Chapter

Discussion of Policy at First Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1992
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Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System, Carlos Solchaga

I am pleased to have this opportunity to report to Governors, in my capacity as Chairman of the Interim Committee, on the work of the Committee over the past twelve months. At its spring meeting on April 27–28 of this year and more recently at its meeting of September 20–21, the Committee devoted considerable attention to the world economic outlook in industrial and developing countries and to the process of economic stabilization and systemic reforms in Eastern Europe and in the states of the former Soviet Union. It also focused on other matters central to the Fund’s activities, including progress on consents to quota increases under the Ninth Review and acceptances of the Third Amendment of the Articles of Agreement, the consideration of international liquidity and the role of the SDR, and concessional assistance from the Fund following the use of enhanced structural adjustment facility (ESAF) resources. As these issues have been well covered in the two communiqués, I shall limit myself to commenting briefly on the main items.

In reviewing the world economic outlook, the Committee observed that despite the initial signs of economic recovery in industrial countries, the pickup has remained sluggish and uneven, and unemployment is unacceptably high. Furthermore, recent exchange market tensions have contributed to increased uncertainty. On the positive side, inflation and interest rates have declined significantly in a number of industrial countries. Despite this weak international environment, developing countries as a group have shown encouragingly stronger growth, and the Committee welcomed the steady and successful implementation in many of these countries of sound macroeconomic policies and structural reforms. The progress being made by the countries of Central and Eastern Europe in reforming their economies, and the courageous initial steps taken by many of the states of the former Soviet Union toward building market-oriented economies, were also welcomed by the Committee.

Allow me to summarize briefly the Committee’s deliberations on each of these three main country groupings.

For industrial countries, the Committee re-emphasized the importance of a firm and concerted pursuit of policies aimed at ensuring that the recovery gathers pace in an environment conducive to stronger, sustainable, noninflationary growth into the medium term. Fiscal and monetary policies must be geared toward facilitating a lasting decline in long-term interest rates through a decisive reduction in public sector deficits—and here the Committee pointed to unproductive expenditure as a particular area for action. At the same time, vigorous steps must be taken to eliminate structural rigidities that impede employment and productivity growth.

The recent currency turmoil has forcefully illustrated the need to firmly implement the above-mentioned medium-term strategy, reinforce policy coordination among major industrial countries, and also continue efforts to make progress toward economic convergence in Europe. Close cooperation among these countries is needed to strengthen private sector confidence, improve the balance of fiscal and monetary policies, and thereby facilitate a narrowing of interest rate differentials and foster greater currency stability.

During the past year, the Committee devoted considerable attention to the challenging tasks of economic reform and transformation in the former centrally planned economies. In the countries of Central and Eastern Europe there has been encouraging progress, under Fund-supported programs, as evidenced by the slowdown of inflation, the expansion of the private sector, and the growth of exports. However, these achievements are still fragile, underlining the need to carry through further reforms quickly. The Committee called for firm actions in all former centrally planned economies to reinforce budgetary and monetary discipline, to accelerate structural reforms and institution building, and to foster domestic and foreign investment. Many of the states of the former Soviet Union have made major efforts to liberalize prices and prepare the framework for market-oriented economic systems, and Fund arrangements have been negotiated with the Russian Federation and the Baltic countries. But the task of building a wholly new economic system remains formidable. It will require strong and continued adjustment efforts in each country supported by external assistance, both technical and financial. Important also, the Committee drew attention to the need for close cooperation between the states of the former Soviet Union, to ensure financial stability and free trade, consistent with the multilateral principles of their recently acquired membership in the Bretton Woods institutions.

With regard to developing countries, the Committee was pleased to note that the adjustment and reform programs increasingly implemented in these countries have resulted in stronger growth and lower inflation and have been accompanied in a number of cases by substantial inflows of foreign investment. These are encouraging developments that other countries need to emulate. In southern and eastern Africa, however, the severe drought is having dire consequences, and the Committee called for prompt international assistance to the affected countries.

In discussing the Fund’s support of adjustment programs in low-income countries, the Committee welcomed the extension to November 1993 of the period for commitments under the Fund’s ESAF and the Executive Board’s intention to review the effectiveness of ESAF programs and examine the options and operational modalities of a possible successor facility. The Committee urged that this work be completed in good time before November 1993.

