Presentation of the Twenty-Second Annual Report 1. By the Chairman of the Executive Board and Managing Director of the International Monetary Fund

International Monetary Fund. Secretary's Department
Published Date:
October 1967
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Pierre-Paul Schweitzer

Mr. Chairman, I wish to join you and Mr. Woods in thanking the President of Brazil for his kind words of welcome. We all deeply appreciate the gracious invitation of the Government of Brazil that has resulted in our meeting here; and we are moved by the warmth of the welcome that we have received. The beauty of this city, in this great country, is famed throughout the world and, as one who comes to it for the first time, I may perhaps be permitted to say that it even surpasses my expectations.

In greeting all those present today, I too wish to express my particular pleasure at seeing the Governors for Indonesia and The Gambia, and also the representatives of Botswana whose country has applied for membership. Lesotho and Malta, though not represented here, have likewise applied to become members.

It is my privilege, Mr. Chairman, to present to you the Annual Report of the Executive Directors of the Fund, which deals with a year of intensive activity in relation to transactions, consultations with members, technical assistance, and international liquidity. In the past fiscal year, outstanding drawings on the Fund rose for the first time above the equivalent of $5 billion. This figure has subsequently fallen, largely owing to a substantial repurchase operation by the United Kingdom.

At the last Annual Meeting, I reported on the extension of the Fund’s compensatory financing facility, designed mainly to assist primary producing countries which experience temporary short-falls in their export earnings through circumstances largely beyond their control. The value of the facility is borne out by the fact that in the intervening year seven member countries have made use of it. Another noteworthy development has been the further widening of the range of currencies used in Fund drawings. It is surely an auspicious circumstance, Mr. Chairman, that the currencies used for the first time in the past fiscal year included both that of your country and that of our host.

After these brief remarks I now turn to the two main subjects on which I wish to dwell today: the state of the world economy and international liquidity.

As you are aware, the remarkable expansion of world economic activity that had characterized the 1960’s up to about the middle of last year has since been interrupted. The economic slowdown among the industrial countries has been the most pronounced and widespread in nearly a decade. This slowdown, in turn, has had markedly adverse effects on the primary producing countries. During the first half of 1967 the world economy was apparently at a standstill, showing little if any growth. However, by midyear it was evident that a cumulative downward movement had been prevented by the shift to expansionary policies in a number of industrial countries during late 1966 and early 1967, so that the key question then related to the timing and strength of an upturn. In recent weeks the fact of an upturn in the U.S. economy has been established, and signs have appeared that the German economy reached the trough of recession some while ago.

Let me now be more specific concerning world economic developments during 1966 and the first half of 1967. For all of the industrial countries taken together, the rise in industrial production decelerated steadily after the first quarter of last year and gave way to actual declines, though small, in the first two quarters of 1967. This change of pace was led and dominated by four countries—the United States, Canada, Germany, and the United Kingdom. In only two of the industrial countries—Japan and Italy—has the trend of industrial production remained strong. Not surprisingly, therefore, the rate of expansion in the total imports of industrial countries has fallen sharply since about the middle of 1966. On the export side of international trade, the impact of this change has been felt most forcibly by the less developed group of primary producing countries. In the aggregate, and adjusted for seasonal influences, the export receipts of these countries increased only moderately in the second half of 1966 and appear to have declined slightly in the first half of 1967.

The immediate background of this recent slowdown in the world economy is to be found in developments and policies during the latter part of 1965 and early 1966. This was a period in which the forces of expansion were both vigorous and widespread. By the end of 1965, an easing of demand pressures over much of the industrial world had become appropriate and necessary, inasmuch as the intensity of demand in individual countries was incompatible with the maintenance of reasonable price stability and balance of payments equilibrium. However, the adjustments of national economic policies to deal with this situation cannot be said to have been very successful.

In the first place, industrial countries generally applied policies of financial restraint too late; indeed, because of a belated recognition of the problem in some cases, these policies were put into effect only during the first part of 1966, when prices were advancing at an exceptional rate but output expansion and demand pressures were already tending to subside. Fiscal action usually was delayed or employed only moderately, and the primary emphasis was placed on monetary policy. This contributed to severe strains in money and capital markets, and in a number of countries the ensuing credit squeeze had undesirably harsh effects on particular sectors of the domestic economy.

