United States. Dept. of State. Office of Public Co.

Department of State bulletin (Volume v. 56, Jan- Mar 1967) online

. (page 61 of 90)
Online LibraryUnited States. Dept. of State. Office of Public CoDepartment of State bulletin (Volume v. 56, Jan- Mar 1967) → online text (page 61 of 90)
Font size
QR-code for this ebook


342



DEPARTMENT OF STATE BULLETIN



upon in the earlier period have dictated the large
investment outflows of recent years.

Whatever the reasons for the sharp increase in
direct investment and bank lending in 1963-64, it
clearly was imposing an intolerable strain on the
U.S. balance of payments.

Consequently, early in 1965, the United States in-
troduced a program of voluntary restraint on for-
eign investment by U.S. corporations and banks.
This program was designed to moderate the capital
outflow to the developed countries, while not inter-
fering with the flow to the less developed. The Fed-
eral Reserve program requested that banks limit
their increase in claims on foreig^ners in 1965 to 5
percent of the outstanding claims at the start of
the year; a further 4 percent increase was the sug-
gested limit in 1966. Banks were asked to give pri-
ority to export financing and credits to less devel-
oped countries. Similar guidelines were applied to
foreign lending by other financial institutions. This
program — together with the effects of tight money
— achieved a $2^/i billion favorable swing in bank
lending from 1964 to 1965 and a further $200 mil-
lion improvement in 1966.

The Department of Commerce, early in 1965,
asked large nonfinancial corporations to make a
maximum effort to expand their net payments bal-
ances and to repatriate liquid funds. Late in 1965,
corporations were asked to limit their average an-
nual direct investment outflows (including rein-
vested earnings, but net of U.S. corporate borrow-
ing abroad) for 1965^66 to specified developed and
oil exporting countries to no more than 135 percent
of the average annual flow in 1962-64.

Under the Commerce program, firms have been
encouraged to obtain maximum foreign financing.
An indication of the program's success is the sharp
surge in U.S. corporate borrowing abroad. In par-
ticular, U.S. corporations issued more than $500
million of securities in foreign capital markets dur-
ing the first three quarters of 1966. (These issues
are included in Table 31 under foreign investment
in U.S. securities; it offsets a part of the debit on
direct investment.) In addition, borrowing by for-
eign subsidiaries of U.S. corporations has increased,
reducing the need for outflows from the United
States.

With these adjustments in financing, U.S. cor-
porations continued their extraordinary expansion
of plant and equipment expenditures abroad. Out-
lays in 1965 were more than 20 percent higher than
in 1964; a further substantial increase is estimated
for 1966, to an amount nearly double the outlays in
1962. The increase from 1965 to 1966 in U.S. manu-
factuiing investment in EEC countries may have
been more than one-third.

Foreign Capital. Higher yields on U.S. securities
in 1966 attracted a large inflow of foreign capital.



Table 31. — United States balance of payments:
Capital transactions, 1960-66

[Billions of dollars]



Type of capital
















transaction


1960


1961


1962


1963


1964


1965


1966 1


U.S. private capital.
















net -


-3.9


—4.2


-3.4


— 4.B


-6.B


-8.7


-3.6


Direct investments.


-1.7


— 1.6


-1.7


-2.0


-2.4


—3.4


-3.2


New foreign secur-
















ity issues


-.6


-.B


-1.1


—1.3


— 1.1


-1.2


— 1.2


Other transactions
















in foreign
















securities*


— .1


-.2


.1


.1


.4


.4


.7


U.S. bank claims -


-1.2


-1.3


— .B


-l.B


-2.B


.1


.3


Other claims


—.4


-.6


— .4


.2


-1.0


.3


-.8


Foreign nonliquid
















capital, net


.4


.7


1.0


.7


.7


.2


2.0


Direct investment- _


.1


.1


.1


(3)


(')


.1


— .1


U.S. securities
















(excluding
















Treasury
















issues)


.3


.3


.1


.3


— .1


— .4


1.1


Long-term U.S.
















bank liabilities -


(=>)


(3)


(3)


