Discussion of Fund Policy by Governors at Fund Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1965
Statement by the Governor of the Fund for Iraq
Khair El-Din Haseeb
This meeting may very well prove to be a landmark in the history of the Fund because from the trend of discussions there seems to be a consensus among members about the need to adapt the international monetary system to the changing and growing needs of world economy. It is extremely important that members realize that the problem of inadequacy of liquid reserves cannot be solved by each member trying to increase its reserves: such a course of action would be self-defeating. It is clear that the members appreciate the near-urgency of the problem, although they differ in their respective approaches to the solution.
Speaking as the delegate of a country which has always supported the United Nations and its agencies and whose interests are closely related to the maintenance of high rates of growth in the world economy, I submit that the plan of action seems to be clear.
First, in the pursuit of any solution to the problem of international liquidity, we should not forget the basic objectives of policy, namely, stable economic growth, full employment and the enhancement of world trade. These are mutually compatible only if we evolve a system wherein temporary factors are not allowed to lead to policies which are at variance with the pursuit of these objectives. Moreover, the system should be flexible enough to serve the needs of the world rather than be governed by some element beyond the control of man. We are all aware that during the last few decades the growth of gold reserves has not kept pace with the growth of world trade. Since, with the price of gold remaining unchanged, supply cannot be adjusted to suit the growing requirements of world trade, it would be better if we did nothing to increase the proportion of gold in world payments. We should try to loosen rather than tighten the golden shackles with which the world monetary system is already bound.
Secondly, any reform of the world’s monetary system should recognize the important place due to the IMF to ensure the participation of all member countries. The Fund has contributed in no small measure to the maintenance of an orderly international monetary system, and any attempt to solve the problem of international liquidity by ignoring this worthy institution would be a step in the backward direction. In this, I fully endorse our able Managing Director’s view that our aim should be to supplement not to supplant the Fund.
Thirdly, it is also necessary that any plan to increase liquid reserve assets should take into account the special needs of developing countries. Development plans of many countries cannot be implemented because of a foreign exchange bottleneck. Foreign exchange difficulties lead to import restrictions and a consequent underutilization of productive capacity of newly established industries. The adverse effects of this action on exports, and hence on incomes of the developed countries, in turn lead to a fall in the demand for the primary products of developing countries. This results in a further decline in the rate of growth of their economies. In this decade of development, the Fund should make its contribution by paying special attention to the problems of developing countries.
I am sure that any scheme which combines these three elements will go far toward solving the present problem. Iraq firmly supports any proposal which enlarges the automatic drawing rights on the Fund from the present 25 per cent of quota to 75 per cent. The Fund should, of course, adopt a liberal attitude in the higher tranches. May I point out in this connection that the compensatory financing scheme of the Fund, though admirable in itself, suffers from one drawback. The borrowing facility under this scheme is available to primary producing countries when the shortfall in their exports is due to factors beyond their control. Since the decline in exports in such cases would be temporary and self-correcting, the Fund should not make the facility conditional on the pursuit by the country concerned of particular policies about its general balance of payments position. The two problems are quite different and should be treated as such. May I also suggest that, in recognition of the special problems of developing countries, the payment of any additional subscription in connection with increases in quotas should be accepted entirely in members’ own currencies. The effect on the Fund’s own liquidity of the adoption of these suggestions can be tackled in a number of ways, for instance, by loans and deposits from the surplus countries. It is only through such cooperative effort on the part of the nations of the world that we can hope to achieve the object of a monetary system which serves the requirements of the world economy.
I assure you that Iraq would support any scheme which seeks to promote that end. …
Statement by the Governor of the Bank and Fund for Australia
I gladly join other Governors who have congratulated you, Mr. Chairman, on assumption of the high office of Chairman of the Board of Governors, and I add my appreciation of the informative and helpful speeches by yourself, Mr. George Woods, the President of the IBRD, and Mr. Pierre-Paul Schweitzer, the Managing Director of the IMF. These, together with the valuable reports from our institutions which are, as usual, rich mines of information, have provided a wealth of material for this year’s series of discussions. Unfortunately the discipline of the clock denies most of us the opportunity to deal comprehensively with many important matters covered in the speeches and in the reports. My own remarks on this occasion will be concentrated on Fund matters and, in particular, the question of international monetary liquidity. If I refrain from detailed comment on the Bank, this implies no lack of appreciation of its constructive work. Funds from the IBRD have already materially assisted Australia’s development through a variety of projects. We hope to avail ourselves of the Bank’s resources to carry new projects of national value forward in the years ahead. Two Australian developments in the year which were mentioned in the Managing Director’s address reflect the growing strength and maturity of our economy. We have assumed Article VIII status and have experienced the first drawings of our currency from the Fund. These are further proofs of our support for these institutions and our ready acceptance of the responsibilities of membership.
Before speaking of liquidity, I offer a few preliminary observations. I venture to make them from the vantage point of seven years’ participation in these annual discussions and as spokesman for a country with large experience of the problems of both the developing and industrialized countries. This enables us perhaps to appreciate more readily the problems of each. Like Mr. Woods, I am an optimist by temperament, but I feel some disappointment at the lack of progress made when the achievements are set against the urgencies and pressures of our times and the needs of developing countries. These countries are convinced—as we all should be—that those persistent enemies of mankind—poverty, mass unemployment, ill-health, and illiteracy—can and must be overcome. In expressing disappointment, I do not overlook the considerable contribution which has already been made. The President of the Bank can point to a host of fruitful projects that would never have been financed but for the activities and resources of the Bank. By way of example, Australia has cause to be grateful for the work of the very able Bank mission which has given us guidelines on problems of development in Papua and New Guinea.
As to the Fund, the course of world trade has undoubtedly been assisted by the judicious employment of the Fund’s resources in meeting the balance of payments problems of individual countries. The Managing Director has emphasized the importance for the international community of safeguarding sterling. He has given an encouraging assessment of the outcome of what he describes as a wide variety of policies, including fiscal, monetary, and exchange control applied by the U.K. Government. The well-being of sterling affects the general health of the international community. Here is a situation in which the Fund has played a notably effective role.
All this is good, but there are other directions in which success so far eludes us. First, there is the general plight of the developing countries, and these encompass a large proportion of the world’s population. I have seen one study recently which reveals that over the most recent five years under review the rate of growth in domestic product of the developing countries amounted to only 4 per cent per annum. This is 1 per cent below the target set for the Development Decade. To some that may not sound too bad, but when account is taken of the fact that population growth has averaged some 3 per cent per annum in these countries, the per capita increase in production is disclosed as pitifully small. What is more disturbing is the apparent slowing down of the rate of improvement. In the quinquennium preceding the most recent one, the annual growth rate was recorded at 4.5 per cent, and in the five-year period before that 4.9 per cent. The industrialized countries can ignore the implications of this discouraging trend only at the peril of international disharmony and political instability.
Secondly, the major problem of constructing satisfactory commodity arrangements remains largely untouched or unresolved. We have seen the world price for sugar swing wildly to a fantastic peak of some $300 a ton in 1963, only to slump to $50 a ton a few weeks ago. The Managing Director has cited cocoa as another example of a commodity subject to wide price fluctuations. The list of commodities which have suffered wide price movements of this sort could be easily enlarged to depressing dimensions.
I applaud what the Managing Director had to say about “growth with stability.” This forms an important part of the economic philosophy applied in my own country. We too encountered earlier much debate about it and I welcome reinforcement from the authoritative voice of the distinguished Managing Director of the Fund. But how can developing countries, however well-intentioned and however firm their resolution, plan with any confidence for growth with stability under prevailing circumstances? They must face the primary producers’ traditional hazards of erratic climatic conditions and the occasional ravages of flood, drought, and bush fire. They must contend with movements ranging from moderate to sharp in the prices they receive on highly competitive world markets. The effects can be disastrous, particularly for those countries which rely on only one or two sizable export items.
Then there is the problem of adequate development finance. The OECD reports that during the period 1952-61 the net inflow of financial resources to the developing areas increased by about 11.5 per cent per annum. But since 1961 there have been signs of some tapering off. In 1963 the inflow of funds—including those from the centrally planned economies—was $9.3 billion and for 1964 there was no appreciable change. The IBRD has estimated that the recent inflow of funds is $3-4 billion below the net foreign capital requirements of the developing countries.
There is a facet of this problem which I have canvassed more than once at these meetings. It is the lack of progress in the development of capital markets. Indeed, events earlier in the year have reduced the already limited sources of international capital. The United States has found it necessary to place a premium on dollar borrowings through the Interest Equalization Tax. The availability of funds in the London market, limited though it was largely to Commonwealth borrowers, has been further reduced by recent events there. The European market is also extremely limited and interest rates there are generally very high. The immediate prospect is quite forbidding, even for borrowers with the highest credit ratings.
Now turning to the liquidity problem, I applaud what Mr. Schweitzer has so admirably expressed on this subject. He put very firmly views which I am sure commend themselves to the great majority of Governors. He has rightly said that “international liquidity is the business of the Fund.” He reminds us—and this fact must never be forgotten—that membership in the Fund now numbers more than 100 countries. We all have, as he states, a vital interest in the subject of international liquidity and the even broader subject of the international monetary system. I stress that word “all.” It follows that it would not be acceptable to the great majority of members to have decisions on matters so vitally affecting every one of us determined in substance, if not also in form, by a small and strictly limited group. There are disturbing indications that this is what could happen. There is some evidence that policies on these matters will be evolved in the limited Group of Ten, and then presented in a virtually unamendable form to this institution for adoption, however unsuitable some of the provisions may appear to many of our members. I have no wish to be critical of the Group of Ten. We have acknowledged in earlier Fund discussions the value of throwing open to various bodies of opinion the study of questions of particular importance. But I speak now as one of more than 90 countries who are not included in the membership of the Ten. I must say that it would be quite unacceptable to us to be confronted with a fait accompli, giving us no reasonable opportunities for expressing our views in a manner which permitted these views to make some impact.
The Group of Ten, whatever its voting strength, can in no sense claim to be fully representative of this world institution nor, I imagine, would it claim to be so. I merely state, and certainly have no wish to do so offensively, that the Group of Ten can claim no mandate to legislate for the rest of the world. The Fund can lay substantial claims to being a democratic institution. It is certainly conducted in a democratic spirit with opportunities available to all members to contribute their views. The Group of Ten, on the other hand, is in no sense a representative group. Its membership contains only one representative from Asia—Japan. There is no representative of any country in Africa, no representative from South America, or any other part of the Southern Hemisphere. The question which faces us on this matter is, I am convinced, a critical one for the future of this organization. I see it as not merely a matter of resolving policies pertaining to these questions of liquidity, important though that may be. If the precedent becomes established that this is the way in which fundamental issues of international economic policy are to be resolved, then the value of these world-wide institutions will be undermined, and their importance gravely diminished.
There is a reference of a sort bearing on this matter to be found in the communiqué put out by the Ten after their short meeting on Monday afternoon.1 This is a Delphic passage which people less skeptical than myself could interpret as conveying the intention to have matters of substance discussed in the Fund before their final adoption and in a way which would permit of constructive amendment if that were found desirable. It will, I imagine, be difficult enough for members of the Ten to come to a basis of agreement. If they succeed in doing so, it would seem unrealistic to visualize any substantial amendment to conclusions they have reached elsewhere as a consequence of any discussion in this body. I have posed this as something of a dilemma, because clearly, if sufficiently speedy progress is to be made on a matter which has already lagged far too long in its resolution—and delay has a disturbing influence on the psychology of governments and business—then there must be some ground-clearing amongst a necessarily limited group. At the moment the Group of Ten appears to be the only body outside the Fund available to deal with these matters in a practical manner. The critical question is whether arrangements can be made for a consideration of views of Fund members on matters proposed before final decision-taking has occurred.
Some of the other dangers which flow from failure to bring nonmembers of the Group into the discussions should be mentioned. First, there is the benefit arising from reserve creation. There are many different types of possible arrangements set down in the Ossola Report. But a common feature of many of the proposals is that countries inside the Group could receive an immediate and direct increase in reserves. The benefit of this increased liquidity to countries outside the Group would be delayed and indirect. Some of those outside the Group are ready and able to assume the obligations involved. They would feel discriminated against if they were denied the opportunity to join in the arrangements made and share in the mutual extension of credits. Even where countries outside the Group were not in a position to accept the obligations involved in participation, they would wish to be assured that their legitimate interests were being taken into account. The improvement in international liquidity resulting from new arrangements might conceivably meet the needs of the Group well enough, and yet be inadequate in quantity or quality to meet the requirements of the international community at large.
Has thought been given to the possibility that the behavior of countries outside the Group could, as a result of judgments that they were not being fairly dealt with, change in such a way as completely to falsify the assumptions on which the limited Group was working? Let me give an example. One view recorded in the Group Report is that any new reserve asset created in a new monetary arrangement might be distributed on the basis of gold holdings. In these circumstances some countries might seek to redistribute their international reserves by converting or attempting to convert foreign exchange into gold. While holdings of foreign exchange at the end of 1964 totaled some $23 billion, more than half of this—$12.7 billion—was held by countries outside the Group of Ten. The position in the international monetary system of countries holding foreign exchange aggregating this massive amount cannot be ignored, even if they are not members of the Ten. One has only to consider for a moment what could happen if there were, in the holding of foreign exchange, some loss of confidence, arising from a widespread conviction that arrangements made by a limited group were inequitable or otherwise unsatisfactory to the international community. Obviously, countries that convert their currency holdings into gold would, on the one hand, reduce the currency element in international reserves, and, on the other hand, cause existing gold holdings to be redistributed without any addition to the total. The net result must be a reduction in international liquidity as a whole.
It is difficult to see who could possibly benefit from such a train of unhappy events. Gold is, of course, of continuing importance in the international monetary system, but it would be dangerous to pursue a course which made countries less willing to hold international reserves in the form of foreign exchange. They would become less willing to do so if a system were adopted which appeared to put currency holding countries at a relative disadvantage.
These are some of the difficulties which come to mind and which fortify my argument for a wider discussion than can occur inside the Group of Ten. Unless this is done, it may be doubted whether any new arrangements will adequately cover the position of all interested elements and be generally acceptable. It would be in accordance with democratic principle if any new arrangements, when finally agreed upon, were to be open to direct participation by countries, provided that they were willing and able to meet the obligations involved.
In other words, direct participation on the assumption that there are to be some limits to this should be based on economic qualification and not some arbitrary selection of members.
I adopt, therefore, with warm approval the Managing Director’s statement that “new facilities should be available to all countries which can meet reasonable and agreed tests.”
Finally, I join in the conclusion that any new arrangement must be brought within the machinery and jurisdiction of the Fund. This is probably the best way of ensuring that the interests of all are taken into account. It seems sensible and highly desirable to build on the international monetary institution we have, rather than to create a second and perhaps competitive institution. I present these views earnestly, believing strongly that they are widely shared by many other member countries.
Statement by the Governor of the Fund for Yugoslavia
I feel particularly pleased at having been given the opportunity to participate in the consideration of today’s world monetary problems at this very eminent gathering of representatives of the monetary authorities of member countries and of the world community.
We have before us the Annual Report of the Fund on its over-all activities in the past year, as well as on the problems with which the present international monetary system is confronted. However, there is one problem which for the last few years has been attracting greater and greater attention from theoreticians, financial and monetary experts, various institutions, and governments. This problem is also a predominant feature of this year’s Annual Meeting of the Fund. It is the problem of international liquidity.
It would be difficult for me to add much to what has already been said and written in the past on this subject. All this prior discussion does not, however, in the present phase of consideration enable us to accept without reservation any of these plans or any program as a whole. The problem is a most complex one. Its solutions affect a range of most delicate relations between individual countries and groups of countries. Much intensive further work in examining the issues in the spirit of mutual cooperation and in mutual agreements between countries is needed.
In my country we have devoted the most serious attention to the problems of international liquidity. Thanks to the activities of the Fund in this field, as well as of various other international bodies, institutions, and individuals, we have available today carefully prepared materials that give us a good insight into practically all aspects of this complex matter.
I must point out that it is my first impression, when reading and listening to discussions on international liquidity, that the problem is treated as though it is in fact the problem of only those countries whose money is now or potentially a reserve currency in international payments. Thus, this might give the impression that the problem of today’s international monetary system consists only of its quantitative aspect and of the territorial distribution of reserve assets within the group of industrially developed countries.
I do not want, not even for a moment, to diminish either the importance or the responsibility of developed countries to the world monetary system and international liquidity. The degree of importance and responsibility of these countries clearly derives from their holdings of the present world gold and foreign exchange reserves. It is understandable, therefore, that any further improvement in international liquidity represents in the first instance a problem of these countries. But we are dealing here with the problem of international liquidity. Since practically all plans for the improvement of international liquidity are also deeply interrelated with the world monetary system, this problem becomes a universal one.
Following the above logic of the universal character of the problem, an inevitable conclusion is that the problem of international liquidity cannot be solved without the participation of the developing countries. They should be heard and consulted from the very beginning. The formula according to which the problem of liquidity is considered exclusively as a problem of industrial countries, and the inflow of capital as the only problem of developing countries, seems to me to be oversimplified. Experience thus far in this respect is very instructive and does not support this formula. For developing countries it is very important that any future reform of the international monetary system must be such as to aid these countries to take their place in the world division of labor as quickly as possible.
For this reason our thinking is broadly in line with those proposals and ideas on the problem of international liquidity which pay due respect to the importance and responsibility of developed countries, but which also lead to solutions on a wider scale of mutual cooperation, confidence, and mutual understanding between countries. The role of the Fund in these considerations is very important. It is clear that only a realistic attitude can be the basis for a favorable solution of the problem. This approach is the basis for the position of my country on this important question of the world community of today.
I will now say a few words about my own country. About two months ago, with the assistance of the International Monetary Fund we initiated a most extensive economic reform. Thanks to the fact that Yugoslavia experienced a very rapid rate of economic development in the last two decades, we have now reached a level of development that makes possible and also necessary for our further successful development the introduction of the uniform exchange rate, thus eliminating the system of premiums on exports and important restrictions on imports. This will further enlarge and develop the effects of market factors on the economy as regards world markets, and thus contribute to further and more intensive integration of the economy of Yugoslavia into the world economy. In this respect it was necessary to introduce most extensive measures to harmonize domestic prices with world market prices, to expand the influence of the banking system, of the fiscal system, and of income policy in conformity with the market mechanism.
I should like to take this opportunity to express my thanks to the Executive Directors, to the management and staff of the Fund who have helped us work out the program and put it into effect. Especially, I wish to thank all those friendly countries from which my Government has obtained a favorable response in rendering support for the successful realization of this program.
Statement by the Governor of the Fund for the United Kingdom
It is a notable experience and an honor to attend the Annual Meeting of the Bank and Fund for the first time, and to take part in the common effort to ensure that our international monetary arrangements serve the political and economic progress of the peoples of the world. The degree of success which has been attained so far is due largely to the work of those assembled here today, and especially of the two great institutions, the International Bank and the International Monetary Fund, under whose auspices we are meeting. I wish to express my admiration and gratitude for the Reports made to us by these bodies, and for the masterly surveys which have been presented this week by the President of the International Bank and the Managing Director of the Fund.
In view of the special role of sterling in world financial affairs, it may be appropriate for me to begin by referring to the present position of the U.K. economy and to the increasing strength of sterling. I well understand the keen interest with which the position of the United Kingdom has been scrutinized during the past year, because the strength of sterling is of concern to all. Therefore, I am glad to report that the United Kingdom is firmly set on the course of recovery from the serious balance of payments deficit we suffered in 1964 and from the consequential period of uncertainty for sterling that followed. As a result of the drastic measures we have taken, our overseas deficit is being steadily reduced and this, together with the assistance we have received, has made it clear to all that the present parity of the pound sterling is not in question. There was never any doubt in the minds of the British Government about this. We held the view from the beginning that a change in the parity value would not have afforded a solution to Britain’s difficulties and could well have added to the problems of other countries. Our determination, therefore, never wavered. In order to overcome the balance of payments deficit it has been necessary for us to remove the excess pressure of demand, to bring the growth of public expenditure properly under control, to contain imports, to promote exports, and to reduce the capital outflow. Taken together, these measures are a formidable burden, but they have been resolutely accepted by the British people, and already we can begin to see the fruits of our policies emerging. We are now in a much better position to increase exports, and indeed in the first eight months of 1965 they have been 6 per cent higher than in the same months of last year. On the other hand, imports have risen by less than 1 per cent. The long-term capital outflow has been much reduced, and I can confirm that the latest estimates we have made show that Britain’s payments will be back into balance in the course of 1966.
But we are not content to leave the matter there. We do not intend to revert once again to the position we faced in 1964. Therefore, while taking the short-term measures that have effected such a marked improvement in our balance of payments, we are now engaged in the long-term task of creating a more dynamic and competitive economy. Following many months of consultation with industry about their future proposals for investment, manpower requirements, export potential, and other questions, the Government has published a National Plan for the economy from now until 1970. The aims are quite straightforward—to pay our way, to grow faster, and to get a better regional and social balance in the use of our resources. We intend to achieve these aims by putting a new thrust into productivity and into the redeployment of manpower and resources. In this we have the full cooperation of employers and trade unions. The Plan provides for a major shift from declining and uneconomic industries to the newer science-based expanding sectors of the economy, such as chemicals, oil refining, telecommunications, manmade fibers, machine tools, and electronics.
A further important step forward has been the widespread acceptance in principle of the need for stabilization of prices, with incomes growing parallel with productivity increases. Both sides of industry have entered into a joint commitment to attack restrictive practices, and progress is already being made in this matter. Recently my Government announced that it will bring forward legislation to put the National Prices and Incomes Board on a statutory basis. This will mean that the Board will have power to require witnesses from both sides to appear before it. The legislation will also contain power to defer proposed price and pay increases until they have been considered by the Board. Meanwhile, trade unions and employers are cooperating on a voluntary basis in this program, in advance of legislation, and we trust that this voluntary cooperation will continue. To sum up, we are confident that this collection of short-term and long-term measures will yield increasing results in the years ahead.
The short-term adjustment process on which we are immediately engaged has been made much easier by our substantial drawings from the International Monetary Fund and the short-term borrowing we were able to make last November. I express the full appreciation of my Government for the facilities which have been made available. These facilities were reinforced by the recent action by central banks announced on September 10. This latest operation is different in nature from that of last November, and, as our own measures have become increasingly effective, it has had a dramatic effect in accelerating the recovery of sterling. As I am sure everyone here will agree, these operations have been of vital importance to all by helping to preserve the stability of the international monetary system.
I now wish to turn to the future of international liquidity. This is of special concern to Britain since sterling is one of the major reserve currencies of the world. We are all indebted not only to Mr. Schweitzer but also to Signor Colombo and other Governors for their comprehensive analyses of the problems that face us in this field. They have relieved others of us from the necessity of treading much of the same ground.
Discussion of the issues and techniques involved has gone on for a long time and has spread to ever-widening circles. The excellent Report by Signor Ossola’s group, analyzing and cataloging the different proposals that have been advanced and summarizing the arguments, now represents a definitive study in this field. It is fair to conclude that the preparatory work has now been completed. The time has come for negotiation leading to the preparation of a plan that can be put into effect as soon as agreement exists on the need to do so. I suggest too that a careful reading of the Ossola Report leads to the conclusion that positions which may seem very far apart are in fact preferences about different ways of achieving the same end. These differences should not be irreconcilable. We have reached a stage where they are reducing themselves to differences in the stress laid on three very real elements in the problem before us.
First, the monetary system must be able to accommodate imbalance, but it cannot work smoothly, or ultimately survive, if the imbalance is too great or continues too long in one direction. It is no solution simply to make balance override all other objectives of policy. We must learn how to combine balance with growth in our system. I look forward to the results of the work which is now being done in Working Party 3 on the adjustment process.
Second, the international monetary system which we have is a mixed system in which gold and currencies exist side by side as reserve assets. This in itself gives rise to risks of instability. But it is no solution to decree that reserves shall therefore consist only of gold and of international reserve units linked to gold. Gold and the reserve currencies and any new units that may be created must continue, in some combination, to exist side by side.
