E.A. 44-a

FILE COPY RESTRICTED MRRTtIJN TO REponTo DEtte VnTHHA

Public Disclosure Authorized O'NE VJEEK

This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEILOPMENJT Public Disclosure Authorized

THE ECONOMY OF Public Disclosure Authorized

1, 1954

Public Disclosure Authorized December

Department of Operations , Africa and Australasia EQUIVALENTS ,,(Par value)

1 U.S. dollar - 50 Belgian 1 Belgian a 2 U.S. cents 1 billion Belgian francs - $20,000,000 CONTENTS

Page

Charts

Basic Statistics

Summary and Conclusions ...... see.. i

The Pattern ...... #6*000*0*00000006000*0, 1

Policy ...... *.*...... 0v 2

Production...... 9*9 3...... o.3

Private Investment ......

Public Investment...... *...*...... 5

Public Finance ...... *.*...... **** 6

Payments Position and Prospects ...... 7

Public External Debt...... 8

Statistical Appendix BELGIUM BALANCE OF PAYMENTS ON CURRENT ACCOUNT (BILLIONS OF U.S. DOLLARS) 3.0 3.0 YEARLY PAYMENTS FOR IMPORTS AND NET INVISIBILES 2.5 2.5 FROM EXPOR,TS /:...:-: 2.0 ~~~~~~~~~~~~~~~~~~~~2.0

1.5 ~~~~~~~~~~~~~~~~~~~~~~~1.5 0 CURRENCIES__ 1

.5

O 0 1949 1950 1951 1952 1953 1954 1955

DEFICIT OR SURPLUS ON CURRENT ACCOUNT (MILLIONS OF U. S. DOLLARS) +400 Y +40( +300 t 30(

fflt200 \TOTALe < . +20( + 100 + IO( O \ 70 O -100'~ ~ ~ ~ ~:-boc -200 -- 20( - 300 ,_ -_ _ ~30( -400 -40( 1949 1950 1951 1952 1953 1954 1955

TOTAL EXTERNAL TRADE: VALUE (MILLIONS OF U.S.DOLLARS) 800 . I I I -p I I I I, I, I- I . , I I I I I800 I I o QUARTERLY EXPORTS

600 oll 600

- 4 __--/ ll~~~~IMPORTS (c.i.f.)

400 AVI 400~A

200 200

0 L-j _J.L. 0 1937 1 if fII IV I 11 III IV I 11t 11 IV I II Ill IV I 11 Ill IV I 11 Ill IV I 11 III IV QUARTERLY 1949 1950 1951 1952 1953 1954 1955 AVERAGE

I / 2/54 NOTE: Includes IBRD - Economic Staff No.958 BELGIUM TRADE WITH DOLLAR AREA (MILLIONS OF U.S. DOLLARS) 200 200 5UARTERLY

. - IMPORTS (c.i.t.) 100 100

50 50

ol 0

TRADE WITH EPU COUNTRIES (MILLIONS OF U.S. DOLLARS) 600 l l 600 OUARTERLY _ eTOTAL EXPORTS 400 ,, - 400

,- _ / ~~~~~~~TOTALIMPORTS (c.i.f.) 200 A ______200 200~~ EXPORTS TO STERLING A MR5°FeA20

%IPRSFROM STERLING AREA O . O 1937 1 11 III IV I 11HI1 IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV QUARTERLY 1949 1950 1951 1952 1953 1954 1955

TOTAL EXTERNAL TRADE: VOLUME (INDEX, 1948:100) 200 OUARTERLY 200

150 150

6~~~~I

100 - 100

50 50 1937 1 11 III IV I li 111IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV 1949 1950 1951 1952 1953 1954 1955

TOTAL EXTERNAL TRADE: UNIT VALUES (INDEX, 1948:100)

06OARTERLY | ' 1 120 120

100,O O100 - _ , - v I , , _, I , , I ~~EXPORTS| 80 so I 11 III IV I 11 III IV I If III IV I 11 III IV 'I 11 III IV I 11 III IV I 11 III IV 1949 1950 1951 1952 1953 1954 1955 11/23/54 NOTE: Includes Luxembourg No.959 IBRD- Economic Staff BELGIUM TERMS OF TRADE (INDEX, 1948- 100) 120 120 QUARTERLY

100 100

so 80 NOTE: Includes Luxembourg

GOLD AND CONVERTIBLE EXCHANGE HOLDINGS OF THE NATIONAL BANK (MILLIONS OF U.S. DOLLARS) 900 l I I 900 END OF QUARTE CONVERTIBsLE Z 800 800

700 ~~~~~~~~~~~~~~700

600 600

O 0 I 11I ll IV I il I ll IV I 11 Ill IV I 11I ll IV I 11I ll IV I 11 Ill IV I 11 111 IV 1949 1950 1951 1952 1953 1954 1955

PRODUCTION: COAL AND STEEL INGOTS (MILLIONS OF METRIC TONS) 1.5 1 1.5 1 QUARTERLY

1.0 ~ \~__-'t-STEEL INGOTS . .5, .5 10.0 I , ,___10.0 QUARTERLY COAL

7.5 = _. _ 7.5 5.0 5.0 1937 0. AV. PRODUCTION: TEXTILE YARN (THOUSANDS OF METRIC TONS)

30 | QUARTERLY A - (COTTON O |' 30

20 20

10 I I

0 -- r *------r | r . r wRAYON o0 . I I I I I I -I 0o 1938 1 11 Ill IV I 11 Ill IV I I 1 11 IV I 11 Ill IV I 11 Ill IV I 11 Ill IV I 11 Ill IV QUARTERLY 1949 1950 1951 1952 1953 1954 1955 11/23/54 AVERAGE No. 960 I BRD- Economic Staff BELGIUM UNEMPLOYMENT (THOUSANDS REGISTERED) (AS % OF INSURED WORKERS AT END OF 1952) 4 0 0 A,,,,A, ,R I,,,,I, Il I I I 11 ]II I I II W,1,,,,,,,,,...... ,,,, DAILYAVERAGESTOTALv PARTIALLY AND TEMPORARILY UNEMPLOYED

