Summary Proceedings of the Forty Fourth Annual Meeting of the Board of Governors 1989

Presentation of the Forty-Fourth Annual Report 1: By the Chairman of the Executive Board and Managing Director of the International Monetary Fund

International Monetary Fund. Secretary's Department
Published Date:
November 1989
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M. Camdessus

I welcome you to Washington, and I welcome in particular the Governor for Angola, which has just become a member of the Fund. And I wish to join the Chairman and Mr. Conable in expressing our sorrow at the tragic deaths last week of Governor Soumaila and Mr. Ali Abakar of Chad while traveling to join us at these meetings.

We are coming to the end of a decade of rapid economic change and of significant achievement: an extended period of growth in large parts of the world economy and a rapid expansion of international trade. But these years leave also a legacy of serious problems for many developing countries which are suffering a sharp reduction in living standards, still face a heavy burden of debt, and have not benefited significantly from the expansion in the rest of the world.

We must approach the 1990s as a decade of opportunity to ensure that world economic growth is sustained and that its benefits are shared more broadly among countries. More than that, we have to aim for a high quality of growth, not only for quantitative gains. This means growth policies that respect the need to protect the environment and economic policies that are sensitive to issues of equitable distribution of the fruits of growth, so as to alleviate the plight of the poorer members of society. These are global challenges. In an interdependent world, no country can succeed in isolation.

You may recall that last year in Berlin I outlined five objectives for our joint action. Let us review them briefly.

The economic strategy of the industrial countries must continue to focus primarily on the long-term objective of attaining maximum sustainable high-quality growth. This is required for their own benefit, but it is also an essential condition for growth in the developing countries. I believe the industrial countries can consolidate their strong recent performance and extend these gains if they act firmly on three fronts. First, they must bring inflation down further, so that it ceases to be a threat to stable growth. Second, they must raise national saving rates. Third, they must use resources more efficiently. And this means structural reforms to improve the functioning of markets, both within national economies and across international borders.

With the industrial economies operating at high levels of capacity, price pressures have re-emerged. One of the important lessons of our experience over the past two decades is that governments must confront inflationary pressures decisively and at an early stage. This has been done, over the past year, by the monetary authorities of the industrial countries. But the dangers have not been eliminated, and until it is clear that inflation has abated, a firm anti-inflationary monetary policy is clearly essential. And it must be supported by decisive fiscal action.

Several industrial countries have reduced their fiscal imbalances, and some have turned deficits into surpluses. But budget deficits remain very large in a number of them, absorbing resources that should be used to finance productive investment. Fiscal deficits also place a heavy burden on monetary policy, causing an unduly high level of real interest rates. This hinders investment, aggravates the debt problem, and jeopardizes growth prospects in both industrial and developing countries.

It is essential that governments reduce the remaining fiscal imbalances promptly. This task is particularly urgent in the United States, where the private saving rate is now very low. A major effort is also required in several other industrial countries. Low national saving rates in many countries are worrisome when we consider the new challenges that the industrial countries must confront over the next few decades: a progressive aging of populations will most likely be accompanied by a substantial drop in private savings and a steep increase in the demands placed on national health and pension systems. Moreover, substantial resources must be devoted to the protection of the environment. The challenge is to raise national saving everywhere. Fiscal consolidation is the essential first step in any credible policy to improve the long-term performance of saving and investment.

With sound fiscal and monetary policies, governments will have the resources—and the environment of stability and confidence—that are essential for sustained growth. But even with the best macroeconomic policies, growth will be disappointing if we do not use resources efficiently. This means that we must simplify the complex network of controls and restrictions so that they do not distort private decisions, limit competition, and undermine the incentives to work, save, and invest. We know all too well the costs to society of these measures that hinder growth. Several countries have addressed these issues in recent years, in particular through tax reform and financial market liberalization. But much more needs to be done, particularly to reduce unemployment, which remains high in many industrial countries after almost seven years of economic expansion: further progress in reducing unemployment, especially in Europe, will depend basically on how firmly governments and social partners accept the need to eliminate the structural impediments to job creation.

Another precondition for a healthy expansion of the world economy is to move decisively toward a more open trade system.