From an external viewpoint, the timing and combination of policies employed to restrain the 1965-66 inflation had a visibly sharp effect on the balance of payments of individual countries. But these policies do not appear to have made any lasting contribution to the reduction of payments disequilibrium in the international system as a whole. In particular, they were of limited usefulness in inducing equilibrating international capital flows, essentially because of the common pursuit of monetary restraint by a number of major countries primarily for domestic reasons. Moreover, the policies of late 1965 and early 1966 failed to prevent marked differences among major countries in output growth and pressures on resources, and these conditions led to an impact on the external current account that in some cases was quite unwelcome to the national authorities.

It must be recognized that the period around the end of 1965 was an unusually difficult one for the formulation of economic policy in the main industrial countries. Nonetheless, the experience of that period throws into relief some valuable lessons for the future. Although none of these lessons is new, I shall mention a few of them in order to underline their importance.

First, a review of recent performance serves to remind us of the inherent difficulties of economic diagnosis and forecasting. At the same time, it signals the importance of improving the flow of requisite statistical information.

Second, the recent developments clearly showed that incomes policies cannot achieve their purposes under conditions of excess demand. An incomes policy should only be expected to work effectively in conjunction with the appropriate use of fiscal and monetary policies, and when viewed in this light it can have an important role in the context of over-all national economic policy. I hope and believe, therefore, that national authorities will persevere in attempts to develop incomes policies suitable to their particular economic and institutional settings.

Third, and of particular importance, the 1965-66 experience demonstrated that industrial countries should make a more flexible use of fiscal measures in seeking an effective combination of policies to meet their domestic and external objectives. On other occasions, including last year’s Annual Meeting, I have dwelt on this need for better fiscal policies.

Finally, the recent economic record points up the continuing need to achieve a better coordination among financial policies of the major countries. Such a need becomes apparent at this time as one looks at the problem of fostering a broad revival of world economic activity while achieving a satisfactory international payments adjustment. It is a problem calling for appropriate adjustment policies on the part of deficit and surplus countries alike.

In the United States, as I have mentioned, an economic upturn is already under way, and the authorities of that country are sufficiently confident—indeed, concerned—about the outlook as to have requested legislative approval for an early increase of income taxes. After only a slight increase in total real output during the first half of 1967, the current U.S. objective is to achieve a growth rate approximating—but not exceeding—4 per cent a year, in line with the economy’s estimated noninflationary potential. This objective is in the interest of other countries as well, given the need to expand world output without generating a resurgence of inflationary forces.

On the other hand, the early realization of its domestic growth objective could hamper the United States in its efforts to improve the external balance on current account if, as now seems likely, over-all growth in the major trading partners of the United States proceeds for a period of time at an annual rate markedly below 4 per cent. In view of the persistent problem of the U.S. balance of payments deficit, the development of renewed strains on the current account balance would be quite inopportune, and it would be essential for the authorities to limit the impact of such strains on the over-all payments position.

In the situation now evolving, a significant contribution to international adjustment can also be made by those major countries that are in relatively strong reserve positions and do not at present face a conflict between domestic and external objectives. It is appropriate that such countries—principally Germany, France, and Italy—should continue to pursue expansionary policies. Such policies are essential to help restore and broaden the upward trend of activity in the industrial world while mitigating strains on the external payments positions of the United States, the United Kingdom, and other countries as well.

Early resumption of a satisfactory growth rate in the industrial world would be of great benefit to the primary producing countries. The slowdown of industrial activity during 1966 and 1967, it should be noted, had a severity of impact on these countries that was most untimely, especially in the case of the less developed group. Over all, the real product of the less developed countries had already grown somewhat more slowly from 1960 to 1965 than in the previous five years, and the performance was distinctly less favorable on a per capita basis. Per capita output in the first half of this decade advanced appreciably in some less developed countries, but in others, accounting for nearly two thirds of the population of all such countries, it rose only slightly or declined. Because of the recent weakening in the export receipts of the less developed countries, the situation undoubtedly worsened during 1966 and 1967. In its close work with these countries, the Fund has been deeply aware of their increased difficulties and will continue in its efforts to alleviate them.

