Discussion of Fund Policy at Second Joint Session 1

International Monetary Fund. Secretary's Department
Published Date:
October 1967
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Statement by the Governor of the Bank for Ghana—A. A. Afrifa

We have been most impressed by the hospitality of the Brazilian Government, and I would like to offer our sincere thanks and best wishes to the President and his people.

When I addressed the Annual Meeting last year, the present Ghana Government had been in office for only a few months and I could speak only of the first steps taken toward economic recovery and our program for the future. This year, happily, I can speak of a modest but concrete progress.

The real rate of economic growth in calendar year 1966 was of the order of 1.6 per cent, and this was a modest improvement on the 0.7 per cent growth rate recorded for the previous year. For the first time in many years, balance was achieved in the financial accounts of the public sector. For the current financial year also, the Government has been able to introduce a budget which shows a small surplus on current account.

In spite of these improvements, our balance of payments has continued to be under pressure, and to reinforce the stabilization measures which were introduced last year the Government announced in early July this year a number of far-reaching financial and economic measures, the most important of which was the devaluation of the currency by 30 per cent. This last measure was, among other things, designed to give the cedi a more realistic exchange rate.

It is our view that these measures will lead to an expansion of domestic production and exports and will enable us to further liberalize our imports, current payments, and transfers.

It seems appropriate on this occasion to recall the wide extent of overseas assistance which we have received during the past year. The Fund itself made its facilities available to us in the form of a compensatory financing drawing of $17 million and of a further stand-by arrangement amounting to $25 million. Negotiations between Ghana and its principal creditor countries have also taken place during the year, and these culminated in an agreement last December to stretch out the servicing of our very substantial debts on suppliers’ credits. This was followed in April by a meeting organized at the request of the Ghana Government by the Fund in collaboration with the Bank, at which Ghana’s balance of payments gap and external aid requirements for 1967 were discussed. This Aid Meeting resulted in encouraging offers of balance of payments support from a number of donor countries, for which we are very thankful.

The provision of this and other forms of relief enabled us during the past year to meet nearly all kinds of current foreign exchange commitments as they arose and also to continue paying off accumulated arrears on short-term debts.

I believe that this was the first time that the Fund had arranged such a meeting at the request of a member country, and I wish to take this opportunity to express to the Fund the appreciation of the Government and people of Ghana.

Having said so much about our own domestic situation, I should like to turn to the question of international liquidity and the progress that has been made during the past year in finding a way to supplement existing reserve assets as and when the need arises. The outcome of these discussions is now before us as an Outline of a Facility Based on Special Drawing Rights in the Fund. I wish to say that my Delegation supports these proposals generally and believes that they represent an important advance toward ensuring that the growth of world trade is not hampered by a shortage of monetary reserves.

The Ghana Delegation, however, recognizes that the Outline is a compromise, which clearly demonstrates the need for flexibility so that the scheme could be adapted to meet the changing requirements of both developed and developing countries. In this connection, permit me to say that Ghana feels that countries with balance of payments surpluses should use these surpluses, where there is no conflict between domestic objectives and external considerations, to contribute to the smooth functioning of the international monetary system.

The present proposals rightly give the Fund a key role to play in the new arrangements, and I am sure that many others will share my hope that it will discharge its task with the same understanding and flexibility that it has shown in all its other transactions. . . .

Both the Fund and the Bank have continued to provide technical assistance to Ghana in various ways, and I would like to take this opportunity, and again more formally, to acknowledge these invaluable services given so freely and so competently to my Government and the people of Ghana.

In conclusion, may I extend my Delegation’s congratulations to the Managing Director of the IMF and the President of the IBRD for completing yet another year of successful operations by these institutions.

Statement by the Governor of the Fund and Bank for Korea—Bong Kyun Suh

It is a great honor and a distinct privilege for me to participate in this Twenty-Second Annual Meeting and to commend, on behalf of the Government of the Republic of Korea, the Fund and the Bank Group for their worthy achievements in promoting further international economic cooperation during the past years. Before talking, however, on subjects of common interest, I would first like to join with my fellow Governors in welcoming The Gambia to our fraternity of membership in the Fund and the Bank Group and the Governor for Indonesia in honor of Indonesia’s resumption of membership in this fraternity. Also, I am very happy to join with the honorable delegates who have paid such well-deserved tributes to our Brazilian hosts for their great hospitality and for making such excellent arrangements for this Conference in this beautiful city and to the staff of the Fund and the Bank Group for their usual superb competence in ensuring the success of our deliberations.

I do not believe that there have been many times before when as much mutual understanding and cooperation among countries, not only in political affairs but also in economic matters, have been required as in the world today. In meeting this need, the Fund and the Bank Group are indeed playing an increasingly useful role. In this connection, I wish to express my Government’s sincere appreciation for the assistance given to us by these two institutions since Korea joined them in August 1955. The Fund has always rendered us valuable advice through its annual consultations and provided us with a very useful second line of credit by means of three successive stand-by arrangements, all of which have been a major element in inspiring domestic and international confidence in our economy. We also highly appreciate the very useful technical assistance that the Fund has provided us continuously since 1964 in the formulation of sound fiscal, monetary, and exchange policies. . . .

Fellow Governors, may I now take a few minutes of your precious time to narrate to you some of our major economic achievements during the last few years, about which we in Korea feel very proud indeed. Last year, we successfully completed the First Five-Year Development Plan, and in the current year we launched the Second Plan. During the First Plan period, the Korean economy recorded an unprecedentedly high annual average GNP growth rate of 8.3 per cent, and in 1966—the last year of the Plan—at 13.4 per cent, the growth rate was indeed epoch-making.

The rapid progress of our economy in recent years has been perhaps most dramatically demonstrated in a substantial increase in the degree of industrialization, with the share of the secondary industries in the fast-growing GNP rising from 18 per cent in 1961 to 25 per cent in 1966. In the external sector, too, we have achieved remarkable results. Our merchandise exports, which amounted to only $41 million as recently as in 1961, rose to $250 million in 1966, the increase in 1966 alone being 43 per cent. Encouraged by this result, and also as an important element in our economic stabilization program, my Government has been pursuing a bold policy of increasingly opening our doors for imports from all friendly countries. Especially rapid strides have been taken in this connection during the current year, as evidenced by the recent trade liberalization measures through the adoption on July 25 of a new negative list system, under which only a relatively limited number of import and export items still remain prohibited or restricted. Furthermore, Korea has actively sought to implement an increasingly rigorous financial stabilization program in close collaboration with the Fund, which, along with the rapid increase in our export earnings and steadily enlarging net inflow of foreign capital, has imparted to our exchange rate a remarkable degree of stability since 1965.

We in Korea, however, fully recognize that all our economic progress hitherto and plans for development hereafter will be largely nullified unless we are able to control our population growth rate. This growth rate is still high, but, thanks to a vigorous family planning program that we launched some years ago to coincide with the inauguration of our First Five-Year Plan, the growth rate has already registered a noticeable decline from 2.9 per cent in 1961 to 2.5 per cent in 1966. But we realize fully that this is only the beginning and are convinced of the need for a further sharp decrease in this rate. Consequently, our new Second Five-Year Plan, which commenced this year, calls for a sustained further drive in this respect, with a view to bringing down the population growth rate to even below 2 per cent by the end of the Plan. We are confident that we shall attain this goal with the adoption of all the necessary measures on our part and with appropriate technical and other assistance from the concerned international organizations in this field.

Although Korea has made such good progress in both the internal and external sectors in the past few years, we are still in great need of further sizable external development assistance. In this connection, please permit me to draw your attention to the pressing problem that is currently facing the world, namely, the widening gap in economic prosperity between the developed and the developing countries, even during this so-called Development Decade. It is regrettable, therefore, that in recent years, the scale of aid from the developed countries to the developing countries has been decreasing relative to the growth rate of their national incomes. Hence, it would not be inappropriate for me to recall here a UN Resolution passed in 1960 that requested the developed countries to allocate at least 1 per cent of their annual national income for giving aid to the developing countries.

Of particular interest in this context to all of us in the developing countries are the activities of the international financial institutions which, I sincerely believe, can provide us perhaps the most suitable forms of both short-term and long-term development assistance. I wish, therefore, to commend very highly the Fund’s Executive Board for initiating in 1966 a new policy of permitting drawing rights for compensatory financing up to 50 per cent of the members’ quotas. This liberalization of the policy in regard to the use of the Fund’s resources is indeed of considerable benefit to the countries eligible to use this facility.

Speaking of the Fund’s resources, my Government welcomes the very happy outcome of the recent London deliberations regarding the appropriate measures for the expansion of international liquidity through the well-tested mechanism of the Fund. This momentous step in the history of international finance in the past two decades has indeed been taken none too soon, and has lifted a great cloud of uncertainty that for the past several years had hung over the future of the world payments system. I am confident that the Executive Board’s imaginative proposals in this regard will be unanimously adopted at this meeting. In this connection, however, may I add that in view of the small quotas of many member countries like mine, which have particularly pressing needs for achieving and maintaining balance of payments equilibrium in the light of the much needed acceleration in the pace of economic growth, my Government strongly urges that special consideration be accorded to our countries in regard to the use of the Fund’s increased resources. . . .

Finally, I take this opportunity to extend my Government’s sincere gratitude to our fellow Governors for approving the increase in Korea’s Fund quota and to convey our thanks to the member countries that are now participating in the Bank Consultative Group for Korea.

In concluding my remarks, may I add that, in meeting the challenge of attaining a self-sustaining and satisfactory rate of economic growth in all the countries, millions of the people must, during the years ahead, undergo such changes in our ways of thinking and modes of living as men in former times have never known. In this task, we as Governors of these Bretton Woods institutions have a continuing obligation to help to focus the world’s attention on the need for the pursuit of sound national and international monetary and external payments policies, and I am confident that we shall discharge this obligation honorably at this historic meeting.

Statement by the Governor of the Fund and Bank for Australia—William McMahon

Mr. Chairman few delegates have traveled as far as we delegates from Australia. From the moment we arrived in Central America—that is, in Mexico—through the United States, later on to Puerto Rico and Trinidad, and now into Brazil, we have been treated with the greatest courtesy and consideration, and I am sure that if all the delegates have been treated in the same way it must add to their capacity to make a contribution in these discussions.

In particular, I would like you to convey to the Government of Brazil, the host country, our respects and also our thanks for the kindness they have showered upon us. They could not have done more to make our stay here both happy and informative.

Most of us, representing countries large or small, must have asked the question—what catalytic agents have drawn us together from all parts of the free world.

I believe there are two reasons why we are here—and they are both rational and practical. First, we are reviewing the work of the Fund and the International Bank, and their related institutions, during the year past. Second, we are considering what action may be necessary in the period ahead to ensure that the Fund and Bank will be better able to fulfill the functions for which they were created.

I shall not discuss the functions of the Fund and Bank in detail. I do believe I can aptly summarize the basic purposes of these institutions in this way. They are inspired by the need to achieve a healthy rate of growth of world production and trade and to maintain that growth with a minimum of checks and reversals. It is for them to help to ensure that world financial and economic conditions are favorable to such growth.

Let us first look at the picture which emerges from our review of the year just past. In important respects it was not a satisfactory one. There was what is now called, not inappropriately, a “deceleration” in world production and trade. To some extent this was avoidable. Initially there was a failure to employ sound economic and fiscal policies in some countries. Action subsequently taken to offset excess demand and correct external disequilibrium was belated. It was excessively concentrated in the monetary sector when fiscal restraints could have been more appropriately used. A slowdown in the rate of growth of trade and development occurred.

One important consequence was a hardening of world interest rates. Capital and aid flows were restrained with adverse effects on growth in the developing countries. World commodity prices and the export incomes of many primary producing countries fell, and the terms of trade moved against the primary producing countries. World reserves showed a slower rate of increase, and official gold holdings actually declined.

Clearly this series of events and these trends have implications for policies in the years ahead if needless slowing down in the growth of production and trade is to be avoided. There is, for example, a need for countries with high external reserves and weakness of effective demand internally to encourage domestic expansion and in that way stimulate growth domestically, and in the rest of the world as well. There is need for recognition of the desirability of a more appropriate mix of monetary and fiscal policies—relying rather more perhaps on fiscal policy than on monetary policy, high interest rates, and direct restraint on capital transfers.

Nor have developments in the world capital markets been encouraging. Interest rates for long-term capital borrowings are discouragingly high. Even at those rates the most creditworthy borrowers have difficulty in gaining access to capital markets. Financial flows to developing countries have been falling, and the international bodies which need funds to channel to those countries have difficulty in raising them. I believe capital should in principle be permitted to move as freely as possible. Such transfers can contribute much to our objective of a strong and steady increase in world production and trade.

This said, I now want to strongly emphasize how much recent economic trends have underlined the need for a scheme to supplement international liquidity. Such a scheme would not be directed specifically to meeting balance of payments deficits as ordinary fund drawings are but more to creating additional reserves for all countries. At the last Annual Meeting many Governors urged the need for early action to create a new reserve asset. Subsequent events have confirmed the opinions then expressed. It is particularly timely, therefore, that an Outline of a scheme for creating additional international liquidity should be before Governors at this Annual Meeting.

Some Achievements in the New Scheme

Various questions will be raised about the content of the Outline of this novel and radical system of special drawing rights, and there will assuredly be some criticisms. I believe, however, that the substance of the proposals should give Governors great satisfaction and should be endorsed.

