Discussion of Fund Policy at Third Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
October 1973
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Statement by the Governor of the Fund and Bank for the Gambia—I. M. Garba-Jahumpa

As a new Governor, it is my privilege, and a great honor, to address this august assembly. I would like to associate myself with the tribute which has been paid to the former Managing Director of the Fund, Mr. Schweitzer. I should also like to extend my delegation’s warmest congratulations to Mr. Witteveen on his election as Managing Director of the Fund, and to assure him of our wholehearted cooperation as he assumes his new responsibilities. It is a special pleasure for us that Mr. Witteveen’s first appearance in his new position coincides with the first Bank/Fund meeting to be held on African soil and particularly in this beautiful city, Nairobi, the capital of the Republic of Kenya.

This, moreover, is an unusually important meeting, in which we have to consider the progress made so far in the reform of the international monetary system. I believe the Committee of Twenty and their Deputies must be highly commended for the good work they have done. However, we all realize that much still remains to be done, and that all of us will have to work hard and in a spirit of cooperation before we can claim success. My Government has already transmitted to the Fund the details of its views on these matters. I should therefore like to touch here only upon a few issues that are of major concern to us.

In the realm of international finance, the foremost problem facing all of us is, of course, the monetary instability that has increasingly beset the world during the last few years. This instability, however, is particularly damaging to a developing country such as The Gambia which, having a low per capita income and being largely dependent on foreign trade for its livelihood, can ill afford the heavy costs of international monetary crises. I will illustrate this by just one example. Despite the guarantee provided by the Sterling Agreement, the downward floating of the pound, combined with the two devaluations of the dollar, has led to a reserve loss that, in real terms, is equivalent to some 5 per cent of The Gambia’s gross domestic product. I should like to ask my honorable colleagues, and particularly those from the developed countries, to reflect for a moment on the magnitude of this loss, bearing in mind that The Gambia is one of the poorest nations of the world and a country that is working hard and making sustained efforts to lift its standard of living. Nor is the effect of monetary instability limited to reserves: exchange rate uncertainties have adverse effects on international trade, on which we are so dependent; they play havoc with the formulation of economic policy and have necessitated difficult policy decisions.

The difficulties we are encountering at present stem, to a large extent, from the failure to establish an adequate adjustment process in the past. The Gambia, therefore, strongly favors an improvement of the international adjustment mechanism. Such an improved mechanism should be based on a thorough assessment of each country’s economic conditions, conducted in a spirit of cooperation and goodwill. In our view, however, the adjustment measures adopted by developed countries should not be allowed to affect adversely the flow of real resources to developing countries, or to harm the latter’s current account transactions.

The attainment of these aims would, in my opinion, inevitably require a substantial strengthening of the Fund and of its major organs. I also believe that it would require a far-reaching review of the quota system, and a strengthening of the voice of the less developed countries in international policymaking bodies.

My Government strongly supports a rapid return to convertibility, which, once a proper adjustment mechanism has been put in place, will ensure a reasonable working of the international monetary system. Convertibility will be difficult to achieve without first taking care of the dollar and sterling overhang problems. The Gambia is therefore in favor of the establishment of a substitution account in the Fund, which would enable holders of dollars and sterling to exchange them for SDRs. As a result of such consolidations, the SDR is likely to be called upon to play a considerably enhanced role in reserves, and it is for this reason that we must ensure that it remains a stable and attractive asset. The Gambian delegation fully supports the proposals to relate the value of the SDR to that of a “basket” of strong currencies used in international trade, and to base the interest rate of the SDR on a similar average.

The strength of the SDR, like that of any other monetary unit, must, however, rest in the last analysis on the soundness with which it is managed. The SDR, like any other currency, can be mismanaged, and generate either inflationary or deflationary impulses throughout the world to the detriment of the developing nations. This, however, does not have to be the case, and, with judicious management, the SDR should make a valuable contribution to the fostering of a strong and sustained expansion in the world’s trade and income.

In this connection, I should like to say that the fears occasionally expressed regarding the possible inflationary effects of the establishment of a link between SDRs and development finance appear baseless to me. The link in itself is in no way inflationary; an excessive creation of SDRs, whatever their distribution, would by contrast prove to be so. The Gambia, therefore, is strongly in favor of the establishment of a link between SDR creation and development finance while, at the same time, it also favors the pursuit of a prudent, noninflationary management of international liquidity.

The contribution of link-SDRs to an acceleration of economic growth in developing countries—and especially in the poorest of them—could, of course, be considerable. It is, I believe, unnecessary to dwell on the vital importance this could have for so many of the world’s inhabitants. At present, despite the clear need to help developing countries in their struggle to reach a rapid and self-sustained growth, the international assistance effort gives signs of flagging. I believe it behooves all of us to strive unceasingly to maintain an uninterrupted flow of real resources to the developing world. . . .

