THE PRESENT STUDY of the balance of payments performance of Latin America and the Caribbean is essentially an empirical exercise in evaluating the performance and in relating it, on the one hand, to governmental policies and, on the other, to factors partially or entirely beyond the control of governments. The period reviewed is the five years 1966 through 1970. It needs to be emphasized that this study is strictly retrospective and in no way attempts to look into the future. Indeed, it is already apparent that the balance of payments performance of the region in 1971 marked a break with the favorable trend over the five years reviewed here.

Abstract

THE PRESENT STUDY of the balance of payments performance of Latin America and the Caribbean is essentially an empirical exercise in evaluating the performance and in relating it, on the one hand, to governmental policies and, on the other, to factors partially or entirely beyond the control of governments. The period reviewed is the five years 1966 through 1970. It needs to be emphasized that this study is strictly retrospective and in no way attempts to look into the future. Indeed, it is already apparent that the balance of payments performance of the region in 1971 marked a break with the favorable trend over the five years reviewed here.

THE PRESENT STUDY of the balance of payments performance of Latin America and the Caribbean is essentially an empirical exercise in evaluating the performance and in relating it, on the one hand, to governmental policies and, on the other, to factors partially or entirely beyond the control of governments. The period reviewed is the five years 1966 through 1970. It needs to be emphasized that this study is strictly retrospective and in no way attempts to look into the future. Indeed, it is already apparent that the balance of payments performance of the region in 1971 marked a break with the favorable trend over the five years reviewed here.

All members of the International Monetary Fund in Latin America and the Caribbean—23 in number—have been covered in this study. This comprises all the independent states of the region with the sole exception of Cuba—an exception dictated by the nonavailability of the requisite information for that country, as Cuba is not a member of the International Monetary Fund.

The statistical information used was the most up to date available to the staff of the Fund. Provisional figures and estimates have had to be used in a few cases to complete the requisite time series. Inasmuch as all the figures were those available to and used by the Fund staff, no sources are cited in the tables that follow.

The study is divided into six sections. A quantitative assessment of the balance of payments performance of each of the 23 countries covered and of the region as a whole is given in the section that follows. Section II addresses itself to the much debated question of compatibility or incompatibility between balance of payments and economic growth objectives. Then follows a section that examines the major factors operating on the balance of payments but largely beyond the control of national authorities. In Section IV an attempt is made to assess the contribution to the balance of payments performance of governmental policies. The penultimate section deals with short-term capital movements. The final section illustrates the significance of the International Monetary Fund’s first allocation of special drawing rights to its members in Latin America and the Caribbean.

I. Balance of Payments Performance in 1966–70

During the five years 1966–70 a remarkably favorable balance of payments performance was achieved in Latin America and the Caribbean. Over this period, the 23 countries of the region covered in this study improved their combined net official international reserve positions by $3.3 billion, not counting the effect of the first allocation of special drawing rights, which added another $330 million to the international reserves of these countries. The net official international reserves of the 23 countries aggregated a mere $1.4 billion at the beginning of the period under review, and the $3.3 billion gain increased the region’s reserves in five years by nearly three and a half times.

It is noteworthy that this international reserve improvement gathered momentum from one year to the next during the period. Thus, of the five-year net official international reserve gain, only 5.7 per cent was registered in 1966, 9.2 per cent in 1967, 18.6 per cent in 1968, 29.6 per cent in 1969, and 36.8 per cent in 1970.

The international reserve gain was, in terms of amounts, very unevenly distributed among the countries of the region, but it was widely dispersed in terms of the number of beneficiaries. Five of the largest countries accounted for 87 per cent of the reserve gain of the region over the five years reviewed—Brazil alone accounted for 42 per cent of the regional total, Argentina for 18 per cent, Chile for 13 per cent, Peru for 8 per cent, and Colombia for 6 per cent. On the other hand, the wide dispersal of the reserve gain among countries is revealed by the fact that, of the 23 countries covered, 16 managed to improve their net official international reserves over this five-year period, although the individual reserve gains of a majority among the 16 were small. Seven countries registered a deterioration of their net official international reserve position. The largest loss in absolute terms was the Dominican Republic’s $12½ million; 4 of the 7 countries suffered losses of $5 million or less. Table 1 shows the balance of payments performance of each of the 23 countries, ranked in descending order of their absolute international reserve gain over the five-year period as a whole.