The debt strategy is another area where progress has been made, with improvement in the debt situation of many developing countries. The Committee welcomed the implementation by Paris Club creditors of greater debt relief for low-income countries, the progress on bank debt restructuring agreements, and the recovery of private spontaneous capital flows to a number of developing countries. It cautioned, however, that a number of countries have yet to secure decisive solutions to their debt problems, and in this respect welcomed the Paris Club’s readiness to consider a reduction of the stock of debt for low-income countries after a suitable period of adjustment. It also encouraged the Paris Club to recognize the special situation of some highly indebted lower middle-income countries on a case-by-case basis. Finally, it commended those countries that, often under very difficult circumstances, have continued to service their debt on a regular basis.

The efforts of the developing countries and of the former centrally planned economies need of course to be backed by a supportive international environment. In this regard, the Committee was emphatic that an early, successful conclusion of the Uruguay Round would be an invaluable contribution to these countries’ efforts and would be essential to regenerating world economic growth.

Another important matter on which the Committee expressed concern at both of its meetings is the fact that the quota increases under the Ninth Review and the Third Amendment of the Articles had not yet entered into effect, despite continued progress made in the number of member countries’ consents and acceptances. The Committee strongly urged the members that have not yet completed their procedures to do so promptly, thereby giving the Fund sufficient liquidity to meet the pressing demands on its resources.

Finally, the Committee requested the Executive Board to continue to keep under review the role of the SDR in the provision of international liquidity.

It was agreed that the spring meeting of the Committee will take place in Washington, D.C., on April 30, 1993.

Report to the Boards of Governors of the Fund and the Bank by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee), Alejandro Foxley

The Development Committee met twice during the year under review and discussed a broad range of development issues.

We started with a very wide-ranging debate on Development Priorities for the 1990s. The Committee agreed that the priority objectives were (i) the reduction of poverty; and (ii) the achievement of sustainable growth. They also agreed that actions to protect the environment were essential for both objectives and stressed that the main task was now to implement those objectives. There was a remarkably wide consensus on what needs to be done—a wider consensus than we could have attained even five years ago. The Committee agreed that success in meeting these objectives will depend on the economic policies pursued by both developing and industrial countries, the creation of a market friendly environment, the strength of developing countries’ human resources, and the availability of human resources, as well as the complementary roles of the public and private sectors. Ministers recognized the need to pursue further growth-oriented economic reforms in order to mobilize domestic resources, attract foreign direct investment, and increase the efficiency of capital use. The Committee called on the International Monetary Fund and the World Bank to continue to consider how best they could support the reform efforts of adjusting countries that were facing short-term problems requiring appropriate safety nets.

The Committee underlined that economic reform in the developing countries should be complemented by improvements in the trade, energy, industrial, and agricultural policies of the industrial countries. In particular, the Committee recognized that wider access to world markets was essential. Ministers were, therefore, disturbed at the continuing delay in the Uruguay Round and emphasized the urgent need for a successful conclusion.

The Committee urged that every effort be made to increase flows of official development assistance (ODA) where needed, especially now that a lessening in international tension allows for a reduction in military expenditures. Ministers acknowledged that the creditor nations could continue to make progress in dealing with the debt overhang.

The Committee urged the Governors to approve the $1 billion capital increase for the IFC. Ministers recognized the need for IDA deputies to reach agreement by the end of 1992 on IDA-10, preferably at a level substantially above that of IDA-9. Ministers agreed on the importance of private sector development as one of the priorities for the World Bank Group. Some of our members are very concerned that, in recent years, net transfers from the World Bank to the totality of developing countries have turned negative. In order to sustain development efforts, the Committee stressed the need to maintain positive net transfers to countries that are still in the adjustment process. It was this debate that led us to look again at the totality of resource transfers to developing countries, a topic that we debated on Monday. Ministers welcomed the states of the former U.S.S.R. into the Bretton Woods institutions and noted the World Bank’s assurance that its assistance to Eastern and Central Europe could be accomplished while continuing to support the efforts of its traditional borrowing members.

The Committee welcomed the recent expansion in the list of ESAF-eligible countries and the International Monetary Fund’s operations in support of adjustment efforts. Ministers urged those countries that had not approved the Fund quota increase package to act speedily.

