Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1988
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System, H.O. Ruding
I have the honor this afternoon to report to you, in my capacity as Chairman of the Interim Committee, on the outcome of the meetings of the Committee this year: one on April 14 in Washington, and the other on September 25 in Berlin (West). At both meetings, considerable attention was devoted to the world economic outlook, economic policy coordination, and the debt situation and strategy. Other matters discussed by the Committee include the question of SDR allocations, the Ninth General Review of Quotas, overdue financial obligations to the Fund, and recent adaptations in Fund facilities. Because the principal conclusions of both meetings are contained in the press communiqué issued following those meetings, I shall limit myself to briefly highlighting some of the main points of our discussions.
In April 1988, the Interim Committee indicated that world economic prospects were for a continuation of steady, moderate economic growth with low inflation. Since then, developments have exceeded expectations. With strong growth in the industrial countries, world trade has been buoyant and some narrowing of payments imbalances has been effected, while inflation has generally been kept moderate. Moreover, higher non-oil commodity prices, together with the implementation of improved policies, have led to a strong growth in export earnings in some developing countries.
Keeping in perspective the optimism prompted by this latest assessment of the world economy, the Committee observed that the debt burden in a number of developing countries remains very high and that, despite economic expansion in the industrial world, current and projected growth in many developing countries continues to be inadequate.
In focusing on the problem of external payments imbalances, the Committee reaffirmed the validity of the process of economic policy coordination initiated in 1985. The Committee stressed the need for further reductions in the U.S. budget deficit and for the adoption of measures to increase private sector savings. In Europe it was felt that structural changes designed to sustain the momentum of growth and to reduce unemployment should complement macroeconomic policy; and in those European countries with large surpluses, strong growth in domestic demand should be effected. In Japan, where the effort to increase domestic expenditures faster than output has already been successful, the Committee called for the pursuit of structural reforms that would support and sustain greater reliance on demand-led growth. Committee members also took note of the strong performance of the newly industrializing economies in Asia and of the contribution that that performance could make to reducing global imbalances.
At both its meetings this year, the Committee emphasized how important it is for the developing countries to implement policies aimed at strengthening financial stability, encouraging savings, enhancing capital formation, and improving efficiency. At the same time, it was considered imperative that adequate financing be provided by creditors on a timely basis in support of such policy efforts and that the industrial countries foster a hospitable international environment, including sustained, noninflationary growth and more open markets for goods and services. In that regard, the Committee called for substantial progress to be achieved at the General Agreement on Tariffs and Trade (GATT) midterm review in Montreal in December of this year.
Recognizing that progress in economic policy coordination among the larger industrial countries in recent years has been due in part to the use of economic indicators, the Committee encouraged the Fund’s Executive Board to explore possible ways of strengthening surveillance—looking both at indicators and at structural policies—with a view to improving the appropriateness, consistency, and timeliness of policy implementation. The Committee recalled in that connection the continuing responsibility of the Executive Board to keep the working of the international monetary system under review and to identify ways of improving it, within a multilateral framework.
In turning its attention to the debt situation, the Committee reiterated its support for the current debt strategy and emphasized that the Fund’s role in the implementation of that strategy should remain a central one. Concern was expressed that many countries continue to face severe financing and adjustment difficulties, the more so with the recent increase in interest rates. Hence, it was felt more forceful actions are needed to resolve the debt problem. Countries with debt-servicing problems must adopt credible, growth-oriented adjustment programs aimed at restoring confidence in those countries, thus discouraging capital flight and improving access to private capital markets. New money, however difficult to secure, remains a crucial element in putting together financing packages for countries undertaking adjustment. There was agreement in the Committee that the menu approach should be broadened further to include, inter alia, voluntary, market-based techniques aimed at increasing financial flows and reducing the stock of debt without, however, transferring risk from private lenders to official creditors.
Engendering great interest at the Committee’s discussions in Berlin (West) was the offer by Japan to extend financing through the Export-Import Bank of Japan, primarily to middle-income countries undertaking Fund-supported adjustment programs. The modalities of this initiative, although not yet fully elaborated, would comprise the following main elements: the financing would be additional; it would be in the form of untied loans at below-market rates; and it would be extended in parallel with Fund arrangements.
An integral part of the Fund’s role in the debt strategy is the ongoing adaptation of the Fund’s facilities and instruments. In that connection, the Committee welcomed the commencement of operations of the enhanced structural adjustment facility to assist low-income countries, the modification of the modalities of the extended Fund facility, and the establishment of a facility that comprehends both compensatory and contingency financing.
On a related matter, the Committee welcomed the agreement by governments of creditor countries to provide additional debt relief through the Paris Club, and the efforts of multilateral development institutions to provide additional relief and/or concessional assistance to the poorest of the indebted countries that are implementing growth-oriented adjustment. It urged that all such assistance be coordinated in form, timing, and conditions.
The question of overdue financial obligations to the Fund prompted a useful exchange of views among members of the Committee. Stressing both the adverse impact of overdue obligations on the effectiveness of the Fund as a cooperative monetary institution and the heavy financial burden such obligations impose on other debtors and on creditors of the Fund, the Committee welcomed the intention of the Executive Board to pursue a multifaceted approach to the problem involving measures to prevent further arrears from arising, coordinated assistance, the provision of bilateral financing to members undertaking strong programs of economic reform and seeking to regularize their relations with the Fund, and prospective support from international financial institutions. In urging all members to treat the Fund as a preferred creditor and to support this cooperative approach to the problem of overdue obligations, the Committee has asked the Executive Board to pursue its work on the modalities of the approach.
In commenting on the Ninth General Review of Quotas, and with emphasis on the notion that increases in quotas would reduce the reliance of the Fund on borrowing, note was taken of the progress the Board has made thus far in its work on the Review. The Committee urged the Executive Board to ensure that its future work on quotas is given high priority, so that it can report to the Committee before April 30, 1989. It was agreed that the Fund’s access policy should be reassessed in light of the outcome of the Ninth Review of Quotas, with the present limits to be maintained for 1989.
On the question of SDR allocations, the Committee took note of the Executive Board’s continued monitoring of developments in international liquidity and of its examination of the implications of those developments for the role of the SDR in the international monetary system, and it encouraged the Board to continue studying ways of increasing the usefulness of the SDR as a reserve asset. It was felt that the question of a resumption of allocations during the remainder of the fifth basic period should be kept under consideration. In that regard, it was my impression that a number of Committee members showed a renewed interest in the useful role that can be played by the SDR in the system, and I saw this as a promising signal.
In concluding, and on behalf of the members of the Committee, I should like to express the Committee’s appreciation to the Government and people of the Federal Republic of Germany and of the city of Berlin (West) for their gracious hospitality and for the arrangements provided for our meetings in this extraordinary complex.
It has been agreed to hold the next meeting of the Committee on April 3, 1989, in Washington, D.C.
Statement by the Governor of the Fund and the Bank for Canada—Michael H. Wilson
It is a pleasure to be in West Berlin and to accept the gracious hospitality of the Government of the Federal Republic of Germany and of the city of Berlin (West).
The practice of holding one Annual Meeting in three away from the headquarters of the Fund and the Bank is a good one because it gives us all a chance to look at the world from a different perspective, and I must say that the vibrancy of West Berlin delivers a strong message to all who care to look. These three-yearly meetings away from home also serve as milestones, for they invite us to look back, in time and distance, on what we have accomplished and what we have not, on the challenges we have met, and, perhaps more to the point, on the challenges we now have to face.
For challenges there are, and in many ways there will be tougher nuts to crack than we are likely to imagine. Some of them are familiar: the dilemma of international debt, for example, and the gap between rich nations and poor. In addition, there is the challenge of the eroding environment, and it is a challenge of dimensions so great that we are still learning the extent of the damage it can do to us.
Six years ago, the Annual Meetings were held in my own country, in Toronto. It was a different kind of world in 1982. The industrial economies were in the deepest recession since the 1930s. Interest rates, inflation rates, and unemployment levels were all into double digits. To take my own country as an example, consumer price increases in Canada had risen as high as 12.5 percent, the prime lending rate reached nearly 23 percent, and unemployment was on its way to 12 percent.
Then, just as the Toronto meetings began, came the onset of the debt crisis. Few who attended the Toronto meetings realized how difficult the debt problem was or recognized that it would persist as a major issue for every subsequent meeting of the Boards of Governors.
In the past few years, we have come into a better kind of world. In the industrial countries we have experienced a period of exceptional growth. We have broken out of stagflation and created real and sustained gains in production and employment.
I believe that one of the significant differences between then and now, a change that has helped to light the way from recession to expansion, is a growing understanding of the nature and extent of the world’s economic interdependence. With understanding has come a willingness to act, to explore new avenues of economic cooperation, and to build a new framework for the coordination of economic policies. And we are doing so. All of us are making good use of the range of international forums concerned with management of the world economy—in these meetings of the Fund and Bank, in the Organization for Economic Cooperation and Development (OECD) and the General Agreement on Tariffs and Trade (GATT), and in the Group of Seven industrial nations.
It would be misleading to suggest that our successes are easily won. We have not yet resolved the large budget deficits and trade imbalances that still pose a threat to sustained, noninflationary world economic growth. Yet we have made headway. The Group of Seven countries have been undertaking policy changes to bring down the imbalances in a manner consistent with stability in currency exchange rates.
Their capacity to coordinate policies more closely was evident in the aftermath of the financial market crisis of last October, when calm was restored with injections of liquidity. This was followed by strengthened policy commitments at the end of the year. This year we are seeing the results of strengthened coordination as trade imbalances decline further and faster than expected. And we will do more to ensure that this adjustment continues.
A second illustration of cooperative achievement is that we have coped with the international debt problem. I do not suggest that we have conquered it, or that we have done enough to ensure adequate growth in developing countries, but we have managed to weather the crisis so far, and in ways that point to what more can be done.
As the 1980s draw to a close, we can legitimately say that the world community is a little wiser and, through its growing awareness of the extent of its interdependence, is experiencing the benefits of closer economic cooperation. We are improving the institutional framework for achieving it. We are better prepared to deal with new concerns and new challenges.
One of these challenges is to sustain global economic growth. The World Economic Outlook just published by the International Monetary Fund paints a fairly optimistic picture, with real gross domestic product (GDP) in the major industrial countries projected to grow at an average rate of about 4 percent this year and 2.8 percent in 1989.
At the same time, however, we face two risks. One is that some economies are now growing so strongly that they are in danger of overheating, and inflationary pressure is emerging in a number of them. It would be foolish to forget the lesson of the 1970s and early 1980s, when an accommodating attitude toward inflation led to more and more inflation. We had to swallow some very bitter medicine—in the form of high interest rates and a deep recession—to bring inflation under control.