The Outline provides for the creation of a new reserve asset which will be available unconditionally and automatically and will be permanent in character. The new drawing rights will be guaranteed in terms of gold value and will bear a moderate rate of interest. As Mr. Schweitzer has said, the new asset has characteristics which “make it an international asset worthy of standing side by side with gold, reserve currencies, and existing reserve positions in the Fund.” There can be no doubt that the proposal we have before us represents a real step forward.

You will recall, too, that many of us stressed at the last Annual Meeting that any new scheme should be under the management of the Monetary Fund. On this point, I think the Governors’ wishes have been met. The Fund Executive Board was closely involved in hammering out the scheme with the Group of Ten. The Outline provides that the Fund will administer the new scheme through a special drawing account. All decisions on the timing and allocation of drawing rights under the scheme will be taken by the Board of Governors of the Fund—that is, by ourselves. Finally, where there are questions as to whether the special drawing rights have been properly used or not, it will be the Fund which will make the judgment. So I think we can fairly say both that the standing of the Fund has been preserved and its status and responsibility have been enhanced.

There is another equally important basic aspect of the scheme which accords with our earlier views. Many of us suggested that any new asset created should be distributed universally and that it should be allocated on a nondiscriminatory basis. The new special drawing rights will be automatically available to any Fund member who wishes to participate in the scheme, and the drawing rights will be allocated to such participants on the basis of Fund quotas. So again I think the Board of Governors should be pleased that in this scheme we have a proposition which recognizes the principles of both universality and nondiscrimination.

Some Questions that Remain Unanswered

Perfection is all too seldom realized in real life. So it is understandable that there are features of this scheme which will probably draw comment from some, though I hope few, quarters.

There is the question of the 85 per cent voting majority and the right of veto which this may give to some groups of countries. Personally, I am not unduly concerned about this provision. If we are to have an effective scheme for creating additional international liquidity, there must be near unanimity in favor of the scheme or it will not work. So I think that the problem of the 85 per cent voting majority may be of less importance in practice than it appears on paper.

There is also the problem of the limits to both the creation and actual use of the new asset. First, there is a limit on the initial allocation of SDR’s and on their use by participant countries. And there is a limit on the extent to which participants have to accept SDR’s. The first limit is clearly necessary if countries are to be prevented from financing deficits indefinitely at the expense of others. Equally, a limit is necessary if participants are not to be compelled to accept SDR’s from others without limitation in exchange for their own reserve assets of a different kind.

And I stress the further argument that, if too large an amount of the new asset is created initially, it may be difficult for it to acquire an appropriate first-line status.

It is important in a scheme as significant and far-reaching as this that we should proceed with responsibility and care. There will undoubtedly be opportunities to improve the scheme in the light of experience. It is better to proceed carefully than to invite difficulties in the early stages. On the whole I think the safeguards built into this scheme should help it toward success and improve its chances of growing into something greater.

There may be some regrets on the part of developing countries that the liquidity proposals are not specifically directed toward meeting development needs. I appreciate the concern of the developing countries. Nevertheless, I believe that the present scheme will be of positive benefit to them. These special drawing rights will add to their reserves and to this extent will ease their immediate reserve situation.

Furthermore, it is not an accident that the flow of aid has been slowing down in recent times simultaneously with a check to the growth in world production and trade. If special drawing rights can improve the economic climate and sustain confidence in the financial world, this is bound to improve the possibilities for increasing aid to developing countries as well as improving their export markets and the availability of capital to them. So for these varied reasons I commend the special drawing rights scheme to the developing countries. I believe the scheme could be of substantial and continuing benefit to them.

Implementation of the Scheme

In my opinion it can be truly said that the Board of Governors has before it an acceptable scheme for creating international liquidity in time of need. But we have not yet cleared all our hurdles. Much remains to be done before the scheme is brought into operation. I see it as critically important that, during the next 12 months or so, momentum shall be maintained.

It is particularly important that the scheme should not be held up by premature arguments about any one country being in balance of payments deficit. Surely the liquidity needs of the world transcend any question about the balance of payments situation of any particular country, important though it may be. In considering the “activation” of the scheme and the amount of the drawing rights to be created, it would be quite proper to take into account the rate of growth of the traditional forms of reserve assets. Nonetheless, if at any time the facts indicate that there is an over-all need for more liquidity, the scheme should be activated without further delay.

While we should be reasonably conservative in deciding the amount of the initial allocations of drawing rights, I strongly feel that the 85 per cent voting majority should not be used to limit allocations to an amount so small as to have little effect in ensuring a degree of liquidity sufficient for world needs. I hope it will not be difficult to reach argreement on these matters.


On earlier occasions I have referred to the problem of gold. The Fund Annual Report indicates that official gold holdings fell slightly in the course of 1966. I do not think there can be any doubt that the fixed price for gold has had a depressing effect on gold production and on the proportion of gold output which finds its way into official reserves. I must repeat what I have said before that the time is overdue for a Fund study of the many aspects of gold production and the contribution it makes to world monetary reserves.

It may be argued that the new facility will reduce the need for gold. I cannot see it that way myself. Behind the special drawing rights facility stands the Fund and behind the Fund stand gold subscriptions. I still maintain therefore that it would be wrong of us to neglect the contribution of gold, which I believe will remain the foundation of our international payments system for a long time ahead.

Reform of the Fund

The Resolution before the Governors on international liquidity also provides for more work to be done in relation to improvements in the present rules and practices of the Fund. Some of the proposals have been formulated in detail. Others, including perhaps the more significant of them, have not. In requesting the Executive Directors to report to us further on this matter, I can say that Australia will approach these proposals—and any others that may be put forward in this context—with an open mind. Some of the proposals elaborated so far appear to us broadly acceptable. However, it is appropriate to say, at this stage, that on the information available to us we would not favor major proposals to render the operations of the present Fund more restrictive than they now are. In particular, proposals to raise to 85 per cent the voting majority required for general increases in quota, or for decisions relating to Fund policies governing drawings in the credit tranches, would not be favored by Australia.

In saying this, however, I am not unmindful that it would be possible in special circumstances to envisage agreement on special increases in Fund quotas for some major member countries which, taken together, would lift their combined quotas closer toward the veto level existing in the present Articles of Agreement.

Of course, the present Articles of Agreement are capable of improvement. I acknowledge the debt we owe to those who have focused our attention on possible changes. However, improvements are one thing. Radical changes which cut at the roots of the mutual contract into which members of the IMF entered after Bretton Woods are another. We will need to exercise care in our examination of these matters.

Mr. Chairman, in my address to the Board of Governors, I have concentrated on the scheme for special drawing rights and on the proposal regarding modifications in the rules and practices of the Fund. I believe it is of the greatest importance that work should proceed apace on these two subjects in the Fund, and I therefore support the Resolution and commend it to my fellow Governors.

Last year, some of us voiced misgivings regarding the outlook at that time for the international trade and payments system. What was said then was borne out to some extent by the check to the advance of the world economy which took place in the second half of 1966 and the first half of this year. For the year ahead, we can take comfort from the strong upturn now occurring in the United States economy and from the hopes that have been expressed regarding developments in other major industrial countries. Let us trust that these forecasts will be fulfilled, for these things are important to all of us, primary producers and industrial countries alike.

In conclusion, may I congratulate both the Fund and the World Bank for the help they have given countries like my own and the undeveloped countries. Without their efforts, I am certain that world trade and development would not increase in the way we have known it to increase over the course of the last few years.

Statement by the Governor of the Fund and Bank for Malaysia—Tan Siew Sin

In the first place, I would like, on behalf of our Delegation, to express our appreciation to the Government of Brazil for the cordial welcome and generous hospitality extended to us. We meet today in this beautiful city of not only a very large country but a country with a wonderful future, and we hope that that future will be as good as what its people wish it to be. . . .

The main issue before this session, insofar as the Fund is concerned, is, of course, the question of international liquidity and the Outline scheme to create special drawing rights within the Fund. I would like to say a word or two on this proposal, and I should add that I am doing this not only on behalf of my own country, Malaysia; I am also doing this at the request of a number of countries in Southeast Asia, which among them cover an area of about two million square miles and have a combined population of about 200 million people. I do not wish to comment on the technical aspects of this scheme, as this is a matter on which our technical experts are more competent to advise than mere amateurs like Ministers of Finance. I do wish, however, to put on record, on behalf of these countries of Southeast Asia, both our views and our hopes on the broad aspects of this scheme. While we appreciate that it is largely designed to meet the needs of the industrial countries and is, by the very circumstances of its birth, a compromise between differing points of view, it nevertheless constitutes a step in the right direction. In any case, it represents the broadest possible area of agreement among the industrial countries, which are most concerned with this matter. As such, we accept that this is the furthest that they can go at this stage of the game.

At the same time, we in the developing world would be less than honest if we were to declare that we welcome it with wild enthusiasm. If, however, this single step forward could be the forerunner of many more steps and if, as Mr. Schweitzer stated in his opening address, this scheme is “capable of further development,” and such further development is directed toward the needs of the developing countries, this move would certainly be a welcome one. Mr. Woods reminded us in his opening address of an old proverb that a journey of a thousand miles begins with a single step. We in the developing world, therefore, hope that the second and further steps of this journey will not be unduly delayed, because these subsequent steps could and should be far more relevant to our needs which are as urgent as they are vast. In other words, we appreciate the necessity for a modest beginning, but let us hope that this modest beginning can lead to something which would be more specific to the problems which confront the greater part of humanity, that is, the developing world. Speaking of the immediate future, this scheme should make it easier for the industrial countries to adopt more liberal trade and economic policies toward the developing countries. We certainly hope that this is the kind of development which we can look forward to as one of the first fruits of an easier payments position in the industrial countries.

It is also encouraging to note that the Fund has met with some success during the year to lengthen the list of currencies which can be used for drawings on it. There are presently 21 currencies in this list, compared with 16 at this time last year, consisting largely of the currencies of the rich industrial countries, although the currencies of a few developing countries, most of them being Article XIV members, are also included in this list. The Malaysian dollar was so included in March 1967, but this status was acquired at a stiff price, namely, the loss of interest earnings as a result of the transformation of interest-bearing external reserves into an increased reserve position in the Fund. Furthermore, the transformation of such reserves into a mere reserve position with the Fund implies some restriction on the use of the reserves so transformed, and unlike the currencies of Article VIII countries, Malaysian currency is not accepted for repurchase, which imposes a further restriction on its use. In order to alleviate some of these disadvantages and to induce a fuller participation on the part of more members, particularly the developing countries, in furthering the aims of the Fund, I would suggest that the Fund should seriously consider paying a reasonable return on the currencies of developing countries used for drawings on the Fund. I am aware, of course, that this policy, if adopted, will necessitate an amendment to the Fund’s Articles of Agreement, but I suggest that these rules are man-made, and hence not sacrosanct, and should be amended if changing circumstances so require. After all, the Fund has achieved a net income of US$50 million plus another US$41 million income from its investments for the fiscal year ended April 30, 1967 and is wondering what to do with it, and I have a feeling that, even if our suggestion were adopted, it would reduce the total amount still available for distribution, if this is deemed desirable, by a negligible figure.

At past meetings, I have constantly referred to a basic problem of the developing world, viz., the need to secure fair terms of trade, our chief disability being that we are paid less and less for what we largely export, i.e., primary commodities, while having to pay more and more for what we largely import, i.e., manufactured goods. Secondly, freight rates of the shipping companies, and the overwhelming bulk of such ships is owned and controlled by the industrial countries, are heavily loaded against both the exports and imports of the developing world, though some are discriminated against more heavily than others. Thirdly, the manufactured goods of the developing world are all too often denied reasonable terms of access into the industrial countries. It is becoming increasingly clear that the principles of GATT are being implemented in such a way that GATT has become a club run by the rich for the benefit of the rich.

Although GATT rules permit the establishment of free trade areas and customs unions, such as the European Economic Community, such arrangements are, by their very nature, more suited to conditions in developed countries. On the other hand, any proposal to introduce new preferential duties in favor of the less developed nations, such as those adopted by the Australian Government with effect from April 12, 1966, requires a specific waiver of the provisions of GATT forbidding the creation of new preferences. While it is not suggested that there was any undue delay in the granting of the waiver by the Contracting Parties on that occasion, we in the developing world urge that the GATT rules should be modified in such a way as to facilitate such arrangements. . . .

I shall now take the case of my own country, viz., Malaysia, as an example to illustrate my point. Between 1960 and 1966, the unit value of Malaysia’s natural rubber exports, our most important export commodity, fell by about 38 per cent from an average of 35 U.S. cents a pound to an average of 21 U.S. cents a pound. Since then, the price has fallen further, and only a little while ago touched a level of 15 U.S. cents a pound, its lowest price in 18 years. Although the volume of rubber exports expected for 1967 is estimated to be about 26 per cent higher than that exported in 1960, estimated export earnings for this year will probably amount to only about two thirds of the sum received in 1960. I need hardly add that the prices of manufactured goods which have to be imported by us have steadily risen, or that the terms of trade have equally, steadily, and correspondingly deteriorated. Since 1960, the foreign exchange loss incurred by Malaysia as a result of falling commodity prices has been of the order of US$1,807 million, which represents more than 57 per cent of our estimated gross national product for 1967, or nearly 1½ times the country’s gross estimated export receipts for 1967, or 6¾ times the amount of official net loans and grants received during the period 1961-66, or more than 3½ times the inflow of both private and official long-term capital during this same period.