Statement by the Alternate Governor of the Bank for Sweden—Kjell-Olof Feldt

I shall confine my remarks to matters relating to the International Monetary Fund. First of all, the Governments of the Nordic countries want to extend a warm welcome to Mr. Witteveen who has taken office at this crucial and challenging juncture in the history of the Fund. At the same time we should like to express our sincere appreciation for the important contributions made by Mr. Schweitzer under whose dedicated leadership many significant innovations were introduced into the international financial system.

In the year that has passed since our previous Annual Meeting in Washington, considerable efforts have been made to sketch a reformed system that would be viable and generally acceptable. Broad agreement now exists on a number of points, namely, the need to base the system on stable but adjustable parities, increased symmetry in the burden of adjustment between deficit and surplus countries, return to convertibility, development of the SDRs into the principal reserve asset, better control of disturbing capital movements, and strengthening of the Fund. Also, the promotion of the flow of real resources to developing countries is acknowledged by everybody to be an important objective on the occasion of the monetary reform. However, many issues still remain open, and in certain regards positions seem to have been established that require both negotiating will and negotiating skill to be bridged. Further analysis by the Deputies of the Committee of Twenty is certainly required, but to resolve conflicts of views and positions, political guidance is urgently needed. We do hope that this Annual Meeting will provide a new impetus to the work of the Committee and make it easier to meet the time limit set last Sunday.

The urgency of the work toward reform is further emphasized when we recall that an accelerated rate of inflation has become a universal phenomenon. Through the international transmission mechanism inflationary pressures have tended to upset the domestic balance of economies. Although the fight against inflation is principally dependent upon domestic policies, the new monetary system should nevertheless provide inducement for such action.

The present interregnum in the foreign exchange markets is characterized by jointly or separately floating currencies, pronounced exchange rate variations, and an underlying uncertainty. This uncertainty came to the surface during last week, and the recent relative calm in the foreign exchange markets may have been deceptive.

I shall now proceed by giving a brief summary of the Nordic position with regard to certain major issues of the monetary reform.

Basically, we think that the guiding principle of the reform should be to promote the necessary coordination of economic policies having important international repercussions while not unduly constraining national freedom of action. In shaping a reformed system we should recognize that, whatever its characteristics, it is intended to be of a lasting nature. Its framework should, therefore, be such as to allow for rapidly changing circumstances. It would seem wise not to include in the new Articles of Agreement an excessive number of detailed provisions tying the system to particular conditions and problems, some of which may be of a transitory nature.

The main problem is how to improve the adjustment process. In a rapidly changing world we want to stress the importance of continuous consultations within the framework of a strengthened Fund. An approach based on an assessment of the underlying situation and the consequent need for adjustment seems appropriate in order to ensure adjustment policies which are mutually consistent. In this context, objective indicators, including reserve movements, have a role to play during the consultations. We also agree that provision for the application of pressures has to be part of the new institutional system.

The adjustment process should be supported by convertibility arrangements, entailing the settlement of surpluses and deficits in reserve assets. Although some degree of elasticity must be allowed for, these arrangements should, in the light of recent experience, be designed so as to prevent an unplanned growth of reserve currency balances. We should keep in mind that not only exchange rates but equally the management of exchange reserves are matters of international concern. The need to review the growth and composition of currency reserves does not, in our view, impose unduly stringent limitations on independent reserve management policies.

As regards the exchange rate regime, we reaffirm our strong support for parities which in general are stable but are adjusted when necessary. This implies that the Fund should authorize floats only of a temporary nature.

Finally, I should like to state our views on the relationship between reserve creation and development finance. It has been the consistent opinion of the Nordic countries that this question should be studied in a positive spirit. It has generally been agreed that the SDRs shall become the principal reserve asset and that their possible use for development purposes shall not be allowed to endanger the monetary objectives set for the SDRs. We believe, therefore, that it should now be possible to find a solution where the monetary aspects of the SDRs are combined with an allocation system which favors the developing world in general and the least developed countries in particular.

Although we hope that the reform work will progress rapidly, we have to manage somehow in the meantime. During this transitory period it is of the utmost importance that the financial authorities in various countries cooperate well so as to provide for as much stability in the exchange markets as the unsettled conditions permit. The understanding reached in Basle in July of this year was a welcome sign of the awareness of the need for orderly developments in the exchange markets.

In closing my statement, I would like to express our gratitude to our Kenyan hosts for their generous hospitality and excellent arrangements.

Statement by the Governor of the Fund for Spain—Antonio Barrera de Irimo

First of all, I should like to express my appreciation to the Kenyan authorities for the hospitality with which they have received us, and extend my congratulations on this magnificent Centre which they have placed at our disposal for our first Annual Meeting to be held in Africa. I should also like to join in the words of welcome to the representatives of the countries which have joined the Fund and the Bank during the past year.

I cannot let this occasion pass without referring to Mr. Pierre-Paul Schweitzer, who skillfully and firmly steered the International Monetary Fund through ten difficult years. We have been fortunate in obtaining Mr. Witteveen to fill his place as Managing Director of the Fund. I wish Mr. Witteveen the greatest success, with the firm belief that, in the new phase now beginning, relations between the Fund and Spain will continue to be excellent, as in the past.