If we are to avoid repeating this painful history, we must act now in order to prevent inflationary expectations from becoming firmly entrenched. Central banks must be in the front line in the battle against inflation, but they cannot carry the fight against inflation alone. Fiscal authorities also must act responsibly by strengthening their balance sheets, particularly in countries where growth is the strongest and external deficits are large.
We have seen a welcome reduction in the imbalances in current accounts, imbalances in which some nations have massive surpluses while others are deep in the red. But herein lies the second risk—the risk that excessive demand growth in some economies and an absence of needed domestic stimulus in others could slow the reduction of the imbalances. The experience of interdependence and effective coordination teaches us that the burden of adjustment can be lessened when market forces are complemented by appropriate policy actions.
These risks can be reduced if the major countries continue to pursue compatible economic policies. These include trade policies that open their economies to the changes that are taking place in our rapidly shrinking world. To take one current example, the midterm review of the current GATT Round of Multilateral Trade Negotiations will be held in Montreal in December. It is vital that this meeting achieve discernible progress.
Another necessary thrust is stronger international policy coordination in the area of structural reforms. Through medium-term structural adjustment, governments can make their economies more flexible, improve their capacity to respond to change, and thereby achieve sustainable growth. This involves improving incentives to work, invest, and save; removing regulations that no longer serve their original purpose; increasing exposure to market competition; and enhancing human resource development.
Because structural reform is so important, the heads of government attending the economic summit held in Toronto in June agreed that efforts in this area should be reviewed and encouraged on an ongoing basis. Progress is being made in a number of areas such as tax policy, regulatory reform, and financial institution reform.
In Canada we have made significant gains in structural reform. During the four years that the current Government has been in office, we have abolished market-distorting regulations in key sectors such as energy, transportation, and financial services. We have privatized Crown Corporations in such diverse fields as telecommunications, mining, and aircraft manufacturing.
Most important, we have negotiated a free trade agreement with the United States. This bilateral agreement gives us a historic opening to build a stronger, more efficient economy. As the OECD pointed out recently, “Canada is expected to derive large economic benefits” from the agreement, including “lower consumer prices, expanded market opportunities, and greater efficiency from the realization of economies of scale.” The free trade agreement with the United States also serves as a model for further liberalization in the multilateral trade negotiations and was given strong public support by the summit leaders in Toronto.
The Canadian Government has been no less active in other areas. We have brought a runaway fiscal deficit under control—by cutting it virtually in half as a percent of GDP over the past four years. We have done this while implementing a tax reform that is restoring fairness to the personal and corporate income tax systems through the elimination of distortions built in over the years. We have preserved and strengthened social programs. We have worked effectively to reduce regional disparities, and we have provided job retraining and other measures to help our people take advantage of new economic opportunities.
I believe it is no coincidence that solid achievements in economic policy have been accompanied by an enviable record in economic performance. Over the past four years, Canada has enjoyed the fastest growth of any Group of Seven country, achieving an average annual rate of GDP growth of 4.5 percent. Since 1984, 1.5 million new jobs have been created in a labor force that now totals 13.4 million people.
While the international community has succeeded in managing the debt crisis over the past six years, the dual challenges of debt and development continue to demand ingenuity and flexibility. It is apparent, for example, that debtor and creditor countries must work together toward a resumption of private flows, including direct investment. Resources from the international financial institutions and bilateral aid agencies can facilitate but not replace such private flows.
Yet, a return to voluntary lending in capital markets for many countries is still some distance in the future. An effective and evolving debt management strategy continues to be essential. Its centerpiece must continue to be strong and comprehensive adjustment measures by debtor countries. Yet, there is also a growing perception between both debtors and creditors, and within the international financial institutions, that new momentum needs to be given to the debt strategy. A number of innovative financing techniques have been suggested as additions to the debt strategy.
In assessing these proposals, I believe we must be guided by three important principles:
—First, such proposals must be based upon and be consistent with sound macroeconomic and structural adjustment policies to increase the creditworthiness of the debtor.
—Second, they should not serve to transfer private sector risk to creditor governments.
—Third, they must not impair the capacity of the Fund and the World Bank to carry out their important work. In this regard, I welcome the proposal of the Japanese, who have demonstrated good ingenuity in meeting our collective challenges.
The situation of the poorest, most heavily indebted countries, particularly those in sub-Saharan Africa, is a distinct problem requiring special attention. It is clear that additional concessional flows, plus some debt forgiveness, will be required. Canada has led the way in this direction by forgiving our official development assistance (ODA) loans to the poorest countries in sub-Saharan Africa. The Toronto economic summit also dealt with the issue. It recognized the need to remove the burden of ODA loans and achieved consensus on developing a framework of comparability for rescheduling official debt with concessional interest rates, partial write-offs, longer maturities, or some combination of these options. I am particularly pleased that the framework for implementing the consensus has now been implemented and that it will shortly become operational.
It is widely agreed that the reduction of poverty must be central to our economic development efforts. But it is not enough just to be against poverty. We need to focus on practical measures to address the problem.
In this context, let me stress the importance of investment in human resources to complement needed investment in physical capital. Investments in people—in their health, nutrition, education, training, and literacy—provide opportunities to realize substantial development gains. Unfortunately, there has been a sharp decrease in many developing countries in the proportion of government expenditures allocated to education and health. The Fund and the Bank should promote, both in their policy dialogue and in the World Bank’s lending program, cost-effective investments in human resources in order to alleviate poverty and maximize future growth prospects.
Closely linked to the challenge of poverty reduction is the challenge of protecting our environment, since widespread poverty is one of the main pressures leading to environmental damage. As Prime Minister Mulroney recently emphasized: “The world is coming to recognize that economic development and environmental protection are mutually reinforcing, not mutually exclusive.” Few issues emphasize so clearly the interdependence of developed and developing countries, or offer such possibilities for leadership by our institutions.
In Canada, with our prosperity and quality of life so intimately connected with the quality of our environment, we are taking a number of steps to protect the environment. These include large-scale reductions in acid rain by 1994; the virtual elimination of lead emissions by 1990; the creation of four new national parks in the last four years; and commitments to clean up the Great Lakes and the St. Lawrence Seaway, in part on a joint basis with the United States.
Some other countries have also taken significant steps, but much remains to be done. Such problems as acid rain and protection of the ozone layer clearly demonstrate that environmental hazards know no political boundaries. As we stressed at the Toronto summit, they can only be solved through cooperative international action.
Canada has already demonstrated that it is prepared to take a leading role in developing international cooperation. We were pleased to sponsor the international conference in Montreal that resulted in a formal convention to protect the ozone layer. We also acted as hosts, in Toronto, immediately following the summit in June, for the international conference on the changing atmosphere.
We must now make progress on the issue of environment and development. Canada is committed to the principles set out in the report of the United Nations’ World Commission on environment and development headed by Prime Minister Brundtland of Norway. This is by no means a new concern on our part. As the Canadian National Task Force on Environment and Economy pointed out last year, sustainable development means that the use of resources and environment today must not damage prospects for their use by future generations.
The Canadian International Development Agency undertakes environmental assessments of all the projects it funds. For some time now, we have been urging that all environmentally sensitive World Bank projects should include clear assessments of their environmental impacts. Mr. Conable, we are pleased to note, has stressed the connection between poverty and environmental degradation and the Bank and made clear its intention to promote conservation strategies in its borrowing member countries. . . .
Destruction of the forests and desperate conditions of urban congestion in the Third World are the consequences of poor people seeking the means to survive. Without improved development opportunities, we cannot expect them to do other than search for such fuel, shelter, and livelihood as they can. We must help them to protect their precious natural resources.
There is a perception in some less-developed countries that environmental protection is a cause of the rich whose burden falls most heavily on the poor. This, I believe, is a misconception. Environmentally sound development is no contradiction in terms. Indeed, in the long run it may be the only sure foundation of better lives for everyone in the world.
We at these meetings in Berlin face a great many challenges, challenges that will directly affect the well-being of the people in the countries we represent. We have come a long way since the Toronto meetings six years ago, but we still have a long way to go. If we confront these challenges directly—the challenges of imbalances, of the international debt burden, of poverty, and of the environment—I am confident that when we meet next year in Washington we will be able to take heart from what we have achieved: a year of solid growth in the industrial economies and a year of progress in securing financing for sound and sustainable growth in the developing countries.
Statement by the Alternate Governor of the Fund and the Bank for Japan—Satoshi Sumita
There are a number of important issues before us, and I am grateful for this opportunity to state my views as Alternate Governor for Japan. Before that, however, I would like to express my very sincere admiration and appreciation to the Government of the Federal Republic of Germany for the impeccable arrangements that they have made for our meetings.
Present State of the World Economy and the Economic Issues Before Us
Present State of the World Economy
In looking at the overall state of the world economy today, the first thing we notice is that it is achieving faster and better economic growth than expected.
The industrial countries continue to enjoy strong expansion, and the developing countries as a whole are managing sustained though gradual economic growth.
The next feature of note is the progress that is being made in reducing external imbalances among the industrial countries, not only in volume terms but also in nominal value terms. The U.S. trade deficit and Japan’s trade surplus in particular have been steadily reduced.
In addition, it is noteworthy that exchange rates, though having changed substantially at times, have been relatively stable of late.
Focusing more narrowly upon Japan, the economy has continued to expand, with the primary impetus from strong domestic demand, while prices have been very stable. Real gross national product (GNP) growth in fiscal 1987 was 4.9 percent—the highest it has been since fiscal 1984. In tandem with this, the current account surplus is being steadfastly reduced, the surplus for fiscal 1987 being $10 billion less than that for fiscal 1986—the first reduction since fiscal 1981.
Looking ahead, Japan, is determined to promote and consolidate the shift to domestic demand-led growth in line with the new five-year economic plan adopted this May. The tax reform now being discussed in the Diet is also expected to contribute to the attainment of this objective by creating a distortion-free tax structure and by instituting major tax reductions.
The Economic Issues Before Us
Yet, while the outlook for the world economy appears bright, there are still three problems that remain before us.
The first is the continuing need to achieve noninflationary and sustained economic growth and to further reduce international imbalances among nations. This need clearly mandates a continued effort for economic policy coordination and for exchange rate stability.
Second is the need to resist the rising tide of protectionism. Here, I hope that the midterm review of the Uruguay Round will provide additional impetus for the promotion of multilateral free trade negotiations.
And third is the persistent problem of the developing countries’ debts. According to IMF figures released recently, these countries’ total accumulated debt is expected to be $1.24 trillion by the end of this year. This is a truly staggering amount, and it is crucial that we make a serious effort to come to terms with this problem, not with idle armchair theories but with practical measures that will have tangible effects.
