The U.K. Investment Currency Market1 - IMF eLibrary

The U.K. Investment Currency Market1

PAUL K. WOOLLEY*

OVER THE PAST FEW YEARS, there has been considerable discussionof the relative merits of various types of controls over interna-

tional capital movements. Controls that have been the subject of themost analysis and empirical investigation are the dual exchange marketand the U. S. Interest Equalization Tax. Yet the U. K. investment cur-rency market, which has operated in various forms for the past 30years and which stems from the embargo on the export of capital byresidents, has been largely neglected.2

In the basic dual exchange market, all capital transactions undertakenby residents and nonresidents take place at the capital exchange rate,and all current transactions take place at the official exchange rate. TheUnited Kingdom's arrangement is a variant of this system in that onlycertain capital account transactions attributable to U.K. residents arechanneled through the investment currency market, while capital andcurrent account transactions undertaken by nonresidents are conductedat the official exchange rate. The U. K. system thus represents an asym-metric version of the dual exchange market in the sense that participa-tion in the financial exchange market is confined to residents. The stockof assets allocated to this market exceeds £7 billion and the premiumover the official exchange rate has fluctuated between zero and 88 percent. The control has survived several devaluations, the move from afixed parity to a floating pound, and periods in which removal would

*Mr. Woolley, economist in the Exchange and Trade Relations Department,received his doctorate from the University of York, England, where he was alsoa member of the faculty. He has been a member of the U. K. Stock Exchangeand a Specialist Adviser to the House of Lords. His contributions to academic andfinancial journals have been mainly in the field of international finance.

1The research on which this paper is based was begun while the author wasat the University of York, and was then financed by the Esmee FairbairnCharitable Trust. In addition to colleagues at the Fund, the author is grateful toHeather Hunter for her assistance in preparing this paper.

2 To the best of the author's knowledge, the only previous studies have beenWoolley (1974 and 1976), a description of the mechanics of the market publishedby the Bank of England in 1976 (See "The Investment Currency Market," Bankof England, Quarterly Bulletin, Vol. 16 (September 1976), pp. 314-22.), and anextended reference in Cairncross (1973).

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©International Monetary Fund. Not for Redistribution

U.K. INVESTMENT CURRENCY MARKET 757

probably have had little effect on the balance of payments. With therecovery in prospect for the U. K. balance of payments and with Britain'scommitment to dismantle exchange controls between itself and theEuropean Economic Community (EEC), the present moment is oppor-tune to study the system.

The analysis of the United Kingdom's investment currency market thatfollows would be generally applicable to other countries operating afinancial exchange market for the use of residents only.3 It would not,however, be applicable without modification to countries operatingfinancial exchange markets in which only nonresidents participate.4 Thepaper seeks, in particular, to show the effects of the control on the bal-ance of payments and on domestic interest rate policy, to identify themain influences on the size of the premium, to analyze the premium'simplications for U. K. investors, and to assess some of the major changesthat have been introduced in the regulation and functioning of thesystem.

The discussion proceeds as follows: Section I summarizes the basiccontrols on overseas portfolio investment, identifies the main influenceson the size of the premium, and shows the premium's effects on therisk/return advantages of international diversification by U. K. investors.It goes on to show the significance of the regulation that permits resi-dents to finance overseas portfolio investments by foreign borrowingand the effect of certain direct and property investment flows that havebeen allocated to this market.

Section II reviews the arguments that have been used in the economicliterature to justify capital controls on long-term investment. It thengauges the effectiveness of the U. K. system in fulfilling some of theobjectives that controls are designed to meet. In particular, there is anattempt to show whether or not the system confers a measure of inde-pendence on U. K. interest rate policy. Then, by working through theeffects of abolition of the control, an order of magnitude is given to theoutflow that the control is forestalling.

Section III is devoted to an analysis of several variants of the invest-ment currency market that have been in use at various times. Itexamines the segregation of foreign capital markets and capital flows forexchange control purposes and the multiple premiums to which this

3 France operated a security currency market for residents' transactions invarious foreign securities between 1969 and 1971, and in Norway and Sweden,foreign securities are transferable between residents at a premium, although theforeign exchange itself is not negotiable.

4 South Africa has a securities rand market for nonresidents. Until recently, theNetherlands had an "O-guilder" market for nonresidents investing in Dutch bonds.


758 INTERNATIONAL MONETARY FUND STAFF PAPERS

gives rise, the parallel operation of an investment currency market fornonresidents, and the possible methods of phasing out controls betweenthe United Kingdom and other member countries of the EEC.

I. Analysis of Present Controls

PREMIUM CURRENCY

The underlying principle of the investment currency market is that aU. K. resident wishing to purchase foreign currency securities must firstobtain the foreign currency from another U. K. resident who is sellingforeign securities. This requirement has the result that the value of allpurchases of foreign securities, in sterling terms, will equal the value ofall sales of foreign securities over any period.5 In consequence, therewill never be an outflow of portfolio investment funds on residents'account. Since nonresidents are not covered by this exchange controlsystem, their transactions will continue to give rise to net inflows oroutflows. Because demand by residents for foreign securities has usuallyexceeded the value of those securities held when they were valued atofficial exchange rates, a premium, known as the "investment currency"or "Dollar" premium, has developed on the currency. Since there is per-fect substitutability of currencies in this market, the premium is the samefor all currencies. All dividends paid on these securities must be repa-triated at the official exchange rate.

There are a number of modifications to this basic principle. The mostimportant is that, while purchasers must acquire all their currencyrequirements at the premium rate, sellers are entitled to dispose of only75 per cent of the proceeds at the premium rate, while the balance mustbe sold at the official exchange rate. This surrender policy results in anet inflow in the balance of payments on resident investors' account, thesize of the inflow depending on the rate of turnover of foreign securities.

The effect of the control is to create a pool comprising foreign cur-rency securities, the size of which is determined by the following:

(a) The value of overseas portfolio investments when the exchangecontrol regulations were introduced;

(b) Subsequent changes in the value of securities represented in thepool, owing both to changes in the values of the securities, expressed inthe relevant foreign currencies, and to exchange rate changes;

(c) Subtractions from and additions to the pool as a result of the

5 This is qualified by any changes that may occur in stocks of liquid investmentcurrency held by dealers or investors.



surrender policy, variations in the countries covered by exchange con-trol, and other administrative policy changes.

The value of the pool of foreign currency securities, when valued atthe official exchange rate at the end of 1976, was approximately £7bill-io®.6

The investment currency market is used for transactions in securitiesdenominated in currencies of all countries outside the Scheduled Terri-tories, which comprise the United Kingdom, the Channel Islands, theIsle of Man, the Republic of Ireland, and Gibraltar. The geographicaldistribution of securities in the pool can change in response to netswitching from one country to another, to the relative performance offoreigs securities markets and currencies, and to changes in the set ofcountries covered by the controls. Table 1 provides an indication of theestimated geographical spread of the securities held in the pool at theend of 1974 and the end of June 1976.

TABLE 1. U.K. INVESTMENT CURRENCY MARKET: ESTIMATED GEOGRAPHICAL DISTRIBUTIONOF FOREIGN CURRENCY SECURITIES IN THE POOL,

DECEMBER 31, 1974 AND JUNE 30, 1976

(In per cent)

North AmericaJapanEuropeFar East (excluding Japan)AustraliaSouth Africa

Total

December 31, 1974

58.05.67.46.25.8

17.0

100.0

June 30, 1976

70.010.27.56.84.01.5

100.0

Source: The data has been inferred from information on the composition of the turn-over of pool securities provided by the dealers in premium currency and from theauthor's investigation of the geographical spread of the overseas holdings of investmentand unit trusts and other institutional portfolios.

Prior to June 1972, the Scheduled Territories comprised the entireSterling Area—that is, in addition to the Scheduled Territories asdefined at present, most British Commonwealth countries, South Africa,and certain other countries. Controls were extended to the Overseas

6 In 1977, the Bank of England estimated the value of U. K. portfolio invest-ment abroad at approximately £8,150 million at the end of 1976. But it statedthat this was no more than a broad indication and that this figure overstated thesize of the pool by including securities that were financed by foreign currencyborrowing and, therefore, were not premium-worthy. The figure of £7 billionused here was obtained after a deduction of £1,150 million was made that repre-sents the estimated value of the securities financed by overseas borrowing. Thesefigures are drawn from "An Inventory of U. K. External Assets and Liabilities:End-1976," Bank of England, Quarterly Bulletin, Vol. 17 (June 1977), p. 198.



Sterling Area (OSA) in June 1972, and OSA securities became foreigncurrency securities. Since U. K. residents' holdings of securities in thenewly-included countries immediately became eligible for sale throughthe premium market, the pool approximately doubled from its previousvalue of £3 billion.

INFLUENCES ON THE PREMIUM

The size of the premium at any time is determined by the supply of,and demand for, investment currency. The significant relationship istherefore that between the net demand for investment currency by U. K.investors and the available pool of currency. The premium is the pro-portion by which the aggregate desired holdings of foreign securities inthe portfolios of U. K. residents (excluding those financed by means ofoverseas borrowing) exceed the pool of foreign securities when thesesecurities are valued at the ruling official exchange rate.

Aggregate desired holdings of foreign securities(excluding those financed by means of

_ . overseas borrowing) .Premium = ^—=—7-7—= rr. r —,—A . ffi . t -1Pool of foreign securities when valued at official

exchange rates

At the end of 1976, with the pool valued at <£7 billion and with thepremium standing at 45 per cent, U. K. residents were holding investmentcurrency-financed foreign securities with a premium-inclusive marketvalue of <£ 10,150 million.7 It is possible to make an estimate of theaggregate value of U. K. investors' holdings of domestic securities basedon the market capitalization of all quoted U. K. securities, makingdeductions for nonresident holdings. On this basis, premium-worthyforeign securities comprise approximately 15 per cent of the averageU. K. security portfolio.

The aggregate demand for foreign securities depends upon therisk/return opportunities offered by foreign securities relative to thoseavailable on domestic securities, as well as the aggregate value of U. K.residents' portfolios. Ceteris paribus, an increase in the expected returnon foreign securities will lead to switching from domestic to foreignsecurities that will push up the premium. Alternatively, an increase inthe value of U. K. portfolios will, ceteris paribus, increase the demandfor foreign securities and thus will raise the premium as investors seekto hold constant the proportionate composition of their portfolios.

7 This was the replacement value, since it included the full premium, whereasif investors allowed for the 25 per cent surrender, a realizable value of £9,360million was indicated.



Another positive stimulus will occur if investors attempt to reduce port-folio risk by increasing diversification through raising the foreign com-ponent of their portfolios.

Turning to the denominator, changes in the value of the pool affectthe premium; an increase in the pool will, other things being equal,reduce the premium, and a decrease will raise it. A major cause of varia-tions in the size of the pool are changes in the official rate for sterling,since these affect the values of all securities equally. Thus, a depreciationof sterling will increase the pool in sterling terms and therefore tend toreduce the premium, while an appreciation will have the opposite effect.The size of the pool will also depend upon the price performance of thesecurities held in it; the more successful the international investmentstrategy of U. K. investors, the faster will be its growth. However, thesurrender policy, introduced in 1965 to increase official reserves, hashad the effect of depleting the pool. Since its inception, the surrenderrequirement has applied to sales of all foreign securities, with the excep-tion of former OSA securities between their inclusion in the exchangecontrol net in June 1972 and March 1974. Table 2 shows the annualcontractions in the investment currency pool deriving from the surrenderpolicy. The surrender policy, by reducing the pool, tends to increase thepremium over time.8

TABLE 2. UNITED KINGDOM: ANNUAL CONTRACTIONS IN THE INVESTMENTCURRENCY POOL DERIVING FROM THE SURRENDER POLICY, 1965-76

(In mil/ions of pounds)Year 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Amount -53 -70 -88 -104 -109 -87 -128 -138 -158 -265 -179 -176

Source: Bank of England, Quarterly Bulletin, various issues.

The relationship between the pool of investment currency and thedemand for overseas securities can be demonstrated diagrammatically.(See Figure 1.)

On the vertical axis is the exchange rate between the pound sterling

8 If there is a turnover of the pool of proportion a per period, then at the endof period /, the pool will have a value St, of

St = Soe-"xt

where So is the value of the pool at t=0. We therefore have the premium at time/ equal to

where 2 denotes the aggregate desired holdings of foreign securities in residents'portfolios.

1 and

Year 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Amount -53 -70 -88 -104 -109 -87 -128 -138 -158 -265 -179 -176



FIGURE 1

and the dollar—the dollar being used as the numeraire for all foreigncurrencies. The current official exchange rate is equal to OL. The supplyof foreign securities is fixed in the short run in dollar terms, thus givinga zero elastic supply curve TN. DD represents the U. K. demand forforeign currency securities at different exchange rates. The pool of secu-rities, when valued at official exchange rates, is represented by LRNO,

MLthe demand for foreign securities by MSNO, and the premium by ~^T •

Chart 1 shows the course of the premium since 1965. The premiumis based here on the difference between the investment currency rate andthe concurrent official rate. The premium is frequently quoted in thepress in relation to the last fixed official parity between the dollarand the pound sterling ($2.60571 = <£ 1), thus overstating the truepremium. Chart 2 shows the course of the official exchange rate andthe investment currency rate between the dollar and the pound sterlingsince the floating of the pound.

