Chapter

Discussion of Policy at Third Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1994
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Report to the Boards of Governors of the Fund and the Bank by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee)—Mourad Cherif

This annual report deals with the work of the Development Committee for the year ended June 30, 1994. During this period, the Committee had two meetings chaired by my predecessor, Minister Rudolf Hommes of Colombia. I would like to pay tribute to his distinguished work.

At the fall 1993 meeting, the Committee discussed the “Adjustment Experience of Low-Income Countries and Implications for Financing Needs.” This item followed up the Committee’s discussions on resource transfers to developing countries, which started in 1992. Ministers recognized that, during the period 1987-92, those low-income countries, which persisted with strong adjustment programs, did better in reaching their growth and development targets than those that faltered or never started. Ministers, therefore, welcomed the broadening political consensus on adjustment strategies that stress macroeconomic stabilization and market-friendly measures combined with human resource development and poverty reduction. Ministers underlined that foreign investment, substantial and timely concessional financial support, and appropriate debt relief were crucial for those countries. Ministers urged the World Bank and the IMF to do more to address the impact of macro-economic and adjustment measures—and their sequencing—on poverty, employment, investment, and environment in the borrowing member countries.

The second item was “Social Security Reforms and Social Safety Nets.” On social security reforms, ministers looked critically at Latin American and European models, which they did not think appropriate for all developing countries. They recognized that, although the mix should vary from one country to another, a system combining elements of public and private provision would be appropriate in most developing countries. Ministers recognized that social safety nets must be an integral part of future adjustment programs and of poverty-reduction policies. They also underlined the need of the poorest countries for technical and financial support from the World Bank, the IMF, and donors.

At the spring 1994 meeting, the first item was “Population and Migration.” Without prejudging its outcome, the UN Conference on Population and Development (which was held in Cairo last month) gave ministers an opportunity to review some key population issues and particularly their financial implications. Ministers identified three priorities: family planning, better education, and basic health care. Ministers agreed that these sectors need more funding—from a combination of charges to consumers, government resources, bilateral donors, and multilateral organizations—and that help must be provided particularly to the poorest countries. In this context, ministers welcomed the increasing share of the World Bank’s social sector programs in the total; these programs have risen from 6 percent to 16 percent of its total portfolio in the past five years.

The second item was “Trade After the Uruguay Round.” Ministers welcomed the successful conclusion of the Uruguay Round in April at Marrakech and the Declaration of Marrakech, and called for their rapid ratification and full implementation. Ministers agreed that the conclusion of the Uruguay Round opens up new prospects for many developing countries—although some, particularly in Africa, may suffer adverse effects because of loss of preferences or higher prices for food imports and deserve special attention and help from the world community to get them. Ministers, therefore, urged the World Bank and the IMF to take account of possible adverse effects in designing country assistance strategies and operational support for the affected countries. They also urged the World Trade Organization, the World Bank, and the IMF to cooperate fully and, within their own areas of responsibility, to help developing countries and countries in transition to take advantage of new markets. The Committee discussed this issue again here in Madrid two days ago and will continue to follow it up very closely.

The Committee also agreed to establish a task force to review the developmental role being played by the multilateral development banks, including the World Bank, and the four main regional banks. A chairman has now been appointed, and the Committee wishes the task force to start its work very quickly. Ministers also discussed a number of other topics. These included: the impact on developing countries of recent trends in the world economy; commodities; the Global Environment Facility; women in development; the Special Action Program for Africa; debt strategy; and the response to challenges in Central and Eastern Europe, the countries of the former Soviet Union, the West Bank and Gaza, South Africa, CFA zone countries, and Viet Nam.

Statement by the Governor of the Bank for the Philippines—Roberto F. De Ocampo

On behalf of the Philippine delegation, I join others in congratulating the International Monetary Fund and the World Bank on the occasion of their fiftieth anniversary.

The world has changed dramatically since that day in July 1944 when representatives of forty-four countries including the Philippines, joined hands at Bretton Woods and established a global framework for economic cooperation, which was born of a shared noble vision that global war would never occur again and that true and lasting peace would be attained in our time. The goals were clear: put the world back on its feet and tackle the causes of global unrest right at their very roots. The specific game plan was to assist in the reconstruction and rehabilitation of countries ravaged by war, provide a catalyst for the development of productive facilities and resources in the less-developed countries, and promote the expansion of global trade and the growth of the world economy through policies supportive of greater international cooperation.

It is a tribute to the vision of those who have come before us and the leadership of these institutions, past and present, that through their responsiveness to the continuing evolution of the international environment, these institutions have played key roles in the reconstruction of postwar Europe and Japan, the remarkable growth and poverty reduction in East Asia, the increase in food production in South Asia, and the resolution of the debt crisis in Latin America. Ongoing initiatives of these institutions are now in place to mobilize resources for the economic transition in Eastern and Central Europe and the nations of the former Soviet Union, as well as the peacemaking process in the West Bank and Gaza Strip.

We also acknowledge the active support of both the IMF and the World Bank for the conclusion of the Uruguay Round of Multilateral Trade Negotiations last year. The dismantling of trade barriers under the Uruguay Round Agreements is expected to bring about economic restructuring that will increase trade and help countries realize more fully their development potential. However, before the benefits of a more open global trading system can be realized, we need to ratify the agreements in our respective countries, a process at least as complex and delicate as the negotiations themselves. The Philippines is now working vigorously on this and, together with other developing countries that have adopted outward-oriented policies, we do so with the expectation that the promise of the Uruguay Round will be fulfilled and that, indeed, our access to industrial country markets will be enhanced and with it our growth prospects.

It is a pleasure to hold this year’s meetings when economic recovery in the industrial countries is well underway. We are hopeful that this upturn will be a durable one, characterized by low inflation and high employment. We are confident that the Bretton Woods institutions will be active and effective in providing advice to ensure that this upturn will be managed through a balanced policy mix consistent with stable macro-economic conditions and sound structural reforms that will enhance longer-term growth.

Indeed, the Bretton Woods twins have traveled far and wide over the past fifty years. But I observe that, rather like men in midlife crisis, they now are engaged in some degree of introspection, even self-doubt, as they search for pathways to find new meaning in life. For even as they have helped rebuild and develop a vibrant global economy from the ruins of war, the problem of poverty in many lands remains compelling. We are, nevertheless, encouraged by the directions toward which change is presently contemplated and hope that as a new era begins for the Bretton Woods institutions, these changes will allow them to have continuing flexibility in their operations. Particularly, in the design and implementation of adjustment programs, they need to guard against substituting dogma for good sense, resist insisting on the impossible best at the expense of the achievable good, avoid clutching at the comfort of already agreed-upon conditionalities in place, and use more rigorous surveillance of the situation in light of dynamic developments—not only in the economy but also in the body politic. In the realm of policy, may I strongly suggest that the dawning of this new era be marked by even more serious consideration of policy suggestions emanating from developing countries themselves, such as those embodied in this year’s Communiqué of the Group of Twenty-Four.

For us in the Philippines, this fifty-year anniversary serves as an opportunity to assess the evolution of our own economy, as well as our relationship with the Fund and the Bank, which is exceptional among developing countries in both its duration and its intensity. The Philippines was one of only three Asian countries, as well as the only Southeast Asian country, that participated in Bretton Woods fifty years ago. Since that time, and with the exception of a period of flirtation with authoritarianism, we have proceeded with our economic development in the context of our people’s unshakable belief in democracy. It is only fair to admit that the record of performance has been mixed and there are those that are wont to say that democracy is in fact the problem.

More recently, however, the Philippines has laid the foundation for long-term sustainable growth with the valuable assistance of the Bretton Woods institutions and the international community at large. We have undertaken wide-ranging reform efforts in consolidating the fiscal position; liberalizing investment and trade and financial regimes; initiating aggressive privatization and a government corporate reform program; and leveling the playing field for private enterprise.

We are now beginning to enjoy the fruits of these reforms. The economy, fueled by investments and exports, registered robust growth in excess of 5 percent this year, after three years of stagnation and earlier years of roller coaster economic performance. Moreover, this growth was accompanied by single-digit inflation and interest rates, a stable peso, and record foreign exchange reserve levels. These reforms have enhanced confidence and encouraged inflows from diverse sources: official assistance, foreign direct investment, portfolio investments in private firms, privatization proceeds, and capital flight reflows. Together with an improved fiscal position and sound monetary management, these have lowered the cost of capital in the economy and enhanced growth prospects further.

We have no intention of resting on fresh laurels and drifting toward complacency. We intend to nurture this growth, push reform forward, and build success upon success in a cycle of confidence and results. At the same time, as a functioning democracy, we will proceed speedily, not hastily, to ensure that the social consensus for such reform is sustained and that growth will not proceed for its own sake but will always be balanced with an eye to equity and with a conscious effort to ensure that the disadvantaged will not be left even farther behind. More relevant to the memory of Bretton Woods, we likewise reiterate that our basic strategy of governance reflects the words of John Maynard Keynes, who said, “The important thing for the government is not to do things that individuals are doing already, and do them a little better or worse; but to do those things that are at present not done at all.” While our resolve is driven by our people’s economic aspirations, our efforts have a further dimension. We also see this as a grand enterprise—to prove to the world that there now looms another Asian model of development worth watching, one that considers the fuller development of human potential and adheres closely to democratic principles and processes, with wider participation by the people in decision making. It is a model based on the faith that in the final analysis it is democracy that can sustain and promote true development.

It is perhaps not too presumptuous to proclaim this faith here in Spain this week, when we are celebrating the fiftieth anniversary of the Bretton Woods twins. For, indeed, if democracy does not promote development, how else do we explain the flowering of democratic Spain and her economy in the past two decades? What else, if not this faith, prompted the believers of democracy in 1944 to join hands to craft a framework for liberal economy and trade for the prosperity of all?

Can there be sustainable development without true democracy? Without fair, transparent, and durable rules that respect individual initiative and make markets work efficiently? Without the assurances to private enterprise that there are institutions, and not just men, which can protect property rights durably and provide for orderly political succession? Without an accountable government that can collect needed revenues legitimately? Without the full participation in the decision-making of those who are to be the beneficiaries of development? Without an environment where freedom, both political and economic, will endure?

Recently, it has become fashionable, however, at least when looking at Asia, to think that the only key to economic success is a strong and authoritarian government rather than an elected one. There have been those who have told us that although democracy is a good thing, there is a price that we have to pay. So be it. We have paid the price in the past, even with our lives, and we are prepared to pay for it again in the future. To those who say that discipline is a prerequisite to progress, we say freedom is the prerequisite to true and lasting progress. We say this with the admonition to others that freedom is not to be equated with anarchy, but at the same time, discipline is too often equated with suppression.

Because of the apparent slowness of its processes, and in light of apparent recent experience in our part of the world, prosperity with democracy is a great challenge for the Philippines and for all others who believe in it. But let us all face this challenge, bearing in mind the thought “Wouldn’t it be truly even more worthwhile and meaningful to pull it off and demonstrate that this is possible?” I realize that there is nothing particularly unique in announcing to you that yet another Asian economy, in this case, the Philippines, aspires to be a tiger or dragon economy before the turn of the century. But tigers may use their strength to prey on the weak, and dragons may breathe fire that can burn forests. In our quest for a balanced march to progress, we hope to emerge as a kinder and gentler tiger or dragon, if you will, but a tiger or dragon nevertheless, growing in strength, to be sure, but balancing this with equity and concern for the needy and breathing fire to bake an ever-growing economic pie for our people, all of these in the context of a democratic society.

In short, we are determined to prove that there is yet another way that miracles in Asia can happen. Keep watch.

Statement by the Governor of the Bank for Greece—Yannos Papantoniou

The economic outlook seems to have improved considerably since our last meeting. All around the world, economic activity is firming up while inflation in industrial countries has been squeezed to the low levels experienced in the 1960s. In Europe and in Japan, protracted recessions have given way to mild recoveries while in the English-speaking countries, the economy continues to expand, as earlier upswings have been picking up in strength. In the developing world as a whole, growth has been robust. Most of the expansion, however, is taking place in the dynamic economies of Asia and Latin America, while in most of the poorest countries, and especially those in Africa, living standards have been declining. Finally, the transition countries seem to be poised for a resumption of growth, though considerable blockages continue to delay the transition process in most of the countries of the former Soviet Union.

Sound economic policies have contributed to good performance in most countries. Continued emphasis on macroeconomic stabilization and structural reform is, however, necessary if growth is to be sustained over the medium term. We should not allow fiscal adjustment to slip behind now that inflation has subsided and the pickup in economic activity will most certainly reduce the cyclical component of deficits. On the contrary, conditions seem right to making further progress toward reducing structural deficits so as to exert downward pressure on real interest rates and create room for strengthening private investment and growth. Structural reform has a role to play in sustaining adjustment efforts. In particular, policies to deal effectively with the unemployment problem are urgently called for. Enhancing the efficiency of labor markets and reinforcing competitiveness provide part of the answer to what appears to be the most critical social issue in coming years. With trade and financial markets liberalized, there is also scope for promoting the adoption of minimum social and environmental standards in order to improve welfare worldwide. The new World Trade Organization is expected to play a catalytic role in raising living standards without disruptions and inefficiencies.

Turning briefly to Greece, the economy is slowly emerging from recession, with growth projected at more than 1 percent in 1994. In spite of earlier gloomy forecasts, the Government’s borrowing requirement this year will not exceed the target set in the budget. Average inflation in 1994 is expected to be around 11 percent—compared to 14.4 percent in 1993—and to decline to about 7 percent next year. The successful handling of a foreign exchange crisis last May helped to reinforce confidence in economic policies and bring about a reduction in money market interest rates to levels lower than those prevailing before the crisis. Balance-of-payments developments point to a continuation of the improvement over the past two years, with the current account being nearly balanced by the end of the year, and official reserves are at the historically high level of $12 billion.

The overall improvement in the macroeconomic environment has been assisted by a policy mix that emphasizes fiscal adjustment and monetary vigilance, as reflected in the Government’s newly adopted Convergence Program that will lead Greece to the achievement of the convergence criteria for participation in the single-currency phase of the economic and monetary union by 1999. The primary task of the Program is to reduce budgetary imbalances by widening the primary surplus of the Central Government from 1.3 percent of GDP this year to 3.5 percent in 1995 and gradually on to 6 percent by 1999. This will be achieved by cuts in spending and through raising revenue by broadening the tax base and combating tax evasion. Moreover, revenue will be enhanced through a program of privatizations. This is being phased in this year with the floating of 25 percent of the shares of the Greek Telecommunications Organization and, soon after, a part of the stock of the Public Petroleum Corporation through the stock market, the auctioning of casino licenses, and the sale of ailing industrial firms under state control. We will move on to other privatization schemes next year.

The Convergence Program focuses not only on macroeconomic adjustment but also on a set of structural and developmental policies designed to strengthen the supply potential of the economy. Large infrastructure projects, financed in part by the European Union, and private investment incentive schemes promoting the outward orientation and dynamism of Greek and foreign investors, are expected to generate higher growth over the medium term. Moreover, Greece already plays an important role in the Balkans and other countries in transition, as reflected in import penetration and foreign investment. Therefore, prospects for a sustainable expansion in the medium term look promising. Together with the other member states of the European Union, Greece supports the transformation process in the countries of Central and Eastern Europe and of the former Soviet Union. Considerable progress has been achieved so far. However, much remains to be done. These countries are encouraged to continue on the reform process with determination, without delays and backsliding. This is crucial for avoiding “transition fatigue,” since public support of the transformation process can be rather fragile.

