Discussion of Fund Policy at Fourth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1988
Statement by the Governor of the Fund for South Africa—B.J. du Plessis
It is a pleasure to join other Governors in thanking the Federal Republic of Germany and the city of Berlin (West) and its people for hosting this year’s Annual Meetings. I also extend the appreciation of my country to the Managing Director and the staff of the Fund, and also to the President of the World Bank and his staff, for their diligence and devotion to the work of these two fine institutions and their affiliates during the past year.
The surveys of major recent economic developments provided in the Annual Reports of the two institutions focus attention on the continued expansion in world output and trade. In the industrial countries, inflation remained relatively low, domestic financial stability was restored after the disturbances in the world’s major equity markets in October 1987, and some progress was made toward restoring equilibrium in external economic relations. Recent efforts toward more effective economic policy coordination among the industrial countries deserve some credit for the improved situation.
The developing countries as a group derived some benefit from the rapid expansion in world trade with an improvement in their current account balance of payments positions. Indeed, the Fund Annual Report notes that these developments led to a decline in the ratio of debt to exports of the developing countries for the first time since the onset of the debt crisis in 1982.
Almost all groups of countries, whether classified according to stages of development, intensity of balance of payments problems, or involvement in different regional development programs, shared in the improved economic conditions in general. Notable exceptions were, however, the low-income developing countries in Africa, and particularly in sub-Saharan Africa. At various points in the Annual Reports of the Fund and the Bank reference is made to the plight of these countries. Numerous examples can be quoted.
—In the group of sub-Saharan African countries the rise in output remained below the rate of population growth.
—The rate of production growth in these countries slowed to 2.3 percent in 1987 from 3.6 percent in 1986.
—Average living standards have fallen by over 20 percent since 1981.
—Export growth remained subdued in most African countries, partly because of supply constraints.
—The terms of trade recorded a further decline of 6 percent in 1986.
—The current account deficit of countries in sub-Saharan Africa increased from $5 billion in 1986 to $6.5 billion in 1987.
And so we can go on. The people of my country are part of and identify with Africa and feel great concern for the present position of and the prospects for the economies of many countries on the continent, and especially for the sub-Saharan African countries whose destiny and future prosperity are, in more than one way, linked to our own. We have feeling and concern for the problems of the underprivileged people of this less developed part of the world where political freedom has unfortunately so far not brought freedom from poverty. Without release from deprivation and poverty, freedom is not complete.
Against this background, we cannot but give full support to the efforts of the Fund and the World Bank to provide more assistance to these countries in promoting growth-oriented adjustment policies. South Africa therefore supports the greater attention that the Fund has in the past year given to structural reforms and the sustainability of medium- and longer-term development programs. It is accepted that the revised policy on the extended Fund facility and the establishment of the enhanced structural adjustment facility and the compensatory and contingency financing facility will all contribute toward this ultimate objective—namely, to provide more assistance to the lower-income countries in order to help them to create a self-sustainable momentum of economic expansion that will raise the living standards of the whole population.
South Africa also supports the various calls for reversing the ever-increasing trend toward greater protectionism, especially by industrial countries. The world must guard against the unwarranted extension of restrictions on trade and capital flows, for in the final analysis we have a universally interdependent economic environment where economic development, even in the smallest member country, rubs off on the rest of the system. Growth engenders growth. Those committed to market economies in their own countries should see the world in the same context. It makes no sense to create additional financing schemes through the Fund and the World Bank for the financing of economic restructuring programs, and at the same time to tolerate the creation of a hostile international economic environment that does not allow for the development, in particular, of the less fortunate members of the system.
It is against the background of the needs of Africa that we pledge South Africa’s support for the proposal for a substantial increase in the quotas of the Fund. We take note of the deliberations so far within the Committee on the Ninth General Review of Quotas and within the Executive Board, and express the hope that a positive result will be reached and a final decision will be taken during the course of next year.
We also take note of the negotiations initiated on the Ninth Replenishment of the resources of the International Development Association (IDA). The role of multilateral concessional funding has become of crucial importance, given the deterioration in the situation of the least developed members of the Fund and World Bank Group. The lag in the economic development of Africa behind the rest of the world, as illustrated by the events of the past year, makes a clear demand on IDA to increase its involvement now in these countries where time is of the utmost importance.
South Africa is not only part of Africa, but forms an integral part of the southern African region, in which it has the most highly developed and diversified economy. However, because it has large internal economic needs to address and because it has become subject to abnormal external constraints, South Africa’s ability to provide economic support to neighboring countries is regrettably limited. We shall therefore continue to seek greater economic cooperation in our part of the world within these limits by fostering existing and seeking further cooperative arrangements for the joint utilization and development of the infrastructure, for mutually beneficial trade, for the exchange of technical know-how, and also in the monetary and financial spheres.
Structural adjustment has a wider application than the individual country operating within its own restrictions. It is within this context that South Africa wishes to participate in the economic development process of the whole region. A better understanding by all the countries of southern Africa of the obvious advantages of this broader approach is needed. South Africa’s participation in a number of regional water schemes and hydroelectric, industrial, and other development projects provides sufficient evidence of my country’s readiness to contribute to a concerted economic development approach for the whole region. The Development Bank of Southern Africa, established only a few years ago, is growing in stature and function, and through its increasingly wider involvement in the region already provides a suitable vehicle for the enhancement of cooperation and coordination in such an approach.
In conclusion, I would like to refer to the continuing international debt problem of many developing countries. We appreciate the problems of adjustment forced by the need to repay foreign debt. The absorption of domestic saving for this purpose restricts the ability to finance domestic investment from own resources at a time when little foreign assistance is available. The delicate matter of “forgiveness” or cancellation of foreign debt should nevertheless be approached with discretion. The private banks of the world or their shareholders cannot be expected to write off lightly by decree such debts against hard-earned profits. Likewise, it cannot unreservedly be expected of taxpayers in creditor countries to foot the bill through additional allocations made for this purpose in the budgets of their governments. The world will have to take a longer-term view in this regard. We must assess not only for the debtor but also for the creditor countries the ultimate advantages that will flow from balanced growth in the global economy. Any solution in this regard will therefore have to find an appropriate balance between the interests of creditors, debtors, taxpayers, and governments, and will undoubtedly also have to involve the Fund and the World Bank Group. In the long term, there is now doubt that assistance allowing a country to become self-sufficient and cease to be impoverished should not be viewed as aid but as an investment to the benefit of the developed world and in the interests of world economic stability. The issue is not only one of repayment of old debt but is indeed one of financing the vital needs of the future.
Many of the debtor countries are situated in sub-Saharan Africa and cannot afford the high economic and social costs of redeeming debt through a further restriction of the existing relatively low level of the domestic absorption of goods and services. The consequences to the social fabric of such countries could be serious, not only for the countries concerned, but also for others. As a debtor country forced to reduce its foreign debt, we know the difficulties of coping with unemployment, exacerbated by the very large number of work seekers from nearby countries. But as a creditor country in our region, we also understand the plight of those who rely on our assistance. We therefore urge the Fund and the World Bank to continue in their search for a solution to the problem of international debt reduction, especially for the relatively low-income and heavily indebted countries of Africa.
Statement by the Governor of the Fund for Luxembourg—Jacques F. Poos
Despite the stock market crash, which was the major financial event of 1987, we find growth for the past 12 months higher than was expected a year ago. Demand levels in the industrial countries remain generally satisfactory; investment activity is quite vigorous; and there is every reason to believe that the longest lasting expansion since World War II will continue into its seventh year. However, to sustain and strengthen longer-run growth prospects, progress will have to be made in the following four areas:
—correction of the trade imbalances;
—coordination of economic policies;
—elimination of structural rigidities and protectionism; and
—management of international debt.
Large external imbalances persist among the major industrial countries, but the markets are now leaning toward greater optimism and greater willingness to finance the imbalances of gradually diminishing levels. The synergistic effects of growth, stronger market confidence, and policy coordination may have reduced the risk that the markets will lose patience and impose a correction of the external imbalances at unrealistic exchange rate levels. We must now guard against the new risk that complacency over this improving state of affairs will slow the pace of further progress in relation to the fiscal and external imbalances, a task that is still urgent because the later the adjustment takes place, the more painful it will be.
The remarkable progress achieved so far with economic policy coordination is an important step that has increased the likelihood of an orderly correction of present imbalances.
Small countries, such as Luxembourg, have always been exposed to large spillover effects stemming from other countries’ policies, but the larger countries, too, are now increasingly feeling the effects of international interdependence with the acceleration of international trade and the integration and liberalization of financial markets. These countries now appear to have realized that the economic domestic effects of actions taken without coordination are too often diluted.
A strengthening of the coordination process is certainly justified by experience gained with the European Monetary System (EMS), which shows that the best way of obtaining exchange rate stability is the common determination to defend a given pattern of exchange rates. Once this has been done, the need for continual interventions to offset destabilizing capital movements gradually subsides.
We believe that capital movement restrictions are ineffective and costly in the long run, besides introducing their own distortions into the allocation of resources. Without a system of free capital transfers, Luxembourg would never have been able to shift its economy from its former reliance on heavy industry toward the provision of services.
It is equally obvious that an environment characterized by structural rigidities favors the emergence of inflationary pressures that are capable of threatening the coordination process. We are therefore convinced that greater emphasis on structural reforms will certainly be helpful in addressing the persistent and unacceptably high unemployment rate levels of certain countries. As a country in which one third of the resident population is foreign, Luxembourg strongly supports the free movement of persons, goods, and services within a framework of minimal administrative, technical, and other kinds of barriers.