Table 1.

Net Official International Reserve Changes,1 1966–70

(In millions of U.S. dollars)

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Changes in the net international reserve holdings of the monetary authorities and state banks other than commercial banks.

Excluding the allocation of special drawing rights in 1970.

Fiscal years October 1 through September 30.

In order to permit cross-country comparisons of their balance of payments performance, it was necessary to adjust for the wide difference in the size of the 23 economies reviewed. The “weight” selected is nominal gross domestic product (GDP) at factor cost—except for Mexico, where GDP at market prices has had to be used—converted into U.S. dollars as a common denominator. The results of this exercise are presented in Table 2, which ranks the 23 countries in descending order of their net international reserve gains as a percentage of their respective GDPs over the entire five-year period. This table shows that the net official international reserve gain of all 23 countries combined represented about 0.6 per cent of GDP for the five years, and that this percentage rose steadily from 0.2 per cent in 1966 to a rather impressive 0.9 per cent in 1970.

Table 2.

Net Official International Reserve Changes Relative to Gross Domestic Product,1 1966–70

(In per cent of GDP)

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Gross domestic product at factor cost (except in Mexico, where GDP at market prices has been used), converted into U.S. dollars.

Excluding the allocation of special drawing rights in 1970.

Fiscal years October 1 through September 30.

II Balance of Payments Performance and Economic Growth

A great deal has been said and written about the relationship between balance of payments and economic growth performance and objectives, virtually all of it based on a priori reasoning. Two opposing views have been advanced. There are those who claim a good balance of payments performance can, as a rule, be achieved only with the pursuit of policies tending to discourage output, and hence economic growth. The other school of thought maintains that growth of output and a good balance of payments performance are perfectly compatible.

An attempt has been made within this study to validate either of these two opposing views on the strength of empirical evidence. The analysis of the performance of the 23 countries over five years yielded 115 observations, and the averages for the period as a whole yielded an additional set of 23 observations. The definition of the balance of payments performance used has already been explained, i.e., the ratios of net official international reserve changes to GDP, and the measure of the economic growth performance used was percentage changes in per capita real GDP. An attempt was made to correlate these two variables, but no correlation was found.

The absence of a correlation would indicate a more complex relationship between balance of payments performance and economic growth. Growth is likely to be associated with a strong balance of payments performance when such a performance is the result of a rapid export expansion. Imports may also accelerate in these circumstances but their expansion will probably lag behind that of exports, at least for the time being, permitting in this process a foreign reserve accumulation. A sustained rise in the inflow of development capital will have a similar effect on growth but its initial impact on foreign reserves will depend on the import component. Associated construction outlays will obviously contribute to growth, although the income thus generated will lead to a second-round increase in imports. The subsequent increase in productive capacity will clearly raise output, income, and expenditures. The final balance of payments outcome will depend on a number of factors, e.g., whether output is directed toward exports or the domestic market. At the other end of the spectrum, a weak growth performance may be associated with a good balance of payments result if the foreign reserve gain is attained by compressing import demand through restrictive domestic policies.

Even though no simple statistical relationship was found between the ratios of net official international reserve changes to GDP and percentage changes in per capita real GDP, a classification of the performance of the 23 countries on both counts over the five-year period as a whole is presented in Table 3. This classification grades the performance as “strong,” “indifferent,” and “weak.” A “strong” balance of payments performance has been defined as one with a surplus greater than ¼ of 1 per cent of GDP; an “indifferent” balance of payments performance as one ranging between a surplus equal to ¼ of 1 per cent of GDP and a deficit of the same size; and a “weak” balance of payments performance as one with a deficit greater than ¼ of 1 per cent of GDP. An “indifferent” economic growth performance has been defined as an annual per capita real GDP gain ranging between 0 and 2 per cent; a “strong” economic growth record as any per capita real GDP gain of more than 2 per cent a year; and a “weak” economic growth record as any reduction in per capita real GDP. On the basis of this classification, Table 3 groups the 23 countries into various combinations of performance on the two counts. This table shows that over the five years 4 countries had what are judged to be “strong” balance of payments and economic growth performances; 5 countries had a “strong” balance of payments but an “indifferent” economic growth record; 6 countries had the reverse experience, that is, an “indifferent” balance of payments but a “strong” economic growth performance; another 6 countries had an “indifferent” record on both counts; one country had an “indifferent” balance of payments and a “weak” economic growth performance; and one country had the reverse experience, that is, a “weak” balance of payments but an “indifferent” economic growth record. It is perhaps worth noting that, on the definitions used, there were no examples of three possible combinations—i.e., a “strong” balance of payments but a “weak” economic growth performance; of the reverse, i.e., a “strong” economic growth but a “weak” balance of payments performance; or of a “weak” performance on both counts.