Turning from general objectives to particular operations, Human Resource Development (HRD) was the second main issue. The Committee reaffirmed the World Bank’s conclusion that HRD is at the heart of any strategy for attaining the agreed objectives of reducing poverty and spurring economic growth. They stressed that, in order to achieve these objectives, donors and recipients need to cooperate in the social field.

Concerning the Bretton Woods institutions, the Committee endorsed the recent shift in the pattern of World Bank lending and the projections for fiscal years 1992–94, which show an increased share (from about 6 percent in the early 1980s to about 15 percent) going to HRD. The Committee also encouraged the International Monetary Fund to continue to increase its emphasis on the social aspects of adjustment.

As I reported to you last year, the Committee has decided to carry out an annual review of the interlinkages between policies of industrial and developing countries. Such review focused on trade. While welcoming the significant efforts made by many developing countries to undertake trade reform and open up their markets, Ministers encouraged industrial countries to complement this by accelerating the pace of their liberalization efforts.

Ministers once more urged all participants to recognize the international importance of the Uruguay Round and to work urgently for an outcome that would result in a substantial reduction of trade barriers.

Ministers recognized the need to control potential damage to the environment but agreed that such legitimate concerns should not be used by any country to justify new or existing barriers to trade.

We also suggested that the World Bank and the International Monetary Fund should undertake and publish regular assessments of the impact on developing countries of changes in world trade patterns; the institutions should continue to support the efforts of developing countries in this area and to collaborate with the General Agreement on Tariffs and Trade (GATT) in promoting open trade policies.

The final issue was the interaction between environmental and development policies in preparation for the UN Conference on Environment and Development in Rio de Janeiro.

The Committee recognized that economic growth and human development can be consistent with improving environmental conditions, but that this would require significant policy, program, and institutional changes in dealing with national and global environmental problems.

While specifying the elements of a strategy at the national level, Ministers recognized that many developing countries would continue to need increased external help to tackle national environmental problems and agreed that official support should be provided through existing development institutions rather than by setting up a separate Green Fund.

Ministers believe that the Global Environment Facility (GEF) should play a leading role in providing new and additional financial resources, and its governance should ensure effective representation and participation by all countries. The Committee asked the GEF participants to reach early decisions on the future coverage, governance, and financing of the GEF; of course, this has now been done. Ministers welcomed the World Bank’s account of its own environmental activities and the related activities of the International Monetary Fund. Ministers also agreed that consideration should be given to a special “Earth Increment” to IDA-10; as you know, those negotiations are still continuing.

Mr. Chairman, this is the last meeting of my two-year tenure. I want to end these remarks by thanking the members and observers of the Development Committee for their valuable contributions to our discussions. I also would like to thank the Bretton Woods institutions and their respective heads for their unwavering support of our activities.

Statement by the Governor of the Bank for the United Kingdom—Robin Leigh-Pemberton

As the United Kingdom currently holds the Presidency of the Council of European Communities, I have the honor, on behalf of the Chancellor of the Exchequer, to address the meeting for the 12 member states. In their name, I welcome Albania, Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, the Marshall Islands, Moldova, Russia, San Marino, Switzerland, Turkmenistan, Ukraine, and Uzbekistan to the Bretton Woods institutions. For this historic increase in membership, we can indeed say that 45 years after their foundation, the Fund and the Bank have become, as the Managing Director has just put it, truly global institutions.

All the member states of the European Community remain fully committed to the completion of the internal market by the end of this year. That must mean the full implementation of the necessary measures to liberalize trade within the Community. The single market will bring substantial benefits, not just to the Community but also to our trading partners. And I can assure you that we are determined that a free market between the member states should not in any way hinder moves toward freer trade with the rest of the world.

The transformation of the countries of Central and Eastern Europe and the states of the former Soviet Union into functioning market economies and their full integration into the world economy are among the most important tasks facing the international community today. We must all play our full part in achieving these common goals. We hope that further negotiations between the Fund and the Russian authorities will make rapid progress. This should allow a full adjustment program to be agreed and implemented as soon as possible, providing assurance that assistance from the international community will be used to good effect.

In a number of developing countries, particularly in Latin America, the combination of a firm commitment to structural adjustment and significant financial support through the Brady strategy has sparked economic recovery and brought renewed access to capital markets. These developments are a tribute to the success of market-based solutions. But development in many of the poorest countries, especially in sub-Saharan Africa, is still severely retarded by an excessive debt burden. We warmly welcome the Paris Club’s decision in December 1991 to begin implementing the London terms, and in particular its agreement to consider stock-of-debt relief to the poorest and most indebted countries that are prepared to adjust.

