Discussion of Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1992
Statement by the Governor of the Fund and the Bank for Australia—John Dawkins
Along with other Governors I spent Sunday and Monday attending meetings of the Interim Committee and the Development Committee. I participated in the discussions and the preparation of the two communiqués. Yesterday I was privileged to hear three excellent speeches—yours, Mr. Chairman, and those of Mr. Camdessus and Mr. Preston. There was a striking similarity in the conclusions of the Committees and in the messages contained in those speeches.
First, our immediate objectives are clear:
to return the world to sustainable growth in order to create jobs; and
to promote development in order to alleviate poverty.
The achievement of these objectives requires action by governments, both individually and collectively.
The individual action of governments needs to be directed toward reducing structural budget deficits, implementing monetary policies designed to contain inflation, and introducing structural reforms to improve efficiency and increase productivity. Remarkably, the countries that have already achieved most in these areas include many developing nations. The success stories of the 35 countries “in transition” are impressive and encouraging. Equally remarkable, although much more disappointing, is the fact that those countries with much still left to do include many of the industrial nations.
There is little that international organizations can do to influence the individual domestic policy actions of the governments of the industrial world. The IMF through its enforced plans has changed dramatically the policies of those countries that have sought assistance. I find it somewhat ironic, however, that many of the developed countries have not willingly adopted the policies they have urged, and in some cases forced, upon the developing world.
We meet at a time of great instability in the financial markets. There has been the suggestion from some quarters that international action is needed to deal with this instability. But, as these meetings have illustrated, the energies of governments would be better devoted to altering those things that can be influenced; in other words, getting the policy settings and institutional arrangements right.
The conclusion that has to be reached is that the instability in the financial markets has more to do with flawed national policies than it has to do with flawed international financial markets. The financial markets were simply reflecting, at least in part, the failure of major countries to correct their budget imbalances and the absence of meaningful structural change. Unfortunately, the instability affects all countries, not just those whose inaction caused the instability in the first place. Searching for alibis, and criticizing the markets, does not detract from the fundamental requirement to act on structural issues.
When it came to the need for collective action, it was agreed that there were two priority areas:
greater generosity from the richer countries is needed to reverse the diminishing resources available to the World Bank to assist the poorest nations; and
rapid action is required to conclude the Uruguay Round.
But, in ranking the importance of these two issues, it was clear that a freer world trading system was of far more importance to the poorest countries than was the availability of additional development assistance.
Trade liberalization, however, is much more than an issue of development. It seems clear that the absence of progress on the Uruguay Round actually prolonged the world recession. In the last ten years, protectionism has again been on the rise, at least among the industrial countries, and this has impeded the growth in global trade. Trade liberalization is a stimulus to growth, and the clearest evidence of this can be seen in the high economic growth in Asia, itself a function of growing trade within the region.
Had trade liberalization been a global, rather than a regional, phenomenon, global economic growth may have been closer to that experienced in the Asian region. But the lack of progress in the Round has also been a letdown to those developing economies that have unilaterally embarked on structural change, in anticipation of a freer world trading environment. The industrial world has encouraged the developing world to embrace the principle of trade liberalization but, in many cases, has denied its own advice in the conduct of its domestic policy.
A rapid conclusion to the Round would have four primary effects:
by expanding world trade it would speed world recovery;
it would keep faith with those economies partway through the process of economic transition, thus encouraging them to stay the course;
it would constitute the single most important contribution to alleviating poverty in the poorest countries; and
it would demonstrate that international cooperation was still the best way to achieve major progress.
Indeed, so universal was the conviction about the importance of trade liberalization that, had we not had a GATT negotiation in progress, there would have been a unanimous call to launch one. The irony is that having done just that six years ago, the world seems incapable of bringing it to finality.
The world is fortunate to have in the United States an administration still committed to the conclusion of the Uruguay Round despite the rising tide of protectionist sentiment within its domestic constituency. Almost all other members of the GATT are ready to settle.
Only Europe seems unable or unwilling to agree. It seems paralyzed by its preoccupation with the extension of European economic union. And yet, through its reform of the Common Agricultural Policy, Europe has taken an important step toward meeting the requirements of the Dunkel proposal on agriculture.
Rarely does the international community display the unanimity that these meetings have produced. Rarely have the circumstances for progress been so propitious. And rarely would the benefits of action be so widespread and immediate and achieve the stated purposes of the two organizations we all constitute.
All the world’s attention will now be focused on Europe’s willingness to promote world growth and facilitate the alleviation of poverty by quickly agreeing to a reformed, more liberal, world trading environment. Europe—so long a champion of this cause—will be judged harshly if it alone is responsible for scuttling the process in which so much has been invested and for which such high expectations still exist.
Statement by the Governor of the Fund and the Bank for Malaysia—Anwar Ibrahim
A year ago, we were still rather elated with the optimism of “the thresholds of a new era.” Unfortunately, the stark economic realities have become more worrying and the pace of recovery has turned out to be slower than expected. The projections for 1992 have been subjected to several rounds of downward revision—from 2.9 percent at the time we met last year, to slightly above 1 percent. Even then, much of the growth stems from the strong performance of East Asian economies. Growth in Malaysia has averaged almost 9 percent a year over the last four years. The performance of industrial countries, as a group, remains relatively weak. This is further compounded by the recent turmoil in the currency markets that has injected even more uncertainties for the prospects for a stronger recovery and would further aggravate the ailing economies of the developing world.
The decline in world trade occurs at a time when developing countries have carried out macroeconomic stabilization programs and significant structural reforms including trade liberalization measures. It is regrettable that, while developing countries have undertaken painful reform measures, there is no corresponding initiative on the part of industrial countries to assist and ensure free trade. A matter of equal concern is the new issue linking the environment and human rights to trade and investment. While we support the concept of sustainable development and the need for good governance, it should not be used as a ploy to frustrate development efforts and economic growth with the imposition and enforcement of standards and conditions unrelated to trade and investment.
The Uruguay Round of Multilateral Trade Negotiations is at a standstill owing to the intransigence of certain countries. Malaysia would like to see the creation of a balanced package of results in the main areas of negotiations. Subsidizing agricultural production and exports in the industrial countries will not only distort world markets but also erode the incentives in developing countries to build efficient agricultural sectors. The industrial countries, particularly the United States and the European Community, bear a major responsibility to settle their dispute over agricultural subsidies. We must, therefore, ensure that international trade is carried out in an open and competitive system, so that all countries will benefit from access to markets and returns from increasing trade flows.
While it is appropriate to help states in the former U.S.S.R. and Eastern Europe to restructure themselves, the need for effective assistance to the developing countries is equally critical as highlighted by the impact of the prolonged drought in some countries in Africa. Malaysia welcomes the recent initiatives and commitments to the needs of those countries undergoing reforms; however, they should not diminish the flow of financial resources to the developing countries. Financial flows to developing countries in 1991 were already lower in real terms compared to 1990. A deprivation of sufficient external finance, especially to the severely indebted low-income countries and those countries suffering from the impact of natural calamities, will hamper efforts at eradicating poverty and further raising the living standards of the people.
The issue of debt servicing in many developing countries remains critical, particularly as some 26 severely indebted low-income countries had a total debt of $162 billion in 1991, equivalent to 104 percent of their GNP, and their scheduled debt-service payments represented 50 percent of their exports. It is essential, at this stage, to implement appropriate strategies to ease the debt problems of these countries in order to enable them to continue with their developmental efforts.
We are happy to note that the World Bank has reaffirmed its long-standing commitment toward poverty reduction. However, we must take note that the new lending commitments by the IBRD and IDA to developing countries have declined. IBRD loan commitments have in fact, fallen by 7.5 percent, while IDA credits have risen by only 4 percent. Furthermore, as a share of total commitments, allocations to water supply and sewerage, population, health and nutrition, industry, and energy fell compared with the previous year. It is appropriate for the two agencies to study these worrying trends and ensure that appropriate actions are taken to facilitate the implementation of programs and projects that are consistent with developmental objectives.
The Earth Summit in Rio de Janeiro formulated appropriate strategies to ensure that the necessary infrastructure to facilitate the implementation of sustainable development actions is carried out by all countries. The Global Environment Facility has to be restructured, to ensure effective implementation of the programs under Agenda 21. Malaysia, on its part, is in the final stages of formulating a National Policy on Environment.
It is very encouraging to note that the World Bank has started work on private sector assessments, which will form the basis for the Bank to identify priority areas of policy reforms and actions critical to private sector development. Related to this, we would like to see the recent capital increase of IFC not only lead to increased new investments in all regions but also enable IFC to become more specialized in the different sectors of economic development of its developing member countries.
Malaysia pioneered several privatization programs that have been implemented with great success. We have, as part of our liberalization measures and to increase the transfer of resources to the economy, further liberalized our policies toward direct foreign investment. Our guidelines for foreign investment are flexible and allow for a much higher level of foreign ownership and control. The inflow of direct foreign investment has been substantial in response to the liberal policy and the strong economic fundamentals.
The failure of certain major industrial countries to reduce their budgetary and external imbalances has been largely responsible for the current sluggishness of the global economy. Greater surveillance over the policies of these countries is, therefore, necessary. The International Monetary Fund should also be more vigilant in detecting early signs of excesses in industrial countries and more forthcoming in recommending appropriate restraints. In an increasingly interdependent world, policy coordination is a necessity. This is crucial if the world economy is to avoid the destabilizing effects of corrective measures that have to be taken subsequently. At the same time, those developing countries that have undertaken structural adjustment, especially the “early adjusters,” with some success should not, however, be rewarded with penalties and denied access to financial assistance, and where appropriate, some form of aid. Some of these countries have undertaken difficult and costly structural adjustment programs with no financial assistance from multilateral institutions.
On the role of the Fund in providing financial and technical assistance to member countries in need, it is recognized that the Fund’s ability and effectiveness will depend, to a large extent, on the extent of the availability of resources. The required majority vote for consenting to the 50 percent quota increase under the Ninth General Review of Quotas has been reached. We, therefore, stress the urgent need for those countries that have not done so to accept the Third Amendment, so as to give effect to the quota increase that is much needed by the Fund for its financial operations.
While we are concerned with growth, we must never lose sight of the broader objectives of development, which are to continually raise the living standard and to ensure that development is equitable. Our experience in Malaysia shows that it is not an impossible task to have a robust and relatively high growth rate while reducing the level of absolute poverty and glaring income disparities. Our preoccupation with growth should not lead us to ignore other critical political and social facets. We must remind ourselves that recent events amply demonstrate that without political stability and social harmony and continued commitment to ensure socioeconomic justice, we cannot achieve progress and sustainable development.
Statement by the Governor of the Fund and the Bank for Korea—Yong-Man Rhee
It gives me great pleasure to have this opportunity to address the Forty-Seventh Annual Meetings of the International Monetary Fund and the World Bank Group. First of all, I would like to extend a warm welcome to the delegations from new and prospective member countries, the former Soviet states, Switzerland, the Marshall Islands, the Federated States of Micronesia, and San Marino. With their entry, the Bretton Woods institutions have now moved much closer to realizing the dream of the founding fathers: namely, institutions that bring together nations of the world into one family with common goals. However, there remain many nonmember countries that have yet to join us. In particular, we hope that the Democratic People’s Republic of Korea becomes a member by duly carrying out its international obligations.
Concerns for the World Economy
In today’s world economy, we see two contrasting and, in a sense, competing, trends coexisting. One is the march toward globalism and free trade, and the other is the shift toward greater regionalism and protectionism. Recently, however, I have been concerned that the tendency toward the latter seems to be gathering momentum over the former. At this time, allow me to offer a few comments on this latest trend.
First of all, economic blocs may deal a negative impact on other countries by diverting trade from outside to inside the region. In turn, other countries will be encouraged to form their own blocs. Ultimately, this will lead to retaliatory measures against other blocs, thereby disrupting the world trade order.
Second, the trend toward protectionism and regionalism may gather speed if the current Uruguay Round negotiations fail. Therefore, it is time for nations of the world to make mutual concessions with a long-term view for the success of the Round.
Third, in spite of the Rio Declaration, there is a growing tendency among some industrial countries to restrict trade in the name of environmental protection. I am afraid that such a development would aggravate the environmental problem by reducing world trade and retarding economic growth.
Finally, in today’s highly interdependent and multipolar system, closer cooperation among the major industrial countries is a precondition for a stable world economy. Unfortunately, however, we have yet to see satisfactory results in this area.
Policy Directions for the Fund and the Bank
In a rapidly changing world economic order such as this, the roles of the Fund and the Bank are more important than ever. At this juncture, I would like to make the following suggestions on their policy directions.
First, in response to the emerging trends mentioned above, the Fund must strengthen its function of multilateral surveillance and intensify its Article IV consultations. To enhance multilateral surveillance, the Fund must try to improve the quality of policy analysis and to effectively enforce its policy recommendations for individual member countries whose policies are judged inappropriate.
Second, to more effectively support the reform efforts of Central and Eastern European countries, the Fund and the Bank need to maintain closer working relations with other multilateral organizations. It must also be mentioned that new support to the region should not affect in any way the existing assistance to other developing countries. Balanced assistance must be assured between the Central and Eastern European countries and the Asian countries that are moving toward market economies.
