Chapter

Discussion of Fund Policy at Second Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
October 1973
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Statement by the Governor of the Bank for Denmark—Ivar Nørgaard

Having the honor of being the first speaker from the floor before this assembly, I should like first of all to associate myself with the cordial thanks to our Kenyan hosts expressed yesterday. We are all most grateful for the efficiency of all arrangements and for the hospitality so generously extended to us. Also I would express my appreciation to Mr. Schweitzer for the dedicated way in which he has conducted the affairs of the International Monetary Fund and for the role he has played in the creation of the SDR system. At the same time, I am glad that a man of Mr. Witteveen’s stature has been elected to become the Managing Director of the Fund and I welcome him cordially.

Turning to the reform of the international monetary system, I have been asked by my colleagues representing the member countries of the European Community to express some common points of view which the Community has reached in this field.

There are still many serious problems to be solved but the last twelve months have certainly brought progress. Thanks to the painstaking work of the Committee of Twenty and their Deputies a number of important questions have been settled and today positions are certainly closer on several central issues. The reform of the international monetary system requires, however, a complex process of negotiations which cannot be successfully concluded before all major components have been thoroughly dealt with.

The member countries of the European Community have been anxious to further these negotiations. They have expressed coordinated views on most of the important questions, and in particular they have submitted to the Committee of Twenty joint papers containing constructive suggestions on such fundamental subjects as the adjustment process and convertibility.

On the adjustment process the Community has made a particular effort toward finding a generally acceptable solution to this difficult issue. Thus, they have gone a long way toward accepting the point of view of some of their partners that objective indicators—including a reserve indicator—should play an important role. In order to facilitate agreement the Community favors the idea that certain pressures be applied against countries accumulating excessive reserves. However, the Community is convinced that the choice of appropriate adjustment policies needs to be based on general assessment of all relevant factors rather than on automatic mechanisms.

The Community attaches great importance to the adoption of convertibility rules which would ensure symmetry of rights and obligations among national currencies. A stable system requires in particular that currency balances cannot be built up in a way which would threaten the convertibility of reserve currencies and weaken international control of liquidity. A multicurrency intervention system would be of great assistance in correcting some of the previous asymmetries. The experience which the European central banks have gained in this field may prove of value to the exploratory work which the Deputies have decided to undertake in this field.

Experience of the past years has shown that the potential volume of disruptive capital flows has become very large indeed. In order to enhance the stability of the future system we emphasize the need to devise effective means to deal with such capital flows.

An adequate reform of the international monetary system will in itself serve the interests of the developing countries. Moreover, the Community believes that the flow of real resources to these countries should be increased and that particular consideration should be given to those which have the lowest per capita income.

The Community countries recognize the interrelationship which exists between international monetary reform and other international economic negotiations especially in the field of trade. They welcome the understanding reached in this respect during the GATT meeting in Tokyo.

Finally, the European Community maintains that the special position of countries keeping close monetary and financial ties be fully recognized and note with satisfaction that the Outline of Reform implies that this will be the case.

The member countries of the Community welcome the decision of the Committee of Twenty to accomplish its basic work by July 31, next year. This is an important political step. The Community will continue to give its full cooperation both to the solution of key political issues and to the detailed technical work which will have to be tackled in order to speed up the reform. The urgency of the task has been amply demonstrated since our last Annual Meeting.

Statement by the Governor of the Fund and Bank for Kenya—Mwai Kibaki

I would like first to add my own personal welcome to that of His Excellency the President of the Republic of Kenya, Mzee Jomo Kenyatta, to Governors and their Advisers. I am delighted that this meeting is being held in Nairobi. I sincerely hope that we have been able to provide you with comfortable accommodation and that the conference facilities provide everything you require for the efficient dispatch of business.

Second, I must congratulate Mr. McNamara on moving into his second five-year term as President of the Bank and Mr. Witteveen on his appointment as Managing Director of the Fund. The next five years are likely to be momentous in the history of both institutions. It is, therefore, essential that there should be stability in management through this crucial period.

Few would now deny that we have reached a watershed in international monetary affairs. Although procedures for the reformed monetary system may not yet have been defined in detail, I was impressed by the urgency with which it was decided that immediate efforts were necessary to tackle the crisis. The common will and concern of all members were manifest when agreement was reached to establish the Committee of Twenty. . . .

I believe that we are in error to continue to regard the problems of finance, aid and, indeed, trade in separate compartments and to ignore the fact that they are but different facets of the world economy. I believe strongly that, in the years ahead, we shall come to appreciate that the problems of international finance, aid, and trade must be considered as one. The varying emphasis of different countries can only be reconciled in the full knowledge that changes in the pattern of trade and aid also affect monetary equilibrium.

In spite of the progress that has been made by the Committee of Twenty in the last year, it is difficult to escape the conclusion that continuing concern for national self-interest is still determining the rate at which detailed solutions are agreed. If the reformed system is to provide firm foundations for longer-term stability and growth, concern for short-term national advantage must be suppressed.

Indeed, if the new monetary system is to stand us in good stead for the longer term, all countries, both large and small, must now be prepared to sacrifice some part of their monetary sovereignty to a strong international organization. This I see as being formed on the foundations of a strengthened International Monetary Fund. The Fund should be established as the focal point of the new system and should be given primary responsibility for international monetary affairs.

The Articles of the new International Monetary Fund should provide for the retention of the Committee of Twenty as a standing committee of Governors to provide regular guidance to the Executive Board. All countries should be prepared to regard the Standing Committee of Twenty as the primary political forum of monetary affairs after this Board of Governors. We should not in future endeavor to seek solutions through small caucus groups, such as the old Group of Ten. If there is to be order and justice in monetary affairs all countries must be represented when important monetary decisions are made.

During the coming phase of haggling over the detailed wording for the amendment of the Fund’s Articles, those responsible must remember that monetary techniques are no more than a means to an end. They must, therefore, retain a clear sight of the primary objectives of the monetary system, which are an even, stable, and equitable growth of production and trade throughout the world. Indeed, if these objectives are to override individual national self-interest, I believe that we should move toward a more autonomous system of operating within a code of conduct and a system of rules to which all members should be prepared to adhere.

This leads inevitably toward an exchange rate adjustment process and the management of reserves based more on presumptive economic and statistical indicators assessed by the Executive Board together with national authorities. Such an assessment of economic indicators in relation to exchange rate parities must, however, take into account national factors such as domestic, fiscal, and monetary policy, as well as the balance of payments and the level of external reserves.

Our concern for the mechanics and the symmetry of the international monetary system must now be extended as a matter of urgency to the rapidly worsening problem of world inflation. I believe that in the same way as we are tackling the problems of exchange rate adjustments, reserve management, and convertibility, we must now face the problem of inflation by unified world action. One of the first tasks of a Standing Committee of Twenty should be to seek general agreement on the control of inflation on a world level. As part of this investigation, this Committee should also consider how interest rates could be reduced from their present levels. It is a significant but sad comment on present money rates that only development loans carrying an interest rate of less than 10 per cent are now regarded as concessionary. . . .

I join my colleagues in congratulating the Bank for achieving the aid targets it set for itself five years ago. Those achievements have been of great benefit to the developing world and we are grateful for them. However, in the inflationary world we have experienced in the last few years, the real value of the expansion in the volume of aid has been less than we expected when those objectives were set.

Perhaps more serious is the fact that the impetus of the aid effort by donor countries has slackened. Official development assistance as a proportion of donors’ gross national product has fallen, in spite of rapidly rising real income in the industrial countries. It is now no more than 64 per cent of the effort achieved in the early 1960s. The moral commitment to the alleviation of international poverty which Mr. McNamara emphasized so clearly is being pushed aside as the richer countries compete between themselves in a race to raise their own standards of living as fast as possible.

National legislatures in the donor countries are increasingly reluctant to appropriate new and higher levels of development aid. We must, therefore, face up to the fact that so long as the reallocation of the world resources for the development cause is dependent on the whims of individual legislatures, the volume of development finance will not rise sufficiently for the international job in hand—that is, the faster development of the Third World in the interest, both short term and long term, of all countries.

It is because of this that the link proposals as an integral part of the new monetary system are so important. The link is the only way that the volume of resource transfers involved in development finance can be planned and sustained at a given level. Even if national appropriations of aid were to continue, the total world quantum of aid could, under the link proposals, be determined by a world forum, such as these Boards of Governors. I believe enough study has been done on the link. Every year which passes before its implementation means valuable time lost. . . .

Statement by the Governor of the Fund and Bank for Japan—Kiichi Aichi

I wish first of all to join you in expressing my sincere gratitude and appreciation to the people of the Republic of Kenya and to His Excellency President Kenyatta for graciously hosting these Annual Meetings.

The Republic of Kenya will shortly be celebrating its tenth birthday. This first decade has undoubtedly been a very trying, but also fruitful, period for this nation. In a sense, these Annual Meetings are an ideal occasion for us present here to extol the achievements of the young republic as well as to extend to it our best wishes for an even more brilliant future.

It is indeed with a deep sense of emotion that I express appreciation and pay homage to Mr. Pierre-Paul Schweitzer, ex-Managing Director of the Fund. He has devoted a decade of his life to the Fund, a decade which was not at all an easy one. It behooved him to write the concluding chapter of one era and prepare the ground for the opening of another era in the postwar economic history of the world. The memory of the dedication and wisdom of this distinguished leader shall remain in perpetuity with the Fund and its 126 member countries.

The deeper our sorrow in losing Mr. Schweitzer, the higher is our sentiment of rejoicement and hope in the appointment of Dr. Witteveen as his successor. A difficult but historic task awaits him. The major responsibility for establishing a new monetary system and revitalizing the Fund lies on his shoulders. I offer my full cooperation in his discharge of these responsibilities and extend to him my best wishes for a successful outcome. . . .

The past year has proved to be another eventful year for us entrusted with the management of national economies. The expansion and growth of the world economy during the quarter of a century after the war was achieved under the Bretton Woods monetary system. When the major world currencies started floating six months ago, this system ceased to function. However, that did not cause significant disturbance in money, trade, or investment. On the contrary, since then, the speculative movement of funds which had earlier proved so troublesome was greatly reduced in its intensity. Is it safe for us, in view of this experience, to be satisfied with a floating system?

In looking back at our experience during the six months of floating, I cannot suppress a strong feeling of uncertainty. This is because I apprehend that beneath the surface calm, the confidence in world currencies, as a measure of value, is being gradually eroded. Discipline in national economic management tends to lose ground when automatic recovery of balance of payments equilibrium can be expected under a floating system. Our most formidable enemy, inflation, tends also to gain in strength.

In my opinion, floating should not serve as a basis for a long-term monetary system.

At the Annual Meeting in 1971, the Board of Governors confirmed the need for international monetary reform. Last year the Committee of Twenty, representing all member countries of the Fund, and the forum of the Deputies, were established and work was started toward the formulation of a reformed monetary system. This year we have made clear the direction of the new monetary system. We have also agreed on a well-defined schedule for the remaining work on the reform.

Our target is not to reinstate the Bretton Woods system which has ceased to function. Neither is it to establish a monetary system based on floating rates. Our target is to establish a reformed system that will provide the foundation for world economic growth for many decades to come.

We have learned many valuable lessons from our long experience under the Bretton Woods system, as well as from our recent experience with floating. We must put these lessons to good use. A stable but adjustable par value system, an effective and equitable adjustment process, a substantive but practicable asset settlement system as well as a new and attractive central reserve asset—these are the ingredients from which the new monetary system should be formed. I trust that there is a clear consensus on this point.

The fact that the direction of the future world monetary system has been agreed on is a major step forward and carries great significance. Nevertheless, I am not satisfied with the pace of progress to date. Furthermore, in the process of transforming this direction into an actual and working system, numerous problems must be carefully studied and difficult decisions taken. The more specific the issue, the more direct its likely impact on a country’s economy. Thus, the negotiations will tend to take on a more real and difficult character. Hence, the fact that the direction of monetary reform has been agreed on does not mean that we can relax our efforts now. In fact we are now entering the phase in which cooperation among countries, and related political decisions, will be more than ever in demand.

In the discussions over adding flesh and blood to the reformed system’s skeleton, it is imperative for us to remember that this is not a negotiation in which some will be winners and others losers. What we are seeking is a workable and sustainable system, and not a temporary stopgap arrangement to serve us for several years only. It is an exercise which, if successful, will make us all winners, and if unsuccessful, leave us all losers. No country can have a balance of payments surplus at all times nor a balance of payments deficit at all times. If a country were to argue the merits and demerits of the reformed system from the prejudiced point of view of its existing balance of payments position, that country would undoubtedly find cause to regret having done so over the long run.

Let me now briefly express my views on some of the major aspects of monetary reform.

The success or failure of the reformed system will hinge on whether the adjustment process will function effectively and whether convertibility can be substantively secured. As stated in the report of Dr. Wardhana, Chairman of the Committee of Twenty, these have been the two most intensively discussed topics at the C-20 meetings and the Deputies’ meetings, and with good reason. It is regrettable that complete agreement has not yet been reached on these two topics.

A system will be meaningless if it is so loosely put together that the principal objective is lost sight of. At the same time a system should not be so rigidly constructed that it does not work in practice. Our task is to formulate an in-between solution, striking a delicate balance between these two extremes.