I believe that all of us here share the same concern about the difficult stage of crisis and far-reaching adjustments through which the international economic community is passing. If we need any reminder, we have the excellent Annual Report of the Fund Executive Directors which sets out, objectively and precisely, the generalized inflation and monetary disorder which have characterized the world economy during the past year. Two full years have passed since August 1971, when we officially buried the old system; yet we are still endeavoring to solve the basic problems inherent in the setting up of a new international monetary system.

There is no doubt that there has been a relative reduction in world monetary tensions over the past year. The exchange rate structure which arose from the crisis of February and March of this year appears capable of contributing substantially to the equilibrium of the balance of international payments in the medium term. However, there are still grounds for serious concern. Although there is general agreement on the desirability of arriving at a system of exchange rates that will be more flexible than in the past, one must seriously doubt—as the Fund’s Annual Report points out—whether a system of fluctuating exchange rates can reflect, under the present circumstances, the basic trends of international payments and lead to a realistic and adequate exchange structure with prospects for the medium term. And one cannot but have grave misgivings about the risks involved in a system of fluctuating currencies that is not subject to international supervision.

The monetary disorder is continuing to weigh heavily on the world economy. I do not believe there are any doubts about the significant role which this disorder and the excessive growth of international liquidity have played as factors in the severe inflation from which all countries’ economies are currently suffering. In a world of ever-closer interrelationships, inflationary pressures quickly cross frontiers, and medium or small countries are faced with almost insurmountable difficulties in attempting to maintain monetary control over their economies under the effect of the shock waves from international monetary disturbances.

And while monetary disorder has been a significant factor in generating and sustaining world inflation, it can also be a disruptive element in the subsequent adjustment phase. It would be most serious if, while we continue our laborious discussions on the new system of the future in the Committee of Twenty, we were to move collectively into an economic recession without having re-established a certain degree of monetary order, without having achieved, for example, a minimum of international supervision over fluctuating exchange rate policies. For, in my opinion, during a time of economic contraction, such policies could lead to competitive devaluations. Moreover, the recent meeting of the General Agreement on Tariffs and Trade in Tokyo has shown how difficult it is to make progress in the trade field if the monetary uncertainties have not been eliminated to a substantial degree.

These concerns prompt me to call the attention of my colleagues gathered here to something which, in my opinion, is a negative aspect of this whole reform exercise set up in the Committee of Twenty. I refer to a certain lack of momentum on the part of the Fund—of its officers and Board of Executive Directors—as a result of many concomitant factors but also, without doubt, as a consequence of the setting up and functioning of the Committee. This is something which I see as being both prejudicial and to no purpose. Prejudicial, because I am convinced that the Fund, with its capability and experience, could contribute appreciably toward reducing the uncertainty and disorder currently prevailing in the international monetary economy. I am thinking, for instance, of the possibility that the Fund could quickly set up a special consultation procedure which would permit a minimum of international supervision over current exchange rate practices. One could also think in terms of the Fund undertaking a concrete study of the possibilities for initiating some practical form of gradual and flexible consolidation of the excessive balances of reserve currencies that have been accumulated. And the present immobility of the Fund seems purposeless to me because I believe that between the Committee—responsible for the future system—and the Fund—charged with bringing a little order into the transition period—there could be a mutually beneficial division of labor. If through active and immediate intervention by the Fund the monetary disorder and confusion during the transition to a new system could be reduced in some measure, the work of the Committee of Twenty could probably proceed in a more favorable and productive atmosphere. I trust that the new Managing Director will find it possible to reactivate the institution with the cooperation of all concerned, and hope that we shall reach agreement not only on the basic principles and general rules, but also on the operating procedures of the new system.

Despite the many causes for concern that I find in the present situation of the world economy, I am not pessimistic. I think I have perceived among my colleagues at this meeting a propitious climate for negotiation and a willingness to compromise. Therefore, I believe that the draft Outline of Reform prepared by the Deputies of the Committee of Twenty provides, despite its limitations, a good basis for continued progress, for modifications of national positions, for the making of concessions, and, definitely, for arrival at a final compromise. Although the outstanding problems are of great technical complexity, their solution can only be reached at the political level. The work of the technicians is indispensable for clarifying the alternatives to be submitted to the politicians, and in this connection the work of the Deputies of the Committee of Twenty is most valuable. But, in the last instance, the decisions and the agreements have to be adopted by the political authorities. So we should not dwell excessively on the technical studies or use them to delay the adoption of solutions. I think that out of this meeting should come a call to international solidarity and, most particularly, to the responsibility of the leading countries so that the will to accelerate the process of the reform of the system shall prevail.

