Discussion of Fund Policy at Second Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1990
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Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System, Michael H. Wilson

I am pleased to have this opportunity to report to Governors on the work of the Committee at its last two meetings. The issues dealt with at these meetings have been well covered by the two communiqués, and I would propose to touch only on the more important ones. Let me refer first to the review by the Committee of the world economic outlook.

The Committee observed that, after several years of rapid expansion, growth is continuing, albeit at a slower pace. External imbalances among industrial countries have narrowed. Inflation has picked up in some industrial countries and remains very high in many developing countries.

Uncertainties have increased on account of recent developments in the Middle East, and have unsettled financial and exchange markets. Though the situation should generally remain manageable, the Committee agreed that much would depend on countries following stability-oriented monetary policies and sound fiscal policies in order to avoid the twin risks of higher inflation and lower growth.

For this to happen, fiscal and monetary policies would have to resist accommodating the domestic adjustments of oil prices required by the changes in the terms of trade, and these policies would need to be buttressed by a commitment not to compensate for those price corrections by increasing nominal wages. Fiscal consolidation more than ever remains a priority in countries with budget deficits, not only to support the adjustment process, but also to raise saving at a time when investment demand is picking up—especially in Eastern Europe and developing countries—and to lower real interest rates by lessening the burden on monetary policy. Structural measures also are required to raise potential output growth, bring downward pressure on prices, and encourage saving and investment. Measures to enhance domestic competition and liberalize external trade regimes should be a cornerstone of these structural adjustment efforts.

Committee members welcomed the Fund’s continuing evaluation of major issues in the evolving international monetary system. The Committee stressed the Fund’s central responsibility for assessing the functioning of the international monetary system and identifying possible improvements.

The Committee underscored the vital importance of a successful conclusion of the Uruguay Round by the end of 1990. Committee members strongly urged all the participants in the negotiations to make every effort to resolve quickly the many remaining issues that are crucial to an overall agreement.

The Committee also welcomed the progress made by Central and Eastern European countries in the process of structural change. It stressed that the Fund must continue to provide financial and technical assistance as these countries move their economies further toward a market system and integrate their economies into the world economy. The Committee encouraged international cooperation in support of these members’ programs. However, Committee members clearly were mindful that further support to these countries must not be at the expense of other countries in need of similar assistance.

The Committee welcomed the undertaking by the Fund, in cooperation with the World Bank, the OECD, the EBRD, and the Commission of the European Communities, of a detailed study of the economy of the Soviet Union.

With the recent adverse changes in the international economy, many Fund members are again facing serious short-term payments difficulties. The Committee was of the view that the Bretton Woods institutions should play a central role in supporting the necessary mix of adjustment and financing that these countries would require to restore sustainable growth. The Committee did not see a need for new facilities in the Fund, which has an array of instruments that can be used effectively and flexibly to deal with a variety of situations. It was recognized, nonetheless, that some modifications could usefully be introduced in some of these instruments such as the CCFF and ESAF. The Executive Board was asked to work expeditiously on such possible adaptations and to take account of the requirements of current circumstances in tailoring members’ access to Fund resources, including ways to address the problems of certain members in servicing such new debt.

The Committee welcomed the progress made so far under the strengthened debt strategy. The successful cases that we are witnessing are clear evidence that the debtor countries themselves must create the conditions for sustained growth, and a return to creditworthiness, by adopting policies that raise efficiency and foster saving, investment, and private capital flows, including the return of flight capital. At the same time, such policies have to be supported by prompt and adequate external financing.

In the case of the middle-income countries, the Committee urged all parties concerned to speed up the negotiations between members and commercial banks and called for a prompt resolution to outstanding arrears problems. The Committee welcomed the recent decisions of the Paris Club regarding debt owed to official creditors by lower middle-income countries. It also noted that several creditor countries had forgiven ODA obligations of low-income countries. The Committee encouraged the review of additional options and invited the Paris Club to consider further initiatives that might help enlarge the scope of official debt relief. It welcomed the U.S. Enterprise for the Americas Initiative.

Governors will recall that, by the spring of 1990, the Executive Board had reached agreement in the context of the Ninth Review of Quotas on the method of distribution of quotas, the size of the participation requirement, and the period for consent to and payment for the increase in quotas. It remained for the Committee to reach conclusions on the percentage by which the total of Fund quotas should be increased and on the timing of the next review of quotas. It was agreed by the Committee that the present total of Fund quotas should be increased by 50 percent and that another review of quotas should be conducted by March 31, 1993.

The Committee also devoted much of its attention at the Spring 1990 meeting to the arrears strategy. Fully supporting the intensification of cooperative efforts to reduce and eliminate existing overdue financial obligations to the Fund, the Committee also emphasized the importance of enhancing the instruments available to the Fund to prevent the accumulation of further arrears. The Committee invited the Executive Board to propose to the Board of Governors the text of an amendment of the Articles providing for suspension of voting and related rights of members that do not fulfill their obligations under the Articles. The Committee came to a consensus that, as part of the overall quota increase package, no increase in quota would become effective before the effective date of such an amendment.

On June 28, 1990, the resolution on the proposed Third Amendment was approved by the Board of Governors, together with the Resolution on Quotas under the Ninth General Review. The Committee agreed at its September meeting that, given recent events and uncertainties in the world economy, it is now of the utmost importance that the quota increase be ratified and the Third Amendment accepted by the requisite majorities as soon as possible.

This completes my report. The Committee agreed to hold its next meeting on April 29, 1991.

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

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

After enjoying an expansionary phase for eight consecutive years, the world economic climate remained quite satisfactory in the first half of this year. This outcome—which is due to both the success of the anti-inflationary monetary policies being pursued in most industrial countries and progress in structural reforms—has contributed to the establishment of the underlying conditions needed to foster sustainable and balanced noninflationary growth in the medium term. On the positive side, it should also be noted that the pattern of growth has contributed to support internal and external adjustment. This should be given fresh impetus by the adoption of further policy measures in the countries most concerned.

The Community economy is expected to remain strong during the period ahead, with the gradual completion of the internal market and German reunification. These will help to stimulate activity in other countries, thereby promoting adjustment and prolonging the expansion.

The recent developments in the Middle East, if persistent, may adversely affect the outlook for growth and inflation. Meanwhile, the uncertainty of the situation has already been reflected in financial markets, and to a lesser extent in foreign exchange markets, worldwide. The new crisis in the Gulf region emphasizes the fundamental policy prescription of fighting inflation, fiscal consolidation, and structural reforms, including energy conservation required to maintain sustainable growth in the world economy over the medium term. Past experience has shown that we should accept the consequences for nominal incomes rather than trying to offset the adverse effects of a higher oil price level.

At the global level, the generation of savings adequate to fulfill the strong investment demand is a major objective. In this context, it is urgent that those countries running substantial fiscal deficits, such as the United States, Canada, and Italy, bring these down; and that industrial countries generally take measures aimed at fostering adequate levels of private saving. This would help to ease the burden currently borne by monetary policy and to reduce the upward pressure on world interest rates, to the particular benefit of the developing countries. At the same time, and within the constraints just mentioned, surplus countries should contribute to a further reduction of external imbalances, in particular by accelerating the pace of structural reforms.

As far as inflation is concerned, the stance of monetary policies should remain prudent, in view of emerging cost pressures in a number of industrial countries and in particular the risk of escalating oil prices. It is clear from experience that the pursuit of noninflationary growth is essential to the proper functioning of the international monetary system.

New perspectives and challenges are being opened up for the world economy by the epochal changes that are occurring in the international economic and political system. Most of the Eastern and Central European countries are now undertaking important reforms of their economies in order to introduce market principles. Output is expected to decline in these countries in the near future but, beyond the short term, economic performance should improve significantly, with positive effects for the world as a whole, as market-based incentives, including trade at world-market prices, become more widespread.

The European Community is playing a vital role in supporting the transition process in Central and Eastern Europe, as demonstrated by its coordination of G-24 support, both technical and financial, for Poland and Hungary, which has now been extended to cover other countries in this area.

The member states welcome the creation of the European Bank for Reconstruction and Development, which will provide technical and financial support in close cooperation with international institutions active in this area. The Community, furthermore, agreed at the European Council meeting in Dublin in June to study measures of financial assistance to the Soviet Union.

In order to boost sustainable growth over the longer run, structural reforms complementing macroeconomic policies are strongly needed. The construction of the single market in the European Community will strengthen market forces and thus the technological and economic competitiveness of the European Community. It also demonstrates the commitment of member countries to further liberalize and deregulate their markets.

In this context, a successful conclusion of the Uruguay Round would have wide-ranging favorable consequences. It is, therefore, particularly important that the objectives of these negotiations, including the liberalization of financial services with a view to ensuring effective market access, are achieved within the prescribed deadlines. Major concessions will be required of all parties concerned in the next few months. The newly industrializing economies are also urged to acknowledge their responsibilities in a world trade system managed according to the GATT principles. Other developing countries should increasingly do the same.

The member countries of the European Community are now in the first stage of the process leading to economic and monetary union. Our experience in the European Monetary System shows that a system of stable exchange rates and close coordination of economic policies, based on a common objective of noninflationary growth, gives valuable results in terms of the stability of the economic environment, and in particular in terms of price stability.

With capital movements close to full liberalization and growing exchange rate stability, increased coordination of economic and monetary policies with a view to bringing down inflation rates to a low level in all member states will, in the context of economic and social cohesion, help to create the conditions for the successful transition to economic and monetary union.

Far from being an obstacle, the economic and monetary reunification of Germany will provide fresh impetus to the integration process. In turn, European economic and monetary integration can be welfare-improving only if it takes place in the context of open markets and a strengthened economic relationship with the rest of the world.

At the end of a decade of unsatisfactory results, economic perspectives for the developing world remain uncertain. Only some Asian countries have been able to take full advantage of several years of undisrupted growth of the industrial world, while a number of unfavorable factors, including a deterioration of the terms of trade, rising interest rates, and increasing debts have, in combination with unsatisfactory economic policies, hindered prospects in other developing countries.

The cooperative debt strategy, which has recently been strengthened, is yielding encouraging results. A growing number of developing countries are now implementing strong macroeconomic and structural adjustment programs, being aware that the creation of a favorable economic environment is an essential prerequisite for mobilizing domestic saving, attracting investment, and stimulating the repatriation of flight capital.

All industrial countries must remain strongly committed to supporting those adjustment efforts through the provision of adequate financing and the implementation of trade liberalization measures. The renewal of the Lomé agreement clearly demonstrates the willingness of the Community to act positively in these areas. The forthcoming increase of IMF quotas and the earlier increase in the World Bank’s capital will enable these institutions to continue to meet members’ requests for financial assistance and to catalyze assistance from other sources. The commercial banks, too, have an important role to play by responding in a timely and adequate way to debtor countries’ needs.

As to environmental matters, an important result was achieved last June in London, when it was agreed to set up a financial mechanism to assist developing countries in complying with their obligations under the Montreal Protocol. In this context, we strongly support the initiative of the World Bank—in cooperation with the United Nations Environment Program and the United Nations Development Program—to establish a Global Environmental Facility to finance pilot projects in areas of particular interest.

The poorest countries, particularly the severely indebted ones in sub-Saharan Africa, continue to depend heavily on the availability of concessional flows. They are benefiting from official debt reschedulings by the Paris Club under Toronto terms and from the cancellation of overseas development aid debt by an increasing number of creditor countries. They will have available the resources of the Ninth Replenishment of the International Development Association. Negotiations have also been launched for the refinancing of the World Bank’s Special Program of Assistance into 1991-93 and for the replenishment of the African and Asian Development Funds. As major contributors to these initiatives, the countries of the European Economic Community are looking forward to a timely and positive conclusion of the related negotiations.

We also support the Paris Club’s continuing review of additional options to address the specific problems of those of the poorest and the lower middle-income countries, which are highly indebted to governments and which are implementing strong adjustment programs. We also welcome the recent decision by the Paris Club as regards the lower middle-income countries to lengthen further the repayment of their debts and introduce a debt-swap option. The contribution of both the Fund and the Bank has been instrumental in the progress achieved so far in the strengthened debt strategy. The relevant guidelines approved by the two institutions remain valid and should be implemented prudently and with the necessary degree of flexibility.

The IMF should continue to play its irreplaceable surveillance role and to support the correction of domestic and external imbalances in all member countries. In addition, the Fund and the Bank should further intensify their efforts to encourage structural reforms. The recent increase of oil prices and its consequences could be damaging to the many developing countries that are net oil importers and are vulnerable at present to outside shocks. It is, therefore, important that the IMF and the World Bank stand ready to assist the countries most affected in their efforts to deal with the problems that have arisen. Furthermore, the member states of the Community are studying the possibilities of assistance to certain of the countries most affected by the Gulf crisis.