In order to ensure the effectiveness of the adjustment process, objective indicators can serve as a useful device. I do not object to the introduction of a reserve indicator structure. Furthermore, as a matter of course, major importance should be attached to these indicators in the making of the various decisions related to the adjustment process. However, in no country has a computer been appointed as minister of finance. The orientation of a nation’s economic policy is a matter to be decided on by the responsible authorities, carefully taking into account various objective indicators and exercising their knowledge and experience. We must fully bear in mind that the establishment of the need for adjustment action, and the judgment as to whether pressures should be applied, are matters calling for complex and comprehensive judgment.

With respect to convertibility, I believe that the principle of asset settlement should be established. Needless to say, the causes for, and manifestations of, balance of payments imbalances are varied. Hence, there will undoubtedly be situations where it is difficult for a country experiencing a balance of payments deficit to strictly carry out asset settlement. In this sense, a degree of elasticity is necessary in the system. However, I do not believe that such elasticity should be provided in a manner that would prejudice the principle of asset settlement. Rather it should be provided primarily by way of international assistance to enable the country in deficit to meet its obligation.

The working out of the concrete details of the reformed system is going to be difficult work. However, nothing must deter us from a unanimous determination to complete the blueprint of the reformed system by the end of July 1974, and submit a draft amendment to the Fund’s Articles of Agreement and related action to next year’s Annual Meeting. Our hearts are already set on this common objective. From now on it is up to our strong resolve and unbiased reason to follow the urgings of our hearts and accomplish that objective.

Let me next comment briefly on recent economic developments and policies in Japan. Since I took office as Minister of Finance last year, I have set as my policy priorities three major tasks. These are the improvement of national welfare, the stabilization of prices, and promotion of international cooperation.

Active policy efforts are continuing to transform the Japanese economy to a welfare-oriented economy. To this end, we have adopted such measures as strengthening social security and expanding public investment for improvement of the living environment, including more effective pollution control.

With respect to price stabilization, in order to curb aggregate demand, we have further raised the Bank of Japan’s discount rate as well as the banks’ reserve requirements ratio in the monetary field and have slowed down the execution of budgeted public works in the fiscal field. However, prices are still rising and further efforts to curb the trend are called for.

With regard to promoting international cooperation, notable progress has been achieved. Import liberalization, tariff reduction, liberalization of direct investment, and expansion of aid to developing countries have been actively pursued. Japan’s balance of payments is rapidly moving toward equilibrium, and the surplus in our country’s current account balance, which in the calendar year 1972 amounted to about US$6.6 billion, came down to about US$130 million in the period January to August of 1973.

Earlier this month a Ministerial Meeting of the GATT was held in Tokyo and the new round of multilateral trade negotiations begun. The Tokyo Declaration adopted at that meeting recognizes the fact that the reform of the world monetary system and the trade negotiations are closely interrelated, as if they were the two wheels of a chariot. We will do our best toward ensuring that these two wheels roll smoothly together.

To carry out these three major tasks of policy priorities against the background of a world-wide inflationary trend is not an easy assignment. However, efforts must be redoubled and continued. In so doing, I will fully take into account the effect our domestic economic policies may have on other countries. I believe that it will become increasingly important in the future to maintain discipline in domestic economic management, so as to avoid an undesirable impact on other countries. I promise my efforts on these points, while at the same time I am looking forward to similar efforts being made by other countries as well. . . .

The world is now in need of a new economic approach. In the postwar world, international cooperation has been based on free and multilateral economic interchange. Nevertheless, the distrust and confrontation between the different systems and the fixed relationship between the large and small countries have not been dissolved. However, I am happy to note that now cooperation and competition are replacing distrust and confrontation, and the vertical relationship among countries is being replaced by a horizontal relationship.

In the new world, countries will enjoy more equitable rights while assuming correspondingly more obligations. This idea is in fact the one world spirit which I have been repeatedly advocating on previous occasions. The motive power for realizing and maintaining one world will have to be sought in the will of countries; on the one hand to exercise their rights in justice, crossing the borders of different ideologies and of the rich and the poor, while on the other to fulfill their obligations in earnest.

The World Bank Group and the International Monetary Fund are the central entities in this international partnership. We are now living in a challenging world. Let us join hand in hand and proceed together toward one world.

Statement by the Governor of the Fund for Indonesia—Ali Wardhana

With your permission I would like to begin my intervention by paying tribute to a man whose familiar figure we are going to miss from this Annual Meeting onward. Mr. Pierre-Paul Schweitzer, whose term of office expired at the end of last month, was by any standard an outstanding international civil servant. Firm but always mild in his judgment and always quiet and wise in his guidance, he tried to serve the interests of all members, be they big or small. He saw in all of them, each in their own way, the living parts of that broad and vivid mosaic of the community of mankind whose fate and well-being were so close to his heart and mind. He deserves our high praise and deep gratitude as also our warm affection. In my country he will always be remembered as one in whose time we launched our stabilization program which was firmly supported by him and his staff and if, as people say, we have been successful in restoring equilibrium from which we were able to resume our development efforts, a large part of that success should be attributed to him. We hope that in his retirement he will look back on his association with the Fund with satisfaction and pride.

We are fortunate that we have been able to find as Mr. Schweitzer’s successor a person whose qualifications bear a great promise for the future leadership of the Fund. Dr. Witteveen is a highly qualified economist, at home, of course, in Keynesian economics but also in econometrics, planning, the business cycle, and monetary matters. As a finance minister, moreover, he became familiar with the political aspects of economics. It is this blend of theoretical knowledge and practical experience which will serve him exceedingly well in his present position, to which I would like to welcome him most warmly. But above all, I believe, it is his deep interest in and dedication to human affairs which most of all will assist him in exercising his new duties. We know that he has given up a great deal of personal comfort in order to respond to our unanimous call to serve the world of international finance and money on which so many peoples depend in their aspiration to improve their living conditions.

It is not an easy world into which he enters. He comes at a time of uncertainty and lack of orderly conditions. The Bretton Woods system on which the postwar world was built has largely become inoperative because it did not and could not foresee phenomena such as the difficulty to reconcile full employment with internal and external stability as also the rapid and massive movements of capital. The first period after the war was a period of underemployment of resources, and capital was in the possession of practically one country: the United States. The Bretton Woods system was not equipped to cope with the two phenomena earlier mentioned. It is therefore right to look for a new system which may be more appropriate to absorb events and forces unknown to the founding fathers of the Fund. But not all of Bretton Woods is obsolete or inadequate. There are elements which should be retained. Its emphasis on international cooperation, on orderly developments of exchange rates, on expanding world trade with its impact on resources and economic development, to cite a few examples, are worthy to be taken over by the new system.

That new system is necessary and possibly overdue. The present conditions in the monetary field are far from satisfactory as the lucid and comprehensive 1973 Annual Report of the Fund clearly indicates. With a group of countries maintaining their parities among themselves, but floating against other currencies, with many others simply floating, with some others pegging their currencies to an intervention currency, one wonders how long the world can go on operating under such diverse and disorderly conditions. The Annual Report rightly states that one of the features of the “prevailing currency relationships is their lack of firm foundation in an internationally agreed set of rules or code of conduct.” 1 This leads to the negation of one of the fundamental considerations for the inception of the Fund, namely, that exchange rates are principally a matter of international concern.

That concern should be expressed in an internationally new set of arrangements, the surveillance of which should also be undertaken collectively. It is clear that the depository of the new system and its surveillance should be the Fund.

Whatever the modalities may be of the new Bretton Woods—and they are many as the report which I submitted to you in another capacity indicates—it seems clear that the system should be viable for a long period of time. That means that a degree of security and stability should be restored in order to provide countries and especially those in the process of development with the appropriate prerequisites to develop their economy. The lessons of the twilight years of the old system have taught that stability at a given level cannot be frozen forever, but that it should be adaptable to change. But allowing change does not imply continuous insecurity; adaptation should be made in order to achieve a new stability which should last for a number of years.

It is, in my humble opinion, poor consolation that in the midst of disorderly monetary conditions, the developed world has been able to move, according to the Fund’s Annual Report, from a period of “stagflation” to one which may be perhaps called “grow-flation.” Economic growth has been resumed but under conditions of increasing inflation, the ramifications of which are affecting all countries. Moreover, the development of exchange rates so far has not restored balance of payments equilibrium and the nagging question is whether the forces of the market have resulted in rates compatible with equilibrium.

It is true that the revival of the business cycle has somewhat counterbalanced the effects of exchange rate uncertainties for the developing countries which are experiencing from the last quarter of 1972 onward higher prices for their products. But this effect is likely to be temporary because developed countries are already in the process of dampening the growth of their economy. Moreover, exports may have benefited from the business cycle, from inflationary demand, stock replenishment, and hedging operations, but the other side of the coin is that inflation and revaluation have caused prices in developing countries to rise, a fact which was compounded by food shortages.

I believe that developed and developing countries would benefit from more stable conditions which would better serve the goal of growth and equilibrium. It is a strange world in which we are living. In the midst of liquidity plenty, for instance, out of the 65 countries examined by the Fund, 40 did not show any sign of excess reserves. Half of total excess reserves could be attributed to only 4 developed countries and nearly one fourth to 5 oil exporting countries.

When in the immediate postwar period liquidity was concentrated in one country, the Bretton Woods system and the liberal attitude of the United States made it possible that through the flow of trade and aid a redistribution of liquidity took place.

The new monetary system should also provide for arrangements which would lead to the correction of imbalances. This would serve all countries of the world; it would also make the Fund fully operative again which is now suffering from reduced operations due to the fear of an increasing burden of obligations of unknown magnitude. . . .

May I now terminate, Mr. Chairman, by complimenting you for your most stimulating address, by welcoming our new members, the Bahamas and Romania, and by expressing our deep gratitude to the Government and people of the Republic of Kenya who have provided us with splendid facilities and lavish hospitality in this most pleasant and elegant capital city of Nairobi.

Statement by the Governor of the Fund for the United Kingdom—Anthony Barber

This is the first time that the Fund and Bank meetings have been held in the continent of Africa. And much as we enjoy the regular and excellent hospitality at Washington, I know that for many of us here today—including our new and most welcome members, the Bahamas and Romania—it is a pleasant and indeed an exciting experience to visit Africa and to savor the charm of Kenya. Some of us had the additional pleasure last week of visiting Dar es Salaam for a most agreeable and successful meeting of Commonwealth Finance Ministers. I might add that for those of us who are practicing politicians a visit to a game park either here or in Tanzania may sometimes make us wish that our political life back home was equally civilized and well organized!

I have referred to our pleasure in being in Kenya today. But the fact that this meeting is this year taking place in Africa is of much greater historical significance. To appreciate this significance, I would ask you to cast your minds back to 1899. At that time there was being built the new railway from Mombasa to Uganda. And on that route there was a site which had an ample supply of water but which had little other development. That site was called Nairobi. Now, in less than 75 years—less than the span of one man’s life—we have this great thriving modern city, this symbol of African progress, this hall where more than 100 finance ministers are met today.

This is a tremendous achievement. And it is a progress matched in so many other developing countries.

True, it still has an immense way to go. And yet so much as been achieved—and achieved in an astonishingly short time.

One hundred years ago a British Prime Minister, Benjamin Disraeli, described my country, Britain, as comprising two nations: the rich and the poor; the few who lived in affluence, the many who lived in squalor.

Over the past century, under Governments of all political complexions, we have made much progress in Britain in eliminating social barriers, improving education, reducing inequalities, and creating One Nation.

It is the same process which we, the Finance Ministers here assembled, must seek to secure on an international basis. The task ahead of us is, of course, an immense one, but our aim is clear. It must be to end the invidious distinction between developed and developing nations. To create instead One World. One world of equal opportunity; one world of growing prosperity; one world of hope and content.

If we are to succeed in this noble aim, if we are to rid the world of an evil division of mankind, then we need generous overseas aid. We need liberal trading policies. But perhaps above all we need a sound monetary foundation on which the nations of the world can build their own growing prosperity. And this is a task for us all within the framework of the International Monetary Fund.

Of course the trouble about monetary reform, is that when everything is going well, everyone says “Why bother with reform.” And when there is a crisis—and we seem to have had our fill of them in the past year—then everyone is too busy!

At this meeting, it is natural that we should be thinking particularly of two men—Mr. Schweitzer and Dr. Witteveen. Most of us have already said our good-byes to Mr. Schweitzer and paid tribute to his work for the Fund. Suffice it to say today that we shall miss him personally. In his successor—Dr. Witteveen—those of us who have known him know that we have a man with both the experience and the proven skill to match the challenge which now faces the Fund. To say that he has taken on quite a task would be the understatement of this meeting. For if we are to speak frankly the fact is that in these monetary matters there is everywhere a growing sense of frustration and impatience.

And nowhere was this more apparent than at last week’s meeting of the 32 Commonwealth Finance Ministers, representing a quarter of the population of the world. Again and again they stressed the damage that can be done by wild fluctuations in exchange rates—damage especially to the developing countries. They stressed the urgent need for greater stability to facilitate trade and productive capital flows. They stressed the need for a reliable store of international value—the need for a new international asset which could be built up in times of prosperity and drawn down in times of need, with confidence in its fair value.

This morning my colleague, Mr. Nørgaard of Denmark, expressed the common point of view of the European Community, and he too referred to the urgency of reform.