I believe a compromise can be reached on the basic themes of adjustment and convertibility, on which disagreement with respect to certain points is hindering the progress of reform. It seems possible to me to establish a system of flexible adjustments, subject to supervision and backed by sanctions of the international community, without incurring the risks of a rigid automatism triggered by mechanical indicators or of trade sanctions that might disturb the good relations within the international community. And I think it is possible to arrive at a system of convertibility which, while maintaining the basic principles of symmetry and equity, is flexible and accords member countries a certain degree of freedom in the administration of their reserves. It will not be possible, of course, for the new system to function properly unless we resolve the problem of the excess national currency balances accumulated in the reserves at this time, by some procedure involving consolidation on a voluntary and multilateral basis. And this, in turn, makes it advisable to continue studying the matter of adequate reserve levels.

Finally, Mr. Ali Wardhana mentions in his report, as one of the problems to be studied later on, that of the structure of Fund quotas. It is well known that this is a topic of great interest to Spain—as we have said on several occasions. We are concerned lest, due to the studies on reform, the periodic review of quotas that should already be in its preparatory phase would be postponed indefinitely. The five-year review for which provision is made in the Fund Agreement is excessively slow in starting and, as a result, discriminates against the countries with the most dynamic economies.

The Annual Reports of the Fund and the Bank reflect the relative improvement experienced in 1972 and the first half of 1973 in the payments and reserves situation of the developing countries as a whole. At the same time an improvement has appeared in their trade balances—thanks to the price explosion on the international raw materials market—and in their net inflows of capital. However, we must not forget the transitory and artificial factors behind this improvement, or that this increase in international liquidity has been very unevenly distributed. We are gratified, therefore, that the World Bank Group has been able to maintain a strong rate of expansion in its development aid operations. Perhaps this expansion should in future be accompanied by a less pronounced concentration of lending in certain countries and, in any case, it might be advisable to give special attention to the neediest of the developing countries.

The problem of the underdeveloped countries’ external debt would necessitate a far-reaching re-examination following this period of monetary confusion and of adjustments in the principal exchange rates. The Annual Reports already note some of the effects of the dollar devaluation on the reserves and the debt, simultaneously, of the developing countries, and a thorough investigation of the problem would be highly desirable. The Bank is perfectly well equipped for this. Besides, this investigation would make it possible to determine the optimum conditions for linking up the reform of the system and the maximum aid to development—either through a direct or indirect link between SDRs and aid, or through an expansion of the Fund’s operations, the creation of new and different operations, etc.

To conclude, I should like to express the frank and free willingness of Spain to cooperate in resolving the problems we are facing and the hope that, at our next meeting of September 1974 in Washington, we shall be able to inaugurate formally a new phase of international monetary and financial cooperation.

Statement by the Governor of the Fund and Bank for Canada—John N. Turner

Let me first thank our hosts, the Government of Kenya, for the excellent arrangements for the Annual Meetings. I welcome the occasion to visit this most beautiful city and to help dedicate the new Kenyatta Conference Centre.

I wish also to express, on behalf of both the Canadian Government and myself, our sincere appreciation to Mr. Pierre-Paul Schweitzer for his informed leadership and his significant contribution to international monetary cooperation. We wish him well for the future. And I extend a warm welcome to our new Managing Director, Mr. Johannes Witteveen. I can assure him of Canada’s support and cooperation in carrying out his responsibilities. . . .

My second point relates to the issue of debt servicing. The President [of the World Bank] has reminded us that for many developing countries the process of development is giving rise to increases in debt payments which are growing faster than the revenue to service them. The shortage of official development assistance is contributing in many developing countries to a greatly increasing use of credit on commercial terms.

More knowledge is essential in this area and I believe the Bank can help us, particularly in respect of commercial credits. Such credits can, of course, contribute much to the development process. They need, however, to be directed to high priority and high return projects, and the importing country needs to be sure that it is getting the best terms available for equipment and financing. The Pearson Commission recommended that the Bank make use of its expertise to assist the developing countries in making the most appropriate use of credits. I believe the Bank should again examine this situation to see what it can best contribute.

In many cases, however, even with appropriate economic policies, debt servicing problems can best be avoided by the provision of development assistance on appropriately concessional terms. It is for this reason that Canada has continued to provide its assistance to the poorer developing countries on very soft terms. . . .

The pace of international monetary and economic developments since our meeting last September has undeniably been swift. Few of us, I am certain, anticipated the tumult in exchange markets and the soaring commodity prices that followed.

The massive movements of short-term capital, the closing of exchange markets, the urgent meetings of officials, the repeated realignments of exchange rates, the adoption of a wide variety of measures to influence capital flows, the move to exceedingly high interest rates, the widespread adoption of floating exchange rates, and the startling increases in food and raw material prices—all these developments ocurred in the short period of the past twelve months.

These developments pose some hard questions for us. How satisfactory is our progress to date? What is the significance of recent developments for the kind of monetary system we should construct? How can we best proceed now?

Some progress is reflected in the First Outline of Reform prepared by the Chairman and the Vice-Chairmen of the C-20 Deputies. There is better understanding of the problems and of possible solutions.

