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

Discussion of Fund Policy at Third Joint Session1: Report to the Boards of Governors of the Fund and the Bank by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee)

International Monetary Fund. Secretary's Department
Published Date:
November 1989
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B.T.G. Chidzero

The Annual Report on the work of the Development Committee for the year ended June 30, 1989 has been formally submitted to the Chairman of the Boards of Governors. The main focus of the Committee’s attention this year was on problems and issues in structural adjustment, development prospects for severely indebted countries and the evolving debt strategy, the promotion of economic recovery and development in sub-Saharan Africa, and the World Bank’s support for the environment. In addition, the Committee discussed international trade developments, the Ninth Replenishment of the International Development Association (IDA), and trends in the transfer of real resources to the developing countries.

Problems and Issues in Structural Adjustment

The Committee conducted the first global review at ministerial level of experience with growth-oriented structural adjustment programs supported by the Bank and the Fund. The essential ingredients for the achievement of successful and sustainable programs were identified and included, in particular, political commitment, broad public support, integration of poverty considerations, adequate and timely financing, and supportive external economic conditions.

Members concluded that while growth-oriented structural adjustment can yield positive results even under unfavorable external conditions, the pace, scale, and sustainability of benefits could be adversely affected by an unsupportive external setting. The industrial countries were accordingly called on to adopt economic policies supportive of developing countries’ adjustment efforts.

I would stress the importance of ensuring that the conclusions that the Committee reached on the question of structural adjustment programs are translated in practice into Bank- and Fund-assisted programs, and that these be monitored by the Committee.

Development Prospects for the Severely Indebted Countries

The problems of all groups of severely indebted countries were discussed at both meetings. The Committee continued its review of the debt strategy of the middle-income heavily indebted countries. It expressed concern at the decline in the prospects for growth and development of these countries. Members therefore welcomed proposals to strengthen the debt strategy by including debt and debt-service reduction. Members called on the World Bank and the Fund to offer assistance for adjustment programs and to support voluntary market-based debt reduction transactions and debt-service reduction as well. The Bank and the Fund were asked to develop and implement specific proposals to achieve these objectives as expeditiously as possible. In September, the Committee reaffirmed its support for the strengthened debt strategy and commended the Fund and the Bank for taking prompt action. Members were encouraged by the progress made in several cases in the negotiation of debt and debt-service reduction arrangements with banks.

In the case of the low-income debtor countries, the Committee welcomed the arrangements worked out by the Paris Club to provide concessional debt relief. Members also agreed to continue the collaborative framework for donor action under the Special Program of Assistance coordinated by the Bank and to discuss in the spring of 1990 the long-term perspective for sub-Saharan Africa. The Committee welcomed measures announced recently by several donors to forgive official development assistance (ODA) debt owed by low-income countries in that region. It noted steps taken by the Bank to support commercial debt reduction in eligible IDA-only countries. As the debt problems of these countries remain severe, the Committee requested the institutions to undertake an evaluation of the impact of the various debt relief measures taken so far. The members also drew attention to the external financial problems of countries that had avoided debt-service difficulties and urged that efforts be made to maintain an orderly and adequate flow of finance to these countries.

Environment and Development

A report by the World Bank on its efforts to support the environment and to increase public awareness of Bank environmental activities was reviewed by the Committee at its September meeting. Members commended progress achieved so far, including the preparation and release to Executive Directors of environmental impact assessment guidelines. The Bank was encouraged to increase public access to environmental information on projects and programs. The Committee recognized that additional external financial and technical support on appropriate terms was needed by the developing countries to help meet the costs of integrating environmental considerations into development projects. The Bank was asked to prepare a study of the mechanisms and financial requirements that may be needed.

The Committee also emphasized the links between population growth and poverty and environmental degradation and called on governments, multilateral development institutions, and bilateral agencies to strengthen their efforts in the field of population.

Other Issues

The Committee reviewed current international trade developments, noting that the Uruguay Round had now entered its final and critical phase. All countries were called on to take the fullest advantage of the unique opportunity provided by the Round. The Bank and the Fund were requested to keep under study, in close consultation with the General Agreement on Tariffs and Trade, the possible implications of regional trading arrangements for developing countries for discussion at a future meeting.

In reviewing the status of trends in the transfer of resources, the Committee noted the continued decline in net flows to the developing countries. Donor countries below the 0.7 percent ODA/gross domestic product target were urged to redouble their efforts to increase assistance levels. The Committee made a strong call for a substantial replenishment of IDA to meet the pressing needs of IDA recipients for concessional assistance.

Concluding Remarks

The Committee has come to grips with the key issues outlined above and has, I believe, cast its net wide in coverage of different groups of countries and their pressing problems in a policy- and action-oriented manner. The work of the Committee has, therefore, become more relevant than ever.

Statement by the Governor of the Fund and the Bank for India—S.B. Chavan

I extend my hearty welcome to the People’s Republic of Angola, which has just joined the Bank-Fund family.

We are meeting on the threshold of the 1990s, and, as we look beyond to the end of the century, the question to ask ourselves is whether we have learned the lessons of the 1980s. The President of the World Bank, Mr. Conable, stated that the objectives of the Bank are to “reduce poverty and accelerate growth.” The Managing Director of the Fund, Mr. Camdessus, said that the 1990s must be a decade of opportunities. How near or far are we from these laudable objectives?

The 1980s are a decade of low growth, high inflation, and rising poverty for most developing countries. There are, of course, exceptions. India, for instance, has done reasonably well. National income over the 1980s has grown at over 5 percent per annum, the incidence of poverty has come down, inflation rates have been modest, and exports are increasing rapidly. Development has been financed predominantly by high domestic savings, and recourse to external borrowing has been kept within prudent limits. However, even those of us who have done well have had to cope with the declining flows of concessional assistance, rising protectionism in the industrial countries, a high degree of exchange rate volatility, and persistent imbalances in the global economy. The progress in the coordinated correction of balance of payments deficits and surpluses among major industrial countries has stalled. The impact of these imbalances on trade policy, exchange rates, and interest rates contributes, in no small measure, to the current account deficit of developing countries. Since the developing countries lack the finances required to cover these deficits, they have had to implement strong expenditure-reducing policies that hurt investments and growth and erode already low levels of living of the poor. At a time when they need resources to correct the structural imbalances in their economies, there is a net transfer of resources from them to the rich countries. Small economies are being asked to make large adjustments while large economies continue to carry on as before. As long as the imbalances in the industrial countries continue, structural adjustment in the developing countries will remain difficult.

A more symmetrical adjustment process is necessary if the global economy is to recover its balance. In particular, it must be ensured that macroeconomic policy coordination among industrial countries goes beyond narrow monetary objectives. Policy coordination should aim at promoting stable and healthy growth and open markets. They should not have narrow national or regional focus and should take into account the impact on the global economy, particularly the developing countries.

The belief that the answer lies in the free play of market forces is true to a certain extent, but this is not all that is required. The failure of many structural adjustment programs testifies to this. In developing countries the response to market signals is often constrained by the lack of infrastructure. Investments in energy, transportation, land and water development, and human resource development are essential, both for adjustment and for growth.

In this context, I must point out that the overall magnitude of net resource flows to developing countries has been clearly inadequate to meet their developmental needs. Aggregate net flows still remain far below the levels observed in the first half of the 1980s, financial markets continue to be tight, and real interest rates remain significantly higher and more volatile than in the 1970s. Besides, private lending is steeply lower than the levels observed in the 1970s. Net official flows have also declined in real terms, though less sharply. In these circumstances, a major global effort is needed to provide additional resources to accelerate the process of growth with equity in developing countries ….

The aggregate current account deficits of developing countries and their financing needs are likely to remain large. Therefore, their potential access to the Fund’s resources must be maintained, if not actually increased.

The effectiveness with which the Fund can play its assigned role would depend crucially on the adequacy of its resource base. There is, in our view, a strong case for a substantial increase in quotas under the Ninth Review. It is also important to ensure that the shares of developing countries in quotas, which are already relatively low, are not allowed to fall, and we welcome the acceptance of the need to maintain a proper balance among different groups of countries in the distribution of quotas.

The case for a fresh allocation of SDRs has been convincingly argued time and again by the Fund management, as also by most of us present here. We believe that a decision on a new sizable issue of SDRs should not be delayed any longer.

Let me, in this context, refer to the problem of debt. A new initiative has been launched to resolve the debt problems of the highly indebted middle-income countries. This development, as well as the initiatives for reducing the debt of the poorest countries, is desirable and welcome. However, low-income countries that have thus far managed to service their debt, often at a great cost, need to be assisted to maintain the momentum of growth. Some of these countries are already facing severe resource constraints in achieving desired levels of investment for growth and poverty alleviation. They must be helped to maintain the momentum of their development, particularly by larger flows of concessional finance. In particular, the debt initiative must not reduce the availability of resources for the normal Bank- and Fund-financed programs.

The flow of external finance is only one dimension of the development problem. We recognize the value of an open trading system and the multilateral arrangements that underpin it. That is why we deplore the increasing use of unilateral and bilateral measures in this sphere. In particular, the adjustment process calls for an early reversal of the increased protectionist measures imposed by the developed countries. This is necessary to enable the developing countries to reduce their external imbalances through expansion of their exports ….

Sustainable growth is in the common interest of the entire international community. Effective initiatives to protect the environment require additional concessional resources. In particular, a global effort is necessary to ensure adequate funding of research, development, and the diffusion of environment-friendly technologies. With this end in view, India has proposed the establishment of a Planet Protection Fund under the United Nations. We have proposed that the contributors to, and the beneficiaries of, this fund will include both the developing and the industrial countries.

Mr. Chairman, we share your conviction that, while the tasks of poverty alleviation and development, maintenance of stability, and protection of our environment are indeed immense, all of us, acting together, can meet these challenges.

Statement by the Alternate Governor of the Fund for the Federal Republic of Germany—Theo Waigel


This is a time of change and historical opportunities. In many areas—in economic relations, politics, in questions of environmental protection and of security—we can sense a new willingness to communicate and cooperate. This is the response to the interdependence which has evolved and to the growing awareness that we share a common destiny.

Everywhere, people are demanding more individual and economic self-determination. The relations between neighboring countries in East and West have entered a new phase.


The failure of central economic planning has become obvious. All over the world, we are witnessing a reorientation in favor of the real foundations of economic progress, namely, individual initiative and effort encouraged by the market system. This resurgence of the free-market spirit is a source of hope to all those who have been denied the opportunity to develop their creative potential because of oppressive state interference.

The reform processes initiated in Poland and Hungary are particularly encouraging to those who strive for more freedom, self-determination, better living conditions, and more human treatment of human beings by each other. To be successful, this reform process needs outside support. We must use all the instruments available, through both bilateral and multilateral approaches, to enable the people of these two nations to help themselves. Above all, these countries need productive investment to enhance the potential for growth and to promote structural change.

My Government supports a timely agreement of Poland and Hungary with the Fund and the World Bank on a program of sustained, market-oriented reforms. This would also provide the basis for enabling Poland and its commercial bank creditors to make use of the new elements of the strengthened debt strategy.


The Fund and World Bank play a key role in the process of international cooperation. Both institutions now stand ready to provide financial support to indebted developing countries to help them achieve significant debt reduction through voluntary agreements with commercial banks. This represents an important extension and strengthening of the debt strategy and demonstrates the responsiveness of these two institutions. And it puts into practice an idea which was first taken up in the communiqué of the Interim Committee in Berlin (West) last year.

Political sensitivity and economic realism, solidarity, and patience, but also confidence—these are qualities which are required for our future cooperation in the Fund and the World Bank. The basic objective of this cooperation remains unchanged: to promote sustainable economic growth and to improve social conditions in the developing countries.

We in the industrial countries must not lose sight of how much effort is required to implement reforms under the difficult conditions in which the developing countries find themselves. Nevertheless, to postpone reforms means forgoing opportunities for economic progress and withholding from the socially disadvantaged the prospect of a better life. To be successful, however, reform programs must be regarded by the governments concerned as their own, and they must be accepted by the population. The programs supported by the Fund and the World Bank must therefore be oriented toward sustained growth; they must offer a clear prospect of better social conditions; they must lead to a normalization of relations between creditors and debtors.