.1


.2


.2


.8


Other-i


— .1


.3


.8


.4


.B


.4


.3


Foreign nonliquid
















capita], net


0.4


0.7


1.0


0.7


0.7


0.2


2.0


Plus: Foreign private
















liquid capital, net


.B


1.0


-.2


.6


1.6


.1


2.3


Less: Increases in non-
















liquid liabilities to
















foreign monetary
















authorities'






.3


(3)


.3


.1


.6


Equals: Foreign cap-








ital excluding offi-
















cial reserve trans-
















actions, net


.8


1.7


.B


1.3


1.9


.2


3.9



1 First 3 quarters at seasonally adjusted annual rates.

2 Includes redemptions.

3 Less than $B0 million.

■* Includes certain special government transactions.
^ Included above under foreign nonliquid capital.

Note, — Detail will not necessarily add to totals because of
rounding.

Source : Defpartment of Commerce,



particularly into Government agency obligations and
certificates of deposit issued by U.S. banks. Foreign
official agencies and international organizations
shifted a substantial volume of liquid dollar claims
into these instruments.

The inflow of foreign private liquid capital that
occurred in the third quarter of 1966 was particu-
larly large. U.S. monetary tightness provided a
strong pull to such funds. Some of the inflow clearly
reflected a movement out of sterling during the pe-
riod of acute pressure in July and August. Although
an upward trend in private foreign demand for dol-
lar balances is to be expected, the surge that
occurred in the third quarter will obviously not con-
tinue and may be partly reversed in the future.

Most of the inflow represented borrowing by U.S.
banks from their foreign branches as the home of-



FEBRUARY 27, 1967



348



fices of U.S. banks responded to tightness in their
reserve positions. The foreign branches, able to offer
higher rates to depositors than those allowed in the
United States, gathered a substantial volume of
short-term funds abroad. Although this flow of
funds did not reduce the U.S. deficit on liquidity
account, it did prevent what would otherwise have
been a larger flow of dollars into the hands of for-
eign official monetary agencies, and thereby placed
the official settlements account in substantial surplus
in the third quarter. It probably held down the loss
in U.S. reserve assets at a time when there was
temporary deterioration in other parts of the bal-
ance of payments.

Prospects and Policies for 1967

The U.S. trade surplus should resume its growth
in 1967. Indeed, improvement may have begun in
the fourth quarter of 1966. Success of the domestic
economic policies described in Chapter 1 will be es-
sential to improvement of the trade surplus. A mod-
erate pace and more balanced pattern of domestic
economic advance should lower the ratio of imports
to domestic income from the peak recorded in 1966.
While imports grow at a slower rate, export expan-
sion should continue to be strong, given favorable
growth rates in foreign markets and the increase in
dollar earnings enjoyed by foreigners in 1966. The
easing of domestic demand pressures and more
stable prices should enable U.S. producers to take
full advantage of export opportunities.

In addition, the U.S. Government will undertake
further active efforts to promote exports, in part
through expanded credit facilities of the Export-
Import Bank. Steps are also being taken to attract
a substantially larger number of tourists to the
United States. The special task force on travel
which the President will appoint in the near future
should lay the groundwork for a greatly intensified
long-run effort in this area.

Military expenditures abroad will continue to be
large, although they will probably grow at a slower
rate than in 1966. At the same time, the excess of
investment income receipts over payments should
show a substantial growth. The surplus on goods
and services, then, should improve in 1967.

Just as the capital account of the U.S. balance of
payments last year benefited greatly from the sharp
tightening of monetary conditions, relaxation of
credit could create pressures in 1967 for increased
private capital outflows and reduced foreign in-
flows. This makes it especially important that the
programs to limit capital outflows be continued and
strengthened.

Strengthened Voluntary Programs

The 1967 guidelines for the Federal Reserve and



the Department of Commerce voluntary restraint
programs, issued last December, reflect these con-
siderations. Commercial banks by late 1966 were
more than $1.2 billion under their Federal Reserve
guideline ceilings. To limit the potential increase ins,
total foreign lending during 1967, the Federal Re-
serve asked each bank to continue to observe,
throughout 1967, its existing ceiling of 109 percent
of the claims outstanding as of the end of 1964.
Banks were also asked to use their leeway under
the ceiling only gradually — not more than one-fifth
of it per quarter — beginning with the fourth quar-
ter of 1966. Moreover, to assure that such credits
as are extended will be devoted primarily to the
financing of exports or to meet the credit needs of
developing countries, any increase in nonexpert
credits to developed countries is to be limited to 10
percent of the leeway existing on September 30,
1966. New and greatly simplified guidelines were
also issued for nonbank financial institutions.