IMPACT ON INVESTORS

Investors are mainly concerned with the return and riskiness of secu-


CHART 1. UNITED KINGDOM: INVESTMENT CURRENCY PREMIUM, 1965-77

&L

IJDW

VW A

DN

aaan

o IN

HWXS

HANI

-rn

Source: The Financial Times, various issues.



CHART 2. UNITED KINGDOM: OFFICIAL AND INVESTMENTCURRENCY EXCHANGE RATES, 1972-77

Source: Bank of England, Quarterly Bulletin, various issues.rities, and the investment currency premium affects both.9 The standardportfolio theory definition of the return on a domestic security is thechange in the price of the security between two dates plus accrued divi-dends as a proportion of the price at the beginning of the period (or thepurchase price).10 The return on a foreign currency security if all settle-

9 It is assumed in this paper that investors observe the axioms for portfolioselection first proposed by Markowitz (1959), and that investors' preferences maytherefore be described by an ordinal preference function.

U = U(R, a)where U = an ordinal preference index

R = expected portfolio rate of returna = variance of portfolio rate of return

and where

where Po is the buying price, Pi is the selling price, and d is the dividend payablein the holding period.



ments took place at the official exchange rate would therefore be thedifference between the prices of the securities at the beginning and atthe end of the period, converted at the ruling official exchange ratesplus the accrued dividends, similarly converted, all as a proportion ofthe price at the beginning of the period.11

Allowing for exchange controls, the return now becomes based on asterling equivalent price at the beginning of the period that incorporatesthe premium and on a price at the end of the period that is inclusive ofthe premium on all but the 25 per cent surrendered at the officialexchange rate.12 Because the dividend is repatriated at the officialexchange rate, the proportionate return is reduced by the premium; thehigher the premium at the time of purchase, the lower the yield. The 25per cent surrender is also a factor tending to reduce the return.13

Over the period from the end of 1961 to the end of 1976, an invest-ment in U. K. equities by a resident would have yielded an annual aver-age return of 6.8 per cent. This compares with an annual average returnof 7.9 per cent available on U. S. equity investment over the sameperiod, had all settlements taken place at the official exchange rate. Ifallowance is made for the premium (but the surrender is excluded), thislast return becomes 11.5 per cent.14 The additional yield from invest-

11

(1)

where Co is the official exchange rate between sterling and the relevant currencyat the time of purchase, Ci is the exchange rate at the end of the period, andthe dividend is converted at Ci.

12

(2)

where TTO and ir\ are the premiums at the time of purchase and sale, respectively,and x is the surrender proportion. The dividend is again assumed to be convertedat the official exchange rate at the end of the period, since it is not eligible forthe premium.

13 This discussion has implicitly assumed that the foreign currency in whichthe securities are denominated has a unitary exchange rate and free convertibility.For certain countries of interest to U. K. residents (e.g., South Africa, Belgium),there are dual exchange markets and other capital controls that must be takeninto account in calculating the return. In order to formulate the expected return,the investor must therefore make estimates not only of Pi, Ci, TTI, and d, togetherwith any possible changes in U. K. exchange controls (such as might, for example,affect r), but must also try to anticipate any relevant changes or developments inregulations or two-tier markets abroad.

14 The returns are based on the U. K. Financial Times—Actuaries 500-shareindex and the U. S. Standard and Poor's 425-share industrial index. U. S. invest-ment is taken as the proxy for overseas investment because of its heavy weightingin the pool. Equity returns, rather than bond returns, have been used, since thepremium penalizes fixed-interest investment and ensures that few foreign bondsare purchased with investment currency.



ment in the United States has therefore been only 1.1 percentage pointsover this period, although investors in U. S. securities have fared muchbetter because of the rise in the premium. One explanation for the cur-rent high level of the premium may be that investors expect the yielddifferential in favor of overseas securities to widen in the future.

In general, foreign securities offer scope for risk reduction throughportfolio diversification. Risk reduction may be obtained because thereturns on foreign securities are less variable over time than those ondomestic securities. But, at a more general level, because foreign secu-rities markets are subject to different sets of prevailing economic andpolitical conditions, the various overseas securities indices display arelatively low correlation, both with the U. K. securities market and witheach other. A U. K. resident's securities portfolio with internationaldiversification will therefore be less risky than one without.15

The existence of a volatile premium can be expected to alter thevariability of the returns on foreign securities and therefore the benefitsof international diversification, but these changes are not necessarilysystematic.16 However, by comparing the variability and correlation ofthe premium-inclusive returns with the hypothetical returns that wouldhave been received had the investments been made at the officialexchange rate, some indication can be gained of this effect in practice.The quarterly returns on investment in the U. K. and U.S. equity indiceswere taken for 1962-69, 1969-75, and for the entire period 1962-75.The findings are, first, that, for all three periods, the variability of U. K.equity returns was greater than that of U. S. equity returns, whether thereturn for the latter was premium-inclusive or calculated at the officialexchange rate; the premium also reduced the variability of U. S. equityreturns to a U. K. investor.17 Second, the correlation between the U. S.and U. K. returns was higher with the premium than without for the firstperiod but lower for the second period, so that the results here wereinconclusive. Third, no systematic change was introduced by thepremium in the correlations of returns on equity investment in differentcountries. The premium was not, therefore, responsible over the periodin question for any significant increase in risk, and the potential bene-fits of international diversification were not noticeably lessened.

15 For a discussion of the potential gains from international diversification, seeGrubel (1968) and Levy and Sarnat (1970).

16 In portfolio theory terms, the effect can be assessed in terms of the changein the variance of the returns on the foreign securities and the covariances betweenthe returns on the various foreign securities and between the returns on foreignand domestic securities.

17 These findings are reported in greater detail in Woolley (1976).



BORROWING ALTERNATIVE

As an alternative to investment currency financing, investors mayfinance overseas portfolio investment by foreign currency borrowing.Permission to do this must first be granted by the Bank of England;one of the conditions is that asset cover of 115 per cent must be pro-vided for the overseas Joan, with 15 per cent of the amount of the loanbeing purchased with investment currency. In other words, the foreigncurrency value of the premium-paid securities must be at least 15 percent of the foreign currency loan. If a drop in security prices exposesa shortfall in this cover, the purchase of more foreign securities mustbe made with investment currency to restore the position.

In practice, most investors borrowing abroad already hold a portfolioof foreign securities financed by the premium; they merely earmarkpart of this as the extra backing for the loan. If, on final sale of thesecurities, the proceeds are insufficient to repay the loan in full, thebalance must be repaid with investment currency, whereas any profitremaining after repayment may be sold for the benefit of the premium,subject to the surrender. Any shortfall between the dividends on thesecurities and the interest payable on the loan must also be made goodwith investment currency. Switching of securities financed by overseasborrowing is not subject to the 25 per cent surrender.

The above provisions ensure that the borrowing option does not giverise to any loss to the balance of payments. If a profit is realized onthe securities, the capital account benefits to the extent of the proportionsurrendered at the official rate, and the size of the pool is increased bythe balance of the profit. If there is a loss, this is made good through apurchase of premium currency, which reduces the size of the pool buthas no effect on the capital account.

Prior to 1970, there had been only moderate use of overseas borrow-ing. As shown in Table 3, it developed strongly in 1972 and 1973, buthas since fallen back to lower levels. If it is assumed that there wasoutstanding borrowing of £200 million at the beginning of 1970, andthat there were no net currency gains or losses, the total outstandingborrowing was £1,040 million at the end of 1975. Approximatelyone tenth of overseas portfolio investment was therefore financed byborrowing at the end of 1975.

The investor's choice between financing by investment currency oroverseas borrowing will hinge on which offers the more attractive risk/return prospects. The principal difference is that overseas borrowinglargely insulates investors from fluctuations in the official exchange



TABLE 3. UNITED KINGDOM: PRIVATE PORTFOLIO INVESTMENT UNDERTAKENWITH FOREIGN BORROWING, 1970-75

(In millions of pounds}

Repayments

Year

197019711972197319741975

Foreign CurrencyBorrowing

48.7111.9696.7373.5167.0276.0

Using proceeds ofsales of foreign

currency securities

3.97.5

37.6186.1216.1129.2

Using investmentcurrency l

35.6148.465.1

Source: U. K. Treasury.1 Repayments with investment currency are generally made when, because of a fall

in the value of the securities, the sale proceeds are by themselves insufficient to meetthe full cost of loan repayment.

rate and the premium. If the borrowing takes place in the same currencyas the investment, changes in the official exchange rate or the premiumduring the holding period will only alter by a scale factor the capitalloss or gain from the transaction. Investors will therefore have apreference for overseas borrowing, other things being equal, when theyexpect a fall in the premium or a rise in the official exchange rate or,because of the freedom from the surrender penalty on switches underthe borrowing option, when they anticipate frequent switching.

A further consideration is that, the larger the amount of overseasborrowing in the financing mix, the higher is the leverage in theoverseas investment. Leverage from this source is eliminated if theinvestor makes a sterling deposit equal to the initial sterling value ofthe loan. Such combinations of loan and collateral deposit (knownas back-to-back loans) are frequently employed and are required bylaw for investment and unit trusts.

Because expectations about the movements of the relevant variablesare not held with certainty, a portfolio of foreign securities will usuallybe financed by a combination of the two methods, with premium-financed securities providing cover, well in excess of the stipulatedminimum of 115 per cent, for the foreign loan.18

18 The capital return on securities purchased with investment currency is:

This is the same as the overall return except that it omits the dividendelement, which is considered separately below. The capital return, assuming that



Use of the borrowing option has a number of consequences for thesize of the pool and the premium. First, the bypass reduces the demandfor investment currency and therefore lessens the premium. Some ideaof the reduction in demand can be obtained from the data for foreigncurrency borrowing in Table 3. Second, if foreign securities prices fall,there will be asset cover shortfalls that have to be made good withpurchases of investment currency. Falling securities prices have alreadybeen associated with a contracting pool and a rising premium, andthese are similarly the consequences of the restoration of asset cover.Conversely, rising securities prices are associated with an enlargementof the pool and a falling premium. Rising prices will result in profitsfrom overseas borrowing activities that will also serve to enlarge thepool and to lower the premium. The borrowing option will thereforetend to accentuate the effect on the premium of fluctuating foreignsecurities prices.

These relationships are well illustrated by what happened in 1974.In the preceding two years, there had been a heavy buildup of overseasborrowing, most of it undertaken to finance investment in securitiesdenominated in other currencies. Investors were tending to pay more

the borrowing and the investment are in the same currency and that a back-to-back loan is employed, is

If Pi - PQ < 0, x = 0, whereas if Pi - P0 > 0, x = 0.25.Where the investment takes place in a different currency from the borrowing,

the capital return is

where Co and Ci are the official exchange rates between the currency in whichthe securities are denominated and sterling at the time of purchase and sale,respectively; Fo and Fi are the official exchange rates between the currency inwhich the borrowing is denominated and sterling at the time of purchase andsale, respectively. The conclusions regarding changes in the premium are thesame as when the currencies are matched, but, in this case, a change in either ofthe two official exchange rates can alter the sign of the overall return.

The income return on currency-financed investment is

where Y is the annual dividend yield on the securities. The income return,assuming a back-to-back loan, is

where /•« is the servicing cost of the overseas loan and ruK is the return on thedeposit in the United Kingdom. Of the variables in this expression, Ci, in, and Yare expected future values; ra and ruK are known or expected, depending uponthe length of the loan and the corresponding deposit.



regard to interest charges than to exchange risk, and there was exten-sive borrowing in deutsche mark and Swiss francs in order to investin dollar securities. The subsequent capital losses had to be madegood with investment currency, and these covering purchases werelargely responsible for the rise in the premium from 30 per cent to88 per cent in the 12 months ended in June 1975.

DIRECT AND PROPERTY INVESTMENT

While the investment currency market was originally designed tocover portfolio investment, the authorities have extended its use overthe past 15 years to include certain flows of direct and property invest-ment funds owned by U.K. residents. The conditions under whichoutward flows of direct and property investment are required to passthrough the investment currency market and under which returninginflows are permitted to pass through it have varied from time totime, primarily according to the pressure on the balance of payments.For overseas direct investment by firms, the greater the pressure onthe balance of payments, the fewer are the projects that have beeneligible to be financed at the official exchange rate and that have hadto be financed with either premium currency or foreign borrowing. Thecontrols at the end of 1976 were as tight as they ever have been; theonly direct investment eligible to pass through the official market wasthat which met the "supercriterion," which is defined as a benefit to thebalance of payments equal to the initial outflow within 18 months andcontinuing thereafter. Profits accruing from all direct investment abroad,together with the proceeds of any disposal of assets, could only berepatriated at the official rate, whereas until March 1974 the liquidationproceeds of direct investment made outside the Overseas Sterling Areaand the European Economic Community had been eligible for repatria-tion through the premium market.