We also need a feeling for economic realities. Without credible economic reforms, outside help will not fall on fertile ground. For flight capital to return, people must have faith in their country’s economic policy. However, to achieve the necessary revival of productive investment in the developing countries, their limited domestic savings need reinforcement through external assistance. The industrial countries will find it easier to mobilize taxpayer support for such assistance if it can be clearly seen that the help given is being put to productive use and benefiting broad segments of the population in the developing countries.

There are, no doubt, many countries whose debt has grown to such proportions that it hampers economic development. The German Government last year substantially extended its program of cancellation of official development assistance debt owed by very poor countries to almost DM 9 billion. For years now we have been providing new development aid to the least developed countries in the form of grants. The Fund and the World Bank are now prepared to support debt reduction arrangements, case-by-case, if such arrangements help to achieve the objectives of the debt strategy—economic growth and creditworthiness. To be sure, in doing so, the Fund and World Bank are exposing themselves to new risks. It is therefore all the more important that Fund and Bank loan arrangements are conditional upon credible reform programs, as the maintenance of their financial integrity is in the interest of all their member countries.

We also need solidarity. Both creditors and debtors must do their part to promote renewed growth and better living conditions in the developing countries. For the Fund this means we must ensure the continued strength and effectiveness of this central institution through a substantial quota increase.

We need the solidarity of the industrial countries, but we also need solidarity within the developing countries.

Last but not least, we owe solidarity to the coming generations. Our goal is a sustainable process of development which protects the natural environment—the basis of our existence. It is precisely here that we can see that all countries share a common destiny. The Paris economic summit has provided new impetus in important areas. We must confront the alarming danger of irreversible environmental damage. The World Bank has, in the meantime, made environmental policy a regular component of its dialogue with borrowing countries. The Bank should resolutely continue on this course and deserves our full support.

We need patience because there is no quick-fix solution for the problems of debt and underdevelopment. Success can only be achieved through persistent cooperation and solutions tailored to the individual case. Let us now concentrate our energies on making effective use of the available opportunities and instruments and make them work.


In spite of the still existing problems and difficulties, we have good reason to be confident. A number of countries have maintained their creditworthiness in spite of their large debt. Their economic upswing is continuing, at an impressive rate in some cases. Others have initiated a change for the better with their reform policies. Their success serves as an encouragement for all. The unbroken economic expansion in the industrial countries should continue to contribute to a favorable international economic environment.

The durability of the expansion in the industrial countries reflects the fundamental improvements which have been achieved in the conditions for growth since the beginning of the 1980s. The success achieved proves us right in pursuing a policy which relies on market forces, removes obstacles to growth, and rewards qualification and skills, risk-taking, and hard work.

In this atmosphere, business investment is now reacting positively to the opportunities and challenges offered by structural change, technological progress, regional integration, and high-capacity utilization. This will strengthen the foundations of growth and prevent the emergence of inflationary bottlenecks. Investment in Europe is gaining additional momentum from the internal European market planned for 1993. It is not without pride that we can point to the new eurodynamism, which stands in sharp contrast to the once fashionable catchword “eurosclerosis.” The German Government—and I stress this—can conceive of the internal European market only as a market which is open to the outside. The basic idea of the internal European market applies both inside and outside: releasing forces for growth in a larger economic area by dismantling barriers.

But let us not forget the old insight: inflation does not solve any problems, it just creates new ones. Monetary policy has played its part in preserving price stability as a foundation for sustained growth and secure jobs. Our policies must be consistent and coordinated. This also requires budgetary discipline, encouraging competition and a sensible wage policy.

The further reduction of persisting large external imbalances remains a continuing objective of our cooperation. Better external balance will support the stability of the financial markets and it will remove a pretext for protectionism. Those industrial countries whose budget deficits are too high serve both their own interests and those of their partners if they put into practice their declared intention of budget consolidation. This would release resources for productive private investment; it would facilitate the task of monetary policy of ensuring the financing of tension-free growth; and it would strengthen their external position.

The surplus countries must, both in their own interest and that of the world economy, further improve the conditions for domestically led growth. In the long run, such growth can only be achieved by continually improving fundamental economic conditions. Short-term fine-tuning of demand is nothing but a dead end. The dynamic German market offers our partner countries growing opportunities for marketing their products. More and more use is being made of these opportunities; we strongly welcome this. Germany’s trade surplus with the United States has dropped sharply, and our trade balance with the developing countries remains in deficit.


In the Federal Republic of Germany, the economic upswing, now in its seventh year, stands on a solid foundation. In the current year economic dynamism has even increased. Our lively business investment augurs well for the continuation of the upswing in the time to come.

The excellent state of the German economy and its good prospects are underpinned by the significant improvement in the underlying conditions for growth. We are now reaping the fruits of the economic reforms of recent years in Germany too. We have improved our country’s basic economic strength by reducing and reforming taxes, by promoting market forces, through privatization and deregulation. We have responded to long-term changes in our demographic and social structures by reforming the health and pension systems. Next year, domestic demand will get an additional boost from a further tax cut amounting to about 1 percent of the national product. And in the coming years we will continue our policy of deregulation and removing structural barriers to adjustment.


In the pursuit of our domestic objectives, we are all well advised to consider the international effects and repercussions of national action. To maintain steady growth while achieving an orderly reduction of global economic imbalances, there is no alternative to the closer economic and monetary cooperation among the major industrial countries.

Our cooperation must now prove itself through a successful and timely conclusion of the multilateral trade negotiations in the General Agreement on Tariffs and Trade. Here we have an opportunity to make real progress in:

—opposing unilateralism in world trade;

—making regional integration part of an open trade system;

—enlisting the cooperation of the newly industrializing economies in a free multilateral trade system; and

—offering the developing countries new prospects for growth and trade.

Let us seize this opportunity to strengthen free world trade as an engine of economic progress for all countries.

Statement by the Governor of the Fund for the Syrian Arab Republic—Muhammad Imady

It gives me great honor to address these Annual Meetings on behalf of the Arab Governors of the World Bank and the International Monetary Fund. The Arab countries share not only a common national heritage but also common interests and objectives, especially in their drive toward social and economic development and in their efforts toward economic integration.

At the outset, I would like, on behalf of the Arab Governors, to warmly welcome Angola as a new member of the Fund.

When we look at the current world economic situation, we see a picture which is mixed at best. While the economic performance in the industrial world has continued to be generally favorable during the past year, there is reason for concern about the sustainability of noninflationary growth in the major industrial countries. The persistence of large external imbalances in the three largest economies and the lack of sufficient progress in addressing the underlying causes of these imbalances continue to cast a cloud over the outlook of the world economy as a whole. Unless these external imbalances are reduced in a timely manner, the world economy will continue to be threatened by the possibility of a substantial slowdown in economic activity and/or a building up of inflationary pressures. Perceptions about the unsustainability of the external positions of major countries could also jeopardize the stability of financial and foreign exchange markets.

Together with further fiscal adjustment in the deficit countries, a key requirement for sustaining noninflationary growth and correcting the external imbalances in the major industrial countries is further structural reform in these countries. This is also crucial for improving growth prospects of the developing countries. Structural reforms, particularly those aimed at dismantling trade protection and discriminatory subsidies, can contribute greatly to the developing countries’ efforts toward external adjustment, diversification, and growth. Given the cost to developing countries of protectionist barriers in the industrial world, it is understandable that the developing countries may be somewhat concerned that the trend toward regional liberalization in Europe and North America will divert attention away from the need for truly global trade liberalization. Since there is little disagreement on the potential benefits of structural reform, it is hoped that the process of policy coordination, which so far has been limited to macroeconomic policies, can also be extended to structural reform in order to improve the management of the world economy further.

We all agree that the developing countries themselves have a primary responsibility in continuing to pursue economic policies which are conducive to noninflationary growth and financial stability. But as we are all aware, the prospects for developing countries also depend in an important way on the external environment facing their economies. Aside from their access to industrial country markets, another major element of that external environment is the level of international interest rates. The increase of real interest rates over the past year has significantly increased the burden on the indebted developing countries. It is therefore crucial that economic policies in industrial countries, both individually and in the framework of their policy coordination, take fully into account the impact of their policy choices on the rest of the world.

Since the early part of this decade the Arab countries, like other developing countries, have had to cope with a difficult external environment. The sharp decline in oil prices over the past few years has had a particularly adverse effect on our region. Not only did the oil exporting countries themselves suffer a sharp decline in their revenues, but the non-oil Arab countries were also affected negatively by the regional slowdown. In response to these adverse developments, the Arab countries have embarked on strong adjustment efforts which included substantial cuts in their public expenditures as well as structural measures aimed at enhancing private sector activity and growth. In some of the middle-income and low-income Arab countries, the adjustment process also had to cope with mounting debt-service obligations.

We deplore Israel’s arbitrary policies in the occupied Arab territories which have continued to weaken the economic base, hamper growth, and disrupt the structure of production in those territories. These policies and practices run counter to international law and common human values and call for a concerted effort in order to put a stop to them.

As you know, the Arab countries represent a wide spectrum of the developing world. They include fuel exporting countries which have made big strides in developing their economies and at the same time provided substantial assistance to other developing countries. Indeed, despite the sharp decline in the income of these donor countries, they have continued to provide external assistance which, in relative terms, remains significantly higher than that provided by industrial countries. The Arab countries also include a number of low-income countries which face the same difficulties and challenges faced by other low-income countries of the world. They also include middle-income countries which are trying to deal with a large external debt burden and at the same time restore adequate rates of growth.

The difficult external environment facing the Arab countries and their efforts to adjust their economic policies in response to that environment are reflected in the increasing number of Arab countries which have embarked in recent years on adjustment programs with the support of the Fund and/or the World Bank. There are currently eight Arab countries which are either implementing programs supported by the Bretton Woods institutions or are in the process of formulating such programs. We hope that these countries will receive the support needed for the success of their efforts.

The reorientation of the debt strategy toward more emphasis on debt reduction constitutes a potentially important development for the heavily indebted commercial borrowers. However, the debt situation of lower middle-income countries whose debt is owed mostly to official creditors is, in many cases, just as severe and deserves similar attention. The official creditor community has made significant efforts in recent years to provide debt relief to the poorest countries, and we would encourage the creditor community to intensify these efforts, particularly since the distinction between low-income and other countries has perhaps been drawn too sharply. In our view, it is crucial for the debt strategy to address the problems of all debtor countries according to their circumstances. Such a global approach to the debt problem underlies the proposals which were put forth by one member of our group, Kuwait, both during last year’s regular session of the United Nations General Assembly and more recently in the meeting of the nonaligned nations in Belgrade.

While still on the question of debt, let me add that we consider it of crucial importance that official support for debt and debt-service reduction does not lead to a reduction in other forms of bilateral and multilateral assistance to the developing countries. It is also crucial that such official support be provided to countries on the basis of objective criteria and be extended to all indebted countries which may benefit from such support.

Given the degree of capital market integration which has occurred in recent years, we welcome the ongoing efforts to harmonize bank regulatory and accounting standards. However, let me again express our concern over the new framework for measuring the capital adequacy of international banks, which has been recommended by the Basle Committee and endorsed by the Group of Ten and which classifies countries into two groups for the purpose of calculating country transfer risks. Such a classification could have adverse implications for many creditworthy developing countries as well as for debtor countries that manage to improve their creditworthiness.

There is no doubt that the role of the International Monetary Fund has grown in recent years with the increased importance of multilateral surveillance and the direct involvement of the Fund in the formulation of economic programs which serve as a basis for debt rescheduling and other financing flows. We therefore attach great importance to enabling the Fund to play its role effectively in the process of multilateral policy coordination and providing it with adequate resources to support members’ adjustment programs. In this latter regard, we consider it important to agree on a quota increase of sufficient magnitude for the Fund to continue playing its financing role and at the same time correct the large discrepancies between members’ quota shares and their relative size in the world economy. We also continue to believe that an augmentation of international liquidity through an SDR allocation is fully warranted by global reserve needs and the objective of making the SDR a principal reserve asset. We call on major reserve currency countries to reconsider their position on an SDR allocation. We also call on them to refrain from practices that impede capital movements and the credibility of the international financial system in general, including the freezing of other countries’ foreign assets.