Third, and most important, the system must be capable of expanding the supply of reserve assets deliberately and under some appropriate form of control. But the gold element is inelastic, and we must not continue to rely on the currency element to provide the increase. Some new asset is necessary.
Each of these aspects of the problem has been stressed by one or another of our members, and we have reason to be grateful to those who have insisted on their importance. The differences of stress must not now stand in the way of building on the ground which is common to us all.
The U.K. Government welcomed at the time the initiative taken by Mr. Fowler in July to ensure that we should all press forward in this field. The Group of Ten, which has done so much work in this field, is now prepared to move on to further discussion and negotiation, and the Deputies are due to report next spring. That is a welcome development. I likewise welcome the statement of the Managing Director of the International Monetary Fund that it is his intention to continue his examination of the problem. Clearly the results of these two efforts must at some time in the future be brought together.
For this reason, I welcome the Statement by the Ministers and Governors of the Group of Ten that as soon as there is a basis for agreement on essential points it will be necessary to proceed to a broader consideration of the questions that affect the world economy as a whole. I take this to mean that, at the next stage, countries which are not included in the earlier discussions will be brought fully into the picture before there is any final enactment of such new arrangements as may be agreed. This stage is necessary in order to ensure that the basic interests of all members of the Fund are adequately represented and appropriately considered, for all countries have a vital interest in such arrangements. Only after this has been completed should we be able to proceed to the final stage of enacting the new arrangements at an international conference.
As we are about to embark on a round of negotiations that will, I trust, lead to agreed proposals for action, it would be counterproductive for me to take up a rigid position in advance on the substance of the problems that are before us. I can, however, indicate our general approach.
First, I agree with Signor Colombo that the problem of any new arrangements for reserve creation is essentially of a political nature. It is now for governments to see how far they are prepared to forego their own particular preferences in the interests of securing agreement. Secondly, it seems to me that the Managing Director of the International Monetary Fund should be supported in his statement on Monday that “international liquidity is the business of the Fund.” It seems to me that in its origin, by its history, and through its current activities, the Fund has demonstrated that it commands a central place in any new arrangements that may be agreed upon. It follows from this that I hold the view that the creation of liquidity involves a wider circle than that of the reserve currencies and the members of the Group of Ten. I also accept that the creation of liquidity should be a matter of deliberate control.
As between the various families of proposals which provide for the creation of such assets, I would like to make it clear that we in the United Kingdom are ready to consider with an open mind all of these proposals that have been brought forward. The major requirement in my view is that we should make a maximum effort to secure the agreement of all parties legitimately concerned on the way the international monetary system should develop. There is no advantage to the world in all of us holding fast to our own particular preferences for achieving such evolution if the result should be that we were not ready to meet the need deliberately to create more reserves as that need arises. …
Statement by the Governor of the Fund for China
I wish to congratulate the Managing Director, Mr. Schweitzer, the Deputy Managing Director, Mr. Southard, the Executive Directors, and the staff of the Fund upon their excellent performance in 1965 and their stimulating Annual Report. Indeed, the Fund operation has been both active and fruitful. We are happy to note that, during the past fiscal year, more members made use of the facilities of the Fund than in any previous year. Purchases from and stand-by agreements with 34 member countries amounted to the equivalent of more than $4 billion. Of this amount, roughly 75 per cent were accommodation to the United Kingdom and the United States, whose currencies make up the bulk of world reserve currencies. This accents the urgency of the liquidity problem. But the availability of substantial Fund assistance, together with even more substantial ad hoc financial arrangements which individual member governments were able to muster in short order, clearly indicates that, even at present, machinery does exist for effective international monetary cooperation on problems of mutual concern.
We are in general agreement with the Fund position that, although existing methods to increase liquidity may suffice to meet the world’s requirements for a time, new techniques for creating reserves should be developed in due course. It is gratifying to hear from the Managing Director, in his statement at the Opening Session, that the Fund considers international liquidity as its business, and intensive examination will continue to be made on ways and means to best meet the anticipated increase in general needs for reserves, taking into account the contributions that have already been made by the Deputies of the Group of Ten in the same field.
On the problems of international liquidity and the international monetary system, I propose to comment briefly on two points.
First, the current gold exchange standard, after all, is the result of a long evolutionary process. It has served our trading and developmental needs well, though, as we all know, not well enough. As the Fund Report points out, the predominance of the currencies of major trading countries under this system has its raison d’être. The facilities offered by the wide network of banking arrangements of these countries are available to transact trade and related payments, including capital movements, among all countries. Thus, the international monetary system has a natural tendency to anchor itself on the currencies of a few countries which loom large in the total trade of the world.
As a matter of convenience, the foreign exchange reserves of many countries are also held in those reserve currencies. This practice produces the inevitable consequence that the supply of reserves depends on the balance of payments situation of reserve centers. As the deficit in the balance of payments of the major reserve center, the United States, is expected to narrow, a drain may develop on the supply of reserves. This has given rise to the various schemes for deliberate reserve creation. Insofar as the scheme involves enlargement of Fund drawings, the actual drawings will still have to be made in existing reserve currencies. The proposed collective reserve unit cannot be counted upon as a full-fledged substitute for reserve currencies, as it is not meant to be an instrument for market intervention, nor convertible to gold or currencies, nor usable in current transactions. These practical aspects, we trust, will be adequately taken into consideration by the Executive Directors in their continuing deliberations on the principle and technique of reserve creation. The edifice of the world monetary system should be provided with supplementary additional chambers, but it will rest more securely on strengthened, rather than on weakened, reserve currencies.
Next, I shall undertake to say a few words on the role of the developing countries in the world monetary situation. The gradual deterioration in 1964 in the position of primary producing countries, which hold a large proportion of their reserves in dollars and sterling, is said to have added to the pressures on the two principal reserve centers. Many developing countries, furthermore, carry excessive debt burdens, mostly in the form of short-term suppliers’ credits. Restraints on capital outflow by the industrial countries would cause undesirable repercussions on the balance of payments of the developing countries and would also slow down their rate of growth. It stands to reason, therefore, that the developing countries should welcome schemes to increase international liquidity, because their own development depends upon the continued inflow of capital.
However, the scanty application that developing countries have made of the compensatory financing facility of the Fund would seem to indicate that the economic problems of developing countries cannot readily be solved through temporary accessibility to credit. The most effective boost to the economy of the developing countries is a favorable turn in the terms of trade for primary products. So far, international arrangements toward price stabilization of primary products have fallen short of their objectives. The issue, of course, can partly be circumvented by the development of industry in the primary producing countries, which they like to undertake anyway as a matter of policy. But industrialization means much more than the technological adaptation of a manufacturing process. It means the development of markets and accessibility to markets; it means intricate avenues of financing and transport; it means education and a whole set of social changes. While it is obvious that the developing countries have to tackle these problems in their own way, much of their success would still have to depend upon international cooperation in trade, diffusion of scientific knowledge, stability of prices, and availability of credit. The developing countries, therefore, have as much a stake in international liquidity and in the international monetary system as the industrial countries. It is difficult to see that any international schemes can successfully work without their active support and participation.
My country, the Republic of China, falls in what the Fund Report calls the more industrialized group of the primary producing countries, and a short account of our recent experience toward industrialization may be of general interest. The development of our trade and balance of payments situation during 1964 and the first half of 1965 has been most satisfactory. But for more than a decade before 1963, we ran a heavy balance of payments deficit; that heavy deficit, fortunately, was counterbalanced by the substantial U.S. economic aid. Also during that period, the groundwork was laid for industrial development. The power industry was greatly expanded and many import-substitution industries were built up, among which the most notable were fertilizer and textiles. The sudden rise of the world price of sugar in 1963 gave our economy a much-needed impetus. The rapid accumulation of foreign exchange reserves during that year reinforced the public confidence in the stability of the external value of the currency, and intense business activity helped to neutralize the inflationary impact of the resultant credit expansion. The rate of industrial growth was 10.1 per cent in 1963 and reached 25.8 per cent in 1964. The momentum seems to have been carried well into 1965, though at a slackened pace.
The logical sequence of the growth rate being higher for industry than for agriculture is that, in time, industrial production outstrips agricultural production. That seems to be the wishful objective of all developing countries. In our case, that objective has already been attained. But a shift from an agriculturally dominated economy to an industrially orientated economy requires a good deal of adjustment. In my country, that adjustment seems to have been made easy by the fact that, together with the development of industry, painstaking efforts are directed toward the improvement of agriculture and the improvement of the land-tenure system. Significant results have been achieved in the adoption of new farming techniques, the development of new and improved varieties of farm products, and the better and more equitable distribution of land ownership which gives greater incentive toward production. Thus, we are able to provide a sound and revitalized agriculture as a base for industrial development. The industry is supplied with as much needed raw materials as can be produced inside the country. Also, what perhaps is even more important, the prosperous farming community provides a ready market for the new industrial products.
The strength of our economy is perhaps best illustrated by the fact that we have been able to record a favorable balance of trade in 1964 and early 1965 when the world price of our staple export—sugar—suffered a serious decline. What we did not get in sugar sales abroad was more than made good by increases in other exports, agricultural and industrial. Meantime, our merchandise imports also showed a substantial increase, and we were able to increase the allocation of foreign exchange to import capital goods for the purpose of further industrial production. On balance, we added the equivalent of some $65 million to our foreign exchange reserve in 1964. We have been able to maintain our gains during the first eight months of 1965. The prospect for the rest of the year looks good.
However, we fully realize that prosperity, like peace, is indivisible. The continued expansion of our exports, which is essential to pay for our imports, will depend upon the availability of markets which, in the final analysis, can increase only when the national income of our trading partners increases. We welcome, therefore, all plans for international cooperation toward greater monetary stability and greater ease in the transfer and settlement of international balances. To achieve this lofty objective, we venture to submit that to build upon the present structure will prove much easier and much more feasible than to start on a new structure altogether.
Statement by the Governor of the Bank and Fund for Japan
On this occasion of the twentieth Annual Meetings, I should like to join my fellow Governors in paying highest tribute to the International Monetary Fund, the International Bank for Reconstruction and Development and its affiliates for their outstanding accomplishments in the development and strengthening of the economy of the free world, and for their continuing leadership in the field of international financial cooperation and economic development under the wise guidance of Mr. Schweitzer and Mr. Woods.
As economic interdependence and solidarity among nations grow ever closer, no one nation can prosper unless others also prosper. Today, the economic management of a nation cannot be insulated from that of others. Much to our satisfaction, the world economy has continued its expansive trend in the past year. However, we have to watch carefully disquieting developments in the world economy referred to in the Fund’s current Annual Report, such as the slowing down of economic activity in several of the major countries, the balance of payments pressures in the two main reserve centers, the strain in the payments position of primary producing countries, and the general rise in interest rates. Even though nations may differ in their stages of economic development and have different economic problems, I believe that we must do our utmost to combine our efforts to manage our economies in a spirit of mutual cooperation for the common interest of prosperity for the world as a whole and to try to avoid stagnation and retrogression that will undermine the advantages of a system of free and multilateral trade and payments. This, I am sure, is what Article I of the Fund Agreement stands for and, based on this very spirit, all of us should endeavor to strengthen our international cooperation and jointly search for roads to prosperity for the whole world.
Let me take this opportunity to make some remarks on the economic situation in my country. The deterioration of our balance of payments in the latter half of 1963 necessitated the adoption of corrective measures from the end of that year. The effect of the adjustment process permeated gradually, and economic activity since last fall has calmed down. The balance of payments recovered to a surplus position owing mainly to an improvement in the trade account. As a result, adjustment measures were gradually removed from the end of 1964. However, recovery of business activity was slow and a recessionary mood continued to prevail. Since I took office as Finance Minister last June, I have been endeavoring to stimulate demand by adopting positive fiscal and monetary measures in order to accelerate the recovery process. Some indications of a favorable turn have already appeared, and I am confident that the Japanese economy, with its indigenous vitality and adaptability, will resume its upward trend before long.
The objective of the economic policy of my country is to realize a high level of national welfare through continued expansion. We aim to maintain a satisfactory balance of payments and a stable price level, while at the same time promoting the modernization and rationalization of every sector of our economy, and furthering social development in harmony with economic development. However, this objective cannot be realized without economic prosperity of the world as a whole and without a stable international monetary system.
Turning now to the subject of international liquidity, I highly appreciate the efforts made by the Executive Directors since last year to consider the question of adjusting quotas of Fund members. I am happy to say that my country has already consented to the increase in her quota. I hope that the Fund quota increases will become effective as soon as possible.
It is noteworthy that the General Arrangements to Borrow have functioned effectively. They were activated in the past year on two occasions for drawings by the United Kingdom, thus demonstrating their usefulness. In the light of the important role which the Arrangements play in replenishing the Fund’s resources, I am prepared to support the renewal of these Arrangements. Also, in the past year, a number of experts from ten countries participating in the General Arrangements to Borrow have studied various methods by which new reserve assets can be created for future needs. I believe that the report of the Study Group, analyzing various aspects of the problem, has laid a good foundation for future discussions on this matter.
In the examination of international liquidity, creation of new reserve assets is the important facet of the problem, but we cannot lose sight of the importance of credit facilities and the balance of payments adjustment process. I should like to reiterate the important function which credit facilities play in promoting free and multilateral international trade and payments, and to stress the need for all countries to observe discipline in their balance of payments in such a way that both deficit and surplus countries will make every effort to achieve, without undue delay, balance of payments equilibrium. Each country quite obviously should find and adopt policies of its own, appropriate both to external as well as essential internal objectives.
The problem of international liquidity should, I believe, be approached from the viewpoint of providing adequate liquidity to assure future expansion and prosperity of the world economy. However, I think it would be a matter of great regret if the absence of fundamental consensus about the future concerning international liquidity should lead various countries to timid management of their economic policies and, consequently, to a contraction of the world economy. In this sense, I think it has become more urgent than before for countries concerned to reach a common agreement on the prospects for the international monetary system, at least on its basic points.
The present international monetary system is a tested one with a historical background. I believe the contributions it has made to the balanced growth of the world economy should be appraised highly. Therefore, should any reform become necessary in the future, it is desirable that it be undertaken gradually on a practical basis by supplementing, not supplanting, the present one. My conviction is that the most important criteria for considering the creation, if necessary, of new reserve assets in the future are compatibility with the evolution of the existing system and the contribution they will make to greater stability of the international monetary system. I think the creation of new reserve assets too closely linked with gold would not be desirable, not only because of its unfavorable impact on the present international monetary system through possible acceleration of the propensity to hold gold and the inducement to speculation in gold markets but also because of the danger it contains that it might lead the world economy ultimately into contraction.
Although I can understand the view that the purpose of deliberate creation of reserve assets, when necessary in the future, should be not so much for meeting individual balance of payments needs but for meeting global needs, I do not think that global needs can really be assessed entirely separately from individual needs. In this connection, I believe that the International Monetary Fund, which has played the central role of providing credit facilities to cover individual needs, is the most appropriate institution through or by which deliberate creation of new reserve assets may be effected. …
In concluding, I confidently expect that the International Monetary Fund, the International Bank for Reconstruction and Development and its affiliates will make the best use of their wisdom and ability for the stability and the development of the world economy.
Statement by the Governor of the Bank and Fund for Ireland
Many distinguished speakers in this forum and elsewhere have emphasized that one of the greatest economic problems facing the world at the moment is the problem of how to improve the present international payments mechanism. It has repeatedly been urged that something must be done if serious difficulties are to be avoided within the next few years, but there is, unfortunately, less agreement about what precisely should be done. It may be of interest to hear some observations on the matter from what we hope is the impartial viewpoint of a smaller nation which has not as yet borrowed from either the Fund or the Bank.
A number of commentators have questioned whether international liquidity is really likely to be inadequate in the near future and have suggested that, if excessive balance of payments deficits are reduced, ample liquidity will be available. This view gives insufficient weight to the desire to hold and even accumulate reserves regardless of any imminent need to use them to finance balance of payments deficits. At a time when certain major countries are trying to regain both external balance and a full use of their productive potential, this desire of others to retain and even build up reserves contributes to the present international tendency toward contraction of capital flows and slackening of the growth of trade and output. Ireland, like other smaller countries, is being affected by these developments since we rely for a moderate rate of economic development on selling most of our increased production on export markets and on our domestic savings being supplemented by external investment in Ireland.
While the various proposals which have been put forward to improve present arrangements conflict with each other in many ways, they have certain points of contact. There is a consensus of world opinion in favor of some change in the present system. It is generally recognized that a system is faulty which relies on two arbitrary sources for increases in liquidity, namely, the net amount of new gold available (when gold for industrial uses and hoarding has been subtracted) and balance of payments deficits of the reserve currencies. There also appears to be a large measure of agreement that a new reserve currency asset is required which will be subject to conscious management and control.
At previous Annual Meetings we have suggested that the organization best fitted to create and manage a new reserve asset is the Fund, since its membership is world-wide and covers both industrially advanced and less developed economies. I fully endorse what the Governor for Australia said on this subject earlier this morning, although I may say that the remarks since made by the Governor for the United Kingdom are somewhat reassuring. The type of reserve asset to be created, the amount from time to time required, the control of arrangements for issue, distribution, and redemption—these are all important questions on which much light is thrown by the Ossola Report. As that Report shows, some schemes can be brought into effect without changing the Articles of Agreement of the Fund. It is desirable that some arrangement be made soon to ensure that the international payments system is adequate to the needs of an expanding world economy.
Statement by the Governor of the Bank and Fund for the United States
Henry W. Fowler
We are complimented by the presence in our capital city of so many distinguished people, from so many nations throughout the world. With the addition of Zambia last week and of Malawi in July—to whom I extend my own and my country’s hearty welcome—the Fund now numbers 103 countries.
Each of the Annual Meetings of the great organizations for international financial cooperation that we take part in leaves the world a little changed, and changed for the better. What we say each year rests upon what we have accomplished, and what we have learned, in another year of world-wide cooperation and constructive endeavor in the management of our financial and economic problems.
This year—my first as a Governor of the Fund—we can look back with special pride. During the year just passed, our processes of consultation and cooperation passed stern tests of their practical effectiveness. We are implementing a significant increase in IMF quotas. The General Arrangements to Borrow were twice called into operation and the participating countries have indicated that they are prepared to continue the arrangements if the Fund so requests. I consequently look forward with confidence to continued progress in seeking a consensus on matters of very far-reaching importance for all our countries, and for a long time ahead. I hope that when we meet next year we will find ourselves near the final stages of policy agreement in the field of improved international monetary arrangements.
The United States regards the Fund as an essential part of these international financial arrangements. Since the inception of the Fund, large sums in dollars have been used by the Fund to accommodate drawings by other countries. Over the years, these dollars have been repaid to the Fund.
In the last two years, my country has also drawn on the Fund. Our drawings have been, in large part, technical arrangements making possible the continued use of dollars in the settlement of the obligations of other countries with the Fund. However, at the end of last July, the United States made a regular drawing of $300 million, through which it acquired foreign currencies for its own use in financing international payments.
All these events provide evidence that the availability of Fund resources is increasingly important for all the Fund members, large or small, industrial or developing.
The economic health of the United States affects world economic health in many ways, but in no way more fundamentally than in the reflection of U.S. economic conditions in the strength of the dollar. During the past year the value of the dollar—and therefore the value of that large part of the world’s monetary reserves kept in dollars—was reinforced in two ways: continued vigorous and sound economic growth in the United States, and progress toward eliminating our balance of payments deficit.
In the fiscal year ended last June, national output increased by about $41 billion, equivalent to almost 5 per cent in real terms, continuing the longest peacetime economic expansion we have known. Prospects for maintaining our forward momentum are favorable. Despite its record length of 55 months, the current expansion has remained remarkably well-balanced and free from inflationary distortions.
In our manufacturing sector, increases in productivity and in wages received have been sufficiently in harmony so that labor costs per unit of output over the past year have again been stable. Since 1960, our unit labor costs have declined by 3.3 per cent. We calculate that the recent key settlement in the steel industry provides increased wages and benefits over a 39-month period, equivalent to a little over 3 per cent per year. We are hopeful that this will help sustain a pattern of balance between wages and productivity in industry generally, and will be accompanied by a continuation of stable prices. Under the stimulus of improved incentives and prospects for expanding markets, capital spending by private industry continues to move ahead vigorously, as it has over the past three years, providing assurance against strains on capacity.
U.S. Balance of Payments
In the light of this continued expansion in the domestic economy of the United States, it is particularly encouraging that I am also able to report a significant improvement in the U.S. balance of payments position since the announcement of President Johnson’s program on February 10. In the second quarter of this year, we experienced a surplus of $119 million, seasonally adjusted, compared with deficits of $780 million in the first quarter and $1,551 million in the fourth quarter of 1964. We do not by any means conclude from three months’ data that our balance of payments problem has been solved. Over any short-term period, balance of payments accounts exaggerate the effects of particular transactions, whether these be favorable or unfavorable. On balance, we believe that our second quarter figures were distorted in a favorable direction.
I regard it as more prudent for us to look at the combined results of the first and second quarters of the calendar year. During the first half of 1965, our balance of payments position was much improved, although there was still a deficit. This amounted to $661 million in the 6-month period and represents an annual rise of about $1.3 billion.
The figures I have used are in terms of the “regular” deficit concept which has been used generally in recent years in U.S. balance of payments accounting. This concept has been criticized in that it includes in our deficit additions to private balances of dollars which represent working balances and investments by private parties. As many of the Governors know, we intend to report our balance of payments data on the official settlements basis as well as in the usual form, in order to make our figures more comparable with those of other countries. On the official settlements basis our deficit in the first half of the year, seasonally adjusted, was about $400 million, or an annual rate of $800 million. This improvement gives us confidence that our efforts over several years, supplemented by a vigorous new attack on the problem proposed by President Johnson last February, are moving the United States toward the equilibrium we are determined to attain and sustain. Our programs will be vigorously pursued until we are certain that the conditions have been created in which equilibrium in our international accounts can be sustained. In this, it is clear that we have the support of the Congress and the U.S. public at large.
Increasing Free-World Reserves
This brings us to the heart of the matter: will the free world continue in the years ahead to be able to increase the reserves in our international monetary system sufficiently and in season to be certain that the sound employment of the world’s economic resources for growth and improvement is not crippled by inadequate financial means? This question must be asked because in the future the world’s reserve needs will no longer be met by U.S. deficits, and because in recent years additions to reserves have depended so heavily upon dollar outflows. The record is as follows:
The United States has supplied about three quarters of the new reserves accumulated by the rest of the world since the end of 1958. Only about one quarter of this increase came from new supplies of monetary gold and from the credit operations of the International Monetary Fund. We estimate that as of the end of 1964 more than a quarter of the official reserves of the rest of the world was held in the form of dollars. Reserves deriving from the U.S. deficit grew in two forms—dollar balances held as such and dollars acquired and converted into gold. The latter development, of course, resulted in a decline in U.S. reserves.
Thus, we have before us a problem of conflicting objectives. Resolution of this problem is of central importance to the United States and to the rest of the world:
(a) On the one hand, there is the need to achieve and sustain equilibrium in the U.S. balance of payments, in order to preserve the integrity of the dollar at home and abroad, to the end that the dollar can continue to function as an essential part of the world’s monetary system, and in order to arrest further drains on U.S. reserves, and
(b) on the other hand, there is the need to continue to supply additions to reserves for continued economic expansion and betterment in all our countries.
All our countries are fully committed to a policy of dynamic growth in a dynamic world economy. This means growing international trade, growing domestic supplies of money, growing national outputs, and growing real incomes and profits. If this expansion is to occur it is reasonable to expect that the free world, including the United States, will in the course of time face growing needs for monetary reserves. We can hardly expect that either the industrial nations that have experienced such reserve growth or the rest of the world can be satisfied very long to limit future growth in reserves to the very modest level of new monetary gold supplies and such limited increases as come from normal IMF drawings.
These are the principal considerations that led my Government to take the initiative in suggesting that it is now time to negotiate new monetary arrangements which will enable the nations of the world to deal with future demands upon the international monetary system.