Now we all know the difficulties—they are obvious. We all know the problems—they are self-evident. We all recognize that we have to resolve issues on which there are strongly held and divergent views. But to ordinary people everywhere it seems incredible that we are taking so long to reform the system. The Committee of Twenty is to meet again in January, but if we are to reach final agreement by July 31 next year, then, because of the practical difficulty of convening these ministerial meetings, I believe myself that, in due course, as we approach the conclusion of our work, we may well have to gather together for one last meeting on the basis that we would stay there until we had taken these final decisions. Certainly we shall very soon have reached the stage when it is no longer appropriate to keep on referring back to official matters of a general character, and when we as Ministers will have squarely to face up to the outstanding issues and take those decisions.

The documents from the Committee of Twenty which are now before us present us with an Outline of Reform. It is, of course, still far from complete. But, in fairness—and while sharing the impatience to which I have referred—it is right that I should say, as one who has been involved in the work of the Committee, that we have made considerable progress during the past year.

On two central issues, the adjustment process and convertibility, we are, I think, now within sight of agreement on the main framework.

What we have been faced with really boils down to the need to strike a balance between flexibility and rigidity; between discipline and freedom; between the authority of the international community and the autonomy of individual states in the management of their own economies. The dilemma is not just one of technicalities, of economics, or of international finance. We are also faced with a highly sensitive political dilemma.

At Bretton Woods our predecessors faced the same dilemma: the solution which they found was geared to the problems which they faced at that time and to the world as it then was. Experience and change have shown up the limitations of that solution. It simply does not work today. When nations have divergent trends, the Bretton Woods system does not identify with sufficient clarity which of the nations should make the adjustment. And in almost all circumstances that system seems to weight the balance heavily in favor of the autonomy and discretion of the individual nation as against the joint interests of the international community.

The new solution which we have been hammering out places greater emphasis on the role of the international community. It seeks, by a combination of objective indicators and collective judgment, to pinpoint more precisely which nation or nations should take action. And its aim is fair treatment for both deficit and surplus countries.

There are some who still have reservations about such an approach. Or to be more precise, they do not so much doubt the objectives, but they want to know in greater detail how the various proposals would work in practice. And until this has become clear, their reservations will remain. But the work has now reached the stage from which it can, and must, be taken forward. It must now be translated into the rules under which a new system would operate.

In the Committee of Twenty we have agreed to work out a structure of reserve indicators. And we have agreed to define both the levels at which a persistent accumulation of reserves would warrant the application of international sanctions and what these sanctions should be. This has not been at all easy, but the scheme which is now emerging offers, in my view, the best prospect we have of combining a generally stable system of exchange rate relationships with prompt adjustment where necessary.

I turn now to the question of convertibility. The arrangements on convertibility must clearly match those on adjustment. What we need is a system of convertibility which is in general strict and rigorous, but which can, under international agreement, accommodate the pressures, particularly those of a temporary nature, which it will be bound to face from time to time.

The precise way in which convertibility would operate still remains unresolved. Partly this may reflect the need for more careful examination of the practical implications of some of the ideas. But it is, I think, partly because we have approached this problem from rather different starting points.

The United States has been concerned—and I must say very understandably—about the quantity of reserves which would be required to restore convertibility of the dollar in the face of potentially overwhelming capital movements. Others have been more concerned that the future arrangements should not again permit long-term financing of reserve center deficits.

It seems to me that the solution lies in this direction: to authorize relaxation of the settlement obligations in respect of part of the debts incurred when large-scale support is required. The remaining part, if not immediately settled from reserve assets, would have to be financed by swap credit or drawings on the Fund. This would have the effect of sharing any exchange risk between the debtor and the creditor countries. There would of course need to be undertakings on the part of the debtor to repay, and the arrangement would be subject to the consultation and surveillance procedures of the Fund. Here again, we have agreed on further work to create a scheme which would do the job.

There is also the interesting possibility of multicurrency intervention which, if it proved practicable and acceptable, might ease some of the problems.

But before we can finally resolve the problem of convertibility, we need also to settle two major related problems: the nature of the new form of SDR which is to be the reserve asset and medium of settlement, and the means by which to deal with outstanding reserve currency balances.

As the report from the Committee of Twenty shows, there is still some divergence of opinion about the relationship of the SDR to world currencies. What we need to do is reconcile two aims. First, creditor countries must be offered an SDR which as a store of value is acceptable, if not preferable, in comparison with holdings of currencies. And, second, debtor countries must be willing to part with SDRs to pay debts incurred in currencies.

Here I believe the way forward is this. To go for a mechanism which maintains the value of the SDR on average as near as possible to the value of typical short-term reserve holdings of the world’s leading currencies. By value I mean both the principal and interest of the SDR. There seem to me to be important arguments against either a higher or a lower SDR value in this sense.

Too high a valuation might make the SDR too attractive and so freeze it by hopes of future appreciation. It would also impose on debtor countries an inequitable burden.

On the other hand, too low a valuation would mean that the SDR would not be sufficiently attractive to compete with reserve currencies and other assets. And this would place too heavy a reliance on control over alternative holdings in order to enforce the use of SDRs. If we could agree on an average value, there seems to be a strong argument for the same average to be applied in respect of both principal and interest.

Then there is also the problem of outstanding balances held in reserve currencies. I think we are all agreed that these balances have severely distorted the operation of the monetary system. And after the experience of this past year, we all know of the damage, and indeed the chaos, which can be caused by massive shifts from one currency into another. I think there is a consensus—this is certainly my own position—that holders of reserve currency balances should not be forced to convert them into SDRs, but should have the freedom to do so.

At the same time it seems to me to be only reasonable to hope and expect that all countries will come to appreciate the importance of some self-denial in the interests of overall equilibrium, at least to the extent to which assets may be arbitrarily transferred from one currency to another. Some code of conduct, if not actual rules, will need to be agreed.

So it is clear that on so many of the aspects I have referred to there is still a good deal of practical work to be done, but as I have pointed out, the time will soon be approaching when it will no longer be appropriate for Ministers to say, “It’s up to you, Mr. Morse.” Instead, if he were not the courteous man he is, he should soon be saying to us, “The Deputies have done their part. It’s now up to the Ministers to face the issues and take the decisions.”

There is one other aspect of reform to which I want to refer—the stage we have now reached concerning the proposal to link the issue of SDRs with the needs of developing countries. I have consistently said that I will support such a scheme provided—and this is an important proviso—that it does not weaken the major objectives of reform. But if therefore I need say no more about the well-known position of the United Kingdom, there are two comments of a general character which, I think, should be made.

First, it has become much clearer since we last met that the developing countries do recognize the need to ensure that decisions on liquidity creation are governed solely by monetary need, and I believe that we can devise means to secure this. That, of course, would meet some of the genuine apprehensions of those countries which are still opposed to the proposal.

The second point is this. In the past, this issue has tended to be regarded as one between the developed and the developing countries. But it has become abundantly clear in the Committee of Twenty that this is not the case.

If the principle of the link does become generally acceptable, then we must be much clearer about the question of distribution. My own view is that it would be right that the distribution among the developing countries themselves should be relatively more favorable to the poorer ones, and if this is to be a genuine link between SDRs and aid, then we must be sure that resources provided through the link are in fact to be used for effective development.

I said that our objective is to create One World—one world of growing prosperity. And in this quest both trade and aid are crucial.

In Tokyo, the trade negotiations have got off to a good start and I say no more about that. . . .

This is the fourth meeting of the Fund and Bank which I have had the privilege of addressing. But it is the first at which I speak as one of the Finance Ministers of the European Community.

I know that there were some who feared that the European Economic Community might become an inward-looking bloc—a rich man’s club. The facts prove the contrary. The truth is that the new enlarged Community is now the main source of assistance for the developing world.

But aid is not the whole story. It is perhaps significant that at our two-day meeting of the Commonwealth Finance Ministers at Dar es Salaam last week, half our time was spent in considering monetary reform. And the fact is that, whether one thinks of literate people in the developing world or the developed world, to ordinary men and women the constant succession of financial crises appears not merely incomprehensible but frustrating and, indeed, ludicrous.

To achieve a sensible reform of the system is the concern of governments. But it is particularly the responsibility of Ministers of Finance and Governors of Central Banks. And while individual countries and groups of countries still cling—very understandably—at this stage, to their negotiating positions, the discussions within the Committee of Twenty and outside it have convinced me beyond doubt that there is the goodwill to succeed.

But goodwill alone is not enough. What we now have to show is that we also have an urgent driving determination to bring this protracted debate to a conclusion. It is up to us. To no one else.

Statement by the Governor of the Bank for Germany—Helmut Schmidt

This first meeting of the Fund and the Bank Group in an African country demonstrates that the young nations of this continent have established themselves as respected partners. My Government is determined to cooperate with the African and all the other developing nations in the interest of peace and economic welfare. I greet President Kenyatta and the people of Kenya. Your country’s economic and social development policies are truly impressive.

And I welcome the most recent members of our institutions: Romania—whose accession is part of our movement to new horizons—and the Bahamas. One might say that in Nairobi there emerges these days the “second generation model” of world-wide monetary cooperation but one might as well call it the third system already and thereby count the contemporary floating epoch as the second one. This second regime of floating must, of course, not become a permanent one. Therefore, I am glad that the preliminary results of the work on reform have now been presented to the public for scrutiny, comment, and constructive criticism.

In their Annual Report the Executive Directors of the Fund have appropriately reminded us that of all the tasks of economic management, “none is more urgent, or of greater significance for the longer run, than that of finding a solution to the problem of controlling and reducing inflation.” I fully agree with that judgment, and also with Mr. Witteveen, in stressing that inflation is an infectious dangerous disease of our societies that impairs the efficient allocation of resources and leads to a redistribution of wealth from the economically weaker to the economically stronger. This holds true not only within individual countries but also between nations. Poorer countries are often the first to suffer from price increases. The industrialized countries have, therefore, a particular responsibility to fight inflation. My country has launched an energetic stabilization program against inflationary tendencies, employing fiscal tools, tax increases, surplus budget, credit restrictions, and all the monetary tools. (I might insert here that we have abstained from wage and price controls because we see no convincing success of these in the countries which have applied such controls. I personally do not believe that wage and price controls can make up for failure in controlling the growth of the money and credit volume. We, therefore, have adhered to a combination of strict measures in the fiscal and monetary fields.) The German public has well understood our determination to break inflationary expectations. We now see a small silver lining of success on the horizon. But it is quite obvious to me that no single country can effectively isolate itself from the world-wide inflationary disease. Only steady and vigorous collective action can achieve a lasting success. Economic growth as such will not lead our societies to social satisfaction. Dependability of the value of your money is an inevitable prerequisite upon which to build social justice.

It is in view of this general prevalence of inflationary dangers that we must ask ourselves how the reform of the monetary system can promote both stability and economic growth. It is in this light that I evaluate the draft Outline published today by the Committee of Twenty. I think the Outline reflects in a fair and balanced way the state of our reform discussions and it clearly defines the areas in which political compromises are still necessary, as well as those areas in which more elaboration on the details is to be expected. In this anti-inflationary context I would like to offer five remarks:

  • 1. We should maintain the emphasis on adjustment, and we should limit the possibilities of financing balance of payments disequilibria rather than expanding them. We ought to reinforce the adjustment process by keeping liquidity tight.

  • 2. Adjustment obligations and pressures should be truly symmetrical as between surplus and deficit countries.

  • 3. The volume of international liquidity must be brought under effective control. I should like to underline the conclusion of the Fund’s Annual Report1 that the substantial degree of reserve ease in a large part of the world was an important element in the failure of governments in checking inflationary developments. Full asset settlement is an important condition for a satisfactory management of international liquidity. But in order to establish effective control over international liquidity we need an SDR sufficiently strong to become the center of the system.

  • 4. Multicurrency intervention has been somewhat neglected in our deliberations up to now. It needs prompt and careful study. Multicurrency intervention would lead to the very desirable greater symmetry in the monetary system.

  • 5. We should no longer permit large movements of capital to paralyze national monetary policies. The improvement of the adjustment process should remove some of the inducements to shift capital from one currency to another. Better coordination of credit policies and administrative controls will have a great role to play. For the rest, exchange rate elasticity will have to provide the needed protection. I support, therefore, the widening of the exchange rate margins as well as the authorization to float in particular, specially defined situations.

On monetary reform I wish to limit myself to these five brief points. I am well aware that they are only part of a wider range of issues which must be resolved in the Committee of Twenty at a rapid pace. I am confident that, under the able chairmanship of our Indonesian colleague, Ali Wardhana, satisfactory solutions can be worked out if we approach the still open questions in a spirit of mutual understanding and compromise. After having participated in all related international deliberations since last summer, it is my judgment that compromises are possible on all points and that they are possible in a network which in the end will be characterized by consistence in substance.

We should, however, not lose sight of the fact that it is not enough to draw up an ingenious blueprint of reform. Equally important for the improvement of the international monetary system is a sound and stable dollar. The gap in the U. S. balance of payments was the main source of excess international liquidity and thereby of inflation. We have jointly undertaken far-reaching steps to close that gap. Germany, for instance, has revalued the deutsche mark vis-à-vis the dollar by nearly 50 per cent within less than four years. Other European countries and Japan also have helped. Only when this joint effort in favor of the dollar is successful can the new monetary system take effect, but I have no doubt that we will be approaching the era of a stable rate for the U. S. dollar, reflecting its true value, in the course of 1974.

