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

Discussion of Fund Policy at Second Joint Session 1: Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System

International Monetary Fund. Secretary's Department
Published Date:
November 1989
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H.O. Ruding

I am pleased to have this opportunity to report to Governors, in my capacity as Chairman of the Interim Committee, on the work of the Committee over the past 12 months. At its spring meeting on April 3-4 of this year and, more recently, at its meeting on September 24–25, the Committee devoted considerable attention to the world economic outlook, including surveillance and policy coordination, and the debt situation and strategy. It also focused on other related matters: the Ninth General Review of Quotas—especially in the context of the Fund’s role in the 1990s—and overdue financial obligations to the Fund, as well as access policy and limits and the question of SDR allocations. As the topics for discussion at these meetings were nearly identical and the principal conclusions are clearly outlined in the respective communiqués, I shall limit myself to commenting briefly on the evolution of the Committee’s work, focusing in particular on the world economic outlook and on some of the important steps that have been taken, or are being taken, in responding to developments in the global economy.

In reviewing the world economic outlook, the Committee observed that the rapid expansion of economic activity in the industrial countries that had been evident in the past two years is now moderating to a more sustainable level. Moreover, while inflationary pressures have built up over the past year, monetary restraint has worked to reduce the risk of an acceleration of inflation. Growth has also been strong in a number of developing countries, particularly among the exporters of manufactures, reflecting the continued buoyancy of world trade.

Despite these favorable prospects for sustained growth among many countries, a number of developments—including still high inflation in some industrial countries and high unemployment in several countries, particularly in Europe—demand continued vigilance. Moreover, while further progress has been evident in the reduction of imbalances, the pace of external adjustment has slowed. In the developing world, growth remains weak in most of the heavily indebted middle-income countries and in many of the low-income countries in Africa.

In addressing these concerns, the Committee cautioned that, especially given the present high level of capacity utilization, too early a relaxation of monetary policy could result in a renewed rise in interest rates. In view of the prospect of sizable and persistent current account imbalances among the largest industrial countries, the Committee wanted to give renewed impetus to external adjustment by indicating that the deficit countries should work toward a strengthening of both public and private savings and that the surplus countries, for their part, should continue to expand domestic demand at a pace that avoids any threat to price stability. The industrial countries, together with the newly industrializing economies, should step up the pace of structural reforms that would support noninflationary growth, facilitate external adjustment, and help cut unemployment, so as to enhance efficiency and facilitate the further integration of the developing countries into the world economy.

In stressing the urgent need to restore satisfactory growth in those developing countries with debt-servicing difficulties, the Committee reiterated the importance of steps to raise domestic savings and investment, increase efficiency, curb inflationary pressures, foster the return of flight capital, and promote foreign direct investment. It will, of course, be necessary to protect the poorest from the adverse effects of such steps.

Also, in welcoming the economic reforms in certain Eastern European member countries, the Committee expressed the hope that those reforms would become elements of strong and sustainable economic programs that could be supported by the Fund and the World Bank.

Finally, the Committee re-emphasized that the effort to strengthen the global economy would be enhanced if each country took strong steps toward trade liberalization. In that context, the Committee stressed that the successful completion of the Uruguay Round by the end of 1990 was critical.

In the context of its review of the world economic outlook, the Committee reaffirmed the central role of Fund surveillance in fostering the process of policy coordination through work on key economic indicators and the development of medium-term scenarios to clarify the implications of alternative policy choices. It encouraged the Executive Board to continue improving the analytical and empirical framework for multilateral surveillance, including the role of international capital movements.

As for the debt situation and strategy, Governors will recall that, at its April 1989 meeting, the Committee focused on specific proposals aimed at building on the basic principles of the collaborative debt strategy and the case-by-case approach. Following the Committee’s recommendations, the Executive Board then established operational guidelines for Fund support of debt and debt-service reduction in the framework of financing packages in support of strong growth-oriented adjustment programs. At its most recent meeting, recognizing that it may still be too early to fully evaluate the effectiveness of the strengthened debt strategy, the Committee welcomed the progress made so far in implementing the strategy in several specific cases. The approach adopted has allowed the tailoring of financing packages to a diversity of country circumstances. Now, commercial banks need to move expeditiously in arranging financing packages, involving both new money and debt and debt-service reduction, for countries with strong adjustment programs. For its part, the Fund must evaluate the adequacy of financing in the light of the country’s circumstances, the efficiency of debt reduction operations, and the need to ensure that the resources of the institution, and thereby its financial integrity, are safeguarded. The Committee reaffirmed its view that official creditors should not substitute for private lenders. These remain our guidelines and at our spring meeting next year we will review further progress in implementing them.

We all of course commend those countries that, despite heavy debt burdens, have pursued sound economic policies and have thus preserved their access to international financial markets. And in this context, the Committee cautioned that the debt strategy must not divert financial support from these countries.

The Committee welcomed initiatives of donors and creditors, both individually and collectively, through the Paris Club, to forgive or alleviate the external obligations of the poorest low-income countries, which rely mainly on official financing, and it encouraged further such steps as appropriate.

Turning to the Ninth General Review of Quotas, the Committee took note of the Executive Board’s report outlining the progress that has been made toward an agreement on an increase in the size of the Fund and on the principles for distributing that increase between members.

In the context of agreement on the need further to reinforce the Fund’s role as the central monetary institution in the system and to ensure that it is provided with sufficient financial resources to fulfill its systemic responsibilities as we move into the 1990s, while reducing its reliance on borrowing, there was widespread support in the Committee for a substantial increase in quotas under the Ninth Review. Although a few members consider that the Fund currently has adequate resources at its disposal, the Committee was generally agreed that the Fund must be able to respond effectively to the balance of payments needs of members that adopt strong growth-oriented adjustment programs. At the same time, it must maintain a strong liquidity position and ensure the revolving character of its resources. In that context, the Committee noted that the prolonged use of resources by some countries could impair that revolving character, and it requested that the Executive Board look at possible solutions to that problem.

The Committee endorsed the main principles for the distribution of a quota increase and accepted that an ad hoc quota increase should be considered, where appropriate, in the context of a general increase.

The Committee urged the Executive Board to pursue its work on the outstanding issues relating to the Ninth Review as a matter of the highest priority, with a view to a decision by the Board of Governors on the completion of the review before the end of this year.

On a related matter, the Committee agreed that, given the Fund’s present liquidity position, the enlarged access policy would be reviewed in the light of the outcome of the Ninth General Review of Quotas. In the meantime, access limits for 1990 will remain unchanged.

In taking up the matter of members’ overdue financial obligations to the Fund, the Committee reaffirmed its strong support for the three elements—preventive, collaborative, and remedial—of the cooperative approach to reducing and eliminating arrears that had been endorsed last year in Berlin. The appropriateness of this strategy has been illustrated by the significant reduction in the number of members in arrears, the establishment of Support Groups for two members, and progress by several members toward the adoption of policy reforms that would help clear their arrears to the Fund and to other international financial institutions.

Despite these encouraging developments, the Committee expressed concern at the continuing rise in the overall amount of arrears because of failure of a few countries with protracted arrears to meet their financial obligations. It noted with regret that a few members with arrears were still not cooperating adequately with the Fund and that remedial measures had had to be adopted. It also urged all members to assist the Fund in the implementation of its cooperative strategy. The Committee will review the matter of overdues at its spring meeting.

The Committee welcomed the further discussions by the Executive Board on key issues relating to the functioning of the international monetary system, international liquidity, and the systemic role of the SDR. It asked the Board to keep this subject under review, with a view to identifying possible improvements in the system.

Finally it was agreed that the spring meeting of the Committee will take place in Washington, D.C., on May 7, 1990.

Statement by the Governor of the Fund and the Bank for Japan—Ryutaro Hashimoto

It is a great honor to have the opportunity to address this Forty-Fourth Annual Meeting of the World Bank and the International Monetary Fund on behalf of Japan.

I would like at the outset to express my appreciation for the splendid arrangements that the United States has made for these meetings and my heartfelt welcome to Angola as it joins the World Bank-Fund family.

In addition, I would like to state my appreciation for the painstaking efforts that World Bank President Conable, Fund Managing Director Camdessus, the two organizations’ Executive Boards, and their staffs have made.

The World Economy and the Japanese Economy

Economic Policy Coordination

I would like to look first at the present state of the world economy. Having moved into a recovery phase since 1983, the world economy has managed since then to achieve one of the longest sustained periods of growth seen in history. Although 1989 is seeing slightly slower growth than 1988, this expansion has been firmly maintained.

This sustained growth, of course, has been backed by favorable business investment and strong household consumption, but we must not overlook the contribution made by the tireless policy coordination efforts among the leading industrial countries.

While I believe our countries are thus basically on the right policy track, it is increasingly important that we steer our economies carefully for sustained and noninflationary growth.

Specifically, there is first of all the problem of external imbalances. While the imbalances among Japan, the United States, the Federal Republic of Germany, and the other leading industrial countries have been moving basically in the right direction since 1988, it is imperative that both the surplus countries and the deficit countries continue to work to keep this trend alive in the future.

Second, there is the concern about inflation. In those industrial countries that had seen price acceleration, the rate of inflation has recently slowed as a result of the official discount rate increases and other policy measures. But this is still an area where continued vigilance is required.

Third, there are the continuing fiscal deficit positions and the declining savings rates in the leading industrial countries as a whole, both of which are issues that require our attention.

And fourth, there is the need to resist the protectionist moves evident in some countries. In this connection, it is essential that we cooperate to bring the Uruguay Round of multilateral trade negotiations to a successful conclusion by the end of 1990 and that we maintain and strengthen the multilateral trading system.

Management of the Japanese Economy

Fully aware of the present state of the world economy, we in Japan are determined to continue to consolidate the present noninflationary economic growth led by domestic demand and to actively promote economic structural reform with the goal of better quality of Japanese life and to further promote external adjustment.

Supported by strong business investment and household consumption, the Japanese economy is experiencing prolonged expansion. Real gross national product (GNP) growth in fiscal 1988 was 5.1 percent. Looking at this growth more closely, we see that the domestic demand contribution was 6.9 percent and the external demand contribution minus 1.7 percent, clearly indicating that this was very much domestic demand-led growth. At the same time, the current account surplus was $77.3 billion, down by $7.2 billion from the previous year, and consequently the current account surplus was down from 3.3 percent of GNP in FY 1987 to 2.7 percent of GNP in FY 1988. Steady progress has thus been made on reducing the external imbalances. We have also made a number of efforts for structural reform, primary among them the recent tax reforms designed to make the tax system more equitable and neutral, in an effort to enhance Japanese economic vitality. I assure you we are determined to promote further structural reform in line with the basic midterm guideline of the five-year economic management plan adopted last May.

Debt and Development

I would like next to move on to the debt and development issues.

Basic Approach

Looking at the situation of the developing countries, it is clear that the problems that they face are not the same. Even among the heavily indebted countries, there are some countries that are making a solid effort to achieve sustained growth through steadfast adjustment efforts, and countries where these efforts are not going as well as hoped. At the same time, there are countries that are so mired in poverty that it is not easy to see how they will ever develop. Because each country is in different circumstances, it is also clear that there can be no single panacea and that our responses have to be tailored to each specific situation.

Let me look first at the heavily indebted countries. The fundamental in resolving the debt problem is that these countries restructure their economies through structural adjustment and become strong enough to regain the confidence of the international financial markets. It is also imperative that effective measures be taken to prevent capital flight or repatriate flight capital from these countries. In all of this, it is essential that the dedicated efforts of these countries in the process of restructuring be supported with concerted cooperation from all the parties concerned, including international financial institutions, the commercial banks, and the industrial countries.

Part of this concerted cooperation has to include an appropriate response for countries that are burdened with heavy debt and debt-service payments. It was in this context that an agreement was reached on the strengthened debt strategy with an emphasis on market-oriented debt and debt-service reduction. Japan strongly supports this new debt strategy. In this connection, we believe that the recent agreement between the Government of Mexico and the creditor banks is most welcome as an important first case toward resolving the debt problem in line with this strategy.

Second, as for the poorest countries of sub-Saharan Africa and Asia, they have very limited access to financial resources from the private sector, and they need official development assistance (ODA) and other forms of official support for their structural adjustment efforts. The reduction of the existing official debt burden has also played an important role in this respect.

Here, I find it encouraging that agreement was reached at last year’s Toronto summit on a scheme for reducing the official debt burden of the poorest countries working for structural adjustment and that this Toronto scheme is being steadily implemented.

The Ninth Replenishment of International Development Association (IDA) resources (IDA-9) now under negotiation is particularly important for the poorest countries. I would thus like to call upon all donor countries to make continued efforts to negotiate in a constructive manner, based upon the principle of fair burden sharing. I hope that an agreement will be reached at the IDA Deputies’ meeting in Kyoto scheduled for this November.

Third, I would like to pay the utmost respect to those countries that have achieved good performances by their efforts in pursuing appropriate economic policies and steadily implementing economic adjustment. Moreover, I would stress that the need to sustain and consolidate such economic development makes it important that they maintain the confidence of the financial markets and further promote direct private sector investment in these developing countries. And creating conditions conducive to private investment in turn requires not only efforts by the developing countries themselves but also active support from the international financial institutions and the industrial countries. It goes without saying that sustained world economic growth under the free trade system is an absolute prerequisite for further development of these countries.

Japan’s Efforts

Now I would like to say a few words about Japanese efforts to help developing countries resolve these debt and development problems.