To illustrate my point further, I might add that a drop of one Malaysian cent in the price of natural rubber over a period of one year results in an annual loss of nearly US$7 million in export earnings. One can come to the valid conclusion from the figures which I have given that if Malaysia had been given fair terms of trade we would not need any aid from anybody, because the difference between what we actually received and what we should have received was 6¾ times the amount of official net loans and grants or more than 3½ times the inflow of both private and official long-term capital during this period. In fact, not only would we not require any aid from anybody, we would be in a position to give aid to others, and this brings me to the main theme of my statement. . . .

Mere project financing is only a palliative, and at the moment it is treating only the symptoms rather than the causes of the disease. The basic causes are, as I have stated already, three in number, viz., (a) uneconomic prices for primary commodities, (b) excessive freight rates for the goods of the developing world, both exports and imports, and (c) difficult terms of entry into the industrial countries for the manufactured products of the developing world. I am, of course, aware that at least two of these subjects are being studied by bodies sponsored by the United Nations, but one cannot help feeling that the Bank and Fund would be the most appropriate institutions not only for the study of these subjects but for the implementation of schemes which such studies could well produce.

Though the United Nations was asked to take over these tricky subjects, it is clear that this body does not possess the financial resources to implement any scheme, however soundly conceived, which could tackle the root of the problem. On the other hand, the Bank and Fund are the only two institutions in the world which have the resources to implement sound and viable schemes, however vast such schemes might be, so long as the will to help is there. These two institutions can also act expeditiously because five or six of the largest industrial countries between them represent more than 50 per cent of the total voting power. The apparent unwillingness of the Bank and Fund to tackle the basic problems of the developing countries will inevitably give rise to a growing belief in the developing world that the Bank is not really interested in the basic reconstruction and development of Asia and Africa as it originally was with the reconstruction and development of war-torn Europe. This would be a very great pity indeed. . . .

We in Malaysia, therefore, warmly welcome the Resolutions to be put forward by a number of countries urging the Bank and Fund to concern themselves directly and closely with the question of fair prices for primary commodities. We would like to congratulate them on their initiative, and we hope that the Bank and Fund will respond suitably and spiritedly to the challenge which has been presented to them. That response could well signify the beginning of a new era in the history of these illustrious institutions and open up a new vista of hope for the developing world. In the process the shadows of today would be lifted and make way for the promise and fulfillment of tomorrow.

Statement by the Governor of the Bank for Germany—Karl Schiller

I am very happy and honored to address this distinguished assembly. I should like to say how very much impressed I am by the hospitality of this great country of Brazil. I am overwhelmed by the vast economic possibilities and by the social needs of this continent. I am deeply impressed by the efforts made for growth and stability. My greatest wish for this country is that it may be able to make further progress on the road toward a higher standard of living. You may be sure you are not alone in your struggle for economic and social development. The fate of the developing countries is also our own fate. The developing countries and the old industrialized countries are living in one world. We all—for instance, Brazil and Germany—are in this sense united in an Alliance for Progress.

The Bank and the Fund have again this year been doing excellent work and have submitted impressive Reports. I should like to thank them for this and to express our congratulations to President Woods and Managing Director Schweitzer.

In the field of international monetary policy we have reached an important stage. Our task today is to consider measures to be taken in case there should be a need for additional international liquidity. That is a challenge for all of us. There was fruitful cooperation at the joint meetings of the Fund and the Group of Ten. These joint efforts have now resulted in a concrete proposal for a system of special drawing rights within the IMF. I will try to stress the main principles and the main necessities underlying this proposal.

1. The first principle is that the special drawing rights are universal, that means they are for all member countries. Therefore, I do not hesitate to call the new system, laid down in the Resolution before us, the most important contribution to monetary policy since Bretton Woods.

2. The new mechanism for the expansion of liquidity is based on the principles of credit and repayability. This is the right combination. As in the national field, money is created by credit. So the new drawing rights shall be controlled by volume and speed in their creation. All of us know from daily experience what possibilities and also what dangers and temptations lie in such mechanisms. Therefore, we must take care that the new instrument is employed wisely.

3. True, no monetary system can be free from deficiencies. Man is denied the achievement of perfect solutions. It would, however—in the words of the Bible—be “not to see while seeing,” if we were to attribute today the balance of payments crises merely to the actual system as such. Our problems depend primarily on our behavior.

4. At any rate, I do not believe that one could definitely conclude that today there is an acute widespread shortage of liquidity. But when the balance of payments deficits in the reserve currency countries diminish, X-day will surely come. Therefore, we have to prepare for a future contingency. Consequently, the further work laid down in the Resolution before us must be continued and concluded with due speed. It will take some time anyway until the new drawing facility becomes available. In activating the system we should proceed with caution—not the least for the purpose of gathering experience with the new instrument.

5. The decision-making process agreed upon warrants that the new facility can count on a broad basis of trust. The new supplement to conventional monetary reserves must be supported by a large number of countries. During the first basic period it will be important to establish confidence in the new facility and to enable member countries to get used to it. The system will function properly only if the drawing rights are not permanently employed by some countries with chronic deficits and do not accumulate in a few surplus countries. The new drawing rights must not be a remedy against national balance of payments deficits. They should be applied only to global needs. Also, the system must not result in prolonging imbalances and postponing processes of necessary adjustments.

6. Therefore, the principle of reconstitution is an essential of the new system. The new system shall be an instrument to favor world economic growth but shall not become a further way to favor world inflation.

7. The draft Resolution before us concerns the creation of drawing rights and the amendment of rules and practices of the Fund. My Government approves the Resolution. The two are for us a single entity. We wish to propose that—parallel to the amendments of the Articles of Agreement which have to be made to create the new special drawing rights—studies be undertaken to establish what reforms of the IMF Articles of Agreement are necessary. Between the new drawing rights and the reform of the Fund there are important points of logical interdependence. Practical work done within the IMF too has shown that several rules and business principles have to be adapted to the new situation. The member countries of the European Economic Community have worked out joint proposals for these studies. We attach a great importance to this work.

For practical as well as procedural reasons, all amendments of the Articles of Agreement proposed should be considered by the Board of Governors and thereafter by Parliaments and should enter into force at the same time. Hence, the work carried out within the IMF must be concluded simultaneously. . . .

I would now like to make some comments in respect to the economic position of my own country:

1. Last year our country ran into a significant recession. This has been reflected in our foreign trade balance development. During the first eight months of 1967, German imports were 6 per cent lower than in the year before; exports, however, continued to rise vigorously, by 9 per cent, during the same period.

This development in our balance of trade is an “import deficit” rather than an “export surplus.” It has given rise to concern in some of our partner countries. But you may be assured that we do not want to pursue any beggar-my-neighbor policy by exporting recession. We are aware of our responsibility for international trade. Also for that reason we have—since the beginning of the year—taken decisive measures to revive economic activity. The Federal Government has carried out a first public investment program involving about DM 2.5 billion, and now, in September, we have started a second public investment program comprising DM 5.3 billion. We also stimulated private investment by special depreciation allowances. The Bundesbank has lowered its discount rate by stages, from 5 per cent to 3 per cent, and has reduced the minimum reserve requirements seven times altogether. The measures since the beginning of the year have meanwhile brought the recession to a standstill. The level of production, however, is still low, and upward forces are still weak. But I am firmly convinced that the rapid and straightforward decisions on the second investment program will strengthen the forces of the market and initiate a revival on a broad front of economic activity without any danger to our stability.

2. Unlike several other countries, our conflicting aims are not tensions between the development of domestic demand and the balance of payments equilibrium. On the contrary, only by strengthening our domestic demand can the foreign trade balance be brought back to a better equilibrium. Sometimes in our country there seemed to be another set of conflicting aims, i.e., between a policy of expansion and the necessities of the medium-term financial planning. We are trying now to overcome this conflict by a “twin program,” by consolidating our budget on the one side and by mobilizing an investment budget on the other side. Thus the so-called German double-talk policy in fact makes good sense.

3. Along the same line we have contributed to the international leveling of interest rates. In this way our surplus in the balance of trade has been compensated by short-term money exports and by long-term capital exports out of Germany. Today, the Bundesbank’s currency reserves of a little over $7 billion are no higher than they were at the end of 1966 and at the end of 1965.

4. In order to create the instruments of a modern policy of balanced growth, the German parliament has passed an “Act to Promote Economic Stability and Growth,” which is—in my eyes—a modern version of the old “Employment Act” of the U.S.A. Our new law provides the legal basis for a global monetary and financial guidance to our market economy, to vary income tax rates by 10 per cent upward or downward, to facilitate investment by tax bonuses, and so on. And now we possess the legal background for a “concerted action” between trade unions, employers’ federations, and the Government to work out “orientation data” for an adequate economic behavior of the important groups of society.

5. As a member of the European Economic Community and as one of the important world trading nations, the Federal Republic of Germany is aware of its over-all responsibility for world trade and for the world monetary system. As in the past we are also in the future ready to mediate differences of opinion in the international field. For us the activity of the World Bank and the new developments within the Fund are milestones on the road to a better world, milestones on the road to common progress for all people.

Statement by the Governor of the Fund and Bank for Japan—Mikio Mizuta

I should like to begin by expressing my warm appreciation of the hospitality accorded to us and the excellent arrangements made for this Annual Meeting by the Government and people of Brazil and the city and citizens of Rio de Janeiro. I should also like to pay high tribute to the excellent Annual Reports made by the Fund and the World Bank Group and to the most lucid and penetrating presentations made at the beginning of this meeting by Messrs. Schweitzer and Woods.

For the past several months, people interested in international finances have focused their attention on the progress of the negotiations on international liquidity. And we, who are responsible for the management of international financial affairs, have been sharing a common hope that the Outline of a plan for the creation of a new reserve facility would be worked out before this Annual Meeting in Rio de Janeiro. Now, as we have all been expecting, such an Outline has been presented to us attached to a draft Resolution for consideration. This Outline is, indeed, the fruit of international cooperation, produced through the concerted efforts and collective wisdom of many people. I believe that this Annual Meeting, which will pass a Resolution on this Outline, will mark the greatest step forward in the 20 years since the creation of the International Monetary Fund and will herald a new era in the progress of international finance.

In statements at previous Annual Meetings, our Delegation emphasized the importance of reaching agreement on a contingency plan at the earliest possible date, in order to prevent a shortage of international liquidity, if and when it arises, from interrupting growth and development of the world economy and in order to ensure confidence in the prospects of international monetary stability. With regard to the contents of the plan, we advocated that it should be compatible with the evolution of the existing system and should contribute to greater stability of the international monetary system; that the Fund should be the agent to manage the new facility because of its profound experience in the international financial field; and that too close a link with gold would not be desirable in the creation of a new reserve facility, not only because of its unfavorable impact on the present international monetary system through possible acceleration of the propensity to hold gold but also because of the danger that it might lead the world economy ultimately into contraction. Furthermore, we maintain that the new reserve facility should be created for and distributed to all member countries of the Fund on the basis of universalism and nondiscrimination; that it would tend to merge with the existing drawing rights in the Fund in its economic sense since both in effect represent the right to draw other participants’ currencies; that it should therefore be used only to meet balance of payments needs; and that due regard should be paid to assure equity and order in the holding and use of the new reserve facility. In the light of these viewpoints, we positively and fully support the Resolution to establish the new reserve facility. I sincerely hope that the amendment of the Articles of Agreement based on this Outline will come into effect, and confidence in the prospects of the international financial system will thereby be firmly assured as soon as possible.

The international monetary system in the future will, I believe, be neither a system subject to the physical limitations of a natural product such as gold nor a system too dependent on economic management or on the heavy responsibilities of a single country, but will rather in due course inevitably evolve into a system managed by the collective wisdom and collective responsibility of all countries. The new reserve facility to be created deliberately in accordance with the Outline becomes a good asset only when it is properly managed and controlled. I do not believe I shall be going too far in saying that such collective wisdom and collective responsibility of all countries will be increasingly called for as years go on. The spirit of international cooperation, needless to say, would be of utmost importance for the future international monetary system, but I would like to add that the maintenance of world peace and discipline in the management of economies are the basic prerequisites for its smooth functioning.

The creation of a new reserve facility does not ensure a final solution to international financial problems. We still have before us many problems that need our continuous study. To begin with, how would reserve assets as a whole, including the new facility, be properly used and held? Secondly, how would the improvement in the balance of payments position of the United States, a reserve currency country and the foremost supplier of long-term capital in the world as well, be achieved in compatibility with the sound growth and prosperity of the world economy? Would it not be necessary for the improvement of the U.S. balance of payments to expect also cooperation on the part of the surplus countries as well? Thirdly, would it not be necessary to make further efforts for improvement in the balance of payments adjustment process? I hope studies on these questions will be further pursued.

This year’s Annual Report of the Fund points out that the period from the beginning of 1966 to the first part of 1967 witnessed a substantial change in the international economic environment. It suggests that it is of great importance for the major industrial countries to achieve an early resumption of economic growth while avoiding undesirable pressure on prices, in order to cope with the economic slowdown which is widespread and pronounced. It also points out that the U.S. authorities are confronted by the conflict between domestic economic growth and external balance and that fulfillment of the domestic objective of restoring the economy’s growth rate to its noninflationary potential is not only important for the United States but is also in the interest of the entire world. It then notes the important role of economic cooperation to be played by the major countries having a strong reserve position and their adoption of appropriate adjustment policies as well as the need for the U.S. authorities to pursue easier monetary policies only with the utmost caution.