My last point concerns the transfer of technologies related to environmental protection. As proposed by Korea and adopted in Agenda 21 at the Rio Summit last June, the international organizations should commercially acquire environmentally sound technologies from the industrial countries and subsequently transfer them to developing countries on a noncommercial basis. I look forward to the Bank’s leading role in this issue.
Korea Duly Carries Out Its International Duties
Turning to the Korean economy, we are continuing the steady course of market opening, not only in trade but also in the services sector. After a few years of trade surplus, we are now faced with a turnaround in the balance of payments to a deficit. Weakened industrial competitiveness and high inflation caused by soaring wages remain as hurdles to overcome. Nonetheless, we see some improvement this year thanks to our economic stabilization policy. Despite the difficult economic situation, Korea continues to provide assistance to developing countries, fulfilling its duties as a member of the international community. Through the Economic Development Cooperation Fund, almost $500 million has been committed since 1987. Among Asia’s so-called newly industrializing economies, Korea contributes the most in concession-type funds through multilateral organizations. I am also pleased to announce on this occasion that the Korean Government will contribute to the Bank’s consultant trust fund, which will facilitate the transfer to developing countries of Korea’s experience and technology gained over the course of development.
Turning to market opening, steady progress over the years has resulted in a liberalization rate of approximately 98 percent for both imports and foreign investment in manufacturing. A wide opening of the financial markets is also being pursued, and, in January this year, the stock market was opened to foreign investors. For a more systematic financial liberalization, we are presently formulating a “Blueprint for Financial Market Opening and Deregulation.” We have even consulted with experts from the Fund and the Bank in this process.
With the end of the cold war, we are now facing a historical opportunity, where joint efforts are called for in pursuit of greater human welfare. To the concern of many, however, we are witnessing growing trends of regionalism and protectionism, which threaten world trade. At this point, we need to remind ourselves of the founding spirit of those who devised the Bretton Woods institutions for global economic prosperity and stability. They recognized that, while protectionism and regionalism may bring individual gains over the short term, they would only serve to suppress the world economy’s growth potential in the long run. It was this recognition and foresight that inspired them to create these institutions.
In closing, therefore, I urge the member countries once again to rekindle the founding spirit and renew the efforts toward mutual cooperation. Moreover, I call upon the advanced nations to set an example in pursuing economic policies conducive to the expansion of world trade and welfare. We must not allow humanity’s past progress to have been in vain.
Statement by the Governor of the Bank for Greece—Stefanos Manos
The prospects for world economic activity next year seem better than those of the recent past. These positive prospects arise from efforts undertaken worldwide. In many developing countries, courageous and persistent adjustment and structural reform efforts are bearing fruit. The experience of a number of countries in Asia and Latin America provides important lessons for other countries undertaking economic reforms. The key to success has proven to be fiscal consolidation, reinforcement of market forces, and the removal of obstacles to the efficient allocation of resources. Appropriate policy adjustments have also enhanced growth prospects in industrial countries. However, the pace of activity remains uneven and the recovery appears fragile. Fiscal deficits remain high in some major industrial countries, putting pressure on interest rates and global savings while undermining exchange rate stability and world growth. Growth prospects would be enhanced by a more coordinated policy implementation by the industrial countries, by successful reform efforts in the former centrally planned economies, and by a quick and successful conclusion of the Uruguay Round.
In the European Community (EC), the drive toward economic and monetary union provides a framework for economic policy in member states. With the completion of the internal market program this year, the focus now shifts to the achievement of the final stage of economic and monetary union (EMU). No other monetary arrangement can offer the stability associated with a single currency. It is our responsibility to take all necessary steps to make it happen.
To achieve this objective, continued progress must be made toward economic and monetary convergence based on the criteria and the time frame laid out in the Maastricht Treaty. Reducing public deficits, containing inflationary pressures, and removing structural impediments to growth would reduce tensions in foreign exchange markets and create scope for a reduction in real interest rates that would allow for increased investment and growth. For the least prosperous member states, the timely conclusion of the negotiations for the increase in the Community’s structural funds, along the lines proposed by President Delors, would help sustain convergence efforts and thus reinforce growth prospects for the Community as a whole.
The Greek economy is undergoing rapid and accelerating change. The main policy objectives are to achieve sustainably low inflation and high growth. Our means of achieving these objectives are fiscal consolidation, market liberalization, privatization, and structural reform.
The fiscal deficit was halved over the two-year period to 1992 through expenditure restraint and discretionary tax measures. Fiscal consolidation has been accompanied by nonaccommodating monetary and exchange rate policies. These policies have contributed to significant improvements in the balance of payments and in inflation performance. The improvements have occurred despite the removal of price and exchange controls as well as significant adjustments in administered prices and indirect taxes, and despite the need to maintain defense spending at levels twice as high as the NATO average.
In parallel, markets are being rapidly deregulated, state-owned enterprises are being privatized, and administrative barriers to competition are being removed. This year alone four key reforms were adopted. A new regulatory framework for telecommunications has been established, which provides the basis for private sector participation in this key sector. A new banking law was introduced, which increases transparency, strengthens prudential regulation, and reduces state intervention in the banking system; it also provides for an elimination of monetary financing by the end of 1993. A fundamental reform of the social security system was voted into law last week. The new law rationalizes the system and ensures its financial viability over the next twenty years. Finally, a major tax reform sharply reduced marginal tax rates and included a number of provisions for the reduction of tax evasion and tax avoidance. These reforms, together with a number of other measures and actions to streamline the public sector, will lead to important efficiency gains. We also attach great importance to large infrastructure projects. These projects, undertaken largely with EC and private sector funding, will increase productivity and the return on private investment.
The policies we are pursuing aim to secure the full participation of Greece in the European process of economic and monetary union. But the success of the efforts of any individual country depends heavily on the actions of each one of us. The goal we are all pursuing is durable, noninflationary growth. The pursuit of this goal will be greatly facilitated through international policy coordination and the establishment of international and regional institutions that provide a stable and predictable framework for world trade and financial flows. The Maastricht Treaty provides such a framework, although recent tensions in foreign exchange markets underscore the importance of avoiding divergent policies throughout the world. The current round of world trade negotiations aims to provide such a framework as well. A similar international framework must be developed for the coordination of environmental policies, in which area, despite recent progress, none of us is doing nearly enough. The coordinated actions of all of us are critical for the achievement of our common goals.
Statement by the Governor of the Fund and the Bank for the United States—Nicholas F. Brady
I want to welcome the more than 20 countries that have become members of the IMF and the World Bank over the past year, including the Russian Federation, Ukraine, and Switzerland. The Fund and the Bank have at long last become truly universal institutions.
We are at the threshold of a new era that we have been seeking for more than forty years. The enormous economic and political change of the last four years has brought us close to our common dream of global peace and prosperity.
At the start of the cold war fifty years ago, Dwight Eisenhower said, “A world in arms is not spending money alone. It is spending the sweat of laborers, the genius of its scientists, the hopes of its children.” We are free of these burdens of the cold war struggle, and we are witnessing the dawn of a new era of human achievement.
The competition between political philosophies and economic ideas is over. Those who put their faith in the individual and the market have won. The benefit will be a world of greater freedom, faster growth, higher productivity, more jobs, and a better life.
The Triumph of Market Principles
Countries all over the world are demonstrating their commitment to market principles and have made sweeping changes in their policies. We are beginning to see tangible results. The triumph of market principles is perhaps most dramatically demonstrated by events in the former Soviet Union and Eastern Europe. The people of these countries have made a clear choice not just to reform central planning, but to replace it as rapidly as possible with market systems. Their conviction is strong enough to make them willing to undergo the enormous hardships arising from complete economic transformation.
There have been setbacks along the way and that is to be expected given the magnitude of the task. The progress, however, has been impressive. In the space of less than one year, Russia has freed prices, cut its fiscal deficit, liberalized its exchange rate, and is about to embark on an ambitious privatization program. Estonia and Latvia have already reached agreement on Fund-supported adjustment programs. In Eastern Europe, Poland is successfully implementing comprehensive reforms, Hungary is attracting extensive foreign investment, and the Czech and Slovak Federal Republic has made major progress on stabilization and privatization. These countries and others have earned our support as they continue on the road to stabilization, reform, and growth.
In the developing countries, sound market-based policies and commercial bank debt reduction are revitalizing economies, particularly in Latin America. The fruits of these actions are evident. Growth in several countries now ranges from 4 percent to 6 percent, inflation has plummeted, private capital flows have soared, and access to world capital markets is being restored.
Most major debtor nations have reached debt-reduction or refinancing agreements with their commercial banks. These agreements cover 92 percent, or some $240 billion, of their outstanding commercial bank debt. And, for the major debtors and the banking system, it is no exaggeration to say that the debt crisis of the 1980s is largely over. This is an impressive achievement.
This revitalization has not touched every corner of the world. An important lesson for these developing countries is that debt reduction alone cannot produce dramatically improved economic performance. Sound market-based policies, the key to sustained growth, are an integral part of the solution.
Building a Stronger Tomorrow
Our successes in recent years make it all the more imperative that we develop a strong strategy for sustaining reform and raising global living standards. Let me begin with the role of the major industrial countries. Our first priority must be to resume strong growth. For when growth occurs, the world’s money is attracted to projects that produce jobs, thereby reducing poverty and creating a higher standard of living. On the other hand, when interest rates remain high for whatever reason, the returns on investment remain sterile in the banking system. The choice is clear.
Reforming countries also need trade and investment links with growing industrial economies to be able to translate their policy improvements into growth. And we can hardly expect reforming countries to maintain their commitment to market-based systems if our own economies are failing to perform.
The recovery is under way. We are determined, however, to strengthen that recovery. Interest rates have been reduced in most countries, including the first cut in German interest rates in five years. Japan has introduced the largest fiscal stimulus package in its history, which will increase domestic growth and the demand for imports.
In the United States, we have experienced five quarters of growth. Inflation and interest rates have been reduced to the lowest level in 25 years. We are bringing our budget deficits down. The President has proposed an Agenda for American Renewal to increase our long-term growth potential.
The major industrial countries are committed to strengthening world growth. We stand ready to take appropriate additional actions to achieve sustained growth and greater currency stability.
Strengthening Arrangements for Economic Policy Coordination
The present world economy highlights the need to strengthen our economic policy coordination efforts. The basic premise of policy coordination remains valid. A sound world economy requires that the major countries pursue policies that are consistent with our overall objectives and produce a convergence of performance at a higher level of growth. A stable international monetary system is also essential for success.
Policy coordination has worked, sometimes with fanfare, sometimes quietly. In the 1980s, it helped to reduce the wide divergence in economic policies and performance. As a result, our economies prospered, price stability was restored, external imbalances declined, and exchange rates were more stable.
Recently, our economic performance has again diverged, creating new uncertainties. We have had to seek a new consensus, this time on the priority for growth. That consensus was clear at Munich, and concrete steps to enhance growth have since been taken.
However, the world has changed significantly since the coordination process was developed. Capital markets have grown dramatically in size and complexity. Daily transactions in the foreign exchange market are approaching $1 trillion. This is roughly double the total reserves of the major industrial countries and well beyond the resources governments can bring to bear in the markets. The channels through which capital moves have become more diverse with the creation of new derivative products, and the number of market participants has grown. The speed of international transactions has increased dramatically with the introduction of new technology. New ways of cooperating must be developed to fit the changed circumstances of this new world.
It is for this reason that President Bush has called on the world to further strengthen our international economic and monetary systems. There is a clear need for better understanding of the changing face of financial markets and the implications for the international monetary system.
Therefore, as Chairman of the Group of Ten, I am proposing that the Group of Ten undertake an examination of global capital flows, their size and movements, and their implications for the international monetary system. This analysis will complement the work of the IMF and could serve as the basis for Group of Seven Finance Ministers to consider proposals and recommendations to fulfill the mandate of the heads of state and government to strengthen their cooperation and to intensify their efforts to remove obstacles to growth.
Extending Market Principles
Market-based principles must also be extended throughout and across nations to build a better tomorrow. In our own countries, we must intensify efforts to achieve structural reforms. These reforms will reduce obstacles to growth, increase efficiency and productivity, and create greater economic dynamism and competition.
In the past few years, more and more countries have recognized the importance of trade liberalization. They understand that the rising tide of trade lifts the economic growth of all countries.
Let me say unequivocally that the United States remains fully committed to the multilateral trading system. A rapid and successful conclusion of the Uruguay Round is our top trade policy priority. We cannot afford to lose the gains from increased trade and investment that this confidence-building agreement would create.
Role of the International Financial Institutions
The international financial institutions have been central to all of this progress. Over more than forty years, we have entrusted them with the job of guiding and supporting the course of reform in widely different economies around the globe. It is clear that their success is reflected in their universal membership.
As important as the international financial institutions have been, we will expect no less of them in the future. They must remain at the center of the effort to spread market principles, support the implementation of sound and effective economic policies, and promote world growth. They are at the center of the world’s efforts to help transform the countries of Eastern Europe and the former Soviet Union.
