Inflation and Exports in Primary Producing Countries
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

THIS PAPER begins with a brief theoretical analysis of the various direct and indirect ways in which inflation in primary producing countries may be expected to affect their exports.

Abstract

THIS PAPER begins with a brief theoretical analysis of the various direct and indirect ways in which inflation in primary producing countries may be expected to affect their exports.

THIS PAPER begins with a brief theoretical analysis of the various direct and indirect ways in which inflation in primary producing countries may be expected to affect their exports.

Section II seeks to discover, on the basis of postwar data, whether there is any systematic relationship between the degree of inflation, measured in terms of internal price movements, and changes in exports. It has proved convenient to group countries, according to the degree of increase in their domestic prices, into (1) “stable,” (2) “mildly inflationary,” and (3) “strongly inflationary” countries. In view of the special conditions prevailing earlier, attention is mainly focused on the years 1953–59. Over that period, the exports of countries with relatively mild inflation rose, on the average, by some 27 per cent, against a 35 per cent increase in those of stable countries. Exports of countries with strong inflation, however, remained on the whole virtually unchanged.

The role of devaluation, either on an over-all basis or through the adjustment of effective export rates for individual commodities, is examined (1) by comparing the evolution of exports between 1953 and 1959 in different countries with varying degrees of inflation and (2) by studying year-to-year changes in individual countries over the period 1949–59. In countries with mild inflation, devaluation appears to have largely offset the effect of inflation on exports, while in countries with strong inflation, even where devaluation reduced their price levels in terms of dollars below those in stable countries, exports did not increase accordingly.

For a number of countries, mainly those with strong inflation, the “major” and “minor” exports have been examined over the period 1953–59 and compared with those of stable countries. The effect of inflation was particularly pronounced on minor exports; exports of the inflation groups showed a small decline, against an increase of some 50 per cent for the stable group. The shares in world trade of inflationary countries’ exports of a number of products fell, in most instances, in the postwar period; they were also less than in prewar years.

Section III endeavors to illustrate in some detail various direct and indirect effects of inflation on specific exports from a number of countries.

I. Inflation and Exports: General Considerations

The expansion and diversification of exports is of paramount importance to primary producing countries seeking to develop their economies. Though foreign loans and grants are helpful in supplementing foreign exchange receipts, exports are, as a rule, the main source of the means required to secure imports essential in the process of development. Moreover, the intended rise in national income may generate additional demands for imports and make a corresponding expansion of exports desirable. Diversification of exports is sought in order to reduce dependence on a few commodities, and thus to mitigate the sharp fluctuations in export receipts arising from oscillations in demand for, or supply of, individual export goods.

The contention of this paper is that inflation tends to hamper the expansion of exports and to retard their diversification. The initial effect arises from increased domestic demand, and from the resulting rise in prices relative to those in competing or importing countries. Competition for goods or factors of production will induce diversion of products from the export to the domestic market. But even if there is no such diversion, inflationary price increases tend to spread to the export sector, mainly through adjustment of wages to a higher cost of living; increases in costs will then discourage exports. As inflation progresses, the economy becomes structurally oriented toward meeting domestic demand. Speculative investment in building and the development of high-cost industries (the latter often enhanced by import restrictions) are familiar phenomena in countries with protracted inflation. Measures taken to limit price increases in essential cost of living items may lead to scarcities both for domestic consumption and for exports.

On the other hand, the effects of inflation on exports may be partly or wholly offset by measures promoting exports through exchange rate adjustments and other devices.

Initial effects of inflation on exports

The initial effect of inflation is an increase in prices on the domestic market, which makes selling on that market more profitable than exporting. Returns from the latter will not move in line with domestic prices; export prices are practically “given” for most primary producing countries and cannot be significantly altered in response to rising costs of production. Where a country’s share in world exports of a particular commodity is large enough to enable it, by a change in volume, to influence international prices, inflationary cost increases will tend to encourage such a change with a view to raising the price of the commodity and maintaining it at a high level. But sooner or later this will invite an expansion of output in competing countries or the creation of substitutes which, in turn, will adversely affect the country’s exports.

For the majority of export goods, however, changes in supply from individual exporting countries have little effect on world prices. Differences between world and domestic prices will affect exports through the diversion of either goods or factors of production to the domestic market; even if no such diversion takes place, exports will be affected through cost increases and the reduction or elimination of profits on export sales. The effects will vary for different commodities; they will be most pronounced and most immediate on commodities for which domestic demand responds strongly to increases in money income, and on those whose supply cannot be readily expanded, so that increased demand is met at the expense of exports rather than by an expansion of output. “Major” export commodities of primary producing countries are not often affected by direct competition from the home market, since they consist largely of raw materials or basic foodstuffs, often produced mainly for export and with comparatively small domestic consumption and low income elasticity.1 Competition from the home market is most likely to affect certain “minor” exports, partly or largely produced for consumption in the exporting country; diversion of at least part of these exports to the domestic market is likely even if production is expanded.

Competition between industries for factors of production may affect the supply even of export goods for which domestic demand is limited or nonexistent. Labor may shift as wages offered in other occupations become more attractive, and land may be diverted to the cultivation of crops for which domestic demand is rising.

Wage increases in response to the rising cost of living may raise the cost of exports even if industries supplying the home market offer no alternative employment to labor employed in the export sector. Such increases are likely to be more pronounced in mining and processing than in agriculture, where the share of paid labor receiving money wages tends to be relatively small. Rising costs of material and equipment will reduce or even eliminate profits on exports. The decline or cessation of exports may then result in an accumulation of inventories and ultimately in a reduction of output.

Longer-run and indirect effects of inflation

If inflation continues over a period of years, exports will be adversely affected through structural changes in the economy. Although inflation frequently stems from efforts to speed up economic development, sometimes with special emphasis on particular sectors and targets, it is likely to divert investment into processes which yield quick returns, at the expense of longer-run projects. Furthermore, speculation in real estate, which often acts as an inflation hedge, induces investment in residential building. A rising demand for imports, while exports tend to shrink, usually leads to the imposition of import curbs in order to protect the balance of payments. Such curbs, as a rule more stringent for nonessential than for essential imports, provide shelter for the appearance or expansion of manufacturing industries that are producing at high costs. But neither residential building nor high-cost production of manufactures provides exportable supplies. At the same time, investment in the export industries is comparatively unattractive.