We have also begun to understand the significance for the adjustment mechanism of postwar changes in the relative economic strengths of major powers. It has come to be crystal clear to us that a major deficiency of the Bretton Woods system was that it could lead to excessive amounts of international liquidity. We now appreciate the size and significance of highly mobile private liquidity. Our experiences in the marketplace have enabled us to arrive at a broad consensus as to the kind of exchange rate system the current international environment requires.

But my mood nonetheless is one of only cautious optimism tinged with impatience over the degree of progress made to date. Much time and talent have been devoted to reform during the past year. I fear that if more progress is not soon made, frustration will emerge and momentum will be lost.

I am frankly puzzled by the continuing disagreement over some issues. I believe that these are much smaller than the protracted debate would suggest, in some respects being almost semantic in nature. Political will is now needed to resolve them and to begin to implement reform in a sequential way. I propose to elaborate on this later on.

The Outline in paragraphs 3 to 7 reflects some advance toward agreement on the central problem of securing adjustment of the international payments of countries which are out of balance, either in surplus or in deficit. Canada is prepared to accept this approach. It relies on countries undertaking to act to keep their reserves within internationally agreed limits. It relies also upon general assessment in the Fund of the need for further action in cases of international significance in which these indicator limits are exceeded. We favor graduated pressures upon countries where warranted. We hope that trade measures would never need to be used but would support them as last-resort measures to remove imbalance if they are used in a manner consistent with GATT obligations and if in any instance their use is approved by a committee of Fund Governors.

The Outline reflects our decision to have stable but adjustable par values and wider margins with the possibility of floating rates in particular situations under Fund authorization and surveillance. We support that approach.

There is not yet general agreement over convertibility or asset settlement. This is another major issue of reform. We think the important goal to be achieved here is to maintain international control over the total of reserves and the total of the reserve currency component. We think it would be helpful in this connection to provide for indirect settlement through a Fund facility.

Voluntary bilateral funding seems to us to be the best approach to consolidation of excessive holdings of currency reserves. We are concerned that use of a substitution account in the Fund for that purpose might lead to excessive creation of SDRs in place of currencies. If the latter were explicitly guarded against, we would support the approach.

We are pleased that the Outline foresees the SDR becoming the principal reserve asset and numeraire of the system. We favor an SDR whose value would be equal to an average of the most widely traded currencies and on which the rate of interest would be determined from time to time by the Fund in order to preserve an appropriate balance of attractiveness of holding SDRs and holding reserve currency assets. We were disappointed that the Outline did not refer to this possible approach to determining the rate of interest on the SDR.

Gold, in our view, should be gradually phased out of monetary use. We support the view that transactions in gold between monetary authorities and official purchases in the market at above the present official price should continue to be prohibited; but we think that such authorities should be permitted to sell gold in the market.

We have given much thought to the SDR-aid link. We have done so not just because of our interest in monetary reform, but also because of the great importance we attach to increasing the flows of development finance. Our judgment at present is that no form of the link so far devised will ensure an increase in the total quantity and the quality of developmental assistance while at the same time avoiding undesirable repercussions for the SDR. We hope that further and more detailed work will see these difficulties surmounted.

We need to build a stronger Fund. Developments of the past year, and particularly the almost simultaneous emergence of rapid inflation and accelerated economic growth in many countries, have underscored the high degree of economic interdependence that now exists.

This is also evident in the area of economic policy itself. When, for example, a country begins to reduce a large payments surplus by increasing imports it may create inflation for others, unless there is the closest of policy coordination; and when one of the larger countries raises interest rates to slow excessive expansion, it generates troublesome international capital flows. Because of such interdependence we need a strong code of international conduct and an alert and critical international organization to help us cope with powerful forces that transcend national boundaries.

Strong international cooperation is needed to control inflation. None of us is escaping inflation. All of us, I believe, feel that part of the problem is beyond domestic control. We do not yet know enough about the international causes and transmission of inflation. To what extent are payments imbalances at fault? What is the relationship between international liquidity and inflation? Indeed, what should our SDR allocation policy be to make it consistent with controlling inflation? What kind of collective action is now needed if inflation is to be controlled and rendered less contagious? We must look to the Fund for authoritative response to these questions.

We must give encouragement to our new Managing Director to enable him to ensure that the Fund can cope with current problems of international financial instability, inflation, and payments imbalances. The structure of the Fund will have to be appropriate for the purpose. For this reason, we favor use of a “consultative body,” in the words of the Outline, that will include, for certain designated meetings, senior representatives from capitals. Unless this is done we fear that effective consultation in exchange rate and payments matters will take place in new and informal groupings outside the Fund.

The Committee of Twenty should become a permanent feature as well, but not for routine matters. It should concern itself with emergency matters, including the area of sanctions, and it should keep the Articles of Agreement under review.