In performing its financing role, it is important that the Fund avoid the tightening of its access policy and ensure that assistance is provided to members on an equitable basis. Of at least equal importance is the quality of adjustment programs which are supported by Fund and Bank resources. We welcome the increased recognition given in adjustment programs to members’ growth objectives, and the attempts to incorporate in those programs measures to mitigate the adverse effect of certain policies on the poorer segments of the population. We encourage the two institutions to strengthen this trend further by integrating adjustment programs into the broader and longer-term objectives of development, taking into account the particular social and political circumstances of individual members.

The Arab countries fully endorse the current efforts of the international community, including the World Bank, to adopt effective measures to protect the global environment. However, as Mr. Conable emphasized in his statement yesterday, it has to be recognized that industrial countries are the source of most of the environmental damage in the world today. We therefore urge these countries to make more intensive efforts to address their domestic environmental problems and to extend much-needed technical and financial assistance to developing countries implementing environment projects. We also urge the World Bank Group to exert its efforts to induce more effective measures by the industrial countries, and to avoid undue pressure on borrowers to an extent that may turn environmental considerations into an integral part of lending conditions ….

Statement by the Governor of the Bank for Bangladesh—A.K. Khandker

At the outset, may I join my fellow Governors in expressing our deepest condolence at the sad demise of Bank Governor Mr. Mahamat Soumaila and Mr. Midallal Ali Abakar of the Chad delegation.

I congratulate you, Mr. Kyu Sung Lee, on your election as Chairman of the Annual Meetings. We welcome Angola as a new member of the Bretton Woods institutions.

The current international economic situation is still characterized by uncertainties; the world economic outlook over the medium term appears to be a slackening of growth with little prospect for sustained growth for the developing countries. The industrial countries witnessed sustained rapid growth for the seventh year in a row, but this strong growth and their large and widening external imbalances have given rise to renewed concerns for inflation leading to restrictive policies. In the developing countries, growth was inadequate and marked by significant disparities between regions and groups; the heavily indebted countries continue to stagnate; in sub-Saharan Africa, the downward trend of real per capita gross domestic product (GDP) is yet to be arrested; and the low-income developing countries are groping with the abject poverty of their populations.

Nonetheless, this year has also seen some positive developments—resolution of the debt problem now enjoys official support, and there is a growing consensus among the international community for concerted actions to protect the environment.

Our country, Bangladesh, is a victim of serious environmental degradation. It is heavily populated, with low per capita GDP and limited natural resources. The country is characterized by a fragile ecosystem susceptible to disruption and damage by human activities and interference with nature both within our borders as well as in the region. Our efforts to attain sustainable growth and alleviate poverty are offset by frequent visitations of devastating floods. The Government’s prompt relief and rehabilitation measures and the courage and resilience of the people during the 1988 floods avoided a catastrophe that could have had far worse consequences. In this, we gratefully acknowledge the help and understanding of the international community.

It is not possible for the country to bear this recurrent scourge. The Government of Bangladesh has already initiated some projects to mitigate the adverse effects of floods, but the solution of the problem will need extensive international help. At the initiative of the United Nations Development Program and the Governments of France, the United States, and Japan, four major studies on flood problems in Bangladesh have been completed. We are grateful to the World Bank for its role to bring about a synthesis and integration of the major recommendations of these studies. An international conference under the auspices of the World Bank and Bangladesh, hosted by the Government of the United Kingdom, will be held in London on December 11 and 12, 1989, to present an integrated action plan as well as to mobilize financial resources required for flood control in Bangladesh. We are looking forward to the successful conclusion of this meeting. In this context, I would like to express, on my behalf and on behalf of the Government and the people of Bangladesh, our gratitude to the Group of Seven for their call on the international community, at the 1989 Paris summit, to support the Government of Bangladesh in finding a solution to this major problem. I would urge the donor countries to actively support our efforts.

We are launching the Fourth Five-Year Plan in July 1990. The central strategy of the plan is poverty alleviation through human resource development and participatory decentralized planning. The plan also emphasizes greater self-reliance through substitution of scarce capital for abundant labor. Structural reforms, including deregulation and privatization, will be deepened, and measures for increased production in agriculture and industries will be intensified. The successful implementation of this plan will move the poor and disadvantaged groups from the periphery to the center of the economic process.

The problems confronting the developing countries are many and varied. Most of them undertook structural adjustments and reforms at considerable social and political risk to attain sustainable growth paths. Their efforts have been offset by deteriorating terms of trade, protectionism, higher interest rates, growing debt burdens, and negative resource flows. As a result, no significant growth has been achieved in many developing countries, and the crisis has become more acute, especially in the least developed countries (LDCs). Structural adjustment has proved to be a complicated, slow, and painful process, and its success and sustainability require a more favorable international environment and symmetrical adjustment and enhanced policy coordination by developed countries. Further, the program should incorporate contingency measures for coping with any unanticipated shortage of funds. The International Development Association (IDA) and the Fund should, in their operational programs, pay more attention to the special needs of the LDCs in the light of the Substantial New Program of Action (SNPA) for these countries. It has to be clearly recognized that there are qualitative differences in the economic characteristics and problems of the LDCs. We hope that the Second United Nations Conference on LDCs in the 1990s will succeed in formulating and adopting appropriate policies and a program of action for accelerating the development process in these countries.

Declining terms of trade and rising protectionism in the 1980s have been a source of concern for the developing countries; the 1980s have also witnessed a continued worsening of the debt crisis, resulting in low levels of investment and low growth rates in many developing countries. Following the Toronto economic summit in June 1988, some progress has been made in reducing the debt burdens of many severely indebted low-income countries, but more is required to be done. We appreciate the initiative of the Bank for reducing the private debt of eligible IDA-only countries by setting aside $100 million from Bank net income. We also appreciate the new debt strategy of the Bank and the Fund in support of private debt and debt-service reduction of the severely indebted middle-income countries and hope that the commercial banks adopt a realistic and constructive approach and channel new money for growth in these countries.

One key constraint of world economic growth has been the insufficient flow of capital to the developing countries. There has been a continuous decline of the net resource flows to the developing countries—it stood at $45 billion on average in 1986-88, compared with $110 billion in 1980-82, measured in constant 1986 prices. The decline is due to sharp contraction of private flows to the developing countries. The President of the Bank, in his report to the Development Committee, has indicated that the overall magnitude of net resource flows to developing countries is clearly inadequate given the needs of achieving adjustment, sustained growth, and poverty reduction. There is therefore a need for taking further steps to increase the flows.

Of particular concern is the near stagnation in the flow of official development assistance (ODA), which is the major source of concessional resources for the low-income developing countries undertaking structural adjustment and reforms and promoting growth and alleviation of poverty. There was an increase in the flows in 1988, but the level of net flows still stands at the 1984 level. We join the Development Committee in urging the donors, especially those whose assistance levels are below the 0.7 percent ODA/gross national product target, to reverse the current declining trend in overall financial flows and the negative transfers of several developing countries. In this context, I need hardly stress the importance of a substantially larger IDA-9 replenishment, commensurate with the needs of the IDA-eligible countries, and look forward to its successful negotiation ….

While we welcome the Fund’s new debt strategy, the delays in finalizing the Ninth General Review of Quotas and the new allocation of SDRs are causing concern to us. We hope there will be a substantial increase of quotas and resumption of new SDR allocations before the end of this year. This will help to build the confidence of the members in the ability of the Fund to provide timely adequate financial resources in support of the adjustment programs.

A large segment of the population of the developing countries is living in absolute poverty; the environmental degradation is threatening the global ecological balance and the very survival of humanity. These are big challenges and need to be addressed jointly both by the developed and developing countries. Let us recognize these and resolve to act. Let posterity not say we left behind a world not worth living in.

Statement by the Governor of the Fund for the United Kingdom—Nigel Lawson

Let me start by extending a welcome to Angola as a new member of the Bank and the Fund.

Eastern Europe

The outstanding event since we last met has undoubtedly been the dramatic developments in Eastern Europe, and in Poland and Hungary in particular. Many of us have had the pleasure of meeting the new Polish Finance Minister and hearing his energetic and forceful description of the economic challenges ahead for Poland and the radical action his Government plans.

I very much welcome the strong commitment he and others in the new Polish Government have made to the swift introduction of a market economy in Poland. That is the key to successful economic reform. We in the West must do all we can to help, offering assistance and advice on freeing up markets, on training, and on removing the obstacles to inward investment.

In this connection, I very much welcome the part the Bank’s International Finance Corporation is playing in both Poland and Hungary. It has already approved seven investments in joint ventures in Hungary and has offered a program of assistance to Poland, including investment in joint ventures, advice on Poland’s privatization program, and help with the creation of new banks.

The West must also provide appropriate financial assistance. It would be a historic error if economic reforms in Poland and Hungary were to fail for lack of external support. The first step must be for Poland to negotiate a Fund program as soon as possible.

But it is the market reforms within both countries that are crucial. They provide the great hope we all share—that Poland and Hungary will be able to unlock the vigor and enterprise of their people and develop into strong and successful market economies—in the process, providing a clear example for others to follow.

World Economy

Turning to the world economy as a whole, performance has been generally satisfactory, in particular in the industrial countries.

Growth is slowing to a more sustainable level without any sign of the lurch into recession that some had feared. Investment has continued to grow rapidly, which will help improve performance in the future, while inflation has peaked, thanks to swift action to tighten monetary policy in all the countries concerned.

There is general agreement that the major countries are adopting policies likely to promote continued noninflationary growth. If passages in the Group of Seven communiqué on policy actions have a familiar ring, it is a reflection of the continuing consensus, right around the table. Cooperation remains strong, and we share a common view of the importance of controlling inflation and implementing supply-side reforms. And that cooperation was demonstrated by the effective action by central banks in the markets this week.

Not that we have found—or ever will find—a solution to all the problems and difficulties that will inevitably arise. There will always be fluctuations in growth and in inflation, though we can try to minimize them. The problems of many developing countries remain severe, as we have been reminded once again by some of the contributions we have heard this morning, but sound and stable policies in the major industrial countries offer the best prospect for steady growth in the world economy as a whole.

Longer-Term Changes

The most striking development of the past decade has been the movement toward deregulation, reliance on markets, and a smaller role for governments. In particular, the virtual abolition of foreign exchange controls in the major economies, coupled with domestic deregulation and advances in information technology, has led to the creation of a global financial market. This has had far-reaching effects on our economies and on the conduct of policy.

One impact of this new freedom is that economic behavior has become less predictable. For example, people’s spending is less constrained by the short-term path of their disposable income, given their greater ability to borrow. However, predictability is far from the prime virtue of an economic system. The improvement in performance from a less regulated economy is what matters. And that is what we have seen.

Of course, the effects of greater financial freedom are much wider than this—in particular, the emergence of a world market for savings. This has had profound effects, not least on the balance of savings and investment between countries, and this has come at a time when, for the world as a whole, there are growing signs of a shortage of private savings in relation to planned private investment.

Perhaps the strongest evidence for this shortfall is the historically high level of real interest rates. The persistence of these high rates throughout the developed world suggests that this is no mere cyclical phenomenon.

It is now apparent, too, that the total of private sector savings in the major industrial countries has been declining as a share of gross domestic product (GDP) during the 1980s and particularly in the last few years. It is impossible to be sure why this has occurred, but we can identify a number of contributory factors. Better economic performance may have boosted consumer confidence. Increased personal wealth seems to have lessened the perceived need to save, and cultural changes too may have played a part.

These factors may well persist, so it is important that governments accept the consequences. High real interest rates—however unwelcome—are likely to be with us for the foreseeable future. This underlines the need to eliminate budget deficits in those countries that have them.

At a time of shortage of private savings in relation to planned private investment it is surely wrong for governments to appropriate private savings to finance their own expenditure. It would also be a mistake to do anything which discouraged savings, even in the surplus countries.

One Keynesian legacy has been a preoccupation with an incipient shortage of demand, whereas it is an incipient shortage of capital that is emerging as the real problem. The fall in savings in the industrialized world as a whole conceals very different patterns in different countries. By contrast, the pattern of investment has been much more uniform among the major nations. Thus, in the Federal Republic of Germany and Japan, sector savings exceed investment, with the inevitable counterpart of a current account surplus. In the United States, the United Kingdom, and France the reverse is true.

This represents a major change of behavior, compared with the 1960s and 1970s. For most of that period there was a strong similarity in each country between the levels of savings and investment.