Table 3.

Comparison of Balance of Payments and Economic Growth Performances, 1966–70

(In per cent)

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Fiscal years October 1 through September 30.

III. The Capacity to Import

The concept of capacity to import has been used in this paper to encompass all balance of payments receipts and payments over which national authorities are assumed to have only limited control. More concretely, this concept has been defined as the sum of all balance of payments flows with the exceptions of (a) the part of merchandise import payments that reflects a variation in the import volume; (b) short-term capital movements (including errors and omissions); and (c) international reserve changes. Changes in the capacity to import of Latin America and the Caribbean over the five-year period 1966–70 are examined below under five separate headings—(1) changes in export volume; (2) changes in the terms of trade; (3) changes in the service and transfer account; (4) changes in long-term and medium-term capital flows; and (5) special factors.

Changes in export volume

Latin America and the Caribbean experienced a marked growth of export volume over the five-year period under review, particularly in 1968 and 1969. This growth of export volume was the most important factor by far in the region’s rather impressive gain of capacity to import, accounting as it did for 84 per cent of this gain. In absolute terms, the area’s annual exports at 1965 prices averaged over the five years some $1.4 billion, or 13 per cent, higher than in 1965, and the increase was progressive, reaching more than $2.4 billion in 1970.

The performance of the individual countries is presented in Table 4, which ranks them in descending order of their percentage gain of export volume, in relation to 1965, over the five years. This table shows 4 smaller countries—Costa Rica, Bolivia, Guatemala, and Honduras—as having had the highest rates of export expansion. In all, 20 countries registered gains, and 3 countries—Paraguay, Haiti, and Uruguay—suffered losses.

Table 4.

Export Volume Changes in Relation to 1965 1

(In millions of U.S. dollars in 1965 prices)

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Change in the export volume with respect to 1965 multiplied by the 1965 export value.

Fiscal years October 1 through September 30.

Brazil’s export volume growth was the largest in absolute terms—its average annual export volume in this period was $437 million above its 1965 level. It reflected volume growth in such traditional export items as coffee, cotton, and cocoa, as well as in a number of new manufactured products. A marked growth of production for export of minerals was the major dynamic element in Bolivia (tin), Chile (copper), and Peru (copper, iron ore, lead, and zinc), and the latter also benefited from a growth of fish meal and coffee exports. Sharp rises in exports of bananas and coffee highlighted the export growth of Costa Rica, Guatemala, and Honduras. At the other end of the spectrum, it was mainly reduced coffee exports from Haiti and a decline in meat shipments from Paraguay that caused these two countries to suffer losses of export volume in this period.

Changes in terms of trade

The terms of trade did not favor Latin America and the Caribbean during the five years under review. A small initial improvement in 1966 was followed by fairly sharp reversals in 1967 and again in 1968, and although there was a major recovery in 1969 and a further, albeit a smaller one, in 1970, the changes in the terms of trade cost the region a loss of capacity to import of $665 million over the five years.

The performance of the individual countries is presented in Table 5 which ranks them in descending order of their percentage gain from changes in their terms of trade measured against 1965. Only 6 countries—Chile, Peru, the Dominican Republic, Uruguay, Paraguay, and Mexico—registered gains over the period under review. The other 17 suffered losses, and the heaviest losses among them were suffered by El Salvador, Costa Rica, and Venezuela.

Table 5.

Effect of Terms of Trade Changes in Relation to 1965 1

(In millions of U.S. dollars)

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Change in the terms of trade with respect to 1965 multiplied by the 1965 average value of exports and imports.

Fiscal years October 1 through September 30.

It was the progressive rise in import prices and not a drop in export prices that was responsible for the adverse behavior of the region’s terms of trade. Table 6 shows only two countries—Uruguay and Peru—as having benefited in the period under review from reduced import prices, but these two apparent exceptions from the general experience of the region may well reflect shortcomings in the statistics used. The rise in import prices appears to have cost the region almost $2.7 billion over the five-year period, and more than $1.1 billion in 1970 alone. Venezuela suffered the largest absolute loss on this account—some $700 million in the five years—followed by Brazil with close to $500 million.

