Discussion of Fund Policy at Fund Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1968
Statement by the Governor of the Fund for Spain—Faustino García Moneó
I should like to begin by congratulating the Managing Director on his excellent opening speech and on the productive work that he and the Executive Directors have performed in recent months, as summarized in the Annual Report for 1968 presently under discussion by this Board of Governors.
Their extraordinary efforts have led to the approval by the Board of Governors of a new facility based on the special drawing rights; I believe we are justified in placing the greatest confidence in this facility, since it will make it possible for the growth of international liquidity in the years ahead to be decided upon rationally on the basis of real needs, estimated by a process of collective judgment. In this connection, I am pleased to report that the Spanish Government is taking the necessary legal steps to approve the Proposed Amendment to the Articles of Agreement of the International Monetary Fund.
Next, I consider that the utmost importance attaches to the work done so far by the Fund, in cooperation with the World Bank, in studying and resolving the problem of stabilizing the prices of primary products. The short-term fluctuations in these prices and the long-range trend in real terms of trade, which is unfavorable for the producing countries, must be remedied if true international equilibrium is to be achieved. For this reason I support the draft Resolution with great interest and trust that the Executive Directors will put forward specific measures to solve such important issues.
On this occasion, contrary to what has been my custom in previous years, it is unavoidable that I should make some reference to my country’s economic situation, because Spain is one of the nations which devalued its currency in November 1967. I should like, therefore, to speak just briefly on the causes that led to devaluation, on its aftermath and the repercussions of the associated measures, and on the future prospects of the Spanish economy.
The devaluation of the peseta in 1967 was made necessary by a combination of domestic and external factors. The Executive Board of the International Monetary Fund recognized that the margin afforded to the Spanish economy by the par value established for the peseta in 1959 had vanished as a result of the evolution of Spanish prices and costs in relation to those of other countries, owing to the imbalance created by the powerful growth process recorded in Spain since 1959. This situation was unquestionably aggravated by the gloomy prospects afforded by the incidence of the external factors that have produced the upsets in the operation of the international money markets, as explained very clearly in the speech of the Managing Director.
Spain did not stop short at adjusting its exchange rate, but simultaneously adopted a package of measures aimed at leading the economy along the road to balanced expansion. I feel it is safe to say that the operation has proved fully satisfactory, in spite of the difficulties with which we have been confronted. The short Spanish citrus harvest and, above all, the measures enacted by other countries created additional difficulties for our economy. It stands to reason that our problems could have been solved more readily had the major industrial countries of the West recorded a steady expansion in an atmosphere of monetary stability and freedom of trade.
In a far less propitious context, we managed to achieve the desired effects on prices and on the balance of trade. In the case of prices, the cost of living rose by only 1.3 per cent between November 1967 and the end of August 1968, despite the fact that prices had to absorb the full impact of devaluation. Also satisfactory were the results attained on the exchange of goods. Our exports in 1968 are expanding at a rate in excess of 15.5 per cent, and, in addition, a major change in their structure is being brought about, since, in the last year, our agricultural exports performed relatively weakly, with the burden of expansion falling on minerals and metals and on industrial manufactures for consumption and investment. Our industrial exports, which in 1964-65 represented 48.8 per cent of sales of goods in the domestic market, increased this percentage to 65 in 1968. As a result, it may be anticipated that our balance of payments will close at year’s end in virtual equilibrium.
However, the foregoing remarks should not blind us to the existence of problems within the Spanish economy; I feel that an awareness of these problems and the will to solve them make an excellent starting point. The expansive impact of devaluation has far from petered out as long as sustained economic growth is taking place without inflationary pressures. The decline in the balance of goods deficit—which is still sizable—can be remedied only slowly and provided our exports are buoyant during the next few years. This buoyancy will primarily be a reflection of the steadily growing competitiveness of our economy, which we shall achieve only through sound and stable economic development.
The turn of the year should find us with a fully expanding economy, and we shall have to tackle, once again, basic problems that the measures of November 1967 were neither designed nor able to solve by themselves. Spain, which has successfully passed the initial phase of economic development, is now faced with the task of improving its productive structure in keeping with the constraints and growing demands of efficiency.
Statement by the Governor of the Fund for Venezuela—Benito Raúl Losada
I have the great honor to address this meeting on behalf of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador,. Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Uruguay, and Venezuela. First of all, we wish to confirm to Mr. Schweitzer our gratification at his well-deserved reappointment as Managing Director of the International Monetary Fund. We also wish to congratulate him, as well as the technical and administrative staff, for the excellent work done in the presentation of the Annual Report, which has been given our closest attention.
Since the last Annual Meeting in Rio de Janeiro, several developments have served to prolong the grave uncertainty hanging over the present international monetary system in general.
The devaluation of the pound sterling in November of last year unleashed a wave of speculation in different exchange markets and in the gold market, creating serious stresses in the international payments structure. Furthermore, although the efforts made have admittedly staved off the immediate crisis, the underlying pressures on the monetary system still persist.
The abandonment of the policy of supporting the price of gold in the free market and the introduction of the two-tier price system have given rise to fresh apprehension regarding the future role of gold in the functioning of the gold exchange standard system. Our countries believe that, whatever the ultimate fate of gold may be as a monetary standard, it will continue to play an important role for many years to come. We therefore consider it necessary that a study be undertaken in the International Monetary Fund of the collective measures that will prove most effective in maintaining an orderly situation in the gold markets, a primary aim being to obviate speculation in the free market.
The present monetary situation and foreseeable future events fully justify the adoption of the amendments to the Articles of Agreement of the Fund and the introduction, at the earliest possible opportunity, of the special drawing rights for which those amendments provide. As far as the Latin American countries and the Philippines are concerned, we are pleased to report that most of them have submitted the Proposed Amendment to their parliaments and that some of them have already given it their final approval.
We should now like to refer specifically to the proposed amendments to the Bretton Woods Agreement. In regard to those concerning the general policy on the use of the Fund’s resources, our countries confirm what they have said on earlier occasions, namely, that in no event should those amendments be implemented in a restrictive manner. It is our understanding that this attitude is shared by all member countries, since the preamble to the Proposed Amendment is so worded. We also note with satisfaction that the latest decisions of the Board have shown a shift toward increasing liberalization of the use of the Fund’s resources, particularly as regards the equitable and flexible application, for all member countries, of the policies relating to stand-by credits.
With respect to the facility of the special drawing rights, we reiterate our satisfaction at the fact that this mechanism will be based on a number of principles which were wholeheartedly supported by the developing countries, such as participation by all members in the decisions that will need to be taken to create new international liquidity, the absence of discrimination in the distribution of that liquidity, and its unconditional nature. Moreover, we feel that one of the fundamental achievements of the amendments is the fact that the International Monetary Fund will be at once the creator and the regulator of the system. By and large, we consider that the special drawing rights, though only to a certain extent, constitute a suitable mechanism for regulating the world’s liquidity. We therefore suggest that as soon as the Proposed Amendment is ratified, a responsible and collective effort be made to fulfill, at the earliest possible opportunity, the conditions precedent to its effectiveness.
Notwithstanding the benefits already referred to in connection with the activation of the system of special drawing rights, anyone who imagines that this facility can suffice to meet the liquidity needs of the monetary system is guilty of overoptimism; one ought not, therefore, to disregard future requirements of conditional liquidity, especially those deriving from an increase in the Fund’s ordinary resources.
Furthermore, we must recognize that whatever benefits may accrue from the SDR facility will depend on the smoothness with which the process of balance of payments adjustment is carried out. In this respect, one of the chief concerns of the Latin American countries and the Philippines is the inadequate distribution of responsibilities between the surplus and the deficit countries in regard to the adjustment of the balance of payments. Continued one-sidedness in the reaction and the attitudes of the monetary and fiscal authorities to balance of payments disequilibria could, in fact, rapidly neutralize the favorable results that are expected from the deliberate creation of international liquidity and thus lead to an excessive build-up of the special drawing rights to be created in the countries that show a tendency toward a surplus.
Our basic argument is therefore that, aside from the need to pay special attention to the adequacy of aggregate international liquidity, identical rules of conduct must be adopted as a basis for achieving an appropriate distribution of that liquidity in the ensuing process of circulation. Accordingly, we take the liberty of appealing to those surplus countries that play a determining role in the sphere of international finance to accept without reservation the responsibility which rests upon them and to adopt the necessary measures to maintain virtual equilibrium in their balance of payments. In this connection, the efforts being made by the authorities in some of those countries to contribute in a responsible manner toward improving this process of adjustment deserve special recognition.
Such is the importance which the Latin American countries and the Philippines ascribe to this adjustment mechanism that at this point we formally propose that a study be undertaken in the International Monetary Fund on the problems of these processes of adjustment, which would constitute a worthwhile contribution applicable to all member countries.
In the meantime it is abundantly clear that one of the greatest obstacles to the processes of adjustment at this time is the restrictions on the movement of capital and goods in force in the surplus countries. The countries of Latin America and the Philippines wish, as developing countries, to register their concern at the fact that some industrial countries wielding great influence in the world economy are maintaining or imposing restrictions on the free movement of capital and of goods originating in our countries, restrictions which cannot be justified solely on the strength of balance of payments considerations. We therefore consider that the most highly developed nations ought, to the extent that their external position will permit, to make every possible effort to promote the export of capital to the developing countries. Furthermore, we deeply deplore the downward trend at present being recorded in the volume of external economic aid that is being channeled into the less developed regions, and the increasing number of strings that are being attached to the utilization of loan funds, with the resulting substantial drop in their real value to the beneficiaries.
A further sign of the critical situation prevailing on the international money scene is the rise recorded in interest rates in the chief money and capital markets of the world; there is no denying that this state of affairs stems, in large measure, from the tardiness of the authorities concerned in enacting fiscal policy measures consistent with over-all equilibrium of those economies in a world where a close interdependency now exists between nations. This situation has led to a steady and sizable increase in the cost of the lending money available in the national and international agencies that dispense financial aid to the developing countries and has thus been reflected in an added load on the already heavy external debt burden of most of our countries. This trend is threatening the very continuity of the economic development efforts now under way in our countries and could very well result in a slackening of the over-all growth rate of the region, which is already very modest.
So much for financial aspects. The gravity of the situation is still further compounded, however, by the restrictions in force in the sphere of trade, which exert a powerful influence on our exports of both primary products and manufactured and semimanufactured goods. This state of affairs represents a bottleneck as far as the development of our economies is concerned, since it stands in the way of the diversification which our external sectors so badly need. This is why we are very concerned at the obvious reluctance of the developed countries to dismantle the protectionist machinery which they have traditionally maintained. Proof of this can be seen in the paucity of achievement at the Second World Conference on Trade and Development and in the purely token benefits of the Kennedy Round.
In the face of the discouraging prospects of the situation as it is today, we consider it essential that the international community here gathered should persevere vigorously in its search for solutions that will help alleviate the foregoing problems and promote better conditions than prevail at present for pursuing the fundamental mission of our countries, which is to achieve an acceptable standard of living for our peoples.
At the same time, the Latin American countries and the Philippines are very much interested in the study being conducted by the International Monetary Fund and the International Bank for Reconstruction and Development on the subject of primary products. We have taken due note of the general and analytical section of this study and wish to stress the need for this study to be continued and deepened, in order properly to identify the problems in this area and to ensure that any solutions proposed will make an effective contribution toward remedying, in a fair and economically efficient manner, the grave consequences for the developing countries of the present situation of world trade in those products.
As a special issue, a suggestion has been made at this meeting concerning the desirability of a thorough study on a possible link between the creation of reserves and the provision of funds for development needs. Our countries support any initiatives in this direction that may be undertaken by the International Monetary Fund and the World Bank.
Two general conclusions can be drawn from the foregoing remarks. One concerns the reform of the international monetary system and financial cooperation; the other is related to the specific problems arising for the developing countries from the present conditions of international trade and payments.
In regard to the first of these matters, we emphasize, as Mr. Schweitzer did at the inaugural session, the need for the special drawing rights to become effective as soon as possible, as is more than warranted by current monetary conditions in the international sphere. What is more, it is indispensable to back up their activation by a progressive improvement in the amount of conditional liquidity and in the terms on which it is made available. Side by side with this, we must stress the need to improve the process of adjusting the payment balances of the surplus countries, since, up to the present, as we have repeatedly pointed out, the burden of such adjustment has fallen to an undue extent on the deficit countries, which is particularly onerous for those of them that are classed as developing countries.
