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Text File | 1994-05-02 | 21KB | 419 lines

<text> <title> Belgium: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Belgium </hdr> <body> 1. General Policy Framework Belgium belongs to the group of leading industrialized democracies. The country enjoys one of the most open economies in the world, with exports and imports together equivalent to a very high 140 percent of GNP in 1989. Belgium's greatest economic strength lies in its geographic location. Situated on Europe's northwest coast and sharing borders with four countries, including Germany and France, Belgium is a natural center for transit trade. Having few natural resources of its own, Belgium is reliant upon industries which transform imported goods for reexport. The principal sectors of Belgium's industrial base include pharmaceuticals, high tech, automobile assembly, textiles, steel products, chemicals, refined petrochemicals and petroleum products. Major imports from the U.S. include tobacco, aircraft and associated equipment, cars and other vehicles, coal, computers and related equipment, precious and semi-precious stones, chemicals, plastics, textiles, photographic equipment, and specialized machinery. The Belgian economy performed well in 1990, with real GNP growth of 3.7 percent, against 2.9 percent for the European Community (EC) as a whole. For the third year in succession, Belgium exceeded the EC growth average. Belgium ran a current account surplus of 2.1 percent of GNP, one of the highest levels for all OECD members. The Belgian export results were helped by the beneficial effects of German reunification. However, Belgian exports to the United Kingdom and France declined as those countries' economies stumbled. The effects of the Gulf Crisis on the Belgian economy, while only marginal during 1990, bit deeper in 1991. GNP growth in 1991 was significantly lower, about 1.9 percent. Declining orders and consequently higher unemployment, particularly in many small and medium-sized companies, will be lagging effects of the Gulf Crisis. The effect of the Gulf Crisis on prices was short-lived. Inflation equal to 3.7 percent in 1990 should average 3.3 percent for 1991. Growth in investment slowed in 1990 (nine percent in 1990 vs. 16.3 percent in 1989), but its contribution to GNP growth was still substantial. In 1991, downward pressure on profits and high interest rates contributed to a less favorable climate for corporate investment. With a direct investment position of US $9,462 billion in 1990, American investment is well represented in Belgium, with more than 1,100 companies present. In all, U.S. companies generated direct employment for some 200,000 Belgians in 1990 (five percent of the labor force). Belgium's elaborate infrastructure, extensive transportation, banking and communications systems, and its status as the capital of the EC combine to make the country a prime location for American firms seeking to establish an office or facility abroad. More than 60 percent of the purchasing power in Western Europe lies within 500 miles of Brussels. The 1990 budget deficit equaled 6 percent of GNP, against 3.9 percent for the EC average. For 1991, the deficit target is 5.6 percent of GNP. The government faces a large domestic debt stock equal to about 120 percent of GNP, which was run up mostly in the late 1970s and early 1980s. Progress in reducing the overall net debt/GNP ratio is likely to be slow, due to high European interest rates and the large amount of short and medium-term debt. Part of the success of the gradual decline of the Federal budget deficit can be attributed to the Regional Devolution Act of 1988, whereby Belgium's regions and communities were granted substantial budgetary expenditure autonomy, but only limited fiscal revenue autonomy. By not matching the fiscal resources to the devolved responsibilities, the Federal government in effect passed on part of the budget austerity burden to the regions and communities, which in turn were forced to rely on borrowings. These borrowings are not covered by a Federal government guarantee. The government believes that it may take 10 to 15 years to bring the debt stock ratio down to 80 percent of GNP. This problem constitutes a potential stumbling block for Belgium's full participation in Phase Three of the EC's Economic and Monetary Union (EMU), which will require strict budgetary discipline (a debt/GDP ratio of no more than 60 percent and a deficit/GDP ratio of no more than 3 percent). 2. Exchange Rate Policies Belgium participates in the EC's European Monetary System (EMS), and the Belgian franc (BF) makes up part of the basket of European currencies from which the value of the ECU (European Currency Unit) is calculated. The Belgian Franc is equivalent at par with the Luxembourg franc; the two countries formed the Belgian-Luxembourg Economic Union, or BLEU, in 1921. In March 1990, the Belgian government abolished its system of dual exchange rates, whereby an official rate was used for capital transactions and a free or commercial rate for commercial transactions. The move, in the context of further EC capital market liberalization, did not disturb financial markets in Belgium because the difference between the official and the market rate had averaged less than one percent since 1982. Of greater consequence for the Belgian exchange rate outlook was the decision by the Belgian authorities in May 1990 to link the Belgian Franc much closer to the German Mark (DM). The National Bank of Belgium said that it wanted a maximum divergence between the BF and the DM of 0.5 percentage points (against the 2.25 allowed in theory) in a first stage. Consequently, the BF short-term interest rate differential with the DM disappeared almost overnight. The Bank will aim for full parity in a second stage. The remarkably strong performance of the Belgian franc since mid-1990 is also related to the enormous improvement of cross-border securities trading, bringing the basic balance (current account plus long-term capital) out of the red. Belgian franc investments by non-residents in 1991 increased steeply (currently 12 times higher than in the preceding 12-month period). 3. Structural Policies In practice, there is freedom of trade for all purposes, and no discrimination between foreign and domestic investors. There are basically no measures in force to protect local industry against foreign competitors, except in the agricultural sector. In this case, the EC's external tariff and the quota structure of the Common Agricultural Policy (CAP) apply. The Belgian Government's attitude toward free trade enjoys widespread support throughout the business community. Subsidies: The national government substantially reduced its aid to business during the 1980s, particularly for steel and shipbuilding. Nonetheless, Belgium remains a heavy subsidizer by EC standards in several sectors. (Subsidies to Belgian coal producers, planned for elimination in 1992, were in fact terminated in mid-1991, well ahead of schedule.) On July 19, 1990 the EC commission announced that it was recommending the abolition of several long-standing general investment aid programs in Belgium. The Commission was particularly troubled by general investment aids which did not have any clear regional or structural objectives. Subsequently, the regions of Wallonia and Flanders announced revisions to their aid programs, in both cases to make them more effective in terms of job creation. Investment: Foreign investments in the transportation, banking, and insurance sectors are subject to screening by the Ministry of Economic Affairs. Nonetheless, there are no difficult administrative procedures. Foreign interests may establish a Belgian company on the same basis as domestic interests. Establishing a branch of a foreign corporation or acquiring the assets or shares of an