At a time when exchange controls were prevalent and capital was, in general, less mobile, governments had little option but to respond to current account deficits by tightening fiscal and monetary policy. This had the effect of reducing or offsetting the threatened difference between savings and investment within each country. All that has now changed, with capital flowing from those countries where savings are in excess of investment to those where they fall short of investment, thus financing current account deficits, sometimes for a sustained period.

We have to go back to the era of the classical pre-1914 gold standard to find an extended period of free capital mobility and so little government intervention. At that time, too, there were large and persistent current account surpluses and deficits on the same scale as recent years. A new study estimates that between 1880 and 1913, six out of the eight economies for which data are available recorded an average current account surplus or deficit of over 2½ percent of GDP. This contrasts with the 20 years to the mid-1980s, when only one of the countries studied had an average imbalance of that size; and none of the five major nations had an average imbalance of as much as 1 percent of GDP. These figures reinforce the conclusion that in a world of capital liberalization and the integration of financial markets, large current surpluses and deficits are not unusual.

The international capital markets are carrying out one of their fundamental roles—allocating excess private sector savings to the countries with investment opportunities that exceed their domestic savings. For any one country, this means that investment is not constrained by its own savings. For the world as a whole, the increase in imports and exports of capital has almost certainly produced benefits analogous to the gains from trade.

Without the safety valve of international capital flows, any excess or deficiency of savings would have been concentrated in the countries themselves. By one means or another in the deficit countries, savings would have had to rise or investment fall, or, more likely, a combination of both. That is no easy matter, and it is worth recalling that the raison d’être of the Fund was to provide bridging finance to assist with this problem. So far as the major nations are concerned, this role has now effectively been taken over by the private capital markets, and this has inevitably led to a change of emphasis in the role of the Fund itself.

Some observers remain concerned about these large-scale capital flows and the current account deficits they finance, and consider them unsustainable and dangerous, regardless of their origin. But I note that the Fund takes a more measured view. As its latest World Economic Outlook points out, “Inasmuch as they reflect private saving and investment decisions . . . external imbalances should be seen as efficient and self-correcting, and the role of policy should be limited to the removal of any distortions affecting such decisions.”

It follows that current account imbalances do not carry any necessary implications for exchange rates. To draw such implications is to give the exchange rate an exaggerated role in the adjustment process. It is a mistake to look to the exchange rate to resolve a set of circumstances of the type I have been describing. Nor should we attempt to fine-tune fiscal policy. Now that once again we have worldwide capital mobility, last seen in the pre-1914 gold standard days, it would be wise to recall the conventional wisdom of that period about fiscal policy—namely, the principle of the balanced budget.

In the short run, some fluctuations are inevitable. But we will be better served by adhering to this important principle of budgetary balance than by trying to compensate for private sector savings and investment imbalances by making offsetting movements in public sector savings or investment. To do so would require sharp changes which would unnecessarily disrupt the stability of tax rates or sensible planning of public expenditure, with damaging economic consequences.

These developments and, in particular, the increasing interdependence of the world economy also increase the importance of policy coordination. As our meetings here in Washington have demonstrated, that fact is widely recognized. One aspect of this coordination is a desire to maintain a reasonable degree of exchange rate stability. This too has echoes of the period before 1914 when freedom of capital flows took place within the context not only of balanced budgets but also of a general adherence to the gold standard.

The U.K. Economy

Finally, I turn to the U.K. economy, which grew particularly rapidly in 1987 and 1988 following five years of relatively steady growth. Domestic demand was driven by a welcome investment boom, with total investment growing by 23 percent over the past two years. But with consumer spending also growing strongly, pressures on capacity intensified, and, as a result, inflationary forces re-emerged.

Over a year ago, the Government tightened monetary policy sharply, and that is now producing its intended effects. Domestic demand growth this year is likely to turn out to be less than half of last year’s figure of 7 percent. Consumer spending has slowed markedly; and the housing market, which proved to be the engine for much of the excessive growth of demand in the past few years, has now gone into reverse. Investment growth remains strong, and the capacity that has been added in recent years will play a significant role in expanding supply in the future.

The Government continues to run a large budget surplus, but the fall in private savings and the growth in private investment have meant the emergence of a substantial current account deficit. The decline of private savings seems to have come to an end this year, as high interest rates increase the attractiveness of saving and, in particular, increase the cost of borrowing to finance consumption.

The slowdown of demand is even evident in the current account figures. In recent months domestic demand growth has been broadly in line with the growth of output. Although the deficit for this year will turn out higher than forecast last March, I warned a year ago that the current account would be one of the last indicators to respond to monetary tightening.

In time, the growth of domestic demand will fall below the growth of output, and the current account deficit will begin to diminish. In the meantime, the deficit can be readily financed during what is likely to be a gradual process of adjustment.

Of much greater importance are the clear signs that monetary policy is working and inflation declining. The underlying rate, which had risen from around 4 percent in the first half of 1988 to 6 percent in May, fell back to 5.7 percent last month and is set to decline further. Getting inflation down by maintaining high interest rates for as long as is necessary remains the cornerstone of our policy.

Statement by the Governor of the Bank for Norway—Gunnar Berge

I have the honor of addressing this distinguished gathering on behalf of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden. As the short-term prospects and challenges confronting the members of the Bretton Woods institutions have been discussed at length at the meeting of the Interim Committee, I shall mainly reflect on some of the major problems which the world economy and the international financial system are facing in the medium term.

But first I would like to join my fellow Governors in welcoming Angola as a new member of the International Monetary Fund.

The world economy has in recent years performed remarkably well in some fields, while developments in other areas have been disappointing. The economy of the industrial world is now in its seventh year of growth, an exceptionally long period of expansion. Albeit still too high in several countries, inflation has on average been brought down to a moderate level. However, in spite of the relatively sound growth performance, the rate of unemployment has remained high in many industrial countries, and the current account imbalances among the major countries have only slowly been reduced, while new imbalances among the European countries have emerged. Moreover, while economic growth has been satisfactory in most industrial countries and several newly industrializing economies, many of the heavily indebted developing countries have experienced low economic activity and declining per capita income.

The basic challenge facing the industrial countries is to sustain the present expansion while avoiding a resurgence of inflation. To meet this challenge, the industrial countries have to deal forcefully with the problems threatening noninflationary growth, such as external imbalances, protectionism, structural rigidities, and the present inappropriate mix of fiscal and monetary policies.

The current account imbalances among the three largest industrial countries, which developed during the period 1983-87, have to some degree been reduced in the past couple of years. These adjustments in the external imbalances reflect, however, mainly the movements in exchange rates in the period 1985-87 and to a lesser degree a shift in domestic demand. Furthermore, there are indications that as the effects of these exchange rate changes taper off, large structural imbalances will remain.

So far, the United States has not encountered difficulties in financing its external deficit. This might imply either that the deficit is more sustainable than earlier envisaged or that we are storing up problems for the future. I do not feel confident that the former interpretation is the correct one.

I should also like to add that one of the implications of the U.S. external deficit is that approximately half of the global savings which are channeled through the international capital markets go to the United States. The effects of this on international interest rates and on the availability of capital to other countries are inescapable.

A lasting improvement in the U.S. current balance will require that investment be maintained and that the necessary reduction in national spending be concentrated upon consumption. This will require a determined and continuous effort to reduce the fiscal deficit. The magnitude of this task is such that it will have to be attacked both on the expenditure and on the revenue side of the budget.

To minimize the internationally harmful effects of a deceleration in U.S. domestic demand, countries with a strong balance of payments and low inflation should be prepared to alleviate these effects. Since countries such as the Federal Republic of Germany and Japan are now operating close to capacity, an expansionary shift in macroeconomic policies is not advisable. Nevertheless, for the surplus countries in general, there seems to be room for increasing domestic demand without rekindling inflation through implementing policies to adjust the structure of their economy, and removing rigidities and distortions, including those that discourage investment and imports and inhibit flexibility in the labor market. Newly industrializing economies in a strong balance of payments position should also contribute to the adjustment process through maintaining a high rate of growth in domestic demand and through the removal of policy measures that inhibit imports and unduly stimulate exports.

Currently, the economies of the major industrial countries are growing approximately at their potential output, and inflationary tendencies have recently been observed in some industrial countries. The threat of inflation has been met by tighter monetary policy. But additional measures are needed to sustain growth while combating inflation. Particularly, implementation of appropriate fiscal and structural measures is imperative. In the present situation, with global low saving, large investment needs, and high interest rates, it is important to enhance the rate of saving in deficit countries by correcting fiscal deficits and stimulating private saving. However, where the net financial saving of the private sector is much larger than the deficit of the public sector, it is not obvious that global interests are best served by a policy of fiscal strength, which results in large balance of payments surpluses.

Structural adjustment is also much needed in most industrial countries. Raising efficiency and removing rigidities and distortions, including those that discourage investment and restrict imports, are necessary for sustaining the present expansion. Although substantial adjustments have been carried out in recent years, much has still to be done. For example, liberalization of capital markets needs to be complemented with actions in other sectors of the economy. It is of particular importance to improve the functioning of the labor market, remove distortions in the tax system, eliminate trade restrictions, and reduce subsidies and other support measures for ailing industries. In these circumstances, the trend toward proliferation of nontariff trade measures is deplorable, and recent efforts to reverse this trend should be strongly supported. It is also important that disputes be resolved within the existing multilateral framework and not through unilateral trade measures. In a medium-term perspective, success in the Uruguay Round of trade negotiations is essential to the open trade system which has served us so well in the postwar period. We also welcome the decision by the European Community to establish a single European market by 1992. Successful completion of the Uruguay Round and implementation of a single European market will create a much more open international trade system.

The heavily indebted developing countries have generally benefited only modestly from the recent economic recovery. Because of the debt problem, insufficient policy adjustments, and limited market access for their exports, economic growth has been subdued, the standard of living has continued to fall, and the economy has remained vulnerable to adverse changes in the external economic environment. Net inflows of foreign capital, which are regarded as essential to restoring growth, have not been forthcoming as expected.

The debt strategy which has been pursued in recent years has to some degree been successful: debts have been restructured, adjustment programs have been implemented, current account positions have been strengthened, and the threat to the international payments system, including the commercial banks, has been reduced. In spite of these improvements, the situation remains extremely difficult for many of the indebted countries. The Nordic countries therefore welcome the recent strengthening of the debt strategy by the Fund and the World Bank.

Looking to the medium-term future, I think we have to realize that, in spite of the recent strengthening of the debt strategy, we will have to live with the debt problem for many years to come. Although debt ratios have declined moderately, they are still very high for the heavily indebted countries, and the discounts in the secondary market for the debt of these countries have risen sharply in recent years. Moreover, the current account improvement since the onset of the debt crisis has, to a large extent, been achieved through a sharp decline in investment in relation to gross domestic product. This—in combination with serious policy slippage—has affected the prospects for growth and the ability of these countries to meet their future debt-servicing obligations. Capital flight has also remained a serious problem.

In these circumstances, private creditors have sharply curtailed their new loans, and sizable net transfers of resources from the heavily indebted countries have occurred. It is therefore of utmost importance that the debt strategy is fully implemented with little delay, and that all participants play their proper role. In the absence of such a collaborative approach, the ability to sustain adjustment and reform policies may weaken, thereby undermining the debt strategy. We will then all be losers. As for the debtor countries, strong and consistent economic adjustment remains essential. External financing can never replace necessary adjustment. It is also important that the commercial banks make their appropriate contribution to the debt strategy. The Bretton Woods institutions must continue to play a central role in designing, implementing, and financially supporting the strengthened debt strategy.

Turning to the question of the Fund’s capital base, the Nordic countries hold the view that the present resources of the International Monetary Fund are not in line with the Fund’s responsibilities. We therefore hope that the Ninth Quota Review will soon be brought to a positive conclusion. In our opinion, up to a doubling of total quotas would be justified.

A central responsibility of the International Monetary Fund is to promote international monetary cooperation and to provide the machinery for consultation and collaboration on international monetary problems. This task is at least as demanding today as it was in the past. After a period of freely floating rates among the major currencies, greater exchange rate stability has in recent years been regarded as desirable, and, through coordinated policy actions, more appropriate conditions for such stability have developed. In these circumstances, we find it desirable that the Fund’s role in the Group of Seven surveillance exercise be strengthened where appropriate.