10%

100 _ 5%

D J D J D J D J D J D J D 1950 1951 1952 1953 1 9 5 4 (Istweek)1 9 5 5

INDEXES: WHOLESALE PRICES, RETAIL PRICES, MONEY SUPPLY, AND INDUSTRIAL PRODUCTION (INDEX, 1948- 100) 125 125 END OF MUARTERSP e OLESALE PRICES

100 -C8 S;100 ~~~~~~~~RETAIL PRICES

75 L 75 125 a_ 12 5

l _ < INDUSTRIAL PRO~~~~~~~~DUCTION (QUARTERLY AVERAGE)

MONEY SUPPLY (END OF QUARTER) 7 5 L I I I I I I I I I I I 1 775 I 11 III IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV I 11 III IV 1949 1950 1951 1952 1953 1954 1955

BUDGET REVENUES AND EXPENDITURES (BILLIONS OF BELGIAN FRANCS)

0 20 40 60 80 100

1949 EXP.EXPV ORDINARY BDE REV. ORDINARY BUDGET EXTRAORDINARY 0 EXP. BUDGET 1950 REV.

1951 EXP.

EREV.XP. 1952 REV. 1953 EX P~~~~~~~~~~~~~~. . ...:...... :.: 1954 EXP. REV. 1954EXP.REV. 1955 REV.

11/23/54 No.961 IBRD- Economic Staff Basic Statistics 1953

Population (end of year): 8,798,000 Area 11,774 square miles

Currency Unit: Belgian franc

Gross National Product: 418 billion francs ($8.4 billion) a) Origin I b) Use % Agriculture 8 Private consumption 71 Extractive industries 6 Public civil consump- Manufacturing 33 tion 8 Electricity, gas & water 3 National defense 5 Building 5 Gross capital forma- Transport 6 tion 16 Commerce and services 29 Government 10 100 100

Government Budget Billion francs M Million eauivalent Ordinary expenditures 77.2 1,544 Extraordinary expenditures 17.1 342

Ordinary receipts 76.8 1,536 Extraordinary receipts 2.7 54 Long-term borrowing 15.4 308

External Trade Imports (c.i.f.) Exports (f.o.b.) Balance U( million equivalent) Dollar Area 378 324 - 54 Sterling Area 459 311 -148 Other EPU 1,179 1,237 + 58 Belgian Congo 181 132 - 49 Rest of world 226 257 ± 31 2,424 2,261 -163

Balance of Payments ($ million equivalent) Visible trade (f.o.b.) + 55 Transportation - 50 Foreign travel - 22 Workers' remittances + 15 Investment income + 15 Other invisibles - 10 Current balance + 3

Private capital movements - 55 Government loans + 16 Other capital + 4 Change in foreign assets of banks(+=decline) + 32 Capital balance - 3

Long-term External Public Debt of the Belgian Monetary Area

U.S. and Can. Swiss francs Other Total (j' million or equivalent)

June'30. 195L 29,9.1 149.5 16.3 464.8 Summary and Conclusions

1. Belgium is a small country that is densely populated but has few natural resources. She has nevertheless attained one of the highest standards of living in Europe by processing raw materials, for the most part imported, for sale in foreign markets as finished and semi-finished products. Her major industries have, therefore, been expanded far beyond the purely domestic needs of less than 9 million people. Steel and textiles, for example, the core of Belgian industry for many years, have to find foreign markets for between one-half and two-thirds of their output, and in some branches of engineering the proportion is as high as three-quarters.

2. Belgium's prosperity is necessarily bound up with a rising volume of trade on as favorable terms as possible. She thus looks for free access to foreign markets and practices low tariffs and an open door policy both at home and in the Belgian Congo. Belgium is working with the Netherlands to develop Benelux as a common market. She no longer imposes any Controls on current trans- action for balance of payments reasons and she has been relaxing restrictions on capital transfers.

3. In these circumstances, the external position is immediately and strongly affected by changes in domestic demand. To maintain internal financial stability, Belgium has relied primarily on orthodox monetary policy. Physical controls were scrapped as soon as possible after the Second World War. Taxes are imposed to meet recurrent expenditures and the budget is not used to influence the level of effective demand. The successful use of monetary policy is shown by the moderate movement of domestic prices since 1947 and the consistent hardness of the Belgian franc.

4. In turn, the level of economic activity is highly dependent on external conditions, since Belgium has to export about one-third of the national product. Belgium has prospered on two occasions since the Second World War from exception- ally high foreign demand for her products, resulting from European reconstruction after 1945 and rearmament after 1950. In each phase the demand for textiles appeared more immediately than that for steel and engineering products and was in turn satisfied more quickly. There were consequently few occasions up to the end of 1953 when steel and textiles were prospering at the same time.

5. Since the end of 1953, however, steel and textile production has been steadily climbing towards levels reached earlier only under exceptional condi- tions. The pressure of competition on export prices has, so far, been met successfully and volume has continued to expand. Modernization and reequipment at home and the more rapid increase in costs abroad appear to have improved Belgium's ability to compete under normal market conditions.

6. It remains true that the growth of Belgian output has been less impress- ive than that of her major competitors in Europe. The rate of investment has probably been smaller than in some other countries in Western Europe, such as - ii -

France and the Netherlands, and effective credit control has probably tended to keep the rate down. On the other hand, it is probable that those industries which have been prospering have modernized their plant successfully. It is less certain that investment in factories making new products has yet been sufficient to make good the secular decline in traditionsa industries such as glassware and leather goods, and so to ensure a wide enough variety of export products.

