ERM86 r-~~~~~~~~~~~- SUMARY OF TmE UNITED NATIONS ECONOMIC COMISSION IFOR JRCPE REPORT ENTITLED "A StURVEY OF TEE ECONOMIC SITrUATION AND PROSPECTS OF EtJROPE" I.:B.R.D. Economic. Department GdeF/cstp May 4, 1948 A SIRV:EY OF TI ECONOHIC SITT'UiTIOI AlND PROSPECTS OF EUROPE TA.BLE OF CO1TEN S A S'02art THE RCOVBY IN PRODUCTION Page ]To. 1. Ind.uistrial Production ...2 2. AgriculturaliProductioni.... .....t.on e 2 3. Transport ' .. . 2 4. A Comparison with Post World ,TWar I ..................... 3 5. Changes in Availtble Resources ......... 4 6. Manpower and Productivity ,. ...... .....,.... 5 Part IX THE RECOVERY OF TRADE 1. The Current Level of Europets Trade ........,......... 6 2. Trade in Relation to Production . ...... ..... 7 3. Geographic Distribution 0* ........ .............. ... 7 4. Commodity Changes in Europets Trade ......... 9 Part III P~ t1ANC~ OF PAY:.:"_T~'S THE R&LANCE , EY;2t 1. What are the Factors Responeible for the Deficit ,..... 10 2* How was the Defioit Financed ...........,. ................. 12 3. Possibilities of Restoring International Balances ....3 Part IV PROBLEms QF C ,PL REICONSTRUCTIC 1. The Problem of Inflation [6................,......... 2. The Problem of Intra:European Trade ................... 18 T. PRODLM3 OF PRODUCTION 1. Dimensions of the Problem - 22 2. The Reconstruction Targets *....,..,..*.90*,..t. 22 3. Bottlenecks .......... * 23 _Page 2 APPTD DIX A Page No. The Economic Plans of European Ooun tries , ........ 25 Plans in Central and Southeastern Europe ........,.. 25 The Fourth Five-Year Planl of the U.S.S.R, ..... 27 The Economic Plans of the CEZC Countries ...,.. 28 APPEDIX B Notes on Sources and Methods 3.0..,.......................... 30 A SURVEY OF TH ECO01TOMIC SITUATION AND PROSPECTS Or EUROPE The following paper attempts to summarize the most important Ideas and a few of the facts contained in the vol.minous re-port prepared by the Research and Planning Division of the Economic Commission fc-' Europe. 3mphasis is laid in the report on the dominant features of Europe as a whole rather than on separate.problems in individual countries. Overall estimates exclude almost always U.S.S.R., very often Yugoslavia and Rumania. However, 70 to 80% of pre-war industrial production, and up to 90% of agricultural production are accounted for, The report is divided in four main partst 1) The recovery in production. Z) The recovery in trade., 3) The balance of payments. 4) Problems of European reconstruction. and two Important Appendixes, namely:' A) Economic Plan of European coWxtries. B) Notes on sources andi methods. The renort includes 96 tables, 9 charts and over 300 pages of text. In most cases figures and text refer to Europe as a i.hole and it is hardly even possible to distinguish accurately between C.E.E.C. countries and the others, If such a distinction could be made, many problems would probably appear in a different and often more favorable light. In view of the delay involved in publishing most official data the report actually refers to the period ending during the fourth quarter of 1947 and contains no new facts relating to 1948. PART t THE RECOVTY IN PRODUCT IOC 1) Industrial Production For fifteen European countries representing 75% of the total va_lue of pre-war European industrial productions the average level of production rose from 60% of pre-war in the latter half of 1945 to 83% including and.98% ex- cluding Western Germany for the period October 1946 to October 1947. There were considerable differences in performance (over a range of about 40% out- side of Germany). Xevertheless the rate. of recovery was on the whole surprisingly rapid up to the end of 1946. But no further considerable progress was made during 1947. Underlying causes of this stag;iation can be laid only partly to temporary factors such as the fuel shortage, In addition, there was a shortage of raw materials, resulting in critically low levels of stocks, impeding further expansion. The stock position has improved in the course of 1947, but progress in the coming year cazinot continue at the 1945/46 rate, as more normal levels have now been attained (with the conspicuous exception of Germany. )As higher percentages of prerwar production are attained, the current rate of progress diminishes: in countries where production was under 70`'? of pre-war, the average gain during 1946 was over 53%; in the intermediate group where the production index stood between 70 and 100%, the average gain was 29;, in the countries whose level of out-ut weas above 100%, the improvement was only 17%. If individual industries are considered, production of investment goods industries appears to have risen much faster than that of otller industries: by 32% in the course of 1946 as against 19% for other industries* This increase continued in 1947, even after the general increase had stoppedt However, it must be noted that for the group of countries shown, investment goods output was low in 1938. PART Z TH RE1O0VEY IN PRODUCTIC0X 1) Industrial Production For fifteen European countries representing 75% of the total value of pre-war European industrial production, the average level of production rose from 60% of pre-war in the latter half of 1945 to 83% including and.98% ex- cluding Western Germany for the period October 1946 to October 1947. There were considerable differences in performance (over a range of about 40/ out- side of Germany). Nevertheless the rate.of recovery was on the whole surprisingly rapid up to the end of 1946. But no further considerable progress was made during 1947. Underlying causes of this stagnation can be laid only partly to temporary factors such as the fuel shortage. In addition, there was a shortage of raw materials, resulting in critically lowr levels of stocks, impeding further expansion. The stock position has improved in the course of 1947, but progress in the coming year cannot continue at the 1945/46 rate, as more normal levels have nowv been attained (with the conspicuous exception of Germany. )As higher percentages of pre-war production are attained, the current rate of progress diminishes; in countries where production was under 707? of pre-war, the average gain during 1946 wfas over 53%; in the intermediate group where the production index stood between 70 and 100%, the average gain was 29%: in the countries whose level of outrut was above 100%, the improvement was only 17%. If individual industries are ponsidered, production of investment goods industries appears to have risen mruch faster than that of other industries: by 32% in the course of 1946 as against 19% for other industries* This increase continued in 1947, even after the general increase had stopped. However, it must be noted that for the group of cuntries shown, investment goods output was low in 1938. 