0-169

 

 

 

'1‘ A.
This is to certify that the
thesis entitled
ECONOMIC IMPACTS OF DEFEI‘ISE MOBILIZATION
ON SELECTED COUNTRIES "
presented bg
Onno van Teutem
has been accepted towards fulfillment \
of the requirements for
__I;.__S.o____degree inWal Economics
41/ '
Major professor
Date / a. / 7J‘l ’7
/ ’ '

 

 

 

 

(*3

13001301ch ILTPACTS 0F DEFEI‘IS M BILIZATIOI‘I 3'3 SELECTED COUNTRIES

A “IE-[ES IS

BY

Onno van Teutem

‘

submitted to the School of Graduate Studies of Hichigan
State College of Agriculture and Applied Science
in partial fulfillment of the requirements
for the degree of

L’ASTLIR 0F SCIEIICE

Department of Agricultural Economics
1951

AC K’ IO’TLxu 3'3? 733733

c

The writer wishes to express his sincere appreciation
to Dr. Lawrence W. titt, Professor of Agricultural Eco-
nomics, who originally suggested the problem of this thesis
and'who throughout its preparation, was always ready to ad—
vise and criticize him in the spirit of humane and intel-
lectual cooperation.

He also wishes to express his thanks to Dr. Thomas E.
Cowden, Professor and Head of the Department of Agricultural
Economics, who through his liberal policy, made possible the
selection of a topic which stimulated the writer's interest.
In.many'ways, the year spent at Hich gan State College, the
writer's third year in the United States, was the culmination
of his most pleasant and most instructive acquaintance with

the Forth American people.

ECOEOEIC IEPACTS CF DEFERSE FOBILIZKTIOH CH SELECTED COUNTRIES

BY

Cnno van Teuten

AN ABSTRACT

Submitted to the School of Graduate Studies of Michigan
State College of Agriculture and Applied Science
in partial fulfillment of the requirements
for the degree of

RMSTER OF SCIEECE

Department of Agricultural Economics

Year 1951

Approved M4 jag/152‘

Cl;

 

 

Onno van Teutem

The problem studied in this thesis is a current aspect of he dy-
namics of international economic elations. Larg scale defense mobil-
ization is having a major impact on the world economic situation. The
primary and s condary forces nos generated by military nd political
factors may continue to influence the morld economy for a decade or
longer.

A characteristic of these developments is an increase in the rel-
ative purchasing power of all primary commodities sepecially of the so-
called strategic materials. The result is an increase in effective dol—
lar demand of the primary product exporting countries. Conversely, a
deterioration of th terms of trade of industrial countries has developed.

In order to evaluate the impacts of the rapid changes occurring,
price data were gathered for important primary products and for repre-
sentative types of n ur actures. With this information an attempt was
made to ana yes in general terms the domestic situation in, and to de-
termine the probable impacts of the relative price changes on countries
in different stages of development. The countries were: Australia,
Belgium-Luxemhurg, Brazil, Canada, Colombia, Indonesia, Xalaya, Esther-
lands, Sweden, Switzerland, the United L ugdon, the Union of South if-
rica, the United States, and Venezuela.

This study has been based upon one set of assumptions regarding
future political conditions - namely, a continuation of international
tensions but no all-out war. While the subject is complex, the follow»
ing are th major.findin;s of the study:

1) As a result of the rearmament decisions made by the United States

and other western countries, fundamental economic changes hare occurred

Onno van Teutem

and further changes are pending in nearly all countries of the non-
Soviet world.

2) The terms of trade of many primary product exporting countries
have improved considerably. The specific percent of increase in recent
months does not have much significance in view of the fluctuating char-
acter of primary product prices and probable future changes.

3) The impacts of these developments on under—developed countries
is moderately favorable. In many cases, lack of capacity, Opportunity,
or desire to utilize the opportunities may cause much of the gains to
be dissipated in inflation or in additional income inequalities instead
of being utilized for permanent improvement.

h) Industrial European countries, although burdened by man; in-
ternal and external difficulties, will have the opportunity to improve
their'balance of payments by increasing exports to the under-developed
areas and to the United States.

5) The intediate problem of the "dollar-shortage" has disappeared
and if proper adjustments in policy are now made by the countries cone
earned, the possibility for more permanent improvement appears to exist.

6) A heavy responsibility rests upon the United States to devise
economic policies which will cushion the disturbing impacts of defense
mobilization on the rest of the relatively free part of the world and
to use the present situation as a stimulus to the formulation of perma-
nently constructive economic measures.

Kore detailed analysis of the policy problems and presentation of

appropriate policy measures is provided in the thesis.

Ynfim*j
Cl!.‘-L .. J.
m

I.

II.

III.

TABLE OF CCKTEHTS

:mODUCTIOI'o00.000000000000000.

“ms Boom no SITUATION OF THE 112mm sums III 1950
DomeStic Situation 0 o o o o o o o o o o o o o o o 0

International Situation 0 o c O o o o o o o o o o 0

POST ”"CPLD “AR II CHANGE3 IH PRICE RELATICUSHIPS 0F
PRIEARY PRGDUCTS AND MANUFQCTURJD GOCDS o o a o . 0
Limitations 0: the Data 0 o o o o o o o o a o o o o

Primary'uaterials, Hon—Foodstuffs . . . . . . . . .

TeXtileS o o o o o o o o o o o o o o c o o o o

Finerals o o o o o o o o o o o o o o o o o o o
FOCdSthfS o o o o o o o o c o o o o o o o o o o o o
Fats and C113 0 o o o o o o o o o o o o o o o o

Grains o o o o o o o o o o o o o 0 o o o o I 0

Animal PrOdUCtS o o a o o o o t o o o o o o o o

other Tropical and Sub-tropical Foodstuffs . .
Kanufactured PrOdUCtS o o o o o O o o o o o o o o o
Relative Price Trends of Groups of Commodities . . .

General Implications on the Terms of Trade . . . . .

THE IKPACT ON PRIEARY PRODUCT PRCDUCING COUNTRIES .
Introduction . . . . . . . . . . . . . . . . . . . .
Indonesia and Malaya . . . . . . . . . . . . o o . .
Australia and the Union of South Africa . . . . . .
’razil, Colombia, and Venezuela . . . . . . . . . .

Conclusions on Primary Product b'porting Countries .

11

Irma or c 3131's, Continued

r” W“ pfifi
Chiap'l JR PH'JEJ
“

 

V. II‘I’I‘LCTS (313303533 INDUSTRIAL COLE-{TRIBE . . . . o . . . . . 61

VI. or: POLICY cozzfiIDIILATIozz . . . . . . . . . . . . . . . 75

VII. 813mm A211) COI‘ECLUSIC-RS . . . . . . . . . . . . . . . . 85

I

in
Q

T or RTFERES.ES CITED 0 o o o o O o o a o o o o a o o 91

t4

(D

OURC ‘

O? STATISTICAL DATA 0 o o o o o o o o o o o o o 92

H
L}

I.

II.

III.

IV.

V.

VI.

VII.

VIII.

X.

 

Va us of United States exports and imports of goods

and services, 1955-1950 . . . . . . . . . . . . . . .
Price indices of selected primary materials in major
markets, 19h7~1950 .

0.00000000000000

Price indices of selected.prixexy'materials in major
markets, may and Dec., 1950, with comoarison . . . .
Price indices of selected foodstuffs in major markets,
19h -l9§0 . . . . . . . . . . . . . . . . . . . . . .
Price indices of selected foodstuffs in major markets,
Hay and Dec., 1950, with comparison . . . . . . . . .
Price indices of gr ups of manufactured products of
pecified countries, l9h7—1933, and Kay and Dec.,
1950 00000000000.

Relative price trends of groups of commodities, 19h?-

19500000.0000000000000000000

Unit values of exports and imports and over-all terms
of trade of Indonesia and Halaya . . . . . . . . . .
Indonesian.major exports and estimated effects of

1930 price rises . . . . . . . . . . . . . . . . . .
Halayan major exports and estimated effects of 950
price rises . . . . . . . . . . . . . . . . . . . . .
South African major exgorts a.d stimated effects of
1950 price rises . . . . . . . . . . . . . . . . . .

Australian major excorts and estimated effects of

1930 price T1568 0 o o c o o o o o o o o o o o o o 0

iii

fl“
Fri U431
*

1h

23

27

30

33

h3

SO

A wr 1;: ‘s'yn'rq

3*. jlnl .‘.-J-‘»’

LIST OF T GLES, Continued

 

XIII.

XIV.

XV.

XVI.

XVII.

XVIII.

XII.

Brazilian major exports and estimated effects of
1950 price rises . . . . . . . . . . . . . . . . . .
Venezuelan.major exyorts and estimated effects of
1950 price rises . . . . . . . . . . . . . . . . . .
Colombian.major exports and estimated effects of
1950 price rises . . . . . . . . . . . . . . . . . .
Cryort and import price indices and over—all terms of
trade of selected primary product exporting countries
Defense budget estimates for selected European and
Earth anerican countries, fiscal 1931 and 1952 . . .
Raw material imgorts in industrial countries . . . .
Unit value indices of eXports and imports and over-
all terms of trade of selected industrial countries .
Increases in price levels of selected industrial
countries, May~3ec., 1950 . . . . . . . . . . . . . .
United States exports and innorts from selected

industrial countries 0 o o o o o o o o c o o o o o 0

iv

 

Ch

I!
v'

70

71

FIGURE NW?)

1-.

2.

"‘7 PA"?

United States Exports and Imports, 19145-1950 . . . . 15

Over-all Terms of Trade of Selected Primary Product

Btporting Countries 0 c o o o o o o o o o o o o e o 58

Over—all Terms of Trade of Selected Industrial

6 .
(.2

Ccuntrie o o o o o o o o c c o e o o o o o o o o o

 

CHAPTER I
IE-ITRODUCTIOII

The intermticnal situation has become increasingly confusing in
the first half of the twentieth century. Ymile many would blame rightly
the chaotic political revolutions for this confusion, there seems to be
mp1s Justification for at least blaming partially the deplorable eco-
nomic conditions for creating an envirorment favorable for the growth
of the political vomin of recent years.

Only a short time after the world started to recover from the
grevious wounds received during the second World m, not and terrify-
ing prospects seem to arise once more at the horizon. What the outcome
of the struggle for life between the world's tee giant powers will be
is e question that cannot be smeared by any hmn. Not necessarily the
worst thing will happen, however, and on this assumption it is possible
to study some of the worldwide impacts of the sudden rush to roam the
western countries and especially the United States.

International economic relations have been suffering for almost
to years from a phenomenon which has bosom widely known in recent years
under the name of I'dollar shortage." is the name indicates, the cm
for dollar goods at a certain price was larger than the supply of funds
to pay for them.

Before the outbreak of the first world ”Ear a "dollar shortage" or
cry other currency shortage, would have been impossible. Basically,
following the theoretical pattern described by the classicist writers,
the casparatively free interaction of the forces of supply and demand

2
would secure an equilibrium.both domestically and internationally. If,
for some reason or other, one country developed an eXport surplus and
another country an import surplus, a chain of events started immedi-
ately to correct the situation. Under gold standard conditions, the
country with he import surplus would have to pay gold, which would
flow'into the country with the original export surplus. In the first
country the outflow of gold would result in such changes of relative
prices and shifts in relative demands of "foreign" and "domestic" com-
modities that there would be a stimulus to export more and import less.
Conversely, the country experiencing an inflow of gold would find it
more desirable to import and less desirable to export. This mechanism
'worked surprisingly efficiently in the period before the Tbrld‘wars to
restore a neW'equilibrium in international payments.

It was not necessary, however, to have gold standard conditions
for the operation of an "automatic" adjustment of international equi-
librium. In the first part of the nineteenth century, when England
suspended specie payments temporarily,;/ and for certain currencies in
the interwar period, the fluctuating exchange rates obtained similar
results by'naking exports more desirable in the debtor country and im-
ports more desirable in the creditor country. Exchange rates are prices
and are therefore always able to establish a sound equilibrium. Thus,
the prerequisite for an "automatic" adjustment mechanism.uas either free
gold flows, with the appropriate monetary authorities not attempting to
offset the effect, and relatively fixed exchange rates, or fluctuating

exchange rates and no need for a flow of gold.

l/r See Viner, Jacob, Studies in the Theory of International Trade,
(Harper and Brothers, New York, 1937) for an excellent analysis of
the English currency problems and controversies of the nineteenth
century. Especially Chapters III and IV.

3

With the increasing complexity of the modern economy it seems more
and.more likely that a return to the gold standard will not be attempted
again and is not even desirable. The logical alternative would be to
let exchange rates fluctuate freely‘while the various national govern-
ments would take domestic measures to insure a high level of employment
and a relatively stable economy;

First under the impacts of the first World war, when many materials
were extremely scarce and later with the occurrence of serious fluctua-
tions of the business cycle, rationing and price fixing, two inseparable
items, were introduced increasingly into the economic system. At first
taking the form of commodity'rationing, currency rationing rapidly fol-
lowed and started to dominate the scene. Exchange rates were fixed,
the gold standard was abandoned, and domestic financial and monetary
policies were solely directed at the maintenance of a minimum amount of
economic stability, without sufficient regard to the international bal-
ance of payments. In other'words, the mechanism of adjustment of eco-
nomic relations was not allowed to operate freely, in fact, many meas-
urea were specifically designed to counteract the operation of the mech-
anism.

There still would not have been any Specific reason.for the occur—
rence of a "dollar shortage" rather than a "sterling shortage," had
not the two‘Wbrld'flars broken out, fought mainly in Europe and paid
for mainly by EurOpeans, had not the United States continued uninter-
ruptedly to grow strong and self-sufficient, and had not the Asiatic
uprisings resulted in economic setbacks in large, formerly European
colonial areas. Furthermore, the American tariffs, greatly increased

in the interwar period and especially designed against imports of

h
manufactures, made it very difficult for the rest of the world to bal-
ance its dollar accounts. But after these events and with the post
World war II exchange rates fixed virtually'at the prewar level, it was
not surprising that a tremendous demand for fimerican goods deve10ped
hand in hand with a worldwide "shortage" of dollars. The exchange rates
or dollar prices had been set too low, or in other words, the degree of
inflation in.most countries had been too much larger than in the United
States to enable world trade to flow along a natural pattern. The
large degree of fixity in the various national economies had become
one of the most burdensome factors in postwar reconstruction.

In such a situation any autonomous event having economic impacts
on one or more countries, changes the outlook for the possibility of
reaching a new equilibrium either for the‘bettcr or for the worse, by
changing relative price levels and by influencing, in such a way, the
deviation existing between fixed exchange rates and "true" equilibrium
exchange rates. It will be the purpose of this study to investigate,
in this light, the probable impacts of the new defense efforts on cer-
tain countries.

Under the impact of the outbreak of the Korean war and the deci-
sion of the'western world to rebuild its defenses, prices of especially
primary commodities soared in'world markets. Since prices of products
imported by primary product exporting countries have not risen as much,
it is clear that important shifts in the terms of trade have occurred
and perhaps the pattern will remain influenced by the defense factors
for a considerable time.

The main.task of this study will be to evaluate the apparent im-

proved position of many primary material producing areas, as a result

S
of the rise in.demand for vheir products, and also the apparent worsened
position of the United States and, to an extent, other industrial coun-
tries which buy the primary'materials and man ’acture then into other
goods. Two main hypotheses arise now:

(1) Recon price rises of primary products, if consolidated, will
improve the economic position of the areas supplying the products to a
considerable extent.

(2) The United States as the financier of the largest part of the
rearnament of the fest, will either experience relatively larger price
increases than other western, especially'E ropcan, countries, or will
be compelled to restrict her exports. In either case, European goods
would flos'nore easily to the United States and to third markets exp-
plied by the United States.

Because of the fact that the various primary product supplying

countries are not affected similarly by the price rises during 1930, and
that industrial countries are affected differently acccr‘ing to Witt
primary products they import and what their original economic position
was, a set of countries have been selected for studv, representing var-
ious stages of development and different conditions. They are: Canada,
the United States, Brazil, Colonbia, Venezuela, Union of South ifrica,
Australia, Indonesia, Malaya, the United Kingdom, the Benelux countries,
Switzerland and Sweden.

After having reviewed the chain of events started by the Korean
outbreak (Chapters II and III), the procedure will be to determine for
each country and for the groups of countries, as far as possible, how
much, if any, they stand to lose or gain from the developments, under

certain assumptions, (Chapters IV and V‘.

6
In the light of these findings an ttenpt W111 be made to dis-ores
certain aspectso th e Uni ed States foreign: economic polio ie. a, as they
exi. t at present or as the;r might function better to attain their stated
objectives (Chapter VI).

As :2ir3.-- as the scope of these- objectives seems and as involved as

many of th- pro le .-s me io ed are, his report must not be seen as the
result of a prof 112‘. and detailed stud; . It rather attempts to outline
in a gene r‘al y xvi-at lo: ically can be expected to he: pen wi+ him the

next fe.; years on the basis of certain existing trends and on the ”meals

I‘

of some limiting assumptions.