First of all, at this July’s Arche summit in Paris, Japan announced that it would expand the original 1987 capital recycling program of more than $30 billion to the developing countries over a three-year period into a five-year program to recycle more than $65 billion to the developing countries by 1992. All of these funds are completely untied. In order to support the effective implementation of the strengthened debt strategy, Japan is prepared to provide more than $10 billion of untied fundings, including Export-Import Bank of Japan parallel lending with the Fund, for those countries eligible for the new debt strategy, under the expanded recycling program.

Second is Japan’s support for the poorest countries. Japan has decided to provide as much as $600 million nonproject grant-in-aid for the poorest countries of Africa and elsewhere to support their structural adjustment efforts over the three years from FY 1990 through FY 1992.

Third, recognizing it is necessary for the developing countries themselves to make a determined effort in resolving their debt and development problems, it is important that they make their governments’ administrative systems more efficient and improve their capacity to formulate and implement policies that are needed in those countries. In order to support their efforts through cooperation with the international financial institutions, Japan has made voluntary contributions to the World Bank, for example, for the purpose of promoting technical assistance, establishing a scholarship program, and human resources development.

Fourth, Japan is striving in its own cooperation programs not only to pursue quantitative expansion of available resources but also to see that these funds are used more effectively and efficiently on better formulated projects.

And, finally, Japan has decided to support developing countries’ efforts for environmental conservation, by providing about ¥ 300 billion of Japan’s ODA for that purpose over the three-year period starting this fiscal year, with consideration being paid to the possibilities for cofinancing with the World Bank. In addition, Japan has recently taken the lead within the framework of international cooperation for contributing to IDA for the establishment of a special fund to finance technical assistance related to environmental conservation.

The issue of environmental conservation is now a global concern, and it is imperative that the industrial countries do more to deal with this shared problem.

Issues Related to the Fund and the Bank

These, then, are my views on macroeconomic policy and on the debt and development issues. I would next like to touch on some of the issues facing the Fund and the Bank, which play important roles in these areas.

The Fund

First, I would like to say a few words about the Fund.

Central to the international monetary system, the Fund has an important role in promoting policy coordination among the industrial countries. Japan and the rest of the world have high hopes that the Fund will provide the analytical framework for identifying the policies that the different countries should implement to achieve noninflationary and sustained growth. The Fund has also contributed importantly to the solution of the debt and development problems, and it is especially important that the Fund and the Bank continue to cooperate to promote the new debt strategy which was recently formulated and has already begun to be implemented. Within this, it would be useful for the Fund—in order to secure the debtor countries’ adjustment efforts—to conduct conditionality reviews of specific cases, in particular, to study how conditionality is determined and to assess how the borrowing countries are meeting their commitments.

This brings me to the Ninth General Review of Quotas. The Fund’s Ninth General Review of Quotas is very important in light of the need to enhance the Fund’s financial resources so that it can function effectively in the early 1990s, and from this viewpoint Japan hopes to see a substantial quota increase. It was agreed at the last Interim Committee meeting in April this year that the work on the quota increase should be completed by the end of the year. I believe it is imperative that even greater efforts be made to wrap this up in the few months remaining. As part of this process, it is essential that the quota shares stipulating the members’ rights and responsibilities within the Fund be reviewed and revised to better reflect each country’s relative economic position in the world, with the viewpoint that each member country make a contribution corresponding to its relative economic position. In this respect, it should be noted that Japan’s quota share is currently a mere 4.7 percent. I cannot believe that Japan’s relative position within the Fund—4.7 percent—accurately reflects the realities of the Japanese economy. I would thus emphasize the need for ad hoc adjustment, including an ad hoc increase for Japan, within the context of this Ninth General Review. Japan very much hopes to be allocated a quota share commensurate with its economic realities, so that we can continue to contribute positively to the international community through the Fund.

Third, I would like to address the improvement of the SDR function.

The Fund has made an admirable effort to follow up on Japan’s proposal at last year’s meetings and to analyze the role of the SDR and the issue of international liquidity. While much valuable work has been done, I believe it is necessary to continue to study the way the SDR is being used, the problems involved, and what needs to be done to make the SDR transactions more activated. In this same vein, I think the effort to activate SDR transactions could benefit from consideration of some arrangement whereby the industrial countries would collectively let the Fund arrange an agreement to transact SDRs within certain limits. Likewise, it might be worth considering expanding the scope of SDR holders….


If I may, I would like to close on a historical note.

I was still a schoolboy when the Second World War ended. It is now exactly one quarter of a century since Japan acceded to Article VIII status with the Fund in 1964, just one year after I was elected to the Diet and began my political career in 1963. At the time it joined the Fund and the Bank in 1952, Japan was running chronic trade deficits. The very next year, 1953, and again in 1957, Japan borrowed a total of about $250 million from the Fund to tide it over hard currency shortfalls. Between 1953 and 1966, Japan came to the Bank to borrow a total of $850 million for modern highways, shinkansen (the bullet train), and other basic industrial projects. At one point, we were the second largest borrowing country from the Bank.

When the flames of war finally died down, rubble and people were all that was left in Japan. Out of this desperate situation, the restoration and development process was initiated and, with aid and help from the Fund and the Bank, fully aware of the importance of human resources and the introduction of capital and technology from abroad, we have been striving to build modern Japan to what it is, by implementing appropriate economic policies. Japan’s loans from the Bank will be fully repaid in July 1990. Hoping that the developing countries find something meaningful in this Japanese experience, I am pleased to announce that Japan is now prepared to contribute a total of about $300 million to the Bank over a three-year period from FY 1990 for the establishment of a special Fund in the Bank, namely, the “Special Fund for Policy and Human Resources Development,” to provide technical assistance for developing countries and to help develop human resources that could take the responsibility of formulating and implementing development policy. . . .

Statement by the Governor of the Fund for France—Pierre Bérégovoy

Since France currently holds the Presidency of the Council of the European Communities, I have the honor of addressing this meeting on behalf of the 12 member states.

During the past two years the world economy has performed considerably better than expected. In Europe, too, the current and medium-term economic outlook has improved markedly. This reflects primarily the cumulative effects of the policy reforms undertaken since the beginning of the 1980s, characterized by increased reliance on market forces, a reduction of public intervention, and the removal of structural barriers to growth. Moreover, the growing optimism in Europe is supported by the ongoing realization of the single European market, which is already giving a strong stimulus to private investment and economic activity in general.

Inflation did pick up in the latter part of 1988, although at different speeds from one country to another, and the rise in short-term interest rates in several countries, which started in roughly mid-1988, continued until recently. However, recent developments are cause for a little optimism on the price front. The rise in inflation in the industrial countries in the early months of 1989 now appears to be abating, thanks largely to a prompt monetary policy response. There are now a number of factors making for the moderation of inflationary pressures, such as the greater flexibility of productive systems, the higher interpenetration of economies, the tightness of monetary policy, the softness of oil prices, and the slowing of growth in certain overheating economies.

There is no cause for complacency all the same. Wage trends in various countries are worrisome and could trigger a resurgence of inflation; even where such strains are not being felt, we must maintain vigilance on wage dynamics. This is why we must stay on our guard against inflation and continue to fight it through a better mix of fiscal, monetary, and structural policies. It is only in this way that we can avoid an overburdening of monetary policy and the accompanying threats to employment and growth.

Risks could also arise from the recent development of the current account imbalances. Although some progress has been achieved in reducing these, the adjustment process appears to have come to a halt and the level of deficits and surpluses remains a matter of concern.

Further efforts are called for on the part of both deficit and surplus countries in order to redress the disequilibria between savings and investment and hence to achieve more balanced external accounts. This will, in turn, contribute to steadier, more predictable world economic development, in particular by reducing the vulnerability of the world economy to adverse shifts in sentiment in financial markets and to threats of rising protection. It is particularly essential to secure a continued and substantial reduction of the U.S. fiscal deficit as well as measures to encourage private savings in that country. At the same time, Japan should continue its efforts for a greater opening of its markets.

The newly industrializing economies could also help foster more balanced world economic growth. They can contribute significantly to the process of reducing current account imbalances by accepting the appropriate General Agreement on Tariffs and Trade undertakings and by allowing their exchange rates to reflect their competitive position.

This necessary international compatibility in respect of economic performance calls for continued—and, if need be, more strenuous—efforts to further improve the functioning of the international monetary system. In this context we continue to support the role played by the Fund in the process of international policy coordination, notably via its surveillance function, and we also welcome the growing use of indicators to strengthen this surveillance.

The European Economic Community (EEC) countries have contributed significantly to that process through the European Monetary System, and they are continuing to do so by reaffirming, at the European Council in Madrid on June 26 and 27, 1989, their determination to move gradually toward economic and monetary union. In our view, the commitment to a system of stable exchange rates and economic policy coordination based on the shared objective of noninflationary growth has proved its effectiveness in Europe, yielding valuable results in terms of monetary stability. Our experience too could be useful in the effort to improve the international monetary system.

The importance attached in the process of international economic cooperation to reforms designed to make national economies more effective and more flexible represents a most favorable development with regard to balanced noninflationary world economic growth. Trade policy reforms occupy a major position among these, alongside measures to reduce subsidies and to improve tax systems and the workings of the labor market. With respect to multilateral trade negotiations, the European Community welcomes the progress achieved last April in the framework of the Uruguay Round. It played, and will continue to play, an active role in strengthening the integrity of the multilateral trade system and widening its coverage. It is important that efforts are made by developed countries to ensure that developing countries obtain full access to their markets.

The construction of the single European market demonstrates our concern to open up our frontiers, thereby helping to make our economies more flexible. We believe that it will represent a further step forward in the multilateral liberalization process and will stimulate trade in goods and services.

The situation in the developing countries, particularly the highly indebted ones in sub-Saharan Africa and in Latin America, is a matter of prime concern to us. In spite of improved raw materials prices, their situation and their balances of payments are still fragile. What is more, in many cases investment, especially productive investment, has been curtailed, thereby restricting their growth prospects. Lastly, their debt levels are in some cases an obstacle to the restoration of a viable economic situation because the fruits of growth are entirely pre-empted by their debt obligations.

The developing countries, the multilateral financial institutions, and the developed countries have taken measures to cope with this situation. Recent progress provides grounds for guarded optimism.

The first requirement, if developing countries are to achieve growth rates commensurate with their needs, which include financial stability and external viability, is the resolute pursuit of strong macroeconomic and structural policies in order notably to mobilize domestic savings, attract investment, and stimulate the repatriation of capital. Several countries have implemented courageous policies, which have yielded positive results in many cases. These must be pursued and intensified.

Putting these sound economic policies in place is often not enough, however. Industrial countries, international organizations, and commercial banks must jointly support these efforts by providing adequate financing. Encouraging progress has been achieved in this respect in recent months.

Concerning, first, the poorest countries, significant debt or debt-service relief has been granted. Thirteen countries have already benefited from the debt-service reduction measures on which the Paris Club reached consensus in September 1988. The EEC countries account for more than three fourths of the amount thus rescheduled. Looking beyond that, several EEC member states have significantly increased the proportion of grants in their development aid or converted sizable quantities of loans into grants. Lastly, the conclusion by the Fund of the enhanced structural adjustment facility arrangements, to which the Community’s members are major contributors, and the application of the World Bank’s Special Program of Assistance to the poorest and most heavily indebted countries are evidence of the commitment of the multilateral institutions to increasing the volume of support for the adjustment efforts of the low-income countries. We are hopeful that these combined efforts of the donor community to reduce the debt burden and provide new resources will soon be reflected in increased net flows to these countries, thus reversing the adverse trend of the 1980s. A sustained effort is necessary, and we must be vigilant to ensure that the provision of increased resources is maintained for a sufficiently long period to allow a strong revival of growth.

The efforts of the international community must not, however, be confined to contributing financial resources: it is essential for the poorest countries to find stable and growing outlets for their exports. It is with this in mind that we are currently negotiating the renewal of the Lomé Convention, seeking to adapt its instruments more closely to the needs of the countries for which it is intended.

Regarding the most heavily indebted middle-income countries, here also recent trends provide grounds for cautious optimism. The decisions taken at the Washington meetings last April have already contributed in an important way to the new agreements of the Governments of Mexico and of the Philippines with creditor banks. Given the persistently high ratio of debt service to exports, it is crucial that other heavily indebted countries be allowed to qualify themselves for these debt relief measures.

Even so, these countries still face many difficulties. The EEC member states strongly support recent work done by the Fund Executive Board to make the debt reduction approach, agreed at our last meeting in April, operational as soon as possible. Such action must be complemented by free access for these countries to export markets.

Recent developments in certain Eastern European countries confirm that higher and more balanced growth must be based on the implementation of sound economic policies and structural adjustment measures. Attention will have to be given to the degree of support which the international community should provide.

To perform effectively their task of safeguarding the integrity of the international monetary system and of helping the component parts of the world economy to develop in harmony, the Fund and the Bank need adequate resources.

These roles of the Fund and the Bank can only be fulfilled if countries scrupulously observe their financial obligations to them. Under no circumstances can arrears be regarded as acceptable, as their effect is to increase the cost of the resources made available to other members of these institutions. The Fund is a monetary institution, and the revolving character of its resources is to be preserved. For its part, the Bank has to safeguard its credit rating and access to capital markets. Accordingly, our countries endorse the cooperative strategy pursued in recent months to resolve the issue of arrears, combining a firm stand on principles—in the interests of the debtor countries themselves—with a concern to avoid any measures that might prove counterproductive.

