Discussion of Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1994
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System, Philippe Maystadt
I am pleased to have this opportunity to report to the Governors, in my capacity as Chairman of the Interim Committee, on the work of the Committee over the past twelve months. At its spring meeting on April 25, the Committee encouraged industrial countries to adjust macroeconomic policy to sustain the recovery with low inflation, while addressing decisively fiscal imbalances and proceeding with labor market reforms. The Committee also encouraged developing countries and countries in transition to pursue strong adjustment programs supported by adequate financial assistance. Finally, the Committee requested the Executive Board to continue to work on an SDR allocation and on strengthening Fund surveillance with a view to reporting back on these issues at its meeting in Madrid.
At its meeting on October 2, the Committee focused on recent developments in the world economy and also devoted considerable attention to the evolving role of the Fund, to strengthening the Fund’s ability to provide financial assistance to member countries, and to the Committee’s future role. The issues before the Committee have been well covered in the communiqué, and I shall, therefore, limit myself to commenting briefly on the main items.
In its discussions on the world economic outlook, the Committee welcomed the substantive progress under the cooperative growth strategy set out in its Declaration of April 1993. The encouraging developments in the world economy noted a year ago have continued, and world economic activity has strengthened and broadened. Indeed, the immediate prospects for economic growth in the world economy are better than they have been at any time in this decade. The outlook improved significantly in the industrial countries, and the encouraging success stories of many developing countries and among the economies in transition illustrate forcefully the benefits of early and determined adjustment and reform. Thanks to steadfast progress in macroeconomic stabilization and structural reform, many developing countries are experiencing continued robust growth. Likewise, in Eastern Europe, the process of transition to market-oriented economies has advanced furthest where firm macroeconomic discipline has been accompanied by far-reaching structural measures.
Nonetheless, Committee members agreed that there is no room for complacency. Public debt and fiscal deficits, as well as unemployment in many industrial countries, remain high, hampering their growth and threatening the sustainability of global expansion. At the same time, a number of developing countries have shown a disappointing economic performance while living standards continue to stagnate or even to decline. Also, in many transition countries, particularly several of the former Soviet Union, the declining trend of output has not been reversed. Against this background, and in view of the importance of tackling decisively the serious policy challenges that lie ahead, the Committee adopted a Declaration on Cooperation to Strengthen the Global Expansion. The key elements of the adopted strategy can be summarized as follows: industrial countries must use the current upswing wisely. The stronger economic outlook provides an opportunity for these countries to take forceful actions so as to achieve durable growth with low inflation, shrink deficits further, and find ways of overcoming unemployment. To that end, the Committee attached particular importance to the following three elements of a common strategy:
Structural impediments to sustained growth and employment should be eliminated. In particular, problems of long-term unemployment and lack of jobs for young and unskilled persons should be addressed by efforts to improve education and training and by fundamental labor market reforms to reduce disincentives to employment.
Fiscal deficits should be reduced in 1995 and beyond as part of medium-term fiscal consolidation efforts to significantly reduce fiscal deficits beyond the effects of cyclical recovery and cut debt to GDP ratios, thereby facilitating lower real interest rates.
Monetary authorities should stand ready to adjust policies so as to avoid a reemergence of inflationary pressures.
The Committee will review progress in implementing this common strategy at its spring 1995 meeting.
Developing countries and economies in transition that have not yet embarked on bold strategies for adjustment and growth must do so. As a number of Committee members have noted, the strength of countries’ policies is the key to success in attracting external assistance. In addition to the provision of adequate and timely financial support by the international community, these efforts would need to be supported by a global environment characterized by improved access to industrial country markets and timely financial support on appropriate terms, including a flexible approach to official bilateral debt reduction for low-income countries. Recognizing the special needs and problems of countries emerging from economic and political disruption and also of the poorest, most indebted countries, the Committee has requested the Executive Board to examine proposals in these areas.
The prospective entry into force of the Uruguay Round agreements will contribute significantly to an improved climate for global economic growth by fostering competition, more flexible markets, and an expansion of trade. The Committee looks forward to close cooperation with the proposed World Trade Organization. In that context, the Committee called on members to ratify the Uruguay Round agreements without delay and to implement measures to sustain the impetus of progress toward liberal trade and payments.
In view of the importance the Committee attaches to the ongoing effort to enhance the Fund’s role in the international monetary system and its ability to serve its member countries, the Committee has also requested the Executive Board to pursue its work on strengthening Fund surveillance, as the central element of the Fund’s contribution to better economic policies and more effective cooperation, and to continue its work on capital markets.
Finally, the Committee has considered measures for strengthening the role of the Fund and its ability to provide financial assistance to member countries. The Committee has so far not reached a final view on all of the issues on which it had requested the Executive Board to submit its recommendations. On access, the Committee asked the Executive Board to consider a proposal for a temporary increase in annual access limits with a view to its early adoption. It also had a broad-ranging exchange of views on a proposal for an extension of the systemic transformation facility with increased access, as well as on proposals for an allocation of special drawing rights (SDRs). This exchange of views has shown that more reflection is needed before a general agreement on all modalities of the proposals can be achieved. The Committee has, therefore, asked me to conduct further consultations and to call a meeting of the Committee when it appears that the prospects for resolving these issues are favorable.
Let me just add a few personal comments to correct the excessive tone of some headlines that I have seen in the press:
It is not the end of the IMF because we did not yet agree on the modalities of a new allocation of SDRs; we have not reached such an agreement over the past thirteen years and the IMF is still alive and well.
It is not a clash between North and South, as many industrial countries are in favor of a general allocation of SDRs under the present Articles.
It is not the death of the SDR as a reserve asset, since every member agrees that there should be an allocation of SDRs, even if so far we have not yet agreed on its size and its modalities.
I am confident that the cooperative spirit which has enabled us to agree on so many issues in recent years will once again prevail and will allow us to resolve the remaining difficulties in the next months.
Statement by the Governor of the Fund for China—Zhu Rongji
I am glad to be in the beautiful city of Madrid to attend the 1994 IMF and World Bank Annual Meetings. I wish to thank our host, the Spanish Government, for its thoughtful arrangements. I also wish, Mr. Chairman, the Annual Meetings complete success under your guidance. Today, 179 members throughout the world, including our new member, Eritrea, are all gathering here. This reminds me of a Tang Dynasty poem written more than one thousand years ago. It says, “We are friends even if we come from all over the world. We are neighbors even if we are far apart.”
Fifty years ago, when the Bretton Woods institutions came into being, the world was still at war. Though profound changes have taken place over these years, peace and development remain the two major pressing tasks facing the international community. Maintenance of world peace calls for concerted efforts, active participation, peaceful coexistence, and mutual respect by all nations. And development of the world economy requires close cooperation between industrial and developing countries. The economic growth of the developing world is indispensable for that of industrial countries. The industrial countries should help to create a more favorable environment for the developing countries.
The Chinese Government has all along maintained that in international affairs, all nations, large or small, strong or weak, should be treated equally and should have the right to choose a social system and mode of development suited to their national conditions. In trade and economic cooperation, the principle of equality and mutual benefit should be observed and nobody should attach any political strings to that. Otherwise, we would not be able to obtain common development and prosperity.
Over the past fifty years, the International Monetary Fund and the World Bank have played a positive role in postwar economic reconstruction, alleviating the debt crisis, and providing development funds. The admission of a large number of countries into these two institutions since the beginning of the 1990s has both increased their universality and presented greater challenges. To meet these challenges, they will have to strengthen their role in promoting economic cooperation and development. At the same time, they should strictly observe the codes of conduct as contained in their Articles of Agreement and adopt a fair and objective approach to the needs of their members. We hope that the position of the developing countries in the Fund will be enhanced to reflect their actual economic strength. On the SDR allocation, industrial countries should adopt a cooperative attitude to help bring about a satisfactory solution to this issue at an early date. The World Bank, as a multilateral development institution, should be charged with the task of promoting economic development. Nobody should ask it to interfere with the policymaking of sovereign states or fulfill the functions of other international organizations. We welcome the “client-orientation” principle proposed by the Bank and hope that it will pay more attention to the practical needs of the low-income countries in their reform and development. In addition, we hope that the Bank will ensure a steady increase in loans while paying attention to the quality of projects. In other words, it should provide developing countries with more development aid.
Since the introduction of the policy of reform and opening up, China has undergone profound social and economic changes. It has enjoyed continued economic growth and a steady improvement in people’s living standards. So this policy is now irreversible, for it enjoys immense popular support. China’s reform has distinctive Chinese features. Given the size of its population and territory, and uneven development, drastic changes are not good for China. Therefore, we can only push ahead with reform and opening up in a gradual and mild manner. We have never failed to pay close attention to the interactions between reform, development, and stability, and handle them properly.
The reform and opening up of the past decade and more have brought about profound changes to China’s economic structure. The old structure is now giving way to a new one. Since the beginning of this year, we have taken a decisive step in our efforts to establish a socialist market economy. We have successfully introduced, as planned, a series of reform measures in the fiscal, taxation, banking, foreign exchange, foreign trade, and investment control mechanisms. Those include the institution of a revenue-sharing system; a turnover tax system with the value-added tax as the main tax; a strengthened role for the central bank; an interbank exchange market with unification of exchange rates; and simplified and transparent foreign trade management. We have also experimented with a modern management system for the state-owned enterprises. These measures will help to achieve sustained, rapid, and healthy economic development and a solid foundation for expanding reform and opening up.
Since mid-1993, we have adopted a series of macroeconomic adjustment measures to cope with the problems arising from the process of rapid economic development. As a result, problems of certain overheating have been addressed. Our economy, which has slowed down a bit, has continued to grow at a fairly high rate. The money supply has been brought under effective control. Market exchange rates have remained stable on the whole. Our foreign exchange reserve has noticeably increased. The macroeconomic control measures and new reform policies we have introduced since last year have proved to be successful. On the other hand, in the process of reform and development, we still face some difficulties and problems. For instance, there is a big gap in the economic development level between the coastal and inland areas. There are more than 80 million people who still lack sufficient food and clothing. Prices have risen too fast. In the past, the inflation rate was about 5 percent and last year it rose to 13 percent. This year the annualized rate is expected to be over 15 percent. This is due partly to the irrational investment size and excessive money supply in the first half of last year, but mainly to the structural price reform. We have lifted price controls over energy, raw materials, and agricultural products. In fact, this is unavoidable for any country which opts for a market economy through reform. The price index will go down after the unavoidable painful stage. The Chinese Government has full confidence in its ability to solve all those problems.
In the past fifteen years since the adoption of the opening up policy, our economy has grown by 9.3 percent a year on average. The annual growth rate was 13 percent for the past two years in a row and is expected to exceed 10 percent this year. It is expected to maintain an average annual growth rate of 8 to 9 percent for the coming years up to 2000. China formally applied for reentry into the General Agreement on Tariffs and Trade (GATT) as a contracting party in 1986. Since then, we have taken a series of major reform measures to converge with the international trade and economic norms as established by the GATT. These include streamlining our trade system, substantially reducing the tariff level, introducing a single exchange rate and conditional convertibility of the Chinese currency under the current account, and gradually opening up our domestic service sector. Now, China’s economic and trade system is, generally speaking, in keeping with GATT requirements. Therefore, China’s reentry should not be delayed. For this will not only benefit China, but also the entire world. The GATT and the World Trade Organization (WTO) cannot be considered universal if China is kept outside.
China cannot develop its economy in isolation from the world economy. The world economy can only benefit from the development and prosperity of the Chinese economy. China is ready to further develop its economic and technological cooperation and exchanges with the rest of the world. It is also looking forward to increased cooperation with the IMF and the World Bank. As a member of the international community, China will, as always, make its contribution to world peace and development.
Finally, I would like to take this opportunity to express my thanks to my colleagues here as well and to the IMF and the World Bank for supporting the proposal to hold the 1997 Annual Meetings in Hong Kong. The Chinese Government will, as the host, welcome you to a stable and prosperous Hong Kong for the Annual Meetings. Welcome to China, and see you in Hong Kong.
Statement by the Governor of the Fund for Germany—Hans Tietmeyer
As the Governor for Germany, I, first of all, should like to welcome Eritrea as a new member of our institutions. I should also like to sincerely thank our Spanish hosts for having organized this year’s meeting and for their warm hospitality. This is a very special year. The Bretton Woods institutions are celebrating their fiftieth anniversary, and, following the accession of numerous countries in the past few years, they have become truly global institutions. At the same time, and notwithstanding many difficulties, the transformation process in the Central and Eastern European countries is making increasing progress, accompanied by growing economic and political cooperation with the countries of the European Union. And, almost fifty years after the end of World War II, my own country was able to crown its peaceful reunification with a series of steps that have placed its relations with the countries of the former Soviet Union on a basis of reconciliation, good neighbor policy, trust, and cordial cooperation.
The German economy is currently again on an upward course. The pace of economic growth quickened perceptibly in the first half of 1994; industrial capacity utilization is gradually approaching its multiyear average. While private consumption—in line with expectations—has slackened of late, exports, industrial investment, and residential construction are all providing powerful stimuli. By now, all earlier growth forecasts for Germany have had to be revised upward—including those of the current World Economic Outlook. It is now apparent that the wide-ranging efforts of the past few years aimed at improving Germany’s international competitiveness are beginning to bear fruit. Similarly, our monetary policy, geared as it is to the medium term and to the maintenance of price stability, likewise appears to be yielding the expected rewards. It proves that we were well advised to adhere firmly to this course, despite proposals and calls from both within Germany and abroad to modify it. It is now important to make wise use of the recovery, as the Managing Director put it, in order to avoid a revival of inflationary pressures and to secure the foundations for a sustainable process of economic growth and the reduction of unemployment.
Above-average growth rates are now being achieved in eastern Germany; there, the national product is currently expanding by about 9 percent, with industrial output alone rising by over 20 percent. These rates of growth naturally need to be seen in the context of the low base level that was the result of the painful, but largely unavoidable, restructuring process of the economy in eastern Germany. But it is now manifest that the transformation efforts and the massive transfer of resources from western to eastern Germany are increasingly having an impact. The infrastructure is improving discernibly; construction activity is changing the face of the land daily; new patterns in the services sector have already emerged; and a future-oriented industrial structure is beginning to take shape.
German fiscal policy is now focused primarily on fostering growth and employment by consolidating public sector budgets and, at the same time, containing the burden of taxes and other public levies. Perceptible advances have already been made in reducing the overall public sector deficit. The IMF estimates the progress made toward consolidation between 1991 and 1994 at about 4.5 percent of GDP, or roughly DM 130 billion. Germany has thus embarked on a course that, given the enormous deficits in the wake of reunification, is urgently called for. Despite the onerous burden resulting from reunification, it is likely that Germany will trim the public sector deficit to below 3 percent of GDP already this year. The draft budget for 1995 implies a continuation of this consolidation effort at the federal government level. Federal spending is budgeted to grow by not more than 1 percent in nominal terms; and the deficit is to be lower than in 1994.
To date, German monetary policy has succeeded in performing the increasingly difficult balancing act of progressively lowering the rate of inflation while providing room for expansionary forces. The Bundesbank has lowered its interest rates significantly in several steps. By holding money market terms and conditions steady, we endeavored to counter the volatility of the international financial markets throughout the summer. Meanwhile, the expansion of the money stock—which was inflated at the beginning of the year by special factors—has likewise decelerated markedly. Nevertheless, the provision of liquidity to the business community remains relatively generous. Overall, we regard our monetary policy at present as being consistent with both internal and external requirements—a view endorsed by the World Economic Outlook. But we shall, of course, continue to review regularly the adequacy of our monetary stance. The inflation rate has fallen significantly. At about 3 percent, it is, however, still too high. Notwithstanding the rising prices of raw materials, we hope to see a further moderation of inflationary pressures within the next few months.