7. The Government is taking steps to encourage more private investment in new directions. In view of the importance of reducing industrial costs in the face of foreign competition, public investment itself concentrates on transport facilities, particularly ports and inland waterways. There is a substantial backlog of public works to be carried out, but the maintenance of a sound monetary policy has limited the volume of work that can be put in hand to the amount of non-inflationary finance that can be assured. At various times Belgium has put off new works or borrowed abroad, or both. Ifall the projects planned for 1955 are to be carried out, the Government will have to borrow about 21 billion francs and public corporations and municipalities about 8 billion francs. It is unlikely that these amounts could be raised on the domestic capital market without resort- ing to inflationary steps and without prejudice to the interests of private bor- rowers. The Government is consequently seeking supplementary loans abroad.

8. Belgium's accounts with the rest of the world have been in overall balance or in surplus in four of the last six years. The heavy surpluses of 1951 and 1952 were the consequence of an exceptional demand for Belgian products at exceptional prices during the Korean boom. The deficit in 1950 is readily accounted for by stockpiling and the more moderate deficit in prospect for 1954 appears to be due to the adjustment of stocks and current imports to a renewed expansion of industrial production. There is nothing in the current situation to suggest that a general tendency towards external equilibrium will not be maintained.

9. Belgium is normally in surplus with Western Europe, with which two- thirds of her trade is carried on, and in deficit with the dollar area, which accounts for a fifth of her total trade. Past investment and receipts from services provide a mounting income from the Congo, which has a surplus with the dollar area. Surpluses and deficits with individual currency areas are not likely to be large in relation to the total turnover of trade. Belgium should not meet any particular difficulty in financing such regional deficits as may arise and with hard currency reserves of 0850 million she is able to take care of substan- tial fluctuations.

10. Belgium's public external long-term debt is very moderate, At the end of June 1954 it stood at $365 million equivalent (not including $17 million of Luxembourg foreign debt or the Congo foreign currency debt of $82 million equiva- lent, for which Belgium has a contingent liability). Service payments make a very small call on foreign exchange earnings. Debt service for the Belgian mone- tary area requires, on the average, about $40 million a year, half in dollars, over the next ten years and declines thereafter. These sums represent less than 2% of Belgium's current earnings in all currencies and 5% of her earnings in dollars. In addition to the long-term debt, Belgium has external short-term debt amounting to the equivalent of about $90 million, amply offset by her foreign exchange reserves. - iii -

11. Service payments on the proposed Bank loan and public bond issue would, at their peak in 1957, add about $7 million a year to the cost of debt service and would need less than $5 million after 1959. Belgium is well able to service debts of this amount, whether in convertible or inconvertible currencies. The Pattern 1. Belgium has a compact and old-established economy. Nearly 9 million people, mixed in language and in cultural background, with a long tradition of commerce, craftsmanship and industry, crowd into an area little larger than the State of Maryland. The rivalry of Antwerp with other ports in Wiestern Europe goes back to medieval times. The textile industries of France and England owe much to Flemish weavers, and when industrial revolution stirred in Europe, the ironmasters of Liege were among its leaders. The textile industry is still concentrated in and centered on Ghent$ and heavy industry still cluster. on the southern coal fields from Liege to Mons and the Borinage. Belgian deposits of iron, lead and zinc are now largely worked out and the metal working industries have to rely on imported raw materials. The narrow-seamed coal basin in the south itself has been declining for many years in favor of the newer, better planned and better equipped Campine field in the northeast. Belgium can still supply her own needs for coal, but the growth in consumption of petroleum continues the long-run trend towards greater dependence on imported raw materials The rapid growth of industry was financed largely through the parallel develop- ment of "mixed" banks (which used to combine long-term industrial financing with commercial banking.) The close-knit industrial and financial groupings that are so characteristic of the Belgian economy have not, however, modified substantial- ly the social and economic or, indeed, the political significance of the small entrepreneur, the independent craftsman and peasant proprietor.

2. The development after 1945 of a far-reaching social security system worked out jointly by labor and management during the war removed an otherwise sensitive subject from the political agenda and with the distribution of party strengths that has persisted since the war. major differences on economic policies between the various political groups have been few. The economic policy of the present Socialist-Liberal coalition places much the same emphasis on financial stability, freedom in international trade and payments and the en- couragement of private initiative as the Social Christian governments that were in office from 1950 to April 1954.

3. Belgian industry, with an annual output of some $2.5 billion equiva- lent, employs directly more than one-fourth of the working population and con- tributes one-third of the national product. Mining and construction together add another tenth. Agriculture, by contrast, employs one-eighth of the working population, but contributes only one-twelfth of the national product. The indus- trial field is, in turn, dominated by metallurgy and engineering, which account for about a third of total manufacturing output, and by textiles and clothing, which account for about one-fifth.

4. Industry has expanded its capacity far beyond the needs of the Belgian market and must rely on foreign markets to sell its output. The steel industry has to export nearly two-thirds of its output if it is to run at optimun capacity and textiles about the same. For the engineering industry as a whole, exports average one-third of total production, but the machine tool industry is selling two-thirds of its output abroad and makers of transport equipment and ship-builders three-fourths.

5. Transactions with the rest of the world represent more than one-third of the national product. The consequence is that Belgium plays a part in world trade larger than might be expected from the size of her economy. Her per capita - 2 - foreign trade is nearly three times that of the U. S. In 1953 she ranked sixth among the world's exporters and fourth in Western Europe, followed closely by the Netherlands. With less than 3% of liestern Europe's population and 4% of its total output, Belgium accounts for over 10% of the trade of the EPU area.