Important Objectives to Keep in Mind
It is not my intention in these remarks to comment on the substantive proposals and the issues that have already been set forth for us in the work of the Deputies of the Group of Ten, the Ossola Group, and the Reports of the International Monetary Fund. The process of attaining a general consensus on the best ways of providing additional reserve assets will take time and great effort. I do, however, wish to draw your attention to some important objectives to keep in mind as we go forward with the work of improving the international monetary system.
1. As I have stated, we should not expect to rely upon the dollar to continue to supply the major part of the growth in world reserves. The responsibility for providing reserves should be shared. This means that other ways of creating reserve assets will be needed to provide assurance that their total will grow at a rate that will encourage a continuation of the impressive growth in world economic production and trade.
2. The adjustment of imbalance should be brought about firmly but smoothly, in order to avoid disrupting effects on other countries and on the system as a whole. And here I want to stress that it is of key importance for surplus countries to adjust their positions as well as for deficit countries to do so. The adjustment burden not only should not—realistically, it cannot—rest solely on deficit countries. In the field of medium-term credit, in which the Fund has a pre-eminent place, we should assure that there are adequate amounts of such credit available to enable the adjustment process to function in ways consistent with the economic and political realities of modern society.
3. We should, at the same time, perfect the defenses of the international monetary system against its vulnerability to massive destabilizing movements of funds. In this area, international monetary cooperation in general, and especially short-term credit facilities among major countries, are important.
As I have said before, in pursuing these objectives the United States is wedded to no specific plan. We are impressed with the wide variety of technical possibilities which have been developed in the writings of distinguished economists here and abroad. And we have, in addition to these plans, the extremely valuable exploration of basic issues that has been developed by the Study Group on the Creation of Reserve Assets, under the chairmanship of Dr. Rinaldo Ossola of Italy. This Report not only provides a useful guide to current concepts, but has brought out clearly that the obstacles to progress are not questions of technical ability to create reserve assets but policy issues concerning how, when, and where to create and distribute them. The problem is to reconcile the objectives of governmental policies so as to find ways of making progress that will find broad support.
Two Phases for Improving Monetary System
It is, therefore, appropriate and gratifying that the Ministers of the Group of Ten decided on Monday of this week to move from preliminary and technical consideration of improvements in the international monetary system to a level of active negotiation among responsible policy officials. This is the first phase of preparation for new and improved international monetary arrangements. I urge that these negotiations to identify a broad measure of underlying agreement go forward with concentration, vigor, and dispatch. It is commendable that the Ministers of the Ten have requested the active participation in this first phase of preparation of the representatives of the Managing Director of the International Monetary Fund and of the OECD and Bank for International Settlements.
With respect to the Fund itself, it is the hope of the United States that in this first phase of preparation the management of the Fund will keep the Executive Directors fully apprised of work going on in the Group of Ten, and that the Fund will keep the Group of Ten informed of results of discussions and considerations by the Executive Board of the International Monetary Fund.
Beyond this, there lies a second phase of preparation of the utmost importance, on which the United States has been both insistent and persistent in its pursuit of appropriate preparation for an international monetary conference. This second phase should be designed primarily to assure that the basic interests of all members of the Fund in new arrangements for the future of the world monetary system will be adequately and appropriately considered and represented before significant intergovernmental agreements for formal structural improvements of the monetary system are concluded. Within the Fund membership there are variations in the extent to which individual countries are able to, or choose to, accumulate and hold large reserve balances. All, however, have a vital interest in the evolution of the world’s monetary arrangements.
Twenty-one years ago, the Coordinating Committee of the Bretton Woods Conference submitted to the full Conference its report recommending that the IMF and IBRD be favorably considered by governments. The section of the report dealing with the IMF began with these words: “Since foreign trade affects the standard of life of every people, all countries have a vital interest in the system of exchange of national currencies and the regulations and conditions which govern its working.” I believe that thought is as true and as important today as it was in 1944.
It is true that only a limited number of countries hold the bulk of the official reserves of the world. No doubt these countries, including my own, have deep interests and responsibilities of a unique kind in the system by which reserves are generated and regulated. But other countries, which are not large reserve holders, also have legitimate and vital interests in these matters. This is why all the countries of the free world have a fair and reasonable claim that their views must be heard and considered at an appropriate stage in the process of international monetary improvement.
I welcome the action of the Group of Ten Ministers and Governors in recognizing this essential requirement for our continued efforts toward improvement of the free world’s international monetary system. The United States views with hearty approval the Managing Director’s suggestions to make suitable arrangements so that the efforts of the Executive Directors of the IMF and those of the Deputies of the Group of Ten can be directed toward a consensus as to desirable lines of action, and we welcome the agreement of the Ministers of the Group of Ten on this point. Because there has been some misunderstanding, I should like to quote in full the pertinent paragraph of the text of the communiqué1 bearing on this point.
“Paragraph 9: The Ministers and Governors recognize that as soon as a basis for agreement on essential points has been reached, it will be necessary to proceed from this first phase to a broader consideration of the questions that affect the world economy as a whole. They have agreed that it would be very useful to seek ways by which the efforts of the Executive Board of the Fund and those of the Deputies of the Group of Ten can be directed toward a consensus as to desirable lines of action, and they have instructed their Deputies to work out during the coming year in close consultation with the Managing Director of the Fund procedures to achieve this aim with a view to preparing for the final enactment of any new arrangements at an appropriate forum for international discussions.”
We are looking forward to bringing together these two groups, which together can contribute so much experience and knowledge to the solution of the world’s monetary problems, into full-fledged preparatory discussions. This combination provides an adequate and appropriate preparatory committee for a significant international monetary conference, provided, of course, that a meaningful basis for substantive agreement can be reached in advance.
Toward a Greater Society of Nations
Let me close with a plea that, formidable and complex as is the task of extending and improving the workings of our international monetary system, we lift our eyes from it long enough to see what it is, in reality, that we are about.
Let me say—and President Johnson’s policies in this respect as in many others are predicated upon this—that what we are engaged upon is the task of creating in the free world an international monetary structure strong enough, flexible enough, and with adequate elements of growth, to provide the financial framework for the building of a greater society of nations.
These international arrangements we debate, the improved international monetary system that we grope toward, are the extension of the great international task of economic development to which so many of us have dedicated so much of our resources.
I say this not to magnify our undertakings, but to give them the inspiration of their true perspective setting.
Let us build patiently, and strong, for many of our fondest hopes rest upon what we are undertaking in our monetary as in our development tasks. But there is too much to be done to permit us the luxury of delay. So let us go forward with confidence that the institutions and processes of international consultation and collaboration we have brought into being are adequate to keep our problems from mastering us, and that they will permit, instead, that we shall master our problems in peace and increasing plenty.
Statement by the Governor of the Fund for the United Arab Republic
Nazih A. Deif
I long hesitated before deciding to start this statement by citing the UN Secretary-General’s first report on the UN Development Decade of the sixties, in which it was predicted that economic disaster would engulf first Asia, then Africa and Latin America, if the present projections of population and production were maintained for long.
We all remember that the concept of a Development Decade was adopted by the UN General Assembly in December 1961, and that it sought a minimum annual growth rate in the national income of developing countries of 5 per cent by 1970. However, according to U Thant’s report, the rate slowed from an average annual rate of 4.5 per cent during the period 1955-60 to an average annual rate of 4 per cent during the 1960-63 period. Moreover, the gap in per capita income between the developing and developed nations actually widened during the early 1960’s.
In addition, debt repayment would be taking up, according to the same report, about 15 per cent of the less developed countries’ export earnings. This percentage, being an average, must have been surpassed in the case of those countries that were determined to achieve and to better the goal of the 5 per cent growth rate set by the UN.
In choosing to make these opening remarks, I have only underscored the general consensus as to the close relationship between finance and development. Indeed, it was the Managing Director of the International Monetary Fund who stated at the Closing Joint Session of the Boards of Governors last September that he realized that there was a close connection between a country’s needs for development financing and the difficulties it might experience in maintaining the viability of its balance of payments.
Mr. Schweitzer recognized that, while the broad division of responsibility between the World Bank and the Fund which was envisaged at Bretton Woods should be maintained, it was of the greatest importance to foster in every way the cooperation between the Fund and the World Bank, in the interest of providing more effective assistance to the developing countries in solving their problems. It was with this object in view that we were promised that the two institutions would be working closely together to find means of tackling the problem of the debt burden of the developing countries. …
Therefore, I would like to urge this distinguished gathering to agree with me that, when the Boards of Directors of our two great institutions consider the question of imbalance, the question of at what cost balance should be achieved must not be forgotten, and if a reasonable quantum of cost is inescapable, then the question of spreading it over a suitable period of time should also be considered. After all, I need not remind the creditor countries of today that few, if any of them, were not in their recent or distant past heavily in debt to others. On the other hand, my country, one of the debtors of today, was not long ago a creditor country that had to wait for payment year after year, in spite of her dire need for what was owing to her to reconstruct her own economy.
The essence of my remarks is that, as a member of both the Fund and the Bank since their inception, we feel that, although we have always kept close relations with both institutions and over the last few years have made regular calls on the Fund’s services, it remains our opinion that a more blended assistance from the two organizations would have been of more value to our economy, especially during those last few years when we were committed to an important development plan. We also believe that, having had to do with little help from the Bank, we had to resort to the Fund, a fact which seemed to put us still further away from the beneficent hand of the Bank. This, in its turn, persuades us that the Articles of Agreement of the Fund relating to repurchase obligations are too inelastic and should be reconsidered with a view to strengthening the Fund as a source of international liquidity which is the topic of the day.
On this subject, I can but reiterate the gist of what I said last year in this forum, since, while my country can hardly contribute to the solution of this problem, we appreciate its importance in the whole complex of the international monetary system. Indeed, we have reason to believe that the highly industrialized countries have not, during the last two years, been as forthcoming in granting credit as they had been before the looming on the international financial horizon of the problem of liquidity. Moreover, the measures that have been taken this year by the United States, in its endeavor to improve the state of its balance of payments, must have had direct and indirect unfavorable effects on debtor countries trying to correct their own state of imbalance. That is why I feel obliged to dwell a little longer on the question of international liquidity, now that we have before us the Fund’s Report, allowing us to get a glimpse of the state of thinking going on within the management regarding ways and means of tackling this problem. I feel I must begin by complimenting the Executive Directors on the deep thought and broad outlook manifested in Chapter 2 of the Report. But while we appreciate the quality of the analysis of the several aspects of the question dealt with in that chapter of the Report, we deem it our duty to voice clearly our support of the idea that, although the task of influencing the total level of world reserves can be carried out by a new institution and although, if that task were entrusted to the Fund, it would involve certain amendments to the Articles of Agreement, particularly in the parts relating to the allocation of voting powers and to the establishment of a coordination system, it is nevertheless absolutely manifest that a matter which is of such concern to so many countries of the world should be in the hands of the Fund—an organization conceived and formed as an institution working for financial cooperation on a universal scale.
This should be so; otherwise, if the task is given to a soulless body motivated only by technical considerations, it will not be long before the extra reserves will have been absorbed by the countries already having a positive balance of payments, while what is required is an institution imbued with a realization of the human aspect of international financial problems—an institution with a full appreciation of the difficulties of the developing countries that should be the receivers of the newly created reserves. Such receiving countries need their reserves in order to be able to continue their endeavors toward economic growth. If this entails some transfer of real resources, such a transfer will be in the right direction and indeed none too soon.
Along with other countries depending mostly for their foreign exchange earnings on the export of one or two raw materials, we are mindful of the dangers that a crisis in international payments may bring in its wake to world trade. Such dangers as the world has experienced in the past and come through with no more than some economic bruises here and there—if they should befall our universe on top of the difficulties referred to by U Thant in his report—will possibly spell a disaster such as has hitherto been unknown.
This having been said, I would not like it to be thought that the U.A.R. is not alive to the importance of the measures taken by the Executive Directors of the Fund leading to a general increase of members’ quotas by 25 per cent and additional increases in the case of 16 member countries. Needless to say, my country has fully endorsed the Executive Directors’ proposals. We also welcome the facilities offered by the Fund for the payment of quotas by installments and the special drawing rights to enable certain member countries to effect the gold payment required for the increase in quotas. These facilities are clear signs of a happy reorientation of the Fund’s policy as regards the developing countries.
All these measures will increase the capacity of the Fund to generate international liquidity. The present decision will, it is estimated, increase the total quota of the Fund from $16 billion to about $21 billion, resulting in an extra unconditional liquidity of $1.25 billion and an extra conditional liquidity of $3.75 billion.
Neither do we, by urging such measures and policies, as I very briefly indicated in this statement, tend to treat lightly considerations of sound finance and economic stability. I would like to end my statement by referring to the efforts exerted by my Government to stabilize the economy in cooperation with the International Monetary Fund. It may be recalled that in May 1962 a stabilization program was agreed upon with the Fund on the occasion of the stand-by arrangement authorizing the U.A.R. to draw the equivalent of $42.5 million over a period of 12 months. The salient features of the program were the adoption of a uniform experimental exchange rate of $2.30 to the pound in all our international transactions, the raising of the Central Bank discount rate from 3 per cent to 5 per cent, the adjustment of interest rate schedules accordingly, and the restriction of the expansion of bank credit to both the private and public sectors.
In support of the renewed efforts made to stabilize the economy, another stand-by arrangement, amounting to $40 million, was approved by the Fund in May 1964. In continuation of the measures already taken, a comprehensive stabilization program was laid down, designed to achieve its objective over a period of several years without impairing the rate of economic growth of our country. In addition to the reduction of the rate of domestic credit expansion the program embraced a number of new measures. These included a general review of our pricing policy in order to check the increase in local consumption, to promote savings, and to encourage the export drive, as well as reduced reliance on external short-term borrowing to finance long-term projects.
Certain features of the 1965 budget estimates bear witness to the keen interest of my Government to promote economic growth with stability and to tackle some of the problems encountered in the implementation of our development plan. Among the latter, mention may be made of the persistence of the balance of payments deficit, the inadequacy of available foreign exchange resources, and the rather disproportionate increase in domestic consumption which has jeopardized our efforts to raise genuine domestic savings to the level compatible with the need to mobilize available resources to provide the required financing for the plan.
Despite the recovery staged by U.A.R. exports in recent years, the deficit in the current balance of payments has persisted owing to the large import surplus brought about by increased imports of capital goods and intermediate commodities needed to carry out planned production, as well as basic foodstuffs needed to cope with a quickly growing population. This deficit has been financed by the utilization of development loans granted to the U.A.R. by friendly countries, by tapping the IMF resources, and by the accumulation of U.S. counterpart funds. It is hoped that this imbalance in U.A.R. external transactions will be rectified in the course of the second five-year plan with the accomplishment of the industrialization drive and the completion of the high-dam project, the impact of which on agricultural production and electric power generation need hardly be stressed.
Such long-term objectives, however, have not excluded other action in the light of the experience of the first five-year plan and the results revealed in its implemention as well as in view of certain other considerations. Thus, in drawing up budgetary policy for the present fiscal year, care has been taken to check unnecessary expenditure, to scale down investment outlay to the level compatible with available domestic and external financial resources, and to observe an order of priorities in carrying investments without, however, jeopardizing the rate of economic growth. Consequently, investment in productive sectors is given priority over investment in the services sectors, the targets of which have been already achieved in certain fields by the end of the first five-year plan. Moreover, in carrying out investment policy, priority has been given to the utilization of the existing capacity to the fullest possible extent and to the completion of projects already started. Special consideration is also being given within the productive sectors to projects contributing to the promotion of exports as well as to projects which generate prompt yields, so as to alleviate the strains on the balance of payments. It goes without saying, however, that special emphasis is placed on the completion of the high-dam scheme and related projects in the fields of irrigation, drainage and electricity.
In order to check the increase in consumption and thus increase the availability of certain products, it has been decided to increase the domestic prices of certain export commodities and services as well as to put an end to the hire-purchase system for a number of durable consumer goods. In the meantime, definite measures have already been taken and others are being contemplated in order to encourage various forms of savings, including tax exemptions, the raising of interest rates, and the flotation of savings certificates.
Statement by the Governor of the Fund for the Federal Republic of Germany
… As regards the monetary field, after looking back over the past year, I think it is no exaggeration to say that, by the efficacious action of the International Monetary Fund and the major central banks, a crisis in the world’s payments system has been prevented. The Fund’s Report describing the working of that system is a fine piece of work, and the chapter on international liquidity is carefully balanced. Frankly, I would have preferred to see more attention paid to the necessity of domestic adjustments in deficit countries, as under the existing system of fixed exchange rates the inflationary pressure mostly linked with deficits tends to spread to the whole international system. It is not primarily for the surplus countries to make adjustments; it is up to the deficit countries, too, to put their houses in order.
I stress this idea although now the Federal Republic of Germany has become a deficit country, after having been a surplus country for many years. During the last 12 months our deficit on current account has amounted to DM 4.5 billion. On long-term capital account we were roughly in balance, since our long-term capital imports were more or less compensated by long-term capital exports. We are no longer attracting reserves from the rest of the world but, on the contrary, supplying reserves to other countries. This fundamental change, which is not yet recognized everywhere, is due to the following facts: (1) The German economy is booming. Our imports have therefore risen more than our exports. During the first 8 months of 1965 our trade surplus amounted to only DM 870 million, compared with DM 4,700 million for the same period of 1964. (2) The inflationary pressure prevailing nearly two years ago in some of our neighboring countries, which stimulated our exports and hampered our imports, has more or less disappeared. (3) Our tourist travel abroad exceeds foreign travel in Germany considerably, and the remittances by foreign workers to their home countries are rising.
While we were able to afford the loss of some of our reserves—thereby increasing liquidity abroad—corrective measures became necessary to restore internal financial stability and external equilibrium. Inflationary pressure became more and more accentuated, private and public investment ran at too high a level, wage increases exceeded productivity gains, and prices went up at a faster pace. The central bank, therefore, had to apply a restrictive policy: we increased the minimum reserve requirements, raised our bank rate to 4 per cent and reduced the rediscount quotas of the commercial banks. Monetary policy could, of course, have been less restrictive if it had been possible to rely also on budgetary and fiscal policy as a means of curbing excessive demand. The use of fiscal measures proved, however, difficult for political reasons. In applying restrictive monetary policy we have always kept an eye on foreign markets. So far the policy pursued by the central bank has not led to substantial short-term capital imports nor has it done any harm to foreign markets.
The fact that Germany has developed into a deficit country has not changed my opinion, which I expressed last year in Tokyo, namely, that what the world needs is not so much a general reform of the international monetary system as an improvement of national policies of adjustment. I still maintain that no system, however ingeniously conceived, can function satisfactorily without the necessary measure of monetary discipline in the leading countries. If a country lives beyond its means and faces balance of payments difficulties, it has to make adjustments in its own economy. I am quite familiar with the tremendous problems involved in that process, as Germany itself is now in the midst of such a process. It is hard to reduce general demand and to give up the dream of even higher growth rates. It is equally hard to reduce public spending and to contain social expenditures. And it is even harder to keep wage increases within productivity limits. But ultimately, under the system of fixed exchange rates, there is no alternative, since even the most perfect machinery for financing balance of payments deficits cannot replace domestic adjustment. In the long run, it will be more rewarding to rely on timely adjustment measures rather than too much on assistance from abroad.
If all leading countries were to aim at balance of payments equilibrium, the need for reserves would be small. Temporary deficits are, of course, always possible but they can be financed from owned reserves or from conditional reserves such as those provided by the Fund or other financial institutions. If a country enjoys confidence, it can obtain credit from anywhere; if it does not enjoy confidence, it must, first of all, adopt measures to regain this. I cannot help thinking that too perfect a machinery for financing balance of payments deficits weakens monetary discipline and contributes to creeping inflation. I am glad to say that the “multilateral surveillance” within the Group of Ten already represents a useful step in the direction of stricter balance of payments discipline. But it seems to me that still more should be done in this field. We should not abandon our endeavors to lay down certain rules of conduct for adjustment policies in cases of external disequilibria.
I can see no urgent need for additional international liquidity, especially now that the quotas in the Fund are being increased considerably. The fact that some deficit countries are short of reserves is no justification for a global increase of liquidity. We cannot bring the tide to a higher level because a few ships have run aground. To do that would mean inflation pure and simple. Such grounded ships must be refloated by making them lighter. Also, we should not create money artificially to assist the developing countries. What they need is not short-term money but long-term capital, and this can only come from savings and should not be created by the monetary machinery. I do not share the view of those who believe that the world will face a major crisis unless international liquidity is increased. If the world were really in for a crisis, it would be because of persistent inflation. The surest way, in my opinion, to arrive at a crisis would be to create excessive liquidity. The most acute problem is not the artificial creation of new liquidity but rather the danger that existing liquidity could be destroyed by a sudden run on one country or group of countries.
It is most gratifying to observe that the American balance of payments has improved considerably and that the American authorities have succeeded in keeping their price level more or less stable even during a boom period. Both facts offer encouraging prospects for the international payments system. The improvement of the American balance of payments means that fewer dollars will flow to the rest of the world, especially to European surplus countries and that, therefore, it will become easier in Europe to combat inflationary tendencies. Price stability in the United States, if maintained also in future, will compel European countries to keep their prices in line. Let me say quite frankly that in my opinion a sustained improvement of the balance of payments situation of the United States and of the United Kingdom is of greater importance than all the efforts to reform the international payments system.
I do not share the view that the disappearance of the U.S. balance of payments deficit must necessarily lead to an immediate shortage of international liquidity. However that may be, my Government agrees to contingency planning with a view to providing suitable machinery for increasing liquidity if the need for it were really to arise. In the interest of avoiding inflation, it would, however, be wrong to create liquidity in advance. What we should do is to provide, without undue haste, for arrangements to meet future contingent needs. I find it useful, therefore, to proceed from the stage of discussion and technical exploration to the stage of preparing acceptable solutions. We all know that considerable divergences of opinion exist between the leading countries about a reform of the international monetary system and the liquidity question. In my opinion we should first start and try to overcome these divergences where they exist, i.e., within the Group of Ten, to reach prior agreement on basic points before embarking on negotiations on a broader front.
For the benefit of forthcoming deliberations I should like to make a few remarks. I have already said that in my opinion creation of international liquidity is not an urgent matter. If any increase of liquidity were to be taken into consideration, such increase should be made dependent on the real needs of the world economy as a whole, not on balance of payments deficits of individual countries. The form in which new liquidity would have to be created in case of need still requires careful consideration. In its Annual Report the IMF has already referred to some of the many ways in which this could be done. It would be premature now to take sides regarding any of the different techniques conceivable. It seems to me that the responsibility connected with any creation of additional liquidity should be borne by a limited group of industrial countries, as only those industrial countries are in a position to back such a scheme by their own resources. This does not mean that other countries are excluded later on from such deliberations nor does it necessarily mean that newly created liquidity would be distributed only to assist this limited group. It could also be made available to other countries, in some form or other, for example, via the IMF. I should like to emphasize that in my opinion such a new reserve asset would have to supplement rather than replace the dollar in its role as the main reserve currency in the holdings of central banks. The position of the dollar should on no account be impaired. It can play its part all the better the sooner the U.S. balance of payments deficit disappears and the more effectively internal stability in the United States is maintained.
Statement by the Governor of the Fund for Somalia
Scek Abdi Hagi Abicar
On the occasion of the Annual Meeting of the Bretton Woods institutions the United States of America and the City of Washington this year act again as our hosts, and the warmth of their hospitality, although well known to us, never fails to evoke our feelings of appreciation.
All through the years in which we have had a continued exchange of ideas and contacts, there has been no change in our principal theme, which is also the ultimate reason for our presence here. This time again the main subject that occupies our attention is cooperation. It is a fact that there is an interdependence between the various countries as far as development is concerned, and the institutions represented at this meeting are keenly aware of this. Monetary cooperation has acquired pre-eminent importance and is beneficial for all countries of the world, both the developed and the developing areas. General monetary stability and a level of international liquidity adequate to meet the requirements of international trade are in fact essential for the sound development of the various economies all over the world. In other words, owing to this international interdependence, each country may, by its economic conduct, help or prejudice all the others. The efforts we are all making within the International Monetary Fund are precisely aimed at avoiding—through the protection of monetary stability and of a sufficient liquidity in the individual countries—the occurrence and spread of monetary disturbances.
