I. Introduction1

International Monetary Fund. External Relations Dept.
Published Date:
September 1978
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The world economy continued along the path of cyclical recovery in 1977, but progress was both uneven and, on average, slower than in 1976. Particularly disappointing were the low rates of growth in output achieved by the industrial countries of Europe, where the average increase in real GNP was only about 2 per cent. The expansion in the United States and Japan, although somewhat stronger, showed a distinct deceleration in the course of 1977. For the industrial countries as a group, the year’s advance in real output was less than 4 per cent, compared with almost 5.5 per cent in 1976. The generally slow pace of economic activity in the industrial world was manifested in a continuation of very high unemployment rates. Averaging slightly more than 5 per cent in 1977, unemployment remained close to the recession-induced peak in the second half of 1975 and substantially above the rates (in the range of 2.5–3.8 per cent) that prevailed during the 1960s and early 1970s. Progress toward a further reduction of inflation in the industrial countries was limited. The rate of increase in prices averaged approximately 7 per cent, as measured by GNP deflators.

The faltering of demand expansion in the industrial countries during 1977 was accompanied by a marked deceleration of growth in the volume of world trade. Such growth is estimated at only 5 per cent, compared with an increase of 12 per cent in 1976 (following a fall of 5 per cent in 1975) and an average annual increase of some 9 per cent during the late 1960s and early 1970s. There was, however, a more marked increase in the value of foreign trade. The renewed acceleration of increases in foreign trade prices, stemming mainly from sharp advances in prices of primary commodities during 1976 and the first half of 1977, helped to bolster the export earnings of many developing countries. Among such countries, the only major group whose export earnings did not outpace the rise in total value of world trade was the oil exporting group, for which export volume was almost unchanged from 1976 to 1977.

The current account surplus of the major oil exporting countries registered an appreciable decline in 1977, while the developed countries and the non-oil developing countries improved their current account positions. The last-mentioned group of countries, which were the main beneficiaries of buoyant commodity prices prevailing through mid-1977, raised their export earnings by an amount appreciably larger than the continuing increase in their payments for imports and external services. Accordingly, their combined balance of payments deficit on current account declined in 1977 to about US$22 billion, compared with about US$26 billion in 1976 and a peak of US$37 billion in 1975. The decline in the group’s aggregate current account deficit, which was rather unevenly distributed among developing regions and individual countries, together with the continued flow of concessionary aid, helped to ease the requirement of this group as a whole for other external finance.

As in 1976, several of the major world currencies were the object of recurrent pressures in the foreign exchange market throughout much of the period under review, resulting in some sharp adjustments in their market exchange rates. Changes in exchange values were especially pronounced in the latter part of 1977 and the first few months of 1978. Chief among the currencies which registered substantial changes in exchange rates were the Japanese yen, which in terms of its value against the U.S. dollar rose over most of the period. The currencies of the countries participating in the European common margins arrangement,2 appreciated slightly vis-à-vis the U.S. dollar through September 1977 and then rose sharply in subsequent months. Divergences in underlying economic conditions in the countries participating in the common margins arrangement were reflected in several realignments of the respective exchange rates of the currencies within the arrangement. In April 1977, the Danish krone and the Norwegian krone were each depreciated by 3 per cent, and the Swedish krona was depreciated by 6 per cent, in terms of the value of the respective currencies vis-à-vis the SDR (as previously defined in terms of gold) which is used as a numeraire for establishing intervention points under the common margins arrangement. Denmark communicated a new central rate vis-à-vis the SDR. A second realignment of relative exchange values of the currencies participating in the arrangement took place at the end of August, when Sweden withdrew from the arrangement and devalued the krona by 10 per cent vis-à-vis a basket of currencies of its main trading partners. Of the two other participating Scandinavian countries, Denmark communicated a new central rate and Norway established new intervention points; these adjustments represented a depreciation of 5 per cent for both the Danish krone and the Norwegian krone, in terms of the value of the respective currencies vis-à-vis the SDR (as previously defined in terms of gold). A further adjustment took place in February 1978 when the intervention points of the Norwegian krone were again lowered, by 8 per cent. The Swiss franc, after remaining fairly steady against the U.S. dollar in the first eight months of 1977, registered a steep rise in the latter months of 1977 and the first quarter of 1978.

Among other industrial countries, the exchange rate of the pound sterling in terms of the U.S. dollar remained relatively steady over the first ten months of 1977; it appreciated in the next four months but declined again in March 1978. The U.S. dollar rates for the French franc and the Italian lira moved within a narrow range over most of 1977; both currencies appreciated slightly in the early part of 1978. Over most of 1977 and early 1978, the Canadian dollar weakened against the U.S. dollar.