Table 6.

Effect of Import Price Changes in Relation to 1965 1

(In millions of U.S. dollars)

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Change in import prices with respect to 1965 multiplied by the 1965 import value.

Fiscal years October 1 through September 30.

During the five-year period, the region recovered 70 per cent of its loss from rising import costs through better export prices, and there was even a small positive balance in 1970. In all, 15 countries were in varying degrees favored by this compensation. Table 7 shows countries exporting minerals—Chile, Peru, Mexico, Jamaica, and Guyana—as among the principal beneficiaries from higher export prices. Peru, which together with Chile was favored by record copper prices, was also able to sell its fish meal at good prices. The Dominican Republic fared well, notwithstanding depressed sugar prices through 1968, because it was able to shift its sugar exports increasingly to the higher priced U.S. market. In 1968 Argentina suffered a sharp drop in meat prices, but subsequently recovered much of the resultant loss when prices rose again. Venezuela was adversely affected by a severe decline of petroleum prices in 1966 and their continuing weakness during the remainder of the period. Brazil, Colombia, and Central America were hit by weak coffee prices through 1968, but the situation improved in 1969 and 1970. The effects of these fluctuations in coffee prices were in several producing countries aggravated by the somewhat similar pattern followed by banana prices.

Table 7.

Effect of Export Price Changes in Relation to 1965 1

(In millions of U.S. dollars)

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Change in export prices with respect to 1965 multiplied by the 1965 export value.

Fiscal years October 1 through September 30.

Changes on service and transfer account

The service and transfer account also had a negative impact on the region’s capacity to import merchandise in the period under review. The loss on this account amounted to $860 million over the period, and there was no discernible pattern in the year-to-year fluctuations.

Table 8 ranks the countries in descending order of their percentage gain on this account, in relation to 1965, over the five years. This table shows Haiti, Paraguay, and Jamaica as having had the best experiences on this score, and El Salvador, Trinidad and Tobago, Bolivia, and Guyana as having had the worst. Since the service and transfer account includes a great variety of international transactions, it is hazardous to draw any sweeping inferences from these calculations. It would seem, however, that countries with relatively large tourist earnings—such as Haiti, Jamaica, Barbados, and Mexico—were able to improve their service and transfer account and that countries with relatively high factor income payments abroad did not suffer any noticeable deterioration in this account.

Table 8.

Changes on Service and Transfer Account in Relation to 1965

(In millions of U.S. dollars)

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Fiscal years October 1 through September 30.

Changes in long-term and medium-term capital flows

Long-term and medium-term capital flows were a distinctly positive factor in the region’s balance of payments performance during the period under review. The improvement on this account in relation to 1965 netted the region $4.2 billion over the five years. Moreover, this improvement was markedly progressive through 1969, and the reversal of this progression in 1970 shown in Table 9 would disappear with the inclusion of the first allocation of special drawing rights. This table ranks the individual countries in descending order of their gain over 1965 on long-term and medium-term capital account measured in relation to their GDP. On this basis, Jamaica heads the list, followed by Guyana and Ecuador. Other countries that registered gains on this account of more than 1 per cent of GDP were Honduras, Colombia, Paraguay, Nicaragua, and Mexico. In all, 17 countries of the region registered gains. Only 6 suffered losses, with 3—Trinidad and Tobago, the Dominican Republic, and Peru—having suffered losses of more than 1 per cent of GDP.

Table 9.

Changes in Long-Term and Medium-Term Capital Flows in Relation to 1965

(In millions of U.S. dollars)

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Fiscal years October 1 through September 30.

Special factors

During this period two cases of mandatory repatriation of nationals’ foreign funds were taken into account in calculating changes in import capacity. The first was Colombia’s in 1967, which is estimated to have yielded about $20 million, and the second was Peru’s in 1970, which is estimated to have yielded $160 million.

Summary

Table 10 shows the combined balance of payments effects of the factors separately reviewed in this section—changes in export volume, changes in the terms of trade, changes on service and transfer account, changes in long-term and medium-term capital flows, and special factors. For the entire region, the gain in import capacity in relation to 1965 amounted to $8.3 billion over the five years. Except for 1967, this gain was progressive, rising to almost $3.4 billion in 1970.

