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

Discussion of Fund Policy at Fifth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1987
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Statement by the Governor of the Bank for Papua New Guinea—Galeva Kwarara

It is a great honor for me to attend these meetings for the first time as Governor representing Papua New Guinea.

Much has happened in Papua New Guinea over the past decade, which has been a period of construction and consolidation since our independence in 1975. Our economic progress has been largely determined by external forces. Because we are a small open economy, these outside influences are particularly important to us.

A healthy world economy injects vigor and life into all its members. The reverse is also true. It is crucial that recent improvements in the international dialogue on the world economy be sustained. Better policy coordination by the industrial countries is essential.

The developing countries have suffered as world demand has fallen and world commodity and metals prices have remained depressed. Most developing countries have experienced very poor growth performances in recent years.

We are still feeling the pinch in many areas. Prices for coffee, copra, cocoa, and palm oil, which are all very important exports for Papua New Guinea and for many other developing countries, have been consistently depressed in the recent past. This makes life difficult for the bulk of our population who are dependent upon agricultural production. Papua New Guinea has the good fortune to have some diversity in primary exports and to some extent has remained insulated by continuing buoyant gold prices and improved copper prices over the course of 1987.

It now seems clear that we cannot expect a recovery by the industrial countries to bring demand for all primary commodities back to previous levels. The demand functions of the industrial countries are continually changing as new goods and substitute products enter the marketplace. Developing countries need to be able to adapt quickly to changing technology and world circumstances if they are to progress.

Optical fibers and other innovations have cut the industrial demand for copper, and growing supplies of vegetable oils—particularly soya bean and palm—have limited the recovery of coconut product prices. Many other products have suffered a similar fate and for similar reasons. In Papua New Guinea we have been diversifying our export base and exploring avenues for the introduction of new industries.

During the late 1970s and 1980s, some developing countries responded to declining demand for their traditional exports by adopting the easy option of borrowing to fill the growing income gap rather than by cutting back on imports and generally restraining expenditure. It was believed that if enough money and capital were pumped in, then these economies would somehow magically grow. Now, the repercussions of those over-optimistic days are clearly evident in the debt service ratios of various developing member countries. The world economy must live with the consequences as many developing countries face the unenviable task of lifting themselves out of their indebtedness and persistently low growth rates. Responsibility for the success of these efforts rests with all members of the world economy.

The benefits of any industrial growth continue to be diminished by the onset of the “new protectionism.” The record of the 1980s is of growing levels of protection, especially nontariff barriers and increased recourse to sector-specific bilateral arrangements. There are many areas of major controversy. Agricultural support schemes in the EEC, Japan, and the United States are causing major problems for all countries, as are a host of other restrictions in critical areas such as clothing, footwear, automobiles, and other manufactured goods. We will have the usual amount of nonsense spoken at these meetings by countries which practice protection while preaching free trade.

Papua New Guinea firmly supports the general liberalization of trade. The ongoing GATT talks and the role of the international organizations are crucial for several reasons. The talks must call to task those industrial countries that have failed to honor their obligations under the Tokyo Round to free trade in manufactured goods. The talks must also continue the process of reducing restrictions on agricultural trade. Finally, the talks must make some progress on freeing up trade in services. There has been some progress, but much of the developed world has failed to implement promises made in the Tokyo Round. We are frustrated that the talks are allowed to drag on for too long. Why cannot we decide on such issues quickly?

Let me now turn to questions of aid and resource flows. There appears to be a growing reluctance on the part of many donors to fulfill the old goal of contributing 0.7 percent of their GNP to the developing world. This goal seems to have been forsaken, even though it is still written into the political manifestos of many of the political parties currently in government around the world. Increasing resource flows to the developing world remains of crucial importance.

There are real constraints on our ability to pursue an effective restructuring and growth program without adequate availability of development assistance. Our traditional and generous neighbor, Australia, is going through difficult economic times and has unilaterally breached the aid agreement between our two countries. The uncertainty that is created by wealthy nations has been attacked for years in forums such as this, because of the difficulties it causes for good planning in the developing world.

We live in a turbulent world in which we are frequently buffeted by the ebbs and flows of world trade, capital markets, and the policies of industrial countries. This volatility causes instability and uncertainty in the system. Investors are hesitant and afraid to take risks. Government budgets and plans are formulated on uncertain forecasts of expected export receipts and domestic demand. Amid this muddle of uncertainties, it is important that other sources of income and assistance, such as aid and trade flows, be kept as stable and predictable as possible. There is no argument for tying aid flows to the vagaries of trade cycles in the developed countries.

Direct aid is not the only concern. The international institutions also have obligations and an important role to play. We are concerned at the trend toward decreased resource flows between the developed and developing worlds. We view with alarm forecasts that suggest major institutions such as the Bank and the Fund will shortly reach the stage at which they drain more resources from the developing world than they send to it. We face a very dangerous and conflict-ridden future if this trend is not significantly reversed. The institutions must be provided with adequate resources and their policies must be realigned to allow speedy and productive use of these resources. Increased lending by the Bank to a level of at least $60 billion over the period 1987–89 is crucial.

The problems I have outlined in relation to growth, trade, commodity prices, aid, and resource flows are of significant concern to the developing world. We all continue to hope that the coming years will provide a period of hesitant recovery in the world economy, the speed of which will depend on the policies we all pursue.

The lower oil prices, lower inflation, declining interest rates, and currency realignments of 1985 and 1986 still provide a potential base for sustainable growth. However, continued problems in the U.S. economy remain of fundamental concern. We would all be assisted by better policy coordination and more appropriate policymaking in the United States, Japan, the Federal Republic of Germany, and Western Europe.

Let me now discuss the role of the Bank and the Fund in the current world climate and especially their role in my own region of the world. While we have valued the services of the Bank and the Fund, the policies of both organizations have not always been conducive to our needs as a small Pacific state. The international organizations and those highly privileged and highly paid individuals who work for them must develop greater vision in formulating and implementing development strategies. The capacity for complex theorizing on global, regional, and sectoral issues must be converted into greater understanding of the realities of development at the level of nations and individuals.

With regard to the Fund, many in the Pacific continue to be disappointed that technical assistance previously provided to central banks is being phased out. For many countries that take a prudent approach to managing their balance of payments, the provision of technical personnel has been one of the few contributions the Fund has been able to make. In Papua New Guinea, we have been waiting in vain for some years for the filling of several key positions in our Central Meeting, and thought we had an understanding for the early provision of assistance. We are very disappointed that absolutely nothing has happened in the past year.

Other Fund issues of general concern to the developing world include better surveillance and coordination of the rich countries; more positive approaches to conditionality and cross-conditionality; and increased resource flows to the developing world combined with better access to concessional facilities for the small states. . . .

Let me conclude on an optimistic note. Appropriate policies in the key industrial countries, matched by relevant policy mixes in the developing countries and meaningful levels of assistance from the major international institutions, can see us all move to a higher plane over the next year. Let us all strive for that aim, for the betterment of all mankind.

Statement by the Governor of the Bank for Pakistan—Mian Mohammad Yasin Khan Wattoo

I join my colleagues in congratulating the staff and the management of the Bank and the Fund on presenting encouraging reports of successful operations in a turbulent year.

Last year we experienced a change in the stewardship of both the Bretton Woods institutions. Mr. Conable had, of course, assumed leadership of the World Bank before the Annual Meetings in September 1986, and we had the opportunity of welcoming and congratulating him. We were, however, still troubled with the question of filling the vacuum created by the decision of Mr. de Larosière to retire. I am glad that we were able to entrust the responsibility of guiding the destiny of the Fund at a critical stage in the global financial situation to Mr. Michel Camdessus—a man with a keen insight into the financial issues of our times and a sympathetic understanding of the problems faced by developing countries. I offer my heartiest congratulations to him and welcome him with sincere assurance of all constructive support.

The performance during the preceding year inspires confidence in the quality of leadership shown by the new team in both the Bank and the Fund. The lucid presentation of global economic issues and the role being played by the Bank and the Fund in meeting these problems outlined in the opening speeches by the President of the Bank and the Managing Director of the Fund provide an excellent starting point for our deliberations. The inaugural address by Mr. Reagan, the President of the United States, was deeply inspiring. His determination to resist protectionism was indeed most encouraging.

It should be a matter of primary concern for all of us that the pace of the world economy has slowed down further. In 1986 the growth rate in the major industrial countries came down to 2.7 percent. In fact, in the final quarter, the rate was only modestly above 2 percent.

It is unfortunate that the leading industrial nations of the world have so far not been able to coordinate their efforts toward generating a growth momentum commensurate with the potential of their economies. Not all nations have participated in the efforts to sustain recovery. The world economic climate was particularly favorable for such an effort in 1986 and even in the early part of 1987. The terms of trade moved substantially in favor of the developed industrial countries, giving them a massive transfer of resources at the cost of poverty-stricken nations in the world. With supporting policies in industrial countries, this major reverse transfer of resources should have strengthened the global recovery. The progress of the world economy in the fight against inflation also offers considerable scope for accelerating the pace of development with stability. The persistent high rate of unemployment and idle capacity in at least some of the powerful economies of the world creates a moral obligation on us to resist the risk of a further slowdown in economic activity.

The imperative need is to ensure greater international coordination of economic policies. We can all benefit from an intensified awareness in the developed industrial nations of the impact of their economic policies, not only on world economic trends but particularly on the adjustment efforts of the developing countries. Political will is essential to reduce fiscal and balance of payments deficits, thus enhancing the prospects of sustained growth in the world economy and expansion of world trade unhindered by protectionist pressures. Countries with persistent surpluses have a greater obligation to play a more positive role. They need to initiate structural shifts not only in the pattern of domestic demand but also in expanding the transfer of resources to the developing countries.

It appears that the entire burden of adjustment is being placed on the exchange rate mechanism. This has given rise to increasing volatility in exchange markets, with adverse consequences for the development of world trade in a liberal framework. The journey from the Plaza accord to the Louvre accord signifies a major shift from an excessive reliance on exchange rates as the only adjustment mechanism. I hope that with the passage of time there will be a greater appreciation of the full implications of this important accord in the essential area of international policy coordination; and also that the necessary political will would be forthcoming to back the accord fully as a comprehensive practical policy. The measures adopted by European finance ministers in mid-September to strengthen their cooperation under the European Monetary System signify progress in the same direction.

The work done by the Fund staff in developing the use of key indicators of economic performance and policies is expected to play an important role in strengthening such policy coordination, while making Fund surveillance effective. I hope we will be able to effectively combine a flexible exchange rate system with policy cooperation, imparting stability and steady growth.

For the future, the World Development Report has projected a high scenario based on growth in industrial economies of more than 4 percent. This offers a realistic target, which can be seriously pursued. Such growth in the world economy is essential to ease the tensions attached to the process of adjustment both in the developed and developing countries.

This would no doubt require a bold collective attempt by the leaders of the world economy. Many nations would need to pursue policies that might be painful and politically unpopular. It is, however, important to express the hope that the major industrial nations would seek to follow policies designed to manage the world economy in a manner that enables it to realize its full potential.