And, as we oppose these barriers, so do we oppose protectionism, which leads to inefficiencies in the protected sectors and, in turn, to a misallocation of resources. Progress in the dismantling of protectionism within the framework of the Uruguay Round would also help speed up the correction of trade imbalances.
In the developing world the situation unfolding over the last year has been less satisfactory than that in the industrial world, though some encouraging signs are visible. However, there is a risk that recent interest rate increases will wipe out these gains.
It must be acknowledged that the benefits of the improvement in the debt situation are unevenly distributed and that some low-income countries are still accumulating further overdue obligations. These include especially the sub-Saharan countries. My country has made a special effort to participate in a number of initiatives aimed at alleviating the debt burden of these countries. The replenishment of International Development Association (IDA) and the activation of the enhanced structural adjustment facility constitute important steps toward addressing the need for additional concessional resources to support the execution of poverty programs in the context of structural adjustment lending. The merits of excluding social expenditures when reductions in overall budget deficits are recommended should be considered. We strongly endorse the Managing Director’s efforts to define a set of social indicators protecting minimum living standards, to be considered in Fund programs along with economic indicators. We also appreciate his willingness to foster a national consensus on adjustment policies through a dialogue with social partners.
With regard to the heavily indebted middle-income countries, we are aware that they continue to have difficulty in servicing their external debt and in generating the funds needed to finance the investments essential for sustaining growth. We still believe that the case-by-case approach, combined with the use of growth- and market-oriented techniques aimed at reducing the existing stock of debt, is the only viable solution for these countries. However, all alternative solutions to alleviate the debt burden need to be studied carefully by the international community. In this respect, I especially appreciate the proposal recently put forward by my Japanese colleague. We therefore welcome the new use of the extended Fund facility and the protection offered to countries that implement adjustment programs against external shocks through the Fund’s newly created external contingency mechanism.
The prospect that this mechanism will successfully protect countries’ adjustment programs against external shortfalls will be even further ensured if the commercial banks will prepare themselves to support this new scheme with innovative and flexible reimbursement schemes of their own, based on market techniques and opportunities. . . .
Finally, we support an adequate quota increase in order to allow the Fund to fulfill its responsibilities in the adjustment of developing and industrial countries alike.
Whether growth can be strengthened and imbalances improved in the coming years will depend very much on the agreements reached during these meetings. I am confident that the cooperative spirit of our assembly will be helpful to the ongoing consolidation process of the international financial system and economic cooperation among all nations.
Statement by the Governor of the Bank for Israel—Michael Bruno
It is an honor and a privilege to address this distinguished gathering on behalf of the State of Israel. The Annual Meetings of the Fund and the World Bank provide an opportunity for reflecting on recent developments and for the formulation of priorities for the future.
Coordination of the macroeconomic policies of the leading industrial economies continues to be a key prerequisite for the orderly reduction of their external imbalances and for the restoration of stable long-term growth, whose rate in the 1980s has been half that recorded in the 1960s. Higher sustainable economic growth in the industrial countries is a necessary condition for a recovery in the fortunes of developing countries. Moreover, if the industrial countries do not act in unison to correct their economic imbalances, adjustment is forced upon them by the financial markets through exchange rate shifts and higher real interest rates. These are detrimental to the adjustment efforts of developing countries. The recovery of the developing countries is thus inextricably linked to the policies and resulting performance of the industrial economies.
But high growth in developing and developed countries alike cannot be sustained without a liberal and open trade system. Recent trends in this field are not encouraging, and we place much hope in this context in the present round of General Agreement on Tariffs and Trade (GATT) negotiations, particularly as regards the agricultural sector.
The fortunes of the developing countries are also linked to the more industrial world through their need for new financial resources. Adjustment programs, however well planned, need adequate and sustained financing. Inflows of new capital and the easing of the terms of debt repayment are essential in supporting the stabilization of the deeply indebted countries.
The Fund and the Bank play a central role in this respect by providing countries with much-needed financial assistance and, even more crucially, acting as a catalyst for other financing. But if these institutions are to fulfill these functions properly, they must have adequate resources at their own disposal. Otherwise, their actions will lack credibility, both in the eyes of the developing member countries and of the international financial community.
However much the growth of developing economies is linked to the policies of their industrial counterparts, it is still not a substitute for sound adjustment on behalf of the developing countries themselves. We would now like to turn to one particular aspect of this adjustment effort and its relationship with the traditional division of duties between the Fund and the World Bank in supporting stabilization policies and longer-term structural adjustment. Stabilization addresses severe short-term problems—inflation and depletion of foreign exchange reserves—while structural adjustment is usually directed at longer-term growth issues, as well as the removal of trade and financial distortions. However, more often than not the deeper roots of a stabilization crisis are structural by nature. In such cases a crisis cannot be permanently cured only by a short-term stabilization program, however well it may have been conceived. For example, a large and sustained government deficit may be temporarily removed by a tax increase or an expenditure cut, but it will not be permanently eradicated unless the underlying tax and expenditure systems (and thus the whole set of relationships between the private and public sector) undergo fundamental reform. In the absence of such reform, the fiscal problem will soon re-emerge and with it stability will again be impaired. Similar examples could be brought forth from the areas of trade, finance, or labor market policies.
Likewise, a structural adjustment effort is doomed to fail if stabilization of government budgets and external accounts is not assured. Thus, the credibility of trade liberalization or financial reform in the eyes of investors will soon be lost if large fiscal deficits re-emerge, implying continued inflation and balance of payments crises.
My own country’s recent experience is often cited as an example of a successful stabilization effort; yet it also exemplifies the need for the continued pursuance of more fundamental structural reforms, most of which still have a long way to go. In the three years of the Israeli stabilization program (started in July 1985), annual inflation has dropped from 500 percent to 15 percent; the foreign exchange position of the country has dramatically improved; also, output, employment, and productivity have been growing more rapidly, at least until recently (presently there is a slowdown in economic activity). At the same time, however, there are numerous deeper structural problems, some of which have surfaced only once the initial stabilization phase has taken place.
A large government budget deficit which was sustained at the rate of 12-15 percent of gross national product (GNP) for over more than a decade, has been substantially reduced, yet the heavy tax burden by which the budget is financed hampers future growth prospects. Its elimination requires a restructuring of the role of government so as to reduce its extensive direct role in the economy. Similarly, after years of government dominance in financial and capital markets with a large overhang of internal debt, there is need for a gradual restructuring of these segmented markets. Real interest rates on free market borrowing are still high, and numerous firms in financial distress require internal debt-rescheduling schemes. Finally, greater flexibility in real wage and labor market adjustment as well as further trade liberalization are prerequisites for the final step of reducing inflation to world levels. All of these are examples of the need for sustained structural adjustment in the wake of, and alongside, a serious stabilization effort.
Similar evidence can be brought from the experience of other countries that have gone through recurring fiscal and balance of payment crises. The lessons to be learned from these is that stabilization, liberalization, and structural reforms must be jointly embedded within a medium- or even a long-term strategy. Another implication is that the external support for a country’s adjustment effort must be conceived and sustained within an integrated short-, medium-, or long-term framework.
These examples suggest the advantage of closer coordination and joint external finance planning by the Fund and the World Bank on a case-by-case basis. Each one of the institutions has its own comparative expertise and should keep its independence; yet there is need for improved cooperation in the support of individual country adjustment and development strategy as well as in ongoing surveillance.
In closing, I would like to join the previous speakers in thanking the city of Berlin (West) for being host to this year’s Annual Meetings and for the excellent arrangements it has made for this occasion.
Statement by the Governor of the Fund and the Bank for Sri Lanka—M.H.M. Naina Marikar
It is a great pleasure and privilege for me to address this distinguished gathering in this historic city. At the outset, I would like to thank the people and the Government of the Federal Republic of Germany for their warm hospitality and efficient arrangements for our meetings.
In my remarks, which I have shortened for the purpose of this address, I would, if I may, focus on the critical issues facing us, the ability of the Fund and the Bank as presently constituted to deal with these issues, and what we, as Governors of the two institutions, can do to facilitate this task.
In the backdrop is a world economy continuing to show resilience and improvement despite the considerable tensions posed by large external imbalances among the very rich. For developing countries, the pessimistic view is the harsh reality of 950 million people, over a fifth of the world population, living in conditions of absolute poverty and deprived of even the basic needs. A more optimistic view takes note of the upturn in certain commodity prices. But these improved price levels are well below historical levels and spread most unevenly. Moreover, the accompanying rise in interest rates worldwide makes economic adjustment and per capita growth objectives even more difficult to achieve.
On commodity prices, the distortions to domestic resource allocation and international trade arising from the system of subsidies prevailing in the industrial countries are well known. Given the dominance of developed countries in the international trade of these products, liberalizing action on their part would have a significant positive impact on world welfare. Fund and Bank analyses on this subject have demonstrated this very clearly. On the subject of trade, an issue of operational significance to the Fund and Bank arises. Invariably, as part of the comprehensive structural adjustment programs, policy changes are mandated so as to expand export volumes of certain primary products. Let alone between the two institutions, even within each institution we have yet to see progress in placing the policy prescriptions within a global or regional perspective so as to avoid excess supply and price fluctuations.