In conclusion, I should like to express my admiration for what the International Monetary Fund has accomplished in recent years. It has contributed greatly to the efforts to resolve many of the difficult problems facing the world economy. In particular, I should like to commend the Managing Director, Mr. Michel Camdessus, for his excellent leadership of the Fund in a difficult period. The Nordic countries can assure him of our support in the Fund’s endeavor to build a better future for developed as well as developing countries.

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

Allow me to say, first of all, how pleased we are that Angola has joined our ranks.

We have seldom met in an atmosphere of euphoria like that which pervades the corridors of these Annual Meetings.

Beyond doubt, we can congratulate ourselves on the uninterrupted continuation of growth in spite of the stock market crisis of October 1987. The growth of the industrial countries has been wholly satisfactory and the danger of inflation has so far largely been contained. Moreover, the large balance of payments disequilibria which persist among the industrial countries have easily been financed by the markets. Certain positive developments are taking place in Eastern Europe, and the new debt strategy promoted by Secretary Brady has paved the way to major agreements between the creditor banks and the heavily indebted countries, or some of them.

This euphoria will nonetheless prove treacherous if it obscures the potential risks connected with the persistent large payments imbalances which already show a tendency to snowball, and if it gives us the illusion that a global, definitive solution to the debt crisis has been found.

More generally, economic policy and international cooperation cannot be reduced to crisis management. We must possess, at both the international and national levels, an adequate arsenal of economic policy instruments and institutional mechanisms which are capable not only of reacting to crises but also of promoting, over time, the necessary adjustments.

At the national level, we must avoid overloading monetary policy; besides budgetary policy, whose contribution to the adjustment remains crucial, it is in our interest to retain the incomes policy instruments needed to prevent cost slippages, as well as instruments for setting structural reforms into motion.

The same need also exists at the international level. Independently of crisis situations, we must possess clear rules of play and appropriate institutional mechanisms which will help create confidence, reduce uncertainties, encourage sound economic policies, and create the kind of environment in which market forces can best realize their potential.

Let me illustrate this point of view with particular reference to exchange rate discipline and the debt strategy, and indicate its implications with regard to the increase in the Fund’s resources. Finally, I will discuss two important dimensions of the development problem—the struggle against poverty and the protection of the environment—which also require voluntary actions that cannot be left to market forces alone.

Multilateral Surveillance and Exchange Rate Discipline

Belgium’s position on exchange rates is well known: we favor multilateral surveillance under the aegis of the Fund, and we believe that the international coordination of economic policies would be greatly enhanced by a better “anchoring” of the international monetary system through acceptance of a greater degree of exchange rate discipline.

Allow me to elaborate my thoughts on this point. Since the Plaza and Louvre agreements, international cooperation on exchange rates has indisputably been remarkable; nonetheless, the results obtained cannot in our view be consolidated unless all participants can recognize in the exchange rate relationships a coherent structure reflecting the basic indicators of the economies concerned and compatible with the requirements of balance of payments adjustment. If we want capital movements to play a more stabilizing role in the exchange markets, the participants must know that the authorities of the industrial countries are ready to intervene to defend the announced exchange rate relationships and to adjust, if necessary, their underlying policies. In this area, the experience of the European Monetary System provides a very instructive precedent. That experience shows how exchange rate discipline plays a key role in the pursuit of a greater convergence of economic policies and in the establishment of a more stable environment conducive to economic growth. The Fund is uniquely positioned to play a similar role in organizing multilateral surveillance over the exchange rates of the major industrial countries, with the aim of establishing a rate structure more likely to correct the present balance of payments disequilibria.

The Debt Strategy

Mr. Brady has given a decisive impetus toward a more dynamic approach to the debt strategy. Belgium supports this approach, and at the same time would like to shed some light on the conditions needed for this approach’s potential benefits to be fully realized.

First of all, we have to maintain an equitable balance between the heavily indebted countries, which will probably benefit from the new emphasis on debt or debt-service reduction, and the other developing country members of the Fund and the Bank which, out of respect for their financial obligations, have made often considerable sacrifices to preserve or regain access to the financial markets. This means that we must not give the impression that debt reduction strategies are necessarily preferable to strategies involving new loans. Strategies based on a judicious assumption of new borrowings should continue to be encouraged whenever favorable conditions are present, in particular the prospect that debt ratios will be stabilized at a sustainable level. Even for the heavily indebted countries which do not yet meet all these conditions, debt reduction should continue to be considered a complement rather than a substitute for additional borrowings.

In the second place, the success of the new debt strategy will require us to give an enhanced leadership role to the Bretton Woods institutions:

(a) To restore confidence to the relations between the heavily indebted countries and their creditors, each of these countries should prepare, in close cooperation with the Fund and the Bank, first, a medium-term scenario which would cover both the totality of the adjustment measures and development policies it intends to implement; and, second, a financing plan identifying the financial flows which will be required to restore its balance of payments to a position of viability capable of ensuring their return to normal access to the international financial markets. This medium-term scenario would include targets for the repatriation of flight capital.

(b) The intellectual leadership of the Fund is also needed to help the heavily indebted countries and their creditors arrive at a well-informed judgment about the best strategy for achieving a sustainable debt-service position in the medium term. Left entirely to themselves, the markets are unlikely to be able to organize an optimal choice or balance between new loans and the reduction of pre-existing debts.

(c) It would be unwise for the Fund and the Bank to commit large amounts of resources to the debt strategy very early in the game unless their role in the organization and coordination of the financial efforts required from all participants has been clearly accepted from the outset.

(d) The involvement of the Bretton Woods institutions in the debt strategy must be sufficiently long term in nature. From this standpoint the Bank is especially well placed to ensure that the debt strategy and the development strategy are linked. The dialogue it maintains with the indebted countries on all aspects of their development strategies, and its assurances that it stands ready to continuously support the debt strategy with advice and financing, can only help in the restoration of stable financial relations between the countries concerned and all their creditors. In the case of countries which have lost all access to the financial markets, the Bank is called on to play a larger role; it alone can obtain from these countries their commitment to long-term development strategies capable of forming a basis for catalyzing financing commitments of a similar long-term nature from the lending community.

(e) As part of a long-term strategy for addressing debt and development issues simultaneously, I would suggest that the Bank and the Fund should exercise their intellectual leadership on the complex question of the connections between the distribution of wealth and income, taxation, and capital flight. At first glance, there seems to be a correlation between the phenomenon of capital flight, excessive concentration of wealth and income in a limited part of the population, and serious deficiencies in taxation systems. Reforms aimed at a better distribution of wealth and income and more equitable, efficient taxation systems should be included in the conditionality of the Bretton Woods institutions and would contribute to the establishment of a macroeconomic framework favorable to long-term local investment of these countries’ available savings.

In the third place, complementary initiatives seem needed to encourage the commercial banks to play the important role expected of them under the enhanced debt strategy.

(a) First of all, we must take still greater care to ensure that there is nothing in our accounting, prudential, or fiscal regulations which lessens the banks’ willingness either to lend new money or to accept reductions in debt or debt service, in accordance with the individual circumstances of each debtor.

(b) In addition, the Fund might introduce into its arrangements a performance clause under which a country’s access to the Fund’s resources would be suspended if it failed to honor fully its obligations toward those commercial banks which had not only agreed to extend new loans in support of a structural adjustment program but had also agreed to assign to these loans a repayment schedule to be modified as a function of certain parameters affecting the debtor country’s balance of payments (interest rates, certain primary commodity prices, etc.). Experience has shown that adjustment programs are more likely to be sustainable if uncertainty concerning their future financing can be reduced. The compensatory and contingency financing facility added to the Fund’s instruments last year works in this way, but its impact would be significantly increased if the commercial banks could be persuaded to include similar contingency clauses in their loan agreements.

Fourth and finally, we must be ready to take initiatives complementing the decisions of the Toronto summit in favor of the overindebted low-income countries which demonstrate perseverance in the implementation of structural adjustment programs. In this spirit, Belgium has taken three measures:

—cancellation of debts it had made to 13 poor countries of sub-Saharan Africa in the form of state-to-state loans;

—a combination of several of the options adopted at the Toronto summit for its largest African debtor; and

—acceptance of interest and principal payments in local currency from that same debtor, these payments being earmarked for the financing of jointly selected priority development projects in that country.

This last formula should doubtless be added to the Toronto “menu,” since it establishes a direct link between debt reduction and development by guaranteeing that the resources freed by debt reduction will be used for investment in the country concerned.

Quota Increase and SDR Allocation

Now let me turn to the resources of the Fund. It is well known that we favor a doubling of quotas and a substantial allocation of SDRs. However, I am not sure that the reasoning which explains our positions has always been fully understood.

The Fund cannot meet its responsibilities with respect to policy coordination and the debt strategy unless it possesses adequate resources to do so. Determining the nature and magnitude of these resources requires first of all defining the needs they will have to satisfy. This seems to me to involve two kinds of needs: the balance of payments needs arising from the implementation of adjustment programs, and needs of a new kind which could arise, on the one hand, from the necessity of providing certain industrial countries with the means to defend more stable exchange rate relationships, and, on the other hand, from the necessity for certain heavily indebted developing countries to provide collateral to guarantee their debt reduction or debt-service reduction operations.

The resources that members must have to support the implementation of their adjustment programs should continue to be provided by quotas. The formula determining these resources assesses each country’s needs as a function of its share in the movement of foreign exchange and international payments. The present trend of this movement justifies a substantial increase in quotas.

On the other hand, the new needs, those resulting from the exchange rate stabilization strategy and the debt strategy, can be so large for individual countries that they cannot be satisfied by a quota increase. Providing the needed amounts without depriving other members of access to the Fund’s ordinary resources that must be reserved for financing adjustment programs would require a quota increase so large that it would be politically unacceptable. It would therefore be better to answer the need for supplementary reserves resulting from the stabilization strategy and the debt strategy by retransferring, back to the Fund, an allocation of SDRs, using a technique initially proposed by Belgium and refined during intensive discussions in the Board of the Fund. I would like to mention, in this connection, our especial recognition of the capacity for farsighted vision exhibited by the Fund’s Managing Director, Mr. Camdessus.

The quota increase and SDR allocation should thus be seen as complementary aspects of the necessity to reinforce the operating resources of the Fund. Both respond to a global need which simultaneously reflects the spirit and the letter of the Articles of Agreement. It is hard to see how using SDRs in the ways I have just proposed, in conformity with the present needs of the payments system, could make it more difficult to decide on an allocation. On the contrary, the retransfer principle on which these uses depend would seem to refute the objection that a new allocation is not justified because it would not be addressed to problems requiring exceptional financial assistance.

Protection of the Environment and the Struggle Against Poverty

In my speech at the Annual Meetings in Berlin (West), I stressed the continuing major challenge with which the struggle against poverty confronts our international institutions, and I suggested that the World Bank should more systematically incorporate the poverty dimension into the advice it gives to countries ….

The decade of the 1980s witnessed, all over the world, an unleashing of the dynamism and the creativity of the markets. The economic performances of the industrial countries, the “quiet revolution” at work in the developing countries, and the astonishing transformations of which we are spectators in certain countries of Eastern Europe suggest that this fundamental choice was the right one. Nonetheless, to enable this same dynamism and this creativity to fully realize their potential in the 1990s, we will have to find a new balance between the forces of the market and the interventions by public authorities which are needed to create stable, pertinent, and fair rules of play, and to inspire the confidence of all participants in the world economy.

The Bretton Woods institutions, by their nature, are beyond doubt the best placed to create these rules and inspire this confidence. To aid their efforts they can count on Belgium’s active and resolute support.

Statement by the Governor of the Fund and the Bank for Sri Lanka—D.B. Wijetunga

On behalf of His Excellency R. Premadasa, President of the Democratic Socialist Republic of Sri Lanka, the Government, and the people of Sri Lanka, let me express our warm felicitations and good wishes to all of you. I wish to associate myself with the sentiments and sorrow expressed in this assembly on the tragic death of two of our colleagues from Chad.

I consider it a great privilege to participate in the Annual Meetings of the World Bank and the International Monetary Fund for the first time, and to have this opportunity of addressing this distinguished assembly as a representative of the Government of Sri Lanka.

At the outset, we welcome Angola into our membership.