The developing countries have always received advice on carrying out difficult and painful adjustments, however high the cost in terms of strains on fragile political institutions and also in terms of human suffering. The developed countries have been above such constructive advice because they are not formally borrowers from the international institutions. The time has come to realize that the developing countries may not be able to carry out adjustment programs against the background of slow growth in the level of world economic activity and shrinking world trade.

If the present policies continue with the resultant growth rates of 2–2.5 percent, there are serious dangers that the solution to the debt problem will prove elusive and a large number of low-income countries, particularly in Africa, may sink deeper into poverty. Above all, the slowdown in world trade, with growing imbalances, may strengthen the protectionist sentiments.

The volume of world merchandise trade rose by about 3.5 percent in 1986. Trade expansion prospects were consequently limited for a large number of developing countries. At the same time, declines in primary commodity prices, mainly stemming from weak demand, severely impaired the terms of trade of developing countries. By early 1987, real commodity prices had fallen to a level 25 percent below the previous low point reached in 1982. The more recent trends indicate partial recovery, but do not signify a basic change in the longer-term picture. I am happy to note that the Development Committee has also agreed to stress the importance of raising global economic activity by an improvement in the policies of industrial countries. This would improve the climate for the developing countries.

Developing countries have made remarkable efforts toward formulating and implementing adjustment policies, despite an unfavorable world climate and often without adequate support by way of external resources. The growth rate has improved in a number of countries. Most remarkable has been the re-emergence of moderate growth in Africa during 1985 and 1986, although per capita incomes on average have continued to decline. The successful pursuit of adjustment and development goals by a number of African nations has begun to modify the economic landscape in the region. The encouraging performance in Asia is a source of comfort for the world economy, as it offers the remarkable prospect of half the human race moving away from poverty. Pakistan has made its modest contribution to this great Asian drama by attaining close to 7 percent growth, not only during fiscal 1987 but on average for the past ten years. . . .

The Fund was less active [than the Bank] during the year, as reflected in the amount of fresh purchase of currencies by members. In fact, because of the magnitude of repurchases, outstanding Fund credit to members declined by SDR 3 billion. The number of stand-by and extended arrangements at the end of 1986–87 was lower than in most recent years. This decline in Fund activity in a year when the need for Fund assistance in the developing countries, combined with the desire to institute reasonable adjustment programs, was at a high level requires a deeper analysis. Apart from the self-congratulatory argument that a number of countries have successfully carried out adjustment and no longer require assistance and the argument of despair that some of the countries are in arrears, we should ask ourselves why a number of developing countries have been unable to agree on the arrangements with the Fund. It is possible that some flexibility in approach to accommodate sociopolitical realities, while maintaining smooth adjustment over the medium period, could enable a number of developing countries that wish to pursue corrective policies to use Fund resources and ease their progress.

Last year, when the Fund initiated the structural adjustment facility to recycle the funds originally made available under the Trust Fund, the move was generally welcomed and hopes were raised. However, so far only 15 countries have made use of funds available under this facility. The fact that, despite the concessional terms of the facility, only a small number have availed themselves of it suggests that the conditionality attached to the facility and the comprehensive three-year program required are too restrictive. I am glad that the Interim Committee has pointed out the need “to consider whether the Fund’s policies regarding conditionality need to be re-examined in light of changes in the conditions facing member countries since the last comprehensive review in 1978–79.” We will watch developments in this area with great interest.

The sharply reduced flow of resources to the developing countries, uncertain export prospects, and the slowdown in economic activity in industrial countries have again brought to the fore the question of a fresh allocation of SDRs. The SDR has not assumed a major role in the international monetary system mainly because only SDR 21.4 billion has been allocated since the inception of the scheme, and no allocation has been made since 1981. The original objective of making the SDR the principal reserve asset remains as elusive as ever. The question of a fresh allocation of the SDR has been engaging the attention of the Executive Board of the Fund. While a majority of Executive Directors have favored a new allocation, sufficient support needed for a decision has not emerged. There is no doubt that the SDR can play an important role in providing unconditional liquidity, which would lead to growth without the negative effect of import compression. What is now required is not further technical analysis of the SDR allocation but sufficient political will among industrial countries to tap this source to make additional liquidity available to developing countries. Once the decision to make a fresh allocation of SDRs is taken, a suitable mechanism can be devised to improve the distribution of SDRs, keeping in view the needs of member countries for additional liquidity.

The world monetary and fiscal system based on the Bank and the Fund faces a set of new challenges today. The system has served us well because of its capability to reform itself and face new situations. My remarks are intended to keep this process alive. I am confident that we can evolve an approach designed to maintain stable growth with full and active participation of the developing countries.

Statement by the Governor of the Fund and the Bank for Guyana—Carl Greenidge

It is my privilege to deliver the statement on behalf of Guyana and the Commonwealth Caribbean members of the Fund. May I take this opportunity also to congratulate Mr. Camdessus on his appointment to the post of Managing Director of the Fund. All the members of the Caribbean Group wish you a successful tenure. We are all aware, of course, that in your success lie the hopes of all of us as members of this organization.

Global Economic and Financial Management

At the level of nation states and national economies, certain principles, now widely accepted, have begun to guide approaches to many fundamental problems, such as indebtedness and poverty. Among the most important of such principles is that of shared responsibility and equity. Unhappily, no similar principles inform international practice. There is, no doubt, widespread recognition of the phenomenon of the interdependence of all elements of the global economy. The recognition is, however, not translated into balanced or symmetrical international economic management. This lacuna is reflected in the contradictions evident in the world economy today and leads to rates of growth and paths of adjustment that are less smooth and less rapid than would otherwise be realizable.

Thus, today we are faced with a global economy characterized by:

  • — trade liberalization in some countries alongside growing protectionism in critical industrial countries;

  • — efforts to reverse balance of payments deficits alongside inadequate arrangements for the productive or functional use of surpluses; and

  • — noncomplementary monetary and financial policies among the industrial countries.

Together, these policies have resulted in:

  • — widespread financial and monetary instability;

  • — a third successive year of declining growth among the industrial countries as a whole; and

  • — a weak transfer of growth to the poorer countries.

In other words, the intention of improving global economic performance by means of extensive structural adjustment and harmonious coordinated economic policies still remains to be realized. There are signs of recognition by the industrial countries of this dichotomy and we are heartened by the recent commitment of these countries to policy coordination and cooperation embodied in the Louvre accord and the conclusions of the Venice summit. We trust that this commitment will soon be reflected in practical terms in, for example, realistic exchange rate policies, complemented by the commitment to an open trading system, and policies of the surplus countries consistent with the adjustment efforts of the deficit economies.

Debt

Nowhere is the need for symmetry in policies more evident than in the case of debt. Nowhere is the asymmetrical impact of international economic policies more palpably inequitable than in the case of debt. In addressing this issue, there has so far been a tendency to focus almost exclusively on those cases or categories that have the most dramatic impact on the international financial system. Consequently, the coverage of countries has been inadequate, as has been the coverage of financing. Thus, the Baker plan dealt only with the largest (in absolute terms) debtors and contained provisions that beneficiaries undertake structural adjustment, while no corresponding obligations were extracted from lenders. Generally speaking, the consequences of what we here term policy asymmetry have been:

  • — commercial bank contraction of net flows to developing countries with no commitment to reversing this trend at a time when the obverse is needed;

  • — debtors’ commitment to adjustment and repayment of debt;

  • — the abandonment of multilateral development bank debtors by the multilateral development banks on grounds that they cannot reschedule;

  • — noncompulsory surveillance of developed country policies, giving rise to disharmonious policies by the major economies at a time when coordination is needed to overcome recession.

Thus, between debtor and debtor, creditor and debtor, and creditor and creditor, different and unsystematic policy prescriptions are now commonplace.

For this reason, we should like to recommend to the members of the World Bank and the Fund the initiative on debt recently formulated by the Caribbean Community and welcomed by the Commonwealth Ministers of Finance. The specifics of this initiative were outlined to this gathering by the Minister of Finance and Prime Minister of Jamaica. Let it suffice for me to say, therefore, that this initiative is intended to treat the question of indebtedness in a comprehensive sense, starting with the identification, in terms of objective economic criteria, of all the debt-distressed countries. The common and specific responsibilities and options open to creditors and debtors are identified in the context of global needs.

For these reasons, although we endorse the proposal emanating from the Governor for the United Kingdom, Mr. Nigel Lawson, and the action already taken by Canada, for example, we insist on the need for symmetry and comprehensive treatment of the issue. As we search for such a workable solution to this crisis, let us not lose sight of the need for additionality of resources to the low- and middle-income countries. A solution needs to involve the timely provision of resources and in the context of agreed structural adjustment programs. This could have a catalytic effect on productive capacity, thus stimulating exports, generating employment opportunities, and returning these countries to a state of creditworthiness.

The Role of the Fund

It is no secret that growing concern about the role of the Fund in the context of the evolving global crises is giving rise to serious reviews of this institution. The Fund commands a somewhat unique position with respect to the international financial system. It commands this position also because of the sensitive and pivotal levers that are at its disposal. In this regard, we welcome the new perspectives offered on the purposes and role of the Fund in the Group of Twenty-Four report, “The Role of the IMF in Adjustment and Growth.”

The Fund’s traditional facilities, namely, the stand-by arrangement, the extended Fund facility (EFF), and the compensatory financing facility (CFF), together with the recent structural adjustment facility (SAF), which is open to eligible countries on softer repayment terms and with a more medium-term focus for adjustment, provide avenues of financing for countries in difficulty. It is therefore essential that access limits to these facilities are not reduced. For this reason, we were heartened to learn that the Interim Committee endorsed the proposal to continue into 1988 the enlarged access to the Fund’s resources. We wholeheartedly agree with the Managing Director who, in summarizing the deliberations on this subject, expressed the view that the maintenance of the access limits would signal that the Fund would continue its role in promoting a cooperative solution to the debt problem. A reduction in access would indeed send the wrong signal to international markets.

The Ninth General Review of Quotas should be approached bearing in mind the need for the Fund to have readily available resources with which to lubricate an expanding world economy. Reliance on borrowed resources should be kept to a minimum in order to avoid the costs that have to be borne by the countries that have to resort to Fund financing.

The industrial countries have already agreed at Venice to a “significant” increase in the SAF. The Managing Director of the Fund has called for a tripling of resources to be made available to the SAF. The additional SDR 6 billion are to be contributed by a range of donors, particularly surplus countries such as Japan and the Federal Republic of Germany. This proposal is most welcome and we support the early formulation of, and agreement on, the modalities of this increase. The need for this action is made especially urgent by the fact that these resources will allow that facility to be substituted for stand-by arrangements in many low-income developing countries. We regret that at the recently concluded meeting of the Interim Committee, no consensus could be reached on either the size or the modalities of operation of the facility.

The Fund must remain cognizant of its surveillance role in relation to both major and minor countries as is identified in its charter. The Fund appears to be powerless to obtain appropriate policy responses from the major industrial countries which are not currently using its resources. The time is opportune, however, for the Fund to exercise a harmonious influence on the policies of the industrial countries.

