Enclosed is a report on the voluntary program to improve the balance of
payments which I sent to the President today. I also want to call it to
your personal attention.
I think it is vital that we continue to remind ourselves of the strategy
underlying the cooperative effort by the business community, and I think
we should also keep in mind our anticipations about the expected timing
of the basic results from the voluntary restraint of direct
investment.
It may be recalled that when we launched the program last winter—and as
we have stressed on a number of occasions since then—we said that we do
not expect the benefits of voluntary restraint on long-term direct
investment to show up until the closing months of the year. The main
reason was the substantial backlog of projects which the companies
already had underway when the program was begun. Moreover, the
[Page 188]
time lag between the start and
completion of such projects is considerable, and it will take a number
of months for the companies to work through the backlog. Consequently,
although the companies might have taken immediate steps last February
and March to restrain the direct investment outflow, it would be late
this year or early next year before we began to see the detailed
evidence in the balance of payments statistics.
On the other hand, the companies could repatriate quickly short-term
financial assets held abroad in excess of their normal requirements.
This they have done. In the first six months of this year, they reduced
such holdings by $575 million compared with a net increase of $588
million in the first half of 1964. More detailed comments on the
progress of the voluntary program are given in the enclosed report.
Enclosure2
Washington, September 21,
1965.
REPORT ON THE VOLUNTARY PROGRAM TO IMPROVE THE BALANCE
OF PAYMENTS
The evidence available after six months operations under the
voluntary program indicated that:
- —Business corporations are making serious efforts to meet
the requirements of the program.
- —The balance of payments has benefited from measures
recommended by the Department of Commerce and effected by
the participating companies.
- —Circumstances not subject to control of business leaders,
including strikes and adverse economic developments abroad,
have made it more difficult for some of the corporations to
increase their balance of payments contributions. But the
over-all results may still be in the neighborhood of the
improvement projected earlier.
Short-term Financial Assets
We asked the companies to reduce their foreign holdings of short-term
assets during the course of 1965 so that at year end they would be
no
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higher than the level
held on December 31, 1963. The companies have reduced these funds
faster than anticipated; by the end of June they had already nearly
reached the goal we recommended for December 31, 1965.
The pattern of change is as follows:
|
Participating Companies Reported |
Shown in U.S. Balance of Payments |
|
|
Net Changes from prior date shown |
Net Changes from prior |
|
Outstanding |
date shown |
date shown |
|
|
(millions of dollars) |
|
|
| 12/31/63 |
927 |
|
|
|
|
| 12/31/64 |
1,426 |
+499 |
|
+588 |
|
| 3/31/65 |
1,202 |
-224 |
|
-265 |
|
| 6/30/65 |
985 |
-217 |
|
-310 |
|
| 6 months 1965 |
|
|
-441 |
|
-575 |
These data indicate that the participating companies are adhering to
our guideline on short-term financial assets, and they have
accounted for the bulk of the reductions in corporate holdings of
such funds.
Exports
Exports are the largest category of transactions upon which
cooperating companies are relying to effect improvements in their
balance of payments contributions. In 1964, exports accounted for
two-thirds of the range of alternative transactions used in
calculating improvements.
Tabulations for 507 companies show an estimated total improvement of
$1.3 billion for 1965, or an increase of 10 per cent in their net
contributions compared with 1964. Early in the year exports were
adversely affected by strikes, and many companies have reported that
some of these losses are irretrievable. The companies indicated only
a slight improvement in the first half of 1965 rate compared to
their 1964 total exports (3 per cent on an unadjusted basis). But
the general outlook for exports during the second half of the year
does appear somewhat better, and the statistics are expected to show
a much better rate of gain. First half results are shown in the
following figures:
Non-Agricultural Exports
|
|
All U.S. Companies |
| 380 Participating Companies |
(Bureau of Census figures) |
|
(millions of dollars) |
|
| 1964 |
11,277 |
19,740 |
| Jan-June 1965 |
11,586 |
20,377 |
| Per Cent increase |
+3 percent |
+3 percent |
| (unadjusted annual rate) |
|
|
[Page 190]
Transmittal of Income
In addition to the repatriation of foreign short-term funds, the
companies show a healthy increase in transmittal of foreign
earnings. The following seasonally adjusted data are from the
over-all balance of payments statistics.