As we conclude this decade, we can look back with a sense of relief that our structures and institutions were able to avert a crisis in the international economy. At this point, the question that practical-minded men should ask is whether and to what extent we are ready to face the challenges of the 1990s. Our overriding concern should not be the search for tools with which the Bretton Woods institutions can deal with a crisis. To do so would be shortsighted. It would reduce these institutions to instruments of crisis management. The present situation should rather be put to much better use so as to endow these institutions with a capability to prevent the development of crisis situations while promoting a broad-based and a respectable growth in the world economy.

Let me dwell briefly on the main issues facing the Fund and the Bank. First, during this decade, as much as we witnessed a prolonged period of world economic growth, we have also seen a contraction in the size of these institutions in terms of the world economy. The Fund has the responsibility of promoting economic conditions conducive to growth, price stability, and balance of payments viability. The Bank has the objective of promoting economic growth and conditions conducive to efficient resource allocation and sound investment. The ability of these institutions to perform these functions efficiently would be at substantial risk if their size were to decline in relation to the world economy.

Second, and of more direct relevance to the Fund, is the present status of the process of policy coordination among the major industrial countries. Some benefit in terms of greater stability in exchange markets is seen. But it should not be taken for granted that such coordination can guarantee a stable environment for the future. The Fund should stand ready to strengthen this process of policy coordination. Not only should the Fund be prepared to meet any threat of instability to the international monetary system but, more important, it should be perceived by member countries and financial markets as able and ready to play its role.

Third is the international debt problem. Here, the Fund and the Bank should play a forward-looking role in rehabilitating the environment for private capital flows. In particular, private commercial creditors should be encouraged to resume lending to creditworthy middle- and low-income countries. In this connection, we commend the Executive Boards of the two institutions for rapidly opening up additional windows to help the heavily indebted countries. In developing these new initiatives, we hope that attention will be paid to those countries that managed their debt problems effectively despite enduring domestic hardship. Specifically, dealing with the debt problem of some should not result in a reduction of resources to others.

Fourth, we still have the need for balance of payments assistance to many low- and middle-income countries in Asia, Africa, and Latin America. Further, as economic policy reforms continue, especially in the trade area, there should be a preparedness to meet new situations, even in some industrial countries.

A strong Fund is required to help members develop and implement economic policies in ways that will enhance the global economic environment. At the same time, given the crucial role of external finance, the Fund’s involvement should help catalyze finance from a range of sources in order to support and sustain economic change. It is not possible for the Fund to take on the sole responsibility as provider of finance. Other international institutions, official creditors and donors, and private markets all have a role to play. However, the extent of that role would be strongly influenced by the quality and quantity of Fund financial support. It would be unrealistic to expect others to share this responsibility if the Fund’s own involvement is inadequate.

Both the Fund and the Bank have recently taken new initiatives. In the Fund, the extended Fund facility has been revitalized; in order to protect economic programs from unforeseen events, a compensatory and contingency financing facility has been developed. The Fund and the Bank have crafted a framework of support that includes debt and debt-service reductions as part of the debt strategy. The World Bank’s structural adjustment lending has an increasingly complementary role to support the Fund’s stabilization focus. These developments, if they are to have any operational meaning, underline the urgent need for a substantial increase of resources. A quota increase that is inadequate runs the risk of not merely impairing the financial standing of these institutions but also of being a disincentive for the other partners to play their respective roles. These considerations make us strongly urge the few members who are yet undecided to provide the remaining links to achieve unanimity and so speedily resolve the question of the Ninth General Review of Quotas. For the World Bank, the general capital increase and IDA-9 issues should be settled.

Permit me a moment to focus on the Fund’s quota issue. As much as there is a need for a substantial quota increase, we in the developing world look forward to a fair distribution. All countries should get a meaningful quota increase. We would thus expect that a large portion of the quota increase would be distributed on the basis of existing shares. Obviously, the smaller the overall quota increase, the larger should be the distribution according to present shares. We would need to be assured that the potential absolute access under present quotas would be safeguarded under the new quotas too. We urge this on the basis that the current problems will continue well into the 1990s. In seeking a distribution according to present shares, we are also mindful of the need to address our concern over the maldistribution of international liquidity and of financial flows. We support the request of Japan for an ad hoc quota increase at the time the quota question is settled, partly because of Japan’s standing in the world economy and partly because of Japan’s specific support of the Fund in discharging its responsibilities.

No reference to the quota issue can be complete without reflecting on SDR allocations. Fellow Governors would recall that the SDR had a very difficult birth. Recent developments are such that today the question is not how this baby can be nourished but, more fundamentally, how it can be kept alive. The role of the SDR is visibly increasing. We have increased its attractiveness as a financial asset. We have secured its monetary character by increasing its interest rate to that of market levels. We need to popularize it as we need to draw away from the risks, uncertainties, and constraints of overdependence on one or two key currencies. Unless its supply is increased in some proportion to the growth of the world economy, the SDR will be relegated to limbo. The fifth basic period for SDR allocations is fast running out. It is now a political decision based on judgmental criteria. We hope that the necessary consensus will emerge.

I have concentrated on the subject of finance because the level and quality of finance plays a crucial role in the success or otherwise of a country’s economic adjustment program. Inadequate finance would make necessary a sharper adjustment. We no longer speak of adjustment at any cost. We have come to recognize that a sustained adjustment is one that is growth oriented. The people’s participation is essential for any economic program, however technically perfect it may be in its design. Hardships are necessary, and the people’s tolerance would be forthcoming if they could see the light at the end of the tunnel.

Besides the question of finance, it is necessary to look to the external environment in which economic policies have to be implemented. Both the Fund and the Bank place strong emphasis on the reduction of protection and the liberalization of external trade in programs of assistance. In many a program, it is a condition of assistance that the borrowing country should remove various import restrictions and open up its borders for exports from abroad. Trade obviously promotes mutual interests. But an issue needs to be highlighted. While the borrowers, which are middle- and low-income countries, have an ongoing record of trade liberalization, reciprocal action from industrial countries is less forthcoming. We join others in encouraging industrial countries to resume the momentum for reducing restrictions of all sorts in their markets. The Uruguay Round presents this opportunity. The resulting improvement in the external environment can support adjustment as substantially as the provision of finance.

We strongly welcome the poverty focus in World Bank lending. More recently, we have noted the concerns shown by the Fund in this area. As I mentioned earlier, unless the people at large can see and feel the benefits, an adjustment program is bound to meet with reverses. Sri Lanka since 1977, after a major turnaround in policies, has pursued a Fund- and Bank-supported adjustment path. We have scored many successes. But the adjustment path has also left behind several problems.

Many benefits accrued to society. But they were not seen to trickle down soon enough and in adequate amounts to relieve conditions of widespread poverty. This discontent has also bred and nourished divisive elements in society. It is primarily with a view to attacking the roots of poverty that rehabilitation and adjustment measures have been designed. Alongside macroeconomic and financial policies, we are targeting a program of poverty alleviation. In essence, it is aimed at increasing the productive potential of poverty groups. Sri Lanka’s potential lies in its educated and skilled labor force. Harnessing this fully is the prime socioeconomic objective of my Government, and we are working closely with the Fund and the Bank to this end. We appeal to the international donor community to assist Sri Lanka in this task ….

All too often, we encourage member countries that come to these institutions to come early; we say that delay makes matters more difficult. We should likewise turn the focus on ourselves—the Governors and our Executive Boards—to speedily resolve these issues and thus maintain our confidence and belief in international cooperation.

Statement by the Governor of the Fund and the Bank for Australia—J.S. Dawkins

Australia joins with other members in welcoming Angola as a member of the Bretton Woods institutions.

The outlook for the world economy remains generally favorable. The rate of growth in world output and trade is expected to be slower than experienced in recent years, but the present consensus is that the moderation in the pace of activity is unlikely to develop into a pronounced cyclical downturn. The slowing will be welcome for its dampening effects on inflationary pressures.

The achievements of the past years have been substantial. The high rate of investment in the industrial countries has been a notable feature. The strength of business confidence in part reflects the success of the sound and stable macroeconomic policies pursued by many countries in recent years. The growing emphasis being given to structural reform is laying the foundation for sustained growth at levels higher than we were able to achieve throughout the 1970s and early 1980s.

The continued success of past efforts will depend largely on our ability to deal with a number of emerging challenges to the world economy. Foremost among these is the threat of inflation.

The average rate of consumer price increases in the industrial countries is expected to be well above the outcome for recent years. Many countries have already experienced significant increases in unit labor costs. If these pressures get out of hand and lead to a wage and price spiral, the achievements of past years would be eroded. Gains in employment, structural reform, and the liberalization of world trade would be set back. The unavoidable rise in interest rates would have a particularly negative effect on investment and on the debt-servicing burden of the highly indebted countries. The role of governments and of central banks is therefore to adhere to their medium-term perspective and remain vigilant against price pressures.

The continued existence of the large external account imbalances of the major industrial countries continues to be a serious cause for concern. A gradual moderation in the pace of economic activity in countries where demand has been running excessively high will work in favor of narrowing external account imbalances. A significant reduction in the U.S. fiscal deficit also remains important because of the contribution it can make toward increasing national savings and reducing that country’s large external deficit.

International economic policy coordination has an important role in meeting the challenges still facing the world economy. The Fund has an important role in that process. However, the fundamental prescriptions remain unchanged. There can be no lasting benefits from international policy coordination that do not go hand in hand with domestic economic policies that are sound, well-directed, and, at times, courageous.

One of the most pressing areas for policy reform is agricultural protection. In addition to its manifest benefits for consumers in the industrial countries, the liberalization of agricultural trade is among the most important means of assisting developing countries. It is important that the Uruguay Round negotiations produce significant progress with trade liberalization and reform, particularly for agricultural trade.

It is worth relating that agricultural exports figure prominently for many highly indebted countries, and industrial countries can hardly condemn high debt while their own distorted domestic policies prevent these countries from benefiting from their efficient unsubsidized agricultural products. It would do well for our remarks on debt and its solution to take account of the importance of substantial liberalization in the international trade system—access and subsidies. How incongruous it is to hear Europe’s exhortation for the adoption of free market policies in other countries and their admiration for reforms in Eastern Europe, while remaining wedded to the quaint excesses of the Common Agricultural Policy. It is important, therefore, that the Uruguay Round of negotiations produce significant progress with trade liberalization and reform, particularly in the area of agricultural trade.

The Ninth General Review of Quotas has received two extensions since the original date for its completion expired. There is no dissent from the proposition that the Fund is central to the functioning of the international monetary system: indeed, that proposition is the raison d’être of the Fund and our membership. The delay in reaching a decision reflects the diversity of views among the membership on the size of the quota increase consistent with the continued effective fulfillment of the Fund’s central role. A prolonged extension of the current debate risks damaging the institution with risks to all members.

Australia supports a rapid resolution of the Ninth Review and a substantial increase that would increase aggregate quotas by up to two thirds. We support a distribution which would reflect the changing economic significance of member countries and also protect the interests of the small island members. This would include ad hoc increases for Japan and Korea, whose quotas are significantly out of line with their economic standing.

The problem of overdue obligations to the Fund is a pressing one. Australia supports the measures which the Executive Board is now taking to counter new arrears, to reduce existing overdue obligations, and to bring back into current status those members with long-standing arrears. Although the problem is not as serious for the Bank, arrears have expanded rapidly in recent years and will need to be reversed if they are not to undermine the Bank’s capacity to assist all its members. The Fund and the Bank will need to cooperate closely in addressing the arrears problem.

The developing countries have shared only unevenly in recent world economic growth, not least because of the barriers to access erected by the industrial countries to their participation. I have already spoken about the contribution that liberalization of agricultural trade could make to developing countries. Developing countries also need to undertake adjustments in their domestic policies. The experiences of a number of adjusting countries, especially in Asia, suggest that growth-oriented adjustment programs can yield substantial benefits, even in an unfavorable external environment. Indeed, the justification for such programs becomes even greater as the external environment worsens. We would therefore encourage the developing countries to increase their efforts to adopt comprehensive adjustment programs.