Policy

6. Since Belgium must seek prosperity in a rising volume of trade on as favorable terms as possible, she has a close interest in free trade and convert- ibility. Postwar trade policy has seen Belgium urging the reduction of tariffs and the abolition of quantitative restrictions, and, within the limits imposed by high cost agriculture, practicing what she preached. She is working with the Netherlands to develop a common Benelux market. She has now removed virtually all restrictions that were imposed for balance of payments reasons on current transactions with dollar and non dollar areas alike and she has also been relax- ing a number of restrictions on capital transfers. Belgium has, at the same time consistently sought to get as large a part as possible of her exports paid for in convertible currencies, so as to be in a position to buy in any market.

7. Belgium had already abolished direct controls on her domestic economy when she relaxed restrictions on foreign trade and capital movements. Her external payments position was thus left wide open to changes in the level of domestic demand and the highest priority was necessarily accorded to the mainte- nance of internal financial stability. To attain it, reliance has been placed on monetary, rather than fiscal, policy. With recollections of the failure to control inflation after Wlorld War I on the one hand, and of the effect of deflation on industry and the banking system in the thirties on the other, the monetary authorities have endeavoured to steer a middle course. This has been taken to mean that the money supply should expand only in line with the growth of the physical resources available to the economy.

8. The first and crucial step in establishing an effective monetary policy was the currency reform of 1944., which blocked or taxed away the great bulk of the excess liquidities accumulated during the war and prevented a runaway inflation. The subsequent policy of importing heavily to fill the pipe-lines as quickly as possible moderated the extent to which prices rose in the immediatc postwar period. The second move, intended to prevent monetization of government debt and hence to restrict commercial credit, was taken in 1946 when the commercial banks were required to hold, on the average, 60% of their deposits in government securities. Finally, in 19148, the present ceiling of 10 billion francs was placed on National Bank advances to the Treasury. The absence of deficit financing through the has been of prime importance in the maintenance of financial stability, for psychological as well as purely monetary reasons.

9. With control established over the money supply, the National Bank was in a position to make discount rate effeQtive. Between the end of 1946 and the outbreak of war in Korea, discount rate varied from 3% to 3-1/2% and was tightened to 3-3/14% in September 1950. The recovery of savings after the Korean boom brought a downward trend in interest rates and from the middle of 1951 it proved possible to reduce the rate progressively to its present level of 2-3/4%. 10. The success of Belgian monetary policy may be measured by the relative stability of prices at home and the hardness of the Belgian franc abroad. Even after a steep rise during the Korean boom, wholesale prices in Belgium are now only 5-6% above the average for 1948, as is also the case in the U. S. Retail prices have fluctuated less than wholesale prices and risen slightly more.

11. Conceivably, the price of stability was a somewhat lower level of production and employment than might have resulted from the adoption of a cheap money policy. But, on the other side of the account, Belgiumts external position has remained sound and she has been able to profit from a generally free flow of imports. Industry has been kept under pressure from foreign competition and private investment decisions have had to be made with this competition in mind.

Production

12. If the external position of Belgium is sensitive to changes in demand at home, the fact that a third of the national product must find foreign markets means that the domestic economy is in turn sensitive to changes in demand abroad. As an important producer of textiles on the one hand and metal products on the other, Belgium has, in principle, been in a position to profit from foreign demands for both consumption and investment. Actually, up to the end of 1953, steel and textiles seldom prospered at the same time.

13. The development of the economy since the end of the Second Wiorld War falls fairly clearly into four phases. The first covered the period up to the end of 1947. By the end of it, stocks had been rebuilt, production wmas generallw back to 1936-38 levels and financial stability had been regained. Coal, however, still lagged seriously and, until the harvest of 1948, foodstuffs remained short. In the second phase, the economy was faced with the problem of adjustment, not only to price stability at home, but to declining foreign demand. In the course of 1948, production of consumers goods and particularly of textiles slowed down as Western European countries were beginning to satisfy their most urgent needs for household goods and clothing. From the beginning of 1949 steel output began to decline and coal piled up at the pitheads. It was from this point that un- employment emerged as an intractable problem,largely because of its structural nature: unemployment is heavily concentrated in the north, while differences in language hamper movement to the industrial regions of the south which have, indec continued to recruit immigrant labor, particularly for the coal mines.

14. The third phase began with the outbreak of the Korean war, the effects of which varied from sector to sector. Textiles boomed briefly under a flurry of Belgian and Dutch buying, only to fall back in the second half of 1951, when consumers in Belgium had finished stocking up and the mounting Dutch deficit with Belgium led the Netherlands to restrict textile imports. In the heavy industrial sector, the first impact was felt by steel and only later by engineer- ing as orders were placed for finished military equipment. Crude steel pro- duction rose from an annual rate of 3.8 million tons in 1950 to 5 million tons in 1951, and when demand was sustained fortuitously by the American steel strike early in 1952,reached a peak rate of 5.5 million tons, finally surpassing the level of 1929. - 4 -

15. While steel was still profiting from exceptional demands, textiles and other consumer goods were suffering from the reaction to the Korean boom that set in elsewhere in Western Europe in the course of 1952 and marked the beginning of a fourth phase. Conversely, when the general level of production elsewhere in Western Europe began to pick up during 1953, activity in Belgium appeared to stagnate because, although the consumer goods industries shared the common recovery, the exceptional demand for steel finally disappeared.

