Chapter

Discussion of Fund Policy at Opening Joint Session 1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1965
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Statement by the Governor of the Bank and Fund for Trinidad and Tobago

A.N.R. Robinson

I would like, first of all, to express my gratitude to you, Mr. Chairman, for the considerable distinction you have conferred on me by according me the status of first speaker from the floor. I must confess that I have accepted this honor with some trepidation. …

We have again been treated this year to farsighted and comprehensive addresses from Mr. Woods and Mr. Schweitzer; and we have had the benefit of the excellent Reports prepared by the dedicated staff of the Bank and Fund.

You, Mr. Chairman, have clearly identified the two major problems which weigh heavily upon us as we meet this year—the problem of international liquidity and the related problems of development finance. …

It is clear that the combined effect of recent increases in interest rates, appeals for voluntary restraint, and other measures has been to reduce the flow of capital and increase the cost of borrowing to developing countries. Increased costs and difficulties in external capital markets have escalated to domestic markets as well and threaten seriously to aggravate budgetary and foreign exchange burdens.

In these circumstances, the role of the Bank and its sister institutions has become more crucial than ever before. Commercial borrowing, suppliers’ credits, bilateral aid, even though not with-out their usefulness, have proven to be grossly inadequate to meet the needs of development finance.

We have been pressed on every side by advice to make greater use of our own resources. While the wisdom of such advice cannot be overemphasized, the limits of its application cannot be ignored. In common with many other developing countries, Trinidad and Tobago has done much to help herself. We have instituted fiscal reforms which over the past three years have increased recurrent revenue from 15 per cent to 18 per cent of gross domestic product. We have achieved this in spite of our limited tax base narrowed by the grant of fiscal incentives to attract private investment and in spite of adverse movements in the terms of trade and declining production in the area of our principal natural resource—crude petroleum.

We are committed to working out our solutions within a democratic framework. We have achieved a fair measure of internal price stabilization and, in furtherance of the principle of the rule of law, we have established a specially constituted court for the settlement of industrial disputes. Needless to say, these measures have been taken at considerable political risk. It is no doubt possible to go even further, but turbulence does not attract investment capital, except perhaps on a government-to-government basis.

We have also been advised that we deserve aid. But aid is usually limited to the direct foreign exchange content of development projects and is generally tied to the export of goods and services from the donor country at a time when we need to make maximum use of local goods and services owing, among other things, to an unemployment rate of more than 10 per cent.

Although there are welcome signs of softening in the terms of aid in some directions, it appears that only the Bank and its sister institutions can break the vicious circle of development finance. Has not the time come to reconsider the excellent proposals which have been put forward for the subsidizing of interest rates on commercial loans or underwriting the bond issues of creditworthy developing countries?

It is generally agreed that the terms of bilateral aid with respect to the financing of local currency costs can be substantially liberalized if there is some easing of the international liquidity problem. The implications of any scheme for monetary reform must consequently be widespread and far-reaching and could best be appraised and implemented within the framework of a multilateral institution such as the International Monetary Fund. In this connection, permit me to recall the proposals I made at last year’s Annual Meeting for the registration of bilateral aid transactions with the IMF or one of its sister institutions with a view to taking the balance of payments problem out of international aid. Pending a solution to the problem on a long-term basis, such as that proposed, and while the present difficulties obtain, could not the Bank consider meeting in appropriate cases a proportion of the local costs of projects of which the direct foreign exchange costs are already available through bilateral aid?

I would like to take the opportunity to mention how much I welcome the growing cooperation between the Bank and Fund, on the one hand, and the United Nations Specialized Agencies and UNCTAD, on the other. In this connection, I would particularly like to refer to the work now being done by the Bank on the UNCTAD proposal for compensatory financing. I would like also to pay tribute to the valuable work being undertaken through the advisory services of the Bank and the Fund and would welcome an extension of these services to an even wider range of technical fields. …

Statement by the Governor of the Bank and Fund for Nigeria

Chief Festus Sam Okotie-Eboh

… It is becoming increasingly clear that, apart from the handicaps in the fields of education and training, insufficient foreign exchange receipts and inadequate capital formation are the chief obstacles impeding the growth of many developing countries. Quite often, they can be traced to identical causes. To this extent, balance of payments weakness and investment insufficiency can actually be regarded as external and internal symptoms of the same fundamental problems. It is becoming increasingly important to bear this inner connection in mind, in view of the noticeably growing tendency to regard the balance of payments deficits of developing countries as the main criteria governing amounts, forms, and terms of development aid, especially when such deficits reveal serious strains due to interest and redemption payments.