As the premium is not recoverable, it resembles a tax on overseasdirect investment.19 The deterrent effect of the premium thereforeensures that only a very small portion of overseas direct investment isfinanced in this way, since firms find that overseas profit retentionand foreign borrowing are lower-cost alternatives. The bias against

19 The return on direct investment collapses to

Where PO denotes the initial foreign currency outlay, d denotes the accrued profits,and Pi denotes any proceeds from the liquidation or sale of the investment.



direct investment as opposed to portfolio investment is contrary to therelative stringency of controls usually accorded to the two types ofcapital flow by most countries and, indeed, by past policy in theUnited Kingdom.20

Private property purchases by U. K. residents must also be madewith investment currency, but in contrast to the rules for direct invest-ment, 100 per cent of the proceeds of sales may normally be sold forthe benefit of the premium. Confining the initial transactions for directand property investment abroad to the investment currency marketensures that there is no loss to the balance of payments. The purchaseof investment currency by a U. K. firm making a direct investmentabroad will be matched by a sale of foreign securities or property byanother U. K. resident. However, the difference in the consequencesfor the balance of payments between the use of the investment currencymarket for direct or portfolio investment is that, whereas 75 per centof the proceeds of a sale of securities is eligible for the premium, noneof the proceeds of a sale of a direct investment are eligible. Since theentire return on direct investment is transmitted at the official rate,the balance of payments will generally benefit more from direct invest-ment than from portfolio investment. The value of the pool will alsobe reduced by the full amount of any direct investment transactedthrough the investment currency market.

Because both purchases and sales of private property are channeledthrough the premium market, consistent analytical treatment requiresthat U. K. residents' holdings of private property abroad, valued atofficial rates, be added to the value of foreign securities to arrive atthe full value of the pool. However, the value of these holdings is notknown. Also, the use of the market for property fund flows in eitherdirection is small, relative to portfolio investment flows, and they aretherefore commensurately less significant in the determination of thepremium. In the circumstances, it is probably best to regard propertyfund flows as giving rise to changes in the size of the pool over time—negative changes for purchases and positive changes for sales.

20 The usual argument in favor of lighter controls on direct investment outflowsis that the investing companies retain control over the investment, trading, financ-ing, and profit distribution policies of their overseas subsidiaries and branches, andthese policies can still be influenced by the authorities of the capital-exportingcountries in a way that is impossible when minority shareholdings are purchasedin overseas firms. In addition, it is felt, rightly or wrongly, that the return ondirect investment is both quicker and higher, and thus more useful for the bal-ances of payments, than that on portfolio investment.



II. Evaluation

CAPITAL CONTROLS AS POLICY INSTRUMENTS

Countries usually impose controls on outflows of long-term privateinvestment for one or more of the following reasons:

(a) to reduce the pressure on the balance of payments;(b) to extend the freedom of maneuver for the monetary authorities;(c) to increase the amount of domestic investment in preference to

overseas investment;(d) to influence the composition and destination of outward invest-

ment.As a palliative for balance of payments disequilibrium, the imposition

of capital controls may be regarded principally as an alternative toexchange rate adjustment. The choice will depend on how responsivethe current account balance is to the corrective measures available tothe authorities, the likely impact and effectiveness of the capital con-trols, and how important it is to insulate the current account frompressures deriving from capital flows that may prove to be episodicand without any real root in the normal structure of trade and pay-ments.21 For example, the current account may respond feebly or withan unacceptably long delay to an exchange rate depreciation. Theaction taken will be influenced by the expected duration of the imbal-ance; the authorities may not wish to depreciate if they anticipate thatthe balance of payments pressure is a short-run phenomenon.

Capital controls can be erected with relative ease and, if effectivelypoliced, their immediate consequences are more predictable and quanti-fiable than those of exchange rate variation. There is a danger, how-ever, that restrictions on the outflow of capital may have a perverseeffect on capital inflows or give rise to retaliation abroad. Controlsalso have a habit of remaining long after the grounds for their incep-tion have disappeared. This observed longevity may be self-defeating,since the capital controls of today may prevent an improvement inthe balance of payments in a year or two when the rewards of theoverseas investment would have been reaped. Finally, the choice ofpolicy will depend upon the distributional consequences, the inter-national setting, political expediency, and so forth.

The more that freedom of maneuver is sought for monetary policyand the more that fluctuations in exchange rates are limited, thegreater is likely to be the need for controls on capital movements.

21 See Cairncross (1973) and various papers in Swoboda (1976).



Conversely, the case for capital controls is weaker, the more readilyone contemplates floating exchange rates or the abandonment ofmonetary instruments for domestic purposes. In principle, controls oncapital outflows will enable a country to sustain a lower rate of interestthan that prevailing in the rest of the world. Nevertheless, there aremany linkages between economies that will tend to undermine anautonomous interest rate policy, however tough the capital controls.For instance, leads and lags, export credits, and overseas borrowingwill all tend to bring a country's real interest rate into line with pre-vailing international rates. Short-term capital movements are moreresponsive than long-term ones to interest rate differentials, so thatcontrols on long-term capital movements are less relevant if the targetis an independent monetary policy. However, such distinctions dependupon the substitutability between the two types of capital flow, and itmay be felt that substitutability is sufficiently high at the margin towarrant the extension of controls to both or that to distinguish betweenthe two would give rise to unacceptable distortions.

A recurrent argument for restricting outflows is based on the viewthat real capital formation at home does more for productivity, employ-ment, and long-run growth than does investment abroad. Thus, eventhough the private returns are equal, the social return from investmentat home is greater. It is also argued that, despite the equality of theprivate returns, the social returns will be higher at home because, wheninvestment is made abroad, the taxation accrues to the overseas govern-ment. Even the existence of tax treaties fails to compensate the domesticexchequer for the forfeited revenue.

Given the decision to impose capital controls, the questions will thenbe which type to adopt, to which categories of investment it shouldapply, and whether to cover residents or nonresidents or both. Thechoices between symmetric and asymmetric two-tier exchange markets,taxation, quantitative controls, etc. will be based on how much restric-tion is sought and on which control is the most efficient in exerting thedesired influence on the target variable.22 It will also depend uponwhether one method rather than another gives rise to any especiallyunpalatable side effects, such as the loss of international financial inter-mediation or undue losses or windfall gains to residents or nonresidents.There will also be the fundamental issue of enforceability—can the dualmarkets be effectively separated or can the control be policed withoutexcessive cost?

22 See Snider (1964) for an appraisal of the efficiency of the U.S. InterestEqualization Tax.



INTEREST RATE DIFFERENTIAL

The U. K. investment currency market can now be evaluated in thelight of this summary of the general case for capital controls. Considerfirst the effects of the investment currency controls on the relativereturns to portfolio and direct investment available in the United King-dom and the rest of the world (RoW). In the absence of controls overflows of direct investment between the United Kingdom and RoW—and given the satisfaction of the usual competitive conditions—theexpected real returns on long-term real investment will be equated (ateach level of risk) despite the existence of exchange rate fluctuations.If portfolio investment funds can flow freely between the UnitedKingdom and RoW, then, under the same set of ideal conditions, theexpected real returns to investment in bonds and equities will also beequated. If exchange controls are imposed by either the United Kingdomor RoW, whether on inflows or outflows of both direct and portfolioinvestment, capital flows may be prevented from exercising their equal-izing influence. The disparity in expected real returns will depend uponthe type and the stringency of the controls.

If controls are imposed by either the United Kingdom or RoW on theflows of portfolio investment, but not on the flows of direct investment,the returns on direct investment will be equated; however, the equaliza-tion of the returns on portfolio investment depends upon the degree ofsubstitutability between direct and portfolio investment in theUnited Kingdom and RoW. If there is anything less than perfect sub-stitutability, the returns on portfolio investment will not, in general, beequated. Assume that the only restriction on the free flow of capitalbetween the United Kingdom and RoW is the U. K. investment currencycontrol and that it relates exclusively to portfolio investment flows. Theinvestment currency market will prevent any flows of portfolio invest-ment funds into or out of RoW by U. K. residents. If direct and portfolioinvestment are perfect substitutes in both areas, there will be no obsta-cles to the equalization of the returns on both direct and portfolio invest-ment between the United Kingdom and RoW. If there is not completesubstitutability, then the portfolio investment funds of U.K. residentscannot be used as an instrument of equalization of returns on portfolioinvestment. However, if the residents of RoW are free to allocate theirfunds between the two areas, their portfolio investment fund flows will,in general, act as an instrument of equalization. The same is true evenif the investment currency market extends to full or partial coverage ofdirect investment.



The conclusion is thus that the asymmetric investment currency mar-ket will not necessarily prevent the equalization of expected real returnsin the United Kingdom and RoW, since nonresident capital will be ableto perform the equalizing role. Of course, if rUK < rRoW, residents inRoW may not have sufficient funds already invested in theUnited Kingdom to repatriate and so promote the equalization. On theother hand, as stated in the preceding section, there are other ways inwhich interest rates tend to be drawn together between countries, evenin the absence of capital flows.

The preceding analysis has shown that the U. K. investment currencymarket, when it relates to portfolio investment flows alone, does little toassist the authorities in the pursuit of an independent monetary policy.The flows of direct investment funds owned by U. K. residents and flowsof all categories of nonresident capital will result in an equalization ofthe expected real rates of return in the United Kingdom and RoW.Rather more scope for autonomy is conferred when the investment cur-rency market is extended to direct investment. There may also be scopefor a lower real interest rate in the United Kingdom if nonresident assetholding in the United Kingdom is relatively small.

The prediction of this analysis is borne out by the evidence of thepast 15 years. The annual average return to U. K. investors in domesticgovernment bonds over the period 1962-76 was 7.0 per cent perannum, whereas the return available to them on U. S. Governmentbonds, allowing for changes in the official exchange rate, would havebeen 7.4 per cent. The evidence on the return from equities has alreadyshown that the differential was a mere 1.1 per cent per annum in favorof the United States.

In the light of the preceding analysis, why would a premium everdevelop on investment currency? In other words, would U. K. residentsever wish to invest abroad if it involved a penalty in the form of a lowerreal return on investment than that available in the United Kingdom?On the basis of the assumptions that have been made, they would not,and, consequently, no premium (or, for that matter, no discount) wouldever develop on investment currency. If some of the assumptions arerelaxed, however, we see that a premium may arise.

In the first place, expectations about the return and the riskiness ofportfolio investment in the United Kingdom and RoW on the part ofresidents in both areas may differ, so that the expected return mayappear equalized to residents in one area but not to residents in theother. In this event, a premium may develop on investment currencyso as to equalize the expected returns as perceived by U. K. residents.



Second, the U. K. investment currency market will not usually be theonly control in operation between the United Kingdom and RoW. Non-resident capital may be prevented from performing its equalizing func-tion by deterrents to capital inflows into the United Kingdom otherthan those of an exchange control nature,23 or there may be capital con-trols operated in RoW. Third, exchange rates do not, in general, adjustin such a manner as to offset price level differentials exactly. If adjust-ment is delayed or jerky, there will be incentives for short-term pur-chases of foreign currency assets by U. K. residents.

OUTFLOW PREVENTED BY THE CONTROL

Some idea of the balance of payments significance of the investmentcurrency market can be gained by working through the consequences ofabolition. By appealing to comparative static analysis of the mean-variance approach to portfolio theory, it is possible to make some tenta-tive statements about the possible capital outflow for the general case ofabolition and, by inserting the current figures, to get an indication of thepossible outflow if abolition occurred now.

Let the observed pre-abolition value of the aggregate desired holdingsof foreign securities, when valued to include the premium, be 20 andthe post-abolition value of desired holdings be S^ The lifting of controlswould cause the premium to disappear, and investors would be leftholding foreign securities amounting to the value of the pool, S. Assume,for the moment, that the elimination of the premium rate does not affectthe official exchange rate, so that S remains unchanged following aboli-tion. As investors sought to build up their holdings to the desired post-abolition level, the capital outflow would be (2,1 — S).

I0 would not necessarily be equal to ̂ because the disappearanceof the premium will change the risk/return characteristics of foreignsecurities and the value of U. K. residents' portfolios. Following aboli-tion, the proportionate return on foreign securities will increase becauseboth dividends and capital will now be channeled through the officialmarket and the surrender penalty will disappear.24 This increase inreturn will be greater, the higher the premium prior to abolition. InSection I, it was reported that the variance of return on overseas invest-ment might be reduced by the existence of the premium, but that therewas no systematic change in the covariance between the returns on U. K.and U. S. investment or between the returns on equity investment in

23 Such deterrents may be of a fiscal, legal, or political nature.24 The increase in return will be equal to the difference between equation (1) in

footnote 11 and equation (2) in footnote 12.



different countries. Comparative static analysis of the mean-varianceapproach to portfolio theory seeks to determine how the optimal weightsof an individual's portfolio will respond to changes in the expectedreturn and risk.