16. From the beginning of 1954, however, the signs have been encouraging. Production in both consumers and capital goods sectors has been returning to the levels of 1951 and early 1952, but without the exceptional circumstances which brought those earlier gains about. Unemployment has fallen to lower levels than at any time since 1948. The ground gained under highly favorable market con- ditions is, by and larges being consolidated under more normal conditions. Steel is running at 80-85% of capacity, which means, in effect, that all the modern capacity is employed and only marginal plant shut down. It is most significant that export volumes have been expanding since 1952 despite (from the producers point of view) a steady decline in price in the face of keen competition. There thus appears to have been more room to squeeze profit margins and compress costs than was commonly thought outside Belgium. Modernization and reequipment at home and the more rapid rise in costs abroad have probably meant that the Belgian economy is adjusting itself successfully to the changes in the cost structure caused by the sharp relative increase in money wages immediately after the war and the introduction of extensive social security benefits.

17. Fluctuations in steel and textile products tend to divert attention from other developments. Power consumption has been expanding by about 6% a year. There has also been a very steep rise in domestic oil refining, from 424,ooo tons in 1950 to over 3 million tons in 1953 on the completion of a major refinery at Antwerp, with which developments in petro-chemicals are being associated. Con- versely prosperity in other sectors of the economy has done little to check the secular decline, due in varying degrees to high costs and changing tastes, in some of Belgium's traditional products, such as ceramics, glassware, wood products and leather goods. 18. High cost coal is the major structural problem. Belgium's newer coal fields, in the northeastern Campine region, can readily compete with others in Europe, but in the older mines in the southern coal basin, which still produce about two-thirds of Belgian coal, average mining costs are among the highest in Europe. Belgium has been subsidizing the southern mines for a number of years. The Coal and Steel Community has authorized further subsidies on a diminishing basis to come in part from the Belgian Government, in part from a levy on Netherlands and German production. The object of these is to enable the mines to remain in operation over the next five years, by which time it is hoped that an effective reequipment program will have been carried out. Production did not regain the prewar level of 30 million tons a year until 1951 and since then a decline in net exports has contributed to what are now embarrassingly large stocks.They are most probably a temporary phenomenon. Europe can make use of Belgian coal: the question is whether Belgium can afford to mine it to sell at competitive prices. -5-

Private Investment

19. Private consumption and private capital formation both increased as a result of the gains in national production between 1948 and 1950, with con- sumption taking substantially the larger part of the increase. On the other hand, the increase in the volume of production between 1950 and 1953, which took place for the most part in 1951, has gone to support a higher level of defense expenditure and a higher volume of exports. There has been little change in the absolute amount of gross domestic capital formation; in 1953, at about 69 billion francs, it was probably still somewhat below 1950 in real terms. Private investment accounts, on the average, for a little more than three-quarters of total gross investment.

20. There has been no significant change in the direction of either private or public investment since 1948. As far as private investment is con- cerned, about 45% was devoted to industry, 30% to housing, 20% to transport (including private automobiles), and 5% to agriculture, commerce, etc. Roughly one-third of industrial investment was carried out by heavy industry - steel, non-ferrous metals and metal manufactures - and one-tenth each by textiles, chemicals, and electricity, water and gas.

21. The available data, recent revisions notwvithstanding, do not allow for confident assertions about the adequacy of private investment in Belgium. The fear has been expressed in Belgium as well as outside that it has been too low for a heavily industrialized country which must export to live. The picture is likely to be mixed: industries that have prospered have probably modernized their plant quite extensively. This seems to be true of a number of major steel producers, for example. What is lacking are new products and newi branches of industry to take the place of those faced with secular decline and so reduce the preponderance of steel and textile products in Belgiumts exports.

22. Whether Belgium's credit policy has discouraged private investment cannot be established, since a great many factors are involved, of which the cost of borroving is only one. The Government has for some time been working for lower interest rates and is actively concerned with measures to stimulate private investment, particularly in new directions. A series of measures has been taken or is planned, ranging from tax concessions on reinvested profits to subsidizing interest rates of the Government-sponsored Societe Nationale de Credit a l'Industrie (SNCI), which makes equipment loans to companies which cannot find finance elsewhere.

Public Investment

23. There is little doubt that public investment has been held back by lack of funds and could with advantage have been expanded. Public capital expendi tures are found not only in the Government's extraordinary budget but also in the investment programs of the public corporations, notably the National Railways and local authorities, notably the City of Antwerp. Their total expenditures fell from 15.8 billion francs in 1950 to 14.5 billion francs in 1953 and by even more in real terms. In 1947, the Government hoped to spend 91 billion francs or. a series of public investment projects between 1948 and 1953. In fact, expendi- tures on these projects over the six years amounted to only 75 billion francs (at 1948 prices). 24. An interministerial committee recently pointed out that the execution of public works in Belgium may have suffered from a lack of overall programming. It is not at all certain that the most useful projects have always been given top priority and there has been a tendency to undertake more projects than could be handled economically at the same time. The result has been that the com- pletion of some projects has been delayed, and that capital has been immobilized for a long time before an economic return was obtained.

25. As a whole, the public investment program is, nevertheless, soundly conceived. The Government intends to continue to devote the larger part of public investment expenditure to transport facilities and to concentrate in particular on ports and inland waterways. It is this sector in which the greatest shortfall of Government expenditure occurred from 1947 to 1953 and public invest- ment to modernize transport facilities is the necessary complement to the pro- motion of private industrial expansion in a period of growing international competition.

Public Finance

26. The Government's ability to increase the rate of public investment is directly affected by its own budgetary and monetary policies. Taxation is customarily limited to the amounts needed to balance the ordinary budget. Extra- ordinary budget expenditures, in which Government capital expenditures are in- cluded, are limited to the amount for which borrowed funds can be secured. How much the Government requires to borrow at any one time is, of course, affected by the whole complex of Treasury operations. Monetary policy affects the picture by requiring that the Treasury avoid central bank borrowing which would increase the money supply without a related increase in foreign assets. When total borrowing requirements have exceeded the potential of the domestic capital market, ass for example, in 1949, 1951 and 1953, the Government has put off new capital works or borrowed abroad or both.

