Discussion of Policy at Second Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1992
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Statement by the Governor of the Bank for The Bahamas—Hubert A. Ingraham

I have the honor to speak on behalf of the members of the Caribbean Community and Common Market, namely, Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago.

We join others in welcoming the states of the former U.S.S.R., the Marshall Islands, and Switzerland to the membership of the Fund and the World Bank. These developments toward enlarged global membership of the Bretton Woods institutions will undoubtedly bring new challenges and opportunities, as many of these countries will require tremendous support in the form of financial resources, technical assistance, and advisory services while undergoing the transformation to market-oriented economies.

We meet here today against the background of a world in accelerating change. We have witnessed the increased momentum toward regionalism in trading arrangements, and world markets have been enlarged with the entry of the states of the former U.S.S.R. and Eastern Europe.

However, it is disappointing that growth in world trade and output continues to be slow and uneven; long-term interest rates remain high, as global savings have diminished in the face of rising demand; financial markets have been exhibiting a widening divergence; and the recent turmoil in European markets is creating growing uncertainties as to future economic prospects. These conditions exacerbate economic difficulties for developing countries, especially those small economies on whose behalf I speak.

In recognition of this evolving global environment, we in the Caribbean have been adjusting to meet the challenges and embrace any opportunities presented. We have significantly liberalized trade and have reduced the role of government while at the same time redirecting our energies toward poverty alleviation and improvement of our social infrastructure. We have exercised greater fiscal discipline, and, in most of our countries, we have active privatization programs under way. Moreover, we have also broadened the scope for private initiative by putting in place improved investment incentive arrangements.

Let me now turn to discuss some of the key issues directly impacting the region. This annual meeting, like many others in the past, coincides with a year in which we had our Biennial Consultative Group meetings, skillfully organized by the Fund and the World Bank, with active cooperation of our major development assistance partners. We wish to record here again our gratitude and support for the generous assistance over the years.

Equally helpful to us has been the continued support from the Paris Club in managing our onerous debt servicing. We especially appreciate the recent adoption of enhanced concessions of the Paris Club, though we must express regret that these new terms fall short of the originally proposed Trinidad terms.

Having said that, however, we continue to be concerned about the declining net transfers from the Fund and the World Bank to the region. Since turning negative in 1986, these flows from the World Bank have remained so, falling to minus $103 million in fiscal year 1992.

Our specific concern is that, given only modest economic growth over recent years and our lower-middle-income league table status, we have not been able to generate the level of domestic savings required to improve our economic and social infrastructure, notwithstanding stronger efforts to correct budgetary imbalances. This has hampered our ability to participate fully in the global marketplace, as well as to meet the increasing costs of delivering basic social services to our population. Efforts at generating public savings, at experimenting with changes in the traditional concept regarding ownership and operation of public enterprises, and at increasing cost recovery for publicly provided goods and services have all helped but are clearly not enough.

Our social and economic problems have been exacerbated by a series of annual natural disasters. The property destruction and human misery occasioned by hurricanes in the region are compelling reasons for the urgent establishment of some form of mechanism to provide additional resource flows into the region to assist with reconstruction of affected areas. External resources from international financial institutions and donor countries need to be enhanced significantly if we are to improve and sustain economic performance.

With the implementation of structural adjustment and stabilization programs, countries in the region have had to devise various social safety net programs to alleviate some of the resulting adverse side effects. These efforts have attracted some welcome support from the Bank, which we would like to see formulated and implemented within the context of the adjustment programs themselves.

In this context, we are particularly anxious that the IDA-10 discussions be concluded speedily and provide for a real increase in resources beyond IDA-9. Similarly, we acknowledge and support the extension to the end of November 1993 of the Fund’s enhanced structural adjustment facility (ESAF), and would urge the Fund and donor countries to establish a successor to the ESAF.

In terms of private investment flows, we have observed the catalytic role played by the International Finance Corporation (IFC) in the current investment boom under way in the wider Latin American region. We would challenge both IFC and the Caribbean Business Advisory Services to help us to create the conditions for a similar success story in our own subregion.

Our trade relations with the world are set to undergo the most profound changes ever. We face the prospects of increased competition from much larger producers of our major exports to the traditional markets of Europe and North America. If we are unable to meet the competition, it is likely that net external resource flows to the region will be further reduced, thereby compounding our development problems.

We support the successful conclusion of the Uruguay Round, recognizing that with the challenges posed by increased competition come also the opportunities for greater access to larger markets. If the region is to avail itself of these expanded opportunities, support in areas directed at economic diversification, market intelligence, and productivity improvements is of high priority. It is also hoped that, as we transform our economies, consideration will be given to the continuation of preferential trading arrangements to small countries such as ours.

Within the Caricom region, there has been renewed focus on economic integration, with the commitment to the establishment of a single market and economy by 1994. In addition, our governments are exploring possible levels of economic and diplomatic relationships with countries of Central and South America. To assist the region in furthering its developmental goals and objectives, the heads of government established an independent West Indian Commission, which has held wide-ranging consultations in the region, as well as outside, over the past two and a half years. The Commission’s final report is currently receiving active consideration by the Caricom heads of government.

Finally, we fully support the World Bank’s recommitment over the last year to the alleviation of poverty. We share this sense of mission and will do our part in working toward its realization. We are also supportive of the World Bank’s other major objectives of promoting sustainable economic growth, human resource development, and protection of the environment. In regard to this latter objective, we in the region have found the Global Environment Facility particularly innovative in addressing some of the more intractable problems that we face.

Before closing, Mr. Chairman, we should like to underscore the region’s continued adherence to the democratic process. This has been most recently demonstrated again in The Bahamas, where the process has resulted in my assumption of the leadership of our country after 25 consecutive years of the same governing party in office. We have already embarked on an aggressive program of reversing the penetration of government into the private sector, and I look forward to working with colleagues, both regional and extra-regional, in continuing to advance the welfare of our people and downsizing government in our country.

Let me conclude by saying that, despite the present uncertainties in the world economy, we believe that the course we have charted here at these Annual Meetings is the correct one, with its emphasis on sustainable economic development and the preservation of the environment, and we in the Caribbean look to the future with much confidence and anticipation.

Statement by the Governor of the Bank for Portugal—Jorge Braga de Macedo

As Minister of Finance for Portugal, I have the honor of addressing these Annual Meetings for the first time. I would like to highlight some recent economic developments in my country and offer a few brief comments on the major economic challenges facing the world today. I would like to welcome all new members to the Bretton Woods institutions.

Growth in many industrial countries remains subdued, and there are unfortunately few conclusive indications that economic recovery is firmly under way. As a small open economy, Portugal has naturally been adversely affected by the cyclical downturn. Economic policy in Portugal has for some time been determined according to the widely held consensus on the need to implement sound economic policies in a medium-term framework. This has proved consistent with the maintenance of higher rates of growth than those registered in other industrial countries. Thus, the process of the real convergence of living standards—that is, the Portuguese catching-up process—is continuing, while, at the same time, progress toward nominal convergence is being maintained.

Let me highlight some of the main features of the sustained stabilization and structural reform efforts undertaken in Portugal over the past decade, as they may prove illustrative for developing countries and former command economies. First, the Government recognized the necessity for open and competitive markets, a choice reinforced by the accession of Portugal to the European Community in 1986. The Government further acknowledged that macroeconomic stability provides the best means for securing sustainable noninflationary growth over the medium and long run.

To these ends, four consecutive adjustment programs have been introduced, the last of which was endorsed by European Community finance ministers in December 1991. The reform process continues apace as evidenced by two important decisions taken this year—the entry of the escudo last April into the exchange rate mechanism (ERM) of the European Monetary System (EMS), and the recent decision to completely liberalize capital movements by the end of the year. The strong currency option implicit in the decision to participate in the ERM and the full convertibility of the escudo are the corollaries to the sustained pursuit of domestic policies consistent with the nominal stability of the escudo, thereby promoting nominal convergence within the European Community.

Turning to the economic situation in the Community as a whole, the slow growth rate of the Community is illustrated by comparing our expected pace of recovery with upswings achieved in the aftermath of previous recessions. The performance of the Community compared with other industrial countries is particularly disappointing with respect to unemployment. The lagged impact of the cyclical downturn on the labor market means that the number of people unemployed is still rising and almost certainly will continue doing so for some time.

The sluggish performance in the Community and elsewhere calls for renewed efforts to promote noninflationary growth. The combined effects of fiscal consolidation and the removal of structural rigidities will ease inflationary pressures and bring about a reduction in long-term interest rates that is necessary to promote higher growth.

As a first step, structural rigidities need to be removed. In addition to the elimination of rigidities in markets for nontraded goods and for financial services, particular attention should be paid to the labor market as rising unemployment levels, particularly in Europe, highlight the scale of problems that persist. A substantial and timely noninflationary growth stimulus could be attained with the rapid conclusion of the Uruguay Round negotiations. A successful outcome is most important for developing countries and those undergoing the transition from command to market structures. Open and competitive markets are the best way to enable these nations to reduce the level of their indebtedness and secure their long-term development and prosperity.

There is also a need to raise the overall level of savings in order that adequate resources are available to cover all investment needs, not just in developed countries, but also to meet the demands of developing countries and the former command economies. Increased savings should primarily come from the reduction of excessive budget deficits. More specifically at the Community level, growth could be enhanced by taking all feasible measures to progress toward European economic and monetary union (EMU).

The events of recent days underline the importance of credibility and therefore the benefits of swift and steady progress toward full EMU. I warmly welcome the outcome of the French referendum, which constitutes an important step toward the completion of the ratification process of the European treaty, as foreseen at the Lisbon European Council in June this year.

In closing, I would like to emphasize the statement I made before to the Interim Committee last April regarding the need to provide the IMF with adequate human and financial resources necessary to fulfill the multitude of new responsibilities assigned to it. Greater progress must be made in the Ninth General Review of Quotas and toward the acceptance of the Third Amendment of the IMF Articles of Agreement. Also, members should settle all financial arrears as soon as possible. I would like to welcome the agreement to extend the enhanced structural adjustment facility for one year, and emphasize the importance we attach to provision of adequate financial resources to IDA. Portugal is in the process of becoming an IDA member. This instrument will also enhance our continuing dialogue with the five Portuguese-speaking countries of Africa, where an economic policy dialogue is taking shape among finance ministers and central bank governors. The Portuguese Government will make every effort to ensure that ratification in the Parliament will proceed swiftly.

The additional tasks of the Bretton Woods institutions in encouraging economic reform and stabilization in the former command economies must not impinge upon their similar role in developing countries, particularly in the South. Moreover, it should not lead to a fall in ODA transfers; rather, industrial countries should seek to enhance the levels of their contributions. Sound management of national and communit-wide finances will allow the European Community to continue playing its crucial role in the global development process.

Statement by the Governor of the Fund and the Bank for the Russian Federation—Aleksandr N. Shokhin

Today, for the first time, the Governor from Russia is participating in the work of the plenary session of the Annual Meetings of the International Monetary Fund and the World Bank. Allow me to express the hope that in two years Russia will be observing the fiftieth anniversary of the Bretton Woods Conference as a universally respected, reliable, and responsible partner.

First of all, let me say a few words about the present state of the Russian economy. For about the past nine months, we have been making vigorous efforts to create a market economy. We have freed almost all prices, opened the economy of Russia to international trade, and eliminated all elements of centralized planning. Today we are launching a radical privatization program.