On the basis of calculations using weights derived from the Fund’s multilateral exchange rate model, there were sizable movements in the effective exchange rates3 of the currencies of a number of the industrial countries during the period under review. The movements in effective exchange rates were particularly pronounced in the latter part of 1977 and the first quarter of 1978. Of the currencies whose effective exchange rates rose over the period, the sharpest increases were in those of the Japanese yen (24 per cent) and the Swiss franc (almost 17 per cent). The effective exchange rate of the deutsche mark increased by 1 per cent through June 1977 but then rose by 9 per cent in the following nine months. The effective exchange rates of the Austrian schilling, the Belgian franc, the Netherlands guilder, and the pound sterling registered relatively smaller increases than those mentioned above. In terms of their effective exchange rates, the currencies of Canada, Norway, and Sweden declined appreciably, while those of Denmark, France, and Italy fell only moderately. The effective exchange rate of the U.S. dollar declined slightly in the first half of 1977 and the downward movement gained momentum over the second half of the year and in the first quarter of 1978. The fall in the effective exchange rate of the U.S. dollar over this period about offset the increase registered between mid-1975 and the end of 1976.

In addition to the exchange rate developments and official exchange rate actions described above, several major industrial countries issued statements in connection with exchange rate policies. In October 1977, the U.K. authorities announced a modification of the intervention policies of the Bank of England in the light of developments in the exchange markets. In January 1978 the United States reaffirmed that it would intervene to the extent necessary to counter disorderly conditions in the exchange markets and that for this purpose it would utilize the Exchange Stabilization Fund of the U.S. Treasury and the US$20 billion swap network negotiated by the U.S. Federal Reserve System. In March 1978, the United States and the Federal Republic of Germany jointly announced further steps to counter disorderly market conditions, including the use of an augmented swap agreement between the central banks of the two countries.

The exchange rate arrangements adopted by members over the past few years cover a broad spectrum, ranging from independent floating with relatively little attempt to influence market forces to the maintenance of a fixed peg against a single intervention currency. The fact that most major currencies float independently implies, of course, that even countries that peg their currencies in some manner face variability in their bilateral exchange rates against currencies outside their group. During the period under review, several countries changed their exchange rate arrangements, but the number of members adopting new exchange arrangements was considerably fewer than in the years immediately following the breakdown in 1973 of the Smithsonian pattern of exchange rates. At the end of March 1978,4 96 members were maintaining a fixed relationship for the value of their currency in terms of another denominator. Of these currencies, 42 were pegged to the U.S. dollar and 23 were pegged to other currencies. The currencies of 14 members were pegged to the SDR, while those of another 17 were pegged to another composite of currencies. Five countries were periodically adjusting the exchange value of their currencies by small amounts according to a set of indicators, and 6 were participating in the European common margins arrangement. Twenty-five countries were maintaining other exchange rate arrangements.

With the entry into force of the Second Amendment of the Articles of Agreement on April 1, 1978, members became subject to the obligation under Section 2 (a) of Article IV to notify the Fund, within 30 days, of the exchange arrangements they intend to apply in fulfillment of their obligations under Article IV, Section 1. Furthermore, members are obliged to notify the Fund promptly of any subsequent changes in their exchange arrangements. By the end of April 1978 most members had met their obligations in respect of the initial notifications of exchange arrangements.

In July 1977, the Council of the Organization for Economic Cooperation and Development (OECD)5 and member governments of the OECD (other than Spain) renewed, for a further year, their Trade Declaration of May 30, 1974 which provided for the avoidance by the participating countries of the use of trade restrictions for balance of payments purposes.

The Tokyo Round of Multilateral Trade Negotiations, with the participation of 98 countries, entered into an intensive phase. As indicated in last year’s Report, concessions in the tropical products sector were implemented early in 1977 by a number of developed countries. Subsequently, in November 1977, the participants submitted requests for concessions in the areas of non tariff measures and agriculture, and in January 1978, most developed countries and a few developing countries submitted their offers of concessions. Substantial negotiations have commenced on these requests and offers. Negotiations are also continuing in the other fields covered by the mandate of the Tokyo Round.