Closing the gap in the U. S. balance of payments is not only an indispensable prerequisite for monetary reform, it is also an indispensable condition for fighting inflation elsewhere in the world. In comparison with the other countries, the U. S. economic aggregates are of such enormous weight that the rest of the world cannot sustain any situation in which Washington neglects the effects of its economic policies on other countries. It is in this understanding that my Government undertook to help in closing the gap. The spirit of mutual cooperation will be needed also in the future. And in remembering the opening remark of Tony Barber about well-organized game parks in East Africa, I would nourish the hope that Finance Ministers will be able to tear down a few of the fences, or like elephants just push them over. Mutual cooperation is also the indispensable basis for development aid. . . .

We all know that the expectations raised by the report of the Pearson Commission on the improvement of the economic and social situation in the developing countries were too optimistic. They were not fulfilled in many respects. On the contrary, there is the apprehension that the gap between the rich and the poor countries will widen even further until the end of this decade. Consequently my Government will increase its official development assistance substantially until 1978. In fact it will double it in that period, and will therefore increase its official development assistance to a share of 0.41 per cent of our gross national product. I am confident that this positive trend can also be maintained in the years thereafter. I would like to underline here that our actions in the field of multilateral aid (in particular replenishing IDA), and in official bilateral development aid, do prove our determined will to transfer real resources at a growing pace. I might add that, much like the United States, I have a clear preference to do so by means of taxes and savings rather than by creating liquidity. We ought to transfer real resources to the developing countries which means real sacrifices for our own peoples, and not deceive ourselves by transferring only inflationary increases of liquidity.

My Government subscribes to the principle of open partnership. It is aware of the fact that the future problems of the developing countries cannot be solved solely by an increase of assistance from outside. I take it, therefore, that in the future all concerned, both donor and recipient countries as well as the multilateral institutions, will make a common effort to achieve the goals of the Second Development Decade.

Statement by the Governor of the Fund and Bank for the United States—George P. Shultz

Nairobi has been a happy choice for this Annual Meeting. For many of us, the prospect of visiting Kenya and seeing some of its natural splendor provided a special sense of anticipation. Upon arrival, we found these striking and efficient facilities in the setting of a city that epitomizes the rapid progress that independent, self-reliant, and energetic people can make when they have the tools with which to work. I particularly appreciate President Kenyatta’s warm words of welcome and his challenge to us all.

Less than two weeks ago in Tokyo, most of the nations here represented pledged themselves to a thorough review of our trading practices and rules. This week, we can provide the necessary impetus to complete our work in reshaping our international monetary arrangements. Here in Nairobi—on a continent where vast potential often contrasts starkly with human poverty—we also come face to face with the challenge of economic development.

Trade, money, development—each of these is a large task. Any one of them, it might be said, would be enough for us to deal with alone. Yet, in a larger sense, we are fortunate that the pressure of events forces us to deal with them together. They are related, not by any artificial or self-imposed negotiating calendar, but by reality.

It is right to keep in mind that delay in one area could undermine progress in another. It is equally right—and a better omen—that success in one area will support and encourage good results in the others.

These fundamental interrelationships were plainly recognized in the mandate given the Committee of Twenty on monetary reform a year ago. They were recognized in the Tokyo Declaration on trade adopted by the GATT earlier this month. Let us keep them in mind in all our work in Nairobi and beyond and emphasize the mutually reinforcing benefits of success in each field.

Monetary Reform

Our monetary discussions are now well advanced, owing in no small part to the patient and effective efforts of Mr. Wardhana and Mr. Morse. We take satisfaction in the extent to which a basic convergence of views on the broad framework of a new system has emerged.

  • —We all seek a substantial strengthening of the processes of international adjustment through a blending of objective criteria and international judgment, with the recognition of the need for symmetrical and evenhanded pressures on both surplus and deficit countries.

  • —There is full acceptance of the idea that the center of gravity of the exchange rate system will be a regime of “stable but adjustable par values,” with adequately wide margins and with floating “in particular situations.”

  • —We anticipate a general system of convertibility to support the regime of par values, with a modified SDR as the central reserve asset, and de-emphasis of the roles of gold and reserve currencies.

  • —There is a common will to explore the complex technical requirements for multicurrency intervention and to find mutually satisfactory terms for consolidating or funding outstanding balances of reserve currencies.

At the same time, my sense of satisfaction is tempered. Issues of critical importance—carefully outlined in the report submitted to us by Mr. Wardhana—remain unresolved. No doubt we could each expound at length views on particular aspects of these issues. However, I believe those issues will be resolved as national governments are able to appraise more thoroughly the operational aspects of different approaches toward adjustment pressures, toward convertibility, and toward the definition and valuation of reserve assets. Moreover, we need to consider answers to each of those questions in the full context of answers to the others.

In constructing a world monetary system, we cannot act, as I see it, like merchants in a bazaar bargaining for selfish advantage. Nor should we be concerned out of pride or politics with patching together and compromising components from every national position. All our success depends upon achieving a coherent, workable whole that fairly serves the common interests.

With goodwill and intensive technical work, the ground can be fully prepared for a comprehensive agreement as soon as next spring. That agreement will then need to be translated into an extensive and detailed rewriting of the Fund’s Articles of Agreement. Is it wrong to aim to approve those new Articles, for submission to our legislatures, at our next Annual Meeting?

The transitional period

We are all conscious of the stresses in exchange markets arising from time to time during this transitional period. Yet, in broad terms, the substantial exchange rate changes of the past two years—although in some instances clearly exaggerated by speculation and uncertainty—have provided powerful and needed impetus toward correcting persistent structural imbalances.

In the case of the United States, the alarming erosion in our trade position has by now been decisively reversed. In contrast to a deficit of more than US$6.5 billion in 1972, we should be close to balance in 1973. While an extraordinary surge in agricultural exports has greatly speeded the turnaround, our trade position in manufactured goods has also been improving, even in the face of high domestic demand.

We are also beginning to see welcome evidence that both American and foreign firms are reappraising their investment programs, with more emphasis on U. S. production. Thus, shifts in capital flows should reinforce the favorable effects on our payments of the swing in our trade position. In these circumstances, surpluses in both our trade and basic payments position now appear in sight for next year. Such surpluses for a period seem to me indispensable for full restoration of confidence, for encouraging a reflow of dollars to the United States, and for implementing any lasting monetary reform.

Our contacts with traders, investors, and businessmen suggest they have acclimated themselves reasonably well to the present monetary environment, despite more instability in exchange markets from day to day than they or we like to see. Propelled by boom conditions, world trade is, if anything, expanding even faster than in most earlier years.

It would be a fundamental error, however, to mistake present arrangements for monetary reform. Habits of cooperation and the exercise of good sense have carried us over the rough spots. But what is lacking—and what I believe to be the essence of any lasting monetary system—is a deep sense of commitment to an agreed code of international conduct to help guide us when the actions of one nation impinge on those of another.

Issues left open

In one way or another, most of the issues left open in Chairman Wardhana’s report deal with delicate and sensitive questions arising out of the inherent tensions between the responsibilities of national governments to meet their domestic priorities and our common commitment to a mutually beneficial international order. We firmly believe these tensions can be constructively resolved, for, in the end, a well-functioning international system should contribute to the growth and stability of the individual countries operating within that system.

The challenge is to translate that concept into operating reality. To do so will require a commitment to some basic rules established in advance and seen as equitable to all. We must provide for necessary international review and surveillance. Not least, we must permit necessary scope for national decision making.

In seeking an appropriate balance among these components of a new system, we have emphasized the role that quantitative indicators—and in particular reserve indicators—could play in helping discipline the adjustment process in an evenhanded, effective, and politically acceptable manner. I therefore welcome the prospect that in the months immediately ahead a common effort will be made to appraise and test the operational feasibility of that approach, alongside related questions of the operation of the convertibility provisions in the new system.

At the same time, I believe it is common ground among us that effective processes of international consultation and decision making are critical to the operation of the new system. I have been encouraged by the widespread recognition of the need to equip the International Monetary Fund to play its full role at the center of the system. The logic is strong that, for the Fund to act effectively, member governments should have available a forum of workable size within the organization at which responsible national officials can speak and negotiate with both flexibility and authority. Conversely, we should be sure that the deliberations and concerns of the international community are fully and directly reflected in the internal councils of member governments.

These objectives could be fostered by keeping in being a streamlined Committee of Twenty, able to review periodically or in emergencies larger issues with a significant impact on the monetary situation as a whole. Plainly, there will also be a need to retain a body along the lines of the present and highly competent Executive Board, with resident members and the knowledge and insight that comes only with intimate day-to-day contact with operations and emerging problems.

In the effort to resolve finally these difficult substantive and organizational questions, I particularly look forward to the participation and fresh insights of our new Managing Director, Mr. Witteveen. He brings to us rich and varied experience as a professional economist and a practicing politician—precisely the disciplines that must be blended in all our work.

Development

The day has long passed—and rightly so—when discussions of trade and monetary issues could take place primarily in a relatively closed circle of industrialized countries. We must consider with great care what special arrangements within the trading and monetary systems may be appropriate to help meet development needs more effectively.

  • —In presenting broad trade legislation to our Congress, we incorporated the concept of assisting development by means of generalized preferences, to be granted on a nonreciprocal basis. This approach, undertaken in concert with comparable efforts by other industrialized countries, is consistent with the broad thrust of our mutual effort to reduce barriers to trade and to encourage economic development. We look forward to early passage of this legislation.

  • —We support the idea of freeing flows of capital to developing countries and exempting where possible those countries from controls imposed for balance of payments purposes.

  • —Closer examination should be given to methods of providing credit through our international institutions better tailored to the needs of developing countries experiencing extended periods of difficulty.

  • —Our judgment concerning the value of another proposal has, as is well known, been different. We feel the so-called SDR-aid link would in practice serve well neither monetary stability nor economic development. Experience strongly demonstrates the wisdom of keeping separate the function of money creation—which is what the SDR is all about—and the essentially political decision of resource transfer and redistribution.

The larger stakes

As we deal with these specific issues, let us never lose sight of the much larger stake that developing countries—as all of us—have in a well-functioning stable monetary system and an open trading order. Mr. McNamara has already pointed to the cost to poorer countries of burdens on their exports in the markets of industrialized nations. Long delays and sharp exchange rate adjustments among their more affluent trading partners, responding to imbalances that were permitted to build up over a period of years, have complicated the financial management of developing countries.

At the same time, a number of countries still classified as developing are reaching a stage of industrialization where they can, in the mutual interest, accept their fair share of the responsibilities for a world order. Controls, subsidies, and other impediments to open trade that might have been justified in an earlier stage of development need to be reviewed and eliminated. The disciplines of balance of payments adjustment—whether to correct deficits or surpluses—need to be observed and this can be done without sacrificing developmental objectives. Indeed, I believe there are longer-term dangers to the kind of open, one-world economy we would like to see in casually proliferating arrangements that would divide the world sharply into distinct groupings of “have” and “have not” nations.

In the short run, the prosperity of developing countries is tied to the prosperity of the industrialized world. In the past two years, relatively high prices for agricultural products and raw materials have directly benefited many. When the labor forces of industrialized economies are fully employed, resistance to imports of labor-intensive products declines, to the benefit of producer and consumer alike.

While uneven country by country, the overall results are apparent in the recent growth of production and monetary reserves of the developing world. Excluding the main oil producers, developing countries had a surplus of over US$4.5 billion in 1972, and their surpluses appear to have been well maintained this year.

Long-term development and official assistance

A cyclical surge is, of course, no substitute for sustained development over a long period of years. In the end, development will succeed or fail as the result of the efforts of the millions of people in the developing countries themselves—working under the direction and leadership of their own governments. Compared to the human and material resources of even the poorest country, the effects of external assistance are bound to be modest. Indeed, all the official assistance of all the donor countries of the Western world amounts to less than 2 per cent of the gross national product of developing countries.

Effectively used, however, the margin of resources from abroad can be a catalyst—in some instances an essential catalyst—to the development process. I speak of this potential as seen from the particular vantage point of a country whose people and government have had experience in the provision of assistance in amounts, and over a period of time, without parallel in history. Even today, when others have moved to help pick up the burden, the United States provides almost 40 per cent of official development assistance from the member countries of the Organization for Economic Cooperation and Development, and it is by far the largest source of private capital as well.

This commitment has been a natural one, for we are a large and relatively rich country, unusually blessed with resources, political stability, and a productive population. We accept today, as we have in the past, the simple premise that no nation—whether the motives are properly considered those of common humanity or enlightened self-interest—can be oblivious to the conditions in which other men and women are living.

Out of this long experience, we have reached certain conclusions and raised certain questions that I want to convey to you today. The questions are no doubt sharpened by the searching look at priorities evoked by long years of an agonizing war and by the evident strains on our external position. Like every other country represented in this room, we face hard decisions about economic and social priorities in many areas.

The strongest of our convictions is that aid stimulates development only where there exists the will and competence to utilize it effectively. This implies a responsibility upon the donor as well as the recipient to identify, develop, and carry through projects of strategic developmental importance. The World Bank Group and its sister regional financing institutions rightly pride themselves as leaders in efficient project planning and execution, and in assessment of those projects as part of a larger development effort. This is not a matter of dramatic, new initiatives, but hard, persistent effort. . . .