Table 10.

Changes in Capacity to Import in Relation to 1965 1

(In millions of U.S. dollars)

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For calculation see Table 21. Includes residuals in foreign trade balance after calculated changes in export and import volumes and effects of changes in terms of trade.

Includes an estimated $20 million mandatory return of flight capital in 1967.

Fiscal years October 1 through September 30.

Includes an estimated $160 million mandatory return of flight capital in 1970.

The individual countries are ranked in Table 10 in descending order of their percentage gain of import capacity in relation to their 1965 import value. Jamaica heads the list, followed closely by Chile. Both countries increased their capacity to import by more than 45 per cent. Other countries with gains of more than 25 per cent were Colombia, Mexico, Costa Rica, Brazil, Panama, and Haiti. The largest absolute gains were Mexico’s $2.2 billion, Brazil’s $2.1 billion, and Chile’s $1.5 billion in the five years. In all, 17 countries increased their capacity, and only 6—Trinidad and Tobago, Argentina, El Salvador, Uruguay, the Dominican Republic, and Venezuela—suffered reductions.

IV. The Demand for Imports

In the preceding section changes in the region’s capacity to import in the period 1966–70 were quantified by major sources. The next step in the analysis is a comparison of the calculated import capacities with actual import levels—in other words, of the demand for imports or rates of import capacity utilization. Since changes in import prices over the period under review were already accounted for as part of the calculated changes in the terms of trade—which, it will be recalled, were treated as one of the factors affecting the capacity to import—the demand for imports is defined here in terms of 1965 prices.

After comparing the demand for imports with the capacity to import, an attempt is made in this section to explain divergences in the behavior of the two in relation to national policies in four separate fields: (1) import taxation; (2) import and exchange restrictions; (3) credit policy; and (4) exchange rate changes.

The region’s import demand increased very rapidly from year to year over the period under review. In absolute terms, the area’s average annual import volume in this period was some $2.2 billion, or more than 22 per cent, above its 1965 level, and the increase reached almost $4 billion in 1970.

The performance of the individual countries is presented in Table 11, which ranks them in descending order of their percentage gain of import volume, in relation to 1965, over the period as a whole. This table shows Brazil as having had the largest import expansion by far, both in relative and absolute terms—average annual imports in this period being about $800 million, or 73 per cent, above their 1965 level. Other countries that had large percentage increases in import demand were the Dominican Republic, Colombia, Chile, and Honduras. In all, 21 countries registered increased import volumes, and only 2—Trinidad and Tobago and Haiti—suffered reductions.

Table 11.

Import Volume Changes in Relation to 1965

(In millions of U.S. dollars in 1965 prices)

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Fiscal years October 1 through September 30.

More relevant to the present analysis is a country-by-country comparison of changes in import demand in relation to changes in capacity to import—in other words, the degree of underutilization or over-utilization of import capacity. These comparisons are shown in Table 12, which ranks the individual countries in ascending order of the percentage increase, in relation to 1965, in the rate of utilization of their import capacity over the five-year period. In these comparisons no change in relation to 1965 implies that a country’s policies—in the fields of import taxation, import and exchange restrictions, credit policy, and exchange rate policy—caused a change in import demand equal to the change in its capacity. A positive change signifies that the country overimported, while a negative change indicates that it did not use the change in its import capacity fully. In all, 11 countries reduced the rate of utilization of their capacity to import, and 12 countries increased their rate of utilization. Haiti shows the largest reduction of almost 25 per cent, followed a considerable distance behind by Jamaica with a reduction of about one third less than Haiti’s. At the other end of the spectrum, the Dominican Republic had the highest rate of acceleration of import capacity utilization—with 62½ per cent—followed by Brazil with 37 per cent and Uruguay with 33 per cent.

Table 12.

Indices of Utilization of Capacity to Import1

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Ratio of import volume to capacity to import.

Fiscal years October 1 through September 30.

Notwithstanding its ranking among the top three in terms of acceleration since 1965 of its rate of import capacity utilization, Uruguay still had the lowest absolute utilization rate—with 87 per cent—followed by Peru with 88 per cent and Chile with 91 per cent. Other countries with low but appreciably increased utilization rates were Brazil and Colombia. Barbados had the highest absolute utilization rate with more than 133 per cent, followed by Ecuador with 120 per cent and Costa Rica with 111 per cent. Costa Rica’s still appreciable rate of over-utilization had come down from its 1965 level, but Barbados and Ecuador had widened further their margins of overutilization.