Another aspect of Fund-Bank policy conditionality is diversification of the export base. But sustained implementation of these policies is impaired by experience of protective barriers in major markets. There is clear evidence that protectionist trends have tended to impact disproportionately on developing countries. This unhealthy trend toward discriminatory protectionism has made it even more urgent for the Uruguay Round to be successful. In this context, we note that the standstill and rollback commitments of the Uruguay Declaration remain a dead letter.
On the question of debt, all approaches adopted so far have resulted in creditors taking the lion’s share of the dividends from growth-oriented adjustment. Though the market-related “menu” approach has been useful, new lending has all but dried up, with commercial lenders showing growing preference for exit mechanisms. In this context, debt relief must be an essential complement in the debt strategy. Consideration must also be given to nonmarket and imaginative approaches to debt reduction. Official action to harmonize regulatory, tax, and accounting provisions in creditor countries can provide further impetus to this approach.
In the case of low-income countries, we welcome the recent initiatives by official creditors. These should be quickly translated into action. This should be reinforced by an adequate level of official development assistance (ODA), which regrettably has declined further in the recent past.
Addressing directly Fund and Bank issues, I note that economic adjustment in developing countries can be sustained over time only if supporting finances are assured. In this context, the reflows both to the Fund and, in particular, the Bank are striking. The credibility of policy prescriptions could be enhanced if financing support is more transparent. The recent general capital increase, enhanced structural adjustment facility, the revitalized extended Fund facility, and revisions to special facilities are steps in the right direction to enhance financing support and the protection of growth-oriented adjustment programs. We would underscore that the application of conditionality to these additional resources should not be a deterrent for their widest possible use.
On the issue of quotas, we note the potential for downside risks in the World Economic Outlook. The size of the quotas in relation to the growth of the world economy has been steadily declining. We also recognize the need to strengthen the capacity of the Fund to provide financing support to encourage trade liberalization as well as to support those industrial countries in their attempts to address structural constraints in the process of adjustment. The Fund management has recommended a doubling of quotas. This should be supported and the review must be completed expeditiously in early 1989. As for the distribution of quotas, given the variety of objectives, we favor an equiproportional increase.
On the SDR, we would merely draw attention to the Fund’s Articles under which we should seek to make it the principal reserve asset. We have slipped badly. Besides, the role of reserves has acquired a new dimension in the evolution of the debt issue. The credibility of the Fund’s role is at stake here if it cannot create monetary reserves to meet the needs of the system. For a variety of reasons, private markets cannot substitute official action to meet global reserve needs. We support an early resumption of SDRs of not less than SDR 30 billion.
On the question of overdue obligations by members, we support all initiatives to help them repay their debts by increasing their capacity to grow. This should be a collaborative and flexible approach by all parties concerned. . . .
Statement by the Governor of the Bank for the Islamic Republic of Iran—Mohammad Javad Iravani
In the name of Allah, the Merciful, the Compassionate.
“Certainly We sent our apostles with clear argument, and sent with them the book and the scale that men may conduct themselves with equity.”
The Holy Quran, LVII.25
I would like to express my pleasure at being present in this gathering and, on behalf of the delegation of the Islamic Republic of Iran, offer my sincere appreciation to the organizers for their valuable efforts.
The Joint Annual Meetings of the International Monetary Fund and the World Bank provide an appropriate opportunity to review and discuss the difficulties confronting member countries and to find more fundamental remedies for the current problems in the world economy, particularly for the poor countries. We hope through such gatherings we can at least make the problems of the developing world heard and more practical and fundamental remedies can be found for their solution.
The world economy during 1987 was characterized by disarray and irregularities. The world made much effort to save itself from a crisis. That environment, filled with uncertainties about the future trend of the global economy, still persists. Despite the relative decline of inflation and the moderate pace of growth in the world economy, the overall economic situation is still characterized by disarray and disequilibrium, its main features being international payments imbalances, high interest rates, huge fiscal deficits in certain countries, and large surpluses in others.
The present world economic problems stem mainly from the weakness and inability of the industrial countries to provide conditions conducive to economic stabilization, the lack of flexibility in their economic structure, and the adoption of discriminatory trade policies by these countries. The adverse effects of these factors on developing countries were more profound during 1987. Unemployment, poverty, and high mortality rates among children are some of the undesirable consequences prevalent among the poorest nations.
It has now become quite clear that fundamental solutions should be found for the establishment of a stable, lasting, and equitable international monetary and financial system. In such a system, monetary and financial relations between the rich and the poor countries should be envisaged, implemented, and supervised so as to prevent further widening of the gap between the poor and the rich.
The International Monetary Fund and the World Bank should show greater flexibility in the formulation of economic stabilization and adjustment programs and display more sensitivity to the difficulties facing the deprived nations. Avoiding more restrictions and conditionality on loans, eliminating cross-conditionality by various international institutions, and adopting a uniform and equitable approach toward all member states are among the issues that need further attention. In addition, the Fund and the World Bank should provide the grounds for greater involvement of industrial countries in the development of the world economy and emphasize the joint responsibility of all countries for the improvement of economic and social conditions of the world.
During 1980-87, except for a few newly industrialized countries, the rest of the developing world, particularly the debtor and African countries, faced a severe deterioration in their standard of living, a decline in investments, and economic recession. During 1987 and in the past recent months, only a slight improvement has taken place in supply and demand conditions and prices of primary commodities, which should not give rise to undue optimism. Despite these developments, the real prices of primary commodities are still low and as much as 32 percent below average prices during 1980-84. In fact, they are half the average prices in 1974.
At the same time, capital flows from debtor developing countries continued and, according to recent figures, this net outflow from 1982 onward amounted to almost $85 billion. With the continuous drop in oil prices and increasing net flow of funds from the developing countries to industrial countries, and contrary to expectations and despite all projections, the recycling of such funds to the needy countries has not taken place. On the contrary, new international lending has declined, direct and indirect investments in developing countries have fallen, and official development assistance has also decreased in real terms.
Capital flight and the problem of foreign exchange outflows from the developing countries have assumed greater dimension. It is now recognized by international institutions that capital flight in certain countries has not only caused a reduction of savings and investments and slowed economic growth, but also has further aggravated the debt crisis.
Despite the adoption of debt-relief mechanisms in recent years, the indebtedness of developing countries continues to mount up with greater intensity. It is quite clear that ad hoc remedies have proved to be piecemeal and transient. Recently, some industrial countries converted the poorer nations’ debts to grants, which is commendable. But the main problem still persists. The creditors and international financial institutions should enter into partnership arrangements with the debtor countries, and the focal point in these arrangements should be the creation of debt cooperative funds and direct links between the creditors and the final users. In these arrangements, the rate of return on investments and profitability of such undertakings are the main determinative factors. In recent years, some measures have been taken in this direction and some loans have been converted to investments in the debtor countries, which should be encouraged.
Islamic banking, which is based on similar partnership arrangements and the elimination of interest rates, has become more prevalent in recent years in numerous Islamic and other countries. During last year, a number of studies and research projects have been carried out by international organizations. It is appropriate that the scope of such studies be expanded to cover other aspects of the Islamic economy.
Regarding environmental pollution and its harmful effects, it suffices to say that certain countries have deliberately polluted and damaged the environment. In this connection, mention should be made of the pollution in the Persian Gulf waters, which are the natural habitat for rare marine animals. I hope the international community will take effective measures in protecting and cleaning the environment. Recent measures taken by the World Bank in giving priority to environmental issues are commendable. . . .
For developing countries, export earnings are of utmost importance in their economic development. The earnings of oil producing countries suffered the most during the 1980s, and the decline of real prices of oil put many of these countries in a difficult position and disrupted their development plans. The deterioration of these countries’ terms of trade, which assumed added dimensions in 1986, continued during last year. The continued decline in oil prices adversely affected their imports and investments. The continuation of this trend can bring about further instability for the global economy. It is therefore essential that prices of oil increase and stabilize at a realistic level.
The points I have earlier enumerated demonstrate clearly the need for tackling the problems in a fundamental way. Transient and ad hoc solutions cannot provide a solid foundation for the world economy upon which it can achieve equitable growth so as to allow all the countries to enjoy the blessings endowed by the Almighty Allah. In this connection, the role of international monetary and financial institutions is crucial. Hence, in addition to their surveillance on economies that play an important role in the world economy, they should pave the way for greater international cooperation, which is essential for economic growth and development.
I wish to mention a few points about the recent developments in my country. The acceptance of Security Council Resolution 598 proved to all that we have been seeking a just and durable peace and have spared no effort to achieve this goal. We also hope that a sound and solid foundation can be laid for durable and honorable peace both in the Persian Gulf and the rest of the world.
During the imposed war and despite the decline of oil prices and the pressure to halt the flow of Iranian oil, export operations continued under the severest war conditions, and the best efforts possible were made to fulfill our contractual obligations. It is to be noted that this task was made possible only because of the devotion and self-sacrifice and the faith of our valiant people. Furthermore, our people, with the help of Allah, have used the imposed economic difficulties to their advantage and demonstrated innovation and ingenuity, leading to savings in war expenditures, elimination of conspicuous consumption, and moving toward self-sufficiency and self-reliance in production.
In recognition of the importance of reducing reliance on a single commodity export and attaining self-reliance, the Islamic Republic of Iran has embarked on the promotion of non-oil exports during the last year. The non-oil exports increased to more than $1 billion. It is to be noted that the agricultural sector has enjoyed desirable growth during the last year and as a result of effective management, the efficiency of this sector has increased.