Adequate resources are essential for this job. The United States remains strongly committed to passage of legislation providing for the IMF quota increase. We are also committed to an IDA-10 Replenishment that will support the environmentally sustainable development efforts of the poorest, least creditworthy countries. Progress also requires further attention to ensuring that all parts of society participate in growth.
We must not let the problems of the moment blind us to the opportunities now before us. Our challenge is to overcome the problems and to seize this once-in-a-lifetime opportunity to build a brighter future. Our goal must be an integrated global market economy that produces growth and prosperity, as well as peace and democracy, shared by all.
Today begins a new effort to build a better world. A year from now, let the world look back and say that we made a good beginning.
Statement by the Governor of the Fund and the Bank for India—Manmohan Singh
Mr. Chairman, I congratulate you on your election as Chairman of the Annual Meetings for 1992.1 would also like to join my fellow Governors in welcoming the new members whose entry into our midst makes the Bretton Woods institutions truly universal.
We meet at a time when momentous changes are taking place in the world. Old rivalries have vanished. Rigid dogmas have withered away. The cold war has ended. There is a spirit of experimentation everywhere. These changes present fresh opportunities for growth and progress. They also pose new challenges for both developed and developing countries. Our task is to realize the dividends of peace in a manner that would reduce poverty, improve the prospect for growth for developing countries, and ensure protection of the environment.
The immediate global prospects provide little cheer. The economic recovery forecast when we met last year in Bangkok has remained elusive. Growth remains slow and uneven. Exchange rate volatility in major industrial countries has added to instability. The Uruguay Round has yet to be successfully concluded. Protectionism is on the increase in industrial countries.
These adverse external developments are gathering momentum precisely at a time when most developing countries have embarked on bold measures of reform aimed at restructuring their economies and opening up to forces of competition, both domestic and external. The wave of economic reforms that is sweeping both the developing world and the erstwhile centrally planned economies offers the hope of a sustained economic expansion benefiting four fifths of humanity. It deserves to be backed by timely and adequate external support.
India too is changing with the world. We are re-examining our problems and looking for new solutions, strengthening what has worked and jettisoning what has not. We too are fashioning new responses to new challenges, learning from the past and from the experience of others.
In the past fifteen months we have converted an unprecedented economic crisis into an exciting opportunity. We have embarked on a bold program of economic stabilization and reform. We have reduced fiscal deficits through determined action. We have dismantled the extensive system of industrial licensing that used to fetter the creative energies of our people. We are restructuring the public sector by creating a more competitive regime for public sector units. We are divesting a part of equity in the public sector to the public at large in order to raise noninflationary resources for the government budget and to give the public an involvement and a stake in the functioning of public sector units. We have restructured our trade policy to remove most licensing and quantitative restrictions on foreign trade, and we have set ourselves the goal of moving to full convertibility on the trade account as soon as possible. We are actively seeking foreign investment. We are also devising new instrumentalities to ensure that the poor and the weaker sections of our society are insulated as much as possible from the burden of adjustment. We propose to strengthen our efforts at overcoming the ancient scourge of poverty, which has burdened so many of our people for so long.
The initial results of this program are encouraging. Inflation is down from 17 percent a year ago to less than 8 percent today. Foreign exchange reserves have increased impressively. The response from foreign investors is encouraging. The real economy is also beginning to pick up. I would like to thank the management of the Fund and the Bank for the support they have provided for our adjustment-cum-structural-reform effort. I have no doubt that after an initial adjustment period the program will launch the economy onto a higher sustainable growth path of 6 percent to 7 percent a year.
The task of bringing about change in a large and pluralistic democracy wedded to the traditions of a free press and free speech is not easy. The democratic process is often slow, but it has the great merit of generating a broad consensus before changes are made. In the changes we are making, we have the support of the mass of our people. This renders the reforms both durable and irreversible.
I believe that the success of our effort is of considerable importance to the world. Sustained growth in a country of 850 million people will expand the demand for goods and services worldwide, especially as we open up our economy and integrate with the world. What is true of India is equally true of the developing world as a whole. At a time when other impulses of world growth are weak, the growth of the developing countries offers a most promising source for imparting the much-needed expansionary impetus to the global economy.
It is a revolutionary period in history. Nations the world over are struggling to achieve freedom from want and deprivation and to realize the aspirations of their people for a better life. The international community must act in concert to ensure that the promise of the post-cold-war world is not belied. For the poor countries, it means that external resources and technology needed to support economic changes are not held back, that freer access to developed country markets is not denied, that a truly cooperative effort is made to protect the environment without penalizing development, and that multilateralism begins to denote a new culture of participation in decision making that involves each one of us. This will happen only if the industrial countries work together with the developing countries to promote growth and stability in the global economy. A new political order of peace and security cannot be built without a supportive international economic environment. We have a long history of international cooperation for development. But a qualitative change is needed to bring our institutions and policies in tune with the compulsions of the changing time. We must bend all our energies to this task.
Statement by the Governor of the Bank for the Islamic Republic of Iran—Mohsen Noorbakhsh
At the outset, I would like to welcome the new members, the states of the former Soviet Union, the Marshall Islands, and Switzerland, to the Bretton Woods institutions. With the entrance of the Russian Federation and Switzerland, the relative position of developing countries on the Executive Boards of the two institutions has deteriorated. Nonetheless, we support the decision to increase the size of the Executive Boards of the Fund and the Bank to accommodate the new memberships while preserving the representation of the developing countries. The responsibilities of the IMF and the World Bank for a smooth functioning and equitable international economic order have become even more crucial now than any time in the past. The recent world events have further strengthened the necessity of symmetric surveillance and the catalytic role of the Fund, as well as the development assistance programs of the Bank.
Despite progress in a number of countries, the economic situation of the developing countries in general remains precarious and worrisome owing to a multitude of factors. Trade barriers and protectionist measures adopted by the industrial countries, external debt repayment difficulties, tight capital market conditions, and the shortage of sufficient balance of payments support are some of these reasons.
The lack of progress in the Uruguay Round is entirely unsatisfactory. While multilateral trade negotiations proceed at a very slow pace, regional trade blocs are spreading, thus increasing the risk of further expansion of trade barriers. The Uruguay Round of trade negotiations must succeed, otherwise even the present multilateral trade arrangements and the economic growth prospects of many countries could be in jeopardy.
A positive development that we fully support is the extension of the ESAF Trust for an additional year. Two additional steps should be taken to enhance the medium-term outlook for the developing countries, particularly those pursuing adjustment programs. First, there is a need for a substantial increase in IDA resources not only to support the expanded list of IDA users, but also to create a special fund for the protection of the environment. Second, given the present financial difficulties of developing countries in forming sufficient reserves, a new and sizable SDR allocation is needed to improve the growth prospects of the developing countries.
Another important issue facing the world community is that of the environment, which cannot be separated from the fundamental issue of widespread poverty in the developing world. While the industrial countries should assume a greater responsibility for their past contributions to the environmental degradation, their corrective efforts should not come at the expense of developing countries’ exports.
Today, we are witnessing a human tragedy of enormous proportions in Africa, Bosnia-Herzegovina, and Afghanistan. The inadequate and slow response of the international community is likely to prolong these tragedies. We strongly urge expeditious and effective action to eliminate the causes and consequences of these events.
At this point, I would like to take this opportunity to review briefly the recent economic developments in my own country. In our continuing efforts at adjustment and reform, we have prepared the ground for exchange rate unification; reduced liquidity through tight fiscal and monetary policies; deregulated and liberalized production, distribution, and the price system; further encouraged private sector activities and curtailed the scope of the public sector; dismantled many trade barriers; and improved the payments system.
Our stabilization and adjustment efforts have resulted in the growth of real GDP by 9.9 percent in 1991, surpassing the plan projection by more than 3 percent. In fact, in the last two years of the current Five-Year Plan, real GDP has increased at an annual average rate of 11 percent compared with the average plan target of 8 percent.
Efforts in the area of government finance have resulted in improvement in the structure of the budget and a more disciplined fiscal policy. Government revenues last year increased by 23 percent mainly as a result of an expansion of 63 percent in tax collection, exceeding by a substantial margin the plan projection of 16.5 percent. Revenue mobilization and expenditure containment have resulted in a lowering of the budget deficit to 2.4 percent of GDP in 1991 from 8.7 percent in 1989.
In the monetary area, the reduced reliance of the public sector on bank credit, combined with efforts to support the expanding role of the private sector, has created a better balance in the distribution of credit between public and nonpublic sectors of the economy. This is evidenced by the increase in the share of bank credit allocated to the nongovernment sector from 36 percent in 1988 to 51 percent in 1991.
The ongoing structural reforms in the areas of trade and payments have resulted in an 81 percent increase in non-oil exports in 1991. At the same time, imports increased by 31 percent in 1991, mainly due to the substantial and growing share of capital goods imports. In fact, a large portion of the capital goods imports envisaged in the period of the Five-Year Plan has already materialized in the first two years of the current plan. It is expected that during the remainder of the plan period the coming on stream of new production facilities through the upgrading of capital stock will contribute increasingly to the foreign exchange savings in the economy. To summarize, we expect that the implementation of our economic policies will lead to stability and sustainable growth in the medium term.
In conclusion, I would like to take this opportunity to wish the world community peace and prosperity, which, I believe, can come only through greater cooperation and mutual understanding within the international financial community.
Statement by the Governor of the Fund for Oman—Ahmed Abdul Nabi Macki
It is a great honor for me to speak to this distinguished gathering on behalf of the Arab Governors of the International Monetary Fund and the World Bank. I take this opportunity to warmly welcome the new members to the Bretton Woods institutions. As many speakers have already pointed out, this addition to the membership has turned our two institutions into truly universal ones. If this brings additional prestige for the two institutions, no doubt it also means yet greater responsibilities and bigger challenges.
The importance of international economic cooperation has undoubtedly grown over the years with the increase in global economic interdependence. The historical changes currently under way in the economies of Central and Eastern Europe and the states of the former U.S.S.R., together with the structural reorientation that many developing countries have been undergoing in recent years, make the need for international cooperation much greater. Unfortunately, in some critical areas, especially international trade, cooperation has not been satisfactory. Progress in reducing—let alone removing—barriers has been disappointing to say the least. The major industrial countries have a special responsibility in this regard. It is indeed ironic that just when developing countries and former centrally planned economies are moving to adopt market-based systems and opening up their economies, trade barriers that impede the most efficient allocation of resources at the international level are being erected. It is also unfortunate that some industrial countries are not following through on their commitment to grant developing country exports a preferential status without discrimination. While the proliferation of regional trading blocs may not necessarily be in conflict with trade liberalization as such, there is a legitimate concern that such blocs may become a poor substitute for a truly global trading framework. A successful conclusion of the GATT negotiations should remain a priority goal.
Global macroeconomic management is another area where a strengthening of international coordination is needed. The continuing slowdown in economic activity in the industrial world and the recent turmoil in currency markets have intensified this need. The persistence of high real long-term interest rates in a number of major industrial countries is a hindrance to a stronger recovery. The failure to reduce large fiscal deficits during the long expansion of the 1980s is, in a sense, a failure of policy coordination. In this connection, I would like to welcome the recent policy moves by Japan, which, we believe, are justified from domestic as well as international standpoints.
The economic performance of the developing countries as a group continues to improve, thanks to their persistent reform and development efforts as well as the easing of the debt burden resulting from debt relief and developments in international interest rates. While we strongly welcome the improved prospects for developing countries as a group, this positive outlook does not apply to all developing countries. The low-income countries, particularly in Africa, continue to face exceptional hardships that are being compounded by natural disasters. In addition, the efforts of a number of lower-middle-income countries to achieve external viability continue to be thwarted by unsustainable levels of external indebtedness. For these countries, it is important that the Munich initiative to deal with their special predicament be followed through by the Paris Club soon. There is also a need for tax and regulatory provisions in creditor countries to be better aligned with the current orientation of the debt strategy. Let me add that the current country classification scheme under the Basle guidelines on capital adequacy contains an element of discrimination against developing countries that needs to be corrected.
The states of the former U.S.S.R. face a particularly difficult process of transition. While it is inevitable that output losses will be very high as structural change takes place, the implications for employment and for the sustainability of reforms must be kept in mind. The design and sequencing of reform policies should aim at mitigating the short-term costs of transition to the extent possible.
The Arab countries represent a wide cross section of the developing world and face similar problems and challenges. Among us are low-income countries struggling to reverse the sharp decline in living standards that they experienced during the past decade. The tragic situation in Somalia does not require elaboration. Among us also are indebted middle-income countries that have gone a long way toward adjusting their economies and putting them on a path of sustainable noninflationary growth. For their part, the oil exporting countries continue their efforts toward economic diversification while providing concessional and unconditional assistance to other developing countries, amounting to about $9 billion in 1990–91, despite the strain in their external positions following the Gulf crisis.