I have referred to the International Monetary Fund repeatedly as “the Fund” and yet I confess to a feeling of dissatisfaction with that term. The Fund should increasingly become the locus and the focal point for discussion, consultation, and cooperation; its role as lender may be minor by comparison. The name “International Monetary Union” strikes me as more accurate, and the SDR could be the “International Monetary Unit.”

Having commented on what I think the Fund should become, I would now like briefly to turn to another question: Where do we go from here? The C-20 Ministers and Deputies, and also the Executive Directors, may find the views of the Governors on this matter to be useful as guidelines for their future work.

We may have created the impression through past discussion that all aspects of reform must be completed by a particular date, and that all must be implemented together. I am not certain that this is the best way to make progress. I have also been wondering whether the Committee of Twenty will be able to outline all the operational details of reform. Yet, as I have already indicated, I think it is important that we begin to show concrete progress very soon.

I therefore think we should begin introducing reform in a sequential way.

For example, I would hope that representatives from national capitals could soon begin to attend special meetings of the Executive Board of the Fund in order to examine adjustment problems, exchange market developments, and other issues of immediate importance. An improved consultation mechanism should not have to await complete reform of the system.

I would also give the Executive Directors strong support for continuing to pursue their study of the SDR valuation problem. Through their work and that of the C-20 Deputies, we might be able to introduce desired changes in this area before other aspects of reform are ready.

Similar progress in the near future might also be possible with respect to bilateral funding. This is a matter of talking terms and conditions. Such discussion would help us establish whether or not the problem of the dollar overhang is significant and it might help us lay the foundation for reintroducing convertibility.

I also think that the role of gold in the monetary system could be clarified very quickly if there is a sufficient political will to do so.

We face a heavy year of work. Our minimum objective should be to ensure that by this time next year we could report agreement in at least those areas where it now seems that progress can rapidly be made.

Statement by the Governor of the Fund for New Zealand—W. E. Rowling

I would like first to join with those speakers who have expressed their thanks to the Government and people of Kenya for extending hospitality so generously during this meeting. The warmth of that hospitality is matched by the elegance of our conference place. I should also like to join with other Governors in extending a welcome to Dr. Witteveen as the new Managing Director. He has been set a high target of attainment by his predecessor—a challenge which he is obviously prepared to accept.

The report from the Chairman of the Committee of Twenty, which is before the meeting, shows that progress has been made. The task before them is difficult and complex, and a quick result was not to be expected. However, after a year of intensive discussions, the main areas of agreement and disagreement have been clarified. It is now necessary that reform discussions move at a faster pace. In this respect, we welcome the deadline that the Committee has set on its deliberations. Indeed, if there is the necessary political goodwill, and I believe there is, it should be possible to implement reforms in some areas before the whole package has been finally agreed. This is particularly important in the current context of world-wide inflation which is creating problems for so many countries, particularly those which have their currencies tied to a major currency which itself may be subject to wide fluctuation. Such a circumstance has faced New Zealand, and while we have never regarded our country as a candidate for a floating currency, because of the limitations of our foreign exchange market and our distance from the major exchange markets, we could not let our dollar be pulled up or down by being tied to a currency which is subject to forces quite different from those applying to our own economy. Hence we have recently adopted our own version of the float. We aim now to keep the New Zealand dollar at a steady average relationship with our main trading partners, by means of small daily changes in our exchange rates.

This does not prevent us from making a major adjustment relative to the rest of the world if we deem this to be necessary. Two weeks ago, as part of a package of measures to reduce inflationary pressures, we changed our base of calculation to revalue the New Zealand dollar by 10 per cent. While we have had to take such action to assist in protecting the New Zealand economy from the worst effects of imported inflation, we still believe that a general return to stable but adjustable exchange rates is essential, provided underlying disequilibria can be readily adjusted under the reformed system.

The Outline of Reform prepared by the Committee of Twenty contains, we believe, the essentials of such a system. I want to stress, however, that presumptive or automatic application of graduated pressures is unacceptable to my country. In our view, no pressures should be applied until a proper assessment has been made by the Fund.

The successful functioning of a reformed international monetary system will depend essentially upon consultation and the willingness of all countries to make it work. Unless this is understood and accepted from the start, the reformed system will neither work well nor provide the framework for stability and development envisaged by members.

We are opposed to any use of trade or current account sanctions and consider they would introduce damaging political tensions into the international community and potentially would be particularly harmful to the trade and development of small countries. The New Zealand Government is prepared to cooperate fully with all members, but in our view compulsion is no substitute for cooperation.

We are particularly concerned lest monetary disturbances impede the transfer of real resources to the less developed countries. The urgent needs of the poorer countries for development assistance were eloquently described yesterday by Mr. McNamara. New Zealand maintains that the best guarantee of an increased transfer of resources is the continuing growth in world prosperity, resulting from a stable international monetary system based on the SDR. This should allow developed countries to expand their aid programs.