The latter part of 1964 witnessed a reversal in the international trading positions of many of the developing countries, especially those in Africa. The price of cocoa, a major crop in West Africa, has since fallen distressingly to the lowest level in many years. Coffee and tobacco producers in East Africa have found it difficult to find markets for their products. The prices of such commodities as palm products, tin, and natural rubber have been held in check by competitive products from advanced countries, by national stockpile policies, and by synthetic substitutes.

In 1964, Nigeria, for example, had to increase substantially the volume of its primary exports in order to obtain a marginal rise in the value of exports. Once again, increased effort was not rewarded with increased income owing to an unfavorable movement in the terms of trade. The deficit in Nigeria’s balance of payments was held down only by the imposition of higher taxes. The rate of inflow of foreign capital, though substantial, did not eliminate the deficit in the current account. As a result, the country suffered a substantial reduction in its external reserves.

Future prospects are not bright. In the current year, a bumper soya bean crop in the United States has had a depressing effect on the prices of competitive products, like palm oil, palm kernel, groundnuts, and groundnut oil. Expansion of cocoa bean production has been greeted with declining prices. Any gains in the prices of timber exports are inevitably lost through the declines of those of rubber and cotton. Forecasts indicate that the value of Nigeria’s exports of primary crops in 1965 and beyond will either fall or stabilize at present levels. Since the trend of our production is quantitatively on the increase, what this means is that, regardless of the extra effort exerted by Nigeria, the gains would either be nil or marginal.

Yet, in terms of talking about the deplorable position of the developing countries, there has been no lack of enthusiasm. There is no country today which has not agreed that something needs to be done to rectify the economic imbalance against developing countries. For over two years, the developed countries, which are also members of the International Monetary Fund, have been discussing President Kennedy’s proposal for a round of tariff cuts among the industrialized countries. Among the proposals was one on tariff reduction or outright abolition of duties on primary imports. No report of progress made has yet been available to the waiting developing part of the world.

In 1964, a United Nations Conference on Trade and Development met in Geneva to deal with the question of international trade and development. A number of resolutions were adopted, aimed at improving the distribution of international trade benefits and increasing the flow of international capital to developing countries. It is my conviction that the international trading position of the developing countries would improve if the more developed nations would implement the resolutions adopted at that Conference.

The export trade of the developing countries, including Nigeria, has suffered since 1955 owing to continuous adverse terms of trade. With changing consumption habits in developed countries, demand for tropical exports no longer increases in proportion to increases in income. The development of synthetic substitutes for primary exports, and the existence of national stockpiles, which hang like a dark cloud over the world’s primary export markets, have impaired the price-demand relationships that would be expected to follow a fall in the prices of primary exports. For nearly ten years, the world market for tropical products has been a buyer’s market. The effect of this has been the loss of bargaining power by the primary crop exporting countries, the decline in aggregate receipts from such exports, and a retardation of the growth of owned resources which the developing nations could apply to economic development.

In spite of falling export values, imports from developed countries have continued to be buoyant. This has been due to the need both to satisfy part of the consumption propensities of populations hungry for the good things of life and to meet the requirements for capital goods and raw materials for developing industrial sectors. The net effect of these has been a gradual deterioration of the trade balance of the developing countries. …

Now, coming to the Fund, I would like to make a few points which are important, not only for my country, but for other African countries which are undergoing development. I think there is now general recognition that the world monetary system requires complete overhauling. We are all aware that the basic structure of international monetary arrangements made at Bretton Woods has become out of date. Nevertheless, any new system which is set up has to be based on the tried and tested experience of the last 20 years. In the present arrangements, the pound sterling plays an important role as a key currency in international payments. No less than 40 per cent of the trade of the entire free world is conducted through the medium of sterling. In Africa, there are many countries which hold their reserves almost entirely in sterling. I therefore hope that any new arrangements will fit sterling into the system, so that it can continue to play a key role in the world.

