Abstract

World industrial production (excluding countries of the Soviet area) rose between 1955 and 1956 by about 4½ per cent. Limitations of capacity and of labor supply made it almost inevitable that the rate of growth of 10 per cent from 1954 to 1955, when the United States and some other countries were recovering from the minor setback of 1954, would not be maintained. The rate in 1956 was in fact somewhat less than the average for the past six years. In some countries, demand was pressing against the ceiling of physical resources; elsewhere, before the limits of physical resources were actually reached, limitations were imposed on demand with a view to checking an overrapid increase in prices and wages or to correcting a deficit in the balance of payments.

Main Trends in World Trade

World industrial production (excluding countries of the Soviet area) rose between 1955 and 1956 by about 4½ per cent. Limitations of capacity and of labor supply made it almost inevitable that the rate of growth of 10 per cent from 1954 to 1955, when the United States and some other countries were recovering from the minor setback of 1954, would not be maintained. The rate in 1956 was in fact somewhat less than the average for the past six years. In some countries, demand was pressing against the ceiling of physical resources; elsewhere, before the limits of physical resources were actually reached, limitations were imposed on demand with a view to checking an overrapid increase in prices and wages or to correcting a deficit in the balance of payments.

The slackening in industrial growth was most pronounced in the United Kingdom, where there was no expansion of output but a considerable increase in productive capacity, and in the United States, where output rose by 3 per cent. In continental Europe, production rose by about 8 per cent, a relatively small decline from the previous year’s high rate of 11 per cent. In Japan, with ample labor supply and booming domestic and export demand, the rate of industrial expansion advanced sharply; and in some of the primary producing countries which have embarked upon programs of industrial development, e.g., India, the rate of growth was also higher than in 1955.

The expansion of world trade has tended in the last few years to exceed the growth of industrial production, and in 1956 it was again very considerable. From 1955 to 1956 the volume of world exports rose by some 8 per cent, against 10 per cent from 1954 to 1955. The reasons for the rise in the ratio of trade to production can best be seen when the trade between particular categories of country is considered. In the last six years, the volume of trade between the industrial countries has been rising more rapidly than the industrial production of these countries. This is to be explained mainly by reference to the progressive liberalization of trade by the OEEC countries—a movement which has affected both intra-OEEC trade and imports from the United States—and to the gradual penetration of the U.S. market by the exports of other industrial countries. From 1955 to 1956, the volume of trade between the industrial countries increased by 12 per cent, or 7–8 per cent more than industrial production. In part this was attributable to increased U.S. sales of fuels and foodstuffs, but, even when U.S. exports of non-manufactured goods are excluded, trade between the industrial countries shows a substantial increase.

The imports of industrial countries from primary producing countries, on the other hand, rose during the six-year period 1950–56 slightly less than in proportion to industrial production. Raw material imports were affected by the increasing importance of engineering relative to textile production and by the growing use of synthetic raw materials; the secular growth of food consumption is slower than that of industrial production, and the need of the industrial countries for imports was further reduced by the recovery of European agriculture. From 1955 to 1956, however, industrial countries’ imports from primary producing countries rose slightly more than industrial production. This was accounted for mainly by sharply rising imports of crude oil, a considerable increase in U.S. purchases of newsprint from Canada, and some U.S. restocking of coffee.

Exports from industrial countries to primary producing countries are determined largely by the export earnings of the latter and any other foreign exchange receipts that may accrue to them. Because of increased receipts from private investment and government aid, the imports of primary producing countries from industrial countries grew rather more rapidly from 1950 to 1956 than their exports to these countries. From 1955 to 1956, the volume of these imports rose by 8 or 9 per cent, largely as a result of increased receipts from U.S. private investment.

World export prices advanced by about 2–3 per cent between 1955 and 1956, the first significant rise since 1952. While there was in general little change in the average export prices of primary producers, the export prices of industrial countries rose by some 3–4 per cent. Though there were some price increases in the primary producing countries, their effect upon the export sector was less than in industrial countries. Owing to a rise in ocean freights, world import prices rose slightly more than export prices.

These changes in volume and prices in international trade combined to produce the changes in the interarea pattern of world trade shown in Table 1. The value of the exports of industrial countries increased from 1955 to 1956 much more than that of nonindustrial countries. This is accounted for in part by the sharp advance in the value of trade between industrial countries and particularly of trade between Europe and the United States. The value of exports from industrial to nonindustrial countries, however, also rose much more than that of exports in the opposite direction. Most of the resulting increase from 1955 to 1956 in the trade surplus of the industrial countries in relation to the nonindustrial countries was recorded in the trade of the United States and of the United Kingdom.

