Alexander G. C. Mountford
THE GOVERNORS of the Fund, meeting in Rio de Janeiro, were virtually unanimous in acclaiming the importance of the 1967 Annual Meeting. His Excellency Arthur da Costa e Silva, the President of Brazil, found many supporters for his opinion, expressed in his opening address to the assembled Governors, that “this is a moment of maturity for the international community.” The attention of the Fund Governors was especially focused on an Outline plan for the creation of new international liquidity in the form of special drawing rights (SDR’s) in the Fund (an article on the Outline appears on page 275); Mr. Pierre-Paul Schweitzer, Managing Director of the Fund, referred to these proposals as “the most significant development in international financial cooperation since Bretton Woods.” Many Governors referred to the negotiations and talks on the liquidity problem in recent years, and welcomed the new plan as the outcome of these, and particularly of the collaboration during the past year between the Executive Directors of the Fund and the Deputies of the Group of Ten. On the closing day of the Annual Meeting the Board of Governors adopted a Resolution instructing the Executive Directors to prepare for submission to the Board of Governors the necessary amendments to the Fund’s Articles of Agreement and By-Laws. The Resolution also asks the Executive Directors to study other possible improvements in the rules and practices of the Fund that might be recommended in view of developments since the Fund began its work in 1946. Once approved by the Governors, the amendments to the Articles will go to all member countries for ratification.
Principle of Universality
In discussing the Outline plan for the creation of new international liquidity in the form of SDR’s, many speakers particularly welcomed the clear adoption of the principle of universality, embodied in the form of universal participation by all member countries in the creation and distribution of SDR’s. They also considered it appropriate that the Fund itself would play a central role in the operation of the SDR scheme. Several stressed the crucial role to be played by the Managing Director of the Fund in ascertaining the need for additional liquidity and in formulating proposals for the creation of SDR’s.
Special Drawing Rights and Other Reserve Assets
The interest of most speakers in the prospective role of the SDR’s led naturally to comparisons between the SDR and the traditional reserve assets, namely, gold and the reserve currencies. Much attention had been given by the Executive Directors and the Deputies to the question of endowing the new reserve asset with the appropriate qualities. The combination of characteristics described in the Outline was such that most speakers agreed that it would be an attractive asset to be held in reserves, in view of its gold value guarantee, moderate rate of interest, and its transferability. However, many Governors regretted the requirement that countries which used SDR’s to the maximum amount of their allocation should restore or “reconstitute” part of their original holdings, and several welcomed the indication that the reconstitution provision would be reexamined after the first basic period.
The consensus seemed to be that the plan was sufficiently flexible, and that it could be adapted in the light of experience. The aim of the SDR plan was clearly to supplement the existing reserve assets (gold and the reserve currencies) but not to supplant them; the Governor for the United States reiterated that nothing in the new arrangements was designed to alter the present relationship between gold and the dollar: “The United States’ commitment to the convertibility of the dollar into gold at $35.00 remains firm.” Of course, the addition of a new element in reserves would affect, and was intended to affect, the existing reserve assets. Mr. James Callaghan, the Governor for the United Kingdom, defined the position of his Government as follows:
“… we do not approach the question of the role of sterling with a fixed determination to keep things as they are. But it goes without saying that we could not contemplate any change which did not take full account of the interests of those who have claims on the United Kingdom. Subject to that, however, we shall adopt a flexible position. We are ready to adapt the sterling system to an evolution in the world’s monetary arrangements, provided that the change comes in a way which will strengthen the world monetary system as a whole.”
The Governor for Denmark, Mr. Erik Hoff-meyer, however, while recognizing the useful properties of the new reserve asset, reminded his listeners that the frequent occurrence of short-term disturbances meant that the three types of reserve asset (gold, reserve currencies, and SDR’s) would not always possess the same relative attractiveness. Accordingly, he stressed the need, during the early period of the SDR system, for continued central bank cooperation of the type that had been demonstrated in the swap system and the gold pool.