Royama and Hamada (1967) found that, while a decrease in thevariance of the return of a particular security led to an unambiguousincrease in the proportion in which that security was held, changes inboth the expected return and the covariance between returns on thatsecurity and any other had essentially indeterminate effects. This inde-terminacy arises from the possibility that the wealth effect may be posi-tive or negative. By adopting somewhat more restrictive assumptionsconcerning the portfolio holder's preference function, Jones-Lee (1971)was able to derive the prediction that an increase in the return on thesecurity led to an increase in the proportion in which that security washeld. Abolition, therefore, increases the return, which, in turn, impliesan increase in the desired holdings of foreign securities (2i > 20).

The change in risk and its impact on demand is not clear-cut. Aboli-tion may increase the risk according to past evidence on thevariances/covariances; this implies a negative effect on demand.Variance/covariance evidence, however, does not capture the risk ofabolition that will invariably be on investors' minds, so this should beincluded as one of the risks of holding premium-financed securities. Thehigher the premium, the greater the risk of loss from abolition; but alsothe higher the premium, the less probable abolition becomes because ofits cost to the balance of payments. If the effect of risk on demand isdeemed more or less neutral, we are left with ^ > 20 based on theincrease in return.

The sudden loss of the premium reduces the aggregate value of U. K.investors'portfolios by (20 - S) or (1 - *)(20 ~~ ^) if investors valuetheir holdings at realizable, rather than replacement, value. It may seemparadoxical that a move toward greater freedom in capital mobilityactually involves a cost to investors. However, those investors who heldforeign securities when these exchange controls were introduced back in1947 have received a benefit, and the loss now would be the counterpartof this benefit. Exchange control was an alternative to the devaluationof sterling, and both strategies would have increased the value of foreignsecurity portfolios. If investors were to hold constant the proportionatecomposition of their portfolios, the proportion of total U. K. portfoliosthat the previously mentioned loss represented would be an indicationof the proportionate fall in demand for foreign securities owing to thewealth effect.



Drawing together the risk/return effect and the wealth effect, with itsnegative impact on demand, it seems unlikely that 2^ would differ greatlyfrom 20, implying that, as investors adjust their portfolios followingabolition, the outflow would be (S0 - S).

In Figure 1, the demand curve shifts from DD to D'D' owing to thewealth effect, and the outflow in sterling terms is RUVN, which wouldbe approximately equal to MSRL. It has so far been assumed that theofficial rate will remain constant at OL. In practice, the outflow wouldprobably cause the rate to fall, which, in turn, would choke off some ofthe outflow. Moreover, the inflow of funds into countries overseas couldlead to a rise in foreign securities prices, thus providing a further offset.The conclusion is that, in general, the higher the premium, the greaterthe outflow that is prevented. Based on the above analysis, with thepremium at 45 per cent and the pool valued at <£7 billion, abolitionwould result in an immediate outflow of £3,150 million as investorsadjusted their portfolios. After the initial outflow, there would be ebbsand flows, depending upon the expectations of relative money rates ofreturn and exchange rate changes in the United Kingdom and elsewhere.

There are a number of ways in which the asymmetric two-tier marketcan be designed to yield a result other than a zero net flow of funds.The authorities might, for example, intervene by making purchases inthe investment currency market so as to decrease the pool and to swellthe official reserves.25 However, this policy would be costly and, giventhat the pool is finite, the scope for making compensatory purchases tooffset a large and persistent current account deficit is limited. The U. K.authorities do not intervene in the market for this or, indeed, for anyother purpose, although through the surrender policy, they do ensurethat the investment currency market yields a net inflow.26 There are,however, a number of problems created by the surrender policy. First, itcauses the premium to be higher than it would be in the absence ofsuch a policy; the higher premium leads to policing problems and con-

25 See Day (1976).26 The reverse of the surrender policy might be an arrangement requiring inves-

tors to acquire only part of the foreign currency for purchases of securities at thepremium rate and enabling them to acquire the balance at the official exchangerate while permitting the whole of the proceeds of sales of securities to be trans-mitted through the premium currency market. Such a policy would, at first sight,appear appropriate if the overall balance of payments position improved suffi-ciently to countenance a small net outflow in place of the small net inflow yieldedby the present policy. The scheme would, however, be unworkable, since it wouldbe profitable for investors to purchase foreign currency securities and immediatelyresell them so as to gain the premium on that part that had not borne the pre-mium when purchased. This process would be repeated until, in a short time, thepremium disappeared and the outflow through the official market would be thesame as if the exchange restrictions had been lifted entirely.



notes weakness in sterling as well. Nonresidents, observing the premiumU. K. residents are prepared to pay to invest outside the domestic mar-ket, might feel disinclined to buy U. K. securities. To the extent that thisis true, then the balance of payments saving indicated earlier would bereduced by the amount of the inflow that is deterred.

Second, the surrender penalty inhibits switching, since utility maxi-mizing investors will fail to switch from one foreign security to another(equally risky) foreign security offering a higher expected return unlessthe expected return on the alternative exceeds that on the existing hold-ing by a margin that will compensate them for their surrendered pre-mium. So long as investors' expectations concerning the relative returnsare fulfilled, the balance of payments will suffer from the surrender pol-icy because investors will not necessarily be holding securities offeringthe highest returns. The third drawback is that the surrender inhibitsspeculation in the premium market. Speculation has the merit of increas-ing the rate of turnover, thereby making the market less narrow andreducing dealing margins. The consensus of the literature on speculationis that it may also have the effect of stabilizing the rate.

All dual exchange markets confront the problem of market separa-tion, although the symmetric two-tier exchange market is almost cer-tainly subject to greater leakages than the investment currency marketbecause of nonresident participation and because the financial marketrate usually covers a wider range of capital transactions than does theU. K. scheme.27 The divergence of the investment currency rate and theofficial exchange rate in the past is testimony to the widespread observ-ance of the present U. K. controls. Nevertheless, evasion is known tooccur and can take two forms: (a) the export of capital at the officialexchange rate that should have been channeled through the premiummarket; (b) the selling of foreign currency investments for the benefit ofthe premium when they have not borne it at the time of purchase.

The effect of (a) is to reduce the demand for investment currency,although probably by a good deal less than the amount of the illegallyconverted funds because of the higher exchange cost involved. Themajor effect comes from (b), since these sales increase the size of thepool and therefore tend to depress the premium.

SOME FURTHER CONSIDERATIONS

The investment currency market has survived for 30 years, yet during

27 Lanyi (1975) has provided examples of linkages between the financial andofficial markets in the symmetric two-tier system.



this time there have been a number of occasions when the authoritiesmight reasonably have considered abolition. These included the periodin the early 1960s when the premium almost disappeared, the devalua-tion of the pound in 1967, and the move from a fixed parity to a floatingpound in 1972. The strength of the case perceived by the authorities forthe market's retention at any time will depend upon prevailingconditions.

Against the balance of payments benefit of the system must be set thecosts. The costs imposed on investors stem from the restriction on theexport of capital for portfolio investment.28 The premium to which thisrestriction gives rise reduces the return on overseas securities whilethe surrender compounds this effect. The overseas borrowing optiongives investors scope to augment their holdings of foreign securitiesbut not to increase their net foreign position. The borrowing arrange-ment therefore serves to reduce only partially the loss of utility imposedby the control.

The cost of the control to the community as a whole includes theresources devoted to its administration and some loss of internationalarbitrage business. For example, following the extension of controls toSouth African securities in 1972 and the imposition of the surrenderon former Overseas Sterling Area securities in 1974, the London StockExchange has lost international arbitrage business in South Africansecurities to stock exchanges in New York and elsewhere. Even morerecently, the London Stock Exchange has failed to make progress withplans for a Chicago-style options market in major European equities, inno small measure owing to the complexities introduced by the invest-ment currency premium. This has left the field open to the Dutch, whoare planning to start trading in options next year.

With the major improvement that has already occurred and thefavorable prospect for the U. K. balance of payments in the next yearor two, consideration will almost certainly be given to the lifting ofrestrictions on overseas portfolio investment. A major stumbling blockis the capital loss that would be incurred by existing investors. Theauthorities will feel bound to weigh this carefully, since investors com-prise mainly investment and unit trusts, insurance companies, pensionfunds, and other institutional investors. The impact of lifting restric-tions would be substantial and widespread, and, unlike, say, a fall indomestic security prices that will often be temporary, it would haveto be regarded as an irrevocable loss.

28 See Richard Caves, "The Welfare Economics of Controls on Capital Move-ments," in Swoboda (1976), pp. 31-46.



III. Alternative Arrangements

This section examines some of the variants of the investment currencymarket that have been adopted in the past 30 years. It also considersa major policy change to which the authorities are committed in thefuture.

DUAL POOL SYSTEM

From the passing of the Exchange Control Act of 1947 until 1954,U. K. residents were not permitted to switch between securities quotedin different non-sterling area currencies.29 In 1954, there was a relaxationthat sanctioned switching by U. K. residents of securities quoted inany of the non-sterling area countries excluding the United States andCanada. Since no new funds could be exported and since the proceedsof sales of these securities could be transferred between residents, apremium, known as the "soft dollar" premium, developed on this cur-rency. At the same time, switching between securities quoted in theUnited States and Canada was permitted, and this gave rise to the"hard dollar" premium. There were thus two pools of investment cur-rency, the size of each being determined by the value of U. K. resi-dents' portfolio investments in the area at the time of the institutionof exchange control and by subsequent changes in the value of thesecurities represented in each pool over time. The main feature of thetwo-pool arrangement was that it ensured that the net flows of portfolioinvestment funds between the United Kingdom and both sets of coun-tries were zero, whereas the one-pool system simply ensures that the netflows between the United Kingdom and the rest of the world as a wholeis zero. The markets were merged in 1962, when the two premiumsdiverged little and both were close to the official parity.

The authorities' objective in imposing restrictions on the switchingof securities between currencies and sets of currencies was probably toensure that there was no net withdrawal of funds by U. K. residentsfrom the respective countries lest it provoke a rundown of sterlingbalances. The cost of the segmentation policy was that investors in theaggregate were restricted in their freedom to vary the distribution oftheir portfolios among foreign currencies. The premiums in the two-pool version could adjust to reflect the perceived attractions of the twocurrency groups, but the size of the underlying pools was unresponsiveto switching by investors.

29 See "The U.K. Exchange Control: A Short History," Bank of England,Quarterly Bulletin, Vol. 7 (September 1967), pp. 245-60.



As a general rule, investor utility is lessened if transferability betweenresidents of foreign currency for security purchases is restricted or ifthe geographical composition of overseas investments is constrained.The evolution of the U. K. exchange controls and the emergence of asingle pool and full transferability between residents has thereforebenefited investors.

"SECURITY STERLING" AND "PROPERTY CURRENCY"

Running parallel with controls on residents were those on nonresi-dents. From March 1953, blocked sterling balances were allowed to betransferred between residents of the same country or monetary area,and from September 1953, transfer was permitted between all nonresi-dents. Blocked sterling, or security sterling as it came to be known,could be invested in any U. K.-quoted security denominated in a sterlingarea currency. Markets in security sterling developed in foreign centers,and the rate of exchange invariably stood at a discount to the officialrate. Purchases and sales of securities by nonresidents continued to bechanneled through the security sterling market until April 1967, whenrestrictions on nonresidents were lifted.

For several years there were, in effect, two back-to-back investmentcurrency markets yielding, in principle, a zero net flow of portfolioinvestment funds for residents and nonresidents, both separately andcombined. The arrangement may be contrasted to the fully symmetrictwo-tier exchange market.30 The latter ensures a zero net flow onlyof resident and nonresident funds combined. Thus, in the symmetricversion, residents may augment their holdings of overseas assets if thereis a corresponding increase in nonresident's holdings of domestic assets.Furthermore, the premium confronting residents would be equivalentto the discount facing nonresidents, whereas in the U. K. version, thepremium and discount were independent. There would also be a largerturnover in the unified financial exchange market of the full two-tiersystem, and the scope for intervention by the authorities to influencethe overall balance of payments would be much enhanced.

From April 1965, U. K. residents were no longer allowed to buyprivate property outside the sterling area with investment currency, asthey had been permitted to do since April -1964. Instead, they wererequired to buy the property for sterling from another resident or topurchase foreign currency in the "property currency" market at the

30 For the basic analysis of the dual exchange market, see Fleming (1971and 1974) and Barattieri and Ragazzi (1971).



prevailing premium. This experiment in segregating the markets accord-ing to category of capital flow was short-lived. The market turned outto be lumpy and narrow, and three years later it was merged againwith the investment currency market. In part, the failure occurredbecause it was more difficult to police residents who were often buyingproperty with the intention of taking up permanent residence overseas.