In concluding this statement, I wish to extend my congratulations to the Bretton Woods institutions for their service to the international community over the last fifty years. I am sure that they will continue to perform their respective roles with the same excellence as in the past for the benefit of members and the world economic system.

Statement by the Alternate Governor of the Fund and the Bank for the Republic of Korea—Myung-Ho Kim

It is a great pleasure for me to give this address on behalf of the Korean Government at the Forty-Ninth Annual Meetings of the International Monetary Fund and the World Bank Group, commemorating the fiftieth anniversary of the Bretton Woods Conference. First, I would like to review the accomplishments of the Bretton Woods institutions and then elucidate my views in regard to their future roles. The Bretton Woods institutions have had broad success in fulfilling their roles and responsibilities as stipulated in their Articles of Agreement. They have rendered indispensable contributions to the global economy by responding effectively and flexibly to the various international financial difficulties of the past half century. They have also extended valuable assistance to developing countries by providing them with much-needed financial resources and policy advice. However, it is evident that the influence of the Fund in guarding the international financial order has waned, following the shake-up of the international monetary system in the early 1970s and with the expansion of the international capital markets. In addition, the general economic conditions of many industrial countries deteriorated, and, with poor coordination, the economic policies of the industrial countries diverged. As a result, exchange rate misalignments and volatility increased and capital movements became more unstable.

I would like to urge the governments of major industrial countries to exert continuing efforts to improve macroeconomic fundamentals and strengthen policy coordination for better convergence of the fundamentals. Moreover, the Fund’s surveillance over the macroeconomic policies of the major industrial economies should be reinforced. To this end, the Interim Committee should be empowered to enable it to conduct substantial discussions and make recommendations on the major issues affecting the international monetary regime and the world economy. Also, the Fund could seek ways to enhance the effectiveness of policy dialogue with major industrial countries through Article IV consultations or other mechanisms. This will help the Fund identify possible causes of excessive exchange rate misalignments and volatility before they occur. In this respect, I would like to suggest that new arrangements be introduced to enable developing countries with relatively large shares in global trade to participate in discussions on international monetary affairs.

Turning to the Bank’s operations, I believe the Bank has effectively responded to the changing needs of member countries. However, I would like to make a few suggestions. In particular, the Bank is now facing increasingly diversified and challenging needs from its recipient countries. Therefore, I would like to urge the Bank to become more client oriented in its operations and expand its role in promoting private sector participation. Also, I would like to recommend that the Bank enhance its activities in disseminating successful strategies of development by utilizing technical assistance or other relevant arrangements.

Regarding the future of the Bretton Woods institutions, I want to take up the issue of representation in the governance of the Fund and the Bank. As all of us are well aware, the Asian countries, including Korea, represent one of the most dynamic regions in the world. Their financial contributions to the Bretton Woods system have also increased considerably, and this is reflected in the recent replenishments of the enhanced structural adjustment facility (ESAF). However, some Asian countries are not adequately represented in either the Fund or the Bank. I believe this seriously undermines the legitimacy and respectability of the governance of the institutions. Thus, I would like to request that the representation of the successful Asian economies be adjusted to a level commensurate with their enhanced economic status. Expediting the Eleventh General Review of Quotas next year, the Fund should adjust the gap between the actual and the calculated quotas of these countries. The Bank should also make the corresponding equity adjustment.

Korea is now accelerating its large-scale structural reform to convert its economy into an advanced open system. Last year, the Korean Government announced the Third Stage Plan for Financial Liberalization and Market Opening, articulating its firm commitment to reform the financial sector. The implementation of the plan has been assessed by the Fund and the Bank to be on track and, in certain areas, to be progressing ahead of schedule. At present, lending rates have been liberalized, and all deposit rates with maturities over one year will be liberalized by next month. Moreover, we will continue to open the domestic securities market. In addition, the Korean Government is now drafting the Foreign Exchange Reform Plan, aiming at de facto abolition of the Foreign Exchange Management Act within the next five years. The plan will encompass full liberalization of current transactions as well as the acceleration of capital account liberalization. It will be ready for implementation by next month. The Korean Government will continue expanding its development assistance to developing countries. We have set aside about $500 million for the Economic Development and Cooperation Fund, the Korean Government’s major vehicle for overseas development assistance. We will also continue our training and exchange programs on Korea’s development strategies with developing countries.

Before concluding, I would like to extend my welcome to the new delegation from Eritrea and the observers from the Palestine Liberation Organization, and I express my deep gratitude to the Spanish Government and the citizens of Madrid for their warm hospitality.

Statement by the Governor of the Bank for Pakistan—V.A. Jafarey

It is an honor for me to represent Pakistan at the Annual Meetings of the Fund and the World Bank Group, which are being hosted this year in Madrid, Spain. I take this opportunity to thank the Spanish Government for the excellent arrangements it has made to make our stay in this beautiful country as pleasant and productive as possible and join other speakers in welcoming Eritrea as a new member of the Bretton Woods institutions. We meet this year against the backdrop of the fiftieth anniversary of the Bretton Woods institutions and a global economy that is showing distinct and encouraging signs of recovery. This is a welcome conjuncture of events. There are growing indications that the recovery is broadening and becoming self sustaining. After the slowdown earlier, trade volumes are rising rapidly and non-oil commodity prices have shown renewed buoyancy. Inflation is now at its lowest level in decades. The continued robust growth in many developing countries has been a most encouraging aspect of global economic trends in recent years.

The growing openness and integration of the world economy, including the globalization of private capital markets, create new opportunities for the world but also challenges for the Fund as the institution responsible for the oversight of the international monetary system. The persistence of large swings in real exchange rates for key currencies, large current account imbalances, sizable fiscal deficits, and long-standing structural rigidities are a reminder that the world economy is still some distance from achieving orderly underlying economic and financial conditions and a stable system of exchange rates. The strong overall performance in a number of developing countries stands in contrast with the plight of many others who have failed to register any significant improvement in economic performance. This is a deeply worrying situation. While the prospective improvement in the external environment, including the beneficial effects of the consummation of the Uruguay Round, should help strengthen conditions for sustained growth, the challenges facing these low-growth countries remain daunting. Helping them realize their potential must be accepted as an issue of vital importance for the international community. In this matter, our two institutions must be alert to the need for modifications in approaches that would improve the effectiveness of programs supported by them in order to secure an earlier and stronger response of output, investment, and employment. Adjustment programs must be pursued with constant sensitivity to the ultimate goal for economic policies: to improve living standards through higher growth. It is my hope that the Bank and the Fund will intensify their search for ways in which program design and instrumentalities can be improved to hasten and strengthen the speed of response to structural change and higher investment.

A recent manifestation of the movement toward integration of international capital markets has been the spectacular surge in private capital inflows into developing countries. While this has helped some countries to sustain relatively rapid rates of growth and investment, questions remain as to the sustainability of these flows and the potential for sudden changes in market sentiment. This subject has received prominence in recent deliberations, and I would encourage the Fund to consider the modalities of establishing a short-term financing facility to deal with the risks of abrupt changes in market sentiment. Such a facility would give confidence to members that the Fund has the capacity to provide prompt financial support to members in the event of sudden financial market disturbances arising from factors largely beyond their direct control. For countries that have little or no access to private capital markets, there remains a problem of heavy official indebtedness that will require innovative and radical solutions from creditors.

In contrast to the dramatic rise in private inflows, the picture in respect of official development assistance (ODA) flows is sobering. The level of ODA, as measured by the World Bank, remained unchanged in 1993. It is important to remember that most of the private resources have gone to a handful of developing countries. As Mr. Preston remarked in his report to the Development Committee, “Aid is essential to slow the further polarization of growth,” and we join him in urging donors to resist reducing the volume of aid in response to fiscal pressures. The developing countries, for their part, have an equally important role to play in ensuring that aid is used effectively.

The conclusion of the Uruguay Round has helped to bolster business and consumer confidence worldwide and promises to give new impetus to world trade. Despite our own reservations on textiles and safeguards and concerns about the use of anti-dumping procedures, we support the call for a speedy ratification of the agreement. We are especially concerned by the growing tendency of the industrial countries to link market access to social and labor standards in developing countries. This should not become a new form of disguised protectionism. The creation of the World Trade Organization (WTO) strengthens the institutional basis for trade relations among countries by providing a forum for future multilateral trade negotiations. We are saddened by the deadlock over the question of a fresh allocation of SDRs. We continue to firmly support the proposal put forward by the IMF Managing Director and commend him for his strong and principled stand on the issue. It is difficult to imagine a more propitious time for a fresh allocation of SDRs or any credible alternative that would be as effective in helping countries to deal with the systemic threat of reserve stringency.

We, in Pakistan, have recently embarked on a bold program of macroeconomic adjustment and structural reform with assistance from the IMF, the World Bank Group, and other multilateral and bilateral donors. The program emphasizes sound fiscal and monetary policies aimed at maintaining discipline in a stable medium-term economic framework; an outward orientation with respect to trade, private investment, and competition; and an emphasis on far-reaching and comprehensive structural reforms to increase the efficiency of markets, promote savings and investment, and foster long-term gains in productivity and incomes. We are encouraged by the fact that the program has, within a relatively short period, yielded important early successes.

The fiscal deficit, which has been the root cause of macroeconomic instability, has been brought down sharply concurrent with an improvement in the structure of revenues and expenditures. Monetary policy has been kept tight. The balance-of-payments position has turned around dramatically thanks to a strong inflow of private direct and portfolio investment. This has allowed Pakistan’s gross foreign exchange reserves to rise to more comfortable levels. We have taken the first step toward implementing an ambitious medium-term program of tariff reform and have accepted the obligations of Article VIII. The Government’s privatization program, particularly in the area of telecommunications, has received an enthusiastic response from domestic and foreign investors. We stand on the verge of a breakthrough in the energy sector with recently announced commitments of close to $4 billion in new investments in this sector. While economic growth and inflation performance have fallen short of expectations, due largely to the adverse effect of a series of exogenous factors, we remain committed to persevering with our efforts at adjustment and reform based on the conviction that stability-oriented macroeconomic policies offer the best prospect for an early return to a path of what the Managing Director of the IMF has called “high-quality growth.”

On behalf of the Government of Pakistan, I would like to assure the managements of the Bank Group and the Fund of Pakistan’s continued commitment to the ideals envisaged at Bretton Woods fifty years ago.

Statement by the Governor of the Bank for the Islamic Republic of Iran—Morteza Mohammad-Khan

At the outset, let me thank the beautiful and friendly country of Spain for hosting this year’s Annual Meetings of the IMF and the World Bank Group. I would like also to welcome Eritrea as a new member of the Bretton Woods institutions. We are currently witnessing a strengthening growth of the world economy; and the developing countries are playing an increasingly important role in the growth of the world economy. All economic indicators show that the recession of the last few years in the industrial countries has ended and sustainable growth is anticipated. To achieve that, however, the industrial countries should continue their efforts at fiscal consolidation and removal of structural impediments. The increases in the rate of interest in industrial countries not only jeopardize the pace of recovery in these economies, but they also exacerbate the debt burden of the heavily indebted developing countries. Similarly, massive fluctuations in the foreign exchange markets have undesirable consequences for the world economy. Measures to minimize these risks, and thereby to contribute to a more sustainable growth of the world economy, should become the focus of policy recommendations of the IMF.

At this fiftieth anniversary of the Bretton Woods institutions, I would like to acknowledge the contributions that the IMF and the World Bank have made to the world economy. At the same time, I would join other speakers in emphasizing the need for fundamental improvements in the operations of the international monetary and financial system. Additionally, and taking into account the international cooperative character of these two institutions, one of the urgent steps to be taken is avoidance of political considerations and observance of the principle of impartiality in accomplishment of the tasks entrusted to them. Unfortunately, and contrary to the spirit and the letter of their Articles, it appears that the performance of these institutions is alarmingly influenced by noneconomic factors. In this context, it is worth recalling the advice of John Maynard Keynes to the Board of Governors of the two institutions on the occasion of the inaugural meeting of the IMF and the World Bank on March 9,1946: “If these institutions are to win the full confidence of the suspicious world, it must not only be, but appear, that their approach to every problem is absolutely objective and ecumenical, without prejudice or favor.” This vision has been clearly enshrined, in particular, in Section 10 of Article IV of the World Bank’s Articles providing that “only economic considerations shall be relevant” to the decisions of the Bank and its officers.

In relation to the role of the IMF, I have three comments. First, the institution must strengthen its efforts toward the creation of a more stable international exchange rate system. Second, the surveillance role of the Fund needs to be performed symmetrically with respect to the industrial as well as the developing countries. Third, the IMF, through the use of the SDR mechanism, can and should play a stronger role in the management of international liquidity. Given the mandate of the IMF’s Articles of Agreement and the fact that the global need for reserves is estimated to be between SDR 400 billion and SDR 500 billion, we believe that there is an urgent need for a new SDR allocation. We, therefore, strongly support the Group of Nine proposal that not only addresses this issue but also allows all members to participate in the operation of this most useful mechanism. We would also commend Mr. Camdessus for his valiant efforts in maintaining the integrity of the Articles of Agreement in this regard.

With regard to the World Bank, this institution must play a more effective role in assisting the growth and development process of the developing, especially the low-income, countries. The Bank must redirect its financial assistance effort in favor of the neediest among the developing countries. In this context, priority should be given to the poorest countries in Africa and those developing countries that are in the process of postwar reconstruction. The resources of IDA must be enhanced to make additional assistance to low-income countries possible, and the industrial countries must allow a greater role for the World Bank in the provision of official development assistance. Finally, the Bank should strengthen its cooperation with regional development banks and, by upgrading its own activities in its relations with these organizations, enhance the ability of these institutions to assist countries in their respective regions.

Turning to the economic situation in the Islamic Republic of Iran, despite the massive decline in oil prices and the needs of our reconstruction efforts, reform and structural adjustments have continued. Our First Five-Year Development Plan was completed last year, having accomplished its essential objectives. Real output increased by an annual average of 7.3 percent during the plan period. Most important, non-oil exports reached a level four times as great as at the beginning of the program, reflecting structural reforms in the trade sector and adjustments of the exchange rate system. The government budget, which faced an extensive deficit at the beginning of the program, was balanced in the last two years of the program. Price adjustments, while creating large inflationary pressures for the consumer, helped production expansion, particularly in the agricultural sector. And, in order to help the process of privatization of public enterprises, the Tehran Stock Exchange was activated and the volume of transactions has increased substantially. Last year alone the volume grew by 50 percent over the previous year. Moreover, in line with other structural reforms, creation of nonbanking credit institutions, with private sector participation, has been approved.

The heavy resource requirements of the reconstruction effort and the release of imposed war-related repressed consumer demand on the one hand, and the weakening of the dollar on the other, combined to create a liquidity crisis with consequent difficulties in our debt-servicing obligations. However, with sustained effort along with the cooperation and assistance of our trading partners, arrears have been settled and debt-servicing delays, which have been considerably minimized, will in the near future be completely eliminated.

As to medium-term policies, our Second Five-Year Development Plan, which is now passing through the legislative approval phase, will be implemented from the beginning of the next Iranian calendar year. This plan, while preserving the fundamental commitment to economic adjustment and reform of the First Development Plan, will emphasize economic stability, control of inflation, and attainment of social justice. To achieve the latter, reformed tax and social security systems and a targeted social safety net are to replace subsidies and tax exemptions. Finally, the plan will focus special attention on the importance of private sector participation and specific structural measures to remove impediments to a more expanded and effective private sector role in the economy. In this context, the plan endorses measures to encourage and protect direct foreign investment in the country.