2) Agricultural Production Recovery in agriculture was, by no means, as favorable as in industry: only 63% of pre-war were produced during 1945-19l46 and 75% in 1946.4947. In the current year 19471948, production will be appreciably below this last level. The causes, apart from wveather conditions, are the prolonged lack of fertilizers, the losses in livestock and equipment, and the sgarcity of agricultural manpower. Only in Ireland, Sweden, Turkey and U.K. did production reach the pre-war levels. In former surplus areas of Eastern Europe, production was only 60% of pre-war. The fall in agricultural prod-action between pre-war and 1946-47 was unevenw almost 40% for animal products (meat, eggs, butter, milk), 23% for potatoes, ?0% for sugar, less than 29% for wheat. Production of tobacco was\ maintained. Dlue to the decrease of animal productts share in total production, the calorific value of sup-plies appears to have diminished less than the value of gross output. 3) Transport Railway transport made a remarkably quick recovery, and goods traffic was (in the thirteen countries where data are available) 26% over pro-war. Hlowever, railways operate under heavy strain, for the following reasons: Reduction of inland water traffic, increasing the share of rail- ways in total transport. . Increase in length of haul. This increase is a partial result of the reduction in inland water transport, shifting towards raillways long distance traffic formerly carried by barges, It also reflects a more important fact: the general fall in productivity of the European industry, calling on distant and relatively poor sources of supply, deprived of sufficient or adequately dispersed stocks, and therefore obliged to meet higher oyerhead costs of transport (examplest cross hauls of coal, fuel wood consumption and north- ward shift in logging in Finland)* 4) A Comparison with Post World War I The rate of induetrial recovery was definitely higher after World War II than after World War I. Fourteen months after the cessation of hostilities, the weighted averages of industrial production indexes in 10 countries were 83% in 1920 and 95% in 1946-47 (July-June). While.Germany and Italy fared much worse after World War II, 3elgium, France, U.K. and Poland fared much better, Coal production, despite the fall in Ger.man output, reached in 1947 almost the same relation to pre-war as in 1920. But consumption was higher: 94% instead of 86%f, reflecting greater indhxstrialization in coal- importing countries. Also, the exportable surolus that Europe had in 1213, to cushion the production losses during the wart had diminished in ?1938. These two reasons account for the coal shortage a:d imports of 29 million tons in 1947 as against 8 million after World liar I. The picture was substantially similar for steel: despite a German production of 15% only of prew..ar in 1948, aggregate European production in 1947 was 65%, the same as in 1920 (and 100% if Germany is excluded). "tBetter planning and organization! after World War II have made possible this quicker recovery in production. It is hoped also that Euromean nations are now far better equip-ped to avgid a depression like that of 1921 which caused a severe setback in recovery. The decline in agricultural production in 1946/47 relative to pre-war was not greater than after World War I? but in 1947...48 bread grain production at least was at lower figures, both absolutely and in perce tagese than in any year after Wilorld War I. And because of the decl4ne of per capita European supply that occurred in the inter-war period,4a similar percentage decline nowi means losser absolute levels of consumption. Since the first war, European production never caught up with the growth of population. Even if pre-war agricultural output is restored, as planned, by 1950-1951, this will still mean a 6-8% per capita decrease from the 1934-1938 levels, owing to the increase in nopulation. 5) Changes in Available Resources In order to show the overall and per capita change in available resources at home, it is necessary to go beyond usual index number comparisons. Imports must be added to, and extorts substracted.from the total value of home production, estimated at constant prices ./ . The concept used in the report is that of "commodities available for home use,; in other words, an estimate of gross national product that would exclude all services and to which the net commodity import balance, if any, is added. By putting side by side the total value of home nroduction and the overall and ner capita figures so obtained, it is possible to gain an impression! 1) of individual national recovery, 2) of the physical amount of external resources received by each country (be it with or without immediate payment), and.3) of the goods available per person (be it for consumption or for investment). From the figures for 1946/47 (July-June), it can be seen that while home production was constantly under pre-war level 2/ thelsupply of commodities for home usenwas generally above, except in the case of Finland (reparations) and of the U.K. (relative decrease in import surplus). If population changes are now brought into the picture, rulgaria, DPemark, the Netherlands, and / The total obtained can then be divided by the population figure to show availabilitlep per capita. / sExcept in U K., Ireland,, Sweden and Yorway, Western Geriny with large increases in population appear relatively worse off, while Poland and Czechoslovakia, with large jecreases# appear relatively better off, in terms of per capita resources. The most conspicuous example of the combined effect of trade and population on per capita available goods is probably the U.K., where,home production is 108% of pre-war, while resources per head are 91% only. Of course, if individual wel'l-being is to be estimated,"available resources'$er capita are not determinant. The sl-lare of investments and of government expenditure in the gross national produvct must also be determined. As this share has generally increased, the standards of consumption are low%rer than figures of commodities per head would indicate. 6) Manpower and,Productivit,y The total pp,pulation of Europe remained unchanged between 1938 and 1946 (380 millions). The popula.tion of working age also remained the same, but the number of men has decreased. The proportion of women in the occupied population has increased. Occupational distribution figures show a sharp increase in services (government and commerce) offsetting,a decrease in agriculture, the numbers in industry being left unchanged. Apart from Germany and Italy, there is a large increase in employed population: 4% for 12 countries representing 1/2 of European population. Working weeks (particularly in France) are longer. There has been a shift from heavy to light industries (coal and agriculture are undermanned). Apart from these absolute changes, productivity per man-h.our is definitely lower than pre-war (wvhile it has increased.by 27% in the U.S.). One of the reasons for this is that when shortages, e.g. of raw material and fuel, are felt, employment of 1rorkers is maintained. Thus a considerable but hidden unemployment appears in the labor force, and when output falls, produc- tivity, not employment, falls with it. In addition, other factors (probably more important in 1947) were the obsolescence of capital equipment and the general disorganisation due to inflation and trade restrictions. A study would be necessary to determine what is under-capitalization and what is disorganization. Manpower shortages in particular industries may be eased through the encouragement of international