Trade restrictions are costly, politically disruptive, and self-defeating. Despite this, we have seen a dangerous intensification of nontariff barriers in various forms, including export restraint agreements, import guarantees, and other forms of managed or bilateral arrangements. This trend must be reversed, and protectionism in all its forms should be countered aggressively. The completion earlier this year of the Uruguay Round’s midyear review provides a framework for further negotiations. Governments must seize this historic opportunity and bring the current round of multilateral trade negotiations to a successful conclusion by the end of 1990.

Success in the trade area will have broad implications. It will improve the allocation of resources worldwide. It will facilitate the adjustment efforts of the developing countries. And it will strengthen the process of international policy coordination.

Next we must work toward a stronger international monetary system: stronger in terms of shared responsibility, confidence in the system, and liquidity.

First, shared responsibility. I believe that the recent evolution toward stronger surveillance by the Fund and more effective international economic policy coordination among the major industrial countries show a way in which the system can be made to work better, provided governments demonstrate political will. These processes can marshal peer pressure on all participants so that they give proper weight to the international repercussions of their domestic policies. Surveillance and coordination also help to delineate each country’s responsibilities in the adjustment process and foster a sense of shared responsibility for exchange rate stability. Our growing experience with the use of economic indicators shows that these can play a supportive role in keeping track of where we are, relative to where we want to go. But technical devices can never substitute for careful, judgmental analysis.

Regrettably, the process of external adjustment has slowed significantly since the middle of last year. The persistence of large current account imbalances for the three largest industrial economies is a cause for serious concern, as they are a major element of vulnerability for the world economy. Imbalances of the Federal Republic of Germany, Japan, and the United States are projected to widen in nominal terms in 1989 and 1990, and it is a matter of urgency that the adjustment process be given renewed momentum.

Second, confidence in the international monetary system. This means giving confidence to traders and investors that their decisions about resource allocation and profitability will not be distorted by swings in exchange rates that bear little relation to fundamentals. This is not a plea for rigidity in exchange rate relationships. Rather, macroeconomic and structural policies need to be framed so as to contribute to a reasonable degree of exchange market stability. Confidence likewise means assurance that the system has in place an anchor that promotes a low and stable rate of global inflation. We now have a more symmetric monetary system among the industrial countries than was the case in the Bretton Woods era, and the coordination process reflects this reality. What is needed is to form, and then to expand, a “low-inflation club,” and to ensure that a convergence occurs, by high-inflation countries adjusting their performance toward that of low-inflation countries.

Third, liquidity. This is a broader concept today, as noted by Governor Sumita last year, and one harder to measure than it was in the past. But certain essential goals remain valid. We need to ensure that countries improve their liquidity positions, by following sensible policies that enhance their creditworthiness. It is also important to maintain the right balance between owned and borrowed reserves. One of the unfortunate legacies of the 1980s is that the heavily indebted countries have experienced a significant decline in their reserves and in their reserves/import ratios, which has made their economies more vulnerable to external shocks.

Against this background, the SDR could obviously play a more important role than at present.

Shared responsibility, confidence, liquidity—the Fund has a fundamental role in all three aspects. What I heard in the Interim Committee was essentially an invitation to mobilize our imagination and energy to help improve the international monetary system in the 1990s.

Let me turn now to the developing countries.

Reducing poverty and revitalizing growth in the developing countries is our common responsibility. Many of the developing countries have failed to share in the prosperity generated by the long economic expansion in the industrial world. Real per capita incomes in the most seriously indebted countries have declined during the 1980s. This has to be reversed. We must create again the conditions for sustainable growth.

Excessive debt, carrying high real rates of interest, has been a blight on domestic and global economic management since 1982. Now, with the adoption of the strengthened debt strategy, we are better equipped to deal with this problem. But to succeed, we need to see simultaneous action on three fronts—vigorous and persistent implementation of well-designed adjustment policies, an improved external economic environment, and appropriate financing flows. Much has been achieved. The concerns about the vulnerability of the world financial system which were voiced immediately after the outbreak of the debt crisis in 1982 have been sharply reduced, although not eliminated. Moreover, rapid progress has been made in turning the ideas on debt and debt-service reduction into action in a few important cases. We now have a more complete arsenal of instruments. If they are used wisely and with collective determination, they offer a chance of improving fundamentally the position of the heavily indebted countries.