I am glad that sterling has, as a result of action by some friendly countries, become strong enough to rule out the question of devaluation. However, I appeal to individual countries in the sterling area and international financial organizations to do everything in their power to strengthen sterling. We in Nigeria are taking all possible measures to strengthen the Nigerian pound, which is at par with sterling, so that sterling itself would be stronger. We believe that it is only by each country of the sterling area being in balance with the rest of the world that the area as a whole can be strong. I wish to state emphatically, however, that the obligation to strengthen sterling is gladly undertaken by countries such as mine, only because we believe that the capital-exporting countries of the sterling area, particularly the United Kingdom, will refrain from doing anything to hurt the flow of capital to Nigeria and also arrest any tendencies to unwarranted repatriation of capital from Nigeria. I believe that all members of the sterling area have not only responsibilities but also rights in relation to other members of the area.

We all recognize that one way of increasing world liquidity is to increase the dollar price of gold, but such a measure, apart from tying the expansion of international currency to the vagaries of gold production, would give an entirely unwarranted windfall gain to South Africa. I am sure the countries in Africa would never view such a result with equanimity for obvious reasons.

While we are on the subject of future international monetary arrangements, I must record my strong objection to the problem of international liquidity being regarded as the sole concern of the industrialized countries, and even among them, of only ten important countries. The developing countries are equally important for world trade. We cannot have any confidence in currency arrangements worked out by a narrow group of countries, none of which can have a full understanding of the problems of developing countries. I would, therefore, strongly urge that developing countries be fully represented in any Working Group charged with the duty of formulating new proposals for establishing an improved international monetary system. Today the world is interdependent, and the only hope for mankind is a global approach to development problems.

The progress made since Bretton Woods has been a significant one in that the Annual Meetings of the International Monetary Fund and the International Bank for Reconstruction and Development have long ceased to be mere organs for talking about purely theoretical financial matters. They have become practical organs of economic and financial developments, aimed at raising the standard of living of mankind, irrespective of class, color, or creed in the free world.

Statement by the Governor of the Fund for Italy

Emilio Colombo

Before anything else, I wish to associate myself with previous speakers in rendering warm tribute to the admirable Report which the International Monetary Fund has prepared for us, and to the masterly way in which the Managing Director presented it. With its usual clarity, but this year with more than usual emphasis, the Report deals with the problem of international liquidity, which increasingly occupies public opinion in all our countries. We have also listened with the utmost attention to the penetrating remarks which the Managing Director has made on this subject in his statement.

Evidence of this growing interest comes not only from academic circles, where the great debate goes on with waxing vigor, but also from the wide response evoked by the report of the Study Group which the Deputies of the Group of Ten had asked to examine various proposals regarding the creation of new reserve assets.

In the conviction that this present meeting of ours offers the most propitious opportunity for a fruitful exchange of ideas on this subject, I propose to indicate to you the present state of our own thinking.

Let me say at once that we in Italy share the view that in the discussion of international liquidity problems the distinction between unconditional and conditional liquidity is far more relevant, for practical purposes, than the distinction between owned reserves and credit facilities. In effect, unconditional liquidities can be used freely without outside interference which might affect the conduct of economic policy. Insofar as the industrial countries are unwilling to renounce their sovereignty in monetary matters, the two kinds of liquidity are not interchangeable.

We believe that in considering the problems of how to improve the international monetary system, it would be useful to distinguish between those that require short-term action and those that require long-term action. The latter group includes the problems of a possible future shortage of international liquidity in the not unlikely event that gold production and the supply of reserve currencies should prove insufficient to meet the growing demand for unconditional liquidity of the expanding world economy.

Among the problems for short-term action, no doubt the most urgent is that of the stability of the international monetary system. This problem derives from differences in the composition of reserves in the major industrial countries, and from the circumstance that the composition of reserves does not always meet the preferences of the owner country’s monetary authorities. Consequently, we see an immediate danger that the volume of reserves may contract as a result of the separate or combined effect of a number of factors; among these factors, I would mention, for example, an increase in the propensity of central banks to hold gold rather than other reserve assets; dollar transfers from countries with a low propensity to hold gold to countries with a high propensity to do so; or possible conversions of sterling into dollars and/or gold.