Despite these favorable developments, much remains to be done. Although the cyclical recovery, as it gathers pace, is expected to generate more jobs, we continue to view structural unemployment with great concern. Through its “Program of Action to Promote Growth and Employment,” the Federal Government has already sought to improve the underlying conditions for job-creating investment. There are good prospects that—through the further dismantling of structural rigidities, pay settlements that foster employment prospects, and the continuation of fiscal policy consolidation—unemployment, too, can be reduced appreciably in the years ahead. This, however, requires patience. It would be a mistake to attempt to promote growth and employment at this juncture through a strategy of intensified monetary policy relaxation. A liquidity glut is no solution to the problem of a shortage of investment capital. It would not only create a new potential for inflation but would also lead to a less-than-optimal allocation of scarce resources. The experience of several other countries in the 1980s highlighted the problems and the high economic costs caused by “financial bubbles.” German monetary policy will continue to be set so as to prevent the emergence of such adverse developments in the future.
We in Germany believe that, by our strategy and its results, we are making a constructive contribution to the course of economic activity in Europe and beyond. We welcome the latest cyclical recovery in many countries of Western Europe; and we are particularly pleased to note the progress that some Central and Eastern European countries have managed to make. We hope that those countries engaged in the transformation process that have made only unsatisfactory progress so far will increasingly follow the examples of resolute and consistent anti-inflationary and reform policies, and thus enhance the basic requirements for achieving stable growth in their economies. Stable macroeconomic conditions, along with the necessary institutional and structural reforms, are the best precondition for creating an investment climate that is conducive to mobilizing domestic savings and facilitating the inflow of foreign capital. The Russian Government deserves our recognition for its intention to stick to an anti-inflationary policy stance despite the very difficult economic and political situation. The process of reform on which Russia and the other countries in transition have embarked continues to require the backing of the international community.
Germany has so far contributed more than any other country to support the reform process in Eastern Europe. It will continue to do everything in its power to assist its neighbors and partners by both word and deed, both bilaterally and multilaterally. To us, this is a matter not only of practical solidarity but also of enlightened self-interest. Geography and the consequences of cross-border integration, as well as the lessons of history, all teach us that Europe is a community of states destined to stick together. However, this community must not and cannot be sufficient unto itself. As one of the pillars of a multipolar world, Europe must not be a “closed shop.” On the contrary, it will have to remain a constructive and reliable partner in competition and in cooperation worldwide.
It is particularly heartening to note that outside Europe, too, efforts toward achieving stability and reform are displaying ever-greater success, resulting in positive growth, lower inflation, and more sustainable balance of payments positions. However, performance has remained unsatisfactory in those countries where the resolve to take vigorous steps toward stabilization and reform is lacking. Such problems cannot be resolved simply by external financing. Moreover, those countries that, as a consequence of successful policies, are again recording high net capital imports should ensure that resources are put to productive use in order to avoid renewed debt problems. Only in this way can external financial support be of real assistance.
Irrespective of regional disparities, however, the world economy as a whole appears to be on the right track once again. Nevertheless, it would be both premature and incorrect to believe that we are already “out of the woods.” Manifold efforts must continue to be made in order to consolidate what has been achieved so far, to make good on previous shortcomings, and to stay the course that has been recognized as the right one. For one thing, it is of utmost importance for the global economy that the agreements of the Uruguay Round are expeditiously and resolutely implemented. For another, both national and international action is necessary to achieve better equilibrium between national savings and investment.
Given the rising global need for investment and the low level of net capital exports by the countries of the Organization for Economic Cooperation and Development (OECD), a sustained strengthening of domestic savings is a prerequisite for lasting and noninflationary growth in our economies, particularly in countries with high current account deficits. The low—and still falling—global saving ratios are a disturbing signal, giving grounds for reflecting on their causes and longer-term consequences. We feel that a determined correction of the worrying trend of public finance in many countries is of utmost importance. The crowding out effect of high and, in some cases, still rising budget deficits curbs the potential for private investment, which is crucial to real growth, and is undoubtedly one of the principal factors responsible for the worldwide increase in long-term interest rates.
Thus, apart from the unswerving adherence to a monetary policy strategy geared to stability, one of the main messages emerging from this year’s meetings in Madrid should be the need to focus our efforts over the next few years on a lasting reduction of the structural component of public sector deficits. Only by redressing the public sector’s excessive demand for capital can the financial conditions for private investment be lastingly improved, thus providing prospects for higher levels of employment.
Finally, on future international cooperation—its scope and limitations—it is essential to bear in mind that it takes place in a setting of largely liberalized and integrated markets. Whether we like it or not, this setting is working as a constraint on national policy in two respects. For one, any departure from anti-inflationary policy, as well as losses of credibility, is punished today more rapidly and more harshly than in the past. At the same time, markets tend to react with increasing volatility to major divergencies in both financial policies and actual developments among countries. Such market reactions, as demonstrated not least by our German experience, often affect negatively even those countries pursuing sound economic policies. This situation is unlikely to change in the future. All attempts to turn back the tide of liberalization are doomed to fail.
Hence, there is only one promising approach: on the national level, persistent efforts at strengthening the conditions for growth and employment on the basis of credible and stringent noninflationary financial policies; and on the international scale, as much policy cooperation as possible, although with strict adherence to the precept of stability. As experience shows, nonobservance of this precept is counterproductive as it encourages the misallocation of scarce resources, undermines monetary stability, curbs governments’ room for maneuver, and thus, ultimately, endangers the social and political stability of our societies. This basic approach also shapes our view of the Bretton Woods institutions and their future role. In a world of growing economic and financial integration, institutions such as the IMF and the World Bank Group are clearly indispensable. In the future, they will be rather more important than in the past.
However, their future impact and relevance will depend in particular on the following conditions. On the one hand, the IMF and the World Bank must tackle those tasks—within the tried-and-tested framework of division of labor and cooperation—which they can master under their respective mandates and in keeping with the need for stability. On the other hand, they must resist the temptation to take on tasks that they cannot master, and the pursuit of which would be detrimental to their proper objectives. In our view, all proposals and recommendations on the future role of the IMF and the World Bank should be assessed against those criteria. Specifically, we would suggest the following:
The IMF is a monetary institution. It should, therefore, concentrate primarily on solving monetary problems so as to promote a stable international monetary system and thereby pave the way for growth and employment. Growth and employment should not be mistakenly advocated as goals of the Fund in their own right.
The stability-oriented conditionality of IMF credit arrangements, while it should be applied with due flexibility, is indispensable and should—whenever appropriate—be strengthened. It is a precondition not only for successful stabilization and reform but also for the continued financial integrity of the Fund and thus its viability.
We basically welcome all realistic efforts within the Fund at strengthening monetary cooperation. However, there are limits to such efforts where they would be inconsistent with a strict and persistent noninflationary policy orientation. This applies in particular to proposals to introduce “formalized” exchange rate arrangements for the world’s major currencies. The different structures and traditions in a multipolar world cannot be smoothed out simply by pegging or targeting exchange rates.
Inadequate stabilization and reform, and the associated shortcomings in policies and performance, cannot and must not be compensated for by the artificial creation of liquidity. In particular, it cannot be used to make up for insufficient savings. A general allocation of SDRs is, therefore, not a solution for this problem. On the contrary, it could negatively influence inflationary expectations in international financial markets, since the only relevant criterion, “long-term global need,” is not met under present circumstances. However, we consider it desirable and—in terms of monetary stability—justifiable to ensure by means of a onetime special allocation that, above all, the new members of the Fund can participate adequately in the SDR system. We hope an agreement will be reached soon.
In the case of the World Bank, too, this anniversary year is a good occasion to take stock and set the stage for the coming years. All the parties involved—the member states as well as the Bank itself—are called upon to consider how they can meet, even better than in the past, the continued challenges of combating poverty and improving living standards. In this context, it is gratifying to note that the shortcomings listed in the Wapenhans Report are now to be rectified. The Bretton Woods Commission has also contributed useful ideas on the future mission of the World Bank Group and its governance. Of central importance in this respect will be the need to strengthen the role of the private sector in the process of economic development. The World Bank Group, too, will have to play a leading role in supporting the economies in transition without, at the same time, reducing its efforts to assist the traditional developing countries. Moreover, the Bank Group will have to devote particular attention to the poorest countries also in the coming years.
Germany will remain a reliable and dependable partner of the international community in the future. Within the framework of international cooperation, my country is willing to face the new challenges and to make a constructive contribution to the resolution of international economic and monetary problems. The same holds true for our attitude toward the future role of the Bretton Woods institutions: freedom and welfare must be the objectives, cooperation and integration the instruments, and realism and financial stability the basis of our policies. We are convinced that, through this policy of continuity, consistency, and credibility, we are making the best possible contribution to the wellbeing not only of our own country but also of Europe and the global community of nations at large.
Statement by the Governor of the Fund and the Bank for the United States—Lloyd M. Bentsen
When the Bretton Woods institutions were organized half a century ago, the job was to rebuild a ravaged Europe and ensure order in the global economy. The challenges were clear and precise. It was the tallest economic order in modern times. The institutions did the job and did it well. Half a century ago, we were concerned with just under a quarter of the world’s economy. Today, the developing world and the nations in transition account for nearly half the global economy. The price of failure is just as high, if not higher than it was at the beginning. But likewise, the benefits of success have never been higher. The challenge is development and transition, to broaden prosperity in every nation, and to create jobs in the industrial world. This must be a continuing process. The job evolves over time. We must often stop and look at where we are, and where we are going.
I would like first today to take stock of where we are as far as the United States is concerned and as far as the world is concerned. In the twenty months since the Clinton Administration took office, the lines on the growth charts have turned upward. They had been going down or were just plain flat, but now they are up. I was pleased at the report the Managing Director gave us about the prospects for global growth in the next few years.
When this Administration started out, long-term interest rates were at their highest point in years. We fixed that. We jump-started the economy with the deficit reduction package, and the rates fell significantly. Now they are lower than they have been historically at this point in the business cycle. As recently as 1990, our inflation rate was 6 percent. Today, it is less than 3 percent, and that is a real accomplishment when you add more than 4 million jobs. Twenty months ago, unemployment was 7.7 percent in the United States. Today it is 6.1 percent. Investment is higher—by about 25 percent—over what it was in the last quarter of 1992. And productivity continues to rise.
The budget deficit is coming down, faster than we expected. Next year we will have halved our deficit as a percentage of GDP, and it is now the lowest in the Group of Seven in terms of GDP. The North American Free Trade Agreement (NAFTA) has generated enough new export business for the United States in just six months to support up to 100,000 new jobs in our economy. The numbers for our economy could not be any better if I wrote them in myself. The three-part strategy of reducing our own budget deficit, and encouraging interest rate reductions in Europe and an increase in demand and tax changes in Japan, is clearly working. European economies are beginning to grow. Germany could see as much as 2 percent growth this year, heading up toward 3 percent next year. Europe as a whole should reach that rate by next year. Japan is turning around. The IMF believes the growth there could be 1.5 percent next year.
The world economy is in better shape now than it has been in years. Look at Latin America, where capital flight has been reversed and investment flows are strong. We have an important opportunity here for a second generation of reforms, greater educational opportunities, and progress with social programs. In Asia the growth rates are astounding—double digits in China last year, and 9 percent in Malaysia. I saw the scope of the change when I had the opportunity to visit in January. The infrastructure needs are immense—$1 trillion in the next decade. The spread of market principles in these two regions—Asia and Latin America—has served them well. Africa, however, has serious problems—too little growth, too much poverty. It is critical that we continue to focus on this tremendous challenge. In Naples, we agreed to do more about Africa’s debt problem, and the eleventh replenishment of the International Development Association offers the chance to make a bigger contribution to African growth.
On the whole, the global economy is on sound footing. I would point out, however, that at our Group of Seven meeting the ministers and governors had some concerns about the rise in real long-term interest rates. To some extent that is caused by the increasing gap between what is being saved and what is being invested. There is a growing demand for investment capital, and we asked the Group of Ten to examine the issue. One sure way to help sustain the growth that is occurring is to broaden and deepen our trading relationships. The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) must be implemented. In the United States, I expect we will have it up and running at the start of the year.
Global trade has more than doubled in the past decade, and tripled in the past fifteen years. It is an increasingly potent force in national and global growth. Coupled with the development and transitional assistance of the Bank and the IMF, trade will assume an ever more important role in sustaining growth and encouraging development. For most developing countries, trade is more important than aid. It is estimated that the income gain from the Uruguay Round could be as much as $80 billion a year in the developing world when the agreement is fully implemented. Trade is not the only avenue to solidify growth and bring prosperity. The international financial institutions will also make an important difference. And while the Bank and IMF met the challenges of their first half century, now it is time to change.
One of the most pressing needs is to deal with the issue of economies in transition—from Central Europe to Russia and Ukraine. And the challenge is for the IMF to maximize the economic reform it can support. The IMF has helped Russia and the other transition economies take the painful steps of reform and begin rebuilding their economies. The policy we have long advocated—support measured with the pace of reform—is working. Progress in Russia has been real. Inflation is down—in single digits per month now. Wages are up. Capital flight is ending. Half the GDP comes from the private sector. And real interest rates are positive. I complimented President Yeltsin last week on the change. I want to add a cautionary note. The present situation in Russia concerns me. I cannot tell how it will turn out. But one thing is clear: to avoid slipping backwards, Russia must take a bold step forward. That bold step can stabilize the economy, create modern institutions that work, and bring Russia into the world economy. The success of completing transitions—as is being done in Poland, the Czech Republic, and elsewhere—is up to Russia and the other nations making this historic conversion. It is not up to the United States, not the Group of Seven, and not the IMF. In Russia, a bold stabilization effort is needed to quickly reduce the remaining inflation. A tough budget-cutting program can end this printing of money and allow the delivery of the support pledged at Naples. And pegging the ruble in their foreign exchange market—in the context of a strong program—would permit mobilization of a $6 billion currency stabilization fund.
I want to say just a word about the issue of special drawing rights (SDRs). There is a better understanding of the issue after the past few days. I want to say that we will continue to support an allocation of SDRs that reflects the need to integrate transition economies into the world economy. But any approach that is taken must be consistent with the monetary realities of today. It is a difficult issue, but it is a must that we find an approach that works. I believe we should also extend the systemic transformation facility. The final point I would like to make regarding the IMF is to note that sustained growth in the global economy is important to the prospects for the developing nations, the transition economies, and the industrial world as well. Within the Group of Seven, finance ministers have committed themselves to strengthen the policy coordination efforts. We have also decided to involve the central banks more deeply in the Group of Seven process and endorsed an important role for the Group of Ten in the cooperative effort to monitor global capital markets.
The IMF can play an important role in our endeavors, by acting as an early warning radar for problems on the horizon. And wider dissemination of its policy analysis and advice can be a valuable tool in the Fund’s surveillance and consultative efforts. The IMF has its work cut out for it. And so does the World Bank. The developing world is changing, and the challenge is changing. Emerging markets are taking on new importance. Like any enterprise, the Bank must be customer oriented.