Some may have the impression that our economic reform has slowed down and that we find it more and more difficult to move forward. Let me assure you that this is a wrong impression, and I will try to prove it. For the past several months we have faced a number of difficulties, but each time we were able to hang tough and advance the reform effort. I will cite only three examples.

On July 1, we introduced a unified, free-floating rate of the ruble for the current account, thus ensuring the internal convertibility of Russian currency. We were able to do this despite the fierce resistance of those of our industrialists who for many decades had got used to artificially cheap imports.

On August 21, the President of Russia announced a massive privatization program that will allow all citizens of Russia to become owners and receive their share of property, which thus far has belonged to the state. Today, thousands of enterprises have been transformed into joint-stock companies. It would hardly be an exaggeration to say that our privatization program has no precedent in history.

Last Thursday, the President issued a decree liberalizing prices of oil and oil products, as well as introducing excise taxes on those commodities. Of course, we have been preparing for this very important step for a long time. We expect that domestic prices of oil and oil products will go up approximately 2.5 times and will reach a level equivalent to one third of world prices.

Naturally, we continue to encounter great difficulties. The main task remains achieving financial stabilization. We have made great efforts to reduce the budget deficit and credit expansion. It would be wrong to say that we have failed to achieve any results. For instance, last July the monthly inflation rate for the first time fell to a single-digit number of 7.5 percent. However, the Russian economy and society as a whole had to pay dearly for the improvement of macroeconomic indicators.

In June, industrial output fell by 14 percent compared with last year; in July, by 21.5 percent; and in August, by 27.2 percent. During the first six months of this year, the real income of the population fell by nearly one third. Certainly we have to factor all these eventualities in when we are working on our reform.

In July and August, there occurred a certain loosening of fiscal and monetary policies, and there was an increase in the budget deficit financed by credit expansion, as well as an increase of money creation in general. The Government and the Central Bank of Russia are quite concerned by this situation and are already taking necessary measures. For example, as of the beginning of September the budgetary expenditure is strictly dependent on revenues, and this is intended to reduce automatically the budget deficit. We still hope to achieve the targets provided for in the July agreement with the IMF, and we hope that by the end of this year we will reach the targets we talked about with the IMF in our July agreement.

The problems of managing the ruble area remain rather acute. Russia’s policy is to defend itself from credit expansion by other participants in the ruble zone, on the one hand, and to pursue consistently an improvement of coordination of monetary policies within the area, on the other. We hope that by early October there already will be significant progress in this matter.

Another serious problem is the deterioration of foreign trade indicators. Thus, during the past eight months exports have fallen by 34 percent. This has resulted in a reduction of foreign trade revenues, which in turn has exacerbated the problem of availability of critical imports. Despite significant amounts of new foreign credits, imports have declined by 21 percent during the past eight months. In addition, the problem of servicing foreign debt has got much worse. Even with the deferral granted to Russia, we have found ourselves not in a position to effect the payments due.

At last week’s meeting of the Paris Club, we proposed to our creditors to start official negotiations on the restructuring of Russia’s foreign debt. We are operating on the assumption that a restructuring agreement will take into account the real state of the Russian economy. And we are counting on the support and understanding of the world financial community in this matter.

It is also our expectation that the industrial countries will remove their existing restrictions on Russian goods and open their markets to our goods. This will help increase our exports, thus reversing the decline in industrial production and improving our capacity to service external debt.

The Russian Government is continuously making efforts to create a favorable investment climate. The introduction of the internal convertibility of the ruble is meant to enable foreign investors to repatriate freely their profits. We have nearly finalized the preparation of new legislation on foreign investment, so investors will be able to rely on its stability. Besides that, we are now working more actively on the creation of a system of necessary financial institutions, because otherwise foreign investors will not be able to function properly in our country. What I have in mind is the Russian Bank of Project Financing, which is basically the Russian version of the EBRD.

We highly value our cooperation with the Fund and the Bank. An important accomplishment of this cooperation was the conclusion of first credit agreements. On August 5, the Fund’s Board of Directors approved the agreement on the first credit tranche of a stand-by arrangement for $1 billion. This is a solid document that contains all the principal elements of Russia’s economic policy. At present, work is already under way on a full-scale stand-by arrangement. We attach special attention to developing the balance of payments projections, as this will be required for the talks with the Paris Club. We hope this effort will be completed soon.

The Russian Government is satisfied with the progress made thus far in our relationships with the World Bank. Russia has already become a full-fledged member of all organizations of the World Bank Group. In the near future, we expect to sign a membership agreement with the IFC. In the near future, we expect to sign a rehabilitation loan agreement in the amount of $600 million, which was approved by the International Bank for Reconstruction and Development’s (IBRD’s) Board of Directors on August 6. Good progress is being made on loans to support the privatization program, employment services, social protection, and the oil sector. Soon, we will be discussing with the IBRD leaders a medium-term lending program for fiscal years 1993–95. This will be tied to our structural priorities for 1983 and several years after that.

I would like to make a special reference to the technical assistance we are getting from the Fund and the Bank. We are grateful for this assistance and attach a high importance to it. Still, we consider that there is an urgent need to improve the coordination of technical assistance we receive from various sources.

A government’s latitude of action in a democratic country is constrained by certain bounds. We hope that the Fund and the Bank, as well as other financial and economic institutions, and governments too, will be of great assistance to us in this matter. I repeat, a government’s latitude of action in a democratic country is constrained by certain bounds. In addition to that, our Government has to reckon with significant pressures from various social groups that at times seek to gain social revanche and employ the most flagrant demagogy. We often have to compromise, but we will stick firmly to the path we have chosen. We thus have the right to expect that the courage of the Russian people will be supported by the world community.

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

I would like to join my colleagues in welcoming all of the new members, an unusually large number, joining the Fund and the Bank this year. We note that in connection with the admission of new members this year, it has been agreed to conduct a study of the size, structure, and functioning of the Boards of the two institutions. We would urge that the final recommendations of this study make every effort to resolve these questions in a fashion that would (1) eliminate the need to deal periodically with contentious issues on allocation of seats on the Boards; and (2) produce a balance on the Boards that equitably represents the economic and regional diversity of the members of the Fund and the Bank.

This is now the fourth year in which it has been necessary to open my remarks on the world economic outlook on a pessimistic note. Again, we have to say that the fundamentals are not robust. At best, the outlook is for a slow—very slow by historical standards—and uneven recovery. We all now expect prospects for this decade to be less encouraging than was thought to be the case at the end of the 1980s. What has caused this downward shift in expectations? For the last several years, the sagging economies throughout the world have been analyzed in traditional business cycle terms—seeking explanations in terms of inventory cycles, inflation expectations, and changing fiscal and monetary balances. Indeed, the events in the currency markets during the past week have made it clear that what we are facing is anything but conventional problems.

It is perhaps time to ask if we have been asking the right questions. Are we really going through a cycle of the type we have experienced periodically since World War II and for which the conventional remedies could be expected to work? Or are we passing through a major restructuring of key economies for which those remedies may be irrelevant? There are reasons to think that the latter is what is happening.

First, much of the world economy is working off the aftermath of the excessive buildup of debt during the 1980s, in which both governments and the private sector indulged. Balance sheet adjustments are still needed by major players on a broad scale. One consequence is that many of the world’s leading corporations, and the public sector in some countries, are engaged in slimming down, both to work off debt and to stay competitive. This has hit personal expectations hard, particularly in the middle classes, lowering consumption plans. Second, the economic consequences of the restructuring of the former Soviet bloc and the subsequent changes in military budgets and ensuing transformations of the defense industries in both those countries and the West are still to be worked out.

Finally, the institutional restructuring of the world trading system is not only incomplete, but now it is even unclear in what direction we are heading. The Uruguay Round is at grave risk. It is time to recognize that it may well fail and plan accordingly. The North American Free Trade Agreement is subject to an unpredictable ratification process, and the European arrangements are far more uncertain than any of us would have thought at the beginning of the year. Political imperatives in both areas make a constructive resolution of the EC and U.S. trade issues difficult. Finally, as noted, the exchange rate system is currently in major disarray.

Together, these and other factors have given rise to a process of structural adjustment in the world economy that can effectively be dealt with only by new and creative measures. The remedies used in the business cycles of the last half century have lost much of their effectiveness in the current situation. The lack of impact on the housing market of the dramatic reduction in U.S. interest rates is a case in point. Moreover, the continuing fiscal and trade deficits limit the recourse of major countries to effective monetary and fiscal measures to rekindle growth.

While we may have to settle for lower growth rates for the rest of this decade than we would like, we must strive to push those growth rates up as much as our ingenuity and resolve will permit in the interest of all the peoples of the world. To do this, we must diagnose the nature of the problem correctly and deal with it accordingly. In this regard, good diagnosis will be aided if the analysis in the World Economic Outlook is cast in a more integrated and comprehensive mold. Currently, the prospects and policies of the industrial countries, of the developing countries, and of the formerly centrally planned economies are largely discussed in a self-contained way. It would be both enlightening and constructive if a greater effort could be made to analyze the dynamic interrelationships—positive and negative—between these three major components of the global economy. After all, the world economy is a general equilibrium system!

The debt problem seems to be on a back burner this year. The series of initiatives to deal with the problem since 1988 and the evolving operations of the Paris and London Clubs have done much to alleviate the problem. It is good to note that a number of indebted countries are finding it possible to again access international liquidity.

I think it is fair to say that, in addition to the initiatives of the creditors, one of the major factors in the improved situation has been the initiatives of the debtors to constructively restructure their policies and their economies so as to stem the buildup of debt and to make their economies more productive, efficient, and competitive. Many indebted countries had already been acting on the point recently made by Mr. Summers, Chief Economist of the World Bank, that “good national policies are the key to capital market access.”

Indeed, realism and pragmatism are increasingly the order of the day in the developing economies. This approach to economic policy was strongly emphasized by President Soeharto in the course of his remarks on the occasion of our National Day last month, when he noted that “in this era of globalization we have no other choice than to prepare our economy to compete with other economies...and that...heightened productivity and efficiency—the results of hard work—are prerequisites of a nation’s progress.” Deregulation of the economy and reducing bureaucracy in the government are essential to these ends, and, in our case, we are determined to continue to pursue both of these objectives.

However, as the OECD noted only last week, the debt problem has not disappeared. The continuing seriousness of the debt problem was also reaffirmed during the discussions earlier this month among the participants from the 108 countries that attended the Tenth Conference of the Heads of State or Government of the Non-Aligned Movement in Jakarta. Among the various conclusions that emerged from those discussions, there are two that, I believe, it is appropriate to underscore in these discussions. First, there is a continuing need to reduce the debt burden in the poorest countries. Second, a sound and sustainable solution will require an effective tripartite approach involving the best efforts of the debtors, the creditors, and the multilateral financial institutions. There is still an important need to assure adequate access to international finance.

Unfortunately, access alone is not enough. To sustain global growth, the international financial markets must be able to provide adequate amounts of liquidity on properly structured terms. Those rescheduling countries that have regained access to capital markets are often finding credit rationed in smaller amounts than required and on shorter terms and more highly collateralized than was the case previously.

