II. Economic Background

International Monetary Fund. External Relations Dept.
Published Date:
September 1965
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During 1964 the general climate of prosperity that had characterized 1963 continued to prevail in the industrial countries although there were signs in the second half of the year that the forces of expansion were becoming less powerful, particularly on the continent of Europe. Prices of primary commodities, which had risen substantially during 1963, continued to rise in the early months of 1964 and for the year as a whole averaged about 5 per cent above 1963. At this level, they were higher than they had been in any of the eight preceding years. The value of world exports was some 12 per cent higher than in 1963, the progress being shared about equally by manufacturing and primary producing countries. The rate of growth of world trade was, however, slowing down during the course of the year, in part reflecting the measures taken by some countries to restrain over-all demand.

As a consequence of these general conditions, the payments positions of the primary producing countries were, on the whole, relatively favorable. During the first half of 1964, the reserves of these countries as a group continued to rise. During the second half of the year, however, the rise appeared to be leveling off, as their imports were being adjusted to a higher level of export receipts and the rise in these receipts was slowing down. By the end of the year, there were signs of increasing balance of payments strains in some countries in this group.

Payments imbalances in the manufacturing countries were considerably larger than they had been for some time. At the beginning of 1964, the most serious problem was a substantial deficit in Italy’s balance of payments which evoked large assistance from other countries and the Fund. After the first quarter, responding to internal measures introduced earlier, the deficit was replaced by a surplus, which was very large during the second half of the year. In general, the balance of payments positions of the countries in Continental Europe, and specifically the members of the European Common Market, strengthened in the course of the year as restrictive financial policies led to an improvement of current account positions and an acceleration of the inflow of capital, Germany being the only major exception to this general pattern. The United Kingdom, whose balance of payments had deteriorated during the first three quarters of the year, experienced a severe crisis in the fourth quarter, which led to massive international support for sterling. The Government at that time introduced internal measures and a temporary surcharge of 15 per cent on most imports in an effort to deal with the payments imbalance. In April 1965, the United Kingdom took a further set of measures with the aim of restoring balance in its international accounts. The balance of payments of the United States also deteriorated toward the end of the year as a result of a sharp increase in outflows of capital. As part of the measures to deal with this situation, the Interest Equalization Tax was introduced in September 1964, and the President, in connection with his balance of payments message of February 10, 1965, requested voluntary curbs on foreign loans and investments by bankers and businessmen. These policies apparently had some success in their initial stages in reducing the net capital outflow.

The past year saw a number of international institutional developments of importance to both developed and developing countries. The United Nations Conference on Trade and Development met in Geneva from March 23 to June 16, 1964, and on December 30 the United Nations General Assembly took action which established the Conference on a permanent basis. Under the aegis of the General Agreement on Tariffs and Trade (GATT), the Kennedy Round of trade negotiations opened on May 4, 1964. In December 1964, the process of confrontation and justification of proposed exceptions to the planned general linear tariff reductions for industrial goods was begun. More recently, proposals were accepted in principle for the tabling of offers for agricultural products. The Contracting Parties to the GATT also reached agreement on the text of a new Chapter dealing with Trade and Development to be added to the General Agreement. On March 31, 1965 the Board of Governors of the Fund adopted proposals recommended by the Executive Directors to increase Fund quotas by 25 per cent, together with special increases for 16 countries.

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