I Overview and Major Trends
- International Monetary Fund
- Published Date:
- January 1989
This study emerges from the compilation of the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), which has been published since 1950. These country-specific reports, including the 1989 edition, which serves as the background document for the present study, are prepared in accordance with the provisions of Article XIV, Section 3, of the Fund’s Articles of Agreement. They inform the Fund membership and public of the current status of exchange rate arrangements and the restrictive systems for trade and payments in Fund member countries. Using basic information compiled by the Fund staff, this study identifies trends and reviews major developments underlying topical issues in the system of financial and trade linkages between countries. The emphasis is on recent major policy actions of trading and financial nations that have systemic consequences. By its nature, the study stresses institutional rather than quantitative evidence in support of its findings.
A significant improvement in world economic conditions during 1988 and the first quarter of 1989 1 was accompanied by uneven experience in Fund members’ international exchange and trade systems. Despite the rapid expansion of world trade, tensions increased in trade relations between major industrial countries.2 Strains were evident not only in a continuing increase of bilateral antidumping and trade-restraint measures, but also in participants’ initial difficulties in reaching agreement on a range of major issues at the midterm review of the Uruguay Round of Multilateral Negotiations. Exchange rates in industrial countries displayed more stability in 1987 and 1988 than in other recent years, but the high level of official intervention indicated in 1987 continued. In the group of developing countries, a decline in debt ratios was encouraging, but external payments arrears rose amid signs of greater difficulties in the completion of debt-restructuring agreements with creditors. Nevertheless, on the positive side, developing countries steadily continued the process of liberalization of all major categories of restrictions that has been evident since the mid-1980s.
The further erosion of commercial relations between industrial countries and between debtor and creditor countries in 1988 threatens to move the international trade and payments system further from the path of multilateralism broadly adhered to since the 1940s. It has caused observers to raise the prospect of an increasing regionalization, with smaller exporting countries increasingly coalescing around major countries through formal or de facto arrangements. This may appear paradoxical, because improved communications are generally thought to have lessened the importance of geographical factors, and the reconstruction of major economies has also put their industrial competitiveness on a more even footing. Also, although it had been thought that the high rates of unemployment evident in the early 1980s had contributed to protectionist pressures in industrial countries, unemployment has abated in recent years. Despite the rising employment and investment rates that would indicate reduced need for restructuring of industrial capacity between countries, supported by a sharp reversal of hitherto unsustainable exchange rates, trade imbalances have remained large and have served as a continuing spur for protectionist sentiment. Protectionism, in turn, has put further strains on the arrears situation of the developing countries.
Another of the deleterious effects of the protectionist measures taken has been to cartelize world trade in certain industries by the allocation of various portions of export markets. Moreover, the use of such quantitative controls, voluntary export restraints (VERs) in particular, has enabled exporters in surplus countries to reap large windfall profits that have ultimately enhanced their competitive position in third-country markets. Many of these firms are multinational with operations in several countries and have become adept at re-sourcing their exports once trade actions are threatened. Thus, along with the welfare losses of consumers in the industrial countries, limited access to industrial country markets for many heavily indebted developing countries in which they have or could develop a comparative advantage has exacerbated their difficulties in fostering growth and alleviating debt-service burdens.
Nevertheless, the overall growth of world trade has accelerated continuously since 1986 from a 4.5 percent growth rate in 1986 to over 9 percent in 1988 (Chart 1). Its growth has outstripped that of domestic output in the industrial countries, with the consequence that the global economy has tended toward greater integration despite the increasing protectionist pressures. This development indicates the underlying strength of the forces toward integration of world markets that have been sufficiently strong to override increasing protectionism. However, the global trade-output elasticity has been markedly cyclical, and a slowing in the present long-standing expansion would thus be accompanied by a greater than proportionate slowing in world trade. Imbalances in trade constitute a major continuing threat to the multilateral system, and it is therefore a major concern how such a slowdown would be distributed. Following a marked decline in trade imbalances of the major countries from 1986, progress in reducing deficits has slowed in recent quarters and is projected by the Fund staff to cease in 1989–90 in the absence of major macroeconomic policy adjustments. To the possible effects on the international exchange and trade systems of a slowing of industrial country activity must be added the unfolding debt situation and capital market effects of domestic fiscal imbalances exacerbated by automatic stabilizer mechanisms.