To some extent, this is part of a worldwide credit crunch reinforced in key countries by low short-term interest rates coupled with high real long-term rates, permitting banks to make money by borrowing short term and buying government paper long term, rather than by making loans. In this regard, perhaps, there is a major interaction between the balance sheet problems of the world economy and the experience of the creditworthy developing countries: are the terms that these countries are finding due to an accurate credit reading on them or due to stresses in the world’s financial system resulting from the credit binge of the 1980s? If the latter, then correcting the two problems will need to go hand in hand. In any event, if the world community as a whole is to experience sound growth, it will be necessary to assure a positive net flow of resources to the developing countries through the international capital markets, reinforced by adequate levels of trade and investment. This is not happening now. Until it does, we cannot speak meaningfully of an end to the debt crisis.

Statement by the Governor of the Bank for Italy—Carlo A. Ciampi

I have the honor of addressing this meeting also on behalf of Piero Barucci, Minister of the Treasury. We welcome the entry into the Bretton Woods institutions of the newly independent states that have emerged from the former Soviet Union, as well as Switzerland, San Marino, and the Marshall Islands. With the accession of these new members, the Fund and the Bank have become truly universal institutions. They are at the forefront in helping the world economy to cope with the challenges ahead.

In the industrial countries, the key problems are the unsatisfactory pace of economic activity and acute tensions in the foreign exchange markets. Inflation is declining and is now at historically low levels in several countries.

Within a medium-term framework, public sector deficits must be reduced in many countries—the most notable exception being Japan—so as to allow monetary policy to be geared to sustain balanced growth through lower interest rates in real terms. Structural reforms should be aimed at improving the functioning of labor markets and liberalizing trade. The opportunity for a rapid and successful conclusion of the Uruguay Round should not be missed; the European Community’s decision to reform the Common Agricultural Policy is an important step in that direction.

Urgent action is required to overcome the present strains in the exchange markets, which affect both the U.S. dollar and the European Monetary System. Divergences in the economic policies of the major countries have interacted with the uncertainty on the future of Europe.

Policy coordination and a more stable framework are of paramount importance in a world that in the last decade has seen extremely rapid financial deepening. Recent events affecting the European Monetary System have made clear that decisions concerning both economic policies and the structure of parities have to be taken in a highly concerted fashion, rooted in a truly cooperative spirit. The positive outcome of the French referendum on the Maastricht Treaty has removed a major uncertainty as to the will of Europe to proceed toward economic and monetary union. The political will to proceed with the project of European union has not weakened. It will be reinforced by a critical assessment of the problems with which Europe has been recently confronted.

Since the Danish referendum on the Maastricht Treaty, turbulence in the currency markets has hit the Italian economy in a phase of weak activity, declining inflation, and unsolved budgetary imbalances. After the general elections of early April, the new Government took office only at the beginning of July. By early August, measures to reduce the budget deficit for the current year by 1.5 percent of GDP had been taken, a far-reaching program of privatization had been set in motion, and an important agreement between the trade unions and entrepreneurs had been promoted; the agreement removes wage indexation and moderates the growth of nominal incomes.

The weakening of the dollar, the strengthening of the deutsche mark, and the widening of interest rate differentials between the two currencies led to strong pressures in the exchange markets. The tensions in the European Monetary System were exacerbated by the nearing of the date fixed for the French referendum on the Maastricht Treaty. At the informal ECOFIN meeting which took place in Bath on September 5, a solution to the problems of the exchange rate mechanism (ERM) was not achieved. The lira was particularly affected; on September 13 its parity was revised downward in conjunction with a reduction of interest rates in Germany. A more general realignment of parities in the European Monetary System, combined with a larger reduction in German interest rates, would have been more effective in tackling pressures that, as subsequently became evident, were not directed exclusively against the lira but involved the entire system. Those events happened while, in Italy, additional budgetary measures were in the process of being put into effect. In the week that followed, speculative pressures mounted further, reaching unprecedented dimensions, and led the U.K. authorities to suspend the participation of the pound in the ERM. In the wake of this decision, the Spanish peseta was devalued, and Italy suspended its intervention obligations in the ERM.

In order to prevent the adverse effects of devaluation, Italy must strengthen policies to curb cost and price pressures of domestic origin. On September 17 the Government announced restrictive budgetary measures equivalent to 5.8 percent of GDP; they will generate a budget surplus, net of interest payments, of about 2.5 percent of GDP in 1993. The deficit cut stems largely from structural reforms in key areas of public expenditure—social security, the health system, and employment in the public sector. The Government has reiterated its commitment to a rigorous incomes policy in the public sector and to fostering the full implementation of the agreement to moderate wages in the private sector.

The Italian Government is determined to resume the intervention obligations in the ERM. The parity of the lira will be established at a level consistent with the monetary discipline that represents the very essence of the European Monetary System.

Overcoming the present tensions among European currencies and further progress toward the establishment of Europe as an area of monetary stability represent basic conditions to foster economic recovery and to prevent the resurgence of inflationary pressures worldwide.

In Central and Eastern Europe, progress has been made in several countries in macroeconomic stabilization, price and trade liberalization, and market-oriented reforms. The tasks ahead remain momentous. Besides providing financial and technical assistance, industrial countries should support the transformation effort by eliminating trade barriers and expanding access to their markets. An important contribution in this respect is the Association Agreement between the European Community and Czechoslovakia, Hungary, and Poland, which should be promptly and fully implemented and could be extended to other countries. The newly independent states of the former Soviet Union should not overlook the benefits of a large unified market for their own prosperity.

For the developing countries at large, it is encouraging to see that, notwithstanding the slow pace of world demand, growth is expected to reach its highest level in more than a decade. However, conditions remain hard in many African countries, calling for effective support to reduce poverty and satisfy basic needs of the population. The restructuring of foreign debt and improved debt-service conditions have contributed to growth in the developing countries.

The cooperation between the two Bretton Woods institutions should be maintained and strengthened, particularly in the domain of structural reforms. At the same time, each institution should continue to emphasize its specific field of competence. The Fund should concentrate on stabilization efforts. The Bank should increasingly focus its lending activities on development projects, especially in basic human and physical infrastructure. The excellent World Development Report of this year highlights the positive links between growth and environmental protection; exploiting these links should be a key concern of the Bank’s financial and technical assistance in the coming years.

Statement by the Governor of the Fund For Iceland—Johannes Nordal

I have the honor of addressing this meeting on behalf of the five Nordic countries: Denmark, Finland, Iceland, Norway, and Sweden. May I begin by joining my colleagues in extending a warm welcome to the many countries that have joined the Fund since our last Annual Meetings. Their membership confirms that we are, finally, after close to fifty years, reaching the goal of making the Bretton Woods institutions a global form for economic cooperation between nations.

The transformation of the former states of the Soviet Union and Eastern Europe is opening up new opportunities for trade and economic cooperation as well as re-establishing old historical ties. An example of this is provided by the new bonds now being forged between the Nordic countries and the Baltic states, which will soon join the Nordic constituencies in the Bretton Woods institutions. The changes that are now taking place in the countries of Eastern Europe present the Fund with great and novel challenges, at a time when the world economy is going through a period of prolonged cyclical downturn, making the transformation of the former centrally planned economies even more difficult. The same applies to the efforts of the developing countries to increase economic growth and improve living conditions.

The continuing weakness of economic activity in the industrial world is therefore of great concern to all countries. Significant impediments to a stronger rate of growth still persist, such as the substantial divergence in economic policies among major countries and persisting problems in the financial sector and asset markets. These factors, together with the unrest in currency markets, make current forecasts for economic recovery in 1992 and 1993 look too optimistic. Despite the recent currency market turmoil, which has significantly affected some of the Nordic countries, we will continue to make exchange rate stability a cornerstone of our policy, mindful of the fact that this has to be supported by sound fiscal and monetary policies.

Thus, we face the great challenge of improving growth prospects without putting in jeopardy the important achievements in reducing inflation made during recent years. Fiscal consolidation in all countries with excessive budgetary imbalances is urgently needed to make possible a lowering of long-term real interest rates, which is again a prerequisite for stimulating capital formation. This is a key priority in order to improve the prospects for sustained growth in the long run.

It is also imperative that policies are formulated with a medium-term framework so as to maintain perspective and clarity with respect to the objectives of price stability and sustainable growth.

The experience from the 1980s shows that we must pay close attention to the appropriateness of the policy mix at any given time so as to avoid placing too heavy a burden on either monetary or fiscal policy in attaining economic adjustment. Monetary policies can be successful in reducing inflationary pressures, but often only at substantial short-term cost in terms of reduced growth or even output losses. It also appears that monetary policy has, in the past, inadvertently accommodated speculative increases in asset prices in some countries.

I would now like to turn to the important subject of structural policies. These included all those measures that improved the long-term efficiency and productivity of economies, in particular by enhancing the functioning of markets. We will have to place increased emphasis on dismantling barriers to trade, cutting distortionary subsidies, and improving the functioning of labor markets, particulary in countries where unemployment has remained high. Past structural measures have yielded significant benefits, notably those in the areas of tax reform and financial deregulation. However, experience shows that financial liberalization has to go hand in hand with effective supervision.

Several developing countries are now reaping the fruits of their efforts in carrying out necessary structural reforms and implementing sound economic policies. This is evident in reduced economic imbalances, improved market efficiency, and healthy capital inflows. All these factors have been conducive to growth, and are helping to stimulate the buildup of productive capacity. A pattern has evolved where the adjusting developing countries have generally attained higher rates of growth, lower inflation, and lower external debt. These developments are encouraging, and offer a clear example to countries that have yet to adopt successful adjustment programs.

The former centrally planned economies are now at a critical juncture. In some of these countries, recent economic developments seem to justify cautious optimism, as they indicate that the sharp contraction of output during the past few years has ended or is about to end. It has to be acknowledged, however, that in other countries of Eastern Europe and many states of the former Soviet Union, prospects are still much less favorable. It is vital that these countries firmly embark on programs of macroeconomic stabilization, including price reform and other radical systemic reforms, in order to restore economic growth.

In Eastern Europe and in the states of the former Soviet Union there is no viable alternative to rapid reform. Experience suggests that too slow an approach is bound to create credibility problems for governments facing an unstable political and economic environment. It should also be emphasized that a proper sequencing of individual reforms is of great importance.

The emerging former centrally planned economies obviously need help and cooperation from the outside world. Private sector inflows can play a major role in the form of joint ventures and direct and portfolio investment. The lion’s share of the emerging countries’ investments will, however, have to be financed domestically. Therefore the generation of savings is a vital element to the success of these economies. These countries also sorely need financial assistance on a timely and adequate basis. The Fund has a vital role to play here in conformity with its established practice, strict conditionality, and the revolving nature of the Fund’s resources. I am especially pleased to note that two of the Baltic countries have already established stabilization programs with the Fund, which shows their readiness to adopt strong adjustment policies, and that preparations for the third Baltic program are well advanced.

I would also like to state that the Nordic countries continue to view the increase in quotas under the Ninth Quota Review as a minimum requirement, given the outlook for the Fund’s activities in the coming years. Hence, we look forward to a prompt completion of the Ninth Review.

Important as financial support is, let us not forget that the most effective contribution the industrial countries can make to the wellbeing of the rest of the world is to open up their markets so that all nations can earn their own way to prosperity. In this regard, it is of the greatest importance that the Uruguay Round of the GATT negotiations be brought to a fruitful conclusion. We have, indeed, firm reasons of theory and experience to believe that structural measures, such as the liberalization of trade and deregulation of markets for goods and services, can substantially contribute to the prosperity of all countries.