migration, PART II TIM RECOVERY OF TRADE 1) The Current Level of Europe's Trade The percentages of intra and extra-Buropean trade compared to 1938 are, in real terms, as follows for 1946 and 1947: 1938 100 Trade wl!ith non- Intra..European Trade -ropea Coixntries Total Trade 1946 147 2 94 l947 i/ Imports 45.3 56 91.9 106.5 66.5 79.0 Exports 45.3 56 61.7 77.7 51.0 63.6 Euiropels total trade is thus wel. below 1938 levels, only inmorts from overseas being somewhat higher in 1947. There was in 1947 substantial expansion over 1946, but the increase in .mports was greater than that in ex- ports, making for a larger disequilibriumn The rate of increase in trade (especially exports) slowed down in 1947, like in the case of production. It was very umeven; the U.K. and Finland have been in the unique position of having exmorts rising more than imports, .X/ Excluding Germany, the index of total ezoos (for the 9 first months of 1947) would be 88 and for total imnorts 102. while in other countries the reverse is trueO Volume indices may be estimated as foljovrs for the first 9 months of 1947+ Eurojean Trade (12L8 - 100) Im'ort s :EMort s Total trade including Germany 79 63 Total trade excluding all trade by and. with 102 88 Germany 2) Trade in Relation to Production a) Trade and Production If the changes in the ratio of export index to production index are considered, it can be seen that exoorts have in 1946 and 1947 fallen more than production. There was an improvemetit at the end of 1946, which disappeared in early 1947, the 1946 level being regained, however, in later 1947. (The ratib was 61% at the beginning of 1946, 86% at the end of 1947.) The ratio of exports and imports to Wcommod.ties availablell (in the sense explained in Part I above) shows that only the U.E. supeeeded in increasing the pre-war export ratio, while cutting that of imports. In all other countries, the ratio of exports to"0available commoditiesllhas fallen, In some countries (Sweden, Norway, for instance), it is striking to note that, despite little or no war damage, there was a decrease in exports of some 305C, while impprts remained at or above pre-war levels in both absolute and relative terms. 3) Geographic Distribution A general double entry table gives the distribution of Europels trade by country groups in 1928, 1928, 1946 and 1947. The main conclusions that can be drawn. are an follows; a) As shown above V/, there has been a sharp decline in intra- European trade compared with total European trade. The main areas responsible for thi s decline are: Germany (with the major influence in this respect), Central and Eastern Europe, and the United Kingdom in so far as its imports from Europe are concerned. Imports of European source also declined in Iberian and Mediterranean Europe. Western European and Scandinavian trade with the rest of Europe also wias reduced in both Imports and exports, mainly as a result of the disappearance of German trade b) The percentage of Euroi3ets overseas exports going towards countries affiliated w.rith kixrogean currency regime increased. Ex-orts did not. recover towards the U.S. The TU.K. accounted for nearly 45% of overseas exports. The greatest contraction is again a consequence of the eliminatipn of Germany, Total exports to non-European countries in 1947 were 77% of 1938. c) Eurapets im-oorts from overseas were higher than preo-war, but unevenly distributed (lower in Germany, equal to pre-waar in U.IK., much higher elsewhere), Imports from the U.S. were in real terms twice as large in 1947 as in 1938. Imports from other countries were at most 85% of pre-war. d) Euro-pe-ts trade compared to world trade is much smaller than pre-war. The share of Europe in total exports was 54.9% in 1947 as against 63% in 1938, and Xn total imports 46.9% as against 55B a decline of around 15% in both cases (Intra-Furonean trade is 17% of world trade instead of 30o). Europets competitive position in overseas markets is drastically altered. In 1947 U.S. total exports outside :urope were larger than all combined exports of European countries,.while before the war the latter total was more than three times thie former. Europe is in deficit with the three other main trading / Page 6. ,/ It must be remembered that there has been a substantial recovery of intrao trade within Western Europe (approximately 90% of 1938 for the 16 EPRP countries, excluding Western Germany), areas of the world: in 1947 by $4,900 million with U.S., $i46o0 million with Latin America,,,Canada and the Far East, and $380 million with afiliated currency areas, 4) Commodity Changes in Suropets Trade Instead of importing primarily raw materials and unnrocessed food, stuffs from overseas countries (outside of the United States), Europe now imports large amounts of grain, coal, processed foodstuffs, and also of manufactured goods and capital equipment items (mainly from the U.S.). This reflects temporary emergencies (coal, grain, extraorainary capital requirements), and also, but to a relatively small extent, the fact that a diversion towards the U.S. has become necessary with the disap-pearance of former sources of supply (for bread grains and coarse grains particularly). A reduction in imports has occurred when no diversion to U.S. wras possible (Asiatic oil seeds and nuts), and also as a result of foreign exchange shortages (tea and coffee imports). Impoorts of raw materials and manufactures have been more generally maintained than imports of foodstuffs, but their comnoosition has changed: reductions ini timber, cotton, chemicals and fertilizer being offset by increases in petroleum. All reductions in imports are likely to be only temporary. In respect to exports, there has been a sharp reductionl from pre-,w1r shipments of raw materials and foodstuffs, more severe in intra-European tr'ade than in exchanges with hard currency areas, colonial areas, or the U.S.S,FLP Manufactured goods have recovered in trade with non-European countries (specially machinery and vehicles where exports are at or above pre-war level). Intra&-Tropean trade in manufactured goods has declined much more shar ply, more as a result of Germanyts elimination than from any other.causes, since most of German trade in manufactures aee dlrected towards Europe. This has been compensated to some extent by increased exports of other manufacturing Qountries, Thvt in moqt manufactures (particularly iron and steel, textiles, and chemicals) intra-European trade remains far below pre.-war levels. P?ART I I I THE 3AI,ATCE OF PAY'TS A total deficit of 7,500 millions of current dollars is the most critical feature in Europe's present economic situation. Three main questions arise in this respect: What are the factors responsible for the deficit? How was the deficit financed? How can equilibrium be restored? 