PHASING OUT FOR THE EEC

A significant change in the coverage of U. K. exchange controls is inprospect in the next few years. One of the conditions of the UnitedKingdom's entry into the EEC was that the U. K. Government agreedto adjust its exchange control regulations so as to conform to theprovisions of Community directives on capital movements and tocomplete such adjustments over a transitional period of five years afteraccession in 1973. Each category of capital flow between the UnitedKingdom and other EEC countries was allocated a terminal date bywhich it had to be freed from exchange controls. U. K. portfolioinvestment in the EEC was the final category in the phased programof liberalization, with a terminal date of December 31, 1977. TheUnited Kingdom has sought and obtained postponements of its accu-mulated liberalization commitments on balance of payments groundsin each of the past three years. It will undoubtedly be more difficult toobtain further postponements if the balance of payments recoverycontinues.

No indication has been given of how the liberalization of portfolioinvestment would be conducted. There are a number of possibilities,and each has rather different implications for the balance of payments.One is that, overnight, and without prior warning, U. K. residentsmight be required to use the official exchange rate for all subsequentpurchases and sales of EEC securities. Investors would lose thepremium on these holdings, and the pool would be reduced accord-ingly. The cost to the balance of payments would amount to the rela-tively small outflow prompted by investors seeking to restore the pro-portionate composition of EEC securities in their portfolios that hadbeen depleted by the loss of the premium. A second possibility is thatadvance warning of abolition might be provided. If an early date weregiven, investors would sell all their premium-worthy EEC securitiesbefore the due date, the size of the pool would decline only by theamount of the surrender, and the subsequent outflow would be greaterthan in the first option as investors would have to build up their entireEEC holdings again through the official exchange market.



A third alternative is that the pool might be divided into two—onepool for non-EEC securities and a second, and smaller, pool for EECsecurities—with the decision on final abolition deferred for severalyears. Using this method, liberalization could be introduced more grad-ually, the cost to the balance of payments kept to a minimum, andsudden short-term losses to investors avoided.

With the eventual removal of controls between the United Kingdomand the EEC, a major problem presents itself (assuming there are stillcontrols for non-EEC countries), namely, the leakage of U. K.-ownedcapital through the EEC into non-EEC countries. This could only becured by a uniform, equally well-patrolled fence of capital controlsround the Community as a whole.

IV. Summary and Conclusions

A justification often used for capital controls is that they confer ameasure of independence on monetary policy. One of the criteriaof independence is the extent to which domestic real interest rates canbe differentiated from those prevailing abroad. The above analysis hasshown that, since the investment currency market ensures a zero netoutflow of U. K. residents' funds but leaves nonresidents' funds unregu-lated, the latter can perform the function of rate equalization. Infact, the return differential between U. K. and U. S. bonds, allowingfor changes in the official exchange rate, was less than one half of apercentage point per annum between 1962 and 1976; on equities, itwas only one percentage point per annum.

Another closely allied justification for capital controls is the balanceof payments saving that they ensure. Even though interest rates may bemore or less equalized by nonresidents, there will still be a balanceof payments saving represented by the suppressed demand for interna-tional portfolio diversification from U. K. investors. This is borne outhistorically by the size of the premium, despite the very modest improve-ment in return offered by overseas investment. The analysis showedthe balance of payments saving by working through the effects ofabolition and indicated that, on the basis of the assumptions adopted,the initial outflow, with the premium at 45 per cent and the poolpresently standing at approximately £7 billion, would probably bein the region of <£ 3 billion.

The cost of the controls is represented by the loss of utility to inves-tors stemming from the restriction on the export of capital and thepenalty of the consequent premium. Since the overseas borrowing



option fails to give investors scope to augment their net foreign posi-tion, it only partially offsets their welfare loss. A further cost of thesystem is some loss of international arbitrage business.

There is no official intervention in the premium market, but thesurrender policy ensures a tendency toward a depletion of the pooland an addition to official reserves. The surrender has the drawbackthat it tends to push up the premium, thus aggravating policingproblems, as well as acting as a deterrent to switching of securitiesby investors.

One of the conditions of the United Kingdom's entry into the EECin 1973 was that there would be a progressive liberalization of capitalcontrols between the United Kingdom and other member countries.Portfolio investment was scheduled for liberalization by the end of1977, but deferment of this obligation has been granted on balanceof payments grounds in each of the last three years. Further defermentmay be difficult to obtain if the current and capital accounts of thebalance of payments continue to improve. If the premium no longerapplied to EEC securities but controls were retained for the rest of theworld, policing problems would be greatly aggravated by the abundantscope for capital diversion. However, it is mainly in the context of therecovery in the balance of payments that consideration may be givenby the authorities to the lifting of restrictions and to the abolition ofthe investment currency market.

REFERENCES

Barattieri, Vittorio, and Giorgio Ragazzi, "An Analysis of the Two-Tier ForeignExchange Market," Banca Nazionale del Lavoro, Quarterly Review (December1971), pp. 354-72.

Cairncross, Sir Alexander K., Control of Long-Term International Capital Move-ments (Brookings Institution, 1973).

Day, William H.L., "Dual Exchange Markets Versus Exclusive Forward ExchangeRate Support," Staff Papers, Vol. 23 (July 1976), pp. 349-74.

Fleming, J. Marcus (1971), "Dual Exchange Rates for Current and Capital Trans-actions: A Theoretical Examination," Ch. 12 in his book, Essays in Interna-tional Economics (Harvard University Press, 1971), pp. 296-325.

(1974), "Dual Exchange Markets and Other Remedies for DisruptiveCapital Flows," Staff Papers, Vol. 21 (March 1974), pp. 1-27.

Grubel, Herbert G., "Internationally Diversified Portfolios: Welfare Gains andCapital Flows," American Economic Review, Vol. 58 (December 1968),pp. 1299-1314.

"An Inventory of U. K. External Assets and Liabilities: End-1976," Bank of Eng-land, Quarterly Bulletin, Vol. 17 (June 1977), p. 198.



"The Investment Currency Market," Bank of England, Quarterly Bulletin, Vol. 16(September 1976), pp. 314-22.

Jones-Lee, Michael W., "Some Portfolio Adjustment Theorems for the Case ofNon-Negativity Constraints on Security Holdings," Journal of Finance, Vol. 26(June 1971), pp. 763-75.

Lanyi, Anthony, "Separate Exchange Markets for Capital and Current Transac-tions," Staff Papers, Vol. 22 (November 1975), pp. 714-49.

Levy, Haim, and Marshall Sarnat, ''International Diversification of InvestmentPortfolios," American Economic Review, Vol. 60 (September 1970), pp. 668-75.

Markowitz, Harry M., Portfolio Selection: Efficient Diversification of Investments(New York, 1959).

Royama, Shoichi, and Koichi Hamada, "Substitution and Complementarity in theChoice of Risky Assets," in Risk Aversion and Portfolio Choice, ed. byDonald D. Hester and James Tobin (New York, 1967), pp. 27-40.

Snider, Delbert A., "The Case for Capital Controls to Relieve the U. S. Balanceof Payments," American Economic Review, Vol. 54 (June 1964), pp. 346-58.

Swoboda, Alexander K., ed., Capital Movements and Their Control (Leiden,1976).

"The U.K. Exchange Control: A Short History," Bank of England, QuarterlyBulletin, Vol. 7 (September 1967), pp. 245-60.

Woolley, Paul K. (1974), "Britain's Investment Currency Premium," Lloyds BankReview, No. 113 (July 1974), pp. 33-46.

(1976), The Investment Currency Premium (privately circulated by Capel-Cure, Myers Ltd., London, July 1976).


ERRATA

The following revisions in the July 1977 issue of Staff Papers should benoted:

1. On page 410, equation (3) should read2. On page 416, equation (13) shouldread

3. On page 417, equation (16) should read

4. On page 427, the second sentence in the first full paragraph should read,"These measurements are based on the assumption that a budget is neutralif it implies constancy of shares in potential levels of output."

5. On pages 442 and 444, Charts 5 and 6 are reversed. The chart on page 442(excluding title and footnotes) should appear on page 444, while the charton page 444 (excluding title) should appear on page 442.

787


SUMMARIES

The Impact of Monetary and Fiscal Policy Under Flexible Exchange Ratesand Alternative Expectations Structures—DONALD j. MATHIESON(pages 535-68)

A number of economists have argued that, in order to understand recentexchange rate movements, one must examine the process by which exchangerate expectations are formulated. To describe the influence of exchangerate expectations on the adjustment process, this paper examines a small,open economy's response to either an increase in the money supply or ahigher level of debt-financed government spending under the assumptionthat exchange rate expectations are either rational, semirational, or adaptive.It is argued that the economy's response to an increase in the money supplyis much more sensitive to the expectations structure than is its response toan increase in government spending. The analysis also shows that, followingan increase in the money supply, the exchange rate will overshoot its long-run value regardless of the type of expectations structure that exists. And,in general, the domestic interest rate will be the variable most stronglyinfluenced by the manner in which the private sector formulates its expecta-tions.

Downward Price Inflexibility, Ratchet Effects, and the Inflationary Impactof Import Price Changes: Some Empirical Evidence—MORRIS GOLDSTEIN(pages 569-612)

This article examines the effect of import price changes on the domesticrate of inflation for each of five large industrial countries—the United States,the Federal Republic of Germany, Japan, the United Kingdom, and Italy.More specifically, empirical tests are conducted to determine if there is anasymmetry, or ratchet effect, as between the effect of positive versus nega-tive changes in import prices on the rate of change of domestic prices. Sincedevaluations and revaluations usually give rise, respectively, to positive andnegative changes in import prices (as measured in domestic currency), theexistence of such a ratchet effect could have serious consequences for theglobal inflationary impact of exchange rate changes.

The empirical tests are carried out using six alternative models of infla-tion in the open economy. Annual data are used throughout, and the periodof study is from 1958 to 1973. Also, both aggregated (gross domestic product(GDP) deflator) and disaggregated (price of manufactures) price data areused in the empirical tests to provide at least some protection against aggre-gation bias in the results.

788


SUMMARIES 789

The estimated equations for the Federal Republic of Germany and theUnited Kingdom consistently fail to uncover any evidence of an asymmetry,while those for the United States, Italy, and Japan show more mixed results,with significant asymmetries appearing in some models but not in others.When all five countries are viewed as a whole via the estimation of pooledcross-sectional, time-series regression equations, the asymmetry hypothesisis rejected, and this is true for both the aggregated and disaggregated pricedata. All in all, the empirical tests reported in the paper do not support thehypothesis that negative changes in import prices have a significantly differ-ent proportionate effect on domestic prices than do positive changes. Assuch, the relationship between exchange rate changes and the rate of domes-tic inflation would seem to be consistent with "virtuous" as well as "vicious"circles.

Compensatory Financing: The Cyclical Pattern of Export Shortfalls—L. M. GOREUX (pages 613-41)

Compensatory financing may be considered an insurance scheme allowingmembers to borrow at low interest rates when their export earnings fallbelow trend and to repay when their export earnings rise above trend. Forthe last twenty years, nine tenths of the variance in the sum of the exportshortfalls experienced by the 71 Fund members that may be consideredprimary producing countries is explained by variations in two world eco-nomic indicators characterizing, respectively, manufacturing activity in themajor industrial countries and inflation in world trade. By contrast, onlyabout one third of the variance in individual country shortfalls is explainedby the same two indicators. At the country level, the effects of events specificto each country, such as floods and political crises, are dominant. Whencountry shortfalls are added up, the effects of country-specific events largelyoffset each other, and only the effects of the variations in the world economicindicators remain apparent. For that reason, the sum of country shortfallsfollows a highly cyclical pattern that is closely linked to the economic cyclein major industrial countries.

The study shows that the sum of the positive country shortfalls can bederived very accurately from the algebraic shortfall in the aggregated earn-ings of the 71 sample countries. It indicates how the sum of the positivecountry shortfalls can be projected on the basis of forecasted values for thetwo world economic indicators. The study also considers two possible modi-fications in the definition of export shortfalls. It shows that the sum ofcountry shortfalls would be reduced by about one third if the trend valuewere measured as a geometric average instead of as an arithmetic average.When the trend value is taken as a geometric average, whether shortfalls arecalculated in nominal terms or in real terms does not affect the average sizeof shortfalls calculated for a large number of consecutive years; the methodof calculation only affects the distribution of shortfalls from year to year.



Exchange Rate Policy in Japan: Leaning Against the Wind—PETER j. QUIRK(pages 642-64)

The period since the introduction of generalized floating has been markedby wide variation in the extent of official intervention in foreign exchangemarkets. This, and the scope for different strategies under internationalagreements, has made evaluation of these policies difficult. The purpose ofthis paper is to explore certain quantitative methods that might be broughtto bear on this problem, using developments in Japan over the periodMarch 1973-October 1976 as a reference. A policy reaction function isestimated and applied; in the process, the paper also investigates the rele-vance of various theories of exchange rate determination, including the assetequilibrium approach, to the short-run dynamics of the yen exchange rate.

