Discussion of Fund Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1990
Report to the Boards of Governors of the Fund and the Bank by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee), B.T.G. Chidzero
The Annual Report on the work of the Development Committee for the year ended June 30, 1990 has been formally submitted to the Chairman of the Boards of Governors. I will, therefore, only highlight the major issues discussed and conclusions reached by the Committee. The main focus of the Committee’s attention this year was on the following broad range of problems and issues.
Problems and Issues in Structural Adjustment
The Committee reviewed the experience with structural adjustment programs. It identified the essential ingredients for the achievement of successful programs including, in particular, strong political commitment, broad public support, adequate and timely financing, and an enabling external economic climate. The Committee particularly emphasized the primary role of adjusting countries in the design of their reform or adjustment programs. At the same time, members urged industrial countries to adopt macroeconomic and trade policies supportive of developing countries’ adjustment efforts. In this connection, the Committee decided to discuss the impact of industrial countries’ trade, agricultural, and industrial policies on developing countries in the spring of 1991.
Debt Strategy and Development Prospects of Severely Indebted Countries
The Committee reaffirmed its support and welcomed the progress achieved so far in the implementation of the strengthened debt strategy for the severely indebted middle-income countries. The importance of adjustment programs as a basis for debt and debt-service reduction was also stressed. The Bank and the Fund were asked to continue to provide support for debt and debt-service reduction packages, with the necessary flexibility under their established guidelines. In the case of the lower middle-income countries, largely indebted to bilateral official creditors, members welcomed the recent arrangements by Paris Club creditor countries and the decisions by a number of creditor countries that would contribute to alleviating the burden of bilateral debt of some of these countries. The Committee invited all creditor countries to consider taking further measures on a coordinated and case-by-case basis. The Committee welcomed the debt relief that creditor countries have provided to an increasing number of low-income countries implementing Bank- and Fund-supported programs. Members also welcomed the request made to the Paris Club in the Houston Declaration to review the implementation of the existing options that apply to the poorest countries and encouraged the concerned creditors to complete this review rapidly. The Committee called for early consideration through the Paris Club of the proposals made by France, the Netherlands, and the United Kingdom for further bilateral official debt relief to these countries.
Development of Sub-Saharan Africa
The Committee reviewed the World Bank’s report, Sub-Saharan Africa: From Crisis to Sustained Growth, and endorsed the approach of the strategic agenda outlined in that report. In this context, members emphasized that sustained growth and development required firm commitment and good governance on the part of the concerned sub-Saharan African governments, given their primary responsibility in the design and implementation of their development strategies. The complementary roles 6f the World Bank and the IMF were also stressed. It was agreed that the need to mobilize additional financing for sub-Saharan Africa’s reforms and development remained pressing. Members called on donor countries to pledge sufficient amounts of assistance to ensure the full financing for the second phase of the Special Program of Assistance to Africa. The Committee welcomed the outcome of the Conference on Africa held last July in Maastricht at the initiative of the Dutch Government.
Private Sector Development
Noting the growing emphasis given by a number of developing countries and the countries in Eastern Europe to the role of the private sector and to market-oriented policies in their development strategies, the Committee recognized the complementarity that exists between the public sector and the private sector. The Committee especially encouraged the World Bank Group and the IMF to give a very high priority to private sector development in their operations and to strengthen their activities in this area. The Committee also urged the IFC Board of Executive Directors to complete by the end of the year its review of the operational policies and adequacy of the capital of the Corporation.
Poverty Reduction and Women in Development
The Committee agreed that the objective of effective reduction of poverty is a matter of the highest priority. It was recognized that governments of developing countries have the primary responsibility and the objective of poverty reduction would be most effectively achieved through the adoption of national development strategies based on sound macroeconomic and structural policies. It was stressed that developing countries’ efforts should be supported by industrial countries. To this end, members agreed that aid donors and multilateral development agencies should examine their aid programs to make them more supportive of the goal of poverty reduction. Members also welcomed the commitment by the President of the World Bank to submit to the Board of Executive Directors, for its early consideration, proposals for fully translating the conclusions of the 1990 World Development Report into the Bank’s operational framework.
Recognizing the critical contribution of women to economic growth and development, the Committee encouraged governments and bilateral and multilateral development institutions to further integrate women in development objectives in their programs. Members also urged the World Bank to increase further the resources it devotes to women in development activities and to strengthen its institutional capacity for this purpose.
The Committee reiterated its call on the World Bank and the IMF to keep under study, in close consultation with the GATT, the implications of regional trading arrangements for developing countries’ economic prospects. In respect of the Uruguay Round, members expressed with concern that major uncertainties remained in areas of particular interest to developing countries. The Committee reiterated its call on all parties concerned to reach an agreement by December 1990, noting that this was essential to support the adjustment programs pursued by many countries.
The Committee welcomed the progress made toward the establishment of a program, including funding mechanisms, to address global environmental problems and urged the donors and the World Bank, working in collaboration with UNEP and UNDP, to complete their work before the next Development Committee meeting.
As stressed in the World Development Report, poverty remains a major challenge for all of us in this decade. The implications of the Middle East crisis and economic slowdown in the industrial countries will aggravate poverty and debt problems while making it more difficult for developing countries to pursue their reform and growth programs. Indeed, there is a need more than ever for concerted and action-oriented measures to meet the immediate or short-term problems as well as the long-term objectives of growth, poverty eradication, and sustained development. After serving as Chairman for four years, I have become even more convinced of the critical role of the Development Committee and I am confident that the Committee will continue to play an important and central role in discharging its mandate.
I would like to take this opportunity to place on record my sincerest appreciation and gratitude to all members of the Committee, to the President of the Bank, the Managing Director of the Fund, and their staffs, as well as to the Secretariat of the Committee for their support and cooperation during my tenure as Chairman.
Statement by the Governor of the Bank for the Islamic Republic of Iran—Mohsen Nourbakhsh
O’ You men! Surely, We have created you of a male and a female, and made you tribes and families that you may know each other; surely the most honorable of you with Allah is the one among you most careful (of his duty); surely Allah is Knowing, Aware.
(Holy Qur’an, Chapter 49, Verse 13)
At the outset, I wish to express my appreciation to the organizers of these joint Annual Meetings for their efforts and hope that these important gatherings will effectively lead to a lasting solution of the existing global problems. I also welcome Namibia, Bulgaria, and the Czech and Slovak Federal Republic, who are attending these meetings for the first time as the new members of these institutions, and wish them success in their development efforts.
We are on the brink of a new decade marked by profound developments and challenges for the international community, stemming from greater regional integration, economic and political unification, and the march toward greater market orientation.
The lessons drawn from our experience of the past decade should form an appropriate basis for our policies and strategies for the future. Experience has demonstrated that without effective international cooperation, a lasting solution to the many problems and challenges that confront the world today will be as elusive as ever. Developing and developed countries should work together in a spirit of international cooperation in order to enhance global development and avoid economic crises.
The Persian Gulf crisis that has overshadowed the recent events has different dimensions, one of which is the developments in the international oil market that are going to raise the import bills of many oil consuming countries, including the developing nations. While we fully sympathize and share these concerns, based on past experience, the temporary and reversible nature of such developments should be noted, adding to the uncertainty that surrounds the future trend of the international oil market. As far as we are concerned, a stable international oil market will be beneficial for both the oil producers and consumers. To achieve stability, an effective and meaningful cooperation between consumers and producers is of utmost importance. To this end, the industrial countries are expected not only to refrain from further increasing their prevailing high levels of strategic oil reserves but also to use their current reserves to relieve the current pressure on the international oil market and to restore market stability.
For many oil producing countries in the region, including the Islamic Republic of Iran, this crisis has imposed additional costs relating to the necessity of taking defensive precautionary measures and the costs involved in the settlement of refugees. Tens of thousands of refugees have fled Kuwait and are now settled in the various provinces of Iran, where the reconstruction process had already started, thus disrupting the reconstruction operations. It is unfortunate to note that, shortly after the beginning of the crisis, the price of the industrial countries’ manufacturing exports had risen, resulting in erosion of any increase in the oil export earnings of oil producers and fueling global inflation.
Turning to the world economic situation, 1990 is the second consecutive year in which the global economic growth slowed down, especially in the developing countries. Economic growth in these countries will fall to 2.4 percent in 1990, and, considering their population growth, their per capita income will experience a real decrease. The global slowdown in economic growth was accompanied by inflationary expectations and increased interest rates in the industrial countries, with significant negative effects on the Third World.
The growth of world trade, an important factor in economic development, slowed down in 1989 and is expected to fall further during 1990 and 1991. Developing countries’ terms of trade deteriorated during the past decade, with adverse effects on their economies.
Concerning the debt problem, the rising stock of external debt, as well as the heavy debt burden, significantly contribute to intense poverty and economic problems in many developing countries. Although recent international measures supported by the Fund and the Bank have somewhat alleviated the debt burden of the indebted developing countries, the progress achieved so far is quite limited.
In the area of international trade, the Uruguay Round of multilateral trade negotiations, in which the developing countries have participated for the first time, is drawing to a close, with still many unresolved issues. In this connection, we share the concerns expressed by the General Secretary of the GATT in his remarks in the Development Committee meeting of September 24, 1990, regarding the serious repercussions that may arise if the current negotiations fail. Moreover, we emphasize the position taken by the developing countries as reflected in the September 22, 1990 ministerial communiqué of the Group of Twenty-Four on International Monetary Affairs, regarding the importance of a successful Uruguay Round for the global economy, particularly the developing countries. In this regard, it is to be noted that protectionist trade policies of the industrial countries run counter to their policy proclamations regarding trade liberalization and openness expected from developing countries. Obviously, continuation of such practices may result in countermeasures by other countries, thus aggravating the international trade system.
The industrial countries, commensurate with the greater size of their economies, should contribute significantly to enhance global savings and economic growth, and reduce interest rates as well as inflation. Needless to say, the developing countries will also continue with the necessary adjustments and policy reforms to enhance savings, attract investments, and restore normal international financial relations.
The incidence of poverty has increased in many developing countries of the world during the past decade, so much so that a third of the population of the developing countries—more than 1 billion persons—now live in conditions of poverty. Poverty alleviation, which is now a focal issue on the agenda of international development organizations, cannot come about while there are negative transfers of resources from the developing countries. In fact, effective alleviation of poverty in the world requires greater financial support by donor countries, as well as multilateral development institutions, through greater debt relief, including debt cancellation and the granting of highly concessional financial assistance.
I shall now briefly review the economic developments in the Islamic Republic of Iran over the past twelve months. Upon victory of the Islamic Revolution in 1979 followed by the outbreak of the imposed war, most sectors of the economy faced recession, and production fell considerably, to the extent that the economy experienced negative GDP growth for a number of years. However, in 1989, upon the adoption and implementation of new economic policies by the Government, the rate of growth of the GDP turned positive.
The preliminary estimates and projections indicate that, based on improved economic prospects, the GDP will increase significantly in 1990 compared with 1989. The industrial sector has experienced marked expansion, and gross capital formation and investment volumes have been within the planned targets. New economic policies resulted in an increase of 52 percent in government revenues in 1989, which is about twice the figure projected in the Five-Year Economic Development Plan. The budget deficit in 1989 was halved compared with the preceding year, while most of the development projects have received adequate funding.
According to the reports prepared by the Fund consultation mission that visited the Islamic Republic of Iran in February 1990, the budget deficit was contained to between 4 and 8 percent of GDP during most of the war years, a remarkable figure compared with those countries that have not even been involved in a war. The budget deficit is expected to be limited to 4 percent of the GDP in the current year. The report also adds that the defense budget increased by less than 4 percent annually during the 1980s, when the war was still raging.
The new economic policies in Iran aim to increasingly revitalize the various economic sectors, reduce restrictions, enhance people’s participation in economic activities, sell government-owned shares in various state companies and institutions to the public, activate the stock market, establish free trade and industrial zones, and engage in joint investments with foreign firms. Considerable progress was made during the past year in further deregulating the foreign exchange and trade system and reforming the monetary and banking sectors. In this connection, new exchange rates reflecting economic fundamentals were announced, and, in the area of banking, higher rates of returns on bank deposits, based on Islamic modalities, were introduced.
It is noteworthy that through implementation of the First Five-Year Development Plan of the Islamic Republic of Iran, the budget deficit is expected to be eliminated, inflation brought under control, and distribution of income improved toward greater equity. Government revenues will increase through tax reform, and dependency on oil exports will ease.
Improved economic conditions have set the stage for continued expansion. Support and participation of our people in the task of development is encouraging. During eight years of the war, our people accepted hardship and showed great sacrifice and dedication, contributing significantly toward the cost of the war. As a result, our country relied on its own domestic resources and did not resort to foreign borrowing to conduct the war. These prudent financial policies, together with public support and enthusiasm, have now set the stage for our reconstruction drive.
Finally, the recent earthquake that occurred in the north of Iran inflicted heavy human casualties, as well as significant material damages. However, through public participation and government efforts, reconstruction operations have been under way. Meanwhile, I take this opportunity to express our gratitude to all those countries that rendered humanitarian assistance to the victims of this earthquake.
Statement by the Governor of the Fund for the Federal Republic of Germany—Karl Otto Poehl
First of all, I should like to extend a warm welcome to the new members and the special invitees of the U.S.S.R. We are now rapidly approaching the state of true universality of our two institutions.
The IMF and World Bank Group can look back on the period since our last Annual Meetings with satisfaction. Their policy advice and financial support has helped a substantial number of member countries in their pursuit of economic, financial, and structural policies that have improved the prospect for better internal and external economic balance and more solidly based economic growth. Ever so often, such improvements only become apparent after a period of painful adjustment. There is often a temptation to blame these adjustment pains on the unwillingness of the Fund or the Bank, or both, to provide more financial support under less onerous conditions. Faced with large outstanding claims against many highly indebted countries and often difficult negotiations with them, bank creditors also often wish for more generous help from the Fund and the Bank, as from other public sources. But neither the Fund nor the Bank through their support can eliminate the need for appropriate adjustment efforts on the part of borrowing countries and for private capital flows.
We strongly feel that both institutions must adhere to the principles under which they have operated successfully in past years: the IMF as the institution at the center of international monetary cooperation; the World Bank Group as the institution at the center of economic development. Both institutions have evolved over time, their fields of action have expanded in various directions in response to emerging needs, moving them closer together. Closer contacts and cooperation between the managements and staffs have become necessary and are now well established. This cooperation should help assure the complementarity of their efforts, but should also help them retain their separate identities.