Policy Coordination and Improving the Functioning of the International Monetary System
Policy Coordination Efforts
Meeting at the Plaza Hotel three years ago, the major industrial countries agreed to coordinate their policies to ensure that the dollar better reflects economic fundamentals. While steady progress has been made in reducing the imbalances among the major industrial countries in the months and years since then, this period has also seen very large and rapid changes in exchange rates. Bolstered by the Louvre Accord 19 months ago, policymakers have realized that they have to coordinate their economic policies and cooperate in exchange markets, so as to reduce the external imbalances while promoting exchange stability and to achieve noninflationary economic growth, and all of them are working toward that end.
It was this concerted policy coordination effort by the countries concerned that enabled us to ride out the wave of market uncertainty following last October’s Black Monday spasm, and it is this policy coordination that accounts for the progress we are making in achieving sound economic expansion and reducing the external imbalances.
It is important that these efforts for policy coordination be continued if we are to maintain these favorable trends: the surplus countries should sustain the momentum of domestic demand as long as possible, while the deficit countries should strengthen their efforts to reduce their fiscal deficits. At the same time, although the risk of global inflation is not an issue of urgent concern, it is important that we maintain vigilance against its resurgence.
Improving the Functioning of the International Monetary System
Many of our countries have deregulated exchange transactions, and the international monetary system has undergone sweeping changes since the 1973 shift to floating exchange rates. Having gone through a number of tests and trials, including major exchange rate changes, the floating exchange rate system has gradually evolved and matured. This is thus an opportune time to step back and look at possible ways to improve the functioning of the international monetary system from the medium- to long-term perspective.
However, it should be noted that the introduction of a system establishing ranges, bands, or other binding means restricting the scope for exchange rate fluctuation would necessarily entail full consideration of asset settlement. Given this, I believe that it would be more realistic at this point to consider ways of diversifying reserve currencies to complement the dollar’s key role, thereby facilitating the financing of resources for market intervention and dispersing the exchange risk of reserve currencies. Consistent with this, Japan has been steadily removing the barriers that would impede the use of the yen as an international currency.
The IMF’s Role
The IMF has an increasingly important role to play in the international monetary system. Not only, for example, does the IMF have a pivotal position in monitoring the sound operation of the exchange rate system, there are also a number of issues requiring the IMF’s urgent attention in light of the present international liquidity situation.
The first of these issues is that of studying anew the concept of international liquidity. With the development of financial and capital markets worldwide, and with the enhancement of private sector holdings of foreign exchange, it is unrealistic to define international liquidity simply in terms of the reserve assets held by the monetary authorities. Some new definition needs to be found in better alignment with today’s realities.
The second of the issues is posed by the question of whether or not each country actually has the level of liquidity that it needs. I believe that this problem mandates the additional supply of conditional liquidity from the IMF, which will in turn require a strengthening of the IMF’s resources. I trust we are agreed that this strengthening should be effected not with borrowings but with a new quota increase. The Committee of the Whole of the IMF is currently studying specific modes for the Ninth General Review of Quotas, and I am hopeful that a substantial quota increase will be agreed upon soon.
In this connection, it should be noted that the quota shares are the basis for members’ rights and responsibilities in the IMF, and it would be detrimental to the IMF’s smooth functioning to leave these quota shares grossly out of line with economic reality. Japan fully intends to contribute to the international community through the IMF, and we hope that Japan will be allocated a quota share in line with its economic standing. It is with this in mind that I would like to take this opportunity to state that Japan intends to request a special quota increase in the context of the Ninth General Review of Quotas.
And the third of these issues requiring the IMF’s attention is the need to study the role of the SDR in connection with international liquidity management. It is imperative that a study be made on improving the SDR’s characteristics and making it an easily usable international reserve currency. This must include both analyzing the present situation and problems with regard to the SDR—currently perceived as a contingency safety net—and studying what modalities might be possible to expand the scope of SDR use, including use by the private sector.
Debt and Development
Present Situation and Basic Policy Directions
Although the developing countries’ debt service ratios have come down slightly, these countries continue to bear a staggering debt load, and the situation remains serious. It is imperative that we overcome this situation in order to promote economic growth in the developing countries and to stabilize the international financial system.
It is my firm conviction that the menu approach proposed to cope with the tapering off of the flow of funds to the developing countries from commercial banks is valuable in broadening the range of options and promoting new financing participation.
Efforts to promote case-by-case solutions based upon full and accurate understanding of the situation in each of the developing countries are basic to any attempt to resolve these countries’ debt problem. There is no general panacea for the debt problem. For the middle-income countries, it is essential to promote market-oriented responses premised upon the self-help efforts of those countries with cooperation from the commercial banks, the governments of the industrial countries, and the multilateral financial institutions.
As noted in the Toronto summit’s Economic Declaration, we must also recognize the plight of the poorest countries, and each of our countries should work within its legal framework to lighten their debt burden.
Both the IMF and the World Bank have an especially important role to play in dealing with the debt problem, in that their financing serves as a critical catalyst for the flow of funds from other sources. I strongly hope that the IMF and the World Bank will continue to strengthen their policy advisory functions and will exercise cooperative leadership in resolving the debt problem.
Aware of the seriousness of these problems, Japan has made—and will continue to make—every effort to contribute to a solution to the debt and development problem.
We have, for example, instituted a major program designed to recycle at least $30 billion over a three-year period, and nearly 80 percent of this $30 billion has already been committed. Japan is active in contributing and subscribing to multilateral organizations as well as in cofinancing, with these organizations, by the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund (OECF), and commercial banks. With specific reference to the importance of direct investment for alleviating the debt problem, it should be noted that the Association of South East Asian Nations (ASEAN)-Japan Development Fund (AJDF) was established recently and is moving ahead steadily to implement its investment programs.
Looking to the plight of the poorest countries, Japan announced plans in Toronto to provide grants equivalent to the repayment amount of the principal and interest on yen credits committed to the least-developed countries in the decade 1978 to 1987, thereby in effect waiving repayment on these credits.
On official development assistance (ODA) overall, Japan announced its Fourth Mid-Term Target this June for the five years from 1988 through 1992. Under this Target, Japan has pledged to raise the half-decade total of its ODA to at least $50 billion—twice the total for the previous half-decade—and, for example, to respond positively to the need to provide strengthened resources for multilateral organizations, to work to enhance its grant aid to the least-developed countries, and to make its yen loans generally untied. I assure you Japan is determined to achieve these goals.
Also in this same vein, I am pleased to announce, on behalf of Minister Miyazawa, that, as part of its contribution to promote growth in the developing countries and to help solve the debt problem, Japan is prepared to extend additional financing in the form of untied loans in parallel with the Fund’s extended or other arrangements. The loans will be extended by the Export-Import Bank of Japan, on a case-by-case basis, mainly to middle-income countries in support of medium-term structural adjustment.
The IMF’s Role in Resolving the Debt Problem
With the successes being achieved by the case-by-case approach, I do not believe it would be either realistic or effective to seek a comprehensive, global solution to the debt problem. Reaffirming our support for the existing basic strategy, Japan would like to propose an additional menu item for the middle-income countries’ debt strategies, as suggested by Minister Miyazawa in Toronto.
Under the proposed option, the debtor country would have to start by reaching agreement with the IMF on a medium-term program for economic structural adjustment. This is a prerequisite, and it is hoped that this structural adjustment program would be supported by bilateral funds from the industrial countries as well as multilateral funds from the international financial institutions. Once this program is agreed upon, the debtor country and the creditor banks would meet to agree on securitizing some of the debt outstanding and on rescheduling the rest of the debt under appropriate terms and conditions. In both cases, the certainty of repayment would be enhanced by the debtor country’s special reserve accounts funded by their own resources and held in trust by the IMF. Of course, it goes without saying that this new scheme would have to be structured so that it meets three conditions: (1) that it is consistent with the case-by-case approach; (2) that it is market-oriented and the creditor banks are free to participate or not as they see fit; and (3) that it does not entail any transfer of risk from the commercial banks to the multilateral financial institutions or creditor country governments.
In addition to this, of course, there is much that the IMF can do within its traditional framework. I am thus encouraged by the fact that an effort is being made to revitalize the extended fund facility by, for instance, allowing for one-year extensions of its programs when necessary and accepting some flexibility in its access limits on a case-by-case basis.
Likewise, I am glad to see that the compensatory financing facility—created to provide temporary relief for countries that incur export shortfalls as a result of external factors—has been expanded and enhanced into the compensatory and contingency financing facility to deal with a wider range of external contingencies.
By the same token, I am delighted that the enhanced structural adjustment facility (ESAF) has gotten off the ground and lending has begun from this facility. The Export-Import Bank of Japan has supported the ESAF with an agreement concluded this April to lend SDR 2.2 billion to the IMF, and the Japanese Government has pledged to contribute a grant of SDR 300 million to the ESAF, part of which has already been disbursed. . . .
The world economy today presents an irrefutable picture of increasing interdependence. All of us are irrevocably affected by the way any one of us meets the challenges before it. The need for transnational approaches and transnational solutions is clear. And as we move forward to cooperate in solving our shared problems, I am confident that the IMF and the World Bank will provide the nucleus for this international coordination and will play an even more active role than they have so far.
It is widely recognized that Japan should play a more important role in the international community, and the Japanese people fully recognize their responsibilities and wish to rededicate themselves anew to making an even greater effort to contribute from a global perspective.
Statement by the Governor of the Fund and the Bank for the United States—Nicholas F. Brady
It is a great pleasure to join you for the Forty-Third Joint Annual Meetings of the International Monetary Fund and the World Bank. This is the first such meeting held in the Federal Republic of Germany. It is especially appropriate that it takes place in Berlin (West). This city is a symbol of individual liberty and economic freedom for millions of people. As President Kennedy said 25 years ago: “All free men, wherever they may live, are citizens of Berlin.”
Future historians will record that we have come together at a time when these fundamental principles of individual liberty and freedom have received a new impetus. Economic prosperity and progress flourish only where the rights of the individual are respected and protected and where private initiative is encouraged.
But, with the privilege of freedom comes responsibility. As individuals pursue their personal goals, they must consider the broader interest of their neighbors. And so it is with nations. In pursuing our national objectives, we must recognize our shared responsibilities to improve the world in which we live.
Two fundamental principles should guide us as we consider how to meet this challenge. First, the only lasting prosperity for any of us is sustained prosperity for all of us. Second, the achievement of global prosperity in a world of limited resources requires their prudent use. These principles should guide us as we make the difficult choices to extend benefits to future generations.
And as we undertake this task, four mutually reinforcing pillars continue to support our efforts—the economic policy coordination process, the cooperative debt strategy, the International Monetary Fund, and the World Bank. Let me address . . . these in turn.
Building Economic Prosperity
Global economic prosperity begins with sound policies and strong performance in the industrial world. During the past three years, the major industrial countries have built a new pillar—economic policy coordination—to buttress global expansion and development.
This has helped to reinvigorate our economies. Economic growth in the major industrial countries will approach 4 percent this year, providing a solid footing for all countries. More important, this higher growth has been achieved without a resurgence of inflation. A reduction in our external imbalances is also occurring. Consequently, prospects are excellent for sustained growth with low inflation and exchange rate stability.
