cations for the international economy. The negotiations required to bring this about will take a great deal of time, and the consequences will be even more protracted in appearing. Thus no general recognition is taken of this development given the time horizon of 1975, but some attention is given where appropriate.

Monetary Conditions

The state of world monetary conditions is the most important element determining the U.S. balance of payments, yet the most difficult to foresee with any certainty. At most one can anticipate developments in the long term market, and here one can expect the levels of interest rates to be rather higher than has been the norm in the postwar period. While the peak rates of 1969-70 may not reappear, the range of the early 1960's is also unlikely to be regained.

Policy and Economic Behavior of the United States

As already noted, it is thought unlikely that the United States will increase its aid disbursements to LDC's. It is also likely that the United States will reduce its military expenditures abroad. A combination of technical advances, foreign political developments, international agreements, and domestic political conditions will likely converge to bring this about at the conclusion of the U.S. involvement in Vietnam. Finally, U.S. domestic economic performance should return to our prewar standard, i.e. the avoidance of extremes of inflation and depression with substantial economic growth. With this type of economic performance and less resources devoted to military uses, the U.S. price experience should return to its traditional standard as one of the least inflationary in the Western World. The world standard itself may be a bit more inflationary than the past, and this is consistent with the assumption of a high level of interest rates.

III. THE STRUCTURE OF WORLD BALANCES IN 1975

The implication of the above assumptions is most easily seen in summary form in Table 2. It is well to remember that Table 2 is not the result of a forecast, but merely a conditional projection with the resulting figures intended to show only relative orders of magnitude. The projection is centered on the United States in that somewhat greater effort was made to project the structure of U.S. accounts than for the other groups taken individually.

The equilibrium position depicted in Table 2 can be thought of in two senses: one accounting and the other real. Equilibrium in the accounting sense is seen in the zero overall balance for each sector of the world. This means that no sector is gaining international reserves at the expense of another, nor are U.S. liquid liabilities to foreign official holders being increased. All necessary growth in official reserves is

presumed to come from issuance of SDR's (the amount of which may differ greatly from indicated levels without consequence for this analysis). Equilibrium in the real sense implies relatively stable economic and political conditions prevailing. Thus things like trade wars are not permitted, nor is economic policy concerning stabilization or exchange rates so rigidified as to cause financial crises.

While the sectors will be discussed in some detail, it is well at the outset to look at each sector in the most aggregative sense. The picture of the United States in 1975 is that of a country well along toward being a classical mature creditor and the world's banker. Net capital outflow is sustained by service earnings and the capital account itself has large inflows and even larger outflows reflecting the position of a financial intermediary. The U.S. is depicted as a rich country, but in the presence of other rich countries as well as poor ones. The other Developed Countries include most of the other wealthy countries. They maintain a strong creditor position, but with less short-term capital outflow, which is consistent with the assumption of the absence of financial crises. The capital outflow of other developed countries is sustained by a trade surplus, as their service balance will be under pressure from larger foreign dividend and interest payments. The advanced Primary countries appear as more mature, but still decidedly debtor countries. They are likely to be the recipients of large private capital inflows in response to high domestic growth rates and their proximity and access to markets of developed countries, combined with lower wage scales. The Less Developed countries will remain heavy debtors and primarily dependent on official capital loans and grants. The increasing burden of service payments will require a greater portion of output to be devoted to exports of merchandise rather than

domestic investment for growth. Thus these countries are likely to shift from negative to positive trade balances.

Less Developed Countries.-The detailed description of sectors might best begin with the LDC's because they seem to have the least room for independent maneuver. The implications of the assumption of no increase in aid levels are very restrictive on these countries, as the current account balance can deteriorate no further. When recognition is also taken of the hardening of aid terms by the United States, the tendency is reinforced. The interest rate on U.S. aid loans has risen, and the grace period has been shortened. This follows in part from conscious Congressional decisions and in part from a larger portion of U.S. loans coming from the Export-Import Bank whose loans are practically at commercial rates. Other bilateral donors have split-some hardening their terms and others softening-but on balance have remained the

same.

The United Nations Conference on Trade and Development (UNCTAD) has estimated that at current levels of aid flows, the service burden on LDC's by 1975 will reach $10 billion. It is very likely that some rescheduling of service will occur along with debt repayment and possibly some service will be forgiven, but a substantial increase to above $8 billion seems quite likely. While some gains might be made in other services, such as tourism and transportation, the major burden will have to be carried in the merchandise accounts; the growth of exports must outpace the growth of imports.

For this outcome to occur, both foreign and domestic conditions need be permissive. International markets must be sufficiently open to permit trade expansion. This degree of liberalization has already been achieved and need only be maintained. LDC's have had great success in expanding exports of crude petroleum and less sophisticated manufactured products, but less success with traditional raw materials and agricultural goods. These trends are likely to continue from basic economic forces unless governmental policies intervene. The particular hope of LDC's is to be found in the export of manufactures. While they would be aided by tariff preferences, preferences are not essential. Since the prod ucts involved are likely to be rather heavily weighted with labor inputs, some adjustment will be required in developed countries, but it need not be painful in view of the relative magnitudes involved. An unwillingness to make this adjustment will force the LDC's to repudiate their service burden as this will be the only escape valve open to them.