27. The budgetary and Treasury situation has evolved as follows.Ordinary budget expenditures will have risen from 63 billion francs in 1950 to an estimatex 80 billion francs in 1955. The largest increase is in recurrent defense expendi- tures, from 6 to 13.5 billion francs. War damage compensation and other expendi- tures resulting from the war, pensions, unemployment compensation and other social security measures have all continued at a high level or increased. With rising economic activity, improved collection and new taxes, revenues have increased to match expenditures, or nearly so: in 1954 there may be, quite exceptionally, a small deficit at present estimated at 2.7 billion francs. The 1955 budget is expected to be in balance.

28. The extraordinary budget includes Government capital expenditures on roads, ports, inland waterways, airfields, and public buildings, a substantial contribution to the low-cost housing programs, grants to local authorities for capital works, the initial cost of new defense installations and, since the summer of 1954, grants for special works which usefully employ labor previously receiving unemployment relief. From 1952 to 1955 cash payments from the extra- ordinary budget have amounted to or are expected to amount to 18-19 billion francs a year. Within this total, the cost of new defense installations will have - 7 - declined from 9.2 billion to 7.5 billion francs, and that of civil works will have risen from 9.5 to 10.9 billion francs a year.

29. The Treasury estimates that it will have to borrow a total of about 21 billion francs during 1955. Public corporations and local authorities have plans which call for borrowing a further 8 billion francs over the same period, making 29 billion francs in all. The Treasury and other public borrowers have together managed to raise about 22 billion francs, and private borrowers about 5 billion francs, a year on the Belgian market in the last two years. While the market is encouragingly buoyant, it would be unwise to assume that the rate of public borrowing can be stepped up by one-third in the course of a year. The Government is, therefore, seeking supplementary funds abroad.

Payments Position and Prospects

30. The strength of Belgiumls external position reflects fundamentally her success in maintaining internal financial stability. She profits from her location astride important routes to the industrial areas of Northern France and Western : Antwerp earns for Belgium foreign exchange estimated at $100 million equivalent a year. Belgium's position is reinforced by close association with the Congo whose pattern of production and of earnings complements her own. And circumstances have twice led to Belgium's productive capacity, reinforced by that of Luxembourg, being used by her neighbors with little regard to price: in the early years of reconstruction and later of rearmament, Belgium was, so to speak, seller of last resort. The dollars that she was able to get from Western Europe were sufficient to finance both a high level of imports from North America and additions to her hard currency reserves.

31. Belgium's success in booms has raised some doubts about her ability to face harder times. She carries on, for her size, a very large volume of transactions: total visible trade aggregates more than t4 billion and invisibles add another $1 billion. Consequently, even moderate shifts in import and export prices cause substantial absolute changes, and during the Korean boom, shifts in prices were of course far from moderate: export prices for Belgian steel, for example, about doubled. Nevertheless, the swings in Belgium's payments position from one year to another have been less than 10% of total turnover.

32. Belgium has, in any event, been in overall balance or in surplus in four out of the last six years. The heavy deficit in 1950 was the temporary consequence of stockpiling and the more moderate deficit in prospect for 1954 appears to be due to the adjustment of stocks and the current rate of imports to a renewed expansion of industrial production.

33. Belgium's export prices - and terms of trade - are now somewhat less favorable than they were in 1949, the first year in which she achieved balance after the war. But she has expanded the volume of exports by about 40% in the meantime and to regain balance would require only a small further increase in the volume of exports or very moderate declines in the volume or price of her imports.

34. The presumption that Belgium will continue to give high priority to domestic stability means that she should be able to maintain overall balance of payments equilibrium. There could however still be regional problems. Belgium's - 8 - external payments normally show a surplus with Wiestern Europe, with which she carries on two-thirds of her trade, and a deficit with the dollar area, which accounts for less than a fifth. The currency problem that this implied has so far been resolved without difficulty, for, in the aggregate, Belgium received about $1 billion in and dollars in respect of her exports to Western Europe during the phases of reconstruction and rearmament. Part of this amount was in the form of U. S. Government conditional aid under the Intra-European Payments Agreements of 1948/50 and part accrued to Belgium through the EPU mechanism during 1951 and the first half of 1952 and on the occasion of the adjustment of EPU accounts in June 1952 and June 1954. These adjustments still leave outstanding $180 million in gold and hard currencies that Belgium will receive from the EPU and from five Vfestern European countries over the next seven years.

35. With the Belgian Congo, Belgium has a current surplus based on large and growing invisible receipts and reinforced in recent years by a surplus in merchandise trade. The Congo, on the other hand, runs surpluses with Western Europe and North America and settles its deficit by using Western European currencies and dollars to acquire Belgian francs, in addition to borrowing in Belgium. In the years 1950-1952, heavy purchases by Western Europe in the Congo contributed to Belgium's surplus with, and hence dollar receipts from, EPU.

36. The heavy surpluses with EPU and deficits with the dollar area of many postwar years have probably ended - indeed, there was a complete, if temporary, reversal during 1953. With the recovery of Europe, other countries now produce more of what Belgium needs and the shift in Belgium's imports from dollar to non-dollar sources has been continued. The European position is thus inherently nearer balance than in earlier years. By the same token, Belgium's dollar deficit is likely to be attenuated, It should, moreover, be observed that Belgium's dollar deficit has been much more a "true" deficit than that of her neighbors. She deliberately imported from the U. S. when prices there were advantageous and now has relatively few restrictions on dollar imports. There is thus a wider margin than usual for cutting dollar imports should some temporar. difficulty arise.