As for the second matter, there is a need for a radical overhaul, not only of the trade policies pursued by the most highly developed countries vis-à-vis the developing countries but also of the programs and terms to which external aid to our countries is presently subject.
The fine spirit of cooperation which has so far been displayed by the international community in averting a widespread crisis in the monetary system has culminated in the acceptance of reforms that will render it less vulnerable in the future. Now we can and must dedicate ourselves to the perhaps more formidable task of ensuring that the system remains stable indefinitely and that its benefits contribute toward the development of the less fortunate countries.
Statement by the Governor of the Fund for Austria—Wolfgang Schmitz
First of all I wish to join my colleagues, the distinguished Governors who have spoken already, in thanking the Managing Director for the stimulating address with which he introduced the Annual Report we now have before us. This Report, which was written by the Fund staff in the usual informative and comprehensive manner, is certainly a very important one, as it reflects the beginning of a new era of international monetary cooperation. I refer to the new system of special drawing rights.
Much has been said about the importance and desirability of creating this new kind of international reserve asset. So let me just say that I again endorse the report of the Executive Directors proposing the amendment of the Articles of Agreement. I did so when I approved the Resolution, as set forth in Annex A of this Report, on behalf of Austria. Now the process of approval by the Austrian authorities has been initiated, and I trust that I shall be able to notify the Fund of the definite consent by my country as soon as possible.
However, this positive approach, which obviously is shared by many of my distinguished colleagues, should not lead us to underestimate the real monetary problems which we still face. The new liquidity will help to ease disequilibria in the international monetary system; the main issues, however, will have to be solved by other and more direct means.
The attempt to satisfy the need for additional reserves certainly cannot be a substitute for the need for a better adjustment process. It is my opinion that recently too much has been said about increasing liquidity and too little about effective economic policy in member countries that have balance of payments difficulties. Furthermore, I think that the present efforts to adjust impose too much weight and responsibility upon monetary policy alone. In many countries it is the monetary authorities who have to carry the main burden. I therefore wish to stress the well-known but often ignored fact that fiscal policy, as well as so-called incomes policy, must have its share in the process. Exchange controls or similar direct measures, however, are certainly no alternatives, neither as to their economic effects nor as to their political consequences. It is, therefore, very regrettable to note how such practices appear to become more and more widespread, even among the leading countries.
As regards the economic effects of measures of direct control, we all know by experience that the introduction of such measures by one country, especially if it happens to be an important one, does not remain unheeded and indeed tends to cause other countries that feel the impact of such steps to become more and more willing to follow suit. This aspect becomes particularly marked when the restrictionists, who have had to watch with regret the previous dismantling of protectionist barriers, are making their voices heard again. Once this fatal mechanism has come into full swing it can hardly be stopped, especially when important domestic interests, overemphasized for the sake of public discussion, are at stake. We have had to live through the aftermath of such a misguided economic policy before; let us avoid a repeat performance.
Concerning the political consequences, I agree that the reserve currency countries are under heavy strain because of the role they have to play in the international monetary system. However, they should also be conscious of their obligation to establish the monetary standard for the less important members.
To sum up, the creation of additional liquidity may be necessary in the near future and I hope it will have beneficial effects. But, it is by no means the only medicine to cure the illnesses of our monetary system. The adjustment process, too, must be improved by the simultaneous use of all available instruments. I have the impression that the report of the Executive Directors on the amendment of the Articles, although commendable in many respects, has put too little emphasis on that. Let us hope that the gradual disappearance of the term “adjustment process” from the drafts should not be taken as an indication that the Fund does not attach importance to such measures.
In this respect I also should like to refer to a suggestion that was made by my predecessor, Professor Kamitz, in 1965. He said: “Without wishing to endorse a definite solution, I would like to add that the suggestion to examine thoroughly the advantages and disadvantages of widening somewhat the permissible margins of exchange rate fluctuations, made in a report of the Joint Economic Committee of the U.S. Congress, should be considered. As an organization with unique experience in this field, the Fund could review in detail the pros and cons of a broadening of the permissible limits of exchange variation and guide us in our deliberations as to whether such a step could help further our objectives.” Only just a few days ago a Congressional Sub-Committee re-emphasized the necessity of studying this issue. As far as I know, the Fund has not yet explored such a possibility. Maybe the Executive Directors will be in a position to examine this question, now that they have finished their paramount task of drafting the Amendment of the Articles of Agreement. I am happy to learn from the speech of the Managing Director of the Fund, Pierre-Paul Schweitzer, that the Fund will actively explore what contribution it might make to the further strengthening of the world monetary system. I cherish the hope that such a proposal by a supplementary means to facilitate adjustment, as advanced on many occasions by the academic community, may give rise to reflection and discussion among the representatives of central banks and treasuries, too.
Finally, I should like to make some comments on the reform of the traditional structure of the Fund. I welcome these changes, in particular, because I think they have been overdue for quite some time. The proposals made by the Executive Directors are certainly an important improvement in the conduct of business by the Fund as well as in the relations between the organization and its members. In particular, the legal guarantee of automaticity within the gold tranche means a further step ahead, as these drawing rights will now acquire the character of a real reserve asset.
On behalf of my country I want to underline our willingness to continue to cooperate fully with the Fund and all its members. It is along this line that we have participated and will continue to participate in arrangements designed to improve the stability of the international monetary system. In this context, we consider that our share in the financial support given to member countries in balance of payments difficulties is a good investment for the future. We believe also the amended Articles of Agreement will be a firm basis for the creation of a really stable and prosperous world economy.
Statement by the Alternate Governor of the Fund for Ceylon—William Tennekoon
I should like, first of all, to join the other speakers before me in expressing our thanks to the Executive Boards and the staffs of the Fund and the Bank for the excellent way in which they responded to the two Resolutions passed at Rio. I wish to congratulate the Fund and the Bank on the efficient manner in which arrangements have been made for the conduct of our meetings. I wish also to thank the Fund and the Bank and the United States Government for making our stay in Washington very pleasant.
Considering the diversity of views held on the subject of international liquidity, it is a matter for great satisfaction that at last an acceptable scheme for increasing international reserves through the Fund has been worked out. Insofar as the special drawing rights facility is concerned, there is no doubt that the Proposed Amendment to the Articles should improve considerably the Fund’s capacity to realize more closely its objective of facilitating an expansion of international trade and payments under conditions of full employment with stability and balance of payments equilibrium. It is also to be hoped that the Fund will actively pursue the task of eliminating artificial restraints on trade expansion and exercise greater suasion on surplus countries to facilitate the adjustment process of the international payments system.
As you are all aware, apart from providing, for the creation of the special drawing rights facility, the Proposed Amendment also contains certain modifications in the existing Articles. Some of them, like the codification of the de facto automaticity of the gold tranche, will no doubt give added confidence to members on the availability of Fund assistance to meet balance of payments needs. On the other hand, the proposed amendments also contain modifications in certain other Articles which, if rigidly interpreted, could have a stultifying effect on the capacity of the Fund to adapt and expand its policies as circumstances change. I am referring here in particular to the codification of the concept of temporary use of the Fund’s resources, and restrictions on the creation of further unconditional credit facilities. It is to be hoped that these new provisions will not result in a loss of that flexibility which has been an important feature of Fund policies and which, I have no doubt, has contributed immeasurably in the past to the success of the Fund’s activities. I should also like to express the hope that the restrictions on the creation of further unconditional credit facilities will not impair the Fund’s ability to meet new situations as they evolve in the future.
When the special drawing rights facility comes into operation, I hope a proper distinction will be made between the Fund’s role in meeting the global need for additional reserve assets and its role in assisting individual countries in their payments problems. The one is not a satisfactory substitute for the other. The fact that the Fund has created an adequate amount of additional reserve assets from the global standpoint will not dispense with, or diminish to any significant extent, the need to help particular countries which are in payments difficulties. Because of the fact that the amount of special drawing rights to be created will inevitably be more closely related to the payments positions and the reserve positions of the major industrial countries rather than to those of the smaller, developing nations, there will continue to be a need for assisting individual countries, particularly those countries like Ceylon whose heavy dependence on trade in primary products makes their balance of payments vulnerable to short-term difficulties. A realization that the proposed special drawing rights facility does not cater to the special problems of individual countries, and that such problems can only be dealt with under the existing provisions, will I trust exert an appropriate influence on the Fund’s policies including a liberalization of the compensatory finance facilities.
As a developing country it is Ceylon’s hope that the future evolution of the international monetary system should make provision for a link between liquidity creation and the transfer of resources from developed countries to international lending agencies for financing economic development. I hope that this will be the next step in international monetary reform following the creation of special drawing rights.
It is unfortunate that because of the priority which had necessarily to be given to the special drawing rights facility time was not available for the Executive Directors of the Fund and the Bank to consider specific measures for the alleviation of one of the most pressing problems of developing countries, namely, the problem of commodity stabilization. We can take some comfort from the fact that the staffs of the Fund and Bank have jointly produced an excellent study of this problem. Particular countries may feel disappointed with some aspect or other of the study, but I have no doubt that it is the view of the large majority of countries represented at this Conference that the proposals of the staff are worthy of serious consideration for initial action by the Fund and the Bank in the field of commodity problems.
One of the important points which has been brought out in the study is that the problems faced by developing countries in commodity trade are many sided. The staff also has correctly drawn the corollary that there is no single solution to this problem, and that action needs to be taken on several fronts at the same time, particularly in the field of product diversification, the development of new uses, and improvements in research and productivity.
I should like to draw your attention to one of the problems which Ceylon has experienced in recent years and which several other countries may experience in the future. The prices and values of Ceylon’s exports have been subject to sharp fluctuations at various times. One inevitable consequence of this instability is the uncertainty attaching to the future course of prices and earnings. More often than not, whether a given change in the price of a commodity is temporary or long lasting, only the lapse of time can tell. It is quite possible therefore that a decline in export earnings which was initially thought to be of a temporary nature may later turn out to be of a more enduring kind. A country in that situation would be faced with a formidable problem of restructuring its economy, possibly requiring a large outlay of foreign exchange. It must also be remembered that programs for shifting resources from the production of one export commodity to another can take several years before they begin to show returns. During that period the country concerned may suffer a further loss of exchange as a result of having to abandon production of existing export crops.
To accomplish the diversification of our economies and reduce our dependency on a few vulnerable commodities, the developing countries require increased external capital on a long-term basis. …
It should be mentioned that Ceylon’s recovery program started with the assistance of the Fund, the World Bank, and donor countries, and the exchange reforms Ceylon has introduced, combined with rational investment policies, as well as appropriate budgetary policies, are now beginning to show good results. A high growth rate is in prospect, spearheaded by dramatic improvements in domestic agriculture. All this was achieved despite poor export earnings due to price declines and a tight foreign exchange situation.
In concluding, I wish to express our appreciation to the various countries that have given us long-term assistance in the Ceylon Aid Group.
Statement by the Governor of the Fund for Malta—Giovanni Felice
May I ask you to bear with me for a few minutes and allow me to show my deep appreciation for the gracious way in which
Malta, my country, has been unanimously elected to become the 110th member of the International Monetary Fund and to express my thanks for the greetings extended to me by the Honorable U. B. Wanninayake and Mr. Pierre-Paul Schweitzer. I want also to thank those speakers who have welcomed me and my country as a new member of the Fund.
Not only am I grateful to the Board of Governors for having supported our election so wholeheartedly but I would also like to express our very sincere appreciation of all the help which the Fund has given us during the difficult period of preparation. I must, in particular, mention the expert advice we received in finalizing our Central Bank Act, which was passed last November, and our draft general Banking Bill, the passage of which we expect will be completed through the House of Representatives in a few weeks’ time. This type of highly specialized legislation is unfamiliar ground in a small country, which has hitherto operated on a more or less automatic currency board system, and its implementation has presented even more serious problems. Thanks, however, to the Fund’s technical aid program, we have had the benefit of the services of three experienced central bankers, well versed in the problems of developing countries, and with their help the Central Bank became operative on 7th June, only about two months after the Act itself was brought into force. Looking back over the past few months, and the rather choppy sea which most of us have had to navigate, the fact that we managed to get our Central Bank launched this summer has been of immeasurable assistance to the Government.
As a result of the fundamental changes in military strategy all over the world and particularly in the Mediterranean, and of the general striving toward universal peace, the George Cross Island has had (very willingly) to plan and to implement a national scheme of diversification, that is, of converting its economy, nearly overnight and for the sake of sheer survival, from its age-long role as a major naval and military base to the more civilized and peaceful pursuits of tourism, light industry, and entrepôt trade. From a self-contained and unsinkable aircraft carrier with no economic or financial problems or political life it has changed into a competitive free unit in the comity of nations, with all the problems common to all the newly independent and still developing countries.
