Summary Proceedings of the Forty-Second Annual Meetings of the Board of Governors 1987

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). B.T.G. Chidzero

International Monetary Fund. Secretary's Department
Published Date:
November 1987
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I have the honor to present the 1987 Annual Report of the Development Committee. As this is my first report to the Boards of Governors, I would like to express my sincerest appreciation and gratitude to all members of the Committee as well as the heads of the institutions for their support and advice, which have helped me cope with the challenges of my office.

As the Annual Report on the work of the Development Committee during the period July 1986 to June 1987 has officially been transmitted to the Chairman of the Boards of Governors, I propose to highlight, in the main, the major points of the deliberations at the Committee’s meeting held on September 28.

The central focus of our deliberations was the revival and sustainment of growth in the developing countries and the need to increase resource flows for this purpose, the more so in view of the burdens of debt service and historically depressed commodity prices. In this context, the Committee discussed proposals for action for low-income countries facing exceptional difficulties, especially the seriously indebted countries in sub-Saharan Africa. It also continued its review of growth-oriented programs in the heavily indebted middle-income countries and gave further and pointed consideration to the World Bank’s role in development and its resource requirements.

These discussions were held against the background of a number of external factors adversely affecting growth prospects, such as persistent weakness in commodity prices, modest growth in the industrial countries, increasing protectionist pressures, high debt burdens, and inadequate financial flows. Particular note was taken of the adverse impact of increases in real interest rates. The Committee stressed the importance of raising the level of global economic activity by improvement in the policies of industrial countries as well as strengthening of adjustment efforts in many developing countries.

Low-Income Countries with Exceptional Difficulties

At its last meeting the Committee expressed great concern about the exceptional difficulties confronting many low-income countries, as I have mentioned already, especially the seriously indebted in sub-Saharan Africa. I am happy to report that there was full agreement on the need for urgent action on the part of the international community to assist these countries in their adjustment efforts. The Committee, therefore, supported the proposals by the Bank and the Fund, which would provide donors and creditors with a variety of measures which they could adopt to assist the low-income countries. In this regard, the Committee strongly supported the Bank’s proposals for an increase in IDA disbursements to these countries and encouraged donors to increase the flow of concessional resources in co-financing operations with the Bank. It also strongly endorsed the initiative of the Managing Director of the Fund for a substantial increase in the resources of the structural adjustment facility.

In general, the Committee held that the financing needs of low-income countries should be largely met through assistance on appropriately concessional terms. It considered proposals for debt relief by reducing interest rates for these countries and urged donors to increase the concessional element of their support.

The growth prospects and the debt situation in these low-income countries call for urgent and decisive action. The measures considered by the Committee should go a considerable way in alleviating the situation of these countries that face unique growth and balance of payments problems.

Review of Progress in Heavily Indebted Middle-Income Countries

In its last two meetings, the Committee reviewed the situation in the heavily indebted countries against the background of the current debt strategy. The consensus reached in Seoul in October 1985 called for concerted action by all the major parties—the indebted countries, the industrial countries, the commercial banks, and the multilateral financial institutions.

In its assessment of the complex issues involved, the Committee emphasized the need for an improved external environment and increased capital flows to debtor countries on terms adapted to their payments situation and their specific economic circumstances and for the debt strategy to be kept under review so as to enhance prospects for growth and development. The Bank and the Fund were urged to play a strong leadership role in expanding flows of finance and to assist in promoting a “menu” approach, including help in diversifying financial instruments attractive for creditors and bank financing.

The Bank’s Role and Its Resource Requirements

At its meeting this week, the Development Committee had a most productive discussion on the question of a general capital increase for the Bank and gave full support for a substantial increase, sufficient to support a growing lending program for an appropriately long period of time. The Committee emphasized that this should not be regarded as a substitute for expanded flows of resources from private sources. The Executive Directors of the Bank were urged to complete their deliberations expeditiously so that the provision of increased capital subscriptions to the Bank could start as soon as possible.

Adequacy of Resource Transfers to All Developing Countries

The Committee maintained a regular review of trends in the transfer of resources to developing countries, noting a continued decline in flows of all types. It was agreed to focus attention on the adequacy of resource transfers at our next meeting.

Environment, Growth, and Development

The Committee had a first round of discussion in April 1987 on the important relation between environment, growth, and development. In September 1987, members had a report from the Bank’s President on the Bank’s environmental program and agreed to continue further discussion on the subject in April 1988. The Bank was asked to prepare a paper for this discussion, taking account of elements in the report of the World Commission on Environment and Development (Brundtland Commission) of relevance to the Committee.

Commodity Problems and Agricultural and Industrial Policies of Industrial Countries

In its April 1987 meeting, the Committee reviewed the depressed state of international commodity markets and the unfavorable outlook. Options for dealing with commodity problems were considered by the Committee. In its September 28 meeting, the Committee asked that this important item be placed on its future work program. The Committee also discussed the impact of industrial countries’ agricultural and industrial policies on the economic prospects of the developing countries. At its September 28 meeting, the Committee requested the Bank and the Fund to undertake an in-depth study on the impact of industrial policies of the developed countries on the developing countries for consideration by the Committee as soon as possible.

Poverty Impact of Adjustment and Development Programs

After an initial discussion on the impact of adjustment programs on the poor, the Committee agreed to have a fuller discussion on this critical subject at a future meeting.

Current International Trade Issues

The Committee continued to follow developments on international trade issues with the benefit of presentations by the GATT Director General. The Committee, while welcoming the launching of the Uruguay Round of multilateral trade negotiations, stressed the need to implement the standstill and rollback commitments for reducing protectionism and the importance of trade liberalization in a global strategy on debt and development.


Looking back on my first year as Chairman, I must say I have been encouraged by a heightened understanding in the Development Committee and in other international fora of the nature of development problems facing developing countries and the need for urgent action. Given the gravity of these problems, it is essential and pressing to go beyond stocktaking and agree on concerted actions. Our meeting this week gave political momentum to increasing the resources of the Bank within the coming year, to further actions in support of the low-income, debt-distressed countries, and to the need for strengthening resource flows to the heavily indebted middle-income countries in an improved external environment.

Statement by the Governor of the Fund for the Federal Republic of Germany—Karl Otto Poehl

I first want to express my firm welcome to the new Managing Director of the IMF, an old friend and former colleague, Michel Camdessus. He takes over at a time when many industrial and developing countries can point to solid achievements and progress in a number of areas.

In the industrial countries, the return to greater price stability and, more recently, to greater exchange rate stability stands out as the most important achievement. This has been due primarily to the policies adopted and adhered to in individual countries to deal effectively with the causes underlying the internal and external imbalances that beset each of them. It has also been due to closer and more effective cooperation, especially between the major countries. We have the real chance of turning the present world economic recovery into one of the longest periods of uninterrupted economic expansion on record.

The positive results benefit not only the industrial countries themselves. They also offer the prospect of a more stable world economic environment for developing and highly indebted countries to deal with their problems individually and in cooperation with their partners in the industrial and developing world. There is indeed an important lesson for all countries to be drawn from these achievements: that the primary responsibility for restoring internal and external balance rests with each individual country, but that cooperation at the regional as well as the global level will assist the process of adjustment and help avoid unnecessary friction. Effective cooperation is even more indispensable in today’s less favorable growth environment than in the earlier decades of the 1950s and 1960s.

In the industrial countries, coordinated policy adjustments have created a more favorable environment for a substantial correction of the current account deficits and surpluses of major countries, including my own country. Published monthly and quarterly trade and current account data may still conceal the extent of the adjustment that is under way, and foreign exchange markets may not take due account of the underlying adjustment. But we knew all along that export and import values would reflect the volume effects of changes in relative prices with considerable delay. Differential growth of domestic demand in surplus and deficit countries is, of course, crucial to the outcome and to the speed of adjustment. The recent strategy pursued by the major industrial countries, as reflected in the Louvre and Venice communiqués, rightly emphasizes the need for effective policies designed to ensure that domestic demand expands more rapidly than domestic output in major surplus countries and less rapidly in deficit countries. According to the most recent data available and the estimates made by the Fund staff as well as other institutions, such as OECD or the European Communities, this seems to be assured as far as one can reasonably look ahead.

Economic policies and performance in the industrial countries are moving in the right direction. The recent substantial reduction in the fiscal deficit of the United States is most encouraging. I note the U.S. Administration’s determination to pursue this policy, which is indeed essential for containing a further rise in interest rates, reducing the trade and current account deficits, and thus countering protectionism effectively. Much is at stake for the United States itself and for the world economy.

The budgetary adjustments in Japan and the already enacted tax reductions in the Federal Republic of Germany will give additional impetus to the continuing expansion of domestically led growth in these countries.

Let me recall here that the Federal Republic of Germany, in addition to the tax cuts of the past few years, will reduce personal income taxes at the beginning of the next year by another DM 14 billion or 0.7 percent of GNP, which will be reflected in a significant increase in public sector deficits. Additional net tax relief of DM 20 billion or 1 percent of GNP will be provided in the context of the comprehensive tax reform, which will be implemented in 1990. Thus, between 1986 and 1990, the Federal Republic of Germany will have provided net tax relief totaling DM 50 billion or 2½ percent of GNP. Through this process of tax reduction and reform, we will continue to improve the conditions for domestically led growth, both on the demand and the supply sides of the economy.

After growth had been hesitant—as in some other European countries—around the turn of 1986/87, due to the shock effects of the sharp appreciation of the deutsche mark, and due to adverse weather conditions, the German economy is again back on a satisfactory path of growth, with internal demand expanding at a healthy 3–3½ percent.

The primary objective of economic policy in the Federal Republic of Germany remains steady progress of the domestic economy based on credible monetary policy, substantial tax cuts and reform, the strengthening of market incentives, and the reduction of the role of government to its proper tasks, which it will then fulfill all the more effectively. We will retain the essential medium-term focus of economic policy.

As the recent World Economic Outlook was right to recall, “the key objective of monetary policy remains the containment of inflation and inflationary expectations.” This is the essential contribution of monetary policy to sustained growth and international financial stability. We should not forget the lessons of past recovery phases, in which accelerating inflation brought the upswing to a premature end.

In today’s world of ever more closely integrated financial markets, stability of exchange rates can only be assured on a durable basis if economic, fiscal, and monetary policies in all countries are committed to the objective of price stability. This principle was reconfirmed only a short while ago in the context of an effort to strengthen the functioning of the European Monetary System (EMS). That system, as you all know, has been in operation for eight and a half years now, and it has in large measure succeeded in its objective of creating a zone of monetary stability in Europe. It has helped to prevent the “overshooting” of exchange rates between participating currencies, and it has assisted individual countries in their efforts to overcome inflation at home.

This success of the EMS has made it possible for its members to agree on a number of changes in its operating rules. This should help avoid tensions within the system that have little or no real basis in the fundamental divergencies between countries’ policies and performance, especially inflation differentials, but are mostly the consequence of the erratic behavior of the exchange market. Of course, these changes involve some important concessions on all sides, including—particularly—the Federal Republic of Germany and its central bank. But I strongly believe that the changes we have made are constructive and will give further impetus to the close cooperation that is the basis of the successful functioning of the EMS.

In the same vein, the closer coordination of policies, which has been agreed between the major industrial countries, is crucial if the adjustment process that is under way is not to be undermined by exchange market volatility. In any case, we cannot rely on the exchange rate mechanism alone for external adjustment. As the major industrial countries affirmed last weekend, they will carry forward their economic policy coordination with a view to ensuring that the fundamental economic conditions are in place for the stable functioning of exchange markets.

We have also seen a significant strengthening of the adjustment efforts in many developing countries. Many of them have met with considerable success. However, I do not wish to underestimate the difficult tasks that remain. While many developing countries are successfully promoting needed reforms, others find it hard to maintain the social consensus during the protracted period of adjustment. Often enough, growth rates are clearly insufficient to meet the needs of growing populations, while growth prospects are limited by a lack of investment opportunities.

These severe problems confronting especially the many indebted developing countries should not make us overlook the progress that can be achieved with sound economic policies, perseverance, and determination. Let me also stress once again that there simply is no realistic alternative to the cooperative country-by-country approach to the debt problems. If anything, even greater diversification within this approach to meet individual requirements may be needed.

To be sure, adequate financing is an integral part of the development process. It is also needed to soften the impact of adjustment during the transition to more satisfactory growth. However, it would not be prudent to take on new debt unless the debt-servicing capacity can be expected to rise correspondingly. Efforts made by debtor countries to create a favorable climate for the mobilization and efficient use of non-debt-creating financing deserve the strong support of the Bank and the Fund. Ample opportunities have to be created for the profitable investment of increased domestic savings, repatriated flight capital, and foreign direct investment.

It is highly desirable that the relations of the middle-income countries with the commercial banks should return to normal. Recourse to a wider choice of financing options, of which there have recently been encouraging examples, should help banks in mobilizing finance where this appears justified. Banks are likely to be more cooperative the greater their confidence in countries’ determination to pursue policies that will deal with the underlying problems of each case. It would not be appropriate for the public sector to take over risks that the banks have assumed under their own responsibility. With regard to the poorest countries, official creditors have a special responsibility to fulfill. Without the strong support from the official side, the prospects for these countries to achieve a more satisfactory path of development would appear bleak in many cases.

The debt discussion is showing signs of greater realism. It has become more explicitly recognized that an orderly solution to the debt problems can be sought only in the context of sustainable growth of the debtor economies, which requires a supportive international environment and the support from official and private creditors. Debtors, on their part, recognize more explicitly that they have the primary responsibility for their own development. The importance of domestic policies is brought out in the World Economic Outlook, which compares the sharply contrasting policies and performances of countries that have encountered debt problems and those that have not, thereby setting examples from which we all can learn. Growth and adjustment, countries’ own efforts, and international cooperation must go hand in hand.

There is an undiminished need for a strong, central role for the Bank and the Fund. The agreed Eighth Replenishment of IDA needs to be implemented without delay. The expanded role of the World Bank in promoting growth-oriented policy reforms calls for a substantial general increase in its capital, including an adequate paid-in portion. In the Fund, the immediate task is to work out satisfactory arrangements for enhancing the structural adjustment facility so as to enable the Fund to serve its poorest member countries more effectively. All member countries should contribute to the enlargement of the resources of this facility. We are willing to do so. Moreover, we should work for agreement on the size and modalities of an increase in the Fund quotas, to be implemented in due course.