CHAPTER II
T: IBCOIICEIC sr'rm'nczx CF '12:}: 12:17. STATES 111 1950

For the second time in one decade the economy of the United States
was shaken up vigorously under the impact of international political
developments. Both the United States and other western nations saw
themselves exposed to a large degree of insecurity because of the in-
adequacy of their defense machines and realized that fundamental changes
had to be made in their respective policies to stem the tide.

While, at the end of the year, the Korean War was still undecided
and changing in its outlook, it had become fairly'clear by then how
much'would.be required of the economy during he coming years and what
would be the strains developing in the absence of a total war.

Public opinion seemed to have reversed itself in a very short time.
'What had shortly before appeared to be burdensome surpluses now became
inadequate stockpiles or even critical shortages, while the actual
quantities needed certainly did not change that rapidly;

The United States, for the first time in history,is looked upon
as the unquestioned political and economic leader of the West and will,
in this function, pay.for most of the increased defensebill. In View
of this it seems useful to abstract from political complications and
review briefly the economic situation of the United States in 1950,

both from a domestic and from an international viewpoint.

Domestic Situation
After five years of peace adjustments and increased civilian.pros-

perity, the economy, previous to the Korean outbreak, was at a high

n
(2

level of antivi; . The mild "inventory" recession of 19 h9t as follo‘nd

'n the first half of 1950 by increased activiLV in all sectors so that

H

une.Nl0"u t was declining and at about five percent of the total ci—
vilian labor force. Industrial ;:rodoction was booming at levels close
to two times the pr— World'ma r II fi‘ re and prices and wages were ris—
ing. Puroha see of durable goods, which had approached the prewar rela-
tion to income in lTh9, were above that level in the first half of 19:0,
increa sir; rapidly after the Korean outbreak in June, in the anticipa-
tion of sh rtagos.

Althou ii i seen was clear that military expenditures would have
to be in - cased in the futvrc, not until the end of the year was it de-
cide; by how much.

Mfi cal 1232, the last full year of "peace," about $18 billion
had been agent for dwir ct 81m ind irect mil 1 car ypurposes, including ex-
penditures for the a v“ed orces, atomic enorfiy'projects, stockpiling
req"irenents and foreign military and eoononic aid. This an cunt ,how-
ever, does not take into consideration veterans! payments, interest on
the public debt, etc. which at least partially should be included in
"military expenditures." The Council 01 Economic Alvisers to the Pres-
ident estimated these expenditures for fiscal 1951 and 1932 together

3/ .
to approach 31500 illion. In percentages of the gross national pro-
duct t? is would mq ire an increase from seven at the end of 1930 (an—
nual rate of $20 billion) to perhaps eighteen (annual rate of 330 hi1—
lion) a th end of 1951.

In 19h0 the situation was entirely'different. 3ith more than

eight million workers unemployed, 1h.6 yer;ent of the civilian labor

 

.glfi Council of Economic Advis.ers to th l'resiaent, The innual Economic
Review, Jan., 1951, p. 67.

9
force, and rith otier resources unewolovel to a similar extent, rapid
increases in production were possible. ft the end of19LO, military
expenditures were at the rate of four percent of the gross national
prop not. This percentage increased to 1; by the end of l9Ll and 38'by
tlxe end of 19L2 to reach a pee}: of about L5 in l9L3. Under the 1950
conditions, it would have been a trenendcus effort to bring about sim-
ilar changes but it was clear that the new acceleration process would
be much slower than prior to and in the beginning of fibrld war II, when
there was no hope for peace whatsoever.

In Spite of the large part of resources unemployed, strong inflau
tionar" pressures arose. In order to but d up a war plant large invest-
ment outlays had to be made, cutting down on the amounts available for
current consumltion and as a result of all ftctors the index of consumer
prices re se 25 percent betvreen 19LC and 19L', most of it occurring be-
fore the :er a1 pr ic e freeze in 19L2. Of course, it is c FFicult to
see the real significance oF swc1 a fi: re since there were in adlition
quality diFferences ar ed Qt :entitative restrictions on consumption.

Tit‘i a reco.i inc ‘ustrial capacity inherited from the construction
of war plants Metreen 19LO and 19L3, the situation in 1950 did not seem
to call for as many new outle.ys for construction.

The actual price rises in the second half of the vear were mostly
caused'by the prolonged eff ects of scarc'buying during the summer, re—
sulting in a new round of wage increases. Production, and this was
still almost entirely civilian prosuction, was booming under this stim-
ulus. On a 1935-39 base mt e index of industrial production rose from
196 in June to 217 in October, leveling oFF during the rest of the year.

Unemployment was further reduced.by'a million to only three percent of

10
. . . . . 1
toe CLVilian 3:0: force Consumer ori'c""iicz had risen l percen
n. 1 .‘
in the Lirnt 1131? of the y-eer ro- e e.not'13; £3 perceet from June to ueu

‘ "T" us .. ~ - . ‘ - r u . -. ' -. - r ‘\ Va r“ - ‘
cenoer. "Ac fixdls prices of all coexoxitios a bridczd i; percent dir-

('15

31?53, of which extilca with 24 perc3n; ehi chemicals with 21} per-
cent were tile 13r3:;33t. ‘Tith these price chanjee beginess profitS'were
booming and increased from an annual rate of 29.2 billion in the first
quarter to $L3.3 billion in the fourth quarter.2/

ote: tial inflationary itemS'wero evi eat in the feet that #2303
during 1953 incrm sed,more than prices in guneral and that an estimated
$130 billion of liquifi assets were in the b3ncs of the public. The

general situation see e1 to leave much 1333 room for new'burdcns than

It was clear that t‘ csc panic‘ :y develo; meets could not be allowed
to continue Li oLLJut check 3111 in rijopTLCf a defense proiuction act wee
paSSed by‘Ccnrress, giving the administration w*ie pow re of control.
3x the and oh the ye ea" in tie 3.Licization of shortages of key raw
materials, tivilien cutbacks in consumption hal bee an or;% red for many
co~“o.ic_oo in luding: aluminum, cobalt, cafigiun, cepper, nickel, rub—
ber, 3133, steel and tin. Premarations wage being made to c+3ntralize
purchases of several scarce impom ed ocmm' ‘i,;. in a government ageccy.
Prices 0; nearly all these} .ey meteri 313 rose rzpi ily'during the year,
in some cases to almost three time sthe level before the outbreak of the
hostilities. T1313 will be seen in greater detail in the n:xt cxepter.
General price and 33 3e cor trols seemed likolj'by the enal of the year and
were put into effect during January, lTZl.

As for iniirect controls, taxeS'w rc mo “Pfifelj'iPCP”GSul

.3/ rUido, p. 2020

ll
however,'by even larger wage increases. Consumer credit was restricted
after having increased by almost $2 billion.from.June to September.
Nevertheless, it increased by another billion dollars before the end of
the year to an all time high of $20 billion. Finally, the Federal Re-
serve System increased its reserve requirements virtually to the legal
maximum. Commercial bank loans, however, kept increasing all during
1930; from.June to December they increased.by almost 38 billion to
$52.7 billion!”

In weary, upmrd trends in the level of economic activity, exist-
ing in the beginning of the year, continued at a faster pace after the
Korean outbreak in June under the impacts of inflationary anticipations.
Both government expenditures and economic interference were started on
a large scale. The situation at the end of he year was far from

stabilized.

International Situation

 

The international economic position of the United States was still
largely characterized by the afternaths of‘?orld war II, five years
after its conclusion. As the only'major industrial country spared from
the war destructions, the United States was called upon to fill an ex—
traordinary demand for her goods.

But even under.norna1 conditions, the United States would have
been a strong factor in world trade. In 19h? exports of merchandise
amounted to $11.9 billion or 21.7 percent of the total world exports.
The world's second largest exporter, the United Kimdon, supplied only
little more than half as much during the same period. As for imports,

the United Kingdom.kept its position of world leader with imports

 

y Ibido, Pp. 196—970

12
amounting to $3.2 billion, closely'followed'by the United States with
$7.3 billion.5/

A large part of the United States imports consist of crude mater-
ials and her weight in the market for these commodities is generally
predominant. or such commodities as copper, rubber and tin, of vital
importance in the defense builddup, the United States share of world
imports was respectively'37, SO and hh percent in l9h8;é/rwhile also
in the imports of crude foodstuffs the share was large.

Together with the overwhelming importance of United States imports
and exports in world trade, the circumstance that these large amounts
linvolve only a very small share of the national product giveothe country
a large degree of economic independence. Between 1937 and 19h9 the
percentage of the United States gross national product which was ex-
ported, increased from 3.6 to h.7 under the stimulus of unilateral
grants to aid reconstruction abroad and amounting to more than $5 bil—
lion in 19h9. Imports,on the other hand, made up a smaller share of
the national product after the war. Between 1937 and l9h9 the impor-
tance of imports decreased from 3.6 to about 2.8 percent. While under
peacetime conditions United States imports are closely correlated with
domestic production, these figures reflect the fact that many of the
'Iar induced self-sufficiency factors were kept in the economy after
l9h5. Exports, on the other hand, are composed primarily'of finished
manufactures and are therefore dependent to a large extent on the needs
and purchasing power of the more developed countries.

While basically no changes are to be noted in the composition of

 

5/ United Nations, Statistical Papers Series D, No. 2, pp. 2-7.
{3/ United Nations, 'Revien of International Comodity Problems, 19149.

13
the foreign trade of the United States during 1950, there were several
factors accounting for the changes in quantity and value, influencing
the balance of payments.

In the first place the sustained.recovory'of western EurOpe made
that area return to more normal conditions. As a result, more goods
became available for export and less were needed for import under the
maintenance of the same standard of living there.

Secondly, the effects of the revaluation of currencies at the end
of 19h? began to be felt during 1930. Exports to E. R. P. countries
fell by'more than 30 percent between the third quarter of 19h? and the
third quarter of 1950 while ingorts from that area increased by over
80 percent. At the same time, European goods were made cheaper in third
markets relative to dollar goods, shifting some of the demand of those
countries from American to European goods.

The effects of the above factors were partly obscured, partly
strengthened'by the simultaneous recovery of the domestic economy from
the 19h9 recession. So, at the time that imports from a. P. coun-
tries rose, imports from other areas increased too. Price indices of
all import groups directly affected by the increased domestic demand
rose while unit values of manufactured and semi-manufactured products
showed a small decline. Under the pressure of increased world produc-
tion and competition, export goods generally'declined in unit value.

On top of the above three factors, all'working in the direction
of alleviating the immediate dollar shortage problems, the major fac-
tor influencing United States trade relations in the second half of the
year, of course, was the outbreak of the hostilities in Korea. while

the effects of this factor have certainly not yet'becn felt in all their

1h
force thov are more easil abstracted from other trends. Prices of
1 .
imported crude materials and foodstuffs rose Sharply after June as the

government beran to fill stockpiling needs. Imports from the areas sup-

plying these products increased so much in the second half of the year
that in August and October an actual trade deficit existed.
Table I and Pi ure 1 Show what happened to the gap between the

values of United States ex:orts and imports of goods and services

since IQhS.

Table I. Value of United States Exnorts and Imports of Goods and Ser-
Vicesa’b l9h5-1950. (Quarterly'values at annual rates, bil-

lions of dollars.)
=============:__

Year Exports Imports Difference

 

a=========================================
Year Exports Imports Difference

 

 

19h5 I 17.6 10.0 7.6 19h6 I 13.h 6.7 6.7
II 18.9 11.0 7.9 II 15.6 6.6 9.0

III 12.7 8.0 1.7 III 15.1 7.1 8.0

17 2.h 6.h 6.0 IV 1h.9 7.5 7.h
19L7 I 19.2 v.0 11.2 19h8 I 17.9 10.0 7.9
II 21.1 8.h 12.7 11 17.3 10.h 6.9

III 19.3 7.9 11.h III 16.1" 10.9 5.2

17 19.6 8.8 10.8 17 17.0 10.6 6.h
19h9 I 17.3 10.2 7.1 1950 I 13.1 10.3 2.8
II 17.8 9.7 8.1 II 11.1 10.8 3.3

III 1h.7 9.h 5.3 III 13.9 13.6 .3

IV 1h.0 9.6 h.h IV 13.8 13.6 ..2
‘Source: U. S. Department of Commerce, Survey of Current Business.

bIncome and payments on investments included.

“hile after 19h? declines in exports accounted for most of the
narrowing down of the gap, during the last part of 19h9 and all of 1950
rising imports contributed almost solely to this goal. Both imports
and exports were rising rapidly by the end of 1950 with a negligible

The a;parent trade surplus was the snellest

United States export surplus.

15

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16
since 193?. is government grants and loans really made the continued
high level of exports possible, the approximate balance in the current
transactions meant an accumulation abroad of gold and dollar reserves.
Furthermore, the increased financial strength of foreign countries and
perhaps also some Speculative forces resulted in a large net outflow
of long and short term capital from the United States. In spite of
these encouraging signs, however, it would.be premature to speak of a
new equilibrium in the international economic situation. The trade
deficit of European countries with the dollar area was still large even
with the maintenance of very strict import controls on dollar goods.

An important improvement would be reached when dollar surplus countries
‘would shift their demand for manufactured goods away from the United
States to other countries but the nenly accumulated gold and dollar re-
serves were as yet primarily used to pay off old dollar obligations and
strengthen their financial position. These factors, however, seemed of
only temporary character.

In summary, a worsening of the terms of trade and an increased do-
mestic demand were responsible for the virtual elimination of the United
States export surplus of goods and services during the year 1950 in
Spite of continued large unilateral grants to foreign countries. This
balance on the current account did not represent a new equilibrium or
solving of the dollar problem under the existing conditions inasmuch
as no stability can be seen in a situation as subject to variation as

a halfdwar, halfspeace economy.

17
CHAPTER III

POST “CWLD WAR II CHANGES IN P3103 RVLATIGHSHIPS
OF PRINARY PRODUCTS AHD EAUUFACTURED GOODS

A very important factor to consider when attempting to measure
certain developments in their effect on the economic position of a
country, as it is the purpose of this study, is the "terms of trade"
of that country or of a product important in the trade of the country.

The expression "terns of trade" will be used in the following
pages to signify'what Viner calls the "commodity terms of trade,“ or
the relative purchasing power of a given unit of exports in terms of
imports.1/ Changes in the terms of trade are then measured.by the
relative price changes of imports and exports. In the measuring of
the terms of trade at any moment many statistical problems arisejv'but
these difficulties do not apply to the measurement of changes in the
terms of trade. Since the volume of trade is not constant, changes in
the terms of trade are only an imperfect measure of the economic posi-
tion of a country. However, on the assumption of an inelastic demand
for and supply of primary products, it appears that at least for these
products, measurement of the changes in the terms of trade give a fairly
reliable index. Furthermore, the computation of price relatives is a
rather simple procedure for these products and in the present circum-
stances, the relative price changes have been large enough to make cer-
tain conclusions possible.

While not much can be said about changes in the subjective utility

 

.I/l‘Viner, Jacob, op: cit:, p. 558.

§/' Ibid., p. 565. See also: United hations, Relative Prices of fine
ports and Imports of Under-developed Countries, p. 131 ff.

13
functions, an important factor in appraising the present situation will
be the changes in the volume of trade, capacielly trade in manufactured
products which might decline because of the increased defense require—
manta.

With volumes of trade remaining the same, changes in prices or
unit values of exports relative to imports result in more or less funds
becoming available for the development of a count y'and the financing
of adiitionsl imports. In addition, these changes in relative prices
or the terms of trade affect the credit position of a country by sprOVh
ing or worsening its ability to meet debt service on foreign loans.

This chapter will, in a general wag, describe the present position
and present trends of the purchasing power of certain commodities and
groups of commodities in terms of other goods. For this purpose, monthly
average spot prices were compared for a number of important, interna-
tionally traded primary materials and foodstuffs over the post fibrld
war II period and unit value indices for various kinds of manufactured
goods were compared for several industrial countries of different char-
asteristics;

Naturally, there are limitations to the data and care should.be
used in interpreting then. In general, not much weight should be at—
tached to small changes in price relationships. The trends of the re-
cent period, hosever, have been rather clear and,on the whole, impor-
tant changes have taken place in the terms of trade of the various groups

of commodities.

Limitations 9; the Data
he major limitations of the data gathered are:

1. Prices of crude materials are subject to wide fluctuations from.year

2.

3.

he

6.

19
to year and even.within years because of the generally'low elas-
ticities of demand and supply.

The selection of the base period influences results considerably.
For primary materials and foodstuffs the base used here is 1937.
This was the last full year before the war when business was

rather norn.1. In 1935 a general business recession occurred, es-
pecielly noticeable in the prices of primary products. These pro-
ducts declined on an average about 20 percent in price between 1937
and 1933:]

The index numbers are computed from monthly averages of prices for
specific grades of a commodity in mostly United States markets.
Prices of other grades may have moved differently. The selected
grade may or may not be representative of a certain country's ex-
ports of the commodity.

Prices are often different under various types of sales contracts
and.arrangements. The United Kingdom essecially, has many'long time
purchasing agreements with raw material exporting countries and in
this way, special advantages are derived.