The policy coordination process represents a pragmatic approach to strengthening the international monetary system. It involves a discipline that encourages each of us to take actions whose benefits transcend national boundaries. The United States, for example, has implemented measures to reduce its budget deficit. We do not intend to stop here. Other countries are also pursuing monetary and fiscal policies that foster growth without igniting inflation. Most of us need to reduce trade imbalances further, and all of us need to promote open markets. In addition, structural barriers to growth must be substantially reduced if we are to unleash the vitality of our economies.
Spreading Prosperity to Developing Nations
Policy coordination has provided an improved framework for achieving prosperity in the industrial nations. But this is not enough. Our prosperity must be shared. We should not rest until the benefits of hard work and sound policies are broadly realized throughout the world. There is a necessity, indeed an urgency, to raise living standards throughout the developing nations.
Some developing countries have already made great progress. The newly industrialized economies of Asia have made tremendous strides through the energy and initiative of their people. They have also benefited from the open trading system. Now they should take greater responsibility for sustaining this system by opening their economies and exchange rates to market forces.
For the heavily indebted nations, the course has been more difficult. However, the international debt strategy has provided a working basis for addressing the debt problem. This strategy has become our second pillar for building global prosperity. It is dynamic and has adapted to changing global circumstances. Its principles remain valid. Growth stands at the center—the product of sound economic policies. International financial institutions and commercial banks support these efforts. The strategy is credible because it recognizes the necessity for economic reform, the scarcity of global financial resources, and the political realities of economic development.
Many debtor countries have adopted tough economic measures. They have tackled fiscal imbalances, liberalized trade, introduced realistic exchange rates, and generally allowed a greater role for market forces. These actions required great political courage. Their reward has been a resumption of growth that, with continued effort, can be sustained.
Despite this progress, we cannot ignore the serious problems we still face—both in financial flows and in policies. On the finance side, there have been shortfalls. The response has been the menu approach, which offers an innovative range of opportunities for new finance, cooperative arrangements with international financial institutions, and techniques that contribute to growth and also have the benefit of debt reduction.
I have in mind especially market-based techniques that are voluntary and do not depend upon resources from international financial institutions, or that may otherwise shift private risk to the public sector. We should not forget that if the stock of private debt is to be reduced, we must embrace only techniques that private markets find acceptable and that simultaneously maintain the willingness of private lenders to continue financing future development.
Debtor countries need to renew efforts to enhance domestic savings, to attract home the capital of their own people, and to open their economies to the productive potential of foreign investment. Inflation must be defeated and economies freed from controls. There is no realistic substitute for these policies if debtor countries are to muster resources for growth in a world that is short of capital.
Also, we need to harness private ingenuity in all our countries. We all welcome additional official resources, but we must recognize their limitations and ensure that we preserve the essential principles on which our debt strategy is based. Otherwise, the prospects for true reform, sustainable growth, and a return of debtors to world capital markets will be dimmed—and we will miss the opportunities we now see before us.
Consequently, the United States regards with skepticism proposals that may appear to conform to the basic principles of the debt strategy, but which in practice will produce only an illusion of progress. Indeed, such proposals will make the debt problem intractable—by weakening the international institutions on which we depend, by undermining the difficult but lasting reforms the debtor nations are making, and by building political opposition among tax-payers in creditor countries. We must see proposals for what they are, not for what they purport to be.
If we embark on a course that involves the transfer of risk from the private to the public sector, a true and lasting solution to the restoration of sustained growth among debtor nations will have escaped. And then, when official resources have been exhausted, as they will be; when our international institutions have been made static and vulnerable, and they will be; when private lenders have long since withdrawn from the financing of development, we will still face exactly the same problems we see today. But our firepower will be gone, there will be divisions among us, and we will be reduced to words, not actions.
The Role of the International Monetary Fund
The Fund is the monetary pillar for cooperative international efforts to promote a stable international environment. It is one of the key means by which all of us blend our energies and resources to build global prosperity. In recent years, the Fund has modified its policies and facilities to meet the changing needs of its members.
The Fund, however, should remain faithful to its basic principles. Let us remember that it began as a revolving pool of resources to which all members contribute and from which all members in need may draw. A revolving fund must revolve, with payments made in a timely fashion. The existence of deeply embedded arrears strikes at the core of this fundamental institutional principle.
We welcome the Fund’s three-part strategy to overcome the arrears problem. It includes preventive measures to stop a further buildup of arrears, a collaborative approach to deal with existing arrears, and remedial actions to safeguard its financial position. The United States stands ready to participate in this strategy if all the essential elements are in place.
We have been a strong supporter of the Fund, and we will remain so.
However, at a time of competing demands and budget constraints, the case for additional quota resources must be compelling. There should be a clear vision of the Fund in the 1990s and a demonstrated need for more funds—not simply a presumption that more is better. Finally, the arrears problem poses a hurdle to any increase in Fund resources. If our countries are expected to use scarce financial resources wisely, our international institutions must do no less. . . .
Let me close by expressing my admiration for what you have accomplished during these past years. Through policy coordination, the debt strategy, and our international institutions, prosperity is being advanced throughout the world.
The Fund and Bank have exercised leadership and imagination during a difficult period. They have earned our appreciation and deserve our continued strong support. As we seek solutions to the challenges that confront us, I look forward to working with my new colleague Michel Camdessus, with my old friend Barber Conable, and with each of you.
Together there is no limit to what we can accomplish in building a better world for our children and grandchildren.
Statement by the Governor of the Bank for Greece—Panagiotis Roumeliotis
On behalf of the member states of the European Communities (EC), it is an honor for me to address you. First of all, on behalf of the member countries of the European Economic Community (EEC), our thanks to the Government of the Federal Republic of Germany and to all the authorities of the city of Berlin (West) for the impeccable organization of this meeting and the warm welcome which has been offered to us since we arrived in this city.
Economic developments over the past year contain a number of positive elements that justify some optimism for the immediate future if the efforts toward better coordination of macroeconomic policies and structural adjustment continue to be consistently pursued. There are, however, still weaknesses and risks that it is the responsibility of the world community to attempt to remedy.
There has been continuing growth of the world economy and vigorous growth of world trade, and the external imbalances among major industrial countries have begun to be reduced in nominal terms. Also, many commodity prices have recovered from their previously depressed levels. At the same time, the inflation picture is no longer as bright as before and has given cause for monetary tightening in several countries this year. An unavoidable consequence of this has been the recent increase of interest rates. But there have also been uneven patterns of growth among the industrial countries, high rates of unemployment, large existing imbalances in some industrial countries—which present a continuing risk to the smooth functioning of the international financial and foreign exchange markets—and serious difficulties associated with the foreign debt of a number of the developing countries.
Economic policy coordination at the macroeconomic level has produced tangible results. The stimulus given to internal demand in some major surplus countries is taking effect. At the same time, in the United States, the substantial reduction in the fiscal deficit in 1987 and the rapid growth of exports are significant steps in the right direction. Nevertheless, the fiscal deficit continues to be too high, thereby forming an impediment to more rapid and healthy adjustment. More recently, lack of further fiscal adjustment or incipient inflationary pressures forced monetary policy in several countries to pursue two goals that are difficult to reconcile: to keep the exchange rates around their desired levels; and to counter inflation. The experience of the past few months shows that the success of international cooperation depends to a considerable extent upon the possibility of using all the available policy instruments.
In the European Community, some success has been achieved in the consolidation of fiscal positions and the reduction of inflation. The coordination of policies has been reflected in a remarkable degree of stability in the European Monetary System. For the EC as a whole, the growth rate of domestic demand has continued to exceed that of gross domestic product, which has contributed to the necessary external adjustment. However, unemployment is still very high, and this underscores the need to maintain sufficient rates of growth.
Community member countries strongly support international cooperation in macroeconomic policy, with the central aim of reducing current account imbalances and promoting exchange rate stability. Macroeconomic policy in many industrial countries is gradually being adjusted to the goal of maintaining a rate of growth of domestic demand consistent with medium-term strengthening of fiscal positions, price stability, and the reduction of external imbalances. The consistent pursuit of these goals requires that international economic cooperation be viewed in a medium-term context, while considering ways of further improving the functioning of the international monetary system. Moreover, short-term concerted policy actions designed to promote relative exchange rate stability have proved useful.
In the light of these considerations, the member states of the Community continue to support an active role for the Fund in international policy coordination through the exercise of its surveillance functions, with a view to promoting greater exchange rate stability. In this context, we welcome the progress made within the framework of the Fund in developing the use of economic indicators in a medium-term context.
The Community countries share the view that concerted efforts toward structural reform must also be vigorously pursued as an essential part of a medium-term adjustment process. In the United States, continued efforts are needed to reduce fiscal imbalances and to promote private saving, while in Japan the removal of rigidities and distortions in the distribution and tax systems is essential. In the European Community structural reforms that will strengthen supply responsiveness, including the elimination of a wide variety of subsidies, are essential in order to spur job creation, reduce external imbalances, and enhance growth potential.
It is in this context that the Community is pursuing structural reforms to complement the coordination of macroeconomic policies as part of its program for an integrated internal market by 1992, which includes full liberalization of capital movements, the removal of the barriers to trade, and the full mobility of labor, goods, and services within a truly competitive framework. This program of completion of the internal market will be complemented by the enlargement of the role and resources of the structural funds in support of the additional objective of achieving economic and social cohesion by reducing inequalities between the various regions of the Community. Individual countries are taking supplementary measures to address structural problems specific to their economies. This whole package of policies and measures, which should lead to more dynamic, efficient, and open markets, will be an important contribution of the European Community to noninflationary growth across the world.
The internal market will not close in on itself. Let me reaffirm that the member states are strongly committed to the fight against protectionism. Therefore, the Community supports the commitment to standstills and rollbacks and will press for a successful outcome of the Uruguay Round. Progress in all areas of these negotiations, including services, improved market access both for the developing countries and to the markets of the newly industrialized economies, and the reduction of subsidies and protection affecting agriculture, is a major goal.
Of particular concern is the economic situation in many developing countries. Although the improved international environment contributed more than previously to their efforts at achieving adjustment with growth, not all countries were able to benefit to the same extent. Particularly in sub-Saharan Africa and in some Latin American countries, the situation remains unsatisfactory. Despite the improvement in commodity prices and in competitiveness, which benefited some of these countries, their balance of payments position remains fragile.
With regard to indebted developing countries, slippages in macroeconomic policies and deep-seated internal structural problems continue to play a major role in the persistence of their unfavorable economic situation. This underscores the central importance of appropriate adjustment programs designed to promote a return to financial stability, external viability, and sustainable growth within the framework of a cooperative multilateral effort that also includes the maintenance of a healthy international environment, an open trading system, and the provision of adequate financial resources for development. The Community countries see no alternative to the case-by-case approach. They also take the view that continued emphasis should be placed on structural adjustment programs adequately supported by the international community.