In addition, it may well happen that the U.S. balance of payments gets back into surplus (surplus, that is, as calculated by the traditional methods of the Department of Commerce). We believe, however, that such a surplus could not, in itself, cause any serious decrease in unconditional liquidity. On this point we are in full agreement with Secretary Fowler, when he told the Subcommittee on International Finance of the Senate Banking and Currency Committee on August 18, 1965, that “failure by the United States to dry up its international deficits would be almost certain to lead to a serious drop in international liquidity, because loss of confidence in the dollar would accelerate conversions of dollars into gold at the expense initially of U.S. reserves,” and ultimately to the detriment of the volume of world reserves. Secretary Fowler added that “the U.S. program for bringing its international payments into equilibrium is the best guarantee the world has of continued adequate liquidity.”

In our view, international cooperation can do much to counteract the factors which at present tend to diminish the volume of unconditional liquidity. To this end, international cooperation could be strengthened along the following lines:

  • (1) An increase in the propensity of central banks to hold gold rather than other reserve assets could be neutralized, not only by the adoption of some scheme which provides holders of currency with an alternative asset but also by a common reserve policy of the major industrial countries within the framework of multilateral surveillance. A common reserve policy does not necessarily imply that the same ratio of gold to total reserves applies to all; moreover, it could, at least in the beginning, be formulated in a much looser way, for instance, by laying down an upper and a lower limit for the ratio of gold to total reserves. These limits need not be rigid; they might be moved up or down so as to create the conditions for increasing or diminishing the flow of currency assets to monetary authorities. The International Monetary Fund’s own policy in the matter of currencies to be drawn and to be used on repurchases implies recognition of the need to harmonize the qualitative composition of reserves, for this policy in effect tends to establish uniform proportions between total reserves and that portion of them which is held in the form of credit positions on the Fund. For our part, we are looking forward with keen interest to the Executive Directors’ discussions on this subject, which are scheduled for the near future.

  • (2) The danger of a contraction in the volume of unconditional liquidity owing to dollar transfers from countries with a low propensity to hold gold to those having a high propensity to do so could be obviated by a wider network of reciprocal monetary agreements to be activated in the event of such movements.

  • (3) Sustained conversions of sterling into dollars (and, subsequently, of dollars into gold) would constitute a serious danger to the over-all volume of international liquidity; since central bank swaps can, in this case, be of only temporary help, sterling balances could be converted into claims on the International Monetary Fund. Another remedy would be to introduce some scheme of the Mutual Currency Account type. Obviously, all such schemes should be subject to multilateral surveillance, to make sure that they are not used as a means of financing balance of payments deficits.

As we see it, the problem of strengthening the stability of the international monetary system really comes down to avoiding any decrease in unconditional liquidity—and this latter is a problem which we regard in all circumstances, but especially at present, as far more important than to increase the volume of unconditional liquidity. Let me state clearly that, like others, we see no reason to revise the conclusion reached in May 1964 by the Deputies of the Group of Ten and expressed also in last year’s Report by the International Monetary Fund, to the effect that gold and reserve currency assets, together with a wide range of credit facilities, are fully adequate for present needs and most probably also for some years to come. In other words, we believe that there is no case at present for any further increase in the volume of unconditional and conditional liquidity.

This being said, we would not disagree with the view that preparations ought to be made in good time in case the supply of gold and reserve currencies should later prove insufficient for the reserve needs of the world economy. The international monetary system is not completely without defenses against this contingency, as it was at the time of the famous discussions in the Gold Delegation during the interwar period; it now has a network of bilateral and multilateral credit facilities (swaps, Roosa-type bonds, central bank support operations, IMF credits, etc.) of considerable flexibility and unprecedented volume. In our view, therefore, there is no reason to fear any sudden crisis due to an over-all insufficiency of reserves.