Prices are derived from different sources, quoting prices at differ-
ent points in the marketing channel. Thile most figures compare
closely with those found in the United fictions study, prices for
fats and oils, here derived from.the United States Department of Ag-
riculture seem to be on an average more than ten percent higher.
Again this calls for care in interpretation.

United States markets are taken generally'because of easier access

to the data and'because of the representativeness of United States

 

Relative Prices of Exports and Imports of Under-developed Countries,
92. 22:31.0, p. 31.

7.

8.

10.

20
markets in most world commodity'prices. However, for commodities
such as wheat, corn and cotton, the American price support meas-
ures influence the results. These prices taken from United Kingdom
markets are converted into dollars at the official rates of exchange
prevailing.

The selected commodities include many, but not all, of the important
primary connodities entering'world trade. Therreprcsent the ones
for which the prices were more easily available and include most of
the commodities dealt'with in the United Eations study.

In appraising the price changes between May and December of 1950,

no attempt was made to adjust for seasonal variation.

All indices, but especially the unit value indices of manufactured
goods, have the disadvantage of differences of weighting and comp
parability between the goods of different countries. Changes in

he various exchange rates and also changes in quality and composi-
tion of each group of goods tend to present additional difficulties.
Fluctuations in prices of United States commodity'markets, even
when representative of world prices, do not show the same percentage
changes as the quotations in markets of the countries producing the
commodities because of the marketing and transportation costs. If
these costs would be ten percent of the value of a product, a New
York price rise of SO percent'would amount to a 56 percent rise in
the export revenue of the producing country unless shipping costs

increased with a price rise of the commodity.

Primagz Materials, Hon-foodstuffs

Prices of nearly'all primary'materials increased after the war be-

cause of world shortages, developing out of the need to reconstruct

21
war—torn areas. fith the exception of textiles and lumber, however,
these price rises were small compared to the price rises in foodstuffs
and also in manufactured goods. The general picture for the primary
material group as a whole was one of moderate and continued price in-
creases throuxh 1958. In L 49 the inned.ia te pentdup demand developed
during ”orld Var II became largel y saturaiei a21d a more normal supply
and demand situation developed for most pro.ucts accompanied by price
declines. Then sharp price rises followed in 19% ,starting even be-
fore the Korean outbreak and bringing the average price level for the
group of commodities to considerably above the postwar peak of lQhS.
Tables II and III present price relatives for the primary'materials.

.EEZEEEEE ‘ The textile group in contrast witil oth .er primary ma-
terials had risen sharply in price after Torld Tar II. In the case of
jute this could be explained by the fact that large areas of Pakistan
and India ., producing almost the whole of the world's supply, had been
diverted to food production. Table II shows that wool prices were the
lowest of the group but this is ;)artially due to tile fact th at th grad
selected does not properly represent the instralian and South African
clips. Large stoc :s of however, had been accumulated during the
war and were used to fill most of the pcstrar demand. T? e decline of
stocks could in this way prevent prices from rising very much. During
1950, the situation was quite different. wool stocks had been largely
depleted and the stockpiling demand of see tern countries accounted for

82 percent price increase between may and December. Prices of other
textiles, however, also responded quickly to the new demand and gener-
ally rose to new record levels. Sisal, already'very high in price, new

rose to more than five times the prewar level. Only jute did not seem

22

Table II. Price indiccs of selected primary materials in major markets,8
19h7-1950. (193? a 100)

Borld trade,
1933f
(millions
of dollars) 19h? 19h84_}9u9 1930

 

 

Textiles:
C4314:1011.00000000000000.0000... GC’C 292 286 268 307
T001 00.00000000000000000000. kg; 126 128 126 170
{Lew 81.13:: 00000000000000.0000. 121i 236 138 139 1;;
.Jutec 0 00.000.000.00000000000 E? 336 393 372 33%
SiSfil 0.000000000000000000000 2; 293 332 3&3 39C
A‘»’:.‘-ra;e‘£..................... m 229 220 211 2147
Nin+31alszb
P e+roleum.................o.. hhe 159 217 217 222
coppel00000..0000000000000000 323 159 107 lhb 161
Tin.000000000000000.0000.00.0 195 lhh 183 18h 176
Lead.00000000000000.000000000 7h 2uh 330 256 221
Zinc...................o.o... 3L 161 m8 186 213
p.v0ra;'l:eeo..000000000000000000 “'— 162V 201 191 19S
other:b
Lum58r00000000000000000000000 hBh' 278 31h 286 33h
Hides and 8k1n300000000000000 310 160 160 133 157
RUbberoo000.0000000000000000. 2v? 107 113 91 213
Averagee....o................ “" 195 212 186 2h?
General avera93380000000000.0000... ““ 197 212 197 230
‘

NeW’York , Chicago, Boston, London.

bSource: U. S. Jegertment of Commerce, Survey of Current Business.
cSource: Food and Agriculture Organization of the Unite Nations.
dLondon quotation, converted into dollars at the official exchange rate.
a"'{eiutr'dted by'value of world trade, 1935, in each commodity.

fSource: United Iations, Relative firices of prorts and Imports of Un-

der-developed Countries, l9h9, p. 29.

to be affected. Jute prices continued their decline throughout the
year, as production recovered more normal proportions.
rigerals - The mineral group, as a whole, increased relatively

little in price in the immediate postwar years and after l9h8 price

23

Table III. Price indices of selec+ ed or‘r“1¢ r serials in major mar-
kets, ray and Dec., 195 0 vi th 00‘7“r*:0n. (1937 I 100)

 

_L

iercentage increase or

 

Nay' Dec. decrease (-) Dec., 1950
l 9 5 0 Since 1939 Since fisy, 1950
Textiles:
COttOflaoooooooooooooooo-279 361 3; 29
YD’IrOOlaOOCCOO00......O... m2 259 106 82
HEW Silkaoooooooooooooo 1L3 219 58 53
JUUSD 3.0000000000000000 3:1 319 ’lh ‘ 9
Sl_831w 0000000000900... 333 509 ha 53
Averaged...ooo...c.o.ao 221 313 61 h?
Hinerals:a
Tetroleum.............. 222 222 2 0
CapperoaOGOoooooooooo-l 1L9 12h 26 23
TinoooooooooOOOGOOOOOOO 3 267 kg 87
Lead.-................. 195 283 11 h;
Zinc-couchuoooouooooooo 18L 268 hh hé
Avera gedooooooooooooooo 183 22h 19 2?
Other:a
Lumber........o........ :16 3h1 19 8
Hides and.skins........ 128 208 56 ’ 63
Rubber...............o. 1h? 308 3h0 150
“veraged............... 212 309 119 6b
General averaged. . . . .. o. u o. 206 233 63 h?

V_ ~—

aSource: U. S. Department of Commerce, Survey of Current Business.

bSource: F001 and Agriculture Organization of the United Nations.
cLondon quotation, converted into dollars at the official exchanre rate.
d.¥eighted'by value of world trade, 1933, in each commodity.

declines were registered for all products included. The relative posi-
tion of mineral prices changed rapidly during 1950, tin leading with an
increase of 87 percent between May and December. The fact that the
other minerals did not increase as much in price as tin might be ex-
plained by the fact that tin exports are shfivwlied for a large part by

the political tension area of Southeast Asia. Comparing copper and tin

2b
prices, therefore, both essential products for armament purposes, seems
to indicate that political scares accounted for part of the price in-
creases of tin, rather than the actual demand and supply situation alone.
Petroleum was the only primary product not affected pricewise by the
1950 events.

91:33; - Of the remaining; commodities, rubber was clearly in a sim-
ilar position to tin, with Indonesia and relays supplying over three-
fourths of net world exports. In 19M, rubber prices had hardly in-
creased over 1937 and in 19h9 the average price was actually lower
than before the war. During 1950, however, increased demand, partly
caused by the Korean situation, resulted in a price level more than
four times as high as in 191:9. These spectacular increases, if con-
solidated, would alleviate the dollar shortage considerably, since
1.5alayan rubber has long been one of the most important sources of dol-
lars for the sterling area. Hides and skins also recovered sharply
from the 19h? price declines, while lmn‘oer prices, already very high,

increased a little more.

Foodstuffs

Except for textiles, foodstuffs rose to much higher levels after
the war than most primary industrial materials. This was due to the
lagging prices of minerals and the desperate "inelastic" need for food
of most of the world. After two years of relatively stable food prices,
price declines occurred in all groups during 19h9. The subsequent re—
covery in the beginning of 1950 continued throughout the year, but at
a much slower rate than primary material prices. Althomh new price
rises occurred during;' 1950, the group average for the year was still

considerably below the 19148 peak. The Secember price level approached

25
this peak however. Tables IV and V show the price movements of this
group of commodities.

2222.§2§;221§ alThe serious Shortage of the commoditias included
in this group resulted in very large price increases after'World war II.
The group average price level was at more than three times the 1937
level throughout 19h? and l9h8. Following the recovery of production,
however, most fats and oils declined in price in varying degrees. Such
products as copra and palm oil declined much less than.such products
as soybeans and cottonseed oil. In l9h9 there was a variation of 185
points between the prices of copra (338) and cottonseed oil (153).
Since the price indices of fats and oils are computed from a different
source than the other indices, however, they are not entirely compar-
able. Comparison with United fiations fig res seems to indicate that
fats and oils prices did not increase as much as shown in Table Iv.l9/

The events of 1950 resulted in a slight upward price trend in fats
and oils. Only cottonseed oil registered an important price gain from
19h? to December, 1950. Linseed oil and flaxseed were below the 19h9
level in.December, 1950.

-' gaging ‘ Grains did not reach as high price levels as fats and
oils and the postwar’price declines generally began earlier. Rice was
the only grain to registeralarge price increase between 19b? and l9h8.
This is important because of the influence of rice prices on the costs
of production of such products as rubber, tin, and oilseeds. The de~
cline of other grain.prices, however, resulted in.an.increase of Far
Eastern demand for these cereals, easing the rice shortage. Price

declines of all cereals stopped in 19h9 and during 1950 moderate price

 

19/ or. Limitations of the Data, No. 5, supra, p. 18.

26

Table IV. Price indices of selected foodstuffs in.msjor markets, 19h?-
"_1950. 1937 - 100)

   

.or1d t do
1938gal ’
(millions
of dollars) 19h? 19h8 19h9 1950

Animal Products:‘

Butter.......0...o.0........ 30h 207 220 179 181
Beefo00000000000000000000000 222 . 23h 279 236 261
Pork........000..0000.0..... 216 251 2C0 233 227
Cattle...................... 106 225 269 22; 25h
Eggs........................ 96 198 201 228 192
Ch88380000000000000000000000 '92 ' 231 257 199 200
Lard........................ ho 199 107 115 123
Sheep and lamb30000000000000 17 210 233 237 255
Averacer00000000000000000000 "- 199 2b; 211 219

Grains:a
Wheat....................... th 220 207 185 190
COTD000000000000000000000000 220 191 19h 123 1h3
Rice........................ 19? 29h 361 239 239
BBTIBY0000000000000000000000 80 229 207 1h? 170
Ry90000000000000000000000000 L1 318 22; 15h 155
Oats........................ 21 24 237 167 198
Averagef.................... -“ 233 236 177 187

Vegetable oils and oil-bearing

seeds:cg
Linseed 01100000000000000000 110 357 302 2h? 179
Groundnuts.....0............ 93 270 280 283 288
Scybean50000’000000000000000 7h 321 321 215 261
copra.0000000990000000000000 72 388 538 338 385
Flaxseed.................... 50 35h 321 2b? 198
Palm.oil.................... 3k 373 3h1 251 232
CO.LOn563d 01100000000000000 19 Bhl 333 153 207
Averacef..............0..... -—- 338 3&5 260 255

Other tropical and subtropical

products:
Tobaccod.................... 3)9 180 217 206 227
Sugar“........o............. 340 177 160 166 169
COffBG‘OOOOQOOOO00000000000. 263 I 38 Zhl 286 hSQh
T836000000000000000000000000 202 199 212 20h 188
6000880000000000000000000000 8? LI? h7h 287 381

hrAveragsf.................... “- 211 22h 217 26h
General 8V3ragef00000000000000000 ““ 229 2b? 210 229

 

 

See footnotes on bottom of page 28.

27

Table V. Price indices of selected foodstuffs in.major markets, May
and 390., 1950 with comparison. (1937 I 100)

t

 

 

 

Feroentege increase or
May Dec. decrease (-) Dec., 1950

 

l 9 S 0 513:8 l9h9 Since Bay, 1950
Animal products:‘

Butter-0000000000000... 17h 193 8 ll
Beef.........ooo....... 260 292 2h 12
Porkooooooooooooooooooe 29 232 ' 1 1
Cattle...............o. 253 2:3 28 1h
EgfiSooooooooooooooooooo lhg 2C3 15 8

Cheese................. 12h 213 10 12
Lardooo................ 11; 15 3h 3h
Sheep and lambs........ 252 291 23 15

Averajaf....ooooooooooo 208 238 13 1?

Grains:a

Wheat.................. 195 193 5
Corn................... 1h? 15h 25
Riceooooooooooooooooooo 225 272 In 2
Barley................. 179 170 16

Hu
(h ~4Lu\n+4\n<3

Rye........o........... 157 177 15
oatsooooooooooooooooooo 212 227 36

Averagef...o...oo.o.... 188 199 13

Vegetable oils and oil-

bearing seeds?g
LiDBCQd Ciloooooooeoooo 177 188 ”2b 6
GroundDUtaooooooooooooo‘288 272 - 1 ’ 3

soybeans-0.000.000.0000 296 va 3h '- 3
Copra.....o.........ooo 362 h23 25 1?
Flaxseed..........ooooo 211 262 '18 - h
Palm Oilooooooooooooooo 217 295 18 36
Cottonseed Oiloooooooeo 192 282 8h L7
Averagef..........ooo.o 256 27h 6 7

Other tropical and subtrop-

ical product :
Tobacco 0000000000000.- 237 230 2 - 3
sugaraoooooooooeooooooo 16; 180 8 10

Cof’ee 000.000.00.00... 0 hJS 71 17
TeBBOOOOOOOOOOOOOOOOOOO 17h 19h - 5 11
CQCOaaooooooooooooooooo 3&0 hll h3 21
Averagef......o........ 252 277 20 9

General averager............ 223 2h; 15 10

 

See footnotes on bottom of page 2°.

28
increases followed. The variation in relative prices between the grains
was large with rice remaining very high. The effect of United States
price supports limits the representativeness of the data.

M Products - Although postwar price levels of animal pro-
ducts were lower than the price levels of the fate and oils group, they
'were considerably higher than primary material groups such as minerals.

The definite downward trend of 19h? was reversed in 1950 and the
December 1950 price level seemed to approach the postwar peak. Not too
much significance should be attached, however, to price increases dur—
ing 1950 as computed in Table V. The seasonal factor seems to be im-
portant here, especially in the case of eggs.

éthgglzropical agg.5ubtrgpical Egodstuffs - The variation between
the price movements of the comoditica included in this group was, of
course, large since these products are not readily substitutable for
each other. Cocoa and coffee were largely responsible for the 20 per-
cent price increase of this group between l9h9 and December, 1950.
High.prices led to a considerable rise in the dollar earnings for cocoa
exports from the sterling area. he suall Brazilian coffee crop of
19h9419§0 and world scarcity of the commodity exglained the sharp rise

in coffee prices during 19h9 and 1950. With the tea market in London

 

Footnotes to Tables IV and V.

.‘Source: U. S. Department of Commerce, Rurvey of Current Business.

bSource: Relative Prices of Exports and Imports of Underwdeveloped
Countries, 92. cit., p. 29.

6Source: U. S. Department of Agriculture, The Fate and Oils Situation.
Indices of this group are higher than the ones arrived at in
"b" above, pp. 29-30. See limitations of data, No. 5, supra
p. 180

dSource: U. S. Department of Agriculture, Agricultural Prices.
°Sourcec Food and Agriculture Organization of the United.Nations.
rWeighted by value of world trade, 1938, in each commodity.

gBase period, 1935-1939.

hEleven-month average.

29 9
remaining closed, a representative world price for tea is difficult to
ascertain under the present conditionsaly Sugar was one of the com-
modities least affected by the postuar shortage of foodstuffs and also

showed only a minor price increase during 1950.

Hamifactured Products

As a whole, price indices of the various groups of manufactured
products show similar trends in the postwar period as primary product
prices, only with smaller deviations from prewar and with smaller fluc-
tuations after the war. After the initial price increases, he price
level of manufactured products was more or less stabilized in 19147 at
roughly twice the prewar level. 0f the countries represented in Table VI
the indices of the United States and of the United Kingdom naturally
carry most weight since these countries account for a major share of
the trade in manufactured products. The Enited Kingdom price index for
exports of manufactures on a 1938 base ms 183 in 19M. During 1950
price increases for manufactured products generally lagged far behind
primary product prices and the figures suggest that they amounted to
less than 10 percent in most cases betwem 13h9 and December, 1950.

