Chapter

Presentation of the Nineteenth Annual Report1 by the Chairman of the Executive Board and Managing Director of the International Monetary Fund, Pierre-Paul Schweitzer

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1964
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It is with great pleasure that I join you, Mr. Chairman, in thanking the Government of Japan for its gracious invitation to hold the Annual Meeting in Tokyo and for the courteous hospitality they are extending to us. We have all, I am sure, the most vivid impression of a vigorous and dynamic society, combining with all its modern efficiency the grace and charm which only a deeply rooted culture can convey. Personally, I am most grateful for the opportunity to visit this beautiful country again, and I know that my feelings are shared by Governors and others attending the Annual Meeting.

It is particularly fitting that the Annual Meeting of the International Monetary Fund and the World Bank should take place in a country whose economy can serve as an example for our many member countries in all parts of the world and at all stages of development. Japan’s rate of growth in recent years has considerably exceeded that of any other industrial country and, although the very rapid transformation of the economy has at times given rise to certain strains, this progress has been achieved with a substantial degree of monetary stability. The acceptance of the obligations of Article VIII of the Articles of Agreement of the Fund by the Japanese Government earlier this year—a landmark in the postwar economic and financial history of Japan—gives impressive evidence of its success in combining international balance with uniquely high growth rates.

For the developing countries, the example of Japan is an inspiration. Here is a country which, although densely populated and not endowed with rich natural resources, has, through the efforts of its intelligent and energetic people, succeeded in developing into a major industrial power. This is an achievement which is admired everywhere.

Before I proceed to the review of the year, I should like to welcome particularly the Governor for Kenya, which has become a member since the last Annual Meeting. We are also pleased to have with us, as observers, Delegations from two other African nations, Malawi and Northern Rhodesia, shortly to become Zambia, whose applications for membership have recently been received. We welcome the fact that virtually all the nations that have achieved independence in all parts of the world in recent years have chosen to join the Fund.

The past year has been especially important for the Fund. In particular, it has been a year in which both the Fund itself and the competent authorities of many member countries have been re-examining policies bearing on many aspects of international finance. Later on, I shall refer more specifically to the studies on international liquidity and also to the United Nations Conference on Trade and Development.

During the past year, exchange markets generally have been calm. Among the less developed countries, there were fewer cases of balance of payments strains than in other recent years. One of the most encouraging developments in world payments last year was a considerable improvement in the position of a large number of the less developed countries, mainly as a result of the rise in their export receipts. This has, of course, limited the need of these countries for Fund assistance. Thus, since the two transactions in the summer and autumn of 1963, the Fund has received no further requests for drawings under the compensatory financing facility that was created last year to meet temporary shortfalls in export receipts. The past twelve months have nevertheless been among the more active in the Fund’s history in the field of its financial operations. Indeed, stand-by arrangements attained a record level and drawings have been higher only in three previous years.

As external conditions have been relatively more favorable for the developing countries in the past year, our financial support to them has tended to be associated, more than has been usual, with imbalances arising largely from internal causes; in particular, large budget deficits seem often to have been the major cause of payments difficulties. In such cases, Fund assistance is normally granted only in association with a stabilization program undertaken by the member.

I am fully conscious, of course, that even where the immediate cause of a payments deficit is to be found in a country’s own policies, the difficulties may arise from deep-seated problems which hamper the achievement of an adequate rate of growth. But the very existence of these problems makes it all the more important that sound policies be followed. Most members have understood that it is in their own interests to make a substantial effort toward solving their payments problems by bringing more order into their finances and monetary conditions, correcting overvalued exchange rates, and simplifying complicated exchange systems. By doing so, they create a better basis for carrying out their development plans and for securing assistance and investment by other countries and international institutions.