Close cooperation is another necessary condition of effective action by the Fund and the Bank. This is why we welcome the agreement on the definition of their respective areas of primary responsibility reached by the two institutions last March, and the terms of the report approved in June by the Ministers and Governors of the Group of Ten.

Lastly, the two institutions must not be left short of resources, given the scale of the tasks before them. With respect to the Fund, we welcome the impending completion of the Ninth Review of Quotas. We hope that, as a result, the Fund will revert to a size somewhat more commensurate with the scale of the world economy. In doing so, we should avail ourselves of the opportunity to reduce the Fund’s borrowing and to review the policy of enlarged access. The question of the resumption of SDR allocations during the remainder of the fifth basic period from 1988 to 1991 should be kept under consideration. With respect to the Bank, we believe that a substantial reconstitution of the resources of the International Development Association (IDA) is essential.

If these conditions are met, the Bretton Woods institutions will be able to go on performing their difficult but vital task, continuing to enjoy our full support.

These, Mr. Chairman, are the remarks I wanted to make on behalf of the European Community.

In the name of France, I would like to mention two points that are also of concern to the European countries.

First, the protection of nature and our environment: a key issue for the future of the planet. The industrial countries have key responsibilities for reducing the greenhouse effect and the spread of pollutant waste. Each country must mobilize its own resources, but France believes that the World Bank must also be provided with specific additional resources so that it can encourage large-scale programs. I therefore suggested yesterday to the World Bank that it should study a special program for the environment, financed by voluntary contributions that would be additional to IDA’s normal resources. The sum of SDR 1 billion would be required, and for its part France is ready to provide F 900 million over three years.

Second, very recent events also lead us to express our solidarity with Poland and Hungary, both member countries of the Fund and the World Bank. These countries deserve our support. They have decided to undertake bold programs of economic reform. Their task is immense. France believes that all the instruments at our disposal should be used: Fund and World Bank loans, technical cooperation, bilateral financial assistance, EEC assistance, and, in the case of Poland, rescheduling of Paris Club debts. My country will not stint in its efforts in this direction, because we are convinced of the historic importance of current developments.

Everything must be tried and everything done to give democracy a chance everywhere.

Statement by the Governor of the Bank for Indonesia—J. B. Sumarlin

As I review the data on global economic trends, it seems to me that the prospects for the world economic situation are a little less bright, but basically the same as those we faced a year ago. Overall activity, driven by a deceleration of activity in the industrial countries, is slowing, and this trend can be expected to continue through next year. Inflation has remained under control, although, with several major economies pushing against their capacity limits, the potential for inflationary pressures remains. The need for overt policy interventions to control inflation is therefore a distinct possibility.

Disappointingly little progress has been made in reducing external imbalances. Indeed, the immediate prospect is that they may again widen. Finally, achieving greater policy coordination among the major economies has been slight. However, there have been no dramatic turns for the worse. Overall prospects are not very different from those of last year.

I would stress that the prospect of only a slight deterioration in the world economic situation is the most likely scenario, not a certainty. There are many potential events or developments that would make the outcome much more discouraging. Markets could stumble, or policymakers, each subject to his own political process and imperatives, could inappropriately react in addressing the dangerously large fiscal and trade imbalances. The need to deal with major issues in the domestic banking systems in several key countries may divert attention from adequately addressing issues of international importance.

Moreover, the world economy’s adjustment to very important changes taking place in the role of important participants, such as the enhanced economic importance of Japan and the newly industrializing countries or Europe’s further integration in 1992, could be mishandled. Neither inflation nor rampant protectionism is clearly behind us.

It is because of the possible adverse impacts that could arise from these sources that we support a significant increase in the Fund’s quota subscriptions. We welcome the recent statement of the Managing Director calling for a doubling of quotas. The Fund clearly needs substantial additional resources to meet the challenges that may come to it from unexpected quarters in the 1990s.

Having said this, I would still make the assumption that we face the prospect of a mild deterioration in the world economic situation as the most likely outcome, based on present evidence. That, therefore, will be my working hypothesis, but we must be on the alert for signs that we have been too optimistic.

If this assumption is correct, then the policy objectives should also remain substantially unchanged from those of last year. Of these, in my view, the most important are: to reduce significantly the external imbalances of the major trading nations so as to achieve a greater stability in the international economy; and to reduce effectively the debt burden of the developing countries so as to permit them to regain voluntary access to financial markets and to re-establish a process of sustained growth.

The first objective requires continued emphasis by the Fund on the need for continued vigilance to avoid a resurgence of inflation, and on improved coordination of differential demand management policies in the major industrial countries. Demand should grow more rapidly than gross national product in the countries with balance of payments surpluses, while in the deficit countries, it should be the other way around. Effective coordination of policy would permit the still overly large external imbalances to be reduced on a sustained basis. This would do much to restore market confidence.

The fact that important surplus countries are already pushing up against capacity limit does create a problem for this prescription. Nevertheless, enhanced coordination and the reduction of the external imbalances must remain high-priority policy objectives.

Keeping inflation under control and restoring external balance represent difficult challenges. To meet these challenges will not be easy. The factors involved are complex and can be at odds with one another. It is therefore important not to place too heavy a burden on a single policy instrument—monetary policy—to achieve both objectives.

Relying solely on monetary policy as a cure-all runs the risk of generating exchange rate movements that could undo some of the gains in external competitiveness achieved recently. It could also lead to levels of interest rates higher than they otherwise would be, increasing the debt burden we are all trying to reduce. Clearly, the right policy prescription will require a judicious mix of monetary, fiscal, and structural policies so that exchange rates, interest rates, and supply responses can all work together to strengthen the performance of the world economy. To sustain growth in developing countries, the Fund should continue to emphasize the following three interrelated factors, namely: sustained strong adjustment with improved policy implementation; a favorable external environment; and adequate financing flows to revive productive investment.

Dealing constructively with the debt problems of the developing nations remains one of our most urgent tasks. Re-establishing access to financial markets, or continued access for those countries that still enjoy such access, to obtain the resources necessary to support sustained growth in the developing countries, is an imperative for a sound world economy. To this end, the strengthened debt strategies of the Fund and the Bank are to be welcomed. A few comments on their implementation are in order.

Debt reduction is now recognized as one of the keys to renewed market access. To have a maximum impact on debt reduction, and on the entire adjustment process, it may be necessary for the Fund to be flexible on the timing of disbursements under the strengthened debt strategy—providing more money up front—without abandoning the principle of conditionality. The secondary market for debt might not evolve in the desired way if the debt reduction effort is too drawn out.

It has to be assumed that segments of the commercial markets may be reluctant to provide the required levels of new money in the face of the need to accept discounts on existing loans. Indeed, there are some worrisome implications in the announcements associated with the recent additions to reserves for “troubled loans” made by major U.S. banks in the last few days.

These reactions will need to be carefully monitored. Every effort will need to be made to keep the commercial banking community an active and voluntary partner in the process of financing sustained growth in the developing countries. The official sources of short- and medium-term finance will need to be prepared to provide the funds and policy support that may be necessary to encourage the maximum participation of commercial lenders. The necessary flow of commercial lending may require consideration of changes in the regulatory framework within which commercial lenders operate. It may also be necessary to find ways to reduce the seniority of existing debt—both official and commercial—if an adequate flow of net new money is to be induced.

Of course, the borrowing countries must also do their share to assure an adequate flow of resources. We recognize that surmounting the debt burden problem is a responsibility of both borrowers and lenders. The borrowers must be seen to be genuinely committed to policies of sound economic management and structural reform. Conditionality does have to be part of the solution.

Let me repeat the points I made at our meetings last year in Berlin (West). Inappropriately designed or ineptly applied conditionality can be seriously counterproductive—leading to unnecessary, and unacceptable, levels of hardship. Getting the sequence and timing of the steps in the process right is essential. Nevertheless, it is equally true that good management and structural adjustment make an important contribution to achieving sustained growth.

Last year, I noted that “the experience of Indonesia, and the positive results we have achieved, lead me to state that conditionality—enlightened conditionality, that is, based on strategies of growth—remains an appropriate tool to be applied both by the Fund and the Bank in the proper conduct of their affairs.” The Fund’s surveillance function can play an important role in assuring timely and supportive counsel to members in pursuing their adjustment programs.

Events in my country during the year since I made those remarks strongly reconfirm that judgment. Under the policies we continue to pursue with the supportive counsel of these two institutions, the diversification of our economy is moving forward vigorously; our manufacturing sector is growing at an accelerating rate; our non-oil exports are growing; and our financial sector and capital markets are playing an ever-growing role in mobilizing resources and keeping inflation under control. It is important that we maintain the momentum of our restructuring and growth.

In this regard, I would note that the needs and interests of all groups of developing countries should receive evenhanded attention. The countries that have pursued vigorous adjustment programs, usually at significant cost to themselves, should not become the overlooked or forgotten parties in this process.

My own country intends, and is able, to continue to honor all of our external obligations. Our needs and the positive opportunities for growth open to us will require the mobilization of substantial financial resources. Even if we maximize our own mobilization of resources and continue to receive sympathetic consideration from bilateral and multilateral official sources of finance, we anticipate that we would need access to the commercial finance markets to fund productive activities. We would hope, therefore, that we can expect the continued flow of funds, commercial and official, that we will need on terms that reflect our performance record as a responsible borrower and the benefits both to us and our creditors of our continued restructuring.

Indeed, the importance of adjustment, and adequate incentives and support for adjustment, cannot be overstated. Everything that can be done by the Fund and the Bank to increase the financing available for meaningful, growth-oriented adjustment programs should be undertaken. Moreover, it is necessary to address the question of those additional measures and lending instruments that are necessary to deal more fully with the debt problem. Clearly we are not solving the debt problem or providing the support necessary to sustain growth when the net outflow of funds from the developing countries rises to the $50 billion level as the Bank’s Annual Report notes was the case last year.

New instrumentalities are particularly needed to deal with the problems created for borrowers by external developments. Correct domestic policies are a sine qua non of the solution. However, domestic policies of debt countries cannot cope with: (1) the effects of sharp swings in the external markets that adversely impact the price of their exports; or (2) the problems created by external currency realignments that adversely affect the debt burden when the currencies of earnings and of repayment are different, which is frequently the case.

Growing export earnings are an essential component of any solution to the debt problem. In many countries, restructuring will be necessary to make this possible through increasing the competitiveness of the debtor economy. That possibility, however, can only be translated into realized exports if we maintain and strengthen an open international trading system. Trade-limiting protectionism must be avoided, if possible, or minimized at least. This may require new and imaginative thinking that takes into account the new realities emerging in the structure of the world trading system. We are clearly moving out of the era of simple multilateralism. Trading in the 1990s will be shaped by the existence of massive trading blocs—Europe after 1992; a North American trading area based on the U.S.-Canada Trade Agreement, perhaps soon to include Mexico; and the possibility of an as yet undefined set of arrangements in the Pacific Rim. While this development has undesirable potential for the balkanization of the world economy leading to increased protectionism, it need not have such a trade-limiting impact. Trade could be stimulated if barriers are avoided and the potential increases in productive efficiencies are captured and translated into higher levels of economic activity. It will be particularly important to assure that the new trading blocs avoid recourse to nontariff barriers.

As I proposed last year, it would be desirable to add a currency swap facility to the arsenal of bilateral and multilateral lending instruments. This facility should be designed to assign a fixed value in the currency of export earnings to loans at the time they are issued.

To deal with the problem of export price volatility, we must vigorously pursue maximum gains from the use of funding instruments already in place. The Bank, and the regional development banks as well, will need to continue lending for adjustment programs. They should not be tempted to shift back, prematurely, to what some would consider more traditional lending patterns. The Fund needs to encourage maximum effective use of the compensatory and contingency financing facility to effectively help members maintain their adjustment momentum in the face of unanticipated, adverse external shocks.

The Fund should maintain the present access limits under the enlarged access policy, since it can be expected that the financial requirements of many members could remain large relative to their quotas in light of the less optimistic prospects. Moreover, for the Fund to play a fully supportive role, quotas should be doubled to maintain access in absolute terms while phasing out borrowing. Finally, let me urge that SDR allocations be resumed, so that “own” reserves can be increased and confidence in the international financial system can be strengthened ….

Statement by the Governor of the Fund and the Bank for the United States—Nicholas F. Brady

This Forty-Fourth Annual Meeting, the last of the 1980s, brings to a close a decade of both great challenges to, and significant achievements by, the international community. As we move from the 1980s into the last decade of the twentieth century, it is fitting that we reflect upon several of the major challenges we have faced together and how together we have met them. It is appropriate that we do so in this forum because the past decade holds both achievements to inspire our future endeavors as well as continuing issues of mutual concern which compel us to greater cooperative efforts.

The foundation of our successful endeavors to date, and the key to our future success, remains noninflationary economic growth. The sustained economic growth of the past seven years is a remarkable accomplishment. Just as we all will ultimately share in the benefits from economic growth, we also all share in the responsibility for the continued expansion of the world economy. The industrial countries must continue to play a leading role in this effort.

The Fund estimates that the industrial countries will achieve average growth of 3¼ percent and world trade will expand by some percent this year. The expansion of trade at a rate greater than that of economic growth is particularly significant because world trade is the engine of world growth. Both are essential to meeting our global economic objectives.

One of our principal economic objectives is the reduction of external imbalances. We have made progress. The U.S. trade deficit narrowed by more than 20 percent in 1988 and is continuing to decline this year. While we can take satisfaction in what has been accomplished so far, we must also acknowledge that further progress is required. Surplus and deficit countries must exercise greater discipline in reducing internal and external imbalances. Achieving continued reduction in these imbalances and sustained low-inflationary economic growth is a challenge that our nations face both individually and together.