Another controversial area or issue of concern pertains to the impact of loan conditionality in relation to the use of Fund resources. There is a widespread view, most recently voiced by the Commonwealth Finance Ministers, for example, that the effectiveness and appropriateness of conditionality need to be reviewed. In this context, the time permitted for adjustment, the allowances made for contingencies, the flexibility employed with respect to the range of policy options or instruments, and the impact of demand-management measures on country growth all need to be carefully assessed in the light of the experience over the last ten years.

We welcome the signal contained in the Managing Director’s address at these Annual Meetings to the effect that the Fund would be prepared to conduct a comprehensive review of the use and efficacy of conditionality. In this task, consideration should be given to more extensive use of the “contingent conditionality” so innovatively designed for the Mexican case in 1986. This approach commends itself most strongly when one bears in mind the inadequacy of the analytical tools and predictive devices currently employed by all practitioners in this area.

SDRs and the Compensatory Financing Facility

The question of an allocation of SDRs for the next basic period remains an unresolved item on the agenda of the Interim Committee. Despite the evidence submitted by the staff of the need to supplement global liquidity through the provision of unconditional reserves, a few major countries remain to be convinced on the subject. The Group of Twenty-Four in its communiqué has again requested a substantial new SDR allocation, the magnitude of which is to be consistent with the need to keep the growth of international reserves in line with the projected growth of imports.

I should also like to emphasize the need to ensure the integrity of the Fund’s compensatory financing facility as a source of finance for temporary export shortfalls; in particular, more effective and greater access under the facility, and the desirability of providing CFF drawings on concessional terms to low-income countries.

Conclusion

The Governments of the Commonwealth Caribbean countries are of the view that these are the most important issues facing the Fund and its members today. The proposals which we have outlined or embraced in this statement are intended to strengthen the process, as well as the role of the Fund in global adjustment and growth. This is imperative if the full potential of the world’s current productive capacity and organizational arrangements is to be realized.

We therefore recommend these initiatives to you.

Statement by the Governor of the Fund and the Bank for Romania—Alecsandru Babe

It is a particular pleasure for me to address to you, and to all participants at this year’s Meetings of the Bank and the Fund, my cordial greetings and my best wishes for the success of these important international organizations. At the same time, I assure you of our resolve to join the efforts being made to solve the complex and at times—let us be frank—contradictory problems that confront economic, financial, and monetary activities throughout the world.

The Annual Meetings give me the opportunity and the honor of presenting, on behalf of the President of Romania, His Excellency Nicolae Ceausescu, some considerations and proposals with respect to some of the major problems of international economic and financial life.

These Meetings are taking place at a time when the world economic situation continues to worsen, affecting all countries, particularly the developing countries. Recently, protectionism and discriminatory practices have intensified, particularly with respect to the export of manufactured goods by the developing countries, while at the same time the prices of raw materials have declined.

The signs of recession in the world economy have been felt with varying intensity, owing to deep-seated contradictions brought about by the anachronism of the existing economic order and by the reappearance of old economic dominations and subordinations in new forms.

The overwhelming external debt burden of the developing countries remains a major problem in the world today. As a result of the present recession, the level of external debt has only deepened the crisis, heightened economic instability, and limited the scope for economic development and progress in the developing countries. This is the underlying reason for the widening gap between developed and developing countries, as well as for other adverse effects on mankind.

Particularly acute is the problem of interest rates, which were unusually high at the beginning of the 1980s. Although they have declined in nominal terms, real interest rates are still excessively high in relation to the borrowing countries’ diminished debt repayment capacity.

Deeply aware of the need for a new approach to all international political and economic problems, our country is in favor of finding new and radical solutions that are in keeping with the seriousness of the present situation and with the responsibility of all people and all countries to create a better and a decent world. Convinced of the need to achieve these goals, our President has over the years launched many efforts to help eliminate underdevelopment and establish a new international economic order.

In line with its concern, Romania placed an item called “The Foreign Debt Crisis and Development” on the agenda of the Forty-Second General Assembly of the United Nations. At the same time, it proposed that the world organization call upon all developed creditor countries, international banks, and lending agencies, including the IMF and the World Bank, to declare a moratorium for at least five years on repayments on all loans to developing countries. Romania also proposed that the UN General Assembly call upon all countries to halt protectionism, discrimination, and quota setting in trade and to adhere strictly to the GATT’s most-favored-nation clause.

The Romanian position presented to the Bank and the Fund at these Annual Meetings is shaped by these same concerns. Our goal is to improve the effectiveness of the Bank and the Fund, and we call on them to make fundamental changes in their policies and practices. The Bank and the Fund should develop the capacity to play a catalytic role in the complex process of preparing for and promoting a new, equitable, and democratic financial and exchange system that can genuinely support the developing countries’ efforts to achieve progress. Obviously, this calls for far-reaching measures.

The main features of the considerations and proposals of the President of Romania, Nicolae Ceausescu, which deal with the global solution of problems relating to debt and very high interest rates and which have been distributed as official documents, are as follows:

—For credits already extended and committed by the IMF and the IBRD, the annual interest rate should be limited to a maximum of 5 percent.

—For new credits to be extended by the IMF and the IBRD, the annual interest rate should be 4 percent. Such a level could ensure that the return on each project financed in this way would generate enough resources to service principal and interest payments as well as some net income for the borrowing country.

Moreover, a separate solution governing trade relations should be found, based on agreements between the parties.

—The IBRD should give up the arbitrary and unjust practice of unfairly increasing foreign debt through the so-called exchange adjustment. Credits extended by the IBRD should be repaid at the same value and in the same currency structure initially agreed upon, without supplementary amounts being required.

—The IMF and the IBRD should adopt a resolution with respect to the extension of all credit repayments by at least ten years, so that through the alleviation of the external debt burden the necessary financial resources for the progress of the developing countries should be ensured.

—For the funds already borrowed by the IMF and the IBRD to create credit resources, a decision should be adopted in order to limit the interest rate to 5 percent annually. For future borrowings, the IMF and the IBRD should pay an interest rate not higher than 4 percent.

At the same time, the IMF and the IBRD should undertake measures to reduce their own expenditures, rationalize their actions, and obtain profits of a maximum of 0.5 percent.

—The IMF and the IBRD should democratize their whole activity, so that their developing member countries should play a greater role in the taking of measures and decision making.

The proposals and the considerations of Romania, and of the President of our country, fully illustrate its spirit of commitment to international efforts aimed at solving the problems of the present world recession.

We are living at a time when profound changes are needed, and for this reason we must adopt novel approaches in order to solve these problems once and for all. Considering our present and future aims, such changes are actually in the interest not only of the developing countries but of the developed countries also.

We feel that in this way the IMF and the IBRD could accomplish their original task better and become models of policy promotion for the economic and social progress of their member countries and play an active role in maintaining the stability of the world economy and of the financial and exchange system. All these countries will appreciate what we began and what we achieved, and their appreciation will be based on an improvement in the world economy as a whole, as well as an improvement in individual countries, particularly developing countries.

I am confident that we shall be able to understand what we have to do now and in the future and that we shall be able to summon the strength to overcome the obstacles to radical changes in existing ideas and practices.

Statement by the Governor of the Bank for Solomon Islands—George Kejoa

It gives me great pleasure to speak not only on behalf of Solomon Islands but also on behalf of three other small-island developing member countries of our constituency, Kiribati, Vanuatu, and Western Samoa.

We face special problems in the management of our economies. Terms of trade continue to decline for those countries dependent on sales of a few primary commodities. The International Monetary Fund pointed out in its recent report on exchange and trade restrictions that, whereas restrictive practices have generally been reduced during the past year in the developing countries, they have actually been on the increase in the industrial countries. This aggravates the already serious plight of our fragile, commodity-exporting economies. We acknowledge our own responsibility to follow sound economic and financial policies. But adoption by the other countries of policies harmful to our interests places an excessive load on our ability to adjust to adverse external circumstances. Even as we adopt adjustment measures and face the ensuing political and social pressures, any benefits that might be expected are reduced or nullified by factors beyond our control.

A sustained improvement in world economic growth will not be possible without greater financial flows from the developed to the developing countries. Negative net transfers were recorded for 1985 and 1986, and the United Nations forecasts a continuation of these trends during the next few years. This runs squarely against the spirit of cooperation envisaged at Bretton Woods; in addition, this trend does not reflect the aims of the Development Committee, whose full title, let us recall, is the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries.

We welcome the Lawson initiative, which envisages transforming loans into outright grants, rescheduling to allow much longer repayment and grace periods, and renegotiating interest rates. These measures will need to be supplemented by increased flows of official aid, as well as by the substantial increase being sought by the Managing Director for the Fund’s structural adjustment facility. Amid the flood of exhortations to us to effect structural adjustment, it seems absurd that major donors should be holding back from supporting the structural adjustment facility, one of the most useful ideas to emerge in recent years and the one most likely to be of use to the smallest member countries. We are pleased, therefore, to see signs yesterday in Secretary Baker’s speech that the United States is still looking to play a positive role in both the Bank and the Fund. . . .

With regard to the Fund, a substantial increase in quotas is long overdue. The Ninth General Review should be delayed on no account. It should take special account of the needs of small member contries, whose economies are extremely open, vulnerable to external shocks, and handicapped by the very small access to Fund resources resulting from the current quota and access formulas.

At these meetings last year, we drew attention to the cutting back of technical assistance provided by the Fund. For many of us, the provision of such assistance is the major benefit derived from membership. Technical assistance accounts for a only a very small percentage of total Fund expenditure; yet it is of vital importance to countries that have not yet had time to educate and train specialists. We urge the Fund to maintain existing levels of technical assistance. At the same time, we record our appreciation of the training facilities made available by the Bank and the Fund in economic and financial management. Such training benefits us greatly, and it is important that our real access to it be maintained.

Finally, I extend to the Chairman our appreciation for his conduct of these meetings and to Mr. Camdessus we offer our congratulations on his appointment as Managing Director and our hopes that his term of office will be an active and fruitful one for all of us.

Statement by the Governor of the Bank for Nepal—Bharat Bahadur Pradhan

I am happy to be here, in the midst of distinguished colleagues and friends, to present the views of His Majesty’s Government on the international economic issues and the national economic situation.

Before presenting our views on these issues, we would like to express our appreciation to Mr. Ronald Reagan, President of the United States, for his inspiring inaugural address and for his support for the Bank and the Fund. I would like to join others in extending our warm welcome to the new Managing Director of the Fund, Mr. Michel Camdessus. We wish him every success in his new and challenging job.

Since our last meeting, the performance of the world economy has been far from satisfactory. It is indeed disconcerting to note that the slowdown in economic activities noted during the fall of last year has continued well into the current year. Despite positive developments, such as a decline in the petroleum prices and an easing up in interest rates, the world economy could not register a much needed faster rate of economic growth. Protectionist policies, along with large imbalances in trade and budgetary situations of industrial countries, have more than offset the benefits of these positive developments.

The economic performance of both industrial and developing countries in this period weakened more than initially anticipated. Although industrial countries have succeeded in reducing the rate of inflation, the persistent imbalances in the trade and budgetary situations more than offset the benefits. Instead, it has led to a situation of higher unemployment and lower economic growth in these countries.