Our two institutions are well equipped to meet the calls of the years ahead. The adoption by the Board of Governors of the Resolution to increase the IMF’s quotas has set the stage for providing the financial resources it needs to fulfill its role. I also welcome the progress made in tackling the arrears problem. The expeditious resolution of the remaining arrears cases will be essential for the Fund’s financial integrity and its ability to attract the necessary resources to finance its activities. The history of the existing arrears does, of course, provide important lessons for the Fund; in particular, the need to pay due regard to the repayment capacity of borrowing countries and the medium-term viability of their adjustment strategies. …
Turning to developments in my own country, we certainly can look back on an eventful year. The economy of the Federal Republic of Germany fortunately has been in a strong position to face up to the new challenges. Growth of real GNP has continued strong and unemployment has declined in spite of massive inflows of new labor, above all from Eastern Germany and Eastern Europe. Both developments have occurred in an environment of low inflation. And I hope that this can be continued in spite of the very recent events in the Middle East and the steep increase in oil prices.
The unification process has led already to a substantial reduction of our large current account surplus. This is clearly in the interest of better balance in international payments generally. The adjustment has come about, primarily, through increased imports in response to higher domestic demand in both West and East Germany. It has been helped by a strengthening of the deutsche mark on the exchange markets vis-à-vis a number of currencies.
The positive results of our fiscal and monetary policies over the past few years are a sound point of departure for dealing with the challenges confronting us. We have no illusions about the magnitude of the task. The need for adjustment in the productive sectors as well as in the institutional and “technical” infrastructure in Eastern Germany is very substantial. The unavoidable frictional losses in the course of the changeover and the magnitude of the transfer of resources required are likely to be larger than originally anticipated. In any event, nobody should be surprised to find that decades of economic mismanagement cannot be put right overnight.
Substantial changes are under way, and they are, I believe, quite impressive:
— The currency conversion as from July 1 was effected very smoothly. No “buying spree” has occurred. The supply situation has improved instantly. Free market prices have caused many consumer goods to become cheaper; on average, the price level seems not to be higher than before.
— The establishment of many small- and medium-sized enterprises and substantial recourse to investment credit are evidence of a dynamic response to the new environment.
— The unification of Germany, which will actually be finalized next week, will complete the legal and institutional framework for an efficient market economy including radically new rules for private ownership.
Revitalizing the East German economy can be expected to run along orderly lines. The transfer of real and financial resources will be substantial, but it will not overtax our capabilities within the limits of financial integrity. It will not be brought about by any concessions as far as monetary stability is concerned.
The challenge of German unification will not only test our own performance and political skills. It will, of course, also have an impact on our partners and on the international community as a whole. The conversion of Eastern Germany into a market economy should serve as an encouragement to other countries in Central and Eastern Europe to persevere on the difficult road to reform. It will promote progress toward economic and political freedom and higher living standards, and this certainly not only in Germany. It will thus enhance international political stability and also contribute favorably to the promotion of economic prosperity throughout the world.
Let me quote from the last World Economic Outlook of the IMF: “The overall effect of unification on the world economy would be clearly positive as it would raise output in the industrial countries in the short run and would have favorable effects on the productive capacity of the world economy in the longer run.” The opportunities offered are surely greater than the risks involved. The doors are open to enterprises from all other countries to make use of the new business and investment opportunities, and they are welcome.
There will be no change in the role played by Germany in the international community and in the multilateral institutions. Our commitment to the task of development will remain strong. In 1989, the Federal Republic’s official development assistance (ODA) was again increased markedly. Also, in the current year and in the years ahead we will contribute our fair share toward assisting the developing countries, the burden of unification notwithstanding.
The commitment to European integration at all levels—economic, monetary, social, and political—will also remain at the top of our agenda. The project of the European Economic and Monetary Union (EMU) entered its first stage on July 1, 1990. In December, the Intergovernmental Conference will be convened to negotiate the necessary treaty changes for the further stages, including the establishment of a European Central Bank System. This will be the centerpiece of EMU. It is not surprising that the substance and timing of future steps are hotly discussed between the partner countries. The EMU involves the permanent fixing of exchange rates between member countries and the disappearance of their currencies eventually when a common currency is introduced. The ability of individual countries to act independently of each other has already been reduced substantially as integration of their economies and financial markets has progressed and as exchange rates have been tied together in the European Monetary System. EMU will carry this process to its final stage, depriving individual countries of any remaining scope for independent action, especially in monetary policy. A key part of national sovereignty will have to be transferred to the Community level if EMU is to come about.
In our view the European Central Bank System must be fully committed to price stability as the priority objective of monetary policy; it must be independent of political influence from national governments and EC institutions; it must be comprehensively and solely responsible for monetary policy; and it must be furnished with all the instruments necessary to this end.
It will be the goal of the coming Inter-Governmental Conference to create the legal basis for the establishment of such a system. This is a very ambitious political objective. It deserves all the enthusiasm brought to it by its most fervent supporters. But enthusiasm is not all that is required. Reason and realism are also needed to guide us in the design of a European Central Bank System and of the other key features of EMU, as well as in decisions on the timing of the further steps to move forward to EMU.
Allow me to conclude with a brief word of gratitude addressed to our host country and its people.
Within another week the two Germanys will be fully reunited, only 11 months after the breakdown of the Berlin Wall last November. This event and what followed aroused great sympathy and support all over the world.
Speaking here in Washington today on behalf of my Government, I may be permitted a word of special thanks to our American friends. We have reason to be forever grateful to the American people and Government—and especially to President Bush—for their encouragement and active role over the past year. This is yet another example of the generosity and pioneering spirit that motivate the American people. Without their understanding and support, which could by no means be taken for granted even forty-five years after World War II, all this might have proved impossible.
Statement by the Governor of the Fund for the United Kingdom—John Major
IMF-World Bank Issues
I should like first to extend a very warm welcome to the Czech and Slovak Federal Republic, Bulgaria and Namibia as the newest members of the Fund and Bank. And I look forward to Switzerland and Mongolia becoming members before long. They will all be very welcome.
To existing members I wish to say that I hope they will all soon be able to ratify the Third Amendment to the IMF Articles, so that the Ninth Quota Review can be brought speedily into effect. I know some countries have had doubts about introducing a power to suspend members in arrears, but I hope they will agree that those doubts should now be set aside in the interest of providing the Fund with the additional resources we have agreed. That is important and should not be delayed.
It is no surprise that our meetings this week have been dominated by the invasion of Kuwait by Iraq. Our discussions have tended to focus on the economic impact. But there are wider implications we should not overlook. If we allow Iraq to profit from the invasion and annexation of her neighbor, no small country will feel secure. We must not let that happen. And together, I am sure we will not.
As a signal of our resolve, nothing could have been clearer than the unprecedented cooperation in the United Nations to impose mandatory sanctions. It was impressive and welcome. And that spirit of concern and cooperation has been readily evident at these meetings too.
But there has naturally been concern over the economic implications of events in the Gulf, and particularly the impact of higher oil prices.
I will turn later to the developing countries. But for the industrial countries, higher oil prices will inevitably bring higher inflation and slower growth. It is too early to judge how big a problem we will have to face and how long oil prices will stay high.
But whatever the scale of the problem it is crucial to respond to these pressures with nonaccommodating monetary policies. We cannot avoid an initial impact on inflation. But we can—and we must—prevent it from becoming embedded in higher core inflation. If this means that interest rates in some cases have to be raised, or in others, have to be kept high for longer than would otherwise have been necessary, then that is what we must do. There is no other sensible policy. There is no scope for easing monetary policy to offset the contractionary effect of oil prices on activity. I am greatly encouraged by the number of speakers at these meetings who have endorsed this view.
We must also back up a tight monetary policy with appropriate fiscal policies; there must be no relaxing the effort to reduce excessive budget deficits. The apparent imbalance between available savings and intended investment remains considerable and the developments in Eastern Europe and the Gulf can only add to the pressures. Governments must play their part in reducing them.
Fortunately the industrial countries today are better able to face an oil price rise than they were in the 1970s. They have substantially reduced their dependence on oil over the last twenty years. The United Kingdom, for example, has seen a fall since 1973 of some 30 percent in energy consumption when measured relative to GDP. And the underlying strength of our economies is greater.
Furthermore, these days we have a better understanding of each other’s economies and better policy coordination. While that has been widely acknowledged, the extent of the progress we have made will now be put to the test. As yet we don’t know how severe that test will be.
Monetary Debate in Europe
I would like to turn for a moment to the question of economic and monetary union about which there is great debate in Europe. It began in earnest last year, and has been gathering momentum in recent months.
There is much common ground between the member states of the Community. Not least in our ultimate objectives. Together, we have already taken substantial steps toward economic and monetary union, and there are further important changes to come.
The questions at the heart of the current debate are how we should move forward to monetary union and at what pace. The Delors Committee blueprint looks to an early commitment to a single currency and a single monetary authority. I have recently offered a more evolutionary approach. Rather than sweeping away our traditional system of national currencies and replacing it with a single Community currency, I would prefer to see the development of a common currency, the hard ecu, alongside existing currencies. If in the long term it was the wish of governments and of their citizens, this could itself become a single currency. But that is a decision best left for the future.
Whatever the precise decisions we ultimately take, I am clear that if the Community attempted to move prematurely toward monetary union, without greater economic convergence, the strains and stresses on our national economies would be intolerable. I was interested to see that the Bundesbank last week endorsed that view very clearly.
In recent years the European Monetary System has operated as a powerful force for convergence. The performance of those countries within the Exchange Rate Mechanism (ERM) has been impressive. They have manifestly benefited from the framework of monetary discipline provided by the mechanism. Success did not come overnight. Nor by magic. And it has certainly not eliminated the pain involved in bringing down inflation.
But I doubt if this pain can ever be avoided. In time, low inflation will lead to stronger growth and lower unemployment. The more credible the anti-inflation artillery, the sooner this will happen. It is that credibility of purpose that has been one of the hallmarks of the ERM. Increasingly it has functioned like a modern day gold standard with the deutsche mark as the anchor. It is true that conflicts can emerge between the obligations of ERM membership and the evidence from domestic monetary indicators; but these occur less often and for shorter periods than is often claimed. And they need to be weighed against those problems faced by countries outside the mechanism. Reading the domestic monetary tea leaves has become a tricky business that is made still more difficult by the effects of financial liberalization.
I am, therefore, in no doubt that joining the ERM is the right policy for the United Kingdom, and we will join when we are in a position to make a success of it. The most important reason for delay has been the differential between inflation in the United Kingdom and other ERM countries. But what matters here is less the difference between headline figures, which measure what has happened over the last twelve months, than the prospective movements in price levels from now on.
The origins of the upturn in U.K. inflation have been extensively analyzed and discussed. As we know, to some degree this upturn has been shared by other industrial countries—but not to the same extent.
Since mid-1988 we have had an extended period of monetary tightening. Interest rates were raised to 13 percent in November 1988, 14 percent in May 1989, and 15 percent in October 1989. The effects of this policy have been frustratingly slow to come through. But now the evidence that it is working is unambiguous.
As usual, inflation itself is proving slow to turn down. But it is now only a matter of time before it begins to fall. The headline inflation rate will probably peak soon and diminish noticeably through next year. And before long the tight monetary policy stance should deliver a lower underlying rate of inflation.
For us, as for other countries, the picture is now complicated by the unwelcome increase in oil prices. In some ways the United Kingdom will be less affected than many since we are more or less self-sufficient in oil. The Government’s finances benefit from higher oil prices while the current account is relatively unaffected. But the United Kingdom is by no means immune. Indeed, in the short run, higher oil prices are likely to feed more quickly into the measured inflation rate in the United Kingdom than elsewhere because we have not sought to prevent or delay the proper market response to events in the Gulf.
Higher world oil prices will also contribute to the weakening of economic activity. We now face the likelihood of some months of low growth. It is not possible to say how low. Or, precisely, for how long. That will depend in part on how far businesses and employees raise other prices and wage costs to compensate for higher oil prices. Such action can only add to the weakness of activity and increase unemployment.
I have no doubt that we face the most difficult few months in the cycle. Whatever happens now we are bound to see inflation continuing high while activity weakens and unemployment rises. But we know from past experience that this discomfort will be temporary as long as policy continues to be focused on reducing inflation.
Developing Countries: Debt, Etc.
So far, I have focused primarily on the impact of higher oil prices in the industrial countries. But our discussions here must be equally concerned with the implications for developing countries. Although some parts of the developing world stand to gain from higher oil prices, most lose out. And there are some who suffer more directly from the conflict in the Gulf, not least from the suspension of trade with Iraq.
Just as industrial countries must adjust to higher oil prices, so too must developing countries. For them, the lessons of the 1970s are just as clear. Piling up debt in an attempt to avoid adjustment proved far more painful in the long run. And with real interest rates now higher, it makes even less sense to add to their existing debt burden.
But there is a group of very poor, very heavily indebted countries, particularly in sub-Saharan Africa, which have no realistic prospect of being able to service their debts, even taking account of the relief already available under the Toronto terms. The overhang of debt and the inevitable recourse to annual Paris Club reschedulings places a heavy burden on these countries. That is why I have proposed a four-point plan to help such countries, including doubling the relief available under the Toronto terms and rescheduling all their eligible official debt at the same time, rather than requiring annual reschedulings. I hope all creditor governments will support these proposals when the Paris Club reviews the options for the poorest debtors.
One important step that the industrial countries can take to help developing countries is to open up our markets and pursue a liberal trade regime. The cost to the developing countries of protectionism by the industrial countries greatly exceeds the total value of aid flows. It is a real problem. It is clearly absurd that industrial countries should with one hand encourage developing countries to build up their export potential, and with the other hand deny them access for their goods.
We meet at a crucial time in the Uruguay Round with much still to do if we are to complete the negotiations by the end of this year. It is vital that everyone recognizes the urgency of reaching agreement, and stands ready to make compromises.
Mr. Chairman, 1989 and 1990 have been momentous years. We have seen changes in Eastern Europe, Southern Africa, and elsewhere more radical than any of us imagined just two years ago. More recently we have seen the nations of the world unite to confront a stark challenge to peace and international order. Rightly, we have focused in recent days on the immediate economic effects and our policy response. But we should not forget the clear long-term message of these events: that economic and political freedom, good government, and respect for the individual are not only ends in themselves but the best means to security and prosperity. That, I hope, is the message all of us will take away from these meetings.
