View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

CONFIDENT!^




EXCHANGE CONTROL AND DISCRIMINATION
by
Howard S. E l l i s

and a Note on
THE CONCEPT OF DISCRIMINAnON
by
Alexander Gerschenkron

Division of Research and Statistics,
Board of Governors of the
Fodoral Roservo System.

June 10, I9I4U

EXCHANGE CONTROL AND DISCRIMINATION
Howard S. Ellis
Division of Research and Statistics
Board of Governors, of the
Federal Reserve System
Instruments of Exchange Control

I

Government monopoly of dealing in foreign exchange*

II Government disposition over private holdings of foreign exchange and
assets •
III Enforcement of an overvalued or undervalued rate of exchange,
IV Multiple exchange rates«
... V

-t

Government permission to export or to import.

VI

Government disposition over the prpceeds of exports.

VIJ

Government allocation of exchange to imports,

VIII

Officially conducted bilateral clearing«

.IX

Officially conducted barter,
Purposes of Exchange Control

A*

Primarily with respect to international economic matters^

1. To maintain exchange rate against, depreciation or appreciation.
2*

To attain equilibrium .in the balance of payments •'
»

3f

To "permit trade to go pn" without available fpr^ign exchange.

4.

To secure more favorable "terms of trade"•

5. 'To control or fovrce capital movements.
6#

To wage economic warfar.p*

B#

Primarily with respect to domestic economic matters

1#

To control inflation or deflation.

2. %To increase domestic'employment
3.

To: foster industrialization,; etc>f i.^. "protection".




- 2 -

4*

To prepare for or wage war*

5#

To provide revenue for the state#•

6.

To discriminate favorably or unfavorably with respect to certain
persons or classes within the domestic economy#
Exchange Control and Discrimination

The purpose of the present analysis is to present in brief compass
the character of exchange control with especial reference to the question as
to \vhat forms are and are not compatible with a multilateral convention
designed to expand international trade, render it more free, and particularly
to eliminate discrimination• It is not proposed to attempt a complete description o£ the economic effects of various types of exclmnge control, for
in general these can be inferred from a sufficiently lucid exposition'"of
character and aims* Exchange control is understood generally to include any
or all of the instruments dealt with below; consequently more precise definition is unnecessary,, and indeed — in view of the varieties of meaning
both in popular and technical discussions *•- probably impossible * But to
aid in marking off the field in advance, it may be said that exchange control
is not generally taken to include the following! tariffs, quotas', prohibitions and embargoes, subsidies, state trading, and commercial agreements
and treaties. It impinges'upon these at points but does not include them.
In order to set the whole subject in perspective, we begin with
two lists, one giving the main instruments and the other the main purposes
of exchange control • The discussion follow's the first outline, with continuous cross reference to the second* An international convention undoubtedly aims to eliminate the use of exchanges-control for certain purposes; but most objective rules and conventions will have to be made on the
basis of practices or instruments rather than intent,
I. Government monopoly of dealings in foreign exchangef
This characterizes all exchange control and is essential for any
of its manifold purposes'. Monopoly may connote only centralization without*
attempt to enforce a price not compatible with basic equilibrium factors #
For a brief period England maintained this miid form of exchange control *
after the devaluation of the pound in September, 1931 merely to protect the
market against violent fluctuations* There is nothing discriminatory or
restrictive in such action*
To make the state monopoly effective, however, may require rather
far-reaching controls, particularly if the offic'ial rates of exchange diverge
from what freedom in market dealings would establish* It usually proves
necessary to establish a censorship of foreign mail^-prohibition of sending
out or bringing in the domestic money, of dealing in precious metals, of
receiving or making remittances from or to the domestic baiik accounts of *
foreigners, of exporting without guaranty that the praceeds will be surrendered




- 3 -

to the exchange authority, of exporting at fictitiously high prices; and
finally government access to business..,records., inspection of the person and
baggage .of travellers, and more or less severe penalties for all violations*
All of these may be involved ever*, if the purpose of exchange control is
merely to prevent k flight pf capital#
II•

Government disposition,over private holdings of foreign exchange and
assets *

'

' • '

'

J

Milder forms of exchange control! particularly those oriented
toward meeting temporary Ipalanae-of-payments difficulties, ifiay be content
with a monopoly over the current flow of exchange from exports. But more
drastic controls, particularly .if a shortage of foreign exchange bids ftxit
to continue, include the compulsory declaration and tender to the. state of
individual and business holdings of foreign exchangef currencies, bank
accounts, securities, and procious metals. The measure discriminates against
the domestic owners of foreign assets«
III#

Enforcement of an overvalued or undervalued rate of exchange.

