Q. Do you feel a sense of relief now that your responsibilities at the Fund are over?
A. Oh, certainly in one sense. It is a very heavy job with great responsibilities and an enormous amount of work. Of course, my feelings are also mixed with some regrets because I leave a very unique position. I have had great satisfaction in exercising my responsibilities through the full cooperation of the staff, Executive Directors, and governments. It has been a fascinating and very rewarding experience, but I think there is a time for everything and I look forward now to being free again.
Q. How would you characterize the job of the Managing Director—the role of the Managing Director in the world community and as part of the Fund mechanism?
A. What makes the job so fascinating—and is also one of its most essential elements—is the constant need to harmonize the differing views of governments as expressed in the Board by different Directors or in the Interim Committee by different Ministers of Finance. One of the crucial tasks of the Managing Director as Chairman of the Executive Board is to formulate the consensus at the end of a discussion. That is a very important function and one that makes Fund discussions much more effective than those in other international institutions. There is a readiness in our Executive Board often to accept a consensus without voting. It is important that we can vote, that we have majority rules; but it is just as important that, in practice, we very seldom vote. There is a willingness among the Directors to accept certain compromises and to recognize the task of the Chairman in formulating a compromise based on the consensus of the meeting.
Another important element is the final decision taken on important and difficult negotiations with member countries about Fund programs. In most cases, the Managing Director doesn’t have to be involved very much in detail. The staff is very capable, and I get a briefing which I approve, and in most cases a successful negotiation can take place on that basis. But in some cases when there are difficulties, I have had to take final decisions and participate in final negotiations.
We also now have the Interim Committee. This has been very useful as a forum for policy discussion and has effected a strengthening of the Fund machinery. The Chairman of the Interim Committee plays a key role in formulating a consensus by agreement. Successive chairmen have done this very well. I have been very happy to cooperate with them—with Mr. Turner of Canada, Mr. De Clercq of Belgium, and Mr. Healey of Britain. Each of them has done an excellent job.
Q. How do you see the contribution of the staff in the Fund?
A. The role of the staff is much more important than the role of the Managing Director. I couldn’t have done any of this without the support of the very good staff we have here. It is probably one of the most highly qualified staffs of any institution in this field. With this staff one is presented with a very clear analysis of the economic situation and economic problems both in individual countries and in the world economy in which these countries interact with each other. All negotiations with members are carried out by the staff. A staff mission of a few economists and a secretary can remain for weeks in a country where there are enormous tensions, very great problems, and where they are placed under enormous pressure by government officials because they know that much depends on the agreement with the Fund. In that situation, the staff members have to keep firm and to present the right mixture between an understanding of the country’s problems that involves flexibility in the choice of corrective measures and a persistence to get the adjustment measures that are necessary. I think this is really very crucial work. In general, I have admired the way Fund missions have performed this task in spite of the great physical and mental strain.
Q. You took office in 1973 in a turbulent period. What did you think would be the major problems facing you as you think back on them?
A. At that time the Fund was still in the midst of the monetary reform exercise and I thought that would be the major problem on which I would have to concentrate at least in the early days. I also thought that another important element of the work would be negotiations with member countries to overcome their balance of payments (BOP) difficulties.
Q. What aspects of your work at the Fund have given you the most satisfaction?
A. Different aspects of the work are interrelated and have all given me satisfaction, but the greatest satisfaction perhaps has been that we could follow world economic developments so closely here. Even with the great changes and disturbances that occurred, policies could be adjusted in such a way that difficult problems could be overcome. I found it very satisfactory that we could do this. Another aspect of the work has been in negotiating changes in policy with members, and finally reaching agreement. The diplomatic aspects of this side of the work in trying to reach agreement among different groups of countries has given me great satisfaction.
Q. Could you look back over the past five years and tell us your experience with the practical side of economic interdependence in terms of several ideas: first, the coordination of national policies?
A. We have to recognize that, although this task remains difficult, it must remain a very important part of the work of the Fund. Of course, we do a lot about it. We have consultations with all member countries, which we discuss in the Board; and we also have general discussion on the world economic outlook, which have some influence. Where there are big differences of view among major countries, however, it remains very difficult to coordinate policy. In fact, one can say that the present flexibility of exchange rates is necessary precisely because there is only very limited coordination of policies.
Q. Secondly, the control of international liquidity?
A. That, I think, remains one of the most difficult problems, and one where we have not made any progress. Indeed the situation has even deteriorated since I came to the Fund. The present situation, which combines inconvertibility of the dollar with the growing role of uncontrolled offshore money and capital markets, really means that there is practically no deliberate, international control of world liquidity. It is also evident that such control will be very difficult to achieve.