Statement by the Governor of the Fund and Bank for India—Madhu Dandavate
At the outset I would like to welcome Bulgaria, the Czech and Slovak Federal Republic, and Namibia as new members, and special invitees from the U.S.S.R.
As we enter the last decade of the twentieth century, the world economy is at a difficult juncture. There were signs of fatigue at the end of the 1980s as economic growth slowed down. The recent developments in the Middle East, which have introduced a serious element of uncertainty into the situation, are bound to accentuate the problems in the industrial countries and even more so in the developing world.
The implications and consequences for the developing world, particularly the oil importing developing countries, would be far reaching. The crisis will increase import bills, reduce workers’ remittances and affect exports to the Middle East. In addition to the economic costs of evacuation and rehabilitation, the human cost in terms of hardship imposed on migrant workers would be enormous. Further, the economic slowdown in the industrial countries would have an adverse effect on export prospects, and higher interest rates would increase the burden of debt servicing. Taken together, these factors would dampen growth and fuel inflation, thereby affecting the living conditions of millions in the developing countries.
The task before us is twofold. In the short term, we have to adopt immediate measures which would minimize the economic and social costs of adjustment for people and countries who can afford it least. In the medium term, we must endeavor to return to the path of sustained growth and price stability in the pursuit of equity and justice in international economic relations.
It was only right that both the Development Committee and the Interim Committee devoted a substantial part of their deliberations to the task of devising a proper international response to the immediate crisis. I was also happy to hear from President Conable and Managing Director Camdessus of the measures that both their premier multilateral institutions propose to take in order to respond effectively to the need for additional financing. …
So far as the International Monetary Fund is concerned, the Interim Committee has already given directions to the Executive Board to expeditiously work out the modalities for adapting its existing instruments, including access to its various facilities, such as the CCFF and ESAF. I would urge the Executive Board to get down to this business immediately and to respond quickly and effectively to the needs of all affected countries. A multipronged effort may be needed as the magnitude of the impact, as well as the eligibility of different countries for different kinds of financing, is not the same. In this connection, we welcome the widespread support in favor of modification of the CCFF for the purposes of providing assistance to cover the impact of oil price increases. We must remember that the oil shock is sudden, unexpected, large, and its duration is uncertain. In this situation, in devising the modifications to the CCFF, attention is to be paid to the need to ensure that access is not reduced because of unrealistic assumptions. In our view, in addition to modification to the existing facility, it is also necessary to review the other facilities to ensure that they can be quickly modified to meet the needs of those countries that cannot be adequately served by the modified CCFF. Mr. Camdessus was quite right in drawing our attention to the fact that the cost of IMF charges is now very high and not within the capacity of many developing countries to bear. High-cost financing of high-priced oil imports will not foster an environment conducive to orderly adjustment. Thus, an interest subsidy scheme should be an indispensable companion to a modified CCFF and other mechanisms.
In the medium term, the importance of a transfer of resources and its far-reaching implications for the world economy cannot be stressed enough. This issue, already of critical importance, has assumed even greater significance in the light of recent events. We are of the view that this issue should once again become the focal point of deliberations in the multilateral financial institutions.
For any reasonable international effort in this area, it is necessary to find ways and means to halt and reverse the recent negative trend in international resource transfers. Our mandate must be to ensure transfer of real resources to developing countries; we seem to be accomplishing quite the opposite. The present trends have to be reversed.
The fundamental objective of development is the removal of mass poverty. Experience shows that poverty reduction cannot be tackled in isolation. For any meaningful and durable assault on poverty, an integrated development strategy is essential. We need growth, but we also need programs that address directly the problem of poverty and unemployment. This is because the backlog of unemployment is so large that economic growth, by itself, cannot suffice to solve the problems within an acceptable time frame. There is evidence of gains made in some productive sectors being eroded by losses in terms of trade. There is also evidence of the process of development and poverty alleviation being stalled due to a sluggish supply response because of infrastructure bottlenecks.
I do not wish to take up more of your time in elaborating on these issues, which have been discussed at length in the Development Committee. I would, however, like to make a few suggestions on the role of the World Bank Group in poverty alleviation. …
We share fully the global concerns about the environment. In fact, environmental issues are not only an important concern of the Government in my country but also involve a large number of voluntary organizations and people at the grassroots level.
We welcome the progress made toward establishment of the Global Environmental Facility. We are glad that it has been recognized that the funding for this facility must be both genuinely additional and concessional. In fact, it would be more appropriate if these funds were to be passed on as an outright grant to facilitate adoption of a program for safeguarding our common environmental heritage.
Coming to issues concerning the international monetary system, we must recognize that the global context is one of dynamic change. Our responses should not, therefore, spring from beliefs which do not take adequate account of reality. The specificities in time and space, the diversity of economic conditions, the different stages of development, and the imperatives of protection of the environment require a qualitatively different response from the one we have given so far and which has resulted in periodic eruptions of disorder in the world economy.
The challenge has to be met squarely by revitalizing the whole concept and the institutional structure of international cooperation. Unilateral or bilateral efforts to reshape the world should give way to a genuinely cooperative effort. Neither unipolar nor tripolar arrangements will ensure a smooth and orderly growth of a multipolar world economy.
It is in this perspective that we should approach the role of the International Monetary Fund. In the first place, the Fund has to be financially strong. The spring meeting of the Interim Committee has to some extent strengthened the Fund through its decision on the Ninth Quota Review. We must recognize that the quota increase, welcome as it is, is not sufficient to address resource needs of developing countries confronted with the challenges of adjustment. We need to do more.
The next item on the agenda has to be the strengthening of the role of the SDR as a reserve asset. The unabated turbulence of the financial markets drives home the lesson that without an international reserve asset, the international monetary system will remain inherently unstable. The central role of the SDR as a reserve asset was recognized long ago. There has been no progress in implementing this objective. In fact, the reverse has happened. SDRs today are a smaller proportion of total reserve assets than they were at the beginning of the 1980s. A fresh issue of SDRs is an urgent necessity, and I hope that the Executive Board of the IMF will return to this subject as early as possible.
Resources are one part of the problem. The other part relates to strengthening the surveillance policies of the Fund in relation to surplus and capital-rich countries. The original role, envisaged by the founding fathers of the Bretton Woods institutions, was to ensure that the IMF plays an equally active role in relation to both surplus and deficit countries. This, however, has not happened as the surveillance role has been largely confined to countries that borrow from the Fund. As a result, a mutually reinforcing network of rights and obligations has not emerged and the fundamental asymmetry in relation to surplus and deficit countries continues.
The Fund has an important role in advising countries in their adjustment programs. While advice and expertise based on international experience are most useful, it has to be remembered that authorities in developing countries have to design and implement sound policies in consonance with their specific circumstances and social priorities. We also have to learn from experience, and to ensure that stabilization and adjustment programs do not suffer from rigidity. The past experience has been that a number of programs have had to be abandoned midway simply because the complexity of the adjustment process was not fully appreciated, and the necessary flexibility in implementation was not observed. I would therefore urge that in devising and implementing adjustment programs, their impact on the people, particularly the poor, is specifically taken into account. Adjustment cannot succeed if it fails to respond to the needs of the people.
We have many challenges to face. The international community has to respond speedily and decisively in order to lay the foundation for a stable, sustained, and equitable growth in the world economy.
Those of us who come from the developing countries feel that despite some progress, our planet continues to be divided into the rich and the poor. Let us endeavor to ensure that through peoples’ involvement and resources and cooperation of the multilateral financial institutions, our cherished dream of building one world without poverty and ignorance is accomplished.
Statement by the Governor of the Fund and Bank for Brazil—Zelia Maria Cardoso de Mello
I am honored by the privilege of addressing you in the name of Argentina, Bolivia, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Spain, Suriname, Trinidad and Tobago, Uruguay, Venezuela, and my own country.
Our countries have a particular perception of the world economic situation. For the past ten years they have witnessed from afar a decade of continuing growth in other parts of the world, mainly in the industrial countries. Our stagnation or slow growth was partly due to the cumulative effect of past domestic policies that, although generating development in the short run, created the seeds of macroeconomic disequilibria, economic inefficiency, and social inequality. There is no denying, however, that the international economic environment played an important role in the process of stagnation and decline of the Latin American countries. Contrary to widespread common wisdom, it was not isolation from the world economy that characterized previous developments in the region, but our inability to change past forms of integration in the international economy combined with a new phase in our relation with the international financial community marked by overborrowing and, of course, its counterpart, overlending. These factors introduced new rigidities in our economies so that when the international economic situation abruptly changed, countries in the region were plunged into a period of recurrent crises. The prevalence of a negative external environment and the lack of durable solutions to the region’s problems, mainly on the debt front, aggravated internal problems and hindered stabilization efforts and structural reforms. Throughout the decade the region seemed to be cast apart from world economic development.
The beginnings of major changes were being felt in the area through the re-establishment of democratic institutions, thus laying the foundation for structural reforms, for a redefinition of our region’s role in the international economy, and for a new partnership for growth between our countries and the international financial community.
It is our firm intention to join this process and to proceed to recover lost ground. New and stronger stabilization programs are being applied with the common aim of defeating inflation and restoring fiscal equilibrium. Structural reforms are under way in tune with worldwide developments to redefine the role of the public sector, reduce its presence in the productive sector, recover the regulatory role of the state, and gradually open our economies to competition from abroad. And, what is more significant, all this is being accomplished in free societies and through the functioning of democratic institutions.
It is in this context that we are determined to find from the international community the support we need to put our economies in order and to solve our common problems, especially the debt overhang. To relaunch growth we need a supportive, more predictable, international environment, in particular a well-coordinated multilateral trading and financial system.
This is especially important at a time when the international economy and the economies of most developing countries again face serious risks. Coupled with the uncertainty generated by recent events in the Gulf area, there is the prospect that the limited progress achieved so far in dealing with some of our problems can be set back.
In these circumstances, we must come forward with appropriate contingency measures of support for affected countries and address our common problems in a coordinated way. We are determined not to waiver in our efforts at stabilization and the resumption of growth. In particular, we urgently need to solve the debt overhang in a way compatible with our stabilization programs and our ability to pay.
Special assistance in the financial, technical, and administrative areas must be provided for the poorest countries to permit them to revitalize their economies. At the same time, official lenders and commercial banks must have special regard for those countries that have managed to avoid rescheduling and are implementing adjustment programs but require new money and refinancing of amortization installments. All these initiatives must be undertaken in a multiyear framework, so that governments can dedicate themselves to taking and carrying out decisions, instead of spending so much time on protracted negotiations.
In another three months the Uruguay Round will come to a close. Latin America has indicated its interests and priorities. It has reaffirmed that the Round must yield balanced results. The trading system emerging from this multilateral exercise must immediately benefit every participant, including developing countries. In order to increase their participation in world trade, these countries need positive results regarding agriculture, textiles, tropical products, and safeguards.
Needless to say, an open and more stable trading environment will help internal efforts for structural adjustment under way in Latin America, through trade expansion and increased efficiency.
In agriculture, the time has come to define the exact coverage of the negotiations and to adopt measures conducive to the elimination of export subsidies and internal support. In textiles, if no decision is taken now on the modality for the phasing out of the Multifiber Arrangement, there will be no time to complete the negotiations before December. Results of negotiations on tropical products should not be held back by difficulties in other areas. It must be made clear that results concerning these products are not only needed but essential to a final package. A more discriminatory discipline on safeguards is essential to guarantee the stability of concessions.
Latin America has contributed to the successful outcome of the negotiations. It has shown flexibility and understanding and has offered alternatives, particularly in the new areas, to advance the process. Other parties must also take their share of responsibility and show the same willingness to compromise. Latin America wishes fully to participate in the decisions leading to the conclusion of the Round, in every area of negotiations, to be in a position to share their benefits and to implement their results.
The best trading system cannot support growth if the working of the international monetary system interferes with trade. It is incumbent upon this institution to see to it that the policies of all member countries promote reasonable exchange rate stability. This is not to be sought by exotic methods that would interfere with the free flow of goods, services, and capital. Rather, it is to be achieved by all countries promoting stable underlying conditions and engaging in appropriate exchange market intervention. The Fund must be able to make its advice effective in all member countries; today, only debtor countries obliged to borrow from the Fund need follow its recommendations. In defending a strengthened IMF role one must also give the institution the resources it needs to accomplish its tasks, in particular in the present circumstances. That is why we support the increase in IMF quotas.
The debt problem is one of the most significant factors explaining the economic stagnation of Latin America in the 1980s. It contributed to budgetary problems, to escalating domestic indebtedness, to the inflationary process, and to the poor overall macroeconomic performance of the region.
Since the beginning of the debt crisis, Latin America has transferred roughly $250 billion to creditor countries, whereas it has received only $50 billion in financial resources. The figures are eloquent enough: the region exported resources in amounts several times greater than those contemplated in the Alliance for Progress and the Marshall Plan.
Creditors and debtors alike should work together to avoid the 1990s being a mere repetition of the 1980s, when an enormous transfer of resources was accomplished at the cost of neglecting basic human needs. We must recognize the exceptional circumstances of the present indebtedness crisis. We shall, therefore, look for negotiated solutions that are also exceptional in nature, going beyond palliative or temporary relief. In this context, careful attention should be given to the Latin American and Caribbean proposal on external debt as presented by the Secretary General of the Latin American Economic System (SELA) and approved by the Latin American and Caribbean Council.
If the political will is present, there will be a definitive solution to the problem of indebtedness. Such a solution must be inspired solely by the future of economic and political relations with the region, and should envisage the well-being of its people. It has to allow for increased foreign investment, since the region’s share in global foreign investment fell from 13 percent in 1980 to not more than 5 percent in 1989. It has to create a new momentum for domestic investment, which decreased sharply in the 1980s in parallel with the outflow of capital. It has to take into account the need to balance our budgets and to bring domestic indebtedness to a reasonable level. In fact, the need for the public sector to buy from the private sector the foreign currency required to service the foreign debt has obliged us to greatly increase our internal indebtedness.
The Brady Plan must be strengthened urgently. To this end, an even more active participation is required from the Bretton Woods institutions in the mobilization of substantial additional resources to support growth-oriented adjustment. Instead of focusing largely on the monitoring of domestic policies of individual debtor countries, these institutions should adopt a more comprehensive, systematic approach that takes all aspects of the debt problem into account. It should be said that the International Monetary Fund, under the guidance of its Managing Director, Mr. Michel Camdessus, has been moving in that direction. There is an increasing understanding of the links between sound economic reforms and genuine efforts to solve the debt problem.
