreign Official Agencies 3Balance Financed by Changes in Reserve Assets 4
Industrial countries1979–36.330.8–5.510.656.311.4
1980–66.326.1–40.250.1521.631.5
1981–19.118.8–0.3–20.45–1.4–22.1
1982–14.611.0–3.6–5.95–4.3–13.8
Oil exporting countries1979112.7–44.168.6–54.614.0
1980166.6–52.3114.3–94.619.7
1981118.8–53.865.0–64.10.9
198253.9–56.1–2.2–7.6–9.8
Non-oil developing countries1979–51.3–9.7–61.071.00.410.4
1980–74.3–14.7–89.088.51.81.3
1981–79.6–28.1–107.7102.65.90.8
1982–52.2–34.6–86.870.710.7–5.4
By analytical group
Net oil exporters1979–2.9–5.6–8.511.53.0
1980–3.5–9.0–12.516.3–0.43.4
1981–10.0–13.5–23.523.90.10.5
1982–0.8–14.8–15.69.23.0–3.4
Net oil importers1979–48.4–4.1–52.559.50.47.4
1980–70.8–5.7–76.572.32.1–2.1
1981–69.6–14.6–84.2. 78.75.80.3
1982–51.3–19.8–71.161.47.7–2.0
Major exporters of manufactures1979–20.3–1.4–21.725.0–0.62.7
1980–26.3–6.3–32.527.80.5–4.2
1981–26.4–11.2–37.639.01.02.4
1982–19.3–15.0–34.327.03.3–4.0
Low-income countries1979–12.90.9–12.013.20.41.7
1980–20.23.8–16.414.91.0–0.5
1981–15.72.1–13.611.42.1–0.1
1982–12.31.9–10.413.52.85.9
Other net oil importers 61979–15.2–3.6–18.921.30.63.0
1980–24.3–3.3–27.629.50.72.6
1981–27.4–5.6–33.028.32.7–2.0
1982–19.7–6.7–26.420.91.6–3.9
Total, all countries 7197925.1–23.02.127.06.735.8
198026.0–40.9–14.944.023.452.5
198120.1–63.1–43.018.14.5–20.4
1982–12.9–79.7–92.657.26.4–29.0

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

This balance is computed as the difference between the balance financed by changes 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, SDR allocations, valuation adjustments, and gold monetization. (See also footnote 3.)

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.

The changes in reserve assets indicated here are calculated as the changes in U.S. dollar equivalents of period-end stocks of total reserves with gold valued at SDR 35 per ounce. It may be noted that official agencies of some countries hold external financial claims that are not classified as reserves. Changes in such claims are included in the column “Capital Account Balance” of this table. The dividing line between capital movements and reserve asset changes remains particularly uncertain for some oil exporting countries.

See footnote 7.

Middle-income countries that, in general, export mainly primary commodities.

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. Some of 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 smaller net capital inflow and a larger aggregate change in liabilities to foreign official agencies. If identified Eurocurrency reserve placements (shown in terms of SDRs in Table 17 of this Report) were assumed to have been placed in industrial countries, then the adjusted net capital inflows to those countries would amount to $2 billion, $35 billion, –$16 billion, and $6 billion over the years 1979, 1980, 1981, and 1982, respectively. (See also Table 4, footnote 5.)

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

This balance is computed as the difference between the balance financed by changes 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, SDR allocations, valuation adjustments, and gold monetization. (See also footnote 3.)

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.

The changes in reserve assets indicated here are calculated as the changes in U.S. dollar equivalents of period-end stocks of total reserves with gold valued at SDR 35 per ounce. It may be noted that official agencies of some countries hold external financial claims that are not classified as reserves. Changes in such claims are included in the column “Capital Account Balance” of this table. The dividing line between capital movements and reserve asset changes remains particularly uncertain for some oil exporting countries.

See footnote 7.

Middle-income countries that, in general, export mainly primary commodities.

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. Some of 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 smaller net capital inflow and a larger aggregate change in liabilities to foreign official agencies. If identified Eurocurrency reserve placements (shown in terms of SDRs in Table 17 of this Report) were assumed to have been placed in industrial countries, then the adjusted net capital inflows to those countries would amount to $2 billion, $35 billion, –$16 billion, and $6 billion over the years 1979, 1980, 1981, and 1982, respectively. (See also Table 4, footnote 5.)

Table 8.Industrial Countries: Balance of Payments Summaries, 1979–82(In billions of U.S. dollars)
Balance onCapital Account Balance
TradeServices and private transfersCurrent account excluding official transfersTotal1Long-term capital and official transfersOther2Changes in Liabilities to Foreign Official Agencies3Balance Financed by Changes in Reserve Assets4Memo: Current Account Including Official Transfers
Canada19793.8–8.0–4.23.52.60.9–0.7–4.2
19807.5–8.7–1.21.3–0.11.40.1–0.9
19816.1–11.2–5.15.41.24.20.3–4.8
198214.9–12.72.2–2.76.7–9.4–0.52.4
United States1979–27.630.73.110.9–19.530.4–13.60.4–0.5
1980–25.531.76.2–13.7–13.714.97.41.5
1981–28.137.19.0–12.26.5–18.75.52.34.5
1982–36.430.6–5.86.4–1.37.72.73.3–11.2
Japan19791.8–9.7–7.9–5.0–13.58.5–12.9–8.8
19802.1–11.6–9.514.61.113.55.1–10.8
198120.0–13.86.2–2.7–7.95.23.54.8
198218.1–10.08.1–13.0–17.54.5–4.96.9
France1979–3.210.16.90.4–6.97.30.17.45.2
1980–13.410.9–2.511.6–10.221.80.59.6–4.2
1981–10.07.2–2.8–3.8–10.87.01.2–5.4–4.8
1982–15.96.5–9.43.7–1.45.1–0.2–5.9–12.0
Germany,197917.5–17.5_3.4–0.13.5–0.33.1–6.1
Federal198010.4–18.7–8.3–1.8–5.33.55.4–4.7–15.7
Republic of198117.9–17.80.1–1.3–3.42.1–3.5–4.7–6.5
198226.3–16.49.9–9.1–13.94.80.83.3
Italy1979–1.07.46.41.1–1.32.4–1.16.45.5
1980–16.46.8–9.514.33.410.94.8–9.7
1981–10.73.2–7.54.27.8–3.6–3.3–8.2
1982–7.93.0–4.9–1.34.3–5.6–6.2–5.5
United1979–7.39.92.6–18.6–8.5–10.119.53.5–1.8
Kingdom19802.98.211.1–11.8–14.42.61.60.96.8
19815.89.715.5–16.7–22.96.2–4.3–5.512.1
19823.96.510.4–7.0–16.29.2–6.3–2.96.9
Other1979–20.48.0–12.414.9–4.619.51.74.2–14.6
industrial1980–33.97.4–26.535.67.328.3–0.88.3–29.6
countries 51981–20.34.6–15.76.77.0–0.3–0.3–9.3–19.3
19826–17.53.3–14.217.27.010.2–0.52.5–18.9
Total1979–36.330.8–5.510.67–51.862.46.311.4–25.3
industrial1980–66.326.1–40.250.17–31.982.021.631.5–62.6
countries1981–19.118.8–0.3–20.4–22.52.1–1.4–22.1–22.2
19826–14.611.0–3.6–5.9–32.026.1–4.3–13.8–28.2
Memorandum:
Total industrial countries excluding United States1979–8.70.1–8.6–0.3–32.332.019.911.0–24.8
1980–40.8–5.6–46.463.8–18.282.06.724.1–64.1
19819.0–18.3–9.3–8.2–29.020.8–6.9–24.4–26.7
1982621.8–19.62.2–12.3–31.018.7–7.0–17.1–17.0

See Table 7, footnote 2.

Includes SDR allocations, recorded net movements of short-term capital, net errors and omissions, valuation adjustments, and gold monetization.

See Table 7, footnote 3.

See Table 7, footnote 4.

Australia, Austria, Belgium-Luxembourg, Denmark, Finland, Iceland, Ireland, the Netherlands, New Zealand, Norway, Spain, Sweden, and Switzerland.

Partly estimated.

See Table 7, footnote 7.

See Table 7, footnote 2.

Includes SDR allocations, recorded net movements of short-term capital, net errors and omissions, valuation adjustments, and gold monetization.

See Table 7, footnote 3.

See Table 7, footnote 4.

Australia, Austria, Belgium-Luxembourg, Denmark, Finland, Iceland, Ireland, the Netherlands, New Zealand, Norway, Spain, Sweden, and Switzerland.

Partly estimated.

See Table 7, footnote 7.

The dominant feature of exchange market developments over the period since the beginning of 1982 has been the strength of the U.S. dollar. The nominal effective exchange rate for that currency, which had already risen substantially during 1981, rose even more during most of 1982. Although it fell back around the end of the year, much of the dip was reversed during the early months of 1983, leaving the effective rate in May some 15 per cent above its end-1981 level. Over the whole period since end-1981, the principal counterparts of the dollar’s effective appreciation have been the cumulative declines in the external (nominal) values of the major European currencies, and especially of the pound sterling, the French franc, and the Italian lira. The Japanese yen also depreciated substantially during the first ten months of 1982, but then rebounded sharply. Its effective rate during the first half of 1983 has remained at about the end-1981 level. The deutsche mark, while considerably lower against the U.S. dollar in the first half of 1983 than at the end of 1981, was nevertheless higher in effective terms.