1) What are the factors responsible for the deficit a) Chanae in invisible items: The loss on income from investments alone is about $1,000 million. On ship'ing and other services, Rhropets position has become sharply adverse,at least teporarily, due to losses in tonnage, overseas pu'blic expenditure, -and fall in tourist receipts. Thus, in place of the $700 million of net receipts from these items in 1938, there was a net outlay of $1,000 million in 1947 (a total impairement of $2,700 million). b) Change in real volume of merchandise trade: The remaining $4,800 million of the deficit arise from,l) changes in volume and 2) changes in prices of exports and imrnorts. Changes in volume account for $1,200 million ($800 million less exPorts, $400 million more imports). Elimination of Germany explains 75% of the loss in exports ($600 million), but as this is nearly offset by the present reduction of imports into Germany ($500 million) the problem of coping with the overall European deficit may be considered apart from the special and acute German problem. c) Changes in prices account for the other $3,600 million. Taking Europe as a whole, this is not due to a deterioration in the Mtterms oL trade's, which have in general not changed significantly (the United Kingdom being a notable exception). But the post-war rise in prices, even when equal for exports and imports, has affected more the swollen imports than the depleted exports. If changes in "average values"Z A/ of actual exports or imports are considered, it can be seen that the cost of imports in terms of exports has risen for the U.K,, and fallen on the average for Continental Europe, the changes cancelling out for Europe as a whole. It should not be concluded, however, that this trfavourablet change in Contineital Europet's terms of trade cannot have very unfavourable effects by limiting the possibilities of iparketing Europets exports at their inflated prices,in hard currency areas. In this respect, the report states that Eurore cannot reasonably extect a fall in the price of its imports, while mnaintaining that of its eroorts, if the volume of the latter is to rise. The necessary reduction in ex-nort prices may well offset a fall in import prices and equilibrium will have to be attained by purely auantitative measures: export drives or import cuts. A comparison with the aftermath of VWorld WJar I reveals the relative success of Europets efforts towiads self-help in the field of current trade: 45% of imnorts were bought by exports in 1947 as against 39- only in 1920. But the great deterioration of invisible receipts explains why- the increase in the real volume of imports received by Rurope in the second nost-war period is less than might be expected from the expanded scope of financial / The "laverage valuelt index compares the value of actual trade in a given year with the value of actual trade in the base yeart Changes in tlaverage values" are more instructive than changes in price alone, because they account for changes in the composition of trade. - 12 * assistance: there was only 30% increase over 1920 in total imports (and 44:% in imports from the u.s.). The strain on the U.S. economy, as expressed by the relation of surlias eLorts to Europe to total U.S. output has been only less than half as large- as after World liar I (2% of gross national product in 1947,.5% in 1920). But, after World lWoar II, Europe was not the only claimant on U.S. resources, and its share in total U.S. export surplus was less than 6O'. Despite this fact, however, total U.S. export surplus in 1946 and 1947 together was a lesser part of production than in 1919-1920. Another notable fact is the progressive decline in the ratio.of U.S. imports to tJ.S. production (5.Z% in 1919-'920, in 1921-1939, 2.4% in 1946-1947). 2) How was the deficit financed To calculate the amount to be financed, it must be noted that in addition to the trade deficit, there have been heary payments on capital account: for the U.K. alone $1,274 million in 1947 for.reduction of sterling balances, and other movements towards the sterling area. In addition, subscriptions to the Fund and the Bank totalled $503.9 million (end of June 1947), total wxhich goes far to offset the $938 million of financial assistance extended bv both in4titutions until December 1st, 1947. By and large, gross cap.tal transfers from Purope in 1946-1947 are estimated at nearly $2,000 million. The financing of the 1946 current account deficit is estimated as fol lows: UINRA aid and other grants $2,300 million Loans and credits (net) $2,500 n Use of Ruropean assets $1,000 t $5,800 ' L/ Excluding war surplus credits. The financing of the 1947 deficit cannot yet be comprehensively described in numerical terms. However, the following conclusions stand out clearly: , a) F$nancial requirements were much higher than in 1946. They probably exceeded $9,000 million on current and carntal account (because of increased deficit, rise in -orices, capital payments)P b) These requirements coincided with a period of sharp contraction in post-war aid to Europe (end of VTPMA, suspension of l9ans between the U.K. loan of July 1946 and the first I.B,R.D. loan in May 1947). c) 60% of the $9,000 million requirements mentioned above were met from the following sources: (millions) Use of gold stocks and dollar balances $1,800 Drawings from the Fund (up to December let, 1947) 441 U.S. and Canadian credits 3,270 Total .$5,511 At the end of 1947, pending the realisation of the :E:.R.P. (referred to as a: tplan for comprehensive financial aid coordinated with economic recoveryn, $532 million of interim aid to France, Italy and Austria were appropriated by the United States, The report notes that prospects of comprehensive assistance had "the unfortunate consequence that existing insti- tutions established to provide long-term international financing have tended to suspend new,lending operations for the time being, thus aggravating the dollar crisis"+ 3) Possibilitiee of restoring international balances Eurooets merchandise trade account must bear the main burden of adjustment for the following reasons: - 1- Pirst, net investment income is morp likely to fall than to rise, as Europets assets shrink and its debt increases. Second, a major increase in income from services is doubtful (tourism is the best hope). Total net receipts from invisibles cannot be counted upon to yield more than $500 million. Large outflows of capital are to be foreseen (release in sterling balances, amortization of loans), Thus, adjustments in merchandise account are needed, the size of which can be estimated (in 1938 prices) at $2,000 million (1938 levels of trade) or $3,300 million (1947 levels). Equilibrium at 1938 levels would imply a 56% increase in exports, a 36% contraction in imports, or some combination of both 1 . In the special case of U.K. exports, volume would have to be roughly 175% of 1938 to secure the 1938 inmort volume. The U.K. deficit is a major part of European deficit, and its elimination would leave only a . gap of $300 to $400 million in overseas accounts of other European countries. But to the extent that U.K, ld a trade deficit writh other )urope ($600 million in 1938),.adjustments by UI.K. alone would simply transfer the problem to other countrieso To state these figures is enough to realize the magnitude and difficulties of the problem of restoring equilibrium. It can clearly not be solved in a short period, nor by making adjustments on only one side oL the trade account. Possibilities of export expansion An increase in exports of more than one-third would eliminate trade deficits with overseas countries outside of U.S., but would effect only ,/ Given the temporary nature of some of the im-port needs in 1947 (coal, grain, reconstruction items), it seems more realistic to calculate the adjustments required tQ eliminate the 19,38 trde deficit. To eliminate the 1947 deficit would require a 1l4l increa&o in European exports, or a 53% decrease in imports. 