We would not regard as satisfactory a system relying predominantly upon a flow of gold into reserves, because this would presuppose an increase in the price of gold. We reject the view that an increase in the price of gold is a satisfactory answer to the problem of how to expand international liquidity. To achieve the desired effect, the price of gold would have to be raised quite considerably, and this would generate an unwarranted increase in the volume of unconditional liquidity in relation to present needs; alternatively, gold would have to be upvalued repeatedly at short intervals, and this would have the drawback of undermining the confidence of holders of reserve assets other than gold, with the ultimate result that, far from expanding, the volume of international liquidity would shrink.

The creation of new reserve assets other than gold rests essentially on a credit transaction, by which participating countries obtain either (1) credits or unconditional drawing rights, or (2) actual holdings expressed in some unit of account, whether these are represented by a credit instrument or not. In either case, the system of mutual obligations may be bilateral or multilateral, and may or may not work through the intermediary of an international monetary institution.

It follows that the process of reserve creation must depend upon a convention by which the countries concerned commit themselves to accept the new asset within certain limits as part of their reserves and to use it according to agreed rules.

In our view, the decision to create new reserve assets should not be made to depend upon the needs to finance external deficits or the economic development of the less developed countries; these requirements should continue to be financed by traditional means. Thus, the creation of new reserve assets should not, in itself, affect world demand nor give rise to any outright transfer of real resources. The purpose should simply be to satisfy such demand for “liquidity to hold” as cannot be met by the current supply of monetary gold and as might, therefore, lead to undesirable balance of payments policies and, in the long run, to general deflation.

The fundamental issues involved in the process of reserve creation, such as they have been outlined in the Final Remark of the Ossola Report, are essentially of a political nature. In stating our position on these questions, I should like to make it clear that we approach the coming discussions with an open mind, and shall be ready to consider any constructive proposal so long as it is compatible with the orderly progress of the international monetary system.

1. Distribution of the new reserve assets in proportion to member countries’ gold reserves appears to us inequitable, and we believe that it might modify the scale of propensities of central banks in such a manner as to lead ultimately to a decrease of over-all liquidity. Admittedly, every distribution key is bound to contain an element of arbitrariness, but we would prefer some other yardstick, such as the total amount of official reserves or IMF quotas plus GAB commitments.

As regards the use of new reserve assets, we believe that the accumulation of extreme debtor or creditor positions needs to be avoided and that, therefore, some link between the new reserve assets and gold is not to be excluded altogether. However, given the disadvantages this might entail for the volume of existing liquidity, we would be inclined to consider also a link with the volume of total reserves or else a quota system.

2. In our view, the creation of new reserve assets should take place in close association with the International Monetary Fund. We feel that the responsibilities involved in the creation of new reserve assets should be borne mainly by those countries which are best able to shoulder the resulting burden. Other countries will in any event benefit indirectly from the improvement in the international monetary system, and we are in no way opposed to their gaining also some direct advantage from the expansion of world liquidity. The Fund’s conditional medium-term lending, however, should be kept strictly separate from its new monetary function, so as to prevent any relaxation in the rules governing access to IMF credit. We would, therefore, favor a system under which the new reserve assets were administered by the Fund in a separate account.

3. Our preferred solution is a system of automatic drawing rights in the Fund. There are many well-known arguments in favor of this solution; there is also the additional advantage that the creation of new reserve assets in the form of credit lines or drawing rights, rather than actual holdings, is an eminently flexible method. We know from experience that monetary authorities get used to a certain level of reserve holdings and resist their decline, but they mind much less when claims accumulated against a credit line are repaid to them—if anything, they indeed encourage the process, which actually comes to much the same as spending reserves.

4. As regards voting rules, we ought not to be too much afraid of a system based upon unanimity, because decisions of really great importance are, de facto, nearly always taken by unanimous agreement. De jure, however, provision will no doubt have to be made for a system of weighted voting with a qualified majority, subject to certain safeguards for the rights of the minority. We have no rigid ideas on the subject, but we have in mind a formula similar to that used in the General Arrangements to Borrow (GAB).