During the second World war, prices of manufactured products pro-
duced by different countries increased in different degrees and there-
fore care must be used in interpreting the data of Table VI. While
most European countries represented use a postwar year as base period,
the United States, Canada and Switzerland still use the prewar base.
The degree of inflation in the latter countries was far 19 s s
serious than in the former ones. With this in mind it appears, however,

that Anerican, British and Canadian exported manufactures increased more

 

£1] Unified Nations, Review of International Commodity Problems, 191:9,
p. .

.33

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a mm as? fie omma 03 mi 0.3 ..........,....$éso$e§a so Began
m m UMNH NHH OQHH MHH OHH OOH QOQOOOOOOOOQOQQIOomWHHPNB .HO MPoHOng
m 3 em? and cams 3a DH 02 _..........::.ueoos Hesse so apnoea
m h UHNH NHH omHH MHH QOH 00H .o............nehspoem:mma Mo mphomxm
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mm hm Ham pom hum oom mmw com o......meHHpHe¢ use Meagan no nthQsH
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OMQH eOOOOOOQOOOIOQQOOOJ00.00.00.00005UQG50
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mH m omH Mud ONH JNH nwfl auH _.........eoanpomwssmslfieen Ho manomxm
OH 0 RH m: as” 8a RH SH ...........:.no§pofis§s so apnoea
wMIlommH .OOO.O.OOOOOOO.Q.COOOQOC..Dassm vgfigm
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c.0mmd anenaeoom use
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. . . .

31
in.price between 19h9 and December, 1950 and especially after the Korean
outbreak, than the goods of the Benelux countries and Switzerland. Of
course, the composition of the various product groups is far from iden-
tical between the countries.

Textile products generally increased most in unit value, consider—
ably more than the average of all manufactures; metal products, also
largely represented in the Dutch index for imports of capital goods and

he Belgian.indices for durable producer goods, increased only slightly
or decreased in price between l9h9 and the end of 1950. Since raw mew

terial exporting countries which are generally under—developed, import
both large quantities of textile products for consumption purposes, and
important amounts of metal capital goods for investment and development
purposes, the price trends of these product groups are of vital impor-

tance to them.

The indices of Table VI are expressed in terms of the various na-
tional currencies and therefore do not take into account the revaluation
of currencies in September, 1939. The United Eingdom.and the Rather-

lands and many other European countries with their overseas dependencies

 

Footnotes to Table VI.

ghot adjusted for relative changes in the exchange rates.

bSource: Foreign Commerce'Weekly, U. S. Desertment of Commerce.

°Average of eleven months, Januarybhovenber.

dIioveniber. _

eSource: U. H. Statistical Papers, Series D; Dominion Bureau of Statis-
tics.

fSource: Yonatsbericht des Schweizerischen National banks.

gAverage of twelve months.

hSource: Eonthly'Digest of Statistics, Central Statistical Office.
1Source: Yaandschrift van het Centraal Bureau voor de Statistiek.
JSource: Bulletin de Statistique, Institut Rational de Statistique.

32
devalued over 30 percent at that time; Canada and.Eelgium-Luxenburg
devalued about 10 percent. In terms of the dollar and other nonrdeval-
ueted currencies, therefore, the products of the devaluing countries
became cheaper.

Another important phenomenon is the 37 percent increase in tramp
freight rates between.uay and December, 1950. Shipping lines are al-
most entirely'owned and operated by the well-developed, industrialized
countries and high freight rates therefore represent higher costs to

under-developed countries.

Relative Lr_i_._c_e_ m 93 93.19333. 92 Comodities

Prices of primary materials and foodstuffs had increased generally
more than.prices of finished manufactures during Forld Tar II. Food-
stuffs as a whole increased considerably more than primary materials
except textiles. The disappearance of the most serious postwar food
shortages as production increased, however, together with an increased
demand for raw materials as industrial countries recovered industrial
capacity resulted in.a narrowing down of the gap between the prices of
these two major groups. Price declines occurred in 19h? for all pro-
ducts but they were sharpest for the fats and oils, the grains and the
animal products groups and the smallest for textiles and.minerals. As
a result of the developments during 1950 the process of equating raw
material prices relative to food prices continued. This time prices of
textiles and minerals rose fastest, since these groups ccntain.many com—
modities directly'affected by the stockpiling demand and'by the increased
armament production. Fats and oils, grains and animal products also ap—
preciated in price during 1950, but to a lesser extent. During 1950 the

.favorable price position of foodstuffs relative to primary materials was

C:

 

,1... arrow...) s-“ s - .rEL .4... 9rd,...” 1 s t... .P. I

 

33
reversed. 'fihile in 19L 7 foodstu fs had increased by about 15 percent
more_than primary'materials, the December, 1950 situation was the re-
verse. Both groups had risen in price but primary materials were now
about 15 percent dearer than foodstuffs.

Iaru2actured goods, in the meantime, 510.7ed less distinct price
trends. 0n the whole, much more stability'was present. During 1950
the general trend of unit value indices of manufactures was upward, but
relative to the 19L? position then c trenls were not e1 aye strong enough

to offset price declines of 19b? and the firs part of 1950.

Table VII. Relative Price Trends of Groups of Commodities, 19h?-
1950.8 (1937 - loo)__

- M...- .‘v- ”ww‘“ a... .-

   

nwhec.nuPercentmincreasefi
19h? 19h8 19h9 1950 1950 19h9-Dec., 19W

Foodstuffs
Fats and Cils..... 338 BhS 260 25; 27h 6
Grains............ 233 230 177 137 199 13
Animal Products... 199 2h5 211 215 238 13
Other TrOpicalooca 211 22h 21? 25h 277 20
Average........... 229 2h? 210 229 2h5 l5

Primary'ratorials

TfittileSoooosoosso 220 220 2112117 313 61
Elnora-13 o o o s o o o 0 O 0 1‘52 201 191 19) 22:4 19
Other............. 195 212 186 2b? 339 119
Average........... 199 22h 211 233 283 65
U. S. Exoort Hanu-
facturesé........... 182 193 1:1 173 l? 6

 

gSources: Tables II, III, IV,m m1d V.
b1936-49353 am ual average I 100.

:54

Qoncral nolications g3_thc Worms gngraie

 

Duri 3 the period preceding the accord Tbrld Ear, prices of all
p insrg products showed a secular downward trend relative to prices of
manufactured goods. The United Nations estimatedLZ/ that a given quan-
tity of primary exyorts could buy only 63 percent of the quantity of
manufactured hoods it could buy at the beginning of the century; In
the post World War II period.the relative price position of primary
products had in roved but had not reached, generally'Speaking, the
level of the beginning of the twentieth centu. . The period immediately
preceding the Korean outbreak furthermore, brought some price declines
of primary products relative to manufactures and thus a lowering of their
purchasing power. In this light the recent price increases may be seen
as a partial and possibly temporary'rclicf from seriously depressed
prices rather than as a favorable event on top of a prosperous situa-
tion of the primary product siporting countries.

It aspears that PrimaTY'products improved their relative purchasing
power greatly during 1950. On the basis of the above data a similar
quantity of food could buy 11 percent more United States manufactures
in.December, 1930 than on the average in 1939. For primary materials,
non~foodstuffs, this increased purchasing power amounted to 27 percent.
In terms of foreign manufactured goods the purchasing power of the
groups of primary materials and foodstuffs seemed to have increased even
more. These goods did not increase in dollar unit value as much as dol-
lar manufactures, or did not increase at all, basing this conclusion

upon the unit value indices of Swiss and American imports of manufac-

tures of 19h9 and December, 1950.

 

127rVRelative Prices of Exports and Imports of Under-developed Coun-
tries, .92.- 91109 P- 7-

 

 

35’

An important share of the primary products entering world trade is
produced by a number of countries, mostly located in Southeast Asia and
Latin America, while those areas depend on the manufactured articles of
Europe and North America. At a first glance, therefore, it appears that
the former areas prObably had improved their terms of trade greatly dur~
ing 1950. To a certain extent, however, this conclusion is subject to
qualification. Because of the large dependence of some countries on one
or two export commodities for the obtaining of their foreign exchange,
large variations may be expected to exist between the changes in the terms
of trade of individual countries since some of the primary products in-
creased three times in price, while others actually declined between 19h?
and the end of 19:0. Furthermore, many primary product exporting areas
are large importers of food and textile products. Taking an imaginary
example of a country entirely dependent for its export revenue on pe-
troleum and importing large quantities of wool and meat the conclusion
is obvious that the terms of trade of such a country would have turned
seriously against it during 195 . Chapter IV therefore throws some
light on the problems of some of the countries concerned with this problem.

With these qualifications, however, it remains true that the primary
product areas improved their terms of trade during 1950. At the same
time, this must mean that the terms of trace of the industrial areas
worsened. The countries in this area vary considerably in the extent
that they are dependent on imports of certain types of primary materials
and foodstuffs and in their general economic situation before the recent
price changes took place. Considerable variation in their new economic
position and outlook may, therefore, be expected also between the indi-
vidual industrial countries. Chapter V d¢votes some attention to this

side of the prOblem.

36

CHAPTER IV
THE IEPACTS ON PRIMARY PRODUCT PRODUCING COUNTRIES

lptroduction

The economies of most important primary product exporting coun-
tries tend to be very highly dependent on changes in the demand and
supply situation for their particular products. Their trade is largely
complementary'with their exports supp *' g the industrial needs of'well-
developed countries and their imports consisting almost entirely of
manufactured consumption goods and capital goods, often originating
from far away overseas areas. This crucial dependence on foreign
trade, which in.most cases, makes up a considerable part of the total
national income, is still further accentuated by natural conditions
which tend to increase the production and export specialization of the
various countries and areas. The insecure area of Malaya and Indonesia
for instance, is responsible for threeqfourths of the world's exports
of rubber and tin. The skewed distribution of the world's production
of various primary commodities naturally tends to influence critically
the degree to which each area is dependent on a Specific change in
world.denand. Since the United States is a major buyer of most primary
products, the demand situation in that country largely determines prices
of these products. A typical example of this is the temporary drop in
the price of tin in New York from $1.80 on Harsh S, to 31.31; on March 9,
1951. This was the result of a decision of the United States to stop
stockpiling the*metal until prices would.decline to "more normal levels."
Since European countries took advantage of this favorable price change,

however, the tin price soon recovered to about $1.50. The existence of

37
such large price fluctuations in many primary products constitutes a
serious disadvantage to the stability of less developed countries.

With respect to political conditions, tremendous differences exist
between the status, the postwar'political changes, and the level of po-
litical stability in general of the various less developed primary pro-
duct producing countries. This factor, as will be seen later, is impor-
tant when an evaluation is attempted of the effect of certain price in-
creases of export products or of the mobilization in general on the eco-
nomic position of the selected countries. Among the countries selected
for specific consideration are: independent republics, such as the
Latin.American countries and since recently, Indonesia, colonies, such
as malaya, under the direct supervision of the United Kingdom; and areas
such as Australia and the Union of South ifrica, which, although com-
pletely'independent politically, have made certain arrangements with
other countries of the sterling‘area to pool their dollar resources.
Because of such arrangements the improved dollar position of one part
of the area influences directly other parts.

Finally, large differences exist among the less developed countries
in their standards of living. Generally, their'living standards compare
unfavorably with those of western Europe and Herth America. national
income statistics are generally'scanty for the under-developed srees~
but in.a recent estinate of the United Hations, per capita incomes in
such countries as Indonesia and the Philippines as one extreme were
found to be under $SO,'while Australia as the other extreme, fell in the
group of 3600-900, ranking with the United Kingdom and certain more pros-

perous continental countries.;2/ In YiGW'Of the divergent effects of

 

1.1] ‘United Hations, World Economic Report, 19149-50, p. 9.

_ 38
saving and investment on inflationary tendencies under the impact of
the improved trade relations of the various countries, some considera—
tion to this factor will also have to be given in the following pages.

Realizing the complexity of nary of the problems dealt with in this

study, a thorough discussion of the position of each individual country
in the new world conditions should not be expected as was previously
remarked. The area discussions following; hereafter will, in general,
consist of three stages:

1) the original situation of the area, hat is, ixmediately pre-
ceding the Korean conflict;

2) the initial Speculative or anticipatory activity which mainly
affects-2d international market prices of industrial primary
materials;

3) the more fundamental changes likely to result from the increased
amount of the resources of industrial countries devoted to the
production of armaments, and the consequences which they impose.

Not so much because of their feasibility, but rather because of the

necessity to start a logical train of thought from a specific point, it
will be necessary to make certain ass‘mptions as to the general politi-
cal outlook of the world during the coming years. Doubtless, the con-
clusions of nearly any study of this kind would be of no value whatso-
ever in the case of the outbreak of another large scale war. The pre-
carious assumptions are therefore:

1) the political world situation 1111 not deteriorate below the
level of the second half of 1950, which might be called with

The Economist "three-fourths peace.":-m/

*—

W The Economist, London, March 10, 1951:1313. 521-23.

39
2) he United States and her western allies will proceed with
their contemplated defense program", that is, they will Spend,
for a number of years, considerable neW'amounts for the rebuild-
ing of, and later the maintenance of, a strong defense machine.
Even‘with these assumptions fulfilled, however, prices of primary
products are not likely to be stabilized at their neW'and higher levels
and so any quantitative estimates should rather be considered as an in-
dication than as a measure of the direction of change of the economic

situation.

Indonesia Eli} m

Indonesia played, prior to‘horld‘har II, an important role in the
international payments system. Since the dollar demand for'many'of her
products, particularly rubber and tin, was high, the country'sas able
to earn considerable amounts of dollars. The dollar deficit of the
Netherlands could be offset in this manner since interest payments on
Dutch investments were made in dollars. At the same time, a large vol-
ume of mainly complementary trade was carried on between the Indies and
the Netherlands.

During the war, Japanese occupation resulted in the destruction of
much capital and in the serious depreciation of most transportation.fa-
.cilities and other fixed assets. Exports and imports came to a practi-
cal standstill and under these conditions it'was, of course, impossible
to resume the prewar pattern immediately after lQhS.

Betseen 19h5 and l9h9 the country was disturbed by nationalistic
and terroristic uprisings which, among ocher things, retarded greatxy
its economic recovery. The territory became independent on December 27,

l9h9 and because of the price increases for the major eXport products

to
since that time, due to the recovery of United States demand, much im-
provement has since been made.

The strenuous efforts of the British government to hold down ter-
rorism and concentrate on economic recoveryr resulted in a more favorable
turn of events in the case of tialaya. ‘i’his colony has long been one of
the most important dollar earners of the entire sterling; area as a result
of its rubber and tin exports to the United States. The triangular pat—
tern of pa}, nonts therefore was also an imporv ant feature of llalaya's
economy.

Duet o the destructions and shortages in .‘ibarope, the pattern of
trade of both areas was directed mainly to the United States in the first
postwar years. Indonesia, which before the war dep ended only upon the
United States for 12 percent of her imports, had to cotain 2h oercent
of all in; or‘ s from that area in 1924,. The import dependence of lialaya
on the United States increased in tr .6 same period from 3 to 6 percentw

The disappearance of the traditional trade surolus with the dollar
area had to is financed by grants and loam; from the United Kingdom, the
Netherlands, and the United States. In Spite of this, however, it was
not possible to maintain the old excha11;_,0 rates, for deficit financing
and the slow recovery of production together with large population in-
creases had resulted in dangerous inflationary tendencies which, by their
discouraging effect on er ports and st’mfi‘nm" 6.. feet on imports, exer-
cised tremendous nressures on the financial reserves. To gather with
their metropolitan countries, both territories devaluated approximately
30.5 percent in September, 19119.

While the general economic situation in Indonesia was far worse

15/ United Elations, Economic mrvoy of Asia and the Far East, 19119,
p. 212.

1:].
Table VIII. Unit values of exports and ingorts and over-all terms of
trade of Indonesia and relays.

A-u: _ ——A‘..

 

 

 

 

 

 

1938 19148 Third quarter, 1919

Indonesiab

mortaoooooooooooooooooo 100 318 308

ImpOTtSoooooooooooeoooooo 100 £87 611

Terms Of tradeaoooooooooo 100 ’46 51
Halayab

EXpOr‘bSooooooooaooo-ooooo loo 230 21]-

ImportaSoooooo000000000000 100 276 267

Terms Of tradeaoooooooooo loo 8.3 79

 

3Ratio of export price indices to import price indices.
bEconomic Survey'of Asia and.the Far East, 19h9, 22,'g;§., p. 2h2.

than in halaya as a result of internal disturbances and domestic infla—
tion, the terms of trade had turned radically'against the former and
moderately against the latter in the innediate postwar period. The
ECAFElé/ attributes this to the depressed prices of especially rubber
and tin and the high prices of metal goods, engines and metal'worhing
machinery. Although no reliable unit value figures are available for
the period, the Commission estimates the price indices shown in

Table VIII.

The significant fact is that while the industrial areas of the
world were at a high level of economic activity, this under-developed
region.was at a disadvantage and in the case of Malaya, the terms of
trade actually deteriorated further in the third quarter of l9h9 as‘a
result of the slight recession in the United States.