The design of economic reforms in the economies of Central and Eastern Europe will require particular attention. In this respect we welcome the Czech and Slovak Federal Republic. We also note with satisfaction the invitation given by the Houston summit to the IMF and to other international organizations for a joint study of the Soviet economy. In addition to the mandate on this subject given to the Commission by the European Council, the Community is cooperating fully with the IMF and the other organizations in these endeavors.

We also welcome the adoption of the resolution by the Board of Governors of the Fund on the Ninth General Review of Quotas and the amendment of the Articles of Agreement providing for the suspension of the voting and related rights of members that are not fulfilling their obligations. Continuous efforts are required to tackle the problem of arrears to the Fund, which threatens the cooperative nature of the institution and its monetary character. We call on members still in arrears to put in place measures to restore viable growth in their countries and become current with the Fund and the Bank.

In order to foster the necessary adjustment, it is important that the Fund’s “rights approach” be rapidly implemented in all its parts.

All members are urged to ensure that both the quota increase and the amendment to the Articles are made effective as early as possible in 1991 so that the Fund will be provided with additional resources to execute its mandate in the coming years. The question of a resumption of SDR allocations during the remainder of the fifth basic period from 1989 to 1991 should be kept under examination.

Finally, I warmly welcome Bulgaria and Namibia. By enlarging their geographic coverage, the world character of the Fund and the Bank is enhanced, together with our common responsibility for effective international cooperation.

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

First of all, I welcome as a new old member the Czech and Slovak Federal Republic. Later in the day, Bulgaria and Namibia will also join the Bretton Woods institutions. By enlarging their geographic coverage, the Fund and the Bank are enhancing their world character, together with our common responsibility for effective international cooperation.

As these meetings take place, the world situation is still imbued with the sense of epochal changes that brought about the momentous developments of the past year. These events, which indeed open a new era in modern history, are marked by the bold decisions of the Eastern and Central European countries and the U.S.S.R. to change radically their political and economic systems. In this context, German reunification is to be seen as the natural outcome of the long-awaited removal of the artificial barriers placed between East and West.

The most important developments of the last few months are the threatening events in the Middle East, which endanger peace and bring a sense of urgency to our meetings. The oil price hike ensuing from the Gulf crisis complicates the short-term management of the global economy and poses new difficulties to most countries bearing a heavy debt burden and to countries undertaking the transition from a planned to a market economy.

In facing this adverse circumstance, we can be reassured by the positive results obtained during the noninflationary cyclical expansion that spanned the past nine years. Yet, chances of success in coping with present difficulties depend to a large extent on the cooperative nature of our policy response to the Gulf crisis. Cooperation remains paramount, since imbalances are still large, signs of financial fragility have appeared, and global markets make for an instant transmission of turbulence.

Our past experience has taught us four policy lessons that are crucial to manage the present situation. First, all countries should allow a prompt and full adjustment of domestic energy prices. This is especially important in those economies in which the presence of administered energy prices induces excessive energy consumption. Second, strong emphasis should be given to internal adjustment, thus avoiding an excessive reliance on external financing. In this respect, the International Monetary Fund and the World Bank will continue to play their roles both through direct provision of funds and policy advice, and by mobilizing concessional resources from donors. Third, the persistence of large international payments deficits, coupled with the increasing global scarcity of saving, calls for a resolute curtailment of fiscal imbalances in a number of countries. Fourth, an increasing degree of coordination of monetary policies is desirable in order to maintain exchange rate and financial market stability. Mindful of this, the European Community is making a strong effort to ensure the appropriate conditions for the achievement, by stages, of the Economic and Monetary Union.

Synchronism, nervousness, and, to some extent, fragility have come to characterize financial and stock markets. Recently, they have been sparked by uncertainties stemming from the Gulf crisis, which requires international cooperation and the firm steering of national monetary authorities. This would consolidate our success in developing more efficient and stable financial markets.

The progressive deregulation has resulted in a growing integration of major offshore and domestic financial markets but has introduced new elements of risk. The access to larger private capital sources, while making it easier for deficit countries to finance their external imbalances, has enhanced the overall risk of domestic financial instability owing to changes in expectations or economic conditions abroad.

The speed, magnitude, and complexity of financial transactions, today, create powerful links of a truly global nature that demand of national authorities a greater sense of collective responsibility and the use of appropriate control instruments. First and foremost, monetary policy should avoid fueling an asset price inflation, which even if it does not affect the goods market in the short run, makes for a swelling bubble, which may burn many should it burst.

Second, what has been agreed internationally to preserve the stability of financial intermediaries should be reinforced and enlarged to cover as many markets as possible. The supervisory activities of the financial authorities should encompass bank and nonbank financial operators; international standards should be strengthened to impose limits on risk-taking and maturity transformation activities of financial operators; minimum bank capital requirements should be integrated by including market risks; and the tax treatment of financial transactions to avoid international misallocations of saving flows and counterproductive tax competition remains a challenging issue to be tackled someday.

All this, of course, cannot but rest on the willingness of governments to cooperate. Tighter international collaboration and the governments’ determination to frame major national problems within an international perspective will strengthen competition on solid ground.

Recent developments in Eastern and Central European countries have brought a unique and inspiring challenge to our institutions.

After almost half a century during which international, political, and economic relationships have evolved in a context of rigid separateness, a precipitous sequence of events has dismantled the artificial barriers that have prevented Eastern and Central Europe from benefiting from the economic progress experienced in the Western world.

These countries are now undertaking historical changes that will have a profound beneficial impact on their economies and on the world. I want to express my complete support and encouragement for the huge efforts their governments and peoples are convincingly making.

There are, indeed, no historical precedents to guide policymakers in such difficult tasks and, besides some common features, there are relevant differences among countries undertaking the reform process. However, the most recent developments in Central and Eastern European countries unveil aspects and problems of the transition process.

The success so far achieved confirms the benefits of a quick stabilization of the economy, through a combination of liberalization measures and firm demand-management policies. The restoration of basic internal and external equilibriums through macroeconomic management sets the stage for implementing structural measures. But it is becoming, now, more evident that stabilization is only the first, and perhaps the easiest, phase of the overall program. The costs of stabilization efforts could be high if the supply response, the ultimate goal of reform, is slow.

Price liberalization, freer trade, and a more productivity-related system of wage fixing are the preconditions for any structural adjustment. While the progress already made is encouraging, sectoral distortions and technological backwardness, which are the main limits to a prompt supply response, should be removed through courageous structural adaptations of which privatization of firms and banking reform should be the backbone.

Indeed, privatization and banking reform can only succeed if implemented together. The latter unaccompanied by the former would only perpetuate the accumulation of nonperforming loans in the portfolios of banks. This, in turn, would, de facto, force the central banks to keep afloat banks burdened by bad credit, thus endangering the effectiveness of monetary policy. On the other hand, privatization without banking reform would fail to ensure that capital is allocated efficiently to firms, or to provide capital at all.

An improved operation of the banking system, in the context of the present privatization efforts, would decisively enhance the much needed mobilization of financial resources for productive purposes and increase financial saving. The legislative, regulatory, and supervisory framework requires strong political will and an active participation of the international financial community.

I, therefore, warmly welcome the World Bank and IMF efforts in this field. Both institutions can offer a decisive contribution not only by helping to prepare comprehensive structural programs, but by fostering the concrete support of the world financial community, whose participation they can catalyze and incite. To make current efforts in Eastern and Central Europe fully successful, we need to rely on deeply felt conviction and prompt implementation of international cooperation.

Since the inception of the strengthened debt strategy, some progress has been made in a number of countries to alleviate the external debt problem. Adjustment efforts coupled with debt relief are paying off in a number of cases and the return to market access—although limited—by a few highly indebted countries indicates that external viability appears a less elusive goal than just a few months ago. However, the large size of the debt problem continues to call for strong efforts from all parties concerned. In this context, due attention should be given to the suggestions made in the Craxi Report on Debt commissioned by the UN Secretary General.

The financial situation of middle-income countries appears less uncertain after the decision taken by Paris Club creditors to consent to longer repayment periods and to limited swaps of official debt on a voluntary basis. However, this group of countries should continue to implement far-reaching structural reforms and comprehensive medium-term adjustment programs aimed at attracting foreign direct investments.

Severely indebted low-income countries have continued to benefit from official creditor assistance, as well as from generous treatment in accordance with the Toronto terms, which are to be further reviewed by the Paris Club. Significant efforts have also been made by the Bretton Woods institutions to grant concessional credits. Still, in spite of adjustment efforts, medium-term balance of payments viability remains doubtful in a significant number of cases. To ease the official debt burden of low-income countries, a bill allowing the conversion of ODA loans into grants is under consideration by the Italian Parliament.

Debt is not the only scourge: poverty and environmental degradation are not less worrying from the political, economic, and social points of view. The alleviation of poverty is an area in which the leading role of the World Bank is particularly needed. Growth plans should be promoted to intensify the access of the poor to health and education services, thus allowing them to increase their productivity and react fully to economic incentives.

We also praise the Bank for the increased attention it is providing to the environmental issues within the framework of its activity. We must recognize the strong interdependence between growth and environment; in a world characterized by a high rate of depletion of nonrenewable resources, care for the environment should increasingly become part of the efficient allocation of resources.

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

As I reviewed the data on global trends at the beginning of August, I came to the same conclusion as that with which I opened my remarks a year ago. On that occasion I noted that “the prospects for the world economic situation are a little less bright, but basically the same as those we faced a year ago.” Developments over the intervening year more or less validated that expectation. Unfortunately, the sudden eruption of the crisis in the Persian Gulf calls into question even those weak expectations. Uncertainty has increased sharply.

Clearly, the ensuing military buildup and the need to meet the urgent needs of the refugees flowing out of the area will give rise to a significant diversion of the world’s resources into nonproductive uses. The magnitude and duration of these claims on resources can only be guessed at for the moment, but already that diversion is large.

A tabulation in the New York Times of last week already identifies approximately $20 billion in pledges of financial support from various national governments and the European Community. To figures like this must be added the additional resources that will be needed for extra economic assistance to countries adversely affected by the embargo of Iraq and higher oil prices. Currently, resources on the order of $7 billion or $8 billion are being discussed for this purpose, with the Bank and the Fund playing a central role. Prudent planning must assume that the Gulf crisis will reduce global economic prospects.

The pace at which the roles of important participants in the world economy are changing has quickened since we last met. To the changing roles of Japan and the newly industrializing economies and Europe’s further integration, which were noted a year ago, must now be added the wholly unforeseeable implications of the changes in Eastern Europe and the U.S.S.R. German reunification and the imminent integration of several Eastern European countries into the global market economy also contribute to the uncertainties of future developments.

Against the background of these uncertainties now facing the global economy there are a number of issues that I believe require our careful attention. Among these I would list the developments in the international monetary and financial system, developments in the global trading system, the continued problems of the heavily indebted developing countries, the integration of Eastern Europe into the market system, the ultimate impact of the Gulf crisis, the persistent problem of widespread poverty, and the protection of the global environment. Let me say a few words on each of these topics.

The world’s monetary and financial system has shown impressive ability over the last two decades to weather severe pressures. Nevertheless, unhealthy fiscal imbalances persist and policy coordination among the major economies is still inadequate. Even before the impact of higher oil prices there was mounting evidence that inflationary pressures were on the rise. Moreover, today the system is faced with challenges that will put its strength to the test anew. The Fund therefore should continue to assert its influence in support of better and more effective policy coordination among the members. Fiscal consolidation measures should be undertaken, especially by countries with significant imbalances. These measures should be supplemented where appropriate by the removal of structural elements in tax systems that are an impediment to savings or that encourage consumption. Together these measures should aim to generate a level of global savings consistent with the prospective demands of Eastern Europe, the U. S. S. R., and a united Germany, while at the same time meeting the continuing needs of the developing countries.

The current exogenous shocks, such as the Gulf crisis, the costs of German reunification, and the rehabilitation of Eastern Europe’s economies, come at a time when the soundness of major segments of the financial system is called into question by rising levels of nonperforming loans and inadequate capitalization. The high cost, and the impact on confidence, of dealing with such problems as those of the savings and loan industry in the United States, the impact of weak real estate markets in a number of important economies, and the rising default rate of so-called junk bonds are all placing further strains not only on the banking system but also on insurance companies and pension funds. It is a measure of the seriousness of these developments that the major credit rating organizations are progressively downgrading the securities of major financial institutions; recently, this has even included the major banks in Japan, now the leading financier of the world economy.

Perhaps more fundamental, the weakness of the worldwide savings performance in the face of increased demands for finance from expanding economic activity and trade complicates the fight against inflation. Inadequate levels of savings also make the efforts to strengthen the capital base of the financial system more difficult. It is to be hoped that fiscal policies will increasingly be designed to encourage higher levels of savings consistent with the demand for finance.

It is crucial to the future health of the world economy that the larger trade groupings—Europe post-1992, possibly enlarged by part of Eastern Europe in the foreseeable future, North America, perhaps extended to the entire Western Hemisphere, along with Japan—become outward-looking, open participants in world trade, not self-sufficient blocs of protectionism. Which way these blocs go—expanded trade or greater protection—will depend to an important degree upon the outcome of the Uruguay Round.