Forms of policy response tested include intervention to moderate exchangemovement (leaning against the wind) and intervention directed toward vari-ous forms of exchange rate target, such as purchasing-power-parity equilib-rium rates and a constant level for the yen/dollar rate. The results supportthe view that the underlying Japanese strategy has been to lean against thewind, with transactions volume in the Tokyo spot market also influencingthe policy response. The residuals of the reaction function are used to eval-uate the relative intensity of intervention in each subperiod.

The asset equilibrium theory of exchange rate determination stresses therole of interest differentials in the short run; changes in these are found tobe significant in determining monthly movements of the yen exchange rate.Expected developments in the current balance of payments are also found tobe a significant factor, but official purchases and sales on the Tokyo foreignexchange market are not found to have systematically influenced the ex-change rate. Nor is the short-run version of the purchasing-power-parity viewof exchange rate determination supported by these tests.

Monetization of Developing Economies—ANAND G. CHANDAVARKAR(pages 665-721)

This paper attempts, in the light of a critical review of the concepts andthe empirical evidence, to develop a conceptual framework and an agendafor further research on the analysis and measurement of monetization in theless developed countries (LDCs).

Monetization tends to be used rather uncritically as a portmanteau con-cept in the literature, but it should properly be defined as the enlargementof the sphere of the money economy through the absorption of the non-monetized barter and subsistence sector, and should be clearly differentiatedfrom commercialization and financial intermediation. Since there is no puresubsistence sector in reality, the nonmonetized sector should be understoodas a statistical aggregate of the imputations to nonmonetized economicactivities, whose economic rationale derives from the search by rural house-holds for survival rather than from maximizing algorithms in an environ-ment of high risk and uncertainty. The most meaningful measure of mone-tization is the monetization ratio, that is, the proportion of aggregate outputpaid for in money by the purchaser. Consequently, to capture the level and


SUMMARIES 791

trend of monetization it is necessary to show the relative shares over time ofthe monetized and nonmonetized sectors in the national accounts at con-stant prices. Such data are currently not available for most LDCs, notableexceptions being Papua New Guinea and Tonga—particularly the latter,which has possibly the most highly disaggregated national accounts amongthe LDCs. Historically, monetization has been an evolutionary, albeit dis-continuous, process. It tends to assume an asymptotic character after acertain critical threshold, which varies among economies. But it is a signifi-cant ex ante variable for financial programming in economies that still havea substantial nonmonetized sector, as in Southeast Asia, the South Pacificregion, and tropical Africa. The fiscal implications of monetization are alsorelevant insofar as tax policy affects the incentives of the subsistence sectorand the component of nonmonetized consumption determines the effectiveincidence of taxation. Consequently, the tax structure and rates would needto be appropriately modified in keeping with the pace and direction ofmonetization.

There is, however, a real need for detailed research on the structure andbehavior of the nonmonetized sector as well as the nature and effects ofmonetization on crucial variables, such as the marketed surplus of majorsubsistence sectors and the portfolios of households and financial institutions.The paper, therefore, formulates a conceptual model of monetization as wellas suggestions for an appropriately disaggregated system of national accounts.

Corporation Income Tax Structure in Developing Countries—GEORGE E.LENT (pages 722-55)

This paper considers not only the modalities of the corporation incometax and the tax treatment of dividend income but also tax rate structure,discrimination between different forms of business organization, and dis-crimination between foreign and domestic shareholders.

Differences in economic and social conditions in developing countries callfor separate appraisal by each country of the comparative merits of variouscorporation tax structures in terms of equity, economic efficiency, and ad-ministrative convenience. Although equity considerations would appear tofavor methods that avoid economic double taxation of dividends, this wouldbe true only if the incidence of the corporation tax were on capital. Theuncertainty of the incidence, however, cautions against a decision on thisbasis.

A separate entity system may have some advantages in attracting newinvestment because the tax rate may be much lower than that of integratedsystems that raise an equivalent amount of revenue. It is also usuallyassumed that separate taxation of dividends encourages the reinvestment ofearnings more than other systems, although there is no evidence that this istrue.

Tax discrimination between corporations of different sizes and betweencorporations and partnerships can best be avoided by integration of indi-vidual and company taxes, through either an imputation system or anundistributed profits tax. Although personal taxes may be avoided under



these systems by retaining earnings, there is also an opportunity for share-holders to escape the corporation tax by distributing earnings.

It is difficult to achieve parity of tax treatment between domestic andforeign shareholders. Double taxation may be avoided by the country ofresidence if it provides credits for taxes paid to the country of source. Whena developing country's income taxes on earnings remitted abroad fall shortof the credit allowable by the principal capital exporting country, it ispossible for the country to exploit the tax revenue differential by increasingits withholding taxes on dividends.

The analysis is undertaken with reference to the corporation tax struc-tures and tax rates for 80 developing countries.

The U. K. Investment Currency Market—PAUL K. WOOLLEY (pages 756-86)

In the basic dual exchange market, all capital transactions undertaken byresidents and nonresidents take place at the financial exchange rate, and allcurrent transactions take place at the official exchange rate. The U.K. invest-ment currency market is a variant of this system in that all portfolio invest-ment, and certain direct and property investment, transactions attributableto U.K. residents are channeled through the investment currency market,while all capital and current transactions undertaken by nonresidents areconducted at the official exchange rate. While the basic dual exchangemarket has been the subject of extensive analytical study, the U.K. versionhas been largely neglected despite the fact that it has been in operation for30 years.

The paper seeks, in particular, to show the effects of the market on thebalance of payments and on domestic interest rate policy. The basic conclu-sions are that the market does not, in general, contribute to the insulationof domestic interest rate policy, but that it does prevent a capital outflow,the potential size of which is closely related to the magnitude of the premiumat the time. The paper also attempts to identify the main influences on thesize of the premium, which has fluctuated between zero and 88 per cent inrecent years. It goes on to show the effects of the premium on the risk/returnbenefits of international diversification by U.K. investors and investigates theconditions under which an investor will prefer to bypass the investment cur-rency market by borrowing abroad to finance overseas investment. Finally,there is an attempt to assess the implications of a number of policy changes inthe regulation of this market that have been introduced in recent years, bothfrom the point of view of the investor and from that of the authorities. Inaddition, the paper considers the U.K. commitment to phase out the controlson investment in other EEC countries.

The analysis developed in this paper would be generally applicable to theseveral other countries operating financial exchange markets for residentswhere the rate is allowed to float. It would not, however, be applicable with-out modification to those countries operating financial exchange markets inwhich only nonresidents participate.


RESUMES

L'impact de la politique monetaire et de la politique budgetaire dans unregime de changes flottants et suivant differentes structures d'anticipations —DONALD j. MATHIESON (pages 535-68)

Un certain nombre d'economistes ont soutenu qu'il fallait, pour com-prendre les mouvements recents des taux de change, analyser Je processus deformation des anticipations concernant ces taux. Pour decrire 1'incidence deces anticipations sur le processus d'ajustement, le present document etudieles reactions d'une economie ouverte, de petite dimension, a un accroisse-ment soit de la masse monetaire, soit du volume des depenses publiquesfinancees par 1'emprunt, en prenant pour hypothese que les anticipationsrelatives aux taux de change sont rationnelles, semi-rationnelles ou evolutives.II est affirme que la structure des anticipations influence beaucoup plusprofondement les reactions de 1'economie a une expansion de la massemonetaire que ses reactions a une augmentation des depenses publiques.L'analyse montre egalement que, a la suite d'un accroissement de la massemonetaire, le taux de change depassera sa valeur a long terme, quel que soitle type d'anticipation. Enfin, le taux d'interet interieur sera, en general, lavariable la plus fortement influenced par le mode de formation des anticipa-tions du secteur prive.

Rigidite a la baisse des prix, effets de cliquet et incidence inflationniste desfluctuations des prix a 1'importation : quelques tests empiriques — MORRISGOLDSTEIN (pages 569-612)

Le present article examine J'effet des variations des prix a {'importationsur le taux d inflation interieur de cinq grands pays industriels — Etats-Unis,Republique federate d'Allemagne, Japon, Royaume-Uni et Italic. Plus spe-cifiquement, des tests sont effectues pour determiner s'il y a asymetrie, oueffet de cliquet, entre 1'effet des variations positives et celui des variationsnegatives des prix a 1'importation sur le taux de fluctuation des prix interieurs.Etant donne que les devaluations et reevaluations suscitent generalement desvariations positives et negatives, respectivement, des prix a 1'importation(mesurees en monnaie nationale), 1'existence d'un tel effet de cliquet pourraitavoir de graves consequences pour 1'incidence inflationniste globale desvariations du taux de change.

Les tests empiriques sont effectues a 1'aide de six modeles differentsd'inflation dans une economie ouverte. Les donriees utilisees d'un bout a1'autre sont des donnees annuelles et la periode etudiee s'etend de 1958 a

793



1973. De plus, des donnees agregees (indice d'ajustement du PIB) etdesagregees (prix des produits manufactures) sont utilisees pour les prixdans les tests empiriques aux fins de protection centre la distorsion causeepar 1'agregation dans les resultats.

Les equations estimees pour la Republique federate d'Allemagne et leRoyaume-Uni ne permettent pas de decouvrir 1'existence d'une asymetrie,alors que celles etablies pour les Etats-Unis, 1'Italie et le Japon donnent desresultats mixtes, des asymetrics importantes apparaissant dans certainsmodeles, mais pas dans d'autres. Lorsque ces cinq pays sont considerescomme un tout par estimation d'equations de regression de series chrono-logiques raccordees relatives aux differents pays, on doit rejeter 1'hypothesede Tasymetrie, et il en est ainsi pour les donnees de prix agregees commepour les donnees desagregees. Dans 1'ensemble, les tests empiriques decritsdans cette etude ne confirment pas I'hypothese selon laquelle 1'effet pro-portionnel des variations negatives des prix a 1'importation sur les prixinterieurs est notablement different de celui des variations positives. Telquel, le rapport entre les fluctuations des taux de change et le taux deTinflation interieure semblerait conforme a la theorie du cercle «vertueux»aussi bien que celle du cercle «vicieux».

Financement compensatoire : la structure cyclique des moms-values desrecettes d'exportation — L. M. GOREUX (pages 613-41)

Le fmancement compensatoire peut etre considere comme une assurancepermettant aux membres du Fonds d'emprunter a f aibles taux d'interet lorsqueleurs recettes d'exportation tombent au-dessous de la tendance (moins-valued'exportation) et d'operer le remboursement lorsqu'elles s'elevent au-dessusde la tendance (plus-value d'exportation). La presente etude est basee sur unechantillon de 71 membres du Fonds qui peuvent etre consideres comme despays de production primaire. Au cours des vingt dernieres annees, la variancede la somme des moins-values d'exportation enregistrees par ces 71 payss'explique a concurrence des neuf dixiemes par les fluctuations de deuxindicateurs economiques mondiaux qui caracterisent, respectivement, 1'activitemanufacturiere dans les principaux pays industriels et I'inflation dans lecommerce mondial. En revanche, un tiers seulement de la variance des moins-values de chaque pays s'explique par les deux memes indicateurs. Au niveaunational, les effets d'evenements particuliers a chaque pays, tels que lesinondations et les crises politiques, jouent un role predominant. Lorsqu'onfait la somme des moins-values de chaque pays, les effets des evenementsspecifiques a chaque pays se compensent largement, et seuls les effets desvariations des indicateurs economiques mondiaux demeurent apparents. Pourcette raison, la somme des moins-values des pays et, en consequence, lessommes deboursees par le Fonds au litre du fmancement compensatoire sontetroitement liees au cycle economique des principaux pays industriels.

Cette etude montre que Ton peut estimer avec une grande precision lasomme des moins-values des pays a partir des moins-values ou plus-valuescalculees a partir des recettes de Tensemble des 71 pays de 1'echantillon.


RESUMES 795

Elle indique comment il est possible de projeter la somme des moins-valuesdes pays sur la base des valeurs prevues des deux indicateurs economiquesmondiaux. L'etude examine egalement deux modifications possibles de ladefinition des moins-values des recettes d'exportation. Elle montre que lasomme des moins-values des pays serait reduite d environ un tiers si onmesurait la valeur tendancielle comme une moyenne geometrique et noncomme une moyenne arithmetique. Lorsque la valeur tendancielle estdefinie comme une moyenne geometrique, que les moins-values soient cal-culees en valeur nominale ou en valeur reelle n'influe pas sur Fimportancemoyenne des moins-values calculees pour une longue serie d'annees consecu-tives; la methode de calcul n'influe que sur la repartition des moins-valuesd'une annee a 1'autre.