This is almost as ubiquitous a feature of exchange control as the
state monopoly in exchange dealing. Indeed it is difficult to find aix
example of the latter which does not have as its purpose the maintenance* .of
a rate from which the market would tend to diverge. In the overwhelming
majority of cases, the control is designed to prevent a depreciation of the
country's exchange, though occasionally, as in the operation of/the English
Equalization Account, foreign exchange was sometimes sold to prevent a
speculative appreciation of sterling and a consequent penalty upon British
exports•
Inasmuch as the ordinary case involves an official rate which., over*
values the country's money, nearly ^11 the, international &nd domestic purposes
$£ exchange control involve this phenomenon; and furthermore it is this overvaluation which necessitates all the othei4 cievices. of exchange control* It
i§ therefore j;h& pivotal characteristic of exchange control save for. instances
to be remarked upon subsequently.
Most of the. exchange control systems in Europe and South America
'iri the- 'thirties made? =their advent as. privisiorial sto-gap devices to prevent
a depreciation of the countries' .exchange which would have-ensued because of
the-withdrav/al or flight of qapital from debtor countries. The. preveilence
of "inflation-mindedness" coupled with the inability of the man^oit the street
.to distinguish between devaluation of the foreign exchange -value of -a currency
and; domestic inflation, closed the..door to.setting the balance of payments in
equilibrium by a devaluation, say to a/leyel 'paralleling -that of the devalued
pound•sterling after September, 1931. It, w&6 believed that the public would
engage in a* domestic flight from money into real values £ind thus,, through
increasing the velocity of circulation of money, actually bring-about price
inflation* Thus the original introduction of exchange' control h^d-.a-s -its
motives purposes Al and Bl in the outline. But purpose A2 —- the attainment
of equilibrium in the balance of payments '~ eiisued shbrtly,- for it vras




- 4 -

thought that,, under cover of the officially stabilized rate,, various measures
could be taken to make this rate no longer artificially high, the chief
measures being deflation of costs and prices and the prosecution of a
vigorous program to encourage exports and diminish imports*
However sincere this desire may have been, it is noteworthy that
the overvalued exchange rate in itself was a strong force working in the
opposite direction from an equilibrated balance of payments# Here we encounter the first important sense in which exchange control is inherently
discriminatory, that the overvalued rate discriminates against exports and
in favor of imports* From this basic fact follow the exchange control
instruments designated by the numbers IV through IX,
Part of the indisposition of countries which had adopted exchange
control to affect basic economic changes such as to achieve equilibrium
without direct interference in trade is to be explained by the fact that,
while an overvalued exchange rate 'decreases exports (and thereby eventually
and inevitably also imports) it does on ordinarily valid assumptions give
a favorable turn to the "terms of trade11, i*e, the amount of imports purchased by a given amount of exports (Purpose AI4.). Thus the discrimination
which appeared in the preceding paragraph solely as a matter of conflicting
domestic interests (exports vs, importers)^ now appears in a new form,
a discrimination in favor of the country1s nationals as a group as against
outsiders.
The maintenance of undervalued rates of exchange such as we have
witnessed in neutral countries during the present war is not motivated by
a desire to secure less favorable terms of trade, but this is accepted as
the price which has to be paid to avoid a currency appreciation which might
represent a peril if subsequently, when the war demand falls o$T it became
necessary to devalue. Since tho supply of foreign exchange is per se
abundant, this variant of Instrument III does not tend as strongly ¥0" induce the use of Instruments IV * IX, as in the case of overvaluation». But
discrimination,of course again appears, in this case causing the nationals
of the undervaluing country to lose relatively to outsiders, Within the
countxry the effects are not precisely the reverse of the overvaluation
case. There is discrimination against importers relatively to an equilibrium rate (the reverse of the overvaluation case); but there is no discrimination favorable to exporters, because the war causes-the foreign
demand to be inelastic and hence to be no* larger than if the currency were
raised in its foreign value*
Undervalued rates in and of themselves tend ta produce domestic
inflation^ But in conjunction with the present war-time exchange controls
in neutral countries, this effect is offset - and perhaps even more than
offset - by delivering to the exporter only part of the proceeds of his
sales in cash., and the balance in government bonds.
Motives or purposes of overvaluation (in the past and for the
future the more interesting case) have been found in controlling domestic
inflation (see III, paragraph 3 above) and in securing more favorable