15 a moderate rediuction in deficit with U.S. (ony '14% of 1947 exports went there). Possibilities of triangular or multilateral settlements between Europe and U.S. are very unpromising because of the adverse balances of nonEuropean coumtries with the.U.S. (Import surplus problems are by no means a purely European feature), The expansion of direct European exports to the United. States is not very promising either, at least in the magnitude required. If European currency inflation is cured, however, and if determined efforts are made to expand Euronean markets in the U.S., progress may be made towards closing the gap by exports of luxury and. light industries goods. This process will require the full co-operation of the United States. Apart from the U,S. market, the bulk of any increase in exports will have to come from European heavy in.ustries, whose markets may expand with the industrialization of undeveloped areas. Possibilities of import contraction Zuropets present imports may usefully be divided in three broad categories; "normal" imports (foodstuffs and raw materials), tirelief" imports (coal, bread grains, processed foodstuffs), Ireconstraction"l imports (capital equipment). The first category is incompressible, and is indeed bound to increase be it only for sound economic reasons 4icreased production and ex- ports) or for economically more doubtful purposes (shifts from coal to oil). Additional import reouirements in this category are estimated to some 300 to 400 million dollars at pre-war prices coming over and above the pre-war deficit of $2,000 million. On the ether hand, the other two categories can reasonably be expected to disappear. It must also be noted that before the war -Elurpe imported some $500 million of engineering and chemical goods from the U.S., and in,that case substitution towards European heavy industries appears possible. The conclusion may be drawn that to balance ultimately overseas accounts and yet restore pre-wtar standards qf living, the following steps must be taken in Europe: 1.) The production of heavy industries must be expanded by some $2,000 million pre-war dollars, both to substitute for manufactured goods hitherto imported and to increase exoorts. 2) The remainder of the adjustment will have to be made by increased exports of luxary goods and light industrial products to the TS. and to tte extent possible, by decreased imports of some primary products. This requires sustained effort over a period of years and the fulfillment of three basic prerequisitest monetary stabilisation restoration of intraEuropean trade expansion in European production which are studied in Part IV of the report. PART IV PR03LJEMS OF EURQPEAN RECONSTRUCTION 1) The Problem of Inflation The report contains a review of the causes and of the economic evils of an open or suppressed inflation. The main causes of inflationary pressure are: I) excessive public expenditure in relation to revenue, 2) a reduced propensity to save by the public, as a result of the reduction of standard of living and the accumulation of wartime savings held in more or less liquid forms, 3) high investment reouirements for urgent reconstructiont 4) in countries where inflation has advanced far enough, a tendency to hoard real values. The basic condition of monetary stability is reasserted: capital ex- penditure (government expenditure, private capital outlay and additions to stocks) must not exceed available savings. Budgetary Situation The budgetary situation of thirteen countries is reviewed in terms of comparable percenitages of expendit,4res, revenues and deficits in 1946* 1947 and 1948 as against 1937 or 1938. In most countries expenditures in real terms were considerably above pre-war, e.g. by 300: in the P etherlands and 2001 in U.,K., Sweden and. Denmark. On the other hand, in countries with acute price inflation (France, Ital-, Poland, cGreece), the real volume of government ex:nenditure was low. Public revenue rose, but at comparatively much smaller rates than expenditure so that deficits were incurred, in many cases as heavy as to reoresent 40 to 607- of tota'l pre-war expenditure. (The only exceptions appear to be Denmerk, Sweden, and (in 1947) the United.Kingdom). In 1947, the situation of public finances generally improved over 1946. A notable fact is that the real volume of tac revenue has been generally well maintained (a difference with World WVar I). Open and Re-pressed Inflation Where price controls and rationing are enforced, they lead to a relative scarcity of goods, in comparison with the levels of incomes and credits. The reverse is true in countries with open inflation. The index of real value of cash holdings (i.e, index of currency circulation, index of retail prices) shows the difference in the level of liouidities in both situations: high in e.g. U.K., low in France V/. Consequences of open, or re7yressed inflation are very different, and sometimes drastically opposed. Open inflation leads to unjust income distribution (bet,.7een wages and nrofitst .z/ A high level of 11.uidities is, of course, not in itself an indication of a state of re-rreseed. inflation. It can- also be a consequence of a rise in real incomes, e.g. in Portugal. to,rm and cou-ntry, etc.)* On the other hand, repressed inflation reduces the incentive to work and produce4(while both types of inflation may.stimulate production of unnecessary luxuries at the expense of essentials). The most spectacular distortions may be partially corrected by.subsidies, but these tend to perpetuate the budgetary causes of inflation. The estabIishm-ent of double markets is also a dangerous remedy, as the uncontrolled :isr'et tends to eliminate the controlled onet with an eventual open inflation. It is difficult to say which, open or repressed inflation, has the lesser evil effect on production. The situation in Germany is characterized by the disparition of money in most of its social functions. It is necessary to rebuild an entirely new system of wage and price relation, Inflation and Foreign Trade The well-known effects of inflation on foreign trade are described. In both their open or repressed forms imports are encouraged and exports discouraged. In the one case, high internal prices are reflected abroad through an overv-valued currency. In the other, excess demand in the home market creates a pressure to augment imports and to absorb potentially exportable surpluses. In addition, exports of countries with open inflation and over-valued currency tend to be diverted from hard carrency areas towards regions with similarly overvallued currencies. There is no satisfactory method of measuring the degree of over-valuation of particular currencies. It is too early yet to judge the effects of devaluation and of the limited tlfreel foreign exchange markets on the exports and terms of trade of the countries concerned. 