With regard to the low-income countries, a number of steps have been taken which the Community countries have strongly welcomed. The Eighth Replenishment of IDA; the activation of the enhanced structural adjustment facility, in which Community countries are major contributors; and the World Bank’s Special Program of Assistance for Africa constitute important steps designed to assist the countries that undertake appropriate adjustment efforts to enhance conditions for sustainable growth. The fifth replenishment of the African Development Fund will also contribute to these efforts. We attach particular significance to the proposals discussed in Toronto concerning concessional interest rates usually on shorter maturities, longer repayment periods at commercial rates, partial write-offs of debt service obligations during the consolidation period, or a combination of these options. In this context, special consideration should be given to heavily indebted sub-Saharan African countries, following approved adjustment policies.
With regard to the highly indebted middle-income countries, we believe that the growth- and market-oriented debt strategy applied case-by-case remains the only viable one. A number of innovative techniques have emerged in recent years in dealing with debt problems. The major value of these techniques is that they are market-oriented and constitute voluntary arrangements that can engender new financial flows and reduce the existing stock of debt. We strongly welcome these developments and wish to encourage a further broadening of the voluntary approach through innovations that improve further the quality of financing and contribute to the alleviation of debt-related problems in the framework of the case-by-case strategy. Both the Fund and the Bank can facilitate the use of such market-oriented instruments. However, private participation in helping to alleviate this problem should carry the risk on its own, and this risk should not be transferred even partially to public agencies.
The approach to adjustment must give due emphasis to structural reforms in parallel with the appropriate macroeconomic policies. In this context, the role of the Fund and the Bank is crucial, especially in assisting in the design and monitoring of programs and in catalyzing financing from other sources. We believe that use of the extended Fund facility on a case-by-case basis and of the new facility designed to safeguard the implementation of the programs against shocks from unforeseen contingencies can be helpful. . . .
The role of the Fund in the international monetary system continues to be crucial. In order for the Fund to continue to play this role in support of the adjustment process, it has to be endowed with adequate resources. It is therefore important that the size of the Fund be kept in a proper relation to the expanding needs of the world economy. Therefore, the EC countries believe that the review of quotas currently under consideration should lead to an adequate increase in the size of the Fund. Pending this increase, we share the view of the Interim Committee that for the time being the current access limits under the temporary policy of enlarged access should be maintained.
The members of the EC view with great concern the rapid increase in overdue financial obligations to the Fund in the past few years, as they place a financial burden on other member countries and reduce the financial resources available for future loans. We are therefore willing to consider carefully further actions that are needed to deal with this problem.
In conclusion, I would like to confirm once again that the member states of the European Community remain committed to supporting an expanded role for the Fund and the Bank in finding solutions to the problems of the world economy.
Statement by the Governor of the Bank for Pakistan—Mahbub Ul Haq
As we meet in this beautiful but divided city, we are quietly reminded of the many divisions we have yet to overcome—political conflicts between nations, economic disparities within nations, and increasing distance between rich and poor countries. These are persistent problems, and they can never be completely resolved, but our collective efforts can at least make some difference.
We have a crowded global agenda—growing debt problems, increasing protectionism, inadequate resource flows, imperfect structural adjustment, and interrupted development momentum. Before we get lost in finding technocratic and often piecemeal solutions to a confusing multiplicity of problems, can we lift our sights a little and ponder the real objective of all our efforts?
I believe that the only unifying objective of our efforts must be the enhancement of human development, for people are both the means and the end of economic development. And beyond the convenient aggregates of national output and investment, our ultimate focus must be on the expansion of human capabilities, on the growth of human capital, on the centrality of human initiative and creativity.
If we begin to measure development in human terms, we shall immediately recognize the enormous human gap that is opening up between the developing and the developed nations. Just to take one telling illustration, there are likely to be one billion illiterates in the developing world by the year 2000. And this gap in human development is going to make it even more difficult to overcome the traditional income gap. In fact, the primary task of development should be to expand human capabilities and to let human beings choose their own economic and social path.
Is it not possible today to refocus our attention on overcoming this human gap? We certainly have the technology and the resources to do so—nationally and internationally.
Globally, let us define some challenging but practical targets that the developing countries may try to achieve by the year 2000: (1) 100 percent literacy for the new generation of boys and girls; (2) primary health care for the entire population; (3) elimination of malnourishment; and (4) halving of current high population growth rates.
Nationally, let us build these human goals into development planning. It should be made compulsory for each national development plan to contain a balance sheet of existing human resources and to demonstrate concretely how all the programs and policies contained in the plan will help expand human capabilities, besides expanding output and investment. Often, such a changed focus will imply massive restructuring of spending priorities. It is a cruel contradiction in many developing countries that gleaming new submarines and modern fighter planes coexist, side by side, with shelterless people sleeping on pavements and malnourished children eating out of dustbins. It is also a strange paradox in many developing countries that their resources are so limited, and yet they often let their privileged groups pre-empt most of these resources. Such contradictions must be resolved by these societies themselves.
Internationally, the new development focus would require that aid allocation criteria and loan conditionality should be reviewed to reward countries that give priority to their long-term human development. If debt forgiveness or reduction is to be given, why not to countries that are prepared to devote a substantial portion of the resources thus released to augmenting their education and health budgets? In considering the many proposals for debt relief, we must also think whether we are to reward only those who created excessive short-term external financial liabilities or also those who have assumed heavy continuing financial burdens for expanding their human capital by investing in education and health. And if the macroeconomic conditionality of the Fund must be defined in terms of budgetary and balance of payments measures, or the sectoral loan conditionality of the Bank defined in terms of needed policy and institutional changes, why not combine these with additional conditionality in terms of minimum nutritional standards to be protected, minimum employment levels to be maintained, and minimum expenditure floors for education and health? Such a reformulation will ensure that short-term adjustments are not at the cost of long-term development but are supportive of such development.
Let me add that many debt-reduction proposals that are liberally tossed around these days suffer from two fatal flaws: lack of clarity about conditionality of resources and absence of an institutional mechanism for debt refinancing. Without conditionality of resources, debt relief proposals may merely divert the already inadequate existing assistance from economically sound countries to the financially strapped. And without an institutional mechanism, most debt plans may become a monentary process. I suggested four years ago the establishment of an international debt refinancing facility. I believe that such a facility should be set up in the World Bank, which is in a position to balance short-term term financial adjustments with long-term developmental restructuring and which is the one institution today that the developing countries are willing to trust for such a delicate mandate.
I have a feeling that during the 1980s we have often lost sight of our long-term goals of human development in our desperate effort to achieve short-term survival. Education and health expenditures have declined in many countries to dangerously low levels, and unemployment has increased. Our societies are now asking whether this has been a worthwhile bargain and whether the policymakers cannot come up with a better alternative. We owe them an answer.
And the answer, I believe, can take shape if we pause sufficiently in the midst of always doing what is urgent to consider what is really important.
Robert McNamara observed recently that, if he had to relive his experience in the World Bank, he would put most of the Bank money in education and training. I have much the same feeling after 20 years as a national development planner. And I must congratulate Mr. Conable on beginning to elevate this priority in World Bank lending.
Of course, we cannot talk of human goals to the exclusion of production goals. Economic growth is absolutely essential. But I have seen that in many societies gross national product (GNP) can increase but human lives can shrivel. That should never happen. We must put people first in all development efforts.
If such a changed focus is to be integrated in our international decision making, let me suggest two practical ways of doing it:
(1) The annual World Development Report may be amplified to include a separate section on the state of the human condition every year, with supporting tables and country analysis, to show whether human welfare has advanced or regressed during the course of the year, and in which countries, and through what policies and programs.
(2) A high-level council of the heads of Bretton Woods institutions, concerned United Nations specialized agencies, and regional development banks may be established to meet periodically and to oversee the implementation of a coordinated strategy to advance human development in the 1990s.
As we pore over debt relief packages and capital replenishments and early harvests for the Uruguay Round, it is worth reminding ourselves, again and again, that the ultimate objective of all our efforts must be to advance human development.
This is what will give confidence to our own societies back home that are increasingly questioning the very purpose of our development efforts. This is what may be understood and appreciated by reluctant legislatures when they consider future aid bills. And this is what can give coherence and meaning to many of our concrete proposals in this forum.
Statement by the Governor of the Fund for France—Pierre Bérégovoy
Allow me at the outset on behalf of my country to thank the German Government for its most cordial welcome here in Berlin (West). Berlin is a symbolic city in the very heart of Europe. Allow me also to thank Mr. Camdessus and Mr. Conable for the outstanding caliber of their speeches this morning.
One year after last October’s stock market crash, we get the feeling that the world economy is on the right track. Growth is stronger than projected, international trade is rapidly expanding, and cooperative efforts on the monetary front have made it possible to stabilize exchange rates at acceptable levels.
However, we each recognize that it would be risky to give in to excessive optimism. There are still difficulties to be overcome in order to achieve more balanced growth and to ensure its durability. One need only recall a few facts about the world economy to see the truth of this view.
—The gap between the industrial countries and the developing countries, which have benefited less from growth than the first group, has continued to widen. Poverty, which has become more acute in many countries, poses a harsh challenge to our world.
—The debt of the developing countries now amounts to $1.2 trillion, and continues to place great strains on the international financial system.
—The resurgence of inflation in a number of industrial countries, the persistence of unemployment in others, and the current payments surpluses of the Federal Republic of Germany, and Japan and several countries of the Pacific, which stand in contrast to the deficits of other countries, are hallmarks of disequilibrium that we should recognize as such.
It has become a commonplace to refer to the interdependence of our economies. Economic growth will be all the stronger as the developing countries are part and parcel of it. But how is this to be achieved? Now as in the past, France believes it necessary to promote three objectives: (1) seeking greater monetary stability; (2) warding off the specter of protectionism; and (3) financing development through an improved allocation of financial resources.
Monetary cooperation has progressed quite well following the Plaza Agreements of 1985 as confirmed by the Louvre Accords. The result has been greater exchange rate stability and enhanced convergence of the economic policies being followed in the industrial countries. The texts adopted following the meetings of this past weekend once again lay stress on the industrial countries’ firm resolve to act together to stabilize exchange rates. This positive sign is one that the market needed to receive, and I am convinced that it will ultimately promote easing relaxation of interest rates.
This monetary coordination, which has proven so valuable, would only gain from being extended to yet other countries, in particular to those referred to as the “newly industrialized” countries of the Pacific and several of the Organization for Economic Cooperation and Development (OECD) countries with sizable surpluses; these countries too have duties and responsibilities vis-à-vis the international community.
Finally, I wish to note the need for serious examination of the role of the SDR. Indeed, the time has come to make it a more widely used reserve currency; one implication of this would be that the SDR would ultimately be traded on the market in accordance with modalities to be decided on together.