- 5 terms of trade*; but wq: may add no# al&Q::2uk$Qu-&s> B2> *3# and 4f. and A6,
of which are per se cUfecfriminatory. OYorvajufevtion 'on ordinary elasticity •
assumptions penalizes- exports- UAc stimulates' imports; but since a country
cannot continuously (even under exchange control and .bilateralism) sell.more
than it buys, in,th^j io^g-ru^'the'overvaluation also reduces imports.- This
reduction of imports provides protection'for'home industry and this contributes at least temporarily to the maintenance or increase of domestic production (B2), to fostering home industries' (B3J7 and hence to preparation
for war (M),
v.y '
IV Multiple Exchange Rates-,
Under exchange control the central authority may depart in a variety of Ways from a uniform purchase and sale rat§ for a given country's oxchange and. from "consistency11 (suqh as woul"4 be given by trade and arbitrage,
ing operations under a free exchange system) as between the rates of various
countries.
1«

Purchase at a low price* sell at a higher rate (e.g. the "official rate"),
or purchase at a series of lower prices and sell at a series of higher
prices*

Here the state exploits its monopolistic position against the market
generally and transfers to itself some of the windfjail gain on, the price of
foreign exchange which would,accrue to importers had they racei%red the. "offioial price" without any reduction* In this procedure the favorable, discrimination for importers is reduced*
.,These remarks appear to be valid no matter.to what purpose the
government devotes the funds. Co/see are numerous wl^ere the receipts have
been put into the,general budget* But it is also very '.common to earmark
these funds to subsidize exports in case of overvaluation. In this event
the discrimination against exports through the official exchange rate can
be completely eliminated by the subsidy.
4 particular instance of IV- 1 has Memi the compulsory sale to .the
government of rexpatriated bonds* •"When exchange..control puts a stop to* the
service of domestic securities held abroad, their prices naturally decline
and the corporations would be able to*purchase such securities for retirement
at a windfall profit., It .£ee*ns "only right" that the government- appropriate
this windfall* It is "natural"# though by no means necessary tl^at the sums
be devotecLto subsidizing exports. But again«#-4^.;the- subsidy merely offsets
overvaluation, there is ,no.' discrimination1,against ,f drqign exporters.; relatively
to exporters at home. But the subsidy is 'ultimately paid by the discrirainatory
treatment of foreign creditors.
'
Another and similar case is the monopolisation,of the. purchase and
sale of frozen bank azid other balances of foreign "national^# Here again the
difference between the. price which the foreigner may be Willing to.accept in
order to realize cash immediately and the nomixial burrency va-lu^.may be
appropriated by the state and used to subsidize exports. This is the origin