Table 1.

Value of World Trade, 1953-561

(Value figures in billions of U. S. dollars)

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Sources: Based on data from International Monetary Fund, International Financial Statistics, and Statistical Office of the United Nations, International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Excluding U. S. special category exports.

Excluding exports of the Soviet area.

The United States, the United Kingdom, Austria, Belgium-Luxembourg, France, the Federal Republic of Germany, Italy, the Netherlands, Norway, Portugal, Sweden, Switzerland, and Japan.

Not including trade with countries of the Soviet area.

F.o.b. values estimated by reducing c.i.f. import values by 12,13,16, and 18 per cent for 1953, 1954, 1955, and 1956, respectively.

Not including Mainland China.

Price Developments and Export Earnings of Primary Producers

During the first three quarters of 1956, average export prices of primary producing countries were somewhat lower than in the preceding year. Prices started to rise, however, in the third quarter, and the closing of the Suez Canal accelerated this movement. For the year as a whole, average export prices of primary producing countries were much the same as in 1955. The rise in the export prices of manufacturing countries and the increase in transportation costs produced a deterioration in the terms of trade of primary producing countries which probably amounted to some 4–5 per cent, with considerable differences between individual countries.

Restocking demand for coffee, together with a shortage of the mild varieties early in 1956 and a smaller Brazilian crop in 1956–57, resulted in steadily rising prices, which reached their peak in the third quarter of 1956 (Chart 1). Average prices for both mild and Brazilian coffee were higher in 1956 than in 1955. Cocoa prices in 1956 were about 30 per cent less than in 1955; they remained weak through most of the year as supplies were increased by two consecutive good crops. Tea prices weakened through the first three quarters of 1956, and in spite of a sharp advance after the closing of the Suez Canal, the average price for the year was below the high 1955 level. Sugar prices were firm through most of 1956, with rising demand greatly intensified by scare buying late in the year and smaller crops in some importing areas; they rose sharply at the end of the year when Cuban stocks were nearly exhausted. Continued high demand for copra, palm kernels, and their oils tended to raise the prices of these products toward the end of the year, but the average prices for the year as a whole were lower than in 1955.

Chart 1.
Chart 1.

Indices of Prices of Major World Commodities, First Quarter of 1954–First Quarter of 19571

(1953 = 100: logarithmic vertical scale)

1 Indices are based on data from International Monetary Fund, International Financial Statistics, and U.S. Department of Agriculture, The Cotton Situation.Coffee, Santos No. 4, Santos: coffee, Colombia, Medellin, New York; sugar, Cuba, f.o.b. price to countries other than the United States; cereals (wheat and nee), IMF compilation; wool, Australia, average price at Sydney auctions: cotton, Mexican Matamoros, f.o.b. Brownsville, Texas; cocoa, London, good fermented Gold Coast type; tea, unit value of U.K. imports; copra, Philippines, f.o.b. Manila; crude oil, price on field, East Texas; nonferrous metals, IMF compilation; rubber, Malaya, No. 1 ribbed smoked sheets, f.o.b. Singapore.

As a result of these demand and price developments, most of the exporting countries which depend largely on coffee, sugar, and other tropical foodstuffs (with the exception of cocoa) increased their export receipts in 1956. With higher prices and larger volumes, the aggregate value of the exports of these countries exceeded their value in 1955 by 4 per cent, and thus recovered to the level of 1954 (Table 2).

Table 2.

Trade of Primary Producing Areas, 1955 and 1956

(Value figures in billions of U. S. dollars)

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Source: Based on data from International Monetary Fund, International Financial Statistics.

Coffee and cocoa, other tropical foods, and oilseeds and vegetable oils.

Textile fibers, livestock products, grain, and tobacco.

Including exports, but not imports, of Kuwait.

Totals and percentage changes from unrounded figures.