There has been a welcome effort by the donors in their assistance to the poorest countries. The progress toward concessional rescheduling or cancellation of public debts since the Toronto summit has been noteworthy, and I particularly wish to recognize the work of the Paris Club. The generous initiatives by several industrial countries to forgive outstanding official loans for low-income African countries were most timely and welcome. These efforts address virtually all loans of this type owed by low-income countries in Africa. Such loans are, however, only one component of the total debt of these countries to official creditors. But it is clear that a number of these countries will need additional relief in support of their programs, and I am confident that the creditor governments will show the flexibility recommended by the Paris summit.

In my view, it was appropriate for the Fund and the Bank to agree to support debt and debt-service reduction with their resources. Debt reduction must clearly be a central element of the strategy in a number of cases, and the Fund is rightly expected to play a catalytic role in bringing about debt reduction. But we need to be clear about what debt reduction can be expected to do, and what it cannot. Debt reduction is not a cure-all. It is one additional instrument—no more, no less. An instrument, moreover, that has to be used with care. As with all good medicines, it could have negative side effects. And the extent to which it can help will vary from one situation to another—warranting neither the exaggerated expectations of some nor the skepticism of others.

How can we achieve lasting progress for the developing countries, and what should be the contribution of the major participants?

First and foremost, the developing countries must be prepared to introduce and persevere with comprehensive growth-oriented adjustment programs. This means monetary and fiscal policies that bring down inflation, generate the required domestic resources for investment, and restore a climate of confidence that attracts foreign capital and the repatriation of flight capital. It also means structural reforms to improve the allocation of resources and reduce the barriers that constrain direct foreign investment. The need is for stronger policies and not for any complacent gradualism in adjustment efforts. This is what the Fund’s conditionality is designed to promote.

I am pleased to report to Governors that I see definite signs that these views are increasingly shared in member countries. This is a most significant change. Several countries are choosing to go this way—a painful decision in many cases—because it offers them a prospect of achieving sustainable growth. This “silent revolution” in attitudes in many developing countries—most notably in Latin America but also in Africa and in some of the centrally planned economies of Eastern Europe—is now showing itself in the number of countries that have requested Fund help in formulating their growth-oriented adjustment programs. But the Bretton Woods institutions will not solve the debt crisis alone.

Official creditors have maintained a high level of net lending to developing countries since the outbreak of the debt crisis. It is now vital to establish the necessary conditions to bring about a more appropriate contribution from the private sector. In recent years net new private lending to the indebted developing countries has been far less than the outflow in the form of interest payments.

I would like to invite the banking community to join us in working to ensure that all parties gain from the opportunities of the present juncture. I am impressed when bankers tell us that debt reduction should not take a form that will deter the banks from placing the appropriate emphasis on new lending. They are right. But in accepting this, I must also stress that lending has to be large enough to finance the growth and economic reforms of the debtor countries. And decisions on new lending have to be timely. It is true that strong growth-oriented programs require more financing than programs that pay less attention to the recovery of investment. But if these programs are well designed and firmly implemented, they will lead, as the recent experience of Mexico has shown, to a repatriation of capital and an increase in foreign investment. It would be a mistake to lower our sights; we all know that over the medium term the debts can only be repaid through growth.

I understand that the banks have to make very difficult decisions—in complex circumstances, including an uneven fiscal and regulatory environment—and all of this in an atmosphere of negotiations that is more conducive to reaching consensus on the lowest common denominator than to a realistic evaluation of the appropriate financing for debtor countries. I would like to express my deep appreciation to those bankers who, in this difficult context, are making imaginative efforts to speed up the process of decision making and who show a readiness to reduce as much as they can the burden of debt of their clients. We need such initiatives. I see great merit for the banks to be seen as fully contributing partners in this process, so that debt is recognized as a manageable problem and no longer a crisis.

Prolonged delays in negotiating agreements between the banks and debtor countries can threaten to derail an otherwise good program and postpone the introduction of essential policy changes. That is why the Fund is now prepared to start disbursing its financing at the beginning of a country’s economic program, even while the country is still negotiating with commercial banks. It is our basic responsibility to help generate confidence in these vital programs, even if the country is faced with a particularly tight financial position, which, if bridges are not arranged in a timely fashion, could lead to the emergence of arrears to banks. This has led some banks to ask if the Fund has become complacent about such arrears. On the contrary, arrears are a great danger, and we try to prevent their appearance and to reduce and eliminate them when they do happen. But this has to be done with an acute sense of our shared responsibility. This is why we seek to improve the prospects for an economic program through timely support.