A strengthened debt strategy must also rely upon a greater participation of governments of creditor countries. The negotiations with commercial bank creditors would benefit from their broader view of their own interests. Governments can adopt adequate legal and regulatory measures and give incentives that contribute to more meaningful negotiating results. Debt relief is also important for official bilateral debt. In this regard, we welcome the statements made by France, the Netherlands, the United Kingdom, and the United States, which openly acknowledge the possibility of reducing official debt. It is desirable that these initiatives be broadened and lead to similar initiatives by other creditor countries. The decision of the Japanese Government to earmark a portion of its trade surpluses for a parallel fund for debt reduction operations is also a precedent for other governments.
The sooner a definitive solution to the debt problem is found, the better not only for Latin America, but for all those who can benefit from increased economic relations with our region, particularly in the areas of investment and trade.
Let me now add a few words on my own country. In the face of a monthly inflation rate that had reached more than 80 percent when the present administration took over, we adopted a plan addressed to the rapid and decisive reduction of monetary expansion and price rises and to the recovery of growth.
Considerable results have already been attained so far. Inflation has declined to a monthly rate of somewhat over 10 percent per month and is expected to fall further until the end of the year. Part of the success must be ascribed to the attainment of an operational fiscal surplus of the public sector, in contrast with a deficit of nearly 8 percent in terms of GDP last year. The legal framework compatible with our modernization and privatization objectives has been established. Foreign trade has been radically liberalized. Our industrial policy is directed at fighting monopolistic practices and other market imperfections.
The difficulties that remain are largely due to the persistence of inflationary expectations after almost eight years of unrelenting price rises. We have shown no hesitation in using all instruments at our disposal to convince society that the Government will not yield in its anti-inflationary purpose. Just recently a major tightening of monetary policy has been undertaken. This policy will continue until the back of inflation has been broken.
We have signed a letter of intent addressed to the IMF as the basis for a 17-month stand-by arrangement. We expect that this letter will soon be submitted to and approved by the Executive Board of this institution, opening the way for negotiations with the Paris Club. We have informed the commercial bank creditors of our intention to meet with them in the first days of October and to proceed with expeditious and constructive negotiations with them in order to achieve a long-lasting agreement.
One point, however, is crucial to us and should be clearly understood by all involved. We are only going to accept commitments we can be sure to fulfill in the context of our stabilization program and in the light of our growth objectives.
The possibility of overcoming the serious problems the Latin American region has faced since the beginning of the 1980s will depend partly on the countries themselves. The processes of economic integration open the door for the establishment of stronger markets and economies. The policies of trade liberalization adopted throughout the region will increase efficiency and productivity. They are in line with the efforts toward modernization. The reforms now under way in the region will also increase the potential for the already complex and diversified economies of Latin America to absorb greater amounts of investment resources. The better integration of Latin America in the world economy should rely upon domestic economic health and social justice. Democracy has been the political means we have chosen to attain our economic and social goals. In sum, we do not have problems only. The changes that are taking place in our region are the basis for the hope and optimism with which we look toward the increasing role that our region can play in the world economic system.
Before closing I should like to extend our warm welcome to our new fellow members, the Czech and Slovak Federal Republic, Bulgaria, and Namibia.
Statement by the Governor of the Fund and Bank for the United States—Nicholas F. Brady
I would like to welcome the newest members of the International Monetary Fund and the World Bank: the Czech and Slovak Federal Republic, Bulgaria, and Namibia. I would also like to welcome the special invitees from the Soviet Union.
We meet amid dramatic change in the world economy—change that presents both important challenges and opportunities. Eastern Europe is undergoing a fundamental transformation to pluralism and market economies. The forces of democratization and economic reform are sweeping through Latin America.
Most recently, we have been confronted with the political and economic challenge of the Gulf crisis. The world’s response has been unprecedented. We have forged a powerful political and diplomatic front within the United Nations, and are giving it tangible support with a multinational military deployment in the Arabian Gulf. And we are building a united economic front as well. The economic strength represented by all of you in this room must be mobilized to demonstrate collective resolve and make clear our intention not to yield to aggression.
Over the years, some have questioned the value of these Annual Meetings, saying that they are little but the perambulations of bankers, ministers, and governors. This is not the case. The IMF and the World Bank have a long tradition of confronting, sorting out, and overcoming global economic challenges. We now have a unique opportunity to extend this tradition. As President Bush stated yesterday, the world relies on these institutions for economic leadership, during the Gulf crisis and beyond.
In response to the Gulf crisis, President Bush announced the formation of a multilateral coordination group to assure an effective distribution of the free world’s financial resources to the front-line states. Now, the IMF and the World Bank also must extend their hands to assist these and other affected countries.
We suggest that the Fund consider the following measures:
—Adjust access policy for the countries most seriously affected by the Gulf crisis.
—Disburse more quickly assistance from the compensatory and contingency financing facility (CCFF).
—Widen the coverage of the compensatory window to include such costs as pipeline, transit, transportation, and construction fees.
—Permit immediate introduction of contingency financing into existing programs and increase members’ access to such financing.
—Ensure that either through the compensatory or contingency windows of the CCFF, members can receive financing to compensate for the higher costs of oil.
The World Bank should also provide major assistance to those countries seriously affected by the events in the Gulf. This could take the form of:
—immediate grant and loan assistance to transport and resettle worker refugees;
—expansion of the Bank’s lending programs;
—acceleration of disbursements; and
—strengthening of lending to the energy sector.
The Gulf crisis has also posed new economic challenges for the industrial world. The oil price increase will make it harder to steer between the twin risks of higher inflation and slower growth. We need to maintain a careful balance between continued growth—which is essential to achieve our shared objectives—and price stability, which is essential to protect the gains we have made and to ensure that the growth process is not illusory. Recognizing that we live in a world that must pay attention to both risks is half the battle. The other half is to navigate successfully between these risks. The Gulf crisis has complicated this task, and it will test our ability to steer a course that was already narrow. Nevertheless, I believe we are well positioned to meet this challenge and to move ahead through this important decade on a path of durable and broadly shared growth.
For our part in the United States, we must reduce our fiscal deficit on a lasting basis. President Bush has shown strong leadership in the budget summit process, and we remain committed to achieving a meaningful, enforceable five-year deficit reduction package. The job is not yet done, but our determination is firm and unshakable.
On another front, we have been inspired by Eastern and Central Europe’s courageous rejection of statism and their embrace of democratic and free market principles. Here again, the Bretton Woods institutions need to play a central role in helping to develop sound market systems and attract the resources necessary to do so. Recent efforts of the Fund and Bank in supporting Poland, Yugoslavia, Hungary, and others illustrate the importance of their contributions. We also look forward to the completion of the Soviet country study requested at the Houston summit. There is a real thirst in the Soviet Union for knowledge about how a market system works. We should not disappoint them with anything short of our best advice.
We have also been inspired by the ascendance of a new generation of leaders in Latin America, born of increasingly vibrant democracies, and dedicated to the market-oriented economic reforms that will bring economic revival and prosperity. President Bush’s Enterprise for the Americas Initiative will encourage and deepen the political and economic transformation of Latin America. By building on the successes of the strengthened debt strategy, this initiative will reduce the debt that has burdened and distracted reform efforts in the past. With the full participation of the Bank, the Fund, and the IDB, the Enterprise Initiative will serve to promote investment reform and trade liberalization and enable substantial debt reduction on obligations to the U.S. Government.
Other important projects proceed with force. In the poorest countries, especially of sub-Saharan Africa, the Fund and the Bank must continue their commendable work to provide concessional resources toward sustained growth and the alleviation of widespread poverty. At the same time, the Bank must strengthen its efforts to deal effectively with environmental problems, especially in protecting tropical forests and developing environmental impact assessments and action plans.
The Fund and the Bank can best serve the future by adapting to the changing needs of the world economy, and we must support them by providing adequate resources and policy guidance. In May, we took an important step when we agreed to a substantial increase in IMF quotas. The quota agreement, and the associated strengthening of the IMF arrears strategy, is a strong package that merits our support. Funding for the World Bank Group also remains a first priority.
The founders of the Bretton Woods institutions drew on the lessons of the past to create dynamic, forward-looking institutions. They envisioned the IMF and World Bank as living institutions that would channel the energies and hopes of the world community into a collective response to new opportunities and challenges. Perhaps this spirit was best captured by Secretary of the Treasury Morgenthau, who said:
The Conference at Bretton Woods has erected a signpost—a signpost pointing down a highway broad enough for all men to walk in step—and side by side. If they will set out together, there is nothing on earth that need stop them.
We have set out together, and we remain united. You have my congratulations for the important progress that has been made, and my assurance of firm U.S. support for the mission that lies ahead.
Statement by the Governor of the Bank for Somalia—Abdirahman Jama Barre
It is a great honor for me to speak to this distinguished gathering on behalf of Arab Governors of the International Monetary Fund and the World Bank. I would like to take this opportunity to welcome the new members to the Bretton Woods institutions, as well as those who are on their way to becoming members. The international character of our two institutions will no doubt be enhanced by these important additions to their memberships.
The Iraqi invasion of Kuwait and the ensuing uncertainty in the international oil market have, no doubt, complicated the task of global economic management. The Fund and the Bank are called upon to respond to the needs of the current situation. We welcome the efforts being made in the Executive Boards of the two institutions to explore adaptations to their policies that would facilitate a timely and appropriate response. This is particularly crucial for those members who are most directly and seriously affected. For some countries in our region, the adverse consequences of recent events, particularly those associated with the interruption of trade and the loss of income from workers’ remittances and tourism, are certain to be quite staggering. The current circumstances in the countries in question call for immediate and adequate external support, including finding permanent solutions to the severe external debt difficulties that they face. The urgency of the situation in these countries has been recognized by the international community, and the Bretton Woods institutions should act with the speed and imagination that current circumstances require.
In addition to the recent unfortunate events in the Gulf region, a great deal has happened since our last meeting a year ago. During this period we have witnessed momentous changes in East-West relations, which all but ended the state of polarization that had characterized the international order for decades. The dramatic changes that have occurred in Central and Eastern Europe are a clear indication that we are indeed stepping into a new era in the world’s modern history.
These developments are, in our view, part of a broader historical process that is not confined to Europe. Indeed, we view the unmistakable trend toward reform in the developing countries as a manifestation of the same sense of pragmatism as that shown in the search for ways to fulfill people’s aspirations everywhere for a better quality of life, materially and otherwise.
The challenge, however, is to ensure that this process of systemic reorientation will succeed in bringing about the desired objectives. If central planning and public sector control of resources have often inhibited the productive and efficient use of resources, it does not follow that a reorientation of the system would automatically ensure that the totality of social and economic objectives will be attained. This should be kept in mind in formulating programs of structural and systemic change in which the Fund and the World Bank are playing an important role.
The recent unfortunate developments in our region are a stark reminder of the high degree of interdependence that characterizes today’s world economy. It is our strong hope that stability will soon be restored to our part of the world so that energies and resources will be redirected back to meeting the needs and aspirations of our people, which are the same as those of people everywhere.
As you know, the Arab countries represent a broad cross-section of the developing world. As such, we understand the problems and challenges facing the various groups of developing countries. Among us, we have low-income countries, including my own country, which are striving to reverse the alarming decline in their standards of living that has occurred in recent years. We also include indebted middle-income countries, who are struggling to put their economies on a path of noninflationary growth and external viability. Among us also are oil exporting countries, which are making great efforts to diversify their economies while adapting to the sharp fluctuations in their income associated with oil market developments. Despite their dependence on one nonrenewable resource, the oil exporting Arab countries have provided generous external assistance to other developing countries inside and outside our region. Development and balance of payments assistance from Arab donors has amounted to more than $100 billion during 1973-87.
I mention all this only to underscore the fact that the Arab countries, in their diversity, face the same challenges and responsibilities as the rest of the world, particularly the developing world.
The developments of the past year and the more recent events in the Gulf region, important as these may be, have not changed in any fundamental way the task facing the international community over the medium term. Indeed, it remains essential that a sustained and cooperative approach be followed to achieve progress in resolving the major difficulties facing the world economy. This continues to require that industrial and developing countries, as well as international institutions, play consistent and mutually reinforcing roles.
Industrial countries need to adopt macroeconomic policies that ensure noninflationary growth in the world economy. This requires, among other things, that deficit countries reduce their excessive absorption of global savings. Structural distortions in industrial countries, particularly those that affect global resource allocation, should be eliminated. An open and multilateral trade system remains of paramount importance to global growth and external adjustment. We therefore attach great importance to a successful conclusion of the current Uruguay Round of trade talks.
In addition to adopting policies conducive to global growth and adjustment, major creditor countries will need to strengthen the existing mechanisms for bringing down the debt burden of developing countries to a more sustainable level. The framework that has been established to facilitate debt and debt-service reduction for countries whose debt is owed mainly to commercial banks is beginning to show some positive results, but efforts should be sustained to ensure that the framework is effective in easing the debt burden for all the countries that had been targeted by the 1989 debt initiative.
During the past few years, a number of welcome steps have been taken by the official creditor community to help the low-income countries deal with their especially difficult situation. This notwithstanding, and given the continued deterioration of their economic performance and in their standards of living, the effort to assist these countries should be sustained and strengthened.
Creditor countries also have an important role to play in easing the debt burden of middle-income countries, and especially the lower middle-income countries, which are heavily indebted to official creditors. This is one aspect of the global debt problem that has not received adequate attention in the past. We therefore welcome the more recent indications that major creditors are indeed considering ways of providing the type of debt relief that is consistent with the debt-servicing capacity and external viability of these countries.
It goes without saying that a favorable external environment and external financial support are only necessary conditions for developing countries to be able to put their economies on a path of noninflationary growth and external viability. It is the responsibility of developing countries themselves to adopt and implement the policy changes needed to achieve these objectives. The pragmatic approach to policymaking that one observes in the developing world today is an indication that developing countries are ready to do their part. But to help sustain the adjustment process, the international community needs to assist in mitigating the short-term costs associated with policy reform.
The Bretton Woods institutions have a crucial role to play in this regard.
First, they need to ensure that adjustment programs are designed and phased in a way that takes into account the particular circumstances of each country. Concern about the short-term costs of adjustment, particularly for the more vulnerable segments of the population, is justified not only in its own right but also because of its implications for the sustainability of adjustment.