Statement by the Governor of the Bank for the Philippines—Ramon R. del Rosario, Jr.

On behalf of my delegation, I join my fellow Governors in welcoming the 17 new members that have joined the Fund and the Bank since the last Annual Meetings. The intake is unprecedented. They include some of the biggest and the most influential, as well as some of the smallest, economies in the community of nations.

The formidable challenges posed by the economic restructuring of most of our new members add to the still uncompleted task of lightening the burden of the debt crisis on many existing members. It has been a decade since Mexico, followed by scores of other countries, including my own, was compelled to interrupt service on foreign debt. With the leadership of the Bretton Woods institutions, the responsibility exercised by creditor and debtor nations alike, and the responsiveness of the commercial banks, the international financial system has weathered the crisis. The debtor nations have likewise survived, some less scarred than others.

A few countries are now emerging from this ten-year ordeal that has meant for their people a lost decade. Their debt ratios have declined, and the process of sustainable growth, albeit fragile, restarted. Yet it needs care and support lest the pressures of an impatient electorate in these new democracies snap the thin and taut tightrope governments must tread between the competing demands for long-compressed social and infrastructure spending and still-sizable debt service.

This is especially true for the low-income and lower-middle-income countries where poverty is prevalent. For them as well, a large portion of debt is owed to official creditors. Thus, the benefits they can derive from comprehensive commercial bank deals, while meaningful, are more muted. We urge the creditor nations to summon even greater statesmanship to help these debtors finally put to rest decade-old unfinished business. (We need not look too far afield for new formulas, only to extend the flexibility evident in the cases of Poland and Egypt.)

Debt relief, while an essential condition in many cases, is never a sufficient ingredient for any. It is clear that success lies primarily through steadfast pursuit of internal reforms, albeit difficult and painful, to correct macroeconomic and structural deficiencies. We are assured by examples of success that lasting prosperity can best be attained through continued and growing cooperation with international partners. This lesson is significant, particularly for new members of the Bretton Woods institutions that have recently attained their independence and are now striving mightily to make the market system work in their countries and integrate their economies in the global community.

More than ever before, the Fund and the World Bank are now looked up to by an expanding membership for valuable guidance and assistance in speeding the process of development. Truly, we are seeing the Fund and the Bank move closer to being universal institutions that can hopefully provide the benevolent mantle that will allow all their members to develop to the peak of their potential. To live up to that ambitious task, as they must, and yet serve all their members with fairness and equality, will require the best of our abilities to help these institutions mobilize, coordinate, and focus increasingly scarce financial and human resources. It is in this context that successful completion of the Ninth Quota Increase is so crucial to the Fund. Closely following that, we should already be looking forward to the Tenth Review of Quotas to assess and realistically provide for legitimate financing requirements in the period ahead.

The most important contribution of the Fund and the Bank in this new economic reality where total integration of the global community is now possible is to ensure that the right conditions exist to encourage and support efforts by a growing number of countries to improve economic efficiency. Though the latest World Economic Outlook presents us with some welcome news, the economic reform challenges confronting us today have been heightened rather than reduced.

We would wish to view recent developments through a prism of optimism. But we all probably risk far greater damage if we fail to acknowledge that the world economy as it stands today defines an environment that bears little resemblance to that which was both the promise and the reward to those of us who would willingly embrace the path of reform.

Economic recovery is in danger of faltering in the leading countries and unemployment threatens to be a persistent condition as a result of their own stark failure to address fundamental structural weaknesses in their respective economies.

Ominously, the handmaidens of economic weaknesses in the major countries have been protectionism and unfair competition. The various documents prepared for these Annual Meetings confirm these disturbing trends. In particular, the share of world trade covered by nontariff barriers has intensified over the last decade, particularly in Japan, the United States, and the European Community. The Uruguay Round remains stalled, a hostage to narrow political interests in key countries.

With diminished trading opportunities, how shall we ever find our way to global prosperity? It is also in this light that care should be taken, especially by major economies, to safeguard that emerging regional trade arrangements do not reduce market access by other efficient producers.

The priority of these Annual Meetings should by now be crystal clear. If we can but deal seriously with the key outstanding structural issues in the major economies, whether these involve unsustainable fiscal deficits, rigidities in labor markets, or the perpetuation of uncompetitive industries, we shall have taken the single most decisive step toward the ultimate resolution of the leading development issues of our day: the uplifting of the low-income countries, the permanent resolution of the debt crisis, and the orderly integration of the former centrally planned economies into the mainstream of international economic life.

We find ourselves today far short of our goals, mainly because the burden of adjustment has been principally borne by those who have the least bargaining power, rather than by those whose adjustment would provide the world community the greatest benefits.

This is, of course, not a call nor an excuse for less adjustment in the developing countries. There is no other way forward. But the right global environment would facilitate and broaden these efforts.

While voicing these concerns, we can assure you that the Philippines has not retreated from the struggle. Over the past six years, we have worked hard to steady the economy in the face of a massive debt overhang, a volatile political setting, and a series of natural disasters. That it has taken this long reflects in part the difficulties of putting in place and sustaining a reformist economic agenda when the fruits of reform cannot be enjoyed swiftly enough by an understandably impatient citizenry.

We have now a new Government in place, the first duly chosen in peaceful elections in two decades, with a clear mandate to deepen further our economic reforms. Together with the maintenance of sound monetary and fiscal policies, the new Government is vigorously embarking on tax reform, continued deregulation and privatization, and other structural adjustments to lay the foundation for sustainable growth for the rest of the century. Indeed, one of the first major initiatives of this administration is to lift exchange restrictions on current transactions that have been in place for over forty years. With the continuation of market-opening initiatives of the preceding government, the Philippines has now one of the most liberal economies in our region. In addition, further relaxation of already fairly liberal investment rules has been certified as a legislative priority.

Finally, we are now in a position to close the chapter on the Philippine debt crisis. A comprehensive reorganization plan was reached with creditor banks in February 1992 on remaining medium- and long-term obligations totaling $4.6 billion. In line with that agreement, we implemented a buy-back of $1.3 billion of those debts in May. The remaining balance will be the subject of debt exchange at significantly reduced interest rates with long maturities before the end of the year. Looking beyond this operation, we are now making preparations to access capital markets and thus re-establish our credit.

The early signs of recovery of our economy are encouraging. Imports and domestic lending are buoyant, even as inflation remains firmly at single digit, and international reserves and the balance of payments are healthy.

The market has clearly responded with enthusiasm to all of our reform initiatives as evidenced by the reflow of private capital. In fact, the reflow has been so massive that it has created short-term complications for macroeconomic management. This unexpected phenomenon, more characteristic of mature economies, is also being witnessed in many other successfully adjusting developing country cases, though a satisfactory answer has yet to be proposed on how to deal with the difficult trade-offs. We urge that a real dialogue between the Fund and affected countries give due consideration to such factors to ensure the attainment of economic recovery and growth in a sustainable way.

Indeed, as countries like ours graduate from short-term stabilization programs into medium-term growth-oriented ones, we enter a no less critical stage that presents its own unique challenge. Policy options are no longer as limited, political consensus becomes more fragile. We would need to accept greater room for the exercise of judgment in the means while keeping faith with ultimate goals. What is vital is that we do not throw away much of what is good by reducing a delicate task of political and economic management into single-minded pursuit of numbers cast in print. Our current state of knowledge is far too limited to allow us to substitute doctrine for common sense.

Finally, the responsibility for the design of such adjustment programs should remain with the authorities who must be satisfied that these represent appropriate, realistic, and feasible courses of action. We should never lose sight of the fact that the degree of political commitment to, and public support for, structural reform in the adjusting country is an essential element for the sustainability of the adjustment process.

Some months ago, the first Philippine eagle bred in captivity was hatched. Awkward and weak, the eaglet, named Pag-Asa, or Hope, at first needed extreme care but has now begun to assume some of the majesty for which it is famous. After a prolonged period, when even its survival was in doubt, Pag-Asa will soon be ready to fly and soar to the sky.

We believe that a number of erstwhile heavily indebted countries, the Philippines included, now show signs of Pag-Asa, that they too will soon be ready to fly. All they need is to be nurtured and nudged so that any opportunities that arise are seized. Join us as we seek to fulfill our Pag-Asa, our Hope, of renewed strength and self-sufficiency.

Statement by the Governor of the Fund and the Bank for Brazil—Marcilio Marques Moreira

I am honored to speak on behalf of the states of Argentina, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Spain, Suriname, Trinidad and Tobago, Uruguay, Venezuela, and on behalf of my own country, Brazil.

As we think about our times, it is easy to feel the excitement of taking part in the building of a new world. In the last three years, the international scene has gone through more dramatic transformations than during the whole postwar period. Old arguments and deeply entrenched views have suddenly become irrelevant. The world today is open to new realities, and those new realities are reflected in the IMF’s membership. I wish to welcome all new members and express our deep satisfaction to see the multilateral financial institutions acquire a truly universal character.

Not more than three years ago we lived in a world where it still made sense to talk about East and West as antithetical poles of a divided world. Today, this is all history. And when we think about what has changed, I believe that two facts immediately impose themselves. First, in the political realm: the universal recognition that representative democracy is the best government principle yet developed for the life of man in society. Second, in the economic arena: the recognition of the superiority of market economies—and let me stress that I am considering a multiplicity of types, not a single mold specific to one or the other group of countries—as the best means of allocating scarce resources in societies that are both complex and dynamic.

These two fundamental ideas on how to organize socioeconomic life do nothing more than mark the victory of freedom—political freedom and economic freedom—and are spreading in Latin America as they are spreading throughout the world. In a sort of reverse domino effect, democratic traditions have been restored, and the rule of law has been consolidated all over our continent.

At the same time, many governments have felt ready to launch economic reforms to overcome the stagnation of the 1980s. To proceed to renewed growth, to reverse the former autarkic model of development in order effectively to insert our economies into a changing world economy, and to build a modern social market economy are the issues that stand at the top of the agenda of Latin America.

The fruits of the adjustment implemented in the last few years now begin to fulfill their promise: larger external reserves, lower rates of inflation, higher growth, increasing per capita income, and growing awareness of the priority of a concrete social policy.

Rapid and deep changes have, initially, an economic as well as a social cost. Besides measures to assist the poorest part of the population in these circumstances, the best way to deal with such costs is not to slow down or to suspend reforms. Quite to the contrary, they should be pursued with greater speed and determination to shorten the lag between policy decisions and positive results. This assumes adjusting the pace of our efforts to optimize the results that stability and structural reforms can have on productivity and, ultimately, on growth and on the quality of life.

We also face the challenge of a modern and dynamic integration into the world economy. And in a world where the size of the market is a decisive competitive advantage, integration cannot but be a priority. All channels have to be mobilized, and integration begins at home. We are proud that the subregional integration initiatives taking place in Latin America are succeeding in increasing trade flows within the region. We also recognize the importance of actions of hemispheric reach, as the Enterprise for the Americas Initiative.

In most countries, the external debt problem has been brought under control, while others are on the road to normalization. The reversal of capital flows and the expansion of foreign investment constitute clear signals of Latin America’s promising return to the mainstream of international financial transactions.

This, however, does not give us a definitive respite. The debt problem has not been fully overcome. Additional steps are still needed to alleviate the situation of low-income countries, as the Fund and the Bank have been repeating.