Public enthusiasm for interest-free banking during recent years and the growing deposits show people’s confidence in the present banking system and its functional acceptability. On the basis of Islamic contracts and by utilizing these deposits, many economic and industrial projects have already become operational. It is also to be noted that private sector deposits during the last year increased 20 percent, and priority sectors in providing credit facilities were agriculture, industry, mining, and housing.
Another domestic economic achievement was the lowering of dependence of public revenue on oil through appropriate taxation with a view to establishing social justice and a fairer distribution of income. In this connection, a bill on value-added tax has been prepared and submitted to the Islamic Consultative Assembly and is presently under consideration. In addition, the Government has also paid attention to social welfare. Increasing the rate of literacy in the country, achieving larger enrollment for primary, secondary, and university students, and expansion of electricity and rural health networks are among the achievements.
Another positive development is the extraordinary expansion and development of economic ties with other developing countries and Islamic nations. Relations with the developing world have now become the main pillar of our foreign economic policy.
Considering all the problems and difficulties during the imposed war, the Islamic Republic of Iran, without relying on external financial sources and by taking advantage of a mechanism for foreign exchange allocation, has fulfilled all its external obligations. By honoring financial obligations on time, and not relying on borrowed resources during the war years, the conditions are now favorable for reconstruction and renovation as well as expansion of economic capacity.
In conclusion, I hope these Annual Meetings can achieve their expected aims and that we may be able to at least eliminate a part of economic problems, poverty, and inequalities in our world through cooperation with all nations.
Statement by the Governor of the Bank for Poland—Wladyslaw Baka
Mr. Chairman, let me begin with my warm congratulations on the occasion of your election to the post of Co-Chairman of the Annual Meetings. These are important meetings and I am happy to be here. I have listened with great attention to the statements by Mr. Camdessus and Mr. Conable. They have addressed vital problems of the contemporary world. The directions and actions proposed could bring about significant improvements. This, however, will depend on the efficiency of implementation. In the past, also, good programs abounded. Implementation in the present must be preceded by an analysis of past favors.
Poland begins 60 kilometers east of Berlin. It is a country of rich—over a thousand-year-old—history, in which periods of strength and weakness alternated. In the sixteenth century, it was a major European power; in the nineteenth century, it did not enjoy independence; and at present, Poland is a medium-sized country with 38 million people. Poland has always been present in the life of nations: cultural, political, and economic.
Since June 1986, Poland has been a member of the International Monetary Fund and the International Bank for Reconstruction and Development. In December 1987 we joined the International Finance Corporation (IFC) and in June of this year, the International Development Association (IDA). In IDA we joined the donor countries. It is an expression of our solidarity with developing countries.
Our experience from over two years of membership in the Fund and the World Bank is constructive and promising. It also, however, gives rise to some concerns. On the one hand, we highly appreciate the possibility for policy discussions and exchanges of views with the Fund and the Bank staff on economic and development issues. The studies and reports of both institutions contribute to form a correct international perception of the Polish realities. On the other hand, in spite of two years of intensive cooperation and agreement on the need for financial assistance, we have not received any Fund or World Bank loans.
We encountered the international finance triangle—the Paris Club, the Fund, and the World Bank. This triangle is governed by the principle that the debtor must come to an agreement with all three members before one of them helps him in his efforts to solve the debt problem. This principle hinders the debtor from gaining momentum in the process of re-establishing creditworthiness. It is also inconsistent with the tasks assigned to individual institutions. Most important, the lack of access to credit resulting from this principle impairs the interests of creditors and adversely affects my country’s ability to service its debt.
Poland is a seriously indebted country. Notwithstanding the fact that in the 1980s $12 billion has been paid in interest payments, the outstanding convertible currency debt amounts to some $37 billion, compared with annual export earnings of some $8 billion. The debt increases in spite of annual payments amounting to about 30 percent of convertible currency earnings. Conditions for debt servicing need to be negotiated. This is a difficult process.
Poland is strongly committed to honor its obligations and will continue to do that. Debt servicing should not, however, adversely affect the long-term growth of the economy and the standard of living, all the more so as per capita consumption has not yet recovered or regained the level of 1980 that preceded the economic crisis of the early 1980s. There is no further possibility for a reduction in imports. Thus, the only viable option is to expand exports and to develop a solid capacity to fully service the foreign debt.
Poland is undergoing a deep political and economic transformation. This is an undertaking of historical dimensions. It involves a full democratization of social and political relations and a radical economic reform leading to a market-based, open system. Its basic task is to marry the social values of socialism with high criteria for economic efficiency. In this trying process we have had successes and failures. However, I strongly believe in the final success of this transformation. The source of my confidence is the firm support that the idea of this reform enjoys among the Poles.
At present, a consolidation plan is being prepared in Poland. Its main objective is the prompt removal of obstacles to economic activities by the state, cooperatives, and private operators, including foreign capital in various forms. Another important goal is the further development of exports and improvement in the balance of payments. We want to balance the current account in convertible currencies in 1991. The economy is performing well; exports are expanding at the annual rate of 22 percent. To maintain such a high rate of growth, however, existing barriers to access to international credit for export projects need to be lifted. Access to financial loans is also important since it would enable a more rapid import liberalization and wider access to foreign exchange for production purposes, thus facilitating progess in establishing market conditions in the economy.
We look forward to active support from the International Monetary Fund, the World Bank, and other financial partners for these undertakings. In the absence of this support, the goals of the program will not be attained promptly enough. That would be detrimental to Poland and its creditors. It would be detrimental to further development of East/West relations and thus to the whole family of nations.
Statement by the Governor of the Bank for the Philippines—Vicente R. Jayme
Permit me to begin with a deep expression of thanks to the people and Government of the Federal Republic of Germany and to the people and government of the city of Berlin (West) for the opportunity afforded us to reflect on our world economic situation in the midst of a community that, by its indomitable spirit, has faced many challenges with courage and resourcefulness and overcome them all.
If I am convinced that neither fate nor chance has brought us all to the city of Berlin (West) for these annual rituals of the Fund and the Bank, it is because there are lessons to be learned from the German experience that pertain directly to the major issue before us of international debt and the appropriate strategy toward its resolution.
Seventy years ago, apprehensive over the economic consequences of the peace that followed World War I, John Maynard Keynes, already influential although still young in years, argued passionately against the imposition of heavy debt burdens on a war-ravaged and defeated Germany. He felt then—and history has proved him right—that it would tear at the economic, social, and political fabric of the Weimar Republic and he feared its implications for all of Europe. That it did not take long for Mr. Keynes’s fears to be realized is all history now.
To be sure, the lessons of that last peace were not forgotten by those who later were to craft the new peace that would end World War II. Rejecting punitive measures that were at once debilitating and destabilizing, an enlightened leadership, particularly in the United States, extended to those devastated by war, victors and vanquished alike, assistance, not the least of which was that carried out under the Marshall Plan. In that spirit, Germany’s prewar foreign debt was treated in a rescheduling known as the London Accord that provided debt forgiveness equivalent to 70 percent. Likewise, the loans made by the United States to the United Kingdom were restructured such that the interest due on the loan was to be waived if the interest obligation exceeded 2 percent of U.K. foreign exchange earnings for that year.
The same enlightened—and, by any standard, bold—leadership managed and presided over the creation of two of such key international economic institutions as the Fund, the Bank, and the General Agreement on Tariffs and Trade (GATT), which have been instrumental in reconstruction and recovery after World War II. This is the heritage of the past that we must rediscover and ponder as we view the present debt crisis and chart a resolution of this intractable challenge.
In 1982, we were faced with a crisis of no less significance than the one that confronted the leaders of victorious nations in 1919 and again after World War II. It was not war that had brought us to the brink in 1982, but a series of events, devastating in their impact on developing economies. There was the renewed rise of petroleum prices. Inflation reared its ugly head. Measures intended to forestall it led to a rise in interest rates, prolonged recession, and a drop in commodity prices to levels unseen since the Depression. And with this adverse turn of events, many of those who had borrowed heavily under the aggressive programs for recycling petrodollars were now shocked to realize that their foreign debts had become a serious burden.
Our responses to the challenges of 1982 have not reflected the practical wisdom we ought to have learned from history. Indeed, as most everyone seems to agree, our most significant achievement in dealing with the debt crisis has been in “muddling through” these past six years.
Like the young German Republic of the 1920s, the more heavily indebted developing countries have, since 1982, borne the extraordinary burden of a debilitating debt-service process. In 1982 total debts amounted to $831 billion; in 1985 this had risen to $1,038 billion; and by early 1988, had risen further to the astronomical amount of $1,245 billion.
The same pressures spawned by the transfer abroad of huge amounts of resources, sorely needed at home for development, now threaten the political systems of these heavily indebted countries. The same grim economic prospects today fuel forces in these countries that would undermine their democratic institutions and values.
But to date, sad to say, we do not see the emergence of a bold and enlightened leadership that will espouse the equivalent of a London Accord or Marshall Plan for heavily indebted developing countries. Nowhere is the problem more acutely felt than in my country, the Philippines.
The Philippines today is faced with the responsibility of lifting 30 million people out of its population of 58 million people out of the quagmire of absolute poverty. This high level of poverty has contributed greatly to an insurgency movement that continues to sap our energies and snuff out the lives of our young. If we are to counter the insurgency movement effectively, we must give our people a better life. We must reduce poverty and we must grow.