For our own part, we are convinced that substantial assistance by the Fund can be useful only if it is made in support of effective action to achieve and maintain financial stability under soundly conceived and well prepared programs. Under these conditions, use of the Fund’s resources, although of short duration, can be of considerable assistance in the development effort by minimizing the need for precipitate and often costly adjustments of plans as a result of changing balance of payments situations.

In terms of the amount of drawings outstanding in relation to quotas and the frequency of transactions, the developing countries have continued to be the principal users of the Fund’s resources in the past year. But the absolute amount of new drawings and stand-by arrangements in the period was far greater for the industrial countries, although only four members were involved.

In this year, the first drawings were made by the United States. At last year’s Annual Meeting, I had occasion to explain the background of the stand-by arrangement under which these drawings have been made. As a result of larger repurchases than drawings in U.S. dollars, the Fund’s holdings of U.S. dollars during the latter part of 1963 approached 75 per cent of quota, a level beyond which the Fund cannot accept a currency in repurchase. This situation seemed likely to create inconvenience for the many countries which keep their foreign exchange reserves in U.S. dollars. The United States, therefore, utilized drawings under its first stand-by arrangement to create a conversion facility under which other member countries in effect purchased, against their dollar holdings, the currencies which they needed for repurchase and which the United States drew from the Fund. After using the equivalent of $250 million under last year’s stand-by arrangement, which was for $500 million, the United States has now concluded a new stand-by arrangement for the same purpose, also for $500 million. These stand-by arrangements thus help members to make their repurchases. They also ease the financing of the U.S. balance of payments deficit in much the same way as was previously accomplished by an excess of repurchases over drawings in U.S. dollars.

In assisting member countries to ease and solve their payments problems, the Fund is constantly aware of its responsibility to promote economic growth in the world as a whole. The stand-by arrangements granted last year to industrial countries other than the United States arose in cases where policies for economic expansion, while carrying with them the possibility of temporary balance of payments deficits, were clearly helpful in promoting the continued growth of world trade. One of them, for the equivalent of $305 million, was made available to our host country, Japan, in March. Another, for $1 billion, was granted to the United Kingdom in August 1963, and a new one for the same amount was granted in August of this year. In both countries, the rise in output in 1962 had been limited and recovery in 1963 contributed to the general progress in the industrial countries, and hence to an exceptionally large increase in the export earnings of the primary producing countries.

The only other industrial country that made use of the Fund’s resources during the past year was Italy, which drew $225 million within its gold tranche in March while at the same time receiving the promise of bilateral financial support totaling about $1 billion from a number of countries. I am happy to note that there has subsequently been a welcome improvement in Italy’s balance of payments, attributable in large part to steps taken earlier by the Italian authorities to restrain the excessive demand in the economy but, also, in no small measure to the confidence created by the financial support from abroad. A measure of this improvement is evidenced by Italy’s recent repurchase by which the Fund’s holdings of lire were reduced to 75 per cent of quota.

As in past years, much of the effort of the Fund has been devoted to conducting its annual consultations with its members. In the course of these consultations, the Fund, in addition to undertaking a general review of the economy, provides assistance, in many cases, in the formulation of stabilization programs and in efforts to reduce reliance on harmful exchange practices and to achieve realistic unitary exchange rates, and also helps in other technical matters. I might also add that we are pleased to find that our consultations with countries which have assumed the obligations of Article VIII have continued to provide a mechanism for maintaining close and helpful contacts with those members as well as for keeping the Fund informed of economic and financial developments in those countries.

The Fund’s policies and practices for the use of its resources have been kept under constant review and have undergone certain changes in the past year. The policies that were formalized in an Executive Board decision two years ago for adapting the selection of currencies for drawings and repurchases to changing payments situations continue to be successfully implemented. I would like to thank both drawing and drawee countries for their cooperation in making these policies effective. There were two important modifications during the past year of practices with respect to the use of the Fund’s resources. The first was the decision adopted in August this year to simplify the procedure for drawings in the gold tranche. The new procedure eliminates Board discussion of drawings in the gold tranche, except when an Executive Director should request that the matter be considered by the Board or the Managing Director should so decide. The procedural improvement should emphasize that members can regard access to the gold tranche as automatic in practice and thus of a liquidity comparable to other components of their reserves.