Q. Thirdly, the availability of balance of payments finance for deficit countries?
A. This has been a much more satisfactory aspect of the world economic situation in recent years. In this period we have had to face very large payments imbalances. First there was the oil price increase that led to the large surplus of oil exporting countries and the complementary deficits of oil importing countries. More recently, large disequilibria between the major industrial countries have developed. As a result, very large deficits have had to be financed. Here, of course, the growing Euromarkets and offshore financial markets have played a very useful role.
The Fund has also played a more important role than formerly in providing balance of payments assistance, first through the oil facility and later through the liberalization of the compensatory financing facility. I hope this role will continue in the future with the activation of the supplementary financing facility. Greatly expanded possibilities of providing finance for countries with BOP deficits have thus arisen. In some cases, in fact, the expansion may have been too much—a number of countries have been able to postpone adjustments of their deficits for too long a time. In such cases, the problems have become more serious and are forcing some countries to face very difficult policy choices.
Q. What were your aims in proposing the supplementary financing, or “Witteveen,” facility?
A. The proposal is related to what I have just been saying. Although in general many countries have made progress in adjusting to their balance of payments problems, some countries have postponed their adjustment effort. These countries have large and unsustainable deficits; the supplementary financing facility is meant to enable the Fund to assist these countries more effectively. By providing more financial assistance over a longer time period, it will make it easier for such countries to take the necessary measures. Nevertheless, in this facility we must recognize that the essential thing is for these adjustment measures to be taken, however politically difficult or unpopular they may be.
Q. How do you respond to the charge that this facility is essentially a mechanism for bailing out the commercial banks?
A. I think that is a mistaken criticism. We want to stimulate such countries to take measures to restore reasonable equilibrium in their economies and in their external accounts. That may, in time, also make it possible for them to repay outstanding loans; but our experience shows that they would also become eligible to borrow again from the banks—which they would not be able to do without the corrective measures. Suppose that countries with debt difficulties do not take corrective action and so are not able to repay the banks—I don’t think that situation would be to anyone’s advantage. Some people who talk about “bailing out” the banks create the impression that they hope that the banks would be faced with defaults! Again, I don’t think this would be a very good thing for their depositors or for the world economy.
Q. What are your views about the growth of the Eurocurrency markets?
A. Despite the help such markets have given to individual countries in financing their deficits, I’m afraid that in the future they could be a danger. Such a large source of international liquidity which is quite uncontrolled means that there is a gap in our defenses against inflation. That is a problem that gives me great concern.
Q. So, do you believe it necessary then to try to do something to control the growth?
A. I think it would be very desirable to develop some sort of control of these markets. I recognize that this is very difficult because it requires quite extensive cooperation between different monetary authorities in countries. But it seems to me that, just as in a domestic system, one can hardly control inflation without having some control of the money creation by the banking system, so, too, one must control world liquidity in order to influence world inflation. I think that governments will find out over time that, without any control of this growing and very important market, even their internal monetary policies will be weakened and undermined. And that important defense against inflation will become less and less effective.
Q. What essential steps need to be taken to make the SDR the principal reserve asset?
A. We certainly have a long way to go. In view of the very minimal quantity of SDRs that has been created until now, I think it must remain a long-term goal. However, one has difficulty in seeing a permanent monetary system based on the use of one individual currency as a reserve asset. It has certainly had its disadvantages. To move in that direction there is clearly a need to create more SDRs. But, if at the same time one doesn’t wish to create surplus liquidity, one must also aim to reduce increases in holdings of reserve currencies. The Fund staff have been doing a lot of research on this and they have been able to show, I think rather convincingly, that allocation of SDRs should, in most cases, reduce the need of countries to borrow in capital markets in order to maintain their reserves at a required level or to bring them up to a required level. Accordingly, one could expect an allocation of SDRs generally to lead to a substitution of SDRs for reserve currencies, especially dollars. Nevertheless, one cannot be certain that this will always happen.
In the future, one might also hope for an arrangement whereby SDRs would have to be used in a certain proportion with other reserve assets in settling international balances. In that way, they could really become the principal reserve asset without necessarily having to be the largest one. One could then, by determining internationally the amount of SDRs issued, have a great influence on the total amount of international liquidity. That’s the idea I suggested some time ago in my speech in Frankfurt. I still think it is a good idea but the world is not yet ready for it. It’s something for the future, however.
Q. Why have you paid so much attention to the problems of world economic recovery and BOP adjustment in your speeches?
A. This has been one of the major problems in the world economy during the last few years. We have passed through different phases of world disequilibrium. In 1974, the increase in oil prices and resulting BOP disequilibria pushed the world into a serious recession and the major concerns were clear: reducing inflation and bringing about satisfactory recovery in the world economy. We have learned since, I think, that these two things are related: that one has to reduce inflation if one wishes to achieve a healthy recovery of the world economy. In addition, economic recovery is related to BOP adjustment. So long as there are large BOP deficits, one cannot really expect economies to recover.
Q. Did the problems of the developing countries take more or less of your time than the problems of the industrial countries?