Politique des taux de change au Japon : moderation des forces du marche —PETER j. QUIRK (pages 642-64)

Depuis le flottement generalise des taux de change, 1'intervention officiellesur les marches des changes a largement varie. Du fait de ces variations etdes differentes strategies pouvant etre adoptees dans le cadre des accordsinternationaux, 1'evolution des politiques de change s'est averee difficile.L'auteur de la presente etude se propose d'examiner certaines methodesquantitatives susceptibles d'apporter une solution a ce probleme, en sereferant a 1'evolution de la situation au Japon entre mars 1973 et octobre1976. Par 1'estimation et Tapplication d'une fonction d'intervention, il testela validite des diverses theories relatives a la determination du taux de change,notamment celle de 1'equilibre des actifs financiers, dans le contexte de ladynamique a court terme du taux de change du yen.

Les formes d'intervention testees comprennent une intervention visant amoderer les fluctuations du taux de change (moderation des forces dumarche) et une intervention orientee vers la realisation d'objectifs de taux dechange, tels les taux d'equilibre des parites du pouvoir d'achat et un rapportde change constant yen/dollar. Les resultats confirment 1'opinion selonlaquelle la strategic qui sous-tend la politique du Japon a ete de modererles forces du marche, le volume des transactions sur le marche au comptantde Tokyo ayant aussi influe sur la reaction des autorites. Les resultatsresiduels de la fonction d'intervention ont ete utilises pour evaluer J'intensiterelative de 1'intervention pendant chaque sous-periode.

La theorie de la determination du taux de change par 1'equilibre des actifsfinanciers souligne le role des ecarts entre les taux d'interet a court terme;on constate que les variations de ces ecarts jouent un role important dansla determination des mouvements mensuels du taux de change du yen. Onconstate egalement que les previsions concernant 1'evolution de la balancedes paiements courants est un facteur significatif, mais que les achats et lesventes officiels sur le marche des changes de Tokyo n'ont pas systematique-ment influe sur le taux de change. Les tests effectues ne confirment pas nonplus la these selon laquelle 1'evolution du taux de change est influenced acourt terme par les parites du pouvoir d'achat.



Monetisation des economies en developpement— ANAND G. CHANDAVARKAR(pages 665-721)

La presente etude s'efforce, a la lumiere d'une analyse critique des notionset de 1'experience, de mettre au point un cadre conceptuel permettantd'analyser en profondeur le degre de monetisation dans les pays moinsdeveloppes (PMD) et de fixer un calendrier a ces travaux.

On a tendance, dans la litterature economique, a utiliser cette notion d'unpoint de vue assez peu critique sans bien en preciser le sens, mais il convien-drait de la definir comme etant 1'expansion de la sphere de 1'economiemonetaire par Tabsorption du secteur de subsistance et de 1'economie de trocnon monetisee, et de la distinguer clairement de la commercialisation et de1'intermediation financiere. Comme il n'existe pas de secteur de subsistancea proprement parler, il faut entendre, par secteur monetise, un agregatstatistique des operations imputees aux activites economiques non monetisees,dont la raison d'etre economique provient de la lutte pour la vie des menagesruraux et non pas de la maximisation d'algorithmes dans une ambiance derisque et d'incertitude eleves. La mesure la plus significative de la monetisa-tion est le coefficient de monetisation, c'est-a-dire la proportion de la produc-tion globale que 1'acheteur regie en especes. Cest pourquoi, afin de se rendrecompte du niveau atteint par la monetisation et de sa tendance, il estnecessaire de montrer les parts relatives qui echoient dans le temps auxsecteurs monetise et non monetise dans les comptes nationaux a prix cons-tants. A 1'heure actuelle, on ne dispose pas de ce genre de donnees pour laplupart des PMD, a 1'exception notable de la Papouasie/Nouvelle-Guineeet de Tonga — surtout ce dernier, qui a peut-etre les comptes nationaux lesplus minutieusement ventiles des PMD. De tout temps, la monetisation aete un processus evolutif marque de temps d'arret. Apres avoir atteint uncertain seuil critique, elle semble adopter un caractere asymptotique quivarie d'un pays a 1'autre. Mais elle represente une variable ex ante significa-tive pour la programmation financiere dans les economies qui possedentencore un secteur non monetise ties important, comme c'est le cas en Asiedu Sud-Est, dans la region du Pacifique Sud et en Afrique tropicale. Lesimplications budgetaires de la monetisation sont egalement interessantes dansla mesure ou la politique fiscale agit sur les stimulants offerts au secteur desubsistance et ou la composante de la consommation echappant a la mone-tisation determine 1'incidence effective de 1'imposition. II conviendrait, enconsequence, de modifier de fac.on appropriee la structure et les baremesde l'imposition, conformement au rythme et a 1'evolution de la monetisation.

Un examen approfondi de la structure et du comportement du secteurnon monetise ainsi que de la nature et des repercussions de la monetisationsur les variables essentielles, telles que 1'excedent commercialise des princi-paux secteurs de subsistance et le portefeuille des menages et des institutionsfinancieres, est done une necessite reelle. La presente etude formule, parconsequent, un modele de monetisation ainsi que certaines suggestions per-mettant de desagreger les comptes nationaux par un systeme approprie.

Structure de 1'impot sur le revenu des societes dans les pays on developpe-ment — GEORGE E. LENT (pages 722-55)

La presente etude examine non seulement les modalites de Timpot sur


RESUMES 797

le revenu des societes et le regime fiscal applique au revenu des dividendesmais egalement la structure des taux d'imposition, la discrimination entreles diverses formes d'organisation des entreprises et la discrimination entreles actionnaires etrangers et nationaux.

En raison des differences qui existent entre les conditions economiqueset sociales des divers pays en developpement, chaque pays doit evaluerseparement les avantages compares des diverses structures fiscales applicablesaux societes du point de vue de requite, de I'efficacite economique et dela commodite administrative. Des considerations de justice sembleraientfavoriser des methodes qui evitent la double taxation economique des divi-dendes, mais ceci ne serait vrai que si 1'incidence de I'impot sur les societesretombait sur Je capital. Le caractere incertain de cette incidence, cependant,met en garde contre 1'adoption d'une decision sur cette base.

Un systeme imposant separement les entreprises peut presenter des avan-tages pour attirer de nouveaux investissements parce que le taux d'impositionrisque d'etre beaucoup plus faible qu'avec des systemes integres qui fontrentrer un montant equivalent de recettes. On suppose aussi habituellementque 1'imposition distincte des dividendes encourage le reinvestissement deces dividendes plus que les autres systemes, mais rien ne prouve qu'il en soitainsi.

Le meilleur moyen d'eviter la discrimination entre les impots sur lessocietes de differentes statures et entre les societes par actions et les societesen nom collectif consiste a integrer les impots sur les personnes physiqueset sur les personnes morales en adoptant soit un systeme d'imputation, soitun impot sur les benefices non distribues. Bien qu'il soit possible d'eviterTimpot sur les personnes physiques dans le cadre de ces systemes en nedistribuant pas les dividendes, les actionnaires ont egalement J'occasiond'echapper a I'impot sur les societes si les dividendes ne sont pas distribues.

II est difficile de realiser la parite du regime fiscal entre les actionnairesnationaux et etrangers. On peut eviter la double imposition par le pays deresidence si ce dernier prevoit un credit pour les impots verses au pays quiest la source des dividendes. Lorsque les impots sur le revenu d'un pays endeveloppement dus sur les gains payes a 1'etranger sont inferieurs au creditautorise par le principal pays exportateur de capitaux, ce pays peut exploiterTecart entre les recettes fiscales en augmentant I'impot sur les dividendesretenu a la source.

L'analyse a ete effectuee par reference a la structure de I'impot sur lessocietes et aux taux d'imposition de 80 pays en developpement.

Le marche des divises d'investissemeiit au Royaume-Uni — PAUL K. WOOLLEY(pages 756-86)

En regime normal de double marche des changes, toutes les transactionsen capital effectuees par des residents et des non-residents ont lieu au taux dechange financier alors que toutes les transactions courantes sont fondees surle taux de change officiel. Le marche des devises d'investissement au Royaume-Uni constitue une variante de ce systeme en ce sens que tous les investisse-ments de portefeuille, ainsi que certaines transactions directes et investisse-ments immobiliers attribuables aux residents du Royaume-Uni se font parrintermediaire du marche des devises d'investissement cependant que toutes



les transactions en capital et toutes les transactions courantes des non-residents se font au taux de change officiel. S'il est vrai que le regimeclassique du double marche des changes a deja ete analyse en profondeur, saversion britannique, bien qu'en vigueur depuis 30 ans, a ete largement passeesous silence.

Dans son etude, Paul K. Woolley cherche, entre autres, a mettre en lumiereles effets exerces par ce marche sur la balance des paiements et la politiqueinterieure du taux d'interet. Ses conclusions de base sont que le marche necontribue en general pas a 1'isolement de ladite politique mais qu'il empechedes sorties de capitaux dont 1'ampleur eventuelle est etroitement liee a1'importance de la prime. L'auteur s'efforce aussi d'identifier les principauxfacteurs qui influent sur 1'importance de la prime qui, ces dernieres annees, sesituait entre zero et 88 pour 100. II montre ensuite les effets de la prime surles avantages en matiere de risque et de rendement qu'apporte la diversifica-tion internationale aux investisseurs britanniques et il analyse les conditionsdans lesquelles un investisseur prefere eviter le marche des devises d'inves-tissement et emprunter a Fetranger pour financer ses investissementsexterieurs. Enfin, 1'auteur essaie d'evaluer les implications d'un certain nombrede changements apportes ces dernieres annees a la reglementation de cemarche, tant du point de vue de 1'investisseur que de celui des autorites. IIexamine ensuite 1'engagement pris par le Royaume-Uni d'eliminer progressive-ment le controle des investissements effectues dans les autres pays de laCEE.

L'analyse entreprise dans ce document pourrait s'appliquer a plusieursautres marches des changes financiers pour residents ou le taux flotte libre-ment. Elle ne serait cependant pas applicable sans modification aux marchesdes changes financiers qui ne touchent que les non-residents.


RESUMENES

£1 impacto de las politicas monetaria y fiscal en un regimen de tipos decambio flexibles y con diversas modalidades de expectativas— DONALD J.MATHIESON (paginas 535-68)

Varies economistas ban sostenido que, para poder comprender los ultimosmovimientos de los tipos de cambio, debe examinarse el proceso medianteel cual se formulan las expectativas pertinentes a los tipos de cambio. Conel objeto de explicar la influencia que dichas expectativas tienen en elproceso de ajuste, este trabajo examina la reaccion de una economiapequena y abierta, ante un aumento de la oferta monetaria o ante un nivelmas alto del gasto publico financiado mediante deficit, segun se haga elsupuesto de que las expectativas relativas al tipo de cambio son racionales,semirracionales o adaptables. Se sostiene que la reaccion de la economiaante un incremento de la oferta monetaria es mucho mas sensible a lamodalidad de expectativas que su reaccion ante un aumento del gastopublico. El analisis tambien senala que, a raiz de un aumento de la ofertamonetaria, el tipo de cambio sobrepasara su valor a largo plazo, cualquierasea la modalidad de expectativas que exista. Y, en general, la variante masdrasdcamente influida por la forma en que el sector privado plantee susexpectativas sera el tipo de interes interno.

Inflexibilidad de los precios a la baja, efectos de trinquete e impacto infla-cionario de la variacion de los precios de importacion: Algunas pruebasempiricas—MORRIS GOLDSTEIN (paginas 569-612)

En este articulo se examina el efecto que producen las variaciones delos precios de importacion en la tasa interna de inflacion de cinco grandespaises industriales: Estados Unidos, la Republica Federal de Alemania,Japon, el Reino Unido e Italia. Concretamente, se llevan a cabo pruebasempiricas para determinar si existe alguna asimetria, o efecto de trinquete,entre el efecto de las variaciones positivas y el de las negativas de los preciosde importacion en la tasa de variacion de los precios internos. En vista deque las devaluaciones y revaluaciones suelen dar lugar, respectivamente, avariaciones positivas y negativas de los precios de importacion (medidos enmoneda nacional), la existencia de dicho efecto de trinquete podria tenergraves consecuencias para el impacto inflacionario global de las fluctuacio-nes de los tipos de cambio.

Las pruebas empiricas se llevan a cabo empleando seis posibles modelosde inflacion en una economia abierta. En todo el estudio, que abarca elperiodo de 1958 a 1973, se usan datos anuales. Ademas, en las pruebas seemplean, en cuanto a los precios, datos agregados (deflactor del producto

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•800 INTERNATIONAL MONETARY FUND STAFF PAPERS

interne bruto) y desagregados (precios de los productos manufacturados)para proteger los resultados, al menos en parte, contra el sesgo de agrega-cion.

Las ecuaciones estimadas para la Republica Federal de Alemania y elReino Unido no dan prueba en ningun momento de la existencia de unaasimetria, en tanto que las correspondientes a Estados Unidos, Italia yJapon arrojan resultados mas desiguales: algunos modelos, pero no otros,muestran asimetrias de importancia. Cuando los cinco paises se consideranen conjunto mediante la estimacion de ecuaciones de regresion de seriescronologicas representativas combinadas, se rechaza la hipotesis de la asi-metria, y esta conclusion se aplica tanto a los datos agregados como a losdesagregados relatives a los precios. En general, las pruebas empiricas cuyosresultados se presentan en el trabajo no corroboran la hipotesis de quelas variaciones negativas de los precios de importation producen en losprecios internes un efecto proporcional significativamente diferente del delas variaciones positivas. For lo cual la relation entre las variaciones de lostipos de cambio y las de la tasa de inflacion interna parece ser compatibletanto con un circulo "virtuoso" como "vicioso".