I should like to stress that we should be careful, in the years to come, to maintain the momentum of growth and prosperity of the world economy through mutual cooperation of the member countries. Needless to say, each country should carry out its economic policies with discipline, but I believe that the international monetary system, which should be further elaborated and improved upon by ourselves, could provide a basis which would free all countries from taking excessively restrictive policies, and enable them to follow the path toward expansion of world trade and prosperity of the world economy.

Turning to the domestic economic situation, the Japanese economy entered a course of recovery in the autumn of 1965 and has since been in a new phase of rapid economic expansion. Plant and equipment investment continued on a steady upward course, and consumption remained high. Indications were evident of a strong trend of expansion in every field of economic activity. Although prices have been relatively stable for these several months, the increase of exports lagged behind the continued increase of imports. As to the long-term capital account, the inflow of foreign capital was relatively small while aid to developing countries and export credits showed a marked increase, resulting in a very large net outflow of capital. The balance on nonmonetary transactions thus turned to a deficit since the beginning of this year. The increase of imports reflected the strong demand of the domestic economy, and the slump of exports was also caused chiefly by the strong domestic demand and partly by the economic situations prevailing in the United States and Europe. Under these circumstances, we took a combination of fiscal and monetary measures, at the beginning of this month, including deferment of a substantial amount of government expenditures and an increase in the official discount rate, in order to ensure that our economic growth would be sustainable.

I think it is important for us to maintain a sustainable growth of our economy on a long-term basis also. I believe that flexible and effective management of a fiscal and monetary policy mix is necessary to attain this objective.

Next, I wish to speak on another important problem facing us, that of promoting economic development in the developing countries.

Looking at the progress of aid to the developing countries from the developed countries, one is struck by the fact that the total volume of aid has recently been decreasing rather than increasing. For example, the total for the DAC countries in 1966 amounted to the equivalent of $9.9 billion, about 4 per cent less than the equivalent of $10.3 billion given in the previous year.

In the meantime, Japan’s aid to developing nations has increased considerably. It is my great pleasure to be able to note here that in 1966 it increased by more than 10 per cent over the previous year. This means the amount of our aid has doubled since 1963. We have made strenuous efforts in this field, and we expect to continue our efforts to the extent circumstances permit. . . .

We all realize the importance of the United Nations Conference on Trade and Development which will be held in February 1968. The proposal for a scheme of supplementary financing, which is expected to be on the agenda of the Conference, will, I think, require very careful study from all angles since it involves many problems, including its relationship to the Fund scheme for compensatory financing. . . .

I would like to conclude my statement by expressing my confidence that the International Monetary Fund and the International Bank for Reconstruction and Development and its affiliates will exert continued efforts for the improvement of the international financial system and for the promotion of economic assistance to the developing countries and will thus make full contribution to the stability and growth of the world economy.

Statement by the Governor of the Fund for the United Kingdom—James Callaghan

I wish to express my gratitude to the Government of Brazil for the hospitality that they have extended to the International Monetary Fund and to the World Bank in inviting us to meet here in Rio de Janeiro—a city famed throughout the world for its outstanding natural beauty. In Britain we are very mindful of our historical association with Brazil, which has extended over the centuries, and of the links of trade and commerce that have given us a deep knowledge and understanding of each other.

It is also a pleasure to express the appreciation of the British Government to the Managing Director and to the staff of the International Monetary Fund and to the President and staff of the World Bank for the work that they have done during the last 12 months and for the Reports which they have laid before us. It is my privilege to see a great deal of the work of Mr. Schweitzer and of Mr. Woods, and the world is fortunate to have two such outstanding public servants.

It is a pleasure to see the membership of the Fund and Bank growing year by year, and I am very glad to join in welcoming The Gambia and Indonesia. I look forward to Botswana and Lesotho becoming members in due course.

I shall, of course, have something to say about two important initiatives that will take up much of the time of this Conference. One is the proposal for special drawing rights. This is something which, for my part, I warmly welcome. The other is the case for an early and substantial replenishment of the funds of the International Development Association. This is a need to which I give great emphasis.

But before I come to these two matters, I wish to refer to the disappointing rate of increase in world trade during the last 12 months. For this, the major industrial countries must accept primary responsibility. I remind the Conference that the primary objective of both the International Monetary Fund and the World Bank is to ensure expansion of trade and the development of the resources of all their members. We cannot claim that we have succeeded in either direction in 1966/67.

Indeed, in the early months of 1967 world industrial production actually fell slightly—a situation we have not seen for close on a decade—and this has had an adverse effect on the developing countries as well as on the developed countries.

As the OECD has pointed out, this slowing down in world trade has occurred as a result of deliberate reduction of demand in three major countries, namely, the United States of America, the Federal German Republic, and the United Kingdom, while simultaneously a number of other countries were following a similar course. This deliberate action was taken in each case in order to correct either an excessive pressure of demand at home leading to an inflationary situation or to deal with troublesome balance of payments deficits—or to do both. Where these deflationary measures have been taken, they have had a dramatic effect both at home and abroad. Internally, they have led to a loss of production and to high unemployment. Abroad, they have resulted in the slowing down of world trade with harmful effect on other countries, especially on the developing countries—and consequential harm to the very countries that initiated the deflationary measures.

It is clear from our experience of the last 12 months that, despite the studies and reports and recommendations on these subjects, we have not yet worked out how to achieve full employment and a reasonable rate of growth with a pattern of international payments satisfactory to all of us. All these questions need much more study, which must include the factor of business confidence, before we can be sure that an unbroken period of expanding world trade lies ahead.

Meantime what more has to be done to ensure the renewed expansion of world trade and output which is needed by all of us and in particular by the developing countries who have seen a disappointing fall in commodity prices? I myself have just come from a gathering of the Finance Ministers of 26 nations of the Commonwealth, who represent between them 800 million people of whom the overwhelming number are living in the less developed countries.

My colleagues at that meeting expressed great concern about the price and volume of their exports. Rising industrial production in the developed countries is the best way of ensuring increased export incomes for primary producers, but schemes directed to the support of prices at a level fair both to producers and consumers are also valuable. I warmly support, therefore, the Resolution now before us that these problems be studied by the Fund in collaboration with the other international bodies concerned.

The communiqué of the Commonwealth Finance Ministers’ meeting emphasized a further thought that was frequently expressed during our discussions, namely, that countries whose balance of payments and reserve positions are strong and who have a margin of spare capacity are under a heavy obligation to contribute to world prosperity by pursuing suitable expansionary policies at home.

Speaking for Britain, I can say that, within the strict limits imposed by the overriding necessity of maintaining a satisfactory balance of payments, we are following a policy that will lead to a renewal of growth in the United Kingdom during the remainder of 1967 and 1968. We expect that rate of growth to be around 3 per cent per annum, and that this will be consistent with a satisfactory balance of payments. We have no intention of departing from this basic economic strategy, which will prove to be in the long-run interests of both Britain and the rest of the world.

I understand from my colleagues, Mr. Henry Fowler, the Secretary of the United States Treasury, and Professor Karl Schiller, the Minister of Economics of the Federal German Republic, that both of them also expect to see a higher rate of economic growth in their countries, and if this is so then the world can look forward to renewed expansion and to a higher level of world trade in due course.

I hesitate to be more precise than that because I have long since discovered that while we can predict trends with some accuracy we are nearly always wrong about timing. Nevertheless, my view is that the renewal of growth will be discernible by the end of the year and quite obvious by next spring.

Another constant concern for all of us is the persistent tendency of interest rates to edge upward. Difficult though it may be to avoid this at all times, it is harmful not only to industrial countries, especially those with international reserve currencies, but also to the developing world. . . .

I therefore welcome the United States Government’s proposal for a tax increase which will help them to achieve the right blend of fiscal and monetary policies. I very much hope that this courageous and necessary move will enable the world to avoid a repetition of a rise in interest rates of the kind which occurred last year, as, taking the world economic situation as a whole, such a rise is certainly not called for.

Another temporary problem is the closure of the Suez Canal. This is doing harm not only to the developed nations, who can withstand it, but also to a number of developing nations. I do not wish to become enmeshed in the political aspects of the problem, but, from an economic standpoint and from the point of view of the prosperity of the peoples represented here, I very much hope that an early solution will be found. So long as the Canal is closed both trade and aid are hindered, and the world’s people are all the poorer. . . .

I turn now to international liquidity, which is naturally in the forefront of everyone’s mind at this gathering. This is a great moment in the history of international monetary cooperation. The Outline Plan which we have before us will, if approved, ensure that this 1967 Annual Meeting in Rio de Janeiro takes its place in history. Britain intends to vote for the Resolution approving the Outline. There are those who think that it does not go far enough—this view was expressed by some of the developing nations at the recent Commonwealth Conference. Nevertheless, there was general recognition that compromise had been necessary, and therefore the Finance Ministers of the Commonwealth, while putting it on record that they had their reservations, expressed unanimously the strong hope that the scheme would be adopted at this present meeting.

We support the proposal that a detailed legal instrument should be drawn up, agreed, and presented to us by the 31st March next year. If this is done, I can state now on behalf of Her Majesty’s Government that we shall place a Bill before Parliament in sufficient time for the proposals to become law before this gathering meets again next September. I trust that this will encourage others to do the same.

I take satisfaction in the fact that the new plan offers the prospect of introducing a greater element of reason into the management of world liquidity. Decisions to create new drawing rights would be based on a collective judgment about the world liquidity situation. No longer will the supply of new liquidity and the rate of growth of world reserves in total be dependent so largely on the rate of supply of new gold and the balance of payments positions of reserve centers.

Everyone recognizes that the existing system has served us well over the period since the war, but it is no longer capable of providing for the steady expansion of world liquidity which we shall need in the years ahead. Nevertheless, we are not sweeping away the present system. One of the great merits of the new proposals is that they will strengthen confidence in the means of payment which are in use in the world today. Whatever arguments we may have about gold and the reserve currencies, it is clearly in the interests of all of us that both these means of settlement should maintain their place in the world monetary system.

I do not intend to discuss the details of the scheme today, as they will be familiar to all of you. But I think it is worth pointing out that the new special drawing rights will be distributed universally to all members of the International Monetary Fund who participate in the scheme. That is to say, all countries will be entitled to a proportion of the total special drawing rights based on their respective IMF quotas. By this means we have ensured that any addition to the world’s liquidity is not confined to the major industrial nations.

Secondly, as regards reconstitution, I do not believe that, in practice, the arrangements which have been agreed will operate in an unduly restrictive manner. Indeed, I think it will be useful in early years when confidence is being built up. Perhaps later experience will show it can be dispensed with. Reconstitution, after all, will mean no more than a change in the constitution of reserves, substituting one good reserve asset for another.

I should like to make it clear that the United Kingdom intends to include the new drawing rights, when they are created, in their front-line reserves. We hope that other countries will do likewise. When the new drawing rights are treated in this way it will be manifest that they are a supplement to existing reserve assets.

There has been criticism of the voting majority required to create the special drawing rights. This is related to confidence in the new asset. Whatever may be formally laid down on this point, it will always be of paramount importance for purely practical reasons that decisions to create special drawing rights should have the widest possible support, preferably universal support. This is the underlying reality, and it is more important than constitutional niceties.

Another part of the Resolution before us relates to the reform of the Articles of the International Monetary Fund. I support this part of the Resolution too, including the proposition that consideration of reforms should proceed in parallel with the drawing up of the new instrument for the creation of special drawing rights.

Her Majesty’s Government fully recognizes that some changes may be desirable in the Fund after its 20 years of existence, and we are closely studying the proposals already put forward. But we must not allow discussion of these other changes to hold up final agreement on the special drawing rights. We approach this matter with the intention of participating in constructive discussion, the aim of which would be to enhance the contribution that the IMF can make to the development of the international monetary system.

Finally, I cannot leave this matter without paying a very sincere tribute to those who have worked so hard and devotedly to secure agreement, and in particular to Mr. Schweitzer and his staff. I must also mention the work done by the Executive Directors of the Fund and the Deputies of the Group of Ten separately and in the fruitful series of joint meetings which were held during the year, and I would like to single out the Chairman of the Deputies, Dr. Emminger, who, by his energy, fertility of idea, and exactness of expression has contributed as much as any individual to the success of these negotiations.

Discussion of the liquidity problem naturally brings me to the position of sterling in the world monetary system. It is now more than ever clear that we are living and working within a system which is constantly evolving and which must be improved and adapted to the world’s needs. But this process of evolution is not simply a matter of what Finance Ministers and Governors of central banks separately or collectively may decide, however important we may think we are. It is a matter, too, of the needs and wishes of the world financial community. This has been overlooked in a lot of the talk—some of it rubbish—that has taken place about the role of sterling in international financial affairs.

On this I have two things to say. The first is obvious. The international role of sterling is a fact. It is not something which has been fabricated to support the prestige of the United Kingdom or even our economic interests. Nor does it continue because of any stubborn policy on our part to persist in such a role. It continues because it meets a world need: because bankers, traders, investors, and governments throughout the world find it convenient to hold and use sterling. It is noticeable that the fluctuations in the sterling balances, even in periods of considerable pressure, have been relatively small when compared with the total amounts which are held. Pressure on sterling usually arises when the balance of payments of Britain or of the sterling area as a whole looks like being in heavy and continuing deficit. But at present we are not in that position. Indeed at the recent Commonwealth Conference, the Finance Ministers expressed their conclusion that the sterling area showed the prospect of considerable improvement in the balance of payments and of a surplus in 1968, although the amount will be affected by the length of time the Suez Canal remains closed.