The region’s utilization rate of its import capacity was about 5½ per cent higher in 1966–70, both on the average and in 1970, than it had been in 1965, but it still retained a small margin of underutilization of capacity—about 1 per cent—over the five-year period as well as in 1970. In assessing these results, it is, however, important to bear in mind that a 100 per cent rate of utilization of import capacity, by definition, precludes any international reserve gain, save for inflows of short-term funds and allocations of special drawing rights. As a matter of policy, some countries may, therefore, feel constrained to hold the rate of import capacity utilization below the 100 per cent level, if not in every year, then at least over a period of the length of the one examined here.

Changes in import taxation

Table 13 presents a measurement of the weight of import taxation in Latin America and the Caribbean in terms of annual ratios of import tax yields to c.i.f. import values, a measuring technique that has the drawback of concealing the effect of import tax rates that are prohibitive. The table ranks the individual countries in descending order of the weight of their import taxation over the period under review. It reveals that, with only a few exceptions, this weight has not changed significantly between 1965 and the average for 1966–70. The exceptions were Uruguay, where import taxation increased significantly, and Honduras, Argentina, Paraguay, Costa Rica, and Nicaragua, where it diminished appreciably. In Brazil the weight of this taxation dropped sharply from 1966 to 1967, but again became more important in 1968. For the region as a whole, the weight of import taxation declined by about 1½ percentage points. One has to conclude, therefore, that changes in import taxation probably did not contribute significantly to changes in intensity of import capacity utilization.

Table 13.

Ad Valorem Weights of Import Taxation

(In per cent of c.i.f. import value)

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Fiscal years October 1 through September 30.

Changes in exchange and nontariff import restrictions

Extensive systems of exchange and nontariff import restrictions designed to give balance of payments relief are the exception rather than the rule in Latin America and the Caribbean. About two thirds of the countries in the area—15 in all—have eschewed the use of exchange restrictions, multiple exchange rates, and discriminatory currency arrangements as permanent instruments for managing their balances of payments by accepting the regime prescribed by Article VIII of the Articles of Agreement of the International Monetary Fund. Most of the countries in the area have no extensive exchange controls at all, and only very few having such controls use them to restrict international payments other than payments for capital transfers, remittances of earnings from foreign investments, or foreign travel of residents. Several countries of the region use restrictive import quotas and prohibitions. In a number of countries—particularly in Mexico, Venezuela, and the Caribbean countries—these devices are being used mainly to protect local industry, and only in a few countries—notably Chile and Colombia—do quantitative import restrictions serve prominently as a substitute for exchange restrictions. Chile, Colombia, Ecuador, and Uruguay also rely for the latter purpose on advance import deposit requirements.

More relevant to the present analysis than their absolute level of restrictiveness are changes in these restrictive practices during the five years under review. In this respect, only two countries of the region—the Dominican Republic and Peru—had appreciably more restrictive exchange and trade systems at the end of these five years than at the beginning. Payments arrears began to accumulate in the Dominican Republic in mid-1966. The sale of official exchange for certain payments for invisibles was subsequently discontinued and quantitative import restrictions, including prohibitions, were applied to a number of commodities, but the commodities so restricted could continue to be brought in if paid for with the importer’s own exchange. After the Central Reserve Bank of Peru withdrew briefly from the exchange market, this market in October 1967 was split in two—a “certificate” market for all receipts and payments for merchandise trade, all operations of the government and of government entities, and certain current invisibles and capital transactions, and a “draft” market for all other receipts and payments. Access to the “draft” market was initially unrestricted, but in May 1970 the exchange controls previously applicable to the “certificate” market were also extended to the “draft” market. Moreover, the importation of a number of commodities considered nonessential has been prohibited since May 1968.

One country—Haiti—introduced restrictions on current payments in the period under review but dismantled them toward the end of this period. The restrictions began to be applied in mid-1967; they caused a progressive accumulation of payments arrears, but these were paid off before the end of 1970.

In one country in the area—Uruguay—experimentation with new restrictions alternated during the period with liberalization measures. Advance import deposit requirements and special financing rules for imported capital goods were removed in 1968, but basic exchange allowances for certain payments for invisibles were introduced in 1969. On balance, the restrictiveness of Uruguay’s trade and payments system probably remained broadly constant during 1966–70.