We have no rigid position with respect to the problems of a mainly technical nature, such as transferability of the new reserve assets, the kind of limits to be established for the creditors’ commitment to accept the assets, exchange value guarantee, rate of interest, and rules for liquidation and withdrawal. These problems, we are sure, are relatively less important than the political ones. We do think, however, that the new reserve assets should not be directly convertible into gold (since this would mean introducing a new element of instability into the system), and should, therefore, be covered by a value guarantee. Consequently, a limit needs to be fixed for the creditors’ obligation to accumulate the new assets; this limit might, in our view, be fixed in terms of a link of their use with gold or, better still, with official reserves, or else in terms of a quota system. Furthermore, since the accumulation of the new reserve assets represents a temporary transfer of real resources, they should carry a moderate rate of interest.

One problem to which we attach great importance is that of coexistence of the new reserve assets with existing currency assets, that is, mainly with dollar balances.

We believe that, quite apart from its function as a means of settlement and financing in international trade, the U.S. dollar should continue to be used not only for working balances but as a reserve asset. The arguments in favor of this view were fully discussed by the Deputies of the Group of Ten and by the Study Group they set up. We regard it as unrealistic to want to stabilize or reduce the total volume of dollar holdings by nonresidents—whether in nonofficial or official hands—by any sort of pre-established program, and for this very reason we attach the greatest importance to a considerable reinforcement of multilateral surveillance and to the study of ways and means by which the process of adjustment can be rendered more rapid and effective. In particular, the creation of new international liquidity in the form of dollars should be subject to a collective decision, and this should apply not only to dollars acquired by countries of the Group of Ten, but to all new dollar balances in the hands of nonresidents, in whatever country and regardless of whether the holders are official or not. Although we are opposed to the use of automatic rules linking the volume of domestic liquidity to balance of payments fluctuations, we agree with those who want to strengthen the adjustment process by diversifying and improving the policy instruments at the disposal of the authorities. We also think it is right that we should work out certain rules of good behavior consistent with each government’s responsibilities vis-à-vis the international community. This latter has a right to expect that imbalances of the order of magnitude experienced in recent years will not recur again and again. Even a deficit which is moderate in relation to the deficit country’s gross national product may be very considerable in relation to the volume of existing unconditional liquidity, and in that case may lead to the formation of reserve assets well in excess of world needs and hence difficult to reabsorb. In these conditions, the deficit country would encounter great difficulties in repaying the credits it has obtained; and these would eventually have to be funded in some way or another, with the undesirable result of precipitating a transfer of real resources not corresponding to the income structure of the countries concerned.

To sum up, I would say that our position regarding the long-term problem of the creation of new reserve assets rests on our conviction that it is surely not beyond the wits of wise international monetary management to devise some system which is independent of the hazards of gold mining no less than of fluctuations in the balance of payments of major countries.

The recent European trip by Secretary of the Treasury Fowler brought to light a substantial measure of agreement to the effect that it is now time to make a start on multilateral discussions with a view to finding a rational solution of the problems with which I have dealt. Any intergovernmental agreement will have to be preceded by careful preparation among the countries most concerned, and our meeting here is surely the best occasion to set in motion the first stage of this preparation.

Italy’s own interest in these problems, which we have demonstrated again and again by our active participation in all relevant international discussions, stems primarily from our desire to collaborate in their solution. But we also have a special interest nearer home in that we happen to possess reserves which are high both in absolute and in relative terms—at the end of August, $4,677 million, corresponding to about eight months’ worth of imports.

If at present our foreign economic relations are again swelling our reserves, this is certainly not the result of deliberate policy on our part. On the contrary, Italy is now engaged in a process of stimulating domestic production to reabsorb the external surplus. There have been very large fluctuations in the balance of current items in Italian external payments during the last four years. From a surplus of $234 million in the fourth quarter of 1961, the current balance plunged into a deficit of $325 million in the fourth quarter of 1963, and then went back into surplus to the tune of more than $400 million in the third quarter of 1964 and thereafter. But the part which the current surplus since April 1964 has been playing in the Italian economy is very different from that of the earlier surplus period between 1959 and 1961. At that time, our surplus arose from growing competitive strength due to rising productivity; today, it arises from a larger supply of goods due to falling domestic investment demand.