Protracted inflation frequently induces the imposition of price controls or subsidies on essential cost of living items—basic foodstuffs, rent, transportation, public utilities—in order to protect the living standards of low-income groups. The tendency toward such a policy is not confined to countries with strong inflation, but the latter gives increased impetus to its adoption and intensification. As differentials between controlled and free prices widen, relative shortages in the controlled sector develop and frequently lead to additional measures— rationing, prohibitions on exports, or restrictions intended to channel supplies to domestic consumers. Such steps may be taken for certain foodstuffs and also for raw materials consumed by domestic industries.2

Exchange rate adjustments and other export-promoting measures

The effects of inflation on exports may be counteracted by government action of various types: adjustment of exchange rates, retention quotas, subsidies on exports (either straight or through multiple rate practices),3 reduction of taxes, or government trading in exportable surpluses at a loss. Devaluation or gradual depreciation of the exchange rate will neutralize the effect of rising domestic prices on export incentives and, since it applies to all exports alike, has the merit of avoiding discrimination. Yet, unless inflation is stopped, devaluation is only a temporary palliative; and continuous depreciation, though permitting exports to flow, will undermine confidence in the currency, causing capital flight and intensifying the inflation.

Some of these difficulties can be obviated by the much more common device of subsidizing selected exports, frequently through multiple rate practices. However, by changing the relative prices received for different exports, selective subsidization will affect the present and future export pattern. Certain exports will be maintained, and possibly expanded, under the stimulus of preferential rates, while others will contract; in the end, the evolving pattern may not be in the best interest of the exporting country. Some of the export promotion measures—government trading in exportable supplies at a loss or straight subsidization—raise government spending and thus tend to add to the inflationary pressures.

Since a government, as a rule, tends to protect in the first place the country’s major exports, the net effect of inflation may be expected to be more pronounced for minor export commodities. Since high demand on the domestic market favors the evolution of industries producing for domestic consumption, there is little chance that new lines of export goods will evolve.

External factors

The adverse effect of internal inflation on exports may be modified, offset, or aggravated—as the case may be—by changes in world prices. Thus, the effect has been intensified since the mid-1950’s by a general weakening of prices on world markets. In some instances, however, rising demand for particular commodities, whose production can be increased only gradually, has raised prices on world markets sufficiently to encourage exports even from countries with a high rate of inflation.

In a number of primary producing countries a proportion of exports originates from foreign-owned enterprises, largely in the field of mining and refining, which produce almost exclusively for export. As a rule, the overhead costs of these enterprises, which are not affected by internal inflation, are substantial in proportion to current expenditure. Moreover, part of the latter is incurred abroad, and imports of material and equipment by foreign enterprises are often exempt from restrictions that apply to domestic enterprises. Finally, profit margins are high, as a rule. The result is that, in such instances, inflationary price increases, which affect only part—and often a small part—of the cost of production, usually do not affect the volume of exports.

II. Export Developments in Stable and in Inflationary Countries

The following empirical study of the relationship between inflation and exports is based on data for the years since World War II. In view of the special conditions prevailing in the early part of that period, including the post-Korean boom, attention is focused primarily on developments over the more “normal” years, 1953–59. Inflation is measured in terms of internal price movements. It is convenient to start with an attempt to ascertain whether and how far exports of primary producing countries reflect differences in the movements of their domestic prices. Some inflation, varying in degree and duration, has been experienced by most primary producing countries as well as by industrial countries. Since many other factors influence exports, inflation can be expected to have a visible effect only if it causes prices to be seriously out of line with prices in competing countries and in importing areas. This is borne out by the data in Chart 1 showing changes in exports over the five-year period 1953/54–1958/59 in relation to changes in domestic prices.4 Increases in the exports of countries with comparatively minor price advances show a wide dispersion, ranging from under 5 per cent to some 64 per cent. Also, the rates of growth of exports from countries with more pronounced price increases show a considerable spread and are not closely correlated with the degree of inflation. The expansion of exports, however, where it occurred, remained within narrower limits, and in a number of cases exports declined over the five-year period.

Chart 1.
Chart 1.

Intercountry Comparison of Changes in the Volume of Exports and in Domestic Prices

Citation: IMF Staff Papers 1962, 001; 10.5089/9781451955972.024.A002

Export volume and degree of inflation

The rate of increase in domestic prices, as indicated by the cost of living, varied widely for the countries included in Chart 1; any classification into what may be considered inflationary and what may be considered stable is necessarily arbitrary. For the purpose of this study, increases in prices at an annual average rate of 4 per cent or more are taken to indicate an inflation. In adopting this dividing line, regard has been paid to the fact, mentioned above, that some degree of price increase was common to most countries during the period under review; an average rate of increase of less than 4 per cent was not out of line with general price developments. The countries with annual average price increases of 4 per cent or more have been further subdivided into two groups, countries with comparatively mild and countries with strong inflation, using a rate of price increase of 10 per cent as the dividing line.5 For the countries included in the relatively stable group, the annual average increase in prices varied from less than 1 per cent to a maximum of 3.5 per cent.

The rate of growth of exports of the individual countries within each group varied widely. Within the stable group, differences in price changes were comparatively small, and it is not surprising that their effect, if any, on exports was blurred by other factors—differences in the export structure, in markets, etc. Within the other groups, also, similar factors modified the impact of more pronounced price increases on exports. Moreover, and perhaps of greater importance, in all the selected countries with mild or strong inflation the effect of price increases was counteracted, to a greater or lesser extent, by exchange rate adjustments, which varied widely in timing and degree.6 Finally, in some instances exports in the base or end period may have been particularly high or low owing to special conditions in either period.