The guidelines for the Department of Commerce
voluntary program to restrain direct investment
outlays of business firms abroad were also strength-
ened. The ceiling on direct investment outflow plus
overseas retained earnings for the average of the
two years 1966-67 was lowered to 120 percent of
the 1962-64 average. With the strengthened pro-
gram, the total of direct investment outflows — net
of borrowings abroad — and retained overseas earn-
ings in 1967 is expected to be below the actual level
now estimated for 1966. The program will continue
to permit the expansion of U.S. plant and equip-
ment expenditures in those countries covered to the
extent that the expansion can be financed from for-
eign sources. It also remains a fully voluntary pro-
gram, confined to investments in developed and oil
exporting countries.

Extension of lET

As a further measure to strengthen existing pro-
grams, the President is requesting a 2-year exten-
sion of the lET, now scheduled to expire in mid-
1967, and is asking for authority to vary the
effective rate of the tax between zero and 2 percent
a year. By present law, the tax adds 1 percentage
point, in effect, to the annual interest costs of those
foreigners subjfct to the tax who borrow at long
term in the United States or who sell securities
to U.S. citizens.

The discretionary authority sought by the Presi-
dent would permit a rapid and flexible response to
changing monetary conditions at home and abroad.
Although the present 1 percent rate has virtually
eliminated new security issues of countries which
are not exempted, the current rate could prove in-
effective, if foreign countries do not lower their high
interest rates while U.S. monetary conditions ease.



344



DEPARTMENT OF STATE BULLETIN



BALANCE OF PAYMENTS
ADJUSTMENT POLICIES

As countries grow at different rates and in dif-
ferent ways, payments imbalances are bound to
arise. The adjustment policies of each country will
directly affect not only its payments balance but its
own internal economic performance and the pay-
ments balances of other countries. Therefore, pay-
ments adjustment should be pursued in ways com-
patible with each country's major domestic
objectives and with the broad interests of the entire
international community.

Report on the Adjustment Process

During 1966, important progress was made to-
ward developing a greater international consensus
on policies best suited for adjusting payments im-
balances. A report by Working Party 3 of the
OECD, prepared by representatives of the ten major
industrial countries, carefully explored the nature
of the adjustment process and pointed to various
possibilities for improving it.

The report recommended various ways of
strengthening national policy instruments and out-
lined a set of informal guidelines regarding appro-
priate adjustment policies. In addition, it suggested
a number of steps to improve adjustment procedures
through greater international cooperation, including
collective reviews of countries' balance of payments
aims; the setting up of an "early warning" system
for prompter identification and better diagnosis of
payments imbalances; and the strengthening of in-
ternational consultations with respect to the shar-
ing of responsibilities for adjustment. These sug-
gestions stemmed from the report's major
conclusions, which included the following:

First, countries need to formulate their balance
of payments aims more clearly and base their indi-
vidual and joint policies on aims that are mutually
consistent as well as desirable from the viewpoint
of a healthy world economy.

Second, responsibility for adjustment must fall on
both surplus and deficit countries.

Third, countries need to have available and make
use of a wider range of policy instruments — both
general and selective — and to tailor such instru-
ments more finely to the requirements of different
circumstances and multiple policy goals. There is
particular need in many cases to place greater reli-
ance on fiscal policies, and less on monetary policies,
in achieving internal economic balance, because of
the important international ramifications of changes
in monetary policy.

Fourth, the proper combination of policy instru-
ments depends on the situations encountered and
the particular characteristics of the country con-



cerned. No single policy prescription is appropriate
in all cases.

Fifth, countries must take continuous account of
the impact of their actions on other countries. A
special need for international consultation exists in
the field of monetary policy to avoid inappropriate
levels of interest rates.