The monetary authorities of Somalia are fully aware of this situation and operate in close consultation with the International Monetary Fund. During the past months, in fact, Somalia has maintained closer relations with the Fund. The result has been the conclusion of two stand-by arrangements for a total of $10.2 million; we have agreed upon a number of measures pertaining to credit, financial, and trade policies which have perhaps involved sacrifices and restrictions which we have accepted in the interest of sound economic development.
I have already referred to mutual cooperation among the various countries. In the case of Somalia, as in the case of all developing countries, this form of two-way cooperation has been strengthened through the intensification of contacts with the International Monetary Fund. The meeting of today represents, in fact, the conclusion of a long series of contacts in which Somalia consulted with the Fund and expressed its points of view on the practical effects of the implementation of the measures agreed upon with the Fund. We have, accordingly, notified the Fund authorities of the appearance of deflationary tendencies in the course of implementing the restrictive measures agreed upon with the Fund; we have pointed out the necessity to coordinate the credit and financial policies so as to allow the banks to cover, in the short run, any deficiencies in liquidity following the imposition of restrictions on public spending; the practical experience we have gained has also permitted us to form new ideas on the possibility of adopting a trade policy to support the credit policy.
One problem we have also constantly discussed with the International Monetary Fund—because it affects our national progress as well as the stability of the whole system of which we form part—is the equilibrium of our balance of payments. We have on several occasions given the pledge—which I wish to reiterate today—that Somalia intends to gradually equilibrate her balance of payments. I wish to stress, however, that our deficit—which so far we have been able to meet through the valuable, indispensable assistance of the International Monetary Fund—is not the result of mismanagement in the field of trade and exchange policies but derives from our inability to promote with our domestic resources a development process, the achievement of which will in future modify the situation and will enable us also to redress the position of our balance of payments.
Like all the developing countries, Somalia today could eliminate both the domestic and the balance of payments deficits, even if this would mean a slowing down of its development; but Somalia does not forget that, like all the countries which are now building up a modern and dynamic economic system, it is not alone. The assistance offered by the Bretton Woods institutions, by other multilateral cooperation agencies, and by friendly countries in fact encourages us to try and speed up the modernization of our economy, even at the cost of temporary imbalances—imbalances which international cooperation and our constant effort in assuming direct responsibility for our development should enable us to overcome.
Statement by the Governor of the Bank for France
Valéry Giscard d’Estaing
The ice pack of monetary conformity has finally broken. I am referring here to the ice pack that has been freezing the thinking on international monetary issues into a monotonous, complacent chorus for so many years. The task before us now is to find out what lies under the ice—I mean, what the speakers have in mind—as, obviously, matters have not been made absolutely clear. This meeting will desirably help us to clarify the obscure aspects of the situation.
I am not referring here to obscurities of a technical character; in point of fact, I feel that the Ministers and Governors should not let themselves be involved in technicalities; obviously, a discussion on technical grounds must remain a matter for the experts.
Where our responsibility lies is in presenting the monetary system issue on its real terms and with a reference to its general aspects. As France sees it, the main objective to be attained by all of us is to facilitate a fast and steady growth of the world economy. This poses a two-sided problem: (1) to endow the world economy with a stable and wholly secure international payments system; (2) to secure for the developing countries the real resources needed for their growth. These are two separate issues, technically. Psychologically and politically, however, they are linked together. I should like to deal with them in turn.
Two years ago, in this very place, we advocated a reform of the international monetary system. Our move created somewhat of a shock at the time. In that initiative we are now joined by major countries, such as the United States of America. For this, we all must rejoice, frankly and without any reservation. Let us be assured, however, that no ambiguity remains. It is legitimate to speak of a reform when the issue is to alter significantly current rules and practices. On the other hand, it is equally necessary to specify the desired orientation so as to avoid any misunderstanding. Otherwise, the will to reform would suggest the picture of a family, so far united, announcing enthusiastically an intention to take a trip, while half its members are firmly determined to go North, toward the snow, and the other half to the South, where the sun shines. Where are we headed for?
I shall refrain from using the so-called international liquidity approach. First, because everyone agrees (and agreement has been expressed in this very hall) that the problem remaining to be dealt with, in the immediate future, is one of too much liquidity rather than too little. I should like to start from a permanent principle in the international monetary field, namely, that of a discipline equally urging all countries to adjust their domestic economies to external financial balance requirements, without excessive delay, although naturally without undue rigor.
This would imply (1) correcting the inequalities inherent in the present system, (2) reinforcing the rules of its operation.
(1) As a matter of fact, all countries are submitted to balance of payments fluctuations regardless of the degree of their development. On the other hand, the countries running a deficit find themselves in differing situations with respect to the means at their disposal to settle it. Those whose currencies are used as reserve currencies are in a position to obtain implicit credit facilities over long periods of time through the holding of their own currencies by partner countries. The facilities thus made available to reserve currency countries are of dangerous usage, as these countries are tempted to misuse such facilities by postponing as long as they can the implementation of appropriate adjustment policies. In so doing, they may expose the world community, which bears no responsibility therein, to a crisis which would be all the more serious as it would be sudden and unpredictable. One of our aims in reforming must therefore be the elimination of the dangers deriving from these facilities and from the possibility for reserve currency countries to postpone action. We cannot in fact realistically expect reserve currency countries spontaneously to give up advantages drawn from the current procedures. It is wise for us, therefore, to refrain from enlarging such advantages. In pursuing stricter reserve policies since the beginning of this year and in distributing them along lines closer to those of reserve currency countries, France, followed as she was by various other countries, by no means intended to jeopardize international cooperation; what France meant was only to mark the limits which are desirable for the volume and duration of reserve currency accumulations.
(2) Once misuses are eliminated, it will be necessary to reinforce the set of rules of which the International Monetary Fund’s Articles of Agreement provide the first clauses.
It is not enough to complete the current surveys now being made within the OECD relative to the adjustment process. We must also determine the respective responsibilities of deficit countries as well as of surplus countries. In such times as those in which the world has been living for the last 20 years, when both the international and domestic economies are submitted to inflationary pressures, it pertains primarily to deficit countries to take appropriate action (as was recalled a moment ago by the Governor for Germany, whose speech I have listened to with melancholy, as he said what I myself intended to say). This does not mean that surplus countries will not have to fulfill certain obligations, particularly, to participate in the financing of international trade and payments. That is why France has been endeavoring for many years to behave as a good creditor; the volume of prepayments of our external debt bears testimony to that policy. Accordingly, in order to encourage a wider use of the French franc abroad, I have just authorized French banks to grant loans denominated in our currency to their foreign correspondents.
Following these remarks, I should like to draw the conclusion that the main contribution by reserve currency countries to an international monetary reform is the restoration of a durable balance in their external accounts. This preconditions the study of any other device.
Reforming the monetary system involves a second element, namely, international liquidity. As was evidenced by the Report from Mr. Ossola, the mere use of these two words complicates a problem which can be expressed in simple terms. (1) The present issue is not that of creating additional liquidity. It is not either that of meeting the temporary balance of payments fluctuations, since recently increased Fund quotas provide adequate means to cover these imbalances. The issue is that of eliminating reserve currency countries’ deficits. (2) The elimination of such deficits may uncover the future need for complementary means of payment.
From this we can conceive certain lines of practical action. (a) Since it stems from the reduction of the role of reserve currencies in creating additional liquidity, a reform must imply the emergence of a new instrument, (b) Such an instrument, if it is to have the qualities of an unconditional reserve asset, must be existent per se, as my friend Mr. Colombo so aptly pointed out. It must be ranked as a genuine currency, not as a mere credit facility. It should therefore, through its very definition, be linked to gold, which remains the necessary and unchanging reference basis; moreover, its circulation must be regulated along the same lines as gold movements between central banks, on which movements order and discipline in the whole system are ultimately dependent. (c) Lastly, the volume of currency to be issued will have to be determined by an agreement between countries whose institutions and currencies are providing the basis for international settlements and who are consequently the only ones in a position to issue reserve instruments that would be indisputably acceptable. Such an agreement can only, as a matter of common sense, derive from a unanimous decision. As the Governor for Italy has also pointed out, there is no need to fear too much the consequences of such a principle.
These are the views which France has already made known concerning the ways of dealing with that problem, in the event that it should arise. As a matter of fact, France has so far been alone in expressing specific views.
She expects each of her partners to expose thoroughly its own opinion on a reform. Only on the basis of specific proposals can any progress be made in further consideration of the matter.
A decision has just been made that an attempt to determine the basis for an agreement on reform should be undertaken within the Group of Ten. Such a way of proceeding has given rise to surprise in some circles. To be sure, it was wise on the part of the Fund to direct its staff to undertake such studies, and I wish to congratulate the Managing Director, Mr. Schweitzer, for the clarity and the excellence of the document he has distributed to us. However, for the reasons I have just outlined, it was opportune that the search for a solution be undertaken by the Group of Ten (or rather the group of eight countries and the two monetary areas, namely, the sterling area and the franc area), which, it must be remembered, was initially established with a view to supplying international institutions with additional resources.
Assuming that a solution could be worked out, final approval of the Group’s findings should be subject to a joint scrutiny by the other countries. I am afraid however that a discussion on procedure about that issue would in fact cover somehow a confusion, which calls for clarification in the common interest. As a matter of fact, attempts were made to connect international liquidity creation with development needs. It is a fact, for example, that a few major industrial countries, some of which enjoy an outstandingly rapid and steady growth, were the primary and almost the exclusive beneficiaries of additional liquidity creation in 1964 and 1965 through the General Arrangements to Borrow or drawings on the International Monetary Fund, while at the same time developing countries were seriously affected, as was underlined by the Governor for Cameroon and the delegate of Australia, by a slump in various commodity prices.
Some may think, or at least suggest, that an overlarge creation of currency would improve the lot of the less privileged: sad experiences throughout the world bear evidence to the contrary; inflation denudes the poor while it fortifies the maneuvers of the wealthy. Let us not therefore delude ourselves with the belief that a flooding would adequately irrigate our gardens. Let us be aware that the problem confronting us here is not a single one, but a two-sided one: (1) to endow the monetary system with adequate instruments; (2) to provide real resources for development.
There are wide differences between development financing issues and the monetary questions which I have just dealt with. What matters in this field is not to improve the mechanisms through which national economies communicate, but to alter the natural distribution of wealth and the effective transfers of resources. While it is generally agreed that there is an excess rather than a shortage of liquidity, on the contrary, the inadequate level of long-term international financial assistance at an annual rate of about $9 billion is bitterly felt. If we draw up a balance sheet of the assistance granted at present we are led to a thorough self-examination. Assistance for development considered either in its amount or in its terms or in its spirit does not meet the needs.
Should we take as a criterion the level of the burden carried by the industrial countries we would have to admit that international cooperation is losing substantial ground. The bilateral contributions granted by industrial countries are too markedly uneven. As far as multilateral aid is concerned, it is not negligible; however, it can only play a marginal role. For instance—as a comparison with the figures which I have just mentioned—I should like to recall that the net cash outflow of the Bank in the past fiscal year has not exceeded $100 million, to which is to be added an amount of $222 million disbursed by IDA, all this in spite of the brilliant and imaginative management by its President, Mr. Woods.
In awareness of the growing discrepancy between needs and resources, France took last year, in Geneva, the initiative of putting forward, during the United Nations Conference on Trade and Development, a recommendation which has been voted unanimously. This recommendation assigned as a target for every country to allocate a minimum of 1 per cent of its national income to international economic assistance. To say the least, not every industrial country has followed a practice consistent with its vote.
Aid is not only inadequate in volume, it is also inappropriate in its form. To be sure, the financing is usually secured where economic profitability can be estimated, but that is only a fractional approach to the problem. Financial aid leaves unsettled the most desperate situations in developing countries, namely, the burden of external debt, fluctuations in commodity prices, to say nothing of the difficulty of new industries to secure adequate supply and maintenance.
Lastly, the implementation of existing procedures has to be altered. It would be fallacious to try to impose on developing countries the same rules which are currently applied to transactions between industrial countries. Prevailing standards of free trade, competition, nondiscrimination are no response to hunger and overpopulation. Moreover, have we not modified constantly in our internal economic policy the laws of the market in order to establish a better equilibrium in favor of social categories which are either handicapped in the economic struggle or submitted to overlarge fluctuation in the prices of their products, as farmers are for instance?
We cannot claim to solve the problems of development by taking almost exclusively the approach of investment financing. The whole of the economic relationship between strong and weak countries has to be organized as such. In my view, the improvement of that relationship constitutes the indispensable complement to any progress in the international field of financial and monetary cooperation. Therefore, an effort of imagination such as we propose to undertake in the reform of the world monetary system, and which, to be sure, concerns only the industrialized countries, should be dedicated to increasing the resources of developing countries.
(1) In the first place, an agreement could be made to establish a relationship between the creating of additional reserve assets and the organizing of the markets for certain commodities. Such a relationship could be obtained by setting up a joint timetable for both the studies and the actual establishment of procedures and mechanisms.
(2) At the same time, the hindrances which were responsible for the stagnation of financial aid over the last few years should be removed. Can we not imagine a device progressively leading to an equalization of the financial burden which would induce industrialized countries to direct their efforts toward the targets already assigned by common agreement? Part of the resources so obtained could be earmarked for price supports and primary products stockbuilding.
Lastly, it is conceivable that a distribution of additional reserve assets could take into account, among various criteria, the actual efforts made by each country in favor of developing countries.
If there is a wish that both the problem of reforming the monetary system and that of transferring resources in favor of less developed countries should be dealt with simultaneously, one single endeavor is not enough. There is a need for two. Let us impose upon ourselves the discipline of the mind together with the creative effort of the will.
This meeting of our institutions was expected to be the occasion of a tactical confrontation. There are people who perhaps came with the secret hope to see the pale glitter of the gladiators’ swords. Our feeling is different. The necessity of reform has been launched by some of us, taken up by others. From now on this obligation is laid upon us. The international community, conscious of the task to be performed, wonders whether we are capable of achieving it. The responsibility of performing such a task rests with a small group of men who suddenly realize how fragile they are under its burden. Here we are, in our turn, after many others in other places, facing the ultimate question: does the decision belong to circumstance or to mankind? If it so happens that the circumstance prevails we could not blame anyone for it. It lies in our hands.
Statement by the Governor of the Fund for Belgium
As pointed out in the Annual Report of the Executive Directors, the Fund has been especially active in fiscal year 1964-65. The operations of the Fund have reached the level of about $1,900 million in these 12 months and a further $1,900 million in the next 4 months. Such a large assistance by the Fund is illustrative of the magnitude of payments deficits, a situation which is no cause for complacency. But, given the circumstances, it is heartening to see how successful the action of the Fund has been and how much it has contributed to the maintenance of the stability of the present international monetary system.
It is fair also to stress the solidarity and mutual assistance displayed by the Fund members, of which this action among others of the Fund is both a witness and an instrument. The Managing Director and Executive Directors of the Fund should be congratulated for the excellent Report they have submitted, and more especially for Chapter 2 which is devoted to the international monetary system and international liquidity. Of course, this Report does not propose a solution to the problems of today. It would clearly be premature to make such proposals at this stage, while the problems themselves still require ample discussion. But the Report expresses with great clarity the various aspects of these problems and thus provides a very useful contribution to their further study.
From this chapter, I want to select one idea, or rather one statement which does not claim the merit of originality, but is at the root of the questions facing us: the necessity of improving the functioning of the international monetary system. About this necessity as such, there is no longer any divergence of opinions, but views are not yet in harmony on a wide range of problems concerning the need to create and if created, the distribution, utilization, and administration of additional reserve assets and about their conditional or unconditional character. I hope that we will come to a common conclusion on these matters. The inventory made within the Group of Ten, as well as the analysis presented in the Annual Report of the Fund, constitutes a significant contribution in that direction.
Practices have already been developed, enabling central banks to dispose of increased international means of payment. I refer to the intensified collaboration of the central banks of the industrialized countries and, inside our institution, to the General Arrangements to Borrow as well as to the evolution of some of the Fund’s policies. You will not indeed be surprised that in this assembly it is to the Fund and to its role that I will devote my comments.
Throughout the years and within the scope of its purposes, understood in their broadest meaning, the Fund has adapted its action to the evolution of the economic and monetary situation. This has been achieved through policies set up by its administration with the free cooperation of its members. I do not need to recall all the steps of this evolution, from the adoption of the system of voluntary repurchases, the technique of stand-by arrangements, the increasing degree of conditionality applied to the successive credit tranches, and the policy on compensatory financing. These policies have developed somehow aside and perhaps even beyond the techniques, specifically provided for, in the Articles of Agreement.
In addition, the degree of convertibility conferred on their currencies by a number of members of the Fund, greater than what is required by Article VIII of the Articles of Agreement, has allowed the Fund to direct drawings toward the more appropriate currencies in taking into account the respective balance of payments and reserve positions of the countries concerned. But this practice can only be carried out through the free cooperation of, and in consultation with, the members of the institution. The fact that this collaboration has been so largely extended is indeed a cause of satisfaction.
The Fund’s policy with regard to drawings within the gold tranche and the super gold tranche, helped by a simplified procedure, ensures—except perhaps in extraordinary circumstances—the automaticity of the drawings within those limits and represents, as we all know, a useful contribution to our problem. This system could perhaps be further applied on a limited scale to some part of the credit tranches.
Thanks to these practices, the drawing facilities in the gold tranche and super gold tranche have added to the volume of international means of payments. Indeed, countries have been able to use these facilities without question, in order to buy the currencies required to meet balance of payments deficits. These facilities can be considered as convertible; their value is free from fluctuations in local currencies. However, strictly speaking, the creditor positions in the Fund are neither an asset nor a real claim on the Fund; they are merely a possibility of buying national currencies from the Fund. They can be converted only indirectly. It would not be possible to transfer these positions as such to another member; the transfer can only result from a succession of operations in national currencies. The gold value of so-called creditor positions in the Fund derives from the rules governing the maintenance of the gold value of the Fund’s assets, but there is no single unit in which this value can be expressed. It has to be translated into units of a national currency, to which it does not correspond juridically. The so-called creditor positions have not even a name in the Articles of Agreement, and can be described only by periphrasis.
Furthermore, the use of the gold tranche and even of the super gold tranche remains juridically and, therefore, potentially in fact, conditional. It is subject to a judgment other than that of the holder of these assets and cannot, therefore, be considered as being of the same quality as owned reserves and especially gold. It is, therefore, impossible for central banks to incorporate them in their reserves on the same footing as gold or convertible currencies. This is, of course, of a paramount importance because, if the gold tranche and the super gold tranche could be given the legal status they deserve and be therefore (a) an unconditional reserve and (b) a real asset freely transferable to any other member of the Fund, they could be considered as good as gold and incorporated in central bank reserves.
So, if, in fact, the system thus created within the Fund has proved to be helpful, it, however, is not entirely satisfactory, because its status is not clear. It is not apparent from a reading of the Articles of Agreement, but is the outcome of practices adopted in the course of time. There is, thus, a gap between the basic values of the techniques established within the Fund and their legal status.
This gap is the unavoidable consequence of the empiric character of practices which normally developed within a growing institution with the cooperation of its membership. So far, this system has not brought about serious inconveniences, but neither has it brought about all the good it could have. Further, this method cannot be indefinitely pursued without danger, as it is not acceptable to set up and maintain for long an international system of payments based on credit in incompletely expressed legal terms. On the other hand, this lack of a well-defined status for the practices which have developed in the Fund casts some doubt on their real value and might well be responsible for the fact that those concerned with the improvement of the international system of payments underestimate the potentialities of our institution and may, therefore, be induced to seek solutions outside the Fund.
I would like to conclude as follows: the time has come to review the Articles of Agreement of the Monetary Fund in the light of its experience so that its law clearly reflects its practices. This, if not an easy task, is indeed a sound one which should be undertaken even if we did not have to solve the fundamental problem we have been dealing with for so many months, and which can be summarized as follows: do we have to improve the status of international reserves, directly related or not to balances of payments surpluses and deficits and, if so, in what terms and by what kind of mechanism? Whichever solution is adopted, it will have to be harmonized with the traditional task of the Fund.
Statement by the Governor of the Fund for Greece
I take pleasure in joining my colleagues who have expressed their congratulations to the Managing Director and the Executive Board of the Fund for the stimulating address and the excellent Annual Report with which they have presented us. The constructive contribution of the Fund to world monetary affairs is well reflected in these documents and deserves our high appreciation.
The Executive Directors have rightly chosen to devote again a basic chapter of the Annual Report to the international monetary system and international liquidity. Another equally important chapter deals with some problems of developing countries. The two issues are of primary significance and closely related.
Amidst the growing official recognition of the need to supplement the stability and the liquidity-creating capacity of the present international monetary system, the developing countries of the world are becoming increasingly aware of their vital interest in an over-all satisfactory settlement of this problem.
It is true that the inadequate level of reserves of low-income countries is part of their more general problem of scarcity of capital, which falls short of satisfying at the same time both the goals of rapid development financing and securing sufficient reserves. To try to solve this problem through measures which should aim primarily to meet the international liquidity issue would cause the intermingling of heterogeneous goals, and this could jeopardize the successful attainment of either of them. However, although it is necessary to keep the two problems distinct in dealing with them, it should be kept in mind that they are closely interconnected and equally important to world monetary equilibrium.
The success of the development efforts of lower-income countries is critically dependent on the level and growth rate of international liquidity in a number of ways:
First, adequate and soundly expanding liquidity fosters rising levels of economic activity in the world as a whole, and particularly in the industrial countries, which account for more than 70 per cent of the world’s imports and constitute the chief markets for the exportables of developing countries. Growth of the industrial countries’ markets facilitates the developing countries’ access to them on favorable terms. In addition to an increasing volume of exports, of greatest importance to developing countries is the improvement and stabilization of the prices of their commodities, if the offsetting impact on development assistance by falling commodity prices is to be prevented in the future. While several other factors are involved in the problem, the prices and the volume of exports of lower-income countries could well take a turn for the better or the worse, depending on the adequacy or inadequacy of international liquidity.
Second, the vital flow of development capital from the industrial countries to the rest of the world depends directly on the liquidity margins of the capital-exporting countries. Furthermore, the ability and willingness of the industrial nations to contribute to the financing of the development efforts of lower-income countries should be supported and enhanced by international liquidity measures designed to minimize the adverse effects of liquidity losses caused by capital outflow from the industrial creditor countries. A tightening of credit to the countries in process of development should be considered as an indicator of a liquidity shortage which might not actually be reflected in world trade and production but appear only at a later stage. The interconnection between world liquidity and development credit justifies the conclusion that the primary impact of an inadequacy of liquidity would fall on the developing countries.
Third, the establishment of supplementary facilities to provide for world liquidity would enable the Fund to cope more satisfactorily through the existing quota system with the reserve needs of developing member countries. In this context, improved facilities for compensatory financing and more flexible conditions for drawings and repurchases should also be envisaged to provide for a direct contribution to the liquidity position of the developing countries.
The preceding considerations point out the significance of the problems of less developed countries, both with respect to the interests of these countries and to the successful working of the international liquidity arrangements. Full attention to these problems in the program of further work and on the prospective negotiations is, therefore, of great importance to the advanced as well as to the developing countries.
The staff of the Fund, the Group of Ten, as well as several eminent experts deserve to be highly commended for their valuable contributions to the clarification of the issues connected with the working of the international monetary system and their suggestions for reform.
It is necessary, however, to proceed to further analysis of the problems connected with measures aiming at the creation and regulation of international liquidity. Further work remains to be done in order to secure a broader basis for agreement among the members of the international community.
My own views and proposals on the evolutionary ways in which the gold exchange standard should be supplemented rather than supplanted have been presented to this assembly on several past occasions and need not detain us presently. I should not fail to mention, however, that my recent work on these topics has convinced me of the need for deeper exploration of the problems, including the direct and indirect effects of reformative proposals cast in general terms.