Every year, confronted as it already is with the underemployment of 6 million people, the country’s labor force grows apace by some 700,000. Expert estimates suggest that only an economic growth rate of 6.5 percent through five years would bring the country back to the per capita income levels of 1982, and an even higher rate would be needed to stem further increases in the ranks of the absolute poor.
Last year, for the first time in five years, the country’s gross domestic product (GDP) grew by a vigorous 5.5 percent, following strong political reforms and resurgence of confidence in the economic climate and political leadership. During the first semester of 1988, the economy grew by 6.5 percent. We are fully conscious that whether we succeed in “turning the tide” or fall merely into “plowing the seas” will depend on how deeply committed we are to sustaining the actions we have taken toward fostering greater efficiency in resource use, and at the same time, to addressing directly the needs of our poorest. It depends too on a vigorously growing global economy, open markets for our exports, stable international exchange and interest rates, and increased flows of concessional finance. It requires an approach to the debt problem on the part of major creditor countries and international financial institutions that would reciprocate our adjustment efforts with a financing and debt-reduction program structured according to a medium-term framework and truly supportive of growth.
I need not mention today that the current approach to the debt issue has been frustrating, if not altogether harmful, to the political economies of the heavily indebted countries. It should be enough to stress that net positive resource flows to these countries have yet to be resumed and meaningful growth restored.
The revival of the Philippine economy, although now a reality, remains tenuous. Significant negative resource transfers, with their domestic fiscal counterparts, loom large in our economic and financial prospects. In spite of the sharp compression of the country’s investment to GDP ratio, from historical levels of 25-30 percent to 15 percent, our analyses continue to project negative net resource transfers of $8 billion through the next five years. Close to 20 percent of our 1989 national budget will be spent for our foreign debt service. This exceeds our whole education and housing budget. In 1988, about 28 percent of current account receipts will go to foreign debt service—these levels are unsustainable.
It is equally apparent that the current case-by-case approach to the debt crisis has severe limitations, not only because of debtor fatigue—perhaps destitution—but also because the financing that is supposed to underwrite it has not always materialized. The upward creep in interest rates since the start of 1988 can only mean a heavier outflow and a heavier burden.
The commercial banks, through their individual actions and as articulated by the Board of the Institute of International Finance, have made it clear that for prudential and business reasons they are both unwilling and unable to provide medium-term balance of payments support at the levels they are being asked to provide. We need only recall that “new money” packages in 1987 and 1988 were mostly for regularizing interest arrears, and in many instances the multilateral institutions, far from contributing to closing the gap, have contributed to widening it—being themselves net takers of resources.
But for the Philippines, we have to face the harsh realities of a financing gap that we must provide for over the years or see our recovery and growth falter and probably sputter to a halt. We must negotiate for new money from the commercial banks, the multilateral institutions, and bilateral sources to assure ourselves of continued development.
The options we face are extremely difficult. On the one hand, the Philippines wishes to honor its debt, but more important, it must provide for the needs of its people, about 50 percent of whom, I am pained to say, live in poverty. Being a developing country, we do not have the resources and capital needed to provide for all our people’s necessities. And yet, since we wish to be an honorable people we must set aside annually a large amount to be paid out to our creditors. We only hope that as we negotiate with our creditors they will understand and help us through these debt crisis years by providing us with funding—in amounts and under terms and conditions that will insure the growth that will allow us to provide for our people and pay our debts.
What if they do not provide new funding or do so sparingly—what then? I would not wish to prophesy. But what must a country do when made to choose between its people and its foreign debts? Clearly a government must provide for the needs of its people. Ideally, we can maintain our growth so we can give our people a better life and at the same time service our debts. But even if I were to be optimistic and presume that we will secure all the new funding we will need from our creditors, we still must search for ways to reduce the present stock of debts that burden us. There is no way we can sustain our growth with the kind of debt burden that we agonize under.
It has become clear that for many countries a reduction in the stock of debt or in interest payments would benefit debtor and creditor alike. The debtor’s improved ability to pay would translate quickly into an improved portfolio value for the creditor. Why then have we not seen more substantial debt reduction under an agreed framework instead of continuing to muddle through?
On the one hand, concerned with regulatory, burden-sharing, and free-rider problems, commercial banks continue to insist that, before they do what they clearly must do beyond participating in modest—really marginal—exit vehicles, creditor governments and international financial institutions should first “enhance” both the new financing and the debt-reduction techniques through guarantees and other such mechanisms. Creditor government officials, on the other hand, continue to hurl back the responsibility for the initiative to the commercial creditors, urging them to be more imaginative in seeking market-based techniques on their own and occasionally even disdaining their menu of options as “warmed-up Argentinian leftovers.” . . .
This spirited buck-passing and inert muddling through would have been comprehensible were we not entering the proverbial seventh year without a glimpse of an end in sight and were not economic fundamentals—most ominously an upward creep in interest rates—threatening to magnify the problem.
Not a few among us, I know, perhaps gifted with greater patience, would accentuate the positive. With some measure of optimism they may point at a few new and encouraging developments: the innovative debt conversion scheme was launched for Mexico earlier this year; the general capital increase for the World Bank has been approved; a contingency facility has been established in the Fund that would cushion country programs from adverse external factors; the Fund’s structural adjustment facility has been enhanced; and debt principal forgiveness as well as interest concession will now be available to a small number of the poorest countries under Paris Club rescheduling. At the same time, there has been a valuable recognition among the major industrial countries at the Toronto summit that the “problems of many heavily indebted countries are a cause for economic and political concern and can be a threat to political stability in developing countries.”
We do applaud these developments. If, however, we do not appear overly enthusiastic about them at this time, it is because our apprehension remains that these may be too little. These bits and pieces of make-do patchwork will not and cannot stem the tide of the outgoing reverse flow of funds that will leave many developing countries gasping for economic and political survival.
Indeed, the Mexican debt conversion scheme was a breakthrough. However, its limited success and the absence of any other subsequent schemes underscore the lacking requisites for such mechanisms to work—supportive action from creditor governments by way of a favorable tax and regulatory and credit enhancement framework.
The Bank’s general capital increase enlarges its resource base. The minimal amount of its paid-in portion, however, diminishes its impact on the terms it can offer its borrowers. To be sure, even if belatedly, the Fund’s contingency facility should help improve the survival rate of adjustment programs. The amounts of additional resources to be made available, however, linked as they are to quota and not to needs, fall far short of a true safety net. Finally, welcome as they are, the Paris Club concessions continue to be limited to a small number of the very poorest countries and exclude such countries as Morocco, the Dominican Republic, and the Philippines, even though our 1987 per capita income level of $590, for example, is closer to that of Senegal ($510) and Sudan ($330) than it is to those of Brazil ($2,020) and Venezuela ($3,200). By the same token, we are excluded from the Fund’s structural adjustment facility.
There is doubtless a value to recognizing the differences between the problems of the debt-distressed, low-income countries. Intermediate cases, however, may be overlooked in the process and are consequently at risk, as it were, of falling between the cracks.
Last year in this same forum, I enumerated those elements that I then regarded as necessary if, as at that time, we all agreed, adjustment with growth was to be a realistic goal for many of us. These bear repetition today.
First, a medium-term framework for financing and debt reduction—one conducive to sustainable adjustment with growth—must be established. It must ensure that the burden, till now borne overwhelmingly by debtor countries, is equitably shared.
Second, adequate safeguards must be set that would insulate debtor economies from the effects of unfavorable movements in interest rates, commodity prices, and other external shocks. The Fund’s contingency facility is a step in the right direction. Perhaps the Bank and possibly the commercial banks could provide the cover for the remaining gap.
Third, official creditors need to do more for the poorer among the heavily indebted countries, by way of additional concessional financing support, for example, and greater debt relief over a longer time frame under the Paris Club.
Fourth, if substantial concessional support is not forthcoming, then substantial debt reduction of either principal or interest payments must form a part of the solution. Banks have already allowed some benefit from the discounts on their paper; why not the creditor countries? The multilateral institutions should assume the intellectual leadership in drawing up and mobilizing support for a debt-reduction framework for individual countries. The Bank must act more courageously in providing credit enhancement through its cofinancing instrument and, thereby, facilitate debt reduction. The tax and regulatory authorities of creditor countries must offer more active and predictable support.
Fifth, a high-level commission should be established to urgently consider proposals for an international debt facility that could provide guarantees in exchange for a reduction in the debt of adjusting countries on a case-by-case basis. Such a facility would provide what has been missing heretofore in all our muddling through—that is, an international mechanism whereby meaningful and reinforcing packages may be put together that would bring about financial relief and economic reforms based on a specific country’s needs and merits. Such a facility could be established within or in cooperation with the Fund or the Bank.
An important dimension is the political factor. It has become clear that there can be no effective and long-run solution to the global debt crisis without the necessary political consensus that will make possible meaningful debt relief and new flows of funds for development and growth. This political consensus that President Conable yearns for can only be possible if member governments, especially those of industrial creditor countries, accept their responsibilities to share in the debt burden. There are clear signs that this is beginning to take place. The Toronto summit meeting, which partially condoned debts of the poorest countries, should be the start of similar actions that will extend relief to heavily indebted middle-income countries. There must be a greater flow of concessional funds from bilateral official sources. National laws, rules, and regulations of creditor countries must provide credit institutions that wish to give relief to their borrowers from heavily indebted countries a way of writing down these debts.