The protectionist policies adopted by industrial countries have caused a sharp decline in the export price of developing countries, thereby deteriorating sharply their terms of trade. The situation was further worsened due to a sharp decline in resource availability and the transfer of resources to these countries. This has not only hindered the process of development in developing countries but also aggravated their debt problem. Because these countries have limited access to capital markets, financing from the bilateral and multilateral agencies is crucial in sustaining their efforts toward growth and development. In this context, the role played by the Bank and the Fund assumes vital significance. Moreover, the lending of the Bank and the Fund has a catalytic role in inspiring confidence among other lenders. . . .

At a time of increasing resource requirements by developing countries in their effort to develop, the decline in the flow of official development assistance from bilateral and multilateral resources in real terms in 1986 concerns us very much. The decline in the flow of resources from multilateral sources is significant in real terms, while the flow from bilateral sources has remained virtually stagnant since 1985. We would, therefore, like to urge donors to increase the flow of resources to meet the widening gap in the resource availability in developing countries. It is all the more necessary due to economic adjustment and stabilization programs that have been initiated by several developing countries in recent years.

We are happy to note that the Development Committee addressed the important issue of revitalizing growth in the developing countries and emphasized the strong role to be played by the Bank and the Fund in expanding flows of finance to the developing countries by supporting a substantial increase in the Bank’s capital base. We also welcome the strong endorsement made by the Interim Committee on the initiatives of the Fund to increase the lending program under its structural adjustment facility (SAF). . . .

We appreciate the establishment of the structural adjustment facility by the Fund. It would supplement the efforts of the Bank in supporting the adjustment programs of the developing countries. In this context, we welcome the support expressed by the industrial countries to the proposal of the Managing Director of the Fund for a substantial increase in the size of the SAF. We hope negotiations regarding the increase would be completed by the end of 1987 and the conditionalities attached to its use would be less stringent, so that a large number of needy low-income countries will be in a position to benefit from the facility.

In view of the uncertainties surrounding the world economy and the worsening of payments difficulties, there is a need for the continuation of the enlarged access policy and an increase in the present access limits. Because of low commodity prices, the amount under the compensatory financing facility (CFF) should be approved with less conditionality, especially in the upper tranche.

We believe that there is an urgent need for a substantial increase in the quotas under the Ninth General Review. An adequate increase in quotas would enable the Fund to deal more effectively with any disruptive shocks in the world economy arising from persistent debt problems. In this regard, we support the view of the Group of Twenty-Four that the quotas be fixed on the basis of particular circumstances and financing needs, including some form of poverty index for the low-income countries.

With regard to SDR allocations, a substantial allocation of SDRs would promote economic recovery and would not be inflationary. Such allocations would help meet long-term global need for reserves, thereby supplementing international liquidity. We share the views put forward by other developing countries that the unconditional character of SDR allocations should be maintained and that a link should be established between SDR allocation and development finance.

I would now like to review in brief the macroeconomic management and development performance of Nepal in the fiscal year 1986/87. Following the adoption of the economic adjustment program in 1986, the economy witnessed positive developments in various sectors in fiscal 1986/87. However, in spite of a significant growth in the industrial sector, a drought-induced decline in agricultural production has slowed down GDP growth in 1986/87. Even though investment in irrigation has expanded rapidly over the years, Nepal’s agriculture is still greatly influenced by weather conditions.

Despite a large shortfall in foodgrain production, the measures undertaken to improve supply management helped to contain inflation. The average inflation rate in 1986 came down to 13.3 percent from 15.9 percent in 1985/86. On the domestic resource mobilization front, the Government has had great success in 1986/87. Revenue grew by 29 percent, and in terms of GDP the share went up from 9.3 percent in 1985/86 to 10.7 percent in 1986/87. Growth in regular expenditure was reduced to 14 percent in 1986/87 from 23 percent in the previous year. Similarly, development expenditure in the year increased by 22 percent, compared with 13 percent in 1985/86. The performance in the monetary sector had also been satisfactory. In 1986/87, the money supply grew by 16.9 percent, compared with 28.3 percent in the previous year. The success in containing money supply growth was largely due to tight credit policy. Growth in domestic credit was 14 percent in 1986/87, compared with 29 percent in 1985/86.

On the external front, the current account deficit widened further, mainly because exports remained stagnant and imports increased considerably. The sluggish performance in the export sector was partly due to poor performance in the agriculture sector. However, increased earnings from tourism and foreign aid disbursements enabled the country to maintain a favorable position in the balance of payments.

In order to attain sustained economic growth, we implemented a structural adjustment program in 1985/86. To meet the resource requirements in this process, we have recently entered into an agreement with the World Bank for a structural adjustment loan (SAL). Negotiations with the Fund for use of the structural adjustment facility have been completed. These resources will provide us much needed support in our endeavor to achieve sustained growth in the economy.

I would like to take this opportunity to express sincere appreciation to the staff and management of the Bank and the Fund for their efforts in helping Nepal in its process of adjustment and growth, which as urged by His Majesty, King Birendra Bir Bikram Shah Dev, is intended to provide his people with the basic minimum needs of food, clothes, shelter, education, health, and security by the year 2000.

We have already prepared an action plan for this purpose. We are very much aware that our ability to successfully implement the basic needs program depends on increasing the level of investments in various sectors and subsectors and on improving investment efficiency. For this, we are making concerted efforts toward mobilizing larger domestic resources and adopting a system of program budgeting and monitoring. However, the efforts made in the domestic front will not be sufficient in our endeavor. Therefore, we need more generous cooperation from the donors and multilateral agencies in the years ahead. . . .

Finally, I would like to express our appreciation to the people and the Government of the United States for the warm hospitality extended to us. May I also express our grateful thanks to the management and staff of the Bank and the Fund for the excellent arrangements made for the meeting.

Statement by the Alternate Governor of the Fund and the Governor of the Bank for the Philippines—Vicente R. Jayme

I wish to join the other speakers before me in congratulating the new Managing Director of the International Monetary Fund, Michel Camdessus, on the assumption of his position of great responsibility. I wish him all success.

I am struck by the unanimity in the expressions of urgent concern by scores of Governors from developing countries as we discuss the international debt crisis and its management. This urgent concern is evoked by years of unmitigated adjustment, halfheartedly supported—if at all—by the institutions and agencies with whom coresponsibility is supposed to be shared, and by a deepening sense of frustration over the reverse flow of resources from capital-starved developing countries to industrial countries and multilateral institutions.

If, except for the numbers, not a few of the statements made in these Meetings sound like last year’s speeches, it is because last year’s exigencies remain unrealized—indeed, they have since been intensified in substance and urgency. World output growth, a sluggish 3.2 percent in 1986, is expected to drop further to 2.8 percent in 1987. Neither the U.S. economic engine, itself held back by persistent record-setting fiscal deficits, nor those of Japan and the Federal Republic of Germany seem to be in a suitable position to accelerate activity through the rest of 1987. Already the depreciating dollar has added 12 percentage points to the external debt/exports ratios of the more heavily indebted countries. Interest rates, never really fully down in real terms, have begun to rise again, threatening, with each percentage increase, to impose an additional $3 billion to the net negative transfers of these economies on account of debt owed to commercial banks alone. The perverse flow of resources from the developing to the developed countries is now estimated for 1986 at $29 billion. Interpreted in terms of import capability and growth potential, these developments augur only deterioration or, at best, stagnation for these countries in 1987.

In the meantime, whatever strengthened export capabilities our countries have succeeded in developing have been permitted limited impact on the markets. On one hand, active subsidization of high-cost production in agriculture among the major participants, as in sugar and vegetable oils, continues to depress prices for these commodities. On the other hand, protectionist barriers prevent the full play of market forces in manufactured goods.

The financing which is supposed to underpin the current orthodoxy of adjustment with growth has not meaningfully materialized. Concessional flows declined in real terms in 1986. Paris Club creditors have not—except in very few cases—heeded calls for some debt relief, even for the most severely distressed debtor countries. Two years after Secretary Baker’s initiative was first proposed, World Bank lending appears, more than ever in all its 40 years, constrained by capital inadequacy. The Fund, for its part, remains unable and unwilling to allocate SDRs anew in spite of strong recommendations to do so from its own staff and a majority of the Board. In 1986, the commercial banks lent $3.1 billion to the 15 heavily indebted developing countries cited in the Baker initiative, but received about $6.6 billion from them over the same time period—a net transfer to them of $3.5 billion. Moreover, partly by withdrawing from net lending as well as charging market interest rates on loans rated by the market at less than face value, the major banks have since reduced their exposure to these countries from 200 percent of their capital to 120 percent today.

This is the global environment with which the Philippines, like other developing countries, has to contend in its struggle for recovery and growth in a democratic context. It is difficult to justify that at the very time when the Philippines must rebuild an economy devastated by the depredations of a corrupt dictator, and with our high levels of poverty and unemployment, we had to transfer to our official and private creditors in the past two years $3 billion more than we received. It has made more difficult the task of restructuring our economy and implementing the growth-oriented reforms so necessary for political and economic viability. The recent traumatic events in my country—a general transport strike, a coup attempt, and stepped-up insurgency attacks—demonstrate the urgent need to put great priority on programs that will meet the needs of our people. We must seek more effective ways of fulfilling international obligations without neglecting our people’s needs. Because the National Government had to make a net transfer in 1987 of $700 million to its creditors, we have had to make do with less resources. This has left an overburdened populace more vulnerable to the importuning of extremist elements from both the left and the right. The resulting political and social instability has further impeded economic recovery.

When the Aquino Government came to power, President Aquino stressed that a real growth rate of 6½ percent annually for the next five years would be required in order for Filipinos merely to regain by 1991 real per capita income levels of 1981. The Philippine recovery has since begun, but at a rate which is as yet insufficient to meet even this modest target.

The Baker initiative is stalled. If the debtor countries that took the Baker initiative to heart and built their hopes on it now exhibit evidence of adjustment fatigue, it is because of their perception that the international response from commercial banks and the major creditor countries has been, at best, fainthearted.

Let me stress that Secretary Baker’s insight—if not his initiative—remains relevant to this day. The two necessary conditions for recovery and sustainable economic growth are domestic structural reforms and external cooperation. The former is needed to ensure that the country’s resources are used efficiently. The latter is needed to ensure that the appropriate amount of resources is available. There is no lack of ideas grounded in this principle among both official and private sectors. What has been lacking, rather, is consensus on several corollaries to this principle, which are needed in the current situation.

First, and perhaps foremost, is the recognition that the burden of adjustment—to date borne largely by the more heavily indebted countries—must be shared.

Second, adequate safeguards must be established that would insulate debtor economies as much from the effects of unfavorable movements in interest rates and commodity prices as from trade protectionism. In this connection, interest rate caps and automatic rescheduling provisions that would offset negative net transfers deserve serious consideration. Moreover, the Fund compensatory financing facility might be modified to cover interest rate changes as well.

Third, balance must be restored between official and private finance. It is clear that prompt action is needed to authorize a sizable general increase in the capital of the World Bank, with a stipulation for a higher paid-in portion and, thereby, some concessionality in lending terms. The Fund quota review must be completed and the structural adjustment facility augmented.