I welcome, therefore, the proposal to proceed to additional systematic work and negotiation as a final preparation of the ground for the decisions on the reform of the international monetary system. This work, however, should be rapidly advanced and completed with the active participation of the International Monetary Fund and representatives of the developing countries. We should feel optimistic that the spirit of international monetary cooperation will provide a sound basis for agreement among the members of the international community to pave the way toward an improved monetary system corresponding to the growth and stability requirements of the world economy.
Statement by the Governor of the Fund for Spain
Faustino García Moncó
Although I have attended some of the Annual Meetings of the International Monetary Fund in the past, this is my first opportunity to take part in it as Governor for Spain and I do so with great pleasure. Ever since my country was accepted as a member in 1958, I have followed the activities of the Fund very closely, especially the evolution of its relations with Spain.
The first thing that stands out when we contemplate these relations is the constant and close cooperation between both parties. The collaboration of the Fund took practical form when technical and financial support was given to the Spanish economy with the preparation and launching of the stabilization program in 1959. This cooperation has continued with contacts at the technical level between members of the staff of the Fund and Spanish officials. The consultations held have been an incentive to us and we have carried them out in an atmosphere of frankness, as those who have taken part in them can bear witness.
Spain’s cooperation with the Fund has also taken practical form, insofar as the improvements in our balance of payments and in our economy in general have allowed, in the stepping up of the utilization of pesetas in loans granted to various countries. The figures, which I will not go into now, show for the Spanish quota—as pointed out by Mr. Schweitzer in his introductory speech—one of the highest percentages of utilization. This fact, together with the development of the Spanish economy, has undoubtedly influenced the recent selective increase of our quota.
And this constant cooperation between the Fund and Spain continues today at a time when the Fund, as well as my country, have plainly advanced toward the achievement of their goals. It seems unnecessary to point out the progress of the Fund, to which the Annual Report of the Executive Directors and the introductory speech of Mr. Schweitzer refer. I most heartily congratulate them all on their clear and objective approach to the questions involved.
Certainly, outstanding problems remain to be solved. International liquidity, which is given special attention in the Annual Reports of this and last year, and to which I will refer later, is the most important among those problems. However, here too we may observe a remarkable progress which in my opinion is evidenced by a more open recognition of the issues raised. As these problems have become more tangible, it has been possible to eliminate the mental inertia we met with at the beginning, and this is undoubtedly the first decisive step toward their final solution.
Our economy has also developed since we started this cooperation with the International Monetary Fund. During the last few years, the rate of growth of the Spanish economy has been very high and fully satisfactory. But I am less interested in emphasizing this aspect than the fact that such growth has taken place in a climate of stability and has been accompanied by a progressive liberalization of our trade and international payments. Of course, I will not say that this development has occurred without strains of various types which were the inevitable aftermath of the changes in the productive and commercial structure of a country undergoing full expansion, stimulated, moreover, by a development plan that became effective in 1964. But these are problems characteristic of a growing economy, and I wish to underline that in solving them we have honored the principles of the Articles of Agreement of this organization. In this connection, I also wish to state that the maintenance of stability in the financial and monetary field will continue to be the cornerstone of our economic policy. And this will be possible without slowing down the rate of growth of the Spanish economy and without interrupting its progressive emergence into world economic affairs, inasmuch as by using the safety valve which our reserves offer, we were able to deal with the inflationary pressures that became apparent during the second half of last year without causing an abrupt contraction in over-all demand.
Coming back to the matter of international monetary liquidity, which is the center of our discussions this year, and being aware of the complexity of this problem, to which much thought and on which many opinions have been given, I believe, as I said before, that we are closer to a solution although serious obstacles remain to be negotiated. And in this connection I would like to stress the following four points, which we should have present in our minds all the time, I believe.
1. This is a problem that affects all countries and therefore the interests of all must be given due consideration. Consequently, the Fund seems to be the proper forum in which to resolve this problem, and it would be convenient to initiate urgently the corresponding work.
2. Perhaps smaller groups would be more advisable for the technical discussion of the various solutions. If this were the case, I believe that at any rate all the countries that are concerned in the creation of international monetary liquidity should be present, whether because they hold large assets, or are important in international trade, or because their currencies are habitually used for international loans. And, of course, it would be essential to have the viewpoints of the less developed countries.
3. To tie the increase or decrease of international liquidity too closely to inflationary or deflationary pressures in the world economy is a dangerous oversimplification of the problem, inasmuch as it ignores the great significance of the distributive aspects. As a matter of fact, an excessive accumulation of liquidity, which may be created in the future, in the hands of those countries with large reserves, whose monetary and trade policy is largely unaffected by the level of such reserves, may actually render useless a large part of the increase of liquidity attained. In such a case, we would have improved liquidity expressed as a ratio between international reserves and volume of international trade, but we would not have solved any problem.
4. Finally, although I agree that the establishment of a new system to create additional liquidity is not very urgent, I think that an agreement on a solution should not be delayed. The possible techniques of the different alternatives have been sufficiently explored and what remains is to reach an agreement which will unite the various interests. I believe that this negotiation should not be postponed and that the countries should confront it determined to cooperate and without adopting rigid positions. The International Monetary Fund should also approach this negotiation with an open mind and without sacrificing possible improvements for the sake of upholding the text of an Agreement that has proved to be efficient but that was drafted over 20 years ago under economic and monetary circumstances completely different from those we face today. The reform is so important that the vital thing is not to win short-term battles but to establish a basically stable international monetary system which will permit the orderly development of commercial and monetary relations between countries in the years to come.
Statement by the Alternate Governor of the Fund for South Africa
G. W. G. Browne
The Fund’s Annual Report provides, as always, a most interesting and able survey of world economic developments during the past year. For several years now, the problem of international liquidity has occupied an increasingly prominent place in the Fund Reports and in our discussions at these meetings, and in this connection there are one or two brief comments which I should like to offer.
The Fund Report states that “appraisal of general reserve needs is not something that can be carried out on the basis of precise criteria.” I agree, but in judging the adequacy of reserves I think it is important to bear in mind that we are dealing with a dynamic problem. Economic forecasting is still far from perfect, and an adverse turn in a country’s balance of payments often sets in with unexpected intensity and then cannot easily or quickly be reversed. Especially in the case of primary producing countries, where a crop failure or a sudden drop in commodity prices may lead to a sharp fall in reserves, it is important that an adequate cushion of liquidity should be available. Otherwise, unnecessarily drastic action may have to be taken, i.e., action more drastic than would be required in a static situation to restore equilibrium, and the consequence may be, later, an unnecessarily severe fall in the rate of growth in the economy.
Secondly, I believe there is a tendency to exaggerate the dangers attaching to a level of world liquidity which, by some criteria, may be slightly more than adequate. We have made this point on a previous occasion and I shall not labor it here, except to say that experience seems to show that financial discipline is associated with a reasonably comfortable level of reserves and that such discipline may in fact become more difficult when liquidity falls below a safe level.
We therefore welcome the studies which have been and are being made of methods to increase world liquidity. I think, however, that it is most important to bear in mind the qualitative differences between the various types of reserve assets.
The Fund Report itself distinguishes between conditional and unconditional liquidity and recognizes that countries do not seem to regard these two types as interchangeable. Without decrying the usefulness of conditional liquidity, I think this attitude is understandable and, indeed, correct. Questions of financial sovereignty may be involved and cannot be brushed aside.
On the other hand, if additional unconditional liquidity is created, then the question of maintaining the value of the new reserve assets may raise important problems. Mr. Schweitzer, in his opening remarks on liquidity, referred to four criteria—with all of which I agree—and among them he emphasized the need to protect the quality of members’ reserves. Additional liquidity created in some of the ways which have recently been proposed seems unlikely to command that unqualified confidence which is so essential, or to stand up to the harsh realities of the financial stresses which we must still expect from time to it me.
It seems to me that such fair-weather liquidity might do more harm than good, since it might create a false sense of security. I think we should do well, in studying any new proposals, to bear always in mind the essential role of gold. As the Governor for France stressed at our last meeting in Tokyo, international liquidity may be compared to a series of concentric circles, of which the inner circle is gold. This recognition of the basic importance of gold resides also in recent French proposals for improving and strengthening the international monetary system.
The founders of the Fund at Bretton Woods foresaw that there might one day be a need to augment the gold element—the strongest element—in world liquidity, and they wisely provided the means, in Article IV, Section 7, of our Articles of Agreement, for increasing this element through uniform proportionate changes in the par values of all currencies, i.e., through a simultaneous and uniform revaluation of all currencies in terms of gold. It was never intended, of course, that this section should be applied frequently, or to the exclusion of other measures to provide greater short-term elasticity in the supply of liquidity. But from time to time it may be vitally important to enlarge the gold component of liquidity, and the proportionate decline in this component in recent years, as well as the uncertainties surrounding the future level of gold production at the present price, give grounds for believing that such a time may be approaching. It is rather strange, therefore, that at least one of the recent studies of the problem should have deliberately and expressly excluded any consideration of this solution. I hope that future studies will not be so trammelled but will pay due attention to the role, status, and price of gold in the international monetary system.
Statement by the Governor of the Bank and Fund for the Philippines
Andres V. Castillo
I would like to congratulate Mr. Schweitzer, the Executive Directors, and the staff of the Fund for their fine accomplishments during the past year. In particular, the progress of the project for expanding the Fund’s resources to the penultimate stage of implementation has been a source of satisfaction to most of us who are closely involved in international monetary affairs.
The Annual Report also records the realization of the auspicious prospects for the world economy which were evident at the time of our meeting in Tokyo. However, while the performance of the world economy in 1964 was on the whole satisfactory, one cannot underscore enough the portentous reversal of the erstwhile improvement in exports of the less developed countries during the second half of that year. This is especially significant to a number of these countries that have to finance the servicing of large foreign indebtedness. Even in their best export performance, culminating in the second quarter of 1964, export prices for the less developed countries’ products relative to those of the industrial countries were six points lower than in 1957. Since then, export prices have moved in the opposite direction, to the continuing advantage of the industrial countries and the consequent disadvantage of developing countries. In terms of the value of world exports, the share of the less developed countries fell from more than 25 per cent in 1957 to less than 23 per cent in 1963 and thence to 21 per cent in the last quarter of 1964.
Moreover, the outlook for the foreseeable future is now fraught with uncertainties. Developments so far in 1965 and the prospects for the next 12 months are certainly less favorable than at the time of our meeting in Tokyo last year. We are witnessing the decreasing confidence in the continued economic expansion of a number of industrial countries. We hope that the efforts being exerted to revive or maintain the growth of the industrial economies shall succeed. The stakes of the developing countries in the continued expansion of the industrial countries are high. The growth of the industrial countries had been the main propelling force underlying the outstanding performance of world trade in the past 4 years. The expansion in world trade, in turn, enabled the less developed countries to earn the resources which they needed to help finance development projects.
Alongside the faltering production activities, the international financial situation also deteriorated toward the end of 1964 and early 1965. The consequent measures that have been taken in defense of the two major reserve currencies shall undoubtedly exert a dampening effect on the growth of international trade and the world economy. The short-run effect of these measures is already evident in the difficulties besetting a major Asian economy. In the longer run, the success of these measures, which early results strongly suggest in the case of the dollar, shall arrest the growth of international liquidity. Such success shall paradoxically impede the growth of the world economy through its contractionary influence on world trade. It is in this context that we have welcomed the progress made in the project for expanding the resources of the Fund. But it now seems that the project will at best serve to provide us with a short breathing spell.
We have been following with keen interest the current discussions on a more enduring solution to the problem of international liquidity, a problem which has assumed a new urgency since the introduction of the defensive measures for the dollar and the pound sterling. In view of the significance of world trade to the successful pursuit of economic development in the less developed countries, we have become increasingly concerned about the tendency of reducing these discussions to a dialogue between the richer countries, about the formation of a virtual financial security council. This might be defensible if we operated on the basis of unweighted voting, as in the United Nations, but since our voting is weighted we find this trend invidious and discriminatory.
We do recognize that any solution to the problem of international liquidity will also redound to the benefit of the less developed countries through the continued expansion of world trade. However, we cannot ignore the equity aspect of the solution to this problem. It is more than enough that the developing countries are saddled with the inequitable distribution of the gains from world trade, one of the most important factors behind the ever-widening gap in economic well-being between richer countries and the less developed countries. We would not like to see the institution of a system for creating additional liquidity which confines the direct benefits, in the form of enhanced purchasing power in the world market, to the rich countries. Such a scheme would in effect impose another inequity on the less developed countries, limiting their acquisition of needed reserves to those earned through balance of payments surpluses within a disadvantageous world market situation. Moreover, many of the primary producing countries are still faced with serious external difficulties inherent in developing economies. A great number of them are confronted with a rising need for liquidity to cushion the undue disturbances which such imbalance may inflict on their respective development programs. Unfortunately, expanding the level of international liquidity among these countries involves a still greater task. One of the many problems remains—that of instability of export earnings. For this reason, it could not be confidently relied upon to provide the needed liquidity.
We are thus inclined to view with sympathy the suggestion that any solution to the international liquidity problem should be tied in with increased and equitable aid to developing areas coming from industrial countries, particularly the reserve currency countries. This suggestion, as pointed out by some of its proponents, satisfies certain basic requirements of any increase in liquidity without drastic change in the present international payments mechanism. It is nondiscriminatory, it is noncontroversial, and it does not give unfair advantage to the reserve currency countries (which meets an argument used by those advocating return to the gold standard).
Similarly, we hold the view that any transitionary restrictions on foreign lending by the developed countries should not apply to foreign borrowings of the developing countries. This has been a principal method of temporarily financing the latter’s balance of payments difficulties and has enabled these countries to continue internal economic policies which would otherwise have been impossible without these borrowed external resources.
Along the same lines, I would like to give our support to the proposition that the solution to the liquidity problem should, firstly, be built upon the existing institutional framework—that of the International Monetary Fund. The solution to the problem should, secondly, provide for an equitable distribution of the direct benefits to be gained from additional reserves among all the members of the Fund.
Besides the equity consideration, there are two other reasons from the point of view of efficiency why the Fund should logically be empowered with the administration of the mechanism for additional reserve creation. Since the Fund is already engaged in the provision of liquidity, the management of the mechanism for creating additional reserves by the same institution would, firstly, allow greater flexibility in the use of the total resources available to the international monetary system. In this way, the efficiency of the system would be enhanced, providing that extra capability which is likely to be required by unforeseeable difficulties in the indeterminate future. Secondly, the Fund has already built up the technical manpower required to administer the system. The assigning of this additional function to the same institution would thus prevent the layering of organizations which would otherwise involve needless duplication of work and the consequent wasteful employment of resources, notably technical manpower and time.
I would like, finally, to commend the Fund for its recognition of the problems involved in the formulation of an adequate stabilization policy as evidenced by the reorganization of the Exchange Restrictions Department. We hope that this shall lead to a better understanding of the problem of stabilization, particularly in the context of a developing economy.
Statement by the Governor of the Fund for the Netherlands
M. W. Holtrop
I take pleasure in joining fellow Governors who have spoken before me in expressing my appreciation for the stimulating address of the Managing Director and for the Annual Report of the Executive Directors that is now before us. We are presented in both this address and the Report not only with a review of the main events in our sphere of responsibility of the past year but also with a penetrating analysis of the problems that remain.
The year behind us, and still more the 12-month period that has just passed, have been periods of unprecedented activity for the Fund. They have given the Fund full opportunity to assert the importance of its role in the existing international monetary system; there is reason to feel satisfaction that it has played its part so well and has been able to give support to a greater number of member countries than ever before. Meanwhile, it is a striking feature of this last 12-month period that 85 per cent of the purchases of currencies made from the Fund have been made by the two reserve currency countries. This outcome is largely the consequence of the successive drawings of the United Kingdom, which necessitated the Fund to take recourse to the General Arrangements to Borrow.
It seems to me that the substantial drawings by the reserve currency countries—even though accompanied by programs that hold out the promise of an early restoration of equilibrium—bring home to us the necessity of concentrating still more attention on two problems. I have in mind the problems of reaching wider agreement on the internal adjustment processes necessary to overcome persistent deficits and surpluses and that of the ever-existing threat to the stability of the monetary system caused by the special vulnerability of reserve currencies with respect to fluctuations in confidence.
As far as the adjustment process is concerned, full credit must be given to the Fund for the important advisory task it performs in the execution of its drawing policies and in connection with the annual consultations, and also to the other international institutions which for many years have undertaken periodic examinations of the economic and financial positions of their member countries. Yet, having said this, one has to admit that the results of these endeavors have not yet been fully satisfactory. This has not only been due to the political difficulties often involved in following even the best possible advice, but it has also been the consequence of differences in the basic philosophies underlying the various approaches to policy decisions. For these reasons, I attach great significance to the fact that Working Party 3 of the OECD is now making a special study of the adjustment process, the results of which, I hope, will in due course become available for general consideration.
As to the second problem I referred to, the instability of the system, which is partly due to the freedom of conversion from one reserve medium to the other and partly to the influence of the confidence factor on the movement of private balances, it has already been observed, at our Vienna meeting of 1961, that insecurity as to the use of the right of conversion has a proper function in preventing the system from reverting either to a purely gold standard or to a purely currency standard, alternatives that both seemed unattractive. Freedom of conversion in this way also helped to set a limit to the deficits reserve currency countries could allow themselves to run. Now, with the benefit of recent experience, there is reason again to ask the question whether it might not be preferable to replace—at least within a limited group of industrialized countries—liberty of action in regard to switching from one reserve medium to another by certain rules of behavior with respect to the proportion of different reserve media to be held in official reserves. And also to investigate whether the present unilateral responsibility of reserve currency countries for the consequences of fluctuations in the total volume of reserve currency held by third countries in official and nonofficial balances might not be replaced by some collective sharing of that responsibility. I am convinced that the solution of these problems should form an integral part of any future reform of the international monetary system.
With respect to the possible creation of an additional reserve unit, a subject that has in the course of the past year come more and more into the limelight, I have already said in our Tokyo meeting that the Netherlands Government has made it abundantly clear it is actively interested in the study of this subject. It takes this point of view notwithstanding the experience of the last ten years in which it feels that the Netherlands has been exposed to continuous inflationary pressures, which were accompanied by almost continuous payments surpluses.
In this period, the basic balance of payments surpluses amounted on an average to 1.2 per cent of GNP per year; wages went up by an average of more than 8.5 per cent per year, as against a rise of over-all productivity of only 3.5 per cent and the cost of living showed an increase of nearly 3 per cent per year. It is difficult to deny that this set of circumstances in terms of classical economics has to be interpreted as a case of “imported inflation,” either caused by a faster pace of monetary inflation outside the country than internally, or by existence of a state of fundamental disequilibrium in respect to the outside world.
Even so, the Netherlands Government recognizes that a situation might arise whereby the aggregate demand for an increase in owned reserves would exceed the available supply. In that situation, there would indeed be a threat that the desire for accumulating reserves beyond the possibility of collective satisfaction might lead to generally deflationary conditions. It is quite appropriate that planning for how to deal with such a contingency should be started right now. Nevertheless, Secretary Fowler will forgive me for saying that when, on the occasion of his visit to Europe, he spoke about the wisdom of repairing the roof when the sun shines, I found, in the light of Dutch experience of the past ten years, his simile all the more apt because in our country we are used to repairing roofs to protect our homes not against a shortage but against an overabundance of liquidity.
Part II of the Fund Annual Report has made it abundantly clear that, if there is a fair measure of agreement on the desirability of further study of this subject, there also is room for divergence of opinion on matters such as the choice of possible methods of creation of a new reserve asset, the role of the Fund in such creation, and the relationship between such new reserve asset and the existing ones. I do not intend to elaborate on these various points now. There are, however, two aspects of principle on which the Netherlands Government would like to make its position clear.
In the first place, we agree with the conclusion of the Managing Director that the functioning of the international monetary system and the adequacy of the resources of international liquidity are matters of concern to all members. But we also agree with the statement of my distinguished fellow Governor for Italy 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.
In the second place, the Netherlands Government strongly feels that the purpose of any new form of liquidity creation should not be to bring about a transfer of real resources to the countries that might, on the basis of some agreed formula, be the beneficiary of such creation, whether they are industrialized or developing nations. The purpose of the creation of owned reserves should be the prevention of a general tendency toward deflationary internal policies, or to restrictive practices aimed at an unwarranted increase in the volume of reserves. Whether that contingency is, or is not, going to occur we do not know yet. So far, we actually know very little about the true global need for owned reserves. But if this situation should come about, we should be ready to cope with it. We should do so in the most direct way possible, i.e., by directing the creation of the new reserve medium to the satisfaction of the desire for an increase of owned reserves, thus obviating policies that might otherwise lead to a deflationary spiral. It seems to me that only in this way can the monetary system give the maximum guarantee of being a politically neutral framework, with no aims of influencing the distribution of wealth among its member countries, but with the only purpose—which also inspires the best traditions of national monetary policy—of providing a supply of money that should be sufficient to stimulate sustainable real growth of the world’s production and trade, that should have neither an inflationary nor a deflationary bias, but should provide stable money for the benefit of all.
Statement by the Governor of the Fund for Argentina
Juan Carlos Pugliese
At this current Annual Meeting of the Bretton Woods organizations, I have the great honor to speak in behalf and in representation of the Governors for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Uruguay, and Venezuela, to submit some points of view we have in common with respect to the International Monetary Fund.
At the Governors’ Meeting in Tokyo, the Latin American countries and the Philippines expressed interest in actively participating in the discussion on international liquidity, affirming that this is a subject of concern both to the industrialized countries and to those in process of development. The Latin American countries have closely followed the course of the discussions and now think it necessary both to enlarge their previous views on the problem and to express their opinion regarding the manner in which the endeavors of world-wide cooperation, undertaken with a view to resolving it, ought to be organized.
The International Monetary Fund constitutes at present the most appropriate forum for debating this important question because of its open and multilateral nature, and we are pleased to observe that the Fund’s Board of Directors, in their Annual Report for 1965, have once more included a brief study on the nature, the evolution, and the possible future course of the international monetary system.
We are not unmindful of the alternative of convening a world monetary conference for consideration of the different plans, reforms, and ideas in existence, the purpose of which is to resolve the problems that the present system has brought to light. In that case it might be possible to arrange for a smaller technical group to study such ideas before the conference takes place. But the important thing is that, whichever course is chosen, we think it essential that, both at the conference and in the technical groups, not only the industrial countries but also the developing countries should be represented.
The reform of the monetary system and the creation of international liquidity are matters of the very greatest importance to all countries, and, for this reason, we appreciate the importance of the studies carried out in the Group of Ten countries participating in the General Arrangements to Borrow. But the fundamental point is that any decision on these matters must be made in accordance with the spirit of Bretton Woods, and in a climate of positive cooperation between all the countries concerned, not only by a small group of them.
The creation of international liquidity directly affects the external position of developing countries. Indeed, if international liquidity were insufficient to meet the short-term balance of payments needs of those countries, it would be impossible to maintain the stability and external convertibility of their currencies, which is a primary goal of the monetary system that has been operating during the past 20 years. The developing countries are perfectly well aware that the need to maintain a satisfactory reserve position, for purposes of the balance of payments, is an essential requirement for preserving the stability of the exchange rates, reducing the need for exchange restrictions, and maintaining normal conditions in their trade relations. However, we must remember that, in consonance with the expansion in the national economies of developing countries, and in the amount of international liquid resources mobilized for this purpose, these countries need to increase their liquid position where international funds of a permanent nature are concerned, just as the growth of the economy and wealth in the industrial countries calls for new supporting funds to meet the increasing need for international liquidity.
Furthermore, it is important to bring out the close relationship existing between the level of the international liquidity of member countries of the Monetary Fund and the general trend of the economic policy adopted. An insufficient volume of international liquidity may bring about a proliferation of restrictive economic policies and, by the same token, a reduction in the export proceeds of the developing nations and in the flow of capital toward them, all of this being aggravated by the unfavorable effect on the level of receipts and of employment in the industrialized countries.
Consequently, it is greatly to our advantage if the developing countries and the industrialized countries jointly consider the form in which supplementary resources are to be made available to meet the ever-growing need for international liquidity. The direction given to reforms of the monetary system, and the setting up of bases to measure the adequacy of the extent and the distribution of international liquidity, are matters of immediate concern to us.