We find it particularly unfortunate that while the production and pricing policies of the oil exporting countries aim at fostering stability in the oil market, consideration is being given in the major importing markets in Europe to a further increase in the excessive and distortive taxation of oil and oil products. This, together with the barriers facing petrochemical exports, is a stark example of policies that impede efficiency in global resource allocation. Moreover, and as Arab Governors have indicated in the past, we continue to believe that all countries, and reserve currency countries in particular, should refrain from practices that impede international trade and capital movements or interfere with the working of the international payments system.
Two years ago our region witnessed a major crisis that proved very costly, materially and otherwise. Since the abatement of the Gulf crisis, our countries have, by and large, succeeded in restoring normal economic life and in re-establishing confidence, domestically and abroad.
As I stated at the outset, the IMF faces a particularly challenging task in the period ahead. In our view, a major challenge is to be able to meet the new responsibilities in the former U.S.S.R. and Eastern Europe without adversely affecting the Quality or level of its services to the rest of the membership.
We continue to believe that financing is an important element in the effectiveness of the Fund’s role. It is, therefore, our hope that the ninth quota increase can become effective soon. We are also of the view that a new SDR allocation would be fully justified on the basis of the criteria and objectives set out in the Articles of Agreement.
One of the IMF’s sources of strength is its ability to speedily adapt to the changes in the global environment and the needs associated with those changes. A measure of flexibility and pragmatism is essential if the IMF is to respond effectively to the diverse circumstances of members as the recent experience with the Russian Federation has shown.
Like the IMF, the World Bank Group has undertaken additional responsibilities in relation to the new members in guiding the process of transformation to market economies. There are also major implications for the Bank arising out of the mounting interest in environmental operations, especially following the Earth Summit in Rio de Janeiro. We commend the efforts of the World Bank Group management in adapting the institution to shoulder these new tasks. We also welcome the greater attention now being given to improving the implementation capacity of borrowing countries and ensuring that operations and programs reflect specific country circumstances.
A major challenge the World Bank Group now needs to address is how to perform the new tasks without deviating from the central objective that has been adopted in the past years—that is, the achievement of sustainable growth and the reduction of poverty. In this connection, we welcome the commitment that has been reiterated by Bank management to this objective. The greater attention now given to environmental operations and efforts to activate the private sector is consistent with this objective, and we welcome the policies adopted by the Executive Directors and the activities undertaken by the World Bank Group in this connection.
The World Bank Group activities in the past year have witnessed a welcome expansion in IDA credit, IFC investments, and MIGA guarantees. Commitments by the IBRD, however, have declined from the previous year’s level and fell short of the year’s target. Although we understand the special factors that led to this lessening of lending activity, which also affected the Arab members, we hope that this fiscal year will see an increase in lending, especially in view of the substantial increase in demand for the Bank’s services as indicated in Bank documentation. We look forward to more attention being given to the lower-income countries, including the Asian states of the former Soviet Union. We also expect that adequate attention will be given to human resource development in developing countries.
The Arab countries provide vast opportunities for expanding the activities of the World Bank Group. A large number of them have endured the damaging impact of regional and global developments and have pursued serious programs for economic restructuring. In this direction, we think that consideration might usefully be given to operations having a broad regional dimension that may benefit a large group of Arab countries and may even be more viable because of their regional coverage. We also wish to point out the case of several countries that have suffered the impact of conflicts, of both foreign and domestic origin. These members are in dire need of international help if they are to overcome their severe difficulties. Many countries in various parts of the world have undergone similar experiences, and we think the Bank and the Fund should adapt their approaches to deal with these special conditions.
The new global challenges and the traditional tasks of ensuring economic growth and reducing poverty will certainly require an increased volume of external resources. This is the main message of the President of the Bank to the Development Committee and the main topic of the Committee’s deliberation on Monday. Unfortunately, however, the end of the cold war, the adoption by many countries, including Arab countries, of strong adjustment programs, and the shift toward market economies have not yet led to any meaningful increase in the transfer of resources. As we all know, the flow of net real resources has virtually stagnated since the mid-1980s, and the share of official assistance in the GDP of industrial countries has remained well below the widely endorsed objective of 0.7 percent.
The budgetary constraints of major donors and the weakening public support for foreign assistance have contributed to the stagnation of resource flows. Political leadership in the industrial countries, however, should mobilize the necessary political will to achieve a more effective contribution to resource transfer, especially when the average share of their foreign assistance in budgetary expenditures still remains very small. The most urgent area where extra effort is now needed is in reaching an agreement on IDA replenishment at least equal to IDA-9 in real terms.
Finally, we welcome the efforts of the World Bank Group to promote private investment in developing countries. We recommend in particular the excellent achievements of IFC and the growing role of MIGA. We also welcome the preparation of the Legal Framework for the Treatment of Foreign Investment that has just been endorsed by the Development Committee. We hope that this will contribute to the further evolution of foreign investment legislation, and help provide a more conducive environment for the flow of foreign direct investment to developing countries.
Statement by the Governor of the Bank for Iceland—Jon Sigurdsson
On behalf of the five Nordic countries, Denmark, Finland, Iceland, Norway, and Sweden, I want to extend a warm welcome to all the new members of the Bank. With its enlarged membership, the World Bank has become a truly global institution. This also means that the Bank faces an increasingly complex and challenging task in meeting the diverse demands of a greater variety of countries.
Many of the new member countries have recently begun the difficult transition to market systems. This offers a great economic potential, but it can only be realized if strong adjustment efforts are undertaken. A favorable climate for private investment has to be created. To achieve sustainable economic growth, the new nations must be integrated into the international monetary, financial, and trade systems.
The Bank is, at present, facing demand for support in fields where it has limited experience. In assisting the new nations of the former Soviet Union, the Bank and the International Monetary Fund should take a leading role in coordination with other institutions—not least, the EBRD, UNDP, the EC, and the OECD—as well as individual member states. The new member countries need substantial financial support if they are to succeed in reversing the economic crisis and to start a sustainable process of growth. Consultative groups have to be established to help mobilize resources. The Nordic countries welcome the declaration by President Preston that the Bank’s own lending to these countries will not be at the expense of its lending to traditional borrowers.
There is also an urgent need for the Bank’s expertise in the fields of environment and energy efficiency. The Nordic countries support a prominent role for the Bank in assisting in the formulation of an overall energy strategy in these countries. This would give the Bank a unique opportunity to contribute to international efforts toward decreasing the extent to which the states of the former Soviet Union depend on a number of nuclear power plants that do not meet international safety standards. The Bank should play an active, analytical role in this task, but the EBRD should coordinate the financing.
It is encouraging that all three Baltic states, Estonia, Latvia, and Lithuania, have already negotiated stand-by arrangements with the Fund and are now establishing full-fledged reform programs. It is essential that creditors and donors meet the related financial requirements in those programs as soon as possible to ease the heavy burden of transition.
The transformation of the previously centrally planned economies of Central and Eastern Europe and the former Soviet Union to market economies, in a sense, revives the original role of the Bank to help in the reconstruction of Europe. Bearing in mind that the Bank already had a full agenda as a development institution beforehand, this is a demanding task.
These meetings are the first major gathering of the international community since the Earth Summit in Rio. There is an urgent need to follow up on the progress made in Rio, and to confirm our commitment to the importance of growth, poverty reduction, and environmental protection. I look forward to a presentation of the implications for the Bank of Agenda 21. It is essential for the Bank to define its role in the follow-up to the Rio conference, and carry out its part in careful coordination with the UN agencies. It is important that the Bank’s progressive profile in environmental issues be reflected in all its activities, and that a plan be presented for implementing the recommendations made in this year’s World Development Report.
The Global Environment Facility (GEF) is a flexible and innovative mechanism that has been made operational in a short period of time. I am pleased to note the increasing interest in participation shown by developing countries. I agree that it should continue beyond the pilot phase. A replenishment of the GEF will have to be based on fair burden sharing, and our work on the future governance of the GEF should, among other things, aim at establishing a decision-making process that is independent from the governing bodies of the three implementing agencies.
IDA will be the major multilateral financing mechanism for national environmental measures in the poorest countries. Noting that IDA deputies have agreed on the importance of integrating such measures into the Association’s regular work, I trust this position rests on the understanding in the Rio document, and in the statement to the delegates by President Preston, that additional funding will be needed.
The poorest countries continue to need official development assistance (ODA). At the Rio conference, there was consensus that the volume has to be increased. In the preparation for the conference, the Nordic countries presented a proposal that the donors set up a schedule for reaching the 0.7 percent target for ODA by the year 2000, and that countries that have not yet reached half of this target should take measures to do so as soon as possible, and at the latest by 1997. It is indeed welcome that this proposal resulted in commitments by some major countries attending the conference in Rio.
IDA remains the main channel for concessional financing. It has proved an efficient instrument with the capacity to combine financial aid with policy advice and technical assistance thereby supporting economic and social development in the poorest countries. IDA must be able to continue to play this crucial role. The demands on IDA have grown. Population growth and the increasing number of eligible countries accentuate the need for a substantial increase in real terms. Meeting this need should be the objective of the replenishment. Such an outcome is contingent upon fair burden sharing.
Severe drought has created an emergency situation in large parts of Africa. This serious situation calls for strong action, and I urge all member countries to contribute to emergency assistance. I also urge the recipients involved, and their neighboring countries, to promote the easier distribution of such assistance. The Bank faces a special challenge in identifying lines of action that have both an effect on the immediate desperate needs, and also underpin the countries’ long-term development efforts. In this context, the ongoing efforts of the Bank and the UN agencies to coordinate their activities in southern Africa could serve as an example worth following.
To meet all these demands on the Bank’s resources, every possible means to use resources more effectively must be explored, and the quality of World Bank loans must be safeguarded. The ultimate indicator of success is how the support contributes to alleviating poverty—the Bank’s main objective. Let me underline the key factors behind high-quality lending and successful implementation.
To be effective, any development strategy must be based on developing human potential. We must invest in people. The human resource development strategy rests on three strands: primary education, participation of women, and health improvement. In addition, population policy and family planning are important to reduce poverty.
Effective lending implies that the borrowing country and the Bank together create the necessary conditions for successful implementation of projects. Macroeconomic stabilization and structural reform are of fundamental importance for the Bank’s lending activities to yield the desired results. It is particularly encouraging to note the positive outlook for economic growth in many developing countries in 1992 and 1993. The economic improvements are closely linked to the implementation of sound Bank- and Fund-supported economic adjustment and structural policies.
Consequently, the Bank has a central role to play, not only as provider and catalyst of financing but also as policy adviser and capacity builder. The private sector is, and will be, important for development. It is a very important task for the Bank to help countries create the necessary enabling environment. A prerequisite for a strong and dynamic private sector is a well-functioning and efficient public sector.
It is crucial that the Bank use its instruments for supervision and evaluation in such a way that observations during the project cycle—the feedback—can influence the ongoing implementation. I therefore look forward to the conclusions of the Task Force on Portfolio Management established by President Preston. More could also be done with regard to coordination, both to improve effectiveness and to mobilize resources. The Special Program of Assistance for Africa offers a good example. Coordination could, however, be further improved between all players—including the nongovernmental organizations.
The importance of technical assistance and capacity building cannot be overestimated. More use of local experts would strengthen the countries’ capacity in the longer term. The Bank needs to establish a more comprehensive policy for its technical assistance program with regard to the use of experts and financing. There is also a need for improved coordination between the Bank and the relevant UN agencies.
For successful implementation of projects and programs, it is necessary to have full commitment from the authorities and acceptance from affected population groups. Programs should be tailored to the circumstances of each borrowing country and should take into account any adverse effect that adjustment might have on vulnerable population groups. Local participation should be encouraged. The Nordic countries believe that democracy facilitates genuine sharing in development programs. Good governance is also needed to foster effective and efficient use of scarce resources for development spending. In this regard, it is essential to consider carefully not only the volume, but also the composition of public expenditure. A particularly difficult question is excessive military spending—an issue we must deal with in a constructive manner.
To sum up, the World Bank is, at present, facing greater and more complex demands than ever before. The problems are daunting, but as Secretary Brady reminded us yesterday, it is better to light a candle than to curse the darkness. The challenge has to be met with high-quality loans to new and traditional borrowers alike. I have stressed some important factors that would be instrumental in this task. Mr. Preston has emphasized the global responsibilities of the Bank and that the Bank’s policy must be directed toward its main objective: poverty reduction. The Nordic countries wholeheartedly agree with this. President Preston’s strong commitment to improve the efficiency of the Bank in all its activities gives hope for progress toward this goal in the years ahead.
Statement by the Governor of the Bank for Bangladesh—Saifur Rahman
Let me start by warmly welcoming the new members who have joined the Bretton Woods institutions this year.
The economic demands and dimensions of the recent political and social changes have placed a heavy burden on the Bretton Woods institutions and have placed them in a prominent and central position. It is in our common interest to enable these institutions to meet their new challenges and demands while maintaining their ongoing obligations to the large number of developing countries in their efforts toward economic reform and poverty alleviation.
Notwithstanding the massive increase in demand on the Bretton Woods institutions, our basic collective objectives have been reiterated: stimulation of growth while sustaining environmental protection, reduction of poverty, and multilateral cooperation in international trade and finance. We consider promotion of democratic polity as a natural precondition for meeting these objectives. I would like to share our thoughts on these goals that give direction to our work together.