The Bank has begun to change, with more open loan policies, greater participation for those who benefit from the Bank’s lending, and with a stronger commitment to improved resettlement practices. And there is a more systematic focus on the environment, which I know President Clinton and Vice President Gore support, as well as a greater focus on conserving global resources. I am also pleased at the commitment to increase lending for social programs and to strengthen the emphasis on women in development. Ground-breaking work done by the Bank itself suggests that no development investment provides greater returns than investing in education for young women. For too long in many developing countries, the emphasis has been on education for men only, when the payoff for educating women can be extremely large.
On the administrative side, the commitment to change has been substantial, particularly the budget reductions. I know about that at my own department. I have more than 8,000 fewer employees today than I did twenty months ago. The question now is: where to from here for the institutions? With productivity and prosperity so linked to the fundamentals of health, education, and population control, what more is necessary?
First, it is critical that the new attention being focused on the individual must be strengthened. Bank programs must put people first. It is easy to build a dam, or pave a road, or dredge a harbor. It is far more difficult—and in the long run every bit as important—to educate a generation, particularly young women, and to see that health care is available. It is imperative that the Bank make better use of the private sector and its power as a force in development. There should be a greater emphasis on microenterprises. And working development from the bottom up, not the top down, is what we need now. And we need more people on the ground, at the scene—more hands-on, less direction from a distance. The change so far has been good, but there is much farther to go.
We are coming up now on the eleventh replenishment of the International Development Association (IDA), and there are several points I want to make about that. First, IDA is an important vehicle for advancing the concept of putting people first. Second, this replenishment should result in considerable attention to jump-starting growth in Africa. Third, its lending should be used to accelerate the attention paid to the environment, as well as the private sector. In addition, I want to note that the United States has now stepped up and met this year’s obligation to the multilateral development banks. And this Administration has taken a first step toward paying down what we owe. It is a sign of our commitment to lead the way in a new economic era.
What has been done to date is clearly demonstrable progress in transforming these institutions. But we must look well into the future. We must think creatively about what has worked well, and what has not. That is what the Group of Seven leaders had in mind when they pledged to examine the architecture of the institutions in Halifax—develop a clearer vision of what it will take to ensure the spread of development and the spread and strengthening of prosperity. I am pleased, too, that a task force of the Development Committee will be looking at the operations of the development banks.
There are two other points I want to make in closing, both with an eye on our discussions next year at Halifax on the architecture of our institutions in the coming years. The global economic architecture does not need to be rebuilt, but after fifty years it is time for a renovation.
The first point is that we must explore innovative ways to more effectively mobilize the existing resources of the international financial institutions. We must find additional ways to respond to the special needs of countries making their way out of economic and political disruption—such as South Africa and the Middle East—as well as the needs of the poorest and most indebted countries. Simply waving a wand over an economic disaster or a load of crushing debt and saying “free market system” will not itself solve the problem. There are special cases which deserve special attention. And second, the growing integration of our capital markets, the rise of newly freed markets in emerging economies, and the evolution of markets in mature economies offer the prospect of greater efficiency in mobilizing savings and investment.
This growing economic and financial integration means that the actions of one nation or region, or events in one nation or region, are increasingly likely to affect the economic health of a neighbor or a neighboring region—or the world as a whole for that matter. Depleted fisheries affect everyone. A financial market problem can ricochet through the global economy in seconds through a fiber optic cable. Simple human errors such as transposing a digit or dropping a decimal make a bigger difference these days. But that also creates the need for oversight to understand market practices and the potential for market forces to influence economic events. The leaders at the Group of Seven summit in Naples encouraged greater cooperation among their appropriate authorities. While a great deal of the work needs to be done on a national basis, the Group of Ten is well placed to make a contribution, as is the Fund itself.
After World War I, the world did not consider the changes that brought the conflict, and in so doing brought us to World War II. It took Bretton Woods and the Marshall Plan to put the world back on its feet, and the result was a half century of increasing growth and prosperity. In Naples, we recognized the responsibility that the global economic leadership has to the economy of the next century. The heads of state agreed that the international economic architecture that will affect so much of the post-cold war economy must be reviewed. The process has begun. The result must be one that advances the shared goal of growth, increasing and broader prosperity, and jobs. There is far too much at stake here for every nation—developed and developing—to let these issues lie unattended.
Statement by the Governor of the Fund and the Bank for Malaysia—Dato’ Seri Anwar Ibrahim
Our meeting this year marks a watershed in the history of the Bretton Woods institutions—the IMF and the World Bank. Its significance is not because it coincides with their fiftieth anniversary, but more importantly because we are now living in a period altered radically from that when these institutions were conceived. The voices calling for the reform of these institutions must be supported to enable it to “embrace the future.” We must rise to the challenge of the unprecedented consensus in world opinion toward economic growth. Never before have countries and societies with all shades of political opinion come to agree upon the primacy and necessity of growth to ensure the prosperity and the just distribution of economic wealth. Both institutions must actively forge a stable international economic environment that is conducive to growth and sustainable development. The World Bank must enhance its fundamental objective of helping borrowers reduce poverty and pursue broad-based growth. We have witnessed vast improvements in the lives of the people in the world. However, in developing countries, mass poverty and rampant destitution and widening inequalities remain the greatest challenge to the global conscience.
The World Bank and the IMF are indeed powerful agents for change both in social and economic spheres. We all concur in the basic proposition that macroeconomic stabilization and restructuring are necessary measures for growth; and development should result in and be accompanied by the realization of humanitarian ideals—which include the enlargement of freedom, accountability in the public sphere, justice in distribution, and the elimination of all forms of oppression. Nevertheless, no matter how passionate our belief in these ideals may be, we must guard ourselves against trying to impose them on others with varying and complex circumstances. It is true that poverty eradication and economic reforms are to some extent contingent upon political order, and their effectiveness requires a comprehensive approach. However, we must have a sense of priority. If we can achieve poverty eradication, economic stabilization, and political reform all at the same time, that path should be pursued. Otherwise our conscience dictates that the flow of assistance for development that includes a more generalized and equitable access to SDRs and to the Fund’s and Bank’s resources to countries in transition and the poorest nations must continue. For them such assistance means survival.
We note the significant progress made in the last few years in reducing debt problems. Further action is necessary to reduce debt to sustainable levels and enable the return to economic normalcy. Donor countries and multilateral institutions must ensure the flow of sufficient resources to these countries to help support their efforts for economic adjustments. The fact that some developing countries had been able to record sustained growth when the industrial economies were toiling under recession, points to the success of their prudent economic management. Developing countries have the capacity to harness domestic sources of growth and diversify trade relations to nontraditional markets. One must realize that the sustainability of growth for developing countries also means diversifying their sources of growth, domestic as well as international. Acceleration in regional economic integration and vigorous efforts to harness subregional growth potentials are the fastest means to reduce long-standing dependency.
However, the growth enjoyed by developing countries should not be jeopardized by the imposition of nontrade issues such as labor standards, minimum wages, human rights, and environmental concerns. For most of us in the developing world, there must be continuous, consistent, and pragmatic efforts to improve the welfare of workers. In countries with excess labor, the effective implementation of universal labor standards may appear benign and theoretically appealing, but practically cruel in reality. It only means eroding the advantage these countries possess: labor competitiveness, thus effectively placing employment beyond the reach of the poorest—groups without education and with the least skills. This misplaced concern is equally evident in the attempt to entangle trade with environmentalism and a particular brand of political correctness. Genuine efforts to conserve the environment and the advocacy of political reforms to expand the horizon of human liberty must be commended. But, this entanglement also acts as a Trojan horse to smuggle in nontariff barriers that will only subvert and undermine the progress of a free and multilateral world trading system. Thus, genuine advocates of these issues must not be deceived by motives that are less altruistic and eventually harmful to the very people whose rights and progress they aspire to champion.
We are relieved with the economic recovery in the industrial countries. However, we must be wary of the instabilities inherent in the global economic system that continue to threaten the durability of the industrial countries’ economic recovery. Foremost among them are unemployment and the continuing instability in the financial and exchange markets. The burden imposed by instability in exchange rates, especially with respect to their external debt management, is enormous. Some of the so-called soft loans have turned out to be very “hard” once the impact of the exchange rate appreciation is factored in. In this regard, developing countries find it difficult to accept the practice of certain developed countries getting together to determine exchange rates, without the consideration of their effects on others.
A free movement of capital across national borders, both by direct business investments and by purchases and sales of financial assets, is certainly beneficial and helps facilitate the financing of productive ventures. Unfortunately, the capital flows needed to achieve an efficient allocation of world savings are today a small fraction of worldwide transactions in the currency markets, which are estimated to run at $1 trillion a day. The bulk of these transactions are speculative, seeking to make quick money on exchange rate fluctuations and on interest rate differentials. They contribute little to rational long-term investments. Reform of the international monetary system has become a necessity to restore stability in financial and currency markets. Finally, if we genuinely believe in the relevance of the Bretton Woods institutions, we must be willing to reform and redefine the global economy to enable all countries to achieve their growth potential.
Statement by the Governor of the Fund and the Bank for the United Kingdom—Kenneth Clarke
I would first like to thank our Spanish hosts for their kind hospitality and excellent organization of these meetings. I would also like to join others in welcoming Eritrea as a new member of the Bretton Woods institutions.
Fiftieth Anniversary of Bretton Woods
This year marks the fiftieth anniversary of the Bretton Woods Conference that established the IMF and the World Bank. These institutions have responded admirably to dramatic changes over the years: the breakdown of the Bretton Woods exchange rate system; the third world debt crisis; and increased understanding of the development process, including environmental issues. The challenges that these institutions face today are just as great. We have to clear up the mess that communism left behind. We must respond to the effects of the massive growth and integration of the world’s capital markets. We must build on the widespread recognition that economic success depends on a combination of market-oriented structural and macroeconomic policies. And we must step up the fight against poverty.
Sustaining the Recovery
These meetings take place against the background of new optimism as the recovery takes hold across the industrial world. The discussions over the last few days have shown remarkable consensus on what industrial countries should do to safeguard this recovery. In particular:
We have agreed that further fiscal consolidation is necessary to reduce the global imbalance between savings and investment and to alleviate pressure on long-term interest rates.
We have agreed that monetary policy should be set to guard against the risk of re-emerging inflationary pressures stifling the recovery.
And we have agreed that the problem of structural unemployment should be tackled by increasing labor market flexibility and reversing the effects on employment of well-intentioned but misguided social policies.
Investment Flows and Capital Markets
We have also achieved remarkable consensus on the benefits of the free international flow of trade. Immediate ratification by all countries of the General Agreement on Tariffs and Trade (GATT) agreement is a priority, and with it the creation of a new institution, the World Trade Organization (WTO). I would also emphasize the importance of the free flow of investment which can bring immense benefits, particularly when accompanied by free trade. I propose, for example, that we urge the Fund to encourage members to remove their remaining exchange controls on capital flows.
Private Sector Development
We are also making encouraging progress in tackling the problems of the developing countries. I am one of those who believes that the World Bank should increase its emphasis on promoting private sector development in the developing world. This change has also been proposed by Paul Volcker’s Bretton Woods Commission. It would involve further assistance by the World Bank to help countries to create the conditions that will attract foreign private sector investment. It would require the development of longer-term domestic capital markets. And, it would also mean increasing the volume and quality of capital the Bank Group lends to the private sectors of developing countries. I believe that this would require an increased role for the International Finance Corporation.
Increased Access to IMF Resources and SDRs
One of the best forms of help the Bretton Woods institutions can give to member countries with economic difficulties is finance in support of sensible economic policies. It has become clear that in many countries around the world, with good reform programs, including former communist countries in transition and the poorest countries, temporary financing needs are greater than can be met within the Fund’s current access rules. I am, therefore, particularly pleased that we were able to agree in the Interim Committee to an increase in access limits for the IMF’s stand-by and extended Fund facilities. I was disappointed that we were unable to agree on a renewal and increase in access under the Fund’s systemic transformation facility, which is of particular assistance to the former communist countries undertaking the historic task of creating market economies. Over the days I have been at these meetings, I have yet to hear a single argument against this. I still hope agreement will be possible in the months ahead. I, also, of course, regret the failure to reach agreement on the long-standing issue of further SDR allocations. There is a case, in simple equity, for allocating SDRs to countries that have not benefited from past allocations. In doing so, I would like to make sure that some of the world’s poorest countries also benefit; and, as a practical matter, that all countries receive a sufficient allocation to provide an incentive for ratifying the required change in the Fund’s Articles. Together with the United States, Britain devised a proposal that achieved all these ends, and this proposal remains on the table.
I have also brought to this Conference a specific and practical proposal to remove the burden of multilateral debt from some of the very poorest countries who are making good progress with their development through their own efforts in delivering Fund programs. The multilateral institutions, and especially the IMF, must consider further means to help their poorest and most indebted members committed to reform through the existing strategy of policy advice and concessional lending. It is vital that, through their expertise and experience, the international financial institutions play a central role in helping resolve the debt problems of these countries. But an unsustainable debt burden remains an impediment to reform in many of the poorest countries. We need to offer them the prospect of being free of debt if they pursue the right economic policies. That is why lending must be on terms that these countries can afford.
The IMF could build on the success of its enhanced structural adjustment facility (ESAF). That success was recognized by donors providing scarce resources for its replenishment. I have suggested that one possibility to improve further the concessionality of Fund lending would be to extend the grace period and maturity of Fund lending. These changes could be financed by careful and phased sales of the IMF’s gold reserves. Only the resources from investment of the proceeds of the gold sales should be used for financing ESAF. The nominal value of the gold could be retained by the Fund. The World Bank also needs to look at further ways in which it might be able to help. I welcome the World Bank’s review of the scope of the Fifth Dimension, and I look forward to a similar review of the effectiveness of the debt reduction facility of the International Development Association (IDA).
When I addressed this gathering last September, growth prospects for the world economy looked a lot less promising than they do today. At that time, the IMF was forecasting growth in the industrial countries in 1994 to be 2.2 percent and inflation to be 2.7 percent. Now it is forecasting growth of 2.7 percent and inflation of 2.4 percent. The outlook for nominal growth has stayed much the same. But the split between output growth and inflation now looks more favorable. This pattern is familiar to observers of the U.K. economy. Most forecasters, and that includes the U.K. Treasury, underestimated growth and overestimated inflation. The mistake was to assume that this British recovery would proceed like most of the previous ones. In fact, this recovery has the potential to follow a different pattern and be much healthier, stronger, and more long lasting.
The recovery in Britain is based on a policy framework specifically designed to ensure that rising inflation does not bring recovery to a halt as it has done so often in the past. Inflation in the United Kingdom remains very low. Underlying retail price inflation has been below 3 percent for the past year. That has not happened since 1964. The key now is to keep it low. The concern has always been that Britain would not be able to sustain a strong recovery without the inflation problem recurring. That is why I make no apology for laying such stress on securing permanently low inflation. But there are two reasons why I believe we are better placed to avoid a recurrence of this problem.
First, there is better understanding of the damage that inflation does. The British people do not want a repetition of the 15 percent interest rates needed at the end of the 1980s. That and competitive pressures are making businesses take a much tougher line handling pay claims.
Second, and more important, the new policy framework gives us an institutional bias against inflation. There is a published inflation target, with monthly meetings to discuss progress towards it, and the minutes of those meetings are published. The Bank of England also produces an independent inflation report every three months.