Let me conclude with a strong appeal to all partners to resist protectionism and to work actively toward the early successful conclusion of the Uruguay Round of multilateral trade negotiations. In this context, the standstill and rollback commitment is of crucial importance. Protectionism in all its forms remains a threat to the welfare of all nations, industrial and developing alike. It must not be allowed to gain ground.

Statement by the Governor of the Fund and the Bank for Saudi Arabia—Sheikh Mohammad Abalkhail

In the name of God, the compassionate, the merciful: It is a privilege to address the meetings of the Boards of Governors of the World Bank and the International Monetary Fund on behalf of the Arab Governors. I join my fellow Governors in extending a welcome to Mr. Camdessus as Managing Director of the Fund.

Last year’s global economic performance has been characterized by a mix of progress, disappointment, and continued uncertainties and risks. There have been some encouraging signs on the adjustment front in all countries. Progress has been achieved on policy coordination since the Louvre and Venice meetings; exchange rates have been realigned, and there are serious efforts to stabilize them; and inflation rates have continued to be low.

The disappointments are mainly the slow growth in the industrial countries and the continuation of imbalances in external payments among the three major countries at levels that are unsustainable in the medium term. Unfortunately, growth in many industrial countries has been seriously constrained by the limited growth potential, which was due, in large part, to the lack of progress on macroeconomic and structural adjustments. In some industrial countries, there has not yet been a firm and credible policy to reduce their fiscal deficits, while in others, there has yet to be a convincing effort on structural reform, including shifting demand and resources toward more domestic orientation. It is now uncertain whether even the current moderate growth rates can be sustained.

The major risks ahead are increased protectionism, persistence of the debt problem, and the slow growth in the developing countries, due, in part, to their adverse terms of trade. The lack of progress in macroeconomic and structural adjustment in industrial countries is the fundamental reason why trade and growth have failed to accelerate. Unfortunately, in recent years, several industrial countries have resorted to protection, instead of adjusting and enhancing their potential growth.

A shrinking proportion of world trade is being conducted according to the principles of free trade. In fact, perhaps as much as one half of all trade is now affected by nontariff barriers. Persistent attempts by countries in our region to diversify out of oil production into industries in which they have a comparative advantage, for example, petrochemicals, have been frustrated by protectionist barriers in industrial markets. Intensified trade restrictions are threatening other traditional areas of trade, including agriculture, clothing, and textiles. It is very unfortunate that most industrial countries are perpetuating structural rigidities and distortions through protection, especially through heavy subsidies granted to inefficient industries, leading to a serious global misallocation of resources.

The international community should not stand by and allow this alarming trend to continue. I urge the Bank and the Fund to take a firm position to convince industrial countries that it is in everyone’s self-interest to avoid shortsighted, protectionist solutions, and to opt, instead, for long-term structural adjustment. The Bank and the Fund should vigorously promote free trade and support those countries that see free trade as an essential component of adjustment and restored growth. Industrial countries, in particular, have to address the root cause of protectionism and promote the expansion of world trade, based on the principle of comparative advantage.

The Arab countries have consistently cooperated with the international community. We have followed appropriate economic policies that have taken into account the well-being of the world economy and its interdependent nature. We have also suffered a serious deterioration in our terms of trade. Yet, we have not hesitated to adopt and implement, without delay, difficult measures to adjust and restore growth. Thus, we expect the Bank and the Fund to be more understanding of the problems of the Arab countries and to support their economic and financial adjustment efforts. Additionally, like many other developing countries, we have recognized the need for sound economic policies and the importance of export diversification, particularly in countries dependent on a few sources of export revenue. Successful export diversification, however, requires free and open access to markets. Inadequate access to foreign markets has frustrated private sector investments in our region. Therefore, we call upon the international community to cooperate in promoting free and fair trade based on comparative advantage. Without such policies, it will be increasingly difficult to maintain the open trading systems now existing in many Arab and other developing countries.

Furthermore, it is essential that all countries, particularly the reserve currency nations, refrain from practices that impede capital movements and trade flows, including the freezing of foreign assets. Such actions not only present a threat to the international financial system but may also undermine economic and political relations among nations.

I turn now to the debt problem, which has preoccupied the international community for several years. We believe that it is important to improve on the debt strategy to make it more workable and to look for innovative approaches and viable options. The increased difficulty of ensuring adequate financing flows from commercial banks and the unfavorable global environment facing debtor countries necessitate, in our view, a cooperative and flexible attitude by all parties concerned.

The continued difficult situation in sub-Saharan Africa must be a matter of concern for the entire international community. The plight of the severely debt-distressed nations is well known. We support the efforts being made by the international community to address these serious problems. We also support the recent initiatives by the World Bank and the Fund in mobilizing additional concessional resources for the region, including the enhancement of the resources of the structural adjustment facility (SAF). Moreover, the related adjustment programs should be appropriate for the circumstances of these countries.

I would also like to draw special attention to the unsatisfactory situation regarding resource flows to developing countries as a group. The Arab donor countries have always extended high levels of concessional assistance to other developing countries and have continued to do so in spite of adverse economic and political circumstances. Arab assistance remains untied and continues to help a wide range of countries. It must be emphasized that, over the last decade and a half, this assistance has been unprecedented as a percentage of donor GNP. We therefore encourage the industrial countries to make every effort to enhance their official development assistance and move quickly to reach at least the target of 0.7 percent of their GNP, particularly in light of the substantial terms of trade gains. We also believe that it is now only natural that the industrial countries provide adequate contributions to the enhancement of the SAF resources.

We support the enhanced role of the World Bank, and endorse a general capital increase for the Bank. We also hope that the MIGA Convention will enter into force on time. We also support the resumption of adequate SDR allocations; and we see a need for a substantial increase in Fund quotas. We agree that access limits should stay unchanged at this time and call on the Fund to be more flexible in implementing its access policy. Moreover, in view of recent developments in the prices of primary commodities, we attach particular importance to the compensatory financing facility as a very useful instrument for assisting those countries that experience fluctuations in their export revenues. However, for this facility to perform its role effectively, it is crucial that its unique features with respect to disbursement and conditionality be preserved.

In conclusion, it is important that all parties carry out their responsibilities effectively and without delay. We hope that these meetings will contribute toward achieving a more healthy international economic environment.

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

I welcome the progress that we have made at these meetings on a number of issues of great importance. We have reaffirmed the Louvre agreement. There is now full support for an early and substantial general capital increase for the World Bank. And there is increasing recognition that within the general debt strategy, special action is required to help the very poorest and most heavily indebted countries, particularly in sub-Saharan Africa.

At the meetings of the Interim and Development Committees this April, I put forward a three-point proposal for assisting these countries, provided they pursue appropriate adjustment policies: the conversion of aid loans into outright grants; longer repayment and grace periods on Paris Club reschedulings; and reductions in the rates of interest on those reschedulings.

The Managing Director of the International Monetary Fund and the President of the World Bank have put forward complementary proposals for helping the poorest countries by concessional interest rates, including a substantial increase in the size of the Fund’s structural adjustment facility (SAF). I support these proposals, and believe that heavy indebtedness should be a major factor in determining the allocation of funds under any enlargement of the SAF.

It is of the first importance that we make a real effort to reach agreement on all these proposals at the earliest possible date.

The U.K. Economy

I now turn to the experience of my own country during the past year. Since the sharp fall in the oil price in 1986, the growth rate of the U.K. economy, so far from slowing down as was expected, has actually picked up. At the same time, the growth rate for the major industrial countries as a whole has been below expectations. At first sight, this seems paradoxical. The industrial countries in aggregate were significant beneficiaries from lower oil prices, whereas the United Kingdom, as a major oil producer and exporter, stood to lose significantly.

What has happened is that the U.K. economy has adjusted more smoothly to the fall in oil prices than many thought possible. The latest Fund forecast puts U.K. growth at 3.4 percent this year—the fastest growth of all the major industrial countries. And U.K. manufacturing productivity, currently rising at about 6 percent, has continued to exceed expectations, thus containing the growth of unit labor costs.

The United Kingdom’s strong growth performance has not been brought about by any fiscal stimulus. The public sector borrowing requirement has in fact been reduced to less than 1 percent of GDP. We have been able to bring down tax rates by maintaining a declining path for public expenditure as a proportion of GDP. Nor has there been any relaxation of monetary policy. Interest rates have been held at levels necessary to maintain sound anti-inflationary conditions. In short, it is the enterprise economy that has done the trick. One consequence of this improved performance has been a significant drop in the unemployment figure, which has fallen by 400,000 over the last 14 months.

The strong growth of U.K. output and demand has caused some to suggest that the U.K. economy is in danger of overheating, while others are forecasting a slowdown. Some manage to combine both predictions. But while, as in most countries, inflation is a bit higher than last year when the impact of falling oil prices was greatest, there has been no significant change in underlying inflationary pressure.

The United Kingdom is now well into its seventh year of steady growth at 3 percent a year. During that period there have been minor fluctuations, and after the slight spurt this year, I would expect something closer to the 3 percent average rate next year.

The Background to the Louvre

I now turn to the evolution of exchange rate policy. For the first 25 years after World War II, exchange rate stability was achieved through the Bretton Woods system. This formed a cornerstone of the postwar economic order, not least as a force for financial discipline. But it began to break down in the late 1960s, and by the early 1970s it had collapsed altogether. Thereafter, with countries pursuing divergent economic policies, and many suffering from high and volatile inflation, a system of floating exchange rates was virtually inescapable. Indeed, many at the time believed this new flexibility to be desirable.

With hindsight, some of the arguments for free floating seem much less compelling. And the belief that markets would provide a stabilizing influence, through the operations of medium-term speculators, has not been borne out.

In particular, we have seen wild gyrations in the dollar that have clearly not been a reflection of economic fundamentals, which are essentially slow moving. Few could seriously argue that two deutsche mark to the dollar was “correct” in 1979, and again at the end of 1986, and yet that three deutsche mark to the dollar was “correct” in 1985. Moreover, these gyrations have damaged growth in world trade. Businesses have had to divert scarce management time and skills to coping with currency fluctuations, rather than improving company performance. And the major uncertainties about exchange rate movements inhibited risk taking and required a switching of resources at a pace that was wholly unrealistic.

The explanation for these gyrations in the dollar derives in large part from the nature of the foreign exchange markets. We now have global 24-hour markets in which turnover has increased dramatically, with only a small part of that related to commercial transactions. This presents particularly acute problems for the dollar, which still dominates the world’s money markets. In 1986, on the London foreign exchange market, 97 percent of all transactions were in dollars.

Of course, all financial markets have a certain amount of speculative froth. But to function well they need some players to take a longer view, and so provide a stabilizing influence. In foreign exchange markets, they have been conspicuous by their absence.

This means that once the dollar starts to move in one direction, it can continue in the same direction for months and even years, even if there is a general consensus that the rate is out of line. This is what happened in 1984 and early 1985. Almost everybody agreed that the dollar was overvalued, and that, in the long run, it was bound to fall. But they continued to buy dollars in the belief that, in the short run, it would move even higher—which is, of course, what consequently occurred.

The result is that trends have been greatly magnified. Capital movements have generated fluctuations in the dollar; but equally, fluctuations in the dollar have themselves generated further capital movements. This is how exchange rates have often acquired a momentum of their own, which has not been reversed until they have reached extreme levels of over- or undervaluation.

Background to Plaza

It was a growing concern about this process that led a small group of us to meet in the Plaza Hotel in September 1985. We shared three perceptions:

  • —first, that the gyrations in exchange rates had proved damaging;

  • —second, that the immediate problem was that the dollar was much too high; and

  • —third, that the time was right for the authorities of the major countries to give the markets a clear lead.

The Plaza agreement marked an important step toward a more managed system. In private, we discussed the scale of fall we saw as desirable, and although no figures were given in public, everyone was aware that we were looking for substantial changes. We agreed to cooperate to bring that about. And that agreement played an important role in securing a continuing fall in the dollar over the succeeding 15 months.

The Louvre

The Louvre accord earlier this year marked another important step forward—Plaza II, as I called it at the time to emphasize the continuity. By then, the broad objectives agreed at Plaza had been achieved. The yen and the deutsche mark had appreciated by as much as 50 percent or so against the dollar.

We agreed that, given the policies being followed, the dollar was by then broadly in line with economic fundamentals and that the interests of the world economy would best be served by a period of stability, to allow time for the major economies to adjust to the exchange rate changes that had occurred. We were not, of course, thinking in terms of rigid exchange rates, but we did discuss the scale of fluctuation, around the then current levels, which we would not wish to see exceeded. Figures were agreed in private, but not, of course, revealed in public.

In spite of widespread skepticism when it was first concluded seven months ago, the agreement has proved a success.

Managed Floating

The move to managed floating has been made possible by two fundamental changes.

—First, we have at last returned to a world of low inflation. The average inflation rate for the major seven economies has fallen from 12 percent in 1980 to about 3 percent today. In the process, inflation differentials have been narrowed considerably.

—Second, there is now a clear consensus among the major countries about the approach to economic policy. And we all agree on the need for a greater reliance on market mechanisms within the framework of a firm monetary and fiscal policy.

We have been able to make this regime work because:

  • —We have chosen the right time to give a lead to the markets. In this sense we have been working with, rather than against, the grain of the markets.

  • —We have been prepared to commit ourselves publicly to appropriate and consistent domestic policies.

  • —In particular, we have all been prepared in practice to give significant weight to exchange rates in the conduct of monetary policy.

  • —We have been prepared to back up our agreement with coordinated intervention, sometimes on a substantial scale.

  • —We have deliberately not revealed details of our arrangements. And we have worked within margins of a size sufficient to allow us the necessary tactical room for maneuver.

A Regime for the Future

I believe that we can and should use the experience we have gained to build a more permanent regime of managed floating. I do not see the past two years simply as a temporary phase. Our objectives should be clear: to maintain the maximum stability of key exchange rates, and to manage any changes that may be necessary in an orderly way.

Let me make it clear that I am not suggesting that we can or should return to Bretton Woods. That system was undermined by its rigidity; the margins were too narrow; it required a predictable and mechanical response from the authorities that made them an easy target; necessary realignments were postponed too long and, consequently, when they came, they were inevitably large.

For the future, it is important, therefore, that we continue to keep an adequate degree of flexibility in terms of the width of the bands within which currencies are able to fluctuate. And, if and when the time comes to adjust one of the rates, that adjustment should be made by moving the midpoint within the confines of the existing range. This means that the markets are not given a one-way bet, and the authorities retain tactical flexibility.