Fourth, new methods to reduce the debt burden should be included as realistic options in all rescheduling negotiations—methods such as interest capitalization, export-earnings-linked payments, debt conversion, and even debt forgiveness. This is a view that has been put forth by several ministers and which we endorse.

Fifth, the possibility of establishing new facilities under the World Bank or the Fund to facilitate the conversion of debt to new financial instruments which would reduce the debt burden should be urgently examined. Meanwhile, to address the net transfer problem as quickly as possible, more emphasis should be placed on policy-based and structural adjustment loans than has heretofore been done.

Sixth, and finally, the regulatory and tax authorities of creditor countries should adopt policies to accommodate reasonable measures designed to alleviate inordinate burdens associated with debt and debt service. . . .

I would conclude by quoting some words from a report by the Pontifical Commission, An Ethical Approach to the International Debt Question: “Debt servicing cannot be met at the price of asphyxiation of a country’s economy, and no government can morally demand of its people privations incompatible with human dignity.”

After four years of painful adjustment in the Philippines and a half generation of lost economic development, the social substructure of my country, as with others similarly burdened, cannot endure future years of further deterioration in standards of living. One way or another, a more lasting solution must emerge. The challenge hurled to us is that of ensuring through cooperative action that this solution is an orderly one and reflects practical wisdom and equity long denied. Though the hour is late, it remains my hope that this is still possible.

Statement by the Governor of the Bank for Afghanistan—Mohamad Kabir

Mr. Chairman, please accept my sincere congratulations on your election as Chairman of these Annual Meetings.

I am indeed very delighted to represent the Democratic Republic of Afghanistan at these Annual Meetings of the Boards of Governors of the Bank and the Fund.

First of all, I would like to extend my appreciation and thanks to the management of the Bank and the Fund for the excellent arrangements made for the efficient conduct of these Meetings.

The international economic situation continued to be grim during the last year. The deceleration in international economic activities and growth; the continued, and recently intensified, protectionist policies of the Western industrial countries; and the inequitable trade relations resulting from these policies further deteriorated the terms of trade of the developing countries. Consequently, the export earnings of the developing countries have seriously declined, while their debt service payments on foreign loans have substantially increased.

Furthermore, lending to developing countries has fallen and their balance of payments deficits have greatly increased. As the figures show, the debt burden of the developing countries has reached the staggering level of more than $1,000 billion, and the burden of servicing the debt is as high as more than $110 billion per annum, imposing severe difficulties on developing countries to meet their debt service obligations.

The decline of multilateral concessional flows for development, the insecurity and insufficiency of food supplies, and the harshening of the conditionality of financial and technical assistance have all seriously undermined the efforts of the developing countries, particularly the least-developed ones, to achieve growth in their economies and to ensure the promotion of social and economic development. It is very discomfiting, indeed, to realize that, for the first time in many decades, the per capita gross domestic product of many developing countries has declined.

Apparently, most of the current economic problems facing developing countries result from the financial constraints of the present international economic and financial order. There is a vital need to restructure the monetary and financial system so as to enable the developing countries to adjust their balance of payments deficits without resorting to measures that are immensely harmful to their growth. Furthermore, the present insufficient representation of developing countries in the decision-making processes of international financial institutions should be rectified.

Due to the impact of dismal international economic developments and conditions, the economic state of low-income, least-developed countries has become even more distressing.

The Democratic Republic of Afghanistan, as a free, independent, non-aligned, and peace-loving country, has achieved great and astounding successes in the social, economic, and political realms since its inception, in spite of conspiracies, sabotage, economic restrictions, and depredations against our people, as well as the involvement of our country in an undeclared war imposed from abroad. However, the positive and constructive changes that have taken place in the recent past have been especially significant.

The most remarkable achievement in the social and political life of our society was the declaration of the national reconciliation policy by the leadership of the country at the beginning of 1987. Despite the obstacles created by some neighboring countries, the number of repatriates to Afghanistan is increasing day by day. The needed facilities and assistance are being provided to them by the Government. The policy of national reconciliation, extended further recently, is now successfully moving forward, paving the way for the cessation of bloodshed, ensuring peace and tranquility in Afghanistan, and making possible a more rapid pace of economic development of the country.

The process of the first, genuine democratic elections to local organizations of administrative power has acquired new dynamism with the participation of representatives of different strata of the people, including the opposition and those who have laid down their arms.

As a great step forward toward the realization of a humanistic policy of national reconciliation, the draft of the new constitution has been completed and published in the media to seek public opinion and criticism. The main objectives of the new draft constitution are the consolidation of independence, national sovereignty, and defense of the territorial integrity of the country, as well as the strengthening of reconciliation and national unity, keeping in view the objective realities, traditions, and customs of the people. The new constitution will ensure the democratic and equal rights of all the people in Afghanistan, without any discrimination and in accordance with the accepted and credible international rules and agreements, including the Declaration of Human Rights.

The recently drafted constitution, as well as the newly promulgated Law of the Political Parties, allows the activities of political parties in the framework of a multiparty system, which stresses the equality of political parties.

Now, we have reached the second year of implementing the first long-term socioeconomic program after the April Revolution of 1978, which ensures growth in all spheres of the national economy, including the private sector, and the elevation of the material and cultural standard of all the citizens, especially the working people. According to this plan, the gross national product of the country will increase by 25 percent by the end of the plan period.

The results of the first year of implementation of the main aspects of the socioeconomic development plan of the country for 1986–91 show that considerable growth has been achieved in the national economy. The gross national product of the country grew 5.2 percent during the previous year; the gross domestic product increased by 3.3 percent; and the national income indicated a growth of 3.5 percent.

Of course, the extensive impartial economic assistance given by friendly countries has greatly contributed to the implementation of various development projects vital for the improvement of the economy.

In the current fiscal year practical steps have been taken in the spheres of education, public health, and construction of residential houses; and other social services aimed at elevating the living standard and culture of the Afghan people are envisaged.

To improve the living conditions of government employees, free distribution of two coupon items, flour or wheat and edible oil, and 50 percent increases in food allowance of workers and civil service personnel were put into effect.

In the current year’s state budget, ample funds were allocated and are now being effectively utilized for receiving repatriates and rendering necessary assistance to them.

The Government has all along followed a policy of encouraging private sector investment. In line with this policy, the first nationwide conference of national entrepreneurs and the private sector was held last April under the auspices of the leadership of Afghanistan. In the course of the conference, it was made clear that the Government of the Democratic Republic of Afghanistan had undertaken significant practical measures to create a more favorable climate for secure operation and expansion of the private sector and joint ventures, including foreign investment.

Steps have also been taken to maintain a mutually beneficial relation between the Government and the private sector, and facilities, such as bank credits on easy terms, have been provided for national traders. Further, the Government has guaranteed more aid to private institutions by founding financial, technical, and legal bases for private institutions and factories and by rehabilitating defunct establishments.

Our country is a low-income, landlocked, least-developed country. Development of the national economy, especially the weaker segments of the society, as envisaged in the first five-year socioeconomic plan of our postrevolution era, necessitates external assistance on a large scale. It is deeply regretted that, in spite of our dire need for concessional assistance, the Western countries and also some of the international financial institutions, such as the World Bank, have withdrawn their assistance, going to the extent of even disallowing drawing on loans sanctioned earlier and suspending disbursements for ongoing projects on which substantial progress had been made. Obviously, the decisions in this regard have been taken not on economic, but on political, considerations.

On behalf of the Democratic Republic of Afghanistan, a landlocked and least-developed country, our delegation appeals to these international financial institutions, particularly the World Bank, to take a more reasonable stance toward Afghanistan and to resume their lending activities to our development projects, keeping in view their obligations under the Articles of Agreement, which require them to distribute aid solely on the basis of economic criteria and the actual developmental needs of developing countries. Moreover, we request that these international financial organizations take into consideration in their decisions the resolutions of the UN General Assembly and UNCTAD, which specifically call upon them to implement concrete measures for solving the problems of the least-developed nations, especially landlocked countries.

To conclude, I wish the Bank and the Fund every success in their development-oriented operations in the years ahead.

Statement by the Treasurer of the Commonwealth of Australia—Paul J. Keating

The world economy has experienced another difficult year, although there have been some positive developments.

There has been welcome, though overdue, progress in reducing the U.S. budget deficit this past year. Japan and the Federal Republic of Germany have taken measures to expand domestic demand in their economies. External imbalances have shown some signs of improvement, and inflation remains subdued. Policy coordination among major industrial countries has been enhanced. Economic growth in the major countries is likely to be somewhat stronger in the short term than was previously thought.

Despite these developments, we still face some major problems. External imbalances among the major countries remain large. It is encouraging that there appears to be broader recognition of the fact that serious internal imbalances are the major source of these divergences in external positions. That recognition must be translated into corrective actions. This is all the more urgent as the strength of protectionist forces appears to be growing, rather than receding. All of this, of course, aggravates the continuing severe economic and financial problems of most developing nations.

The correction of external imbalances will take time and concerted policy action by all nations, particularly by the major industrial countries. The United States, through its large current account deficit, is absorbing much of the savings generated by countries with external surpluses. Continued reduction of the U.S. budget deficit is required to release resources for export growth and import replacement. It is crucial that progress be made in reducing the U.S. trade deficit, without resort to protectionism, and President Reagan’s commitment in this regard was most reassuring.

However, actions by the United States alone will not be sufficient to strengthen world economic growth. Japan and the Federal Republic of Germany need to maintain domestic demand growth at a pace which produces further correction of their external surpluses and to remove measures which unduly encourage savings and distort investment.

In the absence of such policy action, exchange rates and interest rates will have to carry the full burden of adjustment of external imbalances. It is widely agreed that reliance on these latter policy instruments will not only be inadequate to the task but will also involve costs in terms of slower growth, reduced trading opportunities, and higher debt-servicing costs for developing countries.

The need for adjustment is by no means confined to macroeconomic policy. Microeconomic adjustment is equally critical to improved economic efficiency and enhanced growth in output and employment.

The freeing of international trade is the single most effective means of promoting structural change and improving medium-term prospects for growth in both developed and developing countries. Open trade policies are important for all countries, but particularly for indebted developing countries. Stagnating export earnings have contributed heavily to the intensification of debt problems. The Fund staff’s latest assessment of the world economic outlook informs us that the greater than expected deterioration in the debt position of non-oil developing countries in recent years is largely explained by poor export prices. A number of factors have contributed to this situation, but it is clear that these countries must be given the opportunity to improve their trade performance if they are to reduce their external debt. In particular, increased market access and the removal of both protection and subsidization of agricultural products would considerably enhance growth prospects. In short, the resolution of the debt problem requires a freer international trading system.

The Uruguay Round offers an opportunity to make major advances in trade liberalization. Yet, over the last six months there has been further movement toward agricultural policies which artificially boost farm production in industrial countries, lower developing country agricultural exports, and depress commodity prices. These developments must be reversed at once. Industrial countries must abide fully by their standstill and rollback commitments and achieve early results in the Uruguay Round, with widespread reform of agricultural policies as a key element.