Second, the direct financing role of the two institutions remains crucial. We therefore consider it essential that they be provided with enough resources to enable them to respond to members’ needs in a timely and adequate manner. In this regard, it is our strong hope that the coming into effect of the Fund’s quota increase will not be unduly delayed. …
Third, the two institutions play a vital role in coordinating and catalyzing financial support to members from other sources. We see it very much in line with this role that the Fund and the Bank draw the attention of the international community to the particular needs and problems of various groups of their memberships, including the financing needs of the lower middle-income countries, which I referred to earlier.
Fourth, through its surveillance function the Fund is uniquely placed to view the economic and financial policies of the major countries from a truly international perspective. An enhanced role for the Fund in the process of policy coordination should help major countries base their policy choices on the broad range of implications for the world economy as a whole.
As shareholders in the Fund and the Bank, we want these two institutions to maintain their financial soundness. The problem of arrears continues to be of concern to us. Therefore, we welcome the significant efforts that have been made to resolve this problem since our last meeting. We are heartened by the progress achieved in a number of cases. But a full resolution of this problem should remain the objective. This can be achieved only through the cooperation of all parties concerned and through assurances to countries in arrears that when they do their part on the policy front, the necessary international support will indeed be forthcoming.
Statement by the Governor of the Bank for the Czech and Slovak Federal Republic—Vaclav Klaus
As you know, Czechoslovakia was one of the founding fathers of the Bretton Woods institutions. We were then, and are now, very proud of this. We expected at that time to remain conscientious and reliable members and partners, but circumstances soon dictated otherwise. After the 1948 triumph of a totalitarian regime and its economic counterpart—central planning—it very soon became clear on all sides that there was no way for Czechoslovakia to participate in the International Monetary Fund and the World Bank. Our country renounced its membership in 1954, with the result that finally, early this year, we had to apply for membership all over again. We now have a chance to reverse the developments of the past four decades: more than forty years of Communist dogma, intolerance, and rigidity, of irrational economic arrangements and disastrous economic policies. History will never forgive us if we do not seize this unique opportunity with all our might. We strongly believe our membership in the Bretton Woods institutions will help us in this endeavor. The decision, at the end of 1989, to reapply for membership was one of the first decisions made by the new Czechoslovak Government. We wish to express our gratitude to all of you who have helped make the time between our first letter and last week’s signing of all the necessary documents so short.
In the past decades, the citizens of Czechoslovakia have experienced a gradual but substantial loss of illusions about the potential of a centrally planned economy (and society). With each passing day it has become clearer to Czechs and Slovaks that the only practical and realistic way of improving their standard of living will be to abolish totally the institutions of central planning; to dismantle controls over prices, wages, the exchange rate, and foreign trade; and to radically transform the existing system of property rights. This is exactly what we started to do a year ago, and what we intend to complete soon. To put it differently, the newly formed Government now has a unique opportunity to transform the wasteful and irrational economy of Czechoslovakia into a normally functioning market system. Our task is not a centrally orchestrated shift in our economy’s sectoral structure, nor even a massive transfer of modern technology; it is larger, and consists of the full-scale replacement of the entire economic system.
Of course, there is a real danger that the short- or medium-term costs of the transformation process—in terms of output, employment, and inflation—will be so heavy and so painful that there will be attempts to postpone the necessary systemic changes and to recentralize the economy again, or once again to look for untried, intellectually challenging, but in principle dirigistic and interventionist solutions.
The Czechoslovak transformation strategy, called the scenario for economic reform, recently prepared by the Government and approved by the Parliament a week ago, is a plan for implementing several crucial reform steps in the proper sequence. The strategy can be briefly summarized as follows:
1. Sound macroeconomic policy is vital if the transformation is to succeed. Restrictive monetary and fiscal policies introduced already this year, will continue in the future:
—we do not want to unleash inflation, with its debilitating effects on economic decision making and resource allocation;
—we are very pessimistic about the short-term growth potential of the unreformed economy and about the speed of the supply response in a reforming economy;
—we want to squeeze out the least efficient parts of the economy as soon as possible, which cannot be done when there is excess demand and easy sales of any product;
—we want to start the real restructuring without being crippled by the burden of repaying a “reform-neutral” foreign debt.
We know that reasonable macroequilibrium is a fundamental requirement for a market economy to operate effectively. Our analyses indicate that to achieve this, we do not need anything resembling a monetary reform; it will suffice to impose strong limits on further monetary expansion while allowing the price level to grow up to the money supply.
2. The early and rapid transformation of property rights—the “wholesale privatization” of the economy—is absolutely crucial. First of all, the old-style enterprises do not react and do not respond to new incentives, new signals, or new changes in the environment. In addition, with the reform already under way, chaotic, extremely inefficient, and extremely unjust privatizations are taking place that in no way fulfill our intentions as architects of the transformation. There is no time to wait.
The final draft of the Transformation Act was to be discussed within the Government of Czechoslovakia during the week of this Annual Meeting and will be sent—with minor modifications—to the Parliament for its approval in the next few days. The privatization process will be divided into two parts—the privatization of small-scale businesses, based on standard privatization techniques, and the privatization of large enterprises using a mixture of standard and nonstandard methods. Because of the lack of domestic capital, we plan to augment the wealth of the population by distributing a part of the state’s property in the form of free (or nearly free) vouchers to the public at large. The vouchers will be used as claims for shares of state-owned companies.
3. Prices, foreign trade, and foreign exchange rates will be liberalized starting January 1, 1991. Relative prices must be changed at an early stage of the reform process. Most of the changes must be, and will be, accomplished by the invisible hand of the market, rather than by administratively orchestrated actions. If prices are not free to adjust to changing market forces, they cannot perform their basic functions, with the result that other means of allocation—well known to us for decades—will take over. The price liberalization process cannot be partial or gradual because either way the economy will remain trapped in a state of macro-disequilibrium. A consensus is growing in Czechoslovakia on this need to work quickly in dismantling controls. Because we understand that gradualism does not work, it is a road we do not intend to travel.
By this stress on the fundamentals of the transformation process, we hope to avoid the danger, later on, that we might be required, under pressure, to make a series of ad hoc decisions that could lead us far off our course. And we are well aware that there will be such pressures: that there will be social unrest and populist opposition. This is all the more certain because our reform measures will coincide with dramatic external changes and external shocks of unknown kinds and unforeseeable magnitudes.
This brings me to my final point. We know that there have been cases where major financial assistance caused the deceleration, not the acceleration, of the necessary systemic changes which we consider of the utmost importance. We do not intend to postpone the institutional and structural steps we have already announced toward a rationally functioning market economy, nor to delay putting an end to the paternalistic behavior of the Government; and we are determined not to prolong either the life of the extremely inefficient “nonsystem,” which exists now, once central planning has gone and the markets are still underdeveloped and severely constrained, or the interval during which various interest groups (including the bureaucracy and black or shadow marketeers) will be able to extend and strengthen their positions.
At the same time, however, we do need a very specific kind of financial assistance: we need a macroeconomic stabilization package to function as a necessary buffer, absorbing, for a very limited period of time, some large short-run fluctuations of various economic variables that have been and will be brought about by the drastic domestic measures and by external shocks.
The stabilization package is important because we need time to be able to distinguish between activities that are temporarily uneconomic and activities that are permanently unviable; a distinction must be made between price increases based on short-run supply rigidities and relative price adjustments based on long-run demand and supply relations in the world economy. All truly reforming countries need to have this form of macroeconomic stabilization assistance at their disposal while the real transformation is under way.
Without the recent changes in the world economy, we would have needed a stand-by arrangement, as well as a standard stabilization (or transformation) program, to mitigate short-run economic hardships affecting large social and economic groups in our truly reforming country.
But the last oil shock, coinciding for us with the demise of Comecon and the dissolution of its protected, mutually debilitating trade area, is expected to greatly alter our economic outlook and the impending costs of adaptation. The synergic effect of all the recent external changes will be extremely severe: practically speaking, we are facing the three oil shocks of the last two decades all at the same moment. It will far exceed our limited capacity to absorb such shocks, and the standard methods of macroeconomic stabilization assistance will not be sufficient.
It seems clear to me that some additional, extra financing will be necessary. The expansion of the compensatory and contingency financing facility is one potential step in the right direction: it would provide a flexible response to the continuing uncertainties surrounding the political and military situation in the Middle East. Extra financing is not an acceptable remedy for inappropriate economic policies, but some additional economic assistance will be necessary, and the urgency of the matter should not be underestimated. In the case of Czechoslovakia (and the other Eastern European countries as well), the extra need poses a serious threat to the success of our economic reforms. Some Western observers, considering the conversion of centrally planned economies into market-organized ones to be this century’s most important, most difficult, and most challenging issue of economic policy, looked into the annals of history for an era of comparable significance. But that was before the advent of the Middle East crisis. My English does not offer me adjectives for describing the problem now. It will not be solved by external financing, but external financial assistance can help a great deal. It is especially by giving us time to adapt that our reform program’s chances of success will be improved.
Statement by the Governor of the Bank for Thailand—Virabongsa Ramangkura
It gives me great honor to have the privilege of addressing these Annual Meetings of the International Monetary Fund and the World Bank for the first time. On behalf of the Government and the people of the Kingdom of Thailand, I wish to extend our warmest greetings to my fellow Governors, distinguished delegates, guests, and staff members of the World Bank Group and the International Monetary Fund. I look forward to welcoming all of you to Bangkok for the 1991 Annual Meetings. Permit me also to join my fellow Governors in welcoming Bulgaria, the Czech and Slovak Federal Republic, and Namibia as members of our Bretton Woods institutions.
The 1980s showed a mixed picture of the world economy. Industrial countries, to a large extent, succeeded in maintaining sustained economic growth, whereas many developing countries encountered serious difficulties in their attempt to promote the well-being of their peoples as a result of an absolute decline in incomes. According to the World Development Report 1990, the 1980s was a lost decade for many of our colleagues in the developing world. We are alarmed and dismayed by the unfortunate disruptions in the Middle East. The sudden rise in oil prices has placed a severe burden on all developing countries and may trigger greater distress for the heavily indebted countries. The fear of triggering recession in major developed economies, rising inflationary pressures, and higher interest rates will lead to a decline in international trade and greater restrictions in capital flows in the short term. We fervently hope that the international community will find some solutions and ensure its nonrepetition.
We have entered the decade of the 1990s with new hope and aspirations of enhancing and improving the quality of life for the less fortunate in our member countries. As in the past, the reduction of poverty and hunger, and the development of human resources, are the major and truly long-term challenges facing most of the Third World countries. In this context, it is gratifying, but mystifying, to learn that the issue of poverty, which is the sole raison d’être behind their establishment, has once more become the central priority in the Bank Group and the Fund agenda. Providing social services has also become an integral part of the poverty reduction strategy. I earnestly hope that under the able leadership of our President, Mr. Conable, and our Managing Director, Mr. Camdessus, the strategies for poverty reduction and, more important, the adequate provision of capital resources will bring about the desired objectives.
Recently, it has been increasingly accepted by the developing countries that an effective and dynamic private sector is the most effective engine for economic growth and development. Eastern Europe is a prime example. There is still much to be done in terms of removing administrative constraints, encouraging both domestic and foreign private investments, and divesting or permitting the commercialization of public enterprises. …
While welcoming the Brady Plan and acknowledging the efforts made by the Fund and the Bank in addressing the debt problems of the developing countries, we would continue to urge the donor community to give urgent attention to this problem, as the progress achieved so far has not been sufficient to make a major impact toward the resumption of growth and development. As the countries in the world have become increasingly interdependent, finding a prompt and lasting solution to the debt issue will be in the best interests of both developed and developing countries. It must be emphasized that the burden should not be transferred to these two institutions, and that the developing countries which have been financially prudent should not be burdened or punished.
We concur with the current thinking that economic development must be consistent with a sound and sustainable environment. The present state of global environmental degradation caused by rapid development in the West is a matter of serious concern to all countries, and it is only appropriate that all countries should henceforth be committed to environmental protection and development. But as the industrial countries were and still are the major source of global environmental degradation, the primary responsibility for taking appropriate actions rests with them. Developing countries, too, have a role to play, but they will need additional financial resources—if possible, on concessional terms—to assist them on issues of the environment.
Given the specter of recession in major developing economies, rising inflation, and disruption in the Gulf, there remains growing concern about the restrictive nature of international trade. The Uruguay Round of trade negotiations remains to be completed; it is hoped that an outcome will emerge that does not narrowly serve the interests and concerns of only a few but balances the interests of all countries, and, in particular, protects and allows improved fair access for the developing countries.
A substantial negative transfer of resources to developing countries has been recorded in the past decade despite various promises and attempts to increase the flow of resources to these countries. If we are to move ahead toward revitalizing the world economy, substantial resources will be required by the developing countries so as to reverse the current trend in net flows of resources and thus enable them to cope with the challenges of the 1990s, in particular the elimination of absolute poverty.
We in Thailand are truly convinced that enabling women to raise their own productivity and income would enhance overall national economic development. This could be achieved, as we have done, by providing them with equal access to education, comprehensive family planning and health care services, credit facilities, and opportunities to expand their access to labor markets.
The rapid pace with which the changes in Eastern Europe are occurring is welcomed, as are changes that we are observing with much interest. While their integration into the world economy will also benefit peace and harmony, we do hope that the high priority attached to restoring sustained growth in developing countries in Asia and Africa will not be altered or compromised.
On issues specifically related to the Fund, first, we welcome the long-overdue conclusion of the Ninth Quota Review. On the other hand, we find it most regrettable that the coming into effect of members’ quota increases under the review has been made contingent on the proposed Third Amendment of the Fund’s Articles of Agreement coming into effect. This should in no way be allowed to become a precedent for future quota increases. We urge the Fund’s Executive Board to start work on the Tenth Review early enough to avoid another delay.
Second, it is heartening to see that a few members that had been overdue in their payments have already become current with the Fund in the past few months, and that prospects are good for a continuation of this trend. We therefore take this opportunity to urge the Fund—and all its members—to do all they can to eliminate any barriers that hinder remaining overdue members from overcoming their problems, and to prevent new cases from emerging.
In conclusion, our objective is to achieve a sustainable and expanding world economy. To achieve this goal, the efforts of all parties concerned must be mutually reinforced. Developed countries must open up their markets to developing countries by reducing all forms of trade barriers. Furthermore, their growing budget deficits must be significantly reduced and inflation controlled, while maintaining a real growth in aid levels and the facilitation of private sector investments of developing countries. Without these positive actions, the developing countries will be deprived of the much needed resources for their development. The developing countries, for their part, must ensure the establishment of a conducive macroeconomic environment by adhering to sound economic and financial measures and by undertaking the necessary reforms that would contribute to such an enabling environment.