The Fund and the World Bank must also develop new approaches to facilitate the implementation of the debt and debt-service agreements. Capital exporting countries should review their regulations to simplify loans to developing countries, adapt reserve requirements to the new debt picture, and duly recognize the efforts of countries as they comply with their debt-rescheduling arrangements.

The recent economic performance of Latin American countries appears even more impressive when one takes into account the slow growth of the industrial countries and the protectionism still permeating world trade, despite six years of travail in the Uruguay Round. In view of the uncertainties created by recent turmoil in exchange markets, conclusion of the Round is now more crucial and urgent than ever.

The present conjuncture underlines the need for an intensified role of the Fund in monitoring the functioning of the international monetary system. The Fund and the Bank must play a positive and active role in the coordination of macroeconomic policies and act to establish the necessary degree of cooperation.

The multilateral financial institutions themselves face a period of change, with new policies being formulated toward countries in transition to market-based economies. While supporting their actions in this regard, let me stress that assistance to new members, both technical and financial, should not be at the expense of traditional borrowers.

During the United Nations Conference on the Environment and Development (UNCED) that Brazil had the honor to host in Rio de Janeiro last June, renewed hopes emerged for increased development assistance, as industrial countries reaffirmed their commitment to reach the agreed target of 0.7 percent of their GDP for this purpose. We welcome in particular the pledge made by industrial countries to announce during the current UN General Assembly their initial financial commitments to implement the objectives agreed upon in Rio, which will require new and additional financial resources to augment the existing levels of development aid. We are also confident that the financial organizations will deploy their best efforts to implement fully Agenda 21 agreed upon in Rio.

When I mentioned the victory of freedom, I said that its two elements were being realized in Latin America. They are also being realized in Brazil. I come here today from a country that is going through one of the severest political crises in its modern history. I come here today from a country that nevertheless is proving that its democratic institutions are solid enough to endure such a crisis. The lesson is that, in Brazil, democracy has come to stay. And along with political democracy, its corollary, economic freedom, is now the rule.

There is today a clear consensus in Brazilian society: we need to redefine the role of the state in the economy, so as to make it smaller, more efficient; we need to build a modern social market economy, capable of competing internationally; and we must resume development in a sustainable way to pay back our social debt, the heaviest of our debts. We need to extend to all our population in a concrete and equitable way the fruits of progress today reserved to a privileged minority.

This consensus has made it possible to implement very strong structural reforms: eliminating state agencies, deregulating economic life, privatizing formerly gigantic public enterprises, and opening up the economy.

In the trade area, we have eliminated all nontariff barriers, without a single exception, and have lowered the Brazilian average tariff rate to a fraction of its previous formidable level. In the financial area, we have normalized our relations with the international financial community. The results of such measures are already seen to be very positive.

Yesterday, I had the pleasure to announce, together with our Bank Advisory Committee, the completion of the term sheet that marks the conclusion of the negotiations with our commercial bank creditors. This term sheet will now be submitted to the Brazilian Senate as soon as it is translated.

It is also a matter of great satisfaction to register that our Congress has authorized Brazil’s entry into the Multilateral Investment Guarantee Agency, and that later today I will be delivering the instruments of accession to the President of the World Bank.

Recent statistics point to capital inflows in 1992 of between $15 billion and $20 billion. The trade surplus expected for the year amounts to $15 billion, and our international reserves are above $20 billion, the equivalent of almost 12 months of imports. Figures like these support our view that the Brazilian economy is working, that the thrust of our economic program remains on track, and that our young democracy has been capable of standing the severe test it is undergoing.

I came here today to share my pride with you that Brazil finally has a solid democratic regime and an emerging social market economy. Basically, I came here today to tell you that greater than any passing crisis is the Brazilian future. It is this future that we are building every day in my country, as are our brothers throughout most of Latin America.

Let my final words be to stress that we are convinced that the basic effort, the effort we are undertaking, must come from our people, from our Government, from our society. But in a world that is becoming one, it is of the essence that the community of nations respond positively. The time is ripe for deepening the partnership that linked us in the past and that should not divide us in the future. Let us hope, let us work, let us persevere in the common task to build a better world of freedom, justice, and prosperity.

Statement by the Governor of the Bank for Peru—Carlos Boloña Behr

In 1990, a mere two years ago, my country, Peru, was in the grip of the worst economic and social crisis in its history as a republic. The policies pursued up till that time had resulted in ostracism and international isolation for Peru. Today I have the privilege of addressing this distinguished gathering as a representative of all countries of Latin America and the Caribbean, at a time when Peru’s situation has greatly changed as a result of the implementation of a comprehensive, meaningful, and consistent government program.

In 1990, Peru had annual inflation of 7,600 percent. We expect to end this year with annual inflation beneath 50 percent; and in 1993 we expect our inflation rate to reach international levels.

When President Fujimori took on the responsibility of governing Peru, international reserves were negative by $100 million; today, the Central Reserve Bank administers international reserves in excess of $1.7 billion. The fiscal deficit left by the previous government was on the order of 11 percent of gross domestic product in 1990. We managed to wipe out the deficit in 1991, and we have also projected a fiscal deficit of zero for the year 1992.

Beginning in 1991, Peru initiated wide-ranging structural reforms. First of all, the regulatory framework was modified to lay the foundations for an increase in private investment and sustained economic growth. As part of this process, modern regulations were enacted in the exchange, monetary, fiscal, trade, financial, and labor areas. Substantial progress has also been made in regard to privatization, so much so that the Government may once again discharge its responsibilities effectively in the areas of health, education, justice, and security.

In 1990, over 70 percent of Peru’s external debt was in arrears. It is only now that we have reached agreements with member countries of the Paris Club and international organizations. In addition, we are receiving $1.1 billion from a group of generous friendly nations through the formation of a support group. A few days ago, the IMF approved the second review of the rights accumulation program for Peru, as a result of which we are practically in the closing stages of settling our arrears with the Fund. Furthermore, in 1992 the World Bank has extended credit in an amount equivalent to $1 billion, which will make it possible for Peru to recover its full eligibility by the end of this year.

The year 1990 marked the tenth one in which terrorism had become increasingly prevalent in Peru and threatened to spread to other countries on the continent; it had been responsible for the destruction of infrastructure and the deaths of over 20,000 Peruvians. Leaving a trail of insane destruction in their wake, terrorists have destroyed property worth $22 billion, a sum equivalent to Peru’s total external debt. Today, we can say that we have captured or neutralized the leaders of all the terrorist movements that were ravaging my country. This does not mean that we have put an end to terrorism; what we have done, however, is deal a sharp blow to these criminal organizations.

In brief, we took a country with a pauperized economy, bankrupt finances, a people at odds with itself, and a government in retreat from the terrorist onslaught and its own inability to govern. Peru today has its finances back in order once again; Peru’s terrorist leaders are out of circulation; and the Peruvian people can at last see hope in their future.

With this introduction, may I say once again that it is a great honor for me to address you on behalf of the countries of Latin America and the Caribbean. First, I wish to welcome the 16 new members who have recently joined the IMF and the World Bank. The membership of these countries in the financial organizations will strengthen the international system.

The political changes unfolding around the world and the efforts that developing countries are making to modernize their economies give us an unprecedented opportunity to take concerted action to remedy the problems affecting economic growth, poverty relief, and protection of the environment.

In Latin America, we are witnessing a remarkable economic transformation. The populist policies that were responsible for years of stagnation and external crisis have been left behind. A growing number of countries are implementing stabilization and structural adjustment programs. These entail the pursuit of prudent monetary and fiscal policies and the implementation of reforms to liberalize markets, expose economic systems to external competition, increase domestic saving, reduce the entrepreneurial activity of the state, and promote local and foreign private investment.

The results have been considerable. Notwithstanding the weak economic growth in the industrial countries, Latin America is expected to record growth of approximately 2.8 percent in 1992. At the same time, inflation has declined substantially in one group of countries. Argentina, Nicaragua, Peru, and Uruguay have made remarkable progress in curbing price increases. Likewise, Chile, Mexico, Bolivia, El Salvador, Costa Rica, and the Dominican Republic—countries of moderate inflation—have continued to bring down their inflation rates.

The qualitative changes in Latin America’s economic performance have been accompanied by an improvement in its capital flows. Since 1988, flows of financing into Latin America have increased considerably, although they are still below the levels achieved at the beginning of the 1980s. One characteristic of these favorable trends has been the substantial increase in non-debt-creating flows, such as foreign direct investment and portfolio investment. However, net transfers to Latin America continue to be negative.

Official financing is the primary source of external financing. In spite of the fact that official credits are stagnating in comparison with the levels recorded in the early 1980s, it is undeniable that this type of financing will continue to be a major source of external resources for Latin America.

Accordingly, we believe that efforts to increase the domestic saving of developing countries must be complemented by an improvement in the flows of external financing. That is why we attach so much importance to increasing the concessional and nonconcessional flows from official credit sources as well as to an enhanced role for multilateral banks.

Completion of the Tenth Replenishment for the International Development Association and a significant increase in World Bank loans to middle-income countries lacking access to private financing would represent another major step in this direction. While flows of private capital have shown greater dynamism in recent years, a major proportion of such capital is represented by short-term capital.

For some time now, the policies for attracting private capital into developing countries have received very close attention. We believe, however, that the time has come to study the other factors affecting private capital flows and their interrelationships with the exchange rate and interest rates. The International Monetary Fund and the World Bank have a major role to play in mobilizing private resources for developing countries.

Foreign direct investment can be a major factor in channeling external capital. Since 1987, flows of foreign direct investment into the developing countries have increased considerably. In 1991, direct investment accounted for 66 percent of net flows of private resources. The report prepared by the World Bank on the legal framework for the treatment of foreign investment represents a unique contribution in this area.

The countries that have been most successful in attracting foreign capital are those that have implemented durable structural reforms and that have been able to achieve external viability. In most cases, regaining external viability has required appropriate debt restructuring.

The recent decision of the Group of Seven to extend the enhanced Toronto terms to the most heavily indebted countries, and its request to the Paris Club that the consolidation periods be significantly extended and the Trinidad terms applied to the lower-middle-income countries, represents a major step toward resolving the problem of debt.

Sustained growth and a consolidated reform process require a favorable institutional environment combining stability, growth, and trade liberalization. We are most concerned by the forecasts of slow recovery for world production and by the lingering uncertainty regarding the growth of international trade. We consider it crucial to make a final push to surmount the obstacles and reach a satisfactory agreement at the Uruguay Round to reduce barriers to free trade, as this will enable our countries to improve their access to the markets of the industrial countries.

There are three things I would like to mention briefly before I close. Peru is engaged in a process aimed at reinforcing and modernizing political democracy, as evidenced in particular by the upcoming elections on November 22 to elect a Democratic Constituent Congress, which will draft a new Constitution and will have legislative functions.

Many of Peru’s achievements are attributable to the understanding and support of the international financial community. We know we can continue to count on your invaluable assistance with regard to the reforms that Peru has been implementing.

I would not wish to end my remarks without paying tribute to a distinguished fellow countryman of mine who recently passed away. I am referring to Ramón Remolina, the doyen of the Peruvians at these international meetings, where he had an uninterrupted record of attendance dating back to Bretton Woods, a record of which he was very proud. His sudden passing has left a void in Peru’s financial community that will not easily be filled. I shall greatly miss his friendly advice, his invariably useful suggestions, and his selfless support.