The New Zealand Government is very much concerned that developing countries receive adequate assistance to help ensure the success of their economic and social development plans. We have undertaken to achieve as soon as possible the target for official aid of 0.7 per cent of gross national product. Though we have a population of only three million people, our official aid program will over the next three years total US$200 million. Our annual aid program will be more than trebled during that period. In addition, my Government is looking for ways in which it might best work with the private sector to meet the 1 per cent target for total resource transfers. . . .

Despite the importance we attach to our aid responsibilities, we are not yet in a position to support unreservedly the introduction of a link between SDRs and development assistance. We believe that it would be best to concentrate first on the monetary aspects of the new SDR to ensure that a stable and attractive asset is created. If this can be achieved, we would be willing to support the introduction of a link between allocations of SDRs and aid in a way which would be consistent with a soundly based international monetary system. . . .

May I conclude by expressing appreciation for the excellent work of the staffs of both the Bank and the Fund during a most difficult year.

Statement by the Governor of the Fund and Bank for Korea—Duck Woo Nam

I would like to join my fellow Governors in extending our sincere thanks to the people and the Government of Kenya for the kind hospitality shown to the members of our delegation and for the excellent arrangements and facilities provided for this important forum.

I am pleased to be here and once again address this distinguished assembly. At the outset let me express my deep appreciation to Mr. Schweitzer, the former Managing Director of the Fund, for his outstanding devotion and contribution during his tenure of office and offer my sincere welcome to Mr. Witteveen, the new Managing Director. May I also extend my congratulations to Mr. McNamara on his assumption of a second term.

I am pleased to see that the members of the Committee of Twenty and their Deputies have, after much hard deliberation, successfully produced a First Outline of Reform which succinctly summarizes some areas of agreement and the remaining issues that are to be settled by the target date of July 31 next year. It is crucial that solutions to these issues be found within this period so that we can return quickly to an internationally agreed upon monetary system and the restoration of international economic order.

For the benefit of future deliberations, I would like to briefly comment on the First Outline of Reform. With regard to the establishment of a reserve indicator structure and the study of operational provisions, due recognition should be given to the special circumstances the developing countries are facing. Particularly, I would like to reiterate some of the factors that should be taken into account in determining an appropriate level of reserves: the continuous need for capital inflows for development purposes; the need for an adequate level of reserves as an index of credit-worthiness; the maintenance of confidence in the economy; sharp fluctuations in export markets; and sudden and substantial increases in payments for imports of key commodities.

We agree that the SDR, freed from unnecessary restrictions and renamed to befit its new role, should be the center of the reformed system as numeraire and principal reserve asset. To fulfill its expanded monetary functions, the SDR requires attributes of secure value and a sufficiently attractive yield. Accordingly, we favor the proposal that the new SDR be valued as a weighted average of a group of currencies, and its yield be set in relation to a weighted average interest rate. As we move to a full SDR standard system, the role for gold as well as reserve currencies will be gradually reduced.

The establishment of the new SDR as the primary reserve asset and the system reforms no doubt constitute a unique turning point in the conception and functioning of the international monetary system which should promote a prosperous and expanding world economy. But even more than this can and must be accomplished. Unlike a system whose standard is based primarily on gold or reserve currencies, the reform that is contemplated allows a historically unique opportunity to make a collective international decision to use the monetary mechanism in favor of a fundamental international priority—fostering the advance of the developing nations. This, in our view, should be done through reform in favor of developing countries of quotas for allocating the initial distribution of future necessary increases in SDRs. Technical discussions held on this SDR-aid link show that there are no insurmountable technical difficulties to achieve this reform; it is rather a question of international will. Inasmuch as no one questions the principle that provision for aggregate reserve growth be guided only by the need for world trade expansion, it seems reasonable to believe that rules and procedures of a reformed system could provide quite adequate safeguards to assure the monetary character of the SDR. In our view then, developing countries as a whole quite rightly regard the SDR-aid link as the touchstone for determining the adequacy of reform to take account of their interests.

Finally, I would like to mention the need for progress in trade reform so as to achieve a consistent general framework in our international economic relationships. In this connection, we attach great importance to the recent GATT Ministerial Statement which specified as one aim of the negotiations the securing of additional benefits for international trade of the developing countries. I hope all participants in this meeting will give their full support in the coming multilateral negotiations to trade measures vitally affecting the progress and hopes of developing countries. . . .

Statement by the Governor of the Fund for Zaïre—Sambwa Pida Nbagui

Since our last Annual Meeting there have been new disturbances in international economic relationships. The precarious stability resulting from the agreements concluded at the Smithsonian Institution in December 1971 was upset by the appearance of further strains, which resulted in the second devaluation of the dollar in February 1973, a double revaluation of the deutsche mark, and generalized floating which seemed, temporarily, to help mitigate speculation. The events that followed have certainly shown, I think you will agree, that even in the campaign against speculation the abandonment of fixed exchange rates is not a sovereign remedy and that, therefore, it would be dangerous to base the international monetary system of the future on a regime of fluctuating exchange rates.