Statement by the Governor of the Fund and the Bank for India—Manmohan Singh

I would like to begin, Mr. Chairman, by congratulating you on assuming the chairmanship of these Annual Meetings. Your presence in the chair is an honor and a privilege for our entire region. I would also like to join my fellow Governors in welcoming Eritrea as a new member of our institutions. I share the view expressed by my fellow Governors that the short-term indicators of performance of the global economy show several positive features. These are welcome signs. But they must not breed complacency. The recovery comes after a prolonged recession and slow growth of the world economy. We have yet to ensure that growth in world output and trade will be more broad based and sustained in the medium term.

This is only possible if we can address some difficult issues. Unemployment in industrial countries is at alarming levels, which not only poses domestic problems for industrial countries, but also poses dangers to world trade, since persistent unemployment often intensifies pressures for protectionism. High fiscal deficits in many industrial countries have produced high real interest rates, which could constrain future growth. Many developing countries, especially in sub-Saharan Africa, have yet to achieve reasonable rates of growth of output. Unless these negative features are corrected, the present recovery will not produce sustained and broad-based expansion. Maintenance of an open trading system, which provides assured market access to developing countries, is perhaps the most important requirement for global prosperity. Most developing countries today are liberalizing their trade regimes as part of their economic reforms. This process needs to be fully supported by increased access to markets in the industrial countries and adequate access to financial resources to cope with possible balance-of-payments pressure. Early ratification of the Uruguay Round is essential but it may not be enough. Because of backloading, the benefit in the near term will be modest. It is to be hoped that actual increase in access can be faster than the agreement provides.

In this fiftieth anniversary year of the Bretton Woods Conference, it is perhaps appropriate for me to share with you some thoughts about the future role of the Bretton Woods institutions. As many Governors have noted, there is much in the past fifty years in which the world can take satisfaction. Growth of world output, including output in developing countries, has proceeded at a much faster pace than in any other period of history, and the growth of world trade has been even faster, knitting both the developed and developing world into one market. And yet, a great deal more needs to be done. Many developing countries are still far from achieving self-sustaining growth. A quarter of the world population lives in extreme poverty. This is at a time when the material and technological resources in the world, as well as the institutional framework of international cooperation, and the breakdown of ideological barriers all over the world make us unusually well placed to tackle these problems. For the first time in human history, the complete conquest of poverty, ill health, and illiteracy is technically and financially a feasible goal of human endeavor. This is the objective to which the Bretton Woods institutions must dedicate themselves.

Let me begin with the role of the Fund. The Fund was set up to perform two main functions: supervise the international monetary system and be a lender of last resort. The changes in the world economy, since its creation, have had their impact on both functions. As far as supervision and surveillance are concerned, events have evolved very differently from what the founding fathers had envisaged. The shift to floating exchange rates in the mid-1970s made coordination of macro-economic policy of industrial countries’ policies more, rather than less, important. But the fact is that we have not devised a satisfactory system of multilateral coordination of macropolicies. This role is performed not in the Fund, but in groupings of major industrial countries, such as the Group of Seven or in even smaller groups. We recognize, of course, that macroeconomic coordination is not a simple matter as it involves reconciliation of sovereign interests. Nonetheless, global interdependence requires that such coordination should take place as part of a truly multilateral process. The IMF is the logical forum for such coordination.

The second role of the Fund is that of lender of last resort. This role too has changed profoundly. Since the late 1970s, no industrial country has borrowed from the Fund, nor is one likely to in the future. The lending role is, therefore, of relevance only to the developing countries and the economies in transition. However, the role is of increasing importance since the payments position of these countries is subject to more, rather than less, uncertainty, as they open up and integrate their economies into a world in which exchange rate volatility and volatility of capital flows are increasing. The Fund has made commendable efforts in the past to adjust to these changes by expanding the range of its facilities and recognizing the need to devise stabilization programs that are explicitly set within a medium-term growth-oriented framework. This flexibility has enabled the Fund to help many countries through periods of difficulty. We, in India, have benefited from this and are happy to acknowledge this support. The Fund’s ability to assist must be strengthened in the future, and the process of tailoring its lending policies to the requirements of the situation should continue. In particular, issues of distributive justice, which lie at the heart of sustainable social and economic reform, must be effectively addressed. The first amendment to the IMF Articles clearly provided for the creation of SDRs to augment reserves. For a variety of reasons, there has been no allocation of SDRs since 1981. At the end of 1993, more than one-third of the developing countries and half of the countries in transition held reserves equivalent to less than eight weeks of imports. In our view the circumstances are appropriate for a fresh, general allocation of SDRs.

Let me now turn to the role of the World Bank Group. IDA provides critically needed finance for social infrastructure and human resource development as well as associated assistance in the design of development policies and programs in the poorest countries of the world. If the international community is serious about eradicating the blight of poverty from our planet, IDA must be supported and adequately funded. Turning to the World Bank, there can be little doubt that despite the rapid growth of international private capital markets, the Bank has an important role to play as a supplier of long-term capital. The overwhelming bulk of private capital flows to developing countries is concentrated in about a score of nations, leaving most developing and transition countries with only limited access to international private capital. For these countries, lending by the World Bank will remain essential for many years to come. Indeed, with most of these countries undergoing major processes of economic reform, I see a larger—and not a diminished—need for the World Bank Group to sustain and support investments for development.

I also do not see any contradiction in the expansion of lending by the Bank/IFC and expansion of lending by the private sector. On the contrary, I see these processes as complementary and mutually reinforcing. After all, the Bank and IFC are themselves intermediaries of private capital and provide valuable service to savers and investors in the private sector at very little public cost. It is generally accepted that the Bank Group can play a valuable part in promoting environmentally sound programs and policies in its member countries. However, it is equally important to ensure that such legitimate concerns do not become the enemies of development or alibis for letting the poor remain poor. Nor should genuine concerns about the environment and the need for improving social conditions in poor countries be allowed to become vehicles for protectionism in international trade. That would give a setback to the cause of social and environmental progress in developing nations.

Finally, let me say a few words about the progress of economic reform and performance in India. After three years of reform, I am happy to report that the balance of payments is strong, the current account is nearly in balance, foreign exchange reserves are at record levels, fiscal discipline has been reinstated, inflation is moderating, and, most important, production and investment—including private foreign investment—are on a strong upswing. Industrial production in recent months has grown at about 8 percent, the rate of growth that we expect for the full year 1994-95. Agricultural production is also responding favorably to good weather and sound policies; foodgrain production is likely to set a new record this year. India has moved to full current account convertibility and assumed Article VIII obligations. There is every reason to believe that the reform measures undertaken over the last three years have set the economy on a path of strong, broad-based growth, which is essential for expanding productive employment and reducing poverty. In 1994-95, real GDP growth is likely to be well over 5 percent. If we maintain the momentum of reform, there are good grounds for expecting further acceleration in the growth of production and employment in years to come. My fellow Governors, we live in a world of unprecedented change. There are immense opportunities on the horizon provided we have the wisdom to recognize the imperative of effective international cooperation for purposeful and equitable management of global interdependence. The Bretton Woods institutions must work toward this objective.

Statement by the Governor of the Fund and the Bank for the Russian Federation—Aleksandr N. Shokhin

The fiftieth anniversary of the Bretton Woods Conference is a good occasion for evaluating the experience of the Bretton Woods institutions over the last fifty years and examining ways to improve them. Let me say at the outset that I do not share the sweeping criticism of the Fund and the Bank that we sometimes hear; nor do I see any reason to propose radical changes in them. On the contrary, I think that the Fund and the Bank play an exceptionally important role in the system of world economic and financial cooperation, helping to improve the system itself and, at the same time, involving more and more countries in the process of international economic and financial integration. This is borne out by the remarkable progress of some forty developing countries that made the world’s economy grow during the recent recession in the major industrial countries.

Among the most common of the many criticisms made of the Fund are, on the one hand, that it is turning more and more into a financial aid agency and, on the other, that it attaches unnecessarily harsh conditions to such aid. These two criticisms are clearly mutually exclusive; they attack the Fund from directly contradictory positions. I think that, as always, the truth lies somewhere between the two extremes, which means that the Fund’s policy is, on the whole, correct.

In reality, the Fund’s efforts in countries that are in crisis, struggling with major macroeconomic and structural imbalances, create the loudest echo. They provide the basis for the accusation that the Fund is turning into a financial aid agency. But this very aspect of the Fund’s work has received broad international recognition in the last ten to fifteen years, and I doubt there is another international organization in the world that could compete with the Fund in this crucial role. Each of us can cite a number of examples of new governments which inherited acute financial crises from their predecessors and turned promptly to the Fund because they had no place else to go. As I see it, the main problem here is that the volume of financial aid which the Fund provides is often inadequate to solve the crisis with which the given country is struggling. I, therefore, welcome the decision made by the Interim Committee to raise the limits of access to Fund resources.

At the same time, it is evident that the Fund’s financial assistance must be accompanied by rather stringent conditions. Clearly, unless countries make the effort required to put their own houses in order, that is, unless they help themselves, no amount of financial aid from outside will lead to success. Stringent conditions for financial assistance are also necessary if the Fund’s assistance to a country is to serve as a catalyst, strengthening the confidence of the international financial markets and attracting private investment from abroad. At the same time, the stringent conditionality of the financial assistance must be combined with flexibility of approach and consideration for the specific circumstances in the country concerned. I realize that the Fund’s Executive Board has been looking into this matter and that the Fund now has a broad enough selection of instruments for displaying this flexibility. Unfortunately, one of these main instruments—the systemic transformation facility (STF)—is presently under threat. I believe that it is extremely important to adopt the decision to extend the STF. This would enable the Fund next year to continue using the STF in transition economies, now in the early stages of economic transformation.

The criticism of the Fund as overly harsh in the conditions it attaches to its financial assistance indicates a need for additional effort to explain the Fund’s policies and recommendations. I am aware that the Executive Board recently decided to permit the publication of certain Fund documents hitherto deemed confidential. I see this as a step in the right direction. The less secrecy there is in the Fund’s activities, and the more openness (or, as we say in Russia, glasnost) there is, the easier it will be to explain the basic ingredients of the Fund’s policies to the people of the world.

While the Fund’s financial assistance to countries in crisis attracts widespread attention, another aspect of the Fund’s activities—technical assistance—remains in the shadows. In my view, this is an extremely important part of the Fund’s work, because it is broadly applicable, and not limited to use in severe crises. It is vital for the Fund to interact consistently with countries that have overcome basic macroeconomic imbalances and no longer require financial assistance. The Fund’s participation in shaping the economic policy of its graduates, to use a Fund expression, in part through technical assistance and Article IV consultations, reinforces the progress made and helps prevent a repetition of earlier mistakes.

Finally, a third area of the Fund’s work, relating to the shaping and operation of the international system of exchange rates, has been at the very center of discussion in the last few years. As it turns out, the Bretton Woods institutions have outlived the Bretton Woods system of fixed exchange rates. It appears to me that there is little reason to doubt the effectiveness of the floating exchange rate system that has developed over the last twenty years. But this by no means signifies that the Fund should stop playing its role in this area, or that its role as a monetary institution is gone forever. This is attested to by the developments of the last few years on the world’s foreign exchange markets.

Excessive exchange rate fluctuations, especially of the major reserve currencies, have been a subject of growing concern to the world economic and financial community. These fluctuations clearly have an adverse effect on world trade and do little for investor confidence. Since 1987, the Group of Seven countries have been consulting with each other for purposes of achieving better coordination of their economic and financial policies and greater stability in the exchange markets. We must admit, however, that these consultations lack an institutional basis and amount, basically, to emergency reactions to unfounded fluctuations in the exchange rates of the major reserve currencies. As a rule, the only result of these emergency efforts is coordinated intervention by the Group of Seven central banks, intervention that is becoming ever less effective as the world’s financial markets expand and develop. It is apparent that better financial policy coordination among the main reserve-currency countries as well as a special mechanism for bringing it about will be needed if exchange market stability is to improve.

A proposal to establish fluctuation bands for the major reserve currencies and to shift to a system of “more fixed” exchange rates has been gaining in popularity recently. As I see it, despite the obvious attractiveness of the idea of creating a more stable exchange rate system, the practical realization of such a proposal will not be feasible for a long time to come. The chain of events that will be needed is as follows: a deepening of international economic and financial integration, growing awareness of the need for far-reaching coordination of economic and financial policies, formation of an institutional basis for such coordination and creation of the relevant mechanisms, and, only then, establishment of fluctuation bands for exchange rates. I doubt that this idea, if applied prematurely, would have much chance for success, as evidenced by last year’s crisis in the European Exchange Rate System. Still, with the progress in international coordination of economic and financial policies, a transition to a more centralized system for regulating exchange rate movements may become both feasible and justified.

At present, the Fund’s role in coordinating the financial policies of the industrial countries is limited, in effect, to its Article IV consultations with them, including with the Group of Seven countries. I think that the Fund’s role in the coordination process will gradually grow, because the industrial countries’ interest in having the Fund participate will grow. In this regard, the recommendations in the report of the Bretton Woods Commission concerning the Fund’s participation in the Group of Seven consultation mechanism are extremely interesting and revealing. I am referring especially to the report’s conclusion that the Fund itself should play a key role in the coordination of the industrial countries’ financial policies and, with time, in regulation of the major reserve currencies’ exchange rate movements. Without attempting to predict future developments in this area, I regard the efforts of the Fund’s management to strengthen the role of the IMF Interim Committee as entirely timely, and I fully support the initiative of Interim Committee Chairman Philippe Maystadt in this area.

The role of the Fund in the development of international economic and financial integration is exceptionally important. I welcome the fact that more and more countries have been accepting the obligations of Article VIII and abolishing restrictions on the convertibility of their currencies for current transactions. I am certain that this process will continue. At the same time, I would support a proposal to broaden the Fund’s mandate in this area to include encouraging members to abolish restrictions on the convertibility of their currencies with respect not only to current transactions, but to capital transactions as well. I think that the Executive Board might soon consider a draft amendment to the Fund’s Articles of Agreement for this purpose. A transition to full convertibility would further the integration of financial markets and improve the efficiency of the international investment process.

An important factor in the Fund’s ability to continue doing its job effectively will be the strengthening of its relationship with its members, the strengthening of the spirit of cooperation and mutual understanding. It is vital that no member should feel offended by anything the Fund does. For example, it would be logical if such a large group of countries as transition economies was represented in the management of the Bretton Woods institutions. I also hope that in the near future it will be possible to resolve the issue of the new allocation of SDRs, which would enable all members to have their proportionate share in this vital mechanism.

A related question I would like to touch upon is the way its members share in the financing of the Fund’s expenses. At present, the administrative and capital expenditures of the Fund are covered basically by raising the interest rate on the Fund’s loans; that is, in fact, they are borne by the borrowing members. Clearly, this is not a system that makes the Fund’s members contribute in an even remotely proportionate way to the financing of the expenditures. I am aware that this question is on the Executive Board’s agenda, and I trust that a decision remedying these deficiencies will soon be reached.

The World Bank has played an important role in economic progress in the last fifty years. We view the criticism of the Bank as a phenomenon of mainly political nature. Multilateral financial institutions should not be held responsible for everything happening in the world economy. Policy advice played and will play the key role, but the resources of the Bank are too limited to resolve all the problems of development. The world economy now is changing fast. It is becoming more integrated, dynamic, and competitive. The transition of a number of former centrally planned economies to the market makes the world more homogeneous but creates new challenges for multilaterals to respond.