- 6 -

of the various categories of "Sperr" marks/ The exchange control$ in its
moratorium on debt service, discriminates against the foreign creditor (see
Purpose A5); but the use of the proceeds does not discriminate against foreign
exporters if it does no more than offset the overvalued exchange rate,
2* Export premia, import surcharges (or exchange rates) differentiated
according to commodity, or country, or both*
In general this practice represents the most overt type of discrimination » If an absolutely uniform surcharge v/ere added to the official
rate at which importers buy bills and if the same amount were added as a
premium to the price at which exporters can soil, then it is obvious that
not only would the overvaluation of the domestic currency be (partly or
wholly, depending upon the magnitude of premia and surcharges) recognized,
but discrimination would not be present• Nearly all premia and. surcharge
systems have, however^ been adopted not only ac a roundabout device fo**
recognizing devaluation but as a device for monopolistic discrimination
against buyers or monopsonistio discrimination against sellers* For discrimination to be possible in either case it is necessary that buyers or
sellers be somehow divided into separate markets. Costs of transportation
and protective tariffs always separate off markets to a certain extent•
But if in addition a system of bilateral clearings exists, the 'separation
into markets can be much more markedf since the device obliges the seller
of.goods to accept a market wheref because there are corresponding sales to
his own country, he does not have to wait to receive payment; and for the
purchaser of goo'ds, a source of supply for which, because there are corresponding purchases from his own country, he does not have to wait in order
to make payment •
Discrimination is possible wherever buyers or sellers are separated into fairly distinct markets; and it is profitable where, in the
language of economic theory, the elasticity of supply or of demand differs
as between markets *•- and this would nearly always be realized because of
differences in incomes and tastes as between countries. Thus a couxrtry
with high incomes or a strong internal demand for the exchange-control
country's goods may be forced to pay a high rate of exchange for all its
purchases from that country. But it is possible to discriminate not only
by country, but also by country and by commodity. Thus the exchange
control country may with profit to itself be able to charge different
prices to countries-A-t 3, C.f etc»,on one and the same commodity export,
or with profit to itself pay different prices to A, B, C, etc, on one and
the same import. But instead of doing so explicitly, it does so covertly
by means of different rates of exchange depending upon the partner country
and the trade item, leaving only relatively unimportant items to be covered
by a uniform rate which attempts no discrimination.
Discriminating rates of these types are used for purpose A4 # to
secure more favorable "terms of trade"; but they may easily be used, in
ways which can easily be imagined, for bestowing favor or meting out punish**
ment either as between outside countries or interests within them, or within
the home economy (purposes B 3, 4 f .5, and 6 ) , Thus political motives may
supersede economic considerations•




- 7 V.

Government permission to export or impor.t»>>

_;

If foreign exchange^, is tf scarce" (the price•* ©f foreign exchange too
low to produce* equilibrium)*: the government may desire*to prevent any imports
for which foreign exchange, will not be available* l*his. measure, often employed in conjunction with -exchange ratioiiing' for imports, (of., VII below)
wouldj if rigorously adhered to4 prevent ani exchange 'Control country from
running into debt on current account, either in ordinary trade or in the
clearing mechanism. It thus serves purpose A5.
The correlative measure for a country with too hiffh rates on
foreign countries (such as the, neutral countries at present in the war) is
the requirement of permission to 'export • The measure has as its purpose the
prevention of accumulating foreign credits (this has boon a motive with some
of Germanyfs clearing partners) or the prevention of inflation by restraining
the outflow o£ certain goods•
Authoritarian interference yrith *^e f r ^ e flow of imports or exports is inevitably discriminatory in. one sense or another, ~-' indeed it is
simply one side of the shield of which ai* overvalued or undervalued exchange
rate is the other. If the government simply limits the amount Of imports
(or exports in the case of undervaluation of the country1 s exchange) without
further measures$ the consumers of these imports are discriminated against
and the importers and domestiq producers of these goods enjoy a favorable
discrimination against other tracers and producers • Price maxima and
rationing of ihe scarce, import/ a^ter the form of the discrimination against
consumers from the price to the* quantity dimension but do not eliminate it*
Importers' windfalls would be eliminated by this device, or by competitive
sale of import licences, or by ex 'post taxation of the windfall gains • The
relative merits of these four procedures is not considered further in the
present analysis•
VI.