I repeat that financing has to be sufficient and timely. The banks should not think that reticence on their part will lead to a larger contribution from the multilateral organizations. You, the Governors of the Fund, have repeatedly stressed that official lending will not be provided to offset the withdrawal of private sector funds: this message must not be ignored.

One group of countries causes special concern to us all. It is the low-income, debt-distressed countries of the world, including those in sub-Saharan Africa. They have fared the worst in recent years, and a special effort is required by all concerned: sustained and strong policies by the countries themselves to transform their economies and make them more productive, and generous assistance by donor governments and the multilateral agencies over many years to come. There will be no easy solutions, no miracle cures. We need a long-lasting commitment by all participants to produce major and sustained progress. Fortunately, there has recently been progress, and more hopeful signs. In many of these countries there is now a much more realistic approach to policymaking allied to a commitment to undertake fundamental structural reforms. We see this in Africa, where the quality of economic policies that member countries are implementing and asking the Fund to support has improved remarkably. Consider the 30 countries in Africa that now have economic programs that are supported by the Fund—they show a consistent pattern of growth-oriented adjustment: the growth they are expected to generate will not be large, but at least it marks an important return to a path of positive growth of real per capita incomes and healthier external finances. The challenge for these countries, and for all who help them, is to attain a steady improvement in their productive base and hence in their standard of living. The Fund is determined to do its full share. That is why it has established the new concessional facility, the enlarged structural adjustment facility (ESAF). I am happy to report to Governors that the experience so far with the ESAF has been really encouraging, and I am confident that we are on the right path in our methods of helping the low-income countries.

I have talked about the poorest countries and the middle-income heavily indebted ones, but let us not forget that there are many countries that have avoided the morass of debt difficulties. Their performance and the quality of their policies have been commendable, and they offer valuable lessons for the future. Their successes could inspire others. Not that conditions have necessarily been easy for them. They also face difficulties. But many of them have shown that by implementing strong and far-reaching policies, designed to reform and modernize their productive base, and by underpinning these efforts with careful and cautious fiscal and monetary policies, it is possible to achieve striking results. The successes of these countries deserve more attention. Many of these countries will still face difficult problems in the years ahead in terms of continuing economic reforms and the need to finance temporary payments imbalances. It is important to ensure that these countries have adequate access to the Fund’s regular modes of financial assistance, should the need arise. The Fund exists for all its members, not only for those in extreme difficulties for whom the special facilities and policies have been devised.

We have redoubled our efforts to solve the problem of financial arrears to the Fund, in the cooperative framework outlined to you in Berlin. That effort was well justified. The very existence of arrears undermines the cooperative nature of the institution and threatens to affect adversely the liquidity of members’ claims on the Fund. Arrears to the Fund are inadmissible. Governors of countries that have allowed their financial obligations to become overdue should ponder the consequences of their action for the rest of the membership, including the effects on other developing countries which also face economic difficulties. Progress has been made; the problem has been contained. The list of countries in arrears has declined from 26 at end-1987 to 13 today, the lowest since 1983. Among the list of 11 countries with overdue obligations that exceed six months, several are now cooperating with the Fund to find a way to solve their problems. This illustrates the fact that several countries have recognized that incurring arrears to the Fund is against their fundamental self-interest, because it may cut them off from vital flows of financial assistance. There has also been an encouraging start with the use of support groups. I am grateful to Canada, Italy, and France for their readiness to show leadership in organizing assistance for countries that are prepared to make serious efforts to work their way out of their arrears situations, and to other countries that are willing to participate in support groups.

Nevertheless, the problem of financial overdues remains a serious one. Although the number of member countries with arrears has declined, the total amount of overdue obligations has risen, owing to a few countries with protracted arrears. I therefore urge the small group of countries still with overdue obligations to take all necessary steps to become current again in their payments. I repeat that the Fund will do its utmost to help those that are prepared to take the necessary measures, but it is also prepared to take the appropriate remedial action when this is necessary.