History has also ushered us Maltese into this new era when progress is development and—allow me to follow Mr. McNamara in quoting Pope Paul—when “development is peace.” This has also its risks and its difficulties. The Fund will surely be invaluable in keeping us abreast of world events, and we on our part will very willingly cooperate in any way we can.
Statement by the Governor of the Fund and Bank for Australia—William McMahon
It is traditional for a Governor to preface his remarks with references to the leadership of the Managing Director of the Fund and the President of the Bank, and to comment on the work performed during the year by those two institutions.
On this occasion, we can be warmer in our praise than usual. In the 12 months since we last met, these two institutions have had an exceptionally fine record of constructive achievement. …
The Fund has had the task of preparing the amendment of the Fund Articles to establish a special drawing rights scheme. There have been the problems associated with the devaluation of sterling and the closure of the London gold pool and there is the new task of studying the problem of stabilization of prices of primary products. The Fund, too, has arranged a record number of financial transactions with member countries.
We thank Mr. Schweitzer and his staff and the Executive Board for the way in which they have handled these issues.
The responsibilities of both the Fund and the Bank cover wide, varied, and changeable fields. I want to mention one or two aspects which particularly concern a country like Australia.
Australia has some points of similarity to its own native animal, the platypus, which has a duck’s bill, a dog’s claws, lives in the water, breathes air, eats worms, lays eggs, and suckles its young. Like it, we do not belong exclusively to any one species of economy. We are primary producing; we are also industrial. We are developing, and also developed. We are in many respects a well-endowed country but still hungry for additional resources, not least of capital. We are a heavy capital importer on commercial terms, but we are also a substantial aid donor on a 100 per cent grant basis.
Necessarily, therefore, we have a point of view—a way of analyzing problems—which sometimes puts us in one camp and sometimes in another, in both Fund and Bank affairs. Let me tell you our point of view on five different issues.
We all seem to agree that the United Kingdom and the United States, the two great reserve currency countries, must achieve a stronger balance of payments position. It is in their interest and it is in the interests of the international monetary system that they should do so. If they achieve this goal, and there is no action taken to offset the restrictive effects of what they do, the consequences for the rest of the world, for world trade and levels of economic activity, could be severe. In a perfect and logically managed world, the downward pressures resulting from United Kingdom and United States action would be countered by expansive action on the part of the surplus countries with a high level of reserves and unused capacity. This is a simple and valid philosophy. It must not be ignored. The consequences of indifference can affect all of us severely and pervasively. In the long run, no one stands to benefit from a breakdown or serious weakening in the international monetary system; in the long run, no one stands to benefit from a downward spiral in world production and trade. This can easily occur if the measures the United States or the United Kingdom take to eliminate their external deficits are not accompanied by compensatory measures on the part of the surplus countries to reduce their external surpluses.
Special Drawing Rights
More than compensatory measures are required for success. We need more than a fixed amount of international liquidity; we need in fact a steady increase in liquidity. We must now actually set up the special drawing rights scheme and then activate it just as soon as the necessary minimum conditions for doing so on a sound basis have been fulfilled. The first decision to allocate special drawing rights will have to take into account a collective judgment that there is a global need to supplement reserves, to attain a better balance of payments equilibrium, and the likelihood there will be better working of the adjustment process in the future.
The outlook is not reassuring. In the 12 months to March 1968, the total official reserves of member countries rose by $2 billion. The whole of this increase can be attributed to special and temporary factors. Thus, if U.S. holdings of currency held under swap arrangements are excluded, reserves actually fell by around $0.5 billion. There has been, to use a phrase distasteful to monetary authorities, an international credit or reserve squeeze. If this experience were to be continued, there would be no monetary basis for the steady growth in world trade to which we all aspire and which is indeed critically necessary. The new SDR facility, which we have labored so long to bring into the world, must not be allowed to wither at birth. Although experimental, it is still, I believe, sound in conception and there can be no doubt as to the inevitable need for such an additional means of exchange.
At the same time we must bear in mind that, as Mr. Schweitzer has reminded us, the role of the SDR scheme is intended to be a supplementary one—supplementary to the established media of international exchange—gold—and the reserve currencies.
The countries that provide reserve currencies and manage them, that is, the United Kingdom and the United States, are discharging a world responsibility; one which carries risks and entails burdens going beyond the ordinary tasks of managing their own national affairs. They therefore have something of a claim on the support and cooperation of the rest of the world.
Australia has a special interest in—and relationship with—sterling, if only because we have, through the years, been one of the largest, if not the largest, holder of sterling in the sterling area.
Notwithstanding the November 1967 devaluation, pressure on sterling continued and a number of countries shifted part of their reserve assets out of sterling in the first half of 1968.
With a view to restoring stability to sterling as a reserve asset, the Basle group of countries offered the United Kingdom a $2 billion medium-term credit as a safety net against further diversification. The United Kingdom, in turn, offered sterling area countries a dollar value guarantee on the bulk of their sterling balances.
Australia did not seek arrangements of the kind which have been offered to us. We have agreed to participate, partly because we wish to cooperate with the Basle group of countries and with the sterling area group of countries in an operation of this nature, and partly again because we believe sterling still has an important role to play in the international monetary system.
Given time and confidence, and the stout efforts the United Kingdom is making, sterling will surely recover its strength on the foreign exchanges. At this time and in this context, the Basle arrangement is a sensible one and in the free world’s interest. We have given it our support.
Our close relations with sterling, and with the dollar, for that matter, have been influenced to a great extent by capital flows. It is unfortunate for capital importing countries that the two main capital exporting countries of the world are in deficit at the same time.
I want to say something about this subject because a great many countries, indeed the bulk of Fund members, are importers of capital in one form or another. It seems to be fashionable these days to suggest that, if an advanced industrial country gets into balance of payments difficulties, it should in the first instance impose controls on capital outflow.
I strongly urge that we should reject this philosophy. If a country imposes internal fiscal and monetary restraints, this should have a helpful effect, not only on its current account balance of payments position, but also on its capital account. As a consequence, capital flows should be more favorable, or less unfavorable. This tendency will be reinforced as confidence in the currency increases. To impose physical controls on capital outflow in addition is to discriminate against capital in favor of current account transactions. It is doubtful if this is appropriate. And I doubt if it can be justified as an initial move.
There are gains to be derived from capital flows between countries just as there are gains to be found in trade between countries. There is an agreed set of principles and institutional arrangements aimed at keeping a free flow of trade and payments on current account. The GATT and the Fund are there for that purpose. In contrast, the area of capital flows seems to be a no man’s land. I do not know why! This argument does show up a deficiency in the framework we have set up for international cooperation.
Furthermore, there is a pretty clear division in the world between the major industrial countries who tend to be capital exporters and primary producing countries of the world, developed and developing, who tend to be capital importers. To the extent that special measures are taken in the field of capital flows, there is a real possibility that an undue share of the burden of the adjustment process may be thrust onto the primary producing countries. Here is a field of inquiry which the Fund, or the Bank, or both might well consider.
In the meantime, I suggest that some caution be exercised in resorting to restraints on capital outflows. Like import restrictions, once adopted, they may be difficult to remove.
Again, there are advanced countries who are in surplus or have a high level of reserves but who nevertheless retain close supervision of outward capital flows. For sound economic and financial reasons they should be liberalizing their controls in a manner compatible with their economic maturity and balance of payments position.
I am not making a general indictment. Some of the surplus countries, Germany for example, are playing the game. To the extent that countries like Germany can continue to take over the capital exporting role of the United States and the United Kingdom, international disequilibrium will be reduced, even if not altogether eliminated.
I want to make one other comment relevant to a country which earns 80 per cent of its export proceeds each year by the sale of primary products and raw materials. I refer briefly to the joint report before the Governors on stabilization of prices of primary products.
Few countries have had greater experience than Australia of the harm done by fluctuating export prices. We strongly support the Dakar resolutions as to the importance of these problems.
They are so important that we do not think the Fund and Bank should be rushed into making hasty decisions. There is a marked tendency these days, when we consider some problem in the “too hard” category, to pass it over to the Fund and the Bank. Countries and institutions have been battling for many years with the problems of organizing markets, of diversifying production, of buffer stocks, of compensatory finance, and so on. We cannot expect the Fund and Bank, impressive as they are, to come up with the answers, even within a limited area, at the drop of a hat.
Finally, we should be cautious about tapping the Fund and Bank (whose resources are by no means unlimited) for additional finance simply because they have some in reserve. The funds they have must be put to the best possible use, and they should be put to uses which are within their proper field of responsibilities.
So I do not think we should ask the Fund and Bank to rush this study. We are interested not in the answer which can best be given within a short space of time, but in the best answer.
We must all be impressed with the work the Fund and Bank have done so far and we look forward to the further work which is to be undertaken by the staff and by the Executive Directors on this topic.
I have mentioned a number of issues currently facing the Fund, which are of particular interest to Australia.
There are different ways of interpreting some of these issues and different suggestions for solving them—this is evident enough from the statements made by Governors from this rostrum.
But whatever problems may lie ahead in 1968-69, we have the satisfaction of knowing that one thing 1967-68 demonstrates is that the Governors of the Fund and Bank and the countries they represent can work together in the interests of the international community. Let us look at examples of cooperation in 1967-68. There was the sterling devaluation—when devaluations were successfully limited to those countries who could really justify it. There was the gold crisis—when the members of the gold pool agreed to work together through the two-tier system to stabilize the situation. Now we have the Basle agreement—which has shown that Europe, America, Japan, the United Kingdom, and the sterling area countries can successfully pool their resources to defend their financial interests.
I have no doubt that, so long as we continue in the same spirit of understanding and cooperation, we shall surmount whatever challenges may lie ahead.
Statement by the Governor of the Fund for the United Kingdom—Roy Jenkins
This is the first time I have had the privilege of addressing this gathering of the Governors of the Fund and Bank.
I would like first to express my appreciation to the U.S. Government for the characteristic warmth and friendliness with which they have welcomed us to Washington for another meeting of these two great world institutions.
I should also like to express my enthusiasm at the reappointment of Mr. Pierre-Paul Schweitzer as Managing Director of the Fund. The world owes a great deal to the wisdom and skill with which he has steered the Fund through recent difficult times. …
The membership of both the Fund and the Bank is still expanding, and it is appropriate for me to welcome four new countries, all members of the Commonwealth, namely, Malta, Botswana, Lesotho, and Mauritius. …
World Monetary Questions
I turn to world monetary questions. The year through which we have passed since our last Annual Meeting in Rio has been a momentous one—almost too momentous.
The first event was the decision taken at the Rio meeting itself on the scheme for special drawing rights. That decision has rightly been called the most important event in monetary affairs since Bretton Woods. It opened the way to a major strengthening and rationalization of the international monetary mechanism. Since then the scheme has been completed. The Fund’s Executive Directors and staff, under the guidance of Mr. Schweitzer, made a very great contribution to the final agreement which was reached in Stockholm in April.
We cannot yet decide what amount of SDR’s it will be right to create when the scheme is activated; but it is clearly desirable that the machinery should be set up without delay. I hope that the process of ratification will be complete within a very few months. With the SDR scheme ratified, and incorporated in the Articles of the Fund, we shall have a new instrument to enable us to respond promptly and sensitively to the need for liquidity of the growing world economy.
The U.K. Situation
I come now to the U.K. situation. There is no need for me to say how painful it was to us to have to devalue the pound last November. We resisted it long and fiercely, largely because of the important role which our currency plays in international finance and the shock which we knew would be felt throughout the system if we altered our parity. But the time came when we had no alternative.
Since I became Chancellor of the Exchequer, it has been my central purpose to make a success of devaluation by following policies which will carry us out of deficit into large and secure surplus.
To ensure this success, we in Britain had to accept very substantial sacrifices. We had first to moderate the growth of public expenditure. The decisions were difficult. Some were not only necessary but desirable. We were able to cut ourselves free from one of the most crippling legacies of our past, the attempt to maintain the status of a great power on the basis of the economy of a medium power. Other cuts in the growth of public expenditure involved the deferment of many desirable advances in social security. Second, I had to impose in the budget greater tax increases than had ever before been imposed in peace or war. This was necessary in order to ensure the restraint on consumption which was essential if we were to free resources for exports. Third, it was essential to prevent a wage-price spiral from developing as a result of the rise in import prices. No one who is responsible for economic policy in any country in the world will underestimate the difficulty, or the unpopularity, of a successful incomes policy. Yet it is vital that we should check the danger of increased costs eating away the competitive advantage of devaluation. To ensure this we have backed our incomes policy by legal powers to an extent which is unparalleled in Western countries. In political terms the British Government has paid a price for following these policies. But we were determined not to tolerate the alternative, which was an ever-mounting deficit.