The other important decision in this field broadened access to the Fund’s resources by giving the Executive Board discretionary power to permit countries which have not yet established par values to draw on the Fund in circumstances where this will further the purposes of the Fund. Except in special circumstances and in very few cases, it had not been possible for a member to obtain financial assistance from the Fund unless it could first agree on an appropriate par value. The new policy has already permitted the Fund to give effective support this summer to a comprehesive stabilization program undertaken by Mali. In carrying out this new policy, we shall be guided by the purposes of the Fund and will support policies aimed at establishing realistic exchange rates and effective par values.

I have already mentioned that the new facility for compensatory financing of export fluctuations has to date been used only twice, largely because of the generally more favorable export situation of the primary producing countries. However, a number of countries have taken advantage of the provision in the Executive Board decision establishing this facility, under which the Board will give sympathetic consideration to requests for quota adjustments from countries exporting primary products, especially those with small quotas. Since the last Annual Meeting, the Fund has agreed to substantial increases in the quotas of nine countries under this provision.

While it is still too early to draw any conclusions on its functioning, I am sure that the compensatory financing facility will prove to be of value in the years to come, and we shall keep all aspects of it under review. In so doing, we shall pay due regard to the recommendations on this subject made by the United Nations Conference on Trade and Development. We shall also follow closely the studies called for by this Conference of longer-term compensatory financing arrangements, which the World Bank has undertaken to do.

During the past year, the services which the Fund is providing to the developing countries have been expanded substantially. Last year we welcomed twenty new members to the Annual Meeting. Many of them, as well as a number of older ones, have an acute shortage of trained personnel and are thus in need of various forms of technical assistance that can appropriately be provided by the Fund. Accordingly, the past year has seen a large expansion of our African Department and the institution of the two new services which I mentioned to you last year in the areas of central banking and fiscal affairs.

In the central banking field, the Fund is ready to provide technical assistance for the establishment of new central banks and also to assist in the recruitment of experienced personnel to serve in the new institutions in an advisory or executive capacity. In the fiscal field, a new department is now being built up to provide technical assistance to member countries on such matters as tax policy, tax administration methods, and budget planning and execution.

The Fund is also in the process of expanding substantially its training program, which is now carried on within the framework of the newly established IMF Institute. We have begun to conduct courses in the French language as a special service to many of our new members in Africa. Finally, we have expanded our publications by issuing, in conjunction with the IBRD, a new quarterly periodical, The Fund and Bank Review: Finance and Development, designed to acquaint a wider public with the nature of our operations. This new publication is being issued in French and Spanish as well as in English.

It is apparent from the development in the Fund’s activities that I have just described that the amount of work devoted to the developing countries’ problems has been increasing substantially. Through this work we cannot fail to be impressed with the tremendous task that is being faced by the financial authorities of these countries and with the importance to the whole world of effective action to raise the standards of living of these vast areas of the world to an adequate level. For a number of years, efforts in that direction were hampered by a decline in the export prices and a worsening in the terms of trade of the developing countries. They have, nevertheless, been able to expand their export earnings (and their capacity to import) at an annual average rate of 4 per cent or, excluding the oil producing countries, of 3 per cent. A rapid population growth, however, has outstripped the growth of exports in many countries and thus has inhibited the growth in per capita imports. To ease this situation, these countries have borrowed heavily, much of it on short and medium term, and debt service has grown sharply.

It is against this background that the recent improvement in the payments positions of the developing countries should be viewed. The change has been substantial. Export prices, after years of decline, showed a marked revival in 1963, and for the first time in some years export receipts of these countries grew at the same rate as those of developed countries. As a result, the over-all balance of payments positions of the less developed countries improved greatly, and a deficit of $650 million in 1962 was replaced by a surplus of $850 million in 1963.

