MONEY SPECIAL

Our Autumn Financial Survey is this year divided into two parts. The first half is concerned with exports and the balance of payments in general. In it Harold Lever puts Britain's present position into perspective, Martin Jacomb discusses the City's contribution to the balance of payments, William Janeway assesses the out- look for world trade in general, and Demetrius Conlin() provides a successful exporter's view of what's wrong with British industry. This leads logically on to the second half of our survey, which is concerned with the major financial develop- ments on the home front. Here Sir Kenneth Keith and Arnold Weinstock deal with two different aspects of the merger boom, Nicholas Davenport discusses the relationship between government and industry in the light of the creation of Mr Benn's new super-ministry, and, finally, John Bull looks at the prospect for the vtock market between now and the oneral election.

Britain's payments in perspective HAROLD LEVER, MP

Harold Lever is Paymaster-General and second minister at the enlarged Ministry of Technology. From September 1967 until his elevation to the Cabinet earlier this month he was Financial Secretary to the Treasury, in which capacity he master-minded the Basle agreement concerning the 'funding' of the sterling area sterling balances.

Nowadays, when we talk of a balance of payments deficit, we usually mean a deficit in the basic balance, i.e. the current balance and the net export of long-term capital combined. Formerly when we talked of a deficit we used to mean a deficit on cur- rent account only. I prefer the old practice. for clearly one set of remedies may be right for a current deficit and another to Put right a capital account imbalance: the very use of the same word `deficit' applied im- partially to both capital and current .ac- count is misleading. To put right a current deficit you must improve the export/import ratio, visible and invisible, over a reason- able period of time: to remedy a capital account imbalance, the right cOurse may well be either to reduce the amount of overseas investment or finance that invest- ment by suitable overseas borrowing.

All advanced nations seek to be in sur- plus but all these nations cannot be in surplus on the combined accounts at the same time. It must be undesirable that we should all be seeking what in aggregate is impossible. If, however, we mean by 'defi- cit' and 'surplus', deficit or surplus on the current accounts, it is entirely possible and indeed most desirable that over any reason- able time span the advanced nations should all enjoy surpluses on current account, for these surpluses are the fund required to,:fin- ance capital investment in the less devel- oped countries.

Certainly, if you want to know if a country is paying its way as ordinarily understood, it is the current account that is relevant, and in examining this account caution is required before making a judg- ment. This is especially necessary in the case of a country like Britain, where every increase in future exports will be preceded by a rise in imports. Moreover, the balance with which we are concerned is always a marginal one. This can be sizeably affected. especially in a period of currency uncer- tainty, by advance buying and stocking up as a hedge against devaluation or revalua- tion or import restrictions. Merely to com- pare -the. exports -of .one 'year with the imports of • that year is not etiough. True, these distortions- of a current balance will tend to -even out in the long run, but this run can be surprisingly long and large sums inay be. involved.

In addition-the figures first to hand on the current account are liable to quite a significant margin of error. I give some examples: the original data for the six years 1952/57 showed the U.K. to have a cumula- tive surplus of /1,100 million but later re- vision showed this as only £700 million. Data for 1960/67 showed a current deficit of £700 million but errors and omissions unaccounted for in that period amounted to £375 million. The recently discovered net under-recording of U.K. exports is thought to have reached an annual rate of about £130 million in 1968 and the first part of 1969. So in deciding whether a country is paying its way by the test of the current account, a good deal of care and judgment is required.

In the case of the UK, the current account over the last twenty years is in aggregate roughly in balance after covering defence, aid and commodity and trade support arrangements—and this in spite of the fact that exchange crises have in this period frequently led to government action calcu- lated to reduce the performance of our industry. It is clear that we would have done very much better in this period if we had taken action sooner than we did to protect ourselves from pressure on the exchanges arising directly from our failure to finance the capital account shortfall in a suitable way. It is this failure which has resulted in stop-goes when Governments felt compelled to tailor domestic economic policy not to our long-term needs but -to the exigencies of exchange pressures.

Britain has a special position in relation to the export of capital. We have vast exist- ing direct investments which would be pre- judiced unless supported by a„continuing supply of capital. We have a world-wide banking and investment system which gives' us the facilities and opportunities for pro- fitable investment overseas. Many advan- tages, by way of export opportunities and invisible earnings, flow to us from the role of distributors of capital overseas.