Second, there is a growing need to place more emphasis on what might be called “people-oriented” projects rather than large-scale civil engineering. We have redirected the emphasis in our own bilateral assistance in support of imaginative, new programs in education, agriculture, and population planning. We warmly support the initiatives the World Bank has taken in these same areas. The fresh emphasis that Mr. McNamara placed on rural development, in his remarks to us yesterday, seems to us entirely appropriate.

Third, and most broadly, a genuine commitment on the part of recipient countries to the idea of development in their own policies is a key ingredient. Experience shows, time and again, that “growth-oriented” countries rapidly become less dependent on official assistance once internal conditions are right.

There is one aspect of “growth-orientation”—the part played by private investment—that I wish to emphasize, sensitive though it may be.

In sheer quantitative terms, the potential is clear enough—net flows of medium-term and long-term private capital to developing countries are now as large as official assistance. Moreover, the private investor can bring benefits in skills and experience that simply have no counterpart in governmental aid.

Every sovereign nation has, of course, the right to regulate terms and conditions under which private investment is admitted, or to reject it entirely. However, when such capital is rejected, we find it difficult to understand that official donors should be asked to fill the gap. Moreover, we do not find it reasonable that a nation taking confiscatory steps toward investment that it has already accepted from abroad should anticipate official assistance, bilateral or multilateral. . . .

Inflation

Before concluding, I must underscore the threat to all our constructive labors from the storm of world-wide inflation.

Unfortunately, inflation is no new phenomenon. What is new is that it is now infecting more countries, in a greater degree, than at any time in memory. Speculation in commodities is fed by fear about currencies. Inflation is becoming imbedded in the expectations of too many people.

Long maintained, this will break down the processes of orderly development. It is simply incompatible with the stability of any international monetary and trading system.

I am familiar with analyses that trace world inflation to defects in the international monetary system. The Bretton Woods system has, itself, been criticized as an engine of inflation, and floating rates praised as permitting the restoration of internal monetary discipline. Equally forcibly, we are urged—especially by those who have seen their own exchange rates depreciate and their import bill rise—that floating rates are themselves an inflationary force.

Whatever the technical merits of these analyses in particular circumstances, I submit they place the responsibility for inflation and its correction in the wrong place. Let us not neglect the causes and cures that lie closer to our national actions and powers.

Two factors, mainly unforeseen a year ago, have been at work in the recent surge of inflation. The first is that strong expansionary forces have coincided among virtually all industrialized and developing countries. As a result, increases in cyclical demand have put pressures on supply, exposed unforeseen shortages of capacity, and driven up prices of raw materials. Second, the pressures on prices in two key areas—agriculture and energy—have been greatly aggravated by crop failures and weather, and by shifts in production patterns and marketing policies.

In the United States, we have long been accustomed to relatively low prices of basic agricultural commodities. For many years, without adequate markets abroad, we kept a sizable margin of farm resources idle. But, in the past crop year, the volume of our wheat exports nearly doubled, feed grain exports rose by two thirds, and soybeans by one sixth. And now, with our markets fully open to the surge in world demand, looked to as a residual supplier when other countries are short, and without the price protection afforded those whose exchange rates have appreciated, we have felt the full brunt of the rise in world agricultural prices.

At the same time, our needs for energy imports are rising rapidly. Obviously, these commodity flows in both directions have responded to pressing needs. But the price impact is measured by the fact that, taken together, prices of food and energy account for 82 per cent of the rise in our wholesale price index and 66 per cent of the rise in our consumer price index in the past year.

We believe a market-oriented system will respond flexibly and effectively to changing needs. We are making great efforts to deal with the high price of food by bringing idle acreage back into production. Normal market processes are at work. The prices of soybeans are 50 per cent below their speculative peak, feed grains have fallen back by a quarter, and wheat prices—where the world-wide supply situation is most tenuous—have at least stopped rising.

We cannot speed the natural cycle of planting and harvesting, and of animal growth. We face for a considerable period ahead a tight situation in agricultural markets. But we have every intention of keeping our markets open, for we are and intend to be a dependable supplier.

Meanwhile, this experience will ultimately redound to our common advantage if we attack with fresh urgency the problem of finding more effective patterns of production and trade to serve our mutual interests in more food at cheaper prices.

Let us work in similar spirit to deal with the problem of developing and distributing energy resources. We, for our side, have now embarked upon a massive effort to develop the bountiful energy sources within our own country now made economic by higher prices. We look to others to help maintain the flow of energy, so long as their own legitimate needs and aspirations are fairly recognized.

A vigorous attack on the special problems of food and energy are not a cure-all for inflation. A number of countries, as ourselves, have resorted to, and even intensified, direct price and wage controls. But we remain convinced that our success will hinge mainly on the firm and persistent application of the traditional tools of fiscal and monetary restraint. I need not belabor, to an audience of finance ministers and central bankers, that expenditure and monetary restraint are never popular. Nevertheless, I believe, in the face of the evident need, these policies are broadly accepted by the American people. We mean to see it through. We hope and expect our efforts will be mutually reinforcing with those of others.

Statement by the Governor of the Bank and Alternate Governor of the Fund for Italy—Guido Carli

I wish to be associated with the sincere thanks expressed by my colleagues to the Government and people of Kenya for their warm hospitality and for providing a most cordial atmosphere for these very important meetings.

I should also like to join those who have paid tribute to Pierre-Paul Schweitzer, that selfless international civil servant who steered the IMF ship so well through many a monetary storm. His name is linked to the introduction of a new international currency, which marked a turning point in the world’s monetary history. His successor, Johannes Witteveen, is an eminent and capable man who we are sure will prove as evenhanded a helmsman.

Monetary events of the last year have been among the most difficult ever recorded and have severely tested the spirit of international cooperation. Massive waves of hot money have forced industrialized countries to abandon temporarily their long-standing commitment to the par value system and to float their currencies singly, jointly, or concertedly. Such developments were not entirely unexpected since no par value system could long have survived the inconvertibility of the principal reserve currency. The nondiscriminatory character of the Bretton Woods system has been endangered. Inflation has been rampant in many countries and has spread rapidly. So far we have not found a vaccine to immunize us from domestic and international cost-push inflation. The world community has resorted mainly to monetary instruments, causing the rapid escalation of interest rates and, consequently, inducing massive capital flows that in turn have made difficult the conduct of national monetary policies. As the most recent events indicate, a closer coordination of the extent to which individual countries resort to monetary policies is necessary for the solution of this problem that presently looms as large as the need for new rules to govern the international monetary system. The system also continues to suffer from the immobilization of gold and SDRs, with the result that only dollars are offered in settlement of payments disequilibria. This entails that this currency is weakened independently of developments in the balance of payments of the United States, intensifying these speculative flows. In the last few months, exchange rate flexibility has succeeded in containing these flows within tolerable limits. But tensions, even major tensions, have periodically arisen where intervention margins are known to the market, to relieve which repeated adjustments of central rates have been necessary.

Notwithstanding these difficulties, world trade has continued to expand at a record rate. The U. S. balance of payments is strengthening rapidly and many countries, Italy among them, have adopted vigorous therapies to combat the inflation which is ravaging our economies. Moreover, the political will to reach a consensus on some of the more vexed issues of monetary reform is emerging. I should like to take this opportunity to thank publicly Minister Ali Wardhana and the Chairman and Vice-Chairmen of the Deputies for their valuable contribution.

International monetary arrangements, enlightened as they may be, are only a means to an end. I must therefore mention, however briefly, what we believe the reformed system should allow us to achieve and what should be its essential technical characteristics.

The new system should first of all safeguard the global, nondiscriminatory character of trading arrangements, lubricating the wheels of international trade. It should aim at ensuring the greatest possible freedom compatible with its proper functioning. It should not be an obstacle for countries to pursue full employment policies in a noninflationary environment. It should be capable of withstanding the stress of large movements of short-term funds. And it should allow for a greater transfer of resources to the less privileged members of the international community.

What monetary arrangements would be most conducive to the achievement of these goals? Let me begin with the closely interrelated issues of the adjustment process and convertibility, the malfunctioning of which has been the root cause of the demise of the Bretton Woods system. In that system, we all agree, deficit countries had an inordinate degree of responsibility in the adjustment process. Surplus countries instead were not under the same compulsion to adjust nor, for that matter, were reserve currency nations. In our view, therefore, a two-pronged attack is required to avoid large and persistent payments imbalances in the future. On the one hand, provision will have to be made for the full convertibility of reserve currencies. On the other hand, definite and graduated pressures should be brought to bear on countries with excessive surpluses to take adjustment action.

All countries should undertake to maintain their basic balances in approximate equilibrium, and departures therefrom would be examined at frequent intervals in the Fund to determine whether adjustment measures were called for and, if so, of what kind. While these assessments would of course be based on objective indicators, such as the movements in foreign reserves and in the basic balance, they would require a comprehensive analysis of current trends and of prospective balance of payments developments. The international community should have at its disposal the means to induce countries to take corrective action early and effectively, but under no circumstances should these means involve retaliatory trade measures. Such measures would surely lead to a re-enactment of the experience of the 1930s.

In the past, convertibility was a bilateral affair between reserve centers and other countries. The decision on whether or not to convert often revolved on political grounds, with adverse repercussions on the viability of the system. In a system where, most likely, there will continue to be substantial amounts of currency balances, the restoration of bilateral convertibility would be technically undesirable since reserve centers could be requested to convert not only new balances of their own currencies but also part of previously accumulated balances. No system could possibly survive for long with such a sword of Damocles hanging over it.

It is for these reasons that we have proposed what has been termed multilateral asset settlement. Such a scheme simply involves setting up an account in the Fund to ensure that reserve centers settle in reserve assets only to the full extent of their new deficits and surpluses. If strains were emerging in the adjustment process because of an insufficient volume of reserve currencies, there could be a collective decision allowing reserve centers to settle only partially. The attainment of full asset settlement would make for the effective control of the volume of international liquidity for the first time in history.

As for surplus countries, we share the view that once their reserves have reached predetermined levels, further accruals should be impounded in a special Fund account.

It would be the joint responsibility of surplus and deficit countries to assure the smooth functioning of the adjustment process. When appropriate, exchange rates would be changed fairly promptly and by moderate amounts, and with equal promptness by deficit and surplus countries alike. In this way, large and deep-rooted disequilibria would be avoided and therefore the economic and social costs of adjustment would be greatly reduced. However, given the huge volume of liquid funds in the international money markets, disruptive short-term flows cannot be expected to be eliminated altogether. Domestic assets are also increasingly mobile, a reflection certainly of the growing economic interdependence among countries, but also of the increasing competition of unregulated Euro-banks. Consequently, there will be a need for capital controls to be available on a stand-by basis; a code of good conduct will have to be elaborated to avoid beggar-my-neighbor policies; and large swap facilities will be necessary with adequate safeguards to avoid their being used to finance disequilibria which need correction. It will also be necessary to agree on how to regulate the Euro-currency markets to prevent them from jeopardizing the functioning of the system.

Let me turn now to consolidation. The overhang of indebtedness of the reserve centers raises insurmountable difficulties for restoring bilateral convertibility, since hardly any country seems inclined to accept an initial mandatory consolidation down to working balances. However, if multilateral convertibility through a special Fund account—which could then be called Substitution Account—is introduced, the overhang would not pose a problem, since new and old currency balances could be easily distinguished. Consequently, consolidation must not be viewed as an immediate problem. Full asset settlement will practically freeze the stock of reserve currencies at the existing level and should lead to their gradual shift to the Substitution Account pari passu with reserve centers’ surpluses. We have proposed that SDRs could also be issued through this Account against reserve currencies transferred to it at the option of the holder. The Account’s holdings of reserve currencies, which would represent a long-term debt of reserve centers, would not need to carry an exchange guarantee. They would be amortized over a fairly long period of time so as not to disrupt trade patterns. In this manner, the pace of consolidation will be determined by countries’ portfolio preferences, which in turn will be a function of the attractiveness of the SDR.

There now appears to be broad agreement that the SDR should be at the center of the international monetary system. To that end the SDR must become the numeraire of the system and its link to gold should be cut. Moreover, it has become increasingly clear that the present method of valuation of the SDR needs to be modified. We would like its transactions value to be maintained equal to an average of a representative group of widely traded currencies. Moreover, the rate of interest of the SDR should be related to the interest rates obtainable on monetary instruments denominated in the currencies which make up the basket. A number of other characteristics of the present SDR, such as the reconstitution obligation and acceptance limits, will need to be modified or abolished to make the SDR a full-fledged reserve asset. If the transactions value of the SDR were determined by the basket technique, holding SDRs would be equivalent to having balances in all the currencies that make up the basket. Consequently, if countries had the option of transferring currency balances against SDRs to a Substitution Account, the present problem of the diversification of currency reserves could be greatly alleviated.

These remarks on the SDRs’ role lead me to comment briefly on gold, which lately has been suffering from the workings of Gresham’s law. Gold, as an important element of central bank assets, should not continue to remain virtually frozen. We believe that an increase in its official price could solve this problem only temporarily, and hence we favor abandoning the maintenance of an official price and allowing the metal to be bought and sold at market or market-related prices.