Against this background the measures which we have adopted have inevitably been hard ones. We in Britain have had to face the necessity of two years’ hard slog—hard but, I believe, ultimately rewarding. The results have not been quick to appear, and it would have been foolish to expect immediate results. We are only just beginning to see the benefits with our recent improved trade figures.
Provided there is no downturn in world trade, I look forward now to a long series of improving British trade figures—not necessarily an improvement every month but a sustained trend of improvement. Taking invisibles into account, we were very near to balance in August, but inevitably the figures fluctuate from month to month, and we must not become too euphoric at one favorable set of figures or too cast down by the reverse. I cannot predict the exact time at which we shall break even and cross the line from deficit into surplus. It should come in the first half of next year and so permit us to be earning a substantial surplus and repaying debt in the second half of the year.
Gold and the Dollar
The third major event of the last year was, of course, the gold crisis of last March. The major factors behind this were, first, the developing distrust of the reserve currencies resulting from the continuing deficits of the United States and the United Kingdom, and second, the build-up, over a long period, of speculation that there would be an increase in the official price of gold. Since we last met, action has been taken to deal with these destabilizing factors.
On the U.S. deficit, I welcome the measures to restrain demand, because it is so clearly in all our interests that the U.S. balance of payments deficit should be held in check and a position much nearer to equilibrium achieved.
However, we should not ignore the possibility that these measures may be a factor making for a slowing down in the growth of world trade and output. World trade has done very well over the last year. After the period of slow growth in 1967, expansion was strong in the latter part of last year and the early part of 1968, led mainly by growth in the United States and Germany. The fact that we must now expect less of a stimulus from the United States means that a greater responsibility to maintain momentum rests on those industrial countries which have strong balance of payments and reserve positions. The importance of this to the developing countries, whose exports depend so heavily on the growth of demand in the developed world, can hardly be exaggerated. These surplus countries are naturally anxious to see the United States and the United Kingdom move away from deficit. I greatly hope that as this happens they will accept their own responsibilities to pursue policies which will bring about a continuation of the expansion we have enjoyed over the last year.
I turn to the decisions taken here in Washington last March to deal with the gold crisis. They have succeeded very well—perhaps surprisingly well. The experience of the months since then has shown that the fever of speculation could be held in check. The two-tier system has worked, and I see no reason why it should not continue to do so for a considerable time to come.
The firm view of the United Kingdom is that the official price of gold should remain unchanged at $35 an ounce. Raising the price of gold would, of course, be one method of increasing liquidity but it would be inequitable and disruptive. I believe that this view has the support of the overwhelming majority of members of the Fund. The decision taken last March to maintain the official price but at the same time to allow the free market price to fluctuate, while withholding sales of gold from official stocks to the free market, was, I am sure, a wise one. The success of the Washington arrangements removed a danger threatening the future of stable exchange rates and hence the whole structure of the international monetary system.
This structure has served the world well for two and a half decades, but I am sure no one will suggest that it is incapable of improvement. I hope the discussions which are taking place this week on the subject of gold will contribute to that objective.
Sterling and the Sterling Area
The next major event of the past year has been the Basle agreement. In the last few weeks, arrangements have finally been completed on the one hand between ourselves and a group of countries operating through the Bank for International Settlements, and on the other between Britain and the other governments of the sterling area. These arrangements have given sterling a new stability.
I should like to pay tribute to the far-sightedness of the BIS and the 12 countries who have provided the facility of $2 billion to offset the effects on our reserves of fluctuations in the sterling balances. Unlike previous arrangements, this is not only large in scope but fairly long term in character. Drawings made under the facility will be repaid during the second half of a ten-year period.
The offer of this new and large facility enables us to come to terms with an historical change that has been taking place over a period of years but which was made more acute by devaluation. The sterling balances themselves were accumulated basically as long ago as World War II, and have changed in composition, though not broadly in their total. There have been far-reaching changes in the pattern of trade and capital sources of the sterling countries during this period which have in turn stimulated a desire for diversification. In the United Kingdom we were ready for an evolution in the nature of the sterling area. Early in July, we were able to put new proposals to the other sterling area countries. These led to a series of agreements, which came into operation toward the end of last month. They are on all essential points uniform. Their essence is that we in the United Kingdom have given a guarantee to maintain the dollar value of the bulk of the sterling reserves of sterling area countries; and, in return for this, those countries have undertaken to maintain not less than an agreed proportion of their reserves in sterling.
The guarantee applies to the total of each country’s official sterling reserves in excess of 10 per cent of its total official reserves; that is to say, 10 per cent of each country’s reserves will be held in the form of unguaranteed sterling. The arrangements, in most cases, are for three years in the first instance, with the option of renewal by agreement for another two years. In the remaining cases, they run for five years.
The guarantee is conditional on each country maintaining at all times a Minimum Sterling Proportion in its reserves. These proportions are not the same for each country, but broadly reflect the level prevailing at the start of our discussions. Thus, the effect is to stabilize the over-all level of the sterling area’s official sterling balances, so long as total reserves remain stable. And although sterling proportions will vary, the arrangements, combined with the guarantee arrangements, mean that every sterling area country has the assurance that 90 per cent of its reserves are protected against any hypothetical loss regardless of the ratio of sterling to non-sterling assets which it holds. It may take a little time for people to realize the radical transformation which has been achieved by the Basle arrangements, but once this has been recognized I believe that we need not again fear a flight from our currency and the contingent threat to the international monetary system.
Thus, we have entered upon a tripartite undertaking. The Basle group have made a major contribution in the provision of the facility. We in the United Kingdom have contributed our guarantee, and we also have the obligation of repayment. The sterling area countries themselves have gone far to assure the stability of the system by their undertakings in regard to the proportions of their reserves which they will hold in sterling. In return, they are fully protected. The advantage to the United Kingdom is that we shall be protected from the threat of large-scale demands on our reserves through withdrawals from the sterling balances during the time when we shall be emerging from deficit into surplus. And the world as a whole benefits from a strengthening of the international monetary system through a less extended and exposed position for sterling.
Thus, as we look at the events of the past year, it is right to emphasize that we have made reasonable progress in securing a greater degree of international monetary stability. But, even though sterling and the dollar are now on a more favorable course, we have been sharply reminded of the great risks to which the system is subject and of the vital need to strengthen it. That we have so far avoided the bitter experiences of the prewar years is a tribute to the achievement of the last 20 years but is no ground for complacency. The tremendous growth in international trade and the commitment to full employment by the major industrialized nations of the world means that the need for international monetary cooperation is now greater than ever. If both rich and poor nations are to achieve the rising standards which are now possible, we must all realize that we must make a continuing and sustained effort to build on what we have achieved during the past year. That is one of the reasons why the United Kingdom particularly welcomes the SDR scheme, and why we urge that it should be ratified as soon as possible. For SDR’s are important not only in their own right but as a symbol of our determination to make our monetary destinies the subject of rational international decisions.
Statement by the Governor of the Fund for the Democratic Republic of Congo—Albert N dele
Before briefly addressing this assembly on the points contained in my statement, I should like to associate myself with you, Mr. Chairman, to thank the President and the people of the United States for their courteous welcome.
I should also like to tell Mr. Schweitzer how pleased we are with the renewal of his term of office. I should also like to welcome the new members of our organization.
During the last three Annual Meetings of the International Monetary Fund, I had the opportunity to inform you of the importance the Democratic Republic of Congo attaches to the reform of the international monetary system. The amendments of the Fund Articles of Agreement and the new provisions concerning special drawing rights, which were legally approved in Congo several weeks ago, are a very gratifying expression of the progress that we wished to see achieved in order to enable the Fund to meet a general shortage of reserves, should the need arise.
The terms and conditions of the special drawing rights facility satisfy, in particular, the recommendations I had the occasion to make in this forum. These rights will be allocated to all member countries according to their quotas; the requirement of reconstitution when continuing and substantial use is made of them and the correlative obligation to accept them up to certain limits will guarantee the movement of this new reserve instrument between countries in accordance with balance of payments developments, and this is essential if it is to play an increasing part in international payments. Finally, determination of the amount of special drawing rights on the basis of specific circumstances, and not by the application of a rigid, pre-established formula, and the gradual integration of the rights into the existing structure of reserves without a radical change in their present composition will, I am sure, make it possible to meet future liquidity needs effectively and on a pragmatic basis.
With respect to the modifications made in the present provisions of the Articles of Agreement, I wish to express my satisfaction in regard to the confirmation of the unconditionality of drawing rights in the gold tranche by the amendment of Article V, Section 3. This modification fulfills exactly the wish I expressed in this connection at our last Annual Meeting. Incidentally, I must confess that I would have been somewhat embarrassed if it had not been proposed by the Executive Directors, because, in anticipation of it, the charter of the National Bank of Congo has included unconditional drawing rights on the Fund in our reserves for almost two years.
The Executive Directors, the Managing Director, and the staff of the Fund can justifiably feel deep satisfaction at the culmination of a number of years of reflection on reform of the international monetary system. There are perhaps few examples as convincing as this one of the possibilities afforded by international cooperation when specific matters are involved and full account is taken of the complementary interests of the industrial countries and the developing countries.
However, our legitimate satisfaction must not serve us in some fashion as a mental alibi, and our success must not make us forget the full importance of the problems at which the present reform of the Fund Agreement is directed.
We find, in fact, that the contingency at which this reform is directed—that of a general shortage of international liquidity—has not materialized thus far or, at least, if it has materialized, it has been secondary to the problem that has continued to dominate international payments during recent years: that of the balance of payments adjustment process, with particular reference to the industrialized countries. This latter problem has posed itself with particular intensity since the beginning of 1967, notwithstanding the strenuous efforts of the reserve currency countries to restore a better equilibrium of international payments by various measures. The defects in the balance of payments adjustment process have not only involved serious disturbances in payments between industrialized countries, but have also exerted a strongly adverse influence on the demand of industrialized countries for exports from the new countries and consequently on the latter’s development prospects. Moreover, the deterioration of the external accounts of certain industrialized countries has led to a substantial reduction in their development aid, while countries in balance of payments surplus have not increased their contribution correspondingly, so that the target of 1 per cent of national product for public and private development aid from industrialized countries was missed by even a greater margin during the last year.
The worsening in recent months of the major problem of international payments—that of the balance of payments adjustment process in the industrialized countries—and the simultaneous accomplishment of projects, also indispensable, relating to another problem—that of a possible shortage of international liquidity—necessarily gave the Annual Report a rather peculiar structure. In fact, the Report begins with a remarkable analysis of the manifestations of international payments disequilibrium for a year and a half and follows with a description of a system that appears unlikely to be destined to solve the difficulties referred to in the first chapter, since the facility for special drawing rights cannot serve as a permanent substitute for a balance of payments adjustment mechanism.
Now that the very important work on a possible shortage of international reserves is coming to a close, I wonder whether the time has not come to turn our attention to this problem of the balance of payments adjustment process.
The moral authority of the International Monetary Fund and the unique experience it has acquired appear to me, in fact, to be too well established for this study to remain academic. The data available to the Fund on the situation of its members and the possibility of undertaking consultations on such a timely issue with all those concerned would be an especially important guarantee of success.
For a study of this kind, undertaken objectively and on a broad scale, the Fund will remain true to its task of seeking solutions to its members’ problems in the interest of all. I have no doubt that in adhering resolutely to this purpose it can gradually establish the conviction that the balance of payments adjustment process ought to conform to more precise rules; in this way, some of the problems of the underdeveloped countries will appear in their proper light, which is that development depends closely on the position of the external accounts and the internal situation of industrialized countries. The problem of stabilization of commodity prices, the solution of which is undoubtedly important, appears to me to be subsidiary to that of the balance of payments adjustment process, since changes in commodity prices depend not only on changes in the supply of commodities but also, and perhaps to a larger extent, on the development of demand in high-income countries and on the measures they are induced to take to correct the impact of their internal policies on their external accounts.