This does not make me complacent about inflation. Indeed, because actions speak louder than words, I raised interest rates a month ago, ahead of expectations, to demonstrate my resolve to take no risks. We are a very long way from having the sort of cultural aversion to inflation that has underpinned the performance of the German economy for so long. But now we have the best chance that we have had for a generation of keeping our inflation performance in line with that of the best of our competitors. Any necessary tightening of monetary policy will not be an excuse for an easing of fiscal policy. With the budget deficit set to exceed £30 billion this year, I have made clear several times that talk of tax cuts in this November’s budget is hopelessly premature. As the economy strengthens further, and as public expenditure is brought firmly under control, tax cuts can come back onto the agenda. But the stock of debt in the United Kingdom, and indeed throughout the developed world, is already far too high. I have no intention of adding to that stock by more than I have to. Therefore, tax cuts can only take place and will only take place in the context of a healthy recovery and healthy public finances. It will be a key matter of judgment to decide when tax cuts can help to sustain healthy economic growth and not detract from it.
The United Kingdom was one of the first countries to emerge from recession. Our economy has been growing now for the past nine quarters, and by nearly 4 percent over the past year. As the recovery has gained momentum, it has become more broadly based. Consumption growth, which provided the momentum for recovery in its early stages, is now giving way to strengthening investment and exports. This pattern of growth is a sign of a fundamentally healthy economy. British economic growth in the past has been plagued by capacity and balance-of-payments constraints. In the end, as these constraints were hit, inflation re-emerged. I was told that it was inevitable that our trade deficit would widen as recovery got underway following the pattern of earlier recoveries when demand had so often run ahead of the capacity of British industry to provide the goods and services to meet it. In fact, exports are up, and imports are flat or falling. I was told that Britain had a chronic inability to invest. In fact, investment has grown by 5.5 percent over the last year.
A healthy recovery led by exports and supported by strong investment should provide a solid base for the type of steady low-inflation growth that I would like to see in the future. This recovery follows more than a decade of supply side reforms that have left the British economy more flexible and more efficient. We are better placed than we have been at any time since the war to take advantage of economic recovery against a background of low inflation and sound public finance. We can already see the benefits:
in our good export performance, up 10 percent over the year;
in the rapid fall in unemployment, down by 370,000 since the end of 1992; and
in our strong productivity growth, up nearly 5 percent in manufacturing over the past year, with unit wage costs actually falling.
Low inflation coupled with sound public finances provide the right environment for our deregulated economy to flourish. By combining the dynamism of the 1980s with the counterinflationary determination of the 1990s, we can build a recovery that lasts.
Statement by the Governor of the Fund for Italy—Lamberto Dini
In the fifty years since the Bretton Woods Conference, output and living standards in our nations have grown at an unprecedented pace. Per capita GDP has more than quadrupled in most industrial countries, while in the preceding thirty years it had barely doubled. Many nations remain unacceptably poor, but economic development has taken off in most areas. Extraordinary new opportunities are starting to emerge in the countries in transition. Together with sweeping advances in science and technology, widespread acceptance of free market principles, increasingly liberal trade policies, and international cooperation have been the key policy choices that have made the successes of the post war era possible. No one can doubt that the activity of the Bretton Woods institutions has been an important contributory factor.
Full resumption of the growth process in the years and decades to come cannot be taken for granted. It requires that appropriate policies be put in place. A lot can be learned from the mistakes of the more recent past. In this regard, it should be recalled that the performance of most of our countries, in terms of growth and unemployment, was much poorer in the 1980s than in the previous three decades: the average growth of the industrial countries fell from more than 4 percent per annum to 2.7 percent. In Europe, unemployment has reached a post war high.
In a year in which the recovery is clearly spreading from the U.S. to the rest of the industrial world—marking the success of the growth strategy that was spelled out in the Interim Committee meeting of April 1993—we must make sure that our policies will lead to high and sustainable growth in the medium term and to the complete, though necessarily gradual, elimination of the plague of unemployment. Growth in the industrial countries is beneficial not only to us but to the whole world; neither the very good performance of many developing countries in the last few years nor the process of transformation in the East can be sustained for long without high growth in the industrial area. In this regard, I would like to identify four key issues.
The first one relates to interest rates. In the course of 1994, we have seen a sharp increase in long-term yields. While several factors have certainly contributed to this development, the basic explanation is that the fundamental imbalances that developed in the 1980s have not been resolved and may be aggravated by the growing demand for capital in the face of unchanged or even declining saving rates. Both private and public saving declined during the 1980s almost everywhere. Economic policy must act on both fronts: to eliminate the distortions that discourage private saving and to reduce public sector deficits. In many countries, interest payments on the outstanding stock of government debt have become a major component of the total deficit. The gross public debt of the industrial countries has risen in the last fifteen years from 40 percent to almost 70 percent of GDP. The financial markets are well aware of this development: they wonder what will happen in the next ten or fifteen years and price long-term assets accordingly. I contend that the primary, and most difficult, task of economic policy is to persuade markets that fifteen years hence government debt ratios will be much closer to their level of fifteen years ago than to their level today. Medium-term deficit reduction strategies have been defined by most countries: with the recovery, the time has come for action. We are all well aware of the great social and political difficulties involved, but I trust that we can convince our peoples that the cost of inaction would very soon prove prohibitive, in terms of real growth and jobs.
High interest rates are also due to financial markets not being entirely persuaded that inflationary pressures are definitely under control. Inflation in the industrial countries is low by historical standards. However, past experience shows that with recovery, prices may quickly pick up again. The risk of hitting capacity constraints is greater today than in past recoveries because of the very low rate of capital accumulation of the last three years. The best way to avoid this risk is to reduce government consumption, but continuing wage moderation and vigilant monetary policies are also essential.
Another key area of concern is the lack of flexibility of our economies, especially as regards labor. In the last two decades, especially in Europe, governments have chosen to give job security priority over efficiency. But, as the Detroit conference on jobs demonstrated, the jobless rate tends to be higher in the countries and regions where the regulatory environment is apparently most protective of individuals’ security. Creating the conditions in which the labor market may function better is essential if we are to reduce unemployment and reap the full benefits of the ongoing recovery.
Finally and foremost, we must continue to work for a more open trading environment, both at the multilateral and regional levels. Free trade has proven to be the most powerful engine for growth. It is our responsibility to make sure that the treaties of the Uruguay Round are rapidly ratified and fully implemented. It is desirable that external imbalances be corrected primarily through changes in the macroeconomic pattern of saving and investment. Adjustment should be pursued through cooperative action, leading to further progress toward a freer trading environment.
Some of the problems that confront the industrial countries as a group are particularly acute in Italy, because of the legacy of a very large public debt and a still higher-than-average budget deficit. The economy, however, is responding well to the challenges posed by sharp changes in both the level and composition of final demand. Industry has withstood the recession by swiftly reorienting production toward foreign demand, in response to the large shift in the terms of trade that has occurred in the last two years. The labor market is functioning better than in the past and enterprises are now in a stronger position to take advantage of the international recovery. Industrial output is rising at a fast pace (more than 7 percent relative to the end of 1993), orders are picking up on the domestic side, and there are good prospects for the creation of new jobs. Other favorable features are a solid external current account and wage settlements in line with planned inflation, resulting in virtually constant unit labor costs.
On September 30, the Government submitted the 1995 Finance Bill to Parliament, which is designed to stop the growth of the public debt relative to GDP by the end of the following year. The deficit-reduction package is composed primarily of expenditure cuts, but measures have also been introduced to widen substantially the tax base in 1995 and beyond. The budget will produce a surplus, net of interest payments, of more than 2 percent of GDP in 1995 and the public sector borrowing requirements will decline by 2 percentage points to 8 percent of GDP. These targets are ambitious, but they can be achieved.
The most important action taken by the Government with the oncoming budget is the reform of our overly generous pension system. In the configuration inherited from the past, the system is clearly unsustainable. A reduction in benefits for those who are now working is necessary for the system to be able to deliver what it promises, without placing an unbearable burden on future generations. The resulting budget economies will be substantial and will increase rapidly over time. I am confident that the Finance Bill and the proposed reforms of the pension and the health systems will be approved by Parliament. Amendments to specific points will not affect the overall budgetary targets, to which the Government is firmly committed. Moreover, the Government has announced a schedule for privatizing a substantial portion of Italy’s public sector enterprises. Action in this field has begun and will be strengthened.
In the last two years, inflation has fallen considerably, to its lowest levels since the 1960s. Recently, however, signs of renewed pressure on prices, due to international as well as domestic factors, have called for a tightening of the monetary policy stance by the central bank. This is consistent with the Government’s objective of reducing further inflation toward the level of the best-performing partners in the European Union. Budgetary restraint, a vigilant monetary policy, and continuing wage moderation are the key conditions for a fall of long-term interest rates from their unacceptably high levels, for the exchange rate to stabilize around values consistent with economic fundamentals, and for economic growth to pick up and to be sustained in the medium term. Sound financial policies are the best way in which Italy can contribute to both further progress in the process of European integration and a favorable macroeconomic environment worldwide.
In the developing world, the most successful economies have been those most actively engaged in policies of macroeconomic stabilization, fiscal deficit reduction, market-based reform, trade liberalization, and financial deregulation. These are the key factors behind the surge in capital flows to these economies. Their success should provide strong encouragement to developing nations generally, and to the economies in transition in particular, to double their efforts and their commitment to persevere in rigorous adjustment and reform policies supported by the international community with financial and technical assistance. If they do so, the benefits and rewards for their economies and the wellbeing of their people will be achieved before long.
Because of the very rapid increase of private investment flows to developing countries, official assistance has accounted for a progressively smaller share of total capital flows. This is a positive development. Private capital, on the whole, is more productive than public transfers, incorporates more know-how, and goes more directly toward the enlargement of the production frontiers of the recipient countries. Nonetheless, this does not preclude the expansion of World Bank activity. We expect the World Bank and the IMF to be both the catalysts of financial assistance and the ultimate guarantors of its effectiveness in recipient countries. This is the task we have entrusted them with and that they can fulfill.
Statement by the Governor of the Fund for France—Edmond Alphandéry
Growth has returned to the world economy. Recovery is vigorous in both developing and industrial countries. However, growth will only be sustainable if we continue to pursue rigorous monetary and fiscal policies. The tensions we have witnessed on international bond markets over the past few months are proof that we must pursue our efforts vigorously. Public deficits absorb too large a share of our economic resources. It is essential that each one of our countries take advantage of the recovery to reduce them. This will help to provide the basis for lower long-term interest rates. As for France, it has embarked upon a multiannual fiscal consolidation program that will see the deficit reduced to 2.5 percent of GDP in 1997. The Government of which I am a member has given top priority to the control of public and welfare expenditures.
A further conclusion we can draw from these interest rate tensions is that the IMF, as well as each one of our countries, should better explain the international economic situation and start by making our own economic policies more comprehensible and more credible. This approach should contribute to a reduction in uncertainties that affect household, corporate, and financial market players’ decisions. Such an approach would also limit market volatility. The Interim Committee’s communiqué is a step in this direction.
As we are celebrating the fiftieth anniversary of the Bretton Woods institutions, I believe this is a good opportunity to reflect on the new duties the IMF should take on, particularly to strengthen its multilateral surveillance of the world economy. The coordination of our economic and monetary policies remains the key element of this. However, we cannot content ourselves with the wise advice that each country should keep its own house in order. I am convinced that greater vigilance on exchange rate developments would strengthen our credibility and, therefore, our collective success.
The key to greater stability, and therefore greater discipline, might be sought in the quest for clearer “signposts” to the future by the authorities of major countries, thanks to a flexible but consistent “routine” of multilateral examinations of countries’ economic situations and policies. The IMF should actively participate in this endeavor. In summary, the Fund should revert to the central position it held at the outset—without, of course, neglecting the new duties that have been entrusted to it over the years and that it has discharged competently and efficiently.
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I should like to take this opportunity to comment on the negotiations that have taken place within the Interim Committee. Together we initiated a set of extremely ambitious negotiations which, once completed, should enable the IMF to respond, in an exceptional manner, to the needs of all its members. The results we have achieved are disappointing when measured against those ambitions. Let us not, however, throw in the towel. An agreement remains within our reach. A little more realism, a little more sensitivity to overtures that could have been made, or to those that were made but were spurned, will enable an agreement to emerge.
France, as you know, has, from the outset, been in favor of a substantial SDR allocation, both for new and existing members of the IMF. I will continue to work for a comprehensive agreement, as I have done during our meetings. The offer put forward by the Group of Seven permits a major step forward. We have improved the initial proposal: the draft amendment confirms our will to maintain the role of the SDR, and we have undertaken to push for rapid ratification and, therefore, rapid implementation of this allocation. Some countries regretted that a general allocation could not be approved. I, too, would have preferred this outcome. But I also prefer a compromise to a disagreement on principles. I would observe that the selective allocation proposed by the Group of Seven does, in fact, benefit all countries. In this sense, it is therefore a general allocation, even if it also enables a number of historical injustices to be corrected. I call upon the Chairman of the Interim Committee and the Managing Director to continue their efforts to achieve rapid agreement on these urgent outstanding issues.
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It is good news indeed that economic growth is now more evenly distributed throughout the world. I am particularly pleased to note that Africa is expected to record a growth rate of 4.5 percent in 1995.1 also derive great satisfaction from the Fund’s finding that countries benefiting from the enhanced structural adjustment facility are those that have recorded the best performance. This strengthens my conviction that this facility—to which France is the leading contributor—is an essential component of the Fund’s range of instruments: I warmly welcome its extension. These positive developments should not make us lose sight of the fact that a lot remains to be done to lay the groundwork for sustainable economic growth in the poorest countries. It is essential that excessive debt does not impede these efforts. France, therefore, would like to see progress within the Paris Club on the treatment of the debt of the poorest countries, by raising immediately the concessionality granted them to 67 percent—the aim being to treat all the outstanding debt of these countries as soon as possible.
France is also in favor of substantial aid to developing countries. I am, therefore, concerned to see that efforts on the part of donor countries are flagging. According to the figures of the Development Assistance Committee of the Organization for Economic Cooperation and Development, the ratio of aid to GDP fell from 0.33 percent to 0.30 percent in 1993. Like all of you, I am only too familiar with the considerable budgetary constraints faced by all our countries. We must not, however, reduce our support for the poorest countries. Our solidarity must be demonstrated on the occasion of the eleventh replenishment of the International Development Association. I hope that all donors will make a contribution proportional to their economic strength.
The counterweight to this effort on the part of the donors must clearly be maximum effectiveness of the aid delivered. For this to be the case, attached conditionality must be manageable by beneficiaries. We must also insist on strict adherence to two basic principles: the adoption of sound macroeconomic policies and proper functioning of the public authorities. The multilateral institutions play a crucial role in this respect. They must, therefore, set an example by continuing to adapt themselves. Their productivity and project selectivity are the keys to increased and effective assistance.
In conclusion, I would like to pay tribute to the Bretton Woods institutions, which have succeeded in keeping in step with changes that have occurred throughout the world over the past fifty years. I am confident that they will show similar resourcefulness in rising to the challenges of today. France stands ready, as ever, to help. I am convinced that they symbolize the three principles at the heart of our common endeavor: dialogue, cooperation, and solidarity.
Statement by the Governor of the Fund for New Zealand—W. F. Birch
The improved world economic outlook is welcome news, but we must look to the opportunities stronger growth provides to implement difficult and necessary reforms. No country can afford to rely solely on the growth of other countries to raise the living standards of its citizens. Only by taking responsibility to make our own economies stronger and more flexible today can we prepare for future challenges. Many problems remain in the world economy. Current high unemployment is aggravated by labor market rigidities and by welfare provisions that too often promote dependency rather than function as an essential safety net. Large fiscal imbalances consume savings and restrict investment in more productive areas. High debt levels impose burdens on our children, and debt servicing swells government expenditure. High inflation creates uncertainty, and trade restrictions lower the world’s growth potential.