As I have already emphasized, what made the Plaza and Louvre agreements possible was that the countries participating were, and remain, in effect, members of an anti-inflationary club, with a clear commitment to taking whatever steps are necessary to curb their own inflation. It is vital that that commitment continue, individually and collectively. A resurgence of inflation in any individual country would make it difficult for that country to remain within the club.

At the same time, we must also ensure that there is no persistent inflationary (or for that matter deflationary) bias for the group as a whole. This can be helped by:

—the development of indicators for the group as a whole; these will be mainly financial but special attention should also be given to the trend of world commodity prices;

—a nominal framework for policy, in terms either of a path for GDP growth for the group as a whole, or one for the average inflation rate; and

—a medium-term perspective when setting out the path and in gauging actual performance; we should not become involved in an exercise in short-term fine tuning.

In recent meetings we have put a lot of effort into developing performance indicators for individual countries. I have to say that I have considerable doubts whether we can usefully take that exercise much further. I believe it would be far more useful to devote our efforts to monitoring the performance of the group as a whole, so that we can ensure that we maintain the correct noninflationary policy stance.

Current Account Imbalances

Some fears have been expressed that the Louvre agreement will be undermined by the persistence of current account imbalances between the major countries. I do not believe this need be so.

What we are seeing is not altogether surprising. It is the familiar J-curve effect, and although the imbalances remain large, trade volumes are adjusting.

In any case, there is no law that dictates that the current accounts of the major industrial countries should always be in balance. We have an integrated world economy and we encourage the free flow of capital and goods. Clearly there are limits to the accumulated external liabilities or assets that can be sustained without creating major anxieties for capital markets. But investment opportunities and savings propensities inevitably differ from country to country, and it is natural for this to produce substantial, and often sustained, capital account flows. These flows necessarily have their counterparts in current account surpluses and deficits.

The present combination of deficits and surpluses has emerged over several years during which the growth of domestic demand in the Federal Republic of Germany and Japan has been consistently below the growth of output, while in the United States it has been consistently above. The process of unwinding the imbalances requires a reversal of the differences between domestic demand and output in those countries. This is bound to take time to complete, but—and this is important—it has now begun.

It would be a serious mistake to seek a shortcut by a further dollar depreciation. It was undoubtedly necessary to correct the huge misalignment of the dollar in 1985. But there is no case for going to the opposite extreme of an artificially low dollar. The benefits to the current account would be small compared to the damage to U.S. inflation and the dislocation to the world economy. The main lesson from recent years is that we should avoid exchange rate misalignments, not encourage them.


In conclusion, I believe that external stability should now complement the internal financial stability that we have already achieved. It will remedy a major weakness in the world financial order and provide a sounder basis for the prosperity we all seek.

Statement by the Governor of the Bank for Botswana—P.S. Mmusi

I am greatly honored to address this distinguished gathering as the spokesman for the African Governors of the World Bank and the Fund. On their behalf, I would like to congratulate Mr. Michel Camdessus on his appointment as Managing Director and Chairman of the Executive Board of the International Monetary Fund. He is taking the leadership of this institution at a time when increased emphasis on growth-oriented adjustment programs for developing countries experiencing economic and financial difficulties is considered of paramount importance to help them grow out of their economic and debt-servicing problems. We are confident that his vast knowledge of developmental issues will enable him to give the necessary impetus to the institution to discharge this task.

Our meeting last year took place against the background of a generally disappointing world economic performance in 1985 and uncertainties about the immediate future. An overview of the economic and financial developments in 1986 indicates a continuation of such poor performance and a persistence of the uncertain outlook for the world economy. World output growth declined for the second year in a row; large fiscal imbalances persisted in industrial countries, particularly in the United States; exchange rates continued to be unstable; and though interest rates declined, they remained very high in real terms. Likewise, although world trade expanded by about 5 percent in volume terms compared with 3.2 percent in 1985, the most salient features in trade developments in 1986 were the unprecedented deterioration in the terms of trade of developing countries and the growing protectionist pressures in industrial countries, which contributed to the aggravation of the financial difficulties of developing countries. As in 1985, the only bright spot in this rather bleak picture was the success achieved by both industrial and developing countries in the fight against inflation: the rate continued to recede in the former and it was reduced by more than one fourth in the latter.

This mixed performance of the world economy reflected to a large extent that of the industrial countries, whose economic growth continued to slow down, declining from 3.0 percent in 1985 to 2.4 percent in 1986. The external imbalances of this group of countries, in particular the three largest ones, widened. The surplus countries strengthened their current account positions while deficit countries recorded larger deficits. It is all the more worrisome to note that these developments occurred despite a sharp decline in oil prices, a substantial exchange rate realignment among the major currencies, and increased efforts at international coordination of the economic policies of the most industrialized countries. How to reverse the pattern of current account developments in industrial countries without creating economic recession and disruption of exchange markets is a major challenge facing the international monetary system. It is the responsibility of the industrial countries to meet this challenge by embarking on coordinated and appropriate economic and financial policies that could dispel some of the uncertainties clouding the short- and medium-term outlook of the world economy.

The ability of the developing countries to achieve and sustain an expansion of their economies would depend critically on the ability of the industrial countries to create a favorable economic environment conducive to world economic expansion. The marked deterioration of the internal and external financial imbalances of the developing countries has brought to the fore the extent of the impact of external developments on the developing countries’ economic and financial performance and their capacity to service their debt. Though exports from developing countries expanded by 8.2 percent in volume terms in 1986, it is worth noting that export unit values, in U.S. dollar terms, weakened by 13.3 percent. As import unit values increased by 4.2 percent, the terms of trade deteriorated by almost 17 percent, contributing to a rise in both the ratios of their external debt and of their debt service to exports of goods and services. This underscores the urgent need for the industrial countries not only to endeavor to promote an external environment conducive to their own economic growth and hence that of developing countries but also to ensure remunerative prices for the exports of these countries. The African Governors welcome the renewed commitment of the seven most industrialized countries to intensify their efforts at coordinating their economic policies to foster balanced economic growth and to stabilize the exchange rates of their currencies. However, we are of the view that in the continued absence of adequate supporting policies, this commitment will do little to improve the external environment. We are also of the view that industrial countries should open their markets to developing countries to help sustain the export diversification policies being implemented. We note with great concern that while many of our countries are liberalizing their exchange and trade systems at high political and social costs, under Fund-supported adjustment programs, trade restrictions and subsidies in various guises remain in force and protectionist pressures are growing in industrial countries. It is in the interest of the world trading system as a whole that policymakers in these countries ought to resist such pressures and roll back existing trade restrictions.

Before I turn to the policies and activities of the Fund, I wish to share with you some highlights of the economic and financial developments of our continent and the views of African Governors on the problems facing it.

In 1986, the deterioration in the standard of living of our populations accelerated, with the decline of per capita real GDP continuing at a faster pace. The external current account deficit of African countries (excluding official transfers), which amounted to $4.2 billion in 1985, worsened to about $15 billion in 1986, and the servicing of their external debt claimed more than 35 percent of their exports of goods and services in 1986. Moreover, the progress that African countries made in 1985 toward fiscal consolidation was reversed in 1986 when the aggregate deficit of the financial operations of their central governments, as a percentage of GDP, increased to 9.1 percent, from 7.2 percent in 1985. It would be unfair to infer that inadequate internal policies or a relaxation of adjustment efforts were responsible for such a performance in 1986. It is well known that most African countries embarked on far-reaching adjustment programs which, in a number of cases, were supported by the Bank and the Fund. Indeed, of the 30 stand-by arrangements and 9 arrangements under the structural adjustment facility (SAF) in effect with the Fund as of December 31, 1986, 20 stand-by arrangements and 6 arrangements under the structural adjustment facility were implemented by African countries. It should be borne in mind that these adjustment programs were being implemented at a time of the worst terms of trade deterioration in Africa’s recent history, an important factor that has contributed significantly to the poor economic performance recorded in 1986. The continued deterioration in our economies has brought many African countries to the verge of financial collapse, forcing a number of them to suspend payment of some of their debts.

As we stated on the occasion of our last gathering, Africa’s debt problems should be considered against the background of its ability to repay; an ability which is very limited and, moreover, is aggravated by the continuous fall in the prices of its major export commodities. The peculiarity of Africa’s debt problem deserves increased attention from the international financial community. The current approach to the debt problem, consisting mainly of annual rescheduling of debt obligations has, at best, only succeeded in buying time, leaving the real problem unsolved. Clearly a new approach is needed to find a bold, imaginative, and lasting solution.

In this connection, African Governors have called for an international conference to discuss practical proposals for solving the African debt problem. Without anticipating the outcome of that conference, the modification of rescheduling rules, retroactive adjustment of terms, concessionary financing of public debt, moratorium on interest similar to IDA lending conditions, the setting on a multiyear basis of a percentage of export earnings to be used for debt service, and an increase in concessional flows might be included in the search for solutions to the problems of debt and financing of growth.

In the meantime, African Governors welcome and express their support for the proposal put forward by some industrial countries at the April Interim Committee meeting for solving the debt problem of the poorest sub-Saharan African countries. We are pleased to note that this proposal has had the support of the Heads of States and Governments at the Venice summit and we hope that its procedures could be worked out promptly for early implementation. However, we are of the view that this approach should be applied to all African countries. As recent developments in primary commodity markets have shown, even the most export-diversified African economies are not immune to acute payments crisis. In view of the widespread financial difficulties facing developing countries, the African Governors would urge multilateral institutions to seriously consider, like other creditors, a more flexible approach in dealing with the financial obligations due to them. Beyond these temporary actions to relieve African countries from their debt burdens, a durable solution to the debt problem lies in sustained growth and an adequate remuneration for export commodities. In this respect, industrial countries should be particularly mindful of the impact of their agricultural policies on the prices of agricultural raw materials of African countries. For their part, the African countries are vigorously implementing their Priority Program for Economic Recovery to bring about the desired economic growth.

This brings me to the “United Nations Program of Action for African Economic Recovery and Development, 1986–1990,” which was adopted by the General Assembly of the United Nations in May 1986. At the 1986 Annual Meetings, we called on the international financial community, donor countries, and multilateral institutions to provide the external financial resources contemplated under the program in order to ensure its successful implementation. While it may be too early to take stock of its execution, it should be noted that African countries have lived up to their commitment. Structural adjustments and policy reforms have been put in place and domestic resource mobilization is being intensified. However, disbursements by creditors and donors have so far fallen short of expectations, and net lending by commercial banks ceased, with African countries repaying US$1.8 billion in 1986. More disappointing was the contribution of the Fund. It is indeed very disappointing to note that at a time when African countries are in dire need of financing, the Fund is withdrawing resources from the continent. In 1986, the Fund received net transfers amounting to nearly SDR 1 billion (SDR 0.8 billion) from African countries, and it is expected to receive an equal amount in 1987. This pattern of resource flows is untenable and should not be allowed to continue. The Fund is urged to find ways to reverse this trend and contribute more positively to the endeavors of African countries. In this context, we note that the Fund’s Managing Director has recognized this and has taken steps to bring it to the attention of the major industrial countries.

On Fund conditionality, we continue to hold the view that conditionality need not be tightened to ensure the success of a Fund-supported adjustment program. On the contrary, conditionality implemented reasonably and flexibly to take into account the circumstances in which adjustment is taking place is likely to be more successful. Unfortunately, the experience of most African countries with Fund-supported programs has so far been that the institution has pushed the application of its conditionality far beyond the limit of social tolerance, thereby creating social unrest, endangering the political fabric of these countries, and calling into question the reforms supported by the Fund. These programs, which have long ignored the human element, should now increasingly take into account the social consequences on the poorest segments of the population. Therefore, Fund-supported programs should henceforth target growth rates that would at least ensure the maintenance of standards of living in order to smooth the adjustment process and make it socially and politically acceptable. It goes without saying that priority should be shifted from contraction-oriented adjustment geared mainly at correcting external imbalances toward effective growth-oriented adjustment and an improvement in per capita incomes.

Concerning the operations of the structural adjustment facility, its creation in March of last year came with the expectation that the Fund would devote the needed attention to growth in the adjustment programs that could be supported with its resources. However, we warned that unless structural adjustment facility resources were supplemented adequately with additional resources from other sources, the new facility would be of limited help to the adjustment efforts of eligible countries. After more than one year of operation, we are disappointed to note that these additional resources have been very slow to materialize. In this connection, the initiative of the Fund’s Managing Director to enhance the resources available to the structural adjustment facility are commendable. We encourage donor countries and the Fund to expedite the financial arrangements for releasing the additional resources. But it is clear that in view of the magnitude of the financing needs of the SAF-eligible countries, the expected additional resources will be insufficient. Other initiatives are needed to ensure the availability of resources commensurate with these financing needs. Another cause for concern is that negotiations for use of SAF resources have proved to be sometimes protracted and more complicated than negotiations for stand-by arrangements and have led to cross-conditionality with the World Bank. Given the fragility of the economies of SAF-eligible countries and their low income levels, the need for streamlining and simplifying procedures under the structural adjustment facility cannot be overemphasized. However, we are deeply concerned about the tendency to deny SAF-eligible countries access to the Fund’s general resources.

We understand that the Executive Board is conducting a general review of the compensatory financing facility to adapt it to suit the present circumstances of the world economic environment. This review is timely and welcome, as it is taking place at a time when developing countries are experiencing large export shortfalls due to factors beyond their control. Yet in recent years we have witnessed a tightening of conditionality and a gradual reduction of access under the compensatory financing facility. In 1986, the conditionality has been further tightened with drawings in the upper tranche made conditional upon approval of a stand-by arrangement. Such tightening of conditionality and reduction of access are not only inimical to the purpose and spirit of the compensatory financing facility but are also ill-timed. We urge the Executive Board to take the opportunity presented by the review to reverse the recent trend in conditionality and link access under the compensatory financing facility to the amount of the calculated shortfalls. Since the integration of the decisions on the compensatory financing of export fluctuations and the compensatory financing in the cost of cereal imports has constrained members’ use of the cereal facility, we also urge the Executive Board to separate the two facilities. We have noted with interest the French proposal to lengthen the repayment period of, and introduce some concessionality in, compensatory financing facility drawings by the low-income member countries. We strongly support this proposal and look forward to its early implementation.