Industrial Countries

Current account developments—The recorded current account balance for the industrial countries, which had moved from a sizable deficit in 1980 to near balance in 1981, remained little changed in 1982 (see Table 4). In view of the large and growing asymmetry in the global balance of payments accounts, however, it seems likely that these countries had substantial unrecorded net receipts, and were actually in significant surplus both in 1981 and 1982.

The most important factor contributing to improvement in the industrial countries’ aggregate external position since 1980 has been the decline in both the volume and the price of their oil imports. Influenced by the recession and by the impact of price-induced reductions in the demand for oil, the volume of oil imports into industrial countries fell by 24½ per cent between 1980 and 1982. Oil prices, which had been 10 per cent higher, on average, in 1981 than in 1980, were on a downward trend after early 1981, and in 1982 averaged some 5 per cent less (in dollar terms) than in the previous year. As a result, 1982 saw a net reduction in the industrial country group’s payments for imported oil of some $40 billion, following a $13 billion drop in 1981.

Import payments for other goods were also restrained by the weakness of economic activity, and by the associated further decline in international commodity prices in 1982. Offsetting the impact of these factors on balance of payments positions, however, demand weakened in the developing world, and this resulted in a significant decline in both the volume and dollar value of industrial country exports.

Within the industrial country group, several noteworthy shifts in current account positions took place in 1982. The United States, whose recorded current account position (including official transfers) had been in small surplus both in 1980 and 1981, moved to a deficit of $11 billion in 1982. By contrast, both the Federal Republic of Germany and Japan recorded a swing from heavy deficit in 1980 to moderate surplus in 1982—for both countries these swings were in the range of $15–20 billion over the two-year period. In the early part of 1983, the U.S. deficit was somewhat smaller than in late 1982, although the strength of the recovery that is under way in the United States, together with the erosion of its international competitive position over the past two years, suggests that the deficit may tend to rise again as the year proceeds. In Japan and the Federal Republic of Germany, the external position has strengthened further in the opening months of 1983. (See Chart 8.)

Chart 8.Major Industrial Countries: Payments Balances on Current Account, Including Official Transfers, 1978–First Quarter 1983 1

(In per cent of GNP)

1 Based on seasonally adjusted figures.

Another significant development in the current accounts of the major countries was the weakening of the French and U.K. positions. For the United Kingdom, this represented a partial erosion of the exceptionally large surplus recorded in 1981, and hence was not a source of concern. For France, however, the deterioration in its external position—to a current deficit approaching 2 per cent of GNP—was a troublesome development and led to a series of corrective measures having the aim of improving the current account. The other two countries in the major industrial group, Canada and Italy, both experienced moderate improvements in their current accounts in 1982—Canada moving into small surplus, and Italy succeeding in reducing further a deficit that had earlier reached worrisome proportions. Nevertheless, the Italian position remained fragile, and the Italian authorities, like the French, adopted measures designed to improve their external position in 1983.

The smaller industrial countries as a group showed a substantial improvement in their external balance during 1981 and 1982. In a number of instances this improvement reflected the implementation of structural adjustment programs, especially in energy conservation. Several of the smaller countries, however, continue to record very large public sector deficits and some of them have had little success in reducing price and wage inflation. Where such long-standing problems exist, they have made the elimination of current account deficits much more difficult.

An important factor affecting current account developments of individual countries is their cyclical position relative to that of their trading partners and competitors. The surplus recorded in the first half of 1982 for the United States, for example, was related to relatively weak import demand, which in turn was probably associated with the severity of the recession in that country. In contrast, most of the continental European economies maintained a rather higher level of activity in this period, which contributed to the weakness of their current account balances. Later in 1982, however, and in the early part of 1983, relative cyclical positions changed somewhat, with activity in the United States tending to pick up relative to that in Europe; the U.S. external position consequently was quite weak during this period in spite of a sharp decline in the value of oil imports.

Perhaps more important than these cyclical developments have been the shifts in the terms of trade and competitiveness that have occurred during the past few years, especially among the largest industrial countries. Competitiveness factors, however, tend to affect balance of payments positions only with a considerable lag, so that it is not always appropriate to associate current account developments with immediately preceding changes in exchange rates and domestic costs. The real exchange rate of the U.S. dollar rose almost continuously from the latter part of 1980 to the end of 1982. Measured in terms of relative normalized unit labor costs in manufacturing, adjusted for exchange rate changes, the real appreciation of the U.S. dollar amounted to about 16 per cent in each of these two years (see Chart 9). Perhaps because of the lags with which such changes in competitiveness affect payments flows, the U.S. current account remained in surplus in 1981 and the first half of 1982. By late 1982 and early 1983, however, the cumulative loss of competitiveness was clearly reflected in the U.S. balance of payments position. For 1982 as a whole, the volume of exports declined by 12 per cent.

Chart 9.Major Industrial Countries: Relative Costs and Prices of Manufactures, Adjusted for Exchange Rate Changes, 1980–First Quarter 1983

(Indices, 1977 = 100)

1 Index of hourly compensation divided by index of “potential output per man-hour.”

2 Annual deflators for gross domestic product originating in manufacturing with quarterly interpolations and extrapolations (beyond the latest available annual data) based on wholesale price data for raw materials and manufactures.

In contrast to the U.S. experience, Japan experienced a significant improvement in its competitive position during most of 1982, extending a trend that had continued since the early part of 1981. As may be seen from Chart 9, however, the extent of the shift in Japanese competitiveness was less than in the case of the United States. With output in Japan holding up better than in the other industrial countries, and with a growing proportion of Japanese exports being subject to restraints, the improvement in the Japanese current account position between 1981 and 1982 was relatively small and mainly accounted for by developments in the service accounts.

Another country experiencing a significant change in competitiveness during the past two years has been the United Kingdom. The U.K. manufacturing sector had suffered a very large decline in competitiveness from 1978 to 1980, reflecting the impact on the sterling exchange rate of tight monetary conditions and the development of North Sea oil fields in a period of rapidly rising oil prices. Since early 1981, however, the U.K. competitive position has strengthened markedly, and this may have contributed to the stabilization of U.K. export market shares in late 1982 and early 1983, after several years of decline.

Competitive factors were also an important influence on the current account balances of the countries participating in the common margins arrangements of the European Monetary System. The rapid rates of increase in domestic costs in France and Italy, compared with the more favorable inflation performance of the Federal Republic of Germany, have not always been fully offset by changes in their effective exchange rates. At least until fairly recently, this pattern resulted in a loss of competitiveness for these two countries, especially for Italy. However, the recent realignments of their central rates within the EMS have substantially improved their competitive positions and should thereby help to reduce their current account deficits.

The decline in the price of oil, which affected current account positions in 1982, and will have an even larger impact in 1983, has sharply different effects from country to country. These differences reflect mainly variations in the degree of dependence on imported energy, but also to some extent the impact of expenditure cutbacks by oil exporting countries on their imports from the industrial world. Japan and most continental European countries import a very large part of their energy requirements, and have benefited most from the drop in oil prices. In addition, some of these countries have been able to achieve a significant reduction in the volume of energy use per unit of output. The current account effects of declining oil prices have tended to be somewhat smaller for the other industrial countries; the United States, which consumes relatively large amounts of oil, is partially insulated from the balance of payments consequences of price changes by its relatively large domestic production. The direct effects of oil price developments on the current balance of Canada, which is essentially self-sufficient in energy, are broadly neutral; and for the United Kingdom, which is a net exporter, the decline in oil prices has actually tended to weaken its balance of trade.

Exchange rate developments.—Exchange rates for the three major currencies (the U.S. dollar, the deutsche mark, and the Japanese yen) continued to be characterized by substantial swings during 1982 and the first half of 1983. The nominal effective rate for the U.S. dollar, which had appreciated by 11 per cent during 1981, increased by another 17 per cent through November 1982. It then declined by 5Vi per cent over the next two months but subsequently began to appreciate again. By the end of June 1983 the dollar was just 2 per cent below its November peak. (See Chart 10.) The Japanese yen, in contrast, depreciated by 13 per cent in nominal effective terms during the first ten months of 1982. It then reversed course and appreciated by nearly 17 per cent from October 1982 to May 1983. The deutsche mark followed an intermediate course, tending to fall against the U.S. dollar but appreciating moderately in nominal effective terms for most of 1982 and the first half of 1983.

Chart 10.Major Industrial Countries: Exchange Rates, 1980–June 1983

(Indices, 1977 = 100)

1 Based on the Fund’s multilateral exchange rate model.

The causes of these swings are complex and are rooted in economic developments that have occurred over the past several years; these developments are reviewed in detail in Chapter 2. However, it is note-worthy that the major shifts in exchange rates were not associated systematically with changes in relative costs or prices. While costs and prices in the United States decelerated sharply during this period, the underlying rate of inflation remained above that in Japan, and was little different from that in Germany.