A sharp rise in the latter part of the year raised average wool prices in 1956 above the 1955 average. This, together with a larger volume of trade in both wool and other livestock products, resulted in increased export earnings for the major exporters of these products. The cotton market in 1956 was dominated by the U.S. decision to dispose of surplus stocks by offering cotton for export after August 1 at prices below the domestic level. Demand for non-U.S. cotton fell in the second half of the year, and except for long-staple varieties, average cotton prices in 1956 were lower than in 1955. For the year as a whole, jute prices were slightly higher than in 1955. Prices of bread grains and rice did not rise, in spite of poor crops in several importing areas, as there were ample supplies, particularly of wheat, in exporting countries. Such increased earnings as occurred in countries exporting mainly vegetable fibers and/or grain were the result of a greater volume of exports.

In spite of a sharp decline in copper prices in the second half of the year, the average prices of nonferrous metals and the earnings of their major exporters were higher in 1956 than in 1955. Tin alone was markedly, though only temporarily, affected by the Suez crisis. Rubber prices began to rise in June, but their average level was lower than in 1955. As a result of these price movements and a smaller volume of trade, export earnings from rubber were also less than in 1955.

As a result of the closing of the Suez Canal and the damage done to oil pipelines, increases from 1955 to 1956 in the export receipts of countries depending largely on petroleum were smaller than from 1954 to 1955.

Exports of Industrial Countries

Since 1953 there have been considerable changes in the relative shares of the main industrial countries in world exports of manufactured goods. The exporting countries that have shown the largest proportionate increases in exports of manufactures are Japan and Germany, followed by Italy, Belgium, and Sweden. On the other hand, the shares of the United Kingdom and the United States in these exports have diminished. Some of the relevant information is presented in Table 3, which illustrates the extent to which relative movements in export prices have been correlated with differences in the expansion of the volume of exports.

Table 3.

Percentage Changes from 1953 to 1956 in Volume and Unit Value of Manufactured Exports of Major Industrial Countries

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Sources: Data supplied by Statistical Office of the United Nations, except those for the United States, which are from U. S. Department of Commerce, World Trade Information Service, Statistical Reports.

The relationship between quantity and price of exports shown in the table appears to imply that demand for each country’s exports was rather highly sensitive to supply price. Such an inference would, however, be hazardous, since factors originating from the side of demand, such as variations in the impact of customs duties, or elements of competitive strength other than price, may also exert a significant influence on the relative increases of exports of particular countries, and sometimes this influence has tended to reinforce that of price competitiveness.

The competitive position of Japan, for example, has been strengthened by the short delivery dates which Japanese exporters can offer. There has been a diminution of the discrimination formerly practiced against Japanese goods in various parts of the world, and the quality of the supplies readily available for export has improved with the progress of Japan’s industrial rationalization. The availability of goods was also an important factor in the expansion of Germany’s exports from 1948 to 1953. Even in the period covered in Table 3 it may still have helped to promote German exports. More important, however, have been the relatively strong increase in world demand for the products of the machinery and metals industries and the relatively rapid expansion of the market in OEEC countries for the manufactured goods that constitute a large part of German exports.

The exports of both the United Kingdom and the United States have been unfavorably affected by the fact that a comparatively large proportion of their exports—62 per cent for the former and 54 per cent for the latter—go to primary producing areas where the over-all expansion of imports has been less than in industrial areas. However, U.S. exports have benefited from a reduction in the discrimination formerly practiced against them, while U.K. exports have been affected by the decline in the degree of discriminatory preference formerly accorded to them in the sterling area and elsewhere.

From 1955 to 1956 there were considerable changes in the export shares of the main industrial countries in world markets for manufactures. It is true that short-term changes in these shares are never very closely associated with contemporary changes in relative export prices, but in the past year the connection was looser than usual, as shown by Table 4. Changes in demand and in availability appear to have had some importance. A further reason for the lack of any clear correlation between changes in export shares and changes in relative export prices may be the absence during this short period of any marked price changes.

Table 4.

Percentage Changes from 1955 to 1956 in Volume and Unit Value of Manufactured Exports of Major Industrial Countries

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Sources: Data supplied by Statistical Office of the United Nations, except those for the United States, which are from U. S. Department of Commerce, World Trade Information Service, Statistical Reports.

Balance of Payments Developments and Reserves

The principal changes in the world’s payments pattern and in world reserves between 1955 and 1956 are shown in Tables 5, 6, and 7. Despite an impressive increase in U.S. private investment abroad, the acquisition of gold and dollar reserves by the rest of the world from transactions with the United States was cut almost in half. The over-all payments surplus of the industrial countries other than the United States taken together fell sharply and almost disappeared. Both of these major changes were concentrated in the last quarter of the year and were partly, but not entirely, attributable to the Suez conflict. The primary producing areas, for which there had been a net deficit in 1955, showed a small surplus in 1956. There was considerable diversity between the payments experiences of individual industrial countries, and also between those of particular groups of primary producers (Table 5).