The feature of the Outline which attracted most approbation was the broad aspect of control: it was important that in the future the international community would control the level of world reserves, instead of the reserves controlling the community. A system which allowed a collective judgment to supplement existing reserves when needed would be an improvement on a system which left increases in reserves to the vagaries in gold production and holdings and to the continuation of balance of payments deficits by the reserve currency countries. However, the welcome given to these aspects was tempered by the misgivings felt by many speakers about other aspects. For example, several Governors from developing countries felt that Fund quotas were not an appropriate basis for the distribution of SDR’s, as they did not take account of the special liquidity needs of the developing countries.
Governors for some of the countries with developed economies, on the other hand, were disposed to make the final adoption or activation of the SDR scheme dependent upon the fulfillment of conditions; thus, Mr. Michel Debré, Minister of Economy and Finance and Governor of the Bank for France, reiterated his Government’s position that the balance of payments deficits of the two main reserve currency countries, the United States and the United Kingdom, should be ended before any scheme for creating new liquidity were brought into effect.
“Reform of the Fund”
Mr. Debré and the Governors of some other countries of the European Economic Community (EEC) also laid particular stress on the need for modifications in the present practices and rules of the Fund. Mr. Debré felt that “the rules of the Fund do not take into account the changes that have taken place in the world during the past few years—on the one hand, the industrial development and the sound financial condition of the European countries, particularly the countries of the Common Market, and on the other hand, the growing aspirations of the many young developing countries.” The Governor for Germany, Mr. Karl Blessing, similarly, mentioned that the EEC countries had made joint proposals concerning possible modifications in the rules and practices of the Fund, and stated his view that there was a logical interdependence between such modifications and the new drawing rights. Like the Governors for some other European countries, he believed strongly that work on such modifications or “reform of the Fund” should take place at the same time as the work on elaborating and finalizing the SDR scheme, and that they should be concluded simultaneously. In voicing this view, the French Governor indeed affirmed that “the parallel execution of these two reforms is… one of the conditions of the agreement of the French Government.”
However, divergent views on this matter were voiced by the Governors for several other major industrial countries, who stressed that action on reform of the Fund might require long study and careful deliberation, and should not be regarded as a precondition to activation of the SDR scheme. Mr. Mitchell Sharp, the Governor for Canada, thought it proper that the two sets of amendments should be the subject of separate reports, with the same target date, but stressed that the resolution did not provide that acceptance of the SDR proposal was conditional on the acceptance of the amendments to the Fund Agreement. Moreover, the representatives of many developing countries argued that reform of the Fund should take account of the special liquidity and development needs of their category of countries. They noted that because SDR’s would be distributed in proportion to quotas the actual addition to their reserves resulting from the scheme would be small. Several of them gave their opinion that the SDR scheme was designed primarily to promote the interests of the main trading countries. Accordingly, the main benefits that could be anticipated for the developing countries were indirect ones, such as the possible improvements in the quality and quantity of development aid that might be made feasible by the reduction of balance of payments constraints on the developed countries, and improvements in the export markets for primary commodities that would result from a better international payments system.
Regarding the proposed decision-making process, there was broad agreement that a requirement of 85 per cent of the votes would ensure that any proposal for the creation of SDR’s would have the support of most members, although it was noted that it would effectively give a veto power to some groups of countries. Many Governors resisted the idea that a similar voting requirement be established in the Fund for certain other types of decision. Thus the Governor for Ethiopia, Mr. Menasse Lemma, stated that “… the proposed 85 per cent majority is a step in the wrong direction. This is especially so if it is extended to the present Articles of Agreement.”