The challenge to our institutions and to our leadership today is clear. Our alternative responses must be equally clear. The experience of Germany remains instructive, and the legacy of the peace and recovery after World War II, relevant and true.
There is need today, as at the end of World War II, for the same bold and enlightened leadership that produced the London Accord that forgave 70 percent of Germany’s prewar debt, put a ceiling on the interest payments of the United Kingdom to 2 percent of foreign exchange earnings each year, and launched the Marshall Plan that brought Europe back to recovery and growth. It was this same bold and enlightened leadership that gave birth to the Fund and the Bank. It is my firm belief that we need to return to this bold and enlightened leadership if we are to effectively resolve our global debt crisis.
Having listened to the opening address of the Fund’s Managing Director, Mr. Camdessus, and the Bank’s President, Mr. Conable, and the new initiatives of the Government of Japan and some European countries, I am hopeful, very hopeful, that this search for enlightened leadership is at hand.
Statement by the Governor of the Fund for Hungary—Janos Fekete
The World Economic Outlook of the Fund gives an optimistic forecast for this year. But what gives ground to a deep worry regarding the world economic outlook is that some industrial countries—fearing inflation—launched a wave to raise interest rates at the end of this summer. Needless to say, higher interest rates discourage investment, contribute to slow growth, imply very serious material consequences, and make the situation of the debtor countries even more serious. The point is not only that their global debt has continuously been increasing and has reached $1.2 trillion in 1987, but that the direction of the long-term capital flows has changed. While during 1972-82, $147 billion of long-term capital entered the developing countries, the tendency reversed during 1983-87, when $85 billion flowed out of these countries.
The middle-income, highly indebted countries obtained less from new loans than they had to pay out during 1983-87 for debt service. There was a net flow of capital into the Fund and Bank in 1986-87. In 1988 this tendency seems to be continuing. Furthermore, overdue claims of the Fund increased, whereby eight countries were excluded from borrowing from the Fund, and there are others that run the same risk.
These few data testify that the actual methods and forms of assistance are not efficient enough and do not contribute to the solution of the debt crisis. A new approach is needed to solve the problem. A distinction has to be made between the two main groups of debtor countries.
The poorest countries constitute the first group. They can overcome these problems if creditors would—partially or totally—write off their capital debt and if new long-term loans were granted at a minimal interest rate. The situation of the sub-Saharan African countries is the most desperate, although important initiatives were made to help them last year: the Paris Club made an offer of a longer-term rescheduling scheme for several countries; the Fund pledged to triple the structural adjustment facility; and the Bank proposed an extraordinary program of action. What this first group needs is a policy containing basically humanitarian and social elements.
The other group of developing countries possesses considerable natural resources, and their indebtedness stems partly from objective external factors—a slowdown in the growth of the world economy, a drop in the prices of raw materials, and a rise in interest rates. But part stems from faults of their own economic policy. The difficult situation of this giant group of countries should be solved not by aid policy—as was the case for the first group—but by proper economic policy as well as elements of assistance.
I would suggest the following points for solving the debt crisis.
—The key is economic growth. The process of growth has to be started somehow in our sluggish world economy. This is the point in the proposal of Mr. Baker made at the Annual Meeting in Seoul with which I agree.
—The countries that belong to the second group, however, are unable to start this growth on their own. The decisive impetus must come from outside.
—Considering realities, industrial countries should make the main efforts in this process.
—The Baker plan proved to be not so successful because it wanted to put unduly large burdens on commercial banks. Since the debt crisis started, these banks have been reluctant to invest new money in the indebted countries of the Third World.
—Overall international growth can be set in motion only by making additional capital available.
In the present situation, substantial additional financial resources can only be created through the Fund. Financial resources of the required magnitude can be a “new SDR” allocation. This new SDR allocation would not be the usual one, based on quotas, which separately must be started again. The beneficiaries of the new allocation would be only the countries belonging to the second group, depending on conditionalities. The new SDR issue would be decided by the Fund’s Board of Governors. The upper limit of such a new SDR allocation can be fixed in relation to the gold reserve of the Fund. I suggest an allocation of new SDR 100 billion under a five-year schedule.
One must not fear the inflationary effect of creating that much liquidity, because today (and, I firmly believe, also for the next years) stagnation, not inflation, seems to be “public enemy No. 1” of the world economy.
As a condition of participation in the new SDR allocation, debtor countries ought to commit themselves to implement appropriate growth-oriented, medium-term adjustment programs by agreements with the Fund and the Bank.
The increase in the Ninth General Review of Quotas under discussion is also necessary to support the central role of the Fund. . . .
A lot will depend on the behavior of the creditor countries. They have to support the Fund-Bank initiatives, as the Japanese Government decided to do. I consider this proposal to be the most important event of these meetings.
Complementing the general adjustment programs, the World Bank would launch an extensive campaign of structural and sectoral adjustment loans and would supervise their use. Debtor countries could start new investments, the industrial sector of the creditor countries would get access to new markets, the government of the industrial countries would cover delivery risk by credit insurance, and commercial banks would finance new investments in which their own risk would be about 10-20 percent. The individual economies would come into motion, the rate of international economic growth would exceed the desirable 3 percent, and the danger of a recession or depression would be over.
Hungary’s Cooperation with the International Financial Institutions
During the six years of its membership in the Bretton Woods institutions, Hungary concluded 3 stand-by agreements with the Fund and 16 loan agreements with the Bank. Since 1985, when our country became a member of the International Finance Corporation (IFC), four joint ventures have been financed with the participation of that institution.
The first two Fund stand-by arrangements, which were approved in 1982-84, supported our external adjustment policies. With the help of these two programs, Hungary improved its external positions and fully regained its creditworthiness on the international markets. . . .
The New Hungarian Economic Program
In 1987 the Government adopted a three-year stabilization and revitalization program for the economy. The medium-term program envisaged fundamental structural changes in the economy and, as an assurance for implementation, it is relying on the close cooperation with the international financial institutions.
On the basis of the economic policy targets for the first year of the program, the Fund approved a one-year stand-by arrangement with Hungary last spring. The main instruments of our economic policy are tight fiscal and monetary policy to restrain domestic demand, an active exchange rate policy, and structural measures to stimulate supply. After having introduced the reform of the banking system in 1987 and the value-added tax (VAT) and personal income tax system in January 1988, we targeted further steps to substantially reduce subsidies to inefficient enterprises and to implement price and wage reforms. The midterm review of the implementation of our program took place recently. According to the Fund Board, the implementation of our targets is consistent with our Fund program. As a result of the decrease in household demand, as well as the expansion of exports, the target of improving the external balance by the end of the year is realistic. The budget deficit will be reduced to an amount equivalent to about 1 percent of gross domestic product (GDP). Hungarian enterprises are granted the right to engage in foreign trade. The new Law of Economic Association will create equal conditions for competition for public and private Hungarian enterprises and foreign enterprises. The law is to be presented to the Parliament next month.
A range of reforms should be completed with the substantial import liberalization and with market-type mechanisms for the social security system.
I think it is obvious that the envisaged reform measures cannot be stuffed into the straitjacket of a one-year stand-by program. The experience of the two first stand-by agreements proved that the restrictions exhausted the resources for longer-term growth. I think that our three-year structural adjustment program requires medium-term finance, providing more ample scope for economic policy.
The Hungarian economic liberalization program is in accord with the structural adjustment policy supported by the Fund and the Bank. We support the recent important innovations in Fund facilities—such as the creation of the external contingency mechanism and the revitalized extended fund facility—which give new impetus to the Fund’s policies supporting adjustment. Hungarian economic reform is worthy of support by the Fund and worthy of its medium-term financial assistance in the form of a future arrangement under the extended fund facility.
This concludes my remarks. I wish to say how much I agree with the five points of the Managing Director, which we want to realize in the next five years. I appreciate their necessary support. We are a little bit late with all these programs, and if we do not have the necessary cooperation with the Managing Director and his staff, I am afraid we shall be too late. And if we do not take the necessary steps, ladies and gentlemen, then I can only suggest that you fasten your seat belts and prepare yourselves for a crash landing.
Statement by the Governor of the Fund and the Bank for Trinidad and Tobago—A.N.R. Robinson
It is a privilege for me to address these Annual Meetings on behalf of those member states of the Caribbean Community (Caricom) countries that are also members of the Fund: Antigua and Barbuda, the Commonwealth of The Bahamas, Barbados, Belize, the Commonwealth of Dominica, Grenada, Guyana, Jamaica, St. Christopher and Nevis, St. Lucia, St. Vincent and the Grenadines, and my country, Trinidad and Tobago. On behalf of these Caricom states, I—like others before me—wish to thank our hosts in this historic city of Berlin (West) for their generous and gracious hospitality. Together with the superb conference arrangements, we have an excellent environment in which to discuss the issues that are troubling so many of us.
Notwithstanding the positive aspects of some recent international economic developments, progress has been uneven. Most of the developing countries, in particular the low-income and heavily indebted middle-income ones, are yet to share fully in the stronger economic performance of the industrial world. The experience of the Caricom countries has been similar, since they too have been subject to a negative net transfer of resources, which has constrained their growth.
While many developing countries have benefited from a strengthening of commodity prices and improving terms of trade, other developing countries have seen a weakening in the prices of some products of importance to them. Additionally, the recent rise in interest rates is increasing debt service costs, thus offsetting the gains that some of us might have received from larger export earnings. Further, protectionism in industrial countries continues to severely restrict the agricultural and industrial exports of developing countries.