Table 5.

Payments Balances1 of Countries Outside the United States, by Major Groups, 1954-56

(In millions of U.S. dollars)

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Sources: Based on data from International Monetary Fund, International Financial Statistics,

Measured by changes in reserves of gold and foreign exchange, in the net EPU position (i.e., including credits granted to, and deducting credits received from, EPU), and in the net IMF position (i.e., quotas less holdings of members’ own currencies).

Based on balances for individual countries shown in Tables 14, 16, and 18 and including estimates for Paraguay, Lebanon, and Korea.

Based on balances for individual countries shown in Table 20.

Table 6.

Official Reserves of Countries Outside the United States and the Soviet Area, 1953-56

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Sources: Based on data from International Monetary Fund, International Financial Statistics, and Board of Governors of the Federal Reserve System, Federal Reserve Bulletin.

Excluding the United States, countries of the Soviet area, and dependent territories.

Including estimated official holdings of U. S. Government securities.

The difficulties of individual countries led to considerably increased recourse to the resources of the Fund. As these countries were able to meet part of their deficits from the resources of the Fund, the aggregate reserves of all countries outside the United States increased in 1956 at much the same rate as in 1955 (Table 6). Since 1954, however, they have been declining in relation to the value of world trade.

The acquisition of gold and dollar reserves by other countries in their transactions with the United States, after having declined from almost $2 billion in 1953 to $1 billion in 1955, was further reduced to about $550 million in 1956; there was actually a net outflow of reserves from these countries to the United States in the last quarter of 1956 and the first quarter of 1957. The relatively greater demand pressure in other countries, compared with the United States, which had been the main cause for the steady rise in the U.S. trade surplus from $1.3 billion in 1953 to $2.7 billion in 1955, was again largely responsible for a sharp advance in this surplus to $4.5 billion in 1956. The greater part of the increase in the surplus was offset by a very large increase in the net export of private capital and by the continued growth of U.S. Government spending abroad. The steep rise in the trade balance and in capital exports between 1955 and 1956 took place in relation to both industrial and primary producing countries, the additional capital flow, however, being directed mainly toward the latter.

As can be seen from Table 6, the gold and dollar reserves of countries outside the United States increased in 1956 by about $1.5 billion, almost as much as in 1955. Of this addition, about $550 million, a much smaller amount than in the year before, was earned from transactions with the United States. Some $580 million came from net drawings on the Fund—a figure which contrasts with net repayments of $200 million in 1955. Some $20 million in gold and dollars went into holdings of the European Payments Union and the Bank for International Settlements, and $350 million became available for reserves from current gold production and Soviet gold sales.

Nearly 80 per cent of the increase in gold and dollar holdings in 1956 was accumulated in the form of dollars, an even larger proportion than in previous years. Credit balances in the EPU and in the BIS changed little between 1955 and 1956. Sterling liabilities continued to decline, and the statistical record suggests that bilateral balances were considerably reduced in 1956. Aggregate reserves of gold and foreign exchange held by countries other than the United States have grown more slowly in recent years than the value of their imports; between December 1953 and December 1956, the ratio of reserves to imports declined from 45 per cent to 40 per cent.

The changes in 1956 in the payments balances of individual industrial countries outside the United States were influenced to some extent by conditions in export markets as well as by domestic cost developments. However, the governing factor determining the trend of the payments balance was in most cases the evolution of internal demand in comparison with movements of foreign demand. This was primarily responsible for both the abrupt deterioration in the position of France and the sharp rise in the surplus of the Federal Republic of Germany. Even in Japan, where the volume of exports increased by 20 per cent, there was a decline in the payments surplus which was the result of a revival of domestic demand.

In the United Kingdom, disinflationary policies, by curbing import demand and promoting exports, brought about a sizable current account surplus in 1956 in lieu of a deficit the year before. There was, however, at the same time a substantial outflow of capital, reflecting, in part, a temporary loss of confidence in sterling provoked by the Suez crisis. The resulting drain on U.K. reserves was largely made good by a drawing from the Fund in December 1956.