Second, it is clear that the liberalization of trade is associated with improved functioning of the international monetary system. The progress achieved in this area, progress it is necessary to continue under the auspices of the international institutions, makes it possible to make comparable gains in multilateral trade negotiations.
From this perspective, what will happen in Montreal takes on particular significance. Either we will be able to impart new impetus to the negotiations now under way, or we will find ourselves boxed into procedural disputes made all the more acute by the protectionist sentiments that are emerging in certain major countries, in particular the United States. So far, the U.S. authorities have been able to resist them. We are glad this is so and hope that everyone will endeavor to resolve the issues outstanding, particularly as regards agriculture where it is necessary to take into account all the direct and indirect support received by producers and to keep unbridled competition from destabilizing individual countries’ agricultural systems. France intends to contribute to this process together with its partners in the European Communities (EC).
I turn now to the third objective: the financing of development. This issue cannot be considered separately from the debt problem. The magnitude of the debt constitutes a serious obstacle to development. Easing of the debt burden and development are two sides of the same coin. How is this problem to be resolved? We must steer clear of two different pitfalls: an excessively financial approach, and the notion that countries experiencing difficulties can dispense with the need to make any adjustment effort.
The poverty and even profound misery in altogether too many countries constitute a disgrace for humanity as a whole. They illustrate our inability, in the century of the atom and of the computer, to resolve fundamental economic problems. International solidarity is the only possible response.
Let us not become embroiled in false debates; it would not be wise to engage in academic quarrels between public aid and private capital, between bilateral aid and multilateral assistance. Resources must be combined, financial flows accelerated. This requires merging the effectiveness of the market with the solidarity of collective action.
It is in this spirit that France encourages every effort in favor of the developing countries. New initiatives have been announced, in particular by Japan. And France intends to examine them attentively, in the belief that efforts by countries with sizable surpluses are a good way to augment growth.
In our view, the essential point is to maintain the multilateral administration of public aid and not to shift private sector risks onto the shoulders of the public sector. The commercial banks must, in fact, make an effort, and the systems of mutualization that exist in most of our countries would appear to set a good example of what might be devised on a larger scale.
In this spirit, France intends to put forward its own proposals after listening to everything said here; be that as it may, it will support the efforts of the international monetary authorities, the IMF and the World Bank, and should, provide funding to them for their interventions.
This is why France, as you know, seeks a prompt increase in Fund quotas. This is why we believe that the subscription to the ongoing capital increase of the World Bank must be completed as rapidly as possible. For its part, France has just contributed an initial tranche of one billion dollars.
Similarly, we consider a new SDR allocation to be necessary in order to strengthen the reserves of the countries that need it the most. Such a decision would improve the financial positions of many countries and encourage the banks to back their efforts. In this regard, I wish to take the opportunity afforded by the banking community’s presence at these meetings to address myself to its members directly.
As I indicated a few moments ago, we must add public capital and private capital together. Realism so dictates, as does solidarity. In the long term, it is in the banks’ interest to assume a greater presence in countries making the adjustment effort they have embarked upon, and I hope that the banks will heed my appeal.
The debt problem has not been resolved, nor has the development problem. There has, however, been movement in the right direction. The structural adjustment facility and the fifth replenishment of the African Development Fund and the World Bank’s special program in favor of the poorest countries constitute valuable steps forward.
The agreement reached during these meetings on the modalities for implementing the decisions taken in Toronto, on the initiative of President François Mitterrand, also bears witness to the enhanced awareness of the industrial countries.
I would like us to move faster, to go farther. Whatever the political orientation of our governments, we cannot disregard the anguish of the several billion men and women whose standard of living has deteriorated further. This harsh reality is unacceptable, and is less and less tolerated.
Here in this country, where Franco-German reconciliation has opened the way toward the building of Europe, and in this city of Berlin (West), which was devastated by the most brutal conflict of our history, it has been demonstrated that one must never despair of freedom’s future. May I express the hope that we might take inspiration from this example in sending the world a message of solidarity and hope.
Statement by the Governor of the Bank for China—Wang Bingqian
We are delighted to have come to Berlin (West) and to attend with our colleagues and friends the 1988 Annual Meetings of the Fund and the World Bank. Please allow me, in the name of the Chinese delegation, to express our wholehearted appreciation to our hosts for their very warm hospitality and excellent arrangements. I would also like to sincerely congratulate Minister Feldt and Governor Dennis on their election as Chairmen of this assembly.
The world economy continues to experience growth imbalances compared with the past year. The developed countries have maintained growth momentum. But the improved economic performance has been largely confined to the industrial countries; many developing countries have not benefited appreciably. The factors destabilizing the world economy and impeding the growth of the developing countries are still very much with us. Although the trade imbalances among the major developed countries have been corrected to some extent, we note that the resurgence of inflation and creeping interest rates have cast a shadow over the prospects for the world economy. Most developing countries have achieved only anemic economic growth, with per capita income in sub-Saharan African countries still declining. We see a continued drop in resource transfers of all types to the developing countries or even negative transfers for successive years to the developed countries. While the world prices of primary products have gone up somewhat, trade protectionism is running rampant. All these facts indicate that there has been no substantial improvement in the overall international economic environment of the developing countries. Without the cooperation of the international community and without timely actions by the developed countries in particular, the prospects for the world economy admit no optimism.
We are of the view that while developed countries, particularly the major ones, should strengthen policy coordination among themselves, accelerate structural adjustment, and correct trade imbalances, they should also enhance their consultation and cooperation with the developing countries. This could lead developed countries to consider the needs of the developing countries while formulating their economic policies, thereby creating a more favorable international economic environment for the developing countries. At the same time, this would also help to lay a solid foundation for the further development of the developed countries’ own economies. What should be mentioned here is that developed countries must resist and reduce trade protectionism and further open up their markets to the developing countries.
Another outstanding issue confronting the present world economy is the debt problem. The heavy debt burden poses an obstacle to the growth of the developing countries and threatens the stable development of the world economy. The past six years have witnessed a situation where, in an attempt to meet their external debt obligations, developing countries have vigorously pursued comprehensive adjustments and have paid a high price. However, their total debt stock today is still increasing, and their debt burden remains heavy. The situation in sub-Saharan Africa is particularly serious. This harsh reality demands that the international community explore innovative approaches to ease the debt problem.
The Chinese Government has always maintained that, in seeking solutions to the debt problem, emphasis should be placed on how to revive growth in the debtor countries and strengthen their debt-servicing capacity, rather than on how to get back principal and interest. We believe that the existing debt strategy ought to be adjusted and supplemented, with a view to increasing financing, reducing the debt burden, and facilitating adjustment. It is our hope that, in the common interest, creditor and debtor countries, commercial banks, and international financial institutions will hold earnest dialogues in the spirit of shared responsibility to explore various approaches that are practical, feasible, mutually acceptable, and capable of reducing the debt stock and alleviating the debt burden. In this connection, some developed countries should be commended for their commitment to debt relief for the poorer countries. We are pleased to note that some countries have already taken action, and hope that other developed countries will also translate their commitment into practice as soon as possible.
In the 1980s, the Fund and the Bank have made substantial efforts to promote the steady development of the world economy, to help developing countries overcome debt problems, and to assist member countries combat poverty. We appreciate those efforts. We are glad to note the successful conclusion of the Bank’s general capital increase, which will enable the Bank to expand its lending programs to the developing countries in the years to come. We are also encouraged by the fact that the Bank’s Special Program of Assistance for Africa and the Fund’s enhanced structural adjustment facility have been put in operation. These measures, in our opinion, will play an active role in promoting the economic development of the poor countries. We hope that negotiations on the Ninth Replenishment of the International Development Association will commence in a timely manner and will achieve progress consistent with the adjustment and development needs of the low-income countries.
It is regrettable that the Fund’s quota increase has been proceeding slowly. The present level of the Fund’s own capital does not measure up to its mandate. We urge that the Ninth General Review of Quotas be brought to a conclusion as soon as possible, so that the quotas for member countries can be greatly increased. With regard to the allocation of quotas, the principle of justice and fairness should be upheld. And the shares of the developing member countries should be maintained and raised. Similarly, an agreement on the allocation of SDRs, in our view, should be reached as soon as possible in the spirit of international cooperation and understanding. . . .
We often say that today’s world is faced with two major issues: peace and development. The factors leading to peace are on the increase, but development momentum is weak. Specifically, the developing countries are in formidable economic difficulties, experiencing a serious shortage of funds and a high incidence of poverty. Such a situation mandates that the Fund and the Bank play a greater and more effective role. I am sure that the Fund and the Bank will not let their member countries down.
This is the tenth year since China adopted its fundamental state policy of reform and opening to the outside world. During the past decade, the reforms of the economic and political structures have led to the emancipation of the people’s mind and to the fast growth of social productivity. A society that had shut itself off from the outside world for a long time is being changed quickly into one that is open to the outside on all fronts. The past decade has witnessed the most rapid growth in our national economic strength and the largest improvement in the living standards of our people. Except in a very few areas, the supply of enough food and clothing to the population is assured. It is through this reform and open policy that the people have obtained material benefits. It is also on this reform and open policy that they pin their future. Of course, there are some difficulties and problems on our road forward, which will have to be studied and resolved. We are confident that through our resolute and prudent efforts, the intensified reforms of the Chinese economic and political structures are bound to succeed.
In the present era, countries are increasingly interdependent in their economic development. The strengthening of international cooperation is therefore particularly important. As multilateral financial and development institutions, the Fund and the World Bank are expected to play a greater and better role in promoting such cooperation. In conclusion, I would like to reiterate that China, together with other member countries, will make its due contribution to world peace and development.
Statement by the Governor of the Fund for Spain—Carlos Solchaga
I would like to begin by adding my voice to those of Governors who have spoken before me in thanking the authorities of Germany and the citizens and municipal authorities of Berlin (West) for the organization of this assembly and for all the hospitality which has been offered to us.
Some of the developments in the world economy since our last meetings justify the moderate optimism being expressed at this year’s meetings. The international financial system has been able to ward off the threat of recession following last October’s stock market contraction, and the economic expansion has entered its sixth straight year with vigor. In addition, the relative price changes brought about in part by exchange rate adjustments have helped reduce in real terms the asymmetry in the external accounts of the major industrial countries. Finally, despite the recent quickening of inflation, price trends remain satisfactory on the whole.
Unfortunately, there is less reason for optimism about trends in the developing countries. Though economic performance differs greatly from country to country, a large number of them are going to record only modest growth rates in 1988, entailing declines in per capita income. Unless there is a sharp change in the present external debt strategy, most of them simply have no hope of reviving their economies.
At the same time, adjustment fatigue in some cases and the fiscal and exchange fallout of servicing the external debt in others have boosted the inflation rate dangerously, further reducing—if that is possible—the chances of future growth.