We share the view of other members that the Bank should be more active and flexible, should be more client oriented within its general mandate for development. In the new economic environment the Bank has made—we believe—some substantial steps to adjust to the new situation. For example, it has made considerable efforts to address both analytically and practically environmental problems in developing countries. It has already started to work more closely with the private sector. One example is the Russian lending program of the Bank, with one of the projects designed to strengthen precisely the private banking sector.

We are prepared to support a shift in the balance of activity of the Bank from money to ideas, given the specific conditions and level of development of recipient countries. Greater selectivity will raise the efficiency of the Bank. At the same time, the Bank could play a far more important role in addressing the issues of international economic arrangements, particularly trade ones. The traditional agenda of poverty alleviation may have a new aspect of helping to avoid “transitory poverty.” Finally, the focus on the private sector does not preclude deep analysis and continuous work on improving the efficiency of the public sector.

Statement by the Temporary Alternate Governor of the Fund and the Bank for Canada—Douglas Peters

Let me begin by expressing my appreciation to the Government of Spain for its impressive efforts in hosting this event and the warm hospitality that has been extended to us.

World Economic Outlook

The international economic picture is brighter than it has been for several years. The recovery is now firmly on track in North America and gathering steam in much of Europe. Nevertheless, the industrial world still faces two paramount challenges: achieving sustained growth and reducing unemployment. With the resumption of economic growth, the enduring problem of high rates of unemployment in most of our countries needs to be addressed at both the macro-and microeconomic levels through education, training, and other appropriate structural policies, as well as appropriate fiscal, monetary, and exchange rate policies.

A central macroeconomic priority in nearly all industrial countries is to take advantage of the recovery to make substantial progress toward restoring fiscal balance. Most of us did not adequately exploit the strong growth that was experienced in the 1980s to put public finances on a solid footing. Indeed, in many industrial countries, structural deficits widened substantially in the late 1980s. Because governments avoided taking steps to rein in deficits when times were good, many of our countries went into the recent recession with little or no latitude to respond to worsening economic conditions with fiscal stimulus. We should not repeat this mistake. A successful effort to cut deficits would help boost investment and potential growth over the longer term. It would also provide policymakers with greater freedom to respond to any future recession, a freedom that many of us lack at present. At the same time, we have to learn to do more with less and to spend smarter. Governments will have to focus their spending on priority activities and adapt their programs and policies more quickly to meet new requirements. This is particularly true for policies that encourage labor force development and employment.

Monetary policy is another area where we can learn from experience. In most industrial countries, monetary policy continues to have an important role to play in supporting growth. In the past, protracted periods of monetary tightness have had severe adverse effects on the fiscal deficit. The coordination of monetary and fiscal policy can improve economic performance when the two have consistent goals of continuing growth and prosperity. I would also suggest that much of the financial market turbulence we have witnessed in the last several months reflects market uncertainty about the alignment of fiscal and monetary policies in major industrial countries. Moreover, the market may remain unsettled while participants become more certain of the determination of fiscal and monetary authorities to pursue appropriate policies.

The Canadian Picture

In Canada, we have taken a vital first step toward putting government finances on the right course by setting an interim deficit target of 3 percent of GDP to be met by 1996-97. Spending on government programs was constrained in our February 1994 budget, and our plan is that overall spending on programs will decline so that in 1996-97 program spending will be lower than in any year since 1991-92. Recent figures indicate that the deficit for fiscal 1993-94 was Can$2 billion lower than forecast last fall. This is largely the result of better-than-expected economic growth in the first three months of the year, which resulted in higher tax revenues and lower unemployment insurance benefit payments; low interest rates also contributed to lower-than-expected public debt charges. While the lower deficit for 1993-94 is a positive development, we must be realistic about what it means over the longer term. Last year’s Can$42 billion deficit, for example, added Can$3 billion to the interest charges on the Government’s debt in this fiscal year. Despite the effect of recent interest rate increases, the Government remains committed to meeting the 1994-95 deficit target of Can$39.7 billion. This is based on continued strength in revenues, prudent planning for contingencies, and spending constraints that were imposed in this year’s budget. I remain fully confident that we will achieve our interim deficit target and that this will put us firmly on a path to reduce the fiscal debt burden and eventually to eliminate the federal fiscal deficit.

Economies in Transition

The experience of stabilization and reform in Eastern Europe and the countries of the former Soviet Union underlines the wisdom of resolute action. The countries that acted early to reduce macroeconomic imbalances and eliminate the inefficiencies of central planning have significantly accelerated the benefits of economic transition. In contrast, the countries that have adopted a more gradualist approach to reducing inflation and removing barriers to private activity have experienced the sharpest declines in real output. This demonstrates that the best way to minimize the inevitable costs of the reform process is to push ahead with privatization, in parallel with appropriate fiscal and monetary policies to maintain macroeconomic stability.

Developing Countries

Working closely with the Fund and the Bank, many of these countries have put in place bold reforms to open up their markets and remove obstacles to foreign investment. In turn, these same countries have been rewarded with increased investor confidence, which has triggered the return of flight capital and renewed access to capital markets. While sound economic policies are also essential for the poorest countries, many of these countries clearly face special development challenges. To address these, increased attention needs to be focused on poverty reduction, human resource development—including women in development—and protection of the environment. The Fund and the Bank have a special role to play in helping these countries design viable strategies for development and in ensuring that appropriate budgetary support is available to implement them effectively. In the final analysis, however, reforms will only succeed if we are able to help these countries help themselves. To do this we need to continue to provide improved access to our markets. The role that an open and growing international trading system plays in fostering sustainable growth underlines the critical importance of moving ahead to implement the Uruguay Round.

The establishment of the Bretton Woods institutions in 1944 was an act of great vision. In the ensuing fifty years, they have had a profound influence on the world in which we live. They have tackled some of the most intractable problems facing the international system with flexibility and imagination. To continue to prosper in a rapidly changing global economy, the continued leadership of the Fund and the Bank will be indispensable.

Statement by the Governor of the Bank for Belgium—Philippe Maystadt

Allow me to begin by thanking the Spanish authorities and the city of Madrid for the warm and cordial welcome they have given us. Like others who have spoken here, I would like to take the occasion of this fiftieth anniversary to outline some future prospects for the Bretton Woods institutions. In the past, the Bretton Woods institutions did not hesitate in taking up their responsibilities in the face of major world challenges. While they may at times have tended too much to propose universal remedies for specific situations, today they clearly demonstrate a greater desire to adapt their policies to the diversified needs of their members. I am pleased by this change. Nevertheless,

  • The programs of the Bretton Woods institutions have not yet succeeded in bringing about a fundamental improvement in the living conditions of many low-income countries, particularly in sub-Saharan Africa.

  • The IMF has not yet succeeded in exercising systematic influence on the economic policies of the major industrial countries, nor in replacing the Bretton Woods system with a new framework for exchange stability.

  • The IMF must reposition itself in a globalized economy, which will require in particular a strengthening of its ability to meet the exceptional needs that may arise on markets with a global scale. Allow me to make a few suggestions on how we might make progress in each of these areas.

Sub-Saharan Africa

We have constantly increasing evidence that those African countries that steadfastly undertake adjustment and reform programs with the aid of the Fund and the Bank are also those that show the most positive evolution in per capita income levels. It would be simplistic, therefore, to fault the Fund and the Bank with being at the root of Africa’s problems. It must be acknowledged, of course, that structural adjustment programs initially did place too much emphasis on ruthless liberalization of the economy and showed little concern for their concrete impact on people. But this is no longer the case today: Fund programs have become much more attentive to the needs of the poorest, and World Bank lending to social sectors is increasing strongly (the Bank’s loans for education and health have more than doubled in five years). I also note that many of those who traditionally were most critical of the Fund and the Bank—and often rightly so—are today willing to give some degree of credit to the new choices made by the two institutions. However, the Fund and the Bank must show even more determination as they pursue this path. The means to reach the goal are already available, and for the first time in many years, the international climate seems favorable for renewing the partnership among the main players.

Macroeconomic stabilization remains essential to mobilize countries’ productive forces and to protect the purchasing power of the population from monetary erosion. So, the Fund should continue to play a leading role through its enhanced structural adjustment facility (ESAF). This instrument is vitally important; we will have need of it for years yet, and its repayment modalities should remain sufficiently favorable to allow its beneficiaries to continue their reforms while improving their external debt management. In this context, I support Chancellor Clarke’s proposal to examine the possibility of selling a limited portion of the IMF’s gold stock and earmarking the interest income from the proceeds of that sale to increasing the concessionality of the ESAF. In this regard, the World Bank has a central role to play in the implementation of policies directly aimed at reducing poverty and, more generally, at eliminating institutional and physical barriers to development. This is how I understand Mr. Preston’s call for greater selectivity in the Bank’s operations. While I support this orientation, it implies that the Bank must set priorities for its actions, which may place it in the position of having to make difficult choices at times. It seems to me that the Bank would be better prepared to assume its responsibilities, under such circumstances, if its management and Executive Board could refer to the decisions of a policymaking body having the same status as the Interim Committee does in relation to the IMF.

The success of any broad strategy also depends on the ability to systematically involve the people in the design and implementation of reforms, implying that the Bank would promote collaboration not only with governments, but also with other representatives of countries’ economic and social life. This is a determining aspect for the long-term success of the Bank’s actions, and I would urge the Bank to be less demanding in future when interpreting its legal constraints in this regard.

Finally, it is important that reforms be carried out in a climate of confidence in the country’s financial future. In this context, recent proposals for a reduction of the debt stock of low-income countries lose all meaning. Belgium believes it is high time for the Paris Club to agree to a reduction of the stock of debt of low-income countries that have demonstrated a strong desire for adjustment and reform. Belgium is prepared to apply a 67 percent cut. It is even willing to go beyond this, if objective conditions so warrant, and it asks Paris Club members to call upon the Bretton Woods institutions to establish appropriate criteria. But Belgium also urges all other creditor countries to join in this new advance in handling the problem of overindebtedness. The goal is to avoid unwarranted discrimination between countries and, consequently, to decide on debt reductions on the basis of their economic merits rather than geopolitical considerations.

International Monetary Stability

I will turn now to the role of the Fund in exchange rate stabilization. Exactly twenty years ago, the Committee of the Board of Governors on the Reform of the International Monetary System, known as the Committee of Twenty, submitted its reform proposal, whose second part served as the basis for the provisions in the Articles that underpin the existing exchange system. Its authors considered this second part to be but an “immediate step,” a prelude to a bolder and sounder reform. Could not this twentieth anniversary, though certainly not as prestigious as the one we are celebrating this week, serve as a fitting occasion to ask ourselves how much longer will we continue to live in the “immediate,” or, as a privileged observer described at the time, in “a world run by events rather than by constitutions”? I am perfectly aware of the huge resistance to be overcome, and I understand the legitimate reticence in the face of the huge amounts the market could mobilize to test the solidity of any exchange arrangement. But could we not at least envisage moving from the “immediate” to the “intermediate” through a gradual strengthening of the methods of cooperation we have set up over the years? Such an approach should include at least four stages:

  • first, pursuit of a durable convergence based on a growth strategy adopted by common agreement—that is, the strategy defined by the Interim Committee in April 1993 and again on Sunday;

  • then, more explicit consideration of policies susceptible of influencing capital movements by broadening the IMF’s power of surveillance to cover all external accounts—this, too, is a process begun by Fund staff with the general agreement of its members;

  • third, an agreement among major countries on the desirable direction their exchange rates should take—a commitment to target zones seems overly ambitious today, but it should be possible to reach agreement on the desirable direction on the basis of an objective review of the first two stages; and

  • last, the possibility for the IMF to hold multilateral consultations to counter the risk of slippages through corrective measures— this, too, would not be extraordinary, as we have just given the Fund a mandate to organize a systematic follow-up of the implementation of the declaration adopted on Sunday.

The conditions for implementing this approach seem reasonable to me, as each of the major countries is completing a profound internal adjustment; postponing it would expose us to the risk that the benefits we now receive from this adjustment would be compromised by the resurgence of fundamental exchange rate distortions. Indeed, we have every interest in protecting ourselves from the risk that exchange rate manipulation may become a protectionist weapon. It would be paradoxical indeed if those same countries that proclaim the universal merits of market mechanisms should fail to acknowledge the need to promote exchange market price ratios that are consistent with a good allocation of resources.

Globalization of the Economy

The leaders of our two institutions informed us yesterday of the agenda they have set to meet the challenges of globalization of the economy. For my part, I would like to conclude by stressing three points. Globalization is not limited to the financial and commercial spheres; it also concerns that of labor. We would be deeply mistaken to underestimate the concerns expressed on both sides about a downward leveling of working conditions as a result of potential large-scale industrial dislocations. To ignore these concerns would mean compromising the new world order we seek to build by proclaiming the universal values of private enterprise and democracy. From this standpoint, I am pleased that the Interim Committee has agreed to an exchange of views with the management of the International Labor Organization.

A second topic that merits being brought more to the forefront as a subject of active international cooperation is training and enhancement of human resources. Training is one weapon that can be used to attack the problem of structural unemployment in Europe; it can contribute significantly to the elimination of poverty zones in our part of the world. Moreover, training is an area where international competition can only lead to higher levels of investment. I believe it deserves greater attention in the discussions of our institutions.

A last observation on the global redistribution of economic responsibilities to which the Fund’s Managing Director referred yesterday: in today’s world, the cards have not been dealt definitively; they are constantly being exchanged, sometimes in unexpected ways. What are the implications of this for the working of our institutions?

  • first, rules of the game that are acknowledged and accepted by everyone, which entails a more consistent international monetary system;

  • second, decision-making mechanisms in which all can participate to the extent of the responsibilities they assume in the global economy; and

  • third, instruments allowing the rapid mobilization of financial resources needed to meet the exceptional needs that countries may face in markets of global scale.

Statement by the Governor of the Fund for St. Vincent and the Grenadines—James F. Mitchell

I have the honor of speaking on behalf of the group of countries comprising the Caribbean Community (Caricom), namely Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, Trinidad and Tobago, and my own country, St. Vincent and the Grenadines.

Caricom countries congratulate the International Monetary Fund and the World Bank on their fifty years of valuable contribution—with warts and all—to the management of the world economy and to the development process, as well as on fifty years of institutional growth in response to the changing needs and demands of their membership, which, happily, is now nearly universal.

At this moment of widespread reflection and introspection on the past record and future orientation of the IMF and the Bank, the Caricom countries find it timely to reiterate the value they attach to being a part of these institutions, which in the past have shown a commendable capacity to adapt and which we earnestly hope will continue to adapt in the future. For we believe that our prospects for growth and development in the Caribbean, like similar countries elsewhere, hinge not only on the soundness of our own domestic policies but also on an enabling international environment, of which Fund and Bank programs and facilities are of necessity a vital part. Our Caribbean countries look forward, therefore, to a fruitful and dynamic future for an IMF and a World Bank that are increasingly more attuned to the special challenges we face in our development effort.

Our circumstances force us to place in sober perspective the good news being spread these days about the performance of the world economy. We meet this year in a mood of optimism about global growth prospects and in high spirits about the reported robust net flows of resources to developing countries. At the aggregate level, the indicators are surely encouraging and are to be welcomed. But as we are well aware, this general aggregate picture grosses up a variety of concrete experiences— including many situations that do not inspire celebration—to which the Fund and the Bank need to remain particularly sensitive in their operations. Though developing countries as a group are contributing strongly to world growth, many countries within this group, including some in the Caribbean, are not having any meaningful participation in the recovery. They are striving to get on board in a changing structural framework in which the transmission of growth from the industrial to the developing world is not always as clear and as certain as it used to be.