Some of the most difficult challenges for the 1990s, in my opinion, are those facing centrally planned economies. Some of these countries have recently embarked on a complex and historically unprecedented process of economic restructuring. They need to tackle the fundamental sources of inflation—not only its symptoms. They face the difficult task of opening their economies and integrating them more fully into the world trading system, while ensuring the viability of their balance of payments. In part the solution must lie in transforming their microeconomic decision-making systems: and here the scope for enterprise autonomy, the effectiveness of financial discipline, and the promotion of competition will be central. These are formidable challenges, for them, for the Fund, and for us all. The Fund is presently working closely with several of these countries and we devote keen attention to their problems.

I come now to quotas. We are all agreed that the Fund must have sufficient resources to play successfully the key role that is expected of it in helping to achieve your collective goals. What does this mean? It is well understood, I think, that the adequacy of the resources of the central institution of the monetary system cannot be judged primarily from the demand side. Two basic principles have to prevail. First, the liquidity of the institution has to be strong enough to guarantee the ready encashability of members’ claims on it. In other words, it is essential to protect the monetary character of the institution. And second, the Fund has to be of a credible size so that it gives confidence to the membership and to financial markets that it could respond adequately to any unexpected shock, such as those of the mid-1970s and early 1980s. Let us be as prudent now as our predecessors were then in providing for the unexpected. Rightly so, on Monday, the Interim Committee “agreed that it is of fundamental importance further to reinforce the role of the Fund as the central monetary institution.”

It is necessary for the size of the Fund to be enlarged. Fund quotas were last increased in 1983, and in real terms their level has been severely eroded. Since that time the size of the world economy has increased by 58 percent, and we have also witnessed a remarkable increase in the size and volatility of financial markets. I have noted the vulnerability of the system, resulting in part from the prolonged large imbalances of the major countries. I may also add that we expect a continued high demand for Fund credit during the early 1990s in support of growth-oriented adjustment programs, in particular—but not exclusively—to fulfill the Fund’s responsibilities in the strengthened international debt strategy, but more generally to fulfill its global responsibilities.

Bearing in mind the need for a credible size for the Fund and the unanimous conviction that the Fund should reduce its reliance on borrowing, 19 Directors out of a total of 22 in the Executive Board, accounting for some 70 percent of the voting power, support an increase in quotas of 67 percent or more. Moreover, 15 Directors are in favor of a doubling of quotas, and I personally share this view. I am heartened by this widespread support for a substantial increase in quotas, but I also understand that there are some members who believe that a smaller increase would be appropriate. These views will need to be reconciled, and the Executive Board will work hard on this matter in the coming weeks. Reconciliation will call for compromise in one way or another. Our calculations show that any increase of less than 80 percent will require a reduction in absolute access on average, including access for those members that have not yet benefited from the strengthened debt strategy, by comparison with the first cases. Therefore, if the membership decides on an increase in quotas of 67 percent, as a compromise measure, this will probably mean that the Fund will have to continue to borrow somewhat in the 1990s. This borrowing would be essential not only to maintain the absolute maximum access for members that have not yet benefited from the strengthened debt strategy and others, but also to ensure that the Fund’s liquidity remains strong—an indispensable feature of the central institution of the system.

The Interim Committee has requested the Executive Directors to pursue their work relating to this essential question as a matter of highest priority, with a view to a decision by the Board of Governors before the end of this year. I am confident that the final decision of Governors will be timely and wise, and that the many different aspects of this question will be reconciled to equip the Fund adequately to deal with those needs we can now foresee as well as those which we can perhaps only discern dimly.

For all the membership, the 1980s have been a decade of momentous change: significant achievements for the industrial and many developing countries and severe difficulties for many others, especially in Africa and Latin America. As we enter the 1990s, we carry much unfinished business, but the new decade will bring new challenges as well as new opportunities: helping to reform the centrally planned member economies and reconciling aspirations for higher living standards with a proper concern to protect our environment. If we are to rise to these challenges and make the 1990s a decade of achievement, it will be by firm application of sound policies, bold and imaginative willingness to tackle fundamental reforms, and a renewed and effective spirit of solidarity. Governments must set high standards for their actions and commit themselves to finding humane and multilateral solutions to global problems so that the world—which every day is a more unified world—is set on a path to sustainable prosperity.

That is our agenda for the 1990s. The Fund must play its part. I welcome your guidance on all these objectives.

September 26, 1989.

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