In general, the Latin American countries and the Philippines consider that it would be premature at the moment to indicate a preference for one or other of the numerous plans and proposals for monetary reform and for the creation of international liquidity submitted in academic and official circles in recent years. This being so, we reiterate our willingness to discuss the problem, taking an active part, without prejudice and without reservations, to assure the success of an undertaking in which we all have responsibility, because the future of all of us is at stake. In the meantime, the Governors of the Latin American central banks have just agreed to the appointment of a technical group to advise them in the study of the problem of liquidity. Although it may seem obvious, we should like to stress that the search for solutions to the problem of international liquidity must not entail a disregard of the immediate need to correct the present structure of trade flows and of the distribution of trading profits. The solution to these problems is as important to developing countries as is an adequate supply of international payments media. It is with this conviction that our countries have been taking an active part in the discussions of the United Nations Conference on Trade and Development.
Latin America is making effective efforts to achieve real integration, already with remarkable results in the economic field. A few days ago the central banks of the members of the Latin American Free Trade Association—Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Argentina—signed an agreement in Mexico City to establish a payments clearing system, which is a constructive step toward setting the whole Latin American area, in the near future, on the course opened up by the member countries of the Central American Common Market that, three years ago, established their clearing house, which is actively working toward the same goals.
To accelerate the process, it is to be recommended that these countries’ own efforts meet with the support of the international organizations. In this connection, we should like to place on record the interest and sympathy with which we view the idea of the Fund’s commencing active collaboration with regional endeavors for monetary cooperation, and we take this opportunity of acknowledging its work in the field of the technical assistance that it has begun to render to Central America. We should like to state, however, that the steps hitherto taken by the institution in such matters ought to be supplemented, to stimulate more effectively the various efforts and projects presently being carried out to establish financial mechanisms that will support and accelerate regional integration. We think that these mechanisms would be greatly strengthened if—in conjunction with the resources of the Latin American countries—the financial support of international organizations were also forthcoming.
At various recent international meetings there has been recognition of the need to consider the special case of developing countries in matters of international trade. In the same way, the evolution of the Monetary Fund’s policy should explicitly take into account, in certain cases, the weakness of the economy and of the financial mechanisms of some developing countries, recognition of which has been obtained and reflected up to now in that institution’s gradual change of attitude vis-à-vis those countries.
We should like once more to reiterate our opinion regarding the decision adopted in 1963 by the Executive Board of the Fund on the compensatory financing of losses in the export proceeds of primary producing countries. We recognize that this represents a contribution toward the partial solution of this very important problem. However, it would be advisable to consider three fundamental aspects:
(1) The need for considering the compensatory tranche in addition to the normal credit facilities of the Monetary Fund. The decision of February 1963, indeed, permits the drawing without taking into consideration the position of the requesting country with regard to the credit tranches. Nevertheless, the drawing has been added to those already made and thus may affect the country’s position in respect of future transactions with the Fund. In our opinion it is of the greatest importance that the compensatory drawing be allotted quite separately from the others and invested with the supplementary nature that the different schemes favored by our countries have always upheld.
(2) The amount available under this type of loan, limited to 25 per cent of each member’s quota, is of insufficient size even in the case of very moderate depressions. If this ceiling were raised from 25 to 50 per cent, more significant resources would be made available to the countries exporting primary products, without this entailing a very heavy burden on the resources of the institution.
(3) In conclusion, we would emphasize the nonautomatic nature of the drawings permitted. In the decisions on individual cases submitted to the consideration of the Executive Board there has been some flexibility, although in all of them there has been no lack of a subjective assessment in the determination both of the amount to be compensated and of the circumstances in which the loss of income occurs.
In another order of ideas, Mr. Chairman and Governors, we want to draw your attention to the well-known fact that the developing countries are the subject of continuous analysis, with respect to their economic and financial situation, by the international agencies that render technical and financial assistance; these studies are carried out in observance of the statutory and regulatory provisions of the organizations in question.
The nature of these consultations makes it daily more advisable—we might almost venture to say, urgently necessary—that there should be greater integration of the endeavors of the World Bank and of the Monetary Fund with a view to making their programs for stabilization and for economic and social development consistent, as well as to giving greater scope and economic and political acceptance to our countries’ stabilization programs. A closer cooperation between the Fund and the Bank, in the continuous dialogue they carry on with those countries, would also permit the Monetary Fund to give higher ranking and importance, in its consultations and in its policy recommendations, to the long-term goals that the countries are striving to attain with their development plans.
On the other hand, to carry out these consultations requires the use of technical resources, in the form of the work of specialists, who are scarce in developing countries. In view of this, it would be advisable to come to an agreement whereby all creditor countries and institutions might obtain one and the same kind of information within whatever time limits it was thought reasonable to establish.
Finally, gentlemen, we should like to end this address by expressing our satisfaction at seeing the interest there is in having the next meeting, to be held outside Washington, in Brazil; this would give us the opportunity of extending, once again, a friendly and cordial welcome to the distinguished persons representing the member countries of the world financial community.
Statement by the Governor of the Fund for New Zealand
H. R. Lake
I should like to join earlier speakers in again complimenting the management and staff of the Fund on the continued expansion and development of the Fund’s activities achieved over the past year. In particular, I am pleased to note that the Fund’s financial resources have been made use of by more countries than in any previous year.
The enlargement of the Fund’s resources, in which New Zealand will be pleased to participate, is a worthwhile step which will go at least some way toward alleviating concern about the world’s shortage of international reserves and which further enhances the value of Fund membership.
It is also pleasing to note that in other ways the Fund is widening its usefulness to members. The minor change introduced to accelerate the availability of the gold tranche and the expansion of the Fund’s technical assistance and training services are welcome developments. New Zealand has been happy to participate in the technical assistance program by providing an officer to fill a post for the Central Banking Service.
As we all know, the financial world over the past year has been increasingly concerned about seeking an answer to the growing shortage of international liquidity which has threatened to hamper the further expansion of world trade. In common with other countries, New Zealand has followed with great interest the series of investigations and discussions that have been conducted.
As a country heavily dependent on overseas trade we are particularly concerned to see that international trade continues to grow and that whatever liquidity measures are necessary to ensure this are adopted without delay. It seems especially important to us that concern by countries about their ability to finance the inevitable balance of payments deficits accompanying the growth of trade does not result in the widespread adoption of contractive internal policies. That it should not is, of course, inherent in the whole purpose of the IMF.
Industrialized countries with balance of payments deficits tend to introduce measures designed to reduce the quantity and cost of their imports, to restrict the outflow of capital, and to stimulate repatriation of capital and profits. To the extent that these measures fall on other countries already in deficit they can be harmful, not only to those countries primarily affected but to world trade as a whole. Primary producing countries, for example, may be forced by lower export earnings and adverse changes in capital flows to curtail their own development programs—an extremely undesirable result.
The work carried out by the staff of the Fund and by the Study Group under the chairmanship of Mr. Ossola has added considerably to our understanding of the issues involved in the liquidity debate. It has been suggested in some quarters that future progress on this matter might most usefully be made within the Group of Ten alone. The problem and its solution, however, affect all countries either directly or indirectly and, for this reason, New Zealand would favor a more widely representative discussion.
The Managing Director of the Fund, in his statement to this meeting, emphasized that the functioning of the monetary system and the adequacy of the sources of international liquidity are matters of concern to all members of the Fund. With this view I am in full agreement.
The Fund itself is the accepted focal point of world monetary cooperation and, from the New Zealand viewpoint, is clearly the appropriate medium through which to seek a practicable and enduring solution of the liquidity problem and to manage whatever measures are taken to extend the supply of reserve assets.
The New Zealand economy is continuing to expand rapidly and to develop industrially, although efficiency in agricultural production remains the basis of New Zealand’s prosperity. To sustain an adequate pace of industrial development and to ensure that New Zealand can continue to participate in aid programs for other developing countries, a continuing inflow of overseas capital is required. These considerations, together with inevitable uncertainties of weather, disease, markets, and prices that accompany dependence on agriculture, make access to the Fund’s resources of particular value to New Zealand and other primary producing countries. We therefore look forward to seeing continued growth in both the size of the Fund’s financial resources and the readiness with which they can be made available to member countries without transgressing the basic principles of Fund operations.
Statement by the Temporary Alternate Governor of the Fund for India
May I, at the outset, express the appreciation of my Delegation and of the Government of India for the excellent work done during the last year by the management and the staff of the Fund and of the Bank and its affiliates. Their work and their steadfast devotion to the tasks for which these institutions have been created is reflected not only in the Annual Reports but also in the addresses of Mr. Woods and Mr. Schweitzer.
For the Fund, the most important practical issue is that of giving definite shape and content to the various proposals that have been made on the problem of international liquidity. First and foremost, I would underline what many others have done before and what Mr. Schweitzer has so aptly said in his address, namely, that international liquidity is the business of the Fund and that any solution of the problem should meet the requirements of all its members. Undoubtedly there is room for initiative by any group of countries, rich or poor—and indeed by individual scholars. But, ultimately, the solution to this problem has to be found by consensus in the forum of the Fund; nor can the Fund, without stultifying itself, accept the position of merely registering decisions taken elsewhere. Whether a special monetary conference is needed to take us out of the various circles within which we seem to be moving is a matter on which I have no strong views. But, clearly, no conference without adequate representation of the developing countries can call itself truly international.
We in the developing world are also vitally interested in the problem of international liquidity. The poorer nations cannot, obviously, afford to hold large reserves of their own, and even such reserves as they have are held largely in the form of key currencies. It is important for us, therefore, as indeed for the international payments system as a whole, that these key currencies remain strong. What is even more important, our undeniable needs for liquidity must be satisfied, essentially, by created rather than owned reserves. In this context we welcome the increase in quotas now in process.
We ought further to review the desirability and feasibility of more liberal lending policies by the Fund in the credit tranches. We are also interested in ensuring as liberal a solution of the international liquidity problem as possible, because that is the surest safeguard against reduction in aid and greater restrictions on trade and private foreign investment. We are somewhat disturbed by some of the recent attempts to put the clock back in these respects. There can be no doubt that we have to move more and more toward an international payments system based on deliberate and rational creation of unconditional international liquidity so that the present hold of gold on our affairs is diminished, if not eliminated.
Equally, we firmly believe that, if international reserves are to be created, it is not only legitimate but positively wise to create them in a way that would place the initial additions of purchasing power in the hands of the poorer countries who can use them most profitably. We recognize that international liquidity and development finance are in a sense separate and distinct problems. But that should not prevent us from seeking solutions to international monetary problems which would at the same time contribute, at least partially, to the even more important problem of augmenting development finance.
In this connection I must refer to a major gap in the structure of international financial institutions, namely, that we have at present no satisfactory arrangement for providing to the developing countries even medium-term finance in what I might call a truly liquid form. By medium-term finance I refer to funds repayable over 10 to 15 years. Before World War I, developing countries could obtain liquid funds repayable over a long period by borrowing in the capital markets of the world. The amounts so borrowed were truly liquid in the sense that they could be used for any purpose anywhere, for buying things, for repaying debts, or even for adding to owned reserves. Today, most developmental aid is tied to purchases, and such liquid finance as the developing countries can get, for example from the Fund, is essentially short term in character. And yet the need for at least medium-term liquid funds is even greater today in the developing world than in the 19th century.
Mr. Schweitzer referred, for example, to the growing problem of debt servicing and to the role of the Fund in meeting this by studies, consultations, and occasional consortia for the refinancing or postponement of debt obligations. While these activities are undoubtedly useful, it would be far more rational and conducive to greater confidence all round to recognize squarely that from time to time there arises a genuine need for medium-term and perhaps even longer-term liquid funds and that there should be arrangements for meeting this need directly. I, for one, do not see why the Fund should not emulate its neighbor and enlarge the family of international financial institutions by setting up at least a separate International Stabilization Fund for meeting the genuine need for medium-term liquid finance.
The fact of the matter is that things do not always look the same when viewed from different ends of the world. The progress toward convertibility and freedom of capital movements among the richer countries in recent years, for example, has been rightly acclaimed. But for some of us, all this has resulted in tied aid—which is only another word for inconvertibility. Some might say it denotes also a depreciation in the value of the currencies concerned; it certainly reduces the real value of the finance we obtain by aid and repay in convertible currencies. It is for these reasons that we harp on the importance of international monetary problems being discussed in a truly international and comprehensive sense. We are very happy that the United Nations Conference on Trade and Development has appointed a group of experts, drawn both from the richer and the poorer countries, to study these problems. And we hope that the International Monetary Fund will extend full cooperation to this group. In the end, of course, as I have already mentioned, the problem must return for a final solution to where it belongs, namely, to the International Monetary Fund. …
Statement by the Governor of the Fund for Burundi
On behalf of the Kingdom of Burundi and its people, it is a real pleasure for me to join with my colleagues in thanking the authorities of the Fund and of the World Bank, and particularly the Managing Director of the Fund and the President of the Bank, for the excellent Reports they have presented to us. They make a profound and penetrating analysis of current economic, financial, and monetary problems. They also make it possible for us to identify the important role played by the Fund during the past year. In this connection, Burundi is particularly gratified by the efforts made and by the instruments worked out to permit raw material supplying countries to overcome balance of payments difficulties.
Burundi has followed with great interest the discussions and studies which have been made on the problem of international liquidity. We are fully aware that a liquidity shortage could lead to restrictions in international trade, curb exports from developing countries to industrial countries, and, finally, increase the gap in the level of economic development between member countries.
For Burundi, the year recently ended has been marked by an important reform of its monetary system. We wish to express our warm thanks to the Fund, without whose aid this reform could not have been successfully carried out. For the Fund has shown in an exemplary fashion, by the technical assistance and advice given in the course of several missions carried out by highly qualified experts, and by the subsequent granting of a stand-by arrangement, the essential role that it can play vis-à-vis the small countries of the African Continent, which are rich in good will and potentialities, but poor in technical and financial resources.
Although it does not belong to any monetary area and its foreign exchange assets are subject to the seasonal risks and the price fluctuations of a one-crop economy, my country has undertaken a structural reform leading to a total liberalization of its foreign trade.
This challenge could not have been accepted without the support of the Fund, and no doubt the success already achieved cannot be consolidated without its continued support.
My country is convinced that this evidence of international solidarity of which Burundi has been a recent beneficiary will not be gainsaid, and that this cooperation will be continued in the future in the climate of full confidence in which it has been undertaken.
Statement by the Governor of the Fund for Sweden
I want to make only a few simple remarks stating my country’s position in the discussion on the international monetary system. The present system has, after all, served us well. The industrially developed part of the world has, since the war, seen an economic growth with increases in production and international trade perhaps unequaled in history. It is true that the less developed parts of the world do not show the same favorable picture. This presents us with a challenge for vigorous action, but it is difficult to see that the problems of the less developed countries have had much to do with our international monetary system.
This system has also been capable of evolution. During the postwar period, the International Monetary Fund has developed the practical forms of its operations, it has gained in importance, and on several occasions played a decisive role in meeting what could otherwise have been serious threats to the financial stability of the world. In the last few years, we have also developed a system of cooperation between central banks, admittedly largely of an ad hoc character, but increasingly important and reliable. I think we can be proud of these achievements.
But the process of evolution of the system must of course go on. Irrespective of one’s opinion of the urgency of the problems and the timing of desirable reforms, one must accept as a fact that the international monetary system has become subject to discussion, and that some basic elements in it are questioned. These developments could perhaps have been avoided, but they are already a fact. In this situation, I wish to state that my country is fully prepared to take part—in a positive spirit—in the incipient work on improving the monetary system. I am sure that this goes also for the whole group of Nordic countries, which are all strongly engaged in the international exchange of goods and services, and deeply interested in the monetary system as one of the preconditions for a continued expansion of trade.
As to the direction of this work, I do not think we should envisage any radically new system and, let me add, still less any return to an ancient system—the gold standard—that has already proved its insufficiencies. What is needed is, in my opinion, firstly, arrangements that help to stabilize the system as it stands today, making it more immune against the risks that have become more evident in later years, and, secondly, supplementary arrangements for liquidity creation to be used when the need appears.
It is almost self-evident to us that this work should, to the largest possible extent, build on existing forms and institutions: on the International Monetary Fund and on the cooperation, perhaps in more permanent form, between national monetary authorities. We should thus, in my opinion, temper our radicalism in preparing measures of reform. We should also, I think, be modest in our expectations about what improvements in the international monetary system can achieve.
Monetary arrangements can give countries in balance of payments deficit a reasonable time to put their houses in order, and should also give them strong incentives to do so. The case of surplus countries is already much more difficult. Improvements in the adjustment processes remain an important field for future discussion. Incentives for deficit countries to restore balance already exist, and the means to achieve such adjustment are well known. However, there do not yet exist corresponding incentives or agreed mechanisms for surplus countries to return to external balance without forcing them to give up their understandable resistance to internal inflation.
Further, the system should be expected to provide sufficient liquidity for a sustained growth of production and world trade—an aim that, of course, is of crucial importance in the long run, even if there is no risk for any immediate lack of liquidity. However, I do not think that measures to regulate over-all liquidity are, or can be made into, a particularly fine instrument to influence world economic conditions. It is easy to show with simple arithmetic, for example, that no realistic increase in international liquidity, under any allotment scheme likely to be agreed upon, could be expected to relieve existing pressures on deficit countries, nor really to influence the economic policy of other countries. An annual increase of, say, $1 billion, distributed among most industrial countries in proportion to existing reserves, for example, would give two thirds of the amount to the four or five countries with the strongest reserve position and leave only a third to be distributed among the others. Therefore, with regard to the volume of international liquidity, I am afraid that our ambition must be a limited but important one: to secure a workable system which avoids a lack or excess of international reserves that might become a disruptive force.
I have one concluding remark. The work on monetary reforms will probably not proceed swiftly. I am even inclined to think that it might well be preferable to live for some time without making essential modifications in the present system, rather than risk ending up close to one extreme or the other among the various proposals that have been put forward. As the forthcoming stage of negotiations is likely to be rather prolonged, it is all the more important that the already established forms of monetary cooperation are being used and further developed. One important task would be to find arrangements to use the volume of existing reserve assets in a way that strengthens the stability of the system.
Statement by the Governor of the Fund for Denmark
During the last 20 years international trade and payments relations have benefited from broad agreement on fundamental issues. We have been moving toward freedom for international trade and payments, and the so-called structural problems have largely been handled in a way which has promoted expansion of production and trade.
As an example, I could mention the American aid to the rebuilding of Western Europe, which was historically unique and which was offered without discrimination to the European countries. The growth problems of the less developed countries are also approached along the same lines although a much vaster effort is called for from the more developed countries.
Considering prewar experience, a main element in all these endeavors of international cooperation has been to create and maintain an atmosphere of mutual trust in which international trade can expand and to establish a system where disturbances do not produce deflationary chain reactions from country to country. In this aim we have on the whole succeeded.
At present, however, it is not difficult to spot areas in the world economy where the solution of structural economic problems might lead to a widespread deflationary movement if pressure is brought to bear to follow a very strict line of monetary discipline. I shall certainly not talk lightly of monetary discipline, but there are obviously cases where structural problems should be solved in an atmosphere of cooperation to secure expansion of mutual trade. The long row of prosperous years, which are partly a consequence of international cooperation, have dangerously persuaded several influential circles that deflation is definitely a thing of the past. This would be a hazardous attitude to assume.
The international payments system has to secure the smooth functioning of an expanding world economy where the structural problems can find their proper solution. This is no easy task because it has to be adapted to the changing circumstances in such a way that it exerts pressure both on the countries that pursue a too ambitious expansionary policy and the countries which put too little emphasis on the growth of production. We all know, I believe, notwithstanding the high hopes of many of my distinguished colleagues, how difficult, if not impossible, it is to find undisputed criteria for signals to guide adjustment measures so that this fine balance is obtained.
As mentioned by my Swedish colleague, we in our part of the world are deeply interested in the outcome of the various endeavors which are now being made to improve the stability of the international payments system in such a way that the cooperation of monetary authorities can prevent either a general deflationary development or undesirable disturbances created by speculative raids on important currencies.
To my mind, it would be most unfortunate if the influence of political considerations should lead to exaggeration of the difficulties of finding a satisfactory solution and perhaps prevent a broad solution based on the idea that cooperation is to the mutual benefit of all countries. With no sharp line of division, countries can be grouped in gold reserve countries, which hold a predominant share of their reserves in gold, and exchange reserve countries, which traditionally have a low gold ratio. The future stability of the present system depends, as far as I can see, on the willingness of the gold countries to reduce their preference for gold either directly or indirectly, e.g., by introduction of new composite reserve units, and of the exchange reserve countries to maintain their low preference for gold. This is a common feature of almost all the proposals which have been discussed during the last years regarding improvements of the payments system.
I must stress that both conditions are necessary, as it seems obvious that pure reliance on gold would be detrimental to the working of the international payments system. I must also state quite clearly that the reason for the low preference for gold of, e.g., my country is neither lack of insight in international payments problems nor lack of means to finance the holding of gold. The rationale for continuing an exchange reserve policy is that international cooperation will prove that in the long run it is of no great importance whether we hold our reserves in gold or in foreign exchange.
I presume that many countries have a similar attitude to this problem—in particular when it is added that there are periods when they might have second thoughts on the wisdom of this policy, i.e., when major exchange rate adjustments are expected. This leads to the conclusion that an appropriate supplement to the present system would be to create opportunities for central banks to acquire something which is neither gold nor one of the existing reserve currencies, which means that it should be assets which have the qualities of gold without being gold. If there is still agreement on the fundamental issues of international trade and payments, it ought not to be difficult to agree on suitable devices, building on the International Monetary Fund, which could solve this problem. The technical problems are really much easier than is often assumed.
On the other hand, I think it should be made quite clear that it would hardly be acceptable if a small group of countries invented their own solution, creating international liquidity for their own benefit without regard to the interests of the exchange reserve countries, thereby creating two classes of countries, one of a higher order—allowed to create international liquidity—and one of a lower order.
The spirit of the Bretton Woods Agreements must imply that both gold countries and exchange reserve countries agree on a suitable solution, and the obvious forum is the Fund, the Managing Director of which has given us such an exquisite presentation of the possibilities of strengthening the international payments system.
Statement by the Alternate Governor of the Fund for Israel
May I first identify myself with all the expressions of appreciation for the serious studies which were made last year in search of a solution to the problems concerning international payments and liquidity by the Managing Director of the Fund, the staff, and the economists and statesmen of many countries.
It is my pleasant duty to express my country’s appreciation for the special increase in our quota, which was proposed to us as a result of the Resolution adopted in Tokyo last year. This increase was a result of the recognition of the growth of Israel’s economic potential and its share in international trade. During the last few years, including 1964, our gross national product has been increasing at an annual average rate of about 10 per cent and our foreign trade has gone up by an annual average of about 15 per cent. In this connection, I should like to suggest that the periodical review of quotas of individual countries should be made at such intervals as not to lag too far behind economic growth.
There is a special point which I would like to bring up with regard to the factors, which, in our opinion, are relevant in deciding about individual quotas, and to which, in our opinion, the Fund has not given the proper weight in its considerations. This is the need for additional international liquidity which is required for the servicing of foreign debts. In many countries, especially the developing ones, the amounts necessary for foreign debt servicing have grown considerably and will do so even more in the future. In planning for the foreign reserves to be available, a country must take into account not only the payments which have to be made for import of goods and services but also its obligations for debt servicing. These amounts are a rigid element in the foreign exchange outlays during a specific period. When export proceeds temporarily decrease, the fixed amount which a developing nation has to pay for its debt service considerably aggravates its ability to adjust its import program to the shortfall of its receipts. Consequently, a country which has a heavy debt to service must make provisions for holding much larger reserves than a country in a similar international trade position which has no such debt burden. If the IMF quota is to be the flexible portion of a country’s reserve position, which can be increased in time of need, this particular fixed item of debt servicing should be given special consideration in establishing a country’s quota. I should like to stress that I have discussed only the international liquidity aspect connected with debt servicing of developing countries, without dealing with the general aspects of the crucial problem of the increasing debt burden.