Though exports have expanded further in the first months of 1964, there are signs that the surplus is now diminishing. The rise in prices seems to have leveled off in recent months, but economic activity in the industrial countries remains generally strong and the chances appear good that demand for primary products will continue high. Nevertheless, judging from past experience, it is to be expected that the imports of the developing countries will sooner or later catch up with the improvement in their export earnings, bringing their reserve accumulation to a halt. Although pressures on the balances of payments of the developing countries are, therefore, likely to increase, a rise in their imports is in itself desirable, for without it the development of real resources will be much slower.

In recent years, there has been a growing recognition of the need for collective action to improve the conditions for trade expansion and development of the developing countries, a recognition which has widened the activities of the GATT and which culminated in the United Nations Conference on Trade and Development held earlier this year.

At this Conference, which I had the pleasure to address and in which the Fund participated as an observer, a very wide range of problems affecting the interests of both industrial and developing countries was discussed. I am happy to note that considerable attention was paid to giving better access to the markets of the industrial countries for the exports, including manufactured products, of the developing countries—a recurrent theme in the Fund’s consultations and official statements of policy. It was not to be expected, of course, that agreement would be reached on all issues, but considerable progress was made in clarifying the issues and a number of proposals for special studies of certain problems have been initiated. Proposals have also been made for institutional machinery to keep these problems under constant review and to evolve measures for dealing with them. I am glad to note in this connection that the Conference recognized the need to avoid duplication of work and to ensure proper coordination with existing institutions.

The Fund will watch with great interest these further developments and expects to establish close and effective liaison with whatever institutional machinery is set up, as it has with the Contracting Parties to the GATT. It is the policy of the Fund to cooperate as effectively as possible with other international organizations, whether of a world-wide or a more limited character, with which it has common interests. Effective cooperation and coordination can help to avoid unnecessary duplication of effort and bring about more effective national or international action.

In this connection, as I have already mentioned, the Fund will follow closely the studies called for by the United Nations Conference on Trade and Development, including particularly those on compensatory financing. In another field, which is of particular interest to the Bank—that of the burden of excessive debt service— we shall explore with the Bank ways in which we can be of assistance. The Fund has already, in some cases, helped member countries in reaching solutions to their debt service problem by assisting them in working out a rescheduling of payments better suited to their balance of payments.

While we shall continue our efforts to assist member countries that find themselves in difficulties, it is just as important to prevent difficulties from arising. Both debtors and creditors have responsibilities in this connection.

Much trade, be it domestic or foreign, is commonly financed on credit, and short-term commercial credit plays a perfectly proper and most important role in international trade. Dangers arise rather when other forms of credit are provided, and these dangers can be avoided only if both debtors and creditors are alive to their responsibilities in these matters. If debtor countries are to follow responsible policies, they must have effective means of controlling the commitments they assume. Equally, in providing public or publicly guaranteed credits to the developing countries, the industrial countries should be sensible of the welfare of the country to whom credit is extended and not merely of the commercial interests of their own exporters. For experience has already shown that in the long run it is a disadvantage to both the creditor and the debtor countries alike if a backlog of commercial payments accumulates which cannot be paid off except over a prolonged period. All these questions will receive further study by the Fund in the hope of finding ways in which it can help to alleviate the problems.

Here I might mention a point which may seem obvious, but which I think must be emphasized. We talk of “industrial countries” and “developing” countries because it is convenient for purposes of analysis to do so. But such a division of the world into two categories is an oversimplification. The dividing line can never be firmly drawn, as some countries do not readily fit into either category; but, more important, we should always remember, when using these classifications, that in the long run a firmly based increase in prosperity cannot be obtained by either category in isolation.