We are concerned about the inadequate flow of resources through the Bank Group. While IDA gross disbursements registered an increase of roughly 2 percent from 1991 to 1992, joint IBRD-IDA net disbursements actually declined. At the same time, recent OECD reports show a decline in the quality of the portfolio, suggesting that Bank investments have not been as effective for growth as proposed in project documents. This calls for attention not only for maintaining but also for improving the quality of Bank lending. In Bangladesh during recent years, we have made significantly higher allocations for social sectors, with particular emphasis on female education and universal primary education. I call upon the rich member countries to respond generously to the universal call for enhanced replenishment of IDA-10; also of special importance is the Ninth General Review of Quotas.
Countries like Bangladesh that have embarked on structural changes in the economy and export-based growth would very much wish to see a strengthened multilateral trading system. Consequently, the hesitation shown in the GATT negotiations by the industrial countries is a cause of concern for us. Through trade and tariff policy reforms, the Bangladesh Government has removed protection at a brisk pace. We have adopted an industrial policy that encourages free enterprise and entrepreneurship. The financial sector has been relieved of the burden of state control, and development of capital markets is being pursued. In the agricultural sector, the Government has rescinded controls over the importation, marketing, and pricing of inputs, and is correcting output market imperfections that deny remunerative prices to farmers. These sectoral measures are being complemented by flexible exchange rate management, tax reform, changes in the public expenditure management system to make it more transparent and accountable, and efforts to increase domestic savings to achieve self-reliance in capital formation and growth. All of these measures have made income, employment, and poverty in Bangladesh more sensitive to private risk taking, as well as to developments in the field of trade and financial flows in the global economy. Our success with exports of ready-made garments and with foodgrain production indicates that reforms have created interest and dynamism in the private sector. We are concerned, however, that major disagreements plaguing the Uruguay Round will frustrate our liberalization efforts and hinder the expected spread of this dynamism into other sectors.
I need hardly repeat that the success of adjustment efforts of developing countries like Bangladesh depends significantly on the maintenance of a stable aid, trade, and monetary environment in the industrial countries. The recent turbulence in the European Monetary System and in the foreign exchange markets has therefore been a cause of concern as much to the developing countries as to others. In particular, events like this can be unsettling for developing countries like Bangladesh that have embarked on an export-based growth strategy. We hope that corrective actions will continue to be taken to restore equilibrium and stability with benefits to all developed and developing countries.
We are committed to the establishment of a market-based economy in Bangladesh. All our reform measures in the areas of trade, finance, banking, agriculture, and investment are directed toward the attainment of this objective. It must, however, be recognized that where competitive market conditions are not yet fully developed despite reform measures, the Government should continue to have an active role in promoting growth and investment. During the transition, therefore, a strong case exists for augmentation of public investment in priority sectors until such time as the private sector response is adequate to compensate for public sector withdrawal.
Another major consideration in our search for growth and development is our firm commitment to protect the environment. The recent Earth Summit has formally recognized the threat of global warming, and those of us living in Bangladesh are on the front lines facing the consequences of global warming. As a global issue, we urge the international community to provide additional resources to the World Bank for addressing environmental issues in the lending programs.
Respect for democracy has come to be an important unifying value for the international community. Our two institutions have been strengthened by the joining of nations with a commitment to democratic pluralism, and the Bretton Woods institutions in turn share obligations to adjust their lending programs to make them supportive of the emerging democracies, because economic reforms will be more sustainable only if backed by mandates of democratically elected governments. If structural reforms and economic adjustment measures are pressed in a manner that appears to avoid or to denigrate emerging democratic institutions, then we threaten to weaken those yet fragile institutions. We in Bangladesh know from our own history that democracy and the rule of law are gained at great cost. These values must be respected while we search for economic and social development. In a democratic society, legislators and parliaments must agree upon major reforms for their successful implementation. Getting their approval takes time and requires persuasion. However, changing minds is the essence of reform. When legislators understand and endorse reforms, reverses are less likely, and further reforms could be more easily pursued.
With a new democratic government, Bangladesh has, over the last two years, adopted major tax reforms, introduced a value-added tax, liberalized imports and investment codes, substantially reduced subsidies, and redirected spending to education and rural development. However, reforms cannot altogether be without suffering, particularly to the economically disadvantaged segment of society, and yet, we have carried out reforms for long-term durable growth, employment, and poverty alleviation. Being conscious of this unpleasant reality, I would urge the Fund and the Bank to be sensitive to the plight of this disadvantaged group while designing their projects and programs. Adjustment pain and suffering of the poor can be reduced substantially if such projects and programs are made country-specific instead of universal in character.
Finally, I hope that we shall leave these Annual Meetings with assurances that extending and preserving democracy continues to be the priority that it was in the erstwhile bipolar world and that at a time when unprecedented forces of change are at work, the commitment of industrial nations to the developing world will not be lowered.
Statement by the Governor of the Bank for Thailand—Panas Simasathien
I am greatly honored and privileged to address the 1992 joint Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank Group on behalf of the Thai delegation. At the outset, I would like to join previous speakers in extending a warm welcome to our 17 new members.
As we review recent developments in the world economy, we note that world output and trade recovered more slowly than originally anticipated, despite several positive influences, including the return to normalcy in the oil markets, the resulting low inflationary pressures, and the pursuit of growth-oriented policies in major industrial countries resulting in lower interest rates.
The prospects for recovery in 1992 remain uncertain owing to high indebtedness, rising unemployment, and low trade confidence due to the deadlock in the multilateral trade negotiations under the Uruguay Round and growing trade protectionism in certain industrial countries. However, there are some signs of improvement, such as moderate inflation, lower interest rates, and more stable oil prices. These have contributed to higher trade volume and a slow rebound in the world economy. Yet recession, falling investment demand, rising protectionism in the industrial countries, foreign exchange market instability, and weakening commodity prices have adversely affected the growth prospects of developing countries and undermined their ongoing efforts toward structural adjustment of their economies.
As for the Association of Southeast Asian Nations (ASEAN) region, to which we belong, the ASEAN countries are also experiencing slow growth, but the growth rate is still high relative to that of other regions as a result of strong domestic consumption, while inflation rates are controllable as a result of tight monetary policies. In particular, 1992 is the twenty-fifth anniversary of the establishment of ASEAN, and we have agreed on the plan for economic cooperation and integration of the ASEAN Free Trade Area or AFTA. AFTA will make ASEAN markets more meaningful and more attractive for investment by bringing down tariffs, opening our markets gradually, and allowing the free flow of trade and investment among the members within a time frame. We anticipate that AFTA will bring the benefits of economic and social development to its people and play a meaningful and constructive role in the affairs of the wider region of Asia and the Pacific as well as the international community.
As for Thailand in 1992, continuing macroeconomic stability combined with extensive tax reform and the introduction of the value-added tax have had significant positive effects on the competitiveness of Thailand’s business sector. Spurred on by this enhanced competitiveness and supported by rapid investment growth, exports continued to perform extremely well despite recessionary conditions in our major trading partners.
In spite of the brief political turmoil of May 1992, the Thai economy remains fundamentally strong. At the macroeconomic level, the figure for the first half of this year demonstrated the remarkable resilience of the Thai economy. Exports grew by over 16 percent, while imports remained essentially at the same level as in 1991. Foreign direct investment for the first half of 1992 exceeded $1 billion, significantly up from 1991, and official reserves edged up toward $21 billion. Overall economic growth estimates for 1992 have been revised from about 8.5 percent to 7.5 percent. The half-year consumer price changes indicate that the 1992 inflation rate will register about 4.7 percent, down a full percentage point from last year’s figure.
The Bank and the Fund should be highly commended for another successful year of operations. There are, however, a few observations that I would like to offer for deliberation at these meetings.
We very much welcome the ongoing negotiations on the Tenth Replenishment of IDA and strongly urge the donor countries to reach full agreement on IDA-10 before the end of 1992 to make the resources available for use by mid-1993 as required. The size of IDA-10 should provide for a real increase over IDA-9 to enable IDA to respond expeditiously and effectively to the needs of current and new recipients and to step up its poverty-reduction and environment efforts.
The issue of environmental preservation has become a global concern, and cooperative efforts of both developed and developing countries are vitally needed to solve the problems. Please bear in mind that the major contributors to degradation of the world environment are the industrial giants of today, and accordingly they should bear the major share of its costs. The developing countries, likewise, should set their primary targets for both socioeconomic and environmental development. However, to achieve both objectives simultaneously would require tremendous budget resources, which are almost impossible for individual developing countries to provide without external assistance from multilateral sources. We believe that a multilateral organization like the Bank should play a lead role in establishing a worldwide standard for environmental preservation and a global environment fund. In this connection, I very much welcome the Global Environment Facility, which has initiated many innovative projects on an experimental basis. I urge that its activities should be continued and reinforced. Moreover, I would like to call the Bank’s attention to considering the establishment of a concessional lending program with funding from the Bank’s surplus income to finance environmental projects in addition to the existing Global Environment Facility. This would clearly provide substantial additional resources for environmentally oriented activities. I very much agree with President Preston’s view on additional IDA funding for environmental problems: the question is not whether we can afford to do it but whether we can afford not to do it.
I also would like to stress that many developing countries will continue to need financing on concessional terms for some time to come, taking into consideration the prospects for their balance of payments needs, the sluggish world economy, the debt problem, poverty, and the transformation process of the centrally planned economies. In this respect, extension of the eligibility period for the enhanced structural adjustment facility (ESAF) is therefore welcome. However, before the expiration of ESAF, the Fund should begin early consideration of all possible options to ensure uninterrupted flows of concessional assistance to the countries concerned. With the prospective large financial assistance to the former Soviet Union and Eastern Europe in the next few years, the Fund’s own resources need to be augmented urgently. It is disappointing that the Ninth Quota Review is still not in effect. The prospect of its becoming effective soon is welcome, and early consideration of the Tenth Review is urged. Furthermore, in the absence of an SDR allocation in the past ten years, there seems to be a significant shortage of reserves, at least for certain groups of countries, with potentially adverse implications for the performance of the world economy. I therefore urge all Fund members to consider the proposal for a new allocation of SDRs for the sixth basic period with an open mind.
In conclusion, I wish the Bank and the Fund every success in meeting the difficult challenges that lie ahead. Last but not least, I should like to thank the Bank and the Fund as well as the Government of the United States of America for the meetings’ excellent arrangements and for the hospitality extended to members of the Thai delegation.
Statement by the Governor of the Bank for Belgium—Philippe Maystadt
Our meeting last year focused on the universal mission of the Bretton Woods institutions. That mission is, today, underscored by the accession of 18 new members. I take pleasure in offering them my warmest congratulations. I am also most pleased to note the progress already made in the area of cooperation with these new members and the central role that the Fund and the Bank are playing in making this a reality.
Those who once predicted that, in a world where the principles of market economy were universally accepted, the Bretton Woods institutions would inevitably lose their raison d’être, must today reconsider their viewpoint. The market economy cannot be left to itself; it must be permanently based on an adequate institutional framework that enables the market forces to realize their full potential and protects them against slippages that could jeopardize their long-range effectiveness.
In a statement made several months ago in Brussels, Mr. Camdessus referred to a three-handed economy: the hand of the market, of course, with the business sector at the center; the hand of justice, which is responsible for enforcing the law; and the fraternal hand of solidarity, which is essential to the alleviation of poverty and marginalization. This is also how we view the economy.
Many speakers have already underscored the difficulties facing us today:
The strategies that we have implemented in order to steer our economies along the path of sustainable growth are today being tested by the general slowdown in economic activity.
The confusion created by the first liberalization measures in certain countries in transition is liable to compromise the social consensus on reform even before the market mechanisms capable of generating supply effects can be created.
In a wider sense, we have to admit that it is not enough just to do away with political and ideological frontiers if we are to move from one day to the next into a more stable world.
While these difficulties are of a particularly complex nature, the fundamental choice we have to make is much less so. One way to go would be to temporarily place our stabilization objectives on the back burner, in the hope of being able to implement a policy of stimulation of demand that will spur a recovery conducive to resumption of the medium-term strategy at a later stage. This would also be by far the most dangerous route, because it does not guarantee that private sector confidence, which is currently lacking, would be restored. By following this path, we could therefore end up losers in both the short and the long term. Moreover, the turbulence in the financial markets over the past few weeks points up the continuing fragility of the mechanisms we have created in order to steer our policies toward stability.
I therefore much prefer the alternative approach, namely, that of confirmation, by a set of specific decisions, of the objectives that we have undertaken to achieve in the medium term. It is only by proceeding along these lines that we will succeed in re-establishing confidence, that we can hope to benefit early on from the fruits of our efforts through improvement in the investment climate, and, finally, that we will regain the leeway for coping with crisis situations in the future.