Exchange rate movements during this period appear to bear a closer association with developments in capital markets than with contemporaneous changes in current account balances. The capital accounts of these three countries were affected by a number of factors, including interest rate differentials and structural developments in the United States and Japan.

The improved outlook for the U.S. economy associated with declining inflation, a more favorable tax treatment of investment expenditures, and unsettled economic and political conditions in some other parts of the world no doubt contributed to the net movement of funds to the United States in the recent period. In contrast, domestic investment activity in Japan has been rather weak relative to the supply of domestic savings in recent years, providing the means for substantial foreign investment. In addition, official guidelines have been relaxed in order to permit such outflows, and Japanese firms may have sought to avoid some of the effects of protectionist measures imposed against their exports by establishing production facilities abroad. These developments appear to have contributed to the substantial pressure (in favor of the dollar and against the yen) during this period.

Exchange rates were no doubt also significantly affected by the impact of interest rate differentials on the relative attractiveness of assets denominated in different currencies. However, the precise way in which changes in interest differentials affect exchange rates depends on surrounding circumstances, and during any given period may be offset by other influences on currency values. During much of 1982, for example, developments in exchange markets were not easy to explain in terms of interest rate factors alone. Yields on dollar-denominated securities tended to fall by more in this period than those on assets in deutsche mark or yen. By itself, this might have been expected to bring about a weakening of the U.S. dollar. However, with the level of the interest rate differential remaining favorable to the dollar, there may have been continuing portfolio shifts into that currency, particularly since the relatively rapid decline in inflation in the United States must have enhanced the long-term attractiveness of the U.S. dollar as a store of value.

Official exchange market intervention did not play a major role in the relative movements of the three major currencies during 1982, except possibly in the case of Japan. As the yen depreciated during the year, the Japanese authorities acted to limit the downward movement through a reduction of international reserves. The U.S. authorities intervened on only a few occasions and in modest amounts; U.S. net official reserve assets did rise quite substantially in 1982, but for other reasons. The net reserve position of the Federal Republic of Germany recorded little change during the year.

Another major currency that has recently experienced pronounced swings in real terms is the pound sterling. Following a 9 per cent depreciation in nominal effective terms during 1981, the pound was quite stable through most of 1982. Then, from October 1982 to March 1983, it depreciated by more than 14 per cent. It subsequently recovered part of this drop during April and May, and by mid-June the net depreciation since the peak reached in the first quarter of 1981 was 17–18 per cent. The depreciation that has occurred over the past two years has been accompanied by a deceleration in the rate of increase of normalized unit labor costs to about the average for other industrial countries, and has served to reverse about half of the massive real appreciation that the pound had undergone from 1978 to the first quarter of 1981. The downward movement of sterling over the past two years may be viewed as a response to a weakening in the oil market, as well as to competitive difficulties faced by U.K. manufacturing industries following the earlier real appreciation. In addition, there has been a continuing capital outflow as institutions have gradually responded to the ending of capital controls in 1979. Official intervention by the U.K. authorities was rather light during most of the past year and a half, but it became fairly substantial on occasion, especially toward the end of 1982 and in the first half of 1983, as the authorities sought to moderate the pace of the pound’s depreciation and subsequent recovery.

Another notable exchange market development was the series of devaluations by Nordic countries from August to October 1982. These devaluations amounted to 6 per cent for the Norwegian krone, 10 per cent for the Finnish markka, and 16 per cent for the Swedish krona. Although these adjustments were broadly viewed as being in the right direction, given the exchange market pressures that preceded them, some concerns were raised about the magnitude of the Swedish devaluation.

Central rates within the EMS have been realigned three times during the past year and a half. Following devaluations of the Belgian franc and the Danish krone in February 1982, the French franc and the Italian lira were devalued in June while the deutsche mark and the Netherlands guilder were revalued. The revised central rates were again subjected to pressure in October 1982, following the Nordic devaluations described above. This pressure subsided without a further realignment but then reappeared in March 1983. At that time, all of the central rates were changed, with the French franc, the Italian lira, and the Irish pound being devalued and the other five currencies revalued in terms of the ECU. However, the Belgian and Luxembourg francs, whose revaluation in terms of the ECU was relatively small, actually experienced a depreciation in effective terms.

The strains that appeared within the EMS during this period were generally less severe than had been the case in 1981, except for the period immediately prior to the March 1983 realignment. The proximate source of the pressure on central rates at that time was the concurrence of elections in France and Germany, but the more fundamental reason was the continued lack of convergence of economic policies and conditions between the high-inflation and low-inflation countries participating in the system. It was thus seen as an important positive development that supporting policy changes were adopted in order to help achieve a greater measure of convergence in the years ahead.

Developing Countries—Oil Exporting Group

After reaching a peak of $114 billion in 1980, under the impetus of the second major round of oil price increases of the past decade, the recorded current account surplus of the 12 countries included in the oil exporting group has shrunk rapidly during the past two years. It dropped to $65 billion in 1981 and disappeared altogether in 1982, despite a marked deceleration in the growth of import payments. The very sharp drop in oil export volume—about one third over these two years—was the main factor in the shrinkage of the surplus; but some downward movement of oil prices also contributed to the decline in 1982. In 1983, given the sizable fall in oil prices during the first quarter, the price factor is expected to outweigh the volume factor in generating another substantial decline in the U.S. dollar value of exports of the oil exporting countries. Such a result would leave the oil export earnings of this group lower in real terms than in 1978, despite retention of most of the large gain in the terms of trade that resulted from the 1979–80 oil price increases.

The 1979–82 cycle of sharp expansion and contraction in the current account surplus of the oil exporting countries was the second such sequence during the past decade. The contractionary phase of this latest cycle, however, has differed in important respects from the one following the bulge in the surplus in 1974, when it reached a magnitude similar in real terms to that of 1980. The recent elimination of the group’s current account surplus has occurred much more rapidly and has reflected quite a different combination of causal factors. During the years 1975–78, the main reason for the gradual disappearance of the surplus was a large and sustained expansion of imports and payments for international services by the oil exporters; the volume of oil exports declined by less than 4 per cent over that period, and the real international purchasing power of the group’s total oil export earnings decreased only moderately. The elimination of the surplus since 1980, in contrast, has stemmed mainly from the steep fall in the volume of oil exports and only secondarily from the increase in imports of goods and services.

The large and sustained reduction of the group’s oil export volume, which actually began in 1980, has been mainly a reflection of the continuous decline in world oil consumption since 1979. That decline, in turn, can be attributed to the responses of end users of energy to increased oil prices, to changes in relative prices among different energy sources, and to the recession in the world economy. In addition, the demand for oil exported by the 12 main oil exporting countries has been further curtailed because of continuing increases in oil supplies from other sources—partly in response to the increased real price of oil—and, after mid-1981, because of a substantial drawdown of world oil inventories.

In most oil exporting countries, the response of imports and other current account payments to the increase in export earnings after 1978 was less pronounced than that following the first upsurge of export earnings in 1974. Nevertheless, as financial policies of some countries in the group became more expansionary during the latter part of 1979 and in 1980, import demand rose. Imports increased in real terms by 15 per cent in 1980 and 20 per cent in 1981. This acceleration was reversed, however, by shifts back to more restrained financial policies as the slump in oil exports progressed. Import volume growth, also affected by tightened import restrictions in a few of the oil exporting countries, was reduced to about 5 per cent in 1982. In late 1982 or early 1983, imports were actually declining in several oil exporting countries.

These changes in import demand have been rather unevenly distributed among countries in the group, depending on the severity of their losses of export earnings and the degree of financial constraint faced. Relatively large reductions in imports have been recorded by some of the countries, but import demand has weakened less markedly in others, particularly among the smaller countries with strong reserve positions.

Meanwhile, the rise in net external payments by the oil exporting countries for services and private transfers, which had proceeded steadily and rapidly from 1974 through 1980, also tapered off during 1981 and 1982. In the latter year, payments to foreign contractors and consultants, as well as remittances by expatriate workers, were curbed by widespread slowdowns of development programs.

Within the oil exporting group, relative positions of individual countries have differed markedly in recent years during both the expansionary and the contractionary phases of developments with respect to their combined current account surplus. The bulk of the increase in the aggregate surplus from 1978 to 1980 accrued to those countries whose current account balances had been strongest up until then. These countries not only accounted for the greater part of the increase in oil export earnings over that period, but also received most of the increase in investment income. As the surplus has declined since 1980, the same countries have absorbed most of the impact of the contraction in world demand for oil.

Among other oil exporting countries, several experienced external financing problems during the course of 1982, and sizable adjustments of economic and financial policies, including strong measures to curtail imports and other foreign exchange payments, were undertaken by some of the countries to contain the growth of foreign borrowing. However, almost all of the oil exporting countries had been able to build up their official holdings of foreign assets during the 1979–81 period of large current account surpluses, and some of the individual current account deficits that emerged in 1982 were financed in major part by drawdowns of reserves, which limited recourse to external borrowing. In general, the additions to outstanding debt liabilities among countries of the oil exporting group (amounting cumulatively to some $70 billion over the entire period from 1974 through 1982) have not been large in comparison with the growth in external indebtedness of many non-oil developing countries. Another important consideration limiting the severity of recent financing problems among the oil exporters has been the fact, already noted, that the major share of the group’s 1982 current account deterioration fell on countries with large reserves and strong current payments positions.