The rising aggregate flow of total resources to developing countries also hides the fact that official development assistance is undergoing long-term stagnation and that the private flows reported are, for the most part, narrowly concentrated in a few countries. Indeed, the overall position of the Caribbean is one of a net outward flow of resources, and this at a time when the objective conditions of our countries and the vast scale of the global changes that are upon us combine to exacerbate the difficulties of the adjustment we must undergo.

Within our Caricom grouping, we are committed to pursuing prudent fiscal and monetary policies; to maintaining the momentum of structural reforms; to applying sound policies in the external sector, including collective action to reduce our common external tariff; and we remain resolved to streamline the machinery of government and to make administrative procedures increasingly clear and transparent. However, we are all striving toward these goals under impediments of one kind or another. Some of us are working toward them under the yoke of a continuing debt burden, which remains heavy even after the very welcome reschedulings and debt forgiveness obtained in the past.

Others among us, in common with similar small economies elsewhere in the world, are struggling with adjustment, but in the face of a rather narrow scope for diversification, and are constrained by the high cost of our vulnerability to natural disasters and shocks from the international marketplace. Developments in the production and marketing of bananas, a mainstay of some small Caricom economies, are now having a severe negative impact on the fiscal and external balances of these economies, threatening, among other things, to generate new or worsen existing external debt problems. To make matters worse, the elements of nature recently joined hands with international market forces to compound the problems of two of our countries, when storm damage caused an extensive economic setback in Dominica and St. Lucia. It is against this background that we in our part of the world look forward to the Bretton Woods institutions, continuing to evolve in a manner that increases their sensitivity to the special constraints that confront us. In this, we support the idea of the Fund and the Bank remaining faithful to their original respective mandates, but finding new and more effective ways of fulfilling their missions, and of adapting them to meet the demands that are ever emerging from the changing circumstances of their members.

With respect to the IMF, we support calls for more effective surveillance of the policies of the major economies and for the fostering of cooperation among them, as this would help make the global financial environment in which we have to function more stable and predictable. We also urge that the IMF, while maintaining its essentially monetary and catalytic character, vigorously pursue all avenues for enlarging the availability of financing and for delivering that financing on terms appropriate to the varying conditions of those of its members that need to use its financial resources. In particular, we join in requesting the IMF to actively consider the proposal that the distinguished British Chancellor of the Exchequer has tabled, calling for the income from the invested proceeds of IMF gold sales to be used to enlarge financing on concessionary terms for the poorest countries. We would in addition propose that eligibility for this new facility be extended to small countries like ours in view of their fragility and special vulnerability.

In another concrete area, we welcome the understandings reached by the Executive Board on a temporary increase in annual access limits for IMF resources. We share the widespread disappointment felt by many, however, over the failure so far to reach agreement on an SDR allocation. The Caricom countries continue to support the principle of an adequate general allocation of SDRs as well as an allocation to address the question of equity. We urge the Managing Director, the Executive Board, and the Interim Committee to continue their efforts to come to early agreement on this matter.

With respect to the World Bank, we are greatly encouraged by the fact that focused attention is being brought to bear on the matter of increasing the effectiveness of aid. We broadly support the general principles touching on this question that the President of the Bank has outlined in his report to the just-concluded meeting of the Development Committee. We are pleased to see that these principles embrace not only issues that the aid recipients themselves must address, but also matters with which donors must deal in their own policies and procedures. We look forward to the donor community’s maintaining momentum in this new direction, even as countries like ours increase their efforts to improve and strengthen their policies.

The experience of our countries also leads us to join with those who call for improved coordination and consultation between the Fund and the Bank. Of course, we acknowledge that there has been progress in this regard in the past. We would like to see the two institutions build further on this progress, and I stress that this is in order to avoid gridlock and immobility in the implementation of projects, not for the purpose of ganging up on any country seeking to benefit from their technical and financial resources.

In the next, immediate round of evolution of Fund and Bank policies and programs, we look forward to the Bretton Woods institutions’ continuing to broaden their understanding of the problems of small economies like ours and to improve their response to our needs. It is in this frame of mind that the Caricom countries shall maintain their fruitful working relationship with the Fund and the Bank in the years ahead.

Statement by the Governor of the Bank for Israel—Jacob A. Frenkel

I am honored to address this distinguished assembly as Governor for Israel. On the occasion of the fiftieth anniversary of the IMF and of the World Bank, I wish to express my appreciation for the important roles played by both institutions in implementing the Bretton Woods principles of multilateral economic cooperation. During the half century since their inception, the Bretton Woods institutions have had to respond to crises beyond those that were envisioned in their original mandate. It is to their credit that by continuous, combined efforts, the IMF and the World Bank have responded to fundamental changes by adjusting their roles without deviating from that mandate.

Since the beginning of this decade, they are again in the throes of adjustment to a new political and economic reality and are instrumental in the transition of the former centrally planned economies into market economies. Their role in this process has required imaginative evolutionary adaptations. The systemic transformation facility (STF) is a specific example of the way the IMF, recognizing that traditional facilities were simply not adequate, reacted by creating a new facility, tailored to the challenges of the hour. The need for cooperation between the two organizations has been highlighted by the transition process. There is no easy distinction between the stabilization efforts and the restructuring tasks in this process, where they are intertwined more than anywhere else. That is why cooperation between the IMF and the World Bank is so essential. Furthermore, it is encouraging that, thanks to multilateral efforts jointly coordinated by the IMF and the World Bank, we are now in the process of resolving some of the problems that arose in the early 1990s.

Another tangible manifestation of this joint effort is of course the successful completion of the Uruguay Round and the creation of the World Trade Organization. Two years ago, in front of the same assembly, I expressed my concerns over the slowing down of world trade. Now, we can expect it to pick up again, owing to renewed growth and further price stability in most of the industrial countries and to the rapid development of parts of the Far East and South America. The global consensus reached this year to further eliminate trade restrictions could not have come at a better time. Lack of convergence of macroeconomic domestic policies among industrial countries threatens the stability of our exchange system. Exchange rate stability between “anchor economies” calls for the strengthening of the surveillance role of the IMF. Large structural fiscal deficits represent fertile ground for renewed inflationary pressures in many industrial countries, leaving less room for growth-directed policies and for durable solutions through structural policies to the still very acute problem of unemployment. Indeed, there is still a great need for the IMF to persevere in its ongoing surveillance efforts and to find a global solution to those problems.

In developing countries, official foreign aid is still very much needed. Among those countries that have been able to attract increasing private flows of funds, there remains the uncertainty associated with the fluctuations of relative interest rates. In other less fortunate countries, existing income disparities with the rest of the world will continue to widen, further reducing private capital inflows. Unfortunately, because of fiscal difficulties, donors’ response to this situation is less than warranted by the size of the problems. In this context, it is particularly worrisome that, in many cases, regions that have received the greatest amount of aid, per dollar of GNP, are still plagued by seemingly intractable poverty. This is why development banks are engaged in an effort to reassert the impact of development aid and increase its effectiveness. The World Bank is expected to play a leading role in this joint effort of all bilateral and multilateral development institutions. In 1993 and 1994, considerable effort was invested by the management, the Executive Board, and the staff to remodel and streamline the World Bank’s contribution to worldwide aid to development. One can only endorse their call for more participation on the part of the beneficiaries in the modeling and implementation of development programs, for country-focused strategies linked to IMF-supported macroeconomic adjustment programs, and for less public sector involvement. In order to achieve such a strategy, it is necessary to foster the mobilization of private funds through increased activities by the International Finance Corporation and the Multilateral Investment Guarantee Agency and through cofinancing, and to concentrate lending to the public sector on infrastructure, population, health, the environment, technical assistance, and market transformation and adjustment.

Allow me now to turn to the Israeli economy. Since the beginning of this decade it has had to overcome tremendous challenges. First, it had to absorb a 10 percent increase in its population owing to the influx of immigrants, mostly from the countries of the former Soviet Union. Currently, it has to adapt to a new political and economic reality in the region. Israel is responding to these challenges without abandoning the policies of capital market reform, privatization, trade liberalization, and macroeconomic stability. Consequently, Israel was able to adopt, in October 1993, the provisions of Article VIII of the IMF’s Articles of Agreement. In 1994, Israel has taken new measures toward the removal of foreign exchange controls and the internationalization of its financial markets. Other measures have been taken to increase freedom of action in the private sector and reduce interest rate spreads so as to strengthen economic growth. The Government has taken further steps to reduce concentration and increase competition in the banking industry, and to reduce trade restrictions. In addition, the Government is actively pursuing the privatization of leading Israeli industrial companies and banks.

Continuous budgetary discipline is expected to bring a further decline in the share of government deficit in GDP, which has already been lowered to below 3 percent. Absorption of new immigrants was concentrated primarily in the private sector, with minimal direct government involvement. As a result, the level of GDP has increased by almost a third during 1990-94. The part of GDP emanating from the business sector grew by over 39 percent, allowing for a significant decrease in the unemployment rate. However, at the same time, led by housing prices, inflation has accelerated to 14 percent this year, in turn forcing monetary discipline and increases in interest rates. The Government and the Bank of Israel have announced an inflation target of 8-11 percent in 1995, aiming to further lessen inflationary pressures in 1996. Thanks to its human capital and to widespread investments in infrastructure, the Israeli economy has a promising potential to continue its export-led growth and to become a financial center for the Middle East. These assets are now further enhanced by the recent improvements that have occurred in the geopolitical situation in the region.

To conclude, Mr. Chairman, I would like, on behalf of Israel and myself, to pay tribute to IMF Managing Director Michel Camdessus and World Bank President Lewis Preston, to the Boards of Directors and the staffs of both the Fund and the Bank, for their efforts to foster and coordinate new multilateral channels of economic and development aid to the area, thereby making a unique contribution to the strengthening of the peace process in our region. I would also like to use this opportunity to welcome the three newly appointed Deputy Managing Directors, Messrs. Stanley Fischer, Alassane Ouattara, and Prabhakar Narvekar, and to wish the outgoing Deputy Managing Director, Mr. Richard Erb, all the best. Finally, let me express my appreciation for the arrangements made by the Joint Secretariat in cooperation with our hosts in Madrid. I would also like to thank our Spanish hosts, and especially the fine people of Madrid, for the generous hospitality they have extended us.

Statement by the Alternate Governor of the Fund and Governor of the Bank for Switzerland—Otto Stich

It has been a great pleasure for us to be in this great capital of Spain. We are honored by the presence of their Majesties, King Juan Carlos I and Queen Sofia of Spain. We welcome Eritrea as a new member. Since the stabilization policies advocated by the IMF are being followed by an increasing number of countries, it may not be a coincidence if the celebration of the fiftieth anniversary of the Bretton Woods institutions coincides with an upturn in world economic activity. As did my colleagues, I want to stress the absolute need for structural reforms to improve the economic situation, especially with respect to public finance, labor markets, and competition. Such measures will undoubtedly enhance economic growth. The fiftieth anniversary provides us with the opportunity to take stock of the work accomplished. In this respect, I would say that the IMF has been successful in achieving its objectives. It has grown into a global institution, which has succeeded in promoting noninflationary growth, liberalizing markets, and eliminating exchange controls. In this way, it has contributed in an essential way to the expansion of world trade and to the growth of economic activity.

In financing adjustment programs of countries facing balance-of-payment difficulties, the IMF has shown its capacity to adapt its instruments to the changed environment. Its leading role has allowed its financial support to have a catalytic effect. Even if in some cases the Fund-supported programs have not always yielded all the expected results, countries following these programs have been better off than otherwise. This is particularly valid for Africa. In the future, the IMF will also be confronted with delicate issues. I would like here to mention just a few. Even if the advantages and the feasibility of establishing a system of target zones seem bleak, we are, nonetheless, convinced that enhanced IMF surveillance is the best way to achieve greater convergence of domestic economic policies and, therefore, to lead to a greater stability in exchange rates. The spelling out of convergence criteria and the publication of some Fund documents, such as the reports on the Article IV consultations, would be an advantage in this respect. We do not think that greater economic convergence or increased transparency of IMF activities must necessarily lead to the sacrifice of legitimate national interests. As globalized financial markets contribute to efficient capital allocation, the Fund should further promote elimination of capital controls. On the other hand, increased capital mobility and the globalization of financial markets call for enhanced financial market supervision. Accordingly, the Fund should deal more extensively with multilateral surveillance.

Another challenge that should be addressed by both the Fund and the Bank is the support for economies in transition. Success observed in some Eastern and Central European countries shows us the way. The transition process, however, especially in the countries of the former Soviet Union, has proven to be far more complex and lengthy than initially expected. The Fund should, therefore, be ready to make special efforts in providing technical assistance and financial support. It is especially important, therefore, to achieve an agreement on the extension and expansion of the systemic transformation facility (STF). However, the Fund should be cautious and not extend credit to perpetuate the old economic structures of these countries and therefore lengthen the transition process. In other words, the countries benefiting from the STF should achieve as soon as possible an economic situation that enables them to draw on ordinary Fund facilities. Financial support should only be provided to countries implementing strong adjustment policies. Concerning the SDR, we feel that the time has come for an in-depth re-examination of this instrument. For quite a few developing countries, debt overhang is still a serious problem. In some countries, a large part of these debts is owed to the international financial institutions—to the regional development banks, as well as to the IMF and the World Bank—and the question has been raised whether these countries should be relieved partially or totally of their debts. We have indeed to recognize that there is a multilateral debt problem for some countries. For its part, Switzerland has already initiated bilateral operations of debt buybacks for some of the poorest severely indebted countries, including in some instances arrears on multilateral debt.

Let us turn now to the World Bank. Fifty years represents a milestone. The achievements of development aid are there for all to see: the average income in developing countries has doubled since 1960; infant mortality has been cut by one half over the last fifty years; illiteracy is on the wane; numerous diseases have been eliminated; and poverty has been reduced in a great number of countries. These averages, however, disguise the reality to be found in the countries at the lower end of the international income scale. The per capita income of the thirty-six poorest countries, whose inhabitants add up to half a billion people, has fallen over the last twenty five years. Also, in many countries, huge differences between rich and poor persist. More than one-fifth of the world population is under the bare subsistence level, a fact that cannot be tolerated.

It has become clear that money alone cannot solve the problem, as was believed in the days of the Marshall Plan. Today, it is common knowledge that conducting the “right” policies is just as indispensable as financial assistance. We have to face yet further challenges, which, to a large extent, were not a concern of the founding fathers of Bretton Woods fifty years ago: population growth remains largely out of control; natural resources are strained; and the destruction of the environment is continuing. Nevertheless, I am not pessimistic. On the contrary, the knowledge we have derived from our experiences is invaluable. If we put this knowledge to good use, we can envisage the future with confidence. In many countries, the World Bank plays a crucial role. In what direction is it heading? Since it was founded fifty years ago, the World Bank has proven that it is capable of adapting to changing conditions in the world economy. The founding of the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA) witnesses to that fact. In the coming decades, the International Bank for Reconstruction and Development (IBRD) must continue to be sufficiently flexible, adapting itself when necessary, so that it may continue to strive, unwaveringly, and by availing itself of the most appropriate methods, toward the achievement of its chosen aim: the reduction of poverty. The progress made toward this end will serve as a measuring stick of the degree to which the World Bank has succeeded in its mission.