Statement by the Alternate Governor of the Fund for Germany—Theo Waigel

I am glad to be able to welcome so many representatives of new countries in addition to the familiar faces from previous meetings. One year ago the IMF had 156 members; it now has 172, and will soon have 178. The trend at the World Bank is similar. The IMF and the World Bank have thus become truly global institutions. We are now closer than ever to fulfilling the dream of the founding fathers of the Bretton Woods institutions of creating organizations for worldwide cooperation to promote the prosperity of mankind on the basis of freedom and democracy.

The economic upturn in the West after World War II would have been inconceivable without the international cooperation that is manifested especially in these international institutions. We are now presented for the first time with the opportunity of including the whole world in this cooperation.

The need to assist the reforming countries of Central and Eastern Europe and the former Soviet Union with the introduction of market-based systems adds a totally new dimension to the traditional tasks of the Bretton Woods institutions—namely, preservation of orderly monetary relations between its members; promotion of international cooperation to strengthen growth, stability, and prosperity; and support for developing countries.

Turbulences on the Exchange Markets

In the last two weeks, we have seen substantial speculation on the international currency markets. The United Kingdom and Italy temporarily left the exchange rate mechanism (ERM) of the European Monetary System (EMS) in order to halt speculation.

The “yes” of the French to the European union has taken an important element of uncertainty from the markets. After last week’s decision, there is no further need for adjustment, as a look at the economic fundamentals shows.

We in Europe share one common view: the EMS has, on balance, advanced monetary stability in our countries during the almost fourteen years of its existence; it is the platform from which we move toward the next stage—economic and monetary union, embedded in the European union. We shall stick to the EMS and do everything possible to ensure that the currencies that have temporarily left the ERM return to the system. Germany will continue to meet its obligation in the EMS fully.

But I would like to stress once more the following: the turbulences on the exchange markets during the last week were not the result of stability-oriented policy in Germany. To the contrary, stability is definitely the basis for orderly market conditions. The long-term capital market interest rate in Germany is, at 7.6 percent, the lowest in Europe except for Switzerland; the same is true for money market rates. Capital movements into the deutsche mark obviously had other causes.

Strengthening Growth, Stability, and Prosperity

The prospects are good that the underlying growth forces will gain momentum in our countries. The world economy has emerged from the stagnation of last year.

It is true that this year’s growth is not as strong as had been hoped, especially in the industrial countries. The recovery is not as vigorous as at the beginning of past cyclical upturns in economic activity. Perhaps the expectations of some had been too high, particularly if one recalls that slippages occurred and that some adjustment processes have not been completed.

The IMF has listed important reasons for unsatisfactory growth:

  • Persistently high fiscal deficits absorb private savings and thus obstruct investment.

  • Cost and price pressures are still too high in most of our countries.

  • Private households and enterprises have been busy reducing the debt burden that many of them had accumulated in the 1980s.

  • There has been a widespread decline in the confidence of investors, savers, and consumers.

If this analysis of the causes of weak economic growth is correct, there can be no doubt about the course of action we must take to strengthen growth.

We must again focus our economic policies on the medium term. The basis for growth must be reinforced. Monetary and fiscal policy must have clear-cut objectives and give unmistakable signals to boost the confidence of investors and consumers. Increases in income must stay in touch with productivity gains.

But macroeconomic instruments alone are not sufficient to ensure sustained higher growth. Industrial and developing countries alike must continue to dismantle structural obstacles to growth. We must do all we can to ensure that the Uruguay Round is brought to a successful conclusion before the end of this year. In addition, we must ensure that the growth-stimulating effects of regional trade arrangements are passed on to the world economy at large, by keeping these arrangements compatible with the multilateral trading system.

Germany, too, accepts the obligation to strengthen growth and stability both at home and abroad.

The unification of Germany two years ago was a historically unprecedented challenge whose economic and social implications are only now becoming fully apparent.

  • It has transpired that the productive capacity of the former German Democratic Republic (GDR) economy was much lower than had generally been thought.

  • Only a few of the enterprises were internationally competitive.

  • The traditional markets for GDR products in the East have largely disappeared; from 1990 to mid-1992, exports from eastern Germany to the former Soviet Union and to Eastern Europe declined by two thirds.

  • The number of persons in employment in eastern Germany has decreased by 40 percent from 1989 to the present.

To promote the process of reconstruction, to finance infrastructure investments, to encourage private investment, and to prevent the living standards of people in eastern Germany from falling to a level that is unacceptable within a common state, a financial transfer from western to eastern Germany of 5 percent of GNP a year became unavoidable.

Economic and political reasons, in the beginning, left no alternative but a temporary expansion of the fiscal deficit and public borrowing. This was accompanied by considerable economies and tax increases. However, financing these additional expenditures from the outset solely through tax increases and expenditure cuts would have led to a serious recession, with corresponding negative repercussions on the economies of our partner countries.

We have avoided this. What is more, the demand generated by German unification at a time of global demand weakness led to a vigorous program of economic stimulation from which not only the German economy but also the economies of our partner countries, particularly in Europe, derived considerable benefit.

And we are financing the reconstruction of eastern Germany predominantly from domestic savings. Germany’s deficit on the external current account, which reflects the use of external resources, amounts to only approximately 1 percent of our national product this year.

The main task is now to make real progress in reducing the public sector deficit over the medium term. My Government’s financial plan makes provision for bringing down the general government deficit from the present figure of about 4 percent to 2 to 2½ percent of GNP by 1996 through a policy of strict saving and limiting the growth of expenditure.

Reducing price and cost pressures will also pave the way for further interest rate reductions. At the same time, we intend to improve the medium-term conditions for growth by means of deregulation, privatization, and tax reform. This is Germany’s contribution to more growth and greater stability at home and internationally.

Transformation of the Reforming States of Central and Eastern Europe and of the Former Soviet Union

As we approach the end of this century, the transformation of the economies in Eastern Europe and the states of the former Soviet Union is surely the most important task facing the international community. If it succeeds, new opportunities for trade and growth will open up for the entire world economy. The participation of these states in the international division of labor and their integration into international trade and financial relations will raise the living standard of the population in the reforming states and the productive capacity of the world economy as a whole. If the transformation process should fail—which I do not expect, although we must always reckon with setbacks—then this would not be without consequences for our own economies. The possibility of new political tensions, which would also be felt in the economic area, could not be excluded.

The international financial institutions have been involved in the reform process in Eastern Europe and the former Soviet Union from the very beginning. Their expertise is sorely needed and will be for years to come. The assignment of tasks is clear:

  • The IMF must continue to provide its advice so that the reforming countries will succeed in creating a stable macroeconomic framework. There must be close coordination of monetary, budgetary, exchange rate, and incomes policies. Moreover, many of these countries have barely begun establishing the institutions and instruments needed for implementing free-market economic policies. The IMF helps in this area, too.

  • The World Bank and also the European Bank for Reconstruction and Development must continue to devote themselves to the broad field of structural reforms in these countries. Enterprise and agricultural reform, privatization, and the creation of a reliable legal framework are difficult, time-consuming reform projects that must not be postponed.

Macroeconomic stabilization and structural reforms must go hand in hand. The one cannot succeed without the other. Without enterprise reform and privatization, it will be difficult to reduce deficits and the expansion of credit; without agricultural reform and improvement of investment conditions, investment, production, and the supply of goods will react insufficiently to price liberalization. On the other hand, many structural measures will fail to show results if continuing high budget deficits and rates of inflation leave investors and savers in a state of uncertainty.

We appeal to the states that have set out on the arduous but indispensable reform course not to relax their efforts. The more quickly the transformation succeeds, the sooner will an increase in production, employment, and living standards be possible. Some states of the former Soviet Union are still hesitant to resolutely tackle the reform process. They are in danger of backsliding. We urgently recommend that these states enter into dialogue with the IMF and the World Bank.

The international community will continue to assist those countries that are pushing forward with the reform process. This is what was promised at the Munich Economic Summit and we stand by it. The Bretton Woods institutions will also make important financial contributions.

Help for Developing Countries

The new challenges I have mentioned must not—and, I am certain, will not—be met at the expense of the poorest countries in the world, above all in Africa. But even as we try to increase development aid, the concessionary development aid funds provided from public budgets will always remain limited. The efficient use of these scarce resources must be improved substantially. Responsible government behavior and good governance must form an indispensable criterion in providing public development aid.

In any event the major portion of the investment needed in the developing countries cannot come from development aid funds; this must be overwhelmingly financed from their own savings and by direct foreign investment.

The participants in the Munich Economic Summit stated on this subject:

Economic and social progress can only be assured if countries mobilize their own potential, all segments of the population are involved and human rights are respected.

The Munich Summit also provided a further impetus to the debt strategy. It is gratifying to note that the relative debt burden of many developing countries has decreased markedly. Thanks to the good progress made in adjustment, much has been achieved here. It has also become clear that adjustment and growth do not contradict each other—quite the contrary.

The success achieved by many developing countries with structural adjustment policies in cooperation with the IMF and the World Bank is documented by the above-average growth rates of these countries.

President Preston has confirmed that the sustained reduction of poverty remains the fundamental objective of the World Bank. This has our explicit support.

The UN Conference on Environment and Development in Rio, moreover, put the World Bank at the center of efforts to provide additional financial and technical support for environmental measures in the developing countries.

Germany will make an appropriate contribution to the Global Environment Facility as well as to the Tenth Replenishment of IDA. We hope that the negotiations on a substantial replenishment of IDA can be successfully completed before the end of this year.

In order for the IMF to be able to fulfill its key role in supporting economic reforms and stabilization efforts, it, too, must be supplied with the necessary funds. I urgently appeal to all members who have not yet done so to quickly ratify the ninth quota increase and the Third Amendment of the Articles.

Final Remarks

The world is undergoing profound changes. Thus, the main focus of the work of international organizations has shifted sharply in the past few decades:

  • in the 1970s, the reorganization of the international monetary system and coping with the oil crisis were at the forefront;

  • in the 1980s, debt was the dominant topic;

  • the greatest challenge of the 1990s is the transformation of the former command economies to free markets and democracy.

In order to meet these immense new challenges and to continue the traditional tasks in industrial and developing countries, the world needs the Bretton Woods institutions today more than ever. In turn, these institutions need the support of their member states in order to operate successfully. We must all be prepared to give this support.

Statement by the Governor of the Bank for Pakistan—Sartaj Aziz

It is an honor to once again represent Pakistan at the Annual Meetings of the IMF and the World Bank Group. I join other colleagues in welcoming the new members; their arrival makes the mandate of the Bretton Woods institutions truly global. It is also significant that this movement toward universality should coincide with an unprecedented convergence of thinking in favor of a market-based system for the world economy. Accordingly, the potential and scope for policy cooperation has never been greater than it is today. It is therefore altogether tragic that at precisely this juncture, we should be meeting in the shadow of a global disarray in financial markets, a condition that reflects, in my view, a remarkable failure of international cooperation.

This failure is especially dangerous for the countries of the Third World, which, in addition to the inherent fragility of their economies, must contend with the danger of further delay in the recovery of the industrial countries, on account of the widespread turbulence in financial markets. In a fundamental sense, the current difficulties are only an outward manifestation of deeper-seated forces. The continuing shortage of world savings is perhaps the most troubling of the underlying forces. In addition to competing with industrial countries that run large fiscal deficits, the developing countries must now take into account new claims on the same shrinking pool from the countries of Eastern Europe and the states of the former Soviet Union. We do not question these new claims, but we do expect the industrial countries to adopt macroeconomic and structural policies that would not make it necessary for them to pre-empt a disproportionate share of world savings. This, in turn, would help to reduce real long-term interest rates from their current high levels.