Among the most important unresolved issues still facing the negotiators in those discussions are the reduction of non-tariff barriers represented by the Multifiber Arrangement (MFA) and the pervasive subsidies and barriers that characterize trade in agricultural products. Unless the issues now covered by the MFA can be rolled into the provisions of the GATT and agricultural protectionism can be significantly reduced—especially as applied to tropical products of importance to many developing countries—we place expanding world trade and development at risk. Moreover, failure on this score can complicate the role of the Fund in prescribing sound adjustment programs for countries in need of such programs. Clearly, barriers to trade in agricultural products and labor-intensive manufactures could be expected to close off many benefits from sound adjustment policies.

We recognize the importance of bringing services within the scope of a more liberal trading system and the case for protection of intellectual property rights. However, we feel strongly that agreement on these issues should not be linked to a resolution of the issues in commodity trade. All major areas should be dealt with on their merits or else there will be serious risk that satisfactory results will elude us in all key areas.

From present readings one cannot be fully confident that those negotiations will have a constructive and trade expanding conclusion. We must all try to reassert our political will to achieve the desired outcome of those discussions. The empirical evidence on the welfare gains that would accrue to all parties from significant liberalization of trade is now overwhelming. Such gains could go a long way toward redressing many of the problems of debt and development that currently seem so daunting.

Unfortunately, many developing countries are still laboring under unresolved debt burdens that are sharply limiting their efforts to restructure and resume growth. There have been more imaginative initiatives and there has been some access to new money for a few countries previously denied access to the markets. No remedial actions to date, however, have had a significant impact measured against the total problem, and access to new money has been quite sporadic at best.

Much satisfaction is expressed that the international financial system has weathered the impact of the debt crisis on the banking systems’ capital structure. This, of course, is good. Any significant collapse among the institutions of the banking system would have very undesirable repercussions extending far beyond the debt issue itself. This point notwithstanding, it is important to point out that the ability of the banking system to cope with the impact upon itself of the debt problem still leaves the debtor countries in an extremely unsatisfactory situation. It must also be noted that, in quantitative terms, other threats to the financial system loom as large as or larger than does developing country debt.

An increasing number of the debtor countries are adopting adjustment programs based on sounder economic principles. Yet their problem shows discouragingly little improvement. The debt-servicing burden is compounded by falling terms of trade, an unacceptable level of nontariff and tariff barriers to their trade, and now, for the majority of these economies, the impact of sharply higher energy prices. A satisfactory solution to the debt crisis will entail resolution of all these issues.

Finally, I feel compelled to repeat a point I made last year: a comprehensive solution to the debt problem should include facilities to assist the heavily indebted but performing countries. They have been able to continue to honor their debts through sacrifice on their part and by adopting sound adjustment policies. If they are “forgotten” in the provision of facilities and reduction of debt, it would reflect ill on the prescription of sound adjustment polices and reduce the creditability of the advice recommending such policies.

Politically, one can only welcome the political changes that have swept through Eastern Europe and the U.S.S.R. The concomitant rapprochement between the super powers can be expected to bring many benefits to the world community—economic as well as political. Nevertheless, prudence requires a recognition that the transformation in individual countries will be difficult and requires careful consideration of possible negative effects from these developments, at least in the short run.

Politically, while a desire for change seems to be almost universal throughout Eastern Europe and the U.S.S.R., there are very divisive attitudes as to how to go about reform in each individual country. Debates about the specifics of political decentralization and the means of achieving private ownership of the means of production are already heated in several countries. Historic ethnic and national feelings should not be allowed to give rise to civil turmoil or strife within or between the countries of Eastern Europe.

Economically, restructuring the economies of Eastern Europe is likely to require heavy infusions of capital, most of which will need to come from outside the region. Thus, a new and sizable claim on international financial resources has been created that will compete for those resources with both the investment needs of the industrial countries and the development and debt alleviation needs of the developing countries. Orderly evolution of the world economy will require careful and equitable balancing of these competing claims.

Moreover, to be successful in meeting their economic goals, the countries of Eastern Europe will need to greatly expand their international trade. While this creates opportunities for their potential trading partners, it also requires an increasingly open and liberal international trading system. Thus, Eastern Europe, as well as the developing countries, requires success in the Uruguay Round negotiations. The recent decision of the Comecon countries to conduct their future trade in hard currencies will have to be accommodated within the available world liquidity. This could place yet another strain on international liquidity.

Speaking even as an oil exporter, we recognize the problems created by the current oil price developments. We do not welcome the present high level of prices. First, they are based more on speculation and political accident than on market factors. Therefore they are an unsound basis upon which to base business decisions in this sector. Second, they are likely to have undesirable effects. While these effects are likely to be less severe than the impact of the two oil shocks of the 1970s, they may still be serious, especially the longer it takes to resolve the crisis.

Abrupt price changes of the magnitude that we are witnessing can push the industrial countries toward recession, and they greatly add to the debt and trade problems of the vast majority of developing countries. While a few developing countries, 11 according to the World Bank, will benefit from higher oil revenues, all of the remaining developing countries—a far higher number—will suffer adverse effects. Moreover, the impact will be larger for them than it was in the 1970s, since the developing countries now account for a higher share of oil consumption—28 percent now compared with 18 percent in 1973.

It must also be noted that the continuance of prices at their current level for any length of time can give rise to disruptive international flows of funds at a time when the world’s financial system is already stretched by inadequate capitalization of financial institutions and increasing failures in important segments of the system. Recycling petro-dollars may be more difficult for an already weakened financial system still dealing with the debt implications of the last round of recycling.

Finally, prices that are too high can lead to long-term fuel choice and consumer investment decisions that are not in the interests of the oil producers.

Unfortunately, the crisis in the Persian Gulf that has led to these developments looks less and less like a flash in the pan. One can only hope that good sense on the part of all parties and a firm political will on the part of the international community will produce a resolution of the crisis.

I am pleased to note that, while the process of approval and acceptance of the Fund’s quota increase and the Third Amendment has not been completed, the overall liquidity position of the Fund is at a comfortable level that should permit the Fund to meet the claims upon its resources arising from the Gulf crisis and global economic developments. I welcome the Fund and Bank response to increase the flexibility of their facilities in order to meet the needs of member countries arising from the Gulf crisis. The main continuing challenge will be to find new modalities that will allow both the Fund and the Bank to play an effective role as new developments require new actions. …

In closing, let me again underscore the fact that seldom in the life of these two organizations have opportunities and challenges been mixed to such a high degree. The winding down of the Cold War, the opening up of Eastern Europe, the reunification of Germany, and more recently the revitalization of the United Nations and what we hope is a significant breakthrough on the Cambodian issue all auger well for the future. But on the other side of the ledger, the Gulf crisis strains on the international financial system, the continuing debt burden, and potential deterioration of the global trading system are important factors promising trouble in the future, if we fail to address them effectively. Both care and imagination will be necessary in our deliberations and our actions.

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

In the history of the twentieth century, 1989 will go down as a decisive year for the economies of Eastern Europe and the Union of Soviet Socialist Republics. Breaking with decades of central planning and management, they have decided to adopt the rules of the market and engage in international trade. A symbol of the acceleration of history, German reunification will become effective on October 3, 1990. This is a new opportunity for potential growth and a stirring challenge for the European Economic Community.

For the immediate future, the world economy must face the uncertainties born out of the Gulf crisis and the slowdown of the U.S. economy as well as certain European economies. During the coming months, our economies are going to have to navigate between two risks: a resumption of inflation and a slowdown of activity. Both represent threats to the stability of the financial markets. The firmer our resolve on these two fronts, the better we shall be able to safeguard noninflationary growth and hence employment.

In these circumstances, the attitude of governments will be decisive. The invasion and subsequent annexation of Kuwait by Iraq were vigorously condemned by the international community. Nowhere can it be accepted that might makes right. We must be firm. An unshakable embargo against Iraq is the condition for returning to a normal situation based on respect for international law.

The spirit of solidarity demonstrated in the political arena must also extend to economic matters. For its part, France will work toward greater international cooperation. The IMF and World Bank, whose actions I salute, have in this regard a major role to play.

We are not starting from zero. As regards debt, progress has been made for the poorest countries as well as for the middle-income ones. Some of the impetus provided by the heads of state in Houston has already been turned into reality by the Paris Club. We fully expect to reach in the near future a new, more diversified menu incorporating, along with conventional rescheduling, debt-reduction and debt-service options, not to mention the vital option of new money. Our meetings this week have shown us that an international consensus is building on all these issues.

The promptness with which the international community has responded to the opening of the centralized economies of Eastern Europe is also remarkable; the courageous reforms initiated by these governments, Poland and Hungary in particular, were immediately supported by substantial flows of aid and technical assistance. The establishment of the EBRD was accomplished in record time. We are gratified to note that the Czech and Slovak Federal Republic and Bulgaria have completed the procedures for joining the IMF.

Other countries, like Namibia, have joined the Bretton Woods institutions and I welcome them. I am thinking in particular of Switzerland, whose quota we hope will be consistent with its role in the international economic and financial system. The Fund and the World Bank will then be better able to fulfill their universal role.

These institutions are based on cooperation, and each country must play by the rules; hence, no effort should be spared in securing compliance with them. That is the objective of the cooperative strategy that we introduced in 1988 to resolve the problem of arrears, and which we strengthened last spring. It can now be applied to countries in arrears that are willing to cooperate. This is particularly the case of Viet Nam, whose efforts we intend to support.

Finally, last spring’s increase in quotas is a credit to the international community because it will give the Fund the resources appropriate to its new tasks. It must be implemented without delay, to allow the IMF to support the adjustment efforts of countries affected by higher petroleum prices. To that end, the IMF must rapidly proceed with the necessary amendments to its instruments.

What direction should we take in the years ahead? I suggest that we examine and take action in four areas:

1. Draw long-term lessons from the Gulf crisis. Our economic history has already shown on three occasions that petroleum prices exert considerable influence on the world economy and that their volatility undermines sound and durable growth. It also shows that neither producers nor consumers gain over the long run from excessive price fluctuations.

The leading industrial countries have been committed since 1985 to systematic management of exchange markets so that the value of currencies is consistent with economic realities. It should be possible to apply this approach to the petroleum markets. These are still insufficiently transparent, and the rules of competition—a prerequisite for the smooth running of the market economy—are rarely applied, leading to sharp fluctuations that seriously disturb the world economy. The IMF, which is mandated to monitor the key determinants of economic activity, cannot ignore this issue, and I thank Mr. Michel Camdessus for having agreed to study it.

2. The fight against poverty. I already indicated to the Development Committee the priority accorded by France to this goal. The recent Conference on the Least Developed Countries in Paris adopted an action program that advocated increased aid to those countries and the cancellation, by those creditors that have not yet done so, of all debt contracted as official assistance.

3. Ensure environmental protection. The establishment of a special fund to protect the ozone layer is a first step in this regard. Last year, France proposed a new financial instrument to coordinate and mobilize funds allocated to specific projects. I hope it becomes operational as soon as possible under the form of a global environmental facility.

4. The integration of the U.S.S.R. into the world economy. I am delighted that, following the Houston summit, the International Monetary Fund, the World Bank, OECD, and EBRD undertook to carry out, in close cooperation with the EEC, an in-depth study on the Soviet economy, of which we have high expectations. That study could be the prelude to the Soviet Union’s joining the international monetary institutions.

* * * *

The world economy is today in a better position than it was during the oil shocks of the 1970s. However, we must react quickly and resolutely to restore the favorable expectations of economic agents and prevent the increase in oil prices from wiping out the efforts made by the developing countries and unsettling the economies of the industrial countries.

The difficulties must stimulate our imaginations. Economists must reduce uncertainties; politicians must reduce social inequities everywhere and bridge the gap between the North and the South in order to give the human race the opportunity to reconcile its differences.

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

It is a great pleasure to have the opportunity to address the Forty-Fifth Annual Meetings of the International Monetary Fund and the World Bank as Governor for Japan.

With the global tide toward market-oriented economies, the Annual Meetings are important occasions for reviewing the tasks ahead for the world economy in the 1990s as well as for addressing the very urgent question of the economic consequences arising from the Gulf crisis in collaboration with Fund and Bank management.

The Gulf Crisis and the World Economy

I would like first to elaborate on our measures to respond to the crisis in the Gulf, which is the most serious problem we are now faced with.

The Gulf crisis is not only disrupting world peace and security, it is also casting a dark shadow over the prospects for world economic development and prosperity.