The Fund and the Bank, as well as other international organizations, must be ready to play their part in helping the developing countries to undertake investment and adjustment policies that can be sustainable over time. The commercial banks must also be more forthcoming in their lending to the developing countries.
Finally, on behalf of the Government of the Kingdom of Thailand, I look forward to welcoming all of you in Bangkok at the next Joint Annual Meetings, and I can assure you that we will spare no effort to make the meetings a success, and your stay a very pleasant and memorable one.
Statement by the Governor of the Fund and Bank for Australia—Simon Crean
I welcome this my first opportunity to participate on behalf of the Australian Government in the Annual Meetings of the International Monetary Fund and the World Bank. To those new member countries attending their first Annual Meetings, the Czech and Slovak Federal Republic, Bulgaria, and Namibia, I wish to extend a warm welcome.
Substantial growth has occurred over the past eight years owing to the greater willingness of governments to set fiscal and monetary policies in a medium-term context and to undertake structural reforms.
Recent developments in the Gulf region and increases in the price of oil have added a considerable degree of risk to inflation and output growth. Such risk, however, needs to be placed in some perspective. If oil prices remain at around present levels, the increases in price would be much lower than those experienced in the oil price shocks of the 1970s. In addition, many economies are now more flexible and most industrial countries are now less reliant on oil than in the past.
The present situation clearly entails risks of a breakout in world inflation. Even before the oil price increases, inflationary pressures were strengthening in a number of countries. It is therefore essential that policies continue to promote price stability in a medium-term framework.
Australia recognizes that external imbalances between the major economies have narrowed in recent years and have been financed relatively smoothly thus far, although more progress is required in order to limit the possibility of disruption to activity and the emergence of protectionist pressures. More effort needs to be made in improving savings in those countries with external deficits. The trend toward fiscal consolidation needs to be maintained; we also need to continue pressing ahead with structural reforms and measures to remove rigidities and to improve the responsiveness of markets.
Australia is able to demonstrate its own commitment to fiscal responsibility by posting its fourth consecutive budget surplus, a trend that has seen a turnaround from a central government deficit of 4 percent of GDP six years ago to a surplus today of over 2 percent.
We are also placing renewed emphasis on achieving better responses to adjustment by implementing labor-market reforms and tackling particular rigidities in sectors of the economy through substantial microeconomic reform programs, particularly in transportation and telecommunications.
Wages policy through the accord with the trade union movement has continued to contribute to appropriate macroeconomic settings and noninflationary wages growth, but is now also being used to drive efficiencies in the workplace by linking reward to training, multiple skills, and changes in work organization.
In all economies the challenge to develop policies for adjustment must, however, be judged against their social viability as well as their economic, financial, and technical viability. Governments must therefore confront the difficult challenge of ensuring that adjustment policies and the need for them are widely understood. This in turn highlights the value, in our view, of strengthening consultative mechanisms to involve the parties directly affected by structural changes necessary for national development in an attempt to gain broad-based support for these policies.
No greater is the extent and consequences of market-oriented structural reforms likely to be evident in the period ahead than in the economies of Eastern Europe and the U.S.S.R. Significant injections of capital will be required for Eastern European countries to reform and restructure. However, the availability of such financing will critically depend upon both the appropriateness of the policies pursued by the reforming governments and their political stability. The Bretton Woods institutions must play a responsible role in this. They must also remain cognizant of their original charters as they relate to members’ development needs and to the needs of members experiencing external account difficulties.
No issue is more crucial to the course of the world economy over the next decade than achieving a successful outcome to the Uruguay Round. A successful outcome would help sustain growth in trade and activity, enhance the effects of structural reforms, ease debt problems, and contribute to the relief of poverty in many developing countries. On the other hand, failure of the Round would bring severe risks for renewed protectionist pressures.
A successful outcome for the Round cannot be achieved without a substantial outcome on agriculture. This must involve concrete and agreed proposals for substantial and progressive reductions in specific trade-distorting agricultural support and protection measures (including export subsidies) over an agreed time frame. Significant reductions in tariffs and barriers to trade in the area of textiles, and progress on services, intellectual property rights, and trade-related investment measures will also be important.
Australia is therefore very concerned that the negotiations in agriculture, and in the Round as a whole, have fallen further behind schedule. It is worrying that so much remains to be done in the limited time which is available between now and December. It is of greater concern that there is a lack of political will in the major economies to consider seriously the substantial reductions in nontariff barriers that have affected agricultural trade.
It is a disappointment that several major participants have not shown the leadership in tackling trade barriers that their positions in the trading system warrant—indeed, some have proved obstructive. Australia and other efficient agricultural producers in the Cairns Group will continue to push hard for liberalization and to oppose obstructions that continue to be tolerated by the major economies.
The time for paying lip service to trade liberalization is well over. Governments in major economies must provide fresh and flexible mandates to their GATT delegations to resolve quickly the impasse in agriculture and other key areas. The timetable agreed to by the Trade Negotiations Committee meeting—all offers, including on agriculture, on the table by October 15—must be strictly adhered to. We then have only a month or so to reconcile the substantive differences. If this Round fails, we face an uncontrollable retreat into economic fragmentation and disharmony.
The preservation of an open multilateral trading system is one necessary step for addressing the enormous and complex problem of world poverty. During the 1990s, a major test facing the community of nations and international organizations will be their ability to reduce substantially the numbers of people living in absolute poverty. The main responsibility lies with the governments and peoples of developing countries themselves, as they recognize. They can draw on the collective development experience of the past thirty years, as distilled in this year’s World Development Report. But their efforts deserve a supportive external environment, including increased volume and quality of official development assistance and a fair and open international trading environment.
Environmental problems also pose a major challenge for the world economy in the years ahead. Australia has fully supported the Bank’s efforts to integrate the consideration of environmental issues into its policy and operations work, and welcomes the progress made so far. However, we consider that the Bank’s environmental work will not be fully effective until at least the substance of environmental impact statements is publicly released early enough for public response before discussion of projects in the Board. Australia has been active in promoting initiatives to deal with global environmental problems and has ratified the Montreal Protocol. At this stage, however, we have a number of questions about the desirability of the proposed Global Environmental Facility and how it would operate relative to other funding mechanisms directed toward global environmental issues. …
Australia is very aware of the difficulties of countries with severe debt-servicing problems. We applaud the efforts of those countries that have managed, by their commitment to sound economic policies, to maintain creditworthiness while continuing to grow. Such countries should not be disadvantaged by measures to assist others that have not followed this course.
Australia recognizes that debt restructuring and debt-service reduction negotiations may be justified for some most heavily indebted states: we welcome the various recent proposals that have been put forward in this regard. Any such arrangement must, of course, be based on a real commitment to economic reform by the countries concerned. Care also needs to be taken that such arrangements should not result in the undue transfer of private risk to the official sector.
Australia notes with concern that improvement in the position of women in developing countries is often hindered by factors such as legal and regulatory constraints, or social, cultural, and religious traditions. Development policies and programs that have a bias toward men exacerbate the problem. Women have particularly suffered the negative impacts of structural adjustment programs and Australia therefore supports the Bank’s intention to give more explicit attention to women’s issues in policy dialogue with governments, including structural adjustment and other macro issues. …
Australia remains confident that, by working together through the Fund and the Bank, our solutions to these problems will help benefit the world as a whole.
Statement by the Governor of the Fund for Turkey—Gunes Taner
I join other speakers in welcoming the new members—the People’s Republic of Bulgaria, the Republic of Namibia, and the Czech and Slovak Federal Republic, which very recently has reclaimed its membership in our institutions—and in greeting the representatives of the Soviet Union, who are attending these meetings for the first time, in a special status.
In our view, 1990 continues to be a year filled with extraordinary events. Among the most positive, to my mind, have been the developments in the Eastern European countries, especially their choice of free market principles as the new basis for their economies. I also find the unification of Germany exciting. I welcome these events not least because I believe their demonstration of the failure of the centrally planned model of development will make a great and long-lasting impression on the developing countries.
Just when hopes for a peaceful world were highest, we were shocked by the unexpected developments in the Middle East. We find the Iraqi invasion of Kuwait intolerable in every way. Its repercussions are already being felt throughout the world and will surely continue to be felt as long as this problem lasts. Solving this crisis is a real challenge for the international community: overcoming the difficulties will require a great degree of international solidarity.
The crisis erupted at a time when many industrial and developing countries, which had made various degrees of progress with their implementation of the structural adjustment strategy, had begun to harvest its rewards. Efforts to promote a more efficient use of resources, including trade liberalization, the elimination of industrial and agricultural subsidies, and the creation of employment opportunities, had borne some fruit and seemed to promise us a better vision for the 1990s.
At this critical stage, I believe that the formulation of future stabilization measures should give particular attention to preventing the emergence of recessionary trends, which could eventually undo the hard-won gains already achieved by growth policies. The instabilities and uncertainties now appearing in the world markets definitely bring dark risks rather than promising prospects. Elimination of these risks will require the effective pursuit of conceited actions by the international community. We must now be quick to take the measures necessary to limit the damage that the crisis can inflict on our economies.
Turkey is one of the countries hardest hit by the Gulf crisis, due to its unique location and its extensive trade and business relations with the countries involved in the crisis. You will all appreciate that Turkey faces the certainty that the crisis will have some negative effects on its economy.
Turkey has immediately taken measures to alleviate the financial impact. The 64 percent increase in domestic oil prices now fully reflects the increases in international oil prices, and the central bank rediscount rate has been increased. Fiscal discipline has been improved, and additional revenue-increasing measures, such as raising the rates of the value-added tax, and the excise tax on cigarettes and alcoholic beverages, have been implemented. Additional sales of land and state corporations have been organized to offset the swelling costs of the crisis. We expect that our implementation of these measures, assisted by favorable external economic circumstances and supported by appropriate external financing, will enable Turkey, during 1991, to continue to have a viable balance of payments position, reduce inflation, and maintain relatively high real income growth.
Notwithstanding the impact of the crisis on our economy, Turkey is determined to pursue its pre-crisis adjustment program. However, the presence of a favorable international financial and trade environment is crucial for our attainment of these targets. I am confident that the developments in the Gulf region will not affect Turkey’s access to the international financial markets. I would like to hope that Turkey’s efforts and achievements in the area of trade liberalization will be matched by other countries. On this issue, let me quote Professor Stanley Fischer:
Recent Uruguay Round developments have been disappointing. The obligations of the industrialized countries are clear. At many fora—including this (assembly)—they have for long, and rightly, preached the virtues of an open trading system and open economies to the developing countries. Many developing countries, many with the help of the Bank and the Fund, have significantly reduced trade barriers and opened their economies. But the time has come for the industrial countries to practice what they preach. More is at issue than consistency and good faith. The phenomenal prosperity of post-World War II was fueled by the growth of trade in a gradually liberalizing international economy. The growing resort to nontariff barriers has stopped that progress, and can easily lead to a system of managed trade between regional trading blocs. It would be a tragedy if the industrial countries destroy the international economic system set up at Bretton Woods at this time of its triumph. We need more vision (and wisdom) in the Uruguay Round negotiations than we have seen so far.
Let me now make a few remarks on the policies of the Fund and the Bank.
If the Annual Meetings serve a purpose, it is to give us an opportunity to ask ourselves whether our institutions can successfully continue to meet the challenges of the times. They are put today to their most severe test since their creation: can the Bretton Woods institutions effectively assist Central and Eastern Europe in its transition from a command to a market economy? Can the Fund foster the appropriate blend of adjustment and financing imposed by the ongoing shock and obtain among the industrial countries sufficient coordination of economic policies to allow the current expansion to continue? Does the Fund have resources appropriate in amount and quality to further assist the alleviation of the debt burden, and have our reflections on the changes needed in the international payments system been sufficiently straightforward? The reorientation of policies recommended by the Fund’s Managing Director and the Bank’s President is undoubtedly the first step in the right direction.
Let me submit, however, that this first step falls far short of the needs of the day. Considered from a global viewpoint, the Fund’s liquidity is already high and will be raised still further by the upcoming quota increase, but countries’ access, even under the more liberal approach, will still be determined by the size of each member’s quota. The Fund’s interventions in the debt situation have already demonstrated that the amount of collateral that can be financed out of Fund resources will hardly be large enough to substantially alleviate the debt burden of the beneficiary countries. The impact of the crisis on some countries is once more demonstrating the inadequacy of quotas for meeting the liquidity needs of some members. A similar conclusion may one day emerge concerning the intervention needs of money centers in a tripolar system based on more stable exchange rates.
All these considerations lead me to ask that serious consideration be given to our Constituency’s proposal for an allocation of SDRs whose excess proceeds would be retransferred by the industrial countries to the Fund. The Fund would then use these new resources to finance countries’ needs that cannot directly be met out of the quotas. The compensatory and contingency financing facility, which still operates within the limited framework of the Fund’s quotas, was originally devised to meet some of those specific needs but now requires a thorough overhaul in order to make it more easily comprehended and more accessible to members. As an immediate response to the shock, and pending the results of more fundamental reforms,- the foreign exchange losses due to oil price increases should be dealt with under a separate facility, whose limits are linked more directly to countries’ needs than to their quotas. With respect to the cost of access to Fund resources, it seems imperative to find ways of reducing the level of charges to be paid by countries severely hit by the recent shock. Would it not be reasonable to pursue this goal by putting some of the Fund’s gold to a profitable use, and using the profits to subsidize part of these charges?
In conclusion, today’s increasingly globalized world makes the 1990s a decade of opportunities. It offers an opportunity for ensuring that world economic growth will be sustained; and because no country can thrive while remaining isolated in a globalized world, it offers both an opportunity and an imperative for seeking multilateral solutions for the shared problems stemming from short- and medium-term constraints. I feel confident that the IMF and the Bank Group will continue to fulfill their roles, by catalyzing resources, by channeling funds to support the growth and development prospects of our countries, and by directly addressing the problem of maintaining the momentum of the structural adjustment process worldwide.
Statement by the Governor of the Fund and Bank for Ireland—Albert Reynolds
I too would like to join with my fellow Governors in welcoming the new members, Bulgaria and Namibia and, of course, the return of Czechoslovakia, and a special welcome to a special invitee, the U.S.S.R., to participate here in our deliberations.
As we reflect on the past decade, we can conclude, with good reason, that useful progress has been made in the management of the world economy. Our common objective is to provide prosperity for all peoples and, to this end, we support institutions such as the International Monetary Fund and the World Bank. We must work together toward a fairer distribution of the world’s resources and this implies a readiness to make compromises, to give second place at times to national interests, and to recognize that individual nations have differing priorities. It implies that the rich and the powerful will have due regard at all times to their obligations toward the poorer members of the world community.