The decisions to be taken are threefold in nature:
swift conclusion of the Uruguay Round, in order to give a new economic and commercial impetus to interdependence;
maintenance of sufficient economic solidarity, to prevent the collapse of ideological bipolarism from leading to a much deeper rift between regions making economic progress and those caught in a regressive spiral; and
strengthening the role of the Bretton Woods institutions, in order to ensure that our actions are consistent and that sufficient resources are available to accomplish our ambitions.
The construction of the economic and monetary union that we are preparing in Europe is, moreover, founded on the same basic principles:
the irreversible freeing of trade and financial flows through establishment of the single market in recognition of the interdependence of the European economies;
the establishment of support mechanisms (structural funds; economic and social cohesion funds) to enable each member of the Community to participate fully in the economic discipline expected to prevail among participants in the union; and
the creation of an institutional framework capable of ensuring the consistency of decisions that will henceforth have to be taken on the basis of shared sovereignty.
The testing to which these principles have recently been subjected has convinced me more than ever of the need for them to be implemented without delay. The skepticism inevitably aroused by any large-scale undertaking, and the risk of instability that this engenders, can only be offset if we swiftly match actions to our words.
What conclusions can we draw from these few considerations with respect to the plan of action to be adopted to deal with the challenges worldwide?
First, in the trade sphere, we must all accept the concessions necessary for an early conclusion of the Uruguay Round. The underlying principles of the single market in Europe are just as valid on a world scale. Decisive progress in this field is therefore essential and urgent if we want to re-establish confidence with minimum delay.
The budgetary savings to be obtained from elimination of protectionist measures have been demonstrated for some time now. The impact of protectionism on our economic policies is not limited to budgetary aspects alone, however. I am afraid that we will soon be unable to continue to successfully defend the merits of an economic philosophy based on deregulation of our internal markets if we do not adopt similar behavior in our international trade relations. Liberalization of international trade is therefore the necessary complement to the principles that we have been trying to introduce for years in our national economies.
Some more reasons for rapid progress toward elimination of protectionism were given during our discussion on Monday in the Development Committee. Based on those considerations, I have concluded that a decisive breakthrough in the elimination of protectionism is an essential prerequisite for the re-establishment of adequate financial flows to the developing countries. From the trends of the past few years, it appears that direct investments and participation can be expected to become the primary instruments for the financing of the development process and will take over, in this respect, the role formerly played in that area by commercial bank loans. This is all the more applicable to the enormous needs of the countries in transition. However, a substantial and sustained increase in investment flows can only be expected if the countries in question are offered the prospect of rapid and full integration into world trade. These countries will, of course, have to develop their own internal markets, but at the beginning, and for a transitional period of several years, potential investors will focus primarily on prospects for re-exporting to established industrial country markets. The legal framework for the treatment of foreign investments that we addressed in the Development Committee could remain an empty shell as long as we do not draw the necessary consequences from this linkage between investment and free trade.
Still, in connection with the importance of an early conclusion of the Uruguay Round, I should like to add one last comment about the role of trade agreements of the regional type. It seems to me that we should take another look at the skepticism that the development of this type of agreement initially aroused. The creation of the single market in the European Community has already made it possible to conclude association and trade integration agreements with three Central European countries, and others are in preparation. A similar movement is taking shape in the relations between North America and the Latin American countries. Besides their purely economic effects, these agreements open up the prospect for the countries concerned to belong henceforth to regions of the world in which the principles of democracy and market economy have existed unquestioned for many decades. These agreements will therefore contribute toward creating a political and social framework in which the transition process can take place within a climate of patience and perseverance.
It would, however, be unrealistic to regard these agreements as a lasting substitute for the elimination of protectionism throughout the world. On the other hand, progress in reducing protectionism remains essential to the achievement of consistency among regional agreements and to the due universal application of their underlying principles.
If sound policies are to be pursued in a world environment characterized by growing interdependence, they must be based on a sufficient measure of solidarity.
Achievement of this economic solidarity is something that we have focused on in particular over the past decade through implementation of the debt strategy. This strategy has in fact yielded substantial results in several regions of the world, but has not so far succeeded in sparking a virtuous circle in the poorest countries, namely those of sub-Saharan Africa. What can we do, first to arrest this decline, and then to help Africa gradually emerge from its profound crisis?
First of all, we must consolidate the instruments we have set up in the last few years to bring the repayment obligations of low-income countries into line with their limited payment capacity. I welcome the Paris Club agreement to reduce these countries’ official debt by 50 percent through an initial relief of maturing obligations, followed by a later reduction of their outstanding stock of debt on the basis of an assessment of the progress being made in their economic reforms. We should now continue to build on this new frame of reference so that it can gradually produce a cumulative effect. The new principles should be implemented by all creditor countries in order to re-establish consensus within their ranks and to confirm the irreversible nature of the new agreement. Such a confirmation might induce commercial banks to grant more systematic relief of their own claims on the countries of sub-Saharan Africa. Even if the total amount of these claims is relatively modest, their reduction could, in many cases, have a rather substantial impact in terms of re-establishing the countries’ payment capacity. I urge the staff of the World Bank to study the possibility of making more intensive use of the IDA Debt Reduction Facility, which so far has played only a marginal role.
The debt relief provided by these debt reduction initiatives is complemented by the enhanced structural adjustment facility (ESAF). It is essential that the Fund continue to play a central role in the economic rehabilitation of sub-Saharan Africa by making concessional resources available to countries that take the road of fundamental reform. Accordingly, I welcome the Interim Committee’s willingness to envisage a renewal of the ESAF upon expiration of the one-year extension just approved. I call upon Fund staff to review at that time the scope for enhancing the effectiveness of the ESAF’s assistance, including the possibility of joint use with the Fund’s ordinary resources, as has already been done on a trial basis.
These few suggestions may appear modest in comparison with the size of the problems faced by most of the countries to which the suggestions are addressed. I am nevertheless convinced that, if they are adopted as part of concerted action by multilateral and bilateral creditors, they can lead the way to significant, lasting progress.
I would now turn to offer some observations concerning the role of the Fund and the Bank.
The need to strengthen the role of the IMF within a system of economic coordination based on a common set of rules is once again demonstrated by the current uncertainties and by the fact that major industrial countries find it impossible, because of domestic constraints, to engage in such coordination. That this should be the case is old news, of course, but the need to take action has become more compelling than ever before.
The role of the IMF must be tailored to reflect the new interdependence that comes from the worldwide adoption of the principles of the market economy. The integration of the new members of our institutions into the global economy carries with it the risk of serious repercussions, unless the industrial countries pay more systematic heed to the implications of their policies for international adjustment. Such international cooperation would have been highly desirable even earlier, given the debt problem. Today’s challenges are at least as important, and moreover they have to be addressed in the context of what is now the most difficult economic situation of the last ten years. Broadening the Group of Seven would not be enough to achieve greater equilibrium. Only the IMF has the capacity to ensure on a permanent basis the global perspective that ought to govern coordination in coming years.
The second reason for strengthening the role of the Fund in the international monetary system pertains to European monetary integration. As I mentioned earlier, I believe this is a matter of compelling concern. However, it will not by itself guarantee greater financial stability at the global level. The movement toward a tripolar system may even increase the risk of instability, unless we provide instruments capable of ensuring coordination among the three currency poles and, if necessary, mobilizing reserves to support the goal of stability through intervention in the exchange markets. I urge the Fund to continue to think about the role it may someday be called upon to play in such a system.
I am increasingly concerned about certain weaknesses in the multilateral instruments we have created to provide financial balance of payments assistance. The fact that the increase in Fund quotas has not yet been implemented, two and one half years after we agreed upon it, is obviously a disturbing sign in itself. Other recent developments confirm my impression that domestic policy considerations play too great a part in multilateral financial cooperation. Allow me to illustrate this with three observations:
Without in any way questioning the merits of the International Finance Corporation’s capital increase, I cannot help but ponder the fact that this may take effect before the IMF’s quota increase, even though the order in which our multilateral obligations were to be met had been planned quite differently at the outset. Personally, I hesitate in bringing up before our Parliament the matter of Belgium’s participation in the IFC capital increase as long as the increase in the IMF’s resources, approved so long ago, has not yet taken effect.
My second observation has to do with the work of the ad hoc group we set up to help meet the financial needs of the countries in transition in Central and Eastern Europe. While this mechanism worked satisfactorily during the initial phase, for countries whose exceptional requirements were only temporary, difficulties have been mounting steadily since then. I find it particularly worrisome that the amounts available fall far short of the needs of some countries, while other countries do not face this problem because important members of the Group of Twenty-Four believe that their own interests are better served by helping them instead. To prevent this kind of discrimination in the future, it is essential that the Fund and the Bank again take charge of coordinating aid to the new members we welcome here today.
Third, I think it would be appropriate to consider instruments to complement the periodic increases in quotas. As long as the Fund’s financing is provided solely through the creation of liquidity according to an allocating key that is totally unrelated to liquidity needs, it becomes very difficult to justify this exercise on analytical grounds. It becomes essentially political in nature, with the consequences with which we are all familiar. I cannot believe that the Fund’s founders had this conception of it in mind when they decided that the Fund would exercise its influence through recourse to monetary resources. Therefore, I propose that we continue to consider the possibility of an allocation of SDRs according to liquidity needs, to supplement the five-year quota reviews. In contrast to the quota increase, the size of this allocation could be based on a careful analysis of demonstrated liquidity requirements, whether for balance of payments financing or for building up a sufficient level of reserves.
The World Bank is also called upon to strengthen its role considerably in the coming years, both by incorporating environmental priorities into its development policies and by assuming a leadership role in coordinating institutional reforms in the states of the former Soviet Union.
On the first of these issues, I am confident that the mandate given to the World Bank by the Earth Summit in Rio will be discharged more effectively if environmental priorities are fully integrated into the development policies that the Bank and borrowers must agree upon. In this regard, I have insisted on several occasions on the positive impact on ecological equilibrium that can be expected to accrue from a development policy geared specifically to improving the living standards of the most disadvantaged groups of society. The fraternal hand of solidarity is also the hand that makes sustainable protection of the environment possible.
Our discussions regarding the transition in the countries of Central Europe and the former Soviet Union have led to the conclusion that macroeconomic stabilization must be accompanied from the outset by reforms capable of eliciting a supply-side response. Because of its special expertise, the World Bank is called upon to play a primary role in this area, both by its own technical assistance and by its systematic coordination of bilateral assistance. I welcome the initiative of the Group of Seven to request the World Bank to establish a support group for technical assistance to Russia, and I hope that this initiative can be extended to the other states of the former Soviet Union, whose needs are equally valid. I urge the Bank to develop an overall frame of reference within this initiative that will allow bilateral partners to distinguish more clearly between those reform components for which prolonged official support is indicated and those for which the private sector should be able to assume the primary role in the near future.
In the past, the Fund and the Bank have sometimes been accused of indirectly supporting undemocratic regimes in certain countries to which they extended financial assistance. A far graver responsibility would be laid at our door if, a few years from now, we were forced to conclude that democracy and market forces were unable to flourish because we did too little, too late.
The hand of the market is guiding an increasing share of the world economy. So much the better! But let us not forget to hold it with the other two hands: the hand of justice and the hand of solidarity.
Statement by the Governor of the Fund and the Bank for Canada—Donald Mazankowski
It is a pleasure to address the Annual Meetings of the International Monetary Fund and the World Bank Group. The large expansion of our membership rolls over the past year attests to the dramatic changes that have been occurring on the world scene. This in turn reinforces the reality of global interdependence. The moves to market economies and pluralist democracies that the former centrally planned economies have undertaken complement an earlier shift in focus among many developing countries. It can now be truly said, for the first time in more than half a century, that we all share a vision of how our world should function. That vision is based on respect for individual freedom and confidence in the private economic sector as the primary force for technological advancement and the efficient use of scarce economic resources; it is the most appropriate vehicle for sustaining rising standards of living.
That newfound common wisdom should not blind us to the need for government leadership in setting the appropriate framework in which individual initiative can thrive. Despite the progress we have made in improving the underlying conditions most conducive to sustained growth, the global economic picture is far from satisfactory. When we have tens of millions unemployed and hundreds of millions living in poverty, we cannot be complacent. We must orient our policies to deal with these problems in the framework of this newly emerging world economy. This new economy forces us all to do things differently. For example, labor market reforms are urgently required. Labor market rigidities and barriers to productivity gains impede progress in all countries.
There is now a general view that the economic recovery in the industrial world will be slow and weak by historical standards. A number of structural and cyclical factors are conspiring to put the brakes on growth in the industrial world, including restructuring in the face of global competitive pressures, ongoing balance sheet adjustment, and low business and consumer confidence. Recent exchange market fluctuations are sending us a very clear message—that is, that the major industrial countries must reaffirm their cooperative commitment to achieving durable noninflationary growth, using the appropriate mix of fiscal, monetary, and structural policies to achieve these goals.
One favorable development has been the significant reduction in inflation in many industrial countries—a necessary condition for durable growth and job creation. This allowed monetary conditions to ease over the summer in both North America and Japan. In addition, Japan’s favorable fiscal situation has given it the room to stimulate its economy. Continuing good performance toward the goal of price stability will provide additional scope for a further easing of monetary conditions. But monetary policy must be supported with appropriate fiscal policies and structural reforms. Reductions in fiscal imbalances are essential to the lowering of real long-term interest rates. These, in turn, will promote the investment, productivity, and job creation that we need. We believe it is imperative for all countries to implement credible, medium-term plans for getting budgetary deficits under control.