In the past, thought tended to fall into two schools: one was that we must ensure that our economy was so managed that it would produce consistently an export sur- plus sufficient to cover our net exports -of capital. We in fact failed to produce suf- ficient export surplus and, failing, had in- evitably to have recourse to short-term funds to make good the shortfall. When these were recalled we over and again %%ere faced with exchange crises and their subse- quent freezes and squeezes. Another % therefore developed—that though capital in- vestment overseas could be profitable. was on balance undesirable because the eff- orts to finance it by an export surplus pro- duced damaging constraints upon our dom- estic achievements.

I support neither of these vie. In current circumstances it is necessary—and the Government's policy—to earn and gtistain a large current account surplus. But it is not to the advantage of the UK on top (4 that to attempt to tailor its economic policies to the achievement of a continuous export surplus of an unknown amount M order to cover its exports of capital, and in any event current account surpluses are not continuously stable over long periods. In the modern changing world, a country ma% at one period have the necessary export surplus to finance vast overseas investment: in another phase it may not be able to generate this export surplus.

Nor do I favour the abandonment of capital exports as a remedy. In the seminar the role of exporter of capital can be ,%v ung from country to country according to its payments position: not so in real life. '.'.here these roles cannot be discarded or achieved abruptly. It is clear that immense advan- tages accrue to Britain from her role as an international distributor of capital. This per- mits the development of her vast existing investments and makes the maximum use of her existing world-wide banking and fin- ance connections. To abandon this role would slow up the movement of capital and the knowhow that accompanies it to the damage not only of Britain and those countries where the investment would have been directed, but also to the general con- tribution this makes to the progress of world production and trade.

In my view, we should aim to achieve th% maximum profitable capital exports but *e should seek to finance them from such export surplus as we can achieve consist- ently with the proper development of our domestic economy. Any shortfall in our export surplus should be supplemented b■ borrowing overseas. We have already achieved a partial funding and stabilisation oethe sterling balances: we must seek out medium and long-term money in the capital markets of the world to support at its maxi- mum profitable level our own investment overseas.

In the world as it is it would be quite im- practicable for Britain at the present time to weaken the controls on capital movement which are making an important contribu- tion to our recovery from a period of bal- ance of payments difficulty, but to the ex- tent that we can support our capital inye,t- ment overseas by borrowing on a suitable basis we would be carrying on a profitable ektrepot trade in money, for which our hfitory and institutions have adapted It is often argued that this is preciseb wtat was done when the Conservative, %%ere Igpower and that the difficulties we have experienced in the last five years were due to the lack of confidence overseas in the Labour government and its policies. It i` suggested that confidence would be restored if a Conservative government were to be re- turned and that the problem would then solve itself. This view cannot, I am afraid. be squared with the known facts of the past. still less with future probabilities. Even Lin_ der Conservative governments there was not that continuous confidence which alone could justify operating a capital account on money borrowed short term. We had the intermittent exchange crises and stop-we, to which I have already referred. All the esi- dence is that an attempt to repeat the ex- periment in the years ahead would be men more costly and dangerous than it ■%:1, in the past.

If, to our own and the general ads antage we are to exploit to the full the role 0 distributor of capital overseas, there mu,t, be an improvement in the present inter- national monetary arrangements in this neg lected area of capital movements. We ha; not in the past paid sufficient attention the need for international cooperation facilitate the flow of investable capital be tween nations to where it can best utilised. In the international economy 5 have achieved dynamism and interdepe ence faster than we have developed th appropriate institutions.

Within the borders of individual co tries, housing, capital investment. indust and commercial enterprise, etc. are serve by an abundance of institutions such a building societies, banks and finance hou which made it possible to mobilise short term funds for medium and long-term u Internationally we are in this respect aim.' as institutionally impoverished as in pa war times.

We need the mechanisms for harnessin the funds to provide for continuous i vestment throughout the world. The sour. of these funds can only be the surplus con tries. As different countries move into su plus the source of these funds will clear change from period to period. What on: to be recognised is that this must not di rupt the continuing investment flow that required. All this means that we ought t give greater attention to the developme and encouragement of institutions capab of mobilising the world's short-term fu on a large scale to make them available ; a medium and long-term basis for ink national investment.

The leaders of the Western world sti have the task of keeping the trade rout clear and keeping the flow of capital a knowhow moving to all parts of the wo with the aim of continually extending great advances we have so far achim through international co-operation. TM, the road for increasing the political : economic welfare of the poorest nations .a for harnessing the wealth-creating possily ties of the richest. But I conclude with reminder that this problem, like many the others we face, will only be solved people informed by a powerful sense common purpose and this requires a deg of agreement on medium and long-le policy objectives which so far has no been attempted nor achieved. Only when joint purposes have been spelt out agreed are we likely speedily to bring being the mechanics for giving effect them.