Prices of Primary Products
Another matter which received particularly close attention from the Governors for developing countries was the problem of the stabilization of the prices of primary products. An item on this subject was added to the agenda of the Annual Meeting at the request of 13 African countries and the Malagasy Republic and France. Representatives of these countries, meeting in Dakar shortly before the Annual Meetings, had adopted a Resolution calling on the World Bank and the Fund to study the problem and its possible solutions. Governors for these and several other developing countries spoke on the matter and many of them linked it to the problems of international liquidity and development aid. Their main argument was that the benefits of development aid were all too frequently canceled out by deteriorating terms of trade for the developing countries. They thought that the aim should be to establish machinery for the stabilization of prices of primary products at a level which provided a fair remuneration to the producer; the machinery should be financed by balanced contributions from both producer and consumer countries. While several speakers welcomed the improvements in the Fund’s compensatory financing facility (described in the December 1966 issue of Finance and Development), they felt it was not a full solution to the problem and called for further liberalization. On the last day of the Meeting, the Governors of the Fund, like their counterparts in the Bank, adopted a Resolution inviting the Managing Director to have his staff prepare a study of the problem in conjunction with the staff of the Bank. This report was to be transmitted by the Executive Directors with “such comments or recommendations as they may have,” to the Board of Governors for consideration and appropriate decision, if possible at the 1968 Annual Meeting. However, although there was general recognition of the gravity of the problem and the vulnerability of many countries to volatile prices for the primary commodities which they exported, the Managing Director noted in his closing remarks that “one cannot be unaware of the discrepancy between the attention paid to this problem over the last 20 years and the paucity of workable solutions that have emerged….” He reminded his audience that “there is no easy road toward fully satisfactory solutions of the problems related to the instability of commodity prices.”
World Economic Situation
While international liquidity and changes in the Fund’s practices and commodity price stabilization were the salient features of the discussions of the Fund Governors in Rio, close attention was also given to the general matters that are reviewed each year, such as the state of the world economic situation and the Fund’s transactions and policies. As usual, the Fund’s Annual Report provided the background for the discussion on the evolution of the world economic situation. Many speakers agreed with the thesis that the disappointing rate of growth in the world economy had been due largely to the economic policies followed by the major industrial countries; the most noteworthy development had been the deliberate reduction of demand in several of them inspired by the wish to offset inflationary pressures. According to this thesis, the reduction had been accompanied by an undue reliance on monetary instruments of policy, together with an unwillingness to turn to fiscal restraint and reluctance on the part of some industrial countries with high reserves and healthy payments surpluses to follow more expansionary policies. In the words of the Governor for Australia, Mr. William McMahon, “initially there was a failure to employ sound economic and fiscal policies in some countries. Action subsequently taken to offset excess demand and correct external disequilibrium was belated. It was excessively concentrated in the monetary sector when fiscal restraints could have been more appropriately used.” The Governors for many countries, developed and developing alike, were agreed on the importance of achieving an appropriate combination of policies in the industrialized countries that would foster satisfactory economic growth and an improvement in world trade while preserving domestic and external stability. There seemed to be a growing recognition and acceptance of the responsibilities of surplus countries as well as deficit countries in the adjustment process. The hope was also expressed that the new SDR facility would act as a counter to interacting national moves toward unduly high interest rates brought about by competitive action on the part of countries that were protecting their reserves. In his concluding remarks, the Chairman of the Fund Board of Governors, Mr. Erik Brofoss of Norway, stressed that concerted action was required for the resumption of a more acceptable rate of growth than had been experienced in 1966 and 1967. He told the Governors that it was only through their firm determination to make the new SDR facility help them solve the problem of a future shortage of international liquidity, that the Annual Meeting in Rio would stand out as a landmark in the annals of the Fund.
Staff Papers is a publication through which the Fund makes available some of the studies on monetary and financial problems prepared by members of its staff. The studies published thus far have dealt with such subjects as international liquidity, balances of payments and exchange rates, inflation in relation to economic development, and national monetary and fiscal policies. Summaries in French and Spanish are appended to each article. There are three issues each year.
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