The improvement in Italy’s external balance is doing nothing at present to stimulate domestic production, but merely mitigates the effects of recession at home. If, in this situation, we want to absorb our current external surplus and at the same time to expand employment and income in a durable way, our policy must be to boost domestic demand in a selective way with a view to realigning costs to market prices; this means in effect raising investment demand and thereby ultimately productivity in the economy.

Two immediate policy measures we introduced to this end were to step up the pace of public investment programs, and to make funds available for low-cost housing construction. Another important step is that the five-year plan, 1965-69, which is now under discussion in Parliament, provides that changes in wage rates are not to be allowed to push up the general level of prices but should work out their influence in altering the price structure and the distribution of income.

Wages, production, prices, and the balance of payments in Italy have moved in recent years in a strikingly clear-cut sequence of action and reaction—so much so, that the model might well repay study by foreign observers as well. Recent events in Italy have demonstrated once more that, in a system tending toward freer foreign trade, the key to reconciling high levels of domestic employment with external balance is to align wage rises to productivity rises—due allowance being made, of course, for comparative changes abroad. But the main lesson, perhaps, was that it is perfectly possible to reconcile these two objectives, if only the spirit of enterprise remains always alert to any opportunities for raising productivity, and employers and workers are mindful of a higher common objective in settling their disputes—that is, that every single citizen’s level of income and consumption must, at one and the same time, satisfy the requirements of employment and income growth and be commensurate with labor’s contribution to production.

Statement by the Governor of the Bank and Fund for Malaysia

Tan Siew Sin

I am happy to have again this opportunity to address the Annual Meetings of the IMF, IBRD and its affiliates, IFC and IDA, and to welcome those new members who are attending these meetings for the first time. Once again we are indebted to the enlightened and dynamic leadership of Mr. Schweitzer and Mr. Woods who have, during the past year, shown great resourcefulness in meeting the difficult and complicated problems of international monetary management and economic development. The constantly expanding role and increasing moral authority asserted by these organizations in the field of finance and development no longer need to be demonstrated; they are now accepted as a matter of course.

I would like to express my appreciation to both Mr. Schweitzer and Mr. Woods for the excellent Annual Reports they have presented to us, and I am confident that, in the year ahead, the Fund will, under Mr. Schweitzer’s leadership, continue to make a significant contribution toward finding appropriate solutions to problems associated with international liquidity and international monetary reform, while the Bank and its affiliated organizations, led by Mr. Woods, will continue to seek more effective means to promote rapid and sustained development of the developing countries.

As always, the Annual Report of the IMF contains an extremely lucid, well-documented, and comprehensive analysis of the international monetary scene, its prospects, and major problems. It is a document of immense analytical value, and we note with concern the sections on two important aspects of the financial problems facing developing countries, namely, the problems arising from the structural weaknesses of national fiscal systems and the difficulties resulting from an excessive burden of short-term foreign debt. At this stage, I could add in passing that as a tangible expression of our very firm support for the Fund and its policies, we have requested an increase in our quota to $125 million. The magnitude of this increase can be gauged from the fact that, at the beginning of this year, our effective quota stood at $37.5 million.

We in Malaysia have been following with interest recent discussions and pronouncements on the subject of international liquidity and the functioning of the international monetary system. We earnestly believe that the Fund has a greater role to play in these matters in the future than it has been able to do in the past, and we will certainly give our support to any proposals which increase international liquidity and the efficiency of the international monetary system as a whole. In this connection, we have watched with particular interest the activities of what has come to be known as the Group of Ten. I believe that it is intended to hold a meeting of the Group shortly and this could lead to at least a definition of the main problems which lie ahead. Developing countries like Malaysia have, of course, no hope of becoming, in the foreseeable future, a member of this exclusive club, though the policies and actions of this club could have a decisive bearing on our destiny. If, therefore, at a subsequent date, the area of agreement achieved by this club is such that concrete proposals could be ready for implementation, we hope that it would be possible to consult with representatives of the developing countries before irrevocable decisions are reached.