Prior to New Zealand’s necessary economic reforms of the last decade, we were one of the most overregulated and underperforming economies in the OECD. But our reform effort has paid off, and we are seeing an export-led recovery, high employment growth, falling unemployment, rising investment, low and stable inflation, no balance-of-payments problem, and a fiscal surplus which will allow us to reduce our exposure to debt. What are the lessons of this reform process? Macroeconomic stabilization measures, trade liberalization, deregulation of capital and labor markets, and state sector reform are essential. It is critical that the approach promote private sector growth, good government management, and a concentration of government resources in growth-sustaining areas such as education and training.
In New Zealand, there have been several aspects to government reform, from corporatization and privatization of government trading activities to reform of the core public sector. Our Fiscal Responsibility Act requires open reporting of government finances and encourages responsible government management. It also requires governments to live within their income or to explain publicly why they choose not to do so. The Act requires governments to produce their budgets according to generally accepted accounting practices on a full accrual accounting basis. This enables New Zealanders to get a much better picture of the Government’s financial position and the Crown’s balance sheet. The Government is, thus, more accountable for fiscal performance.
Finally, while the gains from reform are substantial, they will not always be easily or quickly won. Our own experience suggests that there are no simple options. Obtaining meaningful change requires a resolution to tackle the hard issues such as industrial protection, agricultural protection, agricultural subsidies, labor market rigidities, and welfare reform. But if we are asked to say if it was all worth it, our response— and increasingly that of ordinary New Zealanders—is a confident “yes.” Our long-term plans are paying off. Our reforms to the workplace are contributing to stronger job growth and higher household incomes. Public sector reform is contributing to stronger government finances, and economic growth is embedded more firmly than in many years.
But we cannot take for granted continuing economic growth in a changing world. Like other countries, New Zealand must continue to work to become more innovative and adaptable. While, in our view, individual countries must carry the responsibility for their own economic adjustment, the World Bank and the International Monetary Fund can play an important supporting role. As these institutions celebrate their fiftieth anniversary, they must continue to encourage and support economic policies that are conducive to growth. They should continue also to facilitate financial and technical assistance programs to encourage macroeconomic stabilization, international competitiveness, growth, and increased opportunities for poorer performing economies.
Looking forward, I would propose that a number of principles must guide the way the Fund and the Bank approach their future work. Each institution has its own specific role to perform, and it is critical to avoid the costs and resource waste that arise from overlapping functions. Equally important, the Fund and the Bank need to avoid entering into work areas beyond their immediate scope of interest. These aims become all the more important as another institution—the World Trade Organization (WTO)—gets set to begin its operations next year.
Criticism has also been leveled at the Fund and the Bank for being too big, too expensive, and too far removed from members’ needs. We think both institutions must continually reassess their management structures and cost-control procedures. Further work to streamline operations should continue. The Bank and the Fund, as well as the emerging WTO, must also continue to play a leading role in supporting stronger international trade and investment linkages. Signing of the Uruguay Round agreements in Marrakech marked significant progress toward freer trade, but we must not become complacent. It is legitimate for developing and transition economies to question the double standards of those who call for trade liberalization when it suits them while supporting protectionist measures that hold back the prospects of the developing world.
Full implementation of the Round as soon as possible is critical. There remains much unfinished business on the trade agenda. Further work on the services sector and on agriculture are two examples. At the same time, we need to guard against the possibilities of emerging protectionist pressures. Issues such as the environment and labor standards are important. But, by linking these to trade, they can all too easily become tools of trade restraint.
Fifty years ago, a group of visionaries began the delineation of an international approach to promote development and eliminate poverty through open trade and capital markets and through the pursuit of responsible macroeconomic policies. Building on these early beginnings, there are now a substantial number of countries whose experience with open trade and stable macroeconomic policies demonstrates the success of these early ideas.
Today we have cause to celebrate the real achievements of the last half century. But we must be prepared to acknowledge how much remains to be done. Let us also stand ready, both within our own countries and as members of these international organizations, to take the tough decisions that will be required if that vision is ever to be fully realized.
Statement by the Governor of the Bank for Indonesia—Saleh Afiff
May I first of all join in the congratulations to the World Bank and the IMF on the occasion of their fiftieth anniversary. In the past twenty-five years Indonesia has had every reason to be highly appreciative of the role of the Bank and the Fund and the support they have given to our efforts to achieve economic stabilization, recovery, and development. Our relations with the Bank and the Fund have been excellent throughout, thanks to mutual respect of, and confidence in, each other’s officials who have worked together. We have enjoyed this parity in professional relationships and wish that such can be duplicated in all developing countries where the Bank and the Fund are working.
Living in an increasingly interdependent world, we must be honest in our relationships. We must strive very hard to make such relationships more equitable and democratic. Members of the Bank and the Fund are either borrowers or lenders. The borrowers are developing countries. The more important shareholders are donor countries, among whom a small minority of large industrial nations call the tune. This dichotomy creates an asymmetry in relations, and developing countries often find themselves at the short end of a deal. For instance, surveillance and conditionalities are imposed much more upon borrowing developing countries, as the industrial countries are not borrowers. Moreover, norms are set by the major industrial countries, even though such practice is in clear contradiction to the widely acclaimed merits of democracy.
The managements of the Bank and the Fund assume a very strong position in relation to Executive Directors and even Governors of the developing countries. In such a relationship, sometimes accentuated by some unintended arrogance of power, errors in judgment often go unchallenged. Looking back at the development of many countries, mine included, projects and policies consistent with the development ideology of the day received ample funding from multilateral institutions. However, later on, changes and shifts took place in what was considered the appropriate development strategy. The changing development ideology of the day resulted in completely different assessments of what was considered appropriate. Borrowed funds were thus spent on what was later on considered as inappropriate projects and policies. While the projects and policies may be abandoned, the borrowed funds continue to be multilateral debts that have to be serviced promptly.
Developing countries also see the asymmetry as the Bank and the Fund are more accommodating to criticism from nongovernmental organizations (NGOs) from the North in comparison to the occasional muted protestations of the countries of the South, even if they refer to the same or similar issues. In order to remedy the weaknesses in the present system, a truly representative intergovernmental review of the functioning of the Bretton Woods institutions and their future role in the changing world economy is needed. The initiation of such a representative intergovernmental review should be one of the major outcomes of the fiftieth anniversary meeting in Madrid.
Coming from Indonesia, which is now in the chair of the Non-Aligned Movement (NAM), I wish to draw the attention of this distinguished gathering to the fact that the debt burden and debt overhang of developing countries is still an unresolved problem. For many of these countries this has become a real obstacle to complete their structural adjustment program, while the repetitive rescheduling meetings absorb scarce administrative resources, which are better deployed for attending to problems of economic development and poverty alleviation. As a follow-up of a resolution on external debt of the 1992 NAM summit meeting in Jakarta, the chair of the NAM recently convened a ministerial meeting in Jakarta attended by some twenty-five least developed and severely indebted countries to discuss their debt and development problems and to learn from each other’s experiences. This meeting came, among others, to the following conclusions:
What is required is not further debt rescheduling but a once-and-for-all debt settlement, through meaningful reduction of all categories of debt. No major group of creditors should be excluded, meaning that it is illogical and ultimately counterproductive to exclude multilateral creditors. A once-and-for-all debt settlement helps to ensure the restoration of creditworthiness of the debtor country, giving it a better chance to achieve a reasonable and sustainable rate of economic growth. Debt reduction needs to be approached on a genuine case-by-case basis, within an internationally recognized overall framework of principles for debt settlement.
Independent third parties could be requested to undertake an assessment of the debt problem of individual countries and to put forward recommendations on debt reduction, the required flow of new resources, and the restoration of creditworthiness.
To avoid jeopardizing the credit rating of multilateral institutions, a number of measures, such as the use of the accumulated reserves of the Bank, sales of IMF gold, a new issue of SDRs, and conversion of debt into equity investment could be considered when implementing debt reduction. The institutions’ arguments against multilateral debt reduction do not hold water. The multilateral institutions’ reputation in international markets depends on capital guarantee from the members, not the security of outstanding loans. The proliferation of conditionalities is a matter of grave concern. Conditionalities related to the use of resources are necessary and legitimate. But political or ideologically motivated conditionalities are to be rejected. There is an urgent need to reduce the number and type of conditionalities and to limit conditionalities to the essential objective of ensuring that resources are used for their intended purposes.
It is heartening to note that the Naples summit meeting of the Group of Seven agreed on more substantial debt reduction and directed the Paris Club to get it implemented. The Naples agreement is most welcome but it was confined to bilateral debt reduction only. The problem of multilateral debt was not considered. For many debt-distressed countries the servicing of multilateral debt is now a major burden, since it has become the bulk of debt-service payments. Multilateral creditors are considered “preferred creditors” and, as a consequence, there is at present no possibility for debtor countries to have rescheduling or reduction of multilateral debt. Actually, many debt-distressed countries are able to service their multilateral debt fully and on time because they do not service their bilateral debt, or service it only partially. As a result, they have large arrears on bilateral debt. The existence of large arrears on bilateral debt means that reduction on bilateral debt amounts to providing relief to debts that are already not being fully serviced anyway. Such relief is beneficial since it is a definitive write-off of arrears and will strengthen the long-term position of the debtor countries. But it will not bring immediate relief to a country’s balance of payments and will not release resources from debt servicing to be used for urgent development purposes. Therefore, to be effective and meaningful, debt reduction has to include all categories of debt: private, bilateral, and multilateral.
The NAM Meeting on Debt and Development in Jakarta accepted the imperative of each country “putting its own house in order:” to restore macroeconomic stability through fiscal and monetary discipline, to mobilize domestic resources, to diversify exports and production, and to design and implement its own adjustment programs. I do not mean to suggest that solving the challenge of returning the least-developed most heavily indebted countries to a path of sustained growth can be achieved by this step only. What I do suggest is that no solution is possible that does not include action on the part of the Bank and the Fund, along with the other multilateral agencies, to reduce the stock of multilateral debt of these countries. Therefore, I propose to take the following steps:
first, to instruct the Board of Executive Directors of the World Bank to take up the proposal for multilateral debt reduction and use the profit of the Bank and IDA repayments to finance multilateral debt reduction of the debt-distressed developing countries; and
second, to instruct the Board of Executive Directors of the IMF to sell part of the Fund’s gold reserves and use the proceeds to finance multilateral debt reduction of the debt-distressed developing countries.
Statement by the Governor of the Bank for Venezuela—Julio Sosa
As a Governor of the World Bank, speaking also on behalf of our Governor of the Fund, Antonio Casas Gonzalez, I am pleased to address this session of the Fund and the Bank Annual Meetings as representative of the nations of Latin America. My intention is to put forward some ideas on economic development for the world as a whole and for our region in particular, with special reference to my own country, Venezuela.
A World in Transition
In a short period of time, we have witnessed sweeping changes, which have radically altered the parameters that defined our global environment. The old paradigms have fallen from favor, and their attendant patterns of behavior have been eroded. We are currently in the throes of a transition, and the ideas and fresh approaches that will serve as lodestar for the future of mankind have still to be clearly defined. We can only stand and wonder at the abrupt disappearance of the very visible differences that polarized the superpowers, to say nothing of the fact that the nuclear time bomb has been defused. No less astonishing is the emergence of previously hidden or brand new problems, obscured until now by the existence of the competition, frequently irrational, that was a perennial feature of human affairs for four decades.
A New Common Agenda for Mankind
Against a backdrop of fading and declining ideological obsessions, a consensus is now developing around a common agenda that aims to reinforce a system of freedoms within a framework of democratic practices, protection and advancement of human rights, and market-oriented economics. Not everything, and not everybody, is moving simultaneously toward adoption of the new agenda that will define the global environment in the coming decades. Its adoption will require changes in behavior and perceptions within a context that has never been known for uniformity.
In spite of the confusion that characterizes any transition period, there exist many achievements that give grounds for optimism regarding the future of mankind. We are rapidly achieving a state of like-mindedness, which transcends geographic and cultural boundaries and keeps us aware of new, shared responsibilities. In this connection, there is every reason to note how interdependent the main elements of the new agenda are and that the agenda is gaining increasing acceptance among the nations of the world. Accordingly, we can only express regret at the impasse that arose in the Interim Committee meeting with respect to SDRs. Our countries, together with many others, have long argued in favor of a new general allocation of SDRs. We took this view for a variety of reasons: first, because in an environment of increasingly intense international trade, our countries need to supplement their international reserves; and second, to prevent further dilution of the major role assigned to SDRs as an international reserve asset. Today, let us express our wish that those countries so radically opposed to the new SDR allocation will show more flexibility, as a pledge that they too share the old wish for international economic cooperation.
Unrestricted supply in the midst of scarcity makes no sense and is a poor basis for long-term policy. Prosperity for prosperity’s sake and the quest for instant gratification have destructive and degrading effects. Achieving a balanced position poses a great challenge, all the greater for its obvious impact where definition of the future is concerned, both for those who are attempting to manage the process of change and for the different social groups. In recent years, the nations of Latin America have made great efforts to master the changing requirements in all aspects of human affairs. In the economic sphere, one observes a shift in attitude, a swing of the pendulum away from positions held at least up until the 1980s.
At present, the debate tends to focus on accumulated experience and the search for equilibrium that will lead to a synthesis that takes into account and draws on the various formulas we have applied so far. The solution appears to be that the private sector must shoulder the responsibility for economic modernization. At the same time, however, it will have to recognize its limitations, in the sense that market forces by themselves—in the absence of a suitable political and social environment created by a proactive government willing to make the necessary corrections—will never provide solutions to the complex problems confronting society. By the same token, political stability, founded on justice, is essential if market forces are to exert their full potential impact. Within a suitably forward-looking time frame, this will be a corollary to all the elements of the new world agenda.
Latin America and the New World Agenda
Latin America has adopted many of the recommendations included in structural economic reform programs. Although in most cases the results are positive, regrettably there are others in which social problems have persisted or worsened. In addition, external debt continues to inhibit economic growth, as do the protectionist practices of the more industrialized nations. An evaluation of results accentuates the need to accelerate the integration of countries at similar stages of development, with the aim of maximizing competitive potential in an environment oriented toward globalization. It is now recognized that failure to take incremental steps when introducing liberalization can mean that its benefits do not reach all segments of society. Common sense and a practical spirit should lead us to search for solutions and identify opportunities consistent with the political, economic, and social conditions prevailing within our societies. This pragmatic type of approach will give us a better understanding of the situation and problems of individual countries, such as, for instance, Venezuela, my own country.
Venezuela’s Stabilization and Economic Recovery Program
I believe you are all aware that political and social stability in Venezuela has been compromised in recent years. Our democratic system was on the verge of being swept away in the midst of an economic adjustment process that had few ethical and social underpinnings. As if that were not enough, the new Government of President Rafael Caldera had to cope with a profound fiscal and financial crisis, now fortunately well on the way to being overcome, and with an external debt of $25 billion accumulated over twenty years of prosperity on a scale unprecedented in Venezuela’s history. We addressed the fiscal crisis with a tax reform program designed to reduce the central government deficit from over 7 percent of GDP to a little over 2 percent in 1994. Six tax laws were approved by the National Congress, on a summary basis and in the form of an enabling law, only two months after the new Government took office. The financial crisis has been one of the most severe in the world. Economic maladjustments, undercapitalization of the banking and financial system, ineffective supervision by the authorities, and the frequently corrupt practices of a number of unscrupulous bankers touched off the crisis that affected over half of the public’s deposits. Dealing with the financial crisis has required government resources amounting to over 13 percent of GDP. This generated excess monetary liquidity during the early months of the new Government, which led to a worsening of inflationary pressures and a sizable decrease in international reserves provoked by capital flight, with the result that temporary controls had to be imposed on the convertibility of the currency. Although its effects have not yet been felt by the sectors concerned, the process of liberalizing exchange controls is already under way.