Sterling also comes under pressure as a result of a weakening of confidence which can arise, for instance, because of war in the Middle East or disturbances in Asia. These events have little or nothing to do with Britain’s economic position, but they can lead to temporary difficulties because the relationship between Britain’s short-term liabilities and short-term liquid assets is less than satisfactory. It is that relationship which needs improvement in order to achieve a better balance. There is, of course, no difficulty about the size of Britain’s long-term assets compared with her liabilities—our world-wide assets are substantially in excess of our overseas liabilities. Therefore I have consistently taken the view that the smooth running of the world’s monetary system requires that a shortage of immediate liquidity should be met by the combined operations of the central banks to offset such a shortage. I readily acknowledge with gratitude the assistance which has been given by the central banks and by governments in this matter, which has enabled these so-called confidence movements to be offset.

Against this background I repeat that we do not approach the question of the role of sterling with a fixed determination to keep things as they are. But it goes without saying that we could not contemplate any change which did not take full account of the interests of those who have claims on the United Kingdom. Subject to that, however, we shall adopt a flexible position. We are ready to adapt the sterling system to an evolution in the world’s monetary arrangements, provided that the change comes in a way which will strengthen the world monetary system as a whole.

As to the U.K. economy, the British Government recognizes clearly that the long-term task is to build an economy which will be capable of sustained growth while still maintaining a strong balance of payments and a high level of employment. To cope with their immediate difficulties we took severe measures last year. Naturally they have been uncongenial to our people, but they have been of great benefit to our competitive position. We have enjoyed a period of over-all relative price stability and of wage stability, with beneficial effects on our overseas prices. The British Government has no doubt that a prices and incomes policy is a necessary condition for success in our efforts to break free from “stop-go.” In this aim we have the support both of employers and of organized labor, although there are difficulties about the methods that should be employed. We have now moved out of the period of total wage freeze into a period where wage increases are to be related to increases in productivity. This will continue to be the Government’s policy for the next phase. It is estimated that the underlying growth of Britain’s productive potential at present is about 3 per cent per annum, with a tendency to accelerate. Accordingly, our medium-term economic strategy is to maintain a rate of growth of demand within that figure.

I have spoken before to this assembly about the long-term structural changes that are taking place in Britain—the rationalization of traditional industries, the training for new skills, the emphasis on productivity, and the technological developments in such fields as computers, nuclear energy, electronics, and natural gas exploitation, not forgetting the growing sophistication of British exports. These are long-term policies, but year by year I can see progress in increased efficiency, better management, and improved labor relations.

At the same time we have taken more direct action to strengthen the external balance. One reason for our difficulties was the high level of government expenditure overseas, principally for defense and aid, which grew from £270 million in 1959 to over £500 million last year. We have taken measures to reduce that burden, and these will have an increasing effect in the later 1960’s and early 1970’s. We have also had to take certain measures to limit the outflow of private capital from the United Kingdom to developed countries while leaving developing countries unaffected. It is a regrettable fact that this outflow was making unduly heavy demand on our liquid resources. We are now roughly in a position of equilibrium in the balance of payments.

If we look at the last 12-month period for which figures are available, the year to June 1967, our balance of payments on current and long-term capital transactions, including the normal unrecorded earnings, was roughly in balance, and this represented an improvement of some £275 million compared with the preceding 12 months. Taking all unrecorded movements into account, the balance of monetary movements showed a surplus during this period of some £140 million, compared with a deficit of nearly £ 300 million in the 12 months before.

We in the United Kingdom look forward to better times, as the various measures we have taken bear fruit. Our objective remains unaltered. It is to make the best use of all our resources and to do it in such a way through the Bank and the Fund that we narrow the gap between rich and poor.

Statement by the Governor of the Fund and Bank for India—Morarji R. Desai

Mr. Chairman, may I first of all congratulate you, Sir, on the very discerning address with which you summoned us to our task yesterday at this annual gathering. To our host, the Government of Brazil, all of us owe a heavy debt of gratitude for the excellent arrangements made for us and for the gracious words of welcome with which our present session was inaugurated by the President of this great country. This is my first visit to Brazil and, indeed, to Latin America. India and Latin America are separated by thousands of miles. But we are drawn together by our common endeavors for the fulfillment of the hopes and aspirations of our people. I have no doubt that the present meeting will mark yet another stage in the coming together of Asia, Africa, and Latin America, a coming together which is directed solely against the poverty, hunger, and want among our people. I would also like to take this opportunity to welcome in our midst the new members of the Fund-Bank community. We are particularly happy that representatives of Indonesia are fortunately with us again after a brief interruption.

This year the Bank and the Fund have completed 21 years of existence. Beset as we are with problems of one kind or another from year to year, we are naturally inclined to focus at these gatherings on the difficulties and disappointments of the day. But a year in which our two cherished institutions have come of age is perhaps also an appropriate time to look back at the entire balance sheet of our efforts and endeavors. As Mr. Woods reminded us yesterday, it is during these two postwar decades that the improvement of the well-being of human beings everywhere has been accepted for the first time in history as an international objective and responsibility. At no other time in the past has the concern for one’s fellow men extended so nobly beyond national or racial or religious frontiers. What is more, what has happened in the social, economic, and political fields during the past 20 years in both the industrialized and the developing countries has surpassed the expectations of even the most optimistic among us. In the international league tables which have become fashionable in some quarters, we see from time to time different countries going up or down in respect of the record of economic progress or political stability or social consciousness and individual freedom. But the more remarkable fact is that behind these vagaries of fortune, there lies everywhere an unprecedented struggle and striving for the betterment of the human condition. We have not all followed the same path; nor have many of us followed the same path consistently. But whatever the course of action that we may have adopted from time to time in the light of our circumstances and in keeping with the traditions of our people, there are not many countries in the world, and hardly any in the membership of our two institutions, where the past 20 years have not witnessed a remarkable progress in social, economic, or political fields.

I consider it particularly appropriate to recall this at the present stage, when so many people hitherto committed to the cause of world economic development are beginning to be daunted and even disenchanted by the magnitude of the task that lies ahead. Throughout the developing world there is at present a sense of disappointment about the progress made, whether in achieving satisfactory rates of growth or in mobilizing adequate amounts of foreign aid on reasonable terms, or in securing greater access to the markets of the affluent societies or ensuring greater stability in regard to the major primary exports. It is not uncommon to hear nowadays that the promise of the Development Decade has not been fulfilled, that the resolutions of the first UNCTAD Conference have remained mainly on paper, and that the Kennedy Round has not sufficiently taken into account the interests of the less developed countries—and now to this series of disappointments is added the fact that it has not been possible so far for the richer countries to come to an agreement regarding the replenishment of IDA funds on a substantially larger scale than before.

Among the richer countries also, one senses some impatience with the fact that foreign aid continues to be needed on as large a scale as before, that the poorer countries are not able to pay off their debts with interest in a reasonably short time, that the record of political stability has not been as enduring as one might have hoped for, and that many of the problems, such as control of population or increases in exports or avoidance of inflation, are proving more intractable than what all of us had hoped for. Undoubtedly, there is substance in all these complaints. But if we allow the present mood of mutual disenchantment to settle, there is every danger of our dissipating the considerable gains of the past two decades. By all means, let us discuss our problems as freely and frankly as possible and learn from the experience of each of us. But let us not lose our sense of proportion out of impatience. I was, therefore, particularly happy to note, Mr. Chairman, that you tried to put this question in a proper perspective.

It is particularly heartening in this connection that this meeting should mark the culmination of one of the most outstanding achievements in the history of our two institutions. The specific Outline for a facility to meet the need for a supplement to existing reserve assets, which has been drawn up by the Executive Directors for our approval, is the result of patient negotiations over a period of years; and it represents a kind of compromise which is inevitable in any international undertaking. We ourselves would have preferred a more straightforward approach to this question of the creation of international liquidity. But this is not the time to reopen the arguments and debates of the past. I would, therefore, say simply that we in India welcome the proposed scheme. We welcome it all the more because it fully meets the fundamental requirements to which we attach importance—the requirement that any such scheme should be operated within the trusted framework of international monetary cooperation, namely, the Fund, and that it should apply uniformly to all members of the Fund. We have every hope that under the leadership of the Fund and its distinguished management the scheme will be operated with the breadth of outlook, flexibility of approach, and expert knowledge that we have come to expect from this institution. I should not fail on this occasion to express our appreciation and gratitude to all those who have worked so patiently for this culmination, to Mr. Schweitzer, to the Executive Directors of the IMF, to the staff of the Fund, to the Group of Ten, to the Secretariat of the UNCTAD, and to many individual experts and scholars who have contributed so much to the liquidity debate not only now but even when our two institutions were being conceived.

Looking ahead, it is our earnest hope that the liquidity exercise will not remain suspended in mid-air for any length of time—that the period between the adoption of the contingency plan and the activation of the scheme would be as short as possible. The time for supplementation of existing reserves had already come. Nor is there any need to delay further action pending formulation of very precise criteria and guidelines to indicate the quantum of reserve creation. These are likely to evolve gradually in any event, and the experience of the first few years would itself influence the further evolution of this scheme.

It is understandable that, after 21 years, some need might be felt for possible reform in the normal functioning of the Fund. From time to time, the less developed countries have made many suggestions to bring the Articles of Agreement of the International Monetary Fund more in line with the special and urgent requirements of the developing world. These and other suggestions will have to be examined carefully before any final decisions are taken on improvements in the present rules and practices of the Fund. However, it is our firm opinion that this question of the reform of the present Fund should not be allowed to delay matters in regard to the activation of the scheme for special drawing rights.

One of the main reasons why we welcome the proposed scheme for special drawing rights is because we see a definite link between the creation of international liquidity and the pursuit of more liberal trade and aid policies on the part of the richer countries. While the developing countries need a growing volume of reserves in their own right, they are equally interested in ensuring that the industrially advanced countries are not forced to follow restrictive trade and aid policies for want of sufficient room for maneuver in regard to their balance of payments. It is, therefore, legitimate for us to expect that the adoption of the special drawing rights scheme will facilitate a greater and more assured flow of multilateral foreign aid, that is, of aid which we can count on with certainty over a number of years and without restrictions on its use. . . .

Sir, I do not wish to take any more of your time by referring to many other aspects of international economic cooperation which are uppermost in our minds today, as I have no doubt that some of my colleagues would undoubtedly do so. I would, therefore, conclude by expressing once again our deep sense of gratitude to the Government and the people of Brazil for receiving us so warmly in these beautiful surroundings.

Statement by the Governor of the Bank for France—Michel Debré

It is a great pleasure for us to be enjoying the hospitality of the Republic of Brazil in this famed city. May we tender our thanks and our compliments to the leaders of this great nation.

Here in Rio de Janeiro we shall be confirming, by a joint Resolution, an agreement that has been eagerly awaited. In this connection I wish to express, on behalf of the French Government, a satisfaction equal to that already expressed by other speakers. The agreement arrived at among the ten countries entrusted with the task of drawing up a plan for the improvement of the international monetary system is a reasonable one. We hope that it will prove possible for the agreement to be approved and implemented in the spirit in which it has been drawn up and accepted. The two main objectives of the agreement are indeed useful ones. It is useful to improve the possibilities and the methods of granting international credit; and it is useful also to bring the Articles of Agreement of the Fund into line with the present status of international economic relationships.

Our satisfaction is, however, tempered by a certain concern. However useful it may be, the proposal cannot solve the serious financial problem faced by both the highly industrialized and the developing countries. It is in fact a dangerous illusion to think that the mere maintenance of present monetary practices, even if they are partially corrected by the provisions upon which we are about to agree, will suffice to meet the demands of our time.

Satisfaction, but at the same time concern: it is around these two themes that I propose to develop the opinion of the French Government.

The London agreement on special drawing rights and the proposal to amend the Articles of Agreement of the International Monetary Fund constitute useful reforms.

The special drawing rights provision in no way constitutes a revolutionary step. These rights do not and cannot establish a new currency designed to replace gold. If such were the purport of the agreement, it is quite clear that France would not sign it. The plan provides for the possible extending of credit facilities. Such is the reform proposed, a limited but important one.

The granting of these facilities is of a contingent nature: recourse to the new drawing rights will be contingent upon the prior fulfillment of certain conditions.

It is true that no statement of these conditions appears in the Outline, but this silence is quite natural, since the sole purpose of the Outline is to describe the proposed mechanism and not to detail the conditions of its activation. However, this is a point on which nobody is ignorant. These conditions have been the subject of detailed studies by the experts, and their merit was endorsed by the vote of the Ministers of the Governments of the Group of Ten at The Hague in July 1966.

These conditions are three in number.

First, the mechanism cannot come into play until a world-wide shortage of liquidity has been collectively recognized to exist. This means that it is not possible either to calculate in advance the amount of the drawing rights designed to remedy such a shortage or to specify that a given tranche of these credits should be made available each year.

Second, the mechanism cannot come into play until there is a more satisfactory operation of the existing adjustment processes.

Third, the mechanism cannot come into play until the balance of payments deficits affecting the countries whose currencies are designated as “reserve currency” have disappeared.