37. The prospect is thus that Belgium will no longer earn large amounts of dollars from Europe and her need for them will be less. Convertibility of other currencies - to accompany the high degree of convertibility that Belgians already enjoy - would clearly add to the flexibility of Belgium's position. She has certain exceptional receipts still to come (offshore orders and debt payments from EPU, for example)) but she does not have to rely on windfalls. The National Bank's foreign exchange reserves have remained for several years at about $1 billion equivalent, of which holdings of gold and convertible currencies in October Ja5Q amounted to $850 million.

Public Ex;ternal Debt

38. On June 30, 1954, as shown in detail in Table 6, the public external long-term debt of the Belgian monetary area (i.e., governmental debt of Belgium, Luxembourg and the Belgian Congo, and debt of Belgian municipalities and public corporations) was the equivalent of $465 million. In the preceding four and a half years, it had increased by 492 million equivalent, due principally to borrow- ing by the Belgian Congo. The Congo, which had no foreign currency debt at the - 9- beginning of 1950, thereafter incurred dollar and debt of $82 million which Belgium guaranteed. Belgium's own debt increased by less than 6B10 million over the same period, mainly as the net result of a rise in Swiss franc debt and a reduction in dollar debt, due in part to the refinancing in May 1954 of her 195c Eximbank loan with Swiss francs borrowed from the BIS. Since June 30, 1954, the Belgian Government and the cities of Antwerp and Liege have borrowed the guilder equivalent of $32.2 million in the Netherlands. The proceeds of the Antwerp issue are to retire on December 1, 1954 the 1928-1958 dollar bonds of that city, outstanding in the amount of $3.2 million. In addition to the long-term debt, the Belgian Treasury had, on October 31, 1954, short-term external obligations in gold, dollars and Swiss francs amounting to about $90 million.

39. The service charges on the long-term public external debt of Belgium, the Belgian Congo and Luxembourg for the next 15 years are shown on Table 7. Debt service requires, on the average, about $40 million a year, half in dollars, over the next ten years and declines thereafter. These sums represent less than 2% of the current earnings in all currencies by Belgium alone and 5% of her earn- ings in dollars. The actual burden on Belgium is less because the Congo services its own debt from its own foreign exchange earnings.

40. Service payments on the proposed Bank loan and public bond issue would, at their peak in 1957, add about $7 million a year and would need less than $5 million after 1959. Belgium is well able to service debt of this amount whether in convertible or inconvertible currencies. Table 1

Prices and Money Supply

Wholesale Prices Retail Prices Money Supply (1948 y.oO; average for per7od) (1948 = 100; end of period) 1946 85 83 92

1947 91 87 95 1948 100 100 100 1949 95 97 104 1950 100 96 103

1951 121 105 112

1952 114 106 115

1953 107 106 120

1954 - 1st half 106 108 120 - July 105 107 120

2/ November/December E/ October/December

Source: Based on information published by the National Institute of Statistics and the . Table 2

Government Budget

(billion francs)

Ordinary Budgetli1 1949 1950 1951 1952 1953 1954 192

Expenditures Public debt 8.0 8.5 8.4 10.3 10.0 11.4 12.1 Defense 5.2 5.9 7.7 10.1 10.9 11.9 13.5 Other 57.8 Aj.7 50.L 56.0 56.3 56.L 55.0 Total 71.0 63.1 66.5 76.4 77.2 79.7 80.6

Receipts 66.9 63.4 76.8 77.7 76.8 77.0 80.6

Surplus (+) or deficit - -4.1 +O03 +10.2 +1.2 -0.4 -2.7 - Extraordinary Budgetv

Expenditures Investment 12.2 10.6 °.2 6.7 9.0 11.5 12.6 Defense 1.5 2.0 5.3 7.5 8.1 6.7 5.8 Special debt repay-

ment 6.1 5.3 5.6 3.5 _ Total 19.8 17.9 20.1 17.7 17.1 19.3 18.4

Receipts 6.8 10.4 6.4 2.1 2.7 2.1 1.1

Deficit (borrowing) -13.0 -7.5 -13.7 -15.6 -14.4 -17.2 -17.3

Ordinary Budget: Figures for 1949-53 are results as determined by July 31, 1954. Accounts for 1954 are revised estimates and for 1955 original esti- mates.

Extraordinary Budget: Most recent available results or estimates.

Less than 50 million francs.

Source: IMinistry of Finance Table 3

B.L.E.U. - Foreign Trade

($ million equivalent)

1949 1950 1951 1952 1953

Imports (c.i.f.)

Cereals 116 115 1511/ 140 122 Wool 79 128 175 - 72 118 Petroleum 36 44 84 114 116 Machinery 68 136 130 162 116 Raw copper 64 78 91 118 110 Automobile parts n,a. 26 32 104 96 Textile manufactures 54 71 88 88 92 Coal and coke 43 48 86 80 82 Cotton 59 91 I19 88 76 Iron Ore 48 31 46 76 74 Diamonds 21 52 66 56 66 Non-ferrous ores 46 54 82 98 60 Milk and butter 73 59 62 76 54 Chemicals 29 40 58 50 48 Passenger automobiles 31 35 40 42 46 All other 867 942 1232 1096 1148 Total 1634 1950 2542 2460 2424

1 Including other animal fibers.

Exports (f.o.b.)