Policy coordination is the process which we have used to support growth in the international economy. And policy coordination has paid off. However, when we measure the success of coordination we must maintain a sense of perspective. We must not confuse the short-term fluctuations in currencies or statistics with an effective policy coordination process that produces lasting results. Pundits would have us judge ourselves in terms of yesterday’s rally or drop in the exchange markets. In truth, policy coordination should be judged by whether the world economy is experiencing solid growth. And it is.

Sustained economic expansion is, and will remain, crucial to the strengthened debt strategy which the Interim and Development Committees endorsed last spring. We should be heartened by the progress achieved in implementing our new approach. The recent agreement reached between Mexico and its commercial bank creditors stands as an important illustration of the progress debtor countries and their creditor banks can achieve.

The combined effect of solid economic policies and a new financing package is already providing a major boost to Mexico’s economy. Mexico’s experience since reaching agreement with its creditors is a compelling example of the result we should seek. Let me contrast a year ago almost to this very day with the circumstances in Mexico today. President Salinas was not in office, and his policies were not yet evident. Inflation was rampant. Capital flight was the order of the day, and confidence was falling. Financing Mexico looked nearly impossible. New money was not present, and we were looking at piling debt on debt. Today, ten months after President Salinas has taken office and two months after the announcement of the agreement between the banks and Mexico, let’s see what has happened. Interest rates in Mexico have fallen from 55 percent to 34 percent, a saving of over $10 billion a year for the Mexican economy, nearly 5 percent of gross domestic product. Reserves have increased nearly $2.5 billion. People are rushing to invest in Mexico. When the sale of the airline took place, there were eight bidders. I am told today in the bidding for the telephone company that there are nine bidders. Under the new strategy—we can’t be exactly sure of the figures—but as a result of the agreement with the banks, the repayment responsibility for nearly $40 billion of Mexican debt will be forever removed from the backs of the present generation of Mexico.

Confidence in Mexico’s economy is clearly on the rise—businesses and individuals are investing in Mexico’s future. The message is plain, the benefits to Mexico go well beyond the terms of the agreement. A cloud has been removed from Mexico’s horizons, and the world knows it.

Preliminary agreement has also been reached between the Philippines and its commercial bank creditors. Again, this holds great promise for the Philippine economy and further illustrates progress in bringing parties together in realistic negotiations where they can seek solutions to their common problems.

A dynamic process is under way—the strategy’s key elements can be implemented to fit the individual needs of a wide range of countries. There is no one right way. Some may seek a broad package including debt and debt-service reduction and new money, fully negotiated up front. Other countries may prefer a more market-based approach, with flexibility in bank waivers to permit buy-backs and development of other instruments over time. And some may choose to pursue limited debt reduction without entering into broad negotiations with commercial banks.

Several countries—including Costa Rica, Venezuela, Morocco, Uruguay, and Chile—are already working toward new financing packages consistent with the strengthened strategy. As they discuss their needs and options with the international financial institutions and commercial banks, their varied interests have become increasingly clear. While reducing debt burdens has been the emphasis of many, new financing is still important for many countries. Although the elements and the mix will vary from case to case, it is important that there be a proper balance between new money, debt, and debt-service reduction.

Priority needs to be given by all parties to negotiating agreements that assure financial support for those countries carrying out significant reform programs. This will require the engagement of top level policymakers on both sides. However, an important challenge at the moment appears to be the problem of unrealistic expectations—both among the debtor countries and the banks.

In one sense, improving expectations was essential to restoring forward momentum in the debt strategy. Progress had come to a halt and there was a growing sense of hopelessness. In another sense, however, we must recognize that rising expectations need to be tempered by realism. This is part of any negotiating process—but in this case time is money. Excessive expectations can only promote delays, increase the risk of breakdown in negotiations, and ultimately raise the economic costs to the banks and debtor countries.

However, debt reduction cannot be seen as a cure-all for the economic problems of debtor countries. It cannot assure economic prosperity. Rather, debt reduction is meaningful only if it supports the economic reforms that are the key to long-term sustained growth. Economic reform must be the foundation on which financial support is built.

Increased investment and return of flight capital are essential objectives of the strategy. And debt-equity swaps offer debtor countries important vehicles to channel such resources into their economies. Privatization programs and reduction of barriers to foreign investment can also signal that private capital will be welcome.

In the judgment of the financial markets, the impact of the new strategy on both borrowers and banks has been positive. The secondary market value of bank debt has increased for most key debtors, as has the value of the shares of many international banks with significant developing country loan exposure.

While concentrating on the individual elements of our debt strategy, we must not lose sight of the larger accomplishment. Working together, we have opened the windows of hope for debtor nations. And we have done so by recognizing that just as we were all party to the creation of the debt problem, we must all be party to the creation of the solution. There is now a growing sense of understanding that while no solution will be perfect for all parties, there can be no resolution beneficial to any party without the full cooperation of every party.

The World Bank and the International Monetary Fund have critical roles to play in the debt strategy. The centerpiece of their efforts is to assist the debtors in shaping and implementing the economic policies that are central to establishing economic growth. These institutions have shown increasing effectiveness in doing just that. As we look to the future, they will need to put even more emphasis on policies designed to promote foreign investment, repatriate flight capital, and reduce government interference in the marketplace.

The Fund and the Bank also provide important financial support for the debt strategy. President Conable and Managing Director Camdessus, I commend you and your staffs for your first-rate work in moving swiftly to provide financial and policy support.

Fundamentally, economic growth is important for one reason—to improve the quality of life for us all. But this quality cannot be assured by growth alone. It also depends upon protecting and renewing our environment. Our land, our air, our waters, and our national resources must be protected.

It is essential that the World Bank exercise strong leadership as the global community strives to grow and conserve our scarce resources for the future. The Bank has already accomplished much in this area, but the time has come for it to establish as a guiding principle of its activities the precept that development and environmental protection must go hand in hand. We must redouble its efforts toward this end.

Preserving the environment is just one of the many great challenges we face as we move into the last decade of the twentieth century. As we face those challenges together, the Fund and World Bank will play a pivotal role in our efforts to build a prosperous world economy and a stable international financial system.

These institutions will continue to be central to our efforts to achieve sustained development and growth. We will look to them as a forum for discussion, coordination, and implementation of our initiatives. And we will look to them for the kind of multilateral leadership and cooperation that they have so ably demonstrated during the past decade.

Statement by the Governor of the Fund for Italy—Guido Carli

In 1989, the process of external adjustment in the major industrial countries has slowed down; next year, external imbalances are projected to rise again, especially within the European Economic Community, thus increasing the vulnerability of exchange markets.

While market integration allows for a smoother financing of imbalances, their sustainability over time is the real cause for concern; sooner or later, the sheer size of the stock of debt and the flow of interest will act as a deterrent against further financing. These risks are magnified if exchange rates move in a way that is plainly inconsistent with adjustment needs, as has been the case recently.

We should remind ourselves that the maintenance of fixed exchange rates in the period 1958-73 was made possible, apart from the existence of controls on capital movements, by the small size of external imbalances. As observed in the Group of Ten report of June 1985 on the functioning of the international monetary system, the influence on exchange rates of financial transactions has constantly increased in recent years; however, variability of exchange rates might have contributed to the widening of capital movements. As a consequence, exchange rate behavior has been influenced to a growing extent by developments in capital markets, where volatile interest rates and policy expectations play a key role.

As the Bretton Woods experience has shown, no international monetary system is expected to survive if the major countries are in great disequilibrium or behave in a way which is expected to lead to a protracted imbalance. It is my firm belief that, today, any discussion on a new international monetary system belongs more to the field of academic research than to the arena of political decision making. Current disequilibria have to be substantially reduced before we can think of a more formalized system than the one we are now living with. And this task, to be carried out essentially through a determined action on fiscal imbalances, belongs, first and foremost, to the main countries that suffer from such disequilibria, with peer pressure and cooperative actions of the other members of the international community playing a complementary and inciting role.

Besides this fundamental readjustment, which will take years to achieve, there is another undertaking to perform: to try to ensure that exchange rates move in line with the fundamentals of the major economies. Although the first task is difficult and fraught with political and social obstacles, it is nonetheless clear, at least as far as the direction of policy is concerned. The second one, however, has become much more elusive; the movements of private funds are so huge that any attempt to reverse the trends is doomed to almost certain failure.

Be that as it may, it would be a mistake to consider globalization of markets as a negative development for the world economy. On the contrary, I am convinced that it will become more and more a key element for the further integration of our economies as well as for their growth. To be sure, it would be unwise to resist market forces, as they reflect the growing interdependence of our economies; the integration of financial markets is an additional reason for major countries to coordinate their economic policies and keep their economies geared to free market principles.

There is no easy way to ensure a desirable exchange rate pattern among the three major currencies. It would be illusory to rely only on interventions to restrict the extent of fluctuations, as the masses of capital that move between the major financial centers are greater in volume than the means available to central banks. In fact, markets react more promptly to the current and expected changes in the stance of monetary policies and to declarations of monetary authorities.

Rather, an increasing degree of coordination of economic policies, not only monetary, must be achieved by major countries to deal, among other things, with problems related to exchange rate behavior, which in the short term is largely independent of trends in the underlying fundamentals. De facto, monetary policy is often overburdened by the need to achieve the double objective of fighting inflation while maintaining exchange rate stability.

Whatever the difficulties, we should be aware not only that recent changes in the world economy require a higher degree of international cooperation than in the past, but also that exchange rates should be considered both as targets and instruments of economic policy. As a matter of fact, monetary authorities are not and should not be prepared to adopt a benign neglect attitude toward large exchange rate swings. Pragmatism is the only philosophy on which we can rely.

The globalization of markets has elicited the interest of the authorities to a greater extent than in the past because of its bearings on the stability and efficiency of the financial system. This concern has several facets.

The first relates to the effectiveness of monetary policy; with full freedom of capital movements, its efficiency relies to a larger extent on financial systems capable of transmitting the impulses given by the monetary authority, that is, on a very competitive and open market.

The second aspect stems from the need to reinforce the surveillance of banks operating internationally. Supervision of international banking rests on cooperation among the national supervisory authorities. Surveillance would also benefit from tighter procedures within the banking system, conducive to greater transparency.

A third aspect refers to the view taken by those who believe that an effective fight against drugs and organized crime must concentrate on the channels that permit illicit profits to be reaped through insider dealings or to be laundered. For this, stock exchange commissions, banks, and bank supervisors must cooperate strictly to maintain freedom and firmness of the financial markets and, at the same time, act to prevent those markets from becoming the place where unlawful profits can be achieved.

Lack of cooperation and of appropriate action to strengthen the financial markets has contributed to create conditions not only for sudden financial crisis, as occurred in October 1987, but also for the debt overhang in developing countries. For too long in the 1970s international banks were relied upon to perform a recycling task among sovereign countries for which they had little experience.

The debt problem can find less painful solutions in an environment of confidence, stability, and expansion of output. Industrial countries can cooperate to ensure that the external environment will not be hostile to the efforts of indebted countries: correction of the major fiscal imbalances will contribute to a lowering of world real interest rates, while progress on the General Agreement on Tariffs and Trade negotiations should ensure enlarged markets for these countries’ exports. Our governments can also facilitate the implementation of the enhanced debt strategy through an action aimed at eliminating possible regulatory and tax obstacles that could dissuade banks from availing themselves of a broad menu of options in the debt reduction operations. Italy is fully cooperating in this regard.

However, action should not be restricted to creditor countries. The change in the debt strategy announced during our spring meeting is further proof that the large size of the debt is by itself an obstacle to the reform process. To benefit fully from the enhanced strategy, all parties concerned should play their role. Substantial efforts are required from debtor countries, private creditors, international financial institutions, and creditor governments. However, while contributing to the endeavor, the international financial institutions, and in particular the International Monetary Fund, must not alter their fundamental nature. In this respect, protracted negotiations between banks and indebted countries should not put at risk the new financial assurance policy of the Fund.

Continued strong adjustment remains the most critical component of the overall debt strategy. Debt reduction by itself can make only a modest contribution to the improvement of the balance of payments and to the resumption of economic growth, unless it is accompanied by a steady implementation of sound economic policies at the national level.

Since the improvement of the international monetary system is the key goal of our efforts, it is important to reaffirm the validity of the present approach until we are able to reach agreement on a more viable one.

Time and again, reference is made to the European Monetary System (EMS) as a model to be transplanted to other monetary areas; in my opinion, its success owes much to the specific fact that it ties together the currencies of countries making progress in their institutional and political cohesion. The three-stage process to reach the economic and monetary union now under consideration is further evidence of this. In a broader setting, the mixture of rules and discretion required to manage an adjustable peg may not be forthcoming: cooperation might not emerge spontaneously whenever it is needed because national short-term objectives might conflict with longer-term requirements.

So far, cooperation and coordination at different levels have been a positive experience from which we have learned that no country can solve its own problems in isolation. Any attempt in this direction would be ill advised, since it could lead only to failure or to the fragmentation of the economic order we have been able to build and maintain since the war. The free movement of goods, capital, people, and ideas should continue to be the cornerstone of our societies and our policies. As differences in national political and economic cycles make the coordination process sometimes difficult, both on technical and policy grounds, our determination to go ahead has to be correspondingly enhanced.

An international institution such as the Fund can play a vital role in this process. Only the Fund, in my opinion, has the technical skill and the experience to advise and assist imbalanced countries in their endeavor toward a more sustainable situation. To this end, the Fund should use fully its authority to bring pressure to bear on the cooperative decision-making process, especially when conflicts arise.