Poor economic performance in industrial countries has clearly had a negative impact on Canada. The slower-than-expected pace of growth in my own country is a reflection, in large part, of the global economic malaise. Moreover, as in other countries, while the ongoing restructuring and the paying down of debt is leaving the Canadian economy increasingly well positioned to compete, the current strength of the economy is not generating employment at a sufficient rate. This, in turn, undermines consumer confidence.
Canada is, nevertheless, well positioned to benefit as world economic activity increases. While real growth this year is now expected to be around 2 percent, improving economic conditions will translate into higher growth for 1993. My confidence in this prospect stems from the fact that the fundamentals are being put in place for stronger economic performance in the future. For the past eight years, we have been working diligently to reduce inflation, to get our fiscal situation under control, and to implement the structural reforms required to improve the flexibility of the Canadian economy and to free up private sector initiative.
Political stability is a key ingredient for economic stability and growth. In that connection, I would like to note that we have just reached an historic agreement within Canada to renew our constitution. On October 26, the agreement will be put to a nationwide referendum. Approval of the agreement will have a positive effect on our economic prospects by reinforcing our political and economic union. In combination with a recovery in the rest of the industrial world, this augurs well for a return to sustained healthy economic growth and prosperity.
Eastern Europe and the Former U.S.S.R.
The former centrally planned economies deserve particular attention. The collapse of the U.S.S.R. completed the sweep across Europe of a new wave of economic and political freedom. The change in this region has been as dramatic as any in history. The policy challenges confronting these countries, however, have grown rather than diminished. Leaders must be encouraged to persevere with stabilization measures despite negative popular reaction. Postponing reform only makes the process that much more difficult to complete. There are no easy fixes—no alternatives to economic stabilization, privatization, the liberalization of markets, the establishment of regional trade based on comparative advantage, and the prudent management of external finances. I would therefore urge the maximum cooperation between governments in the region and the IMF in order to accelerate economic reform.
The primary responsibility for transforming these economies, however, does not lie with Western governments or with the international financial institutions. The thrust for reform must come from within these countries themselves. They will bear the main burden and, in turn, will reap the main benefits. External assistance can be effective only if it reinforces internal efforts.
It is my belief that the private sector in the industrial world will play a far more important role than either governments or international financial institutions in assisting and consolidating reform in this region. I am referring not only to the provision of financial capital but also to the invaluable transfer of human skills and technology. The benefits of financial flows are important—but even more crucial are the skill-building, person-to-person contacts that commercial interaction fosters.
To attract Western business interest, these countries will have to establish a legal framework that protects private ownership, enhances confidence in longer-term decision making, and promotes the efficient operation of a market economy. Although some of these countries have already made substantial progress in bringing in foreign investment, most are still not attractive locations. I therefore encourage all of these countries to improve their environment for foreign investment.
While burgeoning entrepreneurs have already begun making a contribution to more rational business operations, governments must do more to get larger state enterprises onto a commercial basis. It is critical that entrepreneurs have proper market signals to which they can respond. This will encourage productive activities in all sectors and will speed the process of reform.
Canada has been at the forefront of the effort to assist the transition in the region. Among the large industrial countries we are the second largest supporter per capita to the former Soviet Union. We are committed to continue playing a strong role. We have provided extensive export credits and launched major technical assistance and nuclear safety programs throughout the region. However, of much more sustaining importance is that Canada, with its large number of skilled citizens with close ethnic ties to this region, can assist in expanding critical person-to-person contacts.
Western governments and the international financial institutions must continue to give strong support for the reforms being undertaken in these economies without diverting resources from traditional developing country recipients. However, international financial institutions’ and Western governments’ efforts by themselves cannot guarantee success. I would stress again that the most important role in consolidating the transition will be played by the private sector. Individual Western businesses can play a key role through the transfer of both capital and business expertise.
The developing world will also be helped by a stronger recovery in industrial countries. In the past year, significant gains have been achieved in managing international debt problems. Prospects for improved economic growth in developing countries depend first and foremost upon the pursuit of appropriate policies by their own governments, particularly in an environment where there are increasing demands for a limited amount of funds. Governments must design policies to attract direct foreign investment, which must become a more important component of the economic strategies of developing countries.
Countries that take steps to establish an attractive environment for investors will have more access to resources. Of course, the reverse is also true: inhibiting domestic policies and financial market rigidities as well as inappropriate policies that jeopardize a country’s political and economic stability create the conditions for capital flight. The one clear lesson that we can learn from the experience of the 1980s is that resources, both private and official, do not necessarily flow to countries that need them most but to countries that can use them productively.
In this context, I would like to talk briefly about official aid resources. We must all recognize that the outlook for the 1990s is not one of rapid expansion in this source of funding. In an ongoing effort to reduce fiscal deficits, governments must balance a host of competing expenditure demands against available resources. Parliaments, legislators, and the publics they represent are increasingly looking for evidence that funds for international assistance are spent in the most efficient manner possible. This means that evidence of sound economic management and good governance has become increasingly important in allocating aid. Good economic management policies cannot be pursued in isolation from other factors, such as transparency and accountability of public administration, development of basic social programs, respect for human rights, and an appropriate level of military spending.
International Trade Framework
Let me conclude with some remarks on a policy issue that cuts across all economic classifications, namely, the international trade regime. One of the main pillars of Canadian economic policy is the pursuit of liberalized trade. That is why we pursued and successfully negotiated a free trading arrangement with our largest trading partner, the United States, and that is also why we have pursued the discussions and conclusion of the North American Free Trade Agreement, which involves Canada, the United States, and Mexico. Trade is vital for the future prosperity of the global community. It is essential, therefore, that the Uruguay Round of Multilateral Trade Negotiations be brought to a swift and successful conclusion. This should be our number one priority in trade policy. Success will provide a major stimulus to world economic growth, in both industrial and developing countries. Conversely, we will all pay a hefty price if the Round fails.
Although, in addition to the Uruguay Round, Canada is pursuing trade liberalization through the North American Free Trade Agreement, which builds on the current Canada-United States Free Trade Agreement, I want to emphasize that Canada’s objective in this agreement, as in our earlier trade agreement with the United States, is not to create a trading bloc. The North American Free Trade Agreement is complementary to the General Agreement on Tariffs and Trade, and a building block for further international cooperation and a more open world trading order.
No matter what our geographical position or stage of development, all of us desire a pickup of growth in the world economy. But for this to happen, each of our governments must contribute, in particular by shoring up consumer and business confidence. This is best accomplished by making steady progress in reducing inflation, by implementing credible plans to restrain government deficits, by removing structural obstacles to growth and job creation by applying appropriate human resources development policies, and by an early successful conclusion of the Uruguay Round. Governments must manage their own financial affairs prudently and provide a competitive and open economic environment. This will allow the private sector to create productive jobs and raise living standards for all.
Statement by the Governor of the Fund for Poland—Jerzy Osiatynski
As you are all well aware, Poland has been, and continues to be, in the forefront of the political and economic reforms of the post-Communist world. Precisely three years ago my predecessor, Leszek Balcerowicz, unveiled from this podium a path-breaking reform program, aimed at transforming the Polish economy from a centrally planned one to one ruled by market forces.
The program, later known as a “shock therapy” program, served as a blueprint for other countries in the region that decided to follow Poland’s lead toward the market. Having those three years behind us, and witnessing similar struggles of our colleagues in the Russian Federation, Ukraine, and other countries of the former Soviet Union attempting to reform their economies, I would like to share some reflections with you.
First, despite the large displacement in the economy resulting in a drop in production unprecedented in peacetime, and giant unemployment exceeding 20 percent in some regions, it is possible to achieve success in a relatively short time. Poland serves as an excellent example of this theory. Inflation at a rate of 30 percent a month was brought under control. Shortages were eliminated, reducing the omnipresent queues. Money gained in value and people regained confidence in the ideas of hard work and entrepreneurship.
The improvement of the standard of living in Poland can be witnessed in every aspect of life, including easy access to imported products and the ease of purchasing hard currency in banks. Poland is entering a phase of economic growth, the pace of which may be significant next year. Exports to the most difficult markets are growing dynamically.
Second, the changes we are witnessing are of a lasting character and are structural in nature. In the last three years the share of the private sector, outside of agriculture, has grown from 13 percent in 1989 to 41 percent in 1992. Together with agricultural production, which has traditionally been private in Poland, the share of the private sector is close to 60 percent. More than 37 percent of Polish industry, 75 percent of construction, 20 percent of transportation, and 90 percent of trade is in private hands. The privatization of the economy is a result of a creation of new private companies, which grow much faster than enterprises in the public sector. Privatization of large state-owned enterprises will accelerate next year.
Third, there has been a revival of political life and democratic processes in Poland, which not only made possible the start of the economic reforms, but make their continuation possible, and dictate terms for further development. It must be remembered that in the transformation process in all of Eastern and Central Europe two things are at stake: creation of a market economy, and a transition from a totalitarian political system to a system of parliamentary democracy. We have moved forward in both areas.
These are our accomplishments. What are the difficulties, and what actions will it take in the near future to overcome them? First of all, we must eliminate structural causes of the budget deficit. The budgetary revenues based on state-owned enterprises are rapidly shrinking while, at the same time, the budgetary social expenditures based on multiple indexations are growing, especially in light of high unemployment. The private sector is plagued by tax avoidance. The high budget deficit in the underdeveloped capital market must be financed by bank credit.
To deal with this budget deficit problem, the Polish Government is about to recommend a package of measures for the last quarter of this year and another package for next year. The measures are tough, but in my view unavoidable, if we are to remove this threat to a continuing successful transformation of the Polish economy into a market one.
Our otherwise good progress in the transformation process encountered another unexpected setback this year: an intense drought, which reduced agricultural output of major crops by about a quarter. This will not only reduce the overall output of the economy, but will also have a serious impact on the balance of payments. The combined effect of the drought and a large monetary expansion to finance the budget deficit in the second half of this year now represents a threat to Poland’s balance of payments position and its international monetary reserves.
This threat to the balance of payments is significant enough to force the Government to consider the application of an import surcharge, on a strictly temporary basis, and as part of a larger package of measures.
The other major problems are microeconomic: inadequate restructuring of state enterprises, rapidly growing enterprise debt of poor quality, large numbers of loss-making state enterprises, a continued low level of enterprise investment, and a slow rate of privatization of medium- and large-scale enterprises.
The present Government of Ms. Hanna Suchocka is determined to confront these problems head-on. The Enterprise Pact is being developed with implications for faster privatization, a more flexible wage policy, and improved corporate governance. The aim of the Enterprise Pact is to provide more scheduled microeconomic foundations for a continuing policy of enforcing macroeconomic discipline. The Government has prepared 14 pieces of specific new legislation to implement this Pact. A financial restructuring of enterprises and banks is to be implemented next year, with the most welcome assistance of the World Bank. The Polish Stabilization Fund of the Group of Twenty-Four is to play an important role in that financial restructuring, once the IMF-supported program is agreed on. Other structural reforms planned for next year include mass privatization of some 600 large enterprises and the introduction of a value-added tax.
What other lessons follow from the above-mentioned experience of the Polish transition process? First of all, countries undergoing the process of transition should not be misled by macroeconomic success, such as a balanced budget, in the early stages of the reforms. From the very beginning they should concentrate their efforts on reforming their fiscal systems, building up a strong tax administration, and reforming their systems of budgetary expenditures, especially in the social sphere.
Second of all, it cannot be assumed that the state-owned enterprises and banks will adjust spontaneously to the new economic reality. The slow capital privatization cannot be exclusively counted on as a tool to privatize the public sector.
Third, the active wage policy in state-owned enterprises, along with improved corporate governance, must be fostered. This will be contained in a new package of laws, the so-called Enterprise Pact, which will provide a more solid microeconomic foundation for a continuing policy of enforcing macroeconomic discipline.
Fourth, entering the “second stage” of transformation, after the initial wave of politically based enthusiasm has subsided, requires continued education of the society and creation of a democratic decision-making mechanism. Often these decisions require further commitment and sacrifice.
And finally, the hard currency shock of last week was, in my opinion, caused by the societies of Western Europe, fearing the consequences of a tight economic, political, and monetary union. In light of these recent developments, Western Europe should perhaps better understand the political restraints facing the transformation in Eastern and Central Europe. Without its understanding the process of reform that is occurring, and without the necessary political mandate, it will not be possible to continue the economic transformation in Poland, the Czech and Slovak Federal Republic, Ukraine, and the former German Democratic Republic. Integration of Europe as well as transition to market economies and political democracies in Eastern and Central Europe are both processes of historical dimensions, and it is worthwhile to remember that history takes time.
Let me end this brief presentation by saying that the Polish Government is close to resuming a formal arrangement with the International Monetary Fund. During the last three years Polish economic transformation has received much needed support from the two Bretton Woods institutions, the IMF and the World Bank.