In order to eliminate, as far as possible, the effect of special conditions in individual countries, the comparisons in Table 1 of changes in exports in each group of countries in the six years 1954–59 have been based on the averages of the changes in export volumes in the countries in the group. Table 1 also shows changes in exports between 1948/49 and 1953/54, a period when inflation was more widespread than in the later years; half the countries where conditions were stable after 1953, and all but one of those experiencing inflation after that year, had inflation in the earlier period. The composition of each group in 1948/49–1953/54 differs from that in 1954–59.

Table 1.

Groups of Countries: Indices of the Volume of Exports, 1953–54 Average and 1954–591

article image

The countries included in each of the three groups for the years 1954-59 are shown in Table 7, and those included in the 1953-54 average in Table 8. The indices are unweighted averages of the indices of the volume of exports from the individual countries in each group, and are derived from data in Tables 9 and 10. (For Tables 7-10, see pages 61-64.)

As indicated by the data in Table 1, the behavior of exports of countries with mild inflation differed very little from that of countries where prices were stable. Over the first five-year period shown, exports of the two groups rose at the same rate; in later years, the rate of change for exports of countries with mild inflation remained slightly, though persistently, below that of the stable group. The exports of countries with strong inflation, however, behaved very differently and showed a relatively small increase in the earlier period with complete stagnation after 1953.

During the first period shown, the prices of primary products on international markets were high, as strong demand was accompanied by relatively short supplies for many products; this facilitated exports from a number of countries in spite of internal inflation in those countries. In the period 1953–59, however, export prices of most countries weakened. The decline was largest for the countries with strong inflation—some 12 per cent against 7 per cent for the stable group and 5 per cent for the group with mild inflation—but the difference was not sufficient to explain the lack of expansion in the exports of the first-mentioned group.

Effect of exchange rate adjustments in countries with inflation

As mentioned above, all the countries in the two “inflation” groups have made exchange rate adjustments in varying degrees, which should be taken into account in comparing changes in their exports. Only three countries—Finland, Mexico, and Peru—have devalued uniformly for all exports, the first two countries in single steps and Peru by permitting the rate to fluctuate. In all the other countries, multiple rate devices have been used, varying widely for different commodities and frequently also for different currency areas, which makes it impossible to derive meaningful average rates. Six of these countries, however, compile export data both in terms of domestic currency (based on actual receipts by exporters) and in terms of U.S. dollars; for each of these countries an implicit average exchange rate for total exports was obtained. It has thus been possible to express, for nine of the sixteen inflationary countries, changes in the cost of living in terms of U.S. dollars (by “deflating” the cost of living index by the exchange rate), and to relate the movements of their exports to these changes, thereby taking into account the effect of exchange rate adjustment.

The following analysis of the effects of exchange rate adjustments in the nine countries proceeds by (1) comparing the changes in their exports in relation to domestic price changes between 1953/54 and 1958/59 with those of the stable countries, and contrasting these data with export developments relative to price changes in terms of dollars; and (2) examining year-to-year changes in exports for each of the nine countries over the period 1949–59.

For the purpose of the first approach, Chart 2 repeats, in the left section, the data of Chart 1 (export movements relative to price changes in domestic currency), omitting, however, the seven countries for which no exchange rate was obtainable. The right section shows the export movements relative to price changes in dollar terms.7

Chart 2.
Chart 2.

Intercountry Comparison of Changes in the Volume of Exports and in Domestic Prices in Terms of Domestic Currency and of U.S. Dollars

Citation: IMF Staff Papers 1962, 001; 10.5089/9781451955972.024.A002

1 Coffee is not included in these data.

Compared with developments in countries with stable prices, the movements of exports in the three mildly inflationary countries with straight over-all devaluations appear to conform more closely to changes in prices in terms of dollars than to changes in prices in domestic currency. The data for Thailand and more particularly for Colombia, however, indicate little, if any, response to exchange depreciation. The exports of Brazil8 reflect to a certain extent the series of rate adjustments which started in 1953. Indonesia’s exports remained stagnant, and those of Argentina and Paraguay, though their prices in dollar terms appear to have been lower than those of any other country shown, did not grow correspondingly. Various reasons explain this seemingly weak response of exports. In some of the countries with strong inflation, including Argentina and Paraguay, exchange rate adjustments lagged, for many years, far behind domestic price increases. After a protracted period of overvaluation, some time has to be allowed for the full effect of exchange rate adjustments to materialize. Domestic production has to be realigned in the country concerned, to provide larger exportable supplies and, perhaps more important, to develop or redevelop markets, since countries previously purchasing its exports may have shifted to other sources of supply. In some countries, special conditions, e.g., the limitation of coffee exports from Colombia under the international agreement, contributed to the slow adjustment of exports. It should also be noted that the cost of living index, particularly for countries with a sizable degree of inflation, is not always a reliable measure of the changes in prices most relevant to exports.

The second of the two techniques attempts to discover whether, and how far, year-to-year changes in the exports of individual countries in 1949–59 reflected changes in their dollar price level. Three-year moving averages have been used in order to reduce the effect of special conditions which may prevail in any single year. The results, shown in the three parts of Chart 3,9 indicate that the exports of countries with mild inflation (i.e., the countries in Chart 3A) have responded promptly to changes in prices. In Peru, where the exchange rate during most years adjusted itself to internal price movements, the price level in terms of U.S. dollars varied within very narrow limits. The sharp upward trend in exports was not visibly affected by the minor changes in the dollar price level. The same applies, by and large, to Finland, where the exchange rate was devalued twice during the period under consideration. In Mexico, where the rate was also adjusted twice, the rise in exports seems to have slowed down in the years of apparent overvaluation; but, as in Peru and Finland, the temporary discrepancies between internal prices and exchange rate movements were comparatively minor. The data for Thailand also indicate a ready response of exports to changes in the dollar price level. In Colombia, the steady decline of exports after 1954 was reversed when in 1957 and 1958 the exchange rate was drastically reduced; other factors, particularly the quota limitations on coffee exports, prevented a stronger recovery of exports.

Chart 3A.
Chart 3A.