Direct Investment Income
|
|
|
Percentage Increase |
|
Millions of dollars seasonally adjusted |
from year ago |
| Period |
1964 |
1965 |
|
| 1st Quarter |
968 |
1,061 |
9.6 |
| 2nd Quarter |
955 |
1,148 |
20.2 |
| 6 month Total |
1,923 |
2,209 |
14.9 |
The increases in both of the quarters of 1965 were impressive. The
first quarter flow in 1964 and 1965 may have been influenced by
reductions in tax rates. However, the further increase from the
first to the second quarter of this year appears to reflect efforts
of the companies under the program.
Direct Investment
When the voluntary program was announced, many companies had projects
in such advanced stages of development that they could not be cut
back, postponed, or eliminated. The large build-up in the outflow of
investment funds in the last quarter of 1964 and the first quarter
of this year was still evident in the second quarter. These levels
are excessive, and we expect substantial reductions in the second
half.
Under the program we asked only for restraints on private direct
investment in developed countries other than Canada. Balance of
payments data and reports of the companies indicate that they are
following these guidelines.
Direct Investment Outflows
(millions of dollars seasonally unadjusted)
|
|
|
Other Developed |
Reported by |
|
All Areas |
Europe |
Countries*
|
Companies**
|
| 1964, Year |
-2,376 |
-1,342 |
-206 |
-2,288 |
| 1st Half |
-1,026 |
-670 |
-100 |
n.a. |
| Qtr I |
-420 |
-288 |
-61 |
n.a. |
| II |
-606 |
-382 |
-39 |
n.a. |
| 1965 |
|
|
|
| 1st Half |
-2,066 |
-903 |
-152 |
-1,306 |
| Qtr. I |
-1,115 |
-536 |
-82 |
-765 |
| II |
-951 |
-367 |
|
|
[Page 191]
The program of restraint on capital outflows is concentrated on
Western Europe. From the first to the second quarter of 1965, the
direct investment outflow to Europe declined by $169 million and
dropped below the level in the second quarter of 1964. The outflow
to other developed countries includes Japan, Australia, New Zealand,
and South Africa. The increases there reflect large investments in
iron ore ventures in Australia that were underway when the program
was initiated.
The data from the participating companies (including reinvested
earnings) show a decline of $224 million from the first to the
second quarter reflecting the restraints on outflows to Western
Europe.
We did not ask for restraint on direct investment outflows to Canada
or to less developed countries. The evidence indicates that the
companies have shown restraint on capital outflows to the areas
specified in the program. Because of the backlog of projects
underway, we expected that it would take some time to get reductions
of any significance in investment outflows.
Significant new foreign borrowings will permit additional offsets to
the capital outflows. The companies have volunteered information on
new foreign borrowing which add up to about $400 million. Among
these are a number of large flotations of bond issues, between $20
and $30 million each, to be marketed mainly in Western Europe. As
these funds become available to their foreign affiliates, it will be
possible to cut back on flows of funds from the U.S.
Summary
The results to date clearly indicate that the companies are seriously
trying to carry out the program as we have defined it. The degree of
success will be determined not only by the efforts of the companies
and our exhortations, but also by external circumstances which are
not amenable to alteration on our part or the part of the companies.
The most serious obstacle to overcome is the poor export performance
which hampered progress in the first six months of 1965. It will
require serious efforts to obtain improvements elsewhere to offset
the potential short-falls on exports. But if all the companies,
including those with large improvements on exports, make every
effort to increase other foreign earnings and limit the outflow of
funds, the over-all results may still be in the neighborhood of the
improvement projected earlier.