I have already noted that the general prosperity in the industrial countries during the past year provides the major part of the explanation of the recent strong export position of the primary producing countries. It is of major concern to the whole world that favorable conditions should continue in the industrial countries, and our attention must constantly be directed to overcoming impediments to their continuing prosperity.

Fortunately, the immediate outlook in these countries is favorable. During the first half of 1964, industrial production has continued to increase in most of them, although there have been significant changes in the rates of expansion. In the United States, the rise in output accelerated in response to the tax cut introduced earlier this year. The official forecast is that the present expansion will continue well into 1965, with a further reduction in unemployment, which is now at its lowest level in five years. This continued expansion in the United States, which proceeds under conditions of virtual price stability, cannot fail to have a stimulating impact on business conditions in the world at large.

At the same time, measures in which balance of payments considerations have played a prominent part have recently moderated the economic expansion in both the United Kingdom and Japan, and indications are that their rates of growth will be slower in 1964 than in 1963. Although the current rate of increase of output in Japan is still high by the standards of the other industrial countries, it appears to be compatible with balance of payments equilibrium in the foreseeable future. In the United Kingdom, the moderating policies adopted earlier this year appear to have lowered the increase in demand to an annual rate of 4 per cent, which is more in line with what the authorities consider sustainable over the longer run.

During the past year, several countries on the European continent have also taken measures of financial restraint, but predominantly to counter inflationary pressures rather than on balance of payments grounds. For some time the restraining measures have been taking effect, and there has recently been a slowdown in the rate of increase in industrial production in several countries, as well as, in some, a marked strengthening of their balance of payments positions. At the same time, cost increases in several countries have continued to give some cause for concern, and it is understandable that the authorities must continue to pay considerable attention to restraining pressures on prices. In several countries, success in containing these pressures may hinge on wage negotiations later this year.

While measures to restrain over-all demand were undoubtedly needed for internal reasons, due attention should be paid by surplus as well as deficit countries to the external impact of their financial policies. At this time, the restrictive monetary policies in Europe in combination with the more liberal monetary policies in the United States, as evidenced by a growing disparity in interest rates between the two areas, carry with them dangers of their own. This is so in spite of the measures that have been taken in Europe— with some degree of success—to prevent undesirable movements of funds.

The need for a coordination of monetary policies among the major countries is generally recognized. Such a coordination would undoubtedly be facilitated if the responsible authorities would in general give more weight to fiscal policies in regulating domestic demand, leaving greater freedom for monetary policies to be adapted to changing international situations. In addition, those countries in strong payments positions that need to restrain over-all demand should make every effort to lower any impediments to imports and capital exports.

The outstanding feature of payments trends during the past year has been the reduction of basic imbalances and the calm on the exchange markets. Consequently, this has been a very suitable period for considering the longer-term problem of the best means of providing adequate liquidity for the world.

During the past year, the Fund has intensified its studies of international liquidity. These studies have, I believe, done much to clarify the nature of the problems and to help in finding satisfactory and acceptable solutions. The Executive Directors have devoted a key section of their Annual Report to a statement of their findings and their conclusions. Chapter 3 of the Report sets out the broad issues of international liquidity. Chapter 4 deals with the particular role that the Fund now plays in this field and the even larger role that it could play in the future. There has also been close and fruitful cooperation during the year between the Fund and the group of senior officials of the ministries of finance and central banks of the ten countries that participate in the General Arrangements to Borrow. The report of this group was recently made public as an Annex to the statement of the ministers and governors of those ten countries.

Our concern about international liquidity—its level, its composition, and its distribution—arises from the objectives which guide our policies and which we hope to see achieved in the world economy. These objectives include high levels of employment and an adequate rate of economic growth, freedom of trade and payments from restrictions, and reasonable price stability. Measured against these criteria, the record of the two decades since the end of the war, although not perfect, cannot be considered unsatisfactory. Much has been achieved: a tremendous expansion of world trade; the convertibility of all major currencies; greatly reduced reliance on restrictions and on bilateralism; considerable, though still insufficient, progress in the developing countries; high levels of employment; and avoidance of the extremes of inflation and deflation in most areas of the world. The record looks even better if we recall the experience of the twenty years after the end of World War I. We want to ensure that the liquidity conditions for the future will be such as to make it possible for us to earn a similar verdict, or even a better one, during the next decade— although we fully realize that action in many fields other than that of liquidity will be necessary to achieve this end.

