THERE ARE THREE CHIEF ECONOMIC EVILS—starvation and poverty in the third world, unemployment in the industrial countries (and, in consequence, in many other countries too), and price inflation in the industrial countries that has been so fast as to be socially unacceptable at home and to complicate immensely social and economic adjustment in much of the rest of the world. Some would argue that together these evils constitute unshakable evidence of the malfunctioning of the international economic system. But that was not the theme or conclusion of the discussions held under the auspices of the International Monetary Fund and the Overseas Development Institute at Windsor at the end of March 1985. The approach was different. The analysis concentrated on more particular and technical issues, not because the individuals concerned (or the organizations they worked for) ignored the major problems, or believed that they were beyond human intervention, but because the task was to consider international monetary adaptation. The concern was with the way that aspect of the general economic system worked, how it could be improved, and whether it had fundamental flaws that seemed to call for radical change.
Mohsin S. Khan, Peter J. Montiel, and Nadeem U. Haque
Most Developing countries at one time or another have faced the need for macroeconomic adjustment. Such a need typically arises when a country experiences a persisting imbalance between aggregate domestic demand and aggregate supply, reflected in a worsening of its external payments and an increase in inflation. While in certain cases external factors, such as an exogenous deterioration of the terms of trade or an increase in foreign interest rates, can be responsible for the emergence of the basic demand-supply imbalances, these imbalances can often be traced to inappropriate domestic policies that expand domestic demand too rapidly relative to the productive capacity of the economy. As long as adequate foreign financing is available, the relative expansion of domestic demand can be sustained for an extended period, albeit at the cost of a widening deficit in the current account of the balance of payments, a loss of international reserves, rising inflation, worsening international competitiveness, falling growth, and a heavier foreign debt burden. Eventually, however, the country would lose international creditworthiness, and as foreign credits ceased, adjustment would be necessary. This type of forced adjustment could prove to be very disruptive for the economy.
It is indeed my pleasure to welcome you to this seminar on Trade Policy Issues organized by the IMF Institute, headed by Patrick de Fontenay, and the Policy Development and Review Department of the Fund, headed by Jack Boorman. I am very pleased that you have been able to take time from your busy schedules to come to Washington for this seminar.
This paper provides a brief historical sketch of the evolution of the multilateral trading system since its creation, seeking to place the role of the Uruguay Round negotiations in that context, and a qualitative overview of some of the most salient points of the outcome of these negotiations.1 No economic evaluation of these results will be attempted here.