Mindful of the importance of peace and stability in the Gulf region and of the restoration of international law and order, Japan announced active measures to contribute commensurate with its standing in the international community. On August 29, Japan decided to provide $1 billion in assistance for the multinational security efforts in the Gulf region, which included the provision of materials and transportation support. In addition, on September 14, we announced that we were prepared to provide additional funds amounting to a maximum of $1 billion, paying due regard to subsequent developments in the Middle East. We are also in the process of assisting refugees waiting in Jordan and other nations to return to their home countries. Moreover, Japan decided to extend economic assistance in the total amount of $2 billion to those front-line nations such as Egypt, Turkey, and Jordan, which have suffered severe economic damage. Of the $2 billion, $600 million will be provided expeditiously as untied emergency commodity loans, with extremely low interest rates, to Egypt, Turkey, and Jordan to meet their urgent needs during 1990. The remaining $1.4 billion will be provided to assist those affected Middle Eastern countries in the medium term, taking into account their needs through 1991. The concrete uses for this $1.4 billion will be determined in such a manner as is consistent with the coordinated efforts in the multilateral support structures, including the Bretton Woods institutions, to assist those countries.

The Fund and the Bank have extremely critical roles to play in international support for the front-line states, as well as for the non-oil producing developing countries and the Eastern European nations hard hit by higher oil prices. The Fund and the Bank, as the dual foci of the international financial system, now are being called upon to display sufficient flexibility and adaptability in the face of this crisis. By mobilizing its lending facilities as a catalyst for international assistance, the Fund is expected to promote the adjustment efforts of its member countries and thus play an active role as a core of support to those countries faced with difficulties.

We believe that it is most opportune that the Fund is deliberating to allow a greater degree of flexibility in the use of its resources in situations such as the present one. In this connection, we believe that it is particularly important to augment access to the Fund’s resources for these countries and to activate the compensatory and contingency financing facility in a positive way with a great amount of flexibility. …

The Present State of the World Economy

I would like next to move on to the present state of the world economy.

The world economy is performing well overall, entering the eighth year of its current expansion. We recognize that the efforts by the industrial countries for greater policy coordination and structural adjustment have contributed greatly to this process.

While the industrial countries are now less affected by the rise in oil prices than they were during the first and second oil crises, the effects of these price hikes on price movements and economic growth require vigilance, thus mandating even greater efforts in policy management and cooperation for economic stability.

For the non-oil producing developing countries and the countries of Eastern Europe, higher oil prices are expected to worsen their trade balances and foreign currency reserve positions. It is thus imperative that even greater care be taken in our support for these countries to ensure the success of the market-oriented economic reforms now taking shape in Eastern Europe and the developing countries.

Turning to the Japanese economy, noninflationary growth led by domestic demand has been sustained since 1986, and steadfast progress has been made in reducing our external imbalances. The current account surplus has dropped from 4.5 percent of GNP in fiscal 1986 to 1.9 percent in fiscal 1989. For fiscal 1990, while higher oil prices will unavoidably affect prices and economic growth to some extent, the Japanese economy, still being robust, is expected to sustain noninflationary growth led by domestic demand, with appropriate policy management. The rise in oil prices, in the meantime, will accelerate the pace of decline in the current account surplus.

Market-Oriented Economic Reforms

I would next like to touch upon the worldwide tide toward market-oriented economic reforms.

Looking back at Japan’s own economic history, it has been our experience that privatizing state-owned enterprises enhances economic efficiency, which in turn contributes to economic growth. In the 1980s, for example, we successfully privatized three public corporations.

We find it most gratifying that the countries of Eastern Europe, Latin America, and Asia have become increasingly aware of the need to privatize state-run enterprises, to support private sector development, and to strengthen market mechanisms in their endeavors for structural adjustment. In promoting that process, we believe it is also beneficial to utilize the catalytic function of the international financial institutions.

Looking especially at Eastern Europe, for which international support structures such as the European Bank for Reconstruction and Development (EBRD) have been established, we hope that the Fund and the Bank will continue to extend their support to the countries of that region. In this context, the participation of the Czech and Slovak Federal Republic and the People’s Republic of Bulgaria, whose membership we have just voted for, is most welcome. At the same time, I would like to extend a sincere welcome to the third new member, the representative from the Republic of Namibia.

The Fund, the Bank, the OECD, and the EBRD are expected to complete a detailed study of the Soviet economy by the end of 1990 as agreed upon at the recent Houston economic summit, so as to make their due contributions to the reform efforts in the Soviet Union.

In addition to the demand for resources in the developing countries, economic reforms in Eastern Europe and other developments are expected to generate additional massive demand for capital. If we are to meet this demand, it is highly advisable that every country foster savings while discouraging dissavings, in order to avoid higher interest rates to the utmost and to ensure steady development of the world economy.

Furthermore, if we are to facilitate the smoother functioning of market economies worldwide, it is imperative that every effort be made to maintain and strengthen the liberal and multilateral trading system. It is crucial that the Uruguay Round be successfully concluded by the end of this year.

Currency Stability

Next I would like to say a few words about currency stability.

The foreign exchange market is currently in a relatively stable situation, and it is felt that exchange rates among the major currencies have come to reflect the economic fundamentals more accurately. We believe that we owe this to the accumulation of efforts by the major industrial countries for policy coordination and coordinated actions on exchange markets during the late 1980s. The outlook for the future points in the direction of greater international interdependence, which will further expedite globalization of the world economy. Under the circumstances, and given both the achievements we have attained in the process of accumulated cooperation, and the accelerated movement for economic and currency integration in Europe, I wonder if it might not be possible, in a longer perspective, to explore a more stable international monetary system that solidly substantiates the spirit of cooperation thus far. In that endeavor, avenues could emerge to secure more stable relations among the currencies in the triad of the United States, Japan, and the EC.

Debt and Development Issues

Japan’s Basic Position

I would next like to explain Japan’s basic position on debt and development issues.

First of all, it is essential that support for the developing countries be considered and implemented on a case-by-case basis in accordance with each country’s situation.

Second, international support cannot succeed unless the developing countries themselves endeavor to reconstruct their economies through structural adjustments. On the other hand, international support will surely be forthcoming for countries that do undertake the appropriate policies and structural adjustments.

Third, in order to finance growth in the developing countries, it is essential to ensure that the necessary new money is available, whether from official or commercial sources. Japan, for its part, has made active efforts to provide new money through its program to recycle at least $65 billion over a five-year period to 1992.

Fourth, while it is true that there are some lower middle-income countries where the accumulation of official debt casts a shadow over reconstruction, these countries need, at the same time, to aim for structural reform and growth through the inflow of new money with appropriate conditionalities. It would not contribute to the country’s bright future if, with overemphasis on the immediate problem of debt accumulation, concern for large-scale compulsory official debt reduction led to a cutoff of new money to that country now and in the future. We hold these concerns as the largest donor of official new money to the developing countries, and we would like to emphasize once again the need to treat the issue of official debt reduction in a cautious and prudent manner.

I would next like to touch upon some new contributions that Japan is initiating in line with this basic approach.

Last year, I stated that Japan was prepared to contribute about $300 million to the Bank over a three-year period to establish a special fund for technical cooperation to the developing countries and for the development of human resources for policy planning and implementation. This July, we contributed about $100 million as the first year’s installment on this pledge, and I am pleased to report that the fund is already in operation.

Through this fund and other measures, we would like to continue to contribute in a number of important areas.

First, Japan intends to play a fair role in support of the Bank’s African Capacity Building Initiative to develop human resources in Africa.

Second, recognizing the importance of private sector development in the developing countries, Japan intends to step up its technical cooperation for identifying and formulating projects for Bank financing.

Third, in order to give more consideration to the environment in development, Japan has been making special and voluntary contributions to the Bank for the last two years to facilitate technical cooperation relating to the environment. We intend to continue this cooperation for global environmental protection.

Fourth, on the role of women in development, it was our own experience, during the early postwar years when Japan was still subject to food shortages, that educational programs on nutrition, health care, and other areas of interest to the female farming population improved their standards of living and contributed to sharp increases in agricultural production. Building upon this experience, Japan intends to take an active part in providing technical assistance and other educational programs, so as to identify and formulate projects supporting the role of women in development.

The Role of the Fund and the Bank in Debt and Development Issues

Finally, I would like to address the role of the Fund and the Bank in debt and development issues.

While we have the highest regard for the contribution that the Fund and the Bank have made in international endeavors on debt and development issues, we very much hope that the Fund and the Bank will continue to play a key role in promoting economic structural adjustment in the developing countries.

We are, therefore, grateful that, following the Bank’s General Capital Increase, agreement has been reached on the Fund’s Ninth General Review of Quotas to strengthen its financial resources. We hope that all countries will move quickly to bring the Ninth General Review of Quotas into effect along with the prerequisite Third Amendment to the Articles of Agreement embodying the strengthened arrears strategy. …


Last year, Japan became for the first time the world’s largest donor of official development assistance. Moreover, with the recent Ninth Quota Review, Japan will take on increased responsibilities in the Fund as it already has in the Bank. We very much appreciate the cooperation extended by the member countries and the efforts made by Fund management toward agreement on the Review. Recognizing our renewed responsibilities in the international community, we would like to stress our determination to make every possible effort to meet these responsibilities.

At the very time that the world economy seemed to be moving toward greater convergence around market-oriented economies, a crisis has arisen in the Gulf to try our resolve. Will we be able to cope with this crisis through international cooperation? This is the first hurdle that we must overcome on the way to global economic integration centered on market mechanisms and is also a touchstone as to whether we will be able to sustain the international regime of cooperation led by the Fund and the Bank now in its forty-fifth year. Thus it is that we are gathered today in Washington in an effort to bring our collective wisdom and courage to bear on the issues before us and to develop policy responses in conjunction with the Fund and the Bank to surmount this crisis.

Statement by the Governor of the Fund and the Bank for Côte d’Ivoire—Kablan D. Duncan

I feel deeply honored to address this distinguished international gathering on behalf of the African Governors of the International Monetary Fund and the World Bank. At the outset, may I welcome the new members of our institutions, Bulgaria, Namibia, and the Czech and Slovak Federal Republic.

Despite some improvements in the global economy, the gap between the developed and developing countries has widened significantly. The slowdown in economic activity in some industrial countries, the rise in interest rates, and the decline in non-oil commodity prices will have a catastrophic impact on the balance of payments and the growth prospects of several developing countries. Between 1983 and 1989—a period characterized by one of the longest economic expansions in the global economy—the average rate of growth of per capita income in the industrial economies was higher than in developing countries, leading to a more pronounced disparity in the standard of living between the richer and poorer countries. This gap is even wider if the newly industrializing Asian economies are excluded from this comparison. That situation is unlikely to change in the near future, especially for the heavily indebted countries where there is much uncertainty over the prospects for improvement in their economic growth over the medium term. In this respect, it should be noted that high interest rates in industrial countries, resulting from, among other things, excessive reliance on monetary policy to fight inflation, continue to aggravate the debt-servicing problem, against the background of the projected deterioration in the terms of trade of developing countries and the decline in export earnings. These problems have been exacerbated with the onset of the current Gulf crisis. The impact of this crisis will certainly weigh more heavily on the low-income, non-oil exporting countries. We, therefore, urge the Fund and the Bank as well as the international community to develop as quickly as possible an adequate response to help countries cope with the additional financial burden. In sum, the economic horizon continues to pose major challenges for policymakers in both the industrial and developing countries—challenges that must be approached collectively with foresight and imagination.

The major industrial countries have a pivotal role to play in this regard by ensuring that their policies are consistent with long-term growth and stability, not only in their respective economies but also in the developing countries. In this connection, the importance of strengthening the surveillance role of the Fund for all members cannot be overemphasized. Therefore, we urge the continuation of efforts in the Fund to enhance its monitoring procedures, such as the development and refining of indicators and also to keep better track of the process of adjustment in industrial countries. However, in the final analysis, the effectiveness of Fund surveillance is subject to the willingness of the major industrial countries to accept the Fund’s role as the key institution for the coordination of their economic policies. The tendency on the part of these countries to decide on economic matters that affect the global economy outside the Fund cannot but tarnish its credibility as the centerpiece of the international monetary system.

The situation in Africa is particularly grave: many countries have experienced the longest period of economic decline on record. While acknowledging that domestic policies have contributed to the problem in some instances, the adverse effects of natural disasters and an unfavorable external environment have, in general, been the major causes of that decline. In particular, the terms of trade of the African region declined by about 5 percent a year on average between 1982 and 1989, while the region’s indebtedness grew to unmanageable proportions, rising from about 154 percent of exports of goods and services in 1982 to more than 226 percent in 1989. The stock of debt for sub-Saharan Africa grew even faster to more than 320 percent of exports of goods and services in 1989 and to about 69 percent of GDP, the highest among the developing regions.

The economic crisis in Africa is brought into focus by the sharp decline in per capita income in the 1980s, with the drop in some countries being well over 40 percent. The implications are quite alarming and are compounded by the fact that Africa accounts for the large majority of the world’s least-developed countries and a highly disproportionate share of global poverty. We are concerned that in spite of the strenuous efforts made by African countries over the years to carry out policy reforms and implement structural adjustment programs, the general socioeconomic deterioration has continued unabated. Lack of resources has severely constrained the region’s ability even to maintain existing infrastructure, arrested, and in many cases, even reversed progress toward reducing infant mortality and illiteracy, which are the highest among developing regions, constrained human resource development, and frustrated efforts toward combating widespread disease and malnutrition. In the United Nations Development Program’s recent Human Development Report, most African countries are ranked at the lowest end of its human development index. Not only is this situation intolerable and unacceptable from a human perspective, but it also severely constrains Africa’s economic potential. Adequate infrastructure and a healthy, literate, and well-trained population are indispensable to enhancing productivity, which remains the bedrock for sustained improvement in living standards.