The economic record of the developing countries that I have just outlined prompts me once again to urge that the industrial countries improve the access to their markets and that they also accord a high priority to the flow of development assistance.

The successful conclusion of the Kennedy Round, after four years of difficult and intensive negotiations, will bring about a highly important reduction in tariffs on a world-wide basis. It is to be regretted, however, that it was not possible to do more toward the elimination or reduction of tariffs on products of special interest to the developing countries. It is gratifying that efforts in this direction are to continue, and it is important that they yield satisfactory results. In the meantime, the tariff cuts that have been agreed for a wide range of industrial products that are not of immediate export interest to the developing countries should nonetheless exert a favorable influence on the demand for their raw and semiprocessed products.

The value of international collaboration on a world-wide basis as exemplified by the Kennedy Round should not make us lose sight of the benefits that countries can derive from collaboration with their more immediate neighbors. One must be impressed, for instance, by the progress that has been made possible by the Central American economic union among countries of that area in recent years; and I want to express my earnest hope that the high aspirations embodied in the charter of the Latin American Free Trade Association will be realized.

I have already alluded, Mr. Chairman, to the importance of development assistance. It is a matter for deep concern that the flow of long-term financial resources to the less developed countries in recent years has lagged behind the growth of output in the industrial world.

Observation of economic developments in the last few years reveals other disturbing tendencies. I am bound to note, for instance, that there has been retrogression in the freedom of capital movements, although the industrial countries introducing restraints in this area have endeavored to shield the less developed countries from their impact. There has also been increased insistence on the tying of foreign aid, which is hardly conducive to its most efficient use. More generally, I want to stress the need to progress on a collective basis toward the further liberalization of international trade and payments. In this context, I urge that countries make renewed efforts to avoid unilateral action—no matter what its motivation—to withdraw concessions or impose new restrictions.

I now come, Mr. Chairman, to what in my view constitutes the most significant development in international financial cooperation since Bretton Woods. I refer to the proposed arrangements for international liquidity. An outstanding lesson of both the Kennedy Round and the liquidity negotiations is that the most difficult problems of trade and finance can be resolved provided that the will exists. Once again we have seen that the most diverse countries can agree on what best serves their individual and collective economic interests and that they can effectively shape their economic environment in order to promote the general welfare.

The discussions on international liquidity were conducted over a period of four years in the Fund, among the ten countries that participate in the Fund’s General Arrangements to Borrow, in the joint meetings of Executive Directors and the Deputies of the Group of Ten, and in many other forums. As a result Governors now have before them, approved by the Executive Directors as the basis for an amendment of our Articles, a specific Outline for a facility to meet the need, as and when it arises, for a supplement to existing reserve assets. At this juncture I want to express my very real appreciation of the way in which the long period of discussion and negotiation was so lightened and made pleasant by the spirit of cooperation shown by all participants; and I should like here to pay particular tribute to the Chairman of the Deputies.

After a number of years in which I could do no more than report a certain amount of progress and promise intensive additional study for the next year, I am particularly happy to be able to present this plan to you now on behalf of the Executive Directors and to give my warm support to the proposed Resolution that asks them to prepare the necessary amendments of the Articles for submission to the Board of Governors. Once approved by the Board, the amendments would go to members for ratification.

The Fund staff and management stand ready to prepare with maximum dispatch drafts of the necessary instruments, and any other requisite material, to facilitate the work of the Executive Directors in both tasks assigned to them in the Resolution, relating to the establishment of the new facility and to possible improvements in the present Fund.

The Outline reflects the principle that the international community should be able to control reserves, instead of reserves controlling the community. Further, the Outline embodies agreement as to the lines on which action will be taken in case of need. The questions whether there is or will be such a need and, if so, its magnitude are left for determination after the plan has entered into force. Once the final document has been worked out and ratified, the international financial community will have the power to create additions to reserves in the amounts that it judges necessary. When a collective judgment is made that it is desirable to supplement existing reserves, there need be no fumbling for ad hoc solutions. The risk has been dispelled that for lack of agreed international arrangements countries would find themselves driven to adopt solutions dictated not by reason but by force of circumstances.