It is, therefore, certainly appropriate that the World Bank, along with the IMF, continue to promote a healthy macroeconomic policy that can provide the basis for growth. Growth alone, however, is not enough. Growth can only help us to fight poverty if it takes place in a socially equitable and sustainable way. This is why the IBRD must pay yet greater attention to the social sector in the future. Education, public health, and improving the condition of women are all part of this. Therefore, I welcome the priority that the World Bank has already given to these areas in its budget. Likewise, I wholly support the World Bank’s deeper commitment to environmental issues. The World Bank is already the largest international financial institution active in this field today. I would welcome a further expansion of its activities in this area. Whatever areas the World Bank may choose to get involved in during the coming years, its agenda will be strongly influenced by three critical developments.

First, the transfer of numerous tasks to the private sector—in the East as well as in the South. The Bank is called upon to facilitate the privatization process and to play a catalytic role in the stimulation of private investment. IFC is best fitted to accomplish this task. In this context, I welcome the IBRD’s awareness of its original mission, the one the founding fathers in 1944 intended it to have, namely, to be a “bank of guarantees” for investment. The rediscovery of its array of guarantee instruments and its adaptation to current conditions should help to channel financial support to Central and Eastern Europe, in particular. However, the World Bank must take care that capital is allocated to those countries that have shown a true will to reform. Political pressure to do otherwise should be resisted.

Second, the modernization and the upgrading of the quality of the public sector. Irrespective of the growth of the private sector, the public sector will continue to play a crucial role in the development process. This is particularly the case in sectors benefiting only to a very limited extent from private capital, or in which the market functions only imperfectly: I have already mentioned the areas of education and public health, as well as the financing of measures designed to protect the environment. One should include infrastructural projects in this list, not only energy projects and irrigation plants but also silvicultural and agricultural projects.

Third, the need for an objective consultant in the drafting of the “right” policies. When it comes to development issues, the World Bank is a highly valuable source of know-how. All the more so, therefore, the World Bank should realize, as have bilateral donors in the 1970s and 1980s, that financial assistance only makes sense if authorities of the borrowing country are prepared to pursue sensible, rational macro-and sectoral-economic policies. The IBRD must ensure that its directives are carried out, not by imposing additional conditions but by convincing the borrower that its principles are appropriate. It is no coincidence that precisely those programs and projects that are most successful are those that are designed and realized by the government (the principle of ownership) and that enjoy wide support among the population concerned (the principle of participation). If, as a stockholder, I were to put my expectations of the World Bank into words, I would paraphrase those words of President Preston: the stockholders expect an even more efficient and cost-conscious bank, a bank that takes even greater responsibility for its actions, an even more agile, adaptable bank, a bank that attributes a greater importance to results than to intentions, a bank whose quality is judged to an even greater degree by the impact of its programs and its projects on development. That is the bank Switzerland would like to be a part of.

Statement by the Governor of the Fund for Guinea—El Hadj Camara

On behalf of my fellow African Governors, I wish to congratulate the Bretton Woods institutions on the occasion of their fiftieth anniversary. I also wish to welcome Eritrea, the newest member of the Bretton Woods institutions. We wish the Eritreans well as they begin the task of rebuilding their country. And, we congratulate the people of South Africa, whose transition to a multiracial democracy earlier this year marks an important milestone in human history. We wish the Government and the people of South Africa well as they face the formidable challenge of reintegrating their country into the global economy.

The World Economy

All indications are that the prospects for the world economy are much more promising today than they have been in the recent past. Indeed, the fear of a deepening recession that shaped the debate of our last Annual Meetings has given way to hope for a strengthening of world economic activity. While industrial countries are expected to experience modest growth over the medium term, many developing countries are enjoying robust economic expansion and are expected to make a major contribution to the improved prospects of the world economy. This performance has in no small measure been buoyed by sound macroeconomic policies on the part of developing countries, combined with low international real interest rates and unprecedented levels of private capital flows to many developing countries.

In the medium term, low levels of inflation and the successful conclusion of the Uruguay Round give the international community reason to be guardedly optimistic about the potential for a significant expansion in world trade. We cannot afford to be complacent, however: in spite of these positive developments, there are three attendant problems that are likely to reduce the collective gains made during the last year. First, the growth performance of many low-income countries continues to be sluggish compared with that of the rest of the world. Second, there is an unemployment crisis that is structural in nature in a growing number of developed as well as developing countries. Third, the external viability of a large number of low-income developing countries is threatened by a persistently high debt burden.

Industrial countries must take the lead in maintaining a strong commitment to the process of adjustment in their countries, coordinating medium-term fiscal consolidation efforts, providing unqualified support to free trade in the spirit of the Uruguay Round agreement, creating flexible labor markets, and facilitating resource flows to developing countries. On their part, developing countries should continue to pursue economic reform, with governments acting as a constructive force for change by ensuring political stability, improving public sector management, and creating an enabling environment for private entrepreneurship—which are necessary prerequisites for effective economic reform.

Disparity Among Developing Countries

As noted above, although developing countries as a whole have enjoyed impressive growth in the recent past, many low-income countries continue to experience deteriorating living standards. In particular, in spite of ongoing reform efforts and a projected leveling off of commodity prices, poverty levels in Africa are expected to increase as per capita income levels continue to decline. In fact, Africa is the only continent where people were poorer at the end of the 1980s than at the beginning.

Clearly, reversing the process of continued impoverishment of Africa is perhaps the greatest challenge facing the international community in general, and, in particular, the Bretton Woods institutions as they begin a second half century of their existence. In our view, the task for the international community is twofold: first, to help Africa play a significant role in the global economy so that our continent fully shares in the benefits of expanded trade and technological advancements; and, second, to assist Africa vigorously in tackling the problem of poverty.

Actions Already Undertaken by African Governments

By now, it is quite evident that African governments have demonstrated their strong determination to undertake all the necessary actions within their control to improve their economic performance. In this respect, it should be noted that, in a number of cases, our governments have made significant changes in the way we approach economic realities. First, many of our governments are now more determined than ever to embark on, or to maintain, economic reform programs in our countries, as evidenced, for example, by a number of countries that have consistently implemented such programs and by the recent devaluation of the CFA franc by fourteen African countries. Second, our governments are increasingly giving the private sector a much larger role in the development process than it has been allowed to play in the past and are creating an enabling environment to facilitate this enhanced role. To this end, there is a growing acceptance that the role of government is to facilitate change and to ensure that the benefits of development are fairly and equitably shared by different groups in society. Finally, the democratization process currently taking place in much of the continent implies greater popular participation and consensus building in economic decision making. As a result, reform programs benefit from greater borrower ownership, are more effectively implemented, and enjoy a much higher degree of efficiency and sustainability.

The Major Constraints

The actions noted above are all within the control of our own countries, and, with appropriate assistance from multilateral institutions and donor agencies, we are constantly seeking to make our programs more effective. We are doing our part by improving economic management, mobilizing domestic resources, and liberalizing our economies to increase incentives and to create a conducive environment for the private sector. However, the persistent decline in the terms of trade, the heavy debt burden, and the shortage of resource flows to our countries, including private capital, are the most serious constraints to our development prospects. All these hamper significantly the achievement of sustainable growth and external viability.

What Needs to Be Done

Addressing these constraints will require decisive action on several fronts on the part of both industrial and African countries. There are seven areas that require immediate attention in order to pursue our development objectives and on which the cooperation of the international community is vital.

  • Strengthening the economic foundation. We believe that the general strategy of reform pursued over the years remains valid. What is needed, in our view, is a strengthening of the foundation of our economies, with special attention paid to:

    • economic diversification away from heavy dependence on primary commodities;

    • food security, by reducing the continent’s vulnerability to variations in weather conditions;

    • increased investment in basic economic infrastructure; and

    • human resources and institutional development, as well as transfer of technology with a special emphasis on capacity-building.

      These would enable us to build a solid basis for macro-economic stability and to raise living standards in the region.

  • Increased financing. The last two years have witnessed a considerable level of foreign private resource flows to developing countries as a whole. However, despite the intensive efforts of African countries to rehabilitate their economies and to establish an appropriate and conducive environment for private investment, private transfers to Africa have, according to the 1993 World Bank debt tables, actually declined. Additionally, where such investment has taken place, it has been concentrated in very few countries and has been limited to a small number of sectors. Yet, an increase in foreign private resources is necessary to fuel the expansion of a vibrant private sector. We, therefore, call on the World Bank Group, particularly the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), to play a direct as well as a catalytic role in mobilizing such resources.

    The role of the international community in providing concessional assistance to Africa cannot be overemphasized. In this regard, we welcome its continuing support for various initiatives, including the tenth replenishment of International Development Association (IDA-10), the enlarged enhanced structural adjustment facility (ESAF), the global environment facility (GEF), and the third Special Program of Assistance (SPA-3). However, it is important that the targets agreed upon in the context of these initiatives be adhered to so that the anticipated resource flows are realized in a timely manner.

    In addition, although we support the Bank’s efforts to rationalize budget expenditures and improve cost-effectiveness, we hope that the proposed reduction in the Bank’s administrative budget will not adversely affect either its operations or the substance of its economic and sector work in borrowing countries, particularly in the African countries, in view of their pressing needs. We regret that a consensus on the package, including SDR allocation, could not be reached during these meetings and we hope that a satisfactory agreement will be achieved soon.

  • Debt reduction. According to the IMF’s spring 1994 World Economic Outlook, the ratio of external debt to GDP for Africa as a whole stands at about 63 percent. For sub-Saharan Africa, this ratio stands at 131 percent. At these levels, the debt problem is clearly a major impediment to realizing the region’s development objectives. The picture is particularly grim when compared with developing countries as a whole, where the debt-to-GDP ratio stands at only 32 percent. Past efforts to address the debt problem in Africa have proved limited in scope and, therefore, largely ineffective. Yet, its solution would be essential to the adjustment efforts of our countries and a prerequisite to the resumption of sustainable growth. To this end, and in line with the call made by the African heads of state and government at their summit in Tunis in June 1994, we would urge the international community to examine this problem further with a view to bringing about a definitive and material reduction in the stock of debt in the region, including more widespread use of debt forgiveness. Additionally, we wish to lend our strong support both to the proposal, made by the United Kingdom’s Chancellor of the Exchequer at the recent Commonwealth finance ministers’ meeting in Malta, for addressing the problem of multilateral debt of the severely indebted low-income countries, and to the conclusions of the ministerial meeting of the nonaligned countries on debt and development, held in Jakarta August 13-15, 1994.

  • Regional integration. We, in Africa, firmly believe in the merits of regional economic integration, which is a prerequisite for growth and development in our countries. Indeed, our countries have just reaffirmed this belief by signing and ratifying the Abuja Treaty establishing the African Economic Community. The first two phases in the implementation of the Treaty provide for the strengthening of regional economic communities. We urge our partners to support our efforts toward economic integration within this framework.

  • Trade. We welcome the signature, in April 1994, of the Final Act of the Uruguay Round in Marrakech, Morocco. We believe that full application of this accord will reinvigorate world trade. We make this endorsement, however, with the full realization that the benefits from the Round will not be shared equally among the different regions. In particular, low-income, primary-commodity-exporting and food-importing countries, especially those in sub-Saharan Africa, are not likely to derive any tangible benefits in the short to medium term. In fact, some of our countries are likely to lose their preferential treatment in some of the industrial country markets. Additionally, since the prices of some agricultural products from industrial countries, particularly cereals, are expected to rise, all net importers of these products are expected to experience a rise in cost, thus adding more burden to our countries’ balance of payments. The peculiar circumstances facing all African countries must be given special attention, and transitional compensatory and other appropriate measures should be instituted to enable them to adjust to the new trade regime.

  • Population. The recently concluded Cairo Conference on Population and Development and the Summit Declaration on Population and Development in Africa, adopted in June 1994 in Tunis, underline the interrelationship between population and sustainable development and the far-reaching consequences of rapid and uncontrolled demographic changes on poverty and the environment. We need to make vigorous and concerted efforts to formulate integrated demographic strategies that recognize the interaction of growth, population, poverty reduction, health, education, and environmental degradation. We urge the international financial and development institutions, and the donor community at large, to step up their assistance and support to these strategies.

  • Drought and desertification. Drought and desertification constitute serious problems that undermine considerably the development process in many African countries. That is why we welcome the recent agreement on the United Nations Convention to Combat Desertification in those countries experiencing serious drought and/or desertification, particularly in Africa, and call on the international community for its prompt implementation. In this context, we urge the international community to maintain its ongoing support to drought-stricken countries, especially in eastern and southern Africa, and in the Sahelian zone.

In closing, we wish to appeal for a common international strategy in addressing the issue of poverty in Africa. Of immediate importance are concerted efforts to address the issues relating to the removal of the debt overhang and the mobilization of adequate resources to meet our financing needs. On our part, we are prepared to undertake whatever appropriate means are at our disposal to solidify the gains that have been made thus far and to implement programs intended to put our economies on a sustainable growth path. Finally, we invite the donor community and the multilateral institutions, particularly the World Bank, the U.N. Development Program, the African Development Bank, the Economic Commission for Africa, and the Organization of African Unity, to support the proposal we made last year to help us organize an international conference on poverty in Africa before the next Annual Meetings.

Statement by the Governor of the Fund and the Bank for Kuwait—Sheikh Salem Abdul-Aziz Al-Sabah

I am both happy and honored to address you on behalf of the Arab Governors of the IMF and the World Bank. May I begin this statement by congratulating you on being elected Chairman of the Boards of Governors this year, and by welcoming Eritrea’s accession to membership of the Bretton Woods institutions. At the outset of my statement, I would also like to welcome the resumption of the practice of inviting observers to attend the annual meetings, and the presence at this year’s meetings in such capacity for the first time from our region, of the Palestine Liberation Organization, the General Secretariat of the Arab Gulf States Cooperation Council, and the Kuwait Fund for Arab Economic Development. I would also extend a special welcome to the Republic of Bosnia-Herzegovina as an observer, and hope that this Republic will be welcomed as a member of the two institutions at next year’s Annual Meetings.

Our meeting this year coincides with the fiftieth anniversary of the Bretton Woods conference. While the achievements of the two institutions stemming from that historical conference over the past five decades are a source of pride, it is also obvious that the challenges posed by the fundamental changes in the international arena at the political and economic levels over the last few years require the Bretton Woods institutions to continue exerting their unflagging efforts to contribute effectively to transforming those challenges into opportunities for progress and development within an international cooperative framework. The capacity exhibited by the two institutions to adapt effectively to new developments over the years gives us confidence in their ability to shoulder their responsibilities over the coming years with the efficiency and effectiveness for which they are known.

While we feel encouraged at the deepening of economic recovery in most industrial countries, we would like to stress that it is important for these countries to effectively use the opportunities made available by such recovery. This requires that these countries basically concentrate on reducing the structural deficits of their national budgets with a view to creating an environment that is conducive to reducing long-term real interest rates and to allow fiscal policies broader flexibility than that which was available during the recent period of recession. In this connection, we would like to underline the importance of concentrating fiscal adjustment efforts in the industrial countries on reducing public expenditure in view of the high level of direct and indirect taxes in most of those countries, and the positive impact on the movement of international trade of reducing public expenditure in certain areas such as subsidies to industrial and agricultural sectors. We would also like to stress the importance of industrial countries’ giving special attention to introducing structural reforms in the labor markets in such a way as to lead to a radical solution of the problem of unemployment, since the continued spread of unemployment can only result in loss in production and political pressures to take protectionist measures.