Let me note two other factors that impose a heavy burden on the development process: the declining net transfer of resources and growing trade barriers. Barring a few countries of strategic importance to the principal aid givers, there is a declining trend in the flow of resources to the rest of the developing world. This, combined with a rising burden of debt servicing, has led to a negative net transfer of resources for a growing number of developing countries. This situation is particularly worrisome for those developing countries that have little access to international capital markets. Nor is it a question of providing one-time debt relief. There are many developing countries, including Pakistan, that have meticulously met debt-servicing obligations, frequently at heavy cost to their domestic social tranquility and economic growth prospects. These countries would like to continue to honor their contractual obligations if a positive international environment would meet their requirements for capital on reasonable terms, and if an equitable world system would provide proper incentives for the pursuit of prudent policies that do not raise issues of “moral hazard.” Ad hoc responses to crises, such as bailing countries out when they pose an actual threat to the stability of the international commercial banks, must be replaced by a carefully articulated medium-term strategy to help developing countries manage their external finances in an orderly manner.

The same priority applies to world trading arrangements. Nontariff barriers and so-called voluntary export restraints have become a major impediment to the expansion of trade in a number of products in which the developing countries possess an unquestioned comparative advantage. It is disheartening to find so much resistance in the major industrial countries to the completion of the Uruguay Round and to the long phasing-out period proposed for the International Textile Agreement. Even more disquieting is the recent tendency toward the formation of regional trade blocs, especially if these become inward-looking arrangements outside the framework of the General Agreement on Tariffs and Trade. There are a number of developing countries that do not fall into such groupings. It is little consolation for them to know that the trade-creating effects of such regional arrangements would be larger than their trade-diverting effects, because the positive effects would accrue to those inside the respective trading blocs while the negative effects would be felt predominantly by countries outside these blocs.

In this generally unfavorable international economic environment, developing countries must look to the multilateral financial institutions for relief. They can make up for the continuing slack, through an intensification of their efforts to help their members move out of the vicious circle of poverty. The need for a substantial increase in their resource base remains pressing. Speedy approval of the long-pending Ninth General Review of Fund Quotas, together with the activation of a moderate SDR allocation, is critical, as is the Tenth Replenishment of IDA resources. These infusions are particularly important at this juncture; indeed, given the entry of new members, we must soon begin to review resource needs beyond what was contemplated at the beginning of these negotiations.

In this rapidly changing environment, these international institutions must remain innovative in their thinking, creative in their policy advice, and incisive in their analysis; they must lead and not be found to be lagging behind the times. The necessity of structural reform was never so self-evident as in the current transition of the centrally planned economies to market-oriented systems of economic management. Yet the mix and balance of macroeconomic and structural measures as well as the sequence and speed of their introduction remain largely unsettled issues. In the macroeconomic area, in particular, an accounting approach to financial programming and antiquated techniques of monitoring performance must be replaced by more meaningful criteria that pay due regard to the requirements of growth-oriented structural adjustment.

With the ever-expanding demands on the staff and financial resources of our two institutions, ways must be found to promote their balanced use through a judicious blend of meeting new claims without neglecting the older ones. In the case of the IMF, there may be merit in merging various lending facilities into one or two with substantially enlarged access. The IMF must be given the go-ahead to plan for a successor to the enhanced structural adjustment facility as a permanent concessional facility for the benefit of its poorer members who are unable to carry the high charges of its regular facilities. The World Bank may have to reorient its lending practices to reach more directly the private sector and public corporations that run on commercial lines. The activities of IFC and MIGA must be expanded at even faster rates than are currently envisaged. In brief, there is an urgent need for new ideas, new techniques, and new approaches to issues of policy advice, conditionality, and access if our institutions are to remain in the forefront of international financial leadership. I have full confidence in the leadership of Mr. Camdessus and Mr. Preston; their wide experience and wise stewardship are a guarantee that the institutions will indeed respond to these new challenges.

It goes without saying that the ultimate responsibility for success or failure must rest squarely on the shoulders of decision makers in the developing world; they must create an economic policy environment that is conducive to growth with stability and that can serve as the basis for mobilizing support from the international community. Structural reforms that place private initiative and drive at the cornerstone of the development process must be accompanied by prudent demand-management and realistic exchange rate policies. There can be no substitute for self-help and self-discipline in economic management. We in Pakistan recognize this imperative, and the present Government has been implementing a comprehensive package of structural reforms covering privatization, deregulation of sanctioning procedures, and liberalization of the trade and payments systems. As a result, we have succeeded in transforming the basic economic framework from a regulated to a free market-oriented system in less than two years. Some results of these reforms are already visible—6.5 percent growth in GDP, a 12 percent increase in exports, and a 25 percent increase in investment along with a deceleration in inflation from 12.7 percent in 1990–91 to 9.6 percent in 1991–92. These are satisfactory indicators of the record achieved so far. But to realize the full impact of these reforms, we need to create a more positive international environment through bold and concerted measures on the part of major industrial countries on the lines outlined in the first part of my statement. I hope this meeting will provide a strong stimulus in that direction.

Statement by the Governor of the Bank for the Netherlands—W. Kok

Let me start by welcoming the new members of our Bretton Woods family since the last Annual Meetings, and more specifically Armenia, Georgia, Moldova, and Ukraine, the new members of our constituency.

Economically and financially, the world is becoming one and undivided. The end of the cold war has marked the beginning of a new and unprecedented process. The global community is challenged to cooperate on the basis of shared ideas on how to manage economies.

Policy coordination between the major players and within a multilateral framework is more necessary than ever. Getting inflation under control, curtailing fiscal deficits, and removing structural rigidities were generally accepted priorities only a few years ago. At present, divergences in economic policies have become too wide, however. Differing policy measures, both between the United States and Europe and within Europe, have given rise to tensions and a lack of confidence. This came to a head in the market turmoil in Europe in the last few weeks and the shocks to the exchange rate mechanism of the European Monetary System (EMS). Fortunately the result of the French referendum has not provided the setback to further European integration that would have been implied by a no vote. It is important that we remain clear about our goals and instruments. European economic, monetary, and political integration is a precondition for stability and progress in the future. It is my sincere hope that the Treaty of Maastricht will be ratified by countries that have not yet done so and that countries that have decided to leave the exchange rate mechanism will soon be able to return on the basis of compatible policies.

Compatibility of policies is the key to stability at the global level too. The only suitable way to create the conditions for noninflationary and job-creating economic growth in the medium term is to attain a sustainable reduction of real long-term interest rates by setting an ambitious but credible time path for budgetary consolidation. This is all the more necessary considering the fall in world saving over the past twenty years, the expected further decline of private saving in the Western world, and the urgent need for investment resources in the developing countries and the countries in Eastern Europe and the former Soviet Union. If fiscal policy keeps each country’s own house in order, a stability-oriented monetary policy will not create exchange rate tensions. This kind of policy compatibility has been sadly lacking recently. As the Managing Director told us so impressively this morning, the instrument for global cooperation is in our hands here. Let us muster the political will to revive the vision of the founding fathers of the Bretton Woods institutions.

The growth perspectives for developing countries, the struggle against poverty and degradation of the human environment, and the necessary reform of the former centrally planned economies will all benefit if we restore the basis for stable and sustainable growth of the world economy. As a result of the determined application of adjustment programs and structural reforms, many developing countries are performing better now. The international community can take some pride in having provided timely assistance, encouraging the governments and the people to persevere. But the need for effort is not over. Heavily indebted low-income countries, especially in Africa and some of the Asian countries, still have very low economic growth, high inflation, and political instability. In some cases, their situation has been aggravated by natural disasters. Special support is necessary there. I wholeheartedly agree with the President of the World Bank that the adjustment problems of the developing countries should not be compounded by those of the industrial countries. This imposes the duty on us to make the IDA Replenishment a success. Moreover, I invite the Paris Club to study how further debt relief for the poorest countries can be made available on a case-by-case basis, differentiating between countries on the basis of objective criteria. This could be done by granting smaller reductions for the relatively better-off countries, and larger reductions or even complete forgiveness for the poorest countries.

In Central and Eastern Europe and the former Soviet Union, further progress on the road of transition and reform is necessary and possible. Economic and social hardship is lasting longer and is more severe than was initially expected, but changes for the better are already manifesting themselves. It is essential to remove barriers and to persevere with building the legal, institutional, and economic fundamentals of a market-oriented economy, if these countries are to reap the benefits of reform.

There is a need for a mutually reinforcing relationship between macroeconomic stabilization and structural policies and institution building. High inflation takes away the basis for sound investment choices. People with fixed incomes suffer, and social cohesion will disappear.

Structural and institutional obstacles, while especially hard to overcome, seriously hamper the efforts toward macroeconomic stabilization and renewed growth. It is essential to identify the impediments to privatization and to remove them.

It is already agreed that the IMF shall play the leading role as regards macroeconomic policy assistance to the former Soviet Union. These countries should take the necessary prior measures, reach agreement on adjustment programs, and start implementing these programs as soon as possible. The support of the industrial world for these adjustment programs, as well as the programs in Central and Eastern Europe, should consist of several types of mutually reinforcing assistance: first, financial support on the basis of a reasonable burden sharing; and second, technical assistance, soundly coordinated and targeted to the areas most in need.

Each and all of us would benefit from free trade. If free trade is lacking, this is at the expense not only of prosperity but also of the ability of countries to adjust to shocks flexibly. It also drastically reduces the effectiveness of financial assistance and creates financial dependence. If the Uruguay Round were to fail, the major participants in the negotiations—the industrial countries including the members of the European Community—would incur a tremendous responsibility. History would not look kindly on them. How could we explain a more or less deliberate failure to our people at home and to the developing countries and the countries in Eastern Europe and the former Soviet Union?

The behavior of many developing countries holds out an example to us. The World Economic Outlook persuasively shows that unilateral—that is, unreciprocated—trade liberalization has brought them major benefits. They, at a far lower level of prosperity, have dared to incur the short-term political risk that we shy away from.

We all know how the devastating policies of the 1930s, of protectionism and isolationism, led the world into tragedy. This was the reason for the establishment of the IMF, the World Bank, and GATT. It is my firm belief—I repeat—that we should cooperate within these international forums to the fullest. Governments should face the issues and for that purpose cooperate with each other and within the multilateral organizations. They should act according to the agreed principles for achieving prosperity for all nations, including our new members, by avoiding actions that are detrimental to all of us.

Let me end by saying that the challenges of today—incompatible policies, the achievement of prosperity where it is lacking, healthy trade relationships, and the protection of the environment—all point to the need for policy coordination and cooperation between governments and within our precious multilateral organizations. If they fail, they only have themselves to blame if electorates do not understand them and people do not understand each other. Let us avoid that failure.

Statement by the Governor of the Fund for Spain—Carlos Solchaga

In the wake of economic developments of the last few months, and especially of the last few weeks, we would not be acting responsibly if we were to climb up to this lectern merely to take part in a stage ritual. Our duty as ministers of economy and as policymakers requires that, today more than ever, we take time to think calmly and carefully about what is happening in the international economy, without unnecessary theatrics, but also without sterile rhetoric or unwarranted optimism.