Of the difficulties facing the developing countries, the problems of the heavily indebted are among the most pressing. It is now widely accepted that the debt problem can only be resolved through a cooperative approach which produces debt and debt-service reduction on a scale which is significant enough to reduce obligations in line with the service capacity of the debtor countries and encourages growth and a resumption of normal market access. To this end, we support the objectives of the Brady plan and welcome the measures taken to implement it by the Fund and the Bank. The resources of these institutions should be applied with the maximum possible leverage, and we would welcome further contributions from major creditor countries. At the same time, we are concerned that the participation by the Fund and the Bank in the resolution of the difficulties faced by heavily indebted countries not lead to a shift to the public sector of private sector risks, impairing the financial strength of the institutions and their ability to assist other members in need. The contribution that tax and regulatory changes in major creditor countries can make to the willingness of the commercial banks to participate in debt and debt-service reduction should be examined. Given these concerns, we support the strategy which is cautiously evolving in the light of experience.

The debt problems of the low-income countries require a different response. Concessional Toronto terms for official commercial debt are appropriate for the poorest, most heavily indebted countries. The benefits have so far been concentrated on sub-Saharan Africa. International Development Association-recipient low-income countries in other regions should receive similar consideration in the context of strong adjustment programs. However, we do not consider that a case has been made for the extension of these terms to other countries.

In addressing the international debt problem, the Fund and the Bank should not lose sight of countries that have striven successfully to remain current in their debt servicing. The Bank’s expanded cofinancing operations are a welcome addition to the instruments of catalytic support for these countries. However, their use should not be viewed as a substitute for conventional lending to these countries.

We believe that the Fund and the Bank are now working effectively together. Their cooperation has been especially fruitful in their work in debt strategy, guidelines, and operations. This is a welcome contrast to the difficulties that appeared in the relationship in 1988. We welcome the agreement reached between the Managing Director and the President in March 1989, which has clarified the respective responsibilities and relationships of the two institutions.

Global environmental problems are a major source of concern for the Australian Government. We are actively supporting international initiatives to find solutions, including the promotion of environmentally sound development activities funded by multilateral development institutions ….

Looking forward, there are grounds for cautious optimism. We can see many of the problems which confront us and we have the capacity to deal with them. Working together through the Fund and the Bank, we can ensure that our solutions benefit the world as a whole.

Statement by the Governor of the Fund for Pakistan—Ehasanul Haq Piracha

In the name of God, the Merciful, the Compassionate.

I join you in expressing grief on the tragic death of our colleagues from Chad.

It is of particular pleasure for me to address these meetings for the first time as a representative of the democratically elected Government of Pakistan. I congratulate you, Mr. Chairman, on presiding over these meetings. The Republic of Korea has emerged in recent years as a major industrial economy. Your understanding of the problems and constraints of a developing economy has been a great help in these deliberations. I welcome our newly inducted colleagues from Angola. I also join the previous speakers in expressing my appreciation for the excellent arrangements made for these meetings.

The world economy has experienced an extended period of recovery, with an average growth rate of 3.4 percent during 1983-88, with industrial countries growing at 3.6 percent. Nevertheless, the gap between the rich and poor nations has widened. Moreover, notwithstanding this impressive growth record, the world economy continues to face many problems which have been around for a number of years and which tend to constrain growth and stability. These problems include payments imbalances among industrial countries and the need for policy coordination, relatively high rates of unemployment in some European countries, continued large fiscal deficits in the United States, external indebtedness of developing countries, the net transfer of resources from developing countries, and volatility of exchange rates. These problems have been accentuated by the recent upward movement of interest rates.

Exchange rate volatility continues unabated. This situation underscores the need for greater policy coordination among the industrial countries not only in the areas of exchange rates and monetary policy but also in fiscal policies. In all these areas there is need for reinforced surveillance and coordination aimed at fostering stability consistent with other realities. High costs of adjustment can be avoided by greater emphasis on fiscal measures, since adjustment in exchange rates alone has not been adequately effective in remedying the situation. The current high rate of capacity utilization in industrial countries provides a favorable opportunity for containing fiscal deficits. Persistently large payments imbalances and continuing tight monetary stances are constraining the multilateral trading and payments system.

Although the developing countries registered a growth rate of 4.2 percent during 1988, the growth has been uneven, with a large number of countries not sharing in this growth. Even some of the better performing countries of South and East Asia appear to be facing constraints in sustaining their growth momentum. In the non-oil developing countries, inadequacy of external resources, including reduced access to commercial borrowing, continues to be a serious constraint on their development efforts. Assistance from the International Monetary Fund, a major source of balance of payments support, and, lately, of adjustment efforts, has been negative for the past three years. Commitment of a part of the Fund’s resources for debt-service reduction has increased the need for additional resources. The Fund should not only maintain but raise the access limits to its resources under various Fund policies, and it should ease the conditionality attached to the use of its resources with due regard to the sociopolitical conditions in each country. A timely and successful agreement on the Ninth Replenishment for the International Development Association (IDA) before the end of this year is essential for IDA-9 to become effective by June 1990. It is also important that IDA-9 be substantially larger than the previous replenishment in real terms to address the pressing issues of poverty and environment and, in particular, the needs of sub-Saharan Africa and the poor countries of South Asia.

The search for an appropriate policy package to address the problem of the external debt of developing countries continues to be a high-priority area. Progress so far remains far from satisfactory. While the Brady plan is an improvement over previous approaches, its scope is still limited to commercial debt. There also is a need to cover the heavy burden of official debts. Many of these countries are now facing severe pressures on their balance of payments because of a declining net resource transfer as a result of heavy debt-servicing obligations. To be feasible and effective, any debt plan should go beyond temporary relief and should emphasize reforms, which should improve the debt-servicing capacity of these countries. For this purpose, there is a need for broad-based institutional arrangements which still provide for access to commercial borrowing but also provide relief for smoothing the process of balance of payments adjustment.

An important issue that needs immediate attention is the Ninth General Review of Fund Quotas. It is regrettable that the important issues like overall size and distribution of quotas remain unresolved. Judging from the relevant considerations and historical relationships of quotas to world trade, non-gold reserves, current payments, and so on, it is a fact that quotas have lagged far behind requirements. Consequently, almost one half of the total resources made available by the Fund over the past 15 years had to be financed from borrowed resources at commercial interest rates. A doubling of the quota under the Ninth Review would be consistent with substantial progress toward its historical relationships with relevant economic variables. To be effective, such an increase in quotas should be accompanied by equitable distribution among the members. Also, the increasingly high conditionality attached to the use of the Fund’s resources needs to be relaxed. This calls for a basic change in the quota calculation formula, which should give due consideration to need-based variables. Since quotas also serve as the basis for voting, the quota share of developing countries should not only be maintained but increased significantly. The decline in access limits in recent years, coupled with increasingly strict conditionality, has contributed to the negative use of Fund resources during the past three years.

A related issue is that of SDR allocation. Although there is overwhelming evidence that the conditions for a new SDR allocation have been fully satisfied, no allocation has been made for the past eight years. Progress toward making the SDR the principal reserve asset, as required under the Fund’s Articles of Agreement, depends in substantial measure on a regular annual allocation of SDRs, and the mechanism of distribution should take into account liquidity needs and development requirements.

The message that emerges from these Meetings is that all economies, rich and poor, need to coordinate their economic policies. As far as Pakistan is concerned, we are pursuing an adjustment program, and we are grateful for the support of the Bank and the Fund. The elected Government of Prime Minister Mohtarima Benazir Bhutto has reaffirmed its resolve to correct the imbalances in the economy. In this connection, we have taken difficult but necessary measures and we shall continue to do so. However, we need the continued understanding and support of international financial institutions and bilateral donors.

Statement by the Governor of the Bank for the Netherlands—H.O. Ruding

Debt Strategy

For seven years the evolving debt strategy has been on our agenda. For the greater part of this period total debt outstanding of the severely indebted countries has been rising, and many of them are still experiencing huge problems in servicing their debts and at the same time restoring economic growth.

Against this background, I welcome the evolution of the debt strategy as testifying to the constructiveness of the parties concerned and to the courage and fortitude displayed by authorities and people alike in many individual cases. Rightly, we have stuck to the case-by-case approach. Now this also incorporates voluntary market-based debt and debt-service reduction. These can provide an incentive for better adjustment. However, in isolation, they are no guarantee for success. Their results will depend on how the opportunities provided are used. The task of the Bretton Woods institutions in this respect is twofold: to guard the quality of the adjustment program and to provide part of the financing. It is not the task, however, of either the Fund or the World Bank to take over the responsibilities or burdens of debtors or creditors. Indeed, this would be counterproductive.

For the debtor countries, the only way to break out of the vicious circle of low growth and investment, high debt service, and low confidence is to implement a sound adjustment program. That is why the past and the future commitment of a country to realistic but firm adjustment is the main eligibility criterion of the debt reduction program. This should be a program that is strong enough for a return of flight capital, that stimulates domestic savings, and that promotes investment. By now it is clear that the lasting success of adjustment programs requires social cohesion. Only too often, an uneven income distribution, unfair taxation, and the failure to provide opportunities to the poorest people undermine the sustainability of programs. The outside world cannot be expected to offset glaring defects of this kind. Social responsibility is a prerequisite for economic recovery.

At a more mundane level I must stress the importance for investment of tax treaties with Organization for Economic Cooperation and Development member countries and of Multilateral Investment Guarantee Agency (MIGA) membership. Speaking of MIGA, I wish to express my concern over the slowness of its implementation. I hope this will be remedied soon now.

As for the banks, their participation in a debt reduction package must be voluntary. This means that they have to be convinced of the positive consequences in the longer run of debt reduction, for the countries concerned and for themselves. Of course, they rely on Fund conditionality. Furthermore, national authorities must in some cases eliminate impediments for the participation of banks in the debt strategy. In the end, however, it is the banks’ own judgment, on the basis of their enlightened self-interest, that is decisive.

To preserve the financial integrity of the Bretton Woods institutions, new debt reduction operations must remain within the guidelines established by the Executive Boards of both institutions. It is too early to start changing their parameters. This could undermine their credibility and thereby the stability of expectations.


The financial integrity of the Fund and the Bank is also at issue in the mounting arrears of some of their members. That is why the Netherlands at an early stage already called on both institutions to tackle this problem. By now we may note that the Fund has a solid set of policies in place. The logic is inescapable. Fund resources are made available conditionally. If they are not serviced (in part or fully), this forms prima facie evidence of a lack of willingness on the part of the debtor to continue to apply sound economic policies. That is precisely the reason why the essential first step in restoring normal relations between the Fund and a member who is in arrears is for that member to resume mutually agreed adjustment policies. Then, but only then, should the international community, including the international financial institutions, be prepared to assist such a member. If, however, a member is unwilling to cooperate with the Fund, then remedial measures are no less than logical in a situation in which the Fund needs to safeguard its financial integrity. Preventive, collaborative, and remedial measures all serve to remind us that the Fund is a cooperative institution which exists only by virtue of its membership. For the Bank the situation is essentially similar. It too should apply such policies in order to prevent an adverse impact on its financial integrity, to maintain its multilateral and cooperative character, and to prevent extra interest charges from having to be borne by other developing countries borrowing from the Bank. Like the Fund, the Bank should consider remedial action for those countries with protracted arrears that are persistently not cooperating with the Bank.


Of course, the industrial countries must contribute importantly to the ongoing adjustment process. At this moment, with relatively favorable economic developments in the industrial world, I must stress three areas of serious concern: I refer to protectionism, the environment, and the present level of interest rates. Industrial countries, for their own sakes and for those of the developing countries, must withstand the short-term political temptations of protection. The Uruguay Round constitutes an opportunity that must be used to provide effective market access for products of developing countries. I do not underestimate the resistance that will be met, especially in agriculture and in value-added products like clothing and footwear, but we must not accept that economic unreason and gross inequity based on abuse of power should govern global trade relations.