These conditions have been dictated by reason. In particular, we are aware henceforth that the accumulation of claims on reserve currencies, especially in dollars, presents serious drawbacks. It is impossible to imagine a mechanism, designed to improve international monetary liquidity through the instrument of credit, functioning properly so long as a persistent deficit in the balance of a reserve currency as important as the dollar continues to supply, in an uncontrolled manner, world-wide monetary liquidity.

Member countries will use the special drawing rights under the control of the International Monetary Fund, and to meet their balance of payments needs. The fact that provision has been made for generous terms and conditions of repayment is traceable to the concept that these drawing rights will be made available during a period of insufficient liquidity. But rules of repayment nevertheless exist. They are categorical rules and quite properly preclude the possibility of any large-scale or persistent use of the rights. Thus, a country that drew its entire allocation at the beginning of the operation of the system would be obliged to repay it in full at the end of a three-and-a-half-year period, and would be unable to make any further drawing until the end of the fifth year.

This agreement regarding the special drawing rights is accompanied by a re-examination of certain provisions of the Bretton Woods Agreement and of the practices of the Monetary Fund.

The Articles of Agreement of the Monetary Fund are now more than 20 years old. In many respects they no longer meet the operational requirements of the Fund. I shall mention only one example: the way in which the reserves of member countries are computed. The drafting of the amendments necessitated by the introduction of the drawing rights thus provides an opportunity to update the Articles.

Above all, however, the rules of the Fund do not take into account the changes that have taken place in the world during the past few years—on the one hand, the industrial development and the sound financial condition of the European countries, particularly the countries of the Common Market, and on the other hand, the growing aspirations of the many young developing countries.

It is therefore proper to request the Board of Executive Directors of the Fund to undertake—in conjunction with their study of the new facility and within the same time limits—a review of certain important specific points of the Articles, for submission to our Parliaments at the same time as the proposal relating to approval of the establishment of the special drawing rights. The parallel execution of these two reforms is, I would recall, one of the conditions of the agreement of the French Government.

However, the fundamental difficulties that affect the economy of the present-day world call for other remedies.

What are these difficulties?

There are two with which we are quite familiar. First, the slowing down of the economic expansion throughout the world, and, second, the widening growth-rate gap between the industrial countries and the young developing countries.

One frequently hears it said that both these difficulties could be remedied by creating new monetary liquidity ex nihilo and claiming for this liquidity the status of a new currency independent of and replacing gold. But can this be taken seriously? A currency is not created out of nothing, any more than political institutions are created out of nothing. Much more is needed at the start than abstract statements or noble pronouncements. A currency is both an expression of an economy and an assertion of confidence in a higher authority capable of imposing a discipline which, in a free world, is a discipline equal for all. The time has not come for an international currency because the time has not come for such a freely accepted, impartial, and universally respected authority. Any currency other than gold is an expression of sovereignty, and if certain currencies, through the power of the economy they represent and the authority of the government that creates them, enjoy great prestige and a great power of attraction and accordingly play a useful role in trade, the national policy that is—and is alone—at the basis of their management decrees that they cannot be equivalent to gold. Any claim to the contrary may for a time deceive some people, but the truth will very quickly become evident. The longer the deception has lasted, the more tragic will be the consequences of this error.

Let us look at things realistically and wisely. What is at the root of the slowdown in world economic growth?

Political strife and military conflict have their share of responsibility. There can be no growth without confidence, and there can be no confidence in a world divided by sectarianism and strife. But there are also the measures that many industrial countries should have taken to avoid overheating their economy. In the face of nothing short of an explosion of demand, especially for public investment, many industrial countries should cut expenditures and curb inflationary trends when they have been compelled to yield. These countries are not suffering from a shortage of international liquidity but from an imbalance between their production capacity and their economic and social development aspirations. Although monetary factors have been involved and have aggravated these difficulties, it is really inflation that has resulted during recent years from the excess liquidity arising in its turn from the persistent balance of payments deficit of the United States.

Thus, the gold exchange standard, an empirical structure that served well in the past so long as holdings of reserve currencies did not exceed the normal volume of working capital, has become an instrument of instability. It could be otherwise only if the countries whose currencies are responsible for the smooth functioning of the gold exchange standard were to subject themselves to a stricter economic and financial discipline than that required of the nonreserve currency countries.

We note that this is not the case. In other words, the gold exchange standard has had its day, and the more quickly we return to the gold standard supplemented by a good organization of international credit, the more quickly we shall provide the world economy with the conditions for recovery.

The special problem of the developing countries does not affect these conclusions.

It is true that no credit mechanism can fully satisfy the aspirations of the young countries and, in general, of the countries whose rapid development is an essential social priority.

Yet how can it be thought that the artificial creation of paper money can provide a solution? Nothing is solved by distributing small quantities of money, and to distribute large quantities of money would very speedily generate unprecedented disturbances of which the developing countries would be the first victims.

To some extent, the problem of cooperation between industrial and developing countries falls within the framework partly of conventional long-term infrastructure loans.

On this point, I wish to convey to the International Bank and to the International Development Association the support of the French Government. Their past action merits praise, even if their action must take new directions in the future. It will then be possible to place additional resources at their disposal, not excluding the contribution that might be made by the IMF out of the income from interest that it is at present hoarding.

But the effort to be made is greater than the means, even the augmented means, of the existing international organizations, just as it surpasses the special efforts that have been made by certain countries, particularly my own.

What I am going to say here is what I have had occasion to say before other international assemblies, especially the Organization for Economic Cooperation and Development, and I have expressed myself in the same terms to the French Parliament. Aid will be given to developing countries only through a clearly accepted sacrifice of part of their national income by the developed countries.

It is not possible simultaneously to preach about aid to poor countries and selfishly to pursue the welfare of the wealthy countries. We cannot at the same time preach about massive aid to the poor countries and lead the rich countries to believe in the possibility of a rapid reduction in their work effort.

It is true that to bring about a better distribution of income is one of the most difficult tasks before us. We shall not make any serious start on this task except by giving priority to an international organization of the market for certain raw materials and certain products, notably tropical products. By stabilizing prices and by organizing stocks of such items we can bring about an improvement in income having its origin in the prices paid by consumers in the wealthy countries. As a counterpart, the producing countries are required to accept certain disciplines, chief among which is that of production. This is the subsidiary difficulty of the problem.

However, to repeat my conclusion, there is no other way. This is the meaning of the draft resolution submitted by the 15 Ministers of Finance who met in Dakar last week. It is for the members of the Fund and Bank to study the problem and the possible solutions to it, including the possible setting up of a special agency. I am convinced that a well-conducted experiment will permit subsequent developments, the value of which will surprise the most skeptical. France, I need hardly say, is ready to take its rightful share in this effort.


My country has had no lack of trying experiences in the monetary field as well as elsewhere, which allow me to affirm that we should beware of theories and fancies.

We have accepted the London compromise. We shall remain faithful to it, on the conditions and in the spirit that I recalled at the beginning of my statement, that is to say, we consent to a possible mechanism for new credits, accompanied by a reform of the IMF, and nothing more.

We are aware that the effort to arrive at a monetary system that answers the political demands and social aspirations of our peoples is only beginning. Such a system rests on certain fundamental precepts: the gold standard, a solid credit organization for the equilibrium and expansion of international trade, an intelligent lending effort for the economic modernization of the young countries, and a world organization of the markets for certain raw materials and certain products. I do not hesitate to say, with formal dignity permitted before such a distinguished gathering as I am addressing, that either we take this course or we shall achieve nothing. The more France is resolved to oppose monetary adventures, even to oppose them alone—though France will never stand alone for long—the more gladly will it take its place and bear its responsibilities when a profitable and realistic financial cooperation, respecting the equality of nations, finally makes its appearance.

Statement by the Governor of the Bank for Yugoslavia—Janko Smole

The general economic situation prevailing in the world today, expertly presented in the Annual Reports of the Fund and the Bank, indicates some economic trends in the developing countries that are of great concern to us.

The rate of economic growth continues to be below the 5 per cent foreseen for the Development Decade, the growth of foreign trade has slowed down, prices of primary products have declined, and the terms of trade of developing countries present the most unfavorable aspect since 1960. The flow of long-term capital continues to be below the 1 per cent of GNP of developed countries. In addition, interest rates and other conditions of loans and credits have deteriorated.

These developments should be considered when we discuss the Outline before us for the creation of special drawing rights. This proposal tends to solve one very important problem of the existing monetary system, that is, its quantitative aspect. I think, however, that we would not fulfill our task if we stop at this first step without deploying all our efforts for further improvements in the existing monetary system. We see many serious shortcomings in the proposal: it was created for and under conditions which have been evolving in the developed part of the world.

For developing countries, the problem of international liquidity plays a special role. The development of their economies imposes on them the necessity for a growing volume of imports, which cannot be reduced below a certain level without curtailing their development plans. On the other hand, the decreasing volume of foreign aid and large export fluctuations are imposing upon these countries difficult tasks of adjustment in their economies to maintain a balance in their external accounts. Under the existing monetary system the developing countries are confronted by a dilemma: to increase their monetary reserves or to finance their development plans. This problem still awaits a solution.

With your permission, Mr. Chairman, I should like to quote the case of my country as an illustration of the problems which other developing countries may also face. In order to speed up its industrialization, we had resorted in the past to a system of trade and customs restrictions in order to protect the development of our industry. This protective mechanism played a very important role in the initial period of our development. However, when new industry was built up, it became clear that trade restrictions could be an obstacle to further progress in efficiency and productivity. For this reason, as well as because of technological advances, we see the opening of our doors to world markets as a way to continuing economic progress. This transition from a closed economy to an open economy requires, however, considerable adjustment, which inevitably entails balance of payments difficulties. This adjustment process cannot be carried out within a period of a few years only, is not restricted to particular projects, and cannot be carried out without adequate external financial assistance. Neither the assistance provided by Bank loans under the present procedure nor by Fund financing of balance of payments short-term deficits is adequate. Nor has the problem been solved by the present special drawing rights facility. The problem, however, remains a crucial one for the integration of developing countries in world economy.

If I may generalize, the international monetary system cannot be regarded in isolation but must be viewed within the context of economic development as a whole. It should contribute to the elimination of a fundamental disequilibrium in developing countries. It seems to me that the absence of this element in the existing monetary system is clearly evident.

The present international monetary system represents a complexity of various instruments of which one—and an important one—is the Fund’s resources. It would be advisable for the Fund to study the possibilities of applying more liberal criteria for the utilization of its resources by developing countries. Furthermore, a link between the utilization of special drawing rights and basic financing should be established. I suggest that this subject be thoroughly explored.

The present quotas of the member countries of the Fund represent the basis for establishing the allocation of regular and special drawing rights. Because of this, the question arises whether the existing formula for determining quotas is taking full account of the special elements inherent in the economies of the developing countries.

The Fund’s resources are intended to alleviate a country’s short-term balance of payments disequilibrium. They must be repurchased within a relatively short period and perhaps at a time when the balance of payments situation is no better than it was at the time of drawing. Here two questions arise: first, the necessity to establish a relationship between the balance of payments situation when drawing and when repurchasing, and, secondly, the need for a reinterpretation of the term “fundamental disequilibrium” if external imbalance is the consequence of sound economic development.

I have indicated some of the problems which I think are of special relevance for the functioning of the existing world monetary system and in respect of which I think certain adjustments in the Fund’s policies and practices are required. . . .

One of the very acute problems today, much discussed by various international forums, is the debt repayment problem which threatens to nullify the net transfer of capital to the areas where the problem exists. The present slowdown of growth is to a large extent the consequence of the debt-servicing problem. Debt service and capital income transfers are already absorbing more than half of the inflow of capital and grants to developing countries. Concrete and urgent action is awaited, especially from our international institutions, for solutions of the debt consolidation problem and establishing means for easing the debt-servicing burden. I think that the Bank and Fund are equally interested in the solution of these problems, each of them from their own sphere of competence. This requires close cooperation between the two institutions. The same applies, in my opinion, to the setting up of a suitable mechanism for the stabilization of prices of primary products, which is an essential element for further progress in accelerating the economic development of developing countries. . . .

World economic and financial problems in general, and, specifically, the problems of developing countries, will shortly be the object of discussions at the second meeting of UNCTAD. This requires preparatory work on the part of the Fund, and the Bank as well, and their full cooperation in this important international gathering. The contributions of the two institutions in the past to UNCTAD activities have been of great value. The active participation of the Bank in preparing the scheme for supplementary financing contributed greatly to the clarification of the complex problems in this field, and I hope that the support of the Bank will continue until practical measures are introduced. Here also, the full cooperation of the Fund would be desirable in seeking practical solutions.

I should like to use this opportunity to express the great appreciation of my Government to the Fund for its assistance in the implementation of our economic reform. My Government’s appreciation goes equally to the Bank for its assistance in financing the modernization of our industry. . . .

In conclusion, it is with great pleasure that I express my thanks to the Government of Brazil for its hospitality to us in this magnificent city.

Statement by the Governor of the Fund and Bank for the United States—Henry H. Fowler

I take special pleasure in participating in this Annual Meeting in Rio de Janeiro.

I am very grateful to the Government and the people of Brazil for their gracious hospitality on this occasion. The beauty of this city, the breathtaking potential of this huge and vibrant country, form a backdrop to this conference that can inspire us all.

The personal experience of viewing at first hand the problems and potentialities of economic growth in Brazil and in her neighboring nations will, I trust, stimulate us all to assist in further efforts to reinforce international collaboration to support economic development.