Developing Countries—Non-Oil Group

The period since the preparation of the 1982 Annual Report has witnessed continued weakness in the export receipts of most non-oil developing countries and a sharp reduction in net inflows of private credit to those of them that had previously borrowed heavily in international capital markets. This has curtailed access to real resources from abroad and hence the capacity to sustain progress in economic development. In large part, the origins of the external financial constraints now prevailing can be traced to the unexpected length and depth of the current global recession. The adverse effects of the recession on export earnings compounded the balance of payments impact of earlier increases in import prices and the extraordinarily high interest rates that have prevailed in international financial markets over the past several years. For some major borrowing countries, difficulties were further exacerbated by postponement of responses to the deterioration of their export earnings and debt-servicing capabilities.

The high interest rates of the 1981–82 period generated large and unexpected additions to debt service costs, not only for new borrowing but also—under the floating interest rate arrangements applicable to most international commercial bank loans in recent years—on a considerable proportion of the debt already outstanding. Since the escalation of the costs of servicing existing debt occurred with a relatively short lag and at a time of other major negative pressures on current account balances, it contributed to a vicious cycle of additional borrowing needs and further increases in debt service payments. Throughout the period 1979–81, moreover, a number of non-oil developing countries, and particularly the larger debtors among them, relied to an unusual extent on short-term financing, and the relatively high proportion of short-term liabilities in the total external debt thus became a cause of further concentration of debt service obligations falling due.

In nominal (U.S. dollar) terms, the total estimated outstanding external debt of the non-oil developing countries (including short-term liabilities) rose by 17–19 per cent in each year of the period 1979–81, reaching $555 billion at the end of 1981, compared with $336 billion three years earlier. In 1979 and 1980, the U.S. dollar value of earnings from exports of goods and services rose even faster, and the ratio of the debt to such earnings declined from 127 per cent at the end of 1978 to 109 per cent at the end of 1980. In 1981, however, the ratio rebounded to 120 per cent as the recession and the appreciation of the U.S. dollar slowed the growth in the dollar value of export earnings. In 1982, despite a sharp drop in the rate of increase in nominal debt (to about 10 per cent), the ratio of debt to export earnings rose again, to about 137 per cent.

Long-term debt to banks and other private creditors at the end of 1982 comprised approximately half of the total—the same as its share at the end of 1978. However, the proportion of short-term debt (nearly all owed to private creditors) had risen over this period from less than 15 per cent to 18½ per cent, while the share comprising long-term debt to official creditors had fallen from 35 per cent to 31½ per cent. The increase in the share of the short-term component would have been appreciably larger except for rescheduling agreements negotiated by some of the major borrowers toward the end of 1982.

The uneven geographic distribution of the debt is evident in sharp regional differences in the ratios of debt to export earnings, which are much higher than average in the Western Hemisphere and much lower in Asia. For non-oil developing countries of the Western Hemisphere, the end-1982 debt was equivalent to 246 per cent of export earnings (compared with 211 per cent at end-1978), while the corresponding average ratio for the Asian region was 81 per cent (compared with 78 per cent four years earlier). Average ratios for the other three regions differed much less widely from the overall average in 1982. However, the ratio for the African region, which had been considerably lower than the average for all non-oil developing countries in 1978, is now well above the average. This shift is primarily a reflection of declines in export earnings of African countries, rather than of growth in commercial borrowing, which has remained relatively low.

A number of the largest borrowers among the non-oil developing countries are in the Western Hemisphere, and this concentration accounts for some of the striking regional differences just noted. However, additional major borrowers are scattered among the other regions. The uneven distribution of external debt among non-oil developing countries is illustrated more broadly in Table 9, where the first column shows for specified categories of external debt the amounts owed by the 20 countries in the non-oil developing group with the largest external indebtedness to private creditors. Also shown are the percentage shares of the whole group’s liabilities (in corresponding categories) that these amounts represent. At the end of 1982, the 20 major borrowers accounted for 73 per cent of the group’s total debt and for some 88 per cent of its short-term debt. The same group of countries provided only half of the whole group’s exports of goods and services in 1982 and produced only a little more than half of its estimated total GDP. The corollary of this observation is that the debt problems of the majority of non-oil developing countries are considerably less severe than might be suggested by aggregate or average statistics dominated by the data for the major borrowers. Notwithstanding this aspect of the situation, the access of many developing countries to private credit has doubtless been adversely affected by the widely publicized instances of severe debt problems.

Table 9.Non-Oil Developing Countries: Distribution of Outstanding Debt Among Selected Groups of Countries, End-1982(In billions of dollars and percentages, as indicated)
Major Borrowers 1Low-Income Countries (except China and India)Other Countries 2
I. In billions of U.S. dollars
Total debt447.056.6108.8
Short-term debt99.73.010.0
Long-term debt347.353.698.8
Guaranteed, to official creditors93.744.854.7
Other253.68.844.1
II. In per cent of corresponding totals for all non-oil developing countries
Total debt73.09.217.8
Short-term debt88.42.78.9
Long-term debt69.510.719.8
Guaranteed, to official creditors48.523.228.3
Other82.72.914.4

The 20 countries (in the non-oil developing group) with the largest estimated external debts to private creditors: Mexico, Brazil, Argentina, Chile, Peru, Ecuador, Colombia, Korea, Philippines, Thailand, Malaysia, Greece, Morocco, Egypt, Yugoslavia, Israel, Turkey, Portugal, Romania, and Hungary.

Residual group (including China and India).

The 20 countries (in the non-oil developing group) with the largest estimated external debts to private creditors: Mexico, Brazil, Argentina, Chile, Peru, Ecuador, Colombia, Korea, Philippines, Thailand, Malaysia, Greece, Morocco, Egypt, Yugoslavia, Israel, Turkey, Portugal, Romania, and Hungary.

Residual group (including China and India).

Table 9 also singles out another group of countries whose external debt profiles tend to differ rather strikingly from the overall average pattern. The low-income countries do not borrow very much from private market sources, but long-term borrowing by members of this group under official development assistance is generally quite large in relation to their exports. Although the low-income countries (excluding China and India) provide only 4 per cent of aggregate exports of goods and services by all non-oil developing countries, they account for about 10½ per cent of the whole group’s long-term external debt, as indicated in the second column of the table. The numerous countries in the large residual group covered in the third column of the table account for 46 per cent of the export earnings of all non-oil developing countries and for some 38 per cent of their total GDP. However, the share of these countries in the group’s total external debt at the end of 1982 was only 18 per cent, and their participation in short-term foreign borrowing was only half of that proportion.

The wide differences in debt/export relationships implicit in the foregoing comparisons, although altered in some respects by the developments of the past few years, are by no means new. On the contrary, they represent for the most part continuations of longstanding patterns, as depicted in Chart 11. This chart traces the history of debt/export ratios over the past decade for all non-oil developing countries as a group and separately for the 20 major borrowers, for the low-income members, except China and India, and for the remaining countries in the group, both in terms of total external debt and in terms of debt owed to private creditors. The degree to which transactions of the major borrowers have dominated the upswing since 1980 in the relative magnitude of external debt—and especially of liabilities to private creditors—is evident (with due allowance for the relative weights of the various groups) in this chart.

Chart 11.Non-Oil Developing Countries: Debt Ratios, by Category of Borrower, 1973–82

(In per cent of exports of goods and services)

1 Excluding China and India.

2 The 20 non-oil developing countries with the largest external indebtedness to private creditors.

3 Excluding China.

The sheer magnitude of the debt increases of recent years, in combination with the high proportion of funds obtained from private market sources during a period of exceptionally high interest rates, contributed to a very serious widening of current account deficits—and hence of overall external financing requirements—of the non-oil developing countries. Estimated interest payments (including those on short-term debt) rose from just under $20 billion in 1978 to nearly $60 billion in 1982, thus absorbing more than 13 per cent of the group’s export earnings in the latter year, compared with less than 7½ per cent in 1978. Inclusive also of amortization payments on long-term debt, the total absorption of available flows of foreign exchange by debt service payments was equivalent to almost one fourth of export earnings in 1982. With outstanding short-term debt—all due for repayment within one year—generally close to one fifth of export earnings during the past several years, the scope for disruptive effects in the event of difficulties in refinancing maturing liabilities is obviously quite large.

Moreover, the foregoing ratios are all averages for the entire group of non-oil developing countries, and some have had much higher debt service obligations than this average. In the Western Hemisphere area, external debt has long been largest in relation to export earnings, as well as most heavily concentrated in liabilities to private financial institutions at market rates of interest. Also, the debt expansion of the past few years has been particularly pronounced in that region. The ratio of its interest payments to export earnings exceeded 30 per cent in 1982 (compared with 15 per cent in 1978), and the overall debt service ratio reached 54 per cent despite major rescheduling arrangements late in the year. Further exacerbating the cash-flow difficulties associated with these high ratios was the fact that the proportion of short-term debt in total external liabilities was also higher (22½ per cent at end-1982) in the Western Hemisphere than in any other region.