I would like to turn now to some observations that I make as Governor for the United Kingdom.

World Economy

The year since we met in Bangkok has been a disappointing one for the world economy. The slowdown in economic activity in the industrial world has been more protracted than seemed likely at that time. Currency instability has posed difficult problems, both among the three major currencies and more particularly within Europe. World trade has been sluggish, and depressed commodity prices have complicated the task facing many developing countries.

Despite these difficulties, there have been some successes. Those developing countries that have adopted vigorous market-oriented reform programs are seeing their efforts begin to bear fruit. And the decline of inflation in the industrial world will create a firmer foundation for the resumption of durable growth in the ensuing year and beyond.

Why should recessionary forces have proved so persistent? Part of the answer lies in the extent of business and household indebtedness that built up during the long period of economic expansion in the 1980s. Deregulation helped fuel the sustained growth of this period and offered economic agents new opportunities to expand and diversify their portfolios of financial assets and liabilities. Unfortunately, the overexpansion of indebtedness left many borrowers dangerously exposed when interest rates rose, and asset prices weakened.

Households have sought to repair their financial position by increasing savings, while companies have taken measures to strengthen their cash flow. Lenders have become more cautious in their credit evaluation.

This process of financial adjustment, which has been particularly marked in the Anglo-Saxon countries and Japan, is now well under way. No one can predict when it will be complete. But I share the view of the IMF that we can look forward to a period of gradually accelerating economic growth, starting in the second half of this year.

What can governments and central banks do to strengthen the process of recovery? Allow me to draw attention to five guiding principles applicable to all economies, three in the macroeconomic field and two related to structural considerations. They are not new, but we ignore them at our peril. The macroeconomic principles are price stability, fiscal responsibility, and exchange rate sustainability. The microeconomic principles are those of strengthening market forces and reinvigorating the momentum of trade liberalization.

The importance of price stability is, I am afraid, regularly demonstrated by the consequences of failing to achieve it. Tolerance of moderate inflation almost invariably leads to an acceleration of price increases until economic distortions magnify and public opinion forces a change in policy. The subsequent disinflationary process is the more painful, the more price increases have been allowed to get out of hand.

Fiscal responsibility is a second essential precondition for sustainable growth. Budget deficits that are allowed to grow and become entrenched lead either to the crowding out of productive private sector investment or to potentially unsustainable payments disequilibria. This argues for determined action during economic upswings. We must not be content with simply cyclical improvements in budgetary positions as expansion gathers pace. We must go further, and use the opportunity to consolidate fiscal positions.

I turn now to exchange rates. The experiences of the past year, and especially the past week, have demonstrated what profound effects exchange rate developments can have on the functioning of our economies. Such fluctuations are not conducive to the smooth growth of international trade and investment.

If excessive fluctuations in exchange rates have disadvantages, so too do fixed rates, when the policies of the countries concerned are insufficiently coordinated. It is too soon to draw the full lessons from the currency disturbances of the past week. But I would venture to say the lesson is not that exchange rates can be ignored and policies aimed simply at domestic objectives. The exchange rate will always be a discipline on policymakers, and it is a discipline we must respect.

Let me turn now to the two microeconomic principles I mentioned earlier. One of the important lessons learned in the 1970s and 1980s is that improvement in the supply side of the economy is more fundamental in improving growth potential than is the manipulation of demand. Supply-side improvement requires the harnessing of market forces. Markets enable the private sector to mobilize and allocate resources in the most efficient way.

Improved structural flexibility not only strengthens the potential for growth. It can also lessen the costs and hardships of economic adjustments. More flexibility in labor markets can help provide jobs for those who are thrown out of work through technological change or loss of competitiveness. And more flexibility in the prices of goods and factors of production can reduce the extent of the macroeconomic adjustments needed to counteract cyclical disturbances.

The last principle I want to underline is that of free trade. In this connection an early conclusion of the GATT round remains of central importance. Free and open trade is a vital spur to strengthening the expansion of output in the industrial countries and providing a conducive environment for investment and growth in the developing world.

The U.K. Economy

I have set out five principles that I believe all of us should always bear in mind, regardless of the state of development of the economies for which we are responsible. I would like now to report on developments in the U.K. economy and prospects for the period ahead.