Of course, the problems of developing countries do not all lie at the door of the industrial countries. Developing countries themselves must implement disciplined, outward-looking economic policies. While the record remains uneven, substantial adjustment has taken place in a number of cases—with encouraging results. Further efforts are required in this direction.

Where these efforts are forthcoming, they should be supported by suitable transfers of resources. We would expect that where developing countries pursue appropriate policies, the commercial banks would be willing to make additional resources available.

The special problems of debt-distressed countries, particularly in sub-Saharan Africa, have been a particular focus of our Meetings this year. We all wish to see the Bank and the Fund actively engaged in the development of solutions to these problems. Our task is to devise means of doing so which pay proper regard to the respective roles of the two institutions. . . .

The Fund … can play an increased role in assisting developing countries, although we would not wish to see the Fund depart too far from its intended primary role. The Fund has continued to be responsive to the changing demands upon its resources, and the Managing Director has put forward an important new initiative for expanding the resources of the structural adjustment facility. While this proposal has been widely welcomed, greater efforts are required to clarify the modalities of its implementation and thereby to facilitate final decisions on national contributions.

Australia, as a potential contributor to the enhancement, will participate in these further efforts. While we have not taken a final position on the matter, one significant advantage that we can see in using the Fund’s General Resources Account as the conduit for contributions is that it would enable official reserves to be used for this purpose. Certainly, if the Trust Fund concept were to be used, security and liquidity of contributions would need to be ensured. We also think that account should be taken of the balance of payments positions of potential contributors in the determination of contributions.

Australia acknowledges the need for the Fund’s resources to grow with a growing world economy. We support an early and substantial increase in quotas under the Ninth General Review. In the interim, the current access limits should be maintained in 1988. We remain of the view that the case for a new SDR allocation remains to be demonstrated.

A number of proposals for debt relief for the poorest debt-distressed countries are under consideration. Some of these include attractive features, such as conversion of official development assistance loans to grants and increased private direct foreign investment, which we support. In fact, Australia’s official development assistance has been provided wholly in grant form for decades. Some other aspects of these proposals, such as interest rate relief on trade-related debt, could also be an appropriate form of bilateral concessional assistance to low-income debtor countries. We do not believe, however, that it would be appropriate for such relief to be extended to other countries.

While the problems of sub-Saharan Africa are acute, we must not lose sight of the pressing development problems in other regions. They must receive a fair share of available resources. I draw particular attention to the problems of the small Pacific island countries. They have special requirements for financial and technical assistance and we would like to see a more active involvement in the region by the World Bank.

The Bank and the Fund continue to play an important role in the world economy. However, we should not expect too much of them. The vast majority of international financial activity is and should be transacted through nonofficial institutions. Development depends largely on the world economic and trade environment.

I will end by returning to one important theme. We are moving into a time when microeconomic adjustment toward increased market efficiency is receiving ever greater emphasis. It is of the utmost importance that short-sighted protectionist sentiment does not cut across efforts to improve living standards throughout the world. Together we must take early action to liberalize international trade, so that we can deal effectively with the economic and financial problems which beset us.

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

In evaluating the situation of the world economy and its development over the past year, I find little ground for complacency. On the contrary, we are confronted with a number of issues that have presumably become more urgent and more difficult to solve in the recent past.

There are those among us who consider the growth rates in the industrial countries to be quite satisfactory. Nevertheless, these growth rates are not sufficient to reduce the unbearably high levels of unemployment that exist in most European countries. At the same time, the economic situation of many developing countries has deteriorated even further. Though some exporters of manufactured goods have done well, most exporters of commodities have been hit hard by the adverse effects of the weak economic climate in the industrial countries. In many developing countries this has led to a further reduction of already low per capita incomes.

We all realize that the economic performance of the industrial countries is of prime importance to the developing countries. Here, again, the large industrial countries are those whose actions determine the whole picture. What we really need at this critical juncture is a clear signal from the larger industrial countries that they intend to do more about their own adjustment. This implies above all further action on the U.S. fiscal deficit. Also, the Fund’s World Economic Outlook has shown that further efforts by Japan and Germany to stimulate growth and domestic demand would cost these countries only a small rise in inflation and a slowing down of an already largely completed process of fiscal consolidation. But at the same time such moves would help reduce the protracted current account imbalances, improve the dismal unemployment situation, increase the export markets for developing and industrial countries alike, and help ward off the rising tide of protectionist pressures worldwide.

Although most policymakers are aware of the current and medium-term problems, there is always the danger of complacent or passive attitudes, notwithstanding the magnitude of the issues at stake. But in an environment of increasingly interdependent economies, only an active approach by all countries can solve these problems. My country, for one, has tried to define its role in the international adjustment process in an active way by decisively addressing the issue of the lingering fiscal imbalance.

In this connection, let me describe recent developments and the present direction of economic policy in Austria. Largely because of an ever-increasing burden of debt and interest payments, the room to maneuver fiscal policy for stimulating domestic demand and improving the structure of the economy has almost disappeared. In order to recoup the lost margin of action, the new Austrian coalition government has introduced a number of deficit-cutting measures which will culminate in the implementation of a budget consolidation package in fiscal year 1987/88. The estimated results of these policy moves predict fiscal year 1986/87 outcomes that are right on track and an impact of the fiscal year 1987/88 package lying well within the targets of the coalition’s budget agreement. The Government has thus kept the political initiative, for this determined fiscal policy stance is broadly accepted by the public. In addition, we assume that the positive effects of these policies on business expectations will be further reinforced by the complementary tax reform currently under review.

It is essential to combat all attempts to increase protectionism, not only to avoid a trade war among industrial countries but also to permit the heavily indebted developing countries to earn the necessary foreign exchange to service their debts. Five years ago we were confronted with what in the meantime has been named the debt crisis.

Since then, we have been successful in preventing a collapse of world finances. We have, however, not been successful in finding a viable solution for servicing, let alone repaying, the debts of many heavily indebted countries. We have time and again postponed even a debate on long-term solutions for these countries and for their creditors. It is high time that we start thinking about such solutions and start acting accordingly. Although some debtor countries have undertaken sizable adjustments of their domestic and external sectors, the results so far have been mixed. The few success stories have often been achieved at the price of drastic contractions of domestic demand and imports. Exports have not been forthcoming to the extent hoped for.

Reduction of domestic demand means reduction of per capita income. And these reductions are usually in countries where per capita incomes are pitiful to begin with. In the future we will have to develop policies that are much more oriented toward growth in these countries if we want to avoid insurmountable resistance to policy reform. This is all the more important because some of the countries we are speaking of have only recently shifted their political system to democratic forms. It would be more than tragic if these new democracies were to fail because they did not get sufficient support and encouragement from the countries that are always willing to champion democracy in their verbal declarations.

With regard to the impact of industrial countries’ economic policy on developing countries, I firmly believe that the reduction of import barriers is the most important assistance that industrial countries not only should provide, but by moral standards, are obliged to offer to developing countries. Besides opening markets for their products, these countries will, however, also require outright technical as well as financial support for their economic and social systems. The development of an adequate education and health system as well as investments in productive sectors can only be accomplished with external financing. The funds provided by donor governments as well as the World Bank and other multilateral organizations will hardly suffice to meet developing countries’ needs. Private capital flows will be necessary, particularly for financing investments in productive sectors, where the transfer of know-how is usually connected with direct investment. In this context, I would like to welcome the many creative initiatives of the International Finance Corporation.

Austria endorses the concepts developed by the Bank and the Fund to enhance support for countries with the lowest incomes. I would, however, like to add a word of caution with regard to these concepts. There are still formidable questions to be addressed before an enhancement of the structural adjustment facility (SAF) will be possible. Not least among these are the problems some countries face if the SAF-related assets cannot be counted as reserves. Finally, I would like to emphasize that it would be rather difficult to get parliamentary approval for an SAF enlargement in which the largest industrial country of the world, the United States, does not participate. . . .

It goes without saying that, based on our understanding of the role of the Fund, we are in favor of expediting the Ninth General Review of Quotas and of applying to it the well-tested quota formula used in the Eighth Quota Review.

Timely and efficient implementation of the quota increase will help reduce the Fund’s growing reliance on borrowed resources and restore quota additions to their role as the normal way of financing the Fund’s operations and meeting its goals in the global adjustment process.

In view of the task of the Fund in the international monetary system, we believe that a further allocation of SDRs would be in accordance with the principles and purpose of the Fund. At the same time, realism requires us to point out that several improvements in the usability and liquidity of this reserve asset should be made to increase its attractiveness to monetary authorities and prevent the allocations from being deposited right back with the Fund as soon as they are received.

In concluding, let me assure you once more of Austria’s strong interest in the Bretton Woods institutions, which we expect to play a leading role in assisting developing countries in the design as well as implementation of appropriate economic and social policies to improve the living conditions of the population of these countries. This role can only be fulfilled successfully if the Bretton Woods institutions are equipped with adequate resources of their own and are able to mobilize other financiers.

Statement by the Governor of the Fund for Fiji—Jone Y. Kubuabola

On behalf of the Fiji delegation I wish to record our appreciation for the arrangements made for this Meeting. We join other delegations in conveying to you, Mr. Chairman, our congratulations and thank also the Managing Director of the Fund and the President of the Bank for their continuing efforts in promoting the objectives of their respective institutions.

We note that the world economic situation remains uncertain, despite commendable efforts on the part of the major industrial countries to coordinate their macroeconomic policies. It is of concern, however, that the growth prospects of developing countries could be adversely affected by restrictions on market access to the industrial countries. Restrictive trade practices can only lead to stagnation, and it is in our mutual interest that such restrictions be removed.

We would urge improved coordination in the economic policies being pursued by the major industrial countries in an effort to ensure orderly growth in the world economy and particularly to stabilize exchange rates.

We see benefits in the use of the indicator approach, as adopted in the recent World Economic Outlook. Further work needs to be done in this regard to refine the indicators and to ensure their consistent use by the industrial countries. Without the full cooperation of these countries, the exercise cannot be effective. Given the central role of the Bank and the Fund in the promotion of economic growth and stability, it is imperative that both institutions be provided with increased resources, so that they may fulfill the roles expected of them.

We support the Ninth Review of Quotas for the Fund, and we request that quota resources be doubled and that the necessary action be expedited. . . .

We welcome the decision by the Interim Committee to maintain access limits under the enlarged access policy. Unfortunately, the guidelines on access have been applied in a very restrictive way, with the result that actual access remains far below the limits. We would urge that a more liberal application of the guidelines be pursued, so that the recent negative net flow of funds from the developing countries to the Fund could be reversed. We note that the Fund’s Executive Board is to review access under the compensatory financing facility (CFF). The low conditionality and the access limits under the CFF should be retained. An allocation of SDRs and the access limits under the SDRs should also be resumed, so that part of the liquidity needs of developing countries with limited access to capital markets can be satisfied through this means. We regard it as important to respect the multilateral character of the Bank and the Fund. These institutions should not be dominated by any country or group of countries. . . .