Primarily because of massive rescheduling of amortization payments due on long-term obligations of several large Latin American countries, a very steep decline in the ratio of total debt service payments to export earnings in the Western Hemisphere region is expected in 1983. Extensive rescheduling of short-term debt, although not reflected directly in the foregoing amortization ratios, will also help to ease strains on the major Latin American borrowers, as will the prevalence of somewhat lower interest rates. Their medium-term debt-servicing prospects, however, hinge crucially on the extent to which their debt service payments continue to be spread out, rather than concentrated in a short period of time.

The sharpest contrast to the high Western Hemisphere debt service ratios just discussed is to be found in the Asian region. Although Asian developing countries have been relying increasingly on private financial institutions for external credit during the past decade, a relatively large part of their combined debt still consists of long-term obligations to official creditors that are subject to relatively low annual amortization payments. Accordingly, the average ratio of interest and long-term amortization payments to exports of goods and services in the Asian region was only 10 per cent in 1982. That figure was almost the same as the corresponding ratio for 1978, despite a relatively sizable increase in the interest component.

During 1982, part of the sharp cutback in external financing provided to non-oil developing countries by foreign commercial banks was absorbed in ways that cushioned the current account against an immediate necessity of drastic adjustments, but did so only at the cost of considerable impairment of international liquidity positions. Some countries in the group were able and willing to draw down their own reserves, and a considerable number of countries drew on the conditional liquidity available through the Fund. Net use of Fund credit by non-oil developing countries during the year amounted to about $6½ billion, and other official borrowing for balance of payments purposes—mainly through “bridging loans” associated with arrangements for drawings on the Fund soon after the beginning of 1983—brought the total net use of reserve-related credit facilities in 1982 to nearly $11 billion (Table 10). In the three years preceding the onset of the global recession (1977–79), such use had amounted to less than $½ billion annually. Use of Fund credit continued on an unusually large scale in the first half of 1983. Part of this credit, however, was offset by repayment of the bridging loans obtained during the latter part of 1982 from the Bank for International Settlements and major central banks in the industrial world.

Table 10.Non-Oil Developing Countries: Current Account Financing, 1973–82 1(In billions of U.S. dollars)
1973197419751976197719781979198019811982
Current account deficit 211.337.046.332.628.941.361.089.0107.786.8
Use of reserves–10.4–2.71.6–13.0–12.5–17.4–12.6–4.5–2.17.1
Nondebt-creating flows, net10.314.611.812.614.417.923.924.128.025.1
Official transfers5.58.7 37.17.58.28.211.612.513.813.2
SDR allocations, valuation adjustments, and gold monetization0.60.6–0.60.10.82.33.41.40.30.5
Direct investment flows, net4.25.35.35.05.47.38.910.113.911.4
Net external borrowing 411.425.132.933.027.040.849.769.381.854.6
Long-term borrowing, net 511.918.127.128.024.637.236.547.262.741.0
From official sources4.96.8311.710.511.413.813.317.623.019.5
From private sources6.811.315.417.513.223.423.229.639.721.5
Financial institutions*6.510.314.215.39.419.521.728.435.718.5
Other lenders0.31.01.32.23.83.91.51.24.03.7
Use of reserve-related credit facilities 60.21.62.44.60.40.30.41.85.910.7
Use of Fund credit0.11.52.13.20.21.25.66.3
Other short-term borrowing, net, including errors and omissions–0.55.43.3–0.42.03.312.820.413.2–2.9
Exceptional financing*0.10.42.61.2–0.44.16.714.4
Payment arrears1.50.40.81.12.47.1
Other short-term borrowing, net*3.38.38.95.82.74.914.620.810.1
–11.5
Residual errors and omissions 7–3.8–2.9–5.6–5.9–3.3–2.8–1.4–4.5–3.7

The sum of the three items with asterisks represents a rough estimate, broadly consistent with national balance of payments statistics, of total net borrowing (short term and long term) from private banks.

Excludes data for China prior to 1977. For country classification, see Table 2.

Net total of balances on goods, services, and private transfers, as defined in the Fund’s Balance of Payments Statistics (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 $2 billion, with an offset in net official loans.

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

On a balance of payments basis.

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, and minor omissions in coverage.

The sum of the three items with asterisks represents a rough estimate, broadly consistent with national balance of payments statistics, of total net borrowing (short term and long term) from private banks.

Excludes data for China prior to 1977. For country classification, see Table 2.

Net total of balances on goods, services, and private transfers, as defined in the Fund’s Balance of Payments Statistics (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 $2 billion, with an offset in net official loans.

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

On a balance of payments basis.

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, and minor omissions in coverage.

It appears unlikely that the $7 billion reduction of reserve assets recorded for the non-oil developing countries as a group in 1982 can be repeated in 1983. On the contrary, some strengthening of reserve positions appears to be needed by many countries in the group, as the average ratio of reserves to imports of goods and services, amounting to about 17 per cent at the end of 1982, is abnormally low. It has remained throughout the current recession period in the 16–17 per cent range, compared with a previous low of 19 per cent in 1975 and with ratios in the 22–26 per cent range during the years between the two recessions.

Regional differences in such ratios are striking. Particularly noteworthy is the extremely low ratio of reserves to imports for African members of the non-oil developing group—just 6 per cent at the end of 1982. The virtual depletion of official liquid holdings of foreign exchange that is signified by this figure attests to the strains encountered by many African countries in their efforts to sustain imports under conditions of prolonged shrinkage of export earnings, limited access to private international financial markets, and stagnation in the level of official development assistance being made available. Receipts from official transfers and long-term loans from official sources, according to the balance of payments statistics of African countries (except South Africa), were about the same—some $8 billion—in 1982 as in 1979, despite the intervening rise in import prices. It is in the African region that the need for a more adequate flow of official assistance is most pressing.

Reserve/import ratios have also dropped sharply in the European and Western Hemisphere regions, where the end-1982 figures averaged 10 per cent and 13½ per cent, respectively. Most countries in these areas, however, are better positioned than the African countries to withstand the pressure implicit in such a situation and to make satisfactory adaptations to shortages of liquid reserves.

Just as the drawing down of reserves and use of reserve-related credit helped the non-oil developing countries to adapt to a decline of some $35 billion from 1981 to 1982 in the net inflow of capital, so the need for replenishment of reserves will tend to add to the degree of adjustment required in 1983. The further compression of the group’s current account deficit will thus have to be larger than would be suggested by the decline in capital inflows that is now expected. From a peak of $108 billion in 1981, the current account deficit of the non-oil developing group dropped by about $20 billion in 1982, to $87 billion. For 1983, the projections shown in Table 4 indicate another decrease of roughly $20 billion, to $68 billion. Scaled against the group’s exports of goods and services, such a deficit would amount to about 14 per cent, compared with a peak of 23 per cent in 1981, and would thus drop back into the range prevailing between the two latest global recessions.

Judgment regarding the significance of such a drop in the relative size of the current account deficit requires qualifications of at least two types. One of these relates to the distribution of imbalances among individual countries in the group and the other to the composition of changes in current account transactions and the implications of a disaggregated view of particular components of the current account.

One feature of the estimated $40 billion reduction in the combined current account deficit of the non-oil developing countries from 1981 to 1983 is the degree to which it is concentrated in the individual accounts of a relatively few large developing countries where major programs of domestic and external stabilization have been launched. This circumstance is reflected in comparisons between the weighted-average ratios of current account deficits to exports of goods and services and the corresponding median ratios (Chart 12). The weighted averages tend to be dominated by the experience of the larger countries in any group, while the medians may better reflect the typical experience of the majority of countries in a group. The relative size of the median current account deficit in the non-oil developing group has risen more over the past half dozen years, and has remained larger since 1981, than the weighted average deficit. As the chart shows, this divergence is especially pronounced in the African and Asian regions. The implication is that many smaller countries, particularly in those two areas, have been less successful to date than the larger countries in containing the growth of their current account deficits in relation to exports (perhaps partly because of a more unfavorable evolution of exports).

Chart 12.Non-Oil Developing Countries: Payments Deficits on Current Account, by Region, 1967–82 1

(In per cent of exports of goods and services)

1 Net of surpluses of countries whose current accounts were in surplus.

2 Excluding China.

3 Excluding South Africa.

Whatever the adjustments still needed to restore sustainable current account balances, an examination of disaggregated components of the current account makes it clear that the degree of adjustment already accomplished by the non-oil developing countries is quite substantial. Although not yet sufficient in many cases to match the reduced availability of financing, it is nevertheless considerably greater than might be suggested superficially by the size of the reduction in the group’s combined deficit since the peak of 1981. The key consideration here is the generally unfavorable nature of the external economic and financial environment faced by these countries in recent years and the importance of certain major adverse influences almost wholly beyond their own control. The global recession, of course, has undermined the buoyancy of export markets in volume terms and has brought severe weakness in export prices for primary commodities. Meanwhile, continued increases in the import prices faced by non-oil developing countries had already contributed to the prolonged deterioration of their terms of trade (1982 having been the fifth consecutive year of such deterioration). Finally, the upsurge of interest rates that followed the general shift toward monetary restraint in the major industrial countries in 1979 imposed an unexpectedly heavy and lasting burden on this group of countries, whose balance of payments structures already featured quite sizable debt service charges. As noted above, the impact of the rise in interest rates was heightened by the progressive concentration of borrowing during the past decade in obligations on which interest payments are adjusted at frequent intervals to rates prevailing in international money markets. This particular factor may have become less adverse in 1983 than in 1982, but remains unfavorable by comparison with pre-1979 experience.