The Caldera Government has designed a program for stabilization and economic recovery for 1994 and 1995, which is expected to lead to equilibrium in the fiscal accounts in 1995, to a 1 percent increase in GDP, and to an inflation rate not exceeding 30 percent (that is, approximately half of what it was at the beginning of 1994). This program may be summarized as follows:
Recovery of Macroeconomic Equilibrium and Strengthening of the Fiscal Adjustment Program
The Government will center its economic policy on the quest for structural balance in the country’s fiscal accounts. Once the tax program introduced in April took full effect, the number of taxpayers subject to the general sales tax expanded significantly with the incorporation of the services sector and almost all branches of the retail sector except foodstuffs and medicines. It is proposed to raise the basic rate of this tax in 1995. In addition, the Tax Code has been amended in the interests of more efficient collection. These moves to strengthen the fiscal adjustment program introduced in April are expected to increase non-oil tax revenue from 8 percent of GDP in 1994 to over 12 percent in 1995, a by no means insignificant figure in a country in which the non-oil tax ratio barely exceeded 5 percent of GDP prior to 1991. On this score, I would like to highlight the fact that fiscal revenue from oil, which constituted over 80 percent of total tax revenue prior to 1991, will account for only 55 percent in 1994 and less than 50 percent in 1995. The program provides for refinancing the short-term debt generated by the financial crisis and eliminating the excess money supply through the issue of a range of medium-and long-term financial instruments denominated in local currency and dollars at market rates. A proportion of this debt will also be canceled through the early sale of bank assets that passed to the Government as a result of the financial crisis and through the rapid reprivatization of Banco Latino, Banco Venezuela, and Banco Consolidado.
Raising of Domestic Market Fuel Prices
The Government has drawn up a comprehensive plan to eliminate the regressive fuel subsidy in the very near term by converting public transport vehicles to gas, introducing a temporary public transport subsidy, and orchestrating a public sensitization campaign. The 1995 draft budget law calls for a reasonable adjustment in fuel prices, but one that will not affect the lower-income groups that depend on public transport. The aims of this program are not essentially fiscal, although it will pave the way for the 1995 adjustment program.
Privatization Program for 1994 and 1995
The stabilization program includes an aggressive privatization component focused on functioning enterprises in the electric power, agro-industrial, tourism, and financial sectors. These operations are expected to generate roughly $1.5 billion in 1995. At the moment, the air and shipping lines the Government has operated for over fifty years are in the process of being privatized.
Financial System Reform and Deregulation
Fiscal adjustment measures, tax reform, planned privatizations, and timely adjustments in fuel prices are expected to lead to the elimination of fiscal disequilibrium in 1995. Financial reform will focus on capitalization of the banking system as a whole, strict monitoring of the new provisions set out in the Law on Banking and Financial Institutions, insurance legislation reforms, opening of the banking and insurance sector to foreign investment, early privatization of banks subjected to government takeover, and amendment of the Capital Markets Law.
Openness and Strategic Associations in the Oil and Mining Sectors
The complex of iron, steel, aluminum, and forestry enterprises in the Guyana region will be opened up to private domestic and foreign investment, with the Government becoming the minority shareholder in most cases. In the oil sector, domestic and international enterprises will be invited in early 1995 to bid on the exploration of prospective new oil fields that may contain reserves of 20 billion barrels of light and medium crudes and on subsequent production and marketing operations. It is anticipated that opening the oil sector at this level will generate foreign direct investment of approximately $500 million a year beginning in 1995, which will increase production of light and medium crudes by 500,000 barrels a day by the end of the decade. In addition, new legislation governing public works and services concessions will facilitate the development of important infrastructure projects. Reform of the traditional centralist and paternalistic Venezuelan state is a fundamental requirement. In a country such as Venezuela, reforming the state means redefining its role in society. This raises such complex issues as decentralization, privatization of public enterprises, reform of health and education systems, the role of the state in regulating the economy through active promotion of competition, modernization of public finances, protection of intellectual property, reform of the judicial system, and so on.
Strategy for Social Action
Venezuela has seen its social welfare indicators deteriorate markedly in recent years. Oil tax revenue per capita is eight times less than it was fifteen years ago. In 1989, a spontaneous social outburst rocked the political leadership and had major domestic and international economic consequences. President Rafael Caldera put before the country his proposed Commitment for Social Solidarity, which calls for programs in support of the poorest segments of the population, work training facilities, establishment of small community commercial enterprises, and establishment of outlets for low-cost foodstuffs and medications. Since it is also apparent, however, that the social security system needs to be restructured, the President of the Republic will shortly appoint a high-level commission with an urgent mandate to formulate a body of recommendations for reforming the Social Security Institute as it now stands, creating pension funds, and reviewing current social benefits.
Economic modernization has proved harder to achieve in Venezuela than in other countries. The process of disassembling the old protectionist state has been hindered by the fact that the country is accustomed to living on the income from its capital, by its excessive dependence on oil for its livelihood, and by a series of abrupt changes in its oil revenue. Under the last three governments, adjustment programs have been introduced, but with no more than limited, short-lived results. We are convinced, however, that in presenting our Stabilization and Economic Recovery Program, we can anticipate authentic correction of the shortcomings of the programs instituted in 1979,1984, and 1989. We have also profited from the experiences other Latin American and Asian countries have had with adjustment and structural reform. It is our firm belief that with a well-formulated social strategy and ethical leadership in its political affairs, Venezuela can make steady progress toward a modern and competitive economy.
Latin America is advancing today on the path of globalization. Its peoples await the results of the process with optimism, so that they may take part, as both contributors and beneficiaries, in an increasingly unified world. Those results will depend to a large extent not only on their own efforts, but also on the attitudes adopted by the industrial countries. Forthcoming generations will be the judges of whether the effort made was in vain, or whether it brought mankind to the path of international social justice.
Statement by the Alternate Governor of the Fund and the Bank for Japan—Yasushi Mieno
Before making my formal policy remarks, I would like to extend my sincere appreciation to the Government of Spain for making it possible to hold these important Annual Meetings here today commemorating the fiftieth anniversary of the Bretton Woods agreements. At the same time, I would like to pay my respects to the IMF Managing Director, Mr. Camdessus, and the World Bank President, Mr. Preston, as well as to the Executive Directors and staffs of both institutions for the untiring efforts they have made in carrying out their duties. I would also like to extend a warm welcome to Eritrea, which has joined the Fund and the Bank since our last meeting.
State of the World Economy
I would like to begin today by looking first at the state of the world economy, which is generally on the path to recovery and achieving steady growth overall. It is especially encouraging that the momentum of recovery is growing stronger in the industrial countries. In my view, this is because all countries have been mindful of the proper medium-term strategies for noninflationary and sustained growth and have worked to implement the appropriate macroeconomic policies.
In order to maintain this recovery momentum, industrial countries are expected to continue to implement appropriate policies, paying due regard to exchange and financial market conditions. It must be noted that the recent volatility and instability in exchange markets have seriously affected efforts toward attaining economic stability. Given that today’s markets are highly influenced by the expectations of various market participants, it is imperative that all countries carry out policies that enhance market credibility and that the leading countries work to stabilize exchange markets through policy cooperation and close cooperation in the exchange markets. Especially important in the medium-term context is the need for the industrial countries to reduce their sharply increased fiscal deficits and to shrink their structural unemployment.
Looking at developing countries, some economies are achieving strong growth, while others remain sluggish. As for the countries in transition, conditions remain difficult, although the signs are positive for those that are implementing medium-term macroeconomic stabilization and structural adjustment policies.
Turning to the Japanese economy, recovery of domestic demand is now in progress, and we see more encouraging factors spreading in the economy. Although quarterly growth data recorded some fluctuation in the first half of 1994 as a whole, real GDP recorded some positive growth relative to the second half of 1993. In the recent period, personal consumption appears to be picking up, partly due to the effect of the tax cut of ¥ 6 trillion, or the equivalent of $60 billion. For example, automobile sales in July increased, for the first time in fifteen months, by 2.4 percent compared with the same month of 1993, and they increased again by 9.6 percent in August. Shipments of household electronic products have also increased. Inventory adjustment has proceeded, and the adjustment process seems to have been substantially completed. Industrial production output increased for two quarters in a row. The Tankan (short-term business survey) of the Bank of Japan in August shows that business confidence has improved further compared with the May survey.
To sum up, in addition to the pickup in consumption in the private sector, signs of recovery are spreading in the business sector, while public works and housing construction continue to be strong. The Japanese economy is moving onto the recovery path, albeit at a gradual pace, led by the growth of domestic demand.
Along with continuing to work for sustained growth led by domestic demand, the Japanese Government intends to continue efforts over the medium term in such areas as deregulation to enhance greater economic vitality and ensure that our fiscal situation is able to cope with the aging of the population. In this connection, the government parties recently decided on a tax reform package that includes income tax reductions in the next fiscal year and beyond, following the implementation of the tax cut of ¥ 6 trillion including an income tax reduction of ¥ 5.5 trillion in 1994. The tax reform aims at balancing the tax structure among taxes on income, property, and consumption in order to enhance the vitality of the economy in the medium and long term; this is to be carried out against the background of the high proportion of aging population, while paying utmost regard to recent economic conditions. Namely, the tax cut of ¥ 6 trillion will be continued in the next fiscal year; in 1995, the tax cut will consist of a nonpermanent individual income tax cut of ¥ 2 trillion and a permanent tax cut; the interval between the tax cut and the increase in the consumption tax in April 1997 will be three years.
The Roles of the Fund and the Bank (Fifty Years After Bretton Woods)
This year marks the fiftieth year since the signing of the Bretton Woods agreements establishing the Fund and the Bank. It is clear that the world economy has been transformed dramatically over the past half century. Trade and current account transactions have been liberalized, exchange controls have been relaxed, and open, multilateral economic relations have been strengthened under the aegis of the Bretton Woods institutions, resulting in increased international capital flows. The rapid increase in cross-border transactions, technological advances, and the development of capital markets in many countries have indeed worked to integrate financial markets and the world economy. The Fund and the Bank have responded well and flexibly to the changes in the world economic environment and the evolving array of issues. They functioned effectively in response to such challenges as the oil crisis and the debt crisis, and they contributed importantly to world economic growth and stability by, for example, expanding structural adjustment support for the developing countries and assisting the countries in transition. I trust they will continue to serve us well in the years ahead.
The Role of the Fund
What specifically does Japan expect of the Fund? First is the Fund’s role in surveillance. The Fund exercises surveillance of, and provides policy advice to, national economies through its World Economic Outlook exercises and consultations. The Fund also takes part in the Group of Seven’s policy cooperation process.
The current surveillance procedures make it easier for policymakers to exchange views frankly in a climate of mutual trust, thus building a shared understanding of the actual economic conditions and policy directions in the different countries and facilitating efforts to pursue consistent policies. I thus hope that the Fund, while maintaining its hard-won mutual trust with members, will continue to provide objective policy recommendations and promote the policy discipline needed for noninflationary and sustained growth.
Second is the Fund’s role in providing financial and technical assistance to member countries. Along with providing appropriate technical assistance, the Fund has moved in a timely and appropriate manner to establish various facilities—including the structural adjustment facility, the enhanced structural adjustment facility, and the systemic transformation facility—in response to the needs of members in the changing world economy. I am, in this regard, pleased to see that the Interim Committee members recommended that the Executive Board further consider the proposal for a temporary increase in the annual access limits from 68 percent to at least 85 percent. I hope that the Fund will continue to perform its catalytic function as a provider of the financial assistance needed to promote disciplined adjustment policies by the borrowing countries and that it will continue to be able to respond flexibly to the changes in the world economy and financial markets.
Third is the role of the SDR. Many of the countries that did not participate in past SDR allocations are now in a time of economic transition, facing economic difficulties, and very much need to replenish their foreign reserve assets. I hope that an early agreement can be reached so that all member countries can fully participate in the SDR system.
Support for Developing Countries and Roles of the World Bank and Regional Development Banks
Now I would like to outline Japan’s views on assistance to developing countries and the role of the Bank. Recent economic trends in the developing countries show steady growth records in East Asia and Latin America, whereas in other areas, notably sub-Saharan Africa, growth remains sluggish. In order to achieve sustainable and global economic growth, we need to make constant efforts to assist the developing countries. Here, the following three points deserve the utmost priority.
First is the importance of providing adequate infrastructure. As we are all aware, priorities in development assistance are changing and diversifying toward areas such as poverty alleviation, human resource development, and environmental protection. Japan, of course, fully recognizes the significance of these priorities. In tackling these challenges, the concept of sustainable growth with equity remains highly relevant, as the East Asian experience has shown us. In achieving this goal, the importance of providing adequate infrastructure, such as transportation, telecommunications, and power, remains intact. In fact, there is still a great demand in developing countries for such purposes. Even in recently well-performing countries in East Asia and Latin America, inadequate infrastructure can lead to bottlenecks to medium-and long-term sustainable growth. I would also like to emphasize that the provision of clean water supplies, sewerage, irrigation, and rural roads is important in assisting the poor to improve their standard of living. Thus, Japan believes that the World Bank and regional development banks continue to have an important role in helping developing countries achieve medium« and long-term economic growth. In view of this role, the provision of adequate infrastructure should remain the primary task of these institutions. In this respect, it is imperative to pay due attention to environmental consequences and to mobilize private sector resources as well.
Second is aid effectiveness. In supporting developing countries, the effective use of aid, as well as sustained flows of resources, is extremely important. In this respect, it is necessary that the World Bank and regional development banks maintain streamlined business procedures and ensure effectiveness of their operations in the field. To ensure aid effectiveness, although self-help efforts of recipient countries should come first, it is essential that the Bank and regional development banks formulate country-focused, tailor-made prescriptions commensurate with the stage of development in each recipient country. In this context, I believe it is important that the World Bank, as the global aid institution, should incorporate the lessons learned from successful countries, notably those highlighted in its East Asian Miracle, into its specific country strategies and operations. Given the diverse needs of the recipient countries and the increasing call for tailor-made approaches, we need to appreciate each regional development bank’s distinctive features and operational characteristics based on the specific situations of each region. Japan fully recognizes these aspects. In order to support these institutions, it is essential to enhance their capital bases, particularly their concessional resources. In this regard, it is important that we reach an early conclusion to the ongoing negotiations for the seventh replenishment of the African Development Fund and make positive progress on the new negotiations for the eleventh replenishment of the International Development Association. Likewise, the Asian Development Fund’s seventh replenishment should also be placed on the agenda.
Third, in pursuing private sector development, the mobilization of private resources is increasingly gaining greater importance with the recent development of global capital markets. Thus, strengthening the catalytic role of the World Bank Group, including International Finance Company (IFC) and Multilateral Investment Guarantee Agency (MIGA), and the guarantee function of the Bank is all the more important. We would like to see their activities enhanced.
I should also stress that the Global Environment Facility (GEF), established at the Bank’s initiative, is an important mechanism for helping developing countries address global environmental issues. We welcome the agreement reached on reforming and enhancing the GEF, which started a new operation from July 1994.