On the issue of SDR allocations, the question has for many years been in a stalemate because of the opposition of a few member countries. This situation is regrettable. However, we warmly welcome the Managing Director’s ongoing efforts to ascertain through individual contacts the existence of a broad support among the membership needed for a resumption of SDR allocations. We encourage him in this endeavor and we would continue to urge those still opposed to the allocation of SDRs to make a gesture in the spirit of international cooperation. We also welcome the series of studies under way on the characteristics of the SDR with a view to enhancing its attractiveness as a reserve asset. We hope that this would provide those opposed to the allocations of SDRs with an additional reason to change their position.

We note that work on the Ninth Review of Quotas has now been initiated. This is indeed a welcome development. It is the expectation of African Governors that this long exercise will eventually lead to a substantial increase in quotas that could place the Fund in a strong financial position to support the adjustment efforts of its member countries. Regarding the distribution of the expanded size of the quotas, it is also our expectation that its allocation will be really meaningful to reflect the relative access of African countries to Fund resources. On this important subject of access limits, we further note that against the difficult global economic outlook that has been described, we feel disappointed that the present access limits, including those of the compensatory financing facility, would only be maintained. This action does not send an adequate signal to the international capital markets.

We are pleased to note that the Fund has made progress in defining economic indicators that would enhance its multilateral surveillance role. We are further pleased to learn that the seven most industrialized countries support the use of such indicators as a monitoring device for their economic and financial performance. We regret that these countries could not agree on the principle of using divergences from the indicators to trigger consultations in order to discuss corrective measures as required. Nevertheless, we are encouraged to note that the Ministers of the Group of Seven will monitor economic developments in close cooperation with the Managing Director of the Fund. We hope that this would contribute to a lessening of the asymmetry in the Fund’s surveillance.

The African Governors welcome the increased attention that the concept of “growth-oriented adjustment” is getting from the international community. Although a monetary institution, the Fund has an important role to play in the promotion of a sustainable noninflationary growth as stated in its Articles of Agreement. In this context, the African Governors strongly support the recommendations of the Group of Twenty-Four report, “The Role of the Fund in Adjustment with Growth,” that has been submitted to the Interim Committee. Given the Fund’s poor record in helping developing countries to achieve growth under programs supported with its resources, a new approach to growth in program design and implementation seems appropriate through the generalization of the use of extended arrangements. We, therefore, urge the Executive Board to consider ways of implementing the Group of Twenty-Four recommendations.

In spite of the recent efforts by industrial countries at coordinating their economic policies, the African Governors continue to believe that a reform of the international monetary system is necessary in order to cope with the shortcomings of the present system. We would like to reiterate the call for the creation of a ministerial committee with representatives drawn from both industrial and developing countries to plan for a conference on the reform of the international monetary system. . . .

In conclusion, I wish to express our deep concern over the deterioration in the world economic situation and more particularly that of the African countries. The economic crisis through which the African countries are passing has been aggravated by the slump in raw materials prices, the continued deterioration in the terms of trade, intensified protectionist pressures, the worsening of the debt burden, and the decrease in capital flows to our countries. These difficulties faced by our countries stem in large measure from difficult international economic and financial conditions.

I wish to affirm clearly the resolve of the African countries to pursue and step up their adjustment efforts without worsening the poverty that currently afflicts our peoples. But in the absence of effective support on the part of the international community, our countries will be unable to pursue the reforms they have undertaken because the social costs are soaring and are even threatening the stability of our region. In light of this serious situation and the adoption of the UN Program of Action for African Recovery and Economic Development to which I referred earlier, I should like, on behalf of the African Governors, to appeal to the international community and, more particularly, the World Bank and the International Monetary Fund, to give their financial support to the recovery and development programs of the African countries so as to halt the deterioration of the economic situation and, above all, foster and accelerate the growth of Africa.

Statement by the Governor of the Fund and the Bank for Brazil—Luiz Carlos Bresser Pereira

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

In the 1980s, external debt, which has risen to a level of about $400 billion in Latin America, has become the principal concern of our countries. The feasibility of the strategy adopted to deal with this problem—and which was initially conceived as a way of getting through a supposedly short period of illiquidity in the debtor countries—depended on three basic premises: first, adjustment in debtor countries; second, vigorous growth in the economies of the industrial countries coupled with increased international trade; and third, adequate financing. These premises were crucial for the debtor countries to be able to reduce domestic imbalances, expand their exports, and, at the same time, obtain the financing required for investments and continued medium-and long-term economic growth, without excessively increasing the total debt. Unfortunately, only adjustment in debtor countries took place; the other two conditions indeed did not materialize. The economies of the industrial countries did not expand as forecasted, our exports did not increase as necessary, and external financing dropped from an average of $30 billion a year in the 1979–82 period to an annual average of just $6 billion in the past four years.

Thus, instead of fostering adjustment with growth, our countries have had to embark on a painful process of adjustment with recession and inflation, based on cutbacks in consumption and investments and on successive real devaluations of our currencies. All of this has resulted in enormous sacrifices for our population and in increasing political loss for our governments, since the results from these policies have been recession, unemployment, and dramatic reductions in living standards.

As if the sacrifices of the past were not enough, cutbacks in the rate of investments, caused fundamentally by growth in real transfers and reductions in the capital flow, have seriously jeopardized growth potential and, consequently, debt service capacity.

From the point of view of the debtor nations of Latin America, the evolution of the international situation has been extremely adverse. Thus, it is no surprise that, as a consequence of these factors, an increasing number of countries in the region have been forced to limit or to suspend external debt service payments.

As a matter of fact, full payment of interest has been shown to be incompatible with sustained growth, control of public finances, and price stability. In other words, and paradoxically, debt service became incompatible with the adjustment process that was supposed to lead to a solution of the debt problem. This fact can be shown in several ways.

—Transfers of real resources—measured by the trade and nonfactor service surpluses—required to pay the interest bill have depressed investment capacity. From 1983 to 1985, average growth in real transfers from Latin America (5.3 percent of GDP) was roughly equivalent to the average drop in investments (5.8 percent). This means that the countries of the region have been postponing essential investment to service their external debt. The investment level in Latin America has fallen by 40 percent.

—In many Latin American countries, the major share of the external debt is held by the public sector (70 percent in the case of Brazil). In such cases, interest payments require domestic transfers from the private to the public sector to enable the government to acquire—from the export sector—the foreign currency needed to service the debt. Normally, these transfers require additional internal borrowing, thus raising domestic interest rates and, consequently, the public deficit. On the other hand, interest on the public external debt represents a large share of the public deficit. In Brazil, for instance, public deficit, in terms of public sector borrowing requirements, was 3.9 percent of GDP in 1986, while interest on the external public debt represented 2.3 percent of GDP. In other Latin American debtor countries, interest payments, as a percentage of GDP, reached even higher figures. In other words, interest on the public external debt accounts for more than 50 percent of the public deficit.

—The attempt to expand trade surpluses through successive real exchange rate devaluations has led to predatory competition among debtor countries and to further deterioration of the terms of trade. Devaluations have two additional negative effects: they tend to increase the public deficit, since a larger amount of local currency is needed to pay for the same amount of interest; and they have a perverse impact on price stability. Actually, exchange devaluations tend to accelerate inflation.

These factors certainly explain why, in spite of an enormous adjustment effort, the results have been far below expectations, and a return to the system of voluntary loans is beyond the reach of a large majority of debtor countries. Banks have already limited—in a very inadequate manner—their efforts to finance part of the interest owed to them.

The facts clearly demonstrate that the strategy pursued since the outbreak of the external debt crisis has failed. The strategy merely avoided an even greater crisis in the international financial system by dangerously postponing a definitive solution. For the developing countries, it represented stagnation and inflation; for the industrial countries, loss of exports. Only the creditor banks have been strengthened, reducing their exposure to the highly indebted countries. But even for them the situation began to deteriorate, as the financial community realized that the debt strategy had failed, that all debt ratios had deteriorated, and, consequently, that the paying capacity of debtor countries was diminishing instead of increasing. The emergence of larger and larger discounts in the secondary market and the valuation of bank shares in proportion to their exposure to highly indebted countries have been the result of this realistic acknowledgment.

Today, the challenge faced by creditors and debtors alike is that of finding a long-term, definitive solution to the external debt problem, a solution that recognizes the need for a direct relationship between the debt service and the effective capacity of our nations to pay. No longer can a solution be postponed, nor should merely palliative alternatives to the present strategy be sought.

There is a growing consensus on the need for, and the feasibility of, new approaches to the debt problem. I believe that these Annual Meetings of the IMF and the World Bank initiate a new phase in the discussion of the debt problem. The first phase, 1983–84, was the phase of austerity. The second phase, 1985–86, were the years of adjustment with growth and structural reform. In 1987 we begin a third phase where reduction of the debt will be the main emphasis. Responsibility for finding a formula that will lead to a solution does not fall only on the debtor nations. If the industrial world does not shoulder its responsibility for reducing its structural imbalances, fostering international economic growth, and clearing away protectionist barriers, no truly lasting solution can be found.

This is an area in which a more symmetrical Fund surveillance is needed. The next GATT negotiations also have an important role to play in ensuring increased access by Latin American exports, particularly those from smaller countries, to industrial country markets.

On the other hand, if we are to find an adequate long-term solution to a debt that already exceeds the payment capacity of the debtor countries, it is essential that, in addition to the adoption of austere, responsible policies of internal economic adjustment, the interest rates paid by the debtor countries be reduced and that longer maturity terms be set for payment of the debt.

We cannot, however, wait till the moment when market interest rates will decline. There are no prospects that this might occur in the medium term. Thus, creditors and debtors will have to come to an agreement on real and nominal interest rate levels that are compatible with the effective payment capacity of each country. In most cases, what these countries require are real interest rates in line with historical levels.

The reduction of interest rates, longer maturities, and the establishment of adequate credit lines to the debtor countries will make possible reduced transfers of resources. It will thus be possible to achieve the minimum growth rates needed by each country, according to particular circumstances, especially the requirements of its labor market. This is also the way to achieve a gradual improvement of debt indicators.

To achieve these objectives, it is necessary to restructure debt so as to bring it into line with the real payment capacity of the countries in question. A return to the market will only become reality when the debt stock has been brought down to levels which are compatible with medium-term payment capacity.

The market judgment is that part of the existing debt, from both middle- and low-income countries, is not worth its nominal value. This new market reality opens the way for the adoption of new instruments, such as buy-back mechanisms and debt-into-equity conversions, which will permit a sharing of the discount between debtors and creditors.

Another innovative mechanism for an effective reduction in total debt is the gradual conversion of this debt into bonds. This is a promising option. The conversion bonds should have full face value, a fixed interest rate, and the assurance that there will be no restructuring of the principal nor new money requests for the payment of interest. These bonds would be subscribed on a voluntary basis, in accordance with the convenience of each bank. If these bonds receive limited but effective guarantee for payment by government agencies or multilateral banks, their market position would be enhanced and the long-term solution to the debt problem would soon become reality.

For countries that are not in need of debt rescheduling, there is a clear need for improved access to international capital markets at more reasonable lending terms and conditions. In the present situation, adequate external financing is a condition for internal economic stabilization and adjustment to external realities. It is, therefore, essential that government and multilateral credit agencies provide satisfactory financing for the economic and investment programs of the developing nations.

In this respect, Latin American countries consider that it is now time for a review of some Paris Club procedures. There is need for a more flexible approach also in regard to official debt rescheduling, particularly as far as the requirement of formal Fund involvement is concerned. Countries that are heavily indebted to official creditors need multiyear reschedulings and longer maturities. Interest rates on restructured debt should be reduced. Official agencies should shorten the time for resuming coverage and improve terms and conditions for new loans and guarantees.

There is hardly any reason why, in the midst of a crisis of such magnitude, multilateral financial institutions should incur negative net disbursements. In the case of the Fund, this fact is aggravated in part by the imposition of certain conditionalities that little suit the problems and needs of the debtor nations. The challenge faced by the Fund today is that of playing a more active role in providing financial support to growth-oriented adjustment programs. To that end, quotas need to be increased, as well as the developing countries’ share in Fund quotas.

Growing government participation in the solution of the problem seems today inevitable and is only a question of time. The Consensus of Cartagena, which expresses the position of 11 Latin American countries, as well as the Group of Twenty-Four have dealt with the subject and offered many suggestions of both a conceptual and a technical nature, some of which are already being adopted in the negotiations now under way. Brazil, Argentina, and Mexico, which recently joined together into a new G-3 group, have also outlined some principles and mechanisms that should be taken into account in future negotiations.

It should be mentioned that the Japanese Minister, Todashi Kuranari, has recently proposed the creation of an independent high-level group of persons of wisdom with the support of interested countries and relevant international organizations to examine ways and means of encouraging the flow of financial resources to the developing countries. This could certainly be a useful instrument, in that it would make possible a joint analysis of the problem and discussions aimed at a lasting solution.

As an important document issued by the Vatican Commission on Justice and Peace acknowledges, “Debt-servicing cannot be met at the price of the asphyxiation of a country’s economy, and no government can morally demand of its people privations incompatible with human dignity. A decrease in interest rates, the capitalization of payments above a minimum interest rate, a rescheduling of the debt on a longer-term basis, national currency payment facilities … are all concrete measures to be negotiated with the debtor countries in order to lighten the debt service burden and assist in growth recovery.” The price to be paid for the servicing of the external debt cannot be recession, unemployment, or hunger, nor can it be the threat to freedom and to the consolidation of democracy in Latin America.

In conclusion, a few words about the economy of my country, Brazil. In the first half of this year, Brazil was hit by the deepest financial crisis of its history. The Cruzado Plan brought in its wake high rates of inflation, recession, the insolvency of a large number of business firms, balance of payments disequilibrium, and an interest payment moratorium on medium- and long-term debt to private banks.

To a large extent, the crisis is now overcome. Inflation is reasonably under control, overheating of the economy has been halted while recession has been avoided, the financial crisis has been overcome, and large trade surpluses have been obtained. This was possible through a combination of a new price freeze based on the theory of inertial inflation and a set of measures to control the public deficit and to avoid a new wave of excess demand. In order to adjust the economy, industrial production is expected to grow 3 percent this year, as compared with 10.9 percent in 1986.