For the oil importing developing countries, the entire deterioration of their combined current account balance from 1978 to 1981 can be ascribed to essentially the three adverse factors just enumerated. Indeed, the deterioration of their oil trade balance and of their non-oil terms of trade, together with the large excess of the rise in their external payments of interest over the increase in interest earnings on their reserves and other financial assets abroad, amounted to nearly $80 billion over these three years, against a cumulative increase of only $53 billion in their total current account deficit. The difference between these two figures, reflecting changes in other elements of the group’s current account, can be viewed as roughly indicative of the adjustments already made by 1981 to compensate in part for the adverse impact of the external factors identified here. With the oil trade deficit subsiding somewhat in both 1982 and the first half of 1983, interest rates tending to decline, and the deterioration in the terms of trade tapering off, the three factors singled out above, while remaining adverse in comparison with earlier years, have not on balance become significantly more unfavorable from 1981 to 1983. Hence, the actual current account change for that period stems from factors more directly susceptible to the influence of policies and developments within the group of non-oil developing countries.

The capacity of the non-oil developing countries to make necessary adjustments to external changes that strongly affect their current account balances can be further illustrated by a longer-range look at disaggregations of those balances along the lines just discussed. In Chart 13, a similar breakdown (involving separate estimates of the oil trade balance, net interest payments, and cyclical swings in the non-oil terms of trade) is carried back through the 1973–75 period of oil price increases and recession. The changes of that period, in particular, had a profound and lasting impact on the current accounts of non-oil developing countries—one to which the majority of such countries had already made important adaptations by the late 1970s. Such adaptations to adverse external influences, however, have differed considerably among various subgroups of countries, both during the 1970s and more recently, as is brought out in the separate panels of Chart 13, dealing individually with several analytical subgroups.

Chart 13.Non-Oil Developing Countries: Payments Balances on Current Account, 1973–82

(In per cent of exports of goods and services)

1 Balance on goods, services, and private transfers.

2 Sum of (1) balance on trade in oil (on a customs basis) and on interest payments and (2) the product of (a) deviations of the terms of trade on merchandise transactions other than oil from their 1973–82 average and (b) the level of exports of goods and services in the preceding year.

3 Excluding China.

Some of the developing countries in the broad “non-oil” group are in fact producers and net exporters of oil; and the increases in oil prices, both in the middle 1970s and during the more recent round, tended, of course, to improve their current account balances. From 1976 through 1981, the countries in the net oil exporting subgroup used the improvement in their oil trade balances mainly to expand their net imports of non-oil goods and services and to maintain higher rates of domestic investment than would otherwise have been feasible, rather than to lower their overall current account deficits and foreign borrowing. Some of these countries became heavy external borrowers as they used the prospect of a higher level of future oil earnings to promote more rapid domestic development in the non-oil sector. Subsequent developments in the world economy, however, have caused them to undertake substantial revisions in such programs so as to curtail the associated imports.

The net oil importers, despite the cost incentives to economize on imports of oil, were unable after 1975 to reverse much of the preceding increase in their combined oil trade deficit. They were obliged, however, to reduce the unsustainable overall current account deficit that had emerged; and they did so—as shown by the dashed line in Chart 13—through a sizable improvement in the balance of transactions other than those in the three categories dominated by external influences. The net gains in this residual balance leveled off during the late 1970s, reflecting restoration of an overall current account deficit not too large (in relation to current exports of goods and services) for sustainable financing.

With the alteration of that situation by the second round of oil price increases, the recession, and the upsurge of interest rates, another round of adjustments and adaptations was launched, as reflected in the dashed line in the upper right-hand panel of Chart 13 (and as already discussed in connection with 1979–83 developments). Such adaptations have included major shifts in domestic demand management policies, changes in exchange rates, export promotion policies, various kinds of import or exchange restrictions, and other measures, depending on the particular circumstances of individual countries. Although many countries in the group have delayed taking action and others still face a need for further action, the extent of the cumulative change in the structure of their current account transactions during the past decade (depicted in the chart in terms of percentages of export earnings) offers considerable reassurance regarding the capacity of these countries, over time, to carry out requisite adjustments.

The record is most impressive in the case of the major exporters of manufactures (middle right-hand panel of Chart 13), whose rapid gains of market shares in world trade helped them at least until recently to bear the higher costs of oil and interest payments, while maintaining their overall external position. For this subgroup, in particular, the gravest threat appears to be the intensification of protectionist pressures spawned by the recession. Unless that threat is averted, these countries may be unable to resume the kind of progress that characterized their development throughout the 1970s.

The lower right-hand panel of Chart 13 depicts the very difficult situation facing the low-income countries during the late 1970s and early 1980s. In effect, they have had to compensate for the impact of the adverse external influences roughly identified in the chart by greatly reducing their net absorption of real resources from abroad. This substitution in the current accounts of the low-income countries has been extremely large in relation to their own export earnings and has become very damaging to their prospects for renewed growth and development, or even for maintenance of existing low levels of real per capita income. The current account deficit of this subgroup remains much higher in relation to export earnings than that of any of the other subgroups of developing countries, reflecting the large role of concessional official assistance in the financing of imports. For the low-income countries, the principal hope for an easing of current strains must be tied to a recovery of primary product prices and to the possibility of increasing the real value of official development assistance.

A feature of the non-oil developing countries’ current account adjustments to date is the degree to which they have reduced imports. While such a reduction has been unavoidable in most cases, given the external circumstances faced, it has had the effect, of course, of limiting the real resources available for development. (It has impinged adversely on export markets of the industrial countries, as noted earlier, and has thus contributed to the weakness of economic activity in those countries.) Real growth of imports of the non-oil developing countries, after averaging 8½ per cent per annum from 1977 through 1979, was cut back rapidly and progressively to 2½ per cent in 1981 and gave way to a decline of nearly 8 per cent in 1982. For many countries, and particularly for the low-income subgroup as a whole, the degree of recovery expected in 1983 will not be sufficient for the volume of imports to regain its 1979 level.

Regionally, by far the most drastic cutback in import volume in 1982 was that in the Western Hemisphere, reflecting the particularly serious difficulties faced by some of the largest countries in that area. For the Western Hemisphere subgroup as a whole, as shown in Chart 14, the 1982 level of imports in real terms barely exceeded that of the middle 1970s. Real imports into non-oil developing countries of Europe and Africa declined less steeply in 1982 and remained higher in relation to levels of the mid-1970s, but also compared unfavorably with their 1979 levels. Import volume gains were interrupted in 1982 even in the Asian and Middle Eastern regions, where the trends had been most buoyant throughout most of the past decade.

Chart 14.Non-Oil Developing Countries: Foreign Trade, by Region, 1972–82

(Indices, 1972 = 100)

1 Excluding China.

2 Excluding South Africa.

Other marked regional differences in external trade developments during the 1970s and early 1980s are also brought out in Chart 14. The exceptionally rapid and continuous growth in export volume achieved by the non-oil developing countries of Asia, for example, is clearly illustrated, along with the disappointing record of exports of the African countries as a group. In the bottom panel of the chart, the extent of the deterioration in the terms of trade of the African and Western Hemisphere countries since 1977 is noteworthy. Also of interest is the relative stability since the mid-1970s in the terms of trade of the Asian and European developing countries, presumably reflecting the more diversified composition of their exports.

Key Issues of Policy

With the abatement of inflationary pressures that has taken place in 1982 and the first half of 1983, policymakers are now able to concern themselves with a broader range of issues than was possible at times in the recent past. One of the most important of these issues is the nature of the policy adaptations necessary to sustain the economic recovery that is emerging in a number of industrial countries, particularly the United States, and to foster its spread. At the same time, the debt problems of developing countries and the obstacles created by protectionism to the improvement of their export prospects have pointed up further issues requiring the urgent attention of policymakers. Attention has also turned once more to the longer-run impediments to growth, including rigidities in the goods and labor markets and low rates of saving and investment.

Nevertheless, concern about inflation is far from over. There are still many industrial and developing countries where inflation remains virulent, and even in those countries where inflationary pressures have abated, the risk of their resurgence remains. In particular, even though they may partly reflect the existence of fiscal problems, the high long-term interest rates that prevail throughout the industrial world suggest that inflationary expectations persist. Thus, consolidating the progress made toward better price stability remains a major consideration influencing the policy approach to economic recovery and longer-run growth. The need to achieve and maintain low inflation, while turning to the challenge of ensuring that the economic recovery materializes and endures, was recognized in the Williamsburg declaration on economic recovery issued in May 1983 by the leaders of the seven largest industrial countries.

This section focuses mainly on domestic policy issues; issues related to exchange rates and the working of the international monetary system are for the most part considered in Chapter 2.