These events serve to show that the mechanisms for multilateral coordination of economic policy are partially incapable of dealing with the globalized, decontrolled, and liberalized economy that has emerged since the end of the 1980s and the collapse of the Communist system. It is enough to glance at the problems the IMF faces today in ensuring the proper functioning of the international monetary system, or at those faced by the World Bank in reducing poverty and underdevelopment, or at the mired situation of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) to realize that the Fund, the World Bank, and the GATT—the three pillars of postwar prosperity—are not fully discharging their fundamental missions, in spite of the undeniable will and ability of their managements and staffs.

This failure is not the failure of international institutions. Neither is it the failure of international bureaucrats. It is primarily the failure of ourselves, their shareholders and owners. We must not shirk the responsibilities we have in that capacity. On the contrary, we must act decisively to bring about a radical turnaround in the present situation.

Fortunately, it is not necessary to start from nothing to rebuild the mechanisms of international coordination. It is not even necessary to call a new Bretton Woods conference. It would be enough for our institutions to be guided once again by the fundamental principles of equity in the allocation of rights and duties. It would be enough to redefine the rules of operation and decision making in order to promote concerted action and nullify the temptation to yield to individual, destabilizing behaviors. The time has come to cast away once and for all those practices that go against the true spirit of our institutions, even if only because of their demonstrated ineffectiveness in dealing with the complexities of the economic world in which we find ourselves.

Our economic model—according to which ensuring the prosperity of our societies requires the support of political democracy, respect for human rights, and consolidation of the market economy—is today stronger than ever. Authoritarianism, populism, and the stale economic prescriptions of the past lack sufficient substance to occupy the place left vacant by the Communist system. But there they are, threatening to delay our progress toward prosperity, as they have so often done in the course of history.

It is our individual responsibility as political leaders to corner them in each of our countries, to fight them even at a certain cost in electoral terms. This is precisely the greatness of democracy and the reason why our profession—the political profession—is a fundamentally noble endeavor.

But our individual efforts would be of little worth if the multilateral institutional framework—whether it be called GATT, the International Monetary Fund, or the European Monetary System—were to crack and abandon its primary function of ensuring that our actions are mutually consistent. I am confident that the economic history of each of our countries includes sufficient instances to confirm that an integrated world allows no margin for individual decisions that go against the common flow. Our dilemma today is that either we strengthen our regional or international cooperation mechanisms or we abandon our medium-term strategy for stable noninflationary growth in favor of heterodox policies that we know in advance will not be able to create sustained prosperity and well-being.

And we must all be conscious that the pressures for policies that promise immediate prosperity—but that so carefully hide the costs of eliminating their effects—will only continue to mount in coming months. Unemployment in the countries of the Organization for Economic Cooperation and Development (OECD) already exceeds 30 million. In many European countries—not to mention the United States—actual growth rates are now two points below potential. Eastern and Central European countries remain in the hold of the recession that followed from their conversion into market economies, while output and employment losses in the states of the former U.S.S.R. show that delaying reform is also not an effective option.

In fact, only those developing countries that were bold enough to implement structural reforms and apply orthodox financial policies can today exhibit a picture that warrants reasoned optimism. It would be a lamentable paradox if their past and present efforts were to be brought to naught because industrial countries—the same countries that, during the years of the foreign debt crisis, used to state that the best way to help them climb out of their agonizing situation was for them to help themselves by returning to austerity policies—decided to embrace inflationary policies in order to melt away the stocks of debt accumulated by their businesses, households, and governments, in a desperate attempt to set off the next expansionary phase.

In the coming months, our enemies will be low growth, inflation, and the protectionist temptation. It is up to us to make our societies understand that inflation is a tax—not a tax voted on by parliament, but one that also transfers income from some citizens to others. It is up to us to make our societies understand that competitive devaluations do not bring prosperity but higher interest rates instead. It is up to us to make our societies understand that larger government deficits are not an alternative to expenditure cuts and tax increases, but only a way of pushing these decisions back in time. It is up to us to make our societies understand that yielding to the protectionist temptation would impoverish them and would not create new jobs. It is up to us to make our societies understand that the only sure road to prosperity is that of holding firm on our medium-term strategy of sustained growth, exchange rate stability, fiscal consolidation, and market liberalization. It is most certainly up to us to prevent our societies from falling into the old errors of the past.

This is up to us, as finance ministers and central bank governors, and as owners of multilateral institutions that must once again begin to function in a manner consistent with the principles and purposes for which they were founded.

Statement by the Governor of the Fund and the Bank for Ireland—Bertie Ahern, T D.

It is an honor for me to address the Annual Meetings for the first time as Governor for Ireland. At the outset, let me welcome the new member countries that have joined these institutions in the past year.

I represent a small country that has an open economy. Trends in the world economy are of vital importance to us, as we depend on external trade, and we are vulnerable to downturns and recession. It is natural, therefore, that we support efforts to reduce protectionism. We are also anxious to speed up the integration of the world economy and to achieve balanced growth that will respect social values and provide a basis for permanent improvement in living standards.

At last year’s Annual Meetings the general expectation was that a significant upturn in the world economy was imminent. This confidence was misplaced. The projected recovery in 1992, with world output forecast to grow by just over 1 percent, is very modest by previous standards, and there is little prospect of a significant reduction in unemployment. Owing to the large budget imbalances in some countries, and inflationary pressures, real interest rates are persisting at a historically high level. There are also serious tensions in financial and foreign exchange markets.

World Trade

We are still awaiting a breakthrough in the GATT negotiations. While some progress was reported from the Group of Seven discussions in July, there is no settlement in sight of the problems that have plagued this round of discussion. Failure at this point would send a negative signal to world markets leading to increased uncertainty and pressure for more protectionism. I hope that we can secure an early breakthrough so that the earlier expectation of agreement before the end of the year may still be realized.

Following the great political changes of recent years, the opportunity for greater integration of the world economy is better than ever before. We have moved into a period of harmony and political stability, and we should capitalize on this in order to achieve greater prosperity. Economic and social improvement will not happen without encouragement. It requires a concerted effort and a willingness to overcome transition difficulties. Past experience offers conclusive evidence that the route to success is through liberalization of international trade and better international cooperation. The larger and more affluent countries must set a deadline.


I welcome the continuing progress on the implementation of the debt strategy in respect of both official and private creditors. The debt crisis is being reduced gradually to manageable proportions, yet it remains a huge problem for some individual countries. A few middle-income countries have now completed debt-reduction operations and have regained access to the private capital markets. A few short years ago this prospect was not in sight. However, while there has been a general leveling off in growth of debt, there are lingering doubts as to whether some of the severely indebted low-income countries will have the capacity for the foreseeable future to service existing debts. It is time for us to address this problem again in a sympathetic manner and to give more active support for initiatives.

As the debt problem diminishes, the shortage of savings may well prove to be the most severe problem for the world economy in this decade. There has been a gradual but steady decline in saving and investment ratios in the industrial countries since the late 1970s. If this continues, it will lead to a further slowdown in investment and employment and it will also aggravate debt problems. We must avoid this bleak prospect. This requires substantial reductions in fiscal deficits. It is a problem for both industrial and developing countries and, if countries will not act on an individual basis, we must address global solutions in due course. The problem is sometimes aggravated by the pursuit of high interest rate policies and lack of focus on employment. Contrary to the general trend, the savings ratio in my own country is high, but we have not been successful so far in transferring this benefit into productive investment, and we are addressing this problem with urgency.

It is encouraging that so many countries are now implementing economic reform programs with the support of the International Monetary Fund and the World Bank. These programs generally incorporate far-reaching structural reforms. They also provide for education and training which are essential to the proper development of a modern economy. Bad management of national economies hurts the poorest elements of society more than anybody else. While these structural reforms are essential for long-term improvement, they sometimes impose in the shorter term undue hardship on the poorest members of a society. This should be acknowledged in drawing up programs of reform and appropriate measures included to mitigate as far as possible any such hardship.


Despite the occasional successes, poverty continues to gain ground. It is a sobering and discomforting thought that there will be 50 million more poor people in the developing world at the end of the century than in 1985. The list of IDA recipients continues to grow. Poverty is due to many causes, not least irresponsible economic management and the disruption caused by military activities and struggles for political power. Whatever the reasons, the world has a duty to respond urgently and in a sympathetic manner and to continue to fight poverty and injustice in a coordinated manner, no matter how difficult the odds.

Negotiations are continuing on the Tenth Replenishment of IDA, and I was delighted to be able to welcome delegates from the donor countries to Ireland for a negotiating session in July. IDA is a priority because of the brief that it fulfils in reducing poverty. It is now facing additional demands and an increase in the number of claimants. I trust that these realities will be acknowledged in a practical way in arriving at a consensus about the new resources. IDA has achieved considerable success in arresting decline in already impoverished countries, and it is a sad reflection on the overall direction of the world economy that the demands are growing rapidly.

I welcome the improving contacts between IDA and the voluntary groups involved in Third World development. We are proud of the contribution that voluntary groups in Ireland are making in the Third World today. The nongovernmental organizations, as they are called, have been pressing for greater public accountability and more information for local people in respect of World Bank projects. I understand this concern and I too would like to emphasize the importance of involvement of local communities.

Poverty may be relative, but famine and destitution are absolute and require immediate responses. There should be no place in today’s world for widespread famine. The appalling scenes that we all witness on our TV screens from Somalia and other countries are an indictment of our inability or unwillingness to act with sufficient urgency on humanitarian issues.


The ultimate objective of all good development is improvement in the quality of life. Protection of the environment is an intrinsic part of this process. Environmental impact studies are now an accepted element in assessing large investment projects, but, despite this advance, it is evident that environmental degradation is still commonplace. Environmental policy requires a collective international effort, and the World Bank must continue to set the headline because of its role and significance in international investment. Environmental protection adds to the cost of investment in the short term in many instances. Within reasonable limits, we have to accept this as an unavoidable expense just as we have learned to accept safety costs.

Ireland is acknowledged as having a high-quality environment, and, at the domestic level, there is never hesitation in taking steps to protect our reputation. We do not live in isolation, however, and we are deeply concerned about issues such as climate change and nuclear waste disposal that may adversely affect the global environment.

New Members

I welcome membership of the states that comprised the former Soviet Union. The economic crisis in these states has been in the headlines for much of the past year, and they will need substantial financial and technical help for a long time ahead. Both the IMF and the World Bank are actively involved in Central and Eastern Europe in assisting transition to the market economy. It is important that these countries are integrated into the world financial network with the minimum of delay. They continue to face overwhelming difficulties, and it is a unique challenge to our international institutions to overcome the present disorder and to ensure that the transition process is successful. There is no evidence that the support being made available for Central and Eastern Europe is diverting resources away from other developing countries.

I would like, before concluding, to say a few brief words about our own country. We look forward to the greater integration of the European Community as we should gain substantially through more investment and improved opportunities for employment. Better distribution of resources to help the less well-off regions is one of the fundamental principles underlying the Community. Despite the upheaval in currency arrangements in recent weeks, the Community remains the great success story of the latter half of this century, and there are lessons from its evolution that can be applied with good effect in the wider world.

Finally, I want to pay due tribute to the work of the IMF and the World Bank. These two institutions play a decisive part in the orderly development of the world economy. Their perception of their role is constantly developing, and they are called to the rescue in every crisis of an economic nature. It is our duty, as well as our privilege, to ensure that they are properly equipped and adequately financed for their very demanding work.

September 22, 1992.

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