In the Federal Republic of Germany, a restrictive monetary policy, adopted with a view to preserving internal stability, had the effect of lessening the pressure of domestic demand, compared with demand conditions in many other countries, and thus further increasing the German trade and payments surplus in 1956. The restraint imposed upon German domestic demand in recent years has been supported by the persistently high cash surpluses accumulated by the Federal Government mainly as balances with the central bank, most of which were the result of a low actual level of defense expenditure which was substantially below the amounts appropriated. These factors meant that, compared with other industrial countries, a greater proportion of Germany’s increasing productive capacity was available to meet export orders. In 1956, the balance of payments position was also affected by some inflow of foreign funds attracted by higher interest rates or as a result of speculation relating to various European exchange rates, including that of the deutsche mark. The great influence on the trade balance of the relatively slight lessening in the pressure of demand in Germany seems to be due partly to the fact that this lessening of demand affected, to a greater extent than in some other countries, the types of product (notably investment goods) most easily exportable.

The sharp deterioration in the French payments balance, though aggravated by some special factors discussed below, is to be explained mainly by a continued sharp rise in domestic demand for both consumption and investment.

Countries whose chief exports are primary products showed a net deterioration on trade account (imports c.i.f.) of about $1 billion between 1955 and 1956 (Table 2), but they improved their aggregate payments balance by nearly $450 million (Table 5). The greater part of this discrepancy is to be explained by the considerable increase in these areas in both receipts of U.S. private capital and U.S. Government spending, including grants.

For countries exporting chiefly metals and rubber, the payments position tended to deteriorate, as the development of their trade followed the familiar pattern whereby imports increase sharply in response to a rise in export receipts in the previous year. On the other hand, there was a marked recovery in the payments positions of countries exporting chiefly agricultural products (other than rubber), their export receipts improving while, as a result of the restraining measures undertaken by many countries in the group, their imports remained virtually the same as in 1955. An increased inflow of investment capital was mainly responsible for the rise in the payments surplus of petroleum exporters.

Payments Effects of the Suez Canal Closure

Apart from the effects of delays in the arrival of and payments for goods involved in the initial rerouting of trade which followed the closing of the Suez Canal and of the Syrian oil pipelines in October 1956, these events were expected to have other more far-reaching balance of payments effects. The increase in the amount of shipping required to transport goods, and particularly oil, between the countries east of Suez and Europe was expected to raise freight rates and to create a physical shortage of tankers. Import costs (c.i.f.) would thus be increased and/or the export prices actually received reduced, particularly for goods normally transported through the Canal, while the earnings of countries providing shipping would rise. The shortage of tankers would necessitate a diversion of European oil imports from Middle Eastern to more expensive Western Hemisphere sources, and higher freight rates might cause similar shifts in the sources from which other imports were drawn. The earnings of Middle Eastern oil companies would decline, with repercussions on the foreign exchange income both of the countries where the companies operated and of those where they were owned. Even with additional supplies of oil from the Western Hemisphere, the total supply of oil available to Europe would be severely reduced and there might be significant repercussions on production with indirect and unpredictable effects on the balance of payments.

In the event, most of the reactions outlined above have been less severe than had been anticipated, as far as their effects on Western Europe are concerned. For that area the most important result of the closure of the Suez Canal was the movement of short-term funds out of sterling, described elsewhere in this Report.

Industrial activity in Western Europe appears to have been little restricted through lack of fuel or of other raw materials. The shortage of tankers was met by the elimination of cross hauls and the concentration of tanker shipping on the shorter North Atlantic routes. Oil production in the United States and in the Caribbean area was increased to compensate for the reduction of supplies from the Middle East. By January 1957, world oil production was back to the precrisis level; and by March 1957, when the Iraq Petroleum Company’s (IPC) pipeline across Syria was restored to partial operation, oil supplies to Western Europe were almost fully restored to normal volume. With a mild winter in Europe, it was possible to meet the temporary shortage of oil by drawing on stocks which had been increased to storage capacity after the nationalization of the Suez Canal Company in July, by consumer rationing of petrol and heating oil, and by reasonable fuel economy in industry. In countries such as the United Kingdom and France, where restrictions on petrol for private motoring were fairly severe, the consumer demand for automobiles, which had already been showing signs of slackening, was markedly depressed, and this had more effect than any shortage of fuel on the general level of activity.