The past year has been a difficult one for the United Kingdom, as for the world at large. The economy has been slower to recover than virtually all observers expected. The main reasons, as I mentioned earlier, are to be found in the time required for economic agents to correct the situation of indebtedness in which they found themselves when the slowdown began.

The Government responded to this situation by reaffirming its commitment to stable prices as the best basis for longer-term growth, and by confirming that fiscal policy would not depart from the objective of budgetary balance in the medium term. As a result there has been a dramatic success in bringing down inflation, which has declined from almost 11 percent to around 3½ percent in only two years. Output and demand have stabilized, and, unusually for this stage in the cycle, productivity has grown rapidly. There is, in my judgment, every likelihood that when growth resumes it will be soundly based and sustainable.

The framework for the government’s anti-inflationary policy has been, as is well known, membership in the exchange rate mechanism (ERM) of the European Monetary System. It produced significant benefits for the United Kingdom but eventually encountered strains as the need for a restrictive monetary policy in Germany to counter the inflationary consequences of reunification kept interest rates in the United Kingdom and elsewhere above the levels that would have been appropriate on domestic grounds. Even this situation might have been sustainable had it not been for the wave of currency speculation in the run-up to the French referendum on the Maastricht Treaty. The suspension of sterling’s participation in the ERM emphatically does not represent a shift in the fundamental orientation of our policies. We remain absolutely committed to the progressive achievement of price stability.

We and our partners in the European Community (EC) will be considering in the light of last week’s events how to strengthen our cooperation and create a conducive environment for growth with stability. Members of the EC have been struggling to overcome divergences in cyclical positions and a sharp change in policy mix in the “anchor” country since German unification two years ago. Recent events have demonstrated that for the system to function properly there needs to be greater convergence in economic policies and performance, and a willingness on the part of all to adapt their policy mix in order to achieve stability throughout the system.

Central and Eastern Europe

Important as economic developments in Western Europe have been, they cannot compare with the historic transformation taking place in Central and Eastern Europe. We knew when the process of democratization and economic liberalization began that it would not be an easy one. So it has proved. Virtually all of the formerly centrally planned economies of Central Europe and the former U.S.S.R. have experienced a sharp drop in economic output and an increase in unemployment. Many, especially in the former U.S.S.R., have also encountered mounting inflation.

Crucial to the reform effort is the restoration of macroeconomic stability. This requires firm measures to bring budget deficits under control and to limit the expansion of credit by the banking system. None of this is easy, given the very different roles the budget and the banking system are expected to play under a free market economy from those under central planning. But that does not make these measures any less essential.

But, important though they are, macroeconomic and budgetary policies can play only a supporting role in the economic revolution of the former Communist bloc. Market economies do not rise unbidden from the ashes of the command economy. They must be built up, bit by bit, through a program of far-reaching structural reform. Experience suggests that three particular areas are vital:

  • financial sector reform;

  • price liberalization; and

  • privatization.

A well-developed financial sector is central to a thriving market economy. The absence of financing instruments not only constrains the ability of governments to manage the pressures on their budget deficits; it also, more significantly, acts as a serious drag on the development of the private sector.

Price liberalization too is fundamental to the success of economic reform. Agents have to be free to make decisions on the basis of market signals, and these signals convey useful information only if prices are free to reflect relative scarcities.

An effective price system and a well-developed financial sector are essential pillars of the market economy. Developing a private sector able to make use of these is equally important. An early start to privatization is therefore essential to release entrepreneurial spirit, to create opportunities for growth, and to institutionalize the reform process.

Establishing a credible timetable for privatization is a worthwhile preliminary step. Such a move will change attitudes and behavior, even in advance of actual privatization. For, ultimately, the point is to persuade managers that they must behave in a businesslike way. The best way of doing this is to make clear that commercially minded behavior brings tangible rewards.

Conclusion

The world does not lack for challenges. Ten years ago in Toronto, we faced the possibility that the debt-servicing difficulties of the highly indebted middle-income countries might do lasting damage to the world financial system. That threat was averted, thanks to cooperative efforts by all concerned within the framework of the Bretton Woods institutions.

The challenges we face now are those of slow growth and exchange rate instability in the industrial countries, economic reconstruction in the formerly centrally planned economies, and the reinvigoration of the growth process in the developing world.