Fostering a Sustainable Recovery

There is now no doubt that the most pressing task is to ensure that the recovery that is emerging in a number of industrial countries will be noninflationary and sustainable and will spread to the rest of the world. In addressing this task, allowance must be made for the differences in economic conditions among countries, both in the industrial and in the developing world. Focusing first on the industrial world, a large number of countries, including France and Italy and many of the smaller industrial countries, still have high inflation rates and sizable external deficits. National authorities in these countries are currently implementing adjustment policies aimed at lowering inflation and restoring external balance through reductions in the fiscal deficit and in the rate of growth of money and credit. These adjustment policies should in time re-establish conditions for sustainable growth, but, over the short run, they are likely to limit the scope for economic recovery. On the other hand, the other five major industrial countries, Canada, Japan, the United States, the Federal Republic of Germany, and the United Kingdom, have gone further in re-establishing conditions for sustainable growth and have consequently provided their economies with greater scope for expansion, albeit not all to the same extent. Even the countries in relatively strong positions, however, still face difficult demand management problems that will have to be solved if the recovery is to develop and be sustained.

When sizable budget deficits are expected to continue even after recovery is well advanced, they can contribute to the persistence of relatively high levels of interest rates, in spite of declining inflation. These high interest rates, in turn, weaken the process of recovery in the private sector and undermine its sustainability, in particular because they hinder capital formation and contribute to an unbalanced composition of domestic demand. Because of these dangers, a number of national authorities have continued to direct their efforts toward a reduction in their budget deficits.

In the Federal Republic of Germany, Japan, and the United Kingdom, the structural component of the deficit had already been reduced in 1981 and 1982, and further reductions are expected to take place in 1983 and 1984. Fiscal consolidation will continue to be pursued through curtailment of expenditure growth and legislative reforms leading to a gradual reduction of the role of the public sector, as well as limiting the growth of transfer payments. By following this cautious fiscal policy, the authorities intend to foster a decline in long-term interest rates that would favor a recovery of private sector investment. The challenge that they face is to reconcile the longer-run need for fiscal consolidation with the shorter-run danger that cutting government expenditure too quickly may reduce aggregate demand and temporarily stifle the emerging recovery.

The U.S. authorities are also firmly committed to a reduction of the structural part of their budget deficit, but so far they have not been able to move toward that goal. Since assuming office in early 1981, the U.S. Administration has implemented a program of cuts in individual income tax rates, liberalization of depreciation schedules for business, and other tax benefits designed to stimulate saving and investment. The growth of federal spending has been curbed, but not by as much as would have been necessary to offset the reductions in tax receipts caused by the new fiscal measures. The result has been the emergence of a large structural deficit. This deficit, already described in last year’s Annual Report as the main issue concerning policies of the United States, has grown considerably in fiscal year 1983. Thus, it remains the case that a change in the policy mix of the United States that would result from adoption of measures aimed at avoiding a persistent deficit over the medium term, while the targets for monetary growth remained unchanged, would tend to reduce nominal and real interest rates and bring about a fundamental improvement in the conditions for sustained economic growth. Given the stance of fiscal policy in the other relatively strong countries, a reduction of the U.S. fiscal deficit would also constitute a major step toward the much sought after convergence of underlying economic and financial conditions among major industrial countries.

As far as monetary policy is concerned, the major financial innovations that have been introduced in recent years in several industrial countries have temporarily increased the difficulty of gauging the appropriate longer-run rate of growth of specific monetary aggregates. By increasing the mobility of funds among accounts with various degrees of liquidity, these innovations have also increased the short-run instability of the monetary aggregates. These difficulties have been compounded by the magnitude of the various disturbances that have affected the demand for money in recent years, including the major rise and then decline in inflation rates and the severe recession. In such conditions, it is not surprising that changes in the velocity of the monetary aggregates have tended to be large and atypical.

In these circumstances, most monetary authorities, while continuing to regard their aggregates as target variables, are following a flexible and pragmatic approach to the conduct of monetary policy. In the first half of 1983, this approach led to a fairly accommodative supply of reserves to the banking sector in most of the countries considered here. While perhaps justified by the circumstances, the situation is not without risks. The fact that the relatively high rates of monetary growth have not brought about any significant further decline in interest rates might indicate that the point may be approaching at which persistence with such high growth rates could rekindle inflationary expectations.

This brief review has highlighted both the complexity and the diversity of the challenges that are currently faced by the five relatively strong major industrial countries. There is no doubt that all five countries would like to foster a sustained expansion in domestic economic activity, and that each of them views a sustainable lower level of interest rates as an important component of such a process. To achieve a sustained recovery, however, will require the maintenance of a cautious policy stance. Monetary growth rates have already increased considerably, even after making reasonable allowance for the effects of financial innovations. Too rapid a monetary expansion would now be likely to bring about a rise in interest rates, rather than a decline.

Ultimately, the reduction of interest rates has to be sought by convincing economic agents that existing fiscal deficits will decline markedly over the next few years so that there will be no conflict between the growth in the demand for private credit and the desire of the monetary authorities to limit monetary growth. This consideration lies behind the policy prescriptions set forth in the annex to the recent Williamsburg declaration on economic recovery that national authorities should aim, preferably through discipline over government expenditures, to reduce structural budget deficits and bear in mind the consequences of fiscal policy for interest rates and growth. Such a policy could contribute considerably to both the early development and the sustainability of the recovery.

Developing countries would benefit from a recovery in industrial countries, and would at a later stage accelerate this recovery by facilitating the expansion of industrial countries’ exports. As noted in Chapter 2, the scope for such effect is quite sizable, in particular because cyclical variations in economic activity in industrial countries have powerful effects on exports of developing countries.

Much of the transmission of the expansion from industrial countries to developing countries, and back to industrial countries, will, however, take place with a considerable lag. Even more important, the magnitude of the effects will largely depend on the policies followed, both by industrial countries and developing countries. In particular, such a transmission will be more effective if current protectionist tendencies are checked and reversed. The need for industrial countries to maintain a liberal policy toward imports from developing countries, including imports of manufactures and agricultural products, is particularly crucial in this context. The transmission of expansion will also be more effective if interest rates decline in industrial countries. As long as interest rates remain at their current level, the scope for expansion will remain limited in many developing countries because a large part of their foreign exchange resources will have to be used to pay the interest on their foreign debts.

In addition, in many developing countries, the scope for economic recovery will depend largely on the firmness with which the authorities implement the comprehensive adjustment programs that they have recently adopted in order to reduce the severe internal and external imbalances that afflict their economies. Unless the fundamental adjustment envisaged in these programs takes place, it is unlikely that an economic recovery in the industrial world will restore either the external balance or the creditworthiness of these countries. For them, as for many industrial countries, further internal and external adjustment is a prerequisite for full participation in the world economic recovery.

Demand management has a central role to play in the adjustment sought by developing countries. Domestic absorption will remain constrained in many countries by the need to maintain and extend the progress already made in reducing external deficits. However, consumption, rather than productive investment, should bear a major part of the adjustment in order to avoid a reduction of the longer-run growth rate of the economy. In this regard, fiscal policy is quite important because the level and distribution of public expenditures exert a considerable influence on both the overall level and the allocation of domestic demand. Furthermore, the existence of a large fiscal deficit that cannot be financed without excessive monetary growth gives rise to an inflationary process that hinders the entire adjustment process. For these reasons, fiscal trends in a number of developing countries must be viewed with concern. Not only is the fiscal deficit still too large in many of them, but the reduction in public expenditures that has taken place has fallen disproportionately on productive investment. In these countries, there is an urgent need to review the appropriateness of public expenditure programs.

It is also important that the exchange rate, as well as domestic prices and interest rates, be allowed to adjust in order to reflect changes in economic circumstances. This is important not only for the longer-run growth prospects of developing countries, as discussed below, but also because these variables have a crucial role to play over the short run, as a complement to demand management policies. In this context, the substantial increase in exchange rate flexibility demonstrated by a number of developing countries over the past year is a favorable sign. Nevertheless, exchange rate flexibility by itself is not enough. The price changes implied by exchange rate adjustments have to be passed through to individual economic agents in order to promote the necessary changes in the production and consumption structure. In many cases, this condition remains unfulfilled because a complex system of internal and external trade restrictions reduces and distorts the link from world market prices to domestic prices. Allowing interest rates to adjust to reflect the rate of inflation and the demand for credit is important because this may stimulate saving, in particular financial saving, and help to ensure the growth and efficiency of investment.

Longer-Run Growth Considerations

In addition to the demand management problems discussed above, both industrial and developing countries are presently faced with structural problems calling urgently for sustained adjustment efforts. Attention needs to be focused on these structural problems, as it is becoming increasingly evident that many of them will not disappear with the economic recovery and may in some cases become more intractable as it develops.

Industrial Countries

A major characteristic of the policy strategy followed by many industrial countries in recent years has been its longer-run orientation. In particular, the need to stimulate saving and investment, reduce rigidities in goods and labor markets, and encourage technological innovations has motivated many of the policy changes that have been introduced. The principal aim has been to increase productivity and economic growth and to reduce structural unemployment.