After these emergency measures were adopted, including two real devaluations and a price freeze, a macroeconomic control plan was adopted in July. The basic objectives of the plan are GDP growth of between 6 percent and 7 percent in the coming years, an annual trade surplus in the range of $10 billion, and a steady decline in the public sector deficit. The basic growth strategy is one of increased public savings in order to liberate private savings to finance expansion in private investment. The basic obstacle to attainment of this growth is the burden of internal and external public debt interest payments on the government budget. Another basic constraint is external debt-related transfers of resources. These resources represent approximately 3 percent of GDP and reduce the nation’s investment capacity by the same proportion.

It would be misleading, however, to blame all Brazilian problems on the external debt. We have internal problems and constraints. The danger inherent in populist policies is always present. The uneven distribution of income facilitates speculative profits that the fiscal system is unable to tax. Excess consumption by a small segment of society coexists with the precarious economic and social conditions of the majority of the population. Sound internal economic policies and structural reforms are a permanent challenge for the Brazilian Government.

Brazil has no intention of confronting its creditors. Much to the contrary, the nation’s intention, on the internal front, is to ensure the development process and price stability, while—on the external front—seeking its reintegration into the international financial community of which it has long been a part. These are the two objectives that will guide our negotiations of the external debt, in the pursuit of creative and long-term solutions. It would be a mistake to imagine that it is the activity of a few radicals in Brazil that hampers a further integration into the international economic system. These elements do not carry such weight. The great obstacle to Brazil’s further integration is an exceedingly large external debt and the rather unimaginative and less-than-daring manner in which the creditor countries have sought to resolve it.

Statement by the Governor of the Fund and the Bank for the United States—James A. Baker III

Two hundred years ago, the representatives of the 13 American states gathered in Philadelphia to establish a common Constitution founded on individual rights and responsibilities. In much the same vein, we, as representatives of the global community, share similar needs and responsibilities that transcend our particular borders and require a strengthened framework for cooperation for the good of us all.

Our tasks are threefold and interrelated: to build on the progress already achieved in strengthening the process of international economic policy coordination; to achieve higher, sustainable growth among the developing nations; and to improve our international financial institutions.

Strong leadership from the Bank and the Fund in accomplishing these tasks is vital. A reorganized World Bank under the able leadership of President Barber Conable stands ready to expand its role in assisting the developing nations, while in a short period Michel Camdessus has demonstrated his broad capacities in guiding the Fund as its new Managing Director.

Improved International Policy Coordination

The current process of economic policy coordination evolved gradually over the last two years along a steady path, pointing toward greater stability and predictability in our international monetary arrangements. It had its roots in a broad consensus that volatile exchange rates were contributing to large trade imbalances, distorted investment, and a growing protectionist threat worldwide.

The September 1985 Plaza agreement represented a major turning point in our efforts to promote a sound world economy. Too often in the past, the major industrial countries had reviewed the performance of their individual economies with little consideration of the interaction among them. At the Plaza, we revitalized the Group of Five by agreeing on the direction that national policies should take, and by entering into new arrangements to facilitate exchange rate adjustments to reflect more fully underlying economic fundamentals.

The success of the new efforts created a momentum to move further along this course. At the Tokyo summit, the Heads of State and Government agreed on a framework for a political mechanism for conducting multilateral surveillance of their economies utilizing economic indicators. Further, a new group was formed, the Group of Seven, that was symmetrical with summit structure. This brought to bear on the coordination process the necessary political leadership at the Heads of State and Government level. It also created a direct link between the formation of domestic policies and the international coordination process.

The Louvre accord represented another milestone. We agreed upon a strengthened coordination process involving use of medium-term objectives and performance indicators. Furthermore, we made specific national policy commitments, and agreed to cooperate closely to foster exchange rate stability.

In April 1987, we initiated the new coordination process at a Group of Seven meeting in Washington, where we expanded and refined the Louvre accord. At the Venice summit, the Heads of State and Government endorsed these agreements, signaling full support by their governments at the highest levels. This past weekend, the Group of Seven reaffirmed their commitments to the policy directions set forth at the Louvre, including continued cooperation to foster stability of exchange rates.

The process is now firmly in place. Commitments are being met and progress is being achieved in addressing global economic problems.

In fiscal 1987, the U.S. budget deficit has been reduced by over $60 billion, a decline of 1.7 percent of GNP. Over the past four years, in fact, the United States has reduced its deficit by 2.7 percent of GNP—the largest deficit reduction of any of the major industrial countries over a comparable period.

Our other economic signals also remain upbeat. The current expansion is on the verge of becoming the longest peacetime expansion in U.S. history—an expansion that has taken place without a resurgence of inflation. Unemployment is down and jobs are up. Our trade deficit, although still large in nominal terms, has begun to decline in volume terms.

Other major industrial countries have also recognized their obligations. Japan is implementing a major stimulus package and domestic demand is strengthening, which should help to reduce its trade surplus. Germany has accelerated its tax reform efforts and agreed to reconsider domestic policies if growth falters.

These efforts are having their intended impact. Growth prospects are improving. Trade imbalances are showing signs of coming down, and exchange rates have been more stable.

This progress does not mean that we could or should stop seeking further improvements. Imbalances remain large and growth in Europe remains weak. We must follow through on earlier commitments and take additional steps as needed. At the recent Group of Seven meeting, we committed to do just that. In the United States, we recognize the need to continue our deficit reduction efforts in the United States in fiscal year 1988 and beyond. The President’s decision this past weekend to sign the recent Gramm-Rudman-Hollings legislation will reinforce progress in reducing the budget deficit. Germany, Japan, and other surplus countries must also do their part by following policies which will enhance economic growth without retriggering inflation.

And it is critical that each of us works to preserve an open trading system. The imposition of protectionist measures at this time could undermine the progress we have made so far. The U.S. Administration remains resolute in its opposition to protectionist trade legislation. As President Reagan made absolutely clear yesterday, he will veto any protectionist legislation. Others must commit to fair trade policies that will buttress public support for an open trading system.

We have agreed that we should be concerned about the predictability and stability of exchange rates. Our coordination process utilizing indicators takes this into consideration. It is equally important that the policies resulting from the coordination process not be inflationary. It would be unfortunate if our efforts to foster exchange rate stability among currencies led to stable currency relationships—but in a context of inflationary economic policies that reduced the real value of all currencies.

Accordingly, the United States is prepared to consider utilizing, as an additional indicator in the coordination process, the relationship among our currencies and a basket of commodities, including gold. This could be helpful as an early-warning signal of potential price trends.

We are proposing consideration of a commodity price indicator as an analytical tool and an improvement to our coordination process, to be used in conjunction with the other measures of economic performance—such as growth, external imbalances, and exchange rates—in reaching judgments about policies and performance.

Coordination is a step-by-step process, and we should be willing to consider additional refinements as we move forward.

The major industrial economies are not the only ones with an obligation to the world economy. It is time that South Korea, Taiwan Province of China, Hong Kong, and Singapore also help preserve the open world trading system. It is critical that they open their markets where restrictions remain and allow their currencies to reflect underlying economic fundamentals.

The International Debt Strategy

I would like to turn now to our cooperative efforts to address international debt problems. The “Program for Sustained Growth” that we have pursued since Seoul remains the only viable, mutually acceptable approach to solving world debt problems.

Its basic principles remain as important and valid today as when initially proposed. The first is the central importance of economic growth/Second, in order to promote growth, market-oriented policy reforms within the debtor nations are critical. Third, to support these reforms, additional capital is needed in the form of equity, debt, and the repatriation of flight capital. And fourth, each case should be dealt with on its own merits.

Considerable progress has been made under this approach. The debtor nations have made substantial efforts to restructure their economies along more market-oriented lines. As a result, for the 15 major debtors as a whole, GDP growth is now in the range of 3.7 percent, the best in six years. Export earnings are projected to recover strongly in 1987–88, while imports this year are expected to be the highest since 1982. Capital flight has been reversed in several countries, and interest-to-export ratios are expected to fall to 27 percent this year compared to 31 percent in 1981.

The Bank and the Fund have provided sound policy advice, made $16 billion in new loan commitments since Seoul, and catalyzed financial support by other creditors. Over the same period, official creditors have rescheduled more than $17 billion in outstanding debt, including both principal and interest. And the commercial banks have committed nearly $10 billion in new loans, restructured approximately $110 billion in outstanding debt, reduced spreads, and provided longer grace periods and maturities.

Nevertheless, problems remain. Reductions in commodity prices and export earnings in 1985–86 have worsened debt-to-export ratios for some. The recent firming of interest rates and continued strong protectionist pressures are both matters of serious concern.

The debt strategy provides a flexible, case-by-case framework for responding to individual debtor’s needs and changes in the global environment. We should not be attracted by generalized debt relief schemes. They do not really offer significant short-term relief, and they pose major long-term risks to the debtors. They also ignore the reality that many debtors have inherently strong economies with unlimited potential. Their course into the twenty-first century must be built upon increasing their trade and financial linkages with the rest of the world, not undermining them.

We all need to do more to enhance the progress already made under the current strategy. To strengthen it further, we should further develop the “menu” approach, strengthen the Fund’s ability to promote growth, and initiate negotiations on a World Bank general capital increase.

The “Menu” Approach

Last spring, I suggested the development of a “menu” of financial options to facilitate commercial bank financing packages.

Permit me to elaborate today on the types of instruments that should be considered, where appropriate, for such “menus.”

—Trade and project loans can channel more funds to the private sector, encouraging imports and providing banks with more easily identifiable returns.

—On-lending provisions also help to provide funds for productive use by private sector borrowers.

—New money bonds could have some of the characteristics of a senior claim, and therefore may be more attractive to banks in new money packages or to reduce the stock of debt.

—Notes or bonds which are convertible into local equity can help reduce debt service burdens and provide a boost to domestic production.

—Exit bonds can permit banks with smaller exposures to “exit” from future new money obligations, helping to streamline financing procedures.

—Debt/equity swaps help reduce both debt and debt-servicing burdens, while improving the debt/equity mix in foreign obligations.

—Conversion of debt paper to local currency for use by charitable organizations can provide some limited benefit.

—Limited voluntary interest capitalization may also be appropriate in certain selective cases, particularly for small debtors.

—Finally, general balance of payments loans will, of course, continue to be an essential component of virtually all new money packages.

More can be done to develop “menu” options—by the debtors themselves, by commercial banks, by the international institutions, and by creditor governments. For example, we are now trying to identify possible regulatory impediments which might lie in the path of “menu” items. The Federal Reserve Board recently announced measures that will facilitate greater use of debt/equity swaps. Additional steps in this and possibly other areas are under consideration.

International Monetary Fund Policies and Facilities

The Fund has played a central role in the debt strategy, and we must ensure that it will be able to continue this role as long as debt problems persist. In fulfilling this role, the Fund must remain faithful to its mandate as a monetary institution providing sound policy advice and temporary balance of payments financing. To do this, the Fund will need to adapt its policies to the changing circumstances and needs of its members.

In particular, the Fund must give greater attention in its programs to measures needed to promote long-run growth, as well as to correct short-run imbalances. And the Fund should work to see that comprehensive, growth-oriented programs are not blown off course by unforeseen developments beyond a country’s control. Toward these ends, I propose the following package of changes in Fund facilities and policies.

First, I propose the creation of a new external contingency facility. It would help cushion the adverse effects on stand-by programs of external, unforeseen developments such as weaker commodity prices, lower export volumes, natural disasters, and sustained higher interest rates. Modification in economic policies will also often be required, but we hope this facility will catalyze additional lending by other creditors as well. Since such a new facility would compensate, among other things, for shortfalls in export earnings, it would of course replace the existing compensatory financing facility (CFF). Like the CFF, it would be funded out of existing Fund resources.

This new facility should be complemented by other changes which reinforce the growth orientation in Fund programs. Therefore, to help give debtors both the scope and impetus to focus on measures to promote growth and to correct payments imbalances, I propose that programs of 18 months or longer should involve semiannual—rather than quarterly—performance criteria and disbursements. Quarterly monitoring would still be needed to detect problems at an early stage, but debtors could avoid excessive focus on the short run. This would be coupled with greater use of structural reforms as performance criteria in Fund programs, to complement the Fund’s macroeconomic and exchange rate emphasis. Such areas as market-oriented pricing, privatization and reform of public enterprises, and trade and foreign investment liberalization would be covered, with careful coordination with the World Bank.

With the overall strengthening of performance that should result from these changes, the commercial banks should be able to rely more on overall program quality than on rigid linkages to Fund disbursements. In place of a preoccupation with mechanical formulas, the banks should focus on the appropriate policies to restore growth and creditworthiness and to maintain flexibility with regard to financing flows. . . .

Low-Income Countries

Let me turn now to low-income countries. Many of these countries are now pursuing difficult economic reforms whose success requires persistent efforts at home and strong support abroad. A number of recent initiatives are designed to provide this support.

The first evolved from a U.S. initiative at Seoul two years ago. It resulted in the establishment of the Fund’s structural adjustment facility (SAF), and supplied a basis for enhanced cooperation between the World Bank and the Fund through the development of policy framework papers.

Managing Director Camdessus has proposed expanding the SAF to provide additional funds for low-income countries with protracted payments problems. We welcome this proposal and believe that the best source of new funding under the current circumstances would be the surplus countries.

To support these efforts, more must also be done to strengthen the effectiveness of program design and the policy coordination process. I therefore call on the Bank and the Fund to undertake joint missions, and to form a joint committee of the two Executive Boards, to review policy framework papers. IDA loans should also be integrated into policy frameworks as closely as loans from the SAF. . . .

Finally, as agreed at Venice, we continue to support on a case-by-case basis the provision of longer grace periods and maturities in official Paris Club reschedulings for the most needy low-income debtor nations.


We stand today at a particularly important juncture in international economic relations. We have accomplished much in recent years, but major tasks are still before us. The policy agenda remains a challenging one and more than ever demands a unity of purpose among a diversity of interests.

The framers of the U.S. Constitution recognized 200 years ago that each state would benefit if the United States were strong and prosperous. Like them, we must put aside narrow parochial interests for the general good of the international commonwealth of nations. In so doing, we can forge a growing global economy and stable monetary system that enhances the well-being of each of us.

We have made a beginning, a good beginning. Now, we must continue our patient efforts to promote economic liberty, improve the global economy, and strengthen the framework for international cooperation. With your support, I am confident that we will be successful in this important endeavor.