Some attention need be given to the ability of LDC's to produce manufactured goods that can compete in world markets. The historical record implies substantial optimism. The number of success stories recorded in the 1960's is impressive evidence. The trainability of local labor to factory work is clearly established. With proper management by domestic or foreign enterprises, significant productive efficiency can

Charles R. Frank, Jr., Debt and Terms of Aid, Overseas Development Council, Monograph No. 1, Washington, D.C., 1970.

be obtained. However, government policy must be geared to this outcome, including provision of overhead capital (transportation, etc.), reasonable freedom for private economic activity, and especially the maintenance of equilibrium exchange rates.

It might be wondered whether growth-minded LDC's will be willing to devote resources to exports in order to avoid repudiation of foreign debt. There are ample grounds for believing that governments will be willing to permit a proportionate increase in their export sectors. Economic growth that is led by exports can be of a reinforcing character since the export sector itself enjoys high productivity and thus a compositional shift toward exports can raise the overall growth rate. The export-led-growth hypothesis of economic theorists does fit LDC's, and governments are likely to avoid disturbing the growth process, particu larly if the alternative course implies a disengagement from the international economy. Nevertheless, a decline in aggregate direct foreign investment is projected in view of the assumption concerning difficulties in the extractive industries, and petroleum investment in the past has been a large part of total foreign investment.

Advanced Primary Countries.-The advanced primary countries in the 1970's are likely to experience rapid economic growth, and their balance of payments will be dominated by this development. These countries contain untapped raw materials, adequately expanding labor forces, strategic market positions in both geographic and political terms, and domestic conditions in which private enterprise is encouraged.

The most significant development in balance-of-payments terms will be larger inflows of foreign private capital to almost double their previ ous level. One can anticipate both direct investment and bond flotations being important in these flows. American firms will not be alone in expanding their activities in these countries. Large European firms should also see the advantages in operating in contiguous countries with lower wages and Japanese firms will continue to find Australia and New Zealand attractive for new investment.

Other attributes of this same phenomenon should be visible in the capital accounts. Some outflows of short term capital should occur as greater international involvement will require larger private liquidity in foreign currencies. Also these countries as a group should no longer require official capital inflows of aid and credit, and they can be expected to provide some government aid themselves to the LDC's.

The larger net capital inflows will also appear as greater current account deficits. These are likely to come from the service sector where much larger dividend and interest payments will more than cover increases in tourism and intransfers on private account from "guest workers." While little change on balance is expected in the merchandise accounts, the composition of goods traded may change rather substantially. One should expect to see somewhat more sophisticated manufac turers such as household electrical appliances and standard machine tools in the basket of exports. Imports will reflect rapid domestic

expansion including the whole spectrum from industrial materials and semi-manufactures to advanced capital equipment.

Other Developed Countries. Our attention now turns to those countries that have already come of age in modern society. These countries have already had their economic miracles and are benefiting from them. Japan is an obvious exception: rather than concluding its economic miracle, it has institutionalized it as a way of life. To make sense of the situation, a separate discussion will be required of the European countries, Japan, and Canada.

Advanced European Countries.-The economic future of Western Europe may well be greatly influenced by the expansion of the Common Market. However, even if the negotiations with Britain are concluded much faster than now anticipated, the impact of expansion will be much less than that of the creation of the EEC. Europe is now in the stage of maturing its growth, unlike the situation in the latter 1950's. Labor scarcity is now a continuous phenomenon rather than only a characteristic of cyclical booms. While the shortage of new workers entering the labor force is not a new development, it continues to be of great importance. Furthermore, there are now many fewer misallocated workers in agriculture and small-scale retailing, although both sectors will continue to be squeezed. In consequence, wages will be under considerable upward pressure with important implications for the nature of economic growth that will result. Much greater effort will be made to upgrade industrial output rather than mere expansion on all fronts. Business firms in particular will be actively seeking labor saving investments even when expanding capacity. One would expect that the employment decreases in the inefficient sectors would show up as increases in services, especially government, rather than manufacturing-the sign of a post-industrial society.

Per capita income growth should continue unabated. This will lead to greater individual wealth and provide the savings for an expanded capital market (indeed finance will be one of the expanding service sectors noted above). Consumption patterns should also evidence the diversity of rich societies.

The most notable change in the current account of these countries is likely to be a decline in the net service balance. Payments for dividends and interest are likely to grow somewhat faster than receipts, and the same can be said for tourism. Merchandise trade might also show a slight tendency for imports to grow faster than exports, but this is more problematical.

Major shifts will take place within the capital account. Based on the assumption of financial calm, private short-term capital outflows should be greatly reduced and made up in part by larger direct investments. Europeans should continue to be net buyers of foreign debt and equity securities, although recent financial reverses of private firms may well