I should now like to set forth our views on how a greater volume of resources could be transferred to the less developed countries in the new monetary system. First of all, since the Colombo Proposal in 1968 we have favored the introduction of a link between SDR allocations and development finance. We would like a portion of SDR allocations to accrue to development finance institutions so as to enable them to open special “windows” for the 25–30 poorest countries of the world. Lest we stoke the fires of inflation by overissuing SDRs to meet the enormous developmental needs of the less developed countries, we have proposed a built-in check on the size of SDR allocations, which should be regulated by a formula linking them to the growth of real world trade, rather than by periodic and politically-charged negotiations. In this way a sufficient growth of SDRs would be assured to satisfy the liquidity needs of the world. In the second place, we would favor broadening substantially the range of activity of the Fund to encompass greater technical and financial assistance to the less developed countries. We would also support the enlargement of the Fund’s compensatory and buffer stock financing facilities so that they could play a much more active role. Similarly, we would like to see the introduction of what has been called extended Fund facilities, which would provide loans of greater maturity than the Fund has provided up to now to avoid countries interrupting their developmental programs because of balance of payments difficulties.

A journey of a thousand miles begins with but one step. Over the last year we have taken that step and many more on the long road to monetary reform. In the months ahead we shall have to translate the existing consensus on fundamental principles first into an agreement on the major issues and then into a set of workable rules, which all members will willingly adhere to. The forthcoming round of negotiations should aim at preparing a full blueprint of the new monetary system for the next Annual Meetings. In the meantime, the Fund should direct its action to the maintenance of orderly conditions in the exchange rate field. In this connection, we should explore the feasibility and the merit of certain actions that could be undertaken by the Fund prior to the introduction of the reformed monetary system. For example, the Fund could conduct active consultations on the most significant cases of imbalance. It could lay down intervention rules in exchange markets in order to prevent competitive exchange rate depreciation or the maintenance of inappropriate rates of exchange. It could work out arrangements for the unfreezing of gold and other primary reserve assets. And it could assist in consolidating, on a voluntary basis, existing currency balances.

Hopefully, the system we shall in the end construct will serve us as well as the one devised at Bretton Woods. But a system which is well-tailored today may easily be ill-fitting tomorrow unless it leaves scope for its rapid adaptation to changing circumstances. The reform of the international monetary system should therefore be viewed as a continuing process of accommodation to those inevitable future changes in economic relations which at the moment can only be dimly perceived.

Let me turn now to developments in the World Bank Group, whose activities we follow with great interest because we think that, for both political and economic reasons, aid to developing nations should be channeled through international agencies to a much greater degree than hitherto. It is for this reason that we have advocated that link-SDRs accrue largely to international and regional development institutions. . . .

Statement by the Governor of the Fund and Bank for France—Valéry Giscard d’Estaing

The Ancients used to distinguish between years of good omen and years of ill omen. Judging by the turns events have taken, posterity is unlikely to look back to 1973 as a year of good omen.

Take the practitioners first: they saw their universe thrown into chaos and for three weeks in March found themselves deprived of exchange markets; they have been casting about vainly for a unit of reference ever since.

Then public opinion was roused from its trustful composure. Until then the monetary system had simply existed, as if part of the natural order of things, with its conventions that were reassuring in their solemnity and their regularity. Suddenly, the monetary issue hit the newspaper headlines. Opinion woke up fearfully to the discovery that a monetary machine existed, that it badly needed a tune-up, but that this machine was still determining the course of everyday life. It began to wonder whether the breakdown of the postwar monetary system was not, as it kept hearing both at home and abroad, the first sign of a dislocation of the world economy. This may appear to be going too far, but let the possibility sink into your minds for a while. Let us observe a moment’s silence as we anxiously ponder it.

Finally, we have the political leaders, who found themsleves forced to spend more time at international conferences than attending the councils of government. What a pleasure it is, my dear colleagues, to be seeing you so often! Until then, the problem of money had been treated as a matter for the experts and formed the subject of plans that were a delectable blend of sophistication and obscurity. Now it has become a problem for governments and is even being debated by statesmen. At stake is the expansion of international trade, that is to say, the growth of the world economy.

But this is a year of good omen inasmuch as it has shed on the subject the light of experience and has started up the movement of reform.

Some experts were fascinated by certain formulas. Experience in the exchange markets brought out their limitations and dangers.

But above all, the international community decided to tackle the monetary issue; more progress toward a new monetary order has been made in a single year within the Committee of Twenty than in the whole of the preceding decade.

Our meeting opens on a somewhat hopeful note.

We must be realistic, however. It would be a mistake to believe that the work now under way can be brought to a conclusion during these sessions. We still have a long way to go, and this meeting is another stage on the road to reform.

And a particularly enjoyable stage it is, too, thanks to the cordial hospitality of the Government and people of Kenya, whom I thank here as they welcome us on behalf of Africa—Africa, the mother continent which throughout its development is successfully preserving ties with nature that some of our countries have ill-advisedly allowed to weaken or break altogether.

The monetary issue must be put where it belongs, which is in the realm of politics. A new international monetary system must be created in order to consolidate the progress which the developing countries have made in the fight against poverty, insecurity, and stagnation, and to continue progress and assure employment in the industrial countries.

* * *

Therefore, I should like very briefly to present our political position regarding these problems by discussing, in turn, the aim, the mechanisms, and the procedures of the reform.

1. The aim

The main thing at stake in the monetary negotiations is the balanced growth of aggregate supply and demand in the world economy, in other words, greater well-being for everyone and an opportunity for more and more people, through increased material security, to enjoy new forms of individual freedom.

The old international monetary system has made an essential contribution to the progress achieved since the end of World War II.

In the last few years, permissive practices have sprung up. For too many countries the exchange rate system became the main, if not the only, instrument for adjusting their payments balances. There was a theoretical justification for such abdication: it was thought that, if left to their own devices, the markets would be able to set exchange rates by a realistic and consistent evaluation of economic structures. In reality, it was found that their operation was dominated by impulsive and speculative capital movements.

The only good thing one can say about present practices is that they are providing their own proof that they do not work. Currency floats do not contain inflation, nor do they ensure correct market rates. This has been demonstrated beyond any shadow of doubt. The time has now come to put an end to a perilous experiment.

Capital movements and speculation are imposing a permanent mortgage on domestic policies, upsetting their course and jeopardizing their results and taking turns to generate inflation and underemployment.

Though they provide temporary ease for some countries, these disorders place a particularly heavy burden on the developing countries. Such countries’ programs for growth are at the mercy of disorderly movements in the prices of a small number of products; they are thwarted by uncertainties in exchange rates. The international community must make an all-out effort to narrow the gap which separates the poverty-stricken and the wealthy areas of the world.

Monetary reform must create whatever additional conditions are needed for the advancement of the developing nations.

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2. The mechanisms

Now we come to the second point: that is, the mechanism of the reform, and my comments on this point, I think, are very much along the lines of those presented earlier by Mr. Nørgaard, who spoke on behalf of the Ministers of the Economic Community, as well as those which were developed by my colleagues of this same Economic Community, and also along the lines developed by Mr. Aichi, Finance Minister of Japan.

I should also like to note, as regards certain important points, the convergency views were those expressed a few minutes ago by the Secretary of the Treasury, Mr. Shultz.

Negotiations have reached a point where the overriding need is to be quite clear in our minds about the content of the system we are trying to set up. Specious techniques must be avoided and ambiguities dispelled. This holds true for the system of exchange rates. The idea of fixed and adjustable par values now appears to have gained wide acceptance. However, does this convenient formula—since its English and French translations are not even equivalent—accurately convey a refusal to institute a flexible system? There is no doubt a sound case for making the future exchange mechanisms more flexible than those of Bretton Woods, but it is also necessary that currency floats be authorized only on an exceptional and temporary basis.

As far as balance of payments adjustment is concerned, the functions to be entrusted to the Board of the Fund have not yet been clearly defined. The same goes for the function of the so-called objective indicators. These can never advantageously take the place of human judgment. Not that all rules must be dispensed with nor take the place of the legitimate decisions of the political authorities in our respective states. Past experience has taught us that it is particularly desirable to provide for a reasonable symmetry between the constraints imposed on debtors and creditors. I have proposed this, and at the same time suggested provisions designed to dissuade creditor countries from accumulating excessive surpluses.

The touchstone of reform is to be found in the area of convertibility. This question outweighs all others, particularly that of adjustment. It raises the fundamental problem of equality in the way rights and obligations are shared within the international community. We all seem to be agreed that in the future no national currency should be assigned the role of a reserve asset. I welcome this consensus. But we cannot remain at the stage of an agreement in principle. A good resolution has been made. We now have to ensure that its consequences are reflected in the texts we draft and the action we take. We shall not really have broken any new ground in this field until governments observe among themselves the rules that ordinarily apply under common law. It will be recalled that this law requires one to pay one’s debts out of one’s assets. Convertibility, as we understand it, is meaningless unless it provides for a mandatory, multilateral, and symmetrical mechanism.

Still to be resolved is the question of the numeraire, by which we mean the currency of the future system. It is on this point that the report presented to us by the Bureau of Deputies of the Committee of Twenty, transmitted by the Chairman of the Committee of Twenty, presents the greatest variety of solutions. This numeraire, in our opinion, will have to be based both on SDRs and on gold. Now, the SDR will be an abstract numeraire as we suggested nine years ago at the Tokyo conference, the role of which and the nature of which must be clearly defined.

Its role: the SDR must effectively perform the triple function of a standard of measurement, an instrument of exchange, and an instrument for the conservation of assets. The problem lies in how to render it more attractive than the average of currencies. I think that the best way to do this would be to fix its value in relation to a package of currencies in which the strongest currencies would carry a greater weight than the others. Of course, we shall have to very carefully define the content of the words “greater weight.”

Together with the SDR, gold must retain the functions for which it is naturally fitted by its properties. No one can deny that gold in the present state of affairs is still appreciated and sought after.

The reform will be accompanied by a new definition of the role and structure of the Fund, as we were told yesterday by the Fund’s young and distinguished Managing Director, Mr. Witteveen, whom I should like to welcome here in my turn.

The Fund will be vested with responsibilities that cannot be confined to appeals to goodwill, reminding us of the law, the legal obligations, to note that they are not complied with, or to apportion the melancholy blame. These responsibilities will be extremely important as regards the exchange rate regime, adjustment, and convertibility. The international monetary reform, the fruit of delicate negotiation—and we are aware of this—will constitute a political contract of the community as a whole.

The implementation of this pact in international life will entail political decisions and political arbitrage. The responsibility for this cannot be entrusted solely to the Executive Board, to whom it does not pertain; neither can the decisions be taken by meetings of the Governors, which take place only once a year. It would be useful to provide for the establishment of a new body which might be a committee of Governors composed in the image of the Committee of Twenty, meeting if necessary several times a year. It would put into practice political cooperation, without which, as we have seen, an international monetary order cannot exist.

3. The procedure

It is the task of the Committee of Twenty to pursue and complete the work that has been undertaken. We think it would be a useful method, in confirming their mandate, to fix a deadline for the conclusion of their deliberations. I therefore proposed a date, the end of July 1974, which was accepted by my colleagues.

Let us reflect also on the program for the Committee’s next ministerial meeting of 1974. It will be advisable to deal with the problem of the nature and role of SDRs as a matter of priority and questions relating to the structure and the role of the Fund. Why must we tackle these problems? It is because the multiple aspects of the reform with which we are concerned are very closely linked and closely interrelated, and no rapprochement can be expected on the matter as a whole until we have considered one by one the separate factors of which it is composed.

4. The developing countries

Now I want to emphasize the particular concern of the French Government regarding the developing countries. I mention this subject last, not because of a distorted scale of values, but for the sake of clarity, as I hope you will understand.

We are asking that the reform take their specific interests into account. In particular, we would like to see a link established between the creation of new international liquidity and development aid. We have taken a definite stand on this subject. We will stick to it.

But the link, alone, will not be the means of settling the problem of development. It is one means among those that should be put into effect to reach the target the industrial countries have set for themselves: the target which was referred to by Mr. Shultz regarding the level expressed in percentages of the gross national product. France has been complying with this standard for many years, and my country envisages setting itself a new target for public aid more stringent and in accordance with the recommendations for the Second Development Decade.

I should also like to stress once again the importance the French Government attaches to the question of the organization of international markets. As in the case of the stabilization of currencies, the stabilization of the prices for primary products is an obligation vis-à-vis the producing countries. No monetary organization, whatever its merits, whatever its sophistication or its degree of sophistication, can replace an organization of markets for the products exported by developing countries. . . .

* * *

Whether 1973 proves to be a year of good or evil omen depends on the efforts we will make to maintain stability in the markets and, in the coming months, to define the points still to be resolved in the new world monetary order.

A few weeks ago, public opinion sensed that there was a certain willingness among us to come to a rapprochement, and you will have noticed that public opinion has approved this will toward rapprochement.

In fact, public opinion is aware that an international order can be the result of no one’s triumph, but constitutes the common labors of those who choose, above sectarian minds or selfish interests, the patient search for the welfare of all.

Statement by the Governor of the Fund and Bank for India—Y. B. Chavan

As so many speakers before me have pointed out, this is a historic occasion for many reasons, above all because it is the first time that we are meeting on the continent of Africa. The Government of Kenya have made superb arrangements for the conference and we are grateful to them for their warm hospitality. I would also like to congratulate you, Mr. Chairman, for your enlightened remarks at the beginning of the session and for the skill and patience with which you are conducting the meetings.