This brings me to address the important changes that have materialized in the traditional role of the Fund in the 1980s: in this period, its activity has been progressively confined to the financial assistance to developing countries, losing ground as a central institution in the international monetary system.

How can we ask for a more effective role of the Fund as an international monetary supervisor and lender if we are not ready to replenish its resources adequately and to allow it to play its full role in the creation of international liquidity?

I am convinced that the intense work done so far on the quota increase has provided all the essential elements needed to help us in our deliberations. The time is ripe for reaching a consensus and arriving at a decision by the end of the year, thus respecting the commitment we have all accepted. The Fund must be endowed with adequate resources to carry out effectively its systemic responsibilities, which are becoming broader and riskier. Its crucial involvement in the implementation of the strengthened debt strategy is an additional factor in determining this need. We are in favor of doubling the Fund’s quota, given our assessment of the prospective liquidity, which is subject to a number of caveats.

Furthermore, doubling the size of the Fund would also provide the necessary scope to accommodate a significant reduction of disparities between calculated and actual quotas, which, in a number of cases, are quite substantial. It will obviate numerous ad hoc increases.

As a consequence of the quota increase, access limits to Fund resources will have to be reviewed. Given the importance we attach to the role of the Fund in the debt strategy, our position is to maintain broadly unchanged absolute access limits.

A political impediment to the quota increase seems to be the mounting volume of arrears to the Fund; these have continued to accumulate during 1989, albeit at a lower pace. Although some countries have significantly improved their relations with the Fund and started cooperating actively to become current, the problem remains serious and cannot be solved only by international pressure; it needs further study. However, it would be wrong to link the quota increase to the solution of the arrears problem.

A reconsideration of the SDR allocation is also necessary to aim toward a system in which private sources are adequately complemented by official ones for the provision of a stable supply of reserves. I believe that it would be unwise to let the SDR shrink as a share of total reserves. Therefore, an allocation should be made to meet the systemic need of restoring the role of official sources and to stabilize the relative weight of SDRs in total reserves. To apply strictly the criterion envisaged in our Articles of Agreement, written when the creation of liquidity was less demand determined, is, in my view, inconsistent with the present situation.

Leaving aside the international monetary system, I would signal, among the major tasks of the World Bank, the need to reverse the present trend of negative net resource transfer, which certainly continues to be a problem of central concern. Since 1985, the Bank has decided on a strategy to counteract vigorously the deterioration of the economies of the developing countries, starting structural adjustment financing and quick-disbursing loans. This strategy is now being strengthened by enlarging its scope to include debt reduction initiatives.

Just recently, the first agreement focused on debt reduction was signed with Mexico. The Italian Government welcomes this action, but reiterates that the market-based debt reductions should be eligible for the support of the Bank and the Fund only if they provide debtor countries with a significant degree of debt relief….

The Italian economy continues to expand vigorously, even though some signs of a slowdown in the growth of industrial production have emerged. For 1989, the increase in domestic demand should be 4 percent, while gross domestic product (GDP) is expected to grow by 3.4 percent. Although total employment has risen substantially and a situation close to full employment has been reached in the economically stronger regions of the country, the growth in labor supply still keeps the unemployment rate at about 12 percent.

The resurgence of inflationary pressures that occurred in the first part of 1989 is now subsiding, and by the end of the year the rate of inflation should be about 6 percent. A tight monetary policy and the appreciation of the lira within the EMS have helped to stem inflationary pressures, though at the cost of a weakening competitive position.

Buoyant demand is mainly responsible for a widening current account deficit, which for 1989 will be equivalent to about 1.2 percent of GDP. In the first seven months of the year, the trade deficit rose to about $9 billion from about $5 billion in the corresponding period of 1988. In the same period, the inflow of capital was larger than the current deficit, making for a small overall surplus. Although this is proof that freedom of capital movements allows disequilibria to be financed smoothly, it should not delude policymakers into delaying adjustment.

As concerns public finance, latest official forecasts for 1989 point to a deficit for the state sector equal to 11 percent of GDP, down from 11.5 percent in 1988. The primary deficit, at 2 percent of GDP, will be well below the 1988 outturn. By the end of the month the Government will present the 1990 Finance Bill and Budget. Planned revenue and expenditure measures are expected to reduce the state sector borrowing requirement, bringing it down to about 10 percent of GDP; further action is programmed for the subsequent years in order to stabilize the debt/GDP ratio by 1992.

Statement by the Governor of the Fund for Côte d’Ivoire—Abdoulaye Koné

Let me first of all convey the grieving of the African Governors at the death of Mr. Mahamat Soumaila, the Bank Governor for Chad, as well as for his Deputy who passed away. And I would like to thank you, Mr. Chairman, the other Governors, as well as Mr. Conable and Mr. Camdessus, for sharing in our sorrow.

Let me, on behalf of the African Governors, welcome the People’s Republic of Angola, the new member of our institutions.

The African Governors note the encouraging performance of some aspects of the world economy in 1988: economic growth was sustained both in the industrial countries and in some of the developing countries, the volume of international trade reached a historically high level, and the rate of inflation remained relatively moderate in the major industrial countries. We also note, however, that in spite of these positive developments, there are reasons for concern as simultaneously there has been a further widening of the gap between the rich and poor countries, more particularly the African countries. Indeed, while it is true that the rate of economic growth in the developing countries as a whole slightly exceeded that in the industrial countries, the fact remains that the rate of growth of per capita income in the developing countries, estimated at 2.6 percent, was significantly lower than the rate of 3.4 percent recorded in the industrial countries. With regard to the situation in the African countries, there are grounds for grave concern because, for the third consecutive year, the living standards of our peoples have declined further; the rate of economic growth attained in 1988, at 1.7 percent, was far below the rate of population growth. Moreover, while world trade increased significantly in 1988, Africa’s share continued to decline.

The short-term outlook is no better for Africa. Indeed, according to available projections, living standards in Africa are expected to continue to decline in 1989 while those in both the industrial and the other developing countries are expected to show further improvement. In this context, the most immediate challenge facing Africa is to reverse the downward trend in per capita incomes, which have deteriorated to unacceptably low levels. We are very much aware of the fact that we must face this challenge primarily through our own efforts, but we also need the support of our partners in the international community.

As we have emphasized in the past, the fundamental causes of the poor economic performance of the African countries are, among others, the persistent downward trend of the prices for our export commodities, the debt overhang compounded by an excessive debt-service burden, and a lack of adequate financing which has led to drastic cutbacks in investments.

In our opinion, the fostering of a favorable international economic environment, characterized, inter alia, by markets open to our exports, a decrease in real interest rates, and stability in the exchange rates of the major currencies, is a prerequisite for ensuring success for the adjustment programs being implemented by African countries. The prime responsibility of the industrial countries in this regard needs no further elaboration, given the magnitude of the impact that their economic and financial policies have on this environment. In this context, we are greatly concerned about industrial countries’ excessive recourse to monetary policy instruments in their attempt to achieve international adjustment. While this strategy has been intended to control inflation, it has also contributed to large fiscal imbalances. So long as these imbalances persist, the resulting increased demand for international savings will keep interest rates at high levels. The industrial countries must therefore resolutely implement measures to reduce these imbalances so as to create the conditions for a sustained decrease in interest rates. In this context, it is pertinent to mention the important role that effective surveillance by the Fund on the economic policies of these countries, in particular their interest rate policies, could play in order to ensure that they are moving in the right direction in the interest of all members of the international community.

There should be no doubt about the readiness of our countries to assume their share of the global responsibility. The African countries reaffirm their commitment to work toward improving their domestic economic environment by continuing to implement wide-ranging structural adjustment programs and to strive to mobilize additional resources through appropriate policies in support of these programs. The need for the industrial countries to support these adjustment programs with adequate resources and conducive trade policies cannot be overemphasized. But regrettably, as shown clearly in the midterm review of the United Nations Program of Action for African Economic Recovery and Development (UN-PAAERD), while many African countries embarked upon far-reaching programs to reform their economies, there was a simultaneous decrease in real resource flows to Africa. We therefore call upon donor countries to provide the financial assistance required for the success of our programs. We also urge them to dismantle protectionist barriers to our exports.

The Bank and the Fund must continue to play their catalytic role in the mobilization of external resources for all member countries in need, particularly those undertaking adjustment programs. In the context of their assistance in the design of such programs, they should give greater consideration to the economic, social, and institutional realities of the African countries, so as to maximize the chances of success and the sustainability of these programs. In this connection, and in view of the increased prevalence of poverty in our countries, the need to integrate effective measures to protect the poorest segments of the population and to reduce unemployment has become more urgent. The question of how to integrate most appropriately policies on the social dimension into adjustment programs recommended by international institutions is under active consideration in Africa. We urge the Fund and the Bank to cooperate closely with the African countries in order to consider how best to incorporate the outcome of these deliberations in the adjustment programs they support.

While we were encouraged by the relative stability of the exchange rates of the major currencies brought about by the Louvre and Plaza Accords, we must acknowledge that the effectiveness of international policy coordination has been severely tested in recent months by the erratic fluctuations in the exchange rates of the major currencies. In view of these developments, and given the persistence of large domestic and external imbalances in the major industrial countries, we strongly urge these countries to further strengthen the coordination of their macroeconomic and structural policies, and the Fund can play a role in this connection.

The continued deterioration in the terms of trade is one of the most serious problems facing African countries. Indeed, many of them have seen the fruits of decades of development efforts wiped out by the sharp decline in the export prices of their commodities. The perpetuation of such a situation is unacceptable, and ways and means should be found to bring it to an end. We remain convinced that the best form of assistance that the developed countries can provide to our countries in this area is to ensure a just and equitable remuneration for our export products and to provide access to their markets without any restriction, direct or disguised. A fair remuneration for our export products, combined with adequate external financial assistance, would help to alleviate the acute shortage of financing and to increase the level of investment. To this end, we strongly urge the international community to play its role by actively supporting us in our quest for a reform of the raw materials markets. In particular, steps should be taken to enhance the effectiveness of the common fund for raw materials. In this connection, we are pleased to note that the United Nations Secretary-General has appointed a group of experts to examine in depth the question of raw materials from the African countries and the prospects for diversifying Africa’s exports. In the meantime, existing mechanisms within international institutions (STABEX, SYSMIN, CCFF, etc.) should be revitalized and better adapted to the needs of the developing countries. It is thus regrettable to note that the Fund, moving against the tide, has reduced the effectiveness of its facility for the compensatory financing of export fluctuations by merging it with the contingency facility and has, in the process, increased its conditionality.

Our large external debt and debt-service burden continue to drain our scarce resources, thereby wiping out any possibility for economic growth. We have continually called the attention of the international community to the debt burden of the African countries as a source of grave concern, despite its relatively modest amount in absolute terms. We note that the problem of Africa’s indebtedness has been receiving increasing attention from the international community, as indicated by the various initiatives taken to solve the debt problem. We are also pleased that the plan to ease the debt of the poor countries of Africa, which the Group of Seven adopted in Toronto, has become operational. However, we are compelled to note that its impact has remained limited. The proposal made by Presidents François Mitterrand of France and George Bush of the United States to extend forgiveness of a part of their countries’ development assistance loans to the 35 poorest and most indebted countries of Africa is a timely decision. It constitutes an acknowledgment of the fact that, if any solution to the debt problem of the African countries is to be viable, it must necessarily entail a reduction in the stock of existing debt.

This is why the African Governors are encouraged by the various initiatives which led to the adoption of a new debt strategy that now emphasizes debt and debt-service reduction. We note the recent progress made by the Executive Boards of the Fund and the Bank to define the modalities of the two institutions’ participation in debt and debt-service reduction operations and to apply these to the Latin American countries. We wish to underline the importance of extending the advantages of the new strategy to all the indebted middle-income countries, and the low-income countries as regards their commercial debt, with due regard to their low income levels and their capacity to pay. While the new strategy attempts to provide some answers to the problem of the commercial debt of the middle-income countries, the fact remains that the problem of their official debt has yet to be fully addressed. The same is true of the poorest countries’ debts to international or regional development institutions. In an attempt to find solutions to the debt problem of these countries, several proposals, ranging from debt relief from the international organizations to total debt forgiveness, have been put forward in various forums.

Mr. Chairman, let me say a few words about a subject dear to the hearts of the African Governors. The dilution of the voting power and relative shares of African countries in the two Bretton Woods institutions continues to be a source of major concern to us. We, the African Governors, strongly urge that the voting power and relative shares of our countries be preserved and steps be taken to ensure their meaningful representation in the two institutions.

We would like to comment briefly on the collaboration between the two sister Bretton Woods institutions. The African Governors recognize that this collaboration could considerably improve the assistance which the Fund and the Bank provide to our countries. However, it should be stressed that in order to avoid any duplication of efforts and, in certain cases, even working at cross-purposes, the two institutions must work together to enhance the quality of future adjustment programs and mobilize adequate external resources for our countries. Moreover, the Bank should devote greater efforts to intensifying the fight against poverty in the member countries and to helping our countries mitigate the adverse social impact of adjustment on the least advantaged groups of our population ….

In conclusion, urgent action is needed to resolve the debt crisis to enable Africa to obtain maximum benefits from adjustment programs and move toward lasting growth with social justice. It is a matter of concern that Africa has not shared in the benefits of the growth recorded in the developed countries. There are other important problems outstanding, such as long-term growth prospects, regional integration, and the development of industrial potential. It must be recognized that severe resource constraints will continue to be felt sharply in Africa during the 1990s. We therefore reiterate that it is necessary to mobilize additional assistance and to return to higher levels of investment so as to maintain satisfactory rates of growth and achieve the objectives of development, including the alleviation of poverty.