What remains constant in a changing economic scene is the paramount importance of international cooperation in seeking solutions to these problems. The International Monetary Fund and the World Bank Group have served us well in this regard. Under the able leadership of Michel Camdessus and Lewis Preston, I know they will continue to do so in the future.

Statement by the Governor of the Fund and the Bank for Japan—Tsutomu Rata

I am extremely pleased to have this opportunity to address the Annual Meetings of the International Monetary Fund and the World Bank as the Governor for Japan.

The world has undergone spectacular changes recently, and many countries, including the states of the former Soviet Union and Switzerland, have joined the IMF and the World Bank since last year. The Fund and the Bank have now become truly worldwide institutions. Their activities have taken on more vigor and importance, and our meeting here today has become a principal forum for discussing the new economic order that is emerging in the world.

The World Economy and Japan

I would like to begin by reviewing the world economic outlook and the Japanese economy. The economies of the industrial countries are now breaking out of their adjustment phase, and it is strongly expected that they are moving closer to the realization of sustainable growth. To facilitate this, it is important that countries coordinate their economic policies.

Last year, the Japanese economy posted the highest growth rate among the major industrial countries, but it is now in an adjustment process. While there are signs of a recovery in housing investments, the manufacturing sector has been slow, which indicates that a strict stock adjustment process is still under way. The latter is the main factor behind weakening investment in Japan. The other principal factor is the high level of inventories that our industries need to work off, although the situations differ among industries.

Under these circumstances, the Government of Japan decided at the end of August on a package of comprehensive economic measures. The total size of the package amounts to ¥ 10.7 trillion ($86 billion), or 2.3 percent of GNP, the largest economic stimulative package in history, consisting of ¥ 8.6 trillion ($69 billion) of additional public investment and ¥ 2.1 trillion ($17 billion) of additional loan provision from government-affiliated financial institutions targeted to small business and private sector capital investments.

Also included in the package is a wide variety of measures designed to stabilize the financial system and facilitate the supply of funds, measures to vitalize the securities markets, additional tax incentives for machinery and equipment investment, and enhanced import promotion through interest rate reduction of import-related loan programs of the Export-Import (EXIM) Bank of Japan and the Japan Development Bank.

The Government is confident that this package, along with the economic measures in March and the decline in interest rates following the reduction of the official discount rate in late July, will lead to the achievement of a noninflationary, sustainable economic growth based mainly on domestic demand. This package would also have favorable effects on the international balance of payments.

Turning back to the world economy, it is highly welcome that the disturbance experienced in the European foreign exchange markets last week seems to have calmed down and that the market is now moving toward stability. Should the volatility in the market continue, it would have a serious adverse effect not only on the European economy but also on the world economy at large. I believe that it is imperative for us to cooperate closely and to mobilize our best efforts to maintain the stability in the exchange market.

The demand for funds in developing countries continues to be high, and the transition process to market-oriented economies in the former centrally planned economies has placed additional demands on the global financial base. This is further aggravated by the aging of the populations of the major industrial countries. Taken together, these trends suggest the need to be actively engaged from a mid- to long-term perspective in preventing the occurrence of a global capital shortage.

It is therefore precarious for the industrial countries as a whole to continue to run up deficits on their current accounts. Rather, we in the industrial economies must, through reductions of fiscal deficits, etc., strengthen our domestic savings, thereby enabling us to supply developing countries with the funding they require.

Former Soviet Union, Central Europe, and Eastern Europe

I would like to turn to the states of the former Soviet Union. Since the last Annual Meetings, states of the former Soviet Union have undergone dramatic changes. The complete and final end to East-West hostilities has indeed been a boon to the world economy, and I would like to extend a warm welcome to the many states of the former Soviet Union that have joined the IMF and the World Bank.

Still, the transition of these countries to market economies will require enormous efforts. The industrial countries made it clear they would cooperate closely in supporting ongoing efforts toward structural reform in the former Soviet Union.

The first phase of the three-phased approach by the IMF for Russia, the first credit tranche of $1 billion and $600 million in emergency loans provided by the World Bank, will serve as the foundation for the $24 billion comprehensive multilateral financial assistance package that the Group of Seven agreed to in April this year. We in Japan have already announced our willingness to provide Russia with $2.65 billion of financial assistance through the EXIM Bank of Japan and other institutions and are planning to disburse these loans in due course.