U.S. Adjustment Policies

The strategy adopted by the United States to
improve its international payments position can be
viewed in the light of the adjustment principles out-
lined by Working Party 3. U.S. policy has been
designed to minimize interference with basic domes-
tic and international objectives of this Nation and
with the healthy development of the world economy.

Monetary and fiscal policies were used in 1966 to
restrain demand in the light of both domestic and
balance of payments considerations. The United
States has continued to pursue a liberal trade pol-
icy. It has maintained its flow of economic assist-
ance to the less developed countries. Direct inter-
ference with international transactions has been
essentially limited to Government transactions and
restraints on the outflow of capital to the developed
countries of the world.

Policy on Goods and Services

Resort to controls over private international
transactions in goods and services has been avoided
as harmful to both the United States and the world
economy. The long and steady progress toward trade
liberalization could well be reversed by even "tem-
porary" restrictions, which could threaten to become
permanent shelters of protection for economic inter-
est groups. Thus, U.S. actions to deal with the
balance of payments problem have maintained the
trend toward trade liberalization in which the
United States has taken strong and consistent lead-
ership since 1934.

On the other hand, vigorous action has been taken
to minimize the foreign exchange costs of U.S. Gov-
ernment programs. There is no precedent for the
economic and military assistance extended to foreign
countries and the military expenditures made abroad
by the U.S. Government since World War II. The
acceptance of these responsibilities has involved a
major balance of payments drain.

U.S. nonmilitary foreign aid programs — which,
net of loan repayments, currently amount to $3.6
billion a year — now have only a limited net bal-
ance of payments impact. This has been achieved
by tying aid so far as feasible to purchases of U.S.
goods and services. Although tying is already
broadly applied and probably cannot be usefully
extended in any major degree, continuing effort is
required to assure the effectiveness of the techniques
employed.



FEBRUARY 27, 1967



345



U.S. offshore military expenditures have been sub-
stantial during the entire postwar period, reflecting
national security requirements and commitments to
allies in an unsettled world. The impact of these
expenditures on the U.S. balance of payments was re-
duced from a 1958 high of $3.4 billion to less than
$2.9 billion in 1965; the Vietnam war caused a
sharp increase, to $3.6 billion, in 1966 (first three
quarters at annual rate). At the same time, deliv-
eries of military equipment sold to foreign countries
rose from about $300 million a year in 1960 to about
$1.1 billion for the full year 1966.

The foreign exchange costs of the security pro-
gram, even excluding Vietnam, remain high. The
United States is prepared to play its full part in
supplying the necessary real resources for the com-
mon defense. But it seems reasonable to expect those
allied countries whose payments positions benefit
from U.S. expenditures for the common defense to
adopt measures to neutralize their "windfall" for-
eign exchange gains — especially when their reserve
positions are strong. This could be done in many
ways. Specific arrangements could be worked out
within the framework of the alliance itself. Such
arrangements could relieve strategic planning from
balance of payments constraints which, in the ex-
treme, could jeopardize our national security and
that of our allies.

Policy on Capital Flows

Over the years, the outflow of U.S. capital has
made a major contribution to world economic
growth. By providing capital to areas where it is
relatively scarce, U.S. foreign investment raises for-
eign incomes and often leads to a more efficient use
of world capital resources. U.S. direct investment
has provided a vehicle for the spread of advanced
technology and management skills. U.S. foreign in-
vestment also has yielded handsome returns to
American investors and substantial investment in-
come receipts for the balance of payments.

Despite the advantages of U.S. foreign investment
both to the recipient countries and to the United
States, it can — like every good thing — be overdone.
And it was being overdone in the early 1960's. Just
as a person must weigh and balance opportunities
for investment that will be highly profitable in the
future against his current wants, so must a nation
weigh the benefits of future foreign exchange in-
come against current requirements. The costs of
adjusting other elements in the balance of pay-
ments may be greater than the costs of sacrificing
future investment income.

It is often true that U.S. investment abroad gen-
erates not only a flow of investment income but also
additional U.S. exports. From a balance of pay-
ments standpoint, this is an additional dividend. Yet
it is also true, in some cases, that U.S. plants
abroad supply markets that would otherwise have



been supplied from the United States, with a con-
sequent adverse direct effect on U.S. exports.