2) The Problem of Intra-Euronean Trade The fact that intra-Zuropean trade is lagging periously behind fEuropean recovery in general has already been mentioned G Germany played ,mThe qjl-lifying statement in page 8, note 2, about the extent of recovery in Western Europe should be kept in mind here, 19 a major part in this trade, the decline of which is one of the. chief reasons for Europets extraordinary post-war requirements from overseas, Restoration of intra-Turopean trade is thus a prerequisite for the cure of the acute exter- nal disequilibriun. The pre-war pattern is analyzed (though admittedly not as a model for the future). The picture was comlex. There was 1) an exchange of,both manufactured and primary goods by industrial countries among themselves. 2) An exchange of manufactured goods for raw material and foodstuffs, between Industrialized and less industrialized countries. Bread grains moved from Bastern.to Western Nuropq (providing 20 of total 1aropean imports of bread grains). 22% of total U.K..requirements in foodstuffs for 1938 came from Rurope (about $975 million)* 3) 'urope was its ownm source of supply for. three major raw materials and semi-manufactures: coal, steel, and timber. 4) Manufactured goods played a greater part in intra-Ruropean trade than either foodstuffs or raw materials; Germany was Eiviropets main supplier in this field. Trade settlements were based primarily on two major factors which have now disappeared: 1) A large import surplnxs into the UT.I.; 2) a large export surpltas from Germany. Thus, br9pean countries could buy from Germany with the proceeds of their sales to U.K., the latter financing its purchases from its large invisible earnings. Germany iti turn could maintain a large import surplus of raw materials from overseas. The pattern of post-war trade is very different. There are some elements of strength and many weaknesses. Trade in foodstuffs has diminished sharply, as well as trade in raw. materials and semi-manufactures, creating inter- related and Cumulative shortages. On the other hand, if Germany is excluded, 1947 exports of heavy industrial. Droducts within Europe were in real terms onlyT 6% smaller than in 1937, which is an achievement on the part of individual European industrial 20~ countries. But total 1947 intra-trade, including Germany, is only 567o o'f 1937 and this shows the magnitude of the gap left by Germany and the size of the effort still to be made if European trade is to regair its pre-air volume. In individual items of physical production, the picture is still worse: total iron and steel s,upplies of European countries are only about one-half of the 1937 volume-V. And the present recovery, largely accounteL for by exports of vehicles, is less significant than woald be a recovery in iron, steel, and basic machinery. Disappearance of German exports has been particularly severe on Central and Eastern European economies (the total amount of heavy products available to them in 1947 from industrial countries in Europe was only 25% of 1937). Another element of weakness in Europe's post-war trade is the emphasis on luxu.ry and non-essential goods stimulated by inflation and often forced through the agreements by Rtied& sales V The extent of true recovery of trade may also be somewhat exaggerated, because of the growing tendency to export only highly finished products, which.results in increasing trade values without a corresponding increase in utility. The post-war system of trade settlements. in Europe is the network of about 200 bilateral trade and payment agreements. The basic cause for soft currencies and the system of bilateral agreements to w^hich they heave given rise is the fu4damejital disequilibrium in the balances of payments of all European countries. Due to the lack of equilibrium in the balance of payments of individual European countries with other European countries, and to the exhaustion of credit facilities, previous attempts towards greater multilateralism have failed * The recent multilateral compensation agree, ,/ They are 75% if Germany is excluded. But the elimination of Germany from trade statistics does not increase available supplies. ,&/ As an example, 1947 imnorts of luxuries in Sweden are, in volume, at bet;iep4 J20% (perfumes) and 1300% (furp) of pre-war. 3/ e.g. U.K. transferable accounts system. 21 ment of November 1947 cannot be very promising either, unless some change occurs alllowing for: 1) approximate equilibrium in the position of each individual member against all others, and 2) acceptance of the fact that bilateral disequilibria may arise between members. Actually, strict bilateralism is still growing. This process, though indispensable in view of the present situation of European trade V,, has serious drawbacks. Goods cannot be bought, or sold., in such places or in such quantities as would bring the maximum advantage. The most urgent import needs may have to go unsatisfied, if the principal supplying country is unwilling to accept the only available offsetting exports. These weaknesses may be concealed by the mere fact that the volume of trade increases. But commodity composition and geographic distribution may be as important as volume. Of course, these disadvantages do not exist when, though trade is conducted under bilateral agreements, there is no need for a close bilateral balancing of,accounts. It is in this direction that the solution of the problem lies, Arrangements for permitting freer convertibility of Eturopean currencies are only a symptomatic cure. They doild possibly worsen the general situation as the fundamental lack of balance in trade would remain uneffected (by failure to eliminate its essential causes: inflation, low production), while new distorting and restrictive factors would a-opear as a result of increased competition for spendable balances in the common monetary units (com-petitive exports, general import restrictions). Only under conditions ihich permit equalization of s.upply and demand for individual currencies can conv3rtt1bility be restored, In so far as internal inflation is no" ;-,h cause c-C tl-c di.seq3rilibri].; orx% international m3as-1res can help. either credits by the e-porting countr'es , or a cooperative approach to W/ there a few countries have a deficit against most others without adeq.ate Qffsetting surplus, ,/ Either in the form of unilateral credits mr of long-term bilateral agrecwents. 22 the problem of adjustments in trade , or the setting up of a system of triangular settlements. It must be recognized that the report does not strike a very hcpeful note in this connection, and does not offer anyr alternative to the closing of the dollar gap existing in each individual country. THE PROBLEMS OF PRODUCTION l) Dimensions of the Problem In order to fill the gap in European balance of ipayments with over- seas, an increase of $2,000 million (of 1938 dollars) in the production of heavy industries has been estimated necessary, while to compensate the loss of Germany as a supplier of iron and steel in inter-European trade an increase of $400 million is required. These two items together necessitate an increase of production of 20 to 25% above 1938. In addition, in view of the fact that 1938 was relatively a depression year, and that added capacity in heavy industries means higher requirements of steel* etc., another 20-25% increase in heavy industrial production is needed. Thus, the total increase in production reouired in the three heavy,industries (iron and steel, engineering and chemicals) should be around 4C-50%. 