Individual Countries : Volume of Exports and Changes in Domestic Prices in Terms of U.S. Dollars

(Three-year moving averages;1 1950–69 = 100)

Citation: IMF Staff Papers 1962, 001; 10.5089/9781451955972.024.A002

1 Points plotted are midyears of moving averages.

Of the four countries with strong inflation for which implicit exchange rates were obtained (Charts 3B and 3C), the exports of two, Argentina and Brazil, responded to depreciation; however, the response, particularly in Argentina, was weaker than might have been expected from such a drastic devaluation. The exports of Paraguay and Indonesia showed little or no reaction; in both countries inflation had been very strong and protracted, and in Indonesia the devaluation may not have been sufficient to offset the effect of internal price increases.

Chart 3B.
Chart 3B.

Individual Countries : Volume of Exports and Changes in Domestic Prices in Terms of U.S. Dollars

(Three-year moving averages;1 1950–69 = 100)

Citation: IMF Staff Papers 1962, 001; 10.5089/9781451955972.024.A002

1 Points plotted are midyears of moving averages.
Chart 3C.
Chart 3C.

Individual Countries: Volume of Exports and Changes in Domestic Prices in Terms of U.S. Dollars

(Three-year moving averages;1 1950–59 = 100)

Citation: IMF Staff Papers 1962, 001; 10.5089/9781451955972.024.A002

1 Points plotted are midyears of moving averages.

“Majorandminorexports in inflationary and stable countries

It has been argued above that the effect of inflation is likely to be more pronounced on minor exports and on the introduction of new ones than on the main export commodities. In order to give some indication of actual developments, the changes in “major” and in “minor” exports have been compared for inflationary and stable countries. For most countries, data on the volume of “major” exports were readily available, but data on “minor” exports had to be computed.10 The choice of countries here is therefore limited to those for which a computation of “minor” exports was possible. For each country, “major” exports cover one to four commodities which in the base period and in the preceding years represented the largest proportions of the country’s total exports; in most instances, they accounted for some two thirds to four fifths of the export value (Table 3). The selection of major export commodities is necessarily somewhat arbitrary; but any alternative definition (where there is a choice) would not significantly affect the group averages, although it might affect the relative movement of the two series for the individual country.

Table 2.

Groups of Countries: Averages of Indices of Major, Minor, and Total Exports, 1954–591

(1953 = 100)

article image

Unweighted averages of data for countries shown in Tables 11 and 12. (pp. 65 and 66). The figures for total exports are averages for the countries covered in the computation of “major” and “minor” exports, and therefore differ somewhat from those shown in Table 1.

See Table 11.

See Table 12.

Table 3.

Individual Countries: Major and Minor Exports1

article image

Based on data for countries shown in Tables 11 and 12 (pp. 65 and 66).

Costa Rica, El Salvador, Guatemala, and Nicaragua are treated as one country.

Bananas are included for Costa Rica only.

The resulting data presented in Table 2 and Chart 4 indicate that during the period 1953–59 both major and minor exports of stable countries expanded considerably while those of inflationary countries failed to grow.11 Major exports of the stable group were some 30 per cent higher in 1959 than in 1953; for the inflationary group the volume was practically the same in the two years. This striking difference cannot be explained by differences in the commodity composition of major exports in the two groups of countries; as can be seen from Table 3, the major commodities of the two groups, as well as their percentage shares in total exports, were rather similar.

Chart 4.
Chart 4.

Groups of Stable and Inflationary Countries : Indices of Volume of Total, Major, and Minor Exports1

(1953 = 100; semilogarithmic scale)

Citation: IMF Staff Papers 1962, 001; 10.5089/9781451955972.024.A002

1 Unweighted averages of the indices (1958 = 100) of the volume of exports. The countries grouped as “stable countries” are Australia, Ghana, India, Malaya, New Zealand, the Philippines, the Sudan, and four Central American countries (Costa Rica, El Salvador, Guatemala, and Nicaragua) treated as one country. Those grouped as “inflationary countries” are Argentina, Bolivia, Brazil, Chile, Colombia, Indonesia, Turkey, and Uruguay.

The difference in the trends is even more pronounced for minor exports—a decline of roughly 6 per cent for the inflationary group and a rise of 50 per cent for the stable group.

While the major exports of the inflationary group were somewhat better maintained than minor ones, the relationship was reversed for the stable group; minor exports increased between 1953 and 1959 at an average rate of some 7 per cent per annum, compared with some 4 per cent for major exports. In other words, stable countries made considerably greater progress than inflationary countries in diversifying exports. Some measure of the degree of diversification achieved can be derived from data on the growth of the share of minor exports in the volume of total exports since 1953. For this purpose, the average of 1958/59 has been taken as the end of the period. The share of minor exports in total exports of the stable group was 31 per cent in 1953; in 1958/59 it was 35 per cent. For the inflationary group, however, the share of minor exports hardly changed over the period.

The development of major and minor exports varied widely for individual countries within each group, the differences being most pronounced among the inflationary countries (Table 3). In only three of these countries—Chile, Brazil, and Argentina—was there an increase between 1953/54 and 1958/59 in both major and minor exports. Chile’s major exports are produced mainly by foreign-owned companies and are not much affected by internal price developments. Its other exports had fallen off sharply after 1953; the considerable depreciation of the exchange rate in 1958 and stabilization measures implemented late in that year may have contributed to the recovery of these exports. Brazilian coffee exports were exceptionally low in the base period; the rise in minor exports reflects largely the rapid growth of shipments of iron ore and manganese induced by the continued high level of world demand and prices, the expansion of heavily subsidized sugar exports, the revival of the meat trade (which had almost disappeared in the mid-1950’s), and shipments of crude oil from the state-owned wells. The increase of Argentina’s exports, induced by the gradual depreciation of the currency in 1958 and sustained by the stabilization measures introduced late in that year, mainly reflected a doubling of meat shipments compared with the base year.

All countries in the stable group expanded their minor exports. The Sudan was the only country where the expansion was comparatively small and was considerably exceeded by the rise in its major export (cotton). In Australia and New Zealand, major and minor exports rose at roughly the same substantial rate. For four countries in the stable group, the expansion of minor exports was much sharper than that of major exports.