The economic picture I have just painted remains broadly consistent with the analysis all of us have been making at recent annual meetings. The international economic community is fully aware that the near future is clouded by two major uncertainties—the asymmetry in the current account balances of the industrial countries and recession in the heavily indebted developing countries—and both anomalies must be eliminated as soon as possible if we wish to maintain a stable economic order.
While coordination of economic policies and international cooperation have alleviated some of the negative factors associated with the two kinds of disequilibria I have mentioned, we have no choice but to call again for the adoption of collective decisions, reached by consensus, which focus clearly on the crux of the problems.
Correcting the asymmetry in the external positions of the industrial countries requires that the exchange rate adjustments of the years 1985-87 now be followed by changes in domestic spending. The surplus countries must place more emphasis on their domestic markets, and the deficit countries must curtail their domestic spending.
The re-emergence of an inflation threat adds a new dimension to this often-heard viewpoint. It does not seem possible or desirable in the present international context to rely on monetary policy as the sole instrument for moving the growth rate of domestic demand upward or downward, as required, in each country.
We are deeply concerned by the effects that the tightening of monetary policy in the industrial countries is likely to have on their efforts to balance their external accounts and on the situation of the debtor countries. The rise in interest rates will certainly impose a greater burden on the debtor countries and, at the same time, with inflationary pressures rising in the United States, it is likely to widen the interest rate differential, putting the dollar’s exchange rate under pressure and reversing the reduction in the external imbalance achieved at such great cost over the last few years.
Against this background, we feel that fiscal policy and supply-side policies must be given greater weight. We think it is urgent to accelerate the correction of the budget deficit in the United States. We also believe that Japan and Europe, especially the Federal Republic of Germany, must further intensify their application of structural reform policies designed to eliminate the persisting rigidities in their markets, to enhance their growth potential, and to permit inflation-free economic expansion.
Eliminating these external imbalances would not only reduce the uncertainties hanging over the economic future of the industrial countries, but contribute to a marked reduction in the pressures on international financial markets—a change that would have decidedly favorable effects on the developing countries.
We cannot ignore the fact that most developing countries find themselves unable to benefit from the prolonged expansion of the industrial countries. There are certainly factors, such as the weakness in oil prices and the deterioration in the real terms of trade for some countries with a narrow export base, that explain in part their modest growth rates. But we believe that the key factor is the external debt that burdens many of them, frustrating their chances for growth now and in the immediate future.
Six years after the eruption of the external debt crisis, we see that the methods applied thus far are clearly not solving the problem. True, the financial crisis feared in 1982 has been avoided; but, in view of the ratios normally used to measure solvency and of the attitude on the international markets, it is becoming more and more apparent that normal access to financial markets will continue to be denied to many countries.
This is true despite the adoption of costly adjustment programs, which, though implemented with different degrees of intensity and perseverance in different countries, have adversely affected growth, investment, employment, income distribution, and ultimately, the living standards of large segments of the population. The social instability created by this situation is seriously jeopardizing the future of many democracies, overwhelmed by their extraordinary economic difficulties.
Finally, there appear to be a number of reasons, both economic and political, for the international community to reconsider the strategy it has been applying to solve the external debt problem. At the outset, the strategy was dominated by the aim of allaying the very grave risks that threatened the world banking system. This approach was surely unavoidable and wise, and it had the desirable result of strengthening the position of creditor banks through expansion of capital, reserves, and loan-loss provisions out of profits. The same cannot be said of the results as seen from the perspective of the debtor countries, which seem doomed to end the decade without having established a firm basis for restoring their progress in development or having alleviated their external debt burden. I doubt anyone can avoid serious concern about the political deterioration increasingly threatening many heavily indebted countries or about the precarious economic situation affecting their peoples’ living conditions. This is all reflected in the steadily deepening discounts with which their debt is traded on secondary markets. Arresting this decline is a matter of importance to all of us, and doing so will require placing the strategy we apply to the external debt problem on new foundations.
To overcome their current problems, the debtor countries will without doubt have to continue their efforts to make their economies freer, more competitive, and more flexible and give up any unproductive financial policies. This means that no effective strategy can avoid a case-by-case, country-by-country approach or a requirement that debtor countries consistently implement rehabilitation policies under the supervision of international financial institutions.
At the same time, however, the new strategy should provide considerable relief from the debt burden weighing upon these countries, so that they can apply appropriate policies in the knowledge that by doing so they will again have prospects of growth.
External debt relief policies can take many forms, from a reduction or capitalization of interest to more daring operations (likely to look less and less daring as time passes) involving a partial remission of debt based on the discounts in secondary markets and the will of the borrowers to improve the quality of the remaining debt. All paths are possible, provided they emerge from general agreements between creditor and debtor countries, entail a lasting reduction of the debt burden, are directed and, where appropriate, implemented by the international organizations that have brought us together here, and, as I said before, are supported by a commitment of the debtor countries to policies leading to economic viability in the medium term. All alternatives should be examined, and should be examined soon, bearing in mind that opinion on these subjects is changing faster than we sometimes think, even within the banking community itself.
In conclusion, may I point out that the current debt strategy has outlived its usefulness, not just for the reasons I have been discussing, but because the period in which strictly financial solutions to the problem could be sought appears to be over. Open trade arrangements, which give no ground to protectionist temptations, are also required.
We are aware that Spain, given the size of its economy, can make only a small contribution to the solution of a problem of this magnitude. Still, the special bonds that link us to countries suffering the consequences of indebtedness and our concern with the future of societies that have succeeded in restoring democratic systems after arduous years of painful hope oblige us morally and politically to defend, to the extent we can, the ideas I have expressed here.
Statement by the Governor of the Bank for Indonesia—J.B. Sumarlin
I am pleased and honored to participate in the Forty-Third Joint Annual Meetings of the International Monetary Fund and the World Bank and to have the opportunity to address this distinguished gathering for the first time in my capacity as Minister of Finance of the Republic of Indonesia and Governor of the World Bank for Indonesia.
As we review the events of the past year, we can derive some measure of satisfaction from the generally positive movement in many leading global economic indicators. Further, we can be heartened by the relative progress achieved in a number of programs of national economic adjustment as well as in several important areas of bilateral and multilateral cooperation.
During the first nine months of this year, the world economy has continued to expand, trade volumes have increased, real interest rates have remained relatively low and stable, inflation has been maintained at manageable levels in most national economies, and world currencies, while continuing to shift in value, have nevertheless avoided the excessive swings that posed such hardship to rational economic planning during the previous three years.
Similarly, we have seen a number of notable accomplishments in national, bilateral, and multilateral affairs. At the national level, we have seen significant progress by a number of countries in restructuring their economies. I cite my own country as a notable example of this important trend; yet I am delighted to add that we are by no means the only country to demonstrate the beneficial effects flowing from measures of reform and deregulation, when they are carefully targeted and judiciously applied.
On the bilateral and multilateral fronts, we have seen a number of positive developments that also augur well, I believe, for future economic cooperation and growth.
On the trade side, we have seen the successful maintenance of a number of key agreements among producers of commodities and other products, which has led to a return to fairer pricing levels than we have had in recent years. Unfortunately, it is still too early to include energy products in this list.
In addition to these positive multilateral trade developments, we have seen specific undertakings at the bilateral level that also provide encouragement. I would cite the recent proposals for closer market integration in North America, in the European Community, and in my own region, the Association of South East Asian Nations (ASEAN) as examples of constructive trade cooperation on a regional level.
Let me emphasize, however, that all such agreements in the trade sector must have as their ultimate aim the achievement of fuller market integration on a global level—and not, under any circumstances, increased trade balkanization. The specter of protectionism continues to be felt in many corners of the world, and we must all work together to banish it forever.
Moving to the debt side, I would point to the important consensus achieved by the Group of Seven at the Toronto summit earlier this year regarding debt rescheduling to low-income countries. Bold decisions taken by a growing number of donor countries will significantly ease the debt burden by replacing loans with outright grants in the future.
On the debtor side, new and imaginative debt-payment solutions have been proposed. Other countries, including my own, continue to hold firm to a policy of rigorous debt management and unequivocal debt repayment.
If there is a common thread uniting this broad range of positive developments, it is, I believe, the genuine recognition among a growing number of nations of the benefits to be gained from prudent fiscal and monetary management, combined with enhanced bilateral and multilateral cooperation. In our slow, but steady shift toward global economic enlightenment, we can rightly give credit to the spirit—if not always to the specific actions—of our two institutions, the Fund and the Bank, for their important role in economic management and policy coordination.
Having said all this—and in spite of my own overall sense of optimism for the future—it must also be admitted that the world economy of the late 1980s continues to be troubled by persistent underlying flaws and structural imbalances. Among the industrial countries, these imbalances, combined with lackluster economic performance, continue to deprive the world of the full thrust of its primary engine of expansion and growth. Among the less-developed countries, an acute scarcity of financial resources is eroding the ability to consolidate gains and expand economic growth. And among the world’s poorest nations, the entrenchment of structural rigidities is perpetuating a cycle of unabated poverty and economic frailty.
In all this, the single problem of universal apprehension remains that of global debt—ranging from the most piteous examples of countries where the outflow of funds actually exceeds the net inflow, to countries such as my own, where the debt burden, though manageable, places heavy constraints on the ability to invest and to stimulate economic expansion.
As member nations in the Fund and the Bank, we all acknowledge that the obligation of debt repayment is one of the fundamental cornerstones of our global economic order. But we also recognize, I believe, that other principles of equity, or fairness, serve to guide the conduct of our economic affairs as well.
I have specific examples in mind when I assert that in both our bilateral and multilateral lending practices, we have so far failed to devise debt instruments sufficiently flexible to achieve a proper balance between these two principles. I am referring to debtor nations struggling under two forms of exogenous shock: (1) external currency realignments, and (2) sharp declines in export revenues caused by external market swings. In today’s economic landscape, the devastating actions of these all too familiar forces not only drain away financial resources needed for economic growth into onerous debt repayment burdens but, in so doing, also severely undermine the ability of debtor nations to carry out orderly, growth-oriented economic planning.
I cannot emphasize strongly enough my conviction of the need to develop new lending instruments capable of responding to today’s undeniable economic realities. I am convinced the time has now come to introduce new forms of debt relief.
First, I propose that a currency swap facility be added to our bilateral and multilateral lending instruments, by which a fixed value would be assigned to loans at the time of issue. The protection of debtor countries against the downside risk of external currency swings is, I believe, an essential new component that must be added to our strategy of overall debt management if we are to have any hope of meeting the challenge of balanced global economic expansion in the 1990s and beyond.