Against the background of the severe global payments imbalances which emerged in the aftermath of the quadrupling of oil prices announced in 1973 and the world-wide recession which began in the following year, there was widespread concern that many of the countries facing growing balance of payments difficulties would turn to trade and payments restrictions. It was for this reason that members were exhorted, in the Rome communiqué of the Fund’s Committee of Twenty in January 1974, to avoid restrictions on current transactions and to meet the suddenly arising payments difficulties through the financing of their shortfalls, thereby gaining time for a more orderly adjustment. Financial resources available to members through the Fund were augmented for this purpose by the creation of the oil facility and through expanded access to other Fund facilities. In the event, the reduction in payments disequilibria and the increased availability of funds in the international capital market, supplemented by the resources of the Fund, helped to moderate the recourse to current account restrictions for balance of payments purposes. Such recourse was confined to certain countries experiencing prolonged payments difficulties. On the other hand, there were several countries which in the period covered by this Report undertook a major reversal of their policy of heavy reliance on external restrictions. A few of these countries implemented comprehensive reforms of their exchange systems and were able to eliminate, in whole or in part, existing restrictions on current payments, some of which had been introduced in the recent past, and to reduce the incidence of multiple currency practices. These actions were accompanied in some cases by the withdrawal of trade restrictions which had been imposed primarily for balance of payments reasons. However, there are still certain countries which, because of protracted payments problems, have not found it possible to reduce their reliance on restrictive trade and payments policies. A particularly disturbing feature in this situation is the rising number of countries with arrears on their current payments.

In addition to the developments described above, the past several years have witnessed a perceptible rise in pressures for protection in many countries. These pressures have arisen from the disappointingly slow recovery of the world economy, with the concomitant problem of continuing high unemployment. To this can be added longer-term structural problems in some key sectors, reflecting differential rates of growth of productivity in the face of limited resource mobility within certain industrial countries, and the increasing competitiveness of a number of developing countries that have advanced significantly along the path of industrialization. In the developed countries, the protectionist pressures have been manifested in actions designed to alleviate sectoral production and employment problems, particularly in certain labor-intensive industries. In the period under review, the European Economic Community (EEC)6 and individual EEC countries, as well as the United States, Canada, and several other developed countries, made more frequent use of protective trade measures. These involved various forms of quantitative limitations on imports and other actions, such as surveillance licensing of imports. There was also increasing use of antidumping and countervailing duties. In the present somewhat depressed state of international markets, it is often difficult to know whether such measures result from increased sensitivity to longstanding practices or whether they reflect an increased use of price cutting actions by exporting countries. At least in their initial impact, these measures tend to have a trade-retarding effect. There was also increased reliance on various types of bilateral arrangements, or export restraint agreements, which place quantitative limits on trade but which are frequently outside multilateral surveillance practices. Many of the measures adopted by the industrial countries were aimed at or affected trade with other industrial countries, particularly trade between the United States, the EEC countries, and Japan. The trade-impeding effect of these measures, as well as some measures by a number of developing countries, has been detrimental to balanced growth of international trade. It has been particularly harmful to those developing countries that have sought to sustain the growth of their economies, in part through the expansion of nontraditional exports. The successful conclusion of the Multilateral Trade Negotiations that are now well under way therefore assumes great importance.

Developments in policies on capital flows in the industrial countries during the period under review were influenced by the frequent bouts of instability in exchange markets and the generally liquid conditions which prevailed in international capital markets, as well as by considerations relating to longer-term policies on capital movements. A few of these countries with relatively strong currencies adopted measures to lessen the attractiveness to nonresidents of domestic assets, so as to ease upward pressures on their exchange rates. Actions of this kind became more frequent in the early months of 1978. At the same time, a few of the industrial countries relaxed some of their long-standing controls on capital outflows. Among the developing countries, there was an increased effort to adapt policies to mobilize increased foreign financial resources at a time of continued slack in the industrial countries’ demand for funds, and to improve institutional arrangements for the management of external indebtedness.

During the period under review, five countries, Guinea-Bissau, Maldives, São Tomé and Principe, Seychelles, and Suriname became members of the Fund, bringing the membership to 134 countries. Two countries, Chile and Seychelles, accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, raising to 46 the number of members that have formally accepted these obligations.

This Report centers on exchange restrictions, but it also covers other measures and intergovernmental arrangements that may have balance of payments implications. The period covered is 1977 and the early part of 1978.

Belgium, Denmark, Federal Republic of Germany, Luxembourg, Netherlands, and Norway.

An index of effective exchange rates is designed to measure the average change of a country’s exchange rate against all other currencies. In the calculation of such an index, a weight representing the comparative importance to the home economy of each foreign country is applied to the value, relative to a chosen base period, of the exchange rate between the foreign currency in question and the home currency. The index based on the Fund’s multilateral exchange rate model is one of several such indices using alternative weighting schemes. For further information on indices of effective exchange rates see Rudolf R. Rhomberg, “Indices of Effective Exchange Rates,” IMF, Staff Papers, Vol. XXIII, No. 1, March 1976, pp. 88–112.

Exchange arrangements maintained by member countries as of March 31, 1978 are shown in the Annex to Part I of this Report. See page 25.

Australia, Austria, Belgium, Canada, Denmark, Finland, France, Federal Republic of Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States.

Belgium, Denmark, France, Federal Republic of Germany, Ireland, Italy, Luxembourg, Netherlands, and United Kingdom.

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