For Russia to proceed to the second stage of the phased strategy—further support from the IMF in the form of an upper credit tranche arrangement—will require an agreement with the IMF on a comprehensive economic reform program. It is very important that this agreement be reached as quickly as possible and that Russia be unswerving in its implementation based on the principle of self-help. We look forward to seeing other states of the former Soviet Union also make progress in the economic reforms that will move their economies toward market principles. In the Baltics, we welcome Latvia’s and Estonia’s stand-by agreements with the IMF and are encouraged by Lithuania’s agreement with the IMF on an economic program that could be supported by a stand-by arrangement. Japan plans to provide appropriate support to these countries.

In light of the importance of supporting market-oriented economic reforms in Central and Eastern Europe, Japan has provided considerable assistance to this region and will continue to provide appropriate support.

The Need to Ensure Resource Flows to Developing Countries

So far, my remarks have focused on the former Soviet Union and the countries of Central and Eastern Europe, but we should also note the many developing countries in East Asia and other parts of the world that are also making the effort to transform their economies into the market-oriented system or to promote their economic development. These countries too are in serious need of financial support. With the concern about a global capital shortage, we share the heavy responsibility of ensuring continued resource flows to those developing countries that are implementing proper economic policies and economic reforms.

Japan’s Attitude Toward Resource Flows

Japan has paid special attention to ensuring capital flows to developing countries. Recognizing the need for resources to be provided through various official and private sector channels, we announced five years ago special loans from the EXIM Bank of Japan, yen loans from the Overseas Economic Cooperation Fund (OECF), and greater investments in international institutions like the World Bank. We have already reached the targets, but, given the need for development financing, we will continue to make efforts to provide funds to developing countries in the future.

Japan’s Attitude Toward ODA

In Japan, we see official development assistance as a way to complement developing countries’ own self-help efforts at development, and we believe that official development assistance should be directed toward those countries that are sincerely implementing their own self-help efforts. It is gratifying to note that this view has been increasingly shared by the international community.

Japan has been involved in an ongoing effort to steadily increase its ODA, the result of which was to push its total for last year up to $11 billion on a net disbursement basis, making it the world’s largest donor country. We intend to make further efforts to increase our ODA.

As the amount of official development assistance provided by Japan grows, the public is becoming more and more interested in seeing that the money is being used in a truly effective manner. Under these circumstances, we drew up Japan’s ODA chapter in June of this year, making it clear that Japanese aid must be used as effectively and efficiently as possible, and, that in granting aid, we give appropriate consideration to environmental conservation, the recipient country’s military expenditures, and its efforts to promote democracy.

We are pleased that the debt overhang in developing countries has been declining in recent years, a trend that we ascribe to efforts of debtor countries and the cooperation of the international community. A full solution to the problem, however, will require painstaking efforts, which is why it is important that debtor countries work earnestly to rebuild their economies by implementing disciplined economic reforms under the structural adjustment programs agreed upon with the IMF and the World Bank. Japan will continue to support these efforts.

Enhancing the Functions and Financial Bases of the IMF and the World Bank

In order to ensure the flow of resources to developing countries, we must enhance the capacity of international institutions such as the IMF and the World Bank to supply them with financing, as well as these institutions’ ability to act as catalysts in attracting external resources from other sources, principally the private sector.

Given the expanding nature of its work, it is vital that the IMF’s financial resources be strengthened—and that the Ninth Quota Increase will become effective as soon as possible. We welcome the Fund’s decision to extend for one year the enhanced structural adjustment facility, which is concessional financing to the poorest members. We intend to take an active part in the examination of options, including a renewal of the facility. Furthermore, we intend to support appropriate utilization of the arrears fund established in the IMF with a Japanese contribution, with a view to assisting these members in their strenuous efforts to get out of the arrears situation with the IMF and to pursue the normalization of their relations with the IMF based on real adjustment efforts.

Turning to the World Bank Group, the initiatives should be led by IDA to promote economic adjustments, the reduction of poverty, and the protection of the environment in low-income countries. IDA is an important provider of concessional funding for these purposes, so it is important that the negotiation on the Tenth Replenishment of IDA be concluded by the end of this year. As there is great demand around the world for the services of IDA, and we would like to emphasize that attention must be paid to the needs of Asia, which has massive populations living in poverty, we would also like to see an expansion of the catalytic roles of the World Bank, IFC, and MIGA, by making full use of such means as the Expanded Cofinancing Operations program and their good advisory functions to entice private sector funding to developing countries.