The fact that these objectives have not been achieved can be explained to a large extent by the fact that the fight against inflation had to be given priority. In the face of deeply embedded inflationary expectations, monetary restraint contributed to a severe recession that, as is well known, had a dominant and adverse effect on many of the economic variables that the longer-run growth policies were trying to influence. But, now that inflation has abated in many industrial countries, it is an opportune time for national authorities to review their longer-run policies and assess whether they are sufficiently comprehensive to achieve their aims. In this context, it may be useful to make a number of observations concerning the two related problems of low saving and investment and high structural unemployment.

There has been a serious effort to stimulate saving and investment in recent years. In many countries, various fiscal measures have been taken to increase personal saving and to enhance work incentives. Important examples are the significant cuts in marginal income tax rates in Sweden, the United Kingdom, and the United States, especially for high income tax brackets. Financial measures have also been important in this context. The deregulation of the financial system, in particular in the United States, has allowed small savers to benefit fully from the sharp rise in real interest rates in the money markets. Other measures aimed more directly at the corporate sector have included the liberalization of depreciation schedules.

Nevertheless, this effort to stimulate saving and investment has been limited in its results, not only because of the short-run effects of policies of monetary restrictiveness, but also because of the failure to reduce budget deficits. No doubt, the high fiscal deficits were partly the result of the recession. However, there were clearly other factors at work. Even after adjustment for the abnormally low level of economic activity, budget deficits remain quite large in many industrial countries. In a number of them, including Belgium, Denmark, Ireland, Italy, Sweden, and the United States, these structural deficits are roughly as large as the normal flow of net private saving. Once the recovery process is under way, structural deficits of such a magnitude could crowd out private investment as their effects dwarfed whatever additional saving resulted from the recently adopted saving incentives. Therefore, countries with large structural budget deficits should intensify their efforts to reduce them. The measures used to reduce the deficits will have to reflect the social preferences of the countries concerned, but they should also take into account the need for more saving and investment.

The effort to stimulate saving and investment has also suffered because profits have remained depressed. Here again, the recession accounts for part of the problem, but not all of it. The other important factor is the change in income distribution that has taken place in favor of labor over the past 15 years, in particular in European countries and in Japan. For example, in France, the Federal Republic of Germany, and Italy, the share of capital incomes in total incomes (value added) originating in the manufacturing sector declined from about 40 per cent at the time of the 1968–69 cyclical peak in economic activity to less than 35 per cent by the time of the 1979 peak. By 1982, the share of capital incomes had been reduced even further in these three countries, although probably mainly because of the recession. The distribution of incomes clearly involves complex social and ethical considerations. But the major shift in income distribution that has taken place over the past 15 years has tended to reduce the overall saving rate because the marginal propensity to save is normally lower for labor incomes than for capital incomes. This in turn has reduced the financial ability of firms to invest, as well as their incentive to expand production capacities.

The problem of structural unemployment has also been the object of many policy measures in recent years, including training programs and hiring incentives, but the problem has nevertheless continued to grow. In part, the increase in structural unemployment can be traced to significant changes in the size and composition of the labor force, including the increase in female participation, and to changes in international comparative advantage leading to a rapid decline of some traditional industries. Probably as important, however, has been the change in income distribution noted above, at least in European countries. Over time, the marked increase in the relative cost of labor has led to a decline in the demand for labor. Other factors that may have been important in some circumstances include the lack of adequate training, the existence of too high minimum wage rates, and the relatively high level of unemployment benefits. While it is extremely difficult to deal with these factors, the social and economic costs of not doing so could be very high.

Developing Countries

The severity of the debt problems encountered by many developing countries during 1982 and the first half of 1983 is leading to a major reappraisal not only of their demand management policies but also of their longer-run growth strategy. This reappraisal has been hastened by the realization that, even after the economic recovery develops, economic growth rates in industrial countries are unlikely, at least for some time, to go back to the high levels of the 1960s and early 1970s. This prospect has implications both for the rate of growth of export earnings and for levels of official development assistance and commercial bank flows.

In addition, donor agencies are becoming increasingly concerned with the efficiency with which aid is being used, both with regard to the allocation of new investment among sectors and the type of projects or capital formation being financed. The World Bank and other agencies have sought during recent years to increase the share of aid that finds its way into the agricultural sector and into the type of projects that have a direct impact on the poorest segments of the community. The energy sector remains another major target. The manner in which development projects are conceived, initiated, and managed has received increasing scrutiny: for example, a significant body of opinion now favors placing relatively more emphasis on small-scale projects in which the beneficiaries themselves play a substantial role in organization and implementation, even though it is recognized that large-scale projects are at times necessary because of economies of scale and other considerations.

Even more important, however, there is a growing awareness in developing countries that the growth of a country’s output that can be achieved with its available labor force and natural resources does not depend solely on its capital stock. It depends also on the efficiency with which all factors of production are used in different lines of production, as well as on some less tangible aspects of resource use, such as the intensity of effort and the quality of management. In considering ways to increase output in developing countries, especially during a period when external resources are scarce, emphasis needs to be placed on the efficient allocation and management of scarce resources. Of course, some of the less tangible elements in determining productivity—such as the health and education of the work force—are themselves the outcome of a long-term development process. But other elements can be strongly influenced in the shorter run by government policies encouraging a better allocation of resources through suitable price incentives and, whenever appropriate, through decentralization or in some cases privatization of activities previously managed by the central government. In this connection, technical assistance from abroad can often be as important as external financing of capital investments.

There is also a growing awareness in developing countries that there is much that they can do on their own to benefit more fully than in the past from foreign trade. While protectionism in industrial countries has slowed the growth of exports of developing countries, in particular exports of foodstuffs and manufactures, high rates of effective protection in the latter countries have hurt their export sectors by favoring import-substituting activities and also by discouraging trade among the developing countries themselves.

Just as structural adjustment to changes in comparative advantage involves some difficult strategic decisions in industrial countries, there are also complicated options faced by the authorities of developing countries. Even in settings where the development of key activities is left in private hands, the public sector plays an often crucial supportive role. In this connection, judgments as to the areas of a developing country’s potential comparative advantage and the correct time to begin exploitation of that potential advantage are particularly hazardous. There is sometimes the temptation to bypass intermediate stages of development in order to specialize in more sophisticated forms of manufacturing. Scarce resources may be wasted by prematurely initiating, and subsequently protecting, activities that are capital intensive or use advanced technology, which cannot be efficiently operated at the level of labor and management skills available within the foreseeable future. It may be preferable, especially for low-income countries, to define potential comparative advantage only for the foreseeable medium term. This horizon would give proper weight to opportunities in the agricultural sector, in particular in the production of foodstuffs, and in simpler forms of manufacturing that do not make unrealistic demands on the presently available labor and management skills.

Policies of developing countries promoting economic development must also be designed so as to be responsive to the problem of massive structural unemployment. High rates of population growth and large shifts of population from the countryside to the city have made chronic unemployment a typical problem of developing countries. However, as in industrial countries, this problem has grown worse in recent years. Structural unemployment has been significantly alleviated in those countries that have been able to foster rapid growth of manufacturing (to cut down urban unemployment), family planning campaigns (to reduce growth of the labor force), and agricultural development programs (to slow down internal migration). In most developing countries, however, success along these lines has been limited, and the social strains caused by unemployment are reflected in such negative developments as the wasteful use of budgetary resources to swell employment in the public sector, regardless of the productiveness of such employment. The world recession has added to these problems by reducing economic activity in these countries, especially in the export and manufacturing sectors.

Finally, with the growth of international bank lending likely to be at best moderate over the next several years and that of official development aid likely to be quite modest in real terms, the adoption of policies that attract foreign direct investment may have an important role to play in the development strategy of many developing countries. Not only is direct investment not debt creating, it has the advantage of being directly tied to productive capital formation and part of a package that includes the transfer of technology and skills. Care must be taken to avoid unfavorable social effects, as well as to ensure that the technology that is transferred is appropriate. On the whole, however, more rapid growth of direct investment, especially in the non-oil developing countries, could contribute to the structural adjustments that these countries (and indeed the world economy) require.

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The economic situation in mid-1983 is a difficult one for developed and developing countries alike. Developed countries are confronted by the demanding task of conducting policies that foster a recovery that is noninflationary and therefore sustainable. Developing countries continue to face adverse external factors, including weak economic activity in industrial countries and extremely high interest rates on their foreign debts, that hamper their adjustment efforts.

Those among the developing countries that have greatly increased their foreign debts over the past few years have now to deal with both the need to service these debts and to adjust to the recent sharp decline in the flow of new bank loans. These problems will not be amenable to reasonable solutions without strong international cooperation. Cooperation is needed in the first instance to stem the rise of protectionism that would endanger the world economic recovery and make it impossible for the developing countries to improve their external positions. Cooperation is also needed to underpin the flow of concessional assistance, both bilateral and multilateral, to developing countries, in particular to the low-income countries that have limited access to world financial markets and have been very severely affected by the effects of the world recession on their exports. Finally, the cooperative efforts of all member countries are needed to enable the Fund to continue to assist the many countries that are now engaged in comprehensive adjustment programs aimed at gradually restoring the basis for sustained growth.

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