Support for Economies in Transition
Next, I would like to touch upon support for countries in transition to market economies. We believe it is important that the Fund and the Bank, in close collaboration, continue to assist, through their financing and policy advice, those economies in transition and their self-help efforts to achieve further privatization and structural adjustment. Some Central and Eastern European economies that started adjustment efforts earlier are improving. Russia made progress in reducing inflationary pressure and containing fiscal deficits; it is expected to carry forward the adjustment efforts and to respond appropriately and in a timely manner to the international support framework centered around the Fund and the Bank.
Turning to Asia, it is crucial to extend adequate assistance to those economies in transition, such as Viet Nam, Cambodia, the Lao People’s Democratic Republic, Mongolia, and the Central Asian countries, which started their reforms from a more challenging position.
Relations Between the Fund and the Bank and the World Trade Organization
I would like to turn to the relations between the Fund, the Bank, and the World Trade Organization (WTO), which is scheduled to be established next year. The Uruguay Round’s successful conclusion was highly significant for world trade and world economic growth. It is essential that the WTO, the Fund, and the Bank cooperate closely, with each organization fulfilling its own functions in its area of responsibility and avoiding duplication of efforts.
Having developed a wealth of experience and expertise over the last fifty years, the Fund and the Bank have an increasingly important role to play in achieving the stable development of the world economy. I thus hope that they will continue to encourage sound macroeconomic policies for all countries—industrial, developing, and those in transition—and will continue to be pivotal in resolving the various issues facing the world economy.
Japan has been taking an active part in Fund and Bank activities, based on its own experience of economic development, assisted by financing from these two institutions. In 1993, our actual official development assistance totaled $11.3 billion, making Japan the world’s largest donor country for the third straight year in a row. Japan intends not only to provide financial support in collaboration with the Fund and the Bank, but also to offer further human and intellectual contribution to these institutions. It is a privilege to support the Fund and the Bank as they foster sound world economic development.
Statement by the Governor of the Fund and the Bank for Ireland—Bertie Ahern
I am glad that so many are taking the opportunity of this fiftieth anniversary year of the Bretton Woods institutions to review progress, assess performance, and look again at objectives. Review and renewal should, of course, be a constant preoccupation for shareholders, managements, and staffs of both institutions and not an activity limited to a special birthday celebration. I have met members of the development aid organizations in Ireland a number of times in the last twelve months. Ireland is very proud of their work in the developing world. The World Bank, the IMF, and the nongovernmental organizations (NGOs) all have a common goal—supporting development and alleviating the plight of the poor and hungry of the world. Against that background I am concerned that the NGOs have such a negative view of the role played by the Bretton Woods institutions.
There are two issues here. The first is one of perception, and the second relates to the impact on the ground of the development activities of the institutions. There is a need to change current negative perceptions. Both the World Bank and the IMF must intensify their liaison with international and national NGOs. Greater cooperation is necessary in my view to ensure not only increased transparency, and local participation, but more effective action on the ground to help the billion inhabitants of our planet who are living in a state of poverty.
I have heard some very critical views on the impact of the institutions’ activities on the poorest sections of the developing world. There is an onus on us to address that situation in a meaningful way. A willingness by the institutions to learn from past experience is a healthy sign. We are moving into a period of greater accountability. The international financial institutions, and their member governments, are now increasingly being called to account in a more rigorous way in national parliaments and by nongovernmental organizations. In the course of last year in Ireland, there was a significant parliamentary debate on the debt problem of the developing countries which covered the roles of the Fund and the Bank. I welcome these developments and trust that we will all rise to the challenge. Both institutions have shown in the past that they are responsive to changing circumstances, and that gives me confidence in their ability to face the future. The challenge now facing them is to prove their continuing relevance and effectiveness by word and by deed.
The structural adjustment process will have to be more people oriented while still bringing about the required macroeconomic adjustment. This means an increasing emphasis on people and their needs, involving them more in drawing up and implementing projects and programs. It also means ensuring that adequate provision is made both for access by all the people to basic health care and primary education and to protect the most vulnerable and marginal groups, including in particular women and children. In addition, the involvement of women in development must be further enhanced. There must also be a full evaluation of how effective these provisions have been in promoting human well-being. I would, however, add, from the experience of my own country, the importance of building a development strategy on stable macro-economic foundations.
The Response of the Institutions
I welcome the fact that the institutions are moving toward greater openness and transparency in the conduct of their affairs. I have in mind the World Bank’s improved information policy and its new “grievance procedure”—the independent inspection panel. I am glad that the IMF is also discussing increased openness and accountability. A particularly welcome feature is that the concept of good governance is being developed as one of the conditions for assistance. This can address such issues as excessive expenditure on military budgets, and institutional shortcomings that lead to waste of resources or diversion of expenditure from the key social areas. I am also glad to see that both institutions are becoming more sensitive to gender and environmental issues. This is vital to the people in the developing world. The Fund’s Managing Director participated in a seminar in Dublin on the IMF and the debt problem, organized by NGOs, and the World Bank organized a seminar on the Bank and poverty reduction. These are encouraging signs of a more open and proactive approach by these institutions.
I welcomed last year the reaffirmation that reduction in poverty is the benchmark for measuring the Bank’s performance. I am glad to see this year’s Annual Report opening with the statement that the Bank’s fundamental objective is supporting the reduction of poverty in its member countries. I particularly welcome the intention to target programs at poverty relief and the explicit commitment to support access to health and education, promote the role of women in development, and ensure provision of effective, comprehensive, and properly monitored social safety nets. I urge members to support and carefully monitor these developments.
I have previously drawn attention to the problem of Third World debt and called for greater action to combat it. At this meeting last year, I called for a debt relief package for Africa and the other poorest regions at least in line with the Trinidad terms. I am heartened to see that this approach is now more widely accepted. There is now a need to press on beyond the Trinidad terms. As the problems of bilateral public and private debt become more manageable, attention is now focusing more on the remaining indebtedness to multilateral institutions. It is clear that the measures taken up to now do not go far enough in addressing the debt problems of the most severely indebted poorest countries, especially in Africa. At a minimum, there needs to be a further major increase in concessional financing to countries within this group, which are making serious efforts to develop their economies only to find themselves caught in a debt trap. Both governments and nongovernmental organizations are calling for further initiatives in this area, including the sale of some gold reserves. I will be happy to support measures that would help the poorest and maintain the effectiveness of the institutions in the development process.
Resources are limited and donors have a real choice between allocating them to multilateral institutions or using them as part of their own bilateral aid programs. The multilateral institutions will have to demonstrate constantly, to the satisfaction of donors, that their activities are at least as efficient, and as effective, as the donors’ own bilateral programs. They must, in effect, be a model of the fiscal behavior that they encourage in their membership. In this spirit, I endorse the recent proposal of the President of the World Bank for an annual 6 percent reduction in real terms in the administrative budget of that organization over the next few years.
I am encouraged by the current, generally upbeat, assessment of the world economy for this year and next. Despite the upturn in world growth, unemployment remains the major blot on the record. In welcoming renewed growth worldwide we must not lose sight of the uneven spread of this growth. For example, in areas such as sub-Saharan Africa, economic performance remains very disappointing.
I am pleased to report that the Irish economy is performing extremely well with the expectation of GNP growth of over 5 percent this year and a significant increase in the numbers employed. However, unemployment, at 15 percent of the labor force, remains a serious problem. Our progress, I believe, bears out the view that prudent management of the public finances is a precondition for achieving strong and sustained growth in output and employment.
The fiftieth year of the Bretton Woods institutions is a good opportunity for a fundamental review of their role. I am confident that they will remain flexible in their approach and be ready to respond to new issues as they arise. The issues of world poverty, debt, and the environment are, for some, life and death issues. They need to be addressed more intensively than at present. The cries of those in need must be answered. Both the Bank and the Fund must be part of that answer.
Statement by the Governor of the Bank for Tonga—James Cecil Cocker
It is an honor for me to represent the Government of the Kingdom of Tonga at the Forty-Ninth Joint Annual Meetings of the Fund and the Bank. I join my fellow Governors in expressing gratitude to the Chairman, the Honorable M. Saifur Rahman; the President of the World Bank, Mr. Preston; the Managing Director of the Fund, Mr. Camdessus; and to the management and the staff of both institutions for the marvelous effort put into the preparations of this meeting. I also extend my special thanks to the Government and the people of the Kingdom of Spain for the excellent arrangements for this meeting and the hospitality extended to all of us here in Madrid.
This year is special as it marks the fiftieth anniversary of the Bretton Woods institutions since their inauguration at Bretton Woods, New Hampshire, in July 1944. The Bretton Woods institutions were established with the prime objective to “assist in the reconstruction and development of territories of members and to encourage the development of productive facilities and resources in less developed countries thereby assisting in raising productivity, the standard of living, and conditions of labor in their territories.” At this threshold, we can all marvel at the substantial achievements that these institutions have made in the reconstruction of Europe.
However, the continuous political and economic changes require that the Bretton Woods institutions must also adapt to accommodate the changing demand that emerged as a result of this global evolution. Notable in this change has been the rapid increase in the number of developing countries and of economies in transition becoming members of the two institutions. The admission of these new members means that the original objectives of the Fund and the Bank must be adjusted to match the unique circumstances prevailing in these countries. Indeed, the celebration of the Bretton Woods institutions’ fiftieth anniversary provides us with the opportunity to initiate changes that are necessary in order to meet the new challenges emerging from the economies of these new members. Inevitable in this process would be for the Fund and the Bank to be more flexible in their policy guidelines so that they could be adjusted to the different circumstances.
In making these adjustments, however, it is important that the Fund and the Bank not lose sight of their original objectives. For the Fund, it is crucial that it retain its fundamental role of providing macroeconomic stabilization policy guidelines to its developing members. For the Bank, it must focus on its central objective of reducing poverty via sustainable economic growth. We welcome the successful completion of the Uruguay Round, in which both the Bank and the Fund have been greatly involved. The widening of markets and the consolidation of multilateral rules will give a new boost to world trade. The uncertainty about the future of the multilateral trading system has been reduced. With the reductions of tariffs and nontariff barriers, the developing countries are expected to benefit from economies of scale, transfer of technology, increased openness, and global competition in trade.
However, it should be noted that the trend toward liberalization in the wake of the Uruguay Round will, in the short term, have an adverse impact upon the Pacific island economies, including that of Tonga. This means that the level of competition which exporters from Pacific island economies will face in world markets will steadily increase. In this regard, we would urge that the Bank and the Fund monitor closely any adverse impacts that the Round may have on developing countries, especially the poor and small island economies on a country-by-country basis.
On resource flows to developing countries, we are pleased to note the spectacular surge in private capital flows, which reached an all-time high of about $155 billion in 1993. However, while welcoming the increased private flows to developing countries, many low-income developing countries (including small island economies) will continue to rely heavily on aid for development financing. In this regard, donors must be urged to maintain their contributions to the International Development Association (IDA) and to Overseas Development Assistance (ODA); for many developing members these are their only sources of development finance.
Turning to specific Fund matters, we welcome the implementation of the enhanced structural adjustment facility (ESAF). However, we note with concern that the new expanded ESAF pool, which is funded by voluntary contributions or loans by members, has seen a lot of contributions by developing countries while industrial countries’ contributions have not increased significantly. We laud the speedy implementation and flexibility of the new facilities granted to those economies undertaking transition toward market economies in Eastern Europe and the former Soviet Union. While we recognize the need for resources to be devoted to these economies in order to maintain global economic and social stability, this should not be achieved at the expense of developing nations, and we must stress that similar considerations should be given to their demands.
In enhancing the efficiency of the Fund, we welcome the role of the Interim Committee in this respect. My Government also supports the package developed by the management of the Fund for handling both a general component of the SDR allocation and a special allocation. This should be beneficial both to newly emerging market economies as well as to existing members. Tonga has benefited from advice received from the new Pacific Financial Technical Assistance Centre, located in Fiji and financed jointly by the Fund and the United Nations Development Program. This institution makes a valuable contribution to the pool of technical assistance available to the Pacific island economies with their limited skills and resources, and Tonga supports the foundation and continuation of this new facility.
On Bank matters, we endorse the institution’s commitment to achieving its central objective of reducing poverty. This should be reflected in its lending programs and policy guidelines. Priority should be on human resource development, agriculture, infrastructure, and private sector development. Having said that, let me underscore the importance of Bank resources, especially IDA, to our region. I would urge that the Bank maintain its current allocation to our region.
We welcome the incorporation of gender issues into development to ensure that the benefits of development are widely distributed. My Government has accorded high priority to gender issues, which is marked by the establishment of a unit for women’s affairs in the Prime Minister’s Office. This unit helps to coordinate all development activities being carried out by women’s groups in the country. We also welcome the Bank’s emphasis on environmentally sustainable economic development. It is important that we are conscious of the impact that development can have on our environment, especially among small islands, of which we in the small nations of the Pacific are only too aware. To this end, I am pleased to note the completion of the Global Environment Facility pilot phase and its transition to a permanent body early this year.
On the International Finance Corporation, we welcome the establishment of the South Pacific Project Facility, which provided project preparation services, including the market, technical, and feasibility studies needed for raising financing for projects. We are aware that a decision is required before the end of this year regarding the Facility’s continuation. Tonga supports the continuation of this Facility.
Turning to the recent economic development in the Tongan economy, I am pleased to disclose that, over the last few years, Tonga has enjoyed very favorable economic conditions. The Government continues with its objective of promoting private sector development, human resource development, exports, tourism, and the construction of necessary infrastructure. Major expansions have taken place in transport, communications, power, and water supplies. In order to provide finance for the private sector, priority has been given to establishing the banking sector. This has been marked by the admission of two new banking institutions to the Kingdom over the last year. Institutional strengthening measures have been initiated in many government ministries. Further consideration is given to a more substantial rationalization of public services. The objective is to improve the efficiency of the public sector and to enhance private sector development. The Government is also in the process of corporatizing and privatizing many of its commercial activities.
The above policy orientations have contributed to the recent recovery in the economy. Growth is estimated at 5.7 percent for 1993/94 (factor cost); exports have been strong; and tourist visitors are on the increase. Major growth has also been seen in the agricultural sector, even though we must not overlook the need to diversify, rather than relying heavily on squash exports. The government budget has been in surplus, and foreign reserves have recently reached record levels. External debt, most of which is long-term soft loans, has been well under control.
Tonga is very conscious of the value of its membership in both the Bank and the Fund. We consider the regular consultations with both institutions to be very beneficial, and we hope that the technical assistance we receive will be sustained in the future to support our adjustment efforts. Equally important are the lending resources available to us from the Bank, especially IDA resources, which could be crucial in the development of our agricultural and social sectors.
In conclusion, I wish to pledge the continued support of the Kingdom of Tonga to the two institutions. In facing the challenges that lie ahead and in the preparation for the twenty-first century, we agree with the Bank’s own conclusion that the Bretton Woods institutions must observe the following principles: selectivity, partnership, client orientation, result orientation, cost-effectiveness, and financial integrity. We wish the two institutions success.
Statement by the Governor of the Fund for Turkey—Aykon Dogan
It is an honor for me to address you at these plenary sessions of the International Monetary Fund and the World Bank. I would like to take this opportunity to congratulate our host, the Spanish Government, and to thank it for its contribution to the exemplary organization of these meetings.