The Outline now put forward is the result of an intensive and even microscopic examination of many alternative possibilities. I feel confident that it provides a basis for arrangements that will be practical, successful in operation, and capable of further development.

The new facility is aimed at creating international liquidity in unconditional form. In recent years, there has been an increasing tendency in the Fund and elsewhere to distinguish between two main categories of international liquidity: unconditionally available reserves, that is, the kind of liquidity that countries can use without being subject to any commitments or discussion as to policy, and “conditional liquidity” such as the Fund provides in the credit tranches. It is vital to the promotion of an efficient international adjustment process that conditional credit facilities should continue to play a major role in the international payments system. It has become clear, however, from the discussions of recent years that countries see important differences between access to such conditional facilities and reserves available as of right, so that augmented conditional facilities are not regarded as a full substitute for a normal accrual of reserves. A type of international liquidity that has taken on vastly increased importance in the past few years is that provided by bilateral credit arrangements between monetary authorities. These have conclusively proved their value in times of stress, and they have made for themselves a permanent place in the international financial mechanism. However, given their essentially short-term character, they too are nowhere regarded as an adequate substitute for reserves.

The clear desire of members that the new reserve asset should be unconditional and permanent in character is fully met by the Outline. A member will be able to use the special drawing rights for which the Outline provides whenever it has a balance of payments or reserve need to do so, and its judgment of its own need will not be subject to prior challenge. A member will be able to transfer its drawing rights to appropriate transferees, and in this way can be sure that it will get the currencies it needs to meet a payments deficit. Members that join the scheme will be obligated to accept without question the new reserve assets when presented to them by other members in accordance with rules and instructions of the Fund. This acceptance obligation is an important feature of the reserve character of the new drawing right, and its limit has been set at a level designed to ensure that members will be able to use their drawing rights when they need to do so. Of course, any member can agree to hold any amount of the asset in excess of the limit. The new drawing rights will be usable among participating members only for official settlements. But they will presumably also be usable, under rules still to be worked out, for some of the types of transactions that presently take place between the Fund and its members.

The asset will be given certain other characteristics to make it an international asset worthy of standing side by side with gold, reserve currencies, and existing reserve positions in the Fund, such as a guarantee of the maintenance of its gold value and interest remuneration at a moderate rate. For these reasons, countries can be expected to want normally to retain the drawing rights allocated to them, to acquire additional amounts when they are in payments surplus, and, when they are in deficit, to use the new drawing rights only in conjunction with the use of their other reserves. The latter idea is indeed reflected in the Outline, which refers to the desirability that countries pursue over time a balanced relationship between their holdings of special drawing rights and other reserves. A member that follows this principle in the management of its reserves would be unlikely to have to adjust its holdings of drawing rights as a result of the obligation to reconstitute—an obligation which specifies that over a five-year period a member’s average use is not to exceed 70 per cent of its average net cumulative allocation.

I have commented so far on the more technical aspects of the Outline, but surely of no less importance is the fact that it maintains the principles of universality and of nondiscrimination that are basic in the Fund. All members of the Fund will be entitled to participate in the benefits, while sharing in the obligations, of the new facility. The amounts allocated to each member will be based on the yardstick that has been established in the Fund as measuring its economic and financial position in the world, that is, its quota. Each member’s voting power in the new arrangement will be determined on the basis of criteria very similar to those that now apply in the Fund. And the right to use the new drawing rights will be on the same terms for all Fund members. In every way, therefore, the unity of Fund membership has been preserved.

During the long period of discussion and negotiation I have remained confident that the ultimate outcome would be satisfactory both from the technical and from the political point of view, and that it would be such as to strengthen international monetary collaboration and the Fund. It is my conviction that, once the new plan has been translated into an amendment of the Articles, the Fund will be greatly helped in the pursuit of its objectives, which include, if I may paraphrase Article I, the expansion of trade, the development of the resources of all its members, and a regime of stable exchange rates.

In pursuing these aims over the years, the Fund has shown a remarkable capacity to evolve. Its policies and practices are not static. They have been modified and adapted to meet changing world conditions. They can be further modified to enable the Fund to play an enduring and effective role both in the provision of liquidity and in the promotion of international monetary cooperation.

September 25, 1967.

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