Goyarpiaent disposition over the proceeds of exports •

In case of an overvaluation of the countryf.s exchange,, the government 'ordinarily has to take steps to compel the surrender of export proceeds
in order to prevent a concealed capital flight (Purpose A5) in the form of
leaving these sums abroad ,on deposit V/ith a bank 'or ..with .a branch or correspondent of the firm* Occasionally mere' pledges ?arfc acceptedt but a thoroughgoing control may involve posting'a bond or depositing guarantees until the
export proceeds in foreign exchange arc actually delivered...
In the case of an undervaluation of the countryfs exchange the
government's interest .in securing the, inflow of'exchange.to itself is largely
the control of inflation (Purpose Bl)« The 'fexportor may receive the value
of his surrendered bills of exchange only partly in.cash-, and partly in
bonds or blocked accounts.
Neither of these xaeasurcs adds anything to the "unavoidable"
discrimination if outward or inward movements of capital are to be controlled. They are merely enforcement devices.




- 8-u
Government allocation of exchange to importers
If a country's exchange is overvalued, foreign exchange is
scarce and. has to be allocated. This may be done with-.an effort to
avoid discrimination, but as has been- emphasised before,- the consumers
of imported commoditiesftas a whole are inevitably discriminated against,
since the country's exports and1faenoeeventually i t s imports .must shrink
(barri ng sub si dies) •
'
%
•

If the government sold bills of exchange or licenses to importers by competitive bidding it would absorb the windfall profit on
the activity of importing and provide an automatic allocation of scarce
exchange through a price mechanism without resort to rationing.
The most objective method of rationing exchange is: the application of a fixed percentage to purchases of exchange, in some previous
base period to all imports "without distinction. Added to the general
discrimination just mentioned, there may be a further discrimination
agains t firms with abnormally lev/ import requirements in the base period,
against novr or growing firms and industries. Furthermore, bocauso of
divergent elasticities of damund and supply for different goods, the
distribution of imports would, under a froo price mochanisjn operating
on an all-around reduction, differ from a uniform percentual reduction
for each import.
Another basis, loss objectivo but possibly moro just^-ln.thc
sense of equuliturian—is a discrimination against luxury imports.
Still le.ss objective is the allocation of exchange on the basis
of preparation for or the waging of war. Here political considerations
supersede the economic profit calculus, (purpose Bij.),
Closely allied to this, but not necessarily identical, is the
use of exchange 4*1 location as an instrument of protection (purpose B3K
Sometimes the matter assumes the familiar "infant" industry form*
Just as in the case of multiple exchange rates (cft IV above),
the allocation of exchange can be used as an instrument of economic warfaro against outside countries or against political groups in outside
countries, or against political, racial, or othor groups in domestic
affairs.
To prevent an outward capital movement, the exchange authority
has to discriminate against demand for this purpose whether from its
nationals or foreigners, and whether it arises from interest differencies
or otherwise.




- 9VIII*

Officially conducted bilateral clearing

";- Clearing involves thsv.making of payment for-exports; into,
receiving of payment for imports from a domestic account conducted by
an agency, of the state for trade with a particular .country* I t is the
latter rather than the first, feature vftich 'causes clearing- to. differ
from ordinary insthods of payment'Which also involve remittances into
and from- domestic accounts, but th.oy m^y. be. to and; from any country.
Bilateral clearing ttm$ entails that one partner receive payment, for
i t s exports to a particular country only in imports from* 'thftt country,
and reciprocally that i t derive imports fromta particular ^country,1 only
from i t s exports to that country. Clearing can, upon ordinary elasticity
assumptions, always tie made 'to balance by appropriate adjustment of the
bilateral rate of exchange, If the clearing rate of exchange (which may
or may not bo the same as the "official 11 i*ato of the exchange control)
does not achieve- this balancing, one country i s thereby making a tied
loan to'another in the form of a favorable clearing balance.
One motive for the maintenance of .clearing may bo precisely
this forcing of loans, as in the case of Germany prior to and especially
during Vne presenV war• uypically however so far as concerns the reason
for introducing clearing in the f i r s t place, tho alleged purpose was
rather to provide a~ mechanism to "permit trade to go on" when the country
has exhausted i t s for.eign exchange reserves* But this is a legitimate
argument for clearings to a rather limited oxtont* If the country has a
favorable bal&nco, i t does not nood foroign exchange roservos* If i t has
an unfavorable balance, tho chanco that clearings increase i t s total exports i s loss thon tho prospoct that clearings reduce its-imports, and
thoro is no guarantoo that tho gap bo closed oven by both in conjunction.
Consequently clearings permit only a smaller volume of trade to "go on",
and uncleared balances s t i l l remain* lie nee to this extent clearings
amount to a clandestine device for forcing foroign loans, or a device
whereby the exporters of a given country persuade their own government
to make the loan through discounting tho clearing balances* In either
caso
discrimination of a gratuitous character i s involved*
Countries s t i l l possessing adequate exchange reserves may impose bilateral clearing upon their trade with a particular country i f
1) having a favorable balance in their trade, they ?/ish to try to assure
themselves of payment on current account; or if 2) having an unfavorable
balance in this trade, they wish, by threatening to suspend current payment, to "thaw out" some old debts owed them by other countries. In
either case discrimination favorable to tho creditors in a particular
country relatively to others i s involved* With rogard tQ 1) the consequences may boj a) that exports fall to tho lovel of imports; b) that
imports riso to the level of exports; c) that something like tho old excoss of exports ovor imports persists, and tho exyort surplus i s "paid11
in an accumulation of clearing balances* So far as concerns c ) , this
debt muy conceivably be paid through a subsequent reversal of tho import*-