Statement by the Governor of the Fund and the Bank for Sri Lanka—Ronnie de Mel

This is the eleventh year in succession in which I have had the privilege of addressing this assembly as Minister of Finance and Planning of Sri Lanka. Last year, I recalled the hopes and aspirations that countries like mine had when I assumed office in 1977, and how they remain largely unfulfilled. It is true that the past ten years have undoubtedly been the most difficult for the world economy in the postwar period. Unfortunately, these difficulties have been compounded by the problems faced by industrial countries in rectifying their structural imbalances and in stimulating economic growth. As a result, developing countries have had to bear the brunt of international adjustment, at great cost to themselves. Countries like mine, which adjusted strongly and most courageously, seem to be shooting at a moving target, with ever-receding prospects for sustainable economic growth and development. This is an untenable and unacceptable situation.

World Economic Situation

I must concede that, in recent years, there have been some positive features in the world’s economy. These include the better control achieved over inflation in the industrial countries and the slow but positive progress made in the evolution of mechanisms of multilateral cooperation, such as the Plaza and Louvre accords on exchange rates, the Baker plan on debt, the securing of an expanded IDA replenishment, the structural adjustment facility, the adoption of the Special Action Program for African economic recovery, the launching of the Uruguay Round of Multilateral Trade Negotiations, and a greater commitment to a general capital increase of the World Bank.

It is of great concern to us, however, that there has been a pronounced slowing of economic growth in industrial countries. Furthermore, serious macroeconomic imbalances in major industrial countries continue to be a source of great instability in the system. The tensions that prevail have intensified protectionism, complicated exchange rate management, and, in consequence, dampened the prospects of international adjustment.

The growth performance of many developing countries that embarked on comprehensive adjustment programs in the face of severe political risk and significant social deterioration has been constrained by a serious decline in net external financial flows, depressed commodity prices, reduced market access for exports, and heavy debt service burdens. In many of our countries, there has been a depletion of the stock of social capital and a decline in the quality of life.

We have thus reached the point where we can no longer postpone urgent action to strengthen growth in the world economy. Priority must be given to: tackling the macroeconomic imbalances in the industrial countries in a creative way, reversing the present trend of dwindling net financial flows to developing countries, relieving low-income country debt, improving and stabilizing export earnings from commodities, and reversing protectionism and achieving early progress in removing artificial barriers to trade in the Uruguay Round.

Rectifying Imbalances in Industrial Countries

We subscribe to the emerging consensus that it is inadequate adjustment in major industrial countries that has been the overwhelming causal factor for weak growth in the world economy. Little headway has been made to address the structural problems in the large industrial countries, be they in trade policies or in factor markets. There has undoubtedly been intensified coordination among policymakers in the major industrial countries as reflected in the Plaza and Louvre agreements, the policy declaration of the Tokyo and Venice summits, and the increasing involvement of the Fund in multilateral surveillance. But this coordination so far has not amounted to anything more than a limited exercise in exchange rate management, whereas the underlying structural problems remain as they were. This cosmetic approach to international imbalances has failed to foster a sustainable economic recovery.

It is also disappointing that efforts at multilateral coordination have so far ignored the role of developing countries. The increase in the U.S. deficit has been accompanied by not only a rise in the combined surplus of Japan and the Federal Republic of Germany, but also a decline in capital flows and a compression of imports in developing countries, which reflects continued but negative and painful adjustment in these countries. As the poor developing countries have now reached the limits of their adjustment, there are compelling reasons for allowing them some room for adjustment in a more orderly and humane way. The surpluses of industrial countries, particularly of Japan, should be redirected into capital flows to developing countries. This not only will help developing countries to achieve reasonable levels of growth, but it will also facilitate a reduction of the external deficit of the United States and enable the strong economies of Japan and the Federal Republic of Germany to assume their rightful role in international cooperation and thereby prevent a worldwide recession.

Three fourths of developing countries depend on commodities for more than half of their export earnings. Today, the real prices of non-oil commodities are at their lowest level since the Great Depression of the 1930s, and the prospects for the future continue to be bleak. The industrial countries, which consume the bulk of these exports, have turned a blind eye to this problem, in the mistaken belief that it reflects the necessity for structural changes in the world economy. I must caution that this is a dangerous attitude to adopt. They may be under the impression that continuous depreciation of exchange rates and containment of wage incomes would help the producers to remain competitive in a world of structural change. They forget, however, that these adjustments have to be guided by many other factors as well and that the continuing uncertainty of commodity prices is driving millions of producers out of production in developing countries, so that the day may dawn when the world community will have to manage without many commodities that they have gotten so used to having around.

The high degree of commodity specialization of developing countries is largely attributable to the unequal economic relationships of a colonial past. Owing to the relative poverty of these countries, they are unable to mobilize the financial savings needed to restructure their economies out of excessive dependence on commodities. Attempts at commodity price stabilization through international agreements have not been successful, although recent developments at UNCTAD have rekindled hopes of some financial support for the Common Fund. Meanwhile, current compensatory financing facilities have compensated developing countries for only one eighth of their export earnings shortfall from non-oil commodities since 1980. Early remedial action is therefore imperative.

Protectionism and Trade Negotiations

It is indeed disconcerting that new and widespread protectionist measures are being reported, even after the commencement of the Uruguay Round. We will all do well to fully recognize that a debtor country can service its debt only if it can achieve a growth of export earnings that is higher than its debt repayments. With interest rates currently around 7 percent and already moving upward, few developing countries can achieve this required export growth, unless there is increased market access. This requires a speedy dismantling of trade barriers and a revival of commodity export prices.

There are indications from the GATT negotiations that there may be room for a fast-track approach to implementing some key measures to promote trade. These areas include agriculture, tropical products, and preferential treatment of developing countries. Early action in these areas will certainly help, but will be inadequate unless there is a greater commitment by industrial countries to open their markets and facilitate structural adjustment of their economies to the realities of world trade and specialization. Even though in matters of trade the GATT and UNCTAD have been entrusted with more direct responsibilities, the Fund should use its leverage, through multilateral surveillance, Article IV consultations, and the World Economic Outlook exercise, to improve access to industrial country markets.


Despite the extensive rescheduling of principal and easing of nominal interest rates, indebtedness continues to constrain growth and development prospects in many countries. The debtor nations have been forced to switch resources from domestic investment and consumption to generation of trade surpluses. This is not sustainable in the long run. Rescheduling has only led to a pileup of debt on top of debt. The postponement of debt is no lasting solution to the debt problem of Third World countries.

We must therefore welcome the Lawson initiative related to the indebtedness of low-income countries. Action must continue to be taken within the Paris Club to extend grace and repayment periods. Steps should also be taken to reduce interest rates on official rescheduled debt. More donors should favorably consider the proposed conversion of past ODA debt into grants. It is crucial that relief granted in this manner represents additional net resources to debtors and that it is extended to all IDA countries in a nondiscriminatory manner. In other words, those low-income countries that have been prudent in incurring debt should not be penalized in our preoccupation with the problems of the high-debt countries.

There are some recent indications, however, of a more flexible and innovative approach to the debt of middle-income countries. But, leaving the vast international debt problem with the financial markets—with some prodding by the Bank and the Fund—does not appear to be adequate. Whereas the markets tend to react to major problem countries, owing to their high individual exposure, the growing but less conspicuous problems of debt and slowdown of capital flows to other countries tend to get swept under the carpet. Hence, the Bank and the Fund should lead an internationally coordinated effort to resolve the debt problem of the entire developing world.

Decline in Net Financial Flows

With or without debt relief, growth prospects in developing countries are being seriously eroded by the lack of new external financial flows. Private capital markets have continued to be overcautious. The growth-oriented adjustment called for under the Baker plan has not brought about the additional private flows needed to support it. Official development assistance has been sluggish. There has also been a decline in net multilateral assistance, because of a slowdown in disbursements and rising amortization. Thus, it appears that a process of “adjustment by attrition” has been imposed on the poorer nations. The international community cannot continue to be insensitive to the serious disruption of the growth process and the fall in living standards that have occurred in many developing countries. Therefore, our deliberations this week must be geared to creating conditions conducive to growth-oriented adjustment in the developing world.

Fund Issues

You would agree that a transfer of real resources to developing countries necessarily implies that these countries must have current account deficits in their balance of payments in order to absorb the transferred resources. Such transfers would not merely support growth-oriented adjustment in these countries, but would also facilitate reducing macroeconomic imbalances in industrial countries. Instead, we have witnessed a reduction of the combined developing country deficit. This reduced deficit reflects adjustment through import compression, with all the now familiar consequences. The reduced deficit also mirrors a steady decline in medium- and long-term financial flows, as well as a negative contribution from Fund resources. In this situation, the question is the capacity of the Fund to discharge its obligations under its charter to meet the needs of its members.

It is agreed that macroeconomic adjustment and structural policies should aim to increase savings and investment in developing countries from their current low levels. However, for the success of this adjustment effort, adequate financing is necessary until adjustment and structural policies take hold. Strong adjustment without adequate finance not only slows down implementation of growth-oriented structural policies, but could also result in intensified trade and payments restrictions. Hence, the Fund should commit sufficient resources when the occasion demands. Not being able to do so will seriously impair the catalytic role that we expect the Fund to play.

Access Limits

In this respect, we urge that the access limits to Fund resources be restored to the levels prevailing when we took the decision on enlarged access, so as to restore necessary and sufficient maneuverability to the Fund management. Annual average access, which was 60 percent of quota in 1984, has steadily declined to 43 percent in 1986. In 1987, at best, it could still be only 43 percent. Along with the restoration of the annual access limit, the cumulative limit should also be restored to its original limit. If we agree that sustained adjustment can occur only with sustained growth and if sustained growth cannot be brought about in a hurry, the adjustment period should be spread over a number of years. It would be contradictory for the Fund to enter into growth-oriented adjustment programs and, at the same time, to reduce or avoid increasing access limits. Furthermore, at a time when we have emphasized the responsibility of the Fund to assist in better policy coordination, to promote structural adjustment, and to act as a catalyzing agent for financing adjustment, it would indeed be a wrong signal if parallel action were not taken with respect to policies governing the use of Fund credit.

Structural Adjustment Facility

We recognize the potential of the structural adjustment facility (SAF) to contribute to adjustment and growth of the low-income member economies with protracted balance of payments problems. We welcome the recent decision to increase the access limits to 63½ percent of quota over a three-year period. The Managing Director’s proposal to triple resources of the SAF to SDR 9 billion must also be strongly supported. We urge that the enhanced facility be made operational by January 1988. The needs of low-income developing countries, which have limited access to commercial credit, are too well known. Addressing this issue is urgent, and the implications of delay are many. To enable the contributors to conclude action to commit the required resources, a mechanism that seeks to satisfy their concerns as well as one that is thought to be fair by SAF-eligible members should be put in place immediately.

However, we are concerned that a part of this increase was made possible on account of the slower-than-expected disbursements. We are also concerned that benchmarks in SAF programs should not assume the form and character of performance criteria associated with short-term stand-by arrangements. The concessional element in SAF resources is an important consideration in entering into an arrangement. Moreover, the monitoring of benchmarks and the application of conditionality have often resulted in “stop-and-go” policies within a generally deflationary context. Hence, program design relative to policy reforms should be appropriate to the circumstances of low-income countries. Furthermore, Bank-Fund collaboration should not result in prolonged negotiations or in frustrating cross-conditionality.

Ninth General Review of Quotas

We believe that a substantial increase in quotas is necessary to bring the resources of the Fund back into more appropriate balance with the world economy. The current situation of external imbalances among industrial countries, the uncertainty in the global economic environment, and the complexity of the debt issue are interrelated. Resolving them requires the political will to increase policy coordination, as well as the willingness to allow the Fund to play its rightful role in promoting structural adjustment. A strong Fund is required to address these matters and to stand ready to react appropriately if the uncertainties develop into serious risks.

A substantial increase in quotas would also facilitate a reduction of reliance on borrowed resources. This is desirable for reasons of financial simplicity and also for reducing the cost of funds. Governors will recall that at the Eighth General Review, there was only a 47.5 percent increase in quotas, despite an overwhelming majority of members favoring a doubling of quotas. In this context, we support an acceleration of the Ninth General Review and at least a doubling of Fund quotas now.

Consideration should also be given to the inclusion of a poverty index in the quota formulas. This would allow the developing countries a level of quotas corresponding more closely to their financing needs. It is important that the revised quotas do not reduce the combined voting share of developing countries or significantly alter the voting strength of the individual members within this group.

We wish to emphasize that a strong Fund is required to safeguard the monetary nature of this organization, arising from the revolving character of Fund credit. If comprehensive programs of structural adjustment cannot be adequately supported by the Fund, there is a high risk that the anticipated growth necessary to sustain the adjustment effort would not materialize. Countries facing such situations would indeed be hard pressed to maintain liberal payments arrangements. This should not be allowed to happen.

Compensatory Financing Facility

The compensatory financing facility (CFF) was designed to assist members experiencing short-term reversible export shortfalls attributable to circumstances largely beyond their control, by providing unconditional finance in the quickest possible time. It is, however, extremely disconcerting that despite sharp deterioration in commodity prices worldwide, drawings under the CFF have declined substantially from SDR 2.8 billion in 1983 to SDR 0.6 billion in 1986, largely owing to highly restrictive interpretations of criteria relating to cooperation with the Fund and the temporariness of shortfalls. Failure to provide adequate and timely compensation has forced countries to adopt restrictive trade practices and has also increased their indebtedness. For the CFF to be effective, access must be increased and liberalized. Access should be determined on the size of the shortfall rather than on quotas. Furthermore, low-income countries, which are particularly vulnerable, should be provided timely low-conditionality assistance on concessional terms.


An SDR allocation is long overdue. The arguments for an SDR allocation are strong both in terms of its systemic role—that is, in supplementing existing reserve assets—and in terms of its distributional role—that is, in compensating for asymmetries associated with the process of liquidity creation. An allocation would serve to mitigate the global deflationary impact of the reserve building that many developing countries have been forced to undertake through import compression. I hold the view that an SDR allocation at this time will benefit everybody. It would help developing countries to build up reserves and reduce the need for import compression that disrupts their growth and development. For the United States, an SDR allocation would not only strengthen its weak reserve position, thereby helping to defend the dollar if the need arises, but it could also alleviate the strain associated with reducing its large external deficit. Finally, surplus countries would benefit both by the low risk associated with holding SDRs and by the increase in export demand from developing countries. . . .