Steel 347 2140 580 642 456 Textiles and clothing 316 450 606 458 434 Engineering products 360 260 414 386 412 Non-ferrous metals 157 172 248 266 216 Chemicals 139 154 226 186 192 Coal 29 44 52 78 84 Diamonds 34 54 70 58 70 Processed foods 32 58 98 66 68 Petroleum products - 14 24 60 58 Farm products 33 46 64 42 46 Glass 25 30 44 30 42 Paper 14 16 42 26 26 Leather goods 13 18 28 20 24 All other 97 96 156 132 133 Total 1596 1652 2652 2450 2261

Source: Customs data Table 4

B.L.E.U. Balance of Payments on Current Accountl'

($ million equivalent)

All currencies 1949 1950 1951 1952 1953

Exports (f.o.b.) 1598 1590 2576 2284 2051 Imports (f.o.b.) 1448 1686 2194 2051 1996

Trade balance +150 - 96 +382 +233 + 55

Invisible balance - 2 - 92 -166 - - 52

Total current balance + 98 -188 +216 +143 + 3

Dollars

Exports (f.o.b.) 206 228 392 370 -412 J3O Imports (f.o.b.) 396 392 586 .506 Trade balance -190 -164 -194 -136 + 62

Invisible balance - 38 _42 - 88 - 66 - 48

Total current balance -228 -206 -282 -202 + 14

EPU Currencies / Exports (f.o.b.) 1164 1110 1834 1588 1370 Imports (f.o.b.) 774 1014 1286 1277 1414

Trade balance +390 + 96 +548 +311 - 44 Invisible balance - 80 -108 -105 -110

Total current balance +310 - 12 +414 +206 -154

Belgian Congo

Exports Uf.o.b.) 80 71 112 142 130 Imports2/ (f.o.b.) 67 117 164 136 78

Trade balance + 13 - 46 - 52 + 6 + 52

Invisible balance + 61 + 77 + 76 + 88 +106

Total current balance + 74 + 31 + 24 + 94 +158

Payments data. In 1'7.'9 me,rber countries of the OEEC only. .2/ Somewnat oierstated in 1949-1952 by partial inclusion of Congo goods reexported from Belgium. Belgian exports to other areas in those years are correspondingly overstated.

Source: National Bank of Belgium Table 5

Gold and Foreign Currency Holdings of the National Bank of Belaium

($ million equivalent)

Gold and Convertible Credit to Other Assets End of: Currencies EPU (net) Total March 1950 711 164 875 June 675 - 181 856

Sept. 618 - 139 757 Dec. 608 - 97 705

March 1951 629 37 68 734

June 590 107 92 789 Sept. 642 207 82 931

Dec, 639 304 62 1005

March 1952 648 398 56 1102

June 682 424. 19 1125

Sept. 735 295 7 1037

Dec. 732 299 39 1070

March 1952 715 295 22 1032

June 715 278 27 1020

Sept. 755 266 12 1033

Dec. 794 269 25 1088

March/ 1954 797 277 10 1084

Junel/ 776 266 3 1045 Sept.1-' 851 170 -30 991

j Last Thursday of month.

Source: National Bank of Belgium Table 6

Long-term Public External Debt of the BelTian Monetary Area June 30. 1954

($ million or equivalent)

Belgian Luxem- Belgium CongoE bour / Total

U.S. dollar debt I a) Bonds 5.2 - 0.5 5.7 b) IBRD loans 45.0 32.9 9.7 87.L3/ c) U.S. Government loans 151.0 - 3.0 154.0 Sub-total 201.2 - 32.9 13.2 247.3

Canadian dollar debt 51.8 - - 51.8 Swiss franc debt a) Bonds 66.1 42.0 4.2 112.3 b) IBRD loan - 7.1 - 7.1 c) B.I.S. loan 30.1 30.1 Sub-total 96.2 49.1 4.2 149.5

Sterling debt 14.9 - 0.1 15.0

Swedish kronor debt 1.3- 1.3

Total 365.4 82.0 1784&/ 464.8

2/ Guaranteed by Belgium, but in practice serviced out of the foreign exchange holdings of the Congo. Luxembourg purchases foreign exchange for debt service from the National Bank of Belgium. ;2/ Including $3 million undisbursed. 4/ Excluding debt in Belgian francs to IBRD (equivalent of $757,000). Total does not equal sum of components because of rounding.

Source: IBRD Economic Staff. Table 7 Long-term Public External Debt of the Belgian Monetary Area Estimated Service Payments on Debt Outstanding on June 30. 195L ($ million or equivalent)

A. Debt of Belgium U.S. and Canadian Total and Belgian Congo dollars Amortization Interest and Amortization Interest and Amortization Amortization

1955 10.7 19.8 22.7 39.0 1956 10.6 19.3 22.7 38.2 1957 14.2 22.6 26.6 41.3 1958 14.1 22.0 16.2 30.0 1959 12.9 20.4 27.5 40.6 1960 12.9 20.0 27.3 39.4 1961 13.8 20.4 28.2 39.3 1962 13.8 19.9 28.3 38.3 1963 13.8 19.5 16.7 25.9 1964 13.9 20.0 29.6 38.2 1965 13.9 18.6 19.3 26.8 1966 13.2 17.5 17.8 24.6 1967 11.8 15.6 17.2 23.4 1968 11.8 15.2 17.2 22.8 1969 11.2 14.3 16.6 21.7 1970 11.8 13.4 16.2 20.6

B. Debt of Luxemboura U.S. dollars Total/ Amortization Int-rest and Amortization Interest and Amortization Amortization

1955 0.4 1.1 0.5 1.4 1956 0.5 1.2 0.6 1.4 1957 0.5 1.0 0.6 1.3 1958 0.5 0.9 0.6 1.2 1959 0.5 0.9 0.6 1.2 1960 0.5 0.9 0.6 1.2 1961 0.6 1.0 0.7 1.2 1962 0.6 0.9 0.7 1.2 1963 0.6 0.9 0.7 1.2 1964 0.6 0.9 0.8 1.2 1965 0.7 0.9 0.8 1.2 1966 0.7 1.0 0.9 1.2 1967 0.7 1.0 0.9 1.2 1968 0.8 1.0 0.9 1.2 1969 0.8 0.9 0.9 1.2 1970 0.8 0.9 1.0 1.2

2/ Excluding service payments on Belgian franc debt to I.B.R.D.

Source: I.B.R.D. Economic Staff.