I am pleased to say that during a recent IMF staff mission to Warsaw, a broad understanding was reached on economic policies the Fund would be willing to support and the Polish Government is intending to implement. We hope to turn this understanding into a formal arrangement next month.
The agreement with the IMF would pave the way to continued excellent cooperation with the World Bank and IFC, as well as induce private capital to take advantage of the tremendous opportunities that exist in Poland.
Statement by the Governor of the Bank for Austria—Ferdinand Lacina
Only now, with the accession to membership of the countries in transition from centrally planned to market economies, have the Bretton Woods institutions finally achieved the truly universal character intended for them by their founders. We welcome these and other new members, including our neighbor Switzerland.
After last week’s turbulence in the European currency markets, we need to recall at these Annual Meetings that the founders of the IMF were convinced that the fruitful development of the world economy would take place under conditions of close interdependence and stable exchange rates. They drew upon the harsh experiences of the period before World War II in establishing institutions and procedures designed to prevent turmoil in the currency markets from damaging the real economy. Both the events of last week and the recent volatile relationship between the U.S. dollar and European currencies demonstrate that the Fund must be made stronger for the very purposes it was intended to fulfill, namely, to coordinate monetary policies and facilitate dialogue among member countries.
In his remarks yesterday, Mr. Preston pointed to the danger of the inward-looking policies pursued between the wars. It was precisely this experience that led to joint efforts of policy coordination and the creation of the Bretton Woods organizations.
I consider it of central importance for the Fund to maintain its unique role as a monetary institution ensuring the economic stability of the international financial system, as well as its roles in facilitating growth and trade. To achieve these goals, the Fund must place at least as much emphasis on the need to promote coordination and cooperation between its members as it does on the need to provide them with financial support. This applies both to the coordination of the domestic fiscal and monetary policies of its member countries and to their activities in support of the historic reform efforts in Eastern Europe. It has to be understood that financial assistance alone is not enough. This is why the Fund, in addition to providing technical assistance and training, should concentrate on designing programs that contain a policy mix adequate to enable countries to create functioning market economies.
The Fund is best positioned to provide technical assistance to persons working on macroeconomic issues. But, as we know, technical assistance is needed in all other areas of the public and private sectors as well.
Let me turn now to Austria’s specific contribution to the cooperation and coordination efforts of the Fund, especially on behalf of the countries of Central and Eastern Europe. Austria has long-standing historic and economic ties with these countries, and shares with them the historical experience of major economic shocks of the past. Our economic ties have given Austria a special stake in the fundamental political changes taking place in this part of Europe. The past isolation of our neighbors and their recent opening up have had a tremendous effect on economic development in my country. This is why Austria started training activities on a bilateral basis immediately after the commencement of the transition process. These efforts will culminate in the establishment of the new Joint Vienna Institute for training officials from economies in transition. Austria invited the IMF and the World Bank, and other international organizations, to establish this center in Vienna, with Austria providing the infrastructure for the Institute, which will be opened officially on October 5, 1992.
Not just training but a great many institutional reforms will have to occur to make the transition process successful. Many of the necessary steps will inflict hardship on considerable numbers of people. In order to keep the reform process politically viable, the reform programs must include elements designed to soften their social impact. Because the people’s expectations are that, as soon as they establish democratic institutions, they will begin to enjoy higher standards of living, the political risk of economic failure of the transition process should not be underestimated.
Although no one failed to recognize that the transition of the Central and Eastern European economies would be difficult and painful, we seem to have underestimated the magnitude of the problems and the time needed for solving them. Data for the past two or three years show more dramatic declines in output, stronger inflation, and higher unemployment than had been expected. Thus it is not economic consequences alone that urge immediate action. Social unrest, nationalistic conflicts, and rising skepticism about the new democratic institutions will surely emerge if the present unsatisfactory situation cannot be overcome.
In such a situation, institutions like the Fund and the Bank, which practice applied political economy on a global scale, are called upon to mobilize the international community’s cooperative efforts. While the Fund’s programs catalyze essential financial assistance, the industrial countries’ role should go beyond providing financial support.
The self-interest of the international community itself calls for open markets and generous external support for adjustment and reform in the transition economies. In this area, its institutions should not measure their actions by the lowest common denominator among its members, but should strive to convince policymakers that if they do not act, the well-to-do countries risk seeing their own social and economic stability threatened by the spillover effects of instability in the former centrally planned economies.
The World Bank Group is equally as important as the Fund in providing critical support for both countries in transition and for low- and middle-income countries in all regions of the world. While the countries in transition have undergone a severe economic contraction and many industrial countries are at a standstill, many developing countries have achieved their highest growth after a decade of economic stagnation. In order to ensure sustainable economic development, these countries will also need the assistance of the Bank and the Fund in advice and funding. We have to make clear that the increase in the transfer of resources to the countries in transition cannot be at the expense of the developing countries.
Finally, I come to the most problematic question associated with funding. The willingness of the Fund’s major members to agree to the Ninth Quota Review is the minimum requirement for guaranteeing that the Fund’s liquidity needs will be met in the coming years. It is therefore imperative that members consent to the quota increase—and accept the Third Amendment of the Fund’s Articles of Agreement—as swiftly as possible. As Mr. Camdessus pointed out in his statement, the Fund could do more, and we think it should do more on the basis of additional resources.
As to IDA, there are several reasons why we are obliged to provide IDA with the resources it needs to perform its mission in an ever-greater number of recipient countries. The above-mentioned success stories will make it extremely difficult to deny the poorest countries the resources they need to sustain their adjustment efforts. Another reason is that it is now received knowledge that protecting the environment is an integral part of sustainable development, which is primarily aimed at reducing poverty. In light of all these needs, I strongly support a Tenth Replenishment of IDA, substantially higher than the Ninth, which would include the “Earth increment” proposed at the UN Conference on Environment and Development meeting last June. Arguments similar to those made for the Fund quota increase apply to the case of IDA: without the help of the major IDA donors, this target cannot be achieved.
Statement by Governor of the Fund and the Bank for Kuwait—Sheikh Salem Abdulaziz Al-Sabah
I have the pleasure and honor of making the following statement on behalf of the states of the Gulf Cooperation Council: the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait. We wish to share with you our views and visions with respect to the conditions and requirements of the global economy.
Let me begin my statement by welcoming the new members who have joined the IMF and the World Bank over the past few months, thereby making the two institutions truly global as they embrace all countries of the world in their membership.
We are meeting today against a background of fundamental political and economic transformations. Quite recently we witnessed an end to the cold war and international polarization. The European Community is now moving toward political and economic integration, newly independent countries are joining both the IMF and the World Bank, and numerous countries have adopted economic reform programs. On the other hand, we are, most regrettably, seeing a universal economic situation beset by weak growth rates, rising unemployment, and countries burdened by external debt. We are also seeing about 1 billion people suffering from extreme poverty made even more devastating by the famine in Somalia and a destructive drought that has afflicted numerous Central African countries, as well as increasingly bitter regional armed conflicts in various parts of the world. These challenges, despite their magnitude and acuteness, could be dealt with should the political willpower of the world community be geared to solving regional disputes by peaceful means, and sound fiscal and economic policies be adopted to improve the standard of living of the peoples involved and to ensure achievement of international development and cooperation.
It is in this respect that the critical role of the industrial countries in strengthening and underpinning the recovery of the world economy becomes evident; it also demonstrates their key responsibility for adopting policies to reinforce and ensure the sustainability of such recovery. Economic growth of the industrial countries is essential to boost economic growth of the developing countries and the former centrally planned economies. That is why we are urging the industrial countries to adopt economic policies designed to consolidate such growth and open their markets to products from developing countries. Interdependence among various countries of the world requires open economic systems, free of any restrictions. Therefore, we urge all countries to remove trade barriers and to promote international free trade, and at the same time we urge all participants in the Uruguay Round to reach a successful conclusion. Failure of the Round will have a negative impact on the developing countries’ efforts toward open economic policies. In this respect, it is worth noting that existing and planned regional arrangements do not stand in the way of exports of the developing countries that are not party to such arrangements.
The countries of the Gulf Cooperation Council (GCC) constitute an important economic group in the world economy. They have the largest oil reserves in the world and play a major role in the oil market. Recognizing the importance of oil for the world economy, the GCC countries invested substantial resources of their own to ensure adequate supplies of oil to meet world demand and limit price fluctuations. Since the establishment of the GCC, member countries adopted free economic systems based on market principles, including free trade and free currency exchange systems, in addition to the promotion of foreign investment. Furthermore, the GCC countries are an important trade partner for diverse countries in the world. The volume of the GCC’s commodity trade exceeded $141 billion in 1991. In addition, as you may be aware, our countries provide an exceptionally high percentage of their GNP for development assistance despite continued budget deficits.
The GCC countries still suffer the negative economic impact of the Iraqi occupation of Kuwait, which caused extensive damage to property and to the environment, loss of life, and the depletion of resources. Despite this, the GCC countries faced these challenges with prompt emergency measures that helped to alleviate the impact. They also continued to maintain open economic systems free of any restrictions on trade and capital movements. The central banks and monetary agencies also maintained stability in the financial markets as well as the exchange rates of their national currencies and the viability of the banking system. The GCC countries managed to respond to these challenges and established economic integration based on an open and multilateral trading system.
The GCC countries are aware of the growing demand on financial resources by the developing countries, particularly those that have adopted economic reform programs, and would like to indicate that the volume of official resources cannot meet the requirements of those countries during the 1990s. This underscores the need for an increase in these resources and, at the same time, for the possibility of tapping other resources. It further underlines the important and leading role to be played by the industrial countries, the World Bank, and the IMF. Hence, we urge the industrial countries to increase their concessionary assistance in order to reach 0.7 percent of their GNP, bearing in mind that the GCC countries, over the past few years, have provided developing countries with a level of assistance that entitles them to be placed in the forefront of donor states in terms of ratio of assistance to GNP.
The GCC countries endorse the efforts to integrate the developing country economies into the world economy, and they are fully prepared for this integration and have expressed readiness to enter into agreements with major trade partners. They therefore affirm their commitment to an open economic and trade system and their desire to cooperate within the framework of the international community. They call on the industrial countries to respond favorably to these efforts by eliminating barriers to GCC exports, thereby increasing the flow of trade and strengthening joint investments.
Although the GCC countries have been able to restructure their institutions and stimulate their economies, they have not lost sight of their important and central objective of maintaining the stability of the world oil market and have adhered to their commitment to provide their oil resources to meet world demand at reasonable and stable prices. Unfortunately, these efforts have not been matched by similar endeavors by the oil consuming countries. Most major oil consuming countries are levying high and discriminatory taxes on petroleum products, which are in fact exacerbating the problem of financing investment in petroleum facilities in the producing countries, causing misallocation of resources and leading to oil market instability, particularly in the medium and long terms.
The challenges facing the world economy and the role of international institutions in this respect underline the critical importance of the Fund in the international monetary system. We call on the Fund to strengthen its role and to continue to meet the financial needs and technical assistance requirements of all member countries. This is especially relevant as the Ninth Quota Increase is now being finalized and should provide the necessary resources to support stabilization and economic reform programs in member countries. We also commend the efforts of the Fund in helping the lower-income countries. We support the extension for a further year of the enhanced structural adjustment facility (ESAF) and the widening of ESAF eligibility. We also note that the Fund can contribute to the achievement of a more balanced distribution of international liquidity and the adequacy of financial resources through a new issue of SDRs. As to the other tasks of the Fund, we wish to point out the need to avoid the proliferation of tasks and Fund expansion into activities that are not so relevant to its basic mandate.
While we endorse the priorities established by the World Bank Group in its lending policies, particularly its emphasis on employing appropriate policies, financing economic reform programs, and development projects, as well as poverty reduction and improvement of the environment, we urge that greater attention be paid to projects designed to develop the human resources of developing countries. We would also urge that the debt problem not be neglected and that consideration be given to new mechanisms to promote private financial flows to the developing countries and to countries in transition to market systems. The efforts of the working group on the Guidelines for the Treatment of Foreign Investment are commendable, since it has succeeded in producing a comprehensive and balanced document enabling all countries to establish appropriate systems to promote foreign investment. We would stress here, though, that adoption of these Guidelines cannot be deemed a substitute for bilateral agreements or be legally binding.
As regards the United Nations Conference on Environment and Development recently held in Rio de Janeiro and its outcome, which seek to preserve the environment and achieve sustainable development, we believe that the most important ways to preserve the environment include the eradication of poverty and emphasis on strengthening economic growth, in addition to dealing with direct environmental challenges, such as the provision of drinking water, sanitation, education, and health care. In this context, we wish to point out that despite the devastating environmental disasters suffered by our region as a result of the occupation of Kuwait, we are committed to continuing our programs to preserve the environment.
Finally, we call on the Fund and the Bank to support the efforts of the Arab countries to reform their economies and to assist them to meet the challenges they face, and provide them with the financial and technical assistance necessary for reconstructing their economies, developing their human resources, institution building, promoting their private sector, and encouraging foreign investment.
September 23, 1992.