The situation of the heavily indebted countries remains difficult. While an extraordinary adjustment has taken place in these countries, the rapid shifts in current account positions have left unresolved the central issue of how to reignite economic growth. This unsatisfactory situation is being exacerbated by the rising cost of foreign borrowing and increasing unavailability of external resources. This is a most disheartening prospect.
There is an urgent need for the international financial community to renew efforts to fashion a debt strategy that will allow the developing countries to implement effective and relevant policies in order to achieve balance of payments viability, economic growth, and equity within politically realistic time frames. To this end, the international financial community must not only make more concessional and semiconcessional flows available, but it must also address the need for possible forms of debt relief. An orderly solution to this problem is essential for balanced growth of the global economy.
The Caricom states fully support the efforts to resolve the problems of those countries in arrears to the Fund through an intensified process of collaboration among donors, creditors, multilateral institutions, and the members themselves. This three-phase process, which is eminently sound, involves (1) the formulation and implementation of needed economic adjustment; (2) the mobilization of exceptional financial support for the clearance of arrears and for the members’ longer-term adjustment efforts; and (3) the restoration of normal relations between the members and the Fund. This process will require a high degree of coordination and close contact among all the parties concerned.
Quotas, rather than borrowed resources, must obviously remain the principal source of Fund liquidity. Unfortunately, quotas have lagged behind requirements, judging by their relationship to world trade. Hence, a substantial increase in quotas is called for, not only to bring the size of the Fund back into more appropriate balance with the world economy, but also to reduce over time the use of borrowed resources, which have to be lent on harder terms than quotas. The countries of the Caribbean Community, for which I speak, wish to state their unequivocal opposition to any attempt to link an increase in quotas to the resolution of the problem of arrears in the Fund.
We also regret that since 1981 no action has been taken on the new SDR allocation, although there is overwhelming evidence that the conditions for a new allocation have been fully satisfied. Without an SDR allocation the Fund will be unable to play its legitimate role in promoting adjustment and growth, to the detriment of our countries that have only limited access to international capital markets.
Moreover, the Fund must be prepared to provide greater actual access within the existing access limits. The maintenance of the enlarged access policy and prevailing access limits is also essential in these circumstances. Further, flexibility in the length of program periods and in the provision of access, which should be about 200 percent of quota on an annual basis, will also be required.
We welcome the increased resources available to support adjustment and development efforts in low-income countries under the recently established enhanced structural adjustment facility. The sustainability of adjustment will undoubtedly be facilitated by the flexible application of the newly created compensatory and contingency financing facility. We expect external contingency financing and the Fund’s catalytic role to provide protection against development programs derailed by shifts in terms of trade and increasing world interest rates.
We meet this year at a time when one of the states on whose behalf I speak—namely, Jamaica—has been struck by a natural disaster of enormous proportions just as it had begun to experience the benefits of a long period of heroic structural adjustment. We watched on our television screens the evolution and progress of one of the most destructive hurricanes on record in the Western Hemisphere. Other countries besides Jamaica suffered from the storm, though not as extensively. Still others have been victims of similar natural disasters. We applaud the efforts of those who have rendered humanitarian assistance and ask for the further mobilization of resources to assist in the reconstruction effort.
Permit me to say a few words about my own country, Trinidad and Tobago, which is a small, oil exporting country. In addition to the weakness of oil markets, Trinidad and Tobago has been suffering from a declining trend in crude oil production over the last ten years. Like others, we are also faced with the need to meet rising debt service costs. Moreover, we are now going through a period of “bunching” on the repayment of principal, increasing both our fiscal and balance of payments burdens. The scope for financing this deterioration in our external position is narrowly circumscribed. We may, therefore, be forced to reduce production and investment by further restricting imports of both intermediate and capital goods in addition to essential foods and drugs.
Over the last six years, and particularly since January 1987, we have been undertaking adjustment measures, and we have the political will to continue implementing such measures. Both the Fund and the Bank, as well as private financial institutions, should recognize that as regards both human and natural resources, our economy rests on sound foundations. But in order to be able to undertake adjustment with growth and equity, we need external financing on concessional or nearly concessional terms, even as we ourselves gave assistance to others when we had the resources to do so.
It is becoming increasingly apparent that the successful management of the global economy is a responsibility shared between developed and developing countries. We believe that the Bretton Woods institutions possess the capacity and, if supplemented by adequate institutional and other arrangements, can under their present sound leadership meet the widely diversified needs of our varied and multifaceted economies.
Over the years, and certainly since I started attending these meetings as a fledgling minister of finance 25 years ago, there has been no lack of ideas or practical proposals for reform. What has been and continues to be lacking is political will on the part of the principal managers of our increasingly interdependent global economy.
Statement by the Governor of the Fund and the Bank for New Zealand—David Butcher
May I associate my delegation from New Zealand with the other remarks of thanks to our hosts and the staff who have made this conference possible.
Much has been said in the last few days about the process of adjustment. I want to share with you New Zealand’s views about two aspects: first, some lessons from New Zealand’s reform effort; and second, how this adjustment relates to current developments in world trade.
Last year, New Zealand’s Minister of Finance described how New Zealand has embarked on a far-reaching reform program since 1984. What are the lessons that can be drawn?
First, comprehensiveness and speed are of the essence. Members of the community and interest groups can better accept structural adjustment and removal of protected positions when they can see others having to cope with similar changes. It is also important in establishing government credibility. People become more confident about a government when it enacts measures within a consistent overall framework.
A second lesson is that meaningful adjustment takes time. It took time for firms and employees to accept the Government’s determination not to accommodate excessive wage or price demands through loose monetary policy. It took four years to bring the fiscal deficit down from 9 percent of gross domestic product (GDP) to a current position of basic balance. Each year the resolve of the Cabinet was tested in this direction.
A third lesson I want to leave with you is that real adjustment has costs. The Government removed wage and price controls, interest rate and financial controls, and import licensing, and reduced border protection. It has drastically cut subsidies and put a massive effort into making public enterprises more efficient. In New Zealand we have had to accept a pause in our growth. Unemployment has risen to nearly 8 percent of our labor force.
There has been real pain among farmers, exporters, householders from high mortgage rates, and public servants facing a Government determined to achieve a cost-effective state sector. These costs are large and inevitable. However, it would have been more costly to do nothing.
New Zealand’s balance of payments is significantly improved, the fiscal position is comfortable, inflation is down from 18 percent to under 5 percent, and we have begun paying off external debt. My Government is confident that it has laid the basis for a sustained growth period.
I turn now to how our reforms fit in with developments in world trade. In the last four years, New Zealand has substantially dismantled its external protection. We have also significantly reduced subsidies and price support schemes for agricultural products. We did not do this to secure an advantage in bilateral or multilateral trading relationships. We did it because it made economic sense for New Zealand.
New Zealand has gained from this strategy. It has increased productivity, reduced inflation, helped reduce the fiscal deficit, and ensured a public perception of equal treatment among sectors.
For this reason, New Zealand views with dismay growing protection in many industrial countries. We are convinced that expanding world trade is the only way to reduce the debt of the developing countries and reduce unemployment in the industrial countries.
In this context I want to reinforce two points made in the Interim Committee meeting by our colleague, the Australian Treasurer, Mr. Keating. First, we view with concern the potential for regional trading blocks to reduce competition. For example, the Common Agricultural Policy of the European Economic Community has been an unmitigated disaster for the welfare both of European consumers and people like us who live by trade in agricultural goods. This type of protection must not spread to other regions or other products. Second, we believe it is in the interest of all of us to make progress in the Uruguay Round.
New Zealand has moved away from platitudes and has brought about a significant reduction in its protection and subsidies. We did it in our interest. Our moves are also in the interest of everyone. Similar vigorous reform would benefit rich and poor alike.
Statement by the Governor of the Bank for Yugoslavia—Svetozar Rikanovic
May I join my fellow Governors in expressing gratitude to our Berlin (West) hosts for their splendid organization of our stay and our deep appreciation for the warm hospitality accorded us.
In the assessment of international economic developments, satisfaction has been voiced over the economic growth in industrial countries for the sixth consecutive year in numerous meetings during the last several days. We share their pleasure, convinced that lasting and stable development of industrial countries is the sine qua non for sustained development in the world. With global economic interdependence, an economic crisis in the industrial countries is immediately reflected in the developing countries, but unfortunately this is not true in the case of growth. Therefore, economic crisis in the developed world always leads toward a global crisis, but economic prosperity in the developed world does not necessarily mean global prosperity. Favorable economic results of industrial countries are insufficiently reflected in the developing countries, particularly in the poorest among them, owing to numerous old and new customs, and fiscal, monetary, administrative, and other firmly set barriers. In this respect, the Toronto summit agreement is encouraging. In the meantime, the readiness of a growing number of industrial countries, including our German hosts who confirmed this yesterday, to use different instruments for alleviation of debt burden, including partial debt write-off of the poorest and heavily indebted countries, notably in Africa, raises further hopes.
The poverty issue was with good reason on the Development Committee agenda and in our present deliberations. We welcome numerous ideas voiced here in favor of the low-income countries, including the views of the Group of Twenty-Four, which has for years insisted on more specific measures to decisively and definitely reduce hunger and poverty worldwide. The Bank’s Special Program of Assistance for the debt-distressed countries of sub-Saharan Africa is an important further step in achieving our common objectives. Despite its serious economic difficulties, Yugoslavia has for a long time contributed resources to the special Aid Fund for the poorest countries. Unfortunately, positive economic developments in industrial countries have not even been felt in the heavily indebted middle-income countries as was expected.