Support to the Environment

Like trade, the environment is a field in which being penny-wise in the short term will prove to be pound-foolish later, as is now becoming only too evident. Nor can it be denied that the responsibility of the industrial countries for environmental degradation outweighs that of the developing countries by far. There appears to be an increasing awareness that it is no use to wait for one another in clearing up one’s own backyard. At the same time there are gratifying signs of willingness to cooperate at a global level. The Netherlands is undertaking efforts in both respects. It is clear that we must make a distinction between developing and industrial nations when we look at their environmental problems. In the Western world, the problems of the environment are a by-product of prosperity. In developing countries, however, they are rooted in poverty, stagnating economic development, and rapid population growth. The short-term issues of survival often leave nations without the means required to safeguard their natural resources. Unlike in the industrial countries, where both funds and technical and institutional capacity are available to tackle the environmental problems, these are scarce in developing countries. As a result of all this, there is a severe risk that environmental degradation in poor countries will be irreversible. Long-term institution building in the developing countries should be a priority. An efficient administrative capacity is required if environmental aspects are to be integrated into the decision-making process. Neither can one expect national conservation strategies to become operational without such a capacity. If the international community expects the Bank to play an important role in the execution of environmental guidelines, the Bank should also be in a position to do so. Given the need for an integrated approach, this should be done by earmarking some funds of the Bank Group for technical assistance for environmental activities.

The greater emphasis we place nowadays on structural adjustment measures in the Bank and the Fund, in my opinion, is helpful to accommodate social and environmental policies. Within the context of the structural adjustment programs of the World Bank, it is important to devote appropriate attention to poverty alleviation and to the environmental situation. In both fields, preventive and remedial measures must play their role. I am strongly in favor of an integrated approach when dealing with both issues. The Bank, as a development institution with long-term lending relations with its borrowing members, is in the right position to pursue such an integrated approach. The role of the Fund as a monetary institution is different, being devoted, among other things, to external adjustment as a necessary condition for the restoration of growth. The Fund of course needs to be aware of possible social and environmental implications of adjustment programs and to advise countries on alternative routes by which to achieve adjustment. But there its task stops. In the environmental field, the World Bank stands ready, as I said, to assist and has the expertise. I would like to express my appreciation for the rapid pace with which the Bank has deepened its involvement. Such an efficient division of labor should be enhanced by appropriate consultation between the Bank and the Fund.

The International Monetary System

In conformity with the Articles of Agreement, the Fund is called upon to monitor and even guide developments in the international monetary system. It is time to face up to the fact that there have been developments that should not be ignored or dealt with only pragmatically, which can mean haphazardly. In recent years, we have experienced large and at times disruptive exchange rate movements. Therefore, it is understandable and desirable that major industrial countries try to cooperate closely to stabilize their exchange rates. Their attempts, however, are not without costs. The greater the expected exchange rate stability, the more interest rate differentials are decisive in determining the size and direction of capital flows between countries. These, in turn, can directly frustrate domestic policy aims or trigger exchange rate movements which may be inconsistent with economic fundamentals.

In fact, increased exchange rate stability has made interest rate policies less effective for the management of our economies. To avoid counterproductive capital flows, we need a different policy mix. Monetary policy may need to be relieved and receive more support from fiscal policy. This would result in lower interest rates with favorable effects on industrial and developing countries alike. An analytical problem that lies deeper is the question of what governs the size and duration of autonomous capital flows, that is, flows that are not determined by interest rate differentials. Such flows need to be understood to judge the sustainability of balance of payments surpluses and deficits.

Questions such as these have led us to ask the staff and the Executive Board of the Fund to study present international capital flows and to look into their determinants and into the implications for the effectiveness of our policy instruments. We feel that the great expertise of the Fund staff and of the Executive Board should prepare the ground for constructive discussions among all Fund members.

Ninth General Review of Quotas

Basically, the Fund constitutes a framework for cooperation among its members in order to achieve the purposes of the Fund. To this end, the Fund can make its general resources temporarily available to its members under adequate safeguards. Therefore, the Fund has a legitimate need for resources. Since the Fund assists members with temporary balance of payments problems, the need for funds may be derived from the expected aggregate size of deficits, occurring in spite of reasonably sound adjustment. Potential balance of payments deficits cannot be predicted exactly, but one would expect them over the longer run to be related to the size of relevant variables in the world economy.

These have grown since the last quota increase and, therefore, so should the size of the Fund. Reducing reliance on borrowed resources and on the policy of enlarged access is another reason for a substantial quota increase. In fact, we are committed by the decision of the Interim Committee, now again confirmed, to decide on a quota increase before the end of the year. This means that an extra meeting of the Interim Committee may be called for in the next month or so. I would like to add two remarks. First, unlike the World Bank capital increase or the IDA replenishment, the budgetary consequences of a quota increase are no burden on the taxpayer. Second, I appreciate that a quota increase is not possible without complicated legislation, depending on the country concerned. This, however, does not absolve governments from their duty to take a firm view on their support for the Fund, of which members unanimously hold that it should play a central role in the 1990s in guarding the health of the world economy ….

Not just in relation to the Ninth Replenishment of IDA but also in general, I wish to plead for an increase in the contributions for official development assistance. Not for the sake of self-righteousness, but the official aid target of 0.7 percent of gross national product was agreed to internationally long ago. I am sure I am speaking in the name of the few member states which for many years now, sometimes even in spite of their budgetary problems, have met this level. I call especially on the large industrial countries to increase their development aid. That would solve many problems in the poor countries of the world.

Statement by the Governor of the Bank for Thailand—Panas Simasathien

On behalf of the Government of the Kingdom of Thailand, I am privileged to have the honor of addressing these Annual Meetings of the World Bank and the International Monetary Fund. I wish to join fellow Governors in welcoming Angola as a new member of the two institutions.

Thailand is a member in good standing of the Bretton Woods institutions, and we have worked extremely hard to play our part in the vision of attaining sound and stable growth and thus reducing poverty and, most important, in ensuring an enhanced and improved quality of life for our people, with the support of the World Bank and the Fund. It is heartwarming to hear once again a renewed emphasis on this vision from Mr. Conable and Mr. Camdessus. It is a vision which some of us may have already misplaced or allowed to slip from our priorities.

As the Bank and the Fund reach their fiftieth anniversary, there needs to be a renewal in the spirit, vision, and support by all member countries, in particular, the more fortunate industrial member countries. We need new vigor and the reordering of development priorities for the decade of the 1990s.

Achievement of sound socioeconomic development and growth in developing countries requires a timely and sustained flow of both domestic and external resources. This has not been the case in the 1980s. Sustained growth in world development requires an environment of free trade, but that is again not the trend in the 1980s. Indeed, the Uruguay Round is indicative of the growth of protectionism, not its reduction.

The environmental issue is a concern of the 1980s and 1990s, but its causes are over 75 percent due to the industrial economies. For the 1990s, we of the developing world, who are responsible for less than 25 percent of the problem, are asked to share in the cost of the cure.

The international monetary system in the 1980s has been marked by instability and exchange fluctuations, which have on the whole been less than beneficial for developing economies. In fact, the debt burden of the borrowing member countries has increased substantially owing to exchange risks. Terms of trade have been adverse for the past five years.

The international debt problem continues to be the major issue of this decade and very likely will sap the vigor of the international economy well into the 1990s. While we welcome the recent guidelines on the strengthened debt strategy and the recent Brady initiative, we would like to sound a note of caution. Indebtedness is a contractual issue between the lender and the borrower. With the introduction of a third party, namely, the Bank and the Fund, use of their presently limited resources should be based on the principle of additionality. As Bank and Fund resources are for the benefit of shareholder countries, an evenhanded approach is mandatory. For countries that have worked hard to maintain financial integrity but are also in need of scarce domestic and external resources to sustain their development growth, an additional collaborative burden is beyond their means.

The World Bank and the International Monetary Fund are collaborative institutions. They have 152 shareholders. Although the overwhelming majority of members are developing countries, their votes are few. But it is the borrowing member countries which pay for the services and the loans. In addressing the need for development and adjustment in member countries, these institutions should give the landlocked and least developed countries of Asia equal priority with the sub-Saharan region ….

Thailand looks forward to the 1990s as a decade of achievement rather than one of hope. We must act now and not merely postpone the issues. If the present debt strategy had been in place ten years ago, there would have been no debt problem now. The money and time spent in such exercises would have been better used to enhance the development of all concerned.

We are hopeful that at the next Annual Meetings, and definitely by 1991 when Thailand will be hosting the Annual Meetings in Bangkok, Mr. Conable and Mr. Camdessus will be able to announce a substantial improvement in the world development outlook and the completion of the Ninth General Review of Quotas.

Statement by the Governor of the Bank for Austria—Ferdinand Lacina

Let me begin by welcoming Angola as a new member of the International Monetary Fund and the World Bank.

The picture one gets from looking at the world economy is more positive on balance than had been expected a year ago. Growth in the industrial countries has been high, and productive investment has been vigorous. Unemployment has come down, although not as much as might have been expected in a booming economy. My country, Austria, is a good example of successful development. We have achieved above-average growth rates without endangering price stability, while our unemployment rate is about one third the average for Western Europe.

In several Eastern European countries we see efforts toward a fundamental reform of the economic system, while in others this reform process has not yet started. A difficult period lies ahead for those countries which are engaged in restructuring both their political and their economic systems, a process which entails many risks. The advice and support offered by the Bretton Woods institutions to countries like Hungary and Poland could, in my view, at least minimize some of the hardships of the painful transition from centrally planned to market economies.

Among the developing countries, a rather small group of dynamic economies enjoys high growth rates, but a large number of countries suffer from a variety of internal and external problems. Because wide variations in these countries’ individual situations rule out any common solution, we will have to continue dealing with these issues on a country-by-country basis.

Developing countries need increasing access to the markets of the industrial countries, not only to provide jobs for their quickly growing labor forces, but also to enable them to grow out of their debt. It is my strong conviction that now, when many developing countries are liberalizing their trade and foreign investment policies, it is high time for industrial countries to respond with significant initiatives of their own in liberalizing their trade relations with the developing countries.

Given trade’s great importance for development, I urge the industrial countries to seize the opportunity offered by the present favorable economic climate to roll back protectionism and liberalize trade with developing countries. Progress in this field is as important as progress in increasing development assistance.

In the financial sector, too, we should appreciate the liberalization efforts made by several developing countries. The adjustment programs pursued by developing countries often require them to shift from negative to positive real interest rates in order to promote domestic savings and reverse capital flight. This is a situation quite different from that of the industrial countries, where the level of real interest rates has been high for several years. In order to help reduce the debt burden of the developing countries, industrial countries should aim at lower interest rates. Reducing their external trade imbalances, and also their public sector imbalances, could help the major countries to reach this goal.

We all agree that the Fund and the World Bank Group have a central role to play in the adjustment process, not only as providers of technical assistance, but also as advisers armed with their own resources which they can use to catalyze additional resources from other financiers.

I support the modified approach to the debt strategy, although the experience gained so far is insufficient to permit evaluation. To ensure success, the debtor countries will have to continue, and in some cases to strengthen, their adjustment policies for a long time to come, and financiers will have to support them by extending assurances with respect to the provision of future resources.

There is no question that the Bretton Woods institutions have responded quickly. But their exposure to a number of countries cannot be further increased without affecting the structure of their portfolio. Efforts are therefore needed to mobilize financing from other sources for countries that have already obtained quick Bank-Fund assistance, and to permit the extension of the strengthened debt strategy to other countries.

To enable them to fulfill their role in the adjustment process, the Bretton Woods institutions must be provided with adequate financial means. The delay of one and a half years now in completing the Fund’s Ninth Quota Review threatens to undermine the Fund’s position in the international monetary system and to have an adverse effect on commercial banks’ attitude toward the modified debt strategy.

I therefore urge all Governors to agree on a very substantial quota increase at these Annual Meetings so that further formal steps toward concluding this quota increase can be taken between now and the end of the year. By the same token, timely approval of a substantial replenishment of the resources of the International Development Association is required. In this connection, I would like to announce that Austria is prepared to increase its share in those resources.

Finally, let me come to a subject of global importance: the preservation of our natural inheritance. The population growth of recent decades has increased the demand for living space and arable land and has quickly raised our awareness of the constraints of natural resources.

In densely populated industrial areas, concerns about pollution have been with us for quite some time. During recent years, however, public sentiment opposing further damage to the environment has risen worldwide. And now we see what I consider a precondition for any change toward a new environmental policy, namely, ongoing public discussion of environmental issues all over the world, in both urban and rural areas, and in both the industrial and the developing countries.

In conclusion, let me stress my conviction that the current improvement of the economic situation in the industrial countries provides better prospects for the world economy as a whole. Enlarging the room for maneuver should make it easier to equip the Fund and the World Bank with adequate resources, enabling them to function as efficient instruments of international solidarity.

September 27, 1989.

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