The closing of the Canal was followed by sharp, though temporary, increases in tramp freight rates, which, however, apply to only a small proportion of seaborne trade. The average freight cost for transporting oil over different routes is estimated to have been more than 30 per cent higher at the beginning of the first quarter of 1957 than at the beginning of the preceding quarter. During the first quarter of 1957 it declined slightly. Liner freight rates for dry cargo are believed to have risen some 15–20 per cent during the period, but this increase was in part an adjustment to cost increases which had occurred before the Canal was closed.

As has been noted above, speculative and scare buying in some countries after the closing of the Suez Canal led to some short-lived f.o.b. price advances for a number of materials. There was no general change in crude oil prices, even in the Western Hemisphere, to which demand for oil had been diverted, until January 1957, when U.S. prices were raised by 12 per cent; similar changes were made in Caribbean prices shortly afterward. Early in March, when the operation of the IPC pipeline was partly restored, Middle Eastern oil prices, ex Mediterranean pipeline terminals, were raised by 9 per cent.

Partly as a result of these price and freight increases, U.K. average import prices, after a slight decline in the third quarter of 1956, advanced by about 6 per cent between September 1956 and March 1957. Import prices of food reached their peak about the end of 1956, while those of raw materials and fuel continued to rise until March. Import prices in other Western European countries do not appear to have risen so much. Import costs also increased for countries outside Europe, and especially for countries such as Brazil and Argentina, whose oil imports are considerable. Some European countries, notably Norway, had a net increase in receipts from shipping, depending on the type of shipping service they supply. Net importers of shipping services—i.e., some industrial countries and practically all the primary producing countries—were adversely affected by higher shipping costs.

The partial shift in the sources of oil supply from the Middle East to the Western Hemisphere raised the value of U.S. exports of petroleum and products from a monthly rate of $54 million in the first three quarters of 1956 to a monthly average of $105 million between October 1956 and March 1957. Shifts in sources of supply may also have slightly increased some other U.S. exports, but of the increase of $250 million in the monthly rate of U.S. exports from the first three quarters of 1956 to the following six-month period, only a minor part can be attributed to this cause.

The most serious adverse impact of the Suez crisis was felt by the Middle Eastern oil producing countries and by Egypt. Egypt’s payments position was first affected in July by the blocking of a large part of its foreign assets following the nationalization of the Canal. The closing of the Canal later in the year also had important effects upon Egypt’s foreign exchange receipts. Earnings from canal fees ceased, and in the last quarter of 1956 and the early months of 1957 export earnings declined sharply in comparison with the same period of 1955–56. However, this decline in export earnings may have been due in large part to other factors.

Since storage facilities in the oil producing countries in the Middle East are limited, the interruption of the operations of the Canal and the pipelines forced a 50 per cent reduction in their petroleum output from October to November 1956; by January 1957 output was about two thirds of normal, and by April, when the Canal had been reopened and the pipelines partially restored, it was still below the precrisis level. The loss in receipts to the countries concerned will probably exceed $150 million. Although the decline in output affected most of the producing countries of the Middle East, it was most serious in Iraq, because of that country’s heavy dependence on the IPC pipeline. The impact on Iraq’s oil receipts was mitigated by a special credit of £25 million granted to the Iraqi Government by the Iraq Petroleum Company in March 1957. The decline in Middle Eastern oil production affected the balance of payments not only of the producing countries concerned, but also of the countries to which the profits of the oil companies are normally remitted, particularly the United Kingdom. The United Kingdom may also have been affected by a decline in the sterling holdings of those Middle Eastern oil producing countries that are members of the sterling area.

Measures to Correct Payments Disequilibria

In 1956, world market demand for the export products of most countries remained high. Payments difficulties were usually, though not invariably, associated with a state of excessive internal demand, and conditions continued to be favorable to the correction of external deficits, without undue internal difficulties, by the application of disinflationary policies alone. Most countries in deficit or in a weak reserve position did in fact seek to apply such policies. Since increases in wages appeared in many countries to be assuming greater importance as a cost factor and as a source of demand, more and more attention was paid in some of these countries to measures acting directly or indirectly on wage rates. Import restrictions, though intensified in a few countries, are now used much less than in earlier years as a method of dealing with payments difficulties; in many countries, measures tending to raise the cost of imports in the domestic market were applied by adjusting the exchange rates applicable to imports, or by shifting some import goods to higher rate categories within existing multiple rate structures. Frequently, these measures were accompanied by adjustments of export exchange rates and were thus more analogous to devaluation than to import restriction.