At the outset let me place on record our appreciation of the most valuable service rendered by Mr. Schweitzer as Managing Director of the Fund for a decade. A man of great dedication, he discharged his duties dispassionately and with a stern devotion to principles and their equitable application to all members of the Fund. His contribution to the work of the Fund will be remembered for a long time, especially by the developing countries whose cause was dear to his heart.

It also gives me great pleasure to extend a warm welcome to our new Managing Director, Mr. Witteveen, who inherits a most difficult task. I am confident that the background of his varied experience and insight into economic matters will help him in this challenging task. We wish him all success.

Let me also warmly welcome on behalf of my Government, Romania and the Bahamas as new members of the Fund.

The last one year has been eventful on the monetary front. The developments in the exchange markets earlier this year have further underlined the urgency of the task of reshaping the world monetary system. There have been intensive discussions in the Committee of Twenty, but an agreed outline of the new monetary order except in a few small areas is still not in sight. Meanwhile, exchange rates continue to lack any firm foundation in an internationally agreed set of rules or a code of conduct. Although the dangers inherent in such a situation are widely recognized, we have still to find the means to restore confidence and stability in the monetary arrangements.

In this connection, I wish to express my deep disappointment that contrary to expectations aroused at the July meeting of the Committee of Twenty, it has not been possible for the Committee to submit to the Board of Governors an agreed Outline of Reform. Judging by the report of the Chairman of the Committee, and the proceedings of the Committee of Twenty held on September 23, the resolution of outstanding issues since the second meeting of the Committee held in March 1973 is virtually at a standstill. At that meeting, the Committee had emphasized the need for a better working of the adjustment process. Although many months have passed and despite extensive technical discussions of this matter by the Deputies, there is no consensus on the basic features of the adjustment mechanism in the reformed system. At the same meeting, the Committee had agreed that the SDR should become the principal reserve asset of the reformed system and the role of reserve currencies should be reduced. Agreement is yet to evolve on how this is to be brought about. The Committee had further affirmed the desirability in the context of monetary reform of promoting economic development and the flow of real resources from developed countries to developing countries. When concrete proposals having the backing of all developing and a majority of developed countries were submitted to the Committee of Twenty, progress was stalled because of the opposition of a few powerful countries.

I recognize that the issues before us in the Committee of Twenty are highly complex and difficult. Many of these issues no doubt require further technical examination. However, I am also convinced that a technical examination has to be supplemented by political will to find practical and workable solutions if there is to be any worthwhile progress in reconstructing the world monetary system.

We in the developing countries had welcomed the formation of the Committee of Twenty since it implied that for the first time in many years, crucial questions concerning the international monetary system would be extensively debated in a forum in which developing countries had full participation. Developing countries have a strong interest in a satisfactory resolution of all outstanding issues of reform, and it is in this spirit that they have participated in the deliberations of the Committee of Twenty. They have a right to expect that a reformed monetary system would, among other things, help to create a more favorable international environment for their economic development. They have submitted concrete proposals on issues of special concern to them. At the level of the Deputies, the technical aspects of their proposals have been examined in great detail, and it has become abundantly clear that on major issues which affect the developing countries, the solutions do not depend on technical considerations. They depend on the willingness of the industrial countries to accept the simple proposition that the problems facing the developing countries are as much a responsibility of the international community as a whole as are those encountered by the developed countries; that international monetary problems and their solution cannot be divorced from the larger problem of securing rapid development of the poorer countries of the world; and that problems of equitable distribution of world output demand as urgent attention as those of securing stability and rapid growth.

I have had the privilege of attending the meetings of the Committee of Twenty, and the one solid impression I am left with is that the aspirations of the developing countries can be fully met only if there is adequate political will and vision on the part of the developed countries. Let us not take shelter behind the technical complexities of the monetary issues which have, in any case, been so thoroughly debated. These complexities can be resolved and a smooth transition to the new monetary system ensured, given, individually and collectively, the determination to do so.

On the issues themselves, I can only express the views which I have already expressed in the Committee of Twenty in the hope that I can carry conviction with my fellow Governors.

First, we subscribe in a broad measure to the idea that member countries should be ready to accept the need for timely adjustment action. We would like to re-emphasize, however, that adjustment cannot be viewed merely as a mechanical process of adjusting to whatever circumstances prevail. We believe that adjustment becomes meaningful only when governed by objectives outlined in Article I of the present Fund Agreement, and remains consistent with the maintenance of a high level of economic activity, trade and employment, and the acceleration of the growth of the economies, particularly of countries that are weak and underdeveloped. This was the idea that inspired the acceptance of the Bretton Woods framework and we are certain that this ought still to guide and inform our task in the future as well.

Second, we accept the notion that convertibility and stable exchange rates have to be restored in the near future if the present uncertain monetary arrangements are not to distort international trade and investment programs. In endeavoring to restore convertibility we recognize that the question of the large outstanding currency balances has to be first resolved. We believe, however, that it would be damaging to the interests of the monetary system if these balances were automatically transferred to the Fund and the SDR system via the substitution facility. To do so on so large a scale might damage the SDR as a reserve asset at the very outset of its career. It is our view, as expressed in the past, that the problems of these outstanding balances should be dealt with mainly on a bilateral basis between those who issued these currencies and their recipients, rather than having them burden the international monetary mechanism as a whole. However, after serious attempts at bilateral arrangements, any small outstandings might still be dealt with through a substitution facility in the Fund.

Third, we are strongly in favor of the establishment of the SDR as the primary reserve unit and hope that the world will have the wisdom to de-link its monetary system from the constraints set by the production and value of gold and also to move away from the inefficient system of meeting the world’s requirements of reserves through a system of reserve currencies, even though these have, no doubt, played a useful role in the past.

Fourth, I would hope that while pursuing the goals and objectives of an international monetary system, no step will be taken that would create a two-tier monetary society in which some currencies play the role of key currencies and others of satellites. We have had enough problems in the past with such a system. The new system, we believe, must be centered exclusively in the Fund and will be built on the foundation of the SDR. This will help achieve stability, by enabling all the currencies of the members of the Fund to play their appropriate role in a Fund-centered system.

Fifth, we believe it to be the cornerstone of the new monetary system that it must have a built-in mechanism for an adequate transfer of real resources to developing countries. This must constitute an integral element of international monetary reform. The proposal to establish a link between SDRs and development finance is not only technically sound and feasible but is also consistent with the requirements of the strategy underlying the Second United Nations Development Decade. In a world in which the flow of resources to developing countries falls grossly short of agreed international targets, let us not miss the opportunity of reform of the monetary system to impart the necessary element of stability to these flows.

Finally, I would hope that the new Fund will be structured in a manner that will accord to the developing countries the role which they deserve by virtue of their numbers and size, in the decision-making process of the Fund. Even though the number and size of developing countries in the Fund membership has expanded substantially, the weight of these countries in the decision-making process has remained stagnant, or has perhaps even declined significantly. If the Fund is to remain essentially a cooperative international economic organization, the weight of the developing countries in decision making in the Fund calls for considerable improvement. Any attempt at reform of the international monetary system must ensure that the organization build up its structure in the interest of the world community rather than in the interests of any limited group of members, however big or important these might be. . . .

Unfortunately, recent trends in the flow of real resources to developing countries do not restore one’s confidence in the viability of a philosophy of shared responsibilities between developed and developing countries in eradicating poverty, disease, and ignorance from our planet. The aggregate net transfer of resources from the developed world continues to be stagnant. Last year it declined in real terms by 3 per cent; and as a percentage of the gross national product of developed countries, the flow of resources came down from 0.82 per cent in 1971 to 0.77 in 1972. The targets of 0.70 per cent of gross national product as official development assistance is nowhere near fulfillment and the percentage has declined from 0.35 in 1971 to 0.34 in 1972—being less than half of the target. The fact that these are well known statistics does not make them less depressing. While the boom in commodity prices has no doubt provided some relief to primary producing countries, the benefit is not widely shared, and a large part of the developing world may well have been adversely affected by the failure of adequate export expansion opportunities in the face of a sharp rise in import prices. Attempts by developed countries to remove tariff and nontariff barriers restricting the exports of developing countries have been feeble. Uncertainties caused by frequent monetary upheavals have only added to the balance of payments problems of developing countries. . . .

Finally, I would once again like to express my warm appreciation and thanks to the Government and the people of Kenya for their generous hospitality and excellent arrangements.

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

In the first place, I would like to endorse fully the remarks made by my colleague, the Minister of Finance of Indonesia, Mr. Ali Wardhana, on the work done by Mr. Pierre-Paul Schweitzer during his term of office as Managing Director of the International Monetary Fund. To say the least, his services were monumental. I have no doubt at all that what he has done for the international financial community will long be remembered by those of us who know what he has achieved. I would also like to extend a warm welcome to his successor, Dr. Witteveen, who has taken over a most difficult job. His distinguished record of public service should perhaps be of some help to him.

We are meeting at a very critical time. It is generally recognized that the international monetary structure, set up at Bretton Woods soon after the end of World War II nearly 30 years ago, has collapsed and no other has yet been set up to take its place. The result is a vacuum. There is of course the Committee of Twenty, established almost exactly a year ago to devise a new structure. The Committee of Twenty has made some progress, but it is generally acknowledged that such progress has fallen far short of expectation.

Let us now look at some of the major issues on which the developed world has found it difficult to reach even the resemblance of an agreement. First, the Committee of Twenty has to settle on the form and mechanics of the adjustment process. It would be most difficult for us to support the proposal for the presumptive use of the reserve indicator, because reserve movements in Malaysia, as in other developing countries, are often subject to the vagaries of international demand for our main exports—factors over which these countries have no control. Furthermore, the basic function of reserves in developing countries is not only to tide over balance of payments imbalances but also to finance economic development. As such, the use of reserves to trigger adjustments might not take this factor adequately into account. Insofar as the major developed countries are concerned, it is clear that the main reason for their failure to reach agreement on this issue is that they look at this question purely from their own national standpoints. So long as this attitude of mind persists, it is obvious that no agreement is possible.

There are also suggestions that countries which do not conform to the patterns laid down by the International Monetary Fund, assuming agreement is eventually reached, would be subject to what has been called graduated pressures and even sanctions. This looks fine on paper, but here again, insofar as the developing world is concerned, the net result could well be that a developing country which has built up foreign exchange reserves through prudent policies and sound financial management will be punished for its exemplary conduct. That was why, when I spoke on this subject at the 1972 Annual Meetings of the Bank and Fund, I expressed the hope—and I hope that it is not a vain hope—that the new structure should not be devised in such a way as to punish the prudent and reward the imprudent. That was also why, in July of this year, I suggested that these pressures and sanctions should not be made to apply to developing countries. After all, a developing country which runs a surplus or a deficit only affects itself, by and large. Such surpluses or deficits will not significantly affect the rest of the world either way, as these countries are too small to be able to exert any meaningful influence outside their own borders.

As regards the question of settlement of payments imbalances, we are against a permissive system which allows a country to finance its deficits by increasing its liabilities, as has happened in the past. Deficit countries should be compelled to settle in primary reserve assets. However, surplus countries should be given some degree of freedom to convert their surpluses. I feel this is especially important for developing countries in order to give them some latitude in protecting their hard-earned reserves.

Third, agreement is even further away on the question of the future role of special drawing rights and gold. Judging from the august pronouncements made by the Finance Ministers of the major developed countries, one would think that SDRs would in the near future replace gold. I wonder if anyone who has seriously thought about the matter seriously expects this to happen in the foreseeable future. I therefore suggest that we do not raise false hopes by saying something which we do not mean. I accept that the motives for this tactic are well-meaning in the sense—I must admit, however, that this is purely my own guess—that the Ministers concerned feel that they must do everything they can to pave the way for the general acceptance of SDRs, and this might take time. Hence the sooner the ground is laid the better. But I feel that such a tactic could well be counterproductive, because if SDRs are seen to be something which cannot be acceptable for a long time still to come, those who talk about it might well lose their general credibility and they would find it even more difficult to put this idea across, even when the time is right. To us it is obvious that if SDRs are to replace gold in a big way, they must have all the major attributes of gold, so that they can be freely used in international financial and commercial transactions and be universally accepted by those involved in such transactions. It is clear that it will take a long time to reach this stage of acceptability. In the meantime, it is equally clear that gold will continue to play a major role and cannot be whistled away merely because a few wise men sitting in a room devoutly wish this to happen. I therefore suggest that we should adopt a practical and realistic approach in this matter.

Finally, there is the question of the link between SDRs and development finance. What the developing world is asking for is relatively modest, by any standard. If I interpret their desire correctly, they are not suggesting that the Fund should issue more SDRs than it would under normal circumstances. They are not suggesting that because of this proposed link, the amount to be issued should be determined by political considerations to an extent which might cause SDRs to defeat their main and original purpose, namely, a completely satisfactory substitute for gold, which in turn means that they must never be allowed to lose their intrinsic value—assuming that we eventually can convince the world that they have a real value—through being issued in quantities which would lead to such an adverse result. All we are asking for is that if there is an issue of SDRs—and we agree that the quantum of such an issue must be determined by the relevant financial and economic considerations—the developing world should get enough to enable a fair amount of the allocations to be used for development finance. Refusal on the part of the developed world to agree to such a relatively minor concession would be interpreted by the developing world as concrete evidence on the part of the former that it is not really interested in providing meaningful assistance to the developing world, in spite of their protestations to the contrary.