2) The Reconstruction Targets Production targets /for 1951 are amnly sufficient for steel (60% above 1938). This should also -Drove sufficient for the necessary expansion of engineering industries and electric p-ower p)roduction, The coal target 17% above 1938 - appears small in comparison btut might more than satisfy total requirements in view of the decrease in coal consumption per ton of steel. In agriculture, targets of exporting and imrorting European countries taken ,i/ Allowing for the least collectivel'r damageable form of adjustment, e.g. expansion of essential U.K, exoorts to Europe versus curtailment of U.K. imnorts from Eurone. i/ CEEC targets exluding Germany. Including Germany overall lncreases are 16% in steel, 10% in coal. 23- together are 1006 of rrei.rar in grain and potatoes, 1151 in sugar, but only 901 in milk and 87% in meat. In vietw of the 5' to 6< higher 3Maopean population to be expected by 1950, this means lower standards of food supply and at the same time import requirements higher than pre--war (an increase of 33% in import volume would be necessary merely to maintain total supplies at prew-war levels, without any allowance for*increased ponulation nor for failure of recovery in inter-European trade). In manufactures, even with existing targets, the 1952 level of inrnorts will still be 500 of pre-war for manufactured equi- ment, or.of 273"'1 of pre-war for iron, steel and manufactured goods taken together, It is thus clear that balance of payments equilibrium could not be realized in 1951-52, and that to realize it in later years such imports of manufactures would have to 'be severely cut. Realisation of targets will denend on three factors: 1) receipt of continued financial assistance, 2) adequate credit arrangements between European countries for the best use of existing capacity, 3) harmonization ef rates of exoansion In various sectors to avoid bottlenecks, 5) Sottlenecks The transpprt bottlenecks is overcome. So is the coal bottleneck, due mainly to the U.K. and Polish production and to imports from UI.S. Electric power and steel are nowir appearing in short suprly, as well as installe2. capacity in various fields In addition, artificial bottlenecks are created in many instances by lack of credits to move rawr materials towarLds installed capacity, Timber is boulnd to be scarce for a number of years, but the incidence of the shortage is very unenual in different countries. 01 t>e e 0-.%:.e. however, as the nij-o. bottlenees, moJe from the raw material stage ..o -,he Jate: manufacturing stagpes they shollud beaCome easier to overcome, The maovirOwar nroblem shot2.d be eased by internationial migration. ,/ Wagon and locormiotive renairs in -oarticular, 24- But it is mainly necessary to increase productivity. The prospects of obtc.ining production targets are not unnromising, if the three prerequisites mentioned above are fulfilled, namely: 1) continued financial assistance, 2) adeq-:ate inter-Europeean credit arrangements, and 3) harmonization of rates of ex:pansion in the various sectors of nrocluction. Achievement of these.tergets may not be sufficient, however, to restore at the same time com-tlete balance of Dayments equilibrium and the pre-war standard of living. APPE11DIX A TH ECONOMIC PLA1S OF EUOPEN COUNITRIES Economic planning is more and more develoned in most countries in Turope, at least for the direction of capital investments. Most plans will end by the beginning of the next decade, so that it is possible to obtain a picture of the main changes in production to be exDected by then. Success of the plan is almost exclusively a matter of internal effort in the case of the U.S.S.R. For the countries in the crEC, it depends explicitely upon the continuance of U.S. assistance. In most Qountries, the success will depend on mutual consistency of the plans, and on some foreign help. PLANS IN CEITTRAL AND SOUTHASTMN :EM9QpEV These p1ans are designed mainly to accelerate recovery to pre^wslar levels (Czechoslovakia, Bulgaria, Uingary) or to create industrial expansion in agrarian countries (Yugoslavia). In addition, they seek to solve special problems: incorporation of new territories (Poland), elimination of section of differences in living standards (Czechoslovakia), reorganization of agri- cultural production after a land reform (Hungary). The expected rate of increase of industrial production is, in most cases, iruch higher than that of agricultural production, where only Yugoslavia and Bulgaria expect to exceed their pre-war output (by 152% and 1345 respectively) General indexes of industrial produiction to be reached at the end of the plan are: in Poland 152%, in Czechoslovakia 110,l in Hungary 12750, in Yugoslavia 323A, in Bulgaria 134B.A/Rates of investment under these plans often attain 20% of the national income. Despite this, considerable increases in consunmtion are expected by the end of the plan (519 per capita increase in Poland, 3JS absolute increase). E3ases: 1938 - 100 for Poland and ungary, 1937 100 for Czechoslovakia and Bulgaria, 1939 ; 100 for Yugoslavia. _ 26- One of the main problems of the plans is to absorb surDlus labour and improve occupational distribution. In Poland, for instance, total erploy- ment is expected to rise by 400,000 in three years, while urban ropXxlation will increase by 800,000 (total wTorking population - 12.8 millions). Czecho- slovakia is the only country where labor shortages are lik:ely to occur, but mobilisation of labour and migration schemes are nrepared. Individual aspects of the plan are reviewed in the retort. The most far-reaching changes are in electricity, where total poroductionl/ at the end of the plan will be about 240% of 1937. Total coal and lignite production S will be 134% of 1937, Finished steel production wirill be 112%, (Later plans to come in force after the current plaUs foresee larger increases.) Petroleum produ.ction will be 165%o of nre-war. Big increases of output in non-ferrous metals are foreseen, particularly in Yugoslavia. None oL the plans are intended to be achieved on a basis of sel,f- sufficiency. But large changes in the pattern of trade are to be expected. The share of the Soviet Unionts trade is increasing in the total trade of Southeastern European countries, taking to some extent the place of Germany, at least in volume, but,not in substance. Instead of raw materials and foodstuffs, the U.S,S.R. needs industrial goods, so that new trade relations tend to assist industrialization, wi,hile trade with Germany tonded to retard it. Though trai' with Western %urope is still very important (specially in Czechoslovakia and Poland) and not bound to diminish, the future of food ex- ports at least is uncertain. ,/ For Poland, Czechoslovakia, Hungary, Yugoslavia, Bulgaria. _ 27 THE FOURTH FIVEYEAR PLON OF TE TU,S.S.R. Between 1928 and 1941, industrial