Second, I propose that the consensus achieved at the Toronto summit—the conversion of existing bilateral loans to grants—be given even wider application. Specifically, more donor countries should agree to follow this generous precedent and also the class of eligible recipient countries should be further broadened. This, I strongly believe, would contribute enormously to a break in the current debt impasse and, at the same time, would propel many of the world’s more heavily indebted countries along a path of renewed economic growth and expansion. In addition to developing new solutions such as these, we must also work diligently to maximize gains through the funding instruments already in place.
With regard to the disbursement of existing funds administered under the Fund, Indonesia supports the doubling of Fund quotas under the Ninth General Review of Quotas as well as the maintenance of the present enlarged access. Further, with regard to the Bank, we are pleased with the successful passage earlier this year of the third general capital increase and also by the ratification of the IDA-8 Replenishment—as both enable the Bank to direct appropriate funding without undue resource constraints. Where progress still needs to be made, however, is in the area of SDR allocations, which we have left unresolved far too long.
Let me add one final word on the subject of that perennial source of controversy within development funding: “conditionality.” As we are all aware, certain past funding policies of the Fund, and more recently, some of the “policy” lending by the Bank, when tied to onerous conditions of fiscal and monetary reform, have not always received a favorable hearing among recipient countries. Indeed, there have been cases where the conditions of austerity imposed may well have caused greater hardship than the problems they were intended to solve.
Having said that, it is my observation that the worst excesses of austere conditionality seem to be declining and that the Fund and the Bank are demonstrating a clearer recognition that structural adjustment is best achieved in a climate of economic growth. In the case of my own country, we have found the recent counsel of these two institutions to be realistic and, above all, supportive of our continued economic growth. With their support, we have moved boldly during the past five years to undertake a major restructuring of our economy. The experience of Indonesia, and the positive results we have achieved, lead me to state that conditionality—enlightened conditionality, that is, based on strategies of growth—remains an appropriate tool to be applied both by the Fund and the Bank in the proper conduct of their affairs.
Every year at this time, this important international gathering provides a rare and unequaled opportunity for the nations of the world to work together toward achieving lasting economic progress. Let us not waste the opportunity to ensure that the Forty-Third Annual Meetings of the Fund and the Bank will be remembered as a landmark year in the realization of this common cherished goal.
On behalf of the delegation of Indonesia, let me conclude by expressing our thanks to the joint staff of the Fund and the Bank for its fine work in arranging this meeting. Let me express also our appreciation to the Government of the Federal Republic of Germany and the cooperation of the city of Berlin (West) for their generous and gracious hospitality.
Statement by the Governor of the Fund for Italy—Giuliano Amato
First of all I wish to express my warmest thanks to the Government of the Federal Republic of Germany and to the authorities of Berlin (West) for their hospitality. The city of Berlin is the best evidence that Germans are not only efficient—and they are efficient—but also warm and friendly.
Economic expansion has continued in 1988 and has actually accelerated. There is a significant achievement: this year will be the sixth consecutive year of growth, an exceptionally long phase by historical standards. The resilience of world economic expansion, despite last October’s financial market crisis, bears witness to the appropriateness and promptness of the policy response given by major countries to market disturbances.
In most industrial nations growth is being fueled by the strength of fixed capital formation, which is expected to raise economic potential significantly over the medium term.
The feared resurgence of inflation following the increases in world commodity prices has materialized only to a minor extent. Another positive factor is the rise in domestic absorption relative to output expansion in major industrial countries other than the United States. New jobs have continued to be created, but the high rate of unemployment in Europe has not declined yet.
Although some progress has been made in the major countries in reducing trade and payments disequilibria in real as well as, to a lesser extent, in nominal terms, external imbalances are projected to remain large up to 1990 and beyond. As far as the United States is concerned, this would imply an accumulation of external debt that might be difficult to sustain in the medium term.
The crucial issue is to identify the policy mix capable of ensuring noninflationary growth and reducing external imbalances. In some countries, the recent tightening of monetary policy was warranted in view of incipient signs of overheating of the economy that could have given rise to inflationary expectations. In others, the picture does not seem to call for any change in the monetary policy stance. Indeed, data on capacity utilization must also be assessed in light of structural changes taking place in the industrial sector, while recent developments in commodity prices are far from showing a homogeneous trend.
In any event, it would be highly undesirable if an excessive concern about inflation were to bring about a spiral of interest rate rises. Such a move would inevitably transmit deflationary impulses to economies where domestic conditions and objectives require different policies. Moreover, it would aggravate the already difficult situation of indebted developing countries. In these circumstances fiscal and structural policies should be made to play a more important role.
A tightening of the fiscal stance would be the most appropriate tool to deal with the problem of the “twin deficits” of the United States. Continuation of structural improvements would contribute to the reabsorption of the Japanese external surplus, while in Europe, structural measures, coupled with somewhat faster growth of domestic demand in surplus countries, would help to reduce unemployment, which, at 11 percent, continues to be the most serious social and economic problem.
Coordination among the major industrial countries is contributing to the steering of economic policies in the direction required to correct imbalances and to enhance exchange rate stability.
Cooperation in the trade field is also necessary. We look forward to a positive outcome of the forthcoming midterm review at Montreal, where protectionist tendencies should be checked and reversed in all countries. Protectionism is too high a cost on our growth, and is especially severe for developing countries.
Despite some improvements, the situation of developing countries is, as a whole, less encouraging. Their gross domestic product (GDP) growth remains modest by historical standards. Improvements in output and trade performances appear unevenly spread. Protectionist pressures continue to be a real concern. The flow of financial resources remains insufficient. Interest service ratios have increased, especially for the most heavily indebted countries.
The existing debt strategy has at present no practical alternative. However, what we are doing is not enough. Several proposals are now being advanced and should be carefully and collectively examined.
Voluntary debt conversion schemes, as those experimented with by some highly indebted middle-income countries, can help to reduce the stock of debt and foster private foreign investment and thus the attainment of higher growth. However, the effectiveness of these schemes and their ability to deal with the debt problem must not be overestimated.
For low-income countries, official creditors have developed a wide range of modalities for concessional debt rescheduling. These concessions will prove most beneficial to indebted countries if they take the opportunity to improve the efficiency of allocation of their scarce domestic resources and to raise fixed investment.
We welcome the introduction of the additional concessionality in official debt rescheduling by the Paris Club, in line with the Toronto summit communiqué. We confirm Italy’s commitment to making available additional resources on official development assistance (ODA) terms, continuing in our upward trend.
The persistence of imbalances and tensions related to the debt problem calls for a strengthened role of the Bretton Woods institutions and their close cooperation in the design of programs of adjustment and structural reform and the provision of increased financial resources.
The Fund must continue to share the responsibility for alleviating the debt problem, not only through its catalytic function but also by showing its willingness to make an appropriate financial commitment.
We consider the review of quotas an essential step. Even if a decision is expected next April, we would like to stress that the present level of quotas appears clearly out of line with the potential needs of the world economy now and in the near future. In this connection we support a sizable quota increase on the order of 100 percent and the maintenance for 1989 of the present access limits under the enlarged access policy.
The overdue financial obligations to the Fund are a matter of great concern. This problem has to be dealt with in the cooperative spirit of the Fund, keeping in mind the revolving character of its resources.
On the question of SDRs, we continue to believe that a moderate allocation over a number of years would be appropriate. The recent improvements in the nongold reserve ratios of most groups of countries do not detract from the validity of the assessment of a long-term need for supplementing reserves. The dominant role now played by the international financial markets in the creation of liquidity means that nongold reserves no longer represent a firm yardstick for assessing liquidity conditions and needs.
It is desirable to regain a degree of control in reserve creation as part of an internationally managed system and, to this end, we are convinced that a useful contribution to the functioning of the international monetary system can be made by the SDR. . . .
Recent developments in the Italian economy enable us to be more optimistic than we were only a few months ago. There are clear signals that even the latest upward revision in the Fund growth forecasts is on the low side, since the actual figure for GDP growth in 1988 is likely to be around 3.5 percent. This favorable evolution parallels that of other industrial countries where growth has been generally more buoyant than expected. This seems to be partly due to structural changes not captured by existing forecasting models, especially insofar as efficiency gains are concerned.
The 1980s have seen a profound transformation of Italy’s productive structure, mainly in terms of increased flexibility and to some extent reduced dependence on traditional primary inputs. This trend is continuing, and in 1988 the increase in investment is expected to be only slightly below the 5.2 percent figure recorded last year. This is an encouraging feature of the current expansionary phase, especially because it allows demand pressures to be increasingly accommodated by supply, rather than triggering inflationary responses.
It is also reasonable to predict some improvement in the unemployment situation, of which there are already signs. The latest available data indicate that, for the first time after years of continuous decline, employment in the industrial sector has started to rise again.
Recent developments on the price front have been reasonably good, partly due to the continuing favorable trend in import prices and in spite of the recent increase in value-added tax rates. The rise in consumer prices remains below 5 percent and further reduction is expected for 1989. The inflation differential with respect to Italy’s main European partners such as the Federal Republic of Germany is now narrower than at any previous time since the establishment of the European Monetary System in 1979.
In turn, this convergence has allowed Italian exports to remain competitive and to play a positive role in our growth performance in 1988. As a result, this year, Italy’s current account deficit is expected to be about 0.4 percent of GDP and is likely to remain approximately of the same order in 1989.
The disinflationary process would not have been possible without the moderately restrictive stance adopted by the monetary authorities. In this respect, the recent increase in the official discount rate, which has accompanied similar actions taken by other European countries, was both timely and significant. Its timeliness derives from the consideration that credit expansion was going too fast in relation to the target; its significance lies in its being a clear indication of confidence in the effectiveness of market instruments as opposed to administrative measures.
The increase in interest rates is exerting a stabilizing effect on expectations. Demand for medium- and long-term financial assets is rising again. This enables a lengthening of the average maturity of government debt to resume.
The state of Italy’s public finances is a source of concern in an otherwise encouraging picture of our economy. In spite of the progress being made—this year’s public sector deficit should decline to 10.9 percent of GDP, compared with the 11.6 percent recorded in 1987—the burden placed by public dissaving on the economy is still too heavy.
One objective of the Finance Bill for 1989, which is to be tabled shortly in Parliament, is an unchanged public sector deficit in nominal terms, which implies a further reduction in the deficit/GDP ratio.
In order to achieve these results, measures must be taken not only on the expenditure side, but also on the revenue front. In particular, public expenditure must be contained and made more efficient; available resources should be concentrated in the areas where they are most needed and yield a greater return in terms of actual welfare. At the same time, a major reform of the tax system is under way, with the aim of improving its equity and its efficiency.
The rigorous implementation of the rehabilitation plan passed by Parliament should lead to a surplus in the public sector budget net of interest payments and to the stabilization of the debt/GDP ratio by 1992.
A deep and important change is occurring. The awareness has grown in all of us that our debt strategy is sound, but has to be refreshed with new ideas and then reached with new instruments. Upon this background, we have to work for a better future in which growth and justice may eventually overcome the cost of the debt service.
September 27, 1988.