A. I think that’s very difficult to say, as I’ve never counted how many hours I’ve spent on one country or another. What I would say is that a very large part of my time was spent not on any particular group of countries but on the world economy as a whole—problems concerning the membership of the Fund as a whole. We don’t have credit facilities for any particular group of countries. All the Fund’s facilities are available for all member countries. I was of course very happy that, for example, the oil facility was extremely useful to the developing countries. A large number of these countries used that facility and it enabled them to face up to their problems. But industrial countries have also used our facilities. For example, negotiations with the United Kingdom and with other such countries with large deficits also took a good part of my time. Overall, my attention was probably fairly evenly divided among all members.
Q. How does protectionism impinge on the substance of the Fund’s work and how is the Fund able to affect the current trend toward protectionism?
A. This is a very serious danger. We encounter it in many of our negotiations with member countries about programs to take care of their BOP difficulties. Very often the alternative to a Fund program is to fall back on restrictions on imports. We feel that this is always a great disadvantage for the country imposing restrictions and for its trading partners, because it would reduce world trade and therefore impede our efforts to get satisfactory world economic recovery. An important element in many of these negotiations is to persuade such countries that a much better way of tackling their economic problems is to restore equilibrium—to reduce the growth of spending more than that of national income, and perhaps to adjust exchange rates so that these countries’ exports become more competitive in world markets and strengthen the balance of payments without creating unemployment. Such a policy alternative is much better both for the country itself and for the world community. Supporting such a policy has been an important element in many of our negotiations. In this way, I think, the Fund has been very helpful and effective in countering the tendency towards increased protectionism.
Q. Of course, it must be very difficult to persuade a country that it should act for the good of the world?
A. That’s why I say it’s also in the interest of the country itself. I have seen that restrictions very often seem the easy way out—whereas tax increases are always unpopular. Such a view is superficial because the restriction of imports creates scarcities and in that way pushes up prices. Moreover, it often creates very great opportunities for corruption among those who receive import licenses. Further, very often it affects production and employment adversely because no spare parts or new raw materials are available. I’ve seen so many cases of developing countries where one finds a lot of spare capacity just because spare parts or raw materials cannot be imported because they are restricted. Such a policy is really one of the major stumbling blocks to development. In fact, I remember one case that gave me great satisfaction, the case of India in 1974 after the oil prices were raised. India used to rely greatly on import restrictions. When I visited that country for the very first time, I helped persuade them to change that policy, to liberalize imports and to use the oil facility of the Fund to finance the increased purchases. Indian officials have moved in that direction and we are all very gratified to see that the development of India since that time has been much more favorable.
Q. How do you personally react to criticisms of the Fund and its programs in countries?
A. Let me say two things about that. On the one hand, of course, it is understandable that the Fund’s programs are criticized because in a situation where there is a large BOP deficit—which always involves national overspending—any measures taken to reduce that overspending are painful and unpopular. In that sense, one cannot expect anything but criticism of such a Fund program.
On the other hand, I do think that some of the criticism that is now being expressed is extremely shortsighted because the critics do not indicate any policy alternative. For example, I may read today in the paper about the situation in one member country where there are worries that Fund recommendations are leading to rioting in the streets. Such civil disturbances may then, perhaps, lead to the postponement of democratic elections. Our critics will then say, “All this is bad, so the Fund program is bad.” I think such criticism is dishonest unless it also indicates what the alternative should be. If the member does not adopt corrective measures, the international community would have to stand ready to finance that country’s BOP deficits indefinitely. I have not seen any indication from any one of the critics that there is any readiness to do that. If the international community is not willing to finance indefinitely such large BOP deficits, then the country has to adjust. As I said before, it would be much better if countries come to the Fund at an earlier stage when the deficit is not yet so serious; in that case, the adjustment measures need not be as draconian.
Q. You came to the Fund after you had been a professor of economics and also a government official. As you think back, has your experience led you to change your views about some of the international economic problems?
A. That is an interesting question. I do not think that I have had to change my economic views in any major way. Perhaps I have seen more clearly, as have a number of economists and politicians, that in many situations it may no longer be possible to increase employment by more government spending. To get a more healthy growth it may even be necessary to reduce government spending and to give more room to the private sector.
That is, I think, a feature that we have seen in a number of member countries, and at first sight it might seem to be a contradiction of Keynesian prescriptions. In reality, I think it is not. In the mixed economy, the private sector needs sufficient room to live, and to breathe, and to grow. That is a lesson that I have seen clearly.
Also, I’ve seen more clearly, although it involves no change in my views, problems created in many countries, and especially in developing countries, by policies that regulate prices and output in the economy too much in detail by controls. They don’t work very well, and they lead to inefficiencies, corruption, and so on. I have observed this in so many cases where our staff has had to recommend some liberalization because the costs of these controls were so clear. And in most cases where governments have moved in that direction we have seen that the economy works much better. This is just one of the reasons why I’ve found my stay at the Fund so worthwhile.
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