Statement by the Governor of the Fund for the Philippines—Jose B. Fernandez

The debt problem is now nearly a decade old. For many heavily indebted countries, this would be a decade of lost opportunities for economic progress and poverty alleviation. The debt problem has impaired and continues to impair the overall flow of capital resources from both commercial and official sources to many developing countries. In many of them, the burden of existing debt has increased because no economic growth has occurred.

It was in this context that Secretary Brady’s statement last March, building on earlier initiatives of Japan and France, was welcomed for its recognition that the conventional prescription of policy reform, combined with new money and rescheduling, was not adequate for a lasting solution to the burden of many heavily indebted developing countries. In light of this, the debt strategy had to be strengthened by placing at least as much emphasis on debt reduction as on the provision of new resources if the objectives of economic growth, external viability, and eventual access to voluntary capital markets for developing countries are to be achieved.

To the credit of the Fund and the Bank, these institutions moved swiftly to establish broad guidelines on how their resources could best be committed toward the debt reduction called for under the Brady initiative. In tandem with Fund arrangements, the Government of Japan also offered to extend parallel financing within the framework of the strengthened debt strategy.

Yet translating principles into guidelines and guidelines into working agreements has not been easy. This has been reflected in the protracted and complex negotiations that have characterized the recent limited attempts to implement debt reduction programs.

Our collective interests lie in the speedy implementation of the strengthened debt strategy. A key determinant will be the availability and timeliness of adequate official financing to implement the basic debt reduction program, which could then catalyze sufficient private financing flows to ensure the financing of a sound economic program. Thus the strength and timing of actual official flows will essentially define how quickly we can progress in the path of debt reduction.

Many of the rules of this game are being made up as we go along. In such a setting, flexibility rather than distinction by form between various types of debt reduction schemes seems to be called for. At the end of the day, what matters is the efficiency of debt reduction rather than its form.

But we recognize that the strengthened debt strategy does not lessen the need for sound economic and financial policies by the debtor countries, particularly the ability to mobilize domestic savings and to improve the efficiency of investment. Such an economic environment makes sustained growth possible, and in the final analysis, the best way to solve the debt problem should be to grow out of it.

The timeliness of the new debt strategy surely is underlined by the findings in the latest Annual Report of the World Bank on the negative net transfer of resources, which has steadily increased from $10.2 billion in 1984 to $50 billion in 1988. The development process cannot continue with this perverse flow of resources. All sources, private and official, must participate in reversing this net negative resource transfer.

However, while resource flows are absolutely essential for the continuance of the development process, the large industrial countries should also address other policy distortions that not only aggravate the debt burden of developing countries but also complicate their economic planning processes. Among these are the volatility of exchange and interest rates and the well-known problem of rising interest rates at a time of falling developing country terms of trade.

We note also that protectionism remains a concern. It has not abated. Worse, it has begun to assume less transparent forms that make the problem even more difficult to control. Every economy must bear some responsibility for improvements in this area. But the leading economies—owing to the significance of their trade to the world trading system—surely have a higher responsibility to lead the way. The Uruguay Round provides a clear-cut opportunity to demonstrate concretely each nation’s commitment to a free and open trading system.

Finally, while the international debt strategy clearly relies on market-oriented and voluntary mechanisms, this is not the same as saying that the major governments have a less active role to play. Market mechanisms are very much influenced by the tax and regulatory environment for financial institutions. There is much scope for regulatory improvements that would encourage new lending and the granting of meaningful debt relief and that would discourage nonparticipation.

The Fund now occupies a central role in the management of the international debt problem. It will continue to play a leading part in expediting the process of adjustment. The Brady initiative has also thrust upon it a major financing role in debt reduction. Both these tasks require the Fund to have adequate financial resources to fulfill its role. Thus, there is urgency in coming to an agreement to substantially increase Fund quotas. In this respect, the major industrial economies collectively hold the key to its realization.

We are also encouraged that the World Bank has collaborated with the Fund very closely and has been moving to put in place arrangements to support debt reduction for heavily indebted countries.

In the Philippines, the pace of adjustment has proceeded with vigor. We have managed to recover strongly from the severe recession in the mid-1980s. In the past two and a half years, our real gross national product (GNP) growth has averaged over 6.0 percent, and we have managed to keep inflation at low single-digit levels. We are optimistic that for 1989 as a whole we can achieve progress consistent with the objectives of our economic program.

We would note here that this progress has been achieved in the last three years while we continued to make net payments to our commercial creditors amounting to $2.3 billion between 1987 and 1988. These payments contributed to a total net resource outflow equivalent to about 5 percent of GNP during the same period. Our good performance can be sustained only if these outflows are reduced and then reversed.

We are also happy to report substantial progress in our discussions with our creditor banks for both new financing as well as meaningful debt reduction. Our experience confirms that there need not be internal inconsistency in such a financing package. The essentials of the Philippine financing package of 1989 are that it is a combination of debt reduction and new money; it was done largely on a voluntary basis and provides some prospect of renewed access to the international credit market. We consider this only the first stage of our debt reduction effort. We intend to follow up with further debt and debt-service transactions in the future.

We conclude our statement by reiterating our call for an unwavering commitment to find a lasting and equitable solution to the debt problem. That task clearly entails responsibilities for all—for debtors to proceed with adjustment, for governments to ensure an environment conducive to that difficult task, for lenders to concretely manifest support and rise above self-interest, and for the Fund and the Bank to continue to assist in the process of adjustment in both developed and developing economies. These elements must be put together in careful balance.

Statement by the Temporary Alternate Governor of the Fund and the Bank for Canada—John McDermid

It is a great honor for me to have the opportunity to address these Joint Annual Meetings of the World Bank and the International Monetary Fund. I join others in congratulating Barber Conable and Michel Camdessus for their skillful management of our twin institutions through these demanding times. I also welcome the representatives of Angola, which has recently assumed membership in our institutions. Canada joins with others in expressing its deepest sympathy to the citizens of Chad in their time of bereavement.

At the meetings of the Interim and Development Committees, my colleague Mr. Wilson and I have spoken of the increasing integration of the world economy and of the challenges this integration poses for policymakers. In our view, the challenges are fourfold:

—First, we need to put in place balanced policies that will provide a stable macroeconomic environment.

—Second, we need to improve efficiency and productivity through market-oriented structural reforms.

—Third, we need to continue to work on the implementation of the strengthened debt strategy.

—Fourth, we need to give a greater role to environmental considerations in our decisions.

The Policy Framework

I am encouraged by the consensus I see at these meetings on the policy framework needed to deal with these issues. It is indeed remarkable that governments everywhere have reached a shared diagnosis of policies needed to strengthen economic performance. The key elements of this framework are a medium-term orientation, policies that will promote macroeconomic stability, and greater reliance on market forces—a view captured by the phrase “structural adjustment.”

In the current environment, our first priority in maintaining macroeconomic stability must be to reduce domestic imbalances that have threatened a resurgence of inflation. Higher interest rates have been necessary to confront inflationary pressures. However, monetary policy is being asked to carry too much of the burden. Countries with large fiscal deficits need to implement effective fiscal consolidation measures.

In our April budget, we made clear our commitment to implementing responsible monetary and fiscal policies that work to defuse inflation pressures. Hard as these decisions are, we believe they will ultimately improve the well-being of Canadians.

We have also placed a high priority on the need for structural adjustment. We have privatized many state-owned corporations, implemented the Canada-U.S. Trade Agreement, introduced a new regulatory regime for the financial sector, and reformed the personal and corporate income tax systems. We are moving ahead with a major reform of our system of indirect taxation with the introduction of a new goods and services tax. These reforms are needed to improve the efficiency and competitiveness of the Canadian economy.

Macroeconomic stability and greater economic efficiency are important to all of us as trade expands and the global economy becomes increasingly integrated. The increasing integration of the world economy means that international cooperation in economic policy must be strengthened. We have responded to the need to enhance international cooperation in a variety of ways:

—The Venice summit resulted in the formation of the Group of Seven.

—OECD’s “outreach” program is increasing contacts between the industrial countries and the newly industrializing economies of Asia.

—The presence at these meetings of the Secretary-General of the General Agreement on Tariffs and Trade (GATT), Mr. Arthur Dunkel, is a symbol of our determination to strengthen ties between the Bretton Woods institutions and the GATT.

The Fund and the Bank have been at the center of international cooperation for almost 50 years, and I believe that the flexibility and adaptability shown by the Fund and Bank will help ensure that they continue to play a central role as we look ahead to the challenges of the 1990s.

Today I would like to address the needs of our international institutions—their leadership role in the global economy, the resources they will need to fulfill this role, and their priorities, which must reflect the concerns of the shareholders.


Let me begin with the GATT. Nowhere is the need for increased international cooperation greater than in international trade. Trade liberalization not only breaks down the barriers between economies but also serves as a catalyst for freeing up domestic markets. Thus, there is an important synergy between trade liberalization and domestic structural reforms.

Ominously, trade liberalization, which was in the vanguard of market-oriented reforms in the postwar period, has paused in the 1980s. This is why an early and substantial resolution of the Uruguay Round negotiations is critical. Significant progress in agriculture, services, strengthening of the GATT, and trade-related investment and intellectual property concerns are all needed if the trading environment is to complement the forces leading to domestic structural reforms.

Resources for the Bretton Woods Institutions

The Fund and Bank both will need additional resources to discharge their responsibilities as we enter the 1990s. Resources and leadership are inseparable partners for these institutions to work.

The Interim Committee has not yet been able to complete its deliberations on the Ninth General Review of Quotas, but its meeting was useful in clarifying positions on the size of the increase and on the principles that could be followed in allocating a quota increase.

Canada and many other countries believe that a substantial increase in quotas is necessary. Our analysis suggests that a quota increase in the range of one half to two thirds, or SDR 45 billion to SDR 60 billion, would give the Fund adequate resources to play its expected role, including the debt strategy. A quota increase in this range would give the Fund sufficient liquidity, even if substantial increases in its lending to members were to occur over the next five years.

Discussions on the Ninth Review of Fund Quotas have been in progress for nearly two years. The Interim Committee asked on Sunday that the Executive Board pursue its work on the quota increase as a matter of the highest priority, with a view to reaching agreement by year-end. We strongly support this objective ….

I share the concerns expressed by many about the growing arrears problem at the Fund and other international financial institutions—a problem that could seriously constrain the resources of the institutions if we allow it to get out of hand. The different approaches currently being explored to address arrears need to be pulled together to give us a cohesive, targeted, and effective strategy for dealing with the problem.


We must recognize that sustainable development requires a medium-term policy framework where economic and environmental policies are inextricably woven together. Too often we speak of sound economic policies and sound environmental policies as if they are somehow separate issues. Sustainable growth is not possible unless the environmental impacts of our economic activities are fully taken into account.

At last year’s Annual Meetings in Berlin (West), Michael Wilson, Finance Minister for Canada, made a number of concrete proposals for improving the Bank’s support for environmentally sustainable development. And Minister Wilson asked me to say how pleased he was with the progress that has been made on these proposals in the past few months ….


The establishment of the Bretton Woods institutions during a period of global strife some 45 years ago was an act of great vision. They have served us well. If we are to prosper in the face of rapid change in the global economy, then the continued leadership of the Bank and the Fund is indispensable. Individually and collectively, it will take all our best efforts to meet that challenge now and in the years ahead. We in Canada look forward to addressing these challenges with all of you.

Statement by the Governor of the Fund and the Bank for Brazil—Mailson Ferreira da Nobrega

It is an honor to address this meeting of the Governors of the World Bank on behalf of Argentina, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, Venezuela, and my own country, Brazil.

I should like to address three main items: (1) policy problems and policy issues in structural adjustment, (2) the debt situation in Latin America and the current debt strategy, and (3) the World Bank’s support for the environment.

With respect to the first point, the fundamental problem has been forcefully presented by the Managing Director of the Fund in his written submission to the April 1989 meeting of the Development Committee:

Recent experience in the implementation of structural adjustment policies has been sobering. All too often, setbacks in economic progress have interrupted the implementation of adjustment policies, resulting not only in a loss of momentum, but actually in a loss of ground painfully gained.

The record is indeed a rather mixed one. There have been a few successful experiences, some dismal failures, and, for the most part, a wide gray area of outcomes, which have not allowed for sustained growth and the resumption of investment. A recent empirical analysis, for example, indicates that out of 83 developing countries, only 13 (of which 2 are in Latin America) could be considered high-performance countries (in 1987 and 1988) in the sense of having satisfied predefined criteria for both growth and investment. At least 58 developing countries failed to satisfy both criteria in 1987 and 1988.

The reasons for this, of course, vary from country to country, and involve problems in (a) the design of programs, (b) sustainability in their implementation, (c) the external environment, and (d) financing external requirements for adjustment with growth. It should be clear, however, that the four aspects are interrelated and must be addressed jointly in considering the experience of any single country.

The statement of the Minister of Finance of Ecuador, on behalf of our chair, to the Development Committee meeting, has touched on these points. We fully share the view that there could hardly be an effective design or sustainable implementation of growth-oriented structural adjustment programs without squarely addressing the problems posed by the debt overhang, as well as by the crisis of the public sector facing many of our countries.

Let me comment on these issues, before turning to the debt situation in Latin America, its interactions with the crisis of the public sector, and the current debt strategy.