In the past decade, a large part of the supply of international liquidity arose in the form of liquid claims on the United States, associated with the U.S. balance of payments deficit. It is unlikely that the payments deficit of the United States will contribute to the creation of reserves in the future on the same scale as it has done in recent years, and this would not indeed be desirable. Increased reliance has thus to be placed on other, more deliberate, measures to provide international liquidity as needed. It is obvious that any new developments in this direction raise many economic, technical, and also political problems. They deserve and will receive the most careful study, and I do not here want to anticipate the outcome of such study.

However, at this time I do wish to direct particular attention to two propositions of a general character that are contained in the Report of the Executive Directors and that have my strongest personal support. In the first place, while thinking about possible reform of the present monetary system, we must remain continually aware that this system is very much a going concern. Its benefits have been great and continue to be great. In our efforts to supplement and improve this system, we must continually be conscious of the need for orderly development. Secondly, where decisions are taken to create and administer liquidity by deliberate international action, it is particularly important that the advantages of the multilateral institutional approach be kept in mind. An international organization provides the forum for a balanced consideration, and hence the best reconciliation, of the various objectives in the international financial field as they affect all countries.

Since international liquidity in the form of reserves and access to credit comes into play when a country’s international payments are in surplus or in deficit, any consideration of the role of liquidity or its adequacy must pay particular attention to the manner in which disequilibria arise and the policies that are to be followed to eliminate them. In this connection, let me draw particular attention to the importance of what has been called “conditional liquidity.” That is liquidity which is available to countries on the understanding that they will follow constructive policies to eliminate their payments deficits. The main source of conditional liquidity at present lies in the members’ drawing rights on the Fund in the credit tranches.

The discussions that have taken place during the past year in the Fund and elsewhere have led to the conclusion that there is a case for an increase in Fund quotas and hence in the conditional liquidity to which members have access. As Governors know, the question of quotas would, in any case, come up for consideration in connection with the quinquennial review to take place during 1965. I strongly feel that an increase in the quotas of Fund members at an early date is, at the present time, both justified and necessary, and I urge the Governors to give it most careful attention. If it is also the view of the Governors, as I have every confidence it is, that such an increase in Fund quotas is appropriate, the Executive Directors will no doubt be able to prepare proposals for concrete action both to raise the quotas of the Fund membership as a whole and to introduce special additional quota increases for individual countries whose present quotas are out of line.

There may be also, over the longer run, a need for action to increase the unconditional liquidity of members. The Annual Report before you gives some technical and tentative indications of various ways in which this could be achieved through the mechanism of the Fund. This is not a question for decision at this time. As the Executive Directors have indicated, it “would require careful consideration from many points of view before any decision could be reached as to whether it would be appropriate for the Fund to undertake such operations,” and it is their intention “to give these matters further study in the period ahead.” The Fund staff will also cooperate closely with the Study Group which has been set up by the ten participants in the General Borrowing Arrangements to investigate possible methods of adding to reserves by some form of international action.

It is now twenty years since the new framework of an international monetary system was conceived and embodied in the Articles of Agreement of the Fund at Bretton Woods. Although it would not be reasonable to expect the existing system, or indeed any system, to be perfect, it has proved eminently workable and adaptable to changing circumstances. It is, however, appropriate that after twenty years the system should be given the examination that is now taking place. I am sure that, as a result of the work that is being done, the international monetary system will emerge strengthened and even better equipped to serve the interests of the community of nations in accordance with the objectives of the Fund.

September 7, 1964.

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