The conclusion is clear: Africa needs a more imaginative, forward-looking strategy to revive the process of development in the region. Taking stock of the 1980s, it is obvious that our economic problems cannot be solved by short-term financial programming. This is not to minimize the importance of policy measures aimed at achieving price and financial stability; rather, the point is to duly recognize that there is no automatic link between the achievement of this goal and growth with social progress. African Governors, therefore, call on the international community to commit itself to a Special Agenda for Africa in the 1990s, emphasizing increased productivity, the transformation of the primary commodities sector through, among other things, increased processing, the creation of new opportunities for investment, employment, and higher levels of economic growth and social development, while giving particular attention to the reduction of poverty. In essence, therefore, we are making the point that short-term stabilization targets should be consistent with long-term developmental objectives because the former will remain elusive in the absence of fundamental changes in the structure of our economies. This is the challenge of the 1990s: to ensure that Africa does not relive the experience of the “lost decade of the 1980s” and moves with determination along the road to progress and sustained growth.

We are convinced that the agenda for Africa in the 1990s, for which we seek the full support of the international community, should focus, among other things, on the following three broad areas:

(1) Full internalization of the development process through the design and implementation of structural adjustment programs and policy reforms that fully take into account the human condition, the need for real and significant social and economic transformation, particularly in the rural areas where the majority of our people live, as well as increased popular participation in the adjustment and development process.

(2) Acceleration of the measures toward regional economic cooperation and integration leading to the establishment of an African Economic Community as decided by the Assembly of the Heads of States and Government of the Organization of African Unity (OAU) held in July 1990, including the rationalization and strengthening of existing subregional economic groupings to form the building blocks for such a community.

(3) In light of the above, the development of intensive programs for capacity building through the development of a strong base for effective management of our economies and more public accountability.

It is recognized that the primary responsibility for economic reform in Africa rests with the Africans themselves and their governments. We have already taken major steps to ensure greater accountability in the public sector, reduced impediments to private sector initiative, and implemented policies to increase domestic savings and attract direct foreign investment. We recognize that efforts must continue to strengthen our institutions in order to make them more effective tools for improved economic management. Not only will this reduce our reliance on outside technical assistance, but it will also place us in the position to truly “own” the adjustment programs that we have to implement. For these reasons, we welcome the Bank’s initiative to establish a capacity-building program aimed at upgrading national and regional institutions.

The international community should be aware that the drastic fall in per capita income in Africa, which characterized the 1980s, is a major constraint to the extent to which domestic savings can be increased in response to new policy measures and incentives. Our development efforts, therefore, must rely heavily for now on concessional external financing from both bilateral and multilateral sources. It is in this context that we urge the international community to support our efforts by increasing the flow of real resources in Africa, which in the past several years has fallen far short of what was needed. Recent events in other parts of the world should not divert the attention of the donor community from the need to make a special effort to assist Africa. For this reason, we call upon the donor community to support the global coalition for Africa.

The International Monetary Fund and the World Bank have been supportive of our reform efforts, as evidenced by the financial and technical assistance to a large number of African countries. The two institutions should be adequately endowed with resources to be able to carry out effectively their mandate, while serving as catalysts for mobilizing finance from other sources, including direct foreign investment.

We would like to emphasize the determination of our countries, during the decade of the 1990s and beyond, to promote local core industries through regional cooperation in order to meet Africa’s requirements for essential factor inputs, including equipment for farm operations, food processing, building, and construction. …

Africa’s need for development finance underscores the crucial role of the World Bank in helping our countries to implement and sustain economic reforms supported by policy-based adjustment lending and investment finance. There is still an enormous need for investment in infrastructure, health, education, and manpower development in Africa. Of course, the structural adjustment facility and the enhanced structural adjustment facility will continue to be an important channel for Fund assistance to low-income countries, given their focus on growth-oriented adjustment in a stable macroeconomic environment and the concessional nature of their resources.

Once again, we urge renewed efforts to make programs supported by the Fund and the Bank more supportive with respect to the promotion of economic growth, social progress, and the alleviation of poverty. In this connection, we draw attention to the recent World Bank report—Sub-Saharan Africa: From Crisis to Sustainable Growth—that makes the point that a sustained 4-5 percent annual growth rate is essential to provide for even moderate increases in per capita incomes and consumption in Africa. The report also underlines that an appropriate share of that growth should be geared to meeting social development needs as a basis of achieving progress in both economic and human terms. This orientation should be the motive power for African adjustment and development programs in 1990.

We also reiterate our call for greater flexibility in program design, especially with regard to (1) the pace of adjustment, including the timing and sequencing of policy measures; (2) contingency financing, given the high degree of uncertainty in primary commodity markets on which African economies are highly dependent; (3) the role and magnitude of debt relief, with a view to materially reducing the constraint of the debt burden on the adjustment process over the longer term; and (4) the social cost of adjustment, bearing in mind the importance of developing adequate safety nets as well as promoting human resource development. Our emphasis on flexibility is an attempt to draw on the lessons of experience to find more feasible scenarios to tackling the problem of economic growth and development.

The enormous debt burden facing African countries calls for strong and specific action. Although the level of debt is small, in relation to the total outstanding debt of developing countries, the burden is quite heavy. As the Development Committee noted in its communiqué of May this year, despite the concessional debt rescheduling by the Paris Club and the partial cancellation of ODA debt of many low-income countries, they still face uncertain prospects for an early return to external viability. There is an obvious need to re-evaluate the existing debt relief measures for the low-income countries. We also welcome the recent proposals of the British Chancellor of the Exchequer, Mr. Major, calling for further improvements on debt relief under the Toronto initiative. The debt-service problem facing lower middle-income countries also needs to receive high priority. Evidence shows that they will also need concessions similar to those accorded the low-income countries. Against this background, we applaud the French initiative announced in June by President Mitterand to reduce the interest rate on the official debt of some lower middle-income African countries and to extend grants rather than loans in the future to the poorest African countries. We welcome the outcome of last July’s conference in Maastricht, and, in particular, we welcome the massive support expressed there for measures to mobilize external assistance to bolster development activity in sub-Saharan Africa. We strongly urge other industrial countries to follow suit. Besides, we strongly recommend that the now unworkable distinction drawn between low-income and middle-income countries be abandoned, since it tends to deprive the latter of debt relief initiatives, even though they suffer just as much from a heavy debt burden. In line with the recommendation of the heads of state of the OAU, we reiterate the need for an international conference on the African debt situation, in order to find an effective solution to this problem.

The Bretton Woods institutions need to keep in mind one cardinal principle as they devise proposals to strengthen their policies and practices on arrears. It is that the major aim should be to assist countries falling into arrears to become current. The question of arrears is complex and calls for understanding and flexibility in dealing with the countries concerned. Emphasis should be laid not on punitive measures, but on constructive and cooperative solutions by assisting members to become current and to put their economies on the path of sustained growth and development. Only through cooperative measures can the two institutions carry out their full mandate in all member countries.

The linkage between poverty and environmental degradation is now better understood. Moreover, it is clear that sustainable development in Africa, as elsewhere, is also dependent on sound population policies as well as on proper management of the environment. We support the establishment of well-balanced programs to address environmental problems, such as deforestation and desertification. Properly conceived debt-for-nature swaps may also help to protect the environment. …

There are, however, some environmental problems that are of a global character, such as proper disposal of toxic wastes and chlorofluorocarbons. Therefore, we urge the speedy conclusion of negotiations on establishing a Global Environmental Facility. We must emphasize, however, that resources put at the disposal of the facility should be concessional and in addition to the assistance allocations that would have otherwise been available. The facility should also not be used as yet another vehicle for imposing further conditionality on developing countries.

We remain committed to promoting the contribution of the private sector to the development process. However, the circumstances in most of our countries leave no doubt that the public sector has to continue to play an appropriate role. Liberalization should promote complementarity between the public and private sectors, to ensure a balanced development of our economies. …

In conclusion, we believe that the 1990s must become a decade of recovery and progress in Africa. We recognize that the restoration of economic growth will require determination as well as a joint and sustained commitment from ourselves and our development partners. There is abundant diagnosis of the problems facing our continent. The challenge is to energetically and systematically implement, in a concerted manner, the programs for Africa’s recovery and growth. The IMF and the Bank Group can and should be of immense assistance in the realization of our goals. As none of us can accept the cost of failure, we all need to collaborate more closely to meet the challenges of the 1990s.

Statement by the Governor of the Bank for China—WANG Bingqian

Mr. Chairman, first of all, please allow me, in the name of the Chinese delegation, to express our sincere congratulations on your assuming the chairmanship of this assembly. We believe that the present Annual Meetings will achieve great success under your leadership. And I would also like to take this opportunity to warmly welcome new members of the Bretton Woods institutions.

Mankind has entered the 1990s. In retrospect, the development of the world economy over the past decade has been very disappointing for the developing countries as a whole. Notwithstanding the continuous economic growth of the developed countries, which has lasted longer than any cycle in the postwar period, most of the developing countries have not derived the growth impetus as predicted. To the contrary, their development efforts have been repeatedly frustrated by the increasingly unfavorable external environment—worsening terms of trade, mounting protectionism, declining flows of resources, volatile financial markets, and higher interest rates. With the exception of Asia, all the developing regions have had a disturbing tendency to stagnate or even decline in terms of their GDP per capita growth. The developing countries account for an ever-decreasing share, whether in the total increase in global wealth or in the annual volume of world trade. This serious imbalance in the development pattern of the world economy has resulted in a widening rather than in a narrowing of the disparity between the North and the South.

For the near term, the slowdown in world economic growth and the occurrence of tension in the Gulf have created additional uncertainties for the prospects of the world economy, which are bound to increase difficulties for the development efforts of many developing countries, particularly low-income oil importing countries.

The present-day world constitutes an integrated whole in which countries are interdependent and interact with one another. Maintaining balanced growth in all regions is a prerequisite for the sound development of the world economy. It is a narrow-minded and short-sighted view that only the developing countries need the developed countries, and not vice versa. As a matter of fact, the developed countries are inevitably dependent on the developing countries for access to commodity markets, more opportunities for capital investment, and supply of raw materials. It is inconceivable that the developed countries would be able to maintain the required economic growth rates while four fifths of the world population is bogged down in increasing poverty and lasting backwardness. Unless efforts are made to reverse the trend of polarization between the North and the South in a timely fashion, the peace and stability of the whole world will be very hard to maintain. Therefore, reversing this trend is essential not only to improving the living standard of approximately four billion people but also to guaranteeing the peace for more than five billion people. China hopes that the 1990s—the last decade of the twentieth century—can be a new era to strive for the reinvigoration of the world economy and the attainment of common prosperity.

We have been hampered by the debt problem for more than eight years. During the past 18 months, the international community has taken some new measures to reduce the official debt burden of low-income countries and the commercial debt of the heavily indebted middle-income countries. The multilateral financial institutions have also made substantial contributions in this respect. All of these are positive steps. It should be pointed out, however, that the overall debt situation remains serious; the implementation of debt and debt-service reduction is moving very slowly, and the scope of debt relief is very limited. We have yet to find sustainable, just, and comprehensive solutions.

The Chinese Government has always maintained that persistence of the debt issue is, in essence, a manifestation of the stunted growth of the debtor’s economy. Therefore, any effort or program aimed at debt and debt-service reduction must give priority to revitalizing the economies of the indebted countries rather than put debt service before development. In our opinion, to address the debt problem, it is imperative to create an external environment in favor of development of the debtor countries, to provide them with adequate new money, to expedite effectively the implementation of various programs of debt and debt-service reduction, and to broaden the scope of debt relief initiatives. China supports the international financial institutions for their continued role in this respect; we, however, urge all the more strongly that the creditor countries and the commercial banks make substantial contributions commensurate with their status, capacity, and interests.

About one third of the world population in many developing countries is struggling in dire poverty for a minimum livelihood. The international community should be seriously concerned about this situation. The ultimate solution to the reduction and eventual elimination of poverty lies in economic development. We agree that the countries concerned should adopt correct policies, including those to control excessive population growth and to strengthen their own capability to reduce poverty. However, we are of the view that the international community is also duty-bound to provide financial and technical assistance, as well as to foster an environment that will permit development. The economic growth of the low-income countries depends on stable commodity prices, access to world markets, and inflows of concessional funds, which in turn are to a great extent determined by the policies and actions of the developed countries. China is appreciative of the many efforts of the international financial institutions in recent years to make the reduction of poverty one of their priorities. It is hoped that the international financial institutions will take into consideration the situations of different countries, rely on indigenous capabilities, and always strive to achieve practical results.