The study that I recommend should be carried out, I am convinced, in a very constructive spirit and by taking fully into account the complementarity of interests between industrialized countries and developing countries, as was done in the case of the work on international liquidity.
After having dealt with a general problem, I should like to say a few words about developments in my country, since it provides a good example of the usefulness of our organization’s assistance and of the strong justification for the stabilization program it recommends. After a period of seven years of deep-rooted economic disorder, the Democratic Republic of Congo has succeeded, by a radical reform of its exchange system, in restoring a satisfactory level of reserves, in stabilizing prices, and in re-establishing the necessary conditions for an expansion of real income consistent with its capacity. The rehabilitation of public finances now in progress will, I am sure, make it possible to consolidate these gains.
The Fund, by its advice and credit, as well as by its assistance in providing experts, as it has done tirelessly since we became independent, has made a large contribution to our success. To this technical assistance, I should like to give due credit here, while at the same time expressing the hope that it may be continued so long as the need for it is felt.
Statement by the Governor of the Fund for the Netherlands—J. Zijlstra
Without exaggeration it can be said that during the year under review the international monetary system has been repeatedly exposed to serious strains. At the same time we can state with no little satisfaction that international cooperation, both between governments and between central banks, has functioned so effectively that many an impending crisis could be kept under control.
At the Annual Meeting at Rio de Janeiro, the Board of Governors adopted a Resolution requesting the Executive Directors to prepare the amendments to the Articles of Agreement and the By-Laws required to give effect to the new facility supplementing existing reserve assets. The Executive Directors submitted their report, together with the draft amendments, at mid-April 1968, and I would like to take this opportunity to pay tribute to them, as well as to the staff of the International Monetary Fund, for the excellent documents they produced with the devotion and expediency we are by now accustomed to, but nevertheless continue to admire. The necessary procedures for parliamentary approval and ratification have now been put into motion. I would like to express the hope that in the course of the year 1969 all conditions will have been fulfilled to be able, if the agreed required majority of member countries should so desire, to take the necessary steps for activation.
The special drawing rights by no means represent an entirely new monetary system: as I have already said, they supplement existing assets but do not replace them. Nevertheless, the new facility could pave the way for a more rational monetary system.
However, soon after the delegations had left Rio de Janeiro, serious problems became apparent.
1. As many experts had been expecting for a long time, the British economy appeared to be in a state of fundamental disequilibrium, to the extent that a devaluation of sterling could no longer be avoided. Intensive international consultation, preceding the actual decision, undoubtedly contributed much to arriving at a devaluation percentage sufficient and necessary to correct the fundamental disequilibrium. Indeed we can say now that the 15 per cent devaluation, supplemented by the governmental program which has been put into effect in the meantime, can be deemed sufficient for re-establishing equilibrium. The first hopeful signs of recovery are now apparent; I may add, however, that it is essential that the policy restricting internal demand be continued unabated until surpluses of sufficient size can be realized to enable the United Kingdom to repay its debts to the Fund and to others.
2. During the course of the year under review it became gradually clearer that the American balance of payments had developed so unsatisfactorily that drastic measures to restore equilibrium had to be taken without delay. After the restrictions on capital exports that had been put into effect at the beginning of the year 1968, the much discussed program for tax increases was at last adopted by Congress. There is little doubt that the prospects for a decisive improvement in the American balance of payments are now much brighter: in this respect it would seem that one of the principal prerequisites for a possible activation of the special drawing rights is nearing its fulfillment.
3. Apart from the problems concerning the two reserve currencies, the gold problem has attracted much attention during the period under review. Increasing uncertainties on the exchange markets have provoked substantial speculative gold purchases on the free market, resulting in gold losses—for the gold pool countries—of a magnitude that could but lead to the decision, taken at an urgently convoked conference in Washington on March 17, to discontinue all intervention on the free market. This decision reestablished, as it were, the situation that existed before the gold pool was set up in 1961; it has now become customary to speak of the “two-tier system.” In respect of the communiqué issued after the Washington meeting, I would like to say that the signatories of the communiqué have decided, in the interest of the proper functioning of this system, no longer to sell gold to the market, at the same time expressing the feeling that it is no longer necessary to buy gold from the market.
4. Finally, it gradually became clearer that a more definite solution to the problem of the so-called sterling balances was urgently required. The Basle arrangement, provisionally concluded last July and confirmed in September, provides for such a solution. This arrangement not only prevented an immediate threat to the stability of the monetary system from developing, it constitutes, moreover, a probably decisive step on the way to the termination of the reserve currency function of sterling.
Satisfaction concerning the way in which the stability of the international monetary system could be maintained during the past year should, however, not permit us to forget the important tasks that still lie ahead of us. In this connection I should like to stress briefly three points.
1. It appears to me of great importance that we now proceed to build in quietude on the foundations that were laid in the years behind us. Both the re-establishment of equilibrium in the balance of payments of the reserve currency countries and a gradual introduction of special drawing rights should be able to contribute to the restoration of real stability of the monetary system. These days we read about new far-reaching plans for reforms of that system. In this connection I have in mind, for example, the proposals for a “reserve settlement account.” I do not deny by any means that elements of the proposed schemes are based on sound and logical reasoning, and thus may present attractive aspects. But to my mind the hour has not yet come for such far-reaching reforms. We must avoid stacking one experiment on top of another. In a tranquil atmosphere confidence should be built up on the basis of existing foundations.
2. Of utmost importance remains—and in this respect I repeat a point I made in my intervention at Rio—a proper functioning of the adjustment process. The surpluses of the current account of the balance of payments of developed countries taken together must be sufficient for financing sustained—and even gradually increasing—capital exports to the developing countries. At the same time, mutually compatible positions on current and capital account should be brought about within the group of developed countries. The accompanying fact that the United Kingdom should be in a position to effectuate substantial monetary repayments over a series of years will have to be accepted in the sense that the other developed countries will have to allow for corresponding deficits on global account. Within the framework of this conception the United States will hardly be able to afford over-all deficits on any substantial scale in the future, for the reason that the ratio between liquid liabilities in dollars and the U.S. gold stock should not be allowed to deteriorate further.
3. In a previous paragraph I mentioned the arrangements agreed upon in relation to gold. It is clear that there remain unsolved problems in this field. I need only to refer to recent discussions in respect of the interpretation of the Articles of Agreement relative to the policy on gold purchases. It is of the greatest importance that a satisfactory solution to this problem be arrived at without delay; confidence in the maintenance of the monetary price for gold of $35 an ounce should be reinforced, since the entire present international monetary system is hinged on this price; the policy of gold purchases should be directed to this aim. In my opinion this is possible only if the discussions about the legal interpretation of the Articles concerned were to be temporarily suspended and in the meantime a “working arrangement” agreed upon.
In summing up, then, I feel inclined to conclude with another point I made in my intervention at Rio: what has been achieved so far should not be permitted to obscure the problems we still face at the moment. The problem of the instability of the monetary system has yet to be brought to a satisfactory solution, though in the year under review substantial progress has been made. Much remains to be done, however. I have already mentioned the adjustment problem and the practical functioning of the two-tier gold price system. May our recent experiences be proof that further success is possible.
Statement by the Governor of the Fund for Ethiopia—Menasse Lemma
Once again I am privileged and honored to be able to attend this Annual Meeting of the International Monetary Fund and the World Bank Group here in Washington, D.C. The inspiring and wise remarks of the President of the United States of America at our opening session have highlighted our proceedings this year. I would like to ask the Governor for the United States of America to express our respectful thanks to the President. Let me also express my gratitude to the Governor for the United States for the kind and now traditional hospitality extended to us here and the facilities provided to make our stay fruitful and pleasant.
The Annual Report for 1967 describes with clarity and frankness the economic happenings of the period. The year under review has witnessed sharp changes in the world monetary situation. In order to restore equilibrium to the currencies of the major trading countries, adequate corrective measures were and are being applied.
However, when we consider the performance of the year—and here I speak as a representative of a developing country—the results are not at all encouraging. The continued deterioration in the terms of trade of the less developed primary producing countries could not be halted. In addition, the flow of capital from many industrialized countries has dried up almost completely. And again, the restrictive measures adopted in the industrialized countries, to correct imbalances in their payments position, affected the third-world countries adversely, creating a serious strain on their reserve balances.
Under these circumstances, in order to safeguard their payments position, meet bare minimum imports, and service their evergrowing indebtedness, many of the developing countries were compelled to adopt severe restrictive measures. These measures, by dampening internal demand, threaten to slow their economic tempo, thus damaging the future prospects for growth.
The remarks which I have made in connection with the difficulties experienced in the developing countries are not intended as advocating indirectly uncontrolled and disorderly monetary expansionist policies in the industrialized countries. They are made simply to emphasize the difficulties experienced by the less developed countries, whose prospects of expanding their foreign trade are in jeopardy.
As these developing countries are threatened with the perils of economic stagnation, greater efforts are now required to remove these dangers. In support of the President of our Bank, in his determination to raise massive amounts of capital for investment in the less developed countries, the Fund must join forces with the Bank and explore in what way we can all obtain the maximum benefit by accelerating capital inflow for the more needy countries.
In conclusion, let me thank the Managing Director, the Executive Directors, and the staff of the Fund for the achievements of the year. Special mention should be made of the interesting paper presented on the problems of stabilization of prices of primary commodities, consequent to the Resolution passed in Rio last year. During the coming year I hope that it would be possible to move from the study to the practical stage. As primary products are the main foreign exchange earners of many developing countries, to meet the challenge of the Development Decade and the high hopes and expectations of our peoples, we must now involve the Fund actively to find practical solutions to the very pressing problems related to commodity financing and the flow of capital.
Statement by the Governor of the Fund for Nepal—Yadav Prasad Pant
I am happy to participate in the Twenty-Third Annual Meeting of the International Monetary Fund, and thank you, Mr. Chairman, for having given me the opportunity to speak on this occasion. Mr. Chairman, you have rightly focused in your opening address on some of the important tasks which we have to accomplish in the field of international monetary affairs. I wish, first of all, to congratulate Mr. Schweitzer on his reappointment as Managing Director of the Fund. Under his able leadership the international monetary crisis could be resolved over the past years, and we are confident that the Fund will be able in future also to cope with the series of problems facing the world at the moment.
The Annual Report, which is being considered, highlights in our opinion both brighter and darker aspects. Though some encouraging trends are seen, there are at the same time some constraints which need to be quickly resolved to put the world economy in better shape. Particularly, the situation in the industrial countries, which led them to take various corrective measures, had significant repercussions in other countries too. Accordingly, we also had to make certain adjustments. In my own country the monetary situation in the period under review underwent important changes, and we had to take appropriate measures in both the monetary and fiscal fields. Nepal established a par value with the Fund and this in itself, I hope, will provide additional strength to our economy. In all these matters, the expert advice of the Fund made available to us has been of much significance.
The international economy has undergone a basic change between the period when the Fund was established and now. The main tasks facing the Fund then were of short-term nature, such as the liberal trade and payments practices of the gold standard days. International economic problems now are much more complex and thus of a long-term nature. This has been due to a large extent to the advent of a large number of new, independent, and underdeveloped countries with special problems of their own who now find their resources extremely inadequate to keep up in the race for economic growth. The policies and practices of the developed economies applied indiscriminantly to such developing regions sometimes aggravate the situation further. I therefore feel that the Fund should focus its attention on these countries, which now form the majority. The financial and payments needs of these countries are of a long-term nature and the short-term facilities so far provided to them by the Fund have proved rather inadequate to meet their pressing needs. The proposed arrangements for creating additional international reserves, therefore, under the special drawing rights scheme usher in a new era for the member countries in general and a group of developing countries in particular. The SDR facility relates to the longer-run development of a more rational system, and the member countries of the Fund have agreed on the need for deliberately created reserves to satisfy noninflationary requirements for possible growth in trade and production on a global scale. The success of the SDR scheme, however, will depend much on its working procedures. Nepal is ready, in principle, to accept this and we are in the process of ratification of the Amendment to the Articles of Agreement of the Fund in accordance with our constitutional provisions. Although Nepal, I hope, will not have to utilize her share of special drawing rights at least for a couple of years, we are fully aware of the long-term needs. We have decided to join the SDR facility at this stage also to contribute to the international monetary solidarity to the extent of our capacity.
The annual reviews of the activities of the Bank Group and the Fund contain certain proposals with regard to the financial provisions for diversification programs and the improvement of the competitive position of primary commodities. On the general basis, these proposals, which constitute the measures both for short-term and long-term problems of primary producing countries with balance of payments difficulties, are more or less complementary. We feel in this respect that all these proposals are worthy of much fuller consideration in the field of the commodity problems of developing countries. It would also be necessary that each individual country, depending on its available resources and level of economic growth, should undertake separate and more detailed studies of these proposals.