Concluding Remarks

Before I finish, I am very pleased to inform this assembly that a historic peace agreement has been signed to end the ethnic strife that has plagued Sri Lanka since 1983. There has been a cessation of hostilities and a surrender of arms. There are, no doubt, difficulties in the implementation of any peace agreement. My Government is moving ahead vigorously to restore normalcy in all parts of the country. The damage to our economy has been extensive, nearly $2 billion, and the World Bank has agreed to reorganize a Special Aid Consortium meeting in early December to mobilize international support for our program of rehabilitation and reconstruction. Many friendly countries have already indicated their support. I am confident that we will achieve lasting peace and a favorable economic and financial climate, which will enable Sri Lanka to regain the very high rates of growth and impressive development that took place before the outbreak of the disturbances in 1983. We seek the support of the international community in this great endeavor of reconstructing the strife-torn areas of our land.

On behalf of the Government and the people of Sri Lanka, I wish to express my deep gratitude to Mr. Conable, Mr. Camdessus, and the staffs of the Bank and the Fund for so expeditiously helping us in this great endeavor.

Statement by the Governor of the Fund and the Bank for India—Narayan Datt Tiwari

I join my fellow Governors in congratulating Mr. Abdul Karim on his election as Chairman of the Annual Meetings. I would also like to convey our best wishes to Mr. Michel Camdessus who is with us for the first time as the Managing Director of the International Monetary Fund.

These meetings are being held at a time when the world economy is passing through a very difficult phase. Output growth is expected to decline for the third successive year and the medium-term prospects are far from bright even though inflation has remained subdued, misalignment of major currencies has been substantially reduced, and, until recently, nominal interest rates had been declining.

As usual, the poor performance of the global economy has had particularly unfortunate consequences for developing countries. The impact of an unfavorable international economic environment has been aggravated in some developing countries, including my own, by severe natural calamities. However, in this year of unprecedented drought in India, we are finding that our policies of self-reliance and planned economic development have contributed immeasurably to our economic resilience.

The low growth in world output and intensifying protectionism have depressed world trade; its growth rate during the present decade, averaging only 2½ percent, is one half of that achieved in the 1970s. It is unfortunate that even after the launching of the Uruguay Round last year, we have seen an increase in the number of nontariff barriers that have damaged the world trading environment, with especially negative consequences for the access of developing countries to the markets of industrial countries. The situation has been especially difficult for poorer countries struggling to increase exports to meet the debt service on obligations, which were incurred at a time when the global economic environment was more supportive.

The large and persistent decline in commodity prices during the present decade has been a matter of deep concern to developing countries. The sharp reduction in their import capacity has slowed down their rates of growth and trapped many of them in chronic external payments difficulties. While there has been a recovery in commodity prices in the first half of the current year, in relation to export prices of manufactures they are expected to suffer a decline of 13 percent on top of a 16 percent fall in 1986.

The world economy in the 1980s has settled down at a suboptimal level of economic activity, giving rise to high rates of unemployment and worsening of poverty in several regions. The debt problems of middle-income and many low-income countries, particularly those in sub-Saharan Africa, have intensified the need for additional measures to help resolve their difficulties.

The paramount need of the hour is to restore the growth momentum in both industrial and developing countries. In this context, the recent attempts to coordinate policies of larger industrial countries are to be welcomed. These have already led to better alignment among key exchange rates and greater realization of the need to correct serious imbalances in the fiscal and trade areas. However, much more remains to be done. In particular, surplus industrial countries which have successfully contained inflation need to strongly expand domestic demand. We are happy that some useful work has been done in the Fund to develop indicators as aids to economic policy coordination. This should, hopefully, help make Fund surveillance more effective and symmetrical. Policy coordination among industrial countries must safeguard the vital interests of developing countries, which should also be made effective participants in the consultative process.

One key constraint on world economic growth has been an insufficient flow of capital on appropriate terms to developing countries. Commercial banks have been increasingly reluctant since 1982 to provide new financing to highly indebted countries. Although gross disbursements by the World Bank have continued to increase, it is unfortunate that net transfers have been going down. Net disbursements from the Fund have also been declining since 1984, leading to a reverse flow from borrowing countries to the Fund in 1986. Of particular concern to low-income countries has been the sharp deceleration in the growth of official development assistance since the mid-1970s. Net flows of concessional assistance to developing countries from all sources have remained stagnant in real terms throughout the present decade.

It is our considered view that the slackening of efforts in regard to ODA has been a significant factor contributing to the debt problems of low-income countries. It is important that we learn this lesson for the future so as to avoid emergence of similar problems in other countries.

Development is a complex and difficult process which calls for large long-term resources, building of economic and social infrastructures, breaking of age-old barriers to change, and gradual diversification of economies. In particular, eradication of poverty in low-income countries is a long, drawn-out task. Premature substitution of private commercial flows for official development finance in these countries is not desirable. . . .

We welcome the initiative of Mr. Camdessus to enhance the resources of the Fund’s structural adjustment facility (SAF). The enhanced SAF should have the same terms and eligibility and access criteria as in the present SAF. The SAF conditionality should, however, be made more realistic and flexible. Furthermore, the enhancement of the SAF resources should be effected in a manner that ensures genuine additionality in concessional flows.

We are glad that the Executive Board of the Fund has begun discussions on the Ninth General Review of Quotas. There is an urgent need at least to double the total quotas if the Fund is to play its rightful role in helping countries to undertake economic adjustment with growth. Meanwhile, it is crucial that the level of financing of members requiring Fund assistance be substantially stepped up.

In our view, future quota allocations should improve the share of developing countries. The present criteria for quota calculations are based predominantly on the economic strength of members but do not adequately take into account the current and potential needs of members which have to have recourse to Fund resources. This deficiency needs to be rectified.

We have been discussing the question of a fresh allocation of SDRs since 1982. It is a matter of great concern that though the need for a substantial allocation of SDRs is widely recognized, the requisite consensus for an allocation has not yet materialized. The emergence of a multicurrency reserve system and large international capital markets has in no way reduced the need for a fresh allocation of unconditional liquidity in the form of SDRs. We trust that members that still have reservations on the subject will agree to an allocation in a spirit of understanding and international cooperation.

We are happy that the objective of adjustment with growth has been universally recognized. This has an important bearing on the role of the Fund. Adjustment with growth would require a new approach to Fund conditionality as well as to the financing of Fund programs. In that context, we would urge that the Reports of the Group of Ten and Group of Twenty-Four, which contain many useful ideas on that subject, should be expeditiously examined so that these can be discussed at the next spring meeting of the Interim Committee. Secretary Baker’s proposals, outlined in his statement a short while ago, are a substantive contribution to this debate, which would merit serious consideration.

We live in an increasingly interdependent world. The multilateral institutions, particularly the World Bank and the International Monetary Fund, both symbolize and advance international cooperation. The problems which we confront are indeed complex and difficult. However, there is no question that given goodwill and determination, we can together begin to resolve them for the good of one and all.

Statement by the Governor of the Fund and the Bank for Ireland—Ray MacSharry

I, too, welcome Mr. Camdessus here in his capacity as the Managing Director of the Fund. He is no stranger to Annual Meetings but he has now assumed a new and very important role. I wish him well in this role and can assure him of every support.

The key task at these Annual Meetings is to consider how best to achieve higher growth in the world economy. It is only through higher growth that we can overcome the difficulties which face us.

In the pursuit of this task, the use of indicators and the setting out of a number of different scenarios, as is done in the Fund’s World Economic Outlook (WEO), can provide valuable insights. It can show the broad impact of a range of policy changes and the dangers involved with particular courses of action, or inaction. Of course, these exercises are at an early experimental stage and need to be extended and refined. However, it is already apparent that they will make a very useful contribution to international policy coordination.

Efforts to coordinate economic policies internationally have already had a measure of success. The Louvre agreement was a very encouraging development in this regard. It showed the willingness and ability of the major countries to agree on cooperative action. It has been successful so far in bringing greater stability to the foreign exchange markets. However, I wonder whether the commitments made at that meeting, which have since been reaffirmed, will be adequate when assessed against the major problems confronting us.

The short-term economic situation certainly shows some signs of improvement. Yet, the World Economic Outlook points out that, in the medium term, we are likely to see only slow improvement in the major problem areas. Even the most favorable scenario included in the WEO can point only to a modest growth in output. This pace of growth will be insufficient to make satisfactory inroads into the fundamental problem of unemployment. Greater progress must be sought through intensifying and extending international coordination. Additional measures must be implemented with a greater sense of urgency.

There seems to be consensus that a keystone of the policy mix we need must be credible action to reduce the U.S. fiscal deficit in 1988 and beyond. The other major essential envisaged is for domestic demand to outstrip output growth in many of the industrial countries outside the United States. This should help reduce external imbalances and at the same time give support to the growth efforts of developing countries. I have no quarrel with the main thrust of this argument, but I wonder, is too much reliance being placed upon it in the overall strategy? Will it be pursued vigorously enough to adjust the existing imbalances at existing exchange rates and to provide sufficient growth to make inroads into the unemployment problem?

Structural adjustment has an important role to play in backing up demand measures and providing a durable basis for growth. But structural adjustment takes time. I fear that the benefits of structural adjustment may take too long to feed through. Meanwhile, the continuing imbalances could lead to further exchange rate changes. If this were to happen, it could aggravate unemployment, particularly in Europe. It could also add to the pressure in some countries for protectionist measures.

My own country, Ireland, is a small open economy, having close economic ties with the large industrial countries of Western Europe. We depend very much on a stable and growing external environment to facilitate our goal of greater output and competitiveness and to encourage capital flows for investment. We have unemployment at 19 percent of the labor force. We have a large fiscal imbalance, which is being reduced by painful adjustment measures. Our economic situation precludes reliance solely on domestic demand for growth. It is imperative that we have growth in external markets. Otherwise, the necessary domestic adjustment will be put in jeopardy. We must strive to ensure that our adjustment efforts are not frustrated by inadequate responses by the major industrial countries.

Further work needs to be done at the international level to probe the question of international consistency of the policies being pursued, especially for the industrial countries and the stronger developing countries. We must aim for a global strategy that will optimize growth for all in the face of formidable constraints. In this way we can all make real and substantial progress.

The debt situation is a central element of all aspects of World Bank and Fund policy discussions at this stage. It is at the forefront not only of such issues as the enhancement of the structural adjustment facility, but also of issues such as the Ninth General Review of Quotas and the World Bank general capital increase. It is right that this should be so, given the severity of the problem.

It is now clear that the debt problem is going to remain with us for a considerably longer time than many of us might have thought when the crisis first developed. Progress has been made in certain areas. Nevertheless, there are signs of tension emerging.

We are all agreed that the growth-oriented adjustment strategy is the path that must be followed. It cannot be allowed to fail just because difficulties are encountered or because the commitment of any of the major participants is less than it should be. Without adequate support from multilateral and private financial institutions and a much higher level of private direct investment, the adjustment efforts of the developing countries cannot hope to succeed.

In this context, I welcome Mr. Camdessus’ proposals for a substantial increase in the resources available to the structural adjustment facility. I would hope that current difficulties can be resolved and that operations under the enhanced facility can indeed commence by the beginning of next year.

My country has always been particularly supportive of aid efforts aimed at the most distressed low-income countries. Therefore, we welcome the emphasis at these Annual Meetings on providing assistance for these countries, especially those in sub-Saharan Africa. This emphasis is the same as that of our own bilateral aid program. We have also shown our strong commitment to the activities of the International Development Association by agreeing to an increase, albeit modest, in our contribution to ID A-VIII, despite severe budgetary constraints at home.

I am pleased that the existing access limits to Fund resources are being maintained. By this decision, we are signaling the continued commitment of the Fund to support countries which are taking adequate adjustment measures. The Ninth General Review of Quotas, which has now started, gives an opportunity for member countries to ensure that the Fund will have sufficient resources available in coming years to play its central role. I would hope that the review will be conducted in a constructive way and be completed without delay. . . .

In the two organizations with which we are concerned at these Annual Meetings, the World Bank and the International Monetary Fund, we have two of the key institutions on which the prosperity of the world depends. I am sure that they will continue to respond effectively to the challenges of an ever-changing world economy. I hope that the coming year will see even greater progress in their very valuable contribution to the global development effort.

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

Surely it cannot be said that there has been any distinct easing in the problems of the world economy since our last Annual Meetings. The report on these problems prepared by the Fund can only reflect the disappointing developments of the recent past, offer a few projections of modest and uncertain improvement—this at a time when protectionism is on the rise—and acknowledge that we are as far as ever from resolving the debt crisis.

It is readily acknowledged that the external imbalances of the present day are unsustainable and that excessive contraction in the course of correcting them could induce a serious worldwide recession. It has also been noted, however, that serious risks of recession would be entailed in an effort to speed up efforts to eliminate the U.S. deficit should the economic policy of the United States appear not to be properly coordinated with those of the major surplus countries.

There has clearly been improvement of late in the degree to which the policies of the major industrial economies are coordinated. It would appear, however, that there is room for more decisive action along these lines. In the past, and with singularly poor results, excessive use has been made of short-term demand-management policies; there is now the opposite risk of failing to recognize the amount of latitude there is for taking action, and the danger that this will prevent achievement of medium-term objectives. We, therefore, support the Fund’s recommendation that the surplus countries use their latitude for action to stimulate demand by means of fiscal policies in tandem with structural policies, while the United States brings about a significant reduction in its federal deficit, and monetary policies maintain their medium-term stability targets.

In the absence of coordinated and decisive policies, the industrial countries will be unable to improve upon their modest rates of growth or to reduce the high unemployment rates many of them share; without such policies, it will also be impossible for them to make an adequate contribution to overcoming the distressing problems faced by a great many developing countries. This consideration is of the utmost importance because, while the root cause and the eventual solution to the current problems of the world economy are to be found in the industrial countries, their most serious social and political consequences are felt in the developing countries.

The hopes raised by the Baker initiative have not been fulfilled. The ratio of gross external debt to exports has continued to increase even as the ratio of interest payments to exports has failed to decline; restructuring and debt renegotiation processes have become more and more time-consuming and complicated; the banks have continued to show great reluctance to further increase their exposure in these countries, as a consequence of which, net bank financing received by the countries concerned last year was scant or negative, and a secondary market has grown up in which many banks have endeavored to shift a portion of their loans to the indebted countries to third parties at steep discounts. In the final analysis, the indebted countries have been unable to improve their standing as borrowers in international markets and have failed to establish a firm basis for their future growth. If we turn to the case of the low-income indebted countries, we find an even more overwhelming situation, with growth rates that are surely too low to improve the very low standards of living of their people.