- 10 export balance, which can usually only be done by outright discrimination
in permitted exports and imports. Inasmuch as bilateral cloaring limits
the choice of exporters as to markets and of importers as to sources,
it also means that the actual volume.of trade will fall.below the level
of b ) , i.e. 'in the direction of a). Bilateral cloaring thus results
either in outright discrimination, merely to preserve volume (under c ) ,
or in u shrinkage of world trade (which itself procoods from the inherent
discrimination--> limiting traders1 free choice-p-whieh bilateralism necessarily
involves)*
Tho "outright discrimination" in clearings involves not only
turning exports or imports from one country to another in order to pay
off or to be paid accumulated debts, but also the limiting of the list
of articles admitted to clearings in the first place in order to achieve
as nearly as possible a balancing of exports and imports ab initio*
IX.

Officially conducted barter

This usually makes its appearance when bilateral cloaring
breaks dawn because of so large a one-sided balance that the creditor
refuses to soil further without an immediate quid pro quo. Discrimination
is inevitably greater since permission for expcrt or import now involves,
beside a decision as to country, also a decision as to particular commodity
and as to one particular "deal". Tho necessity for finding tho "double
coincidence" entailod by barter reduces tho field of free choice and the
volume of international trade even below tho level of bilateral clearing.




f 11 r
CONCLUSION
In reirospecrfc w^vdan;>umarlzi9'"fKe"-"v^rietieg .of* discrimination involved, in exchange control with especial referon&e. to the
types which necessarily-ipher-e in> the institution i.ts&lf), and those
which do not* (The. di-scusgipn i s limited to.cases of .overvaluation,
since the opposite case. fc^rTlrrgeneraJ. b.e -readily inferred).
1•
Discrimjnation,, p r i s i n g from a p r o h i b i t i o n of c a p i t a l exp o r t s , a g a i n s t f o r e i g n c r e d i t o r s ^ or p o t e n t i a l hoirig lenders to abroad.
Unavoidable'except by moderating t h e p r o h i b i t i o n s ^ e*-g# f o r f o r e i g n e r s •
*t

•

'