Shares of inflationary countries in exports of selected commodities

As pointed out above, the similarity in the commodity composition of the major exports of the two groups of countries and the consider able expansion in such exports from the stable countries suggest that the sluggish behavior of the exports of the average inflationary country cannot be explained by their encountering a less favorable demand for their main products. In fact, world trade in most of these products has increased considerably. However, as can be gauged from the data in Table 4, exports of the inflationary countries, even where they rose, have not kept pace with world trade in the respective commodities.

Table 4.

Countries with Inflation: Exports of Selected Commodities as a Percentage of World Trade in These Commodities

article image
Sources: Food and Agriculture Organization, Yearbooks and Monthly Bulletins, various issues; International Tin Council, Statistical Bulletin, various issues.

Average of the two years 1951 and 1953.

Data refer to percentage shares in production of tin in concentrates.

Share in net exports.

Since most of the commodities involved12 are of agricultural origin and their output and exportable supply in individual countries are subject to year-to-year fluctuations (largely due to weather conditions affecting production), it has seemed preferable to base comparisons on periods of more than one year; therefore consecutive three-year averages, covering the 12 years 194–59, are shown in Table 4; where possible a five-year average of prewar figures has been added. The data indicate that the shares in world trade of major and some minor export products of the seven inflationary countries have in most instances been smaller in recent years than in either 1948–50 or the late 1930’s. However, there have been a few exceptions to this general tendency. Turkey, where cotton production has been greatly expanded under the stimulus of high support prices, has stepped up its export trade so that its small share in world trade of cotton has increased. Its share of world trade in tobacco, however, has lost ground in the course of the postwar years, although it is still larger than before the war. The particular type of tobacco supplied by Turkey, used mainly for blending, has had a steady market in the United States, even though, until recently, prices have been high and rising; but its European markets have been lost, largely in competition with Greece. Indonesia has maintained its share of the world market for natural rubber but has lost ground in markets for other commodities.

Among the commodities included in the table, world trade has increased most for meat. Argentina, a major source of supply, particularly of beef, experienced a sharp decline of its share in the early 1950’s as both production and exports fell off; however, in recent years, largely as a result of sustained efforts to raise output and trade, its share of the market has been partly regained. Uruguay, on the other hand, after a shortlived expansion of export trade in the early 1950’s, experienced a steady reduction in exports of meat, and its share of the market has declined to a small fraction. There has been relatively little expansion in world trade in wool; Argentina’s contribution to the total has declined somewhat, as production has hardly changed and a rather larger share is consumed on the domestic market.

The decline in Brazil’s coffee exports and the sharp reduction in its share of world coffee exports were not caused by the pressure of domestic demand. Although physical shortages were a contributing factor in the early 1950’s, the gradual decline in Brazil’s share of the market is attributable, primarily, to the country’s traditional policy of withholding supplies in order to maintain world prices. The high priority given to the maintenance of coffee prices, and the fear that any exchange rate adjustment might interfere with that goal, have, however, at times delayed changes in the exchange rate for other exports.13 The sharp reduction in Brazil’s cotton exports is accounted for by increased domestic consumption and failure to expand output, the latter resulting, in part, from shifts in the internal price structure caused by inflation.

III. Effects of Inflation on Individual Exports

Exports of individual commodities from “inflationary” countries show wide variations, reflecting the various direct and indirect effects of inflation and of the modifying factors mentioned above. The direct and indirect effects of inflation on specific exports from a number of countries are illustrated by the following discussion. The choice of commodities was greatly limited, however, by lack of information on particular export developments.

Indonesian exports of sugar up to the mid-1950’s showed some recovery, though the greater part of the rising production was absorbed on the domestic market (Table 5); but after 1956 when inflation gained momentum, exports declined sharply, owing to a further rise in consumption, while production changed very little. Price controls intensified the diversion from the export to the domestic market and restrained the expansion of output. Diversion to the domestic market occurred on two levels: Firstly, small cultivators of sugar cane—who had been selling their cane to the sugar estates for processing—found it more profitable to divert a larger part of their output of cane to the production of red country sugar, the price of which was not subject to control and had risen sharply. This accounted, in part, for the stagnation of estate output of “centrifugal” sugar—the form in which sugar is usually marketed and exported. Secondly, demand for “centrifugal” sugar was raised by higher incomes, resulting particularly from higher wages. Sales on black markets further reduced exportable supplies. The expansion of cane output on estates has been hampered by the inability of estate owners to obtain additional land, since suitable land can be used more profitably for producing crops for local consumption.

Table 5.

Indonesia: Production, Export, and Consumption of Sugar

article image
Sources: International Sugar Council, Yearbooks and Statistical Bulletins; Food and Agriculture Organization, Production Yearbooks; A. Viton and F. Pignalosa, Trends and Forces in World Sugar Consumption (International Sugar Council, London, 1959).

Demand for meat responds strongly to increases in income, and the meat-exporting countries of Latin America, where money incomes rose sharply during the 1950’s, experienced a considerable rise in domestic consumption and a decline in exports of meat (Table 6). In Argentina, where the increase in incomes reflected largely higher wages to urban workers, heavy subsidies on the retail price of meat in Buenos Aires further encouraged consumption. Up to 1950, however, the impact of higher consumption on exports was concealed, since heavy slaughtering forced by a prolonged drought resulted in large supplies; when output declined over the next few years, exports were sharply reduced. Drastic steps taken by the Government, including heavy subsidies to packing houses, succeeded in raising output and restoring exports, but competition from the domestic market remained strong and exports expanded less than world trade in meat.

Table 6.

Argentina, Uruguay, and Brazil: Annual Averages of Meat Production, Exports, and Per Capita Consumption

article image
Sources: U.S. Department of Agriculture, Foreign Agricultural Circulars, Series on Livestock and Meats, various issues.

Per capita consumption compares with average consumption in 1955-59 of some 160 pounds in the United States and some 45 pounds in Italy.

