International Monetary Fund Annual Report 1983

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1983
• ISBN:
  9781616351953

NONE

Chapter 1
Developments in the World Economy

Introduction

The recession in economic activity intensified in most parts of the world during 1982. At the same time, however, further progress in curbing inflation was recorded in several of the major industrial countries. This progress had favorable implications for the real incomes of consumers, and the accompanying decline in interest rates improved business incentives and reduced inventory carrying costs. By early 1983, the better outlook for inflation appeared to have improved confidence sufficiently to set the stage for an upswing in production and trade. Indeed, signs of such an upswing were already evident in a number of industrial countries, and especially in the United States. The task now confronting national authorities and the international community is to build a sustainable recovery on the foundation that is emerging.

Total output of the industrial countries declined in 1982 for the first time since 1975, and unemployment rose to the highest levels since before the Second World War. These developments, following two years of weak and uneven growth, created unfavorable conditions for the expansion of world trade, the volume of which declined by 2½ per cent in 1982. Falling prices of primary commodities further undermined the export earnings of most developing countries. The resultant difficulties faced by some of those countries in meeting debt service commitments led to a reappraisal of their creditworthiness by commercial lenders and an abrupt cutback in private financing flows. This posed the threat that cessation of financing would result in a disorderly contraction of world demand. This threat was averted only through concerted measures undertaken cooperatively by the authorities of countries most concerned, the international banking community, and international institutions, in particular the Fund.

The stagnation of world trade and the high rates of unemployment generated by the recession have also provoked an increase in protectionist pressures. These now present an additional obstacle to a renewal of growth in world trade and a hazard to the achievement of higher levels of output and productivity in the world economy.

The non-oil developing countries have been hit particularly hard by the international recession. With continuing weakness in their principal export markets and a further substantial deterioration in their terms of trade, they have had no alternative but to intensify their adjustment efforts. This has resulted in a further moderation of growth in gross national product (GNP) and an outright decline in per capita income levels for the non-oil developing countries taken as a group. Even countries which had previously been partially shielded from the consequences of declining export receipts by their access to international capital markets faced, in late 1982, the need for a particularly sharp measure of external adjustment. Confronted with much more cautious attitudes on the part of international lenders, these countries have had to adopt policies that give their creditors grounds for confidence in their capacity to bring their external obligations and resources into better alignment. The adoption of prudent fiscal and monetary policies, although entailing restraint on demand in the short term, offers the best prospect of sustainable expansion over the medium and longer term. Moreover, the timely adoption of such policies, particularly when they form part of programs that enable the country concerned to gain access to the resources of the Fund and other lenders, can, in fact, involve less restraint than would otherwise be necessary.

The oil exporting countries have also undertaken a major reassessment of their fiscal and development programs in line with the sharp reduction in their oil revenues.

Despite the numerous unsatisfactory aspects of the current situation, various developments of a distinctly encouraging character have also emerged. The most important of these is the progress that has been made in reducing inflation in the industrial countries. This progress, although partly due to the severity of the recession and to declines in oil and other commodity prices, must be attributed in considerable part to the effectiveness of official policies in several key countries. With growing recognition of the firmness of anti-inflationary policies, interest rates in major financial markets dropped substantially during 1982. The inventory liquidation that characterized the recession period seems to have run its course, and the real purchasing power of personal incomes has been enhanced by the decline in inflation. The recent reduction in oil prices, although having some negative effects, is another factor that should, on balance, contribute to world economic recovery.

For all developing countries, economic prospects now depend crucially on the progress of recovery in the industrial world. The need for an early upturn in the industrial countries is therefore very pressing; but there is also a vital need that renewed growth be non-inflationary and sustainable. The durability of the recovery will depend in no small part on the continuing credibility of anti-inflationary policies, which remains somewhat fragile even in several of the industrial countries where inflation rates have been brought down to the vicinity of 5 per cent or lower. Moreover, the still high inflation rates prevailing in a number of other industrial countries do not allow room for any more rapid expansion of nominal demand than is now foreseen. In most of these latter countries, there is a continuing need for firm fiscal and monetary policies. And in all of the industrial countries, avoidance of measures that might generate harmful expectations regarding inflation remains a cardinal requirement in dealing with the present situation.

From this perspective, it will be essential to keep monetary expansion at rates consistent with consolidating the recent trend toward lower inflation. It will also be vital to bring fiscal situations in the larger industrial countries, and particularly in the United States, into better balance. For the economic recovery to be well sustained, it will be essential that government demands for credit be prevented from competing unduly with rising private needs for credit and thus forcing up interest rates.

For growth in nominal demand to be reflected in higher output, rather than in renewed inflationary pressures, one of the most helpful developments would be a reduction of structural rigidities that handicap the efficiency of most industrial economies. Among the most important of these rigidities, apart from excessive fiscal deficits of a structural nature in some countries, are those involving inflexibilities in the wage formation process; the current distribution of income among factors of production, particularly the weakness of profits; inadequate incentives for saving and investment; and, in some cases, inappropriate regulation of economic activity. In addition, the existence of direct and indirect support for declining industries, and an education and training system in some countries that is not fully suited to their economic needs, has hampered the process of dynamic adjustment to technological and social change.

Concerning exchange rates, close international cooperation is needed to reduce volatility, and is especially important at the present time to take advantage of recent and prospective progress toward convergence of economic policies and conditions in the larger industrial countries. Other areas of vital need for international cooperation include the difficult international debt situation, the provision of adequate official development assistance to the low-income countries, and the avoidance of protectionist trade policies, both in industrial and in developing countries.