I welcome the healthy trends started by Mr. Per Jacobsson and further developed by his very able successor, Mr. Schweitzer, of giving special consideration to the needs of developing countries. I am confident that the Fund’s prospective policies and measures will undergo further transformation, according to needs in the years to come. There is no doubt that the Fund is being looked to by all member countries, especially by the small countries, as their friend, philosopher, and guide in the fields of monetary, financial, and payments problems.
Statement by the Governor of the Fund for Libya—Khalil Bennani
I am indeed honored to address this Annual Meeting of the Board of Governors of the Fund and the Bank, which is convened to review activities and achievements of these institutions during the preceding year, and to consider ways and means of solving the problems that are affecting the world economy, international monetary system, world reserves, international liquidity, and economic advancement of developing countries and acceleration of this process.
The 1968 Annual Report of the Fund rightly points out the heavy strains to which the international monetary system was subjected in the last quarter of 1967 and the first half of 1968. The uncertainties about the stability of currencies resulted in flight from the currencies to gold, to a large extent, and movements of large funds from one center to another. The latter further distorted external accounts of the countries concerned. Thanks to international cooperation, establishment of the two-price system for gold, and measures taken by certain countries, confidence in the existing international monetary system was restored. Stresses were again noticeable in May and June and as late as the second half of August last, when speculative activities in the hope of adjustment of parities of some currencies gained momentum. There is a need to evolve measures to reduce vulnerability of the monetary system.
I extend my delegation’s full appreciation and thanks to the Managing Director, the Executive Directors, and the whole staff of the Fund for the progress made in connection with the new facility based on special drawing rights in the Fund. I hope that the Proposed Amendment would be ratified soon by the required majority of member countries, so that the deck may be cleared for its activation for supplementing existing reserves as and when the need arises. This would ensure that growth of world trade is not hampered by inadequacy of international liquidity and at the same time impart some stability to the monetary system.
The 1968 Annual Reports of the Fund and the Bank throw into bold relief the importance of the stabilization of prices of primary products at a remunerative level for the economic advancement of the developing countries. The decline and instability of prices of primary commodities in 1966 and 1967 have adversely affected foreign exchange earnings of quite a large number of developing countries, particularly those depending on the export of a small number of primary commodities or a single commodity. Strains developing in the external position of some primary producing countries not only necessitated curtailment of their imports but had a dampening effect on their over-all economic activity. The necessity for expediting the joint study that is being undertaken by the Fund and the World Bank of the problem of the stabilization of prices of primary products cannot be overemphasized. I am sure that support from member countries of the Fund would be forthcoming for any feasible proposal for the handling, by the Fund, of the financing of the buffer stocks or any other arrangement that would impart stability to the prices of major primary commodities. …
The second session of UNCTAD held in February and March last favored the granting of trade preference to the developing countries. Let us hope that some positive response would be forthcoming in this regard, which would help the developing countries in increasing their exports and accelerating their economic development.
I extend my delegation’s congratulations to the Managing Director of the Fund and the President of the Bank and its affiliates for the continuing excellent work done by these institutions and the efforts that are being made for fulfilling the aims and objectives for which these institutions were set up to serve mankind.
Statement by the Governor of the Fund for New Zealand—R. D. Muldoon
Since we last met in Rio the international financial system has been subjected to more stresses and strains than for many years. That these did not result in disruptive consequences for world trade and payments is due to the remarkable degree of cooperation and understanding between the governments and central banks of the countries concerned. During this severe testing of international financial cooperation unique and improved arrangements have been made between the nations. These should smooth the way for the readjustment process necessary to eliminate some of the imbalances which exist between major trading nations.
Of great significance is the scheme for special drawing rights approved in outline at last year’s meeting. The Executive Directors and the Fund staff are to be congratulated on the work which was done to bring the special drawing rights scheme to the stage where it is now before governments for approval. New Zealand has passed the necessary legislation, and I can inform the International Monetary Fund that my country accepts the Amendment to the Fund Articles and that the appropriate instrument undertaking all the obligations of a participant will be deposited with the Fund as soon as possible. The New Zealand Government hopes that the Amendment to the Fund’s Articles will enter into force at an early date. When this has been done, it will be necessary to carefully assess the effect on world trade and payments of the efforts of the major countries to reach a balance so that the scheme is activated in adequate time to avoid any check to economic growth due to inadequate reserves, and to assist further progress toward liberalization of international transactions. I hope that, when the question of activation is under consideration, the European countries with the power of veto will approach this question of reserve creation with proper regard to the problems and needs of the smaller members of the Fund and that they will not overemphasize the payments position of major industrial countries.
The Basle agreement covering sterling balances and the arrangements agreed between the United Kingdom and other sterling area countries is a further example of international cooperation. This should ease the pressures on sterling and should provide a greater degree of stability for this major reserve currency. As far as New Zealand is concerned, these arrangements were completely satisfactory.
During the coming year the policies of the United States, Canada, Japan, and the United Kingdom are all directed toward restraint. The Annual Report points out that this will mean little, if any, rise in imports by these major countries in world trade. This may have adverse effects on the demand for, and prices of, primary commodities. This in turn could make it difficult for many of the smaller countries which are exporters of these commodities to maintain a balance in their transactions with the rest of the world. New Zealand, along with other countries heavily dependent on primary commodity exports, looks ahead with some uneasiness to the consequences of these policies. Nevertheless, we recognize that it is inevitable that countries such as the United States should take steps to eliminate their substantial deficits and that if this process is delayed too long it could become more difficult to carry out without disrupting world trade.
Further international cooperation will be necessary to find a means of accomplishing the readjustment between the major surplus and deficit nations with the minimum harmful effects on the trade of these nations with other countries. The Annual Report has noted this problem. It emphasizes that the maintenance of satisfactory growth in world trade in such a situation will require expansionary policies on the part of the industrial nations in surplus balance of payments positions having unutilized capacity for expansion and strong reserve positions. These countries must be prepared to encourage the readjustment by action to generate and facilitate increased demand for imports to absorb the expanding exports aimed for by the deficit countries. Only if this is done will the readjustment take place in an expansionary environment favorable to primary commodity prices. If the readjustment should fall too heavily on the reduction of imports rather than the expansion of exports in countries dominant in world trade, the consequences for smaller deficit countries could be disastrous. The surplus countries must be prepared to accept a check to the increase in their reserves and the possibility of loss of reserves without taking countermeasures.
New Zealand will be closely watching trends during the coming year, particularly to assess the consequences for such commodities as wool. The New Zealand Government is hoping also for a responsible approach to the problems arising from excessive support for the production of dairy products in major industrial nations. These policies are likely to be self-destructive and we welcome the realization of this fact by some participants. The statement on this matter by the Governor for Germany will be warmly commended in New Zealand. The offering of surpluses at subsidized prices in the markets of traditional exporters strikes a blow at international economic cooperation.
Partly arising from the slowdown of demand and output in major industrial countries during 1966 and early 1967, and partly because of a structural change for what was New Zealand’s main export commodity—wool—the rate of growth of New Zealand’s export income was severely checked in that period. Although there has been some recovery in the demand and prices for some exports, the deterioration in our terms of trade with the rest of the world in a period of two years has been about 17 per cent. This deterioration and the future outlook for world trade leads us to assume that any significant improvement during the coming year is unlikely. To accommodate our economy to this situation a period of severe restraint has been necessary, covering fiscal and monetary remedial measures, to reduce domestic demand for imports and to create the environment in which the devaluation, which accompanied that of sterling, could achieve the objective of halting the excessive deficit on current account. During the year ended October 1967 the deficit on current account had reached $NZ 136 million. In the year ended last month we had succeeded in changing this to a surplus of $NZ 50 million. We are grateful for the help provided by the International Monetary Fund during this period which, together with short-term credits from other governments and institutions, provided the support we needed to enable an orderly adjustment to the new situation with which we at present have to live. These credits enabled us to avoid any drastic intensification of restrictions on trade and payments. Indeed, during this period it was possible to continue the Government’s program of liberalization of import controls. We have this year found it possible to repay a substantial amount of the short-term credits raised, including voluntary repurchases from the International Monetary Fund.
It is clear that the key to resumption of a reasonable rate of economic growth must lie in channeling more of our resources into exports and competitive import saving to accommodate ourselves to the adverse terms of trade. This reshaping of the economy will require greater emphasis on the efficient use of our resources of labor and capital. To this end, and to ensure the cooperation of all sections of the community, a National Development Conference with committees and working parties covering all sectors of the economy is now engaged in the task of setting targets for an integrated program of development for the next ten years. At a recent meeting targets were set for growth in various sectors designed to achieve an average annual growth of 4½ per cent. …
Because of our preoccupation with commodity prices we have been looking forward to the study initiated at last year’s Annual Meeting on the problem of the stabilization of prices for primary products. The study so far completed and distributed as Part I is a useful one, but I had hoped that more progress would have been made. Little attention has been given to those products which are of particular interest to New Zealand, that is, temperate agricultural products. While these international organizations of ours, and other organizations, pursue their leisurely way toward agreements on commodity prices and markets, individual primary producers and their families throughout the world have personal problems ranging from financial insecurity to downright starvation. It is essential that the major industrial nations give more of this kind of aid, that is, aid to find a solution to the problem of the man who simply wants a reasonable return for the products of his toil. This is not charity. Ultimately, it is simply international common sense.
The staff study refers to the problem of diversification of production in order to remove the problem of surplus capacity in primary products. It seems to imply, however, that this will need to be done by a long-term transformation of the structure of production and exports of the primary producing countries. In many cases, however, the problem of surplus capacity has originated in the artificial stimulus to production of primary products or substitutes for them in industrial countries. I believe that these countries are much better equipped and in a stronger position to undertake any diversification which may be necessary than the smaller primary producing countries. We have noted with interest the reference made to this point by the Managing Director of the International Monetary Fund in his opening address, and fully agree with the emphasis which he gave to this question. While the President of the World Bank was speaking of his plans for increased capital aid to developing countries, I was reminded that a massive flow of aid for development will be rendered useless if the markets for the products of that development are destroyed by short-sighted, protectionist policies implemented for political reasons. This is particularly true of the agricultural development to which he gave so much emphasis.
My country supports the Resolution urging an early completion of the study which has been recommended by the Executive Board.
Statement by the Governor of the Bank for Ghana—A. A. Afrifa
It is my great pleasure and honor to participate in this year’s Annual Meetings. …
I join my colleagues in expressing my satisfaction at the reappointment of Mr. Schweitzer to a second term as Managing Director of the Fund. I congratulate Mr. Schweitzer personally and wish him further success in his work.
For Ghana the past year has been a period of relative stability in which some modest growth was recorded. As a result of the stabilization program, initiated in the first half of 1966 and continued through to June of this year, it has been possible to arrest inflation and to reduce the balance of payments deficit.
The economy also benefited from the improvement in the price of cocoa and from a relatively good harvest of domestic food crops. The effect of these factors has been the moderate easing of the external payments situation.
We ourselves recognize that much still remains to be done. The stability in prices has been achieved by effecting drastic cuts in our investment programs. As a result of the cutback in investment, the level of unemployment is high. The price of cocoa, although reasonably firm now, continues to be the most important factor of instability in the Ghanaian payments situation. Debt servicing continues to impinge upon resources available for investment to ensure future growth.
Our stabilization program has been a success so far, thanks to the cooperation between the Fund and Bank on one part and ourselves on the other. Stabilization as a policy has meaning to us only insofar as it permits us to recheck our bearings on the road toward economic development. Consequently, while we are committed to maintaining the gains realized during the stabilization period, my Government has, this year, introduced a Two-Year Development Plan which is designed to raise the level of investment in the country and to prepare the way for further sustained economic development.
The problems which have engaged the attention of the Fund and the Bank in recent years should be of concern to both developed and developing countries. I am referring particularly to fluctuations in the prices of primary products and the flow of aid to developing countries. As regards the former, we note that the Fund and Bank staffs are currently engaged in completing studies and in working out an acceptable scheme on stabilization of prices of primary products. Such a scheme in our opinion is long overdue. It has been our experience that violent fluctuations in prices of our exports have not only led to ad hoc measures which have threatened the promotion of orderly long-term trends in both supply and demand, but have also prejudiced the efficient long-term planning and allocation of resources. We do not think that this is a problem for us, the developing countries alone. On the contrary, we feel that the developed countries also have a direct stake in the scheme since it will, among other things, assure stable market conditions for both the exporting and importing countries and further the expansion of world trade.