The pre—Korean situation therefore was serious, contrary to the

situation of‘many other under-developed countries in which the export

 

lél' Economic Commission for Asia and the Far East of the United nations.

L2
products had risen more in n. ice since t': 10 '30's than the import goods.
‘z’iith t. 1:) tr- 710113.011? 3., 1.1'1 sgs r; s: :3 of 31.721.11.51 an: in during 19,30,

price relation? 21.-.:313 have, of course, 1301.198. iz‘. favor of both countries.
In Tables IX and X estirs- 1tes were ma 1e 0." the additional export revenue
that would became available arumally if December, 1950 prices would con-
tinue to exist. The estimate for Indonesia made on the basis of United
States price ch21: gas, b0“‘3"1{‘°9 reasonably .a'ell W1 h the actual trade
surplus of the Latter months of 1950, which amounted to about 100,000,000
rupiyah per month. On the basis of mientum iniices, however, a less fav—
orable impression would result. Exports of l'alaya in 19119 were one-third
higher t: zen in 1933 but In~..o 10818 had not reached the prewar volume in
19149. For robber, tin and copra, the ex_1or t percentages compared with
prewar were respectively 90, 76, and 62 in 19319, which is a reason for
concern vii-en the population probably increased by at least 13 percent

in the same “cried.

The impacts of ther scent reversal of the balance of trade are lit-sly
to be both favorable and unfavorable, dqvxv‘in; on local conditions and
administrative skills. In the first place, however, it is significant
that tr e m-enorgence of the dollars “plus of both countries will an-
able the 'Iriangaar payments actions to resur: ts operation, contribut-
ing towards a real new equilibrium The resumption of "dollar cor tain—
ing" interes‘ t pa fl"(mt3 on investments will both contribute to domestic
stability and to tr e investment reputation of the countries, which is
important in vies of the desirability to attract nr e11: foreign capital.

At the same tin e, however, the increased eami ngs are likely to bring

about inflat our-1.17 pressures directly bi; increasing the money supply

and perhaps indirnctly by encouraging the worker population to demand

h3

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£5593» needs 2320s

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. 16
higher wages and to strike, if necessary.

EerFuch will depend, therefore, on the actions of the government to
hold down inflation. There were indications that rigid taxation meas-
ures were underway in the form of increased export taxes on rubber and
tin. Imports were also encouraged by various inducement schemes towards
the end of 1950. The cost of living, however, was definitely rising; and
the inflationary danger was far from curbed.

Since exports of such products as rubber and tin were far larger
than actual world consumption of these cczmodities during 1950 and
since the scare-stockpiling, might be slowed down with U. S. synthetic
rubber production increasing rapidly, the question might be raised whe-
ther the 1950 purchases were not made out of fear of external political
disturbances in the area.

Assuming, however, that demand will remain strong, the largest dif-
ficulty will be for the area to increase its imports especially of cap-
ital goods. In view of the low standards of living existing, the gov-
ernments will probably try to increase the food and textile supply also.
This would raise the standard of living but unless new development pro-
jects would be started sith the new funds, it would probably mean only
temporary improvement. In order to change the outlook of the countries
fumiamentally for the better, the improved trade position would have to
result in an increased inflow of capital goods. It appears, however,
that under the threat of renewed war, public opinion has been awakened
to realize that international cooperation for the development of back-
ward areas is a necessity. The Point I? program of the United States
and the Colombo plan of the British Camom'vxealth seem to be created by

this new line of thought.

he

Australia and the Union of ,ou 'h Africa

 

The economics of Australia and the Union of South Africa are com-
parable in many respects although they are quite different from most
other primary'producing countries. Under the impact of World war II,
manufacturing became an important branch of activity in contrast with
the prewar situation when mining and agriculture accounted for the
largest share of the national income. ’he euport position of both coun—
tries, however, is traditionally determined by a few primary products:
Australia, the orld's largest exporter of v'ool and also an important
exporter of wheat; South Africa with wool, diamonds and gold account-
in;: for a ms: 'or sliare of her exports. Manufactured products are pro-
duced mainly for domestic use and, although the basis for heavy indus-
tries is available in both countries in the form of a variety of ores
and coal, metal goods and machinery constitute, with textile products,
more than half of all imports.

The'wool price is for both countries the most important indicator
of the terms of trade and, as could be eXpected, the tremendous rise
in wool prices during.195 0 brought about considerable improvement in
the respective trade positions of the coun+ rice. Traditionally, Aus—
trelia had had a 8113 :ht export surplus to pay for services and to finance
investments. During 1930, this merchandise export surplus increased
fourfold. Under the arrangement of the sterling area dollar pool, Aus~
tralia's dollar income is added to the pool and she receives drawing

i’hts in tile form of sterling. Imports of dollar goods, however, re-
main subject to Commonwealth regulations, encouraging soft currency
imports.

The Union of South Africa withdrew in 19h? from the dollar pool

47
and has since taken care of her own reserves. Her financial position
was characterized by a fairly large import surplus paid for in gold and
also with diamond exports. Import restrictions were in effect but they
‘were relaxed in 1950 when, instead of the usual trade deficit, an ap-
proximate balance was reached. Political insecurity probably'had some
influence on this achievement since the "free" price of gold had risen,
presumably as a result of hoarding demand. In addition to these ex-
ports the Union exports such strategic ores and metals as platinum,
chrome ore, and manganese, the demand for which is likely to increase
with tense'ucrld conditions.

The inflationary factor was felt rather strongly in both countries
during 1950 under the impact of high export prices and high investment
expenditures. In Lustralia this trend even resulted in curbs on "unpro-
-ductive" capital issues or investments. "Iith the relatively hifih stan—
dard of living, however, the pressure of a ditional export revenue is
not likely to be as inflationary as the distribution of additional in-
come among low income peoples such as Indonesians, since the demand for
food and mass-produced manufactured products would increase more in the
latter case. Nevertheless, the cost of living went up from 163 in.May
to 172 in December, 1750 in the Union of South Africa, and from 171 to
188 in Australia between the first and fourth quarters of 1950.l1/
(1937 - 100.)

In general, the position of the two countries is not comparable to
the position of Indonesia and Malaya. fihile the higher ex:ort prices
provide an a ditional stimulus for domestic saving and development, the

economies are not crucially dependent any'nore on the terms of trade.

 

;Z/ International Konstary Fund, International Financial Statistics.

L8
The staoility of their forms of government and the attractive opportun—
ities provided a sound base in the pos war years to increase the inflow
of foreign capital. To some extent, of course, the availability of ad—
ditional cagital goods in countries such as the United Kingdom and the
United States would determine the rate of economic growth, but the gen-
eral effects of western rearmanent appear to be very favorable to both
fustnalia and the Union of South Africa. Tables XI and XII present the
export situation of the countries. An aiditional favorable factor for
the Union is the fact that after the devaluation were hit in September,

19h? :oorts became chcacer in terms of its eroduct old or which is
, x - :

the same, he price of gold in terms of sterling, rose.

grazil, leombia ESQ Venezuela
These selected countries of Latin America are dependent on entirely

diiferent types of export products than the wool, rubber and tin groups
dealt with above. While the latter materials are supposed to have a
specific strategic value, coffee, the major export product of Brazil and
Colombia is a commodity for which the demand presumably is dependent
upon the level of income of importing countries, in this case, primariky
the United States. Petroleum, accounting for about 95 percent of all of
Venezuela's excorts, might be called a strategic material but the world
supply was not necessarily short in 1950 and Venezuela also seemed po-
litically more secure to the United States.

With the increased United fitates derand.pushing against the rela-
tively inelastic supply of coffee, prices rose sharply and seemed more
or less stabilized by the end of 1950 at a price level 70 percent higher
than that of May. Petroleum, however, sh wed hardly any increase in

. price. Compared with prewar, coffee prices were about six times as high,

1:9

.Aum4.mnm I .¢.m m onov mama moaned meafiwwbmam cash ownsSoxm ommacbm Hmwoflmmo pm vcphmbnoom
.UmanHom was smack gnome

.voasoom mam.mmsoam mcfiUSHocHo

.mcaxm amen» new psow «so «soc mafiHSHooHo

.mmw .m .HHH .Ho> awash hpegoooh HsGOHpecamesH «nephew mama Hmwosmodm HQGOHpmcncpsH “seasons
.omwoxm was maopmso no usefipammom «moflpnfipspm mossy no vomppmee efimpcoz .oOHsomu

 

 

 

jmnNmH N0.\AN4H Illl Ill m: NNJQB OOOIOOOQOOOOOOOHSOB
III III.- .llll .II. m OOWaOH neocooocoooooooooDfivHOU
II III: Illl III N OMoHnOH OOOOOOOQOIOQOOwEOEMfiQ
OHMQM mflm dmdqd Wm M QHMAM cocoooooooooooooHOQQOO
soa.ss sao.s asa.aa em m ma~.a ......omcssm as“ wees:
Mmoaaamaw.m.b mmoawmma<.m emoamwm.<.m 00H mm wmmafimma4.m .................UHooR
woman mowed op mmofium Gama ommfl a.ooa. manomxo seam»
one osoc>oh phonxo q.ocm as mean» I mqmfl mama $90MKO mnmfl
ca shampoo“ voumaausm pnodxo mama mafia moans Hmaop no

psoonem poached

-mqmmhsuwalaesos;
ma vogufiao ooov .mmuwu ooahm omma no mpoowmo vopmaprm one spacixm homes condemn spsom .Hx oHnt

 

“ ‘11.]

 
 

So

.mcwwnsou mo mnwwoon.ampou ca uvw pom ow mumpw mamuwmmmm

.numo.mmm I ms< Hv mama mcauzn mafiafimbmnm opmu omnmnoxo ommno>a Hmwofimmo am umpuobnooo
.nama cam Hmon mndusHonHv

.nfioam nmmpa.mqwusaonHo

.uomdoom flaw ammokm mcfinsaoan

.ommH .mqsnumama .hasw uwma as» pom my“ mpmo
Macaomfipmpm Us“ unmzmo mo amahzm :pflmmunoafioo .muapmapwpm madamhpmn< quhhmfiasm thmfimmse “ochfiomd

 

 

mSNHHOQH Hfiqmflm Q§Amm~n .lll “N5 momQOj OOOOOOOOOOOIIIEOB

MHmAO mwmwnN “NJQMH NW N fimqmfl 00 no... oompwmwa CGNOLCH
mfimam LNOAN NmquN m J NHMAMN ooooioooo ooooohCPfigm
08AMH QNJAJ OquNm m 4.2” OHMQQQ boo-otooooooooooubo‘fl
”OHMAMQG “.mob mom-_Mflmfd fifiqhéf‘ OOH Hm QMJQfiMWod oo-ooooooooooooopflgmb

mwmah oofihm on naoapm,omma ommH ~.oon appopkm dosam> ppom

can oscmbwn anomxo «.00o pm csHmb I.mamH mnmd .Ixm omrmqma

ma ommwuuna umpmafipmm phomwo mama Oman mofipm Hanan no

pamopmm aamouom

 

[HIV
AIM

 

 

 

 

 

 

“.mmpmufim.hmmoe
ca ooppfiao ooov .mamfi» coflya omma mo mpommme nopanapmo cad uppogwu pangs nmfiawnpma¢ .HHM manna

51
while petroleum had less than doubled in value. Prices of both commod-
ities, however, similar to many other primary'products, have been rela-
tively depressed for decades and especially during the 'BO's, a period
characterized'by the deficient demand of the United States.

In epite of these price deve10pments, however, Venezuela's eco-
nomic position in 1950 was far more favorable than the positions of
either Brazil or Colombia, due to internal development and especially
the tremendous increase in quantum. Petroleum production in Venezuela
was almost three times as high as in 1937. The volumes or coffee ex-
ports of Brazil and Colombia, however, were respectively'only'about 20
percent and about 15 percent higheral§/' These figures were temporarily
obscured.by high coffee prices, but, in view of pepulation increases,
seem to form.a less permanent basis for prosperity.

How'much, even after the war, the three economies were dependent
on United States demand appears from the following figures. During ,
19h9, percentages of total exports which'went to the United States were
to, 81,9.nd 29 for Brazil, Colombia, and Venezuelfiespectively. More-
over, a considerable part of Venezuela's oil is exported to the United
States indirectly via the Netherlands Antilles.’ Improvement in United
States demand between the first half of 1959 and the first half of 1950
resulted in a considerable improvement of the trade balances of the

countries. These are shown below:

First half or iggg First half of 1250

Brazil (m. 11.3. a) ’ - 122.5 + 70.3
Colombia (" " ") - 15.9 + 7.7
Venezuela(" ” ") +' 93.3 +’309.3

(Source: United Nations'world Economic Report, 19h9-50, p. 66.)

 

lfl/' International Financial Statistics.

Wee

5'2

Prior to‘world war II the traditional trade pattern of the countries
had consisted of export surpluses, especially with western Europe, in
order to finance investments and also to earn dollars to offset the
trade deficit'with the United States. With the elimination of the Euro-
pean market during the war, however, the dependence on the United States
both as an outlet for export products and as a supplier of manufactured
goods was greatly increased. This association resulted in an accumula-
tion of dollar reserves which could not currently be spent on additional
imports because of the scarcity.

These circumstances, in addition to the fact that the internal eco-
nomic activity of the countries had risen so as to supply themselves
'with a number of formerly'imported.manufactures, contributed to the post-
war international settlement difficulties. Europe was not any more able
to supply dollars to Latin imericagg/ and after the accumulated reserves
had been depleted to normally desirable levels or lower, recourse had
to be taken to bilateral agreements and import controls on United States
goods. Multiple exchange rates were instituted by all three countries
so that in the beginning of 1950, Brazil had three while Colombia and
Venezuela both had six different rates for different classes of imports
and exports. In view of this situation,the dollar surpluses earned as
a result of the new price rises are actually artificial, although for
the time being, they certainly relieve the pressure on the reserves.

As far'as the present trade is concerned, therefore, theenfect
of the first phase of events inspired by'the mobilization certainly
seems to be favorable.

Similarly to the countries previously dealt with, however, temporary

 

_2_Q/ asp. dollars temporarily provided the means to continue the pat-
tern with European countries paying in this way for their import
surpluses'with Latin America.

53
high prices, especially after 50 years of depressed prices, are not a
sufficient basis for optimism. 0n the contrary, they contain serious
dangers resulting from the large fluctuations in the money supply and
the difficulty in adjusting imports or domestic production immediately
to the new situation. Only if he new supplies of foreign exchange can
effectively be used for the economic development of new industries or
the expansion and improvement of existing; prirary produc facilities,
or can be sterilized as additional reserves, can the economic position"
be said to have improved permanently. But, from a defense point of
view, the United States is also highly benefited by increases in, for
instance, mineral production of the Latin American countries and is
likely to assist in the capital needs of the alterprises. The case of
Venezuela seems especially favorable in this reSpect in the light of
recent discoveries of 1,000,000,000 tons of high content iron era. The
countries here dealt with are strategically situated much more favorably
than southeast Asia and in previous years the United States has gained
some emerience in dealing With the Latin materiean peoples.

Brazil, Colombia, and Venezuela, therefore, probably similar to
other Latin American countries, are likely to be affected very favor-
ably by the increased United States demand resulting from def an see no-
bilization, not so much because of improved tense of trade as because
of the interest of the United States in increased production of primary
materials and foodstuffs closer to home. Inflationary preserves were
stremthened greatly during 1950 however, especially in Colombia where

the cost of living rose about 23 percent during; the year. Another pos-
sible problem for the countries' economies is the anticipated shortage
of capital goods imported from the United States and Europe. Tables XIII,

XIV, and XV present the airport position of the three countries.