Financiamiento compensatorio: £1 caracter ciclico de la disminucion de losingresos de exportation—L. M. GOREUX (paginas 613-41)

El financiamiento compensatorio puede ser considerado como un sistemade seguro que permite a los paises miembros obtener prestamos a bajotipo de interes cuando sus ingresos de exportation disminuyen y alcanzanun nivel inferior a la tendencia normal, y rembolsarlos cuado dichos ingresosvuelven a aumentar y alcanzan un nivel superior a dicha tendencia. Enlos veinte ultimos anos, el 90 por ciento de la varianza de la suma de lasdisminuciones de ingresos de exportacion experimentadas por los 71 paisesmiembros del Fondo que pueden considerarse como paises de productionprimaria queda explicada por la variation de dos indicadores de la economiamundial, que caracterizan, respectivamente, a la actividad manufactureraen los principales paises industrials y la inflacion en el comercio internacio-nal. En cambio, solo un 33 por ciento de la varianza de la disminucion deingresos de exportacion de cada pais queda explicada por los mismos dosindicadores. En el caso de cada pais en particular, son predominantes losefectos de ciertos acontecimientos especificos, como inundaciones o crisispoliticas. Al sumar las diminuciones de ingresos de exportacion de los paises,los efectos de los acontecimientos particulares de cada pais se contrarrestanentre si en gran parte, y solo persisten los efectos de la variacion de losindicadores de la economia mundial mencionados. Por esta razon, la sumade las disminuciones de ingresos de exportacion de los paises sigue unatrayectoria ciclica y estrechamente relacionada con el ciclo economico delos principales paises industriales.

Este estudio demuestra que la suma de las disminuciones de los ingresosde exportacion pueden obtenerse con gran precision del valor algebraico deesta disminucion en el valor global de los ingresos de los 71 paises de lamuestra. Se explica la forma en que la suma de las disminuciones de in-


RESUMENES 801

gresos de exportation de los paises pueden proyectarse en base a los valoresprevistos de Jos dos indicadores de la economia mundial mencionados.Tambien se consideran en este estudio dos posibles modificaciones de ladefinition de disminucion de ingresos de exportation. Se indica que la sumade las disminuciones de ingresos de exportation podria reducirse aproxima-damente en un 33 por ciento si el valor de la tendencia se midiera comopromedio geometrico y no como promedio aritmetico. Cuando el valor dela tendencia se considera como promedio geometrico, el hecho de calcularlas disminuciones en terminos nominales o en terminos reales no afecta alpromedio de las disminuciones calculadas para un gran numero de anosconsecutivos; el metodo de calculo solo afecta a la distribution de las dis-minuciones de un ano a otro.

La politica de tipos de cambio de Japon: Moderation de las fuerzas delmercado — PETER j. QUIRK (paginas 642-64)

El periodo posterior a la implantation de la flotation generalizada se hacaracterizado por una amplia variedad en el grado de intervention oficialen los mercados de divisas. Esto, junto con la posibilidad de adoptar otrasestrategias en virtud de acuerdos internacionales, ha dificultado la evalua-tion de las polfticas de intervention. El objetivo de este trabajo es analizarciertos metodos cuantitativos que podrfan aplicarse a este problema, utili-zando como referencia los acontecimientos economicos acaecidos en Japonentre marzo de 1973 y octubre de 1976. Se estima y se aplica una funcionde reaction de politica; al mismo tiempo, se investiga tambien la pertinenciade diversas teorfas sobre la determination del tipo de cambio —incluido elmetodo del equilibrio de los activos—con respecto a la dinamica a cortoplazo del tipo de cambio del yen.

Entre las formas de reaction de politica sometidas a prueba aqui, sehallan la intervention moderadora de las variaciones del tipo de cambio(moderation de las fuerzas del mercado) y la intervention dirigida haciadiversas clases de metas para el tipo de cambio, como los tipos de equilibriode la paridad de poder adquisitivo y un nivel constante para el cambioyen/dolar. Los resultados corroboran que la estrategia fundamental japonesaha sido la de moderar las fuerzas del mercado, habiendose visto influenciadatambien la reaction de politica por el volumen de transacciones del mercadoa la vista de Tokio. El residue de la funcion de reaction se emplea paraevaluar la intensidad relativa de intervention en cada subperfodo.

La teoria del equilibrio de los activos para la determination del tipo decambio pone de relieve la funcion a corto plazo de las diferencias entre lostipos de interes; las variaciones de dichas diferencias resultaron ser significa-tivamente utiles en la determination de las fluctuaciones mensuales del tipode cambio del yen. La evolution prevista de la balanza de pagos corrientetambien resulto ser un factor importante, pero las compras y ventas oficialesen el mercado de divisas de Tokio no parecen haber ejercido una influenciasistematica sobre el tipo de cambio. Las pruebas tampoco sustentan laversion a corto plazo de la teoria de la paridad de poder adquisitivo parala determination del tipo de cambio.



Monetizacion de las economias en vias de desarrollo—AN AND G. CHANDA-VARKAR (paginas 665-721)

Este trabajo, a la luz de una revision critica de los conceptos y las pruebasempiricas, trata de desarrollar un marco teorico para analizar y medir lamonetizacion en los paises menos desarrollados (PMD) y un temario parainvestigaciones ulteriores.

En la literatura sobre el tema, la palabra monetizacion tiende a usarseindiscriminadamente como una especie de "cajon de sastre"; pero debedefinirse en debida forma como una ampliation de la esfera de la economiamonetaria mediante la absorcion de los sectores no monetizados de truequey subsistencia, y diferenciarse claramente de la comercializacion y la inter-mediation financiera. Como no hay realmente ningun sector de subsistenciapuro, el sector no monetizado debe interpretarse como un agregado esta-distico de las imputaciones por actividades economicas no monetizadas cuyaexplication economica deriva de la busqueda de la supervivencia por partede los hogares rurales mas que de la maximization de algoritmos en unambiente de alto riesgo e incertidumbre. La medida mas importante de lamonetizacion es el coeficiente de monetizacion, o sea, la proportion delproducto agregado que el comprador paga en dinero. Por consiguiente, paracaptar el nivel y la tendencia de la monetizacion hay que indicar la par-ticipation relativa, a lo largo del tiempo, de los sectores monetizados y nomonetizados en las cuentas nacionales a precios constantes. Por el momentono se dispone de los datos necesarios para casi ninguno de los PMD, con lasnotables excepciones de Papua Nueva Guinea y Tonga, sobre todo esteultimo cuyas cuentas nacionales presentan posiblemente el mayor grado dedesagregacion entre los PMD. Historicamente, la monetizacion ha sido unproceso evolutive, aunque discontinue. Tiende a asumir caracter asintoticopasado cierto umbral critico que varia segun las economias. Sin embargo, esuna importante variable ex ante en la programacion financiera de economiasque aun tienen un sector no monetizado grande, como las de Asia sud-oriental, la region del Pacifico sur y Africa tropical. Las consecuencias fiscalesde la monetizacion tambien son relevantes en la medida que la politicatributaria afecta a los incentives del sector de subsistencia y el componentede consume no monetizado determina la incidencia ef ectiva de la tributacion.Por consiguiente, la estructura y las tasas impositivas tendrian que disenarseadecuadamente para que armonicen con el ritmo y direction de la monetiza-cion.

Sin embargo, hay una verdadera necesidad de investigar detalladamentela estructura y comportamiento del sector no monetizado y tambien lanaturaleza y efectos de la monetizacion en variables decisivas, como elexcedente comercializado de importantes sectores de subsistencia y las carte-ras de actives de hogares e instituciones financieras. Por lo tanto el estudioformula un modelo teorico de monetizacion y presenta sugerencias para unsistema apropiadamente desagregado de cuentas nacionales.

La estructura del impuesto de sociedades en los paises en desarrollo—GEORGE E. LENT (paghias 722-55)

En este estudio no solo se consideran las modalidades del impuesto sobre


RESUMENES 803

el ingreso de las sociedades y el trato fiscal dado a los dividendos, sinotambien la estructura de las tasas impositivas y la discriminacion existenteentre distintos tipos de organization empresarial y entre accionistas nacio-nales y extranjeros.

Las diferentes circunstancias economicas y sociales reinantes en los paisesen desarrollo exigen un estudio separado, pais por pais, del merito relativede las diversas estructuras del impuesto de sociedades por lo que a equidad,eficiencia economica y ventajas administrativas se refiere. Pudiera parecerque en aras de la equidad convendria adoptar metodos que eviten la dobleimposition de los dividendos, aunque solo si la incidencia del impuesto desociedades se produjera sobre el capital. Como dicha incidencia es dudosa,toda decision basada en ese supuesto debe considerarse cuidadosamente.

El sistema que de a la empresa y los accionistas una entidad separadaquizas ofrezca algunas ventajas al atraer nuevas inversiones como conse-cuencia de una tasa impositiva que, con igual volumen de recaudacion tri-butaria, puede ser muy inferior a la que dispongan los sistemas integrados.Tambien se suele suponer que la imposition separada de los dividendosfomenta la reinversion de las ganancias mas que otros sistemas, aunque noexisten pruebas que lo confirmen.

La mejor manera de evitar la discriminacion fiscal entre empresas dediferente tamano y entre las diversas formas de asociacion empresarial con-siste en integrar la imposition sobre la persona fisica y las sociedadesmediante un sistema de imputation o en base a un impuesto sobre las utili-dades no distribuidas. Si bien entonces la retention de las utilidades permiteevitar los impuestos personales, tambien cabe que los accionistas las distri-buyan para eludir asi el impuesto de sociedades.

No es facil lograr la igualdad de trato fiscal entre accionistas nacionalesy extranjeros. El pais de residencia puede evitar la doble imposition si con-cede una desgravacion por los impuestos pagados al pais donde el ingresose origine. Cuando el gravamen sobre la ganancias remitidas al extranjeroque un pais en desarrollo imponga no alcance a cubrir la desgravacion auto-rizada por el pais exportador de capital que haya realizado el principalaporte, el primero puede aumentar el nivel de retention en el origen queaplica al impuesto sobre los dividendos y aprovechar asi la diferencia creadaen el ingreso fiscal.

En el trabajo se analizan las estructuras del impuesto de sociedades y lastasas impositivas de 80 paises en desarrollo.

El mercado britanico de monedas de inversion—PAUL K. WOOLLEY(paginas 756-86)

En el caso tipico de un mercado doble de divisas, se aplica un tipo decambio financiero a las transacciones de capital efectuadas por residentes,mientras que las transacciones corrientes se realizan al tipo de cambio oficial.El mercado de monedas de inversion que existe en el Reino Unido es unavariante de dicho sistema, ya que todas las transacciones de inversion decartera y las de determinadas inversiones directas y en bienes, atribuibles aresidentes del Reino Unido, van canalizadas a traves del mercado de monedasde inversion, mientras que todas las transacciones financieras y corrientes



llevadas a cabo por no residentes se efectuan al tipo de cambio oficial. Sibien el caso tipico de mercado doble de divisas ha sido objeto de amplioestudio analitico, se ha desatendido bastante el analisis de la variante britan-ica, pese a que ha venido funcionando durante 30 aiios.

En el presente estudio se trata en particular de mostrar los efectos deriva-dos de dicho mercado sobre la balanza de pagos y la politica interna de tiposde interes. La conclusion fundamental consiste en que el mercado no con-tribuye por lo general a aislar la politica de tipos de interes, pero si impideuna salida de capital cuya posible cuantia guarda intima relation con el valorde la prima. Se investigan tambien los principals factores que influyen endicho valor, que en los ultimos aiios ha oscilado entre cero y el 88 por ciento,y se pasa luego a describir los efectos de la prima sobre las ventajas que ladiversification internacional le reporta al inversionista del Reino Unido enterminos de riesgo/rendimento, analizandose en que condiciones prefeririaaquel prescindir del mercado de monedas de inversion y acudir a prestamosexteriores para financiar inversiones fuera del pais. Por ultimo, se trata dedeterminar la repercusion que sobre la regulation de dicho mercado hantenido algunas modificaciones de politica introducidas en los ultimos aiios,desde el punto de vista tanto del inversionista como de las autoridades. Unaspecto adicional de analisis se refiere al compromiso contraido por el ReinoUnido de eliminar gradualmente los controles sobre la inversion efectuadaen otros paises de la CEE.

En general, el presente analisis podria aplicarse a los paises que, para usode los residentes, mantienen mercados financieros de divisas en un regimende flotation, aunque habria que adaptarlo si en dichos mercados intervmiesenunicamente no residentes.


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