We have noted with appreciation the progress made by the World Bank in environmental protection and its follow-up action programs. In this connection, the crucial point is the proper treatment of the relationship between environmental protection and economic development. Given the fact that the environmental degradation in the developing countries has its root causes in poverty and underdevelopment, we should not talk about environmental protection simply as an end in itself or treat environmental protection and economic growth as two aspects mutually exclusive, but rather make them an organic and mutually reinforcing combination. We maintain that to impose environmental consideration in operational practice as a condition for lending is neither desirable nor acceptable. We hope that the Global Environmental Facility will be set up as soon as possible, and that it will genuinely add to the World Bank’s existing environmental protection activities in terms of concessional financial flows and technology transfer.

The vitality of the IMF and the World Bank lies in their role in helping to stabilize the international currency system and promote economic development in their member countries. The history of more than forty years has proved that the independent decision-making power, as stipulated in their Articles of Agreements, is a fundamental condition as well as an important guarantee for these international institutions to adhere to their objectives faithfully and fulfill their mandates effectively. It is regrettable, however, that for more than a year the World Bank’s lending to China—a developing country that meets all the criteria for borrowing and has earnestly fulfilled all of its obligations—has been obstructed by external forces. Like most of the member countries, we could not but feel greatly concerned over the future of this institution. We hope that this international institution will overcome external interference as soon as possible and continue with its efforts to execute its mandate.

As far as China is concerned, the present decade is a crucial phase for achieving the overall strategic objectives of its modernization program. We plan to redouble the GNP by the end of this century, raising the living standard of the people to a level of modest prosperity. At the end of 1988, we adopted the policy of rectification and deepening reforms to redress the overheated economy. Thanks to the efforts made over the past two years or so, encouraging changes have taken place in the Chinese economic situation. At present, agriculture has registered a bumper harvest in summer crops; industrial production is accelerating its upturn; absorption of excess liquidity in circulation is proceeding normally; inflation has been further controlled; foreign trade has achieved a surplus; the international balance of payments continues to improve; adjustment in industrial structure and product mix has made some progress; the output of energy and raw materials has increased in varying degrees; resource allocation is being gradually rationalized; and township and village enterprises, which serve as the mainstay of rural economy, have also had further development through adjustment. All in all, the Chinese economy is heading in the direction of continuous improvement.

Of course, we are not free of difficulties. Many deep-rooted problems accumulated over the years in the national economy remain to be resolved. Some new issues, which cropped up in the course of cooling down the overheated economy, have yet to be addressed. In order to meet the targets of economic development strategies for the 1990s, we are stepping up the designing of the Eighth Five-Year Plan and the next Ten-Year Program. One of the objectives of this task is to seek, from the medium- and long-term perspective, a systematic and organic integration of all the aspects regarding future development of the economy and the deepening of reforms.

From our experiences gained over the past four decades, neither economic construction nor reform could be pursued in disregard of the actual situation of the country, in a hasty attempt to achieve results beyond possibility. Therefore, while concentrating every effort on economic constructions, we will firmly adhere to the fundamental principle of promoting a sustained, steady, and well-coordinated development of the national economy.

The Chinese people have further realized from the success achieved during the 1980s that China will have no future without adherence to the socialist road, nor will she have hope without further reforms and opening to the outside world. Therefore, whatever may happen in the international arena, we in China will press ahead with the economic and political reforms in a steady and coordinated manner, and actively develop contacts and cooperations with the outside world. We are also willing to further expand cooperation with the IMF and the World Bank. China will never close its door already opened. And we firmly believe that through the arduous efforts of the Chinese people, together with international cooperation based on equality and mutual benefits, China will surely be able to achieve the established development goals.

Looking ahead, the future of the world is bright. We may have different political, economic, and social systems, but we all cherish peace and seek development. As a member of the international community, China’s economic development cannot be insulated from that of the world economy. We are willing to make our contribution to the strengthening of international cooperation and the promoting of common prosperity.

Statement by the Governor of the Bank and Alternate Governor of the Fund for the Philippines—Jesus P. Estanislao

On behalf of my delegation, let me join in welcoming the new members of our institutions—Bulgaria, Namibia, and the Czech and Slovak Federal Republic. Events are at times dramatic reminders of basic truths. In the Philippines, the drought, a massive earthquake, and now the floods of 1990 have been reminders of how small human undertakings are beside the acts of nature and of its creator. For the world, the latest developments in the Middle East bring forth the basic truth once again: that we are a family of nations, with a code of conduct that needs to be enforced for the common good of all.

It is at times such as these when conviction is deepened that nationalism is too narrow, even regionalism is too limited, and internationalism becomes a necessity. In the 1990s, more than in any previous decade, no one can escape from the interdependencies being woven ever more tightly within the global community.

Due to these intricate and complex interdependencies, all of us are confronted with the continuing need to respond to challenge and with the pressing demand to undertake reforms. Responses and reforms may appear more quickly under other political circumstances. But in an open society, driven by people power, authorities must listen and take heed of peoples’ opinions and sentiments. Procedures must be followed. Negotiations, which often seem too protracted, petty, and partisan, must be undertaken. Consensus must be gathered and built up. Indeed, democracy may seem to be so much slower and messier. But for the Philippines, it is the surer and safer way of getting results.

Our experience during the almost two decades since 1972 has shown that fourteen years of authoritarian rule had brought economic destitution and that more than three years in an open, democratic regime enabled the economy to recover. Hobbled by debt, besieged by antidemocratic forces from the right and the left, daily criticized by sectors that had confused freedom with licentiousness, we have managed within the democratic process to make the economy grow in real terms at 6 percent a year, to bring annual inflation down to below double digits, and to reduce the absolute level of our foreign debt stock, as well as the relative burden of servicing our foreign debt. Since December 1989, however, external shocks have been endlessly hitting the Philippine economy. Growth has consequently slowed down. Inflation rates have gone up to slightly more than 12 percent a year. Imbalances have built up and are now causing considerable concern, especially since they are making the task of carrying out fundamental reforms so much more difficult.

We, however, cannot use the external shocks as an excuse for delaying reforms. Indeed, it is with a deep sense of urgency that we must bring our macroeconomic balances back on track so as to move forward decisively to make the Philippine economy more outward oriented, more internally dynamic, and more externally competitive.

It is precisely when the odds get to be longer and when problems seem to be mounting that we should not sacrifice long-term objectives for short-term gains. We should never lose sight of our long-term vision, even while frontally addressing short-term imperatives.

As we fix immediate problems, we should take care not to create structural problems. It is in this context that I wish to call attention to the common concerns we have about the Philippine economy. We have been able to fix the absorptive capacity problem. We are now able to manage increased capital flows for public infrastructure. We suffer from a higher public sector deficit as a result. Consequently, instead of looking through the traditional narrow lens at the bigger public sector deficit, we must begin to appreciate this positive change behind it and to respond to it differently. Previously, with the absorptive capacity problems, the Philippine economy may not have been grossly underfinanced. Now it definitely is, and the net negative flow of financing has now become a definitive restraint on growth. It has forced us to supplement inadequate external resource flows with heavier domestic borrowings, and these have now reached levels that should not be further breached.

Against this background, our people have found it increasingly difficult to understand why we should be held to rigid rules. We had an opportunity to further reduce our debt stock through cash buy-backs. Until now, we have not been able to take advantage of that opportunity because the rigid rules on fungibility have not been relaxed. A case-by-case approach is supposed to be taken. But until now, there has been a refusal to draw a circle around the Philippine case, despite the external shocks we have been subjected to and the revealed market preferences that are supposed to drive the current debt alleviation program. In the current environment, when debt-stock condonation and debt-service condonation have been formally presented before the U.S. Congress and other forums, and when other innovative debt-alleviation schemes have been initiated at the official level, the Philippine people are confused and frustrated that despite our good record of foreign debt management, we are unable to proceed on the second round of our debt-reduction initiative because the rules have not been relaxed.

Our domestic rhetoric and internal political dynamics oftentimes cause confusion and exasperation even among friends who are supposed to understand democratic complexities. Let me assure my fellow Governors, however, that no responsible sector of Philippine society—be it the executive branch or the legislative branch, be it church or business—seriously advocates unilateralism in our foreign debt management. We still believe confrontation to be the wrong way and negotiation to be the smartest route toward the best results. We are staying on course, arguing for our cause through reason and appeal to the moral principles of justice and solidarity. We are not measuring the strength of our position by the intransigence of our stand, nor by the stridency of our statements. But we cannot hide our impatience nor can we rein in our earnest efforts toward faster movement, greater flexibility, and effective, immediate maximum debt relief.

Flexibility is a requirement for effectiveness. We cannot merely impose conditionalities, disregarding concessionalities. We cannot mechanically project numbers, disregarding the human face of reforms, because, if we want reforms to succeed, they have to be sold with their costs accepted and their gains widely understood.

The Philippines, together with the rest of the world, stands at an important crossroad. Either we go uphill toward full reform, or we slide right back to where we were in the crisis period at the beginning of the previous decade. Our choice is as clear as that made by people power everywhere. We are willing to pay the price of that choice. Our prayer is that we will find more than token understanding as we persist in hanging on to that choice, price and all.

Statement by the Governor of the Fund and the Bank for Kuwait—Sheikh Ali Al-Khalifa Al-Sabah

On August 2, Kuwait, an active member of the Bretton Woods institutions, a member of the United Nations and the Arab League, fell victim to a naked act of brutal aggression committed by the Iraqi regime.

With no provocation or justification, a ruling tyrant in Iraq invaded our country, shattered and looted our economy, inflicted untold hardships on the people of Kuwait and rendered homeless hundreds of thousands of innocent people.

This wanton act of aggression has no precedent in the annals of Arab history. Never before has an Arab country done to a sister country what Saddam Hussein did to the people of Kuwait.

The crude and calculated invasion of Kuwait by Saddam Hussein violates the most basic principles of international law, tramples on all norms of human decency, and makes a mockery of Arab brotherhood and solidarity.

At this difficult time, we are heartened by the fact that the aggressor stands isolated and condemned by the world community. For the first time, all nations of the world—East and West, North and South—are unanimous, not only in their condemnation of aggression but in their determination that the aggressor must not benefit from his aggression. No words can express the gratitude of the Government and people of Kuwait to all those who stood up in defense of law, justice, and world order.

Since its independence in 1961, Kuwait has always endeavored to be a responsible member of the world community. Our oil policy has reflected the need for stability of oil prices at levels which are conducive to sustained growth in the world economy. Our investment policy has reflected our confidence in the international financial markets as well as the emerging markets of the developing countries. It has demonstrated our long-term commitment to foster the development of our country through technology, management, and the promotion of export markets in an increasingly competitive environment. Last but not least, our aid policy—and I want to emphasize this—has reflected our resolve to contribute to the development of other developing countries and to work closely with Arab regional organizations, the World Bank Group, and the IMF toward stable and sustainable economic growth. It is a matter of pride for us that the Kuwait Fund for Arab Economic Development was the first development institution created by a developing country to help other developing countries. Over the last twenty-eight years, the Fund has been actively involved in development assistance. By the end of June 30, 1990, Fund commitments had reached a level of KD 1.7 billion ($5.8 billion), benefiting 65 developing countries. As I already indicated, the Fund will continue its development operations and will save no effort to pursue the realization of its objectives through close cooperation with beneficiary countries. Kuwait also took the initiative in establishing both the Arab Fund for Economic and Social Development and the Inter-Arab Investment guarantee corporation and played an instrumental role in the creation of the Arab Bank for Economic Development in Africa and the OPEC Fund for International Development. We are also proud to have been the first developing country on IDA’s donors list.

Soon after independence, our country adopted a constitution based on democratic principles, freedom and security of the individual, and freedom of the press. Our people will remain united and committed to continue the evolutionary process after the end of the occupation.

During those years, we emphasized education, institution building, and management skills. Many of our institutions and those in partnership with other Arab countries are well established in international markets. These include, apart from the Kuwait Fund, the Kuwait Investment Authority, Kuwait Petroleum Corporation, Kuwait Institution for Scientific Research, the Arab Fund for Economic and Social Development, and a number of other banking and investment institutions. In all of them, development is a joint effort between Kuwaitis and other nationalities who have made Kuwait their home.

Our citizens also realize that with prosperity comes responsibility. At the time of the invasion, there were more than 70 Kuwaiti nongovernmental organizations contributing substantially toward clinics, schools, and emergency relief in the poorest countries of the Middle East, Asia, and Africa.

Today, in spite of the occupation, the legitimate and recognized government of Kuwait, headed by His Highness the Amir of Kuwait Sheikh Jaber Al Ahmad Al Sabah, and its major institutions continue to function. While there is extensive damage to physical assets inside Kuwait, external assets are safe. By the end of the second week after the invasion, the Kuwait Investment Authority was in full control of all foreign assets. The Kuwait Petroleum Corporation continued its activities of exploration, production, refining, and marketing operations. The Central Bank continues to support foreign operations of the Kuwaiti banks. Kuwait Airways remains in operation through charters and leases and it is shortly expected to begin regular services out of Cairo. The Kuwait Fund and the Arab Fund have re-grouped skeleton staff and are expected to begin operations soon.