.nuamoa.m I w.no Hy mnmfl wqfipfiv maflflflm>mpm mpmh mmumnoxm waofimmo mm» gm vmpumbnoop
.Hwnsmu wowaonoom mmsowmm “mom .m qmdmfi .Hfinwnm ow ooumm “mochaoma

 

 

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own.mm oom.naq oom.-m.a mg m oom.mwm ...............aoooo
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DOOWAM»aomoD OOQGMJNAWMWOHO SMQflmmmquflooHU HF mm 8 “OHWAHHonU no oQOQOOOOOOOomaHHOD
nmmwu mowum ow umowpm ommfi ommH «doom uppomko , wanna»
mfiv oscm>on anomxo ..oom pm osaw> I mama mama ppooxm mama
:« enamhocfl cwpmawpam unoawo mama snap cowhm Have» Mo

pcmonmm gmoohmm

‘IIIII'IIIV

 

A.mmhnwfim
hence ca voapaau ooov .mwmaa coaum ommH no ngooguo vwvmawumo cam uppomxo acnms.:wHHHumum rHHHH canny

 

A;mmom.am I omua av mqoa mathv :rHHHwbmam mama omnmzoxw HMHoHMMo mun pd veeuwpnov n
.a nvaumm umpcmwm HmoHpmHawpm gmovaHpmpm awake wauom.mo humsaum .mcofiuwm vawcp ”oohaomc

dfl
d1

 

 

 

 

 

 

 

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adv «sambah pponxm ..oom pa ofiaN» I mama mam vuocxm meH
nH mnmouuaa umpmaHpmm pnomxm mama omHh ooflpm Hmpop Mo
accommm anachom
wwwu Ln nAnuuuuunuuunuunuuuuuunuunnnnunuununuununnnuu
A. 3.363

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.HuHmL. mm I m.m av mac :m afihnw mamawmbwpm cash mwmwxoxm HQHOHmmo amp am wmphobcooo
.mcquson mo omsmo an Hmpop on www pom 0v mncpa wpwpmommn
.mamsuqu> ow Hanpamo oocwm How :Hpmaom «MOvaflanmV av cwpmaom ”mochzom ad

P . L L,

 

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NQJQMH JJQAOH MOMqu ”J H HmJAMN OOOOQOOQQOOOQOCQmQOOO
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ommw 0mm.m.n HHHLmu m.m HHQLHNmme.m H mm Ho».mmm.mm.m .. .me and anoHogpmm
nmmwn vOHHm ow awedhm.ommfl ommH ..ocm uphomxm doan>
02v mscmpmu puogxm «.oma pm oaamb I.mama mama puoaxu mama
aw omwohoza vopmaHpmm ohoaxo mama omHn aowpm Hmpoa no

pamoum; pnoouom

 

XI“

 

A.mmhzmfih
hence aw wogpwab ooov .mmmHh «oHum ommn no nauomno vmpmavao nun mahoauo panda amamsnmnm> .bHN oHnnH

Conclusions on Primary Profinct Txpcrtin; Countries

 

 

The co1nirics dealt with a1:ove are perhaps not reprm en tive of
all the un er—devsloped countries of the world. Rather, they represent
in their f.orei"n trade i.mportant amounts of the worlzi's supply of some
key commodities and therefore, ml donaxid for their pr oiucts mny'result
and partly has already'rcsulted in more favors ble price relationships.
The additior o1 amounts of IL reigtne exch .ge becoming availLble in this
way'may be used Lo finer.ce larger i"ports. Table XVI and Figure 2 snow
the dramatic changes in the terms of trade of soLL of the countries
under review. In the case of Australia, Fsloye,and Indonesia, the busi-
ness recess ion in the United States of the first part of 1949 18 else rly
visible while after the third quarter of 1959 a general recovery of the
terms of trade ste mt d. Significant impLov~r‘“ts occurred for all coun-
tries during 1950.

The increased export revenue could re alt in both favorable and
unfavorable to lzdencies. On tie one hard, the revenue could be inv3 ctei,

either b; tne :jovernment or by indiviiuals to increase to pnational pro-

ductivity. If imported capital goo as we: continue to be availab
this would provide a strong stimulus for .in L ovement. The revenue could

also be sed for the resumption of paynro an on old debts or investmo-nts
or for the a ortisation thereof. In this case, the rep utztion of such
a country'wonld improve in the eyes of the capital exporting countries
and s DGW'fIGW of private investment might be en m1raged. I vestment
both in neW'and in old branches of economic activity would be beneficial
since th real income would tend to be raised in both cases. The tre-

rendous price fluctn.ati one durir~ 1950 revs WLl once more, however, the

;precsrious status of the under-developed econL mics in.being dependent

IA, —"\

“_24«‘.1 .’ _

r‘Nfi-‘n '4

‘mu arenas P . . ‘1'"; I.

.mppoesa hobo apnomxo mo capomu
.xouc« uncoumo
.stfi toga
.Nocnfi ppomMo was mo soapmpsmsoo can ea nonsense onp mo nowvmaflmp
those op osn.hapnma sowed we on 0“ some mean page Hausa as among mo magma odoono>emnm hHosohexo one .xou
to“ 0:» ca woosaoma mfl monmoflMflpnoo omcmnoxo :wfiou0u.mo scam» nomad .HHMQ4 mnaznamom .oanonmmeoo AHuoHupo
and one menswwm can one .woowuo oawnoflons mo Mensa as m« wooed psomsa axovcfi oaao> was: a ma sowed upoexmo
.moflamflpopm no nfipmaaom.hflnpcow..ncowpwm confinp «cannons
.n 828 steam. Hmoflsfiflm .moflmfifie moss. ESL... mo Lyssa .2033“ 835 8955mm

 

 

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and end NHH «ma ma mQH III mam III mm med mad mad Add as HM

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NHH me mHH OHH NHH MOH mad QfiH pm mm and HHH mmH boa mm pH

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an mfi 43 mm mm 8H am mm m mm N9“ 8H man 03 mm H

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58

. . . .. .O;li.-Ih1’

.w34:.l”

. 303% @325 "8.38

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ponvgm mumfipm umpomaom mo mnmna mo magma HamlpmSo .m 93mg

cm? 32

 

      

 

 

 

 

 

 

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59
upon external demand. Their desire to stimulate diversification rather
than further Specialization, seems understandable in the absence of
any agreements stabilizing within limits their terms of trade.

On the other hand, the additional export revenue could accrue in
the hands of a few wealthy, strategically situated procucers and/or ex—
porters and could be spent to buy luxury goods or mansions or it could
even flOW'off as additional interest on investments of foreign compan-
ies. Theoretically at least, this danger is present with a large
amount of the total investment in estates and.mines of the under-devel-
oped areas owned by nationals of other countries.

Even if the income were divided equally over the entire papula-
tion, a dangerous situation could develop. 'With the generally'IOW'level
of living f the pepulation increased income would cause a large demand
for food and simple mass—produced.manufactures which, in view of the
inelastic supply of many'of these commodities, would result in strong
inflationary'prossures. f this last situation were to prevail, the
effect of the improved terms of trade would decidedly be detrimental
to certain groups in the economy.

Apart from the changes in the terms of trade there is another fac-
tor to be considered. This is the free flow of private capital. Natur-
ally, this flow is disturbed.by the slightest rumor of war, but, as sug-
gested.above, the general political outlook may also move countries such
as the United States to invest its available capital closer to home.
Although this factor would work naturally as a disturbing influence,
its discussion falls perhaps outside the scope of this study which
tries primarily to analyze the possible effects of increased spending

for defense of certain countries.

 

CO

The net effect of the above trends and ch: 363 appears, unier the
conditions of the first part of 1951 of "three-fourths peace," to be
favorable for mOSt primary product exporting countries. Any reduction
in the availability of manufactured consumption and capital goods,
however, could quickly reverse the outloos.

At the twelfth session of the Economic and Social Council of the
United Nations at Santiago de Chile in early 1951, general expectations
seeded rather pessimistic perhaps in the anticipation of shortages sina
ilar to those of earls War II. The attention was devoted mainly, how»
ever, to the fear of new inflationary pressures rather than to the con»

sideration of the relatively long time efiects of increased defense

standing without total war.

A

 

CHAPTER V

IT’ACTS GTE SCT'TE RTFUSTTUKLIZTD CCTTTP'iI'ES

This chapter will deal with a consideration of the second hypothe-
sis, namely that "the United States as the financier of the largest part
of the rearmament of the Host will either eXperience larger price in- e
creases than other western, especially European, countries or wi11.be

compelled to restrict her imports. In either case , European goods

 

would flow more easily to the United States and to third markets sup- ;
plied by the United States. " i
The thoughts underlying this hypothesis are that the United States
will spend relatively more on rearmament than the European countries.
This would then result in greater inflation in the former country which,
in turn, would have a similar effect to a devaluation of the European
currencies in terms of the dollar. United States goods, according to
these assumptions, would become more expensive and scarce, so that less
would be purchased by Europe, While at the same time, the flour of rela-
tively less appreciated European goods to the United States would in-
crease, To the extent that there would be a differential in the price
rises between the United States and Europe, :.:ozgsetition in third mar-
kets would also be changed in favor of European merchandise. One of
the differences between relative inflation in the United States and a
currency domination in Eumpean countries would be that in the former
case, United States exports would become dearer and United States in—
ports would become relatively cheaper where in the case of a devaluation,
all non-dominating countries would be affected. In other words, rela-

tive inflation in the United States would appear to be more specifically

i=2
favorable in view of solving the dollar problem than currency revalua-
tions by other countries. Many of th, 8-7228 sent-mosses that apply to
the effectiveness of devaluation, however, also apply to the case of
relative inflation. Experts from Europe to the United States would
have to increase more in volume than the price change, so as to make
the total value in constant purchasing power larter than before. In
order to rain from such a situation then, there would have to be a
price elasticity larger than one and t‘r:e newlj obtained changes in the
relative purchosing power of the currencies would have to be retained

pemanently.

l.—mma¥umzfizfi¥h\cflhn (bra ¢ '

Under present conditions, these weaknesses would probably appear
to limit the favorable effect on Europe seriously. Because of the
rigid restrictions on imports of American goods into Europe and, to an
extent, on imports of European goods into the United States ,‘Zy the
flow of goods to Europe consists mainly of necessities and the flow of
goods to the United States consists mainly of luxuries. The price elas-
ticity of both groups Appears to be rather low. Furthermore, existing
inflatiomry pressures in many countries are not directly reflected in
the cost of living indices and thus in the cost of production. If
price increases would not be permitted to occur, however, the effect on
trade of the hidden inflationary pressures would in many respects tend
to be the same as in the case of open inflation. Emort controls or in-

port limitations would work in the same direction.

 

22/ Of interest is the following roman»: made by the United nations Eco-
nomio Cozzzission for EurOpe with reference to the gg'adxmted tariffs
of the United States: "Since, however, European countries have to
live chiefly by their exports of mnufectures, the Anerican tariff
is probably no less discriminatory against Europe in its economic
effects, if not in outward form, than the more obvious controls
which European countries in turn, im;::~ose with respect to imports

'from the United States." Economic Survey of Europe in 1949, p. 160.

€23

*ctuelly, however, it appears to be not at all sure whether rela-
tive inflatiozery pressures are greater in the ”nited States than in
Europe. In the first place, the relative size of additional military
expenditures appears to be quite large in European countries. Secondly,
the dependence of Europe on imports of the scarce raw materials to feed
her industries tends to be larger than for the United States, which fac-
tor inoedes the expansion of industrial production in the former area.
And thirdly, the existing imbalance in the payments and the low level
of reserves in “urope tend to endanger the financial stability of the
area, even when quantitatively the defense effort there is on a smaller
scale than in the United States. These three factors require some
elaboration.

Table XVII shows the size of military expeniitures in a number of
Horth Atlantic Treaty Organization countries and Sweden in the present
and in the coming year. Although the figures represent the best estim-
ates available from official sources it'would seam improbable that they
are mutually comparable. The United States figure, for exanole, in-
cludes an amount for strategic stockpiling and also includes foreign
economic and military aid. The United Kingdom budget on the other
hand, considers stockpiling as a nondmilitany erenditure, but here it
is not clear whether military aid from the United States and Canada is
included in the estimates of the defense budget. In Spite of these
limitations, however, certain general conclusions still appear to be
Justified.

In terms of percentages of the per capita national income of the
countries shown, military expenditures were largest in the United States

both before and after the iorean outbreak. Due to considerably lower

‘ummu‘nnrtwnlffim _ .V' . a]? -(

’!

c4

Table XVII. ocionoe buQ et estimate 3

 

 

 

 

 

fc or eel acted E rcpeen ano IHOTtl
doericen countries, fiscal 191 an nd 1952 (billions of
U. 3. dollars).
ITE9 Defense ex-
per cegita pendituree Percent
national as percent of income
713051 Percent incomeg of income to be

19,1 1932 increase (dollars) 1951 1952 given up

Belgima...... .173 .31; C: 3?? 305 6014 209
Canadab....... .8 1.6 100 926 6.8 1300 6.2
nether 1nd3°.. .223 .393 7C 372 5.9 10.5 h.6
Swedend.....uc .1- 3 .231. 113 773 3.0 h.3 1.3
United.1:1,;jd02292.3 34.2 C3 )vu 30$ 11308 C403
United Statesf 21.0 1.1.). 97 1,153 9.7 19.1 9.21

 

8‘Royal Institute of International Affairs, Ihe World Today, March, 1951,
pp. 109-17.

bU. 3. News and WOrld Report, April 2h, 1931.
cThe Hen York Times, Harch 1h, 1951.
dStatistika Centralbyran, Statistik ‘rsb ch, 1?50.
”British Information Services, British Economic Record, April 1t, 1951.

fInternational 'cnetary Fund, Internatio:1el ‘inancial flaws Survey,
v01. IIT’ p0 2160

gUnited Nations, Eonthly Bulletin of Statistics.

incomes in other countries, however, they constituted also important
shares of the incomes of most other countries. With the exception of
Sweden all countries increased their defenee'budgets by between 70 and
100 percent. If constant incomes are assumed, the last column of the
table shown which part of his income each individual will have to give
up in order to pay for to e increased defense preparedness. The United
States heads the list but it should be considered that 9.h percent of
the per capita income or a rich nation.mey weigh less in terms of in-
flationery pressure than 6.3 percent in the case of a poorer nation.
How strong actual inflation is likely to be in the various countries

cannot be conclucied from t1a fie ires in Table XVII. This depends on

"A. If '71-- ‘..‘ ".1. '1

‘m‘a‘ Dru—II. 1’0. 913“. 31’ . '4

g

65'
the may in which the programs are to be financed. If increased taxa-
tion could supply sufficient funds to pay for the entire increase, as
apparently is the goal in the United States, inflationary pressure would
be reduced to a minimum, nhereas deficit financing by'a government would
represent the other extreme. The levels of taxation as percentages of
the net national income, however, seem to be higher in Europe than in
America, with the United Kingdom taxing h2.5 percent of the net national
income in 1949.22/' In countries where thus far low levels of taxation
prevailed more room seems to exist for increasing government revenue this
way. It may be concluded, therefore, that both in the United States and
in European countries the greatly increased defense programs tend to
have strong inflationary influences, while several factors add to the
seriousness of the problem in Europe although the relative share of
the expenditures is larger in the United States. The timely application
of sound monetary and fiscal policies by the various governments may
prevent further price increases.

The raw material situation is another factor which tends to limit
the extent to which European countries will be able to profit from the
increased demand for manufactures both in the United States and in third
markets. Except for iron and coal, which materials appear to be present
in sufficient quantities in Europe, most primary products have to be inr
ported from overseas. The United States, on the other hand, is much
more nearly self-sufficient in such key commodities as copper, aluminum,
zinc, and petroleum. While the share that industrial raw materials con—
stitute of total imports in European countries is therefore, even larger
than in the case of the United States, total imports form a much larger

share of the national income. Table XVIII shows the percentage new

 

gg/’ United Eations, Economic Survey of Burcpe in l9h9, p. 275-

udfl'

v. _v— -. “-Ifl .‘ufluw‘nm ‘nipi-D.

66

Table XVIII. Raw material imports in industrial countries3 (millions
_of U. 8. dollars).

   

 

 

Percent

19h9 value ‘ Percent price
of raw‘ 19h? value Yorcent of total increase
material of total of total national FayaDec.,

 

imports imports imports income 1950
Belgimab........ 781.9 1,803.1; 13.1. 13.7 38
Came-area... 0000 36809 2’6;807 1307 209 1’4
Switzerland 00 q 297-6 88106 3308 706 16 £_
United Kingdom ._ 2,871.6 8,100.1 31:. 7.6 32 *
United Stateseu 1,335.2 6,598.1 23.1 .9 1h

 

8United Nations, Statistical Papers, Series D, No. hl
bIncludes semi-manufactures.
cAgricultural and primary products.

 

 

dRan'materials.
eCrude materials.

material imports are of total national incomes. Typical industrial coun-
tries such as the United Kingdom and Switzerland spend almost 8 percent
of their national income on.imported raw'materials while the ears figure
for the United States amounts to less than one percent. Any change in
the prices of these materials, therefore, tends to influence the eco-
nomic position of most European countries much more profoundly than the
United States or Canada. For the same reason, changes in the over-all
terms of trade are of much more importance to European.countries'which
derive between 20 and 30 percent of their national income from interna-
tional trade than to the United States or Canada. Table XIX and Fifure 3
present the picture of the deterioration in the terms of trade of all
industrial countries here under review due to the ircreased cost of in-
ports after the Korean outbreak. It can be seen, however, that the

terms of trade of most countries already started deteriorating before

the recent military events.

n ma Vum‘w- .I‘IIMJ‘E1J. $13! .m.( ’51.. ‘usl f;

 

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68

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.30..“ .- @435 $295.00 HmwnpmsecH oopooaom .Ho ovmne mo magma flamingo

 

 

 

 

   

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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69
ibsolute shortages o. certain imaortcd r w materials would, of
ccu se Iurtner limit an exgausicn of ifia .1.Flul output.
The t 11rd factor in which EurOpe' 5 economic p0: ition con; a.res un-
favorably with the Earth '::erica n industrial area is the difficulty v: :ich

A

European countries were facing'before the Korean outbreak in their bal-
ances ofm mcnts and the acconganying low levels of reserves. Due to
the 1:0? ts.r recovery needs, financial reserves in Europe had generally
been degletcd to d'zgerously low levels ..hile in the United States cp-

osite trends were apparent. As a result, Burcpe cannot allow any fur-
ther drain of its reserves. Since the terns of trade have deteriorated
thism . mans that more exports have to be 5m filied in payment for the same

Ina :tit3 of irdustrial raw materials at the sa..e time th at large ad: ii-
tional military requirements have to be fulfilled in nations where all
resources are already fully employed. It 13 clear that even maintain-
ing t‘ne save imbalance as previously would therefore be inflationary in
Europa, ::hile actzally closing the existing gtp would become more dif-
ficult.