production has increased 6.5 times, and the whole national output by more than five times. During the war, over 1,300 large industrial plants were transferred to the East and were working at full capacity by the first half of 1942. This is only one example of the immense increase of production in the East 'Arhere, for instance, arable land was increased by 12 million hectares, that.is,.more than the annual peacetime growth iti sown area for the whole of the U.S.S.R. But in the West war destructions did more than offset this increase. Abouit 40,to 60% of total pre-war production in key industries wias seriously damaged. By 1945 about 30% of industry in the liberated areas was restored. Percentages (the only figures available for output) point to a substantial increase in production in the last two years. By3 October 1947, the gross output of "large scale industry" was stated to have regained the average monthly out-put of 1940. Levels of consumption have been improved (end of rationing, abolition of the multiple price systems). The Fourth Five-Year Plan aims at the rehabilitation of war devastated regions and at the continuation of the major task of industrialization. The general increase over the period is 48% "for industrial and 27% for agricultural production. The heavy emphasis placed on expansion of engineering is the most notable feature of the plan; by 1950 the total stock of metal working machine tools is to be 1.3 million - larger than the nre-war stock of the United States. This emphasis on engineering shows that an intermediate stage of industrialization has been reached, when the base of heavy industry being more or less secured, its engineering superstructures have the fastest S/ This relatively low percentage reflects the effects of war. Increase over the First Five-Year Plan was 147%, over the Seoona 120% and over the Third 88%. Of course, there was also a natural decrease in percentage growth, as industrialization progressed. _ 28 rate of development, allowing for easier output of finished products. Agriculture plays also an important part, which may be gauged by the fact that between 1946 and 1950 the farmers are to receive 720,000 tractors, and 17 million tons. of mineral fertilizers, There is also an exoensive program of electrification, Increase in cereal output over 1940 is modest, it is much more substantial in industrial crops. Increase in transport is to allow for a 285 increase over 1940 in actual freight carried. No indications are given in the nlan on the future of foreiga trade. However, the latest trade agreements of the U.S.S.R. show that the latter intends to resume the importation of manufactured equipment in return for grain and industrial raw materials. THPJ ECONOIIIC PLAS OF THE CEEC COUNT-JIES A,detailed description is given of the problems and plans of the CEEC countries. In view of the relatively well-known character of these questions, only the most significant observations will be summarized here. The coal production plan of the CEEC is criticized because 1) it does not allow for any margin in cases of unforeseen emergencies, 2) it still relies (though modestly) on coal imorts from the U.S. at the end of the neriod, and 3) it presumes a considerable change over from coal to oilt resulting in increased dollar expenditure. Steel. The plans provide for much larger imports of crude steel, and larger ex=orts of finished steel than before the war: net im-oorts of crude steel are to be 2.7 million tons in 1951 while they were negligible before the war, and net exports of finished steel are to be about 4-1/2 million tons as against only 0.6 million in 1938., These larger imports of crude steel are a vulnerable point in the plans, as U.S. exnorts of crude steel are likely to be only one-fifth of thp CEJEC estimate (finished steel will be exported by the U.S.. - 29 - in compensation). U.S. State Department estimates assume only, in 1951, a 68% increase over 1938 production of the 16 countries (COEC 861) and net exports at 2.7 million tons (CEEC 4.5 million). Agriculture, OSEc estimates of import requirements are in some cases (notably cereals and( meat) higher than the supplies likely to be avP-ilabl?e. The economic justification of the steep increased planned in mechanization, questioned .y the Harriman Committee, is upheld by the report. It will, in Darticular, offset the loss of draught animals, and release land from fodder crop towe.rds human food production. The deficit in fertilizers should be,offset over the period, thoug;h in the first twro years, there will be a deficit. The conflict betireen alleviation of the European timber shortage and the sales of pulp in hard currency areas is noted. :Balance of paMent, 1) The CEC plans provide for the restoration of the pre-war relation between overseas imports and exoorts, 'ut does not realize such adjust- ments in the trade balance as are required to offset the loss in invisible incomes described in the repocrt. 2) The trade deficit with the U.S. will still be much larger than pre-war. 3) For some countries, the trade deficits with particular areas are expected to be very much larger than the overall deficitt so that multilateral settlements on a large scale may be necessary. But the CEEC is more an invest- ment plan than a plan aimed at restoring a rigoXrous equilibrium. 30 APPENMDIX B NOTES ON SCURCES AND P4ETHODS Only one important item in this appendix is reviewed here. Index numbers of industrial production A special index number has been compiled for the UTJK; (where no official index is published). The original base is 1935 _ 100. It is constru.cted from individual indexes of production in the "iMonthly Digest of Statistics" weighted according to the net values of output as given by the "Fifth Census of Productiontl (1935). The base has then been shifted to 1938# using the pre-war Index Numbers of the Board of Trade, the composition of which has been followed as closely as possible in selecting the elements of the new index. The weights,used and the results of the calculations are shown in the following table. -31- THE IYVEL OF INDUSTRIAL PRODUCTION IN THE UNITED KINGDOM Index Numbers 1938 " 100 194 6 194 7 Groups Relative weights First Second Third Fourth First Second Third Quartr aj.artr aarter a tr ~quarter ur Pw 4N- ueAIAa4ter I, Mines and quarries 12 83.3 84.4 79t5 87.7 86,6 86.9 80f4 II, Iron and steel 10 113,4 115.3 109.5 120.1 101.5 116.o 111,0 III, Non-ferrous metals 2 116.3 122.0 106.8 115.0 103.3 109.7 103,6 IV* Engineering and shipbuilding 21 85,7 98r3 95t2 118,6 101,9 121.1 123,6 V* Building materials and building 7 54.8 65.8 74.2 78.2 54.8 7803 86.1 a VI. Textiles 13 80t2 82,5 85tl 90,3 78.1 90,2 91.1 YI. Chernieals, oi3z, etc* 7 139.5 149,5 146.2 157,9 137.6 153.4 145,7 VIII. Leather and boots and shoes 3 99,0 99.7 100,8 108.8 96o0 115.5 314,3 IX. Food, drink and tobacco 17 109,9 103t7 104,3 117.2 104,7 106,4 105r4 X. Gas and electricity 8 170.0 137,2 130.9 175,4 184.8 140.8 131.6 Total of all groups 100 100.9 102.1 - 100.3 115.2 103.1 110.2 108.7 Source: Research and Planning Division, Economic Commission for %urope. / Estimated by the change in consumnption of cement and bricks between the second and third quarters of 1947,