Restrictions by industrial countries on their imports from the developing world have particularly serious adverse implications for the economies of developing countries. In the near term, continued access to world markets by debtor countries is essential if they are to be in a position to service their external debt and maintain an adequate level of imports. In a longer-term perspective, restrictions against the exports of developing countries penalize most severely those countries that have adopted outward-looking growth strategies and the liberalization of their domestic economies advocated by the Fund. Many of these countries have borrowed abroad to finance export-oriented industrial development. Uncertainty about future continued access to export markets can have serious detrimental effects on this type of growth strategy.

The following sections of the chapter provide a review of developments in the world economy under three general headings. The first section deals with domestic activities and policies in major groups of countries; the second focuses on international trade and payments, both from a global point of view and from the standpoint of each major group of countries. Against this background, the third section of the chapter presents a discussion of current policy issues.

Domestic Activity and Policies

Industrial Countries

Stance of policies.—Confronted by the continuing recession and rising levels of unemployment, authorities in the industrial countries continued in 1982 to seek to establish the conditions necessary for a resumption of sustained economic growth. In general, there was agreement that a lasting solution to unemployment and other problems stemming from the prolonged recession could not be found in short-term stimulus, but rather required a determined effort to reduce inflation and eliminate structural rigidities. In this sense, policy can be said to have been focused on longer-term objectives, although the desire not to exacerbate short-term difficulties led to a certain flexibility in the manner in which financial policies were implemented in most countries.

The Interim Committee, in the communiqué issued following its meeting in Toronto in September 1982 (reproduced in Appendix III) “recognized that the goals of steady expansion of output and reduction of unemployment could only be achieved if there were a sustained reduction in inflation and inflationary expectations, in nominal and real interest rates, and in other impediments.” Following its meeting in February 1983 in Washington, the Committee reaffirmed the belief “that successful handling of the inflation problem is a necessary—albeit not sufficient—condition for sustained growth over the medium term.”

A number of industrial countries have now achieved considerable success in combating inflation and laying the foundation for a durable improvement in economic performance. Evidence of such improvement is already apparent in several of them, and is expected to spread to others in the course of 1983. However, progress toward greater financial stability has been uneven, and in some countries high inflation continues to hamper restoration of conditions conducive to the longer-term goals of growth and increased employment.

As noted in previous Annual Reports, monetary policy has borne the main burden of counterinflationary policy in most countries during the past few years, in large part because fiscal policies have tended to be less restrictive in their implementation than in their initial design. In the absence of adequate support from fiscal policy, monetary and credit conditions have had to be more restrictive than would otherwise be the case. The resulting pressure on financial markets has led to the record high interest rates of recent years. These high interest rates, in turn, have distorted the pattern of demand and increased the severity of the recession.

Although there has been an easing of monetary conditions since about mid-1982, there is no doubt that until that point they had been decidedly more restrictive than in the late 1970s. While developments have differed significantly from country to country, this tendency toward restraint can be seen from trends in both the growth rates of the principal monetary aggregates and the level of interest rates. A weighted composite of annual growth rates of the narrowly defined money supply (M1) in the seven major industrial countries, which averaged 10 per cent per annum during the period 1976–78, fell to 6½ per cent during 1979–81. A rise to 8½ per cent in 1982 was influenced to a significant extent by the jump in the growth rate of Ml in the United States, which in part may have reflected institutional changes in the U.S. financial system. A similarly calculated composite of growth rates of the broadly defined money supply (M2), which apparently was less affected by institutional changes, shows the annual pace of expansion declining from an average of 12 per cent in the period 1976–78 to 10 per cent in 1979–81, and to 9½ per cent during 1982.

As just noted, monetary conditions in many of the major industrial countries have tended to ease over the past year, in part because unexpectedly low rates of growth of nominal gross national product have caused the established objectives for the growth of monetary and credit aggregates to become less restrictive. An offsetting factor in some countries has been an apparent increase in the demand for money (even after allowance for the effect of falling interest rates), attributable partly to institutional innovations and partly to the effect of recession-induced uncertainties on liquidity preference. Where these factors seemed to be particularly important, for example, in the United States, the authorities have acted to accommodate such exogenously induced shifts in money demand by allowing the monetary aggregates most affected to exceed their target ranges, at least temporarily. In some other countries, responding to the severity of the recession, the authorities have permitted monetary expansion to proceed at rates corresponding to the upper end of the target range.

The implications of these various developments for the real money stock and velocity have been quite substantial. For the seven major industrial countries, the weighted average annual growth rate of real M1 (i.e., M1 deflated by the GNP deflator) fell from 2½ per cent during the period 1976–78 to a negative 2 per cent during 1979–81, before rising to 2½ per cent in 1982. A similar composite of deflated M2 growth rates indicates an average annual increase of 4½ per cent in the period 1976–78, declining to less than 1½ per cent in 1979–81, and then rising again to 3½ per cent during 1982. Since the most recent rise in the real money stock has occurred at a time when output was stagnant or falling, there has been a sizable decline in the velocity of circulation, the largest, in fact, for several years.

The changes in monetary conditions that ha...

Table of contents

• Cover Page
• Title Page
• Contents
• Letter of Transmittal
• Chapter 1. Developments in The World Economy
• Chapter 2. Developments in The International Monetary System
• Chapter 3. Activities of The Fund
• Appendices
• Index