I am very glad to see among us once again Governors for Indonesia representing that large and important nation and to note that both the Fund and Bank have been able, in the past year or so, to play a helpful, constructive role in assisting Indonesia to deal with a most difficult and trying period of economic stabilization. I know that all of us wish the Indonesian authorities well in the courageous efforts they are making.

It is also a pleasure to welcome to membership in our organizations The Gambia, which last week completed the formalities to assume membership, and Botswana, whose membership resolutions are before this meeting of Governors.

The Fund and Bank have had another highly successful year, the highlights of which have been recorded in their excellent Annual Reports. Mr. Woods and Mr. Schweitzer have summarized the activity of the past year in the Bank family and in the Fund and I will not retrace the ground they have covered so well.

But the events of the year in the usual pattern have been crowned by an unusual, indeed, unique achievement—the successful completion of substantive negotiations for the creation of a facility to meet the need, as and when it arises, for a supplement to existing reserve assets.

This is to be established within the framework of the Fund and is embodied in the Outline Plan for a special drawing rights facility, which is the principal business of this meeting.

Last year we urged joint meetings of the Executive Directors representing all member countries of the Fund and the Deputies of the Group of Ten. It was our hope and trust that from these meetings a specific plan for deliberate reserve creation would emerge to become the subject of action by the Fund Governors at this Annual Meeting. This hope and trust have been fulfilled. The joint meetings have produced results which exceeded expectations, and the United States is grateful to all the Ministers and Deputies of the Group of Ten and to the Executive Directors, Managing Director, and staff of the Fund.

So, at last we, at this meeting, come to the final and logical forum for an international monetary conference to consider what steps we might jointly take to secure substantial improvements in international monetary arrangements looking to the creation of a facility to provide, as and when needed, a supplement to existing reserve assets. Despite 23 years of steady progress since Bretton Woods, we need to assure a world monetary system conducive to a more rational and constructive world economic order.

It would be a grave error, however, to assume that a strong flexible and adequate international monetary system begins and ends with the assurance of adequacy of global reserves. There are other essential elements which require both international cooperation and a responsible approach of national monetary authorities. Two particularly deserve mention, and the assurance to my fellow Governors is that the United States will play its full part.

The maintenance of convertibility of the dollar and gold for international monetary purposes is also essential to a regime of stable exchange rates, which is a primary objective of the Fund recalled to us yesterday by the Managing Director in his notable address.

Nothing in the new arrangements on liquidity is designed to alter the present relationship between gold and the dollar. The United States commitment to the convertibility of the dollar into gold at $35 remains firm. This has been, and will continue to be, a central factor in the monetary system.

Another element deserving comment is the process of adjusting payments imbalances. International cooperation is important here also, for it is difficult without it to make this process work effectively in the complex world today. The continuing expansion of world trade and investment carries with it a corresponding tendency toward a higher absolute level of international imbalance. An improved adjustment process can serve to moderate this trend, and especially to reduce or eliminate persistent or excessive deficits and persistent or excessive surpluses.

The Fund Report calls attention to some of the difficulties encountered in improving the adjustment process. At the present moment, the domestic economic problems faced by industrial countries show considerable diversity. In my country, there is clear need to apply fiscal restraint to what may otherwise soon become an expansion so excessive as to create serious inflationary strains and an increasing balance of payments deficit. Meanwhile, many countries of continental Europe are still in need of stimulus to restore more satisfactory rates of economic growth. This would also reduce their balance of payments surpluses and thereby promote the international adjustment process.

A perfectly even rate of growth is not to be expected either in national economies or in world trade. The recent situation has been marred by sluggish advances in output—and in some instances, contractions—in a number of key industrial nations. If this state of affairs were to continue, or, worse still, to intensify, strains on the international payments mechanism would surely become severe. In particular, the world’s primary producing nations would bear a heavy burden of adjustment.

In many of the industrial nations, a slower advance in output was consciously sought by national policy in order to reduce inflationary pressures. With the adjustment completed, the basis for a more enduring expansion has been laid. Essential as these adjustments in separate countries have been, policies of contraction in surplus countries must not be allowed to continue so long as to prejudice the prospects for an expanding volume of world trade, severely aggravating imbalances in international payments. A constantly expanding volume of trade, well distributed regionally, is essential if acceptable levels of well-being are to be sustained in developed countries and promoted in the developing countries of the world.

A common theme in the recent experience of many industrial nations has been the monetary strains that are the consequence of too rapid internal expansion and too sparing reliance on fiscal restraint. In general, this year has seen some easing of the most severe financial strains. But, in turn, the welcome moderate reduction in upward pressure on money markets internationally has only been achieved, in the main, along with a slowing in the growth of output in some major industrial nations below the rates that are desirable and feasible from a long-term point of view. Despite this, long-term interest rates have remained high.

There will be a need to harmonize national economic and financial policies in the interest not only of balanced expansion at home but also of a balanced expansion of trade internationally. We are all aware that both deficit and surplus countries share the responsibility for continuous efforts to improve the process of adjustment. Deficits and surpluses are after all two sides of the same coin. There should be no presumption that either the deficit or surplus country is the one that is delinquent. Cooperative action by both parties is essential.

Let me turn now to the main subject of interest—on the Fund side—at this Annual Meeting.

This Twenty-Second Annual Meeting has a special meaning for all Fund members. After nearly a quarter century of experience with the Articles of Agreement prepared at Bretton Woods in 1944, we are now asked to approve a procedure leading to the first amendment to those Articles.

The plan for special drawing rights is important to all our member nations. There is no area of the world that does not have a vital interest in the expansion of international trade. Moreover, the flow of public and private capital across national boundaries is of the greatest concern to the developing world, and these flows can quickly feel the adverse effects of inadequate reserves. At the end of August, President Johnson, commenting on the London meeting, said:

“Without such a scheme, the increasing inadequacy of the world’s money supply will make it progressively harder for national governments to follow liberal trade and employment policies. The livelihood and even the lives of literally hundreds of millions of people over the next decade or two could be at issue, especially in the less developed countries.”

Since the war, gold and dollars have provided a flow of new reserves. But gold is not now adding to global reserves, nor can it confidently be assumed that it will do so to a very large extent in the future. Total monetary gold stocks, including those held by the Fund and other international financial institutions, are not significantly larger today than they were at the end of 1964.

Dollars, sterling, and temporary reserves created by the Fund under existing procedures are for the time being carrying on the growth of reserves. But it is clear that future reserve growth cannot rely, as in the past, on United States payments deficits.

It is against this background that the negotiations on the Outline Plan have proceeded. And the plan makes crystal clear that it is possible to reach agreement on a specific course of action, despite differences in approach to the problems of the monetary system and despite widely varying national reserve positions and policies. We have progressed toward agreement in a pragmatic spirit, recognizing that no one participating in these negotiations could expect the outcome to coincide in full with his own ideas.

The judgment and good will of a large number of responsible officials of governments and central banks have combined to bring about this result after some years of intensive work.

The Outline Plan is now before us. We have the responsibility—and the opportunity—to adopt a Resolution to begin the process of giving it life. This is our unique opportunity, meeting as a body, to act on the Outline Plan, before it is committed to our Executive Directors for final drafting, then to this Board for approval, and to governments for acceptance.

The Outline Plan has the full support of my country. It provides the framework for an effective and workable structure for meeting future global needs for reserve assets.

While there are many aspects of the plan that are noteworthy, I shall confine myself to a few observations:

1. The Outline Plan is a universal plan. It is open to all members of the Fund, and I hope that all will wish to participate.

2. The facility is intended to meet the need, as and when it arises, for a supplement to existing reserve assets. While each country will make its own decision, it is expected that these special drawing rights will be treated as first-line reserves. The United States intends to do so.

3. The new special drawing rights should provide insurance against an excessive cumulative competitive pressure for restrictions on international finance and trade transactions—the discredited beggar-thy-neighbor policies of the interwar period. It can also act as a counter to such interacting national moves toward unduly high interest rates as are brought about by competitive actions of those countries that are protecting their reserves. At one and the same time, it will permit growth in world reserves and buttress confidence in the stability of the entire system of world finance. In a word, it should operate to relax appreciably some of the unnecessarily painful strictures on international finance that come from fears of actual or impending reserve shortage.

4. Endorsement of this Outline Plan should in itself provide smoother sailing in the world’s money and exchange markets. Anticipation of the future is a powerful present factor in all things financial. Gold and exchange markets should reflect a new sense of confidence in the adequacy of future reserve supplies.

5. We are gratified that the Outline Plan recognizes that international liquidity is the business of the Fund. It clearly gives the Fund a central role, and provides that the Board of Governors, where every member of the Fund is represented, will have the final responsibility for the vital decisions to create new special drawing rights.

However, as to the role of the Fund in the use of special drawing rights, the Outline Plan wisely leaves scope for development through experience. The Fund’s role may well become one of general guidance, more than one of detailed operation. While some basic rules for use need to be maintained, they need not be numerous or complex. The essential part of the Fund’s role would seem to lie less in the area of specific transactions than in the process of taking decisions to create special drawing rights and in clarifying and maintaining the basic rules governing their use.

6. A very considerable amount of reconstitution of holdings of special drawing rights may be expected to occur through the normal processes of balance of payments swings. Still, it has been agreed that some explicit reconstitution provision was necessary. At the same time, it was important to avoid compromising the quality of the special drawing rights as a supplement to existing reserve assets. The principles for reconstitution that have been adopted for the first 5-year period assure that the special drawing rights will not be abused, yet do not interfere with their reserve asset status.

In addition to the net average use provision adopted as the initial operating rule, it is also provided that “Participants will pay due regard to the desirability of pursuing, over time, a balanced relationship between their holdings of special drawing rights and other reserves.” This provision is intended to encourage a balanced use of all three assets over time and, thus, maintain stability, in a general way, in relative holdings of the new asset and existing reserve assets as well as to promote equivalence between the new asset and the traditional reserve assets.

My country subscribes strongly to the view that the new facility is designed to assure a satisfactory rate of growth in global reserves. It is not designed to meet the problems of an individual country’s balance of payments problem.

Let me make it clear that the new facility should in no sense be regarded as a solution to the balance of payments problem of the United States or to the corresponding surplus problem of continental Europe. This is a matter that falls under the heading of the continuing effort to improve the adjustment process. As The Hague Communiqué of the Group of Ten in July 1966 noted, the prerequisites for the actual creation of reserves “should include the attainment of a better balance-of-payments equilibrium between members and the likelihood of a better working of the adjustment process in the future.”

Of course in determining his view as to global needs for reserves, presumably the Managing Director will take into consideration prospective future additions to reserves in the form of dollars or other foreign exchange as well as a number of other factors and developments, both quantitative and qualitative. I doubt that an elaborate or detailed listing of criteria and relative priorities can be established, because conditions change and the relative importance of criteria change. I believe it would not be useful to incorporate a fixed list of criteria in the agreement or the report.

The United States Delegation has great pleasure in giving its support to the Resolution that calls on the Executive Directors to propose the necessary amendments to the Articles of Agreement. It is my strong recommendation that the work of the Executive Directors to this end be completed with dispatch. We hope to propose legislation to the Congress of the United States in the early spring of 1968.

The Resolution before us also requests that a report be made on such other possible amendments as may be recommended at the same time. We are clearly at a much earlier stage of our consideration of other proposals for changes in the Articles and By-Laws. Nevertheless, my Delegation concurs in proceeding to an examination of such proposals.

The proposals will have to be judged on their own merits and accepted, altered, or rejected on this basis in the report to be submitted by the Executive Directors. Some suggestions may prove relatively easy either to accept or reject. If, however, some suggestions are found to be complicated and/or controversial, the Executive Directors could not be expected to put forward next year specific proposals for change based on such suggestions. Adequate time should be allowed to permit a mature, broad, and certain meeting of minds. This is the way we have approached the question of special drawing rights.

For the above reasons, I believe that specific substantive decisions on all these matters should not be regarded as a precondition to taking action on the special drawing rights amendment.

I turn now to matters relating to long-term economic development. The improvements we are now setting in motion in the international monetary mechanism are, I believe, essential to the long-term well-being of the developing countries. Economic interdependence of the developed and the developing countries is a fact of the present and of the future that must be a guiding principle in the direction we give to international economic policies. . . .

Rather than permit our serious and continuing balance of payments difficulties—made still more complex by the foreign exchange cost of our effort in Viet-Nam—we in the United States have found ways to maintain a high level of aid through the transfer of real resources to the developing world. We would prefer, in an ideal world, to make our assistance available in the form of financial resources. However, when balance of payments realities confront us, our choice is clear: we strive not to reduce the level of our assistance—but instead to make our assistance available through transfer of real resources. This approach requires that the real resources represent an addition to, not a substitute for, goods and services moving in normal commercial channels.

If serious and continuing balance of payments difficulties constitute a constraint on the ways the United States can provide assistance, persistent balance of payments surpluses constitute an imperative to countries enjoying such a position to expand their assistance in the form of finance. A sensible policy for such countries, and a policy which can make a contribution to the over-all adjustment process in the international payments system, is one of increasing the volume, easing the terms, widening the geographic scope, and eliminating procurement limitations on the flow of development funds. . . .

In closing my remarks I would like to quote to you the words of the Brazilian representative, Mr. Souza Costa, who, in offering a resolution of thanks at the final session of the Bretton Woods Conference, said:

“As the knowledge of these results becomes more widespread, a corresponding increase will take place in the number of those who, realizing the greatness of the objectives sought, will wish to be counted among the supporters of this undertaking.”