This point may be added to the many other reasons why the developing countries are taking an increasing interest in the solution of the problem of international liquidity in general. Although it is generally felt that there is no danger of an imminent world-wide reserve crisis during the next few years, it is also agreed that ways should be found of eventually matching international liquidity to the increase in the volume of international transactions. As is stated in the Fund’s Annual Report, it cannot be expected that the flow of dollars which reinforced foreign exchange reserves in many countries in recent years will continue in the future at the same level. New devices and methods will have to be found to satisfy liquidity needs, and we believe that they should be created in a period of relative strength and confidence. To wait until the crisis is upon us is to invite a major setback to the development of the free world. We think that the 25 per cent general increase in quotas has been a step in the right direction, but it will only become fully effective through the extension of automatic and semiautomatic drawing rights.
Since the urgency of considering this problem has now been recognized, the discussion focuses on two major points, which, in our opinion, are interconnected. The first is that of the institution—existing or to be created—which will decide if and when to increase international reserves. The second is how these newly created reserves will be allocated.
As to the institution, we are opposed to the thinking that international liquidity is the exclusive concern of the well-established, industrialized countries, and that the sole responsibility for a solution must fall upon them. We believe that all countries participating in free international trade share the responsibility in solving major world economic problems, including that of international liquidity. We are aware that probably the final answer to the question of fiduciary international money is ultimately linked with a supranational authority. Our problem, however, cannot wait. We believe that in the meantime the appropriate forum in which such solutions should be thought out and carried through is the International Monetary Fund. This has been most convincingly put by Mr. Schweitzer in the Annual Report, as well as in his opening speech this week.
The Fund’s prestige and experience as an international monetary institution makes it the natural center for the function involving deliberate creation of reserves. In the Fund, all groups concerned are represented, and conflicting points of view have an opportunity of being heard and considered. We realize, of course, that any acceptable solution should take into consideration the point of view of the major industrial countries, but the existing voting rights of the Fund are a sufficient guarantee for safeguarding their interests. In our opinion, it would be detrimental to the future of the Fund if a situation should arise when ready-made solutions, conceived by a particular group of members, will be presented to our organization for acceptance or rejection. The Fund, as well as the Bank, have succeeded from the beginning in being viewed by all members as organizations in which decisions are reached after a common effort is made to come to an understanding of a problem, taking into account the different interests that exist in this imperfect world of ours.
We are not involved in the study of mathematics in which abstract, logical thinking provides the right answer. We are trying to study an economic problem, which is not only one of pure economic theory, but is interwoven with the particular interests of different countries. To exclude from the deliberations from the outset all except the industrial countries must necessarily affect the final solution to be offered to all. In effect, any solution which would thus be presented to all members would be the result of compromises made among the industrial countries themselves, while the voice of the developing countries would not have been heard. If we want to prevent the IMF either from becoming a rubber stamp or from facing a split between the developed and developing countries, from the beginning these deliberations should not be the sole concern of a special group of countries but the concern of all of us.
As to the question of the allocation of new reserves and where they should in the first instance be used, many proposals are today under discussion. The excellent report of the Study Group on the Creation of Reserve Assets headed by H. R. Ossola from Italy and transmitted to the Deputies of the Group of Ten, rightly points out that “deliberately created reserve assets must, of their nature, initially be distributed without the recipients having to forego real resources in order to earn them, but will thereafter command real resources.” But for this very reason, it seems to us that once it is decided to create additional international liquid assets, it is legitimate to expect that their creation should, in the first place, benefit those countries where the fluctuations in the balance of payments are greatest, and those which, due to their economic growth and increase in their trade, are in need of larger reserves.
We think that insufficient attention has been paid to the possibility of linking the question of international liquidity with the general problem of securing sufficient sources for financing the needs of developing countries. We should consider seriously the possibility, which was discussed in the above-mentioned report of the Study Group of the Ten, of “coupling the creation of reserve assets with the provision of development finance under the direction of an international investment institution, say, the International Bank for Reconstruction and Development.” We were sorry to learn that this idea of combining the creation of reserve assets with development finance was not widely favored by the experts of the Group of Ten, but possibly this attitude could be changed after reconsidering it in a broader group of countries.
There is an urgent need for coordination of policies of international and national institutions operating in the fields of international investment financing, short-term financing, and liquidity creation so that joint efforts may make an optimum contribution to the narrowing of the dangerous gap between industrialized and developing nations. This can be a great challenge for the Fund, and may I conclude with an expression of the hope and belief that this challenge will be met.
Statement by the Governor of the Fund for Austria
Our discussions this year on the international monetary system and its appropriate and desirable evolution benefit from a vast amount of spadework, which has been carried out over the past year in order to clarify the issues and point out agreements and divergences as between the principal countries’ views.
The Report of the Ossola Group forms an indispensable basis for further negotiations. While it is regrettable that no agreed exposition of the various proposals for reform could be presented at this stage, the clarification of the fundamental issues is in itself of great importance for achieving further progress.
The Managing Director of the Fund has once more presented us with a clear and lucid analysis of the world’s economic and financial developments. The concise treatment of the international monetary system and of the problem of international liquidity, as well as the Managing Director’s appraisal thereof, will, I believe, find wide support among Governors.
In concentrating on fiscal policy and the burdens of debt, especially short- and medium-term debt, the Managing Director has placed emphasis on two of the main obstacles which stand in the way of sound and sustained growth of the developing nations. Insistence on the fact that monetary stability is a prerequisite for sustained economic expansion is, of course, equally valid for highly industrialized and for developing countries.
Procrastination in taking the action necessary for safeguarding the stable value of a currency will not help matters. In the short run it may be less painful, and sometimes perhaps even politically expedient, to let things go and have the currency depreciate by several percentage points. The trouble is that as time goes by the evil effects of inflation, even if it is only of a mild degree initially, will pervade the economy and sap its strength in the same way as narcotics are bound to weaken the resilience of the addict. The end is either a complete breakdown or a cure, which must necessarily be the more difficult and painful the longer the process of inflation has been going on. On the other hand, the fact that a sound expansion can continue for many years without impairing the maintenance of monetary stability has recently been demonstrated by the world’s largest economy, that of the United States.
Monetary stability—as the Managing Director rightly points out—should not be considered as an objective in itself, but rather as a prerequisite for sustained economic expansion. If governments individually and collectively pursue policies which safeguard financial stability, this will also facilitate the avoidance of large and persistent balance of payments disequilibria. Further efforts should, therefore, be made in order to improve and increase international coordination and cooperation in monetary and financial policies. As the existing organizations, such as the IMF, OECD, Paris Club, and BIS, are fully adequate to carry out such a task, no new institutional setup is required.
Turning to the subject of international liquidity, I believe that despite the existence of many different and apparently contradictory views there is nevertheless a greater amount of consensus among the principal countries than commonly meets the eye. As the Fund Report points out, the present international monetary system has served us well since the end of the war—in spite of strains and stresses encountered from time to time. There is much to be said in favor of achieving further progress through evolution rather than through reform. Few, I believe, will want to do away with either gold, the U.S. dollar or the IMF as the central pillars—the Trinity, so to speak—of the international monetary system. The Bretton Woods System has been invaluable for all nations, whether big or small. I would, however, like to add that small countries, like Austria, in particular have benefited from the standards and rules set forth in the Articles of Agreement of the Fund.
On the other hand, it is obvious that major responsibilities under this system are to be shared by those countries whose currencies are actively used as trading or reserve currencies or in drawings on the IMF.
Currencies which are to be used in the establishment of new international reserve media must present a number of objective characteristics, i.e., those which make them universally acceptable and desirable.
In his excellent recent book, Mr. Robert Roosa has listed the conditions which should underlie the creation of additional reserve assets:
New reserves should be operationally interchangeable, at least by the various monetary authorities; they should be convertible into gold or made equivalent to gold on the basis of the established price and contribute to the maintenance of the system of fixed parities; they should be consistent with and reinforce balance of payments discipline; they should not interfere with the use made of the world’s leading exchange and reserve currencies; they should not infringe upon, but help to extend, the present functions of the IMF; being subject to the free choice of individual sovereign nations, they should inspire confidence, which is essential for the survival of any monetary system.
I can declare myself in full agreement with these basic assumptions for new international assets.
Without wishing to endorse a definite solution, I would like to add that the suggestion to examine thoroughly the advantages and disadvantages of widening somewhat the permissible margins of exchange rate fluctuations, made in a recent report of the Joint Economic Committee of the U.S. Congress, should be considered. As an organization with unique experience in this field, the Fund could review in detail the pros and cons of a broadening of the permissible limits of exchange variation and guide us in our deliberations as to whether such a step could help further our objectives.
The amelioration of the U.S. balance of payments in the course of this year and the distinct possibility that in the near future the dollar will not contribute to an increase in international liquidity—in the first half of this year international liquidity has, indeed, decreased—make it understandable to think of ways and means to promote steady economic growth in the future, although I am convinced that gold and reserve currency assets, together with a wide range of credit facilities, are entirely adequate for present needs and most probably also for many years to come.
While preliminary negotiations and also technical discussions will be held among a limited number of participants, it is essential—and I share in that respect the concern and the doubts of the distinguished Governor for Australia this morning in his speech—that in the final instance decisions are taken by the community of the free world’s nations as represented in the IMF; changes should be made through the Fund, and the Fund should continue as the central agency for world-wide monetary and financial cooperation. This will also guarantee that the interests of all nations, whether highly industrialized or developing, will be duly considered. In passing, I should like to mention that, while development aid in the form of grants or long-term loans will for many more years be an indispensable condition for growth in the developing countries and for ensuring an expansion of world trade, it does not seem appropriate to combine the granting of aid with the creation of international reserves. The transfer of real resources as implied in the granting of aid should be made on its own merits through national and international decisions.
I am happy to state that Austria—while a small country—is ready to play an active role in the evolution of the international monetary system. We have agreed to a substantial increase in our quota in the Fund—from $75 million to $175 million. We were and are willing to lend our assistance to currencies which are under pressure. We shall give our support to a scheme which will ensure the steady growth of trade and payments in a world free of quantitative restrictions and controls. In order for such a scheme to be effective, it is essential that the highest priority also be given to the maintenance of stable monetary conditions in the participating countries.
Statement by the Governor of the Fund for the Democratic Republic of Congo
It is a great honor for me to address this meeting of the International Monetary Fund. May I be permitted, first of all, to join with you in welcoming the Governors for Malawi and Zambia and in hailing the fact that all the African countries that are now independent are members of the Fund and of the Bank. In accordance with the customary practice, I should now like to report to you briefly on economic developments in my country. The situation in 1964 was dominated by the consequences of the devaluation carried out at the advice of the Fund in November 1963. The country’s exchange reserves rose rapidly and the supplying of the domestic market and the maintenance of local industry were largely secured by means of an increase in imports. There was a recovery in domestic production. Prices were stabilized and a satisfactory equilibrium of public expenditure was restored, as is illustrated by the fact that only 10 per cent of expenditure was financed out of loan funds in 1964. Unfortunately, this favorable development received a setback, beginning in the middle of 1964, as a consequence of the domestic unrest of which you are aware and which resulted progressively in a breakdown of transportation services in some regions, a slowing down of exports and an increase in public expenditure.
The year 1965 opened under less favorable auspices than 1964, though without this impairing the supplying of the domestic market or adversely affecting the price structure. Since then, we have overcome the political causes of our temporary testing period, from which we have emerged with our economic structures intact and our powers of recovery unimpaired, and now turn resolutely toward the future.
We face this future with more confidence, since we shall be less isolated. The striking reports presented to us by Mr. Woods and Mr. Schweitzer are evidence of the constructive and increasing attention that is being given by the Fund and the Bank to the financial problems faced by the majority of the developing countries. The solutions that they are studying, and those that they have already proposed, are of such a nature as to solve or alleviate some of these problems; we are thinking in particular of the increase in the financial resources of IDA and the efforts to provide guarantees against noncommercial investment risks.
With respect to the modification and improvement of the international monetary system, I should like to associate myself with the view repeatedly expressed on a number of occasions by the Managing Director of the International Monetary Fund, to the effect that it is within the Board of Governors that an international agreement will have to be arrived at on the principal objectives of liquidity policy and on the principal techniques for their attainment. It will also constitute a forum in which the financially weaker nations will be able to express their views and, if the need arises, signify their adhesion.
In conclusion, I should like once again to thank the Fund most sincerely for the valuable technical assistance that it has constantly and unstintingly rendered to us.
Statement by the Governor of the Fund for Afghanistan
Habibullah Mali Achaczai
I am pleased to have the privilege of addressing this distinguished assembly.
The 1965 Annual Report of the Managing Director of the Fund presents, with clarity and depth of understanding, valuable analyses and stimulating views on the complex and challenging monetary problems facing all of us. Our Delegation would like to offer its congratulations to the Fund for its contributions to improve the international monetary situation.
The past year has witnessed interesting but crucial developments affecting the world economy. Military conflicts in some areas of the world continued to capture much attention and affect the patterns of resource use. Statements and unilateral actions on the part of some industrial countries rendered less favorable the economic prospects of some developing nations and disrupted trade relations. The balance of payments of some major developed countries improved substantially while precarious deficits bedeviled others. On balance, the developed countries, with some assistance from the Fund, seemed to be much better off than a year ago.
For the developing countries the trends of last year appeared not as favorable as for the industrial countries. During the early part of last year prices of primary products increased slightly, but they weakened for the rest of the year. Prices of manufactured products rose and therefore the terms of trade for the developing countries deteriorated. Largely because of such developments, more than thirty primary producing countries had to call on the Fund for temporary assistance. The recent fall in basic commodity prices and difficulties in marketing total available food supplies will necessitate compensatory financing in the coming months. To meet these needs, the facilities of the Fund need improvement.
The developing countries are generally committed to their own further economic development and to accelerated economic growth. Such a policy should be accompanied by strong demands for imports. But they are also seeking to become less and less dependent on imports of basic commodities and such efforts hurt the developing nations. With inadequate export earnings and needed imports of machinery and equipment, their balance of payments problems become continuing phenomena. Such situations require not only foreign public and private capital but also help from the Fund on a long-term basis. My Delegation suggests that the Fund study, along with the IBRD, the long-term capital inflow needs of the developing countries for investment and for payments stability.
My Delegation fully agrees with the Annual Report’s review of the fiscal and the debt burden problems of the developing countries. The revenue systems in most developing countries are not capable of mobilizing sufficient funds to support the necessary and increasing levels of public expenditures. Thus, budget deficits become a persistent feature of development. Such deficits are in turn the most important cause of balance of payments problems. The Fund could provide important technical assistance in this field through its Fiscal Affairs Department.
Another field in which the Fund could provide important service is that of analyzing various approaches to trade policies and systems of exchange rates which will stimulate the sound economic development of the primary producing countries. Rapid economic development is usually accompanied by cost-price distortions; existing exchange structures cannot either correct nor can they readily adjust for such distortions. The answer cannot be the classic defeatist resignation to low rates of development or even stagnation. The Fund should attempt to evolve adjustable systems of exchange rates that serve the development requirements of all the primary producing countries.
The Annual Report’s discussion of the international monetary system and international liquidity deserves commendation. Afghanistan supports the Fund’s efforts to create additional reserves through the extension of quasi-automatic drawing facilities beyond the gold tranches and the extension of the Fund’s activities to obtain special assets. It is absolutely essential that the creation and the uses of this increased liquidity should take into account the contribution which they can make to the developing countries.
During the past twenty years, the Fund’s system of providing liquidity has generally served the world economy reasonably well but the less industrial countries have not shared fully in this service. We have followed with interest the discussions of the Group of Ten and have reviewed the Ossola Report on the creation of reserve assets. We feel strongly that any arrangements for the expansion of resources for liquidity will have limited significance unless the benefits to the developing countries are closely tied in with the ways of mobilizing and handling this greater liquidity.
The subject of international monetary cooperation cannot be the exclusive concern of the industrialized countries. Studies of the Ten, if they are to be effective in resolving any problems connected with international liquidity, must be related to the needs of all the member countries. If the Fund is to continue to be the key agency for international monetary cooperation as we all desire, it must also be a strong center and the aggressive central point through which problems of exchange stability, of balance of payments deficits, and of appropriate liquidity for the increasing volume of world trade can be resolved.
It is gratifying to learn that both general and special quota increases have been agreed upon by a great majority of the member countries. Afghanistan’s import needs require increasing resources in the form of exchange reserves. Greater drawing rights become very important to deter exchange speculation and to correct temporary imbalances.
In June of this year Afghanistan entered into a stand-by agreement with the Fund. The terms of the agreement call for comprehensive and bold measures by our Government. These measures were formulated with the help of the Fund. Their adoption has helped develop and stabilize our monetary situation.
Reliance of the Government on the banking system for funds has declined. Increases have been achieved in various direct and indirect taxes. Increasing taxes in underdeveloped countries is difficult because of the low tax base, the unresponsiveness of the tax structure, the grave barriers to rapidly improved administration and the time required to build a system of incentives.
The Afghan Government was able to double land taxes, to increase import duties substantially, to introduce road tolls, to initiate a comprehensive income tax system, and to improve considerably the administrative and enforcement machinery. The result will be an increase of 35 per cent in domestic revenue sources over the previous year. Export exchange taxes were eliminated or reduced. The budget deficit will be reduced to less than half that of the previous year. In fact, figures for recent months indicate that budget and balance of payment deficits will be reduced more than anticipated.
Adoption of such measures in an underdeveloped country during an election year is especially difficult. The people and the Government of Afghanistan have revealed strong determination to accept austere conditions and to overcome unstable monetary and fiscal conditions.
The Fund has reached an increasing importance in extending to us financial and technical assistance for which we are very thankful. We are confident that with the continuance of present trends and assistance from the Fund we shall start to successfully implement the goals of the third Five-Year Plan of the country.
Statement by the Governor of the Bank and Fund for Korea
Seung Hi Hong
It is a great pleasure for me to participate in these Annual Meetings of the Boards of Governors of the Bank and the Fund, and, on behalf of the Government of the Republic of Korea, to congratulate the Bank Group and the Fund on their solid achievements during the fiscal year 1965. I also take this opportunity to thank the management and the staff of the Bank Group and the Fund for the excellent arrangements they have made to make this conference a success.
The valuable cooperation and assistance rendered Korea by the Bank and its affiliates in recent years are not only important additional contributions to our economic growth but also are a source of encouragement in guiding our future development programs. During the fiscal year 1965, relations between the Fund and my Government have been further strengthened by the conclusion of a stand-by arrangement and provision of technical assistance in connection with the implementation of exchange reforms and a financial stabilization program. My Government wishes to express its most heartfelt appreciation to the Bank Group and the Fund for their ever-increasing assistance and interest in Korea.
The establishment of a free fluctuating exchange rate system, together with substantial liberalization of quantitative restrictions on imports, has contributed much to attaining a realistic exchange rate under orderly market conditions with practically no official intervention. The success is due in no small measure to the implementation of the comprehensive financial stabilization program agreed upon with the Fund. The stand-by arrangement is playing an important role in that it helps to generate confidence in the Korean economy. The orderly movement of the exchange rate and the continued implementation of the financial stabilization program give us confidence that a realistic level for a value to be agreed upon with the Fund will be found sooner or later.
Efforts made in the last few years to accelerate economic development in Korea have been further intensified since the beginning of the current year. The fairly high rate of fixed capital formation has been well maintained; secondary industry has shown steady growth, and there has been an impressive increase in exports, which have been diversified on both a commodity and country basis. Despite the remarkable increase in export receipts, the chronic imbalance in the payments situation necessitates continued dependence in a large measure on foreign aid and loans. This is a problem common to most developing countries. In this context, it is of significance to note, as the Fund’s Annual Report indicates, that, although the exports of the primary producing countries as a whole increased during 1964, the rate of increase was relatively lower than that of industrial countries. So long as a sizable balance of payments deficit persists, rapid economic development is certainly difficult. It is hoped that countries will soon act on the resolution of the UN Conference on Trade and Development which has devoted considerable attention to ways and means of enabling developing countries to promote their trade and development. We are confident that the Fund will continue to play an ever-increasing role in improving the balance of payments of developing countries. …
Finally, I would like to associate myself with many fellow Governors who have already spoken before me to express our general interest and desire that the effective functioning and improvement of the international monetary system should not only be actively related to the Fund but also that the vital role of the Fund for this purpose should be adequately strengthened through the close cooperation of all member countries of the Fund. In this connection, I welcome the intentions of the Group of Ten to continue to have the active participation of the representatives of the Managing Director of the Fund and other international organizations. It would be highly desirable for the Fund to continue to be an appropriate forum for international monetary considerations, representing the broader views and problems both of developing countries and developed nations as well.
In conclusion, I wish to express our sincere gratitude to the Bank Group and the Fund for the valuable assistance they have rendered Korea in its economic development, and to express our best wishes for their challenging role and for the worthwhile activities which lie ahead. We are looking forward to a closer relationship in the years to come.
Statement by the Governor of the Bank and Fund for Liberia
Charles Dunbar Sherman
First of all I wish to join my colleagues in expressing congratulations to you, Mr. Chairman, for your election to the high position which reflects not only the high esteem in which you are held but is also an indication of the coming of age of Africa.
It is quite fitting that, at midpoint in the United Nations Development Decade, we should be giving considerable attention here to the problems and conditions peculiar to the developing nations.
The great success of the Bretton Woods experiment has to be judged not only by its obvious achievements but also by the fact that, as a result of the existence of these institutions, the free economies of the world have international sources of assistance to combat shortfalls, devastating inflation, and other disruptions which in the past necessitated a resort to desperate measures to avoid economic collapse. In this regard, it also must be noted that the provision of finance and credit to promote trade and development is no longer necessarily indispensably tied to political policies or instances of economic accident.
Like many other nations, in the past two years Liberia has been extended financial assistance under a series of stand-by arrangements with the Fund. This assistance has provided the crucial margin of help through a difficult period of economic adjustment, resulting in large part from a sharp fall in the world market prices for our principal export commodities. Equally important has been invaluable technical assistance provided by the Fund on a wide variety of pressing problems. We take this opportunity to express our appreciation for the sympathetic and constructive attitude the Fund has taken with regard to these problems and for the high quality of the personnel assigned to assist us. …
At this Governors’ meeting it is obvious that an overriding problem of the greatest importance is the question of international liquidity. It would seem that most countries are now more or less agreed that the present methods of financing trade and development need strengthening.
Whatever may be said, one has to question the efficiency of a system in which a tug of war is constantly going on between categories of trading partners. Transactions under a system of trading which involves the drain of reserves and loss of liquidity by one party whenever the other party makes a favorable sale seem to cast a doubt on the capacity of such a system to withstand permanently a sustained expansion of trade or of maintaining a dynamic economic equilibrium. It is equally difficult to separate completely immediate short-term liquidity requirements from the longer-term requirements involved in development financing either through very liberal terms or aid facilities.
If the industrialized countries persist in their consideration of the problem of liquidity among themselves alone and without a voice being given to the developing countries, grave suspicions may be aroused. It is well that on these issues we should avoid the mistakes of the past and remember that this is a new day. It must be realized that the developing countries account for a significant proportion of international liquidity. As Mr. Schweitzer has said, the problem of international liquidity concerns all countries, large and small, developing and industrialized. By giving the Fund a central role in any program for reform of the international monetary system or for the creation of additional liquidity, the nonindustrialized countries will be assured that their interests will be protected and their participation ensured.
To create a new organization to implement a plan for action appears to us to be a wasteful bypassing of the wealth of experience, as well as a useless duplication of the facilities already available in the Bretton Woods institutions. I therefore agree with the Managing Director that liquidity is the Fund’s business. Furthermore, to reinforce the already dubious and anachronistic links that persist between gold and world resources of liquidity would appear to us to be a step backward. We believe that the supplementing of available world liquidity should be arranged through the International Monetary Fund, which can adequately represent the interests of all its members in its decisions on the appropriate magnitude and distribution of new resources.
Some solution must be found to the problem of violent fluctuations and long-term decline in commodity prices which continues to widen the gap between the “have” and the “have-not” nations.