It is the considered view of my delegation that the Fund and the Bank should be actively associated with the working out of the scheme. Without prejudging the final outcome of the proposal, however, I would like to say that my delegation is attracted to the idea of a buffer stock scheme for certain commodities where the economic feasibility has been proved. We would also like to see the Fund and Bank make direct contributions of working capital to member countries to carry stocks. In this regard, I wish to record my delegation’s reservations against the view that a member would have to show a balance of payments need before the Fund could make available the resources needed to finance the holding of stocks. The details of the scheme are still being formulated, but I must say that the broad principles are acceptable to us. We therefore find it difficult to understand the noncommittal attitude of some developed countries to the proposals in spite of their numerous professions of sympathy and good will toward developing countries. I would urge these countries to reconsider their attitudes and lend support to these schemes which in our opinion are aimed at nothing more than an equitable allocation of resources among the rich and the poor countries.
This brings me to the question of the flow of capital to developing countries. As a result of recent developments in the world trade and payments situation, the flow of both private and official capital from the developed to the developing countries is not likely to show much increase in the near future. Indeed, there are indications that it may well decrease. Moreover, unless definite steps are taken to reverse the trend, the terms on which capital is made available to developing countries will continue to impose hardship on their balance of payments and eventually lead to very little net inflow, possibly outflow, of capital. …
Before concluding, I wish to thank both the Fund and the Bank for the assistance which my Government has received from them in the past year. The staffs of both institutions have cooperated very well with our officials. I would like, on behalf of myself and of my Government, to express my appreciation for this cooperation.
Statement by the Governor of the Fund for the Philippines—Alfonso Calalang
Allow me to congratulate you, Mr. Chairman, and the Managing Director and the Fund staff for the excellent facilities and efficient handling of these proceedings. I have been delighted to listen to the address of President Lyndon B. Johnson on the first day of the meeting. I have been impressed also by your eloquent opening addresses and by the hospitality of our host country, and I join the other Governors in conveying our grateful appreciation to the Government and people of the United States.
The events of the past year, as presented in the Annual Report, have elicited mixed reactions from a relative “newcomer” though deeply involved member like myself. I have noted with some gratification, for instance, the growing effectiveness of international cooperation in monetary affairs as recently exemplified by the decisiveness and promptness with which the international liquidity crisis was handled last year. On the other hand, I cannot help but feel that in seeking possible solutions to the problem of international liquidity, as exemplified by the proposed special drawing rights scheme, the plight of the developing countries of the world was again not given due consideration. The widening gap between the “have” and “have not” countries therefore continues to raise grave doubts about the adequacy and character of present international cooperative efforts to deal with the problem.
The first chapter of the Annual Report itself confirms the fact that the tendency continues for the deceleration of economic activities in the leading industrial countries to affect the primary producing countries, particularly in less developed areas. While the disturbances in the world monetary system, triggered by the devaluation of the British pound and other currencies and the subsequent speculative pressures on the U.S. dollar, were promptly met by concerted action on the part of the other major industrial countries, the adverse effects of this brief period of instability are still felt in developing countries long after the critical period has passed. The slowdown in economic activity and the adoption of measures of restraint in developed countries have reduced the demand for the exports of primary producing countries and have given rise to serious balance of payments difficulties. The Philippines, for instance, suffered a trade deficit in 1967, the magnitude of which has not been experienced in the last 17 years. Inevitably, the developing countries had to put the brakes on their development efforts, which, in the light of the rapid growth of population in these areas, these countries can ill afford. While this situation did not prevail in some countries favored with substantial foreign exchange resources, in the Philippines the tremendous trade deficit had to be financed by increased borrowings abroad on increasingly expensive terms. Moreover, along with the adoption of appropriate domestic measures, the Central Bank of the Philippines was constrained to introduce certain temporary restrictions on specified external payments transactions to arrest the deterioration in the country’s external accounts. I would be the first to say, therefore, that were it not for the facilities of the Fund upon which my country had drawn considerably during the past year, we would have been in greater difficulties.
But what of the immediate future? The policies of restraint adopted by the major capital exporting countries have hardened the terms of assistance available to us. It is, therefore, with special interest and a deep sense of urgency that I look forward to some assistance from the special drawing rights scheme. But as I look closely at the proposed plan, I find that the industrial countries are going to take the lion’s share of this new reserve currency. I have to reiterate frankly, therefore, that my country accepted this scheme with reservations. While we realize that this was the result of compromise, we consider it only as a first step. It is a grave defect in the distribution of these drawing rights that no realistic recognition was given to the particular needs of the countries in the “have-not” category. If this scheme has to be based on the quota contribution of the member countries, then the next logical step after this is to give special quota increases to these countries to enable them to enjoy a greater share of the special drawing rights along with the other financial facilities of the Fund. Unless these complementary measures are taken, these insignificant increases in their reserves arising from the special drawing rights will be quickly wiped out as the terms of trade continue to go against these countries.
I view with concern also some of the other proposals in connection with the activation of the special drawing rights scheme. I am especially concerned to know why the required majority of the total voting power has to be increased from the present 80 per cent of the total voting power to 85 per cent. If it is the original intention of these supplemental drawing rights to assist countries in balance of payments difficulties, the activation of these rights should be within the normal or present required majority of the total voting power, or even less, if I may say so.
I note also in the Annual Report that, with the United States and the United Kingdom in a posture of restraint, it is the countries in continental Europe which are now enjoying surplus positions in their balance of payments. In the interest of international monetary cooperation and to promote the continued advance of international trade, the Annual Report suggests that these countries now take a more active part with their fuller resources in buying the products of the primary producing countries and to sustain if not increase the flow of capital assistance.
To this suggestion, which I hope will be given careful consideration by the countries concerned, I would like to add a few recommendations. The first is that some consideration should also be given to the feasibility and implications of expanding the list of reserve currencies. This would enable nonreserve currency countries to diversify their foreign currency holdings which in turn can help them minimize their “capital” losses when a particular reserve currency is devalued vis-à-vis another reserve currency. In lieu of this—or in addition to this—a scheme may be devised whereby the value of the holdings of reserve currencies can be maintained in cases of devaluation. Although I am not prepared to go into the specifics, such a scheme, for example, may provide that if the British pound is devalued vis-à-vis the dollar, the absolute value of British pound holdings of nonreserve currency countries will be adjusted upward so as to maintain their value in terms of dollars or of any other reserve currency. As in the case of the two-tier price system for gold, this scheme may be applied only to central bank holdings.
Speaking for the less developed countries, I hope we have learned our lesson that, until a workable scheme of stabilizing the prices of commodities is adopted, we must husband the use of our export receipts during good years in order to conserve them for the lean years, if we are to sustain our efforts in pursuit of the economic development of our countries.
In concluding my remarks, I would like to state that, notwithstanding my observations today, I am grateful to those who in one way or another contributed to the study and finalization of this scheme. Once again, Mr. Chairman, I wish to thank you for giving me the time to express my thoughts on some of the important issues that we face today.
Statement by the Alternate Governor of the Fund for Kenya—D. N. Ndegwa
On behalf of the Kenya delegation, it is my duty and privilege to extend the compliments of my country to Mr. Schweitzer and to offer our most sincere congratulations on his re-election to the high office of Managing Director of the Fund. His report to this assembly was a lesson in lucidity of presentation, and it is our hope that it will receive wide support and encouragement.
The events of the past year brought to sharp relief the damage done to the economies of the developing countries by the slowing down of the rate of growth of a number of industrial countries. On more than one occasion the shortage of international liquidity forced some of these countries to adopt measures restricting demand; on the other hand, countries with balance of payments surpluses did not adopt expansionary measures in order to ease the adjustment processes for the countries experiencing balance of payments difficulties.
It is difficult to escape the conclusion that the shortage of international liquidity was an important factor contributing to the stresses and strains which nearly brought about the breakdown of international monetary cooperation built by common effort over the years since the war. The devaluation of the pound sterling brought home to us the shock waves of international monetary disturbance, and we welcome the efforts which the United Kingdom is making to stabilize the value of the pound sterling and hope these measures will receive universal support.
It seems clear that measures to increase world liquidity were overdue, and if they had been taken earlier, the monetary and financial history would have taken a different turn and some, at least, of the harmful developments would have been avoided. I refer to the plan for special drawing rights. We were not quite happy about all the features of that plan. We still think that an opportunity had been missed to link the creation of additional liquidity with the setting aside of more funds for aid to developing countries. We believe, however, that it was and is more important to deal with the shortage of international liquidity than to have a plan which would be perfect from all points of view. We do, therefore, hope that the plan as adopted by the Fund’s Governors will soon receive the legislative sanction of the member countries and that the majority will then be found for generous creation of liquidity within the framework of that plan.
The events of the recent past are of great relevance for another subject which we have on the agenda of our meeting, namely, the Stabilization of Prices of Primary Products. As I have said before, countries producing primary products were most affected by continuing weakness of demand in industrial countries.
It is the hope of my country that measures to improve international liquidity will permit a more even growth of the demand for primary products. We do not think, however, that this hope should prevent us from making arrangements to mitigate the impact on prices of primary products of any slackening in the world rate of growth. We have, therefore, followed with interest the studies which have been made on the subject as a result of the Resolution adopted at last year’s Annual Meeting in Rio de Janeiro. Our general impression is that the approach taken in most of the memoranda may have been too timid and may concentrate more on the analysis of difficulties involved than on proposals of new remedies. It would appear that the memoranda look for action based on powers given to the Fund by the Articles of Agreement as they now stand. We would think that that approach is too restrictive. Recently we have had to agree to a change in the Articles of Agreement in order to make possible the adoption of the plan for special drawing rights. In our opinion the question of stabilization of prices of primary products is important enough to warrant a further change in the Articles of Agreement to allow a more effective role to be played by the Fund than is possible under the present charter. If it were found that direct financing by the Fund of international stockpiles of raw materials would help to solve the problem, the Articles of Agreement should be changed to permit the adoption of such a plan.
The story of economic life in Kenya does not require so many words to describe it. We have no resources to sustain rapid economic growth. Since the devaluation of sterling, we have painfully rebuilt our foreign exchange to respectable levels of predevaluation. While we are doing our part, we invite every member of this world community to come and invest in success. In the words of our President, it is harambee time—pull together for progress.
Statement by the Governor of the Bank for Somalia—Abdullahi Jirreh Dualeh
Allow me first of all to give my cordial greetings to the participants in this international gathering and to thank the City of Washington, which traditionally acts as our host, for the friendly—thus, typically American—reception accorded to us.
I should like to express my Government’s as well as my own personal satisfaction at the appointment of Mr. McNamara as President of the World Bank and the confirmation in office as Managing Director of the Fund of Mr. Schweitzer… . My Government also welcomes the new countries—Botswana, Lesotho, Malta, and Mauritius—to membership in these institutions.
Last but not least, I congratulate the staff of the Bretton Woods institutions for their excellent performance, and in particular wish to stress the importance of the work undertaken toward the stabilization of prices of primary products. I look forward to concrete steps which may contribute to resolve the long-standing, and for us very important, problem of these prices.
May I now register my regret over the fact that there has been a decline, in the course of last year, in the assistance provided by these three financing institutions… .
I should now mention that, within the framework of the Short-Term Development Plan of Somalia, there has been established, in early 1968, the Somali Development Bank, which is to finance by means of medium-term and long-term loans, productive activities that, by their nature, require heavy investments. May I express the hope that we may count on the assistance of friendly countries and of these institutions to further this new initiative.
As regards cooperation in the monetary field, an important agreement on amending the Fund’s Articles to accommodate the special drawing rights scheme has been concluded. This new arrangement does away with the problems encountered in bringing international liquidity in line with the actual requirements of world trade and paves the way for a sound development of economic and trade relations among the member countries of the Bretton Woods institutions. The availability of these means of payment represents a great help for the developing countries, whose development activities are often impeded by chronically adverse balance of payments positions. I therefore hope that this new scheme will gain unanimous support from all member countries. As regards Somalia, the amendments have already been submitted to the Government and to Parliament for formal ratification.
We listened yesterday morning with great interest to Governor Colombo of Italy’s proposal aiming at providing a link between the special drawing rights facility and the financial needs of economic development. We wish to join him in suggesting that this proposal be carefully studied and eventually implemented.