How correct this prophesy has been with respect to the Fund and Bank. Let us hope that our successors will say the same of the work that we have launched at this Annual Meeting.

Statement by the Governor of the Bank for Iraq—Abdul Rahman Al Habeeb

The Annual Meetings of the Fund and the Bank are always an important event because they give us an opportunity to review the working of the world monetary system and the efforts made to raise the living standards of the majority of world population. This year’s meetings are specially important because they are being held under circumstances which require serious thought and urgent action.

While we are thankful for the studies and discussions on international liquidity both inside the Fund and outside it, the fact is that under the most optimistic conceivable circumstances any plan for creating additional world monetary reserves would take at least two years to come into existence. In the meanwhile, growth of international liquidity is becoming slower, and the consequent dangers of impeding the progress toward a system of free trade and capital flows are becoming bigger. May I repeat a suggestion made by the Governor of the Fund for Iraq at the 1965 Annual Meetings that, pending the finalization of a new plan for creating additional world monetary reserves, we should agree to enlarge the automatic drawing rights of the gold tranche type in the Fund without payment of additional gold subscription. The creation of this facility would not necessarily require a change in the Articles of Agreement and can be introduced without delay.

So far as the contingency plan for establishing new monetary reserves is concerned, let me reiterate that Iraq will endorse any scheme of world monetary reform which would pay due regard to the interests of all—and not only of some—members of the IMF and which would lay the foundation of a system which would be more closely attuned to the world’s needs than the present system is. It is important to stress in this connection that the economic strength of a country or group of countries should not be allowed to be misused for controlling the creation, use, and distribution of new facilities. It should be appreciated that the developing countries deserve special treatment in any new plan of international liquidity, and the proposed Resolution on the Establishment of a Facility Based on Special Drawing Rights in the Fund has not met the requirements and needs of these countries, either from the point of view of principle or from the standpoint of procedural mechanism of the scheme.

Foreign exchange earnings, and indeed a sizable portion of national income of most of the developing countries, are dangerously dependent on the export of one or two commodities. Therefore, they have to keep a relatively high level of monetary reserves in order to be able to maintain their development efforts. While it is generally recognized that reserve currency countries and many other industrial countries need a higher level of international monetary assets than they hold at present, a similar need in the case of primary producing countries is often not appreciated. The compensatory financing scheme of the Fund goes some way toward meeting this need, but it is essential that now, when we are deliberating on the creation of additional liquid assets, the special circumstances of developing countries should be given adequate attention.

In addition to the question of international liquidity, we should give urgent thought to measures which may promote the flow of capital from the developed to the developing countries. It is a sober fact that in 1966—almost the midyear of the Development Decade—the net flow of long-term financial resources to the less developed countries registered a decline. The terms at which capital can be obtained have also tended to be harder. Hence the growing problem of debt servicing would continue to be serious for developing countries in the years to come. The difficulties of poorer countries are likely to be accentuated because of the continuance of restrictions imposed on the imports of products of these countries by industrialized countries. The long-term trend of prices of primary products is also showing a gradual decline, and exports of these countries are highly unstable. In this situation it is becoming extremely difficult for the developing countries to continue to make a successful effort to develop their economies. We fully endorse the view expressed in last year’s Annual Report of the Executive Directors of the Fund that “participation, to an appropriate extent, in the supply of financial resources to the less developed countries should have a high priority in all countries with a relatively high per capita income and should, as far as possible, be shielded from any action needed from time to time to deal with balance of payments problems.” May I add that the supply of these resources should also be shielded from political influences and political differences, if any, between the developed and developing countries. . . .

I am offering these suggestions in the hope that they will help in promoting the objectives of the Bretton Woods Agreements. We wish the Fund and the Bank well and hope that they would continue to show a spirit of tailoring their approaches, procedures, and policies to the social and economic needs and aspirations of the people of the world.

Statement by the Governor of the Fund and Bank for Trinidad and Tobago—Francis C. Prevatt

Mr. Chairman, may I with your permission express on behalf of my Delegation and myself how happy we are to be here in Brazil, one of the most dynamic and vigorous developing countries of the Western Hemisphere and indeed of the world, and to be in Rio de Janeiro, a city which we have found to be most delightful and progressive. We are also happy to be present at this historic meeting of the International Monetary Fund and of the World Bank, the arrangements for which merit the highest praise.

International Monetary Problems

At this meeting there is being put forward for our approval a special drawing rights scheme which will have the effect of creating a new international reserve asset, and I wish to place on record that the Government of Trinidad and Tobago fully supports this new contingency plan for overcoming a shortage of international liquidity.

My Government would have been happier had some of the provisions of the scheme been different. But, taking into account the Herculean labors that went into its production and recognizing the need for achieving a consensus among many nations with widely different points of view, my Government is prepared to vote for the Resolution. In our view the scheme, though not perfect, is workable, and is one capable of meeting the needs of expanding world trade in the years ahead. My Government is also especially happy that the plan satisfies the principles of universality, uniformity, and automaticity.

It is our view that the plan will greatly strengthen the international monetary system. I here wish to emphasize that any strengthening of the international monetary system means a strengthening of the world economy, which should create a better economic environment and broaden market opportunities for the developing countries.

I wish to urge that the adoption of the contingency plan and the consequential amendments of the Fund Articles should be introduced as early as possible. At the same time, I wish to emphasize that other and more general reforms of the rules and practices of the Fund are needed so as to achieve greater liberalization and flexibility, especially with regard to the developing countries. I refer to such changes as the easing of conditions for drawing in credit tranches and the reduction of charges for using the compensatory financing facility. Moreover, I am of the view that the adoption of the contingency plan and the consequential amendments should not be delayed pending the finalization of the more general reforms which should themselves be urgently dealt with. It is also important that some means be devised whereby surplus countries would after a point reduce their rate of accumulation of reserves by adopting more appropriate economic policies and furnishing greater amounts of economic aid and private investment to the developing countries.

While I acknowledge that the resources of the Fund should be protected from injudicious use, I feel that the best interests of member countries would be served by the continuing evolution of this important institution so that it can play a broader role in assisting in the achievement of the objectives set out in the Articles of Agreement. In particular, the developing countries would be greatly disappointed at any attempt to make the rules and practices of the Fund more restrictive; for it is the developing countries that have increasingly less room to maneuver in the international monetary field, not least because of the large and growing burden of external debt service on their slowly growing foreign exchange earnings. Further, at the risk of being superfluous, I wish to state that, except in the case of the contingency plan now before us, the developing countries would not welcome any change in the functioning of the International Monetary Fund which would require an abnormally large majority of votes of members. Finally, in respect to the proposed distribution of the net income of the Fund, I would suggest that part of this should be used for assisting developing countries, for example, by providing them with additional technical assistance.

Development Finance

I now turn to the subject of development finance.

Now that a solution of the liquidity problem is in sight, I earnestly hope that the balance of payments inhibitions which have in the past prevented the developed countries from extending economic aid on the appropriate scale and quality to the developing countries will be removed. We of the developing countries are sanguine that the flow of aid from developed countries over the next few years can reach, and indeed should surpass, the target of 1 per cent of the national income. In fact, we hope that in the proposed Second Development Decade of the United Nations, the 1 per cent aid target will be considered anachronistically low. Further, we would expect to see a rapid end to the tying of aid to goods produced by the donor country and a greater provision to meet the local costs of projects. . . .

Economic Situation in Trinidad and Tobago

With your permission, Mr. Chairman, I shall end by speaking briefly on the current economic position in, and the outlook for, my country—Trinidad and Tobago.

In previous meetings of the Fund and the Bank, the need to diversify our petroleum economy has been stressed. I can now report that diversification programs are now well under way in domestic agriculture and livestock production, in manufacturing, and in tourism. However, no one ought to expect such programs to yield substantial results immediately. By its very nature such a process of diversification takes a fairly long time. At the moment, therefore, we are experiencing certain balance of payments pressures which are likely to persist into the early 1970’s, when the diversification programs now being vigorously pursued will yield their full results both in earning and in saving of foreign exchange.

The stresses now being experienced on external account are also manifesting themselves in our budget. Since the end of the petroleum boom in the beginning of the 1960’s, our budget surpluses have been shrinking in spite of increases in rates of taxation and our efforts to improve tax administration. This shrinkage has in part been caused by the development effort itself, for the capital investment has given rise to greater operating costs for the expanded services. This is particularly so in the case of education.

Our policy in this regard is, as far as is consistent with the development effort, to restrict the growth of recurrent expenditure. At the same time we are now taking steps to increase public savings in general and the budget surplus in particular by the institution of a medium-term fiscal program. The first aspect of this program is the improvement of the financial condition of our public utilities, to be effected partly by increasing rates and charges and partly by more effective management. The second aspect is greater attention to the possibilities of measures which, apart from raising revenue, will in many cases check the rate of increase of consumption expenditure, especially on imported goods. The third is the improvement of the administration of our income tax which would result in greater tax yields even at present rates. As a result of this fiscal program, we hope shortly to be in a position where we can again finance a greater proportion of our public sector capital expenditure from public savings.

But given the present transition to a new economic structure, our best domestic efforts will be of no avail over the medium term unless we receive considerable amounts of external economic assistance to further our process of diversification. I feel certain that we shall during the next few critical years overcome our problems of structural transition provided that we continue to be fully supported by the International Monetary Fund and the World Bank.

Statement by the Governor of the Fund and Bank for Ceylon—U. B. Wanninayake

May I add my voice to the others raised here in expressing to the Government of Brazil my warm appreciation of their generous hospitality. I am truly glad to have had this opportunity of visiting this exciting and beautiful city.

May I also convey my thanks and congratulations to Mr. Woods and Mr. Schweitzer and to the staff of the Fund and of the Bank and its affiliates for yet another year of valuable service. The Annual Reports of these institutions are excellent and helpful documents which contribute so much to an understanding of the problems before us. For us, in Ceylon, our ties with the Bank and the Fund have grown even stronger in the past 12 months. We have used the Fund’s facilities for compensatory financing and have benefited from its guidance in the field of monetary and fiscal policy. . . .

I must say, however, that despite the assistance we have received from various sources, we in Ceylon have suffered severely from the adverse developments in the world economic scene. Two years ago, we initiated a program of economic recovery and adopted several measures on the domestic front—some of them politically difficult. Yet, our hopes have been frustrated by a sharp downturn in commodity prices. Last year, our export earnings declined by as much as 15 per cent, while our terms of trade worsened by 13 per cent. This was the biggest drop in export earnings we have experienced in the whole postwar period, with the exception of 1952 following the collapse of the Korean boom. Depressed prices for tea and, more recently, for rubber played a major part in this shortfall. It is true that we have made some notable gains in the domestic sector, particularly in the field of agriculture, but these did not, and could not, suffice to offset the impact of adverse external forces.

Our problems were undoubtedly—in large part at least—a reflection of the slowing down in the tempo of over-all activity in the industrial world. In particular, the restrictive measures adopted by the industrialized countries in the monetary field have affected adversely the level of commodity stocks in consumer countries. I hope that the recovery of activity in industrial countries now predicted will reverse these trends and lead to an upturn in commodity prices. But I am frankly doubtful as to whether this alone will suffice. It is my view that direct measures to deal with this problem are also needed as a supplement to any general recovery in the industrialized countries. I feel that such measures are needed, for example, for tea as well as for rubber. The crisis in the field of development assistance lends a new importance and urgency to the problem of primary commodities. In this connection, I must welcome the Resolution before us calling for a special study of the commodity problem by the Bank and the Fund. A solution to this problem is intimately related to the effectiveness of the work of these institutions, and it is fitting that they should contribute, together with other bodies, toward the search for such a solution. . . .

Many of our discussions at this meeting naturally center on the subject of international liquidity. Like virtually everyone else, we in Ceylon recognize the proposal to augment international liquidity as a progressive step forward. I congratulate Mr. Schweitzer and his staff and the Executive Directors of the Fund and the Deputies of the Group of Ten on their achievement. I do not suppose that anyone would claim that the proposed scheme is totally satisfactory. Speaking for myself, I warmly welcome the move toward the creation of a new reserve asset under the auspices of an international organization such as the Fund. I cannot say, in all honesty, that I feel that the formula proposed for the distribution of the new asset is an ideal one. I would have wished to see a greater part of the increment to the world’s liquidity channeled to the developing countries. I think that the case for this has been somewhat misunderstood in the past and incorrectly interpreted as a means of bridging the entire aid gap. But, despite the limitations, I welcome the scheme and support its adoption in the hope that it will pave the way for the evolution of a sound international monetary system and that it will induce the adoption of more liberal policies by the industrial countries.

Finally, I wish to say a word or two about other changes in the Fund. For the developing countries these could be of greater direct significance than the liquidity scheme. I have in mind, for example, changes in the following directions: (1) the possibility of selectively increasing the quotas of the developing countries on the basis of the growth in their international transactions and the breadth of the fluctuations in their balance of payments; (2) the provision of greater automaticity in the use of Fund resources; (3) the liberalization of the terms of repurchase of Fund drawings—by extending the three to five year period to, say, seven years; (4) the modification of the compensatory finance facility by linking repayment to recovery of exports per se; and (5) the recognition, as I have urged on previous occasions, of declines in the terms of trade as a yardstick of eligibility for drawings under this facility. These changes, together with a greater voice for developing countries in the decision-making processes of the Fund and in the Bank, should complement the reforms envisaged in the world’s monetary system.

September 26, 1967.

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