‘Pfie Initad its tea, on the other }1and, cor d freely allow the gold
and other reserves to abso b mos t of the shock of the higher import
prices while the country's original position of a "favorable” balance

trade would be an additional strong thenin: lactor.

With this background it is not surprising that inflationary pres-
sures were strong in nearly all European countries during 1950 and that
imilar situation is likely to continue to prevail. It also has to
so consic ered that th e actual diversion of resources from civilian to
military use in most European countries is a certain.number of months

behind the similar adjustment in the United States. Looking at the

70

Table IX. Increases in pr mi levels of selected industrial countries
3.5 '5': r..'lpc.’ 193:0 a

 

 

 

 

Wholesale prices Cost of living
3612111330000...000000000000 2000 308
039.313.3-oooccoOOooooooooooo 905’ 1103
Iletfierlfmds........u..." 13.3 ‘ Sol
SWBdenooocooooooooococo-00 mCh 109
Suitzerland...ou. c 00000.. 11.1 103
United Iinfjd moo... 0000000 Lil-5’ 108
United ‘tates............o 12.3 601

 

8.Source: United Qations, Vcnthly Bulletin of Wtatistics.

figures in Table 2(V ita sears that as far as retail prices are con-
cerned, the U-itcd States experienced the 13% mt inc reases of the

seven countries shown during the latter half of 1930. In the Netherlands,
Canada, and Belgium also, honev: r, imaort nt increases in the cost of
living'were registered, while the United Kingdom, Sweden, ands eiitzer-
land succeeded in holding the line in spite of higher prices of imported
foodstuffs and raw materials. Subsidization, however, plays a consid-
erable role in the economies of the three latter countries and there—
fore, retail prices are perhaps not as good a measure of existing in-
flati one wj'pressures as wholesale prices. Increases in the wholesale
price levels of all countries were much larger than the changes in the
cost of living indices and it seems si ni.icant that all selected. Juro-
poan countries exo e t S..itzerlar d, whicrl belon :s to the hard currency
area, experienced larger wholesale price ircreases than Canada ar nd the
United States. This was not entirely due to the anticipation of larger
defense outlays, hovevo r,'but resulted also from the deci ions of var-
ious ;overnnonts to cut dean on food sub'i diw o. fihile the real impact

of the actual defense expenditures had not yet begun in either north

71

America or Europe by the end of 19:3, inflationary pressures appeared
to be egdall; hi h in both areas. There scene to be no indication of
the validity of the first part of the hypothesis.

Revertheless, most countries were .2318 to improve their dollar
balances considerably. The very high level of economic activity in the
United States was perhaps more important the; price levels as such.
Table XII she"s that ' nited States imports,e Spec mlly from the Pure-
pean soft currency countries, during the first months of 1951 were at
levels two to three ti. es as high as the average for 19h9. filth ugh
exports from the United fitates had also increased in that period, the
not result was still a considerable reduction in the dollar deficit on
current account whidh the European countries and Ca: ada incurred tith
the 73nit2d States. Sweden actually changed from a dollar deficit to
a dollar surplus countr; due to im ortant gzrice inc re2se a in rrood pulp
and other oxyort products of importance in her traie with the United
States. Restrictions aaam st dollar in: orts, however, continued to

exist so that to an extent such a dollar surplus should be considered

somewhat artificial.

Table XXI. United States exports and inserts from selected industrial
_countriee_, (millions ofdollsrs).

     
 

 

         

  

lonthly average l9h9 Januerg, 1951 February) 1951
Trade Trade Trade
Rxo. Imp. Deficit EXp. Inn. Beficit Eix1.Imp. Reficit

Belgium 25.6 6.9 18.7 2h.9 19.5 S. h 29.2 19.2 10.0
Canada 1;3.3 129.2 3h.1 195.7 152.h 11. 3 19h.3 133.8 no.5
NGthBI‘laIldS 2,307 be? 1308 I 1790 901-}- 7. 5 19.0 907 903
S'd'ieden 701 ’40; 2.6 Sol 1008 “"92 7 7.8 8.9 ’101
S‘.7:itZi3rl'-1nd 110:) 7.8 hol 1303 13.9 2.11 11"? 10' 6 1“].
Unitedi Zin,dcm SL.L 13.9 39.5 h1.9 37.3 h.; 55. 33.. 12.8

Total 290.0 172.2 117.8 310.9 272.3 28.6 320.h.2ho.8 79.6

8.Source: U. S. Department of Commerce, Curvey of Current Business.

72

Because of changes in her own trade and in the trade of her over-
seas territories, the United Kingdom was able to improve her dollar po-
sition radically during 1950. The gold and dollar reserves of the
sterling area as a whole increased by $1.6 billion during the year to
a level almost as high as the 1936 figure, although the purchasing
power of this reserve remained, of course, for below the level of

-. 2 - . -
1930. This improved reserve position 03 tne United kingdom opened
possibilities for continental European countries to earn dollars
through export surpluses with the United Kinfidom.

An important favorable factor in the position of the countries
under review will certainly be the increased demand of third markets,
both dependent and independent overseas areas. Since this new demand
is caused by the larger dollar earnings of these areas from the exports
of rubber, tin, wool, and coffee to the United States, European coun-
tries will here have a real Opportunity to offset their persistent trade
deficit with the dollar area. The higher prices for primary products
and the continued recovery of these areas from the war will result in
eXport surpluses, which are able to play a very important role in the
international payments system. There would, of course, also be an in-
creased demand for the manufactures of the United States in competition
with European products but the currency depreciation of 19h9 improved
Europe's competitive position and with the recovery of that continent
the flow of goods to the third markets already had been increasing com-
pared with the early'postwar years. The new situation with reapect to
the demand in third markets, however, is not one in which EurOpe and

the United States are competing to satiety an existing and constant

 

23/ Source: British Information Services, Labor and Industry in Britain,
June, 1951 o

73
demand, tut ratxer t:1e to al demand .es increased considerably'so that
both Ezrcpe and the United States may be able to expand their sales.
Before the impacts of t} e roui ization were felt there was very little
ince: tfive nni op_.ort“n.1t for th :Iur peas ccu rice to expand their ex—
ports to hos .r as since t?.is sculd n L sol”e t e dollar protlen.

Whetger or not actual trade will flow along the lines discussed
aeove depend: largely on the elasticit" f prediction in Europe and on
the part of production thet will have to be divert d to defense. A

aturn of Germany'in the s rkets of under-developed countries would do
much to ir~rcve sestcrn Lurcpe's dollar position since German exports
lave traziitio ally consisted of machinery'and capital goods desirable
for development p' poses. In spite of the serious obstacles discussed
above tie current situation has pctentieli+ ies of improving the pa;- ments
positiO‘.1 of industrial. pean countries and Cr*sja if sensible domes~
tic economic policies are adopted and if serious efforts are made to in-
crease the mobility of resources so as to benefit from the new exnort
opportw i Mi 3 to tfw Jnited States and third markets

In sumrsr;, the most img>ortsnt proolem no w confrontir g western
EurOpesn countries is how to benefit from the increased.denand in the
United states and in primary product exporting areas while maintaining
‘omestic stabilit*. The weight of adeiticnr.l.milit any expenditures,
although not as large as in the United States, pr res ents the countries
with serious prob ms in maintain ng economic stability at a tine'when

f

most resources are already fully'en:r loyed. n prob lem is very d ffi—
cult since a further drain of the financial reserves cannot be permitted
to finance n53: imports and since the terms of trade in general are turn—

ing against them as a result of large price increases in raw materials.

h

The position of Canada and Sweden appears to be more favorable the.

that of he other countries discussed. More eXgorts of woodpulp and

other raw materials and seri-manufectu -r to th United Ttates tend to

improve the terms of trade and he balance of payments.

SONS} POLICY CCZTSIL‘V‘CZ'CICZIS

The bold decision of the United States, supported by the United
Nations, to resist aggression in Korea by force may be considered a
basic chance in the political leadership of the world. Both in the
first and in the second World “Jars the first blows were received by
other countries and the United States was forced later into the con-
flict. In the post-World war II period Wide recognition was given to
the United States as an economic leader but since the outbreak of the
Korean war it is clear that the three—fourths of the world population
which are not under control of the Soviet Union look to the United
States for political guidance and leadership. The privileges, but
also the heavy responsibilities of this fact are becmning clearer every
day to the American taxpayer. It is eSpecially important to those in
the American Government who have the responsibility for formulating a
long-tom foreign economic policy which corresponds sufficiently to the
ideals upon which the American society is built and which is also suf-
ficiently practical for the actual conditions of political insecurity,
widespread poverty and scarce democracy.

The following remarks are, of course, only very sketchy and tenta-
tive since the number of variables is too large and each variable is
too uncontrollable to make definite conclusions at this time. They are
based on sirdlar assumptions as already have been stated or implied
above , namely:

(1) a political climate no less favorable than the second half of

1930;

(2) the continued necessity of a defense program on as large a

scale as proposed by tie Presib mt Oi tne Lnited at:

9

(3) a con oinuation of t .e pcli.cy 01.; ives of .ne last six years

namely, a further liberalization of aeoncnic relatio‘s :here-

politically‘possible.

ever and n;enever ecoromically and
szeiisbel; the :ein problw .1e rgm cut of these assumptions.

‘0

ince defense mobiliz tion is assumed gi'moz and inniSp- nsable, hon can

0)

a coordination be made between this relatively short-run objective and
the long-run ooject.ives of any sound fore ign economic policy? Both
kinds of objectives are equally imperative. Is it possible that the po-
litical climate within or outside the United States is new psychologi-
cally favorable, dangerous as it may be, to press some economically
sound reesures, which might otherwise not be adepted.by denocratic pro-
cesses? It‘uould certainly be in t.1e interest of the Unite States i”
such m:asures would be passed so as to strengthen the economic interde-
pendence of and to increase the prosperity of the relatively free prrt
of the world. In many'ways, of course, defence mobilization will con-
sti ute a serious setbac; to the fulfillment of such objectives since
precious resources which could be working for them entirely, are now
engaged in producing destructive weapons. Kevertholess, there ag)oear
to be things which can be done even now to improve the situation.
.During l;‘,0 t.1e spearent "dolizxr she tags" largely disappeared.
As was shown above, high *ricea for primary‘; ro—‘ucts were mainly re-
aponsible for this development and the additional dollars received by
the courriries pros 'ucing these products are, under certain favorable

domestic and international conxiitions, in a po osition to finance addi~

tional imports of manufactured capital goods. ltnougn the dollar

_ 77
deficit of industrial Eurepean.countrieS'with the United States declined,
this area still had substantial deficits in the latter part of 1950.
Moreover, in view of future armament needs it is conceivable that the
trade gap will be widened again in the near future. The passive bal-
ance of payments with overseas areas had been Europe's most serious
economic problem as soon as the worst phases of war destruction had
been overcome.

Since the amount of gocds that needed to be imported from the United
States see extraordinarily large with the disappearance of Germany as a
supplier and since the prewar triangular payments scheme, hrough which
EurOpe earned dollars with its export surpluses to other overseas areas,
had been disrupted, European countries became much.more "dollar conscious"
in that they stimulated direct exports to the dollar area in.many says.
However, this export drive was none too successful. The volume of busi-
ness activity in the United States is a most important variable in de~
termining changes in the volume of imports originating from.Europe. An
additional problem.for this period was the limits on the productive
capacity of EurOpean countries due to war destruction and dislocation.

A third factor is the structure of United States tariffs. It is gener-
ally considered that the type of manufactured products imported from
Europe is rather price inelastic. Because of thie,.many people are led
to believe that neither the lowering of prices nor the renoval of tar-
iffs can increase the volume of European goods imported into the United
States appreciably.

The structure of American tariffs is such that the effective duty
increases‘with the degree of manufacture a certain product has under-

gone, with the result that primary materials can enter the country

78
relatively easily'uhile many manufactured goods find the tariff rates
prohibitive. Since Europe is mainly dependent on exports of manufac-
tured goods this policy has in effect, led to severe discrimination
against that area, which, in the opinion of the ECEgh/iprObably was
no less severe than the direct restrictions on imports of dollar goods
prevailing in many European countries in the immediate postwar period.
The Commission shows how duties on certain categories of'woollens and
worsteds, although less than half their rate in 1939, still amount to
between 23 and 35 percent;2é/ This may suggest that the existing tar-
iff structure, although much less severe than.during the '30's, is
still able to exclude exactly those products in which Europe's com-
petitive strength is largest and that, therefore, perhaps the lOfi'VOl-
ume of imports into the United States from Europe is caused by the ex-

isting tariff structure and not by the low price elasticity. The lat~

ter, in tdis way of reasoning,'would then be a direct result of the ex-

1"

' \

isting tariff structure. Whatever the actual situation may be, the ECE'

carefully expresses itself as follows:

"If optimistic assumptions might be made'with.regard to a con-
sistent set of policies by European exporting countries and by
the United States, there would seem to be no very definite lim-
its that might'be assigned to the expansion of European sales

in the American market, particularly in such items as woollen
textiles, chinawsre and leather goods, all of which are products
in.which Europe seems to have a competitive advantage owing to
smaller differences in productivity compared with induct

the United States than in other branches of production.

This statement also seems to point at the fact that by eliminating

differential tariffs and facilitating the imports of manufactures in

 

Economic Commission for EurOpe of the finited Nations.
United Nations, Economic Survey of Europe in l9h9, p. 160.
we, p. 178.

me} p. 1780

QW‘E

79
general, more price elasticity can be introduced in United States im-
ports from Europe. A lowering of the marketing margins through larger
scale imports may further contribute to increase the import price elas-
ticity.

The United States cannot insist on reciprocal and equal percentage
tariff reductions when other countries start off with lower rates even
without consideration of the necessary leadership of the United States.
The temporary obscuring of the "dollar shortage"‘by factors of defense
mobilization does not mean that the world, including the United States,
will not benefit from such a fundamental improvement in international
relations. while to an extent this has aluays been true, the argument
is that the United States as a leader should now proceed, alone at
first if necessary, to continue to lower tariff rates. The political
arguments against it have gradually lost most of their validity and un-
‘ der present conditions perhaps also most of their popular support for
several reasons: '

(l) Annually billions of dollars are spent on.military and eco-
nomic aid abroad. If other countries can earn more dollars
by exporting to the United States this may well mean a smaller
need for these sums of taxpayers' money.

(2) Increased imports into the United States at a time when infla-
tion threatens to unstabilize the economy'will constitute an
anti-inflationary factor.

(3) The circumstance that with high levels of economic activity,
industries adversely affected by coupetition will find more
profitable alternatives elsewhere in the economy.

Another factor which may gain importance in later years is that an

80
import surplus into the United States would create a most favorable at-
moSphere for an outflow of capital investment. The general Opinion
‘would perhaps be unaware of this factor but Sir Arthur Salter points at
the British eXperienoe previous to World War I and explains it by the
facilitation of transferring interest,paym3ntsag§/

As was pointed out in Chapter V, European countries also are in the
process of adjusting their economies to the needs of their substantially
inoreased.defense programs and, therefore, also experience inflationary
pressures. These pressures appeared rather stronger than‘waaker com-
pared to the ?nited ftates situatioi. All defense programs, however,
are temporary even if they may last for some ten years. Continued tar-
iff reductions, however, constitute real and permanent gains if brought
about wisely.

Changes in the restrictions on imports of manufactured products,
however, limit their beneficial effect nainl; to Canada and parts of
Europe. Large parts of the world, since recently associated with the
name "under-developed areas," are also in great need of a positive Amer-
ican economic policy. The situation brought about by the political
events of 19:0 appears to change certain policy goals previously held
by the United States government and in the problems which now arise
there is a great need to distinguish between relatively short-run de-
fense goals and the long-run general goals which would need to be ful-
filled “may.

The Point ?our Program, to be sure, was not born out of the Korean

situation. Similar programs had existed at least ten years earlier in

 

28/ Salter, Sir Arthur, Foreign Investment (fissays in International
Finance, Ho. 12, Princeton University), p. 6—7.

81
cooperation with certain Latin-American countries. The implementation
of tie object ves stated in the presidential inaugure address in Jan~
nary, 19h9 seems to have 33ined neu'impctus in view of the fact that
economic improvement is considered basic to maintaining a reasonable
poli vical securitg. The objectives then of ". miing the benefits of our
scientiiic advunc as and inc ‘ustrial progress available for the improve-

24/
ment and growth of under-developed areas" have not changed~at all but
the means of implementing these policy'3ccls, such as technical axi
c:apital governnen al assistance, the role of p. vote enterprise and th
role of defense requirements of the non—Soviet world, are to be seen in
a new light.