After much hesitation, a consistent program for the gradual resolution of the debt problem has been initiated. There has been a belated response to the destruction of the environment, and we have learned to appreciate the importance of proper conservation of energy resources. On the downside, we must acknowledge the uneven rates of progress and the huge inequalities that persist. The single greatest achievement of the past decade, however, is the growing appreciation of the importance of coordination in all aspects of economic and social development.
Balanced economic growth is the key to progress, and the news on the world economy is reasonably good. Growth in the industrial countries has been buoyant, prices have been, in general, relatively stable, and there has been a steady increase in the volume of world trade. So far, the modest slowdown this year is not a cause of undue concern and we hope that the crisis in the Gulf area will not lead to a serious downturn. Some adjustment will probably be required but, provided we do not repeat the mistakes of the 1970s, the world economy should continue on the path of sustainable growth. Undoubtedly, a further deterioration in the present crisis could destroy this prospect. We hope that such an outcome can be avoided.
Inflation remains a persistent threat to the global economy, and we look to the stronger nations, in particular, to ensure that this threat is kept in check. There is reason for concern about the global adequacy of savings, particularly in view of the expected increase in demand for investment funds. It is disappointing that unemployment continues at an unacceptably high level in many countries and that there are no concerted efforts to find adequate solutions.
While the problem of external imbalances has eased to some extent, it still remains a barrier to economic expansion and to continuing financial stability. Greater adjustment is needed on the part of the major surplus and deficit countries. The problem of inflation must be tackled using the widest possible range of policy instruments. Undue reliance on monetary policy will lead to an excessively high level of international interest rates. It is especially important just now not to add to the difficulties facing the world economy, when growth is already slowing down and events in the Gulf area are causing concern about the future. Undue reliance on interest rates to fight inflation can also give rise to economic imbalances across sectors. Small business enterprises and personal borrowers, particularly those with large mortgages, suffer disproportionately. High interest rates also have a devastating effect on the heavily indebted countries.
The Uruguay Round is now in its final and most difficult phase. Our negotiators face the difficult task of achieving agreement on a package that is extensive, difficult, and ambitious. The Director-General of the GATT has wisely laid down a strict timetable to ensure that the deadline of December is respected and we will honor this deadline. Although we have serious difficulties with certain aspects of the negotiations, notably agriculture, we see the successful completion of the negotiations as vital to the good development of the world economy in the next few years. Apart from the increased access to markets that will result, the strengthening of the authority of the GATT will be a major contribution to ensuring that trade can be carried out in predictable and secure conditions. For a country such as Ireland, heavily dependent on trade and on the increased investment that results from business confidence, the importance of a successful conclusion cannot be exaggerated.
One of the biggest challenges facing the world economy in the 1990s will be the integration of the centrally planned economies of Eastern Europe. They face a fundamental transformation over a short period. While the job of creating the proper framework for a market economy is their own responsibility, they will need considerable assistance, and the International Monetary Fund and the World Bank are already at the forefront in providing help. The agreement on a new European Bank for Reconstruction and Development in such a short time is a practical demonstration of what is possible where there is a consensus about the need for urgency.
The huge debt problem is still with us but the new initiatives of the debt strategy are working reasonably well and can be improved with experience. In most countries, the debt crisis is only a symptom of deeper economic problems. It is not enough, therefore, to manage the debt; it is essential at the same time to correct the underlying economic weaknesses and distortions. There has been a positive international response to those heavily indebted countries who have demonstrated their commitment to implement necessary economic policies and, hopefully, this will encourage others to follow their example.
I very much welcome the positive approach by the Houston summit to the debt problem and, in particular, the recognition that relief on debt of low-income countries to official creditors needs to go further than at present.
The Gulf crisis and the attendant rise in oil prices has painful implications for indebted, oil importing developing countries. I would support any measures which the Fund and the Bank could take to counter these adverse effects in countries that are implementing adjustment programs with Fund or Bank support.
The devastating effects of poverty are all too familiar. It is depressing to see the income gap widening sharply in the developing countries and to see conspicuous waste on prestige projects in the midst of poverty. It is a sobering thought that one third of the world’s population lives below the poverty line. Progress toward greater prosperity should be biased in favor of the poor. The poor countries need more generous assistance from the rest of the world and there must be, in turn, a genuine commitment from them to good management of their economies, the elimination of distortions, and the maintenance of a healthy climate for investment.
This can be very difficult because the process of economic restructuring is often slow and uneven. We must be patient and persistent in our efforts to achieve a better distribution of the world’s resources. We cannot afford to be patient, however, in the face of abject poverty and destitution which is still so widespread, and I would ask whether our ability to respond to desperate situations is sufficient. There is a genuine desire to help; it is more difficult to translate good intent into practice. …
Concern about environmental degradation wrought by economic progress is now entrenched in modern thinking. We have finally realized that care for the environment is important, both for its own sake and because it is vital to sustainable economic progress. Indeed, some would redefine the very concept of development, in view of the pressures on the earth’s resources.
Despite the greater awareness, however, serious abuse is still a fact of life even in the developed countries. We cannot expect otherwise until we integrate economics more fully into efforts to protect the environment; nor can we expect poorer countries to give high priority to the environment if we do not lead by example. Pollution knows no borders. National boundaries do not count. I welcome the initiative now being taken to establish a Global Environmental Facility to help the poorer countries. We are fortunate in Ireland that so far we have escaped the worst effects of destruction of the environment, and the bad experiences of some other countries have alerted us to the need to be ever vigilant.
It is an exciting time in Europe and European developments have dominated the headlines over the past year. The movement toward economic and monetary union in the European Community, the dramatic changes in Central and Eastern Europe, and the unification of Germany have released new dynamic forces that will transform the economy. There will be greater integration of European markets generally, and Europe will emerge as a much more powerful influence in the world economy.
The emphasis in Europe is on the liberalization of capital movements and the removal of barriers, and this is the only way forward if the world economy is to continue to develop to its true potential.
The Irish Economy
Events in Europe will have a big impact on the future development of the Irish economy, and we welcome the movement toward greater integration.
I am happy to report steady economic growth in Ireland and an improving financial environment. Following several difficult years through the 1980s, the process of financial adjustment, begun in 1987, is continuing successfully. Inflation, expected to be in the region of 3¼ percent this year, is low by general European standards, and the prospects for employment are getting better. As a small and totally open economy, our prosperity depends to a large degree on continuing growth in world trade and the ongoing integration of national economies into the global economy. We welcome very much the efforts being made to remove barriers and to develop more open systems of trading.
The International Monetary Fund and the World Bank continue to demonstrate a great professionalism and sense of purpose in fulfilling their mandates, and we must ensure that they have adequate resources to look ahead with confidence. After difficult negotiations, final agreement has been reached on the Ninth Quota Review for the Fund and an increase of 50 percent is a reasonable compromise. The apprehension expressed by some of the developing countries about a possible shift of scarce resources to Eastern Europe is, I believe, misplaced.
I welcome the new strategy to deal with arrears owed to the Fund. It is of fundamental importance that members comply with their obligations, and it is proper that sanctions be invoked in the face of persistent default. Prevention and early warning are the best deterrents but, for those countries that have already gone too far, we must be ready to implement practical arrangements to bring them back on course.
There are great challenges and opportunities as we move into the new decade. In managing the international economy, we have learned well from the mistakes of the past, and real progress has been made in improving coordination. There is a greater discipline than before and a willingness to tackle effectively problems such as debt accumulation and arrears which threatens the very foundations of international cooperation.
There is a greater realization than before of the fact that the interests of all members are interdependent. There are still great impediments to progress and sometimes too much rhetoric and too little real commitment to solving difficulties. We are very much indebted to the Fund and the Bank for their contributions to development, and we have the utmost confidence in their abilities to maintain their high standards.
Statement by the Governor of the Fund for Spain—Carlos Solchaga
Allow me to begin by thanking this assembly for having agreed that Madrid will host the Forty-Ninth Annual Meetings of the IMF and the World Bank in October 1994. In addition, I should like to take this opportunity to extend the warmest greetings to Bulgaria, the Czech and Slovak Federal Republic, and Namibia as they join the Bretton Woods institutions, and I think we can all take pride in the fact that these meetings are being attended by special invitees from the U.S.S.R.
The new memberships, as well as those now in the offing, are a tribute to the fundamental intellectual strength of the multilateral approach personified by our two institutions and a reflection of the dramatic and heartening political changes that have occurred since our last meetings.
Significant changes have also emerged in the economic arena. In our statements to these meetings over the last seven years, we, the Governors of the industrial countries, have sought to emphasize the positive aspects of economic trends in our countries. Since 1982, we have with increasing optimism drawn attention to the high rates of growth and job creation achieved in the developed countries, the remarkable achievements in the fight against inflation, and the acceptable results achieved in the efforts to reduce the financial imbalances in our public sectors. With rare unanimity, we subscribe to the view that the duration and intensity of this expansionary phase has been attributable to a highly effective economic policy mix. On the one hand, there have been supply policies designed to give the market a stronger role in resource allocation and to introduce greater flexibility into our respective systems of production. In addition, there have been demand policies intended to promote a well-established, balanced, and noninflationary macroeconomic environment, capable of accommodating rates of economic growth that are both significant and sustainable in the medium term.
The economic bonanza of recent years did not enable us to realize that we could be facing international imbalances that pose risks and uncertainties that could well put an end to this expansionary phase. The disappointing balance of international payments for developing countries in the last decade—a consequence of these countries’ unsustainable policies and the constraints imposed by their exceedingly high levels of external indebtedness, the repeated and increasingly sophisticated threats to the multilateral commercial system, the volatility and arguably flagrant maladjustment of exchange rates on international currency markets, the buildup of external imbalances among the world’s leading industrial countries, and the downward resistance of the U.S. budget deficit—have lately been a cause of considerable concern to these meetings.
The recent developments in the Gulf and the subsequent rise in the price of crude oil have resulted in an economic climate dominated by uncertainty. If the prevention of declining expectations and worsening imbalances used to be a necessity during the period of expansion, it has now become an urgent priority for our economic policy.
Fortunately, the lessons of the two oil crises in the 1970s provide us with unequivocal guidance as to the broad policy outlines to pursue, and especially as regards the errors that must never again be repeated. First, we know that failure to react promptly to genuine upheavals of this nature has irremediable and potentially heavy costs in terms of GDP, employment, and welfare. For all of these reasons, and notwithstanding the fact that the present oil crisis seems liable to prove less disruptive than its predecessors, it is vitally important for economic policies to be promptly adjusted to reflect the new international situation.
The required policy changes are reasonably self-evident. For one thing, recorded increases in prices must be rapidly passed on to consumers, both in order to prevent distortions in the structure of relative costs of factors of production and to prevent inappropriate demand patterns from taking root. At the same time, it is imperative for all economic transactors—the public sector, business people, and workers—to recognize that the outward transfer of resources entailed by the rising price of oil has caused an impoverishment which society as a whole cannot circumvent. It is crucial for each of these economic groups to acknowledge that attempts to pass off the costs of the crisis onto other economic transactors will merely lead to higher inflation, reduced economic growth, a fall in investment, and reduced job creation; in short, behavior of this nature will lead to further, persistent economic impoverishment.
In our opinion, it is also imperative for society to perceive burden sharing as something that has both fairness and credibility. Although the extent to which such a goal is achieved will basically depend on the particular industrial relations model prevailing in each country, the Spanish experience causes us to look favorably upon the possibility of concluding a Social Progress Pact with workers and employers, as a means of minimizing the anticipated costs of a temporary crisis and reinforcing solidarity in this area.
The heavy losses in terms of welfare and employment that resulted from earlier crises have assuredly convinced our economic transactors of the dangers inherent in any sort of wishful thinking as regards increases in their nominal incomes. In any event, it must be made clear that without moderation in nominal wages and in unit profit margins, the market will ultimately exact a penalty by forcing up unemployment, inducing a fall in investment, and reducing the economy’s medium-term potential rate of growth.
Given that the ultimate objective of economic policy in the coming months must be the achievement of a rate of increase in nominal spending that prevents the onset of inflationary pressures and intolerable deterioration in external accounts, moderation in nominal incomes will be instrumental in determining the degree of adjustment that monetary and fiscal policies will require. The less the moderation in wages and business profit margins, the greater the deflationary dose that will need to be administered through interest rates, public expenditure cuts, and accelerated fiscal consolidation.
It would be highly desirable both for the response to the crisis to consist of a balanced contribution from each of the economic policy instruments for managing demand, and for there to be no faltering in the process of market streamlining, as in this way the restoration of internal and external equilibrium would be easier, the slowdown in growth would be of shorter duration, and the burden sharing would have fewer pernicious distributional effects. Yet adjustment will occur one way or another, whether in terms of prices, or in terms of quantities.
In the interrelated world in which we live, the economic policy guidelines I have just mentioned cannot be treated in isolation from the international response to the crisis. Once again, the experience of the 1970s conclusively indicates that an internationally coordinated response is the preferred economic policy option. This is so, first, because in an international environment dominated by the use of orthodox policies, international markets are thus less likely to suffer from excessive volatility that would amplify the adverse effects of the actual upheaval; and second, because a uniform and orthodox international response would leave no doubt as to the heavy price that a country would have to pay if it decided to deviate from the agreed course of action.
This “discipline” argument is by no means insignificant, particularly if one is prepared to recognize that the current international monetary system may lack the means necessary to accelerate the process of economic convergence.
With their well-nigh unlimited access to international capital markets, the developed countries are able for prolonged periods of time to finance financial policies that until very recently would have been quite untenable. For a very large group of developing countries embroiled in external debt, their virtual estrangement from international capital markets prevents them from taking rapid advantage of the benefits of orthodox macroeconomic behavior. This asymmetry in the incentive system, coupled with the absence of binding and irreversible codes to govern an increasingly wide spectrum of international transactions, serves to weaken any resolve to implement virtuous economic policies in the short term, notwithstanding the undeniable advantages that accrue from such policies in the long term.
Action must be taken now to remedy this shortcoming in the existing international economic framework, and while it might be unrealistic to imagine that such a goal can be accomplished immediately, we should waste no opportunity to begin eliminating the least desirable features of that economic framework.