The sharp increase of domestic demand for meat in Uruguay raised per capita consumption in the 1950’s to the highest level in the world, but led to a sharp and sustained contraction of exports. Production was adversely affected by shifts of pasture land to wheat growing, which was heavily subsidized.

The virtual disappearance in the early 1950’s of meat exports from Brazil, where only a small fraction of output is exported, was also attributable to increased domestic demand and consumption. The slow rate of increase of production, due in part to repeated attempts to control prices, caused shortages on the domestic market, and, in order to secure supplies for that market, exports were for some time subject to quota restrictions.

Exports of meat from Paraguay (not shown in Table 6) were also sharply reduced in the early 1950’s, largely as a result of rising domestic consumption.

Exports of livestock from Turkey were reduced from an annual average of some 480,000 during 1948–51 to an average of some 110,000 in the next eight years, as herds maintained on farms were greatly increased. Additional money incomes accrued in the first instance to the agricultural sector; they resulted primarily from high support prices for grain. The higher incomes induced farmers to increase their holdings of livestock, partly as a hedge against inflation. Also, as a result of diversion to the domestic market, there was a sharp decline in exports of eggs.

The contraction of exports of manufactures (other than processed foodstuffs) from Brazil over the last decade reflects the combined effect of increased domestic consumption and inability to compete on export markets owing to high costs of production, the latter enhanced by the high degree of protection afforded by increasingly restrictive import policies.

Exports of manufactures had been sharply expanded during the war and continued to be high through the late 1940’s, but vanished almost completely in subsequent years. In 1948 they amounted to some $32 million or about 3 per cent of total exports; though resumed on a modest scale in the mid-1950’s, they have not risen beyond some $12 million, less than 1 per cent of total exports in recent years. Some 80 per cent of manufactures exported in 1948 consisted of textiles, mainly cotton goods, directed to primary producing countries. The sharp decline of these exports in subsequent years and their total cessation by 1953 has been attributed, in the main, to the gradual reappearance of supplies from industrial countries, while Brazilian exports were hampered by inflationary price rises. Devaluation of the export rate in 1953 came too late and was not sufficient to revive exports. Sharp wage increases as well as high earnings in the agricultural sector during 1954 resulted in booming domestic demand; textile producers had no incentive to attempt recovery of export markets and did not press for exchange rate adjustments. A few years later, when demand subsided as rural incomes declined and stocks accumulated, the interest in export outlets was revived, but the high cost of production and inability to compete at the prevailing exchange rate hampered recovery; exports of cotton goods have remained small, less than one tenth of their 1948 level.

There has been some expansion in exports of other manufactures, but, as mentioned above, the value of manufactured exports as a whole has not exceeded $12 million a year, despite the rapid expansion of manufacturing production over the last decade. The rise of the latter has been estimated at more than 150 per cent14 of its 1948 level, which was already quite high, particularly in the consumer goods sector. The share of industry in the national product in the late 1940’s amounted to over 20 per cent, compared with agriculture’s share of 29 per cent. In recent years industry has attained a share of some 25 per cent, nearly equal to that of agriculture.

The failure of exports to reflect, to a greater extent, the rapid growth of industrial production is largely explained by the concentration of additional output in those sectors where import restrictions and tariffs have provided a high degree of protection. Up to the early part of 1961, exchange for most imports was sold at public auction at rates varying for different categories of goods. Rates for most manufactures other than machinery and industrial and agricultural equipment, for certain types of vehicles, and for pharmaceutical products were some two to four times (in terms of cruzeiros per dollar) the highest export rate and the “free market” rate. These auction rates, supplemented by ad valorem tariffs, in some instances as high as 150 per cent, have effectively restricted imports of manufactures. Apart from stimulating domestic investment in the highly protected industries, the restrictive import policy has also induced foreign enterprises whose exports to Brazil were adversely affected to establish branches in the country so as not to lose a highly receptive market. Thus U.S. direct investment in manufacturing establishments in Brazil rose from $285 million in 1950 to $438 million in 1959. The costs of production, however, are reported to have been very high, comparing unfavorably with those in the United States and other countries where U.S. firms are operating.

A study undertaken by the National Industrial Conference Board15 has analyzed the cost of 13 products16 manufactured by U.S. companies in the United States and in 19 other countries, including Brazil. For only one product were unit costs lower in Brazil than in the United States, and the difference was rather small; for three products the costs were roughly equal in the two countries. For nine products, costs in Brazil were higher; for three of them costs exceeded those in the United States by 45 per cent, and for four others the difference was between 16 and 45 per cent. Comparisons with other countries show that production costs for nearly half the products examined were lower outside the United States, and that for only one third were U.S. costs lower; thus if costs in Brazil were compared with those in countries other than the United States, the disadvantage of Brazil would be still greater. Analysis of costs of the main factors—labor, material, and overhead—indicates that higher material costs account for most of the difference; labor costs were generally much below those in the United States.

The burden of high and rapidly rising costs of materials was also stressed in a study on the operations of the Singer Manufacturing Company in Brazil.17 According to this study, the total output of the Singer plant and of a number of other well-known producers of sewing machines has been far in excess of Brazil’s requirements, but there has been no export in any quantity to any of the neighboring countries.

Altogether, exports from U.S.-controlled manufacturing enterprises in Brazil18 have been very small in comparison with their total sales. Data for 1957 indicate that total sales in that year amounted to $659 million (including $153 million of processed foods), of which $11 million (less than 2 per cent) represented exports. This compares with some 5 per cent from U.S.-controlled manufacturing industries in other Latin American countries, and more than 8 per cent from primary producing areas outside the Western Hemisphere.

Some individual exports from countries with high inflation—notably certain minerals and metals—showed considerable expansion, seemingly unaffected by internal price developments. Exports of several products, e.g., copper from Chile and petroleum from Indonesia, which rose considerably in the course of the 1950’s,19 originate from foreign-controlled enterprises which, for reasons mentioned earlier, are hardly affected by internal conditions. The volume of exports of iron and manganese ore from Brazil in 1959 was more than six times that in the late 1940’s. These products were favored by world demand, which kept prices sufficiently high to induce expansion of exports even from countries where exports of other commodities were hampered by inflation.