Our priority has been to keep as many institutions as possible in operation and to function normally in the international market. On the other hand, it is so essential for us to emphasize the necessity of the Kuwaiti banking system to meet unconditionally its foreign obligations pertaining to the interbank and foreign exchange transactions. The Central Bank of Kuwait is working in this direction and the banks are in the process of reconstructing their books, and in a matter of weeks, we hope to solve this issue to the utmost satisfaction of the world banking community. This would not have been possible without the close cooperation and coordination of the countries in which Kuwaiti assets are located and the dedication and loyalty of our multinational staff.

The invasion of Kuwait is expected to precipitate a severe economic crisis in countries whose economies are strongly linked to the Gulf. The international community should respond positively by providing additional concessional assistance to countries most immediately affected by the crisis. We also expect the Fund and the Bank to assist member countries in developing policy responses, adjusting their lending programs to meet each country’s changed circumstances, and mobilizing and coordinating donor support. The Fund and Bank also should continue to monitor the impact of the crisis, particularly with respect to a large number of developing countries that have adopted strong adjustment programs that remain vulnerable to a deteriorating external environment. Many of the countries affected by the crisis continue to be burdened by debt, making it difficult for them to put their economies on a sustainable growth path. The international community has, over the past two years, developed several initiatives to reduce the debt burden of both the low-income and middle-income countries. We would urge the donor community to widen the debt-reduction options for the countries affected to include substantial reduction of official debt.

Kuwait has always stood ready to bear a fair share of the burden, and more, because of our strong commitment to development. Today, that commitment remains the same, but with even greater resolve.

We have allocated $2.5 billion to assist countries immediately affected by the crisis in addition to some assistance toward food, shelter, and transport of evacuees through international organizations such as the Red Cross and the Red Crescent. This is besides the assistance of the Kuwait Fund. We also intend to increase our contribution in IDA-9 to support the efforts of the poorest members and have indicated a willingness to generously support further IBRD and IMF efforts to help in the adjustment process of those countries most affected by implementation of UN resolutions. We will also actively support and participate in the Gulf Crisis Financial Coordination Group announced this afternoon by President Bush, a leader whose commitment to peace is only matched by his determination to resist aggression and defend international law.

With respect to debt, we plan to pursue His Highness, the Amir’s debt initiative more vigorously to ease the burden on the poorer highly indebted countries. The initiative calls for:

First, debt and debt-service reduction by official and commercial creditors and in some cases total forgiveness, on a case-by-case basis, to allow sustainable adjustment and growth. This excludes national, regional, and multilateral development institutions.

Second, flexible programs with realistic conditionalities by the World Bank and the IMF to include appropriate measures, such as social funds to alleviate the effects of adjustment on the poor.

Third, expansion of technology transfer, human resource development, and technical assistance with the aim of conserving national resources and protecting the environment in a joint effort between industrial and developing countries.

It is our unshakable faith and hope that Kuwait will rise again to take its place as a full and honored member of the world community. To achieve this noble goal, no sacrifice is too great for the people and Government of Kuwait.

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

First, let me express my warm welcome and best wishes to our new members and guests participating in the Annual Meetings, especially to the Czech and Slovak Federal Republic, since that country is not only our neighbor but has also become a fellow member of our constituency. We take great satisfaction in seeing this country, one of the founding members, rejoining the Bretton Woods institutions.

The joining of these countries carries our organizations a step further toward the founding fathers’ vision of them as global instruments for promoting the sound development of the world economy. As the scope of their actions comes ever closer to the truly global, the Bretton Woods institutions will meet new challenges and shoulder much greater responsibilities. Given the performance of the Fund and the Bank over the past forty-five years, I am confident that they will be equal to their new task of shepherding and supporting countries through their ardently desired process of transforming their centrally planned economies into market-oriented economies. The first requirement for enabling the Fund and the Bank to play the role assigned to them is to provide them with resources adequate to the task. For this reason, the Ninth General Review of Quotas of the Fund, on which we agreed a few months ago, should be ratified by all members so that it can enter into force as soon as possible.

Another task adding to the great urgency of adequate funding is the recent crisis in the Persian Gulf region. The adverse effects of the oil price hike will damage the adjustment programs of both the developing countries and the Central and Eastern European countries. I acknowledge the immense efforts and great flexibility shown by both the Bank and the Fund up to now; there can be no doubt that in the future the Bank and the Fund will have to make full use of their existing instruments to cope with the pressing problems of both groups of countries. I wish to stress that the provision of technical assistance, on both the macroeconomic and microeconomic levels, is especially important. To help with the transition of the countries of Central and Eastern Europe, another important multilateral assistance organization, the European Bank for Reconstruction and Development (EBRD), was created some months ago. I hope that this new institution can begin operations as soon as possible and that it will be able to work in close cooperation with the Bretton Woods institutions.

The multilateral efforts to support the economies in transition will need to be supplemented by the donor community on a bilateral basis. Austria has created various instruments for its support of the transition process in Central and Eastern Europe, notably the East-West Fund, which supports investors who are willing to make direct investments in Eastern Europe. Besides this, my country has been very active in providing technical assistance, either on a multilateral or on a bilateral basis.

Another serious consequence of the Gulf crisis is its damage to the economic prospects of the oil importing, debt-distressed developing countries. We have to find efficient ways of easing the extra debt burdens now imposed on these countries. Austria supports all multilateral initiatives for debt and debt-service reduction, especially for the poorest countries. Therefore, I intend to propose to the Austrian Parliament that it examine the possibility of reducing or canceling official Austrian claims on the sub-Saharan countries that are eligible under the Special Program of Assistance.

Just before these Annual Meetings began, there was another meeting of the group discussing the Global Environmental Facility. I hope the negotiations for its creation can be successfully concluded in the next few months, for I am convinced that this facility is urgently needed to solve our global environmental problems. Austria will be ready, when the time comes, to make an appropriate contribution to the Global Environmental Facility.

Finally, I come to the most salient issue of these last months of 1990: the successful conclusion of the Uruguay Round. An open multilateral trading system is even more important than aid flows for sound long-term development. In their adjustment programs, many developing countries have included import liberalization on a unilateral basis, knowing that trade barriers hurt both the importing and the exporting countries. It would be highly desirable for the industrial countries to use these last weeks of Uruguay Round negotiations to match the willingness of the developing countries by providing access to their own markets on a generous basis.

Let me conclude by once more expressing our thanks to the Bretton Woods institutions for their valuable contributions to economic development and my conviction that they will be able to address the new challenges of the future with the same success they have achieved in meeting the challenges of the past four and a half decades.

Statement by the Governor of the Bank for Israel—Michael Bruno

It is an honor and a privilege to address this distinguished gathering on behalf of the State of Israel. We wish to welcome Bulgaria, the Czech and Slovak Federal Republic, and Namibia to the Fund and the World Bank.

The Annual Meetings of the Fund and the World Bank provide an opportunity to reflect on the pertinent problems of the world economy as well as on the common lessons of reform processes going on in individual countries. Much has been and will be said during these meetings about the issues of international economic policy, be it the need for the enhanced flow of financial resources from the developed economies to the less-developed ones, the need to keep more open and liberal trading systems, the impact of rising oil prices, or the problems of coordination among the industrial countries, which in turn determine the growth and stability of the world economy as a whole. We would like to reflect here mainly on the lessons that can be derived from both the successes and the failures of adjustment and structural change that have been going on in several semi-industrial economies in the West and more recently started also in the East.

During the past decade, several countries have gone through rather extreme inflationary experiences, largely as a result of international crises reflecting failed responses to external shocks or mounting debt problems. External causes apart, these crises can almost always be attributed to common internal roots, notably large and sustained budget deficits. Yet the nature of the inflationary process across countries and over time has varied and so has the mix of stabilization cures. Both the common features as well as the differences form an important lesson for future policy formulation.

The inflationary process in some of these cases, such as Bolivia (and more recently, Yugoslavia, Poland, and, through failure of earlier stabilization attempts, also Argentina and Brazil), has reached hyperinflation at more than 50 percent per month. This process is bound to be of relatively short duration (say, no more than two to three years), because it is highly explosive. Its shock cure—no gradualist approach could ever work—rests on the orthodox measures involving sharp fiscal (and monetary) reform.

Cumulative recent experience has also drawn attention to the somewhat different phenomenon of high (chronic) inflation, which is a prolonged and more stable process. It may last from five to eight years and show monthly rates of, say, between 5 percent and 25 percent. This, for example, characterized the inflationary process in Argentina, Brazil, and Israel up to 1985 and in Mexico up to 1987. The quasi-stability of that process comes from an inherent inflationary inertia, which in turn is strongly tied with a high degree of indexation or accommodation of the key nominal magnitudes (wages, the exchange rate, and the monetary aggregates) to the lagged movements of prices. It is the obvious way in which an inflation-prone system attempts to protect itself from the evils of inflation, thus giving it a longer lease on life and delaying its more fundamental cure.

The origin of the latter, as in the case of hyperinflation, comes from government finances. Its cure by necessity must involve the same sharp orthodox fiscal (and monetary) measures. Similarly, the very high rate of inflation makes a gradualist approach too costly, if not impossible. Yet, there is one major difference in such chronic inflation cases. When there is inflationary inertia, the orthodox cure, although necessary, is not sufficient in and of itself.

The correction of fundamentals may not, by itself, remove inflationary inertia, as the Mexican example in the mid-1980s has shown. Supplementary direct intervention in the nominal process, such as a temporary synchronized freeze in wages, prices, and exchange rates, may be extremely important, because it can substantially reduce the initial cost of disinflation and thus make it socially and politically more palatable. This two-pronged approach to stabilization, applied to Argentina, Israel, and Brazil in 1985-86 and later on to Mexico, came to be known as the heterodox program. Two of these countries, however, Argentina and Brazil, failed to stabilize, mainly because their fundamentals were not set in place, and the two countries subsequently went into hyperinflation, which is being attacked by orthodox measures. The lesson of that experience is that the exercise of wage-price controls with insufficient, or only temporary, fiscal correction will inevitably lead to an inflationary explosion. In the other two countries, Israel in 1985 and more recently Mexico in 1988, the heterodox stabilization program has been successful, while structural adjustment is still going on.

Successful adjustment inevitably involves real unemployment costs. In Israel, the cost of disinflation appeared with some delay. Two years after a seemingly costless transition from 500 percent to 20 percent annual inflation, the economy went into a deep two-year slump, leading to a substantial rise in unemployment during 1989. While some unanticipated events may have deepened the recession, its main cause was rooted in the slow recuperation from the distortive effects of a long (15-year) inflationary era as well as real wage overshooting, excessively high initial real interest rates, and a heavy tax burden on the business sector. Since then real interest rates have come down sharply, real unit labor costs have recently started falling in the wake of rising unemployment, and output is beginning to grow again. One of the lessons seems to be that without a temporary cost in rising unemployment, it is hard to establish government credibility in following a stable exchange rate policy immediately after the initial shock of stabilization.

In contrast to Israel, Mexico’s recent example shows that early awareness by a determined political leadership of the depth of the crisis—before annual inflation hits 200 percent—can save some of the more painful adjustments afterward. A more severe external crunch, motivating quick fiscal action, and a more flexible labor market, cushioning the internal shock in Mexico, have certainly helped a lot. Implementation of a bold structural adjustment program, including the privatization of state-owned enterprises and vigorous deregulation and liberalization of external trade, may explain why, in spite of relatively high real interest rates and a real appreciation, private investment and renewed growth can take place during an ongoing stabilization process.

High inflation, after all, is but one manifestation of an underlying deep crisis in the real economy. Even successful stabilization of prices is in most instances no more than a necessary first step in a more protracted structural reform process, almost like anesthesia preceding the more serious real surgery. This is borne out in many of the more successful recent adjustment efforts. While Chile’s stabilization, for example, was lengthy and painful, its very recent history is especially illuminating, since it represents a stage that has probably not yet been reached in other successful stabilization experiences. Well-functioning goods markets, a competitive real exchange rate, a restoration of basic macroeconomic balances—all of these have been conducive to a resumption of the noninflationary growth of exports, investments, and GDP. The structural reform process in my own country, which was slow to come about, has very recently received an extra push. Two weeks ago, the Israeli Government decided on a series of further liberalization measures to open up the labor, capital, and foreign exchange markets. This forms part of a market-oriented reform strategy, the need for which was reinforced by the massive influx of immigrants. At the same time, it will help prepare the economy for the new Europe of the 1990s.