Beyond any doubt, the first priority must be to strengthen our multilateral and open trading system through the satisfactory completion of the Uruguay Round. Nor would it be inappropriate to seek to derive benefit from a number of regional attempts to establish institutions and rules designed to ensure the collective achievement of economic stability. The Economic and Monetary Union in the European Economic Community is the most sophisticated and well-developed example of this.
As a member of the EC, Spain supports such a program unreservedly, given that we are fully convinced of the benefits accruing to member countries and the international community from the establishment of an Economic Union in Europe, and the emergence—at the end of a multistage process, each stage with its own particular objectives and special content—of a monetary union characterized by a single currency, a European central bank, and a common monetary policy for the 12 members of the EEC.
Although such a community-oriented approach might today seem to resist replication on an international scale, it should not be forgotten that what seems reckless today might cease to be reckless in a very short time. Any world such as ours, which has witnessed dramatic political and economic changes over the last year, is at least entitled to be optimistic.
Statement by the Governor of the Bank for the Netherlands—W. Kok
First of all, I wish to welcome our new members, the Czech and Slovak Federal Republic, Bulgaria, and Namibia and I look forward to the membership of Switzerland and Mongolia. I also note with pleasure that we have the U.S.S.R. delegation as special invitees with us. This interest in the Bretton Woods institutions illustrates that the world is growing toward unity, a process that has gathered momentum during the past year. Indeed, the past year has brought the demise of the East-West political divide. The consensus is growing on how to run economies and on their link with political freedom. The rapid growth of international trade and financial flows, and the international spillovers of domestic policies, make “splendid isolation” illusory. Policy coordination in a multilateral framework should therefore come more and more to the forefront.
We meet at a moment of political and economic uncertainty due to the Gulf crisis. The uncertainty and the rise in oil prices resulting from the crisis occur at a time when economic growth in North America is tapering off, and many developing countries are still tackling the consequences of an excessive debt burden. Fortunately, economic growth is strong in Europe and Japan.
Regarding the economic policy reaction to the recent oil price increases, a clear signal should be given in industrial countries, the developing world, and Eastern Europe alike, that policy shall remain aimed at containing inflation and government deficits, and that structural adjustment shall be pursued. This implies that no new distortions should be introduced into the economy through attempts to insulate it from the rise in oil prices. Governments should step up their efforts to make their economies more flexible, so that they will be able to absorb external shocks more easily. The one-off increase in domestic prices as a consequence of the oil price increase should not be translated into a cost-price spiral. This would give rise to a recurrence of stagflation.
Recent developments should not distract us from fundamental issues such as the transformation of the planned economies into market economies, the stability of the international monetary system, the threat of protectionism, the unbalanced distribution of prosperity in the world, and the degradation of the environment. On each of these, I would like to say a few words.
The transition in Eastern Europe from a planned economy to a mixed, market-oriented system has led us into terra incognita. One thing is certain: such an economic reform can be successful only if it is comprehensive, consistent, purposefully executed, and presented clearly enough to acquire democratic legitimation. It requires a change in economic, social, and political attitudes, organization, and institutions. Comprehensive reforms are a precondition for attracting the necessary foreign capital and techniques.
The blessing of the existence of the multilateral institutions has seldom been more clear. The IMF, the World Bank Group, the OECD, and, in due course, the European Bank for Reconstruction and Development stand ready to assist these countries in a conceited effort in the design and implementation of programs, projects, and financing schemes.
Additional efforts may be called for. As an example, I draw your attention to the Dutch proposal to create an “energy community for Europe,” in which Western Europe would supply the technology and capital that would enable Eastern Europe to exploit its natural resources more efficiently and to develop its energy infrastructure.
International Monetary and Trade System
In a world with highly integrated capital markets, stability of exchange rates needs to be achieved through stable domestic policies and careful coordination. Ill-balanced policy mixes can give rise to perverse exchange rate movements. The International Monetary Fund should continue to address this subject in its surveillance of the international monetary system and the policies of member countries. Countries large and small would be well advised to heed the IMF’s recommendations.
A stable international monetary system provides a good environment for international trade and investment. However, our efforts will be in vain if protectionism is allowed to rear its ugly head.
The GATT provides the proper framework for freeing trade. The next months will be critical for the successful completion of the Uruguay Round. Economic analysis is clear about the benefits for all that stem from liberalization. The necessary effort is of a political nature: the setting aside of short-term interests and pressures. Clear examples are agriculture and fibers. If nations, among them the industrial nations like my own, continue to give preference to the protection of their sectoral interests, they are not only damaging their own consumers, wage earners, and tax payers, but they are, more particularly, robbing the poor in the world of a livelihood.
The changed international situation requires a coordinated response in support of developing countries. The outlook for many of these, quite uncertain even before the present crisis, has now become gloomy. Although there are wide variations among individual countries, the majority of oil importing developing nations is severely affected. Contrary to previous oil shocks, commercial financing is now far less available, and for many heavily indebted countries it will be very difficult, if not impossible, to attract financing from other sources.
This gives quite a different dimension to the reform process that is currently under way in many developing countries. For developing countries themselves a rapid domestic adjustment is needed in order to avoid the emergence of unsustainable external and internal imbalances. External creditors as a group would be well advised to support these reforms in order to maintain the momentum of adjustment. The IMF and the World Bank have a key role to play in coordinating assistance to developing countries.
For debtor countries with large amounts of commercial debt it is important that the implementation of the strengthened debt strategy be stepped up. However, the negotiations with the commercial banks are still long and drawn out. These negotiations can be expected to remain difficult in the future. The IMF and the World Bank have an important role in providing the right incentives. The IMF could focus the negotiations by presenting a medium-term framework for adjustment and financing that would pave the way for a return to external viability.
For the severely indebted lower-income countries, the strengthened debt strategy can offer but limited relief, owing as they do the bulk of their debt to official creditors. The prospects for these countries of returning to normal debtor-creditor relationships have been bleak for many years already. The Netherlands was among the first to forgive concessional ODA-debt. Many other donor countries were to follow suit. Regrettably, this has not proved to be sufficient to restore viability. The Netherlands, therefore, now proposes that the community of creditor nations be prepared to start a program of gradual cancellation of bilateral official debts of the poorest developing countries facing severe debt problems. I note with satisfaction that other creditor countries are indicating their willingness to think and act along the same lines. The Netherlands would favor the elaboration of joint proposals and is willing to take an active part in discussions in the appropriate forums in order to create a broad basis for consensus and progress. Such a scheme should be considered seriously and constructively by the Paris Club. Cancellation could be part of a gradual process that is made conditional on the implementation of sound economic policies in the context of IMF programs. Otherwise, it would only give temporary relief, with no prospect whatsoever of a return to financial viability for these countries. For the creditor countries, the budgetary consequences of implementing the Netherlands proposal could be met by charging development aid budgets with a reasonable but limited percentage of the amounts involved, so as to secure true additionality.
The international community should stand ready to support those countries especially heavily hit by the Gulf crisis through a coordinated approach to alleviate their loss. In principle, the European Community decided two weeks ago to offer financial assistance to Jordan, Egypt, and Turkey as part of a wider international effort. The IMF and the World Bank should play a leading role by helping to assess financing needs and by supporting their adjustment programs. …
Growing interdependence in the world is clearly demonstrated by the environmental problems. The continuing degradation of the environment is truly universal. The solution of global environmental problems must remain a top priority for all of us. The future of mankind is at stake. Developing countries have to play their role too. But, if developing countries are to contribute to solving global environmental problems, and they incur additional costs, or are confronted with a scarcity of resources, the industrial nations should be prepared to give financial support; support that should be truly additional.
The Netherlands supports the World Bank proposal for the establishment of the Global Environmental Facility. This facility, although operating in the first phase as a pilot scheme, should reflect the joint responsibilities of all nations. The Netherlands, therefore, strongly feels that this global character calls for a fair and multilateral burden sharing. The Gulf crisis again proves the point that there is a universal need for energy conservation and for alternative energy sources.
In conclusion, I have advocated a more coordinated approach in a multilateral framework to the problems we are facing today. The developments in the last year may mark the dawn of a new era, in which the countries of the world will draw closer together. Coordination is possible only if we can agree on its objective. This objective should be an open international economy that combines equity, freedom, and efficiency.
Ultimately, coordination will be sustainable only if it is supported by the people. Since World War II the right to self-determination of nations has swept through the world and changed its face. I hope that present movements toward freedom in the various regions will leave their mark upon the world to a similar degree.
Statement by the Temporary Alternate Governor of the Fund and Bank for Canada—Monique Landry
In recent years, the major industrial countries of the world, and an increasing number of developing countries, have pursued their national economic policies within a common framework. This framework, which emphasizes the need for a medium-term policy, is based on three interdependent and complementary elements. The first is the need to make steady and credible progress in reducing fiscal deficits, thereby freeing resources in support of private sector investment and growth. The second is a monetary policy aimed at establishing a noninflationary environment in which decision making is not distorted by inflationary expectations. The third element consists of structural reforms aimed at strengthening market forces and encouraging a more efficient allocation of resources, both domestically and globally. Together, these three elements form a consistent policy “package” that is contributing to sustainable growth and rising living standards in both industrial and developing countries.
This framework has been the basis of the policy program that we have been implementing in Canada since 1984. We have sought to follow a policy path that takes the medium- to long-term view. Canada’s economic performance over the past six years provides strong evidence that this policy approach works. Since 1983, real output in Canada has grown at an average annual pace of over 4 percent. This sustained expansion has translated into a significant gain in prosperity for the average Canadian. On a per capita basis, personal incomes, after correcting for inflation, are 16 percent higher than in 1983. But, achieving these results has required tough decisions. We have had to deal with a well-entrenched budgetary deficit and have introduced structural reforms, despite strong resistance by vested interests. Recently, as the economy has reached capacity limits, we have also had to take strong action to counter rising inflationary pressures. As difficult as these decisions have been, without them our performance would have deteriorated, not strengthened.
Canada is, of course, not the only industrial country to have benefited from this policy framework. Indeed, the strong sustained growth of industrial countries since the early 1980s is testimony to the validity of a policy approach that emphasizes the three elements I have referred to. But all of us continue to face ongoing challenges. We face the challenge of containing and then reducing inflation. We face the challenge of increasing global savings to meet the needs of developing countries and the adjustments in Central and Eastern Europe. We face the challenge of making substantial progress in liberalizing world trade. And finally, we face the challenge of the recent run-up in oil prices and the increased volatility and uncertainty in financial markets that has resulted from developments in the Middle East.
Meeting these challenges successfully will require that we in the industrial countries remain firmly committed to our policy framework and intensify our efforts. It will require a similar commitment on the part of developing countries. A number of developing countries have been following this policy framework with considerable success. Others, including Central and Eastern European countries, have more recently recognized the need for such a policy approach and are moving rapidly to introduce market-oriented reforms. Indeed, we have all been impressed by the commitment of countries in Eastern Europe to adopt our policy framework and implement the necessary stabilization and structural reforms.
Allow me to very briefly refer now to the invasion of Kuwait by Iraq and the consequences that invasion has had on the world economy and on macroeconomic policies. First of all, we must marshal our resources to restore sovereignty in Kuwait. And such resources must necessarily be subtracted from our domestic expenditure. Then, simultaneously, we are going to have to resist the recent increase of inflationary pressures as best as we possibly can. If we fail to stand by our principles and the measures we have agreed to implement, buckling under to the prevailing pressures and the burden of increased prices, we would be jeopardizing the progress so painfully achieved in the last decade.
Recent developments in world financial markets support this conclusion. It seems to me that much of the volatility of asset prices and the increase in long-term interest rates can be attributed to concern that industrial countries might change their policy direction. In an environment of uncertainty it is absolutely critical that we pursue the policies that will lead to the achievement of noninflationary growth.
In Canada, and in some other industrial countries, growth has now begun to slow. This is a natural consequence of an extended period of strong growth that has finally pushed spending beyond our capacity to produce. While the slowing will be difficult, it will, nevertheless, bring a better balance of demand and supply and lay the foundations that are essential for a reduction in inflation and interest rates and a return to solid economic growth.
Just as we need to bring into better balance the supply and demand for output, we need to bring into better balance the supply and demand for savings. There is no doubt that, despite some temporary slowing of growth, there has been, and will continue to be, a growing demand on global savings. All of us have a responsibility to intensify efforts to increase global savings. This means that deficit countries, including developing countries, must make further progress in correcting their fiscal imbalances, and surplus countries must continue to sustain noninflationary growth.
This brings me to the third element of our policy framework. In previous IMF and World Bank meetings we agreed on the importance of structural adjustment policies to increase the productive capacities of our economies and reduce underlying inflationary pressures. Over the past several years, many countries have moved to reduce the structural impediments to the efficient allocation of resources.
But, there is still more we can do, both individually and multilaterally. In this context, I would like to comment on the singular importance of the current Uruguay Round of multilateral trade negotiations. With only some 80 days remaining before the Round is scheduled to conclude, it is clear that the negotiations are now at a critical stage. Maximum efforts must be made to ensure that they achieve the greatest possible results. We must strengthen the multilateral trading system and ensure that developing countries are integrated more fully into it. We should, therefore, ensure in these final weeks that our negotiators are given the necessary mandates to achieve the greatest liberalization possible.
It is encouraging to note that there is a growing appreciation in many developing countries and in Central and Eastern Europe of the need to establish a framework of market-oriented institutions and sound policy to stimulate private savings and investment. I firmly believe that the best way we can assist these countries is by fostering an open and prosperous international economic environment while encouraging them to pursue market-based solutions to their economic problems. However, the experience of the early 1980s clearly demonstrated that international trade and development depend critically on stable economic growth.
Sustained, long-term growth is within the reach of all countries. For that to happen, we must remain committed to the broad range of structural initiatives and macroeconomic policies we know are appropriate. As in previous situations of rapid change and unexpected turns of events, we are today in the unenviable position of having to make hard policy choices. We must maintain our resolve to pursue policies consistent with long-term sustainable growth in an environment characterized by price pressures and a temporary slowing of world growth. Ultimately, each country is responsible for its own fate and must make its own decisions. But, our integrated world demands that we recognize the external linkages that constrain us. It also puts a particular responsibility for good domestic policies on the major industrial countries.
Fortunately, in coping with the challenges that the current situation presents, we can turn to the International Monetary Fund and the World Bank to play their supportive and often vital role in helping countries while serving to secure an open and dynamic international economy. By providing financial support and, more important, policy guidance and technical advice, the Fund and the Bank can help their members to make the right choices. We will all benefit from the resulting collective improvement in economic performance.
September 26, 1990.