We urge the Fund and the Bank to play a more dynamic role in bringing producer and consumer countries together for the purpose of evolving more durable solutions to these problems. By virtue of their international character, these two institutions are uniquely suited to perform such a constructive role.
The future holds almost limitless possibilities of development. But in the final analysis these cannot come about overnight. Come what may, as Mr. Woods has so forcefully stated, hard work, increased productivity, savings, and provision of financing on reasonable terms are still the indispensable ingredients of real economic progress. Another very important ingredient is mutual confidence and trust based on a genuine sense of world community. Thus, using the materials at our disposal and working together in mutuality, we can start to build upon foundations already laid a sound superstructure of economic development within the second half of this decade.
Statement by the Governor of the Bank and Fund for Guinea
I should first of all like to congratulate you, Mr. Deressa, on your election as chairman of this meeting and on your able direction of the discussion. I should like, also, to congratulate Mr. Woods and Mr. Schweitzer on their detailed Reports to us on their institutions’ activities during the last financial year. And, finally, I take great pleasure in warmly congratulating our sister countries Malawi and Zambia on joining our institutions, and respectfully call attention to their presence at this meeting.
It is no easy task to convey in these remarks all the preoccupations of the developing countries, particularly of those that have newly attained independence, including my own, at this time when the workings of the international monetary system occasion the members of the International Monetary Fund a certain anxiety. My intention, however, is not to dwell on the purely technical aspects of the subject, but rather to place it within a wider context, that of international monetary cooperation and of the principle of interdependence on which it is founded.
We ourselves do not think that within these two international institutions there should exist a club of wealthy members, which imposes its rule on the other less well-off members. Quite the reverse—these institutions should constitute a true community in which the poor, as well as the rich, have something to give and something to receive, and where every individual is truly given consideration by each and all for the greater good of humanity. This leads me to believe that there is a need to institute frank, continuous discussion between all the countries who wish to join in, to the exclusion of none.
Among many ideas that are now gaining prominence, there is a trend that, I would like to think, is general: the need to bring up to date the now aging system, which at present is sorely tried by internal contradictions. The world, and with it the International Monetary Fund, has grown up. In the year 1963, in particular, a large number of developing countries gained admission to our institutions, and this pace is not likely to slow down. Therefore it is now necessary to recognize their existence and their growing participation in international exchanges by not establishing the currency on as frail and variable a basis as the production of gold. But we are a little reassured by the recent evolution in thinking. We believe that the Monetary Fund, which, in establishing quotas, takes into account the economic dimension and density of countries, is and will remain a particularly appropriate setting for all the studies, all the research, and all the discussions, even the most confidential, carried out with a view to expanding liquidity systems, conditional and unconditional. And since, in the long run, products are exchanged for other products and by far the majority of our members are exporters of primary products, monetary reform cannot help but take into account the varying problems attached to the unequal stages of development of the member countries.
Currency is not neutral. Its definition, its composition, and the regulation of its expansion have immediate and very perceptible effects on the balance of payments and, above all, on international trade. The consummation of political independence entails, for young countries, the real assumption of responsibility so as to exercise a determining influence on the behavior of their nations in their productive and distributive activities. With regard to my own country, it has elected to have a currency independent of any system of foreign domination. One of the aims of the International Monetary Fund should be to guarantee the consolidation of such choices. Indeed, the coming thing is international cooperation between different monetary systems on the basis of a reciprocity of interests. The International Monetary Fund provides the ideal setting for this cooperation in a framework of interdependence. In this connection it must set itself the high mission of contributing decisively and rapidly to bring the living standards of the world’s peoples into line at the highest level, and thus to eliminate the shocking, and even tragic, differentiation existing in our age.
I am convinced that the establishment of composite units, and of special arrangements between central banks (swaps or other lines of short-term credit), without taking into account the special problems and needs of international liquidity, would not be of such a nature as either to meet the general need or to correct the heavy disequilibria that we note today.
It has sometimes been said that, with respect to developing countries, the question ought to be one of aid and not of international liquidity at all. The shade of difference is important. In any case I am certain that the one does not exclude the other, and may even call for it.
The Monetary Fund has been asked to revise its system for compensatory financing of export losses in primary producing countries, this to take place by agreement with the IBRD. The developing countries, my own in particular, attach great importance to the stabilization of their foreign receipts and, consequently, to the prices for basic products that are the essential elements of these receipts.
We think a new impetus will be given to basic research on this subject, and that it will constitute one of the most valuable aspects of monetary reform and, therefore, one of the centers of interest of this meeting. We appreciate at its true value the recent decision regarding quota increases. This in fact is an orthodox method of increasing international liquidity and an effective application of the Articles of Agreement. …
I am convinced that, before we leave this meeting, a useful contribution will have been made to reconciling the points of view on monetary reform and on the restructuring of terms for assistance, with a view to placing our cooperation on broader bases, to giving these institutions a new impetus if that is possible, and to making them more receptive to all the member countries as a whole and to the developing countries in particular.
Statement by the Governor of the Bank and Fund for Uganda
Like those of my colleagues who have spoken before me I would like to congratulate you, Mr. Chairman, on being the first African Governor to be elected to preside over these meetings. I would also like to thank both Mr. Woods and Mr. Schweitzer for their notable addresses and for their enlightened leadership of the two sister organizations. …
Speaking in regard to world trade generally, and in relation to developing countries in particular, we note that the terms of trade have tended to go against developing countries and that, with the notable exception of metals and ores, the prices of primary commodities have been falling. This fall in prices has considerably reduced the export earnings of the primary producing countries; despite increases in the volume of total exports, the reduction in export earnings has in turn seriously impeded the achievement of the planned rates of growth of the developing countries. As a result, therefore, the growth rates of most developing countries have been 3 to 4 per cent as against the planned rates of 6 to 7 per cent. This state of affairs should not be allowed to continue. It is therefore of the utmost importance that the world community make fruitful the efforts of developing countries to raise their living standards by enabling capital to flow from the developed to the developing countries through trade, foreign aid, and investment. It is important, therefore, that the Kennedy Round of GATT negotiations should seek to take into account the interests of the less developed countries and should also recognize the fact that these countries cannot be expected to offer to developed countries any tariff reductions. Moreover, it ought to be the general principle of these negotiations that tariff cuts on tropical products should be more than 50 per cent and wherever possible 100 per cent, so as to give products of developing countries entry into their markets with the least hindrance.
Let me now turn to the activities of the Fund. The past performance of the underdeveloped countries in respect of their planning efforts and the consequent rate of growth achieved is not one to be proud of. We have been told the reasons for this lack of success. The chances are that the developing countries’ rates of growth are not likely to be stepped up unless a lot of foreign capital is allowed to flow into these areas at a reasonably low interest rate so as to minimize the debt burden of the borrowing countries.
The Study Group on the Creation of Reserve Assets, which was appointed by the Deputies of the Group of Ten, recently made their report. Their report on the current discussion within the Group of Ten, coupled with the Fund staff’s study, has brought out the fact that there are fundamental differences in approach to the question of additional reserve assets. Although the conclusion of both the Fund and the Study Group is that there is no shortage of international liquidity, yet it is not clear whether this will continue. It is also not clear whether this conclusion will apply in the future, nor whether the developing countries’ needs have been taken care of. It seems certain that the work of the Group, as well as that of the Fund, should continue and that greater efforts should be made by the world community to reconcile any differences in viewpoint that might exist.
Although it may be argued that the shortage of international liquidity could be limited at this time to the developed countries, yet no one can argue that the effects of such shortage of international liquidity could be limited to those countries without the developing countries being affected. Indeed, such effects will bear disproportionately on the developing countries whose export earnings already suffer to a considerable degree from fluctuating situations beyond their control. Indeed, it has been demonstrated that the recent efforts of certain developed countries to balance their international payments has had the effect of forcing those countries into the position of cutting back on their aid-giving programs and restricting the outflow of long-term capital.
The needs of developing countries for reserve assets is as great as ever and it is important, therefore, that the Group of Ten’s study should not exclude these needs. It is my view that the Group’s deliberations should be no more than preparatory to wider discussions in future on this subject in which the developing countries ought to be given the opportunity to speak for themselves. It is also my view that such deliberations should be within the institutional framework of the IMF, in which both the developed and the developing countries are effectively represented.
In the Annual Report of the Fund, it is rightly pointed out that the key problem facing developing countries is the growing burden of debt and its servicing. It is a problem generated by these countries’ efforts to raise the standard of living for their people, by generally higher interest rates due to scarcity of capital, and also by political and other noncommercial risks. While the Fund’s operations are properly concerned with short-term balance of payments aspects, it may not be possible under conditions of fluctuating export earnings to differentiate between the short- and the long-term aspects. Such conditions tend to make public debt burdens unduly onerous on developing countries which base the servicing of their public debt burden on the expectation of a steady and reasonable growth in export earnings. It is therefore important in my view that both the Bank and the Fund should continue their efforts to find solutions to these problems. The Fund, on the one hand, should review the present compensatory financing arrangements to take account of the problems of fluctuating export earnings. The Bank, on the other hand, should continue to play a prominent role in evolving price stabilization machinery for primary products in association with UNCTAD.
Statement by the Governor of the Fund for Nepal
Pradumna Lal Rajbhandary
I am very happy to participate in this twentieth Annual Meeting of the International Monetary Fund, and I thank you, Mr. Chairman, for giving me the opportunity to speak a few words on this occasion. I would also like to welcome Malawi and Zambia as new members of the Fund and the Bank.
In his inspiring annual address, Mr. Schweitzer, the Managing Director of the Fund, has clearly indicated that all the member countries can look to the IMF for farsighted guidance in matters of monetary and financial affairs. Also, our compliments are due to the Executive Directors and the staff of the Fund for preparing an excellent Annual Report. The Report has highlighted the important trends in the international monetary and financial field, carefully focusing the current problems in both the developed and the developing countries.
The problem of international liquidity has been engaging our attention in recent years. It is heartening to note the encouraging words of Mr. Schweitzer that international liquidity is the business of the Fund. Even though it is a problem debated and discussed now exclusively among the major industrial countries, there is no doubt that in the present setup of world economy all the members of the Fund, big or small, developed or developing, have a stake in this vital issue. Therefore, the Fund is obviously the forum where this issue should be settled, and we would like to see the Fund as an effective institution in the field of international monetary management, even if it may involve suitable amendments to the Articles of Agreement of the Fund.
It is gratifying indeed that the problems and needs of developing countries are being given increasing attention by the Fund. Consequently, it has now been adopting a more liberal policy so that it may be of real assistance to the less developed nations in times of difficulties. I feel, however, that there is still a scope for further liberalizing the terms and conditions of assistance which can be provided to the developing member countries.
Nepal is a small developing country which has not yet established a par value with the IMF. However, necessary steps like the unification of the Nepalese currency so as to have an effective monetary control and other monetary improvements are being effected in the country. Even in situations when a country has not been able to establish its par value, assistance will be needed from the Fund. There are indications in the statement by the Managing Director of the Fund that such assistance will be given in times of need. Obviously, assurance like this from the Fund can encourage smaller countries like Nepal to undertake a policy of mobilizing their own meager foreign reserves for economic development with the confidence that the resources of the Fund would be at their disposal whenever balance of payments difficulties occur. Since joining the Fund in 1961, we have not yet faced a situation requiring financial accommodation from the Fund. Yet, with the rate of economic development which has been envisaged in our current Five-Year Plan, new and unforeseen situations may develop requiring further assistance and advice from the Fund.
So far, the assistance available from the Fund in the fields of technical assistance and training facilities has been quite helpful to us, and we look forward to an increased volume of such assistance in the future. The Fund’s annual consultations with us have also been helpful in reappraising our monetary and financial problems, and suggestions of the members of the consultations team have benefited us greatly.
Statement by the Governor of the Fund for Tanzania
A. Z. N. Swai
First of all, may I join you and my other distinguished colleagues in welcoming the Governors for Malawi and Zambia to this august assembly. Tanzania is particularly happy to have them in our midst not only because they are her adjacent neighbors but because their coming here gives us more hope that Africa’s resolve to liberate herself from her previous bondage is gradually and surely being accomplished.
1965 has been a significant year in the development of our monetary institutions in East Africa. During this year each of the three Governments has decided after a long period of mature and careful consideration to establish its own separate currency and central banking system to replace the existing East African Currency Board arrangements.
In our approach to this problem, it was the Tanzanian Government’s conviction that the establishment of a political federation in East Africa was a necessary prerequisite for the introduction of a unified central banking system. Although Tanzania remained firmly committed to the principle of immediate federation, the prospect of establishing a federal union had clearly receded from the realms of the foreseeable future. It was, therefore, the considered view of the Tanzanian authorities that, in the present and foreseeable political circumstances in East Africa, the path of monetary progress and stability lay in cooperation between national central banking systems of the orthodox kind, rather than in the novel creation of a loosely knit international central bank. It was our belief that the continuing existence of such an international institution would be fraught with constant difficulties and uncertainties which would be detrimental to sound monetary management and the effective development of the financial system in East Africa.
Arrangements are now in hand for the establishment of a central bank in Tanzania, and I should like to take this opportunity of expressing my Government’s gratitude to the Fund for the invaluable technical assistance it has made available to us through the technical mission which visited East Africa earlier this year, and through the provision of central banking experts on a longer assignment under the Central Banking Service arrangements.
The three Heads of Government, acting together as the East African Common Services Authority, have recently decided to appoint a commission which will examine the whole future of economic cooperation in East Africa. All three Governments are, I believe, united in their determination to continue working closely together on central banking and currency matters not only during this transitional period but also in the longer term when each country has established its own institutions.
Immediately following the announcement of the decision to introduce national currencies, the three Governments made various modifications in their exchange control arrangements in order to safeguard the East African economies against any substantial transfer of capital overseas. The basis of these modifications was the application to sterling area countries of existing exchange control regulations affecting capital movements, which had hitherto been confined to countries outside the sterling area. These changes did not affect current payments, which continue to be made to all countries without any serious restriction.
Final arangements have not yet been completed for the introduction of the new Tanzanian currency. However, we hope to begin the conversion exercise within the coming year in full consultation and cooperation with the Governments of Kenya and Uganda and with the East African Currency Board. I should add that it is the firm intention of the Tanzanian authorities to remain within the sterling area, and to issue the new Tanzanian shilling at full parity with the present East African shilling and with sterling.
Turning to the wider monetary discussions, I find it difficult to share the calm and dispassionate optimism of the Fund’s Report on the international monetary system and international liquidity. In the course of the present year my country has faced the serious prospect of heavy foreign exchange losses through the possible devaluation of a major international currency. Over this situation our authorities had no vestige of control. Had such a devaluation taken place, it would have occurred for reasons entirely extraneous to our own economic situation and would have seriously undermined all our development efforts.
In the course of the past year we have seen a withdrawal of fiscal incentives and tighter administrative arrangements placed on the exportation of private capital from our principal trading partner among the developed countries. We have also witnessed a general stagnation in growth in the movement of public capital to my country, and observed the continuing failure of the vast majority of the industrialized states to set aside the generally accepted target of 1 per cent of their gross domestic product for economic aid.
We have noted with increasing anxiety the slowing down of economic expansion in many of the advanced countries of Western Europe and North America with all the adverse implications this holds out for the future level of our own exports and for a further deterioration in our terms of trade.
Serious problems of this kind confront the vast majority of the developing countries, and we believe that they have been aggravated by the imperfections of the international monetary system and by the limited availability of international liquidity. It is our conviction that the present international monetary arrangements should be reviewed as a matter of urgency and that this task should not be the exclusive prerogative of a restricted group of highly developed countries. The issues at stake are of vital significance to the developing nations, and we consider that they must be represented at the council table in any serious discussion of international monetary reform. In this regard, we strongly endorse Mr. Schweitzer’s recommendation that this discussion should proceed within the International Monetary Fund.
Statement by the Governor of the Bank and Fund for Kenya
J. S. Gichuru
First, I extend my thanks for the words of welcome addressed to us by you, Mr. Chairman, as well as by the honorable President of the IBRD and the honorable Managing Director of the IMF. We greatly appreciate what they have said in their opening speeches about the present activities of the Bank and Fund and about their role in the future. We join the leaders of both institutions and the affiliates in their hopeful attitude, always seeking new ways and trying new tools while pursuing their enormous tasks.
I intend to make only a short speech, and I earnestly hope that the delegates here assembled will bear with me.
When I addressed a similar meeting in Tokyo last year I expressed the hope for the establishment of an East African central bank. Since then, certain developments in East Africa, I regret to have to say, have made the realization of my hope impossible. I would, however, like to state before this august body that one sparrow does not make a summer and further assure you that everything possible is being done by the three states in East Africa to preserve and strengthen other aspects of their cooperation. May I add that it is our firm desire and intention to contain the forces that now appear to be drifting Kenya and her neighbors apart. Kenya strongly feels that the present difficulties in this field are only temporary, and that time and force of circumstances will overcome them swiftly and for a long time to come.
I thank the Fund for making available Dr. Baranski to help establish and eventually head the Central Bank of Kenya in its initial stages and also for having produced for us the first draft Charter of the Bank. I assure members and the Fund that the monetary policies to be followed in Kenya would be aimed at maintaining internal and external balance.
In the recent past the question of the reform of the international monetary structure has occupied the thinking of many countries, experts, and financial institutions. It has been suggested that a world conference should be convened to look into the problem widely and in greater detail. The time is indeed ripe for an overhaul in the system established at Bretton Woods, and I consider it right and proper that the IMF should provide the organizational framework for such a conference, which will continue and develop the work started in July 1944.
It is true that—if measured by a normal standard—the volume of international liquidity may not yet appear insufficient for financing the increasing international trade. However, the world economy is now exposed to hectic, unpredictable changes, be it in the form of huge speculative movements of short-term capital, or drastic fluctuations in the market price of primary commodities which may change the economic position of a number of countries almost overnight. It would be most regrettable to fight such undesirable developments with deflationary measures while the appropriate method would be to provide an adequate buffer against speculative or panicky attitudes which eventually would peter out by themselves. The mere existence of sufficient reserves and appropriate machinery for their management and use will make their practical application less likely. Therefore, I warmly support the study by the Fund of such possible methods of increasing the international liquidity as are suggested in the most lucid and convincing Report of the Fund.
Coming now to another important matter, I am glad to endorse what has been said by the Managing Director of the IMF in the matter of growing burdens resulting from accumulated foreign borrowings by some developing countries. Many developing countries like ourselves may yield to the temptation of using profusely offered “contractors’ credits” in order to speed up their investment programs. It would be most desirable if the IMF could use its influence to persuade certain creditor countries not to endorse or facilitate lendings which are granted on terms clearly implying future difficulties in repayments.
In conclusion, I wish on behalf of my country full success in working toward constant improvement of the international monetary machinery entrusted to the Fund 20 years ago. The fact that two decades have passed and this machinery still works—and works better—deserves praise from everybody who believes in a slow but steady progress of mankind toward a better future.
Statement by the Governor of the Bank and Fund for Turkey
It is indeed a great pleasure and honor for me to represent my country, Turkey, at this distinguished forum of world finance. There can be no doubt that the Monetary Fund has, in 1964, made remarkable efforts and has achieved great success both in developing world-wide cooperation in the international monetary field and also in the development of world trade.
From the point of view of international liquidity, the most outstanding event of the year 1965/66 is, no doubt, the general and special increases in the quotas of the Fund members in compliance with the decision taken at last year’s meeting in Tokyo. This will most certainly increase on a large scale the possibility and potential for assistance to the members of the Fund.
It is quite evident that the soundness and strength of the international monetary situation constitute one of the most important factors in the efforts of the developing countries to implement their own development programs. Although developed and developing economies have different characteristics, it is a fact that an economic problem in either one of them is contagious to the other. The liquidity status which constitutes a bottleneck in the development of world trade today is also of vital importance for the developing countries.
It is also a fact that, although there have been many fruitful and positive developments in the field of assistance to the developing countries in past years, there is yet to be established an acceptable criteria for their reserve requirements. I believe it would be beneficial, especially to those countries which are obliged to spend their reserves despite various import restrictions and exchange controls, if the Fund would give its immediate consideration to this matter and study it with the purpose of establishing a logical rate acceptable to the needs of the developing countries.
I must point out, at this juncture, that Turkey, which started the implementation of her Five-Year Plan in 1963, is meeting certain difficulties in the implementation of the annual programs, due especially to deficiencies in foreign reserves.
We note with pleasure that the Fund’s activities have reached a record level during the past year. Member countries have benefited considerably from the sales of exchange and from the stand-by agreements. We hope the efforts to increase the quotas of Fund members will be successful.
I would like to end my remarks by pointing out once again that it gives us great pleasure to note that the activities of the Fund have played a major part in the stable and healthy development of the world economy.
Statement by the Alternate Governor of the Fund for Paraguay
Edgar F. Taboada
Since our last Annual Meeting, in Tokyo, no event has occurred in my country, Paraguay, to produce an unfavorable effect on the position of the balance of payments and monetary stability, which have, rather, been strengthened by the climate of political and social tranquillity prevailing there.
The normal execution of the National Budget, and the rate of growth of 28 per cent in foreign trade, had a decisive influence in strengthening the rate of exchange of our currency, which has remained stable since 1960.
The financial and monetary system is fundamentally based on the foreign trade structure. Exports provide 82 per cent of foreign exchange, which, in the period June 1964 to May of this year, increased by 37 per cent in relation to the same period in the previous year.
The net international reserves of gold and foreign exchange, from September 30 last year to the end of June this year, show an increase of 138 per cent; meanwhile the expansion in the money supply was one of only 11 per cent.
In the period June 1964 to May of this year, the total receipts in foreign exchange exceeded those of the previous period by 27 per cent; and payments for imports and other services increased by 18 per cent. The savings effected strengthened the position of the balance of payments.
With respect to the execution of the National Budget, the receipts for the period January-August this year exceeded by 20 per cent the estimates made in the respective law, and in relation to the same period last year the increase in the receipts represents 34 per cent. These are the first fruits of the tax reforms instituted in the second half of 1964 and of the establishment of a more rigid system of tax collection.
On November 23, 1964, there was put into effect a new stand-by arrangement in the amount of $5 million for one year. However, there were no reasons to justify utilization of these resources. Next November 4 the last quota will be paid in respect of repurchases of foreign currency used under previous arrangements.
In the arrangement now in effect, two stages were envisaged for the maintenance of maximum limits to the net assets of the Central Bank. In the first stage, from May 1965 to August 1965, there was envisaged a maximum expansion of
The National Government is proceeding with the execution of the programs for economic and social development initiated in 1954. The total cost of these amounts to $121.3 million, of which $64 million has already been invested, that is to say, 52 per cent of the amount planned. External financing participated in these investments to the extent of 61 per cent, and the remainder was provided by the country’s own resources, from noninflationary sources.
The sectors affected by these programs are the following: highways and roadbuilding equipment, $38.6 million; waterways, $9.0 million; hydroelectric schemes, $23.8 million; public buildings and airports, $4.0 million; drinking water, $12.4 million; telecommunications, $2.7 million; development of production and agriculture, $27.4 million; and construction of housing, $3.4 million.
The Technical Planning Secretariat in the Office of the President of the Republic, with the technical assistance of the group of experts of the Organization of American States, the Inter-American Development Bank, and the Economic Commission for Latin America, has prepared the Economic and Social Development Plan for the two years 1965-66, which includes an economic diagnosis, an over-all program, and a program for the public and private sectors.
The Government has already approved the report of the Commission for the Financing of the Public Sector, submitted on June 14 this year.
The Nineteenth Annual Governors’ meeting, held last year in Tokyo, adopted a resolution increasing quotas of Fund members by a basic 25 per cent.
Pursuant to the Executive Directors’ report of February 26 of this year, my country’s quota increase, under the Board of Governors’ Resolution, will be from $11.25 million to $15.0 million.
I should like to state, in conclusion, that the Government of Paraguay, by Decree No. 13804 of September 10, 1965, has given the required consent.
September 29, 1965.
See Appendix, pp. 279-81.
See pages 279-81.