The large expansion in the markets of developing countries during the past few years has significantly helped to strengthen the demand for industrial country exports and to support their economic activity during the recent period of recession. Although the potential for continued economic growth in many developing countries is a source of satisfaction, it should not be forgotten that other developing countries continue to be faced with numerous economic problems. In this respect, I would note in particular the low-income countries in Africa that have witnessed a deterioration of living conditions for many successive years. This requires, first and foremost, that the countries concerned persevere in their adjustment efforts. The success of such efforts, however, is dependent on the availability of adequate external support, which should include as a basic component addressing the debt overhang of many of those countries. It is from this perspective that we welcome the recent call by the summit of the Paris Club of seven major industrial countries to seek the implementation of additional measures to alleviate the debt burdens, including debt reduction for the low-income countries and the other developing countries overburdened with debt. In our view, the Naples Summit assumes particular importance in light of the marked increase in long-term interest rates in the industrial countries since the beginning of this year.

While the availability of external financing on appropriate terms is an important element in the adjustment and development efforts of developing countries, the availability of appropriate marketing opportunities for developing country exports to the industrial countries is equally, if not more, important. In this context, and in view of the long-term positive impact of international trade liberalization on global economic performance, the Arab countries—including those whose membership in the General Agreement on Tariffs and Trade (GATT) dates back to end-1993, and other new member countries that have recently applied for membership—welcome the conclusion of the multilateral trade negotiations of the Uruguay Round. We hope that the agreements of the Round can be ratified without delay, so that the International Trade Organization can begin its tasks by early next year, as agreed upon in Morocco. We consider the establishment of this organization, and the special importance we attach to its cooperation with the Bretton Woods institutions within a framework that ensures avoidance of duplication and overlapping responsibilities, to be an important step toward the provision of a code of conduct to govern world trade, based on the need to reinforce international cooperation in this vital area. In particular, great care must be taken to ensure that increases in the terms of trade within regional trading blocs should not lead to fewer market opportunities for nonmember countries, or be made at the expense of international trade. While speaking of the Uruguay Round, we should be reminded that—despite the comprehensive nature of the talks, the issues covered, and the expectation of positive effects on the performance of the world economy—if the agreements are effectively implemented, more would still have to be done during the post-Round phase to improve the marketing opportunities for developing country exports, particularly in textiles, agricultural products, and petrochemical industries. In this connection, I must again voice our concern regarding the continued adoption by industrial countries of tax policies and other measures that discriminate against oil and our exports of oil products, thereby inhibiting the capacity of countries producing oil and its derivatives to increase their productive capacity proportionately with the increased world demand for oil.

Like other developing countries, we would also like to express our concern regarding the various protectionist policies and measures in industrial countries, which are justified by noncommercial objectives. Such policies and measures can only reduce the effectiveness of international trade in the allocation of resources and distribution of production at the international level, in accordance with the principle of comparative advantage. Talking about the Uruguay Round, we must be reminded of the importance of monitoring any damage incurred in the short term by some developing countries as a result of implementation of the agreements of the Round through higher prices of some foodstuffs and erosion of concessions granted under the generalized system of preferences. In this connection, we would like to stress in particular the need to go ahead with implementing the Ministerial Decree included in the concluding chapter of the Uruguay Round, which called for the adoption of principles of food supplies to the developing countries that are net food importers and low-income countries in general. We further urge the Fund and Bank to be prepared to offer every possible assistance to the countries concerned to help them overcome their difficulties at this stage.

As regards the international monetary order, I wish first of all to mention that it is important that the major industrial countries secure the stability of their exchange rates as much as possible. They should also show greater readiness to adopt the policies recommended by the Fund within the context of its surveillance function, and accept its direct participation in the process of coordinating their economic policies on a more systematic basis. For its part, the Fund should consider what can be done to enhance its surveillance role in the industrial countries. While discussing the international monetary order, reference needs to be made to the utmost importance we attach to the need for serious action to ensure compliance with the text and spirit of the Fund’s Articles of Agreement with regard to the role of SDRs under the system. Though voicing our disappointment over the inability of the Interim Committee at its last meeting to agree on a new allocation of SDRs, I would call for additional efforts in order to reach an appropriate agreement as soon as possible.

The great expansion in the volume of transactions in the international financial and currency markets, accompanied by more diversity in market contracts and instruments, requires a high degree of organizational efficiency. At the same time, the Fund is also required to monitor developments in world financial and exchange markets and to enhance its capacity to extrapolate adverse developments in these markets. I would like to add that we follow with interest the Fund’s endeavors to respond expeditiously and effectively to the financial needs of member countries, should their currencies suddenly become exposed to speculative attacks. We would urge the Fund to expand the scope of its technical assistance to include hedging against adverse fluctuations in exchange and interest rates.

The perseverance of many developing countries in implementing adjustment programs has led to notable success in increasing investment and attracting private capital, thereby deepening the conviction of the advantage of pursuing economic policies designed to increase domestic savings and improve the investment environment. In this connection, I would like to highlight the importance of enhancing the opportunities of developing countries that have succeeded in attracting private foreign capital, to make use of these financial resources in a manner that can increase their productive capacities. I would also like to point out that it is important that the Fund continue to examine private financial flows to developing countries and that Fund-supported adjustment programs adopt a more flexible approach with regard to dealing with the challenges accompanying these forms of macroeconomic and exchange rate policies. I would like to stress, in general, the importance that the Fund and Bank, when drawing up their adjustment programs and considering performance evaluation, pay special attention to the political and social dimensions of the adjustment process, and the administrative, technical, and legislative requirements of this process.

Despite the challenges posed in the face of development efforts in our region over the last decade, many of our Arab countries have been able to go a long way in implementing development plans and adjustment programs. In this connection, I would like to refer to the ongoing adjustment efforts in a number of Arab countries, including Morocco,

Tunisia, Algeria, Egypt, Jordan, Mauritania, and the Comoros, either with the direct support of the Bretton Woods institutions or depending on their own resources, as is the case with Syria, which achieved considerable success. Two Arab countries, namely Morocco and Tunisia, were able to successfully implement their Fund-and Bank-supported adjustment programs in 1992, after years of sustained efforts. Jordan and Egypt also made progress far beyond that anticipated for their adjustment programs, initiated about three years ago. As regards the Arab Gulf Cooperation Council (GCC) countries, which, in addition to my own country, Kuwait, include the United Arab Emirates, Bahrain, Saudi Arabia, Qatar, and Oman, it is expected that the continued efforts being deployed will reduce their budget deficits. It is worth mentioning that those efforts were coupled with the approval and implementation of privatization programs that, it is hoped, will lead to an increase in the contribution of the private sector in economic activity and encourage foreign investment to increase the effectiveness of technology transfer to GCC countries, and expand their industrial base. In Lebanon, where reconstruction is in process, a significant degree of financial and monetary stability has been achieved, gaining the confidence of foreign investment circles, as evidenced by Lebanon’s recent successful entry into international financial markets.

While talking about the Arab countries, I would like to remind this membership of the high degree of economic and financial openness in many of them, and the positive role played by the Arab countries in supporting the Bretton Woods institutions and bolstering their effectiveness. I would also recall the generous financial support offered by the oil-exporting Arab countries, despite the sharp drop in oil revenues at levels that far exceed the percentage of GDP and development assistance provided by the industrial countries. I would also like to point out here that a number of GCC countries have forgiven billions of dollars of development debt due.

As we praise the financial and technical support provided by the Fund and the Bank to adjustment efforts in Arab countries, we call on the two institutions to provide further assistance, including assistance to the Autonomous Authority in Palestine. We urge the international community to increase its support for the reconstruction effort in Lebanon. I would also like to emphasize the importance of providing an adequate amount of Bretton Woods institutions’ technical assistance to the Arab countries, which do not use the institutions’ financial resources, as well as reinforcing cooperative relations between the two institutions and the regional agencies in the Arab countries.

In concluding my remarks concerning the Arab countries, I would like to refer to our countries’ firm determination to press ahead in their efforts to enhance economic performance while continuing to shoulder their responsibilities at the international level. We believe that supporting opportunities for achieving a just and comprehensive peace in the Middle East can effectively reinforce those efforts. From this perspective, and in view of the benefit to the international community in general of the achievement of a permanent peace in our region, we welcome the progress made since the beginning of the peace process three years ago in this hospitable country. We hope that all efforts expended in that regard will ensure the realization of comprehensive peace.

Let me conclude with a few brief remarks on other issues related to the Fund and the Bank. I would like to praise the Fund for the attention it has been giving to the poorest members and to welcome the increase in enhanced structural adjustment facility (ESAF) resources and the participation of many developing countries, including ESAF-eligible countries, in financing this facility. It is important that the expected annual enlarged access limits should not only reflect on transition economies but on the membership in general within the guidelines on policies on access. In addition, Fund relationships with its members are based on mutual trust. Thus, any measure that could negatively affect these relations, such as the publication of Article IV Consultation reports, should be considered with great caution.

Concerning the World Bank, I would like first to welcome the large increase in Bank loans for social development, especially in the education, health, and food sectors. Supporting social sectors and infrastructure has a direct positive effect on the development process. I would like also to welcome the Bank’s efforts to improve project implementation in order to ensure the achievement of the development objectives of the projects and the formation of a working team to study the role of international development institutions and to examine the possibility of enhancing their contributions to the development process. I hope, at the same time, that greater attention to the aspects of enhancing implementation will not necessarily mean decreasing flows of resources from these institutions to developing countries.

In conclusion, I would like to thank profusely Spain, its King and its Government, and its people for their efficient organization of these meetings and great hospitality.

Statement by the Governor of the Bank for Finland—Iiro Viinanen

On behalf of the Nordic countries, I would like to express my appreciation to the people and Government of Spain for their generosity in hosting these Joint Annual Meetings. I would also like to extend a warm welcome to the newest member of the Bank, Eritrea.

At the time of the World Bank’s fiftieth anniversary, our main focus should be on the future role of the Bank. But first, allow me to congratulate sincerely the Bank on its anniversary, its contribution to world development, and its achievements in the past. It is important that the anniversary has served as a catalyst for analysis and discussion within the Bank on its future role. The lessons of the past also have been important to guide the future. The analytical process has provided the Bank with a forward-looking vision through the paper, Learning from the Past and Embracing the Future. This vision paper confirms the Bank’s fundamental objective of poverty alleviation through sustainable growth and investment in people. It also acknowledges the fundamental changes that have occurred worldwide and the fluid character of today’s world. I fully endorse this paper, and I expect the Bank to make good use of it in the years ahead in further refinement of its policies.

The many calls for continuous reform of the Bank in connection with the anniversary must be taken seriously, and I trust the Bank will continue to adjust to a changing environment. In my address I will first concentrate on the fact that the Bank is facing many complex challenges that must be met in a context of a highly volatile world and a diverse development community. Second, I feel that it is necessary to underline that the Bank is not alone in its efforts and must act as a partner in development. This will promote development effectiveness and increase greatly the general development impact of the Bank’s activities. And it will give the Bank more to offer its partners, especially through its broad development agenda and resourcefulness.

The World Bank’s development challenges are at many levels and involve a series of difficult issues. The main challenge is to achieve real progress in addressing poverty in the developing countries. This can only be achieved through a balanced and just social and economic development. Improving the lives of the millions of poor people in poor countries is the overriding objective in the years ahead. In this respect, I would like to commend the Bank on its increasing efforts in the area of population, which should continue, for example, by active participation in the follow-up of the recent International Conference on Population and Development in Cairo. The Bank should also contribute to the process toward the World Social Summit in Copenhagen and the Fourth World Conference on Women in Beijing in 1995.1 would also urge the Bank to continue its solid efforts in the area of economywide policies and the environment, where much work remains to be done, particularly on their longer-term linkages.

Another important challenge for the Bank is to focus on the very different levels of private capital flows to middle-and low-income countries. In regions of middle-income countries, such as large parts of Asia and Latin America, the challenge must be to contribute to stabilize the flows of private capital and support their channelling into development investments. For low-income countries, especially in Africa south of the Sahara, emphasis must be given to mobilize concessional resources and to continue to support sound and sustainable policy reform. The Bank’s catalytic ability in resource mobilization is very important for both categories of countries. The Special Program of Assistance for Africa is essential in this respect. If these challenges are met, they can contribute to growth and poverty alleviation.

An important challenge for the Bank will be to address the particular needs and circumstances of the economies in transition. These countries face fundamental tasks in their transformation to market economies. Here, as well as in developing countries, tailor-made reform programs are essential. Policies to promote growth must also be conducive to orderly social development, and I am glad to see that the Bank is increasingly conscious of this. Countries in transition inherited an environmental situation which gives rise to deep concern. It is of utmost importance that investments aimed at promoting economic restructuring and growth are accompanied by adequate efforts to address the environmental situation. The Bank and other International Financing Institutions (IFIs) must cooperate and take the necessary steps in order to ensure that this objective is met.

The importance of the relationship between trade and development has rightly been given new emphasis through the process and completion of the Uruguay Round. The new trade regime will stimulate increased trade and benefit the global economy, as well as the developing countries. Trade is more important to promote and sustain development than aid. But there are also challenges in the new global trade regime. The Bank must consider practical efforts to alleviate short-term negative effects of the Uruguay Round that some of the poorest countries are likely to experience and to help them exploit the opportunities of a more competitive trade regime.

Strongly linked to both trade and the flows of private capital is the challenge of private sector development. It is an indispensable engine for growth, but it must be achieved in very diverse circumstances and types of economies. It is vital that the Bank develop flexible instruments and timing in order to assist in the development of appropriate enabling environments and to address this issue effectively.

The individual human being is the fundamental engine of development, and it will be a particular challenge to bring out people’s development potential. To achieve this, we need improvements in many areas: education, health, appropriate incentive structures, equal opportunities, civil rights, and a legitimate pluralistic civil society, to name but a few. Education is perhaps the most fundamental factor if people are to pull themselves out of poverty. Women and girls are especially important because of their large, untapped potential due to the special constraints they often face.

Bearing in mind the above-mentioned challenges, the tragic unfolding of events in Rwanda illustrates how quickly conflict can destroy the fruits of long-term development efforts. I encourage the Bank to analyze and define carefully its possible future role regarding conflict-related situations. Due to the diverse causes and characteristics of conflicts, the Bank’s role must be clear, and the instruments it uses in conflict-prone and post-conflict situations must be readily available. The Bank can mainly work for conflict prevention through long-term social and economic development. I also believe that the Bank can play a strong role in the reconstruction of disrupted societies in the postconflict phase. The current peace process in the Middle East vividly demonstrates the need for the Bank to be ready and able to provide support for reaping long-term peace dividends. Emergencies and short-term alleviation of the immediate effects of conflicts can be handled better by others. The Bank must always be conscious of its mandate as one of long-term growth and development.

Let me now return to the issue of the Bank as a partner in development. The Bank must become more inclusive in its activities, toward both governments and other development partners. This is particularly important because of the many new development challenges that make it ever more important and urgent to mobilize the combined strengths of the development community. The Bank must be able to respond to the diverse circumstances of the developing countries. This also applies to the large and diverse community of governments, donors, nongovernmental organizations, and the private sector. The greatest challenge for the Bank lies perhaps at the local level where achievement of a development partnership is particularly needed.

Only by mobilizing all involved parties and focusing on its own mandate can the impact of the Bank and the development community be maximized. The Bank has a lot to offer governments and other development partners, including other multilateral development banks and the UN system; not least because of its broad development agenda and great resourcefulness. The Bank could in turn gain much by taking advantage of the comparative strengths of other development institutions. The Bank can only achieve so much on its own, while it can increase its development impact significantly through active partnership. The Bank must acknowledge that it has strategic and operational limits as well as advantages, in order to fulfill its own potential and to help others do the same. A Bank partnership with all involved parties is necessary for the Bank to transform effectively its objective of sustainable and equitable development into reality. Bank management must pay due regard to the responsibilities of its shareholders in formulating overriding Bank policies. Shareholders must in turn refrain from uncritically assigning new tasks to the Bank. In such a context, the innovative and catalytic excellence of the Bank will reach much farther and have greater impact. It is, therefore, crucial for the Bank to have a clear view of its mandate and objectives and to combine this with a certain amount of diversification and flexibility in its instruments.