It is sometimes held that the international flow
of capital occurs always and automatically in just
the economically "correct" amount, and that any
eff'ort to affect this flow through government meas-
ures constitutes a subtraction from the economic
welfare of the country of origin, the country of
receipt, and the entire world community. Such a
position cannot be sustained.

While much of the large flow of U.S. capital to
the developed countries is no doubt a response to a
shortage of real capital there relative to the United
States, the flow is also influenced by many other
factors. These may include cyclical differences in
capacity utilization, differences in monetary condi-
tions and financial structure, speculation on ex-
change rates, tax advantages, and opportunities for
tax evasion — none of which necessarily leads to a
more rational pattern of international investment.

High prospective returns on investment in a par-
ticular country may reflect a particular choice of
policies in the recipient country that is quite unre-
lated to any underlying shortage of capital. If a
country chooses to channel the bulk of its private
saving into low productivity uses, if it employs a
tight monetary policy, if it limits access of its own
nationals to its capital market, it will attract for-
eign capital. Restraint on such capital flows may
therefore merely mean that more of the adverse
effect of such domestic policies on economic growth
will rest — as perhaps it should — on the country that
made the policy choice.

Trade restrictions may also lead to a flow of
capital that would not otherwise take place. U.S.
investment in the EEC has, at least in part, been
induced by the desire to get within the tariff walls
erected around a large and growing market. If, how-
ever, a continued movement toward trade liberaliza-
tion may be expected, the economic justification for
some part of these capital flows is lessened.

One major stimulant for direct investment abroad
is undoubtedly the substantial advantage in tech-
nology and managerial skills which U.S. firms often
possess. The international transfer of these factors
may be embodied in a capital outflow independent
of the relative scarcity of capital. Action would thus
be appropriate, not necessarily to curtail the invest-
ment itself, which would interfere with the benefi-
cial transfer of the scarce technology and skills, but
to transfer the source of financing to the area re-
ceiving the direct investment. This, indeed, is the
primary intention and the result of the present vol-
untary program on direct investment.

Finally, differential monetary conditions among
countries can induce capital flows. But monetary
policy is an important and useful instrument of do-
mestic stabilization and growth as well as of balance
of payments adjustment. During 1960-65, U.S. mone-



346



DEPARTMENT OF STATE BULLETIN



tary policy was oriented to serve domestic expan-
sion. In 1966, it contributed to a desirable restraint
on internal demand and to an improved balance of
payments. In 1967, relaxation of U.S. monetary policy
has begun in order to help obtain a better balance of
internal demand. Appropriate use of restraints on
capital outflows in such forms as the voluntary pro-
grams and the lET can usefully supplement mone-
tary policy in promoting domestic and international
goals.

In summary, it is clear that balance of payments
policy should not exempt capital flows from its
compass. It is equally clear that the United States
should be a major capital exporter. The U.S. pro-
grams have been designed to maintain a reasonable
flow of capital, especially to the less developed coun-
tries. Given the alternatives and the need to improve
its payments position, the United States has re-
strained the outflow of capital as preferable to cut-
ting essential international commitments, limiting
international trade, or restricting domestic — and
world — economic gfrowth.

Adjustment Policies of Other
Developed Countries

Actions by the United States to improve its pay-
ments position cannot by themselves assure that the
world payments pattern will be either sustainable
or desirable from an international point of view.
Such a result is only possible through appropriate
efforts of both deficit and surplus countries.

In 1966, various other countries pursued policies
to reduce payments imbalances. The most dramatic
measures were taken by the United Kingdom, fol-
lowing renewed severe speculative attacks on the
pound in the summer, which were initially met by
drawings on swaps and other short-term interna-
tional credit facilities cooperatively provided by the
financial authorities of the major industrial coun-
tries and the Bank for International Settlements.
The British increased the bank rate to 7 percent,
provided a strong dose of over-all fiscal restraint,
adopted selective tax measures to encourage in-
creased productivity, and imposed a temporary
freeze on wages and prices. These measures mark-
edly reduced the earlier deficit, and the United
Kingdom may soon move into surplus.



Online LibraryUnited States. Dept. of State. Office of Public CoDepartment of State bulletin (Volume v. 56, Jan- Mar 1967) → online text (page 61 of 90)