Chart 1.Growth of World Trade and Output, 1971–88
Sources: Data provided by national authorities and staff estimates.
Schedules of tariffs and import surcharges have changed little in 1988, pending the outcome of the Uruguay Round. In consequence, the major policy changes for the industrial countries have been in the area of temporary antidumping and countervailing duty measures, or the threat thereof, and VERs. Recourse to other border and nonborder measures such as the safeguard clause under the General Agreement on Tariffs and Trade (GATT), industry subsidies, government procurement, health and technical standards, and local content requirements has been mixed. The tendency toward bilateral trading agreements, retaliatory measures of a bilateral nature, and measures within regional groupings persisted in 1988 (see Section IV below). This trend has aroused fears about the creation of economic and trading blocs, despite the contention by participants in the arrangements that they do not represent an increase in restrictiveness vis-à-vis third countries. The possibility of trade diversion resulting from de facto movement into trading blocs, bilateralism, and the replacement of “free” trade with managed “fair” trade is worrisome, particularly when such developments are emerging even as the economies of industrial countries have been performing relatively well. These developments also occurred despite continued financial market deregulation and the liberalization of capital movements in 1988.
Exchange rates of industrial countries showed more stability in 1987 and 1988 than in the previous years, accompanied by sizable official intervention from time to time. These developments paralleled a tendency toward close cooperation by industrial countries in the foreign exchange markets in recent years, in line with the objectives of the February 1987 Louvre Accord and its subsequent reaffirmations in 1987 and 1988.
In the group of developing countries, the rapid depreciation of real (inflation-adjusted) exchange rates that had occurred through 1987 ceased in 1988, as average exchange rates in this group of countries appreciated somewhat in real terms. This was paralleled by the aggregate current account of developing countries, which moved into a deficit of $19 billion from approximate balance in 1987. Abstracting from further policy corrections, including debt reduction, the aggregate deficit of this group of countries would be expected to widen somewhat further over the next two years. This broad trend is evident also in developing countries with recent debt-servicing difficulties, where the decline in the current account deficit from a peak of SDR 90 billion in 1981 to SDR 27 billion in 1986 is expected to be reversed, to yield a deficit of SDR 37 billion in 1990.
Despite the leveling-off of improvements in the balance of payments of developing countries, the pattern of vigorous liberalization of trade and exchange systems evident in recent years continued in 1988, and may even have accelerated in certain categories such as capital restrictions.3 Greater flexibility was evident in the exchange arrangements of some developing countries with the continued adoption of market-oriented exchange systems in several countries. Of the 28 countries undertaking trade liberalization measures as evidenced by tariff and quota reductions, 10 also simplified their exchange rate arrangements and made them more flexible. However, although formal restrictive systems moved in the direction of liberalization, there were growing indications of a retrogressive movement in informal exchange restrictions through the incurrence of external payments arrears. Total arrears, which had declined to SDR 29 billion in 1987, rose sharply again to a total of SDR 40 billion. The number of Fund member countries incurring external payments arrears nevertheless declined markedly—indicating a growing concentration of financing difficulties. The expected sharp rise in net debtor countries’ debt service ratios in 1989, reflecting higher international interest rates, seems likely to put further strain on this situation.
Under Article VIII of the Fund’s Articles of Agreement, Fund members have undertaken to avoid the imposition of restrictions on payments and transfers for current international transactions (defined to include certain capital transactions by Article XXX), discriminatory currency arrangements, or multiple currency practices without the Fund’s approval. However, under the transitional arrangements of Article XIV, members are permitted to maintain those exchange restrictions in effect at the time of joining the Fund. As of March 31, 1989, 86 member countries—all developing countries—avail themselves of Article XIV status; the other 65 members have accepted the obligations of Article VIII.4 Indonesia, Korea, and Portugal accepted the obligations of Article VIII in 1988. As a general policy, Fund resources are not made available to countries and measures inconsistent with Article VIII are not approved unless the Fund is satisfied that any exchange restrictions or multiple currency practices they maintain are necessary, and that their use will be temporary and is caused by payments difficulties that the member is working to eliminate.