In going through the Fund Annual Report I have observed the huge profit that the Fund has made last year. These amounts have been provisionally put into the General Reserve pending the Board of Governors’ decision.
It is the view of my delegation that these profits should not be distributed. Instead we suggest that the bulk of these profits be distributed through international investment institutions in the form of development assistance. Failing this, we would ask that these funds be used to lower the Fund’s charges on its transactions with developing countries.
Coming now to the stand-by arrangements concluded with the International Monetary Fund, the amounts involved have increased from $591 million in 1966/67 to as much as $2,352 million in 1967/68. This substantial increase in the stabilizing activities of the Fund once again evidences the usefulness and the desirability of maintaining and developing further all those forms of international monetary and financial cooperation in order to guarantee monetary stability and thus also guarantee freer trade.
In the last two years several factors have adversely affected our insufficiently developed economy. The closing of the Suez Canal has put greater strain on our exports to Europe; also the devalution of the pound sterling came as a blow, by which we suffered heavy losses in our currency reserves. Thus once more we had to avail ourselves of the assistance of the IMF, in the form of a stand-by arrangement for $7 million. In the year under consideration Somalia received also considerable technical assistance: I may mention, in this connection, the help obtained in drafting the new law governing the functions and operations of our Central Bank; the draft is currently being discussed by Parliament.
We in Somalia believe that aid alone will not solve our problems. In fact we know that without self-help any efforts we make can be meaningless. We therefore have drawn ourselves a timetable for the next three years in the form of a Short-Term Development Plan, which has just been released.
The Development Plan makes use of our experiences of the last eight years of independence and avoids the shortcomings of our First Five-Year Plan. It is based on projected internal resources and available external aid. It lays emphasis on the very sectors that President McNamara has singled out in his opening speech as the basis of sound economic development, i.e., agriculture, animal husbandry, and diversification of exports.
We have every reason therefore to look to the future with optimism, without at the same time being complacent since the path to economic growth is indeed very difficult and requires both courage and caution.
Statement by the Governor of the Fund for Burundi—Joseph Hicuburundi
Weighty matters have just been discussed; decisions have been made that will have important effects on the economic and financial future of the entire world.
Burundi, a small country in the center of Africa, will derive some benefit from them—at least, I hope so. I must confess, however, that our day-to-day concerns, which we share with many other developing countries, seem to us very modest in comparison with all of the subjects discussed.
We can better describe our problems by quoting a few figures. For a population of over 3 million, our foreign exchange expenditure amounts to $25 million a year, our budgetary problem—let us say the word, our deficit—which we are trying to overcome is $2 million. To achieve a balanced budget, and especially to release our country from its isolation and its subsistence economy, will require monetary, physical, and human resources that the State of Burundi and its people do not possess.
It is true that my country has benefited for the past four years from technical and physical assistance from the Monetary Fund, and the stand-by credits granted to us have enabled us to stabilize our currency to an exemplary degree. This aid is given on reasonable terms, which are, in fact, very educational to my country. Each negotiation enables the authorities of Burundi to get a better grasp of monetary and financial problems and to make an educated choice of the most effective means of maintaining the value of our currency and improving the state of our public finances.
I must indeed emphasize the importance to a country like Burundi of the efforts exerted by the Fund and the Bank to recommend various methods in order to stabilize commodity prices.
But this Monetary Fund assistance, supplemented by various multilateral and bilateral aids, is proving clearly inadequate to lift our country out of its present situation. We therefore wished to follow the advice given by Mr. David Rockefeller in a widely noted lecture last year in Rio. To that end, we turned to the private sector—the foreign commercial banks.
In order to attract this private capital, we had first done our utmost to show our good faith and our confidence in the future:
We adhered to the Convention on the Settlement of Investment Disputes between States and Nationals of other States.
We promulgated an investment code very favorable to foreign investors.
We adopted measures authorizing foreign companies to transfer all of their profits after paying taxes—very moderate taxes, by the way.
We communicated with many private banks of great international importance; all but one gave negative replies. There again, the only place we encountered encouragement was in the public agencies.
The indecision of some and the indifference of others show that much remains to be done if the developing countries are not to turn away from the spirit of free enterprise. …
In closing, I should like to congratulate Mr. Schweitzer upon his reappointment for another five years, and to thank Mr. McNamara for having taken stock, immediately upon assuming office, of the resources and uses of the Bank and its affiliates. I am sure that this will bring about decisions that will provide more and better aid to the little countries too often neglected in the past. These little countries are inspired with a strong desire to enter upon the path of economic development and must benefit from a greater share of international public and private cooperation.
Statement by the Governor of the Fund for Paraguay—Carlos Chaves Bareiro
I have come to this meeting full of optimism, believing that, if we were able to overcome the difficult problems created by the international monetary situation at the time of our last meeting in the beautiful city of Rio de Janeiro, this proves that with determination, mutual assistance, and a spirit of fair play we shall be able to preserve the principles upon which our institution was founded and bring about the triumph of the noble aims of “promoting the system of free world trade and international payments, as a means of helping member countries to progress economically and achieve a high level of employment and improved living conditions.”
Having read the Annual Report of the Fund, I feel bound to commend the Managing Director, the Executive Directors, and the entire staff for their work and their achievements. To quote an astute remark made by an observer of world monetary problems, I might say that by far the greatest of these achievements is the simple fact that we can meet once again in this forum and go on talking the same language that prompted us to get together 24 years ago.
Before embarking on a consideration of our country’s efforts and of the highly appreciated work done by the International Monetary Fund, I wish to refer to events that are also of great importance, and in particular to the tour of Latin America by the Managing Director of our institution following the Twenty-Second Meeting held in Rio de Janeiro. Paraguay was honored by the visit paid to it by Mr. Schweitzer and his distinguished assistants. I wish at this point to record our gratitude not only for the interest he showed but also for his appraisals and analyses of socio-economic and, more especially, monetary problems, and of the decline in the prices of primary commodities. In this latter connection, we feel confident that the Fund will act on the study being made in this field and will make its resources available with a view to solving this burning issue. For this I offer to Mr. Schweitzer our renewed and sincere thanks, as well as for his remarks and, above all, for his having taken the time to see and admire the sights of our country and to find out what the facts of our economic and social life are and what persevering efforts are being made by our people.
Paraguay, a primary producing country, could not escape the repercussions of the restrictions imposed in the traditional importing countries, which led to only a minute increase in the value of world trade and left virtually unchanged the aggregate value of imports from the primary producing countries, thereby pointing up once again how they are inevitably affected by the trading levels of the industrialized countries.
It is for this reason that we enthusiastically endorse the warning sounded in the Annual Report just mentioned, when it draws attention to the basic contradiction that exists between the enthusiasm which we all voice, the efforts being made by the developing countries and the fact that these efforts are being doomed by their external situation, unless there is a substantial increase in the capital and assistance they receive and “their exports are afforded freer access to the markets of the industrial countries.”
Since, as agreed at the meeting of Latin American Governors of the Fund, the Governor for Venezuela, Dr. Benito Raúl Losada, has been designated to make a statement on the world situation, the solutions sought and found, all the problems that affect Latin American countries equally, and all related matters, I shall confine myself to taking this opportunity to report on the development of the Paraguayan economy and the way in which we are solving our particular problems.
We have moved resolutely forward with the policy of monetary stability begun in 1957, and, although adverse factors unfavorably affected our balance of trade and our balance of payments, we are managing, by adapting to circumstances and with the aid of the reserves accumulated in previous years, to overcome the difficulties that have arisen.
The development of the country’s economy is being strongly influenced by our dealings with the rest of the world, which proceeded smoothly and without upsets, in spite of the trade deficit of the past three years. The deficit recorded on the exchange of goods and services has been offset by short-term and long-term capital movements, such as direct loans from international lending agencies and direct investments in the private sector.
In this connection it is worth mentioning that our country maintains cordial relations with those international agencies, through which it is capitalizing its own resources and furnishing counterpart funds for loans to finance development programs.
Market restrictions were the factors that caused the physical volume of exports to drop to 80,200 tons below the 1966 level. The chief products affected were maté, lumber, quebracho extract, coconut oil, coffee, and fruits in general.
While it is true that virtually all goods of agricultural origin fetched lower prices, the effect of this factor was less serious than that resulting from the fall in the physical volume of exports. In summary, the decline in the value of exports in terms of 1967 prices was due mainly to the drop in volume, to the extent of $6.5 million, whereas the deterioration of prices resulted in a shortfall estimated at only $2.3 million.
The Government has now embarked on the difficult task of coordinating the endeavors of several public and private institutions in order to give effective promotion to the country’s exports, a coordination which may decide the dynamic growth of the country’s economy in time to come.
However, it is important to point out that our country has brought to completion major programs designed to increase agricultural production and productivity. For this the National Development Bank has granted large loans for the mechanization of agriculture, through cultivation of wheat, soybeans, sunflowers, and other products.
We are convinced that the infrastructure programs drawn up for communications and highways will ensure that products reach both national and foreign consumption centers quickly and easily.
To supplement these investments, it will be necessary to give adequate study to the marketing of the agricultural sector’s products through private enterprise, as a sine qua non for production investments. To this end, the National Congress is studying the creation of an institution to be responsible for country-wide administration of the silos, stores, and conservation service for agricultural products.
Indisputably, the Acaray Hydroelectric Plant to be inaugurated in our country at the end of this year, costing more than $33 million, will lay “the foundations of the nation’s economic independence.” In this respect the Minister of Finance, General César Barrientos, recently told the IDB Ninth Assembly in Bogotá: “The functioning of this important plant will enable Paraguay to supply sufficient electric power over a large area of the country to activate the basic industrialization of the production of raw materials from our soil as a vital contribution to its development, and at the same time will be able to supply border areas of some of the neighboring countries, as an important step toward integration which will be undeniably beneficial to the countries participating in the economic and social process in the hemisphere.”
In the last eight years Paraguay has received considerable foreign financing in the form of loans and credits. In general, the conditions of these loans and credits have been favorable, and, in accordance with its traditional policy of being a good payer, the country is regularly meeting its international commitments. The loans for construction of the airport and for repair of the road to Puerto Presidente Stroessner ($9.8 million in all) were for 40 years.
Our country is willing to prepare a program of long-term foreign loans. To do this it is making special efforts to ascertain the existence of new projects and programs eligible for foreign financing. Highway studies are in preparation, and the institutions responsible for the execution of development projects are being strengthened with a view to providing domestic funds and to ensuring that these have sound sources of financing.
In the last five years (1963-67), the over-all expenditures of the Central Government increased at an average rate of 12.4 per cent. Of this total, current expenditures were growing at a rate of 13.5 per cent, while capital expenditures increased at a rate of 13.7 per cent.
With respect to the behavior observed in current income, we find that, in the same period, the average rate of growth was 8.5 per cent. Income from external sources earmarked for the capital budget showed a rate of growth of 7.2 per cent, and domestic indebtedness to finance investment increased at an average rate of 12.3 per cent.
The level of saving on current account has been maintained within acceptable limits which, on the one hand, evidence the endeavor made by the Central Government to have on hand resources in addition to those provided by its own operations and, on the other hand, show that these figures supplement the resources obtained from abroad and from the national debt.
Finally, we must accept that, in view of the decision to maintain the level of investment required for the growth of our economy, a definite policy will be deployed with regard to the direction that public expenditure must take. In this connection, the Government recognizes that programs of economic and social development require that larger resources be obtained, principally from tax sources. But it also observes the criterion of not drawing on domestic sources that may foment inflationary pressures liable to prejudice the policy of monetary stability.
I take pleasure in stating that President Stroessner’s Government attaches the utmost importance to the mechanism included in the Amendment to the Articles of Agreement, approval and ratification of which is being considered by the National Congress. The establishment of the new basic system of special drawing rights (SDR’s) and the possibility of thereby attaining an adequate level of international reserves in line with the needs of the world economy, assure it, as it has from the beginning, of the Government’s firmest support, which will be given to every agreement likely to improve the general terms of trade and the world economy, without restricting the right of each member country to regulate, in accordance with its actual circumstances and its wishes, the application of the principles of economic and trading freedom for which we all stand.
Finally, it is a pleasure for me on this occasion to express publicly the support and very sincere congratulations of the Paraguayan Government on the appointment of Mr. Pierre-Paul Schweitzer as Managing Director of the International Monetary Fund for a further period, which undoubtedly will redound to the benefit of our institution.
October 2, 1968.