European countries in deficit or in a weak reserve position have, in general, sought to influence the balance of payments by disinflationary measures acting on demand or on money costs, without any extension of restrictions. Bank rates were raised in 1956, partly, though not exclusively, for balance of payments reasons, in the United Kingdom, Ireland, the Netherlands, Belgium, Turkey, and Sweden, and in 1957, in France and Switzerland. In many countries action of this kind has been accompanied by more direct action to reduce commercial bank liquidity or to limit bank advances or by measures to limit the financing of home building and installment purchases. In some countries—for example, France—efforts have been made by fixing prices and other means to hold down the cost of living as reflected in certain key indices to which wage movements are linked, so that wage increases which might have repercussions on the general level of prices could be held in check. Some liberalization of imports, despite its adverse effect on the balance of payments, was used in France as a means of checking an increase in the cost of living and in wage rates. In the Netherlands, the movement of wage rates is subject to some measure of centralized control, and the Government is endeavoring to ensure that certain cost increases are not passed on in the form of higher prices.

Outside Europe as well, only a few countries, mainly in the sterling area, resorted to direct import controls or to more stringent restrictions as a means of correcting their payments disequilibria. In Australia, where import restrictions had been intensified twice in 1955 and again in 1956, monetary and fiscal measures were also employed to restrain domestic demand, and following an improvement in the payments situation, the import restrictions were relaxed in several stages early in 1957. In India, import restrictions were intensified and the effective bank rate was raised early in 1957.

A number of countries, mostly in Latin America, raised the domestic prices of import goods by adjusting their import exchange rates or import taxes, usually applying, at the same time, some degree of credit restriction. Brazil continued to restrict import demand by means of foreign exchange auctions, varying the amounts of exchange offered for various import categories and shifting goods within these categories. Colombia attempted to restrain imports by placing more goods, formerly admitted at the official rate, in the free rate category. Uruguay removed some quantitative restrictions while simultaneously depreciating import rates and requiring advance payments from prospective importers. In Indonesia, the system of import surcharges was revised in September 1956.

Measures which had the effect of raising the domestic cost of imports were frequently accompanied by measures tending to reduce the external, or raise the internal, prices of exports, with a net effect similar to devaluation. Thus exchange rates for exports other than coffee were raised in Brazil in the course of 1956, while in Colombia coffee exporters were allowed to sell in the free market a higher proportion of their export proceeds. In Indonesia, a system of negotiable export certificates, which had to be surrendered in making certain import and transfer payments, was introduced in 1956. Similarly, in Uruguay a new exchange certificate system was used which depreciated its multiple effective export rates.

More thoroughgoing measures of exchange devaluation and reform were undertaken by Argentina in late 1955, by Chile in April 1956, and by Bolivia in December 1956. In Chile a complex multiple rate system was replaced by two flexible rates, one applying to trade and the other to tourist and capital transactions, while in Bolivia a single flexible exchange rate was adopted for all transactions.

Of the countries in external surplus or in a strong reserve position, only the United States and the Federal Republic of Germany are large enough for their policies to have a significant effect on the payments problems of other countries. In both, domestic financial policy was applied primarily with a view to the maintenance of internal stability, which involved restraining rather than stimulating demand. In the United States, however, interest rates, though rising throughout the greater part of 1956, remained below those of Canada and other countries, and this facilitated the sharp rise in the outflow of private capital that has been a major factor in providing dollars to the rest of the world.

In the Federal Republic of Germany, on the other hand, the relatively high level of interest rates in 1956 was probably partly responsible for an influx of short-term funds from other countries. Short-term market rates declined and the discount rate was reduced in the second half of the year and at the beginning of 1957, but bond yields continued to rise. Efforts to mitigate the problem of Germany’s external surplus were concentrated upon further liberalization of imports, lowering of tariffs, purchases of defense materials abroad, and some acceleration of foreign debt redemption. Special steps were also taken to discourage the inflow of short-term capital and to relax restrictions on private capital exports. These measures have not so far had any significant effect on the size of Germany’s current surplus, which has continued at its previous high level. It is possible that the present trend toward a substantial rise of domestic expenditure in Germany, as a result of a changed budget position, higher wages, and social security payments, will lead to a reduction of the current surplus. Steps taken in other countries may also help to reduce the surplus to more manageable proportions.