Article IV of the Articles of Agreement obliges the Fund to “exercise firm surveillance over the exchange rate policies of members and [to] adopt specific principles for the guidance of all members with respect to those policies.” The underlying principle of this Article as adopted is that the policy combination most likely to promote the trade and capital flows that will allow countries to meet their domestic economic and financial objectives is a realistic exchange rate and unrestricted payments. For instance, in 1987–88 several countries that moved their exchange rate regimes closer to market-related mechanisms were in a position to liberalize, to some extent, their restrictions on imports; these countries included Argentina, Bangladesh, Brazil, Ghana, Guyana, Maldives, Nigeria, Syria, Trinidad and Tobago, and Turkey.
For the same reason, tariffs or quantitative restrictions imposed on specific imports to protect specific industries or sectors are counterproductive; by creating pressures for exchange rate appreciation, the tariffs will protect some activities by undermining others. The Fund’s experience with multiple exchange rates supports these conclusions. Most countries have found that rates used to protect the current account or specific elements of it have been associated with continued payments problems and, eventually, depreciation of the official rate, as the authorities become unable to defend its original level. The uncertainty and fiscal subsidies accompanying the proliferation of exchange rates have often contributed to the inflation that the authorities attempted to avoid, as prices were adjusted to the scarcity of foreign exchange. Nor do multiple exchange systems seem to allow countries ultimately to avoid a uniform exchange rate change; experience has shown that eventually the authorities are forced to simplify their practices and to reduce or unify the spreads among their various rates, as occurred recently in Argentina, Bangladesh, Guinea, Paraguay, Peru, and Venezuela. In the meantime, evasion of controls and proliferation of black markets reduce fiscal revenues and exacerbate distortions, and make the adjustment to the inevitable exchange rate change even more difficult.
This study is divided into four main sections and contains an appendix summarizing major measures taken in the international exchange and trade systems in 1988 (some 600 measures classified by type of measure, country, and liberalizing or tightening effect). The second section summarizes developments in exchange arrangements and the evolution of exchange rates; the third section highlights the main developments in restrictive payments and trade practices; and the fourth section describes developments in bilateral and regional arrangements and countertrade practices.5
International Monetary Fund, World Economic Outlook, April 1989: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington, 1989).
For an account of trade measures through mid-1988, see Margaret Kelly and others, Issues and Developments in International Trade Policy, Occasional Paper No. 63 (Washington: International Monetary Fund, December 1988).
Significant problems emerge in trying to quantify the impact of recent trends in exchange and trade controls on macroeconomic variables. First, specific restrictive measures, especially trade measures, may simply not be reported. This is the case particularly of those measures falling outside the scope of the GATT, in which the exporter purportedly voluntarily restrains shipments to a particular market. Reporting in this area has improved in recent years, probably exacerbating the observed trend. Nevertheless, reporting is still mostly limited to officially sanctioned arrangements. Second, the impact and scope of exchange and trade control measures, being essentially administrative in nature and, to varying extents, arbitrary, are difficult to quantify. Third, in the assessment of the effects of changes in controls, there is the inevitable problem of comparing the actual situation with the counter-factual case; that is, what would have been the level of trade, inflation, or other variables in their absence.
Nineteen members availing themselves of the transitional arrangements under Article XIV also maintain exchange systems that are free of restrictions on payments and transfers for current international transactions. Thirteen of these countries are members of the West African Monetary Union (WAMU) or the Central African Monetary Area.
As noted above, descriptions of the exchange rate and exchange and trade arrangements of each member country are published separately in International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), 1989 (Washington, 1989).