Allow me now to focus precisely on the position of this group of countries, not only because Yugoslavia is one of them, but because heavily indebted middle-income countries are experiencing stagnation preceded by a serious economic decline, despite economic prosperity in industrial countries. Their current “middle” income is, therefore, no more the middle income of several years ago. Instead of narrowing the gap between their living standard and that of the developed countries, most of them have not been able even to reach their own standard of living of the 1970s. Their experiences demonstrate that only continued poverty and destitution are worse than economic retardation. For years now, these countries have been almost without any access to financial markets. Market interest rates on past loans with high spreads, which creditors regularly apply to this group of countries, are their only remaining connections with those markets. New loans are given in a teaspoon as a precious medicine, barely able to sustain the patient.
Moreover, well-known data on negative resource transfer indicate that part of the prosperity of the most developed countries was in the last few years supported by capital generated by developing countries. The industrial countries’ growth may not have significantly benefited from the negative resource transfer volume, but the growth in the developing countries has been considerably affected. Resource outflow from the heavily indebted middle-income countries is a process contrary to the basic principles of the Bank as a development institution. Can we simply accept that both the Bank and, increasingly, the Fund are now net recipients of resources from these countries? Instead of calmly complying with such practices, we must strengthen, enable, and increasingly oblige these institutions to assert their historic role and universal character in practice. They will be efficient in their response to this claim only with clear, program-oriented, and concrete actions in coping with each and every economic and financial challenge of our world.
In this context, may I suggest that the Fund and the Bank explore the possibility of devising a special program with specific measures to solve the debt crisis and assure growth of heavily indebted middle-income countries. These objectives, together with the poverty issue, are the greatest economic challenges of the decade. It would be extremely difficult for the Fund and the Bank to justify the absence of their initiatives for overcoming the serious economic crisis in these countries. All the more so as the debt strategy of other creditor groups has for years borne no or only partial results.
There is often a lack of understanding of the problems of heavily indebted middle-income countries. It took considerable time, at least verbally, to recognize and assert that sustainable growth is the only way for these countries to surmount their crisis.
However, the problem has proved to be even more complex in practice, as development, apart from uncertainties, requires additional foreign capital. Should the desired growth and export performance fail, the debt and overall crisis of those countries will be further aggravated. This is a trap we must avoid. We should accord our full attention to the present debt overhang and reduce it at the very outset to an acceptable level. In this context, Mr. Camdessus’ opening statement is encouraging. In our view this program should be designed in such a manner to simultaneously ensure both development and debt burden alleviation. It is unacceptable to insist on a policy that would make these two objectives conflicting. We feel that the most competent experts of the international financial institutions and member countries should take part in devising the program. In preparing it, the following should be taken into consideration.
—The more strongly an indebted country engages in its adjustment efforts, the more intensive and sizable should be involvement of the Bank, the Fund, and other creditors.
—Funds should be provided from additional sources, but not on account of the already set priorities of the least developed countries. In this respect Japan’s initiative is encouraging.
—There is an urgent need to reverse resource flows to these countries.
—There is a need for debt stock reduction with, inter alia, utilization of the existing and the devising of new market mechanisms.
—Debt service should be limited to a percentage of export earnings that would be compatible with the development needs and with the economic and social requirements of each country.
—Conditions and criteria need to be determined to alleviate the debt burden stemming from Bank loans with high fixed interest rates, as well as to reduce foreign exchange losses generated by exchange rate fluctuations.
I have presented only a few ideas and suggestions, which will be naturally further elaborated by others who are deeply involved in dealing with these issues. We are not strongly insisting on each and every particular idea, but rather, on a comprehensive Bank and Fund program containing concrete and practical measures and mechanisms aimed at overcoming severe debt burden and economic deterioration of the heavily indebted middle-income countries. This group of countries should be even more determined in pursuing their numerous economic and other reforms so as to ensure sustained growth and prosperity adequately supported by the international financial community.
In conclusion, allow me to refer briefly to the current relations of my country with the Fund and the Bank. Faced with difficulties in servicing external debt, a high rate of inflation, and stagnation of economic growth for a number of years, we began last May the implementation of a comprehensive, extremely austere economic adjustment program, supported by the Fund and other creditors. It is premature to assess the effects of the program we are consistently implementing, despite numerous difficulties. Achievements in the external sector have further improved: the trade deficit has been reduced with a parallel increase in imports, while the surplus in the balance of payments with the hard currency area is rising; and foreign exchange reserves have increased in the meantime, while the foreign exchange market is operating in compliance with the principle of foreign exchange supply and demand. However, the internal sector has not been as successful. In spite of demand being curbed, which led to a further decline in the standard of living, the rate of inflation is still high. Industrial production is showing the first signs of its recovery. We remain firmly committed to pursuing the program and implementing internal reforms, which should lead to a more developed market-oriented economy. A more favorable international environment may help our great efforts in overcoming the economic crisis and bear the fruit we have long hoped for. We believe this also holds true for many other heavily indebted developing countries.
Statement by the Governor of the Bank for Papua New Guinea—Galeva Kwarara
I am greatly honored to be representing Papua New Guinea at this meeting.
On behalf of my Government, I would like to express our deep appreciation to the Government and people of the Federal Republic of Germany for the warm hospitality offered to us and for the excellent arrangements that have been made to ensure a successful meeting in this beautiful city.
I would like to make a few quick observations on developments that have taken place recently. The year 1987 saw stronger growth performance in most industrial countries than expected following the stock market crash last October. While inflation in these countries was contained at moderately low levels, current account imbalances remained large in 1987. The current account deficit of the United States exceeded $150 billion, while the total surplus of payments of the Federal Republic of Germany and Japan amounted to more than $130 billion. A direct result of this structural imbalance is that the value of the U.S. dollar fell by more than a record 50 percent against the yen and the deutsche mark.
In the developing countries, economic growth in 1987 was on average not only lower than the growth of industrial countries but also lower than the growth recorded by developing countries in 1986. Actual declines in gross domestic product (GDP) were recorded by sub-Saharan Africa and those highly indebted middle-income countries. Some of these countries also experienced associated problems of inflation and financial instability.
Net disbursements of official development assistance from member countries of the Development Assistance Committee (DAC) to the developing countries in 1987 declined in real terms.
During the same period, official development assistance on average represented 0.34 percent of gross national product (GNP) of these countries. Out of a total of 19 countries that make up the DAC, only 5 countries provided more than 0.7 percent of their GNP in development assistance, which is the target set by the United Nations (UN). This clearly shows that greater effort is needed on the part of those respective developed countries that are below the UN target to provide the appropriate proportion of assistance to developing countries.
Developing countries like Papua New Guinea, which are small, open trading economies, are very dependent on conditions in the rest of the world. The growth in world production and trade is crucial to the demand for our commodities. Similarly, our levels of inflation and interest rates are heavily influenced by developments in the rest of the world and particularly by events in our trading partners.
The role of the Fund and the Bank is crucial in a world environment where developments have created structural imbalances in major industrial countries; where economic performances of industrial countries have exceeded those of developing countries; and where developing countries are experiencing debt-servicing problems. . . .
Recent developments have seen both the Fund and the Bank undertaking significant improvements in their operations. Within the Fund, the creation of the external contingency mechanism and the extension of the extended Fund facility provide for more resources over a longer term than available under stand-by arrangements. The announcement of the enhanced structural adjustment facility by the Fund provides for highly concessional finance to the poorest members to undertake structural adjustment programs in coordination with the Bank.
Structural adjustment programs have been a topic of much discussion recently. Although these programs are intended to assist the development process in developing countries, many problems arise in their implementation, and the results are often mixed. The recipe for success is fairly simple. There must be good cooperation between the Fund or Bank and the recipient country. And more so, the program must be initiated by the recipient country with the assistance of the Fund or Bank. This will ensure commitment and should hopefully result in better implementation and more positive results.
For those developing countries that now find themselves in adverse debt situations, their scope of options for development is seriously handicapped. This means that the alleviation of the debt situation is given top priority before any ordinary development policy effort is even considered on any new forthcoming resources.
The efforts by industrial countries and international financial organizations to reduce interest rates or to extend repayment periods for heavily indebted developing countries are considerate and desirable. However, it is not clear if this exercise will completely bail developing countries out of the vicious debt cycle that they are caught in. We would like to appeal to industrial countries and international financial institutions to seriously consider writing off parts or all of outstanding debts for certain developing nations on a case-by-case basis.
I now wish to comment on the role of the Fund and the Bank in the South Pacific. I am happy to say that annual missions to my country by both the Fund and the Bank not only have helped them to understand our own situation better, but also have given us the opportunity to monitor and assess our own policies for achieving development.
With reference to the Fund, I am happy to say that it has provided technical personnel to our central bank, and we highly value their assistance provided for monetary policy management. . . .
I would like to conclude with the heartening note set by the World Bank. I am encouraged to hear directly from the President of the Bank that “countries which undertake to reform and upgrade their education systems will find the Bank a supportive partner.” I believe that this is the right spirit and indeed the right direction for all of us. Our future will be determined by the amount of investment that we are willing to put into education.
I totally agree with the President of the Bank that the productivity of an educated work force is the most reliable engine of economic growth.
September 28, 1988.