In the last analysis, what the developing world really needs is fair terms of trade and not aid. Only fair trading practices—and this is not asking too much—can help the developing world to reach the take-off stage of economic development within a reasonable period of time. Where we are concerned, this means fair prices for primary commodities, which form the bulk of our exports to the developed world. It might be borne in mind that fair prices for primary commodities also mean stable prices, and this would benefit consumers, i.e., developed countries, as well, because such a situation would avoid the violent price fluctuations which have characterized primary commodity prices in the past, and this benefits neither producer nor consumer. If the industrial countries are sincere in their protestations of wanting to give the developing world a square deal rather than charity, they can do a lot here. The Fund can provide adequate finance for the setting up and maintenance of international buffer stocks for every major raw material produced by the developing world. We appreciate that this would cost considerable sums of money, but this would not be beyond the capacity of the Fund to provide if the political will is there. If the will is not there, I agree that it should not be difficult to think of excuses for not doing what is needed.

The main aim of such buffer stocks would be to buy when prices are too low and sell when prices reach unduly high levels. This is not a visionary proposal, because there is an international buffer stock for tin which is working well, except that it is not large enough. It would clearly have to be considerably expanded if it is to achieve the purposes which I have mentioned. The limiting factor here is money, and this is where the snag really lies. It is clear that what can be done for tin can be done for other commodities, because the basic principles are similar and the methods of operation would be governed by similar guidelines.

If I may come back to the original theme of my statement, namely, the uncertainty arising from the existing vacuum in the international monetary system, it cannot be overemphasized that failure to reach agreement on its future structure within a reasonable period of time carries with it major perils. At the moment, all the major industrial countries are enjoying a boom accompanied by spiraling inflation. The governments concerned will probably apply the brakes. If, on top of all this, the existing disorder in the international monetary system continues, there can only be one result, namely, a world-wide recession, and a recession taking place under such conditions could well become the worst one of the post-World War II period. I wish to make it clear that I do not imply that such a recession is about to come on us. In my view, we still have some time left, but that time is not unlimited. It is shorter than most of us would like to believe. Let those assembled here on this occasion remember that we should not waste the time still left to us before the avalanche descends upon us. It might then be too late. . . .

In the last analysis, however, we in the developing world must not allow ourselves to forget that while the international community and international institutions like the Bank and Fund will continue to render as much aid as possible, the main effort must come from the developing countries themselves. We must learn to be self-reliant and we must be realistic, for outside aid is no substitute for self-help. Self-help means good leadership, sensible policies, and effective implementation of such policies. In the past I have stressed repeatedly, and particularly in this forum, that the biggest barrier to rapid economic growth in the developing world is the poor prices which we too often receive for our primary commodities. In fact, I referred to it earlier in my speech. I therefore suggest that if the Fund is unable to provide adequate financial assistance in this field, we can still help ourselves. What we can do is for the producers of a particular commodity to band themselves together and sell what they produce through only one marketing organization. A successful precedent has been set in this field. I refer of course to the Organization of Petroleum Exporting Countries, known as OPEC. The oil producing countries, by combining together, have managed to secure fair prices for their products. They have been able to speak from a position of strength, rather than merely pleading for aid. The developing world could learn a lesson from the strategy of the oil producing countries. I accept that for certain commodities this may not be possible, but there are other commodities for which this strategy is eminently suitable. It is now time for us to choose.

Statement by the Governor of the Fund for Guinea—N’Faly Sangaré

I should like to be associated with the speakers who have preceded me in thanking the people and the Government of our sister country Kenya for the cordial hospitality they have dispensed to our delegations, and in warmly congratulating our new Managing Director of the Fund, Mr. Witteveen, whose brilliant qualifications give us every hope regarding the future of our institution. Also, I should like to welcome the Governors for the Bahamas and Romania, who are among us for the first time.

While the delegation which I am privileged to lead finds just cause for satisfaction in the fact that, for the first time in the history of our two common institutions, the Annual Meetings of Governors are being held in Africa, it does not lose sight of the burning problems that are facing us at these meetings. These are, first, the monetary crisis that erupted in August 1971 and which gave a new note of urgency to the reform of the international monetary system, and, second, the problems of development aid and international cooperation.

As regards the monetary crisis, there is no further need to demonstrate that it is the least developed countries of the international community that are the main victims.

In fact, the prices expressed in the so-called key currencies, and particularly the dollar prices for manufactured products, and debts vis-à-vis countries whose currencies have been revalued have increased, whereas the prices for products exported by the countries of the Third World, denominated in those same currencies, have remained unchanged and in some cases have even declined.

These self-centered unilateral measures adopted by the industrial countries have heavily burdened the feeble reserves of the central banks of the developing countries at the same time widening the gap between the two.

Thus, the realignment of certain currencies and the floating of others, put into effect since December 1971, have led to a new distribution of world reserves to the detriment of our young nations, at the same time aggravating the already disastrous effects of the inequitable terms of trade between industrial and developing countries. In such circumstances, need I repeat that the future of our economies, already largely dependent on trade with industrial countries, is dangerously compromised.

In connection with the reform of the international monetary system, the Republic of Guinea is gratified that the Committee of Twenty includes developing countries which are taking part in the debates on this important subject. However, in view of the Committee’s operating procedures, my country believes that such association is much more formal than real. As in the past, the rich countries—just as they themselves decided on the monetary measures already adopted, which have had such disruptive effects on our economies—are still to all intents and purposes, by virtue of the new procedure that has been introduced, the sole authorities deciding the future of the international monetary system.

We think that the future international monetary system, if it is to work, will have to be shorn of the injustices characterizing the Bretton Woods system. In this connection, we think that equity in commerce between nations and prosperity in international commerce for all are determined by stable prices, and therefore by stability in exchange rates, especially as regards the currencies in which international transactions are contracted and settled. It is for this reason that my country believes SDRs must constitute the basis of the future monetary system and the asset to be used for international settlements.

Meanwhile, the Republic of Guinea wishes to express certain reservations about the adjustment process as it is envisaged in the Outline of Reform, since it is on this matter that there seems to be a prospect of agreement.

  • (1) It is envisaged that future exchange rates will be “stable but adjustable.” In other words, the margins of fluctuation of currencies will be much more elastic than in the past. It is to be feared that this is nothing more than the institutionalization of a concerted currency float. In that case it would not be favorable to the young nations, which will have scarcely any stable prices either for the goods they export or for those they import.

  • (2) Exchange rate adjustments will be triggered by “objective indicators.” It is known that for our countries, which have permanent balance of payments deficits, this adjustment will signify frequent currency devaluations. Has thought been given, in suggesting these criteria, to the many and varied internal and external consequences that their sole use would imply? We do not think these objective indicators should constitute more than mere recommendations for countries because, otherwise, their imposition would mean the abandonment of an essential attribute of sovereignty, and it has not been established in advance that they are always prepared for this. We for our part think it much more practical and realistic to allow each country to study the advisability of adjusting its currency’s exchange rate in one direction or the other. It seems to us more logical that the Fund should grant its assistance to countries with balance of payments difficulties by providing them with more effective financial support than in the past, for instance, by using SDRs to support monetary stabilization programs, and this function remains at the center of the Fund’s responsibilities.

Let us be assured, the developing countries do not intend that all their monetary equilibrium problems should be resolved by the International Monetary Fund alone. In fact, the Fund’s intervention cannot be more than a supplement to their own efforts. In any case, this is what the Republic of Guinea understands; my country has taken and continues to take, at its own level, the most appropriate measures for reducing to the minimum the effects of the present crisis.

Indeed, while I am on the subject, and with reference to bank credit, the banks in my country have found it necessary to practice a very severe restriction of credit. The same applies to public finance; not only has banking assistance for the budget been halted, but a satisfactory budgetary equilibrium has been achieved thanks both to the containment of public expenditure and to the efforts made to increase the revenues of the State.

Furthermore, to mitigate the pressures on the balance of payments, my country’s Government has restricted all new commitments to loans granted on terms that will allow it to mobilize short-term export proceeds without involving it in immediate repayment obligations.

Lastly, in effecting its monetary reform on October 2, 1972, Guinea withdrew a substantial amount of money from circulation, and at the same time checked the utterance of false Guinean franc bank notes, which had grown to alarming proportions.

These are some of the measures taken by the Government of the Republic of Guinea. They have been possible only because my country has the control of its own currency, administered by its own nationals, and not backed by a foreign government.

With regard to questions of development financing, it is unanimously recognized today that such aid, already inadequate, is not only very definitely dropping but is also very poorly distributed among the various developing countries.

Furthermore, the repeated failure of one UNCTAD after another is sufficient indication of the industrial countries’ unwillingness to help finance the development of the Third World in accordance with the commitments they had made. . . .

However, to make development aid more effective and more positive, we think our countries should abandon their passive attitude, which consists of waiting for the industrial countries to have the goodness to allocate them a share of their gross national product for development financing. In our opinion, each country should be responsible for financing its own development, and, therefore, should first and foremost rely on its own energies, be less dependent on external aid which—let me repeat—can never be more than a supplement. Finally, if aid is to be more operative it is desirable that the Board ratify the proposal of the Committee of Twenty to link SDRs to financing of development.

To do so, we believe that SDRs, besides taking the role of a support for stabilization programs, as we have just proposed, should be distributed on a different basis so as to take into account the real needs of each country rather than the size of Fund members’ quotas, in order that our institution may fully act its role of an organization providing aid for development. In fact, it must be agreed that development is a more urgent and pressing matter for young states than for already industrialized countries.

In my Government’s opinion, the best resource for the development of our countries still resides in the will that our governments must have to launch themselves resolutely on the path of progress. This begins, of course, with a determination to rely first and foremost on oneself. We for our part have reached the conviction that this is possible by organizing our people on rational bases, by democratizing intrasocial relationships, in short, by making our people aware of and responsible for their development.

Moreover, at a time when the developed countries themselves are redeploying their forces to strengthen the bases of their economies, it is quite appropriate that the developing countries should unite to exploit their resources and present a common, harmonized front in international trade and economic cooperation.

Indeed, today, the deterioration of the terms of trade—which everyone is resigned to noting and deploring—can really be blamed to a large extent on the lack of unity among the countries of the Third World favoring a unilateral fixing by the industrial countries of the prices for goods manufactured there and the prices for primary and secondary products originating in our young states. So we are witnessing this international scandal which, for the developing countries, entails selling more coffee, more cocoa, more bananas, more bauxite, more copper, etc., every year to get the same quantity of merchandise manufactured in the industrial countries.

As Comrade Ahmed Sékou Touré, Supreme Leader of the Guinean Revolution and President of the Republic of Guinea, said in addressing the United Nations in 1962:

The forces of the major economic markets subject our countries to continuous pauperization which makes the poor countries the providers of the highly developed nations. Replacing political imperialism, a multilateral economic imperialism is trying to extend its domination over the less developed countries. In opposition to these neomercantilist tendencies which characterize international markets, the underdeveloped countries must present a solid and united front in defense of their economic interests, with which are closely linked the protection of their independence and the social advancement of their peoples.

This is to say that, for the Republic of Guinea, only effective concerted action on the part of the Third World in this connection will put an end to this flagrant injustice, by virtue of which the export prices for primary products from Africa, Asia, and Latin America are unilaterally fixed on the exchanges of the developed countries in the absence of the producers.

Furthermore, in this connection the organization of the petroleum exporting countries and the positive results they have achieved should be an example for the entire group of Third World countries to ponder.

To the difficulties occasioned by the deterioration in the terms of trade must be added rising interest payments and the dividends and profits transferred from the developing to the industrial countries which have increased to such a point that they absorb a substantial and growing portion of the net inflow of foreign capital into these young states in the form of aid.

In view of this situation that is prejudicial to the equilibrium of the international trade system and to cooperation, it seems to us particularly opportune to ask that loan terms be re-examined to make them more compatible with the true development needs and the financial capacity of the borrowing countries.

As to another, equally important subject, it is well known that the shortage of project appraisal experts is particularly acute in the developing countries. Therefore, the procedures for submitting projects to the Bank, and the granting of loans, should be simplified to the maximum extent, to take into account the marked lack of suitably qualified professional staff in these states. The absence of detailed statistics, the still unsatisfactory level of economic research in our countries, and the lack of coordination between the different sectors, are realities that should not be overlooked by the experts of the international finance institutions, who sometimes take too long a time to study and finalize projects to be financed by the Bank while the requesting countries have a pressing need for them. Likewise, it is becoming increasingly necessary to determine, as criteria for the validity of these projects, their economic return for the nation, i.e., the incidence of such projects on the country’s overall activities and not simply the immediate financial return.

All these questions merit review and remedial measures if we wish international cooperation to be fruitful in the interests of peace and the economic and social well-being of the peoples of the world.

It is important, in this connection, for the achievement of the harmonious and balanced development for which we strive, that we join all our efforts and that we so act that the concept of cooperation shall be finally divested of inhibitions of any kind.

I remain convinced that, before we part, we shall have accomplished a useful piece of work in reconciling points of view on the matter of monetary reform and the arrangement of conditions for aid so as to set our cooperation on wider bases and to give these institutions, insofar as possible, a new impetus and make them more receptive to both the industrial and the developing countries.

Such is the hope and the intention of the Republic of Guinea.

September 25, 1973.

Annual Report, 1973, page 1.

Annual Report, 1973, page 45.

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