  • (a) Improving the design of macroeconomic and structural adjustment policies could help to establish policy credibility at an early stage. However, policy credibility cannot be established without taking fully into account—in the very act of designing the programs—the legacy of real or perceived structural weakness of the country in question. These could be deep-rooted structural problems, such as inadequate infrastructure, poorly developed markets, institutional and managerial weaknesses in the public and private sectors, lack of critical skills or poor base of human resource development, and undiversified productive base with limited potential for quick supply response. The design of macroeconomic and structural adjustment policies will not be effective if these economic and social realities are not taken into account in establishing the conditions and performance criteria attached to the operation. These conditions should be focused, able to be monitored, reduced in number, properly sequenced, and circumscribed to variables that are under the effective control of the authorities of the country in question.

  • (b) The degree of political commitment to, and public support for structural reform in the adjusting country is an essential element for the sustainability of the adjustment process. But it should be noted that both commitment of the authorities and support of public opinion will be progressively harder to maintain while adjustment continues without payoffs in terms of growth and while human and social conditions deteriorate. In addition, there is a consensus that the primary responsibility for the design of structural adjustment programs should remain with the national authorities of the country in question, which, after all, must implement the program. Although the policy advice and the policy dialogue with the Bank and the Fund are surely welcome, the national authorities must be satisfied that these programs represent an appropriate, realistic, and feasible course of action.

  • (c) The existence of an external environment supportive of structural adjustment is necessary—albeit not a sufficient—condition for sustained domestic reform programs. Four elements are particularly crucial: (i) the provision of adequate medium-term external financial support for serious adjustment efforts, adequately defined in terms of volume, terms, and conditions; (ii) nonrecessional adjustment in industrial countries as well; (iii) reduction of protectionist barriers in industrial countries; and (iv) lower real interest rates. Given the enormous uncertainties now prevailing, it is imperative that the contingency mechanisms be incorporated in the design of adjustment programs.

  • (d) Last, but by no means least, is the crucial importance of estimating the external financial requirements for growth-oriented adjustment. It is clear by now that the external financial assistance that will be required by developing countries, even if they manage to step up their domestic savings, will have to involve in the years ahead a vastly increased role for the official sector. This is not necessarily a transfer of risks from the private to the official sector, as it is usually understood, but surely a transfer of tasks from the private to the official sector.

    Part of these tasks will involve accelerating steps to reduce debt and debt-service burdens as an essential ingredient in the design and implementation of effective and sustained adjustment programs.

In this connection, both the Bank and the Fund will have to pay increased attention (a) to realistic estimates of sustained current account deficits and especially of feasible balances in trade and nonfactor services and (b) to an internal adjustment program consistent with growth, that is, a set of policies that will bring about a matching financeable fiscal deficit plus a private savings surplus over investment at levels of investment high enough to sustain output growth, which is not the case for the indebted countries at the moment, given the magnitude of the net real resource transfers abroad.

For these countries, there could hardly be an effective design or sustained implementation of growth-oriented structural adjustment programs without squarely facing the problems posed by the debt overhang in the very design of the program. This means that, for many countries, we will have to evolve toward official estimates of the magnitude of debt and debt-service reduction that are consistent with the achievement of sustained growth (in the sense described above), instead of leaving this entirely to protracted, voluntarily negotiated schemes between each individual debtor and its commercial bank advisory committee. This approach has been tried for seven years. It has led debtors nowhere.

Let me turn to the debt situation in Latin America, its interactions with the crisis of the public sector, and the current debt strategy. After experiencing an average rate of growth of nearly 6 percent per year in real terms during the previous two decades, Latin America stagnated in the 1980s. The projected rate of growth for 1989 is zero for the region as a whole. In per capita terms, there is likely to be a fall of about 3.5 percent in the two-year period 1988-89, by far the worst performance among all regions of the world.

Although it will be an oversimplification to attribute this dismal performance solely to the burden of external debt, it cannot be denied that transferring abroad an annual average of around 3 percent of gross domestic product (GDP) for nearly a decade had deep domestic adverse implications for the debtor countries of Latin America.

In fact, the attempt to service external debt by transferring abroad unprecedented and unsustainable shares of GDP further depresses national disposable income, particularly of the public sector—which has been made responsible for virtually all foreign debt—while foreign exchange is mostly privately earned. The buying of foreign exchange by the public sector causes domestic public debt to soar and keeps sustained upward pressure on domestic interest rates, always affected by the expected rate of devaluation.

The ensuing uncertainty leads to a dramatic shortening of the time horizons of the relevant economic agents. Private productive investment is postponed while private savings and retained earnings are applied in short-term financial instruments, purely speculative activities, or assets held solely as a temporary hedge against inflation. Furthermore, public investment is sharply curtailed because the financing capacity of the public sector (internal and external) has virtually disappeared.

I should note, however, that there is an emerging consensus in Latin America on the need for a deep reform of our public sectors. The focus on the fiscal budget and on the financial disequilibrium of the public sector, broadly defined to include public enterprises, has come to stay as a critical element in any sound, growth-oriented adjustment program. Likewise, there is a growing degree of political support for a comprehensive modernization of public administration, the efficiency of which must be urgently increased if we are to face the challenges involved in achieving noninflationary, sustained growth in the years ahead.

Compounding the serious problems posed by the crisis of the public sector and the legacy of too high stocks of debt is the observed sharp fall in the net flow of financial resources. For all debtor countries, net borrowing from commercial banks, which had reached the unsustainable figure of $91 billion in 1981, declined to less than $6 billion in 1985, and was more than $9 billion negative in 1988.

For Latin America, borrowing from commercial banks declined from $55 billion in 1981 to minus $13 billion in 1988, in sharp contradiction with the expectations generated by the Baker initiative of 1985. It is unsustainable—economically, socially, and politically—a situation in which a poor region finances rich countries for such an extended period of time. At the close of the 1980s, Latin America is in a state of siege. On the one hand, external debt pressures have both international and domestic implications. On the other hand, protectionism in industrial countries and the regionalization of international trade represent a new constraint on the expansion of trade and trade-related investment in the region. The combination of these constraints poses serious threats to the integration of Latin America into the international economic system.

Latin America is not, however, only a problem region. It is, at the same time, and perhaps more important, a continent of opportunities. It is completing a successful process of political transition toward democracy. It is in the midst of opening up to the world, gradually liberalizing its trade regime—and modernizing its industry. In this endeavor, it counts on an extensive and diversified productive structure, on a considerable technological capability, on a high level of potential savings, as well as human and natural resources, which, together, could support a new wave of prosperity. Given the appropriate domestic and international conditions, the desired change would not be more difficult to achieve than, for instance, the ones observed in major countries devastated by the last world war, countries that not only achieved reconstruction but also formed a base for expansion of the world economy, of which they are now major pillars.

The dismal 1980s have been marked by the legacy of the problems and attempted policy responses of the 1970s. How can we avoid having the 1990s being held hostage to the problems and attempted solutions of the decade coming to an end?

First of all, it is important to continue with the policies for structural adjustment, particularly those related to reform of the public sector. But in the 1980s the burden of adjustment was concentrated on the debtor countries. Now it is necessary to achieve more symmetry in the adjustment between debtors, creditors, and commercial banks. Policy coordination among industrial countries has been inadequate and insufficient to achieve this objective. Too much reliance on monetary policies, without the required complementary actions on the fiscal front, has put an upward pressure on interest rates. A great part of the positive results, achieved at high social costs by the adjustment policies of debtor countries, has been offset by the lack of adjustment and macroeconomic policy mismatches among major industrial countries.

The other area in which the need for more symmetry in the adjustment is clear is trade. This is a vital area for debtor countries forced to generate sizable trade surpluses to attempt to keep current on external debt obligations. Many of these debtors have been implementing trade liberalization measures. Nevertheless, protectionism in industrial countries, words notwithstanding, has increased precisely in relation to trade in products that are of interest to developing countries. Such products have been subjected to administered trade and have faced an increase in nontariff barriers, which are becoming progressively less transparent. In addition, they have been hit by unilateral measures and by attempts to establish bilateral mechanisms for resolving disputes, outside the scope of the existing multilateral framework. One striking outcome of this situation is that the increase in the volume of international trade in the past two years had a limited impact on developing countries.

In the second place, if we really want to avoid having the 1990s see a continuation or even a deepening of the problems of the 1980s, it is essential to move toward a definite solution to the international debt problem. The gradualist approach has been shown to be insufficient—merely postponing the problems and often aggravating them.

The Brady approach should be seen as a right step in the direction of solution to the international debt crisis. We are encouraged by the positive initiatives, particularly of the Japanese Government, to increase the resources available to debtor countries in the form of parallel financing. We also welcome the involvement of the Fund and the Bank in the efforts to reduce debt and debt service, by rapidly approving specific guidelines and identifying available resources.

It is important to consider the Brady approach as an evolving strategy. Accelerating the implementation of the first agreements is important, but so is the need to avoid too modest results, with discouraging effects on other countries.

The Brady initiative must be strengthened. This strengthening will require a more direct and active involvement of international financial institutions in the negotiating process, the mobilization of a more significant volume of resources, and official estimates of the requirements for growth-oriented adjustment. The Fund and Bank guidelines for debt reduction operations need to incorporate, among other things, a front-loading of the enhancements and to allow for fungibility of resources aimed at debt and debt-service reduction. The Bretton Woods institutions have a major role to play, particularly the Fund, which is responsible for a sound global economy and a stable international monetary system. These institutions must take a more active role in signaling the process and in taking an overall systematic view of the problem, instead of concentrating solely on monitoring the domestic policies of each individual borrowing country.

The strengthening of the Brady initiative also requires a more active role on the part of governments of industrial countries. These countries need to adopt changes in regulatory tax and accounting frameworks to facilitate and stimulate debt and debt-service reduction operations. While some “carrots” are there in terms of enhancements through official resources, there seems to be the need for both “sticks” and carrots to lead commercial banks toward more effective debt relief. Governments should also be involved in increasing the flexibility of mechanisms for Paris Club negotiations. In this context, the question arises whether such operations should not also comprise debt reduction instead of only principal and interest rescheduling. Such action would serve as an effective demonstration to the commercial banks that governments are prepared to do what they are demanding from commercial banks. Stronger efforts to waive sharing and negative pledge clauses are part of this cooperative undertaking.

Without such concerted efforts, a generally agreed framework, and official guidance through the exercise of clear and bold leadership, the risk is high that we will continue muddling through, with marginal improvements in the situation of a few debtors after long and protracted negotiations with commercial banks, with no clear mediating role by the official sector.

A substantial change will be one that signals to the market a more durable solution, an increased confidence in the debtors’ capacity to repay, the resumption of their growth, and the restoration of their creditworthiness. Solutions that imply a continuation of substantial negative transfers are not solutions but the continuation of the sacrifices and uncertainties of the 1980s.

Consideration should be given to a carefully prepared international conference to address these issues at a high level.

In short, we should not allow the international economic agenda of the 1990s to continue hindered by the debt problem, dislocating energies that in multilateral and bilateral forums could be used to address problems of the future, rather than concentrating on legacies of the past.

Finally, the time has come to rethink the role of both the Fund and the Bank in the 1990s. In the past few years, there has been a considerable decline in net financial flows from both institutions. Last year, for example, net flows from the Fund to Latin America were negative in the amount of $900 million. For the World Bank, the figure was a negative flow of over $1.2 billion. At the same time, conditionalities have been amplified and strengthened, while excessive efforts have been spent in monitoring and attempting to increase the influence of both institutions in domestic economic policymaking.

In the case of Latin America, this behavior has been proving inadequate to the new realities of democratized societies, in which political representation in parliaments has an increased role in the definition of national policies. It is necessary to develop a more positive approach from the Bretton Woods institutions, designed toward effective assistance to the economic efforts of member countries according to priorities defined by these countries themselves ….

In conclusion, new areas, such as the environment, the renewed concern with social issues, and especially the fight against poverty should open new perspectives for a positive approach in the 1990s. This, however, may not occur if the tendency prevails to increase conditionalities instead of increasing available resources on adequate terms and conditions, if the emphasis is on belt-tightening adjustment to service external obligations instead of on squarely addressing more deep-rooted problems hindering the restoration of investment and growth, such as the debt overhang and the crisis of our public sectors.

Let us cut the Gordian knots that paralyzed our economies in the 1980s and look ahead with the courage to explore innovative alternatives, which should have the objective of reinforcing and expanding the international economic system, based on solidarity and multilateral cooperation.

Statement by the Governor of the Fund for Spain—Carlos Solchaga

I would like to begin my statement today by extending a warm welcome to the People’s Republic of Angola as a new member of our institutions.

In the year that has passed since our last meetings, the development of the world economy has been satisfactory. On the one hand, the industrialized countries have completed their seventh straight year of expansion, the longest period of prosperity in the postwar period, while inflationary pressures, which just a month ago threatened the stability of their growth, have gradually been brought under control. On the other, the external debt strategy announced early in the year has begun to crystallize in specific agreements that will contribute effectively to unblocking the impasse in the economic situation and strengthening the democratic systems in many heavily indebted developing countries.

In an ever more interdependent international community, maintaining growth without inflation in the industrial countries, supporting the adjustment efforts of the indebted countries, and eliminating the negative transfer of resources that has taken place in recent years constitute the only possible strategy for harmonious world economic development.

Consequently, identifying areas in which less promising results have been achieved and strengthening the economic policy coordination mechanisms seem to be the tasks to which we should give special priority in the coming months.