Overcoming these difficulties must be the principal focus of the structural reform and rehabilitation policies of the countries concerned. It is also clear that much remains to be done in this area: such policies have not been adopted on a widespread basis, not all countries have applied the same degree of rigor, nor have all the sectors been covered that should have been. It must be acknowledged, however, that the implementation of such policies, which is always difficult both politically and socially, depends in large measure on the existence of a favorable economic climate, which obviously has not existed in recent years. Many of the countries concerned have considerably increased export volumes in real terms, but the sharp and widespread deterioration in their real terms of trade has prevented the anticipated improvement in their export revenues. At the same time, these countries have had to continue contending with protectionism in the industrial countries—but not there alone—the persistence and spread of which are quite rightly denounced in the reports of both the Bank and the Fund. It is unreasonable to call upon indebted countries to adopt difficult policies aimed at increasing and diversifying their exports if, at the same time, insufficient growth and protectionism in the industrial countries deny them access to markets that are expanding sufficiently rapidly.

The countries experiencing difficulties will only be able to reduce their debt/export ratios if their exports increase at average rates that exceed the interest rates on their external debt. As long as this does not happen, their rating as borrowers will not begin to improve and market pressures will continue fueling the banks’ desire to reduce their risks in these countries.

The new formulas which might help make it more attractive to the banks to extend new financing are important steps, but we must not overlook the fact that new bank financing will be made available to the debtor countries only in small amounts until such time as these countries’ prospects improve and their ranking as potential borrowers becomes higher. This requires efforts with regard to national rehabilitation and structural reform policies in the debtor countries, but also requires expanding markets, and these can result only from higher growth rates and reduced protectionism in the industrial countries.

In the meantime, financing from official sources and the multilateral institutions will necessarily play a crucial role in the next few years. Here again, however, recent experience provides no grounds for optimism. In the case of the International Monetary Fund, the net negative utilization of the Fund’s resources recorded in 1986 and projected to recur in 1987 is inconsistent with the central role that our institution is called upon to play in the solution to the debt problem.

Spain has supported the Managing Director’s proposal with regard to maintaining the same access limits in 1988, both for ordinary resources and for the special facilities. We have never advocated any weakening of the Fund’s conditionality and do not look upon the problems of countries experiencing difficulties as simple liquidity crises. Be that as it may, to the extent that these countries have properly oriented economic policy programs, our institutions must manage to assist them in a more flexible manner. The Fund’s liquidity situation is comfortable at present, but in order for the institution to have sufficient resources to meet its responsibilities in the next few years, Spain is prepared to support a new quota increase.

Furthermore, we share the Managing Director’s conviction that the low-income countries need more concessional financing. We believe that both his proposal to increase the resources of the structural adjustment facility by SDR 6 billion and the quite simple proposal of the United Kingdom to write off the debt of the poorest countries have a number of positive aspects and are worthy of the closest examination. . . .

Under the prevailing circumstances, it appears necessary to intensify the cooperation between the Bank and the Fund. . . .

In conclusion, I would like to stress the need for strengthening our institutions and encouraging the major countries both to promote negotiations aimed at the reduction of protectionism and to increase their cooperative efforts aimed at identifying specific ways of achieving greater growth without abandoning the objectives of stability.

For a country like Spain, which after many years of harsh adjustment policies is now in a phase of significant expansion even as it continues to reduce its rate of inflation, the slackness in the economies of the industrial countries as a whole constitutes a serious restriction. For the developing countries that are experiencing economic problems entailing serious social and political difficulties and are prepared to adopt and carry out rehabilitation and reform programs, the lack of dynamism of the international economy is a source of profound frustration. Faced with problems of such magnitude we should not confuse prudence with fear when we take our collective decisions.

Statement by the Governor of the Bank for Bangladesh—M. Syeduzzaman

It is indeed a great pleasure and privilege for me to be able to address the Annual Meetings for the fourth consecutive year. Before I start, I would like to join other Governors in welcoming Mr. Michel Camdessus, the new Managing Director of the International Monetary Fund. He has taken charge of the affairs of the Fund at a critical time, and we wish him every success in discharging his onerous responsibilities. I would also like to congratulate Mr. Conable on his successful leadership in reorganizing the Bank to meet the new challenges to development, an effort which has not been easy and free from controversy. The new Bank, we hope, will play its leadership role in the comprehensive development process more effectively and efficiently and meet the needs of the borrowers, as reaffirmed by him at the inaugural session.

The Forty-Second Annual Meetings of our two institutions come at a time when all relevant indicators show a declining trend in the world economy. Growth rates of developed and developing countries are declining, largely because of slow and depressed growth rates in developed countries; trade is stagnating as protectionism grows stronger; low commodity prices imposing deteriorating terms of trade for developing countries are accentuating the reverse transfer of resources from the developing countries; debt problems are getting worse; and with fiscal and trade imbalances of developed countries persisting, we apprehend that the world is moving toward the “low-case” scenario indicated in the 1987 World Development Report. Resistance to further adjustments and reforms is naturally hardening in many developing countries in the absence of adequate resource support and trading opportunities. That growth will inevitably decline further in 1987 and 1988 unless significant action is taken by the international community is apparent from the documentation prepared for our meetings this week.

Inability of the industrial countries to reduce their fiscal deficits and payments disequilibria and fear of generating inflationary pressure are inhibiting them from moving to higher growth. The organic link between this and the slowdown in the export growth of industrial countries and the dramatic reduction in the effective import demand of developing countries needs to be seriously recognized. The evidence is also quite clear that the inability of the developing countries to sustain required imports because of unprecedented terms of trade losses and lack of adequate resource inflows is a major factor affecting faster growth in the industrial countries, thereby slowing down the growth of the global economy.

Structural adjustments were prescribed as conditions necessary for attaining a sustainable level of growth for the developing countries. The developing countries have already demonstrated their determination and political will in implementing structural adjustments. The President of the Bank in his report to the Development Committee has underlined the bold efforts made in this direction by many developing countries. They are continuing with their efforts in the face of severe unfavorable social consequences and political constraints. These efforts have helped improve the macroeconomic environment and policy environment in their economies without concurrently putting them onto a sustainable growth path. It is now being increasingly realized that their efforts cannot be sustained for long in the face of an inadequate net transfer of resources, the increasing trend of protectionism in the developed countries, and low commodity prices.

Adjustment programs have been mostly geared to market-oriented policies at a time when market-oriented opportunities are shrinking in exports, capital flows, and private investments. Adjustment is desirable and imperative, but it can only take place in an environment of growth and adequate financial support. The architects of the structural adjustment facility (SAF) visualized a parallel growth in official and private flows, which has not been forthcoming.

There has been no dearth of suggestions and initiatives for solving the current international economic problems—debt, trade, capital flows, concessional aid, and so on. New terms have been coined such as “menu of financial instruments,” “financial engineering,” and many more. I think it would be correct to say that in dealing with the current economic problems and issues, only the Bretton Woods institutions have retained an objective sense of balance. We need to strengthen these institutions by providing them with additional resources.

The hardening of protectionist tendencies, mainly through nontariff barriers in the developed countries, is a major contributor to the deteriorating external accounts of the developing countries, making their adjustment efforts more difficult. This is all the more frustrating as many developing countries are liberalizing their trade and industrial policies as part of their adjustment programs to reallocate resources to the external sector. In the case of my own country, when we were trying to diversify our exports, many industrial countries imposed quota restrictions on our products, though Bangladesh is a miniscule supplier of such products to these countries. Quota agreements are complex in nature and difficult to administer. All these have the effect of discouraging investment in an area where Bangladesh clearly enjoys comparative advantage. This came at a time when our major commodity exports, including jute, jute goods, and tea, were facing declining prices like many other primary commodity exports of developing countries, thus aggravating the problem further. We look forward to the forthcoming multilateral trade negotiations under the GATT later this year for a new liberal trading environment, covering manufactured and agricultural products from developing countries. We have been greatly encouraged by the reassurances of the President of the United States of America yesterday to fight protectionism.

In spite of rescheduling a part of the debt of some middle-income countries and the commendable conversion into grants of a part of the ODA of low-income countries by some donors, there has been an overall deterioration of the debt problem. It is illusory to believe that the debt problem can be satisfactorily resolved without ensuring adequate resource flows and enhancing the ability of the debtor countries to service their debts through higher export earnings.

We welcome the initiative of the Bank and of the Fund for augmenting concessional resource flows to sub-Saharan African countries facing exceptional difficulties through a special program of assistance during 1988–90, following recognition by the Venice summit that their problems need special treatment. In this context we also welcome the initiative of the Chancellor of the Exchequer of the United Kingdom—which was widely endorsed in the recently concluded meeting of the Commonwealth Finance Ministers. But conditions for strong reforms up front will need to be flexibly handled in the light of social and economic realities. The President of the Bank in his statement has rightly pointed out that special attention needs to be given to the external resource requirements of low-income countries outside sub-Saharan Africa in similar difficult situations and facing problems of abject poverty.

We should not underestimate or lose sight of some positive developments in the past year, such as agreement on IDA-VIII; support for a general capital increase of the World Bank; reaffirmation of the World Bank’s role in poverty alleviation; the Venice summit reference to 0.7 percent target for official development assistance by the developed countries; support for increasing the resources of the structural adjustment facility; positive sign of relaxation of tension, both East-West and North-South; progress at UNCTAD VII on debt rescheduling, on a review of SNPA in 1990, and on the Common Fund. There were definite indications of better international understanding and a greater sense of realism at the UNCTAD VII as well as positive signals given by some industrial countries in respect of debt problems of low-income countries. It is also encouraging and heartening to see that even in 1986 OPEC countries provided $4.5 billion in net disbursement of untied ODA to developing countries, despite the sharp fall in income from petroleum, a substantial share of their GNP. The Japanese decision to recycle $30 billion over the next three years is also an encouraging signal. In recognizing the positive elements, the Ministers of the Group of Twenty-Four have rightly pointed out that any optimism regarding growth projections in the medium term can be justified only if all parties concerned assume their responsibilities for the attainment of adjustment with growth. . . .

The structural adjustment facility (SAF) of the Fund has been in position for more than a year, but only a small number of the eligible countries have access to this facility. This needs serious consideration, and in particular, the introduction of conditionalities like stand-by arrangements contrary to the basic objectives of the SAF needs urgent review. In designing programs under the SAF, greater consideration of the economic difficulties and sociopolitical realities of the eligible countries needs to be taken into account to provide the necessary incentives. A combination of increased resources for the SAF as proposed by the Managing Director of the Fund, the Special Action Program initiated by the Bank and the Fund, the Lawson initiative, and a fresh allocation of SDRs could certainly trigger a growth-oriented resource flow to the low-income and least developed countries facing exceptional difficulties.

The importance of growth orientation of structural adjustment programs can hardly be overemphasized and we thank the Managing Director of the Fund for recognizing this. Under the present design of such programs the burden of adjustment mostly falls on public investment when the need is for developing infrastructures and expanding social sector programs to protect the weaker groups in the society during adjustment.

We fully endorse the recommendation of the Ministers of the Group of Twenty-Four that an agreement on a tripling of the resources of the SAF be reached as soon as possible, to make the enhanced SAF operative on January 1, 1988. We have been encouraged by pledges made by several donors in the meetings of the Development and Interim Committees and hope that the process will not be stifled by rigid positions on burden sharing. In this context we also commend the Canadian proposal for increasing food aid to the low-income countries in exceptional difficulties as an important modality for channeling quick-disbursing assistance.

The Ministers of the Group of Twenty-Four have rightly emphasized that the Fund provide larger financial support by increasing access limits to its resources and that the work on the Ninth General Review of Quotas be concluded as soon as possible, keeping in view the need for increasing the share of developing countries in Fund quotas. The Ministers of the Group of Twenty-Four have also rightly deplored the absence of any action for new SDR allocations that hinders the Fund from playing its legitimate role, though there is overwhelming evidence that the conditions of the Articles of Agreement are fully satisfied. . . .

Bangladesh is the largest of the least-developed countries. It represents the most difficult collection of development problems. In the midst of difficult external and internal conditions, our economy during the past five years has shown its potential for growth. We have a strong adjustment program in place. Unfortunately, this summer the economy was hit by one of the worst floods of this century, leading to a loss of property and assets equivalent to 7–8 percent of GDP. It is almost certain that there will be a decline in per capita income this year. It is under such circumstances that targets set for adjustments and reforms under programs supported by the SAF need to be flexibly treated. In this context the recommendation of the Group of Twenty-Four for a contingency mechanism for sudden and unexpected changes in economic conditions to be a part of the SAF is highly relevant. Secretary Baker also suggested a contingency mechanism within the Fund this morning. I am sure these suggestions will receive adequate consideration by the management of the Fund and its Executive Board in due course.

The development issues before us are many; they are complex too. We recognize that there are no easy solutions to them, but certainly these are not beyond the ingenuity of mankind. This will need increased policy coordination among the industrial countries in addition to cooperation between the developed and developing countries. In this context, we endorse the recommendation of the Group of Twenty-Four on the need for an expanded dialogue among industrial and developing countries and the suggestion for an exploration of the modalities for undertaking this dialogue. In the same context, we support the proposal for the creation of a representative committee of ministers to examine proposals for the reform and improvement of the international monetary system as reiterated by the Ministers of the Group of Twenty-Four.

Before concluding, I would like to touch on some issues that in our opinion can reactivate the process of growth in low-income countries if there is a collective goodwill and a sense of urgency among all member countries:

  • —renewed priority to aid targets and their fulfillment;

  • —follow-up of the recommendations of the Task Force on Concessional Assistance;

  • —enhancement of the SAF resources to SDR 9 billion as proposed by the Managing Director of the Fund, preferably by January 1988;

  • —early implementation of the joint Bank-Fund Program of Action for increasing concessional flows to low-income countries with exceptional difficulties;

  • —conversion of loans into grants for low-income countries that face exceptional difficulties;

  • —action on the report of the Task Force on Poverty;

  • —the need to ensure that Fund-supported programs incorporate specific growth objectives including investment levels and flexible targets; and

  • —consideration of ways in which Bank-Fund collaboration could be more helpful to SAF countries in stimulating investments while avoiding cross conditionality. . . .

September 30, 1987.

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