We hope that at this stage it will not be felt that what is good enough for the richer countries should be good enough for the poorer ones. This premise could do serious harm to the latter in view of the fact that membership of this club is based on economic power rather than economic need. I am, of course, aware that I am speaking as a rank outsider in this sphere, but I would like to put forward the proposition that though our stake in the matter of international liquidity is indirect rather than direct, and of far lesser importance than that of the industrial countries, our needs, though different, are sometimes by no means less. This statement of our position reflects the fact that while the problems of the industrial countries, who form the Group of Ten, are the problems of wealth, the problems of the developing countries are the problems of poverty. There is, therefore, a basic difference between our respective problems, and hence our respective needs, and we feel accordingly that, if changes are proposed, such changes should take this basic difference into account, and, for this purpose, we also feel that the International Monetary Fund would be a more suitable instrument for executing any changes or any new system that might be envisaged.

Malaysia, which I have the honor to represent at this gathering, is perhaps a good example of what I have referred to as the problems of poverty. We are a small country which has not been too generously endowed by nature. Our soil is comparatively poor on the whole, apart from that in one or two states; and we are not blessed with things like oil, though we have a certain amount of tin and iron ore. Thanks, however, to prudent financial and economic policies and careful housekeeping, we have so far managed to avoid the twin pitfalls normally associated with developing countries, namely, deficit financing and inflation. We impose the minimum of controls and restrictions, whether for the purposes of trade or exchange, and in spite of this, our gold and foreign exchange reserves are still sufficient to pay for 11 months’ imports. Our current Five-Year Plan is doing well. The latest figures suggest that Plan targets for both public and private investment will be surpassed.

Our next Five-Year Development Plan, which will be known as the First Malaysia Five-Year Development Plan, because previous plans covered only the States of Malaya, having been begun before Malaysia came into being, envisages substantial but not unrealistic capital expenditure in the public and private sectors, with special emphasis on those states which are relatively less developed. It is here that the rub will lie. Whereas previously we were able to finance practically our entire development from our own domestic resources, the success of the next Plan, which covers the period 1966-70, will depend largely on the extent of foreign aid available. The main reasons for this radical change in the picture, and it is clearly a change for the worse, can almost be expressed in one word, and that word is defense. Thanks to the Indonesian confrontation, defense and internal security at present absorb about 25 per cent of total public expenditure. I should also admit that our expenditure on education is high and rising fast, but we feel that this is a worthwhile investment in the future, though it is not an economic project in the narrow and technical sense of the term. Without the Indonesian confrontation, however, our expenditure on defense and internal security would be that much less and we could afford what we have spent in the past and intend to spend in the future on education.

To make matters worse, the average price of natural rubber, which is our principal export commodity and which accounts for more than 20 per cent of the gross national product and about 45 per cent of total export earnings, has declined sharply since the beginning of this decade. In 1964 the average price of natural rubber was almost 35 per cent below what it was in 1960. The net effect is that, in spite of the 11 per cent increase in export volume during this period, total export earnings in 1964 were as much as 30 per cent below the amount earned in 1960. This is a graphic illustration of the problem which I have underlined year in and year out, since I first took part in these annual gatherings six years ago, and that is the growing imbalance in the terms of trade between the developing countries on the one hand and the industrial countries on the other. We are penalized through no fault of our own, and we get paid less and less for producing more and more, as we are not in a position, unlike the industrial countries, to increase the prices of what we sell while lowering the prices of what we buy. In other words, we have to do business on terms set by and for the industrial countries themselves. For the next Development Plan, 1966-70, the volume of rubber exports is estimated to increase by about 37 per cent as a result of our new planting and replanting programs, but receipts are estimated to increase by only 10 per cent above the 1965 level. …

I wish to refer, before I conclude, to the recent separation of Singapore from Malaysia. There is no point at this stage and in this gathering to go into its causes. What matters is the future. In this connection, I wish to make two points. Firstly, there is every possibility of reunification at some time in the future if the conditions and timing are right. Secondly, it is the intention of our Government to cooperate in every way possible with the independent Government of Singapore in spite of separation, bearing in mind, however, that in the field of economic cooperation in particular, such cooperation must be as between two sovereign and independent states, and any thinking on this subject must take account of this political fact. Subject to this political fact of life, there is no reason why such cooperation in the future should not be as good as, if not better than, what it was in the past, because the political difficulties which existed when Singapore was a part of Malaysia, should not, as a result of separation, any longer be there.

September 27, 1965.

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