Table 7.

Groups of Countries: Changes in Domestic Prices (Cost of Living), 1953 to 1958, and in the Volume of Exports, 1953-54 to 1958-59

article image

Based on data in International Monetary Fund, International Financial Statistics.

Based on data in Tables 9 and 10.

Table 8.

Groups of Countries: Changes in Domestic Prices (Cost of Living), 1948 to 1953, and in the Volume of Exports, 1948-49 to 1953-54

article image

Based on data in International Monetary Fund, International Financial Statistics.

Based on data in Tables 9 and 10.

The figures refer to Malaya and Singapore.

Table 9.

Countries with Price Stability: Indices of Volume of Total Exports, 1948-59

(1953 = 100)

article image
Sources: International Monetary Fund (IMF), International Financial Statistics; UN Economic Commission for Latin America, Economic Bulletin for Latin America; and IMF staff computations.

Data are for years beginning July 1.

For years 1948-51, indices are based on major exports only.

Table 10.

Countries with Inflation: Indices of Volume of Total Exports, 1948-59

(1953 = 100)

article image
Sources: International Monetary Fund (IMF), International Financial Statistics; UN Economic Commission for Latin America, Economic Bulletin for Latin America; and IMF staff computations.
Table 11.

Countries with Price Stability: Indices of Volume of Major and Minor Exports, 1954-59

(1953 = 100)

article image
Source: International Monetary Fund staff computations.

For commodities included, see Table 3 (p. 53).

Data are for years beginning July 1.

Costa Rica, El Salvador, Guatemala, and Nicaragua are treated as one country.

Table 12.

Countries with Inflation: Indices of Volume of Major and Minor Exports, 1954-59

(1958 = 100)

article image
Source: International Monetary Fund staff computations.

For commodities included, see Table 3 (p. 53).

RESUME

Cette étude commence par une brève analyse théorique des diverses voies directes et indirectes par lesquelles l’inflation est susceptible d’affecter les exportations des pays producteurs primaires.

La partie II s’efforce de découvrir, sur la base de données d’après-guerre, s’il existe un rapport systématique entre le degré d’inflation, mesuré par les mouvements de prix intérieurs, et les changements qui interviennent dans les exportations. Il s’est révélé commode de grouper les pays d’après le pourcentage d’augmentation de leurs prix intérieurs, à savoir, en pays (1) stables, (2) modérément inflationnistes et (3) fortement inflationnistes. En raison des conditions spéciales qui régnaient avant cette période, on s’attache principalement aux années 1953–59. Pendant cette période, les exportations des pays ayant une inflation relativement modérée ont augmenté en moyenne de 27% environ contre 35% dans les pays stables, tandis que celles des pays fortement inflationnistes n’ont pratiquement pas changé dans l’ensemble.

On examine le rôle de la dévaluation, qu’il s’agisse d’un changement global de parité ou simplement de l’ajustement des taux d’exportation effectifs pour certains produits individuels, (1) en comparant l’évolution des exportations entre 1953 et 1959 dans divers pays ayant connu des degrés variables d’inflation, et (2) en étudiant les changements intervenus d’une année à l’autre dans certains pays au cours de la période 1949–59. Dans les pays d’inflation modérée, la dévaluation semble avoir largement compensé l’effet de l’inflation sur les exportations, alors que dans les pays d’inflation prononcée, même quand la dévaluation a abaissé le niveau des prix exprimés en dollars en dessous de celui des pays stables, il n’y a pas eu d’accroissement parallèle des exportations.

Pour un certain nombre de pays, principalement ceux d’inflation prononcée, les exportations “principales et secondaires” ont été examinées pour la période 1953–59 et comparées avec celles des pays stables. Les conséquences de l’inflation furent particulièrement fortes sur les exportations secondaires; les exportations des pays d’inflation accusaient un léger fléchissement, alors que celles des pays stables augmentaient d’environ 50%. Dans la plupart des cas, les pourcentages des exportations des pays inflationnistes dans le commerce mondial d’un certain nombre de produits a diminué au cours de la période d’après guerre; ils étaient également inférieurs à ceux des années d’avant guerre.

La partie III s’efforce de décrire en détail les diverses conséquences directes et indirectes de l’inflation sur des exportations déterminées en provenance d’un certain nombre de pays.

RESUMEN

Este trabajo comienza con un breve análisis teórico de las distintas formas, directas o indirectas, en que la inflación en los países productores primarios se supone afectar sus exportaciones.

En la Sección II se trata de averiguar, tomando como base el periodo postbélico, si existe alguna relación sistemática entre el grado de inflación evaluado en términos de las variaciones internas de precios y los cambios operados en las exportaciones. Se ha considerado conveniente, agrupar los países de acuerdo con el grado de incremento en sus precios domésticos, en países (1) “estables”, (2) “moderadamente inflacionistas” y (3) “considerablemente inflacionistas”. Se ha prestado mayor atención a los años 1953-1959, en vista de las condiciones especiales que prevalecieron antes de ese lapso. Durante el periodo examinado, en aquellos países de inflación relativamente moderada, las exportaciones aumentaron en un promedio de 27 por ciento, contra uno de 35 por ciento en los países estables. No obstante, las exportaciones de aquellos países que mostraron una inflación considerable, permanecieron virtualmente constantes.

Se examina el papel que la devaluación desempeña, ya sea sobre una base general, o mediante el ajuste de los tipos de cambio efectivos para las exportaciones de determinados productos, (1) comparando la valuación de las exportaciones efectuadas entre 1953 y 1959, por diversos países que registraron grados variables de inflación y (2) observando los cambios operados de un año para otro durante el periodo 1949-59, en países individuales. En aquellos países deinflación moderada, la devaluación parece haber contrarrestado en gran parte el efecto de la inflación sobre las exportaciones, mientras que en los países de inflación considerable, las exportaciones no aumentaron proporcionalmente, aun donde la devaluación redujo los niveles de precios en términos de dólares por debajo de los países estables.