2*
Discrimination against home hqrlder.s of foreign monetary assets*
Avoidable if tho country caii dispense with mobilizing these'exchange
rosorves»
3«
Discrimination arising from high rate of exchange, against
home exporters in general and favorable fe Home importers i'ri general" •
Export penally avoidable by subsidies; import windfall profits avoidable
by competitive "sale" of iforeign exchange and for import licenses, by
pric© maxima or imports, by taxes on profits.
h*
Discrimination^ arising from high rate of exchange, against
foreign purchasers and foreign sellers (protection)* Tho f i r s t d i s ^
crimination, appearing immediately, makes tho home comnodities cost
moro to foroignors; the second, appearing whon horao imports have fallen
to the level of homo exports, roduccs the foreigners 1 market. Hoithor
aru avoidable as long as tho high rato is maintained*
~"
5«
Discrimination, through multiple exchange rates, against or
favorable to particular countries, particular exports or imports,
particular foreign or Eorae groups o£ persons or individuals» Avoidable
rough the use of uniform exchange rates* In soine cases (e• g# 3 above)
discrimination appears as mere by-product of another measure, as for
example, a by-product of avoiding a downward rate revision* In the present case, however, i t is impossible to imagine the discriminations us
othor than doll berate* Ihis distinction ought to bo borne in mind in
comparing tho present (5) type of discrimination with those involved
under 6 bulow, which—it can justly bo maintained--can greatly resemble
tho results of multiple exchange rates. Thore remains however this
difference, that whoroas multiple exchange rates must doliborutely discriminate, rationing doos so only in certain cases' (q*v*) •
6.
Discrimination, through exchange allocation for imports against
or favorable to particular foreign countries, particular imports, particular
foreign or home groups of* persons or individuals. Some discrimination
unavoidable> Even selling foreign exchange or import licences to the
highest bidder does not eliminate the protection to home production
following from the limitod allocation necessarily attending overvaluation*
Bationing relatively l i t t l e "discriminatory" if made according to (reasonb
objective rulo, c»gV: parcentago of Faso yaar, necessitios vs«




- 12 luxuries, imports for re-export, etc. Deliberate discrimination, e*g.
allocation to party members, racial groups, etc. Avoidable»
7«
Discriminations attending bilateral clearing.: Avoidable,
since bilateral clearing is itself avoidable to achieve pxchange^
control purposes not themselves deliberate policies of discrimination,
1£ bilateral clearing is adopted, thp discrimination against third
countries on current trade is .unavoidable. By direct discrimination
in current trade (but only so),tho discrimination of forced loans
through clearing balances is avoidable. Tho us o of clear ings" to 'forco
repayment of old loans is avoidable, by omitting such provision*
8.
Discriminations attending barter. Avoidable on some/basis
as clearing, if adopted, discriminations similar' to clearings un»avoidable, except forced loans which.^are impossible.
*~




Note on the Concept of Discrimination

Alexander-

^j

Broadly speaking adverse discrimination as applied in the
foregoing pages means' placing uftder'«a'•disadvantage a categoryof
persons or .countries fey detracting '£rbm:the /economic, benefits which
they would enjoy in absence of government .interference, with the froo
competT'tive'inarkets* iri^/tfyis broad sense, exchange control'is no
different with respect to discrimination-from any price 'ceiliiigt
This means that ; ,restrictions may;;obtuin whoro exchange' con-*
trol is introduced in an attempt to correct discrimination rather than
to establish i t , o*£» as a weapon against foreign discriinination. If
an agricultural country produces and soils a .-commodity under competitive
conditions but imports industrial goods monopolistically markotod, i t
may soo tho terms of trade turning against it« Thon, it.mey iip|)ly exchango control in order to improve her terms of trade• The success of
such a policy wi^l depend on the reciprocal e l a s t i c i t i e s of d$man(J.
The. effects of exchange control will be the same as.described'in the
preceding pages*. However, we could not call them discrimination,
because the effect i s , in some measure, to correct, discrimination in.troduced by monopolistic domination of the markot by foreign exporters•
It-i;9. therefore prily when comparison with a froo. pompetitiv© market is
legitimate in. torms of 'actual' situations that exchange control is discriminating by dofinltton in-all i t s effacts.
The broad concept of discrimination i s useful therefore if
and when the use of tho free competitive market ..situation i s significant
in terms of practical policies.
This broad concept of di scrimination,. hoyrovor, i s not tho
concept which has 'boon usbd in foreign com^orcial polic^os in v/hat%.
n-ay bo callod .tho doyelopod trading 'systom .of the 19th. .contury. This
is tho concept pf discriinination in tho spocifie. formal or juridical
sense of .equality of trading-opportunity.- S/inca-noii-discrimination in
this sense i s s t i l l the guiding principle .of. o;ur foreign policy this
concept .of discriiiiin^tidn must be considered separately with regard to
.exchange control.; The'most favored nation clause v/a^'the instrument
which^Qn/the whole very effectively prevented this type of discrimination.
Absence of. discrimination- in. th.i^- juridical sanso, is not
premised upon the absence of government intorf.ercmcof
True, tho mostfa yqred-nation clause had twb' effects-1) .It .^s:.sured i t s beneficiaries
of equal treatment in comparison to- third .countries.* 2) I t reduced the
amount of protection by'generalizing-.reduction to one country. But
the second effect took' placo only if they wore such reductions. In
other, words, non-* die crimination in this itraditional. or formal senso
is. perfectly computiblo wit'h rising and ovonprqiiibitivo tariffs; i t