Finally, we would note that a significant part of our discussions have focused on the poorest countries and those burdened by crippling debt. This we fully understand and appreciate. Indeed, we support the measures being proposed for alleviating the problems faced by these two groups of countries. We would, however, wish to draw attention to another group of countries—small, middle-income countries such as Fiji—which are neither overburdened by debt nor qualify to be categorized as the poorest. Such countries, many of which are numbered among the developing island and landlocked states, having pulled themselves up by their bootstraps, now find themselves disadvantaged in terms of concessional finance or reduced aid flows. In such circumstances, sustaining the small gains made is proving extremely difficult. We would ask that our needs and our concerns also be addressed, lest by their neglect a new generation of problems confronts us in the foreseeable future. The stark reality of our interdependence behooves us all to cooperate fully in the search for peace, progress, and stability. My Government remains committed to playing our part in that search.

Statement by the Governor of the Fund and the Bank for the Lao People’s Democratic Republic—Sisavath Sisane

On behalf of the Lao People’s Democratic Republic and of the Lao delegation, I wish to congratulate you, Mr. Chairman, on being appointed to preside over the Forty-Second Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund. I am firmly convinced that our Meetings, under your chairmanship, will unfold in an atmosphere of understanding and mutually beneficial cooperation.

I take this opportunity to express our delegation’s thanks to the President of the World Bank, the Managing Director of the International Monetary Fund, and their staffs for all the efforts they have devoted toward ensuring the successful organization and smooth running of our Meetings, and I also wish to thank the Government of the host country for the facilities it has made available to us.

Our Meetings open this year at a time when the international economic situation is both difficult and complex. As both the Bank and the Fund have stressed in their reports, the world economic scene is characterized by a slowing down of economic activities in the industrial countries. The problems of a deficit trade balance, a decline in commodity and agricultural prices, intensified protectionist measures on the part of the industrial countries, inadequate external financing for the developing countries, climbing real interest rates, the developing country debt, and exchange rate instability continue to be matters of concern for the developing countries, and in particular for the poorest among them. All these problems serve to heighten the uncertainties weighing on world economic growth.

With a view to solving these problems efficiently, the industrial countries will need to coordinate their macroeconomic policies, install a mutual surveillance system, and make their markets more accessible to the products of the developing countries. In addition, they, as well as the multilateral finance agencies, will need to attempt to expand their base for providing assistance and financing to the developing countries.

I should now like to report on the way the economic situation in the Lao People’s Democratic Republic has been developing, and the results accomplished.

The Lao People’s Democratic Republic, which belongs to the group of least-developed countries, has, since its creation on December 2, 1975, had to face up to many natural difficulties, and at the same time cope with subversion and sabotage on the part of the enemies of the new regime.

In recent years, we have unceasingly devoted all our efforts to agricultural production, and we have basically achieved self-sufficiency in food. This year, however, we have experienced prolonged drought, which has seriously affected our harvests. Despite all our efforts, we anticipate a poor harvest, particularly in the mountainous regions where slash-and-burn farming is practiced.

To ensure accomplishment of the objectives of the Second Five-Year Plan (1986–90), the Government of the Lao People’s Democratic Republic has prepared and is gradually implementing its new system of economic management. But in terms of financing, and despite the fact that we have mobilized all our domestic resources, external financing in the form of grants or concessional lending will be necessary.

With respect to the policy of the Bank and the Fund, I should like to express our point of view on the following issues.

Our delegation believes that an increase in the capital of the Bank and the Fund is imperative to enable them to meet the financing needs of the developing countries. . . .

We ask the two institutions to continue to play their respective roles as multilaterals, to continue to perform their catalytic and surveillance functions, to consider the possibility of easing loan conditions, and to facilitate repayment for the most indebted countries.

We support the policy of our two institutions on the promotion of structural and sectoral reform programs within the framework of the structural adjustment facility.

At this point, we should like to congratulate the leaders of the Bank and the Fund for the successes already obtained, and we wish them continued success in the future.

In conclusion, allow me to express the gratitude of the Lao people and Government for the financial assistance that the Bank and the Fund have provided to help us in our work of national reconstruction.

We wish the greatest success to the work of these Annual Meetings.

Statement by the Governor of the Bank for Luxembourg—Jacques Santer

The very elaborate and thoughtful remarks made by the Managing Director of the Fund, Mr. Camdessus, and the President of the World Bank, Mr. Conable, at the beginning of our gathering have clearly shown that against a background of cautious optimism there remain a number of important issues of worldwide concern that have yet to be settled.

During the past year, we have been confronted on several occasions with downward revisions of growth estimates in world output and trade, so that expectations for a stronger revival of the world economy have not been fully met. This is all the more surprising since our expectations were largely based on the rightful assumption that the adjustment of relative prices and the successful fight against inflation, as well as reduced interest rates, would significantly bolster a resurgence of activity.

We all know, though, that the world economy needs stronger activity. For most industrial countries, stronger activity is needed to help reduce unemployment, a scourge that continues to haunt many governments, especially in Europe. For some other countries, which have not yet adjusted their fiscal and financial balances, it is an equally important requisite for achieving those objectives. And for all of them, stronger activity would greatly facilitate and speed up the restructuring process of their economies—a statement for which Luxembourg bears good witness.

Stronger growth of world output and demand is all the more needed for the indebted developing countries that, as a consequence of falling oil and commodity prices, have been exposed to large shortfalls in export revenues at a moment when international lending to them has been scaled back and net reflow of funds has become a hard reality. Low demand and the constraints on financial resources in the industrial countries have forced the developing countries to reduce imports drastically. This reduced import capacity is threatening to spill back into the industrial economies and to impair their ability to support their own internal adjustment with export growth.

International debt and adjustment problems are thus closely interrelated, and only a cooperative approach can lead to satisfactory solutions. Otherwise, there is a real danger that the present recovery—albeit relatively weak but ongoing—will be crushed between the unsustainability of the imbalances on which it is founded and the deflationary effects of their inevitable correction.

The authorities of the major countries are aware of such a danger, and I welcome their endeavors to agree on commonly accepted policies and measures aimed at restoring balances and promoting growth. In this respect, the United States should continue to focus on a reduction of its fiscal and trade imbalances; Japan should continue to foster domestic demand and to open up its markets; and European countries should complete their fiscal adjustment and structural reforms.

Against this setting of broadly accepted objectives, the Louvre accord on exchange rate stabilization was undoubtedly a very helpful agreement, whose spirit ought to be pursued in future negotiations.

World trade should not be hampered further by new restrictive practices, and existing trade barriers should be dismantled as far and as soon as possible. I therefore encourage all those engaged in the present trade negotiations to work effectively to achieve open and free markets. The alleviation of the international debt situation depends essentially on better trade prospects.

I am in a fairly satisfactory position to judge the importance for a country of ensuring freedom of trade and, I may add, of capital movements. Indeed, Luxembourg has traditionally been a country free of any restrictive practices in its economic and financial relations with the rest of the world, and historically the benefits of such a policy have largely outweighed its costs. Thus, the far-reaching restructuring of the Luxembourg economy, by which, on a macroeconomic level, the decay of the steel sector was compensated for by the rise and growth of an international financial center, could only happen because there were no restrictions on cross-border transactions.

Now the Luxembourg economy continues to grow at a steady, although moderate, pace. Helped by a favorable environment, most economic variables have been brought to or kept at satisfactory levels: inflation is subdued, unemployment is very low, the current account is largely positive, and the fiscal budget is balanced. This situation permits the Government to continue its restructuring policy and to consolidate its fiscal position. Diversification among and within economic sectors is a key objective in the restructuring process, and fostering business competitiveness is one of the main objectives of ongoing fiscal reforms.

Turning back to international cooperation, I would like to make a few remarks on the role of the Bank and the Fund in the present world economic context. I alluded earlier to the importance for the world economy of countries’ adopting a cooperative approach in order to eliminate existing imbalances and promote growth. The Fund, which shares those goals, remains the international institution that is in the best position to offer effective assistance in reaching these goals.

Indeed, the Fund has always shown that it is capable of generating innovative ideas and creating new mechanisms that are substantial contributions to the solution of international economic and monetary problems. This innovative function of the Fund, which is basically an intellectual one, is one of its most valuable assets.

In this respect, an important innovation is the introduction and the use of objective economic indicators to monitor the surveillance of the major economies. The Fund is to be commended for giving concrete shape to this idea, and the countries concerned are to be encouraged to devise common policies along the lines suggested by the use of the indicators.

With regard to the debt strategy, the Fund’s present role is basically the right one, although it may need reinforcement in certain areas. Radical solutions to the debt problem, such as merely forgiving the indebted countries some part of their debt, would produce only limited short-term gains to the countries receiving relief. In the long run, it would probably exclude them from access to the financial markets for years to come, thereby increasing rather than reducing the risk that they would default on their later repayment obligations. More realistic solutions, such as the debt-for-equity swaps and other innovative proposals, might, however, be considered under the aegis of the Bretton Woods institutions and might be applied case by case. The only viable alternative overall, though, seems to be the continuation of the growth-oriented strategy, with the understanding that its success depends crucially on sustained growth policies in the industrial countries, on free trade, and on a strengthening of the Fund’s lending role.

Now, more than ever, the indebted developing countries, for their part, must continue to work in a structural framework, focusing on those policies that promise to improve their internal growth prospects by increasing domestic savings and domestic absorption capacity and thus gradually reducing their reliance on external borrowing and traditional export markets.

In this context, the proposal by the Managing Director of the Fund, as endorsed by the Venice summit, to increase substantially the structural adjustment facility (SAF) is to be welcomed as an appropriate contribution to the present debt strategy. With regard to the financing of the increased SAF, alternative financing proposals, such as the conditional use of an additional SDR allocation, might also be considered if there were reluctance to appropriate budgetary resources.

The Fund’s lending role should not be impaired at present by a reduction of access limits, either under the enlarged access policy or under the special facilities; a reduction would give the wrong signals to the debtor community at a time when the Fund is committing itself to strengthening its role. However, a progressive phasing out of the enlarged access policy could possibly be considered in the context of a substantial quota increase under the Ninth Review.

A new quota increase would also enable the Fund to depart from borrowed resources as a means of financing its programs and resort again to quota subscriptions, which are its normal way of financing. Luxembourg fully supports a quota increase and has asked the Fund for an individual calculation of its quota to bring it in line with the relative position of Luxembourg in the world economy.

Cooperation between the Bank and the Fund has been hailed by many as a very important element of the overall debt and development strategy. The rationale for such cooperation lies in the tight link between balance of payments adjustment on the one hand and adjustment of domestic economies on the other. I can only reiterate that cooperation between our two institutions should continue and be reinforced.

I also welcome the proposals made to alleviate the debt situation of the poorest countries, notably in sub-Saharan Africa, which are undertaking effective adjustment programs with the assistance of the Bank and the Fund, by reducing the interest burden and extending maturities and grace periods. . . .

The world economic and financial system faces very difficult challenges, which can be met only with a coherent strategy along the lines designed by the President of the Bank and the Managing Director of the Fund. The Luxembourg Government, therefore, fully supports the Bretton Woods institutions in their most important tasks.