Para un conjunto de países, especialmente aquellos que registraron una inflación considerable, tanto las exportaciones primordiales como las secundarias, han sido examinadas durante el periodo 1953-59 y comparadas con las de los países estables. Los efectos de la inflación se dejaron sentir más ostensiblemente sobre las importaciones secundarias; las exportaciones de los grupos inflacionistas mostraron una pequeña baja, contra un aumento de cerca de 50 por ciento para el grupo estable. Decrecieron las proporciones de las exportaciones de los países inflacionistas en el comercio mundial de varios productos, la mayoría de las veces, durante el periodo postbélico; también fueron menores que las de los años anteriores a la guerra.

En la Sección III se trata de ilustrar con algún detalle los diversos efectos, directos e indirectos, de la inflación, sobre las exportaciones específicas de algunos países.

*

Miss Lovasy, Assistant Chief of the Special Studies Division, was formerly with the Economic and Financial Department of the League of Nations. She is the author of a memorandum on “International Cartels,” published by the United Nations, and of several articles in economic journals.

1

The distinction between commodities produced mainly for export and those consumed mainly in the country is necessarily fluid. As countries become more developed, a number of commodities shift from the first to the second group, partly because the growth of manufacturing absorbs materials formerly exported, but also because consumption levels rise as incomes increase.

2

Sometimes such measures simply reflect the need to divert supplies to the domestic market to meet increasing requirements of goods for which domestic output cannot be expanded. The case here discussed, however, is different: shifts in the internal price structure and not physical limitations prevent an increase in production.

3

Such practices include rate differentials for different commodities and sometimes for different markets, as well as procedures that permit exporters to sell some proportion of their export receipts at “free” market rates but require them to surrender the remainder at the much lower official rate.

4

For the countries covered in Chart 1, see Table 7 (p. 61). The choice of countries was largely determined by the availability of suitable data; a number of countries had to be omitted because reliable data on either prices or the volume of exports were lacking. In addition to the cost of living, which is the criterion of inflation actually used, data on wholesale prices have been examined whenever available for the countries studied.

The price data in the chart refer to the period 1953–58; export data to the average volume in the two years 1958 and 1959 compared with the average volume in the years 1953 and 1954. Throughout this paper, comparisons of changes in exports in individual countries have been based on the averages of two consecutive years, so as to reduce the effects of special factors which may determine exports in any particular year.

5

The cumulative increase over five years corresponding to annual rates of 4 per cent and 10 per cent amounts to roughly 22 per cent and 61 per cent, respectively.

6

The effects of exchange rate adjustments are examined in some detail below.

7

For all but one of the stable countries, the exchange rate remained unaltered during the period under consideration and price movements, in terms of dollars, were the same as in domestic currency. The rate of Nicaragua had been devalued by about 6 per cent.

It should be noted that in Chart 2 the change in the cost of living, shown both in domestic currency and dollar terms, is expressed as an index (1953 = 100) and not as an annual average rate.

8

The data for Brazil exclude coffee, exports of which have not been affected by internal price changes and have moved at effective exchange rates which were kept much below those for other commodities.

9

It should be mentioned that the conclusions derived from Chart 3 may differ from those just discussed. For some countries, notably Argentina as well as Brazil, year-to-year data indicate a response of exports to price changes in terms of dollars over time, while the data in Chart 2 suggest that the exports of these countries relative to the dollar price level remained low compared with those of other countries.

10

Only for a few countries, for which the global volume index appeared to be reasonably comprehensive, was the index for “minor” exports derived by deduction of “major” exports from the total. In most instances the index combines volume data for each of a number of the minor commodities, supplemented by rough estimates (on the basis of value) for the usually small residual. The latter method assures the inclusion of newly developed exports.

11

The data in both Table 2 and Chart 4 refer, for each year shown, to the same countries within each of the two groups. The number of countries used in computing these averages is smaller than the number used in the computation of total exports, shown in Table 1.

12

The choice was limited by availability of data on world trade in the commodities exported by the countries under consideration.

13

This was intimated by Ignacio Tosta Filho in Análise das Exportações Brasileiras Outras que não o Café (Rio de Janeiro, 1958, mimeographed).

14

Estimate by the Brazilian Institute of Economics, Getulio Vargas Foundations. The authors admitted that the estimate was likely to overstate actual growth, but even if allowance is made for some overstatement, expansion must have been considerable.

15

Theodore R. Gates, Production Costs Here and Abroad (National Industrial Conference Board, New York, 1958).

16

The 13 products originate from the following industries: food (2), pulp and paper (1), chemicals and allied products (6), rubber products (1), metal products (2), instruments (1).

17

Survey of Investment in Brazil (Brazilian Embassy, Washington, 1958), App. III.

18

The data refer to U.S. direct investment. Source: US. Department of Commerce, U.S. Business Investment in Foreign Countries (Washington, 1960).

19

The volume of copper exports from Chile in 1959 was some 35 per cent greater than in 1948; exports of petroleum and its products from Indonesia more than doubled during the same period.

IMF Staff papers: Volume 9 No. 1
Author: International Monetary Fund. Research Dept.
  • View in gallery

    Intercountry Comparison of Changes in the Volume of Exports and in Domestic Prices

  • View in gallery

    Intercountry Comparison of Changes in the Volume of Exports and in Domestic Prices in Terms of Domestic Currency and of U.S. Dollars

  • View in gallery

    Individual Countries : Volume of Exports and Changes in Domestic Prices in Terms of U.S. Dollars

    (Three-year moving averages;1 1950–69 = 100)

  • View in gallery

    Individual Countries : Volume of Exports and Changes in Domestic Prices in Terms of U.S. Dollars

    (Three-year moving averages;1 1950–69 = 100)

  • View in gallery

    Individual Countries: Volume of Exports and Changes in Domestic Prices in Terms of U.S. Dollars

    (Three-year moving averages;1 1950–59 = 100)

  • View in gallery

    Groups of Stable and Inflationary Countries : Indices of Volume of Total, Major, and Minor Exports1

    (1953 = 100; semilogarithmic scale)