On their fiftieth anniversary, the Bretton Woods institutions are continuing to oversee the world’s economies. I believe that their role will acquire new dimensions in the years to come in the changing international environment. These two institutions fulfilled their respective roles in the recovery of the world economy in the aftermath of World War II. The IMF has sought to ensure the stability of world exchange rates and has successfully averted crises. Using the mechanisms that it itself has created, the IMF has been able to address a variety of needs. The most recent example is the systemic transformation facility for the former socialist economies. I believe it is generally recognized that the IMF has provided worthwhile solutions during crisis periods.
However, the IMF needs to display greater inventiveness if it is to resolve the problems facing the international monetary system. This is because substantial changes have occurred in the world over the last fifty years. World markets are sensitive to political decisions, which they assess rapidly. In particular, foreign exchange flows in the seven major industrial countries have important consequences. The IMF will have major contributions to make in this regard. The Fund has resources conducive to achieving solutions capable of ensuring stability on world markets. The mobilization of these resources will enhance the IMF’s moderating influence in a changing world. The work relating to the Tenth General Review of Quotas must be completed if the increasing needs for resources are to be addressed.
The World Bank Group likewise has an important role to play in assisting the developing countries. The World Bank has played a leading role in assisting these countries make the transition to market economies, and in so doing it has created an environment conducive to the development of private investment in a number of countries.
However, the IMF and the World Bank must adapt to changing world conditions. Today, the environment has become a fundamental issue where development is concerned. Human resource development, emigration, the environment, health, and education have become priority issues. The economic and social role of the state has been called into question. It is essential to create an environment conducive to promoting the development of private enterprise.
If the World Bank is to resolve these fundamental issues, it must seek to utilize its resources efficiently. For this to occur, the development priorities of each country should be clearly determined, and the proposed solutions should take account of each country’s specific features and structure. Such an approach will enable the World Bank, drawing upon its half century of experience, to respond to changing requirements. I am convinced that the discussions held and agreements reached during these meetings will have important consequences for the world economy.
At these meetings, I have observed encouraging changes in the world economy in comparison with previous years. In particular, the fact that the industrial countries have been emerging from their recent recession is a most welcome development. The conclusion of the Uruguay Round has strengthened our expectations with respect to the stimulating effects of free trade on the world economy. I have watched with satisfaction as the developing countries, particularly in Southeast Asia, have embarked upon a process of dynamic growth. The fact that the formerly planned economies have begun to overcome the difficulties inherent in their transition period is a further welcome development. However, if these encouraging developments are all to be sustained in the long term, the existing policies will have to be pursued with the same degree of care and effort. The confidence and credibility afforded by these policies must be carefully preserved. Both the developed countries and the developing countries should make greater efforts to ensure that this success can continue.
I would like to take this opportunity to refer to the problems associated with the transition period in the formerly planned economies. The fact that private sector operations have taken hold in countries that had long been characterized by the efficiency-destroying policies and methods of the centrally planned system is an encouraging sign. These developments show that the structural adjustment efforts in these countries have begun to bear fruit. The success of the privatization programs in some of these countries is also worthy of note. The inflows of foreign capital into the region will culminate in the development of market mechanisms. Economic problems will be eased as a result. The IMF and the World Bank will undoubtedly continue to play a major role in helping to resolve these countries’ problems. In addition, a return to orderly and peaceful conditions in the Caucasus region will enable countries in that region to make optimal use of their natural resources. Turkey is making efforts, in both the private and public sectors, to create opportunities for cooperation within that region. I am convinced that regional organizations, such as the Black Sea Economic Cooperation Organization, can make a major contribution to stimulating economic activity within the region and to ensuring that the countries of this region can become integrated into the world economy.
Turkey is taking the necessary steps by establishing market-oriented principles and achieving integration with the rest of the world. In addition, Turkey is strengthening its ties with the European Union. It is in this context that the work necessary for the establishment of the Customs Union preliminary to Turkey’s accession to the European Union has reached its final stages. The standards that Turkey has achieved in recent years in its industrial sector and services sector have come closer to the standards found in the countries of the European Union. We expect that once the Customs Union with the European countries is achieved, these standards will become closer still and the efficiency of resource utilization will increase. Turkey stands ready to fulfill its obligations vis-à-vis the Uruguay Round, which was concluded last year. The liberalization that Turkey has achieved in its trade arrangements in recent years ensures that Turkey will be able to adjust to the new world order established by the Uruguay Round.
Finally, as we stand at the threshold of the year 2000, Turkey will be pursuing the reform policy that it began in the 1980s, and will enter the twenty-first century as a player in the world economy. In conclusion, I am convinced that solidarity and cooperation among countries will be strengthened through the contribution of the IMF and the World Bank. Further global progress can be expected as a result. As in the past and in the present, the historic mission of the IMF and the World Bank will continue to grow in the future.
Statement by the Alternate Governor of the Fund for Germany—Theo Waigel
As Germany currently holds the Presidency of the Council of the European Union, I have the honor to address this meeting on behalf of the twelve member states. I would like first of all to thank the Spanish Government for the excellent organization of this meeting and for the warmth of the hospitality extended to us here in Madrid. I welcome Eritrea as a new member of the Bretton Woods institutions.
Fifty years ago, the IMF was established to promote international monetary cooperation, exchange rate stability, and the expansion and balanced growth of world trade. In fulfilling its mission, the IMF has contributed decisively to the free flow of goods, services, and capital, and thus to a more efficient allocation of resources. Since the establishment of the Fund, the volume and the forms of trade and payments have increased enormously, and the challenges have continuously changed. Particularly important milestones came with the end of the Bretton Woods system of fixed exchange rates, the emergence of the debt problem, and the beginning of the transformation process in the countries of Central and Eastern Europe and of the former Soviet Union. In the face of these challenges, the IMF showed itself to be an effective institution, because it was able to adapt while at the same time remaining true to its objectives. The guiding principle of the IMF—that economic, monetary, and fiscal policies consistently directed to stability are a necessary condition for currency stability—retains all its validity.
The experience that we have had in Europe confirms that stable exchange rates cannot be mandated but require, as a prior condition, consistent and credible economic policies on the domestic front. We have acknowledged in the Maastricht Treaty that there is no easy monetary way out of the member states’ economic and financial problems; there is a ban on financing of the public sector through money creation by the central bank or through privileged access to other financial institutions. Within the exchange rate mechanism of the European Monetary System, the broad stabilization of exchange rates has been maintained. Shifts in the U.S. dollar exchange rate gave rise to no disturbance within the exchange rate mechanism, in contrast to what happened in earlier years. Most of the currencies formerly respecting narrow margins are again quoted close to their central rates, which have not changed.
The member states of the European Union are resolved, through policies directed to stability adopted on their own responsibility, to meet the criteria relating to convergence that are laid down by the Treaty on European Union for entry into the final stage of economic and monetary union. The European Union underpins the national efforts with pressure for adjustment generated within the Community in the course of its comprehensive surveillance of economic, monetary, and budgetary policies. The procedures agreed upon in the Maastricht Treaty to foster convergence must, in the present second stage of economic and monetary union, be given an effective form such as will impart new momentum to the noninflationary convergence of policies and economic fundamentals in the member states. In particular, during the second half of 1994, the new excessive deficit procedure will come to the fore. It lies at the heart of the convergence process, which is important in itself but which is also crucial for the preparations for the final stage of economic and monetary union.
The worldwide recovery that has now set in, and the ongoing gradual reduction of the differences between the cyclical positions of the industrial countries are creating conditions that bode well for more stable exchange rates between the main currencies and for greater stability in the international financial and foreign exchange markets. In this connection, the IMF is the indispensable forum for monetary cooperation, including surveillance among the industrial countries. The participation of the Managing Director in Group of Seven surveillance is an important element that will also help to bring the problems and the views of the other members of the IMF generally into the Group of Seven process. The recovery of the world economy has progressed further since the spring. While the strong recovery in Canada, the United Kingdom, and the United States continues unabated, the forces of growth are now also being established in the economies of continental Europe and have given rise to markedly better expectations of growth even as regards the current year. Inflation has been reined in in most of the industrial countries; in some countries there are good prospects for a further reduction. This progress toward stability has enabled monetary authorities in Europe to reduce further their interest rates. However, the renewed worldwide rise of long-term interest rates underlines the importance of credible financial policies. Further consolidation of public finances in all industrial countries will be a central element, in order to bring the state’s absorption of savings back down and thus at the same time to release savings for private investment.
The persistently high level of unemployment remains the biggest political, economic, and social problem. The issues raised by this problem were thoroughly discussed by the European Union in Corfu. We were unanimously of the view—despite the ever more evident cyclical recovery in Europe—that we should reinforce our efforts to promote growth and employment. In that connection, we reached agreement on the following three central “characteristics for the economic policy” of the European Union countries:
We hold firm to the stability-oriented policy, and we are striving to make further progress on price stability.
We will push ahead with efforts for the further consolidation of government budgets as provided in the national convergence programs and, in addition and where necessary, will reinforce them.
We are to improve further the flexibility of our economies— particularly in labor markets—and their competitiveness. This includes pressing ahead with reforms in member states to improve the efficiency of labor markets, privatization, the construction of trans-European networks for transportation, energy, and telecommunications, and further action to ensure the full effectiveness of the European internal market.
In order to foster higher and lasting global growth, employment, and living standards on a firm basis, the European Union supports free trade. Central to our efforts is the implementation of the outcome of the Uruguay Round, including the establishment of the World Trade Organization (WTO). The European Union will endeavor to ensure that the treaties resulting from the Uruguay Round are ratified in time for them to come into force on January 1,1995. The ministerial meeting at Marrakech in April agreed on the work program for the WTO Committee on Trade and Environment, thus providing a forum for making progress through constructive cooperation rather than dispute and confrontation. It also provided for consideration of whether other issues should form part of the future work of the WTO. In considering these questions, the aim must be to preserve the open multilateral world trading system, to ensure nondiscrimination between domestic and foreign products, and to avoid measures that are open to protectionist abuse.
The European Union calls on the IMF, the World Bank, the Organization for Economic Cooperation and Development (OECD), the World Trade Organization, and the United Nations to work together in full respect of each other’s competencies. The signature of the Treaty of Accession to the European Union with Austria, Finland, Norway, and Sweden, as well as a widening network of Association, Free Trade, Partnership, and Cooperation agreements, make it clear that the European Union is successfully bringing together the peoples of Europe in close partnership.
The European Union has opened up clear prospects of accession to the countries of Central and Eastern Europe associated with the Union by Europe agreements. The central challenge now is to establish the preconditions for later accession. The European Union will give its support to the countries of Central and Eastern Europe with a consistent policy of further encouragement within the framework of the existing Europe agreements. The European Union will continue to support the economic reforms in the states of Central and Eastern Europe and of the former Soviet Union through technical and financial assistance. Substantial financial means are available for technical assistance within the framework of the Poland and Hungary Assistance for Economic Restructuring (PHARE) and the Technical Assistance for the Commonwealth of Independent States (TACIS) programs. The European Union has renewed the European Investment Bank lending window and will continue to cooperate with the multilateral financial institutions to integrate the countries of the region into the world economy.
The European Union has, moreover, facilitated the conclusion of program-based agreements with the IMF through the substantial balance of payments assistance granted to the countries of Central and Eastern Europe in the framework of the coordination mechanism set up by the Group of Twenty-Four OECD countries. The European Union and its member states have borne far more than their fair share of the burden of financial support for the transformation process, and we call upon those that have not done so to do their part.
The evidence is that economic progress and the prospect of self-generating economic development are to be expected soonest where reforms oriented to the market economy have been introduced at an early stage and consistently applied. In most of these countries, the task is to build on the economic progress already made, to strengthen it through budgetary and monetary policies oriented to stability, and to come to a successful completion of the transformation process by pressing on with structural reforms. We are worried, however, at the slow progress of reform and the consequent continuing fall of output in some of the countries of the former Soviet Union. The preconditions must quickly be established for a perceptible improvement in the living standards of the population of these countries in order to ensure the success of the reform process. It is important that the Fund continuously examine the design of the reform programs from this point of view as well as from others.
The success of many developing countries, above all in Latin America and Asia, likewise rests on consistent market-oriented reforms, often made in close cooperation with the Bretton Woods institutions. Improved creditworthiness has opened up access for many of these countries to the private capital market and provoked an inflow of private investment. It is, however, of decisive importance that these resources be put to productive use. The other side of the coin is that stagnation, poverty, famine, and disease persist in some countries, above all in Africa, and this gives rise to most serious concern within the European Union. One lesson of both successes and failures is that policies matter. The recent World Bank study Adjustment in Africa concludes that countries that undertook macroeconomic reforms have had higher growth rates than those that did not. There is now an almost general consensus on the market-friendly approach outlined in World Development Report 1991, consisting of a stable macroeconomic policy, a competitive microeconomy, investment in people, and an internationally oriented economy.
The Union puts high value on cooperation with the developing countries, and we are committed by the Maastricht Treaty itself to take account of the goals of development policy in the pursuit of those of its general policies that could affect the developing countries. Above all, the poorest countries will continue to need our support in the future in their adjustment efforts. That is why, in spite of the difficult budgetary situations in our countries, we will endeavor to maintain our efforts in the field of development cooperation. We welcome the renewal of the IMF’s enhanced structural adjustment facility, through which the poorest developing countries obtain financial resources on concessional terms. The European Union encourages the Paris Club vigorously to pursue its efforts to improve the terms that it applies to the poorest countries. Where appropriate, these countries should be granted a final reduction of the total volume of their debt and a higher debt-forgiveness ratio.
We regard the declining trend of recourse to World Bank credit in a number of developing regions as welcome evidence of the successful implementation of market-oriented economic policies and of the related extension of these countries’ access to private capital. The falling share of adjustment operations in the World Bank’s lending similarly indicates that many developing countries have come through their adjustment phases successfully. The Bretton Woods institutions have played an exemplary part in these favorable developments. At the same time, the World Bank also faces heavy tasks, particularly in continuously improving living conditions in the poorest countries—and in particular supporting with determination those countries, including those in Africa engaged in a process of adjustment—but also in supporting the historic transformation taking place in the economies of Eastern Europe and of the former Soviet Union. We welcome the efforts made to date by the World Bank in these fields and urge it to continue in this path. We equally welcome the central role that has fallen to the World Bank in supporting the adjustment process engaged in the context of the devaluation of the CFA franc, the peace process on the West Bank and in the Gaza Strip, and political change in South Africa. We also look forward to a satisfactory outcome to the eleventh replenishment of the International Development Association (IDA-11) negotiations, which have begun, and urge all countries to consider their contributions in that light.
The European Union notes with satisfaction the completion of negotiations on the restructuring and the replenishment of the Global Environment Facility (GEF). With the assumption of its responsibilities by its Council, the GEF has now entered on its long-term phase; it will greatly facilitate the efforts of the developing countries to achieve environmentally sustainable growth. Environmental sustainability is, however, not limited to GEF projects only. All development aid efforts should take account of environmental considerations. Moreover, environmental concerns increasingly call for attention in the policies of both industrial and developing countries. With regard to access to IMF resources, the European Union supports the proposal for a temporary increase in annual access limits from 68 percent to at least 85 percent of quota.
In conclusion, we wish to thank the Bretton Woods institutions for their valuable work in the service of their members over the last fifty years. The institutions are now facing new challenges and increased scrutiny in the changing world economic and social environment. We are confident that the Fund and the Bank are well equipped, within their respective spheres of competence, to master the challenges that the future will bring. They can rightly be proud of their high standing and of their highly motivated staffs, and they can count on the strong support of their memberships.
October 4, 1994.