In conclusion, it is clear that the World Bank will face a great number of complex challenges in its future work. I am convinced that the Bank can meet these challenges through a forward-looking vision and a clear mandate combined with the application of catalytic and flexible policies and instruments. The World Bank must also assume the role of a core development partner on the basis of its comparative advantages. Only then will the Bank be able to maximize its development impact and effectively promote the achievement of its fundamental objective of sustainable social and economic development.

Statement by the Governor of the Bank for Thailand—Tarrin Nimmanahaeminda

It is a great pleasure and privilege for me to address the Forty-Ninth Annual Meetings of the Governors of the Fund and the Bank. On behalf of the Thai delegation, I would like to thank the Government of the Kingdom of Spain and its people for the excellent arrangement for the meetings. As we approach the end of the twentieth century, we are witnessing several signs of recovery in the world economy. Global inflation remains moderate and, with the successful conclusion of the Uruguay Round, the prospect for the world trading system has much improved.

For the Southeast Asian region, practically all the countries foresee conditions for further growth. The Association of Southeast Asian Nations (ASEAN) member countries, in particular, continues to pursue outward-looking policies and enhance its dynamism and attractiveness for foreign investment by accelerating the implementation of the ASEAN Free Trade Area (AFTA), together with expansion of its scope and coverage.

As for the Indochinese nations, we are witnessing market-oriented policies being adopted as their development strategies. We are certain to observe a strong performance from the Vietnamese economy, as well as the economies of the Lao People’s Democratic Republic and Cambodia, in the very near future. To help maintain the momentum of their development efforts, we urge the Bank and the Fund to do their utmost to assist these countries during this transitional period. We also feel that the Bank and the Fund should adopt a constructive and open policy in assisting the economic development of Myanmar.

Let me now turn to the economy of Thailand. This year, the Thai economy continues to expand, with buoyant growth in both exports and domestic demand. The GDP growth rate for 1994 is expected to reach 8.2 percent. Inflation is under control, and the current account deficit is expected to decline as a percentage of GDP. Throughout this year, many important economic measures have been implemented to maintain economic stability, improve income distribution, advance liberalization, and strengthen the country’s international competitiveness.

A fiscal surplus and a decline in government borrowings, together with prudent monetary policy, have helped to moderate inflationary pressure in the face of high growth and large capital inflows. A strong tax incentive for long-term contractual savings through private sector provident funds and the newly adopted civil servant provident fund are expected to reduce significantly the domestic investment-saving gap in the medium term.

Decentralization measures—through the promotion of industrial activities, increased government investment budget to upgrade infrastructure, and the distribution of financial facilities to the provinces— are all expected to reduce the income gap between the rural and urban sectors. Environmental protection and natural resource preservation are also given high priority in our pursuit of provincial growth.

Thailand is committed to the policy of economic liberalization. We are committed to the Uruguay Round agreement and are prepared to support a successful conclusion of trade in services, including financial services. Also, a unilateral, comprehensive customs tariff reform is being implemented. Deregulation of the domestic financial market, as well as the establishment of a bond market, will further facilitate capital flows to the country. To enhance the country’s future competitiveness, the Government is investing heavily in human resource development by expanding compulsory education and upgrading labor skills. Broad tax and financial incentives are being planned to induce private capital formation for human resource development. In this connection, we are very gratified to note that the Bank has adopted a policy to attain a sharp increase in loan portfolio in human resource development projects. We also support the Bank’s initiative on the single currency lending program but urge the Bank to relax the conditions that are restricting its utilization.

On the proposal of the Fund for a new SDR allocation, we note with disappointment the outcome of the Interim Committee meeting, and call for a speedy conclusion of the issue to the benefit of all member countries. We share the view that the surveillance role of the Fund should be strengthened to foster closer coordination of economic policies. However, we urge that surveillance be conducted in such a manner that the burden of adjustment falls equitably on both industrial and developing countries.

Last, I would like to congratulate the Bretton Woods sister organizations on their fiftieth anniversary. I wish both the Bank and the Fund every success in the years to come.

Statement by the Governor of the Fund and the Bank for Australia—Ralph Willis

Mr. Chairman, may I first congratulate you on your appointment and express my sincere thanks to the Spanish Government for the magnificent facilities and the hospitality it has provided for this conference. I also very much welcome the addition of Eritrea to the membership of the Fund and the Bank. I am very pleased to be able to say that on the occasion of this fiftieth anniversary meeting of the Bretton Woods institutions there is good reason to be optimistic about the future. The outlook for the world economy is very encouraging, with some industrial countries growing strongly and others now moving into a clear recovery phase, the East Asian countries continuing their astonishingly strong growth, and a number of Latin American countries and several countries in transition also achieving marked economic improvement.

My own country is now growing quite strongly, with 4 percent growth of GDP last financial year and over 4 percent expected this year. Of course, in most industrial countries, including Australia, strong sustained growth is required for a number of years if unemployment rates are to be substantially reduced from their current, completely unacceptable levels. It is, therefore, even more encouraging that there is a clear determination on the part of many countries to ensure that the prospect of sustained economic recovery is not squandered. In this regard there is increasing recognition that sustained economic growth requires early action to address inflation, which, if allowed to develop, would sooner or later bring the recovery to an end. A number of countries that are well into the recovery phase, including Australia, have moved to tighten monetary policy before inflation begins to increase. Such action has a medium-term focus—aiming to ensure that inflation is kept under control later in the recovery phase when it would otherwise be expected to become a problem. Similarly, a number of governments have recognized the need to reduce their budget deficits and to set out a fiscal consolidation strategy which demonstrates their commitment to progressive deficit reduction.

Australia is one such country. We have announced a fiscal consolidation program that will reduce the budget deficit from 3.2 percent of GDP last financial year to less than 1 percent of GDP by 1996/97 and near budget balance the following year. Such action is essential for improving the national saving performance; reducing competition for capital as private sector investment gets going; enabling a lower level of real interest rates than would otherwise apply; and preventing a costly buildup of public debt with a concomitant escalating burden of public debt interest. The benefits of structural change have also been increasingly recognized by many countries, including Australia. Consequently, reforms to enhance the efficiency of labor markets, increase competitive pressures in the economy, remove unnecessary and costly regulations, and privatize or at least commercialize government business activities are increasingly common. Economic recovery is, therefore, occurring in the context of many economies being considerably more efficient, productive, and competitive. They are, therefore, increasingly capable of producing rapid and sustainable economic growth, rising employment, and higher living standards.

It is also encouraging that there is widespread recognition of the need to strengthen the international monetary system by improving economic policies, enhancing policy cooperation, and achieving greater convergence of economic performance. In this regard, I welcome the call by the Interim Committee for the Fund to strengthen its surveillance activity. The prospects of enhanced world economic growth have also been boosted by the completion of the Uruguay Round. The Fund-Bank estimate of the initial boost to world income from this initiative is about $250 billion, or 1 percent of GDP. However, the Director-General of the General Agreement on Tariffs and Trade (GATT) has recently estimated it to be more like $500 billion, or about 2 percent of world GDP, when account is taken of the dynamic impact of the Round’s economic activity. With such large gains at stake, it is crucial that the momentum is not lost and that ratification occurs promptly to give effect to the agreement from the beginning of 1995.

In relation to developing countries, it is indeed gratifying that, as the Managing Director of the Fund has noted, some forty developing countries in transition are growing strongly. The performance of the East Asian economies, in particular, has been described as a “miracle,” but there is nothing miraculous about it. As the recent World Bank study found, East Asia’s success was primarily the result of getting the fundamentals right, thereby providing essential building blocks for sustainable economic growth. But the situation of many other developing countries is cause for considerable concern. It is particularly disturbing that one-third of the African countries are now poorer than they were at the time of independence, despite the fact that official development assistance (ODA) to sub-Saharan African countries represents 10 percent of their GDP! It is also of concern that ODA to developing countries appears to have stagnated in recent years and even to have declined in 1993. Although private capital flows to developing countries have greatly increased—and now considerably exceed ODA—they do not flow to the poorest and most needy countries. It is essential not only that ODA is maintained, but that steps are taken to increase the effectiveness of the aid, a responsibility that devolves on both recipient and donor countries. I welcome the constructive proposals in this regard contained in the Development Committee communiqué.

Australia also welcomes the decision of the Interim Committee and the Development Committee to request the Fund and Bank Executive Boards to examine proposals to further assist the poorest, most indebted countries. The Interim Committee decision to recommend that the Executive Board of the Fund consider a temporary increase in annual access limits from 68 percent to 85 percent of quota was welcome, but the failure to agree on an extension of the systemic transformation facility or an allocation of special drawing rights was most disappointing. Australia believes that equity and fairness require that all member countries have an entitlement to Fund resources, and that an SDR allocation would be of assistance to many of the poorest developing countries as well as the countries in transition. We call on all parties to work cooperatively together to try to bring about a satisfactory resolution to this problem, which we believe could include a small general allocation under the existing Articles as well as a special allocation.

Statement by the Governor of the Bank for the Netherlands—Gerrit Zalm

It is tempting to use this fiftieth anniversary of the Bretton Woods institutions for a survey of their feats. However, it is more in the spirit of the IMF and the World Bank to look forward. The future tasks of the IMF and the World Bank should be the focal point of a discussion among all members and with the active participation of the Bretton Woods institutions themselves. What role do we envisage for the IMF and the World Bank on the world stage, the setting of which has so dramatically changed since 1944? In a more integrated world economy and with more global players, the importance of a multilateral framework for economic cooperation has only increased. We cannot do without such a framework. On the contrary, we need to strengthen it! In today’s interdependent world there is no room for inward-looking policies and exclusive bilateralism. Political and economic stability can only be secured in concert. The IMF and the World Bank, together with the World Trade Organization, have a special responsibility to present the global perspective. They are the custodians of the agreed rules of the game and help to bring them about in practice.

One of the core tasks of the IMF continues to be the surveillance of exchange rate and macroeconomic policy in all member states. The guiding principles remain international monetary stability, the unhampered expansion of trade and capital flows, and sustainable growth. The value of surveillance has increased in today’s globalized economy with flexible exchange rates. Because markets are integrated and agents act globally, we need strong and independent international institutions. Flexible exchange rates do not absolve countries of the responsibility to avoid negative spillover effects. Surveillance through peer pressure reminds policymakers of this rule and helps them to think ahead. In the context of surveillance, more attention could be paid to the links between exchange rate developments, underlying macroeconomic policy stances, and deficiencies in the structure of the economy. We cannot ignore these issues. The Netherlands’ experience is that the exchange rate, used as a guidepost, supports sustainable policies. Its warnings are neglected at one’s peril. This is true for open economies, and all economies including the largest ones have become so.

The second set of the Fund’s core activities comprises its balance-of-payments support. The range of Fund facilities has increased over the years in response to different kinds of external imbalances. The creation of more tailor-made Fund assistance is an example of the continuous adjustment by the Fund itself. The IMF should target its financial assistance toward two types of imbalances. The first type regards balance-of-payments crises which primarily result from macro imbalances. The second type of imbalances concerns those countries where balance-of-payments constraints are also a consequence of deep-rooted structural barriers to growth. In both cases, the IMF’s primary focus should be macroeconomic; in the case of countries with structural problems, supply-related actions are involved and adjustment may turn out to be a lengthier process. This creates a need for some flexibility in loan instruments of the IMF and particularly for cooperation with the World Bank.

The experience in transition countries has shown that some governments have managed to achieve external viability fairly quickly. However, in other countries, exceptional financing needs may continue for some time. We welcome the temporary increase in access limits. An extension and enlargement of the systemic transformation facility (STF) could also be supported by the Netherlands. We welcome the fact that Ukraine has joined those countries that have reached agreement for drawing under the STF. These countries deserve a supportive international environment. The second type of imbalance also relates to the developing countries. A substantial part of IMF work is oriented toward this group of countries. The enhanced structural adjustment facility (ESAF) is a good-example of a source of financing that is specifically suited to the least-developed countries. The ESAF has enabled the Fund to address medium-term financing needs on concessional terms, without resorting to monetary means. Finally, I hope a constructive solution can be found to the SDR allocation soon. The Netherlands certainly will be ready to contribute to such a solution.

Turning to the World Bank, its overarching objective has rightfully become poverty reduction in developing countries. We have seen that labor-intensive growth patterns are needed, which require the removal of impediments to employment creation and investment in people. As the dynamic economies in Asia have amply proven, increased access to education is the single most effective instrument to ensure that the benefits of growth are equitably shared. The eleventh replenishment of the International Development Association (IDA-11) negotiations, which started here in Madrid, are the occasion to confirm our commitment to these policies and help the poorest countries in their reform efforts. Notwithstanding progress made, hundreds of millions of people still live in absolute poverty, particularly in sub-Saharan Africa. A clear commitment to good governance and market-friendly economic policies is essential if sub-Saharan Africa is to turn the corner. The World Bank should allocate its resources to those countries where they are put to use most effectively. Donors should assist in funding these adjustment programs. At the same time, the Bank should deepen its understanding of factors that complicate implementation of adjustment programs in many sub-Saharan African countries and focus its assistance on that basis.

The policy dialogue with developing countries should be strengthened on the basis of environmental action plans. Internalization of environmental costs, the slashing of subsidies on energy use, for instance, should be part of the development strategy of each recipient country. As global environmental issues require more attention in the future, the role of the World Bank in this field should be extended. The World Bank, with its global focus and its role as both a financial and research and development institution, is uniquely placed to conduct a dialogue with developing countries, countries in transition, and industrial countries about their contribution to a better global environment. In doing so, the work of the Commission on Sustainable Development will have to be taken into account. An encouraging development in the last few years has been the surge in private capital flows to developing countries. However, the number of countries benefiting from these flows remains limited. Apart from assisting countries to improve their business climate, the World Bank should actively use its instruments to facilitate private capital flows, through guarantee and cofinancing arrangements, for instance. A flexible and client-oriented approach is essential to this end. The International Finance Corporation (IFC) should acquire a better capacity to evaluate its development impact, including its net impact on employment creation. This would enable IFC to provide true additionality compared to what private banks can offer.

The common denominator of my foregoing remarks is the need to increase the development impact of the Bank’s activities. I commend the Bank’s management for its efforts to implement the recommendations of the Wapenhans Report. However, I am concerned about the lack of progress with regard to decentralizing to field offices and improving the skill mix of the Bank’s operational staff. In addition, the Bank should spare no effort in giving due regard to the inclusion of a participatory approach in all its operations. Increased openness, communication, and participation of involved parties—including nongovernmental organizations—in other words, fostering borrower ownership, is a more effective way of building a constituency for the Bank’s policies than tightening the conditionality framework. I have the impression that the Bank is moving in the right direction with the implementation of its integrated policy framework of sustainable development. Indicators that measure the output and not just the number of loans of the Bank in its fields of operations would improve the debate on the quality of the Bank’s work and thereby enhance the climate for yet another major resource mobilization operation, IDA-11, that is ahead of us.

The Bretton Woods institutions have reached the respectable age of fifty. Yet their retirement is far beyond the horizon because their work is still indispensable. Thanks to their mandate and their decision-making structure, the IMF and the World Bank fulfill their missions decisively and effectively. Their proven capacity to adjust and reform does bode well for their future.

October 5, 1994.

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