For the industrial countries, the three priority issues are unquestionably maintaining control over price pressures, reducing the high rates of unemployment recorded in the European countries, and correcting the imbalances in the external accounts of the United States, Japan, and the Federal Republic of Germany.

In the area of inflation, we must congratulate ourselves on the rapid reaction of the economic authorities to the initial symptoms of the problem. The adjustments made in their economic policies, especially monetary policies, and the disappearance of some factors which temporarily pushed up prices have made it possible today to predict reasonable inflation rates for the 1989-90 period. Nevertheless, in a number of developed countries domestic demand has been growing at a faster rate than output for some time, which has increased the pressures on domestic and external balances.

To prevent the emerging price pressures from leading to increases in both unit labor costs and profit margins, and thus resulting in a resurgence of inflation, it is essential that economic policy be designed to bring nominal expenditure in such economies back to levels compatible with their production potential in the medium and long term.

The focus which must be placed on the general orientation of economic policy and the distribution of responsibility between monetary and fiscal policies does not, however, have to lead to a slowdown in the job creation rate, a priority objective for many European countries which are still facing high levels of unemployment. Reasonable growth rates must be maintained and structural reforms continue to be expanded if current levels of unemployment are to be quickly absorbed. For this reason, as clearly shown by the measures already adopted in some countries, including Spain, the reduction in nominal expenditure must be achieved carefully, by means of consistent domestic policies.

Even greater uncertainty about the immediate economic future is aroused by the persistent external imbalances in the United States, Japan, and the Federal Republic of Germany. Although recent developments with respect to the dollar and the investment income balance are to a large extent responsible for the apparent lack of progress in correcting the imbalances in nominal terms, the fact is that the current account imbalances in terms of gross domestic product remain very high.

Although the passage of time has convinced us that in a world of free movement of capital and integrated financial markets the question of whether or not these deficits and surpluses can be sustained is not the serious concern that it was in the past, we must point out that this situation is jeopardizing the efficient operation of the international economy in two ways. On the one hand, in the deficit countries protectionist pressures are gradually gaining strength and threatening the system of open multilateral trade on which our prosperity over the past four decades has been based. On the other, the external financing needs of the United States put continual pressure on the financial markets, making it impossible to avoid monetary and exchange policies that are not always desirable a priori.

Following the exchange adjustments in 1985-86, the unanimous recommendation in the international institutions was that changes in relative prices had to be supported by an acceleration in the rate of expansion of domestic demand in surplus countries and a slowdown in domestic expenditure in deficit countries. Under current international economic conditions, this prescription is only partially valid. To be sure, it is still crucial that the United States step up its process of fiscal consolidation. However, the margin for continued expansion of domestic demand in the surplus countries has narrowed considerably as a result of changes in their fiscal positions and the re-emergence of pressure on prices.

Although there is no doubt that both Germany and, especially, Japan have ample latitude for action in the area of structural reforms, it seems very likely that in the future most of the measures which remain to be taken will depend on the restoration of adequate public and private savings rates in the United States.

However, the international coordination of economic policy cannot remain restricted to this group of countries. The vulnerability of the international economy must be reduced through a common effort by all countries forming part of the international community.

In this regard, Spain—an economy which has since its entry into the European Communities (EC) in 1986 rapidly opened up to the exterior—has not only adopted monetary and fiscal measures throughout the year in order to moderate the nominal expansion of its domestic demand, but also reaffirmed its commitment to maintaining a path of noninflationary growth, having decided in June 1989 to bring the peseta into the European Monetary System. At the same time, since our entry into the EC—particularly in the first half of this year, during which we held the presidency of the Community—my country has given strong support to the proposed European economic and monetary union, believing that this union will certainly help to strengthen international economic stability.

As for the developing countries, yet another year has gone by and their economic situation has not improved, as the external debt problem continues to constitute a serious obstacle to growth.

Spain has on many occasions at these meetings argued the need to develop schemes—in keeping with the case-by-case approach—for reducing the stock of debt and debt service of highly indebted countries which clearly show that they are prepared to apply appropriate economic policies. For this reason, we must congratulate ourselves on the decisions adopted during the spring meetings and the measures that have been developed since then.

Spain will continue to support this strengthened strategy, which emphasizes-three essential components: first, the existence of programs which combine far-reaching structural reforms and sound financial policies in the debtor economies; second, the continued participation, at the forefront, of the Fund and the World Bank; and, finally, sharing of the cost between private and official creditors.

For this reason, we are concerned at the continued reluctance of some commercial banks to make efforts similar to those already made by the official creditors. The ongoing support of the commercial banks for the debt and debt-service reduction schemes is essential if a solution to the debt problem is to be found. We reiterate that, where appropriate, the authorities of the creditor countries must amend the accounting and fiscal regulations governing the provision of funds by the banks.

As we said earlier, we believe that the Fund and the World Bank should continue to play a central role in the problem of external debt. For this reason, we approve the policies involving the use of Fund and Bank resources to support the debt and debt-service reduction mechanisms. However, these new measures should not jeopardize the revolving nature of Fund resources or the availability of funding for projects in the World Bank. Furthermore, the cooperative nature of the Fund brings us to call upon members which have outstanding obligations to the Fund to regularize their situations as quickly as possible.

So that our institutions may contribute effectively to solving the debt problem, it is essential that they be able to set aside an adequate volume of resources in support of their programs, which means that they must have sufficient resources of their own. We consequently feel that it is urgent that a consensus be reached on a significant increase in Fund quotas in the context of the Ninth General Review of Quotas. We also reiterate our position in favor of a new allocation of SDRs.

These positions are in keeping with our ongoing willingness to provide the Fund and the World Bank with the resources and instruments they need to perform their roles effectively in the 1990s.

Statement by the Governor of the Fund for Greece—Dimitrios Chalikias

The world economy continued to perform strongly in early 1989 as it did in 1988. Industrial countries enjoyed high growth driven by a rapid expansion of investment. Newly industrializing countries also achieved high growth rates, mainly owing to buoyant exports of manufactures by the Asian countries. By contrast, gross national product (GNP) growth in low-income countries and in countries with debt-servicing difficulties was modest and lower than that achieved in the mid-1980s, with the 15 heavily indebted countries at the bottom of the scale.

Wage moderation and weak prices of oil and some other vital commodities during 1988 enhanced profitability and business confidence in industrial countries, resulting in stronger investment. They also led to lower unemployment and almost unchanged inflation, despite the relative tightening of labor markets. In the first quarter of 1989, inflation accelerated somewhat, partly owing to higher oil prices and the appreciation of the U.S. dollar. Also, unemployment in certain Organization for Economic Cooperation and Development countries remains high by historic standards, owing to labor market imperfections, insufficient structural adjustment, and tight monetary and fiscal policies in some countries.

Regarding the balance of payments, recent developments in current accounts give cause for some concern. The pace at which imbalances are reduced has slowed down, while exchange rates have been more volatile than in most of the period following the Louvre Accord. In particular, movements in the U.S. dollar were not always consistent with fundamentals. While it is true that cooperative efforts by the Group of Seven, mainly through concerted intervention in foreign exchange markets, helped to stabilize exchange rates, further efforts are necessary on the part of both deficit and surplus countries in order to achieve and sustain more balanced external accounts. To this end, it is imperative that deficit countries reduce their fiscal imbalances and encourage private savings, while surplus countries open up their markets and, especially the newly industrializing ones, allow their exchange rates to reflect their external position.

Developments in economic policies in 1988 were characterized by the dominant role of monetary policy. Following some easing of monetary conditions aimed at absorbing the effects of the stock market crash, monetary policy has become uniformly tighter in industrial countries since the second quarter of 1988, with short-term interest rates rising to resist inflationary pressure and/or prevent a fall in exchange rates. Less progress was made toward fiscal consolidation because of conflicting objectives of different countries, partly resulting in external imbalances and in an excessive burden on monetary policies. A common structural characteristic of fiscal policies was the move toward the reform and simplification of tax systems and the reduction in marginal tax rates.

Over the last few years, many industrial countries have intensified their efforts toward structural reforms aimed at supply-side improvements and more efficient use of resources. Among other things, these reforms aim at rationalizing the way governments intervene in the economy by eliminating barriers to competition. This should not be taken to imply that all government intervention is harmful to the functioning of markets. Abuse of power—either owing to monopoly or to asymmetries of information—and market imperfections justify intervention, even in the most advanced market economies. In countries where markets and institutions are less developed, there is even wider scope for intervention, including measures to improve the functioning of the market mechanism and of the institutions that support it. In particular, government intervention in labor markets should take the form of a suitable mix of educational, training, housing, and tax policies aimed at matching the demand and supply of different skills.

Recent developments toward the economic and monetary integration of Europe contribute to the stability of the world economy. The rapid progress that has been achieved in recent years is due to the pursuit of a number of parallel objectives: completion of the internal market, monetary integration, and economic and social cohesion. There exists broad agreement among the countries of the European Economic Community over these objectives, although individual countries are debating the speed of implementation and the instruments to be used. If transitional costs are to be minimized and benefits maximized, member countries should follow—this applies especially to my own country—macroeconomic and structural policies conducive to monetary stability and sustainable growth.

In this connection, I would like to refer briefly to recent economic developments and the stance of economic policy in my country. Since the beginning of 1988, the performance of the Greek economy can be characterized as mixed. On the positive side, real economic growth and private investment expanded considerably in 1988, while in the same year the current account deficit, as a percent of gross domestic product (GDP), fell to a low level and was financed by autonomous private capital flows. On the negative side, inflation decelerated only moderately in 1988 and has stabilized at the high level of about 13 percent, while underlying inflationary pressures have been rising. Over the first half of this year developments have been broadly similar to those in 1988. On the other hand, the stance of economic policy and the policy mix have changed significantly since early 1988. Incomes policy and fiscal policy have been relaxed, and monetary policy has had to bear the burden of achieving internal and external stability.

The main challenge facing the Greek economy today is the reduction of the sizable public sector deficits. Dealing with this problem is becoming increasingly difficult, as the high real interest rates required for monetary stability have compounded the problem of deficits in recent years. The reduction of fiscal imbalances requires difficult choices and concerted efforts and it cannot be accomplished in a short time. It is a task that can only be accomplished by pursuing a consistent and credible fiscal policy in the medium term. The Greek Government is currently formulating a medium-term fiscal consolidation program aimed at tackling effectively the causes of fiscal imbalances. The persistent implementation of such a program is necessary for achieving sustainable noninflationary growth in the new environment of an integrated European market.

Let me now comment on the situation in countries with debt-servicing difficulties and in low-income countries, which gives cause for concern and requires concerted international action. Heavily indebted countries are attracting insufficient private capital to finance their current account deficits. As a result, they are transferring resources abroad, mainly through interest payments, which exceed, on average, 3 percentage points of their GDP. In addition, the financing of their large fiscal deficits through money creation causes very high inflation, which increases uncertainty, undermines business confidence, and discourages foreign investment. Hence, investment and GNP growth remain low, aggravating their overall economic situation.

In low-income countries, low growth is largely due to: (i) the fall in certain commodity prices; (ii) delays in implementing structural reforms to take into account market signals; and (iii) the protectionist policies pursued in the industrial world. Fiscal and current account deficits are being tackled mainly through investment cuts, because very low living standards do not allow a reduction in consumption.

In the absence of sufficient development financing, the adjustment process for most developing countries has meant, in effect, adjustment to a narrowing resource base, the effects of which were exacerbated by protectionist attitudes on the part of some industrial countries and by the burden of external debt-servicing requirements. It is significant to note that, where the action of the Bretton Woods institutions was successful, development finance from other sources was available in adequate amounts to ensure the expansion and diversification of the resource base necessary for sustainable growth as well as for socially and politically sustainable macroeconomic stabilization.

Sound macroeconomic policies, together with structural reforms designed to improve the flexibility and the dynamism of developing countries, must be consistently and persistently pursued. The policies and objectives of the Fund and the World Bank in this respect are entirely appropriate. However, the interventions of the sister institutions, with all the array of instruments at their disposal, are not and cannot be sufficient to ensure growth in developing countries at an adequate and sustainable rate. There is a need for considerable expansion of aid assistance on concessionary terms in conjunction with the Bank and Fund programs. This is the area in which our efforts must be concentrated in the future. For this purpose, action in two directions needs to be taken. First, a significant expansion of the resources of both the International Monetary Fund and the International Development Association (IDA) is necessary. More particularly, with regard to the Fund, a substantial increase in quotas is required in order to bring its size closer to that of the world economy but also to enable it to expand its role in support of the adjustment and structural reform process in an environment of growth. In addition, a rapid and substantial replenishment of IDA is particularly important in enhancing the World Bank’s role in the development process.

Second, it is essential to ensure increased collaboration between the Bank, the Fund, and other multilateral lending institutions, on the one hand, and national aid agencies, other official financing institutions, and international banks, on the other, so as to mobilize the support of the entire international financial community on an adequate scale for comprehensive programs, that is, programs combining adjustment, structural reforms, and adequate investment growth. This will require imaginative joint initiatives on the part of the Bretton Woods institutions and the developing countries concerned, but there has to be a positive response—considerably stronger than has been forthcoming in recent years—from the industrial world. Thus, developing countries can be helped effectively to escape from the trap in which they find themselves now and to contribute positively toward world stability, growth, and prosperity. My country, despite a number of constraints, has in this spirit contributed within its possibilities to the enhanced structural adjustment facility of the Fund and is willing to cooperate positively through the European Economic Community toward these ends.

September 26, 1989.

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