- 2is compatible with outright export and import prohibitions as long
as they are applied equally to al*lt-t5ountries; This type of nondiscrimination is compatible with refusal to allocate exchange for
certain commoditiest (luxuries) &s long as this refusal is applied
equally to imports from all. countries* It is, in fine, compatible
with a system of multiple exchange rates, i.e. with different rates
of exchange established for different types of commodities, as long
as, say, tourists from all countries obtain the same lower rate of
exchange* or as long as importers of luxuries from all countries
rooeivo a lower rato of exchange. For this "typo of "discrimination"
is analogous to tho structure of a country's tariff on imports or
system of export subsidies. Tho multiple rates of exchange arc notessentially different from the "multiple" rates of a tariff.
However, logical or juridical compatibility is ono thing,
practical economic significance is another. Most*favored-nation clause
playod its useful rolo#not because it was compptiblo with a general
prohibition against foreign trade but because in an economic environment where foreign trade was primarily regulated by tariffs, and these
tariffs were relatively low, not only a large and growing amount of
foreign trade was possible, but the formal equality of tho most-favored-*
nation clause fitted the fact th&t the determination of the. volume of
trade was loft to the objoctivo mechanism of tho market. As Long as
government intervention did not extond to the determination.of the
volumo of trado tho most~favorod-nation clause was folt to be a
sufficiont guaranty of trading equality, or, moro precisely, tho formal
equality of treatment was regarded as sufficiont.
The appearance of exchange control and bilateral clearings
apart from being "discriminatory" in the broader sonse of tho word
presents a special problem because thoy are discriminating in a quite
special senso: exchange control in conditions of an overvaluation involves shortage of foreign exchange. In absence of exchange,control
this shortage normally is overcome uithor by an outflow, of gold, by
a change in relative pricos and incomes, or by a reduction of tho rate
of exchange. .Tho existence of a. permanent shortage raises, the problem
of allocation of foreign exchange among imports from individual countries
and this introduces an element of arbitrary determination of. tho total
value.of trade which is alien to the.nature of the most^favored-nation
clauso. Therefore discrimination handled in tho procoding pages under %*
6, 7, ^nd 8 differs from tho preceding types of discrimination in that
it is not only discrimination in the broad sense of the word, but dis~
crimination from the point of vieiv of the formal equality of the mosj>
fayored nation clauso. In other words - the problem is how to handle
exchange control so as to make it compatible with the formal equality
of treatment as required by the clause.
The answer then is, as already stated, -that any type of
Government allocation of exchange among countries is alien to the naturo
of the clause. Tho makeshift device of base period never was satisfactory
and will be fully fictitious after interruption produced by the war. Tte

*

So far as concerns discrimination against countries.




- 3 only satisfactory device is salo of exchange to the highest bidder
and only to the extent that this is possible can exchange control be
made compatible with the most-favored-nation clause.
In the case of discriminations listed under 7 o-nd 8 the
compatibility with the most-f&vorod-nation clause could be preserved
only to the extent that a country undertakes to offer a clearing agreement i t has concluded with one country to all other countries, Needless
to say this is almost meaningless. Hie functioning of the clearing
requires enforcement of a certain ratio between exports and imports
and whether this is achieved by temporary oxport or import prohibitions,
or changes in exchango rates or price change^ , those devices cannot
be generalized and as such aro incompatible with the formal equality
of the most-favored-nation treatment.