Japan has already completed all of the necessary domestic procedures for IFC’s 1991 general capital increase and has agreed to contribute $500 million to the Multilateral Investment Fund (MIF), a new organization being set up under the auspices of the Inter-American Development Bank to foster private sector development in Latin America and the Caribbean. That contribution is the equivalent of about 40 percent of the MIF’s capital. Nor should we forget other regional financial institutions. Like the IMF and the World Bank, they too will need to reinforce their financial bases in the future by capital increase and so on.

In view of the importance of providing developing countries with technical and human resource development assistance for their efforts at development, Japan has contributed to the setting up of a technical assistance fund in the IMF and the policy and human resource development fund in the World Bank. We hope that these funds will contribute to the enhancement of the capabilities of the IMF and the World Bank, respectively.

The transition of the former centrally planned economies to market economies indicates that the world economy is rebuilding itself around market mechanisms. With their vast experience and knowledge, the IMF and the World Bank will have key roles to play in dealing with this situation, and Japan will continue to actively support their work.

The Importance of Private Sector Funding

Although ODA and support from international institutions are indispensable to meet the funding needs of developing countries’ economic growth, the role of private sector resources is on the rise. Japan will continue to lay the groundwork to facilitate the flow of resources from private institutions to needy recipients among the developing countries. In view of promoting foreign direct investment in developing countries, Japan has been providing official resources to support the developing countries’ efforts for infrastructure improvement and making extensive use of such instruments as the EXIM Bank of Japan and OECF’s equity investment. Japan is also assisting the development of financial and capital markets in developing countries, with a view to promoting portfolio investment in developing countries. In this respect, we would also hope that the developing countries themselves will engage in efforts to improve the necessary climate for receiving such funds.

Global Environment

I would now like to turn to environmental issues. We are encouraged by the international agreement reached in June at the UN Conference on Environment and Development (UNCED) that environmental protection and economic development are compatible goals and that the achievement of global environmental protection and sustainable development will be promoted through their integration. It is important for these ideas to become part of the development programs of developing countries and the development assistance programs of industrial countries.

The Global Environment Facility (GEF) has been established as the organization to lead efforts to deal with global environmental issues. Provided that the mechanism for efficient and effective implementation is established, appropriate funds to the GEF should be provided. Japan is now looking into ways in which it can contribute effectively to the organization.

Japan announced a target of providing ¥ 300 billion ($2.4 billion) for environment-related ODA over the three years commencing FY1989. The final total was actually over ¥ 400 billion ($3.2 billion). Beginning this fiscal year, we will be substantially expanding and enhancing the program to a target of between ¥ 900 billion ($7.2 billion) and ¥ 1 trillion ($8.0 billion) over a five-year period. To meet this goal, we plan to make active use of policy dialogues with developing countries to identify, formulate, and implement appropriate projects.

A New, Open International Economic Order

Finally, I would like to discuss the establishment of a new and open international economic order. Since the end of the cold war, the world has been searching for a new order. As the people responsible for the world’s fiscal and financial policies, we at this meeting bear the brunt of the burden of creating a system of stability and vitality that can become the basis for further economic growth.

I have already discussed the issues facing the former Soviet Union, the countries of Central and Eastern Europe, and developing countries around the world. I would also like to call particular attention to the ongoing private-sector-driven development in East Asia as well as the achievement of dynamic growth in the newly industrializing economies of Asia and the members of the Association of Southeast Asian Nations. I hope that those countries will contribute to the economic development of countries in other parts of the world.

In Europe, progress is being made toward the integration of European Community markets; in North America, the United States, Canada, and Mexico reached a basic agreement in August on the North American Free Trade Agreement. We hope that these moves will not only help activate the economies of the regions but also lead to greater opportunities for trade and investment in other countries.

Regional cooperation and integration should not devolve into economic blocs or resurgent protectionism. It is vital to the development of the world economy that, while each region uses its own particular strengths to achieve development, it keeps its markets open to others, thereby promoting a multilateral free trade system. In this sense, too, an early and successful conclusion of the Uruguay Round is very important.

Our meetings here today give us the perfect opportunity to begin working on the challenging task of building a new and open international economic order. It is a task that we, the members of the global community, must approach with courage and resolve.

September 22, 1992.

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