As was discussed above, many primary projuot exoortin3 areas have
experienced a s bstantial improvement in their balance of payments and
terms of trad e, thus far mainly'because of increased stockpiling ac-
tivity of the United States and other western countries. In vies of
the fact 'hat the actual rate of consumption of primary materials will
also increase with the maintenance of lar3e def-=nse pro3 rams an ad that
new backlogs in the demand of countries such as t‘ie United States will
certainly'3usrantee hi3h levels of economic activity for a number of

‘0

years after the dei‘ense prc3ram will have sis aspeared, it seems reason-

able to suppose that the improvement in the terms of trade of primary

’

materiaIS'will remain for perhaps a period oi ten years. It was also
seen above that it is not at all certain whether the newly available
dollar resources rill be used for constructive development or for in-

creasing to Torarily the food supply, or vi 1 be lost in inflation.

 

32/ 113311331?er Address by President Truman, January 20, 1919. Excerpt
in: Partners In Progress, Report by the International Development
Advisory Board, p. 91.

32

But on the assxmlution that at least a com}. 1":32'73318 part of these re-
sources will be axe" ila'ole for constructive par sees a: 6. also ass-min 3
that no serious i 99 edirents 33‘ 'll arise 33:1. 4.31 re rep ct to the availability
of capital goods in industrial countries -, it is perhaps wise for the
United 3 :1th to" .. .ift tm't'orarily the miner-7:13 of development programs
from more casi‘ml assistance to 'zero tec‘. 3:1 cal assistance. Inless ira-
partiala 33:! 3 Ise $111518. nee is exercised in the formulation of the devel-
ocrment or Trans of these co*1n.rie:., premature anb' tions rather than ur-
gent necessities me": do. fmte. Here, of course, there is a lIL‘T'i catirn
to what a13J'Aneri an policym ybrin; about. TM: fiber cedntri es .re
not 1i cely to tolerate any inroads on their sovereiggntgr even if eco-
nouically speaking; a program might be sound. l'r . mgene R. Blacfvt, Pres-
ident of the International Bank for Recomtruction and Development
stated this problem as follows in an address to the Twelfth Session of
the United Elations Economic an Social Council at Santiago de Chile:

"Idleness and inefficiency, corruption and unstaile govern-

ment can be heavier drag s on progress than lack of capital,

and in: cad, are likely to be among tzze root causes of a lack

of capital. 01‘ all the desirable refoms, the reform of

land tenure i- {Krebs 1;," the 120? t i"qrortzant. The economic

develOpment of a country is primarily the reaponsibility of
the cofntry itself. It is not someti. n" whic b can be in-

‘0

ported from abroad but must be won internally by acceptance

of reopensioilitg, hard work, and sacrifice. Once these

factors 138571.? to appear, external ca pi al me ,I be used ef-

fethiveLyo d

The outlook for a flow of private ca;;.if....al has probably enterienced
a serious setback after the Korean even a. As far as the United States
is concerned, it appears new to be almost -. h'ioitive to invest any

private fund}: whatsoever outside the western he” sphere. In vie w of."

his feet and the continued fear of expropriation, itis surprising

 

19] International Monetary Fund, International Financial News Survey,
V010 III, P0 278.

o3
that the International Development Ad icon: Board in ite report to
President Truzr '1. ether-11:13 the role private enterprise is expected to
fulfill.2-1/ On the contrary, it would 3133311 that governmental assis-
tance would be much more appropriate in the anticipation of an improve-
ment in t‘1 e polit- .c l situation. T‘1e QTCI‘J'C, 9.1.. 3:2r is, however, that
short-r1111 defense objectives will dominate in the formulation of inner-
can policy. It r19 3; be very urgent to 1.:1crec13e the m..- ‘oer or tin ore-
111r11'1on of certain! 1t1n American co11ntr1e'3 1111; it r1111 11-111 19 .1111} 11r-
gont to reconotmct the trrmeportntion "yet“ o? such countries as
Indonesia. The c cot of’ +313 econ-3‘. “for d. "for has been ymmisely' the
former so tr oi t‘m western her: 1;.:~‘:":11— re 171.0122? 1': ch 111019 self—sufficient

in both primary materials 1nd mnufxcturor.1'.ro‘:.11cts 11.11113 otl'1 er regions

1

became more dopenr‘ient on imports from the western hemf spnere. A 1011?-
run eq 111151111111, there fore, will not 123 o". tained if the U111.- "Let ed a outes
will or": in a ronicm 'l self-sufficiency pro,. em rather than in world
wide deve10p591t.

Another aspect needs to be mentioned briefly. The formulation of
capital depends on the level of income after taxation. If the United
States would pev'for the entire defense progre: out of current taxation,
the amount of capital that could possibly' be invested abroai ‘oy private
i.vestors would certainly tend to decrease. The 1dv1eory‘fioerd on the
other hand, envisages an expansion of the arruel capital 0L Mflov from
the United Utotes from 31,000,000,000 to? 2,020,00C,OOO. This does not
seem to he reelietic n the coming decade, however desirable it other~

i
wise my be. The need for this capital 131111311111, however, is apparent

and the 'g'crcrmrent may, therefore, deci” e to take part in this inveemsent.

2}] Partners In Progress, 93. cit. , Chapter 5;.

81;
It seems to be an.irony of fate that the Test, already having full env
ployment of its resources, is nOW'urged to build up an adequate defense
machine, and at the same time, has to embark upon a world wide develop-
ment program while its fertile resources lay idle for almost ten years
previous to World Var II.

In summary, the follOWing general conclusions with reSpect to an
appropriate United States foreign economic policy in the present con-
iitions were explicit or implicit in the above discussion.

(1) The United States should continue to proceed towards further
liberalisation of trade among the relatively free countries of the world,
and, if necessary, should lower her tariffs unilaterally.

(2) Emphasis of foreign development programs should be directed,
for the duration of the mobilization, towards supplying impartial tech-
nical assistance rather than large capital gifts, in countries benefit-
ing from high primary'material prices.

(3) The United States should continue to make available the neces-
sary exports of capital goods to the underudeveloped areas of the world.

(h) The immediate defense needs should not lead the United States
towards a regional self-sufficiency program within the western hemi-
sphere. Instead, the pooling of strategic stockpiles within the allied
block would provide adequate political safety, as far as possible while
no serious economic maladjustments'would he created.

(5) For the duration of the political turmoil private capital should
not be expected to fulfill the objective of economic development.

(6) Above all, the United States should coordinate her foreign eco-
nomic poliCtes with those of other countries individually, and also with

the United Eations agencies engaged in similar programs.

fi—I

\
U,’

CHAPTER VII

SUE-MARY A319 CCIIC ITSIOEIS

Economic developments in virtually all countries of the non-Con-
munist'world have been profoundly affected by the outbreak of the Korean
war in June, 1950 and by the subsequent decisions of the United States
and many other countries to increase their defense preparedness rapidly.
Throughout this report it has been assumed that this reversal in the
postéWorld'War II defense policies of western countries constitutes
an important structural change the economic impacts of which'will be
felt for a considerable period of time, at least a decade. These eco-
nomic impacts nay'be divided in primary and secondary impacts. The pri-
nary impacts consist mainly of price rises of various proportions. The
secondary impacts will be the changes in the cost of production.pattern
as a result of these price rises and the adjustment of international
trade and international economic policies to the changed situation.

In the present situation the United States has emerged as both the
political and the economic leader of the non-Communist‘world.and in
view of this fact, it is the immediate interest.and the grave responsi-
bility of the United States to see to it that the increased defense ar-
mament, the effects of which are propagated abroad especially by changes
in the trade and prices of primary materials, will have the least pos-
sible disturbing effects on the sound economic develogment of other
countries. Indeed, if at all possible, the changes in attitudes and
economic conditions of the western world should be utilized to improve
the situation.

The price rises of primary materials during 1930 which appeared for

86
the most part to level off by the end of that year, affected virtually
all products but especially certain strategic products produced in stra-
tegic areas. Rubber, tin, and wool registered the largest price gains.
In December, 1930 these commodities found themselves at price levels
respectively'lSO, 67, and 32 percent above the ones in.Kay, 1950, the
last month before the Korean outbreak. Industrial primary materials,
as a group, rose about hS percent in price during the latter half of
1950 and the prices of primary foodstuffs entering international trade
rose about 10 percent in the same period.

Hany so-called under-developed countries are dependent on a small
number of primary materials as a source for nearly all their foreign
exchange while domestic production supplies only a very small proportion
of the manufactured goods consumed. In view of the short-run, inelastic
supply of their export commodities, fluctuations in the prices of these
commodities are large as are the fluctuations in the countries' na-
tional incomes. Over the 70qyear period since 1830, however, prices
of most primary commodities have become more and more depressed rela-
tive to prices of manufactured goods. Recent price changes have been
upward and since prices of manufactures are only slowly catching up,
the purchasing power of many primary'comsodities has been increased.
With the large scale armament prosPects and the resultant virtually
guaranteed high levels of economic activity in developed countries for
the next decade, the amount of foreign erehange available to less de-
ve10ped countries is definitely expected to remain at much higher levels
than previously. ‘ .

An attempt was made to measure quantitatively'the effect of the

1930 price rises in primary products on specific countries. For this

87
purpose the 19h? volume and constitution of each country's exports was
taken as a base and then recalculated to obtain an estimate of the in-
creases in export revenue which would occur due to price rises between
the 19149 averafe and December, 1950. Since import prices rose also
during this p riod the results do not represent the net improvement of
each country. Furthermore, during the first part of 1931 it‘was seen
that prices of primary products had not get found a new equilibrium.

The qxantitative estimates therefore are only a znomentar‘.)r picture.

The follow.‘ 3' figures are the percentages export revenue was es--
timated to increase over the actual amount in 1919: Halaya, 2153
Indonesia, 91; Australia, 77; Brazil, Ch; Colombia, S73and Venezuela, 3.
The position of the Union of South Africa is complicated by the importance
of gold in her encports.

Under the stated conditions the selected countries could dispose
over an annual additional amount of foreign exchange in terms of United
States dollars of about $3,2oo,coo,-:oo. or this amount, Malaya would
receive $1,026 million; Australia, $1,011 million; Brazil , $527 million;
Indonesia, $206 million; Colombia, $172; million; and Venezuela, $36 mil-
lion.

This does not mean, however, that the economic problems of the so-
called under-developed regions are now solved. The new financial re-
sources magr well be used unproductively either by private individuals
who dispose of then as additional personal wealth or by governments
which lack the capacity or the will to embark upon an all-around sound
economic development program. On the. other hand, potentially the op—
portunity appears to exist to utilize the resources productively to

maintain or obtain a better balanced economy and to increase political

83
and economic stability. There is a great need, however, to obtain in-
partial teclnical assistance from the more developed countries on a
large scale. Sepecially serious is the circums‘ nee that at present
technical assistance programs sponsored by the United States alone may
well be devised so as to fulfill relatively short-run defense Objectives
which, in the long-run, may be detrimental to a sound development of
the world.

is the situation existed in early 1951, it appeared that those pri-
mary product exporting countries which are already developed to some
exten ,‘Wlll have a much better chance to benefit from the price rises
than other countries'which will tend to feel the price rises in the first
place as a disturbing, e. g. inflationary factor. ‘Huch'will depend, how-
ever, on the foreign economic policy adopted by the United States.

The industrial area of western Burepe is affected quite differently
and also quite considerably by the recent defense developments., The de-
terioration of its tents of trade as a result of higher import prices
for primary products tends to affect western Burepe similarly to Horth
America. However, the importance of this deterioration in terms of na-
tional product is much larger in western Europe and the inflationary im-
pact of this factor is therefore more evcre in Europe than in the United
States. Actual rsarmament will take place on a larger scale in.North
America than in'uestern Europe although substantial increases will occur
also in the latter area. The still precariously low levels of reserves
and the balance of payments difficulties of many western European coun-
tries present an additional problem to them as contrasted with the
United States.

The indices of the cost of living increased in all countries. In

C9
3" tzarland, Sweden, and the United Kingdom, these increases were be-
tween one and two percent from raybuecombor, 1950. In Belgium and Can-
ada the increase nae about four percent, in the fietherlands five per-
cent and in the United States six percent.

Wholesale pric as increased much more and along a different pattern
so that it was not clear in'which area actual inflationary pressures
were highest. HayaBecenber, 1950 wholesale price increases were as fol-
lows: Belgium, 23 percent; the Netherlands, Enite' States, United King-
dom, and Sweden, between l2 and 1: percent; Initzerland, 11 percent and
Canada, 10 percent.

On salance, there are a number of f"vorable and unfavorable factors
affecting the western EurOpean economies which are di“ficult to evaluate
absinst each other. The unfavorable factoz s are mentioned above. The

a'orable factors are first, that total demand of under-deveIOped coun-
tries for European products has been increased and that the availability
of n- v dolls.r resources in thee e tizird ra:é“ets will open the possibility
of new triangular palments schemes. oecontl , an . probably equally n-
{Jortant is the fact tllat the United States as the bulwark of the entire
non-Cc;:n~ met econo.y'will continue to have virtually full malo:iment
for a number of years. In the past year there has already been consid-
arable in,T rovaner t in the European trade bale: 1068 with file United States

I this fact, together with the new export Opportunities opened in third

markets may'aid considerably in relieving the "dollar shortage" problem,
if proper policies are a dopted by all countries.

The present economic situation and the state of mind of non—Commun-
ist peoples s hould be utilized to increar as the interdependence f the

non-Communist world. Continued liberalisation of trad 5, payments and

530
the movement of capital, indeed, the outing integration economically

and politically'of the area is not onlg'attraotive but also mandatory.

u...

uatually, the aim sho;ll not be to obtain.a owrmanently closed bloc.

A
However, the goal of an eventual improvement in the relations between

the two major areas of the world at present me well be served best'by

‘P
U

a demonstration of solidarity on our side. flhatever measures the

Unitefl States will take to implonent such objectives will be of tremen-

dous imp rtanoo to all other countries.

‘0

LIST OF REFUWEJC" S CITED
Council 0. Jconcnic Advisors to the Iresident, Tle annual Economic
Review, January, 1951.

International Jevelopment Advisory Board, Partners In Progress (Simon
eni fiohnnter, Ken lork, 19-31).

International Vonotary Fu21d Inter.eti n11 ;i, ncial lens Eu vex,
weekly'iseues , 1950-51.

Organization of baropean licononic Coogeretion, The European Recovery
lmb‘a“, UUOODC; l'k’laort 01- Lie C'.J'i.iC (PCT-{‘13, 12/0).

Salter, Tir Arthur, Foreign Investment, Jesays in International Fi-
nance, £0. 12 (Princeton University Press, 1950).

United Nations, Economic Development in Selected Countries, Plans,
Progrannes and ‘gencien (Lake Success, 19h7).

United Lation 3, ficnnomic Survey of Asia and the Far East, 19h9, (Lake
0 ACCESS, 1950) 0

United nations, Economic Survey of Europe in 19119 (G ueneva, 1950).

UnitedE Iatione, Economic Survey of Latin 9 mrica in 19h8, (Lam naccees,
1919).

United Iatione, mtive Prices of 31p orts and Imports of nder—devel~
Oped Countries, (Late Success, 19'9).

United Nations, Review of International Commodity Problems, 19h9, (Lesa
ancess, l,-,C).

United nations, Iorli Economic Report, 19L9-33, (flew York, 1951).

Viner, Jacob, StuLies in the Theorv o. Inte rnntionel Tra 16, (Harper and
Brotners, NeW'York, 193; ).

92
SOURCES OF STATISTICAL DATA

Banco do Brazil, Resenha Economics Yensal.

Banque Nationals Suisse, Bulletin Yensuel.

British Information Services, British Economic Record.

British Information Services, Labor and Industry in Tritain.

Contraal Sureau vocr dc Statistiek, Netherlands, Meandschrift.

Central Statistical Cffice, United Kingdom, Vonthly'Digest of Statistics.

Department of ' riculture, United States of America, Agricultural Prices,
nimeo. '

H

Department of Agriculture, United States 0
Situation, mineo.

America, The Fats and Oils

Department of Commerce, United States of America, Foreign Commerce

“teem c

Department of Con erce, United States of America, Survey of Current
Business.

Department of Customs and Excise, Union of South Africa, yaandeliksa
Uittreksel van Handelsstatistiek.

Dominion Bureau of Statistics, Canada, Canadian Statistical Review.
Food and Agriculture Organization, Food and Agricultural Statistics.
Institut Rational de Statistique, Belgium, Bulletin do Statistique.
International Vonotary Fund, International Financial Statistics.
Ministerio de Fomeuto, Venezuela, Boletin de Bstadistica.

Penerbitan Kantor Pusat Statistik, Indonesia, Statistisch Raandover-
zicht.

Statistika Centralbyran, Sweden, Statistik Arsbok, 1950.
United Nations, Monthly'Bulletin of Statistics.
United Nations, Series D, Summary of World Trade Statistics.

United Nations, Series T, Direction of International Trade.

”P",

I S 771% TE
50531;

7 266

031

 

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