Four countries of the area—Argentina, Brazil, Chile, and Colombia—seem to have de-emphasized their reliance on exchange and nontariff import restrictions during the period under review. Argentina’s case is special in that the early part of this period was characterized by efforts to dismantle restrictions while the end of the period was marked by a trend in the opposite direction. Thus, import prohibitions were eliminated and prior import deposit requirements were lowered in 1966. However, toward the end of the five years, the exchange market was briefly closed and then reopened only gradually, and when it was fully operative again there were certain restrictions on capital movements.

Brazil removed quantitative restrictions from nonessential import commodities in 1966 and kept its exchange system generally free from restrictions throughout the five-year period. Chile’s liberalization process in this period involved the elimination of payments arrears, a major expansion of the list of permitted imports, and a partial dismantling of advance import deposit requirements, but its exchange and trade system still retained major restrictive features even after this liberalization. Colombia’s efforts in the same direction included a broadening of the list of imports exempt from licensing and more liberal policies for imports still subject to licensing, but the practices of this country, too, still remained rather restrictive as the period under review came to a close.

Credit policy

It is generally recognized that domestic financial policy is a powerful tool of balance of payments management. In developing countries, financial policy probably is most accurately represented by changes in the volume of bank credit, which follow rather closely the changing needs for funds both of the public and private sectors and hence reflect fiscal as well as monetary policies. An analysis of the factors that determined the level of import demand would, therefore, be incomplete without some attempt to quantify the role that credit policy had played. However, a measurement of the effects on import demand of a given credit policy is made difficult by the fact that this policy—and the financial policy mix for which it is a proxy—influences not only the balance of payments performance but also domestic prices.

The theoretical framework for the appraisal of credit policy in this paper is the proposition that changes in the stock of bank credit must equal changes in the community’s stock of savings in the form of claims on the banking system generated by real income changes plus or minus changes in the community’s preference for such savings, in order to be consistent with balance of payments equilibrium and domestic price stability; and if domestic prices are to follow the price level in the rest of the world rather than remaining absolutely stable, then the changes in the stock of bank credit will also have to reflect the movement of foreign prices. This framework assumes that credit policy will not influence output in the short run. It is recognized that this assumption is an oversimplification for some of the more advanced countries, but it seems reasonable for the area as a whole. It follows from this proposition that departures from balance of payments equilibrium and disparities between domestic and foreign price movements are to be taken as an indication that the observed change in the stock of bank credit differs from the equilibrium stock. As already mentioned, credit policy can be judged only in terms of its combined effect on these two variables, and this raises the technical problem of devising a combined measurement of balance of payments performance and price movements. The methodology followed here satisfies the need to bring to a common denominator annual balance of payments performances and annual price changes, the former defined in terms of net international reserve movements and the latter as changes in domestic price levels—as a rule, levels of consumer prices—deflated by changes in import prices. International reserve movements and changes in domestic prices relative to those in the rest of the world can both be related to changes in the stock of money and quasi-money. The translation of international reserve movements into changes in the money and quasi-money stock was a straightforward one-to-one proposition, and the price effect was calculated by applying the percentage change of domestic prices relative to import prices during the year to the stock of money and quasi-money at the beginning of the year. The two calculated effects were then added or netted, and this sum or difference was taken to represent domestic bank credit expansions or contractions in excess or short of those that would have been consistent with external and internal equilibrium. These credit excesses or shortfalls were then related to the observed annual changes in bank credit in order to derive indices of credit expansions in excess or short of those that would have been consistent with absolute balance of payments equilibrium and absolute domestic price stability relative to prices in the rest of the world. The methodology just described is illustrated by an example in Table 22 in the Appendix.

The results of these calculations are shown in Table 14, which ranks countries in ascending order of their excess credit expansions so defined over the five years. For what it is worth, the region as a whole appears to have been expanding credit during this period at a rate about 21 per cent beyond the equilibrium point. In all, 12 countries showed up with lower-than-equilibrium rates of credit expansion and 11 countries with higher-than-equilibrium rates.

Table 14.

Indices of Credit Expansion in Excess or Short of That Consistent with External and Internal Equilibrium1

(Credit expansion consistent with external and internal equilibrium = 100)

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