Statement by the Governor of the Bank for Malta—George Bonello Du Puis

It is my honor and pleasure to address you for the first time as my country’s representative at these Forty-Second Annual Meetings of the World Bank and the International Monetary Fund, as well as to welcome Mr. Camdessus as the Fund’s new Managing Director. I would have wished that the circumstances in which we meet had been somewhat more propitious. Recent reports, however, seem to indicate that the world economy is at present steering a precarious course between the Scylla of resurgent inflation and the Charybdis of renewed recession. In fact, it has been noted that, in some industrial countries and in some markets, prices have been gradually creeping upward again. The outlook is further clouded by the dangers of currency instability arising from the wide imbalances within and between the world’s major industrial countries. The persistent surpluses of some major economies, together with the as yet unresolved problem of the heavily indebted developing countries, continue to exert a deflationary bias, which threatens to plunge the world once more into recession. This possibility could be accentuated by a further sharp decline in the value of the U.S. dollar, which could intensify inflationary pressures and protectionist sentiment in the world’s largest economy.

There is not much that small countries, like the one I represent, can do in the face of such dangers, except to batten down the hatches and brace ourselves against possible rough weather. The main responsibility for dealing with a situation that is potentially dangerous, especially for small developing nations, rests on the large economies, on whose performance the fortunes of the rest of the world depend. At the same time, we expect the Bank and the Fund to do their part by alleviating the burden on the weak indebted countries by anticipating the problems of others and, above all, by exercising “firm surveillance” on the leading economies, in accordance with the Fund’s Articles of Agreement.

For the Bank and the Fund to be able to perform their functions efficiently, however, it is essential that they should be provided with adequate resources. In this regard, it is pertinent to point out that the ratio of Fund quotas to world trade has declined from some 12 percent in 1965 to less than 6 percent in 1986. It is essential, therefore, that the forthcoming Ninth General Review of Quotas should provide for a substantial increase. SDR allocations should also be resumed as soon as possible, if we are to move any closer to the as yet distant goal of making the SDR the principal reserve asset in the international monetary system. . . .

Looking on the brighter side of things, there have been some gradual but continuing improvements in the international economic environment. There has been a slow but positive evolution in the mechanisms of multilateral cooperation: the Plaza agreement of September 1985 and the more recent Louvre accord on exchange rates for the major currencies; the Baker plan on debt; the securing of an expanded IDA replenishment; the establishment of the structural adjustment facility (SAF) at the Fund; and the adoption of the UN Program of Action for African Economic Recovery and Development, as well as the launching of the Uruguay Round of multilateral trade negotiations under the auspices of the GATT. Worthy of special mention also are Mr. Camdessus’ efforts to secure a significant increase in the resources of the SAF so as to enable the Fund to better assist the world’s poorest and hardest pressed countries.

While these developments and initiatives are welcome, we feel that, in view of the seriousness and the magnitude of the problems besetting the global economy, much more needs to be done. For instance, macroeconomic policy coordination among the leading industrial countries has so far largely involved a limited exercise in exchange rate management through central bank intervention on the foreign exchange markets, without sufficient action being taken to correct the fundamental imbalances that are the underlying cause of exchange rate instability. Such exercises alone will not alter the trend toward slower growth and growing protectionism and are ultimately doomed to failure even with regard to their own limited objective.

As for the strategy that has been adopted to tackle the debt problem, this is a combination of debtor adjustment, rescheduling, growing external financial flows, and improving the international economic environment. But failure in the last two threatens the strategy. Finally, while many developing countries are being (rightly) urged to diversify their economies—usually away from dependence on commodity exports—the success of this strategy hinges critically on protectionist measures being brought to a definite standstill, particularly in the industrial countries. Indeed, little progress is possible unless protectionism is reversed in the context of the current round of multilateral trade negotiations. Otherwise, many developing countries will find themselves in the same predicament as my country did when, while striving to move away from dependence on the British military establishment, its newly established textile industry came up against quota restrictions imposed on its exports by some industrial countries.

In fact, the importance of rolling back the protectionist tide cannot be overstressed. But here, too, it is the strong countries that should take the lead. For how can the weak developing countries be expected to do without limited protection for their fledgling industries when the world’s largest industrial countries, by protectionist measures, have created one of the greatest and most costly economic paradoxes of our times, namely, huge agricultural surpluses.

The newly elected Government of Malta, which I have the honor to represent here, believes, however, that protectionism is not only wrong; it is also ultimately counterproductive, since it leads to the misallocation of resources. For this reason, while my Government will continue to help industries in their initial stages or those which are encountering difficulties of a temporary nature, it has indicated its intention gradually to remove protection when it becomes clear that an industry is not viable in the long run. In any event, my Government has made it clear that protection will not be open-ended, for it wants to attract investment to those industries which are truly competitive, with sound prospects of securing, holding, and adapting to export markets. Such industries would, we hope, prepare Malta for entry, eventually, into the European Economic Community. To this end, the main thrust of my Government’s economic strategy—which we intend to be largely private sector oriented—will be directed to the mobilization of human resources and to investment in those industries, such as high-technology industries and offshore financial services, which we believe are well suited to the facilities and economic environment our country can provide. But for this strategy to succeed—and we believe it is the only strategy that can put our country on the path to self-sustaining long-term growth—we do need the cooperation of other countries and international financial institutions.

This brings me to a point that I believe to be of great importance not only to Malta but also to many other small states that make up a substantial proportion of the membership of the Bank and the Fund. These countries often project an image of relative economic affluence, which may conceal the vulnerability of their economic base. This vulnerability arises from their sheer smallness and openness, their often total lack of natural resources, and the fact that many of them are islands or are otherwise disadvantaged. Because of their small size, the needs of such countries, on a global scale, could not be very great. Yet because their problems are not adequately reflected in the traditional criteria of per capita income and balance of payments need, they are often denied access to the facilities of the Bank and the Fund, or at least are denied access on concessional terms. Malta, for instance, does not even qualify for World Bank loans. For these reasons, I would like to appeal to the Bank and the Fund to reconsider the current criteria for access to their facilities and the terms on which such access is granted, so as to take into account the special problems of small countries like Malta.

The fact that these institutions have become more flexible in their approach over the years gives us hope that our call will not fall on deaf ears.

Statement by the Governor of the Fund for Paraguay—Cesar Barrientos

On behalf of the Government of the Republic of Paraguay, which it is my honor to represent, I am pleased to extend most cordial greetings and warmest regards to the Chairman of the Meetings, to the President and authorities of the World Bank and its affiliates, to the Managing Director and Executive Board of the International Monetary Fund, and to the Governors and delegates of the member countries and other participating organizations.

I would also like to wish Mr. Michel Camdessus success and wisdom in carrying out his important functions as head of the Fund.

As we join in these discussions attended by such prominent leaders working with the important issue of development, we are once again convinced of the leadership and qualifications of the Bank and the Fund in approaching the arduous common task of identifying solutions to the difficult world economic situation.

As always, a substantial proportion of our days here together will be devoted to the search for formulas and points of agreement that will make it possible to strengthen and bring closer together the economic positions taken by our countries as regards the goals of prosperity, social justice, liberty, and equal opportunity to which we aspire and to which the aims and resources of our two institutions are devoted.

As an eloquent demonstration of shared aspirations, and also as an expression of the need to achieve the political will to fulfill them, at the last Annual Meetings and repeatedly at previous Meetings we have discussed a similar list of issues concerning the role of the Fund that are of great interest and concern to the majority of Governors.

As in the past, initiatives and actions which should harmoniously and resolutely move our countries toward achieving an atmosphere and conditions conducive to recovery—in which each can achieve its own goals and fulfill its own intentions in the economic sphere and in the interest of social welfare without affecting or posing obstacles to other countries—are urgent and important issues today.

As an effective means of stimulating growth, we would like to see greater efforts made to promote widespread and vigorous world trade. Given the persistence and worsening of sizable current account imbalances and the slow progress made in dismantling structural rigidities, it is fitting for the industrial countries to seek appropriate and immediate corrections; however, they must avoid opting for any form of protectionism even as they work decisively to achieve a real reduction of interest rates.

The elimination of fiscal deficits, the expansion of domestic demand, and faster growth in the developed economies with a view to stimulating investment and improving trade continue to be factors that are decisive as regards ensuring and increasing growth in, and enhancing the competitiveness of, our countries in their capacity as exporters of primary products.

The smaller export volumes and continuing price drops for exportable primary commodities accentuate the disproportion between the debt and foreign exchange incomes even as they exert pressure on exchange rates, thereby adversely affecting the adjustment burden.

We would like to call your attention to and cite the views expressed by former Managing Director Jacques de Larosière with respect to debt strategy and debt management: “Creditor countries must not ask debtors to adopt outward-looking policy reforms and to honor their heavy debt service obligations and simultaneously handicap their ability to do so.” In the knowledge that the debt crisis can only be overcome by means of a strategy for action based on economic growth, we take note of the importance of implementing policies and making efforts that entail equitable sharing of burdens by debtors and creditors alike. One anticipated result would be that export competitiveness and efficiency would come to depend more on the efforts of the developing countries themselves, and not, as at present, almost exclusively on domestic political decisions reached by the industrial countries.

These reflections on the external framework do not rule out, and indeed they underline, the complementarity required in the application of the effective growth-oriented stabilization policies to be pursued by the developing countries.

It is in this context that the Government of Paraguay has made a renewed effort and, step by step, posted successes in its endeavor definitively to achieve both an economic takeoff and social progress. Noteworthy are the introduction and steady refinement of recently adopted economic measures aimed at increasing production; rationalizing public spending while according priority to investment in infrastructure; balancing the external accounts; bringing inflation under control; reducing the public sector deficit; protecting and increasing wage levels; and improving employment levels.

After two years of continuous growth in gross domestic product (up 3.1 percent in 1984 and 4 percent in 1985), the projected targets were not met in 1986, when our economy registered no growth of any kind, although the introduction of significant exchange rate measures and steps to enhance efficiency allow us to estimate 1987 growth at 4 percent so long as the gradual rise in the prices of the major export commodities continues.

In the fiscal area, the Central Administration’s finances have been maintained at a level such that it has been possible to finance 90 percent of aggregate expenditure by current revenues. In these circumstances, no current account deficit has been posted by the Central Administration in 1986 or the current year, and only moderate use has been made of domestic public credit.

Owing to its weaker reserves position, the persistence of unfavorable terms of trade, and the effects of not subjecting the country to strong debt service pressures, Paraguay has found itself obligated to substantially limit external financing, although it has pressed ahead with efforts involving existing lines of credit as well as with actions associated with infrastructure projects and productive sector development projects now under way.

In the foreign trade area, there has once again been a deficit, which has been influenced by low world market prices for the major export commodities and by certain restrictions applied by the countries that purchase primary products. Exports in 1986 were down 10 percent from the 1985 level but are expected to increase in value terms in the current year. At the same time, 1986 imports increased by 12 percent over the previous year, resulting in a balance of payments deficit.

We remain confident that international cooperation will continue to become stronger, resulting in timely and effective measures to promote economic equilibrium and well-being, especially through positive resource flows together with measures and instruments which, in harmony and along with domestic efforts, will promote and facilitate sustained growth in the developing countries.

In conclusion, my country’s delegation would like to thank the people and Government of the United States of America for their hospitality and for their support for the successful conduct of these discussions.

October 1, 1987.

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