Recent dramatic developments in Eastern Europe have turned our interest in the direction of the economic reform process going on in that part of the world. It is interesting that in spite of the vast difference in structure and political-economic regime, the first adjustment stage of a deep reform process closely resembles the above shock therapy. Yugoslavia’s and Poland’s reform programs are the most recent fresh examples. In spite of the institutional differences there are many lessons to be learned from the Western experience and many pitfalls to be avoided. One common lesson is that a strong political leadership that credibly expresses its preference for stabilization and structural change as well as a social consensus on the key economic issues (even if divided on other political issues) are important prerequisites for the success in both Western and Eastern groups of countries. Their absence explains much of the recent failures of stabilization.

The structural reform in Eastern Europe poses great challenges to our way of thinking on economic policy, since neither theory nor previous experience tells us how one should go about moving from a highly centralized, collective property, command economy to a decentralized, private property, market-oriented economic system. Partially liberalized markets may give the wrong signals about pertinent prices for business planning. One example of that is the irrelevance of a free-market-determined exchange rate for export planning when foreign exchange is the only means of saving in an otherwise distorted economy. In a case like this, domestic currency becomes grossly undervalued because the demand for foreign exchange is then dominated by portfolio investment considerations and not by the supply and demand for tradable goods.

Another likely mistake is to believe that moving from a centrally controlled system to a market-oriented one may mean that everything, including fiscal and monetary policy instruments, should be decentralized. One of the main problems of a centrally controlled system is the existence of hidden public sector deficits originating in the quasi-fiscal, cheap credit allocation functions of central banks as well as in the collectivization of losses stemming from lack of financial accountability at the individual enterprise level. It is important to stress that even in the best run and most liberal market-based industrial economies, monetary and fiscal policy must always remain under very strict central control.

In my own country, although it is primarily a market-oriented economy, there have been trade-union-owned as well as collectivized subsectors of the economy, which were run on the basis of a mutual guarantee and a soft budget constraint. These are now undergoing very tough and painful reform processes with an emphasis on establishing microfinancial accountability. Having to do this for the whole economy, as is the case in Eastern Europe, must be a very tall order indeed.

The role of the Fund and the World Bank in promoting and monitoring the adjustment and structural change of the Eastern European countries will be central in the coming years. Another very important agent in promoting and financing the reform process will be the newly established European Bank for Reconstruction and Development, of which my country is proud to be one of the founding members. If there is one central lesson that has been learned from all recent country adjustment programs, both the failed and the more successful ones, it is the absolute necessity of supporting the internal reform with the variety of sustained, even if temporary, external financing arrangements through, or with the help of, our international institutions. Without these, the internal economic and social costs of adjustment will make the task insurmountable. One example of such need, in the context of Eastern Europe, may be the use of foreign loans to finance the reconstruction of individual enterprises in the process of liberalizing and privatizing the production and distribution systems. Another role will be to support joint ventures and foreign private investment.

To sum up, based on recent experience, one can be confident that a determined and forward-looking government, if supported by internal social consensus and prudent economic support from outside, can successfully transform even the most ailing economic system.

Statement by the Governor of the Bank for Greece—Efthimios Christodoulou

Before I begin, I would like to welcome the representatives from Namibia, the Czech and Slovak Federal Republic, and our neighbors from Bulgaria, as well as the special invitees from the Soviet Union, to this meeting. I hope that these last will soon be counted among our members.

The state of the world economy reflects the effects of policies pursued over the last year, but it is also influenced by the crisis in the Persian Gulf and extraordinary events and developments in Europe. In 1989, world output growth decelerated while consumer prices increased at a faster pace. However, the slowdown in economic activity was not universal. In certain low-inflation European countries, output growth in 1989 was the highest of the 1980s, while in most other European countries it remained at the high 1988 levels.

The acceleration of inflation in the industrial countries in 1989, particularly in the first half of the year, reflected higher U.S. dollar prices for oil and non-oil commodities, high rates of capacity utilization, and inclement weather in some countries.

Projections made by the IMF staff prior to the Gulf crisis, on the assumption of unchanged policies, envisaged a deceleration of both world output growth and of inflation in 1990, while projections for 1991 suggested that economic activity would pick up and inflation would stabilize.

These projections have recently been adjusted in light of the anticipated likely effects of developments in the Gulf. According to IMF staff projections, the rise in oil prices is expected to produce a moderate decline in GDP growth and a moderate increase in the inflation rate of industrial countries. It is evident, however, that the new oil shock will be a major challenge for the oil importing developing countries and Eastern Europe, which are going through a difficult phase of transition, facing serious external debt problems and trying to implement wide-ranging structural reforms.

The crisis in the Gulf poses a threat to the world economy. Although conditions in the world oil market are less tight today than in 1973/74 and 1979/80, when the two oil price shocks occurred, a continuation of the present crisis could destabilize markets. To limit the stagflationary effects of such an event, the policy mix should be adjusted appropriately. If estimates about the duration of the crisis warrant it, putting strategic oil reserves of OECD countries on the market should be seriously considered. According to some estimates, after production adjustments the anticipated actual reduction of oil exports from the Gulf will amount to only 5.5 percent of the world oil supply, and if this is true, it should not be allowed to destabilize markets with detrimental effects on production and inflation.

The effects of persistently higher oil prices could be very serious for a number of oil importing countries, like my own, that are already engaged in stabilization and structural reform efforts. Their situation will be aggravated by lower external demand, higher inflation, and higher interest rates; in many cases, the required import adjustment may be difficult to achieve in the short run without major dislocations. A careful reassessment of the adjustment and financing needs of these countries is required on a case-by-case basis, if past mistakes are to be avoided. It is unavoidable that real resources be transferred from the oil importing industrial and developing countries. We must make sure, however, that this does not entail the abandonment or postponement of long-term strategies aimed at redressing macroeconomic imbalances, increasing efficiency, emphasizing market mechanisms, and raising capital formation. This calls for the coordinated action of every agent and mechanism involved.

Oil importing developing countries, particularly some low-income countries, will bear the brunt of the crisis, in terms of reduced growth and deterioration of their external accounts. Coordinated action by the countries themselves, the IMF, the World Bank, and the international community must therefore be strengthened. Leaving aside the frontline countries—for which an international donor program is already being developed—assistance schemes must be quickly devised for those oil importing countries that are in the middle of applying strong macroeconomic measures and structural adjustment programs.

In 1989 and 1990, the world witnessed a series of extraordinary events that are bound to change the shape of the world economy. One set of events is related to the sweeping changes that are taking place in the political and economic systems of Eastern European countries. Another concerns the increased momentum toward European integration.

The restructuring and opening of the economies in Eastern Europe will have positive effects for the world economy in the long run. However, the introduction of sweeping reforms could have adverse consequences for these countries in the short run. The European Community is playing an active role in assisting the process of restructuring by providing financial and technical assistance. The European Bank for Reconstruction and Development, which will provide technical and financial support to Eastern Europe, in cooperation with the IMF and the World Bank, is expected to play an important role in this process.

In 1989 and 1990, the process of European integration gained momentum. Two intergovernmental conferences will convene before the end of the year to negotiate a revision of the Treaty of Rome, as required for the realization of two fundamental objectives: economic and monetary union, and political union. The first stage of economic and monetary union started on July 1, 1990, and by its end all currencies of the member states will join the exchange rate mechanism of the European Monetary System, all capital controls will be abolished, and all remaining obstacles to the free movement of persons and goods will be removed.

The process of European unification will have obvious beneficial effects, in terms of world political, economic, and monetary stability. Its success, however, depends on a number of conditions that must be fulfilled. The process must be completed in the minimum possible time, so that the expected benefits show up as soon as possible to counter the unavoidable costs of transition. The process of economic and monetary union must move in parallel with the process of political union, since no progress can be achieved in one without the other. Furthermore, for monetary union to be accomplished, economic union must proceed at an equal pace, since it would be impossible to establish irrevocably fixed exchange rates and a single currency, without having attained all the economic goals explicitly set in the Single European Act. This calls for enhanced fiscal discipline, as well as more efficient mechanisms for economic and social cohesion. For the success of the whole assignment, it is imperative that all EEC member countries fully participate in all stages of the process involved.

The successful transition to the final stage of economic and monetary union, with a single monetary policy and a single currency, depends on rapid nominal convergence among the member economies and increased coordination of policies. Without rapid nominal convergence, a regime of fixed exchange rates combined with free capital movements might produce serious imbalances and tensions in financial markets.

The European Community remains committed to open markets and to the strengthening of economic relationships with the rest of the world. The renewal of the Lomé agreement demonstrates the willingness of the Community to maintain and broaden its trading relations with the rest of the world, in particular with the developing countries. The Community also urges other countries to make efforts to meet the deadlines regarding the objectives of the Uruguay Round.

The implementation of trade liberalization measures will help the developing world. In this connection, it is encouraging to see that the cooperative debt strategy is yielding certain, albeit limited, results and that many over-indebted developing countries are now implementing suitable structural adjustment policies.

The need for direct financial assistance is more obvious in the case of the poorest, heavily indebted countries. It is hoped that the negotiations for the refinancing of the World Bank’s Special Program of Assistance and the replenishment of the African and Asian Development Funds will come to a timely and positive conclusion.

In this connection, if I may point out, it is satisfactory that the recent conference of the UNCTAD in Paris was marked by convergence, despite existing differences on some aspects of debt, public aid to development, human rights, and the environment. The program of action for the next decade, compared with that of the 1980s, is certainly more concrete and susceptible to synergies and coordinated efforts. Proper weight must be given to restoring productive apparatus, promoting private sector initiative, and freeing market mechanisms, as well as to coordinating the mobilization of all partners involved, including all social partners and nongovernmental organizations.

Let me now refer to economic policy in my country. During most of the 1980s, a policy based on extensive government intervention, ever-increasing public and external borrowing, and unrealistic price and incomes policies, brought the Greek economy to the verge of a breakdown. At the end of 1989, major problems facing the economy fell into two categories: sizable macroeconomic imbalances and serious structural rigidities, which had accumulated over the years. At the beginning of 1990, the public debt/GDP ratio was projected to be about 110 percent, growth and investment prospects were deteriorating, inflation was accelerating, and the current account deficit was widening. High interest rates, required for monetary stability, exerted downward pressure on capital formation and boosted public debt-servicing outlays. Imports were growing at an accelerated pace, while exports decelerated owing to the slowdown in world demand and to deteriorating relative price competitiveness.

Dealing with macroeconomic imbalances and promoting sustainable noninflationary growth had become increasingly difficult, as structural inefficiencies prevented rapid expansion and diversification of the resource base. It was clear to the new government, which was elected last April, that in these circumstances proper solutions should be sought only within the framework of a comprehensive medium-term adjustment program aimed at both redressing imbalances and initiating extensive structural reform. Such a program is currently in force, covering almost a four-year period (1990-93) during which the inflation rate is targeted at one-digit figures from the current 20 percent average annual rate.

A central element of this medium-term program is fiscal consolidation that will reduce the net PSBR/GDP ratio by 11.5 percentage points. The primary deficit is expected to be reduced to around 5 percent of GDP in 1990, from 9.4 percent last year, and will gradually evolve into a 4 percent surplus by 1993. Fiscal consolidation will ease the task of monetary authorities. A downward trend of interest rates is expected as inflationary expectations subside and government borrowing diminishes.

The medium-term program combines macroeconomic stabilization with far-reaching structural reforms, including tax reforms and the privatization of publicly controlled enterprises. The four-year strategy aims at tackling major structural deficiencies, such as overregulated output and factor markets, antiquated public administration structures, a financial structure subject to serious constraints, and selective subsidization; incomes policies that discourage work effort and the acquisition of skills, labor-market regulations that reduce private employment opportunities and induce the public sector to act as a substitute for unemployment benefits; and insufficient economic and social infrastructures, especially in education, health, transport, communications, and utilities.

In the last five months, important tranches of measures initiating the medium-term program have already been introduced. A first stabilization package, in April, provided for increases in public utility and value-added tax rates and in excise taxes on oil, tobacco, and alcohol, as well as for substantial cuts in government subsidies and in the wage bill of the public sector. Soon after, a package of privatization and liberalization measures was introduced, whereby monopoly privileges of some public enterprises were abolished, and trade intervention agencies were closed down. Procedures are now under way for the privatization of publicly controlled manufacturing firms. A new Law for Modernization and Development was passed last summer introducing major changes in labor-market legislation measures to modernize public administration, provisions for the development of the stock exchange, and a more efficient system of investment incentives. A bold social security bill is now before Parliament, introducing major reforms in pension schemes, that will rationalize the system and reduce its substantial deficit.

The Greek Government is firmly committed to fully implement its program, especially in view of the serious implications of the recent oil crisis. As an EEC member, Greece counts on the full support of the European Community, which has already provided explicit assurance that problems facing the Greek economy will be confronted within and by the “European family.” With the Community’s support, the firm implementation of the reconstruction program will soon lead to positive results, which, besides being desirable in themselves, will allow the Greek economy to participate fully in the ongoing process of Europe’s economic and monetary union.

September 25, 1990.

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