These new and serious disturbances have provided yet another proof of the urgency with which we must complete the study of the international monetary reform begun less than a year ago in the Committee of Twenty. This study shows that the problems to be resolved are many and complex. Considering the extremely turbulent international economic framework in which we have had to examine these problems, I think the progress made by the Committee of Twenty has been satisfactory from many points of view. However, this progress relates essentially to analysis of the options that can be taken on the question of the numeraire and of the convertibility of the new monetary system, and those relating to the adjustment mechanism and the exchange rate regime. There has been considerable progress also in the study of distortionary capital movements. But the same cannot be said with regard to the links to be established between the international monetary reform and the financing of the less developed countries’ economic development. In this respect, the work has barely touched on aspects of principle.

I should like to reaffirm the positions that the Republic of Zaïre thinks it necessary to adopt regarding the main problems on which our committee for the study of monetary reform is to deliberate.

As regards the exchange rate regime and the adjustment mechanism, Zaïre adheres to the principle of par values that are fixed but adjustable to the real economic situation of each country. Floating should remain an exceptional and temporary measure controlled by the international community.

Considering how seriously the community as a whole can be affected by the emergence of disequilibrium in one or more countries and recourse to certain types of adjustment measures, the community should organize itself so as to keep constant watch over members’ equilibrium and so as to work together on the procedures to be implemented for the correction of disequilibria. The community will not be able to discharge this delicate mission successfully unless it has a small body of distinguished persons who are so well trusted by their own countries or the group of countries they represent that they can adopt, with all the necessary rapidity, appropriate solutions to the difficulties which are becoming ever more numerous as the world economy becomes more complicated.

The use of economic indicators, particularly exchange rates, basic balance of payments, domestic prices, and public finance will facilitate the task of this organ of surveillance and concerted agreement. Its action will also need to be based on gradual pressure by the community on those members that do not observe the recommendations made to them.

As to the choice of the numeraire, I would like to express my satisfaction at the orientation of views toward a unit of account independent of gold and national currencies. Concerning the definition of this unit, my country is not convinced that, to be an equitable instrument, the unit of account would need to be subject to periodic revision. But we are open to any solution that would involve linking the value of this unit to those of a package of the most representative currencies in international trade.

The Republic of Zaïre favors a reduction of the role of gold and of national currencies in the composition of liquidity, and the promotion of an abstract international currency as the principal reserve asset. It opposes an increase in the official price of gold for the purpose of increasing overall liquidity and, on the other hand, supports any proposal to discontinue an official price for that metal. The participation of national currencies in the reserves will be determined by new rules on convertibility. In this connection, my country is inclined to favor formulas in which flexibility should not mask uncontrolled disequilibria of reserve centers.

Zaïre is perfectly aware of the disturbances provoked by disorderly capital movements in the internal and external monetary policy of certain countries, and I admit that control measures are essential in this domain, but I would once again stress my concern that we make certain that these controls do not affect the less developed countries’ opportunities for access to the international financial markets.

One of the most difficult problems concerns the volume of international liquidity and its distribution. At the present stage of the work of our reform study committee I shall confine myself to emphasizing the unequal distribution of reserves in the world. The last Annual Report of our Executive Directors brings out the fact that, while there has been creation of surplus liquidity in the last few years in relation to the expansion of world trade, this surplus has been concentrated in some ten countries. With the exception of the Third World countries that produce oil, international liquidity is concentrated in the Western countries.

As a representative of a less developed country, I am of the opinion that the new monetary system, if it is to meet the needs of all countries, will not only have to be able to satisfy the liquidity needs of the community as a whole but will also have to provide the most appropriate means of distributing that liquidity so as to promote a substantial transfer of resources toward the poorest countries. Thus, the monetary system will contribute, by way of expanding markets, toward bringing about the conditions for a harmonious development of trade throughout the world.

The mechanism for transfer of resources to the Third World countries that have been in operation thus far have proved to be ineffective to the point where we are getting farther and farther away from achieving the objective of transfer of 1 per cent of gross national product agreed upon by the United Nations.

The time allotted us, Mr. Chairman, does not permit me to revert to the manifold arguments that have been developed in favor of the link. Please allow me, however, to note that in my opinion there have been no cogent arguments against this matter which is vital to the less developed countries. That is why I must express in this high forum the greatest reservations with respect to the reform as a whole if this question has not received sufficient attention in the course of the work of the Committee of Twenty.

In this regard my country is indeed amazed to find that there has even been a retrogression in the present positions of certain industrialized countries, when this idea had previously received support from a growing number of countries.

I continue to hope that the countries which are somewhat reluctant to accept even the principle of the link will admit that this formula is likely to facilitate the solution to the underemployment of the factors of production in the community as a whole. . . .

I should like to conclude by saying that it seems to me essential that the spirit of cooperation which fortunately breathes through the work on reform become the permanent source of inspiration of the new international monetary system.

As regards the new rules to be laid down in a revised code of good conduct, I for my part am against manifold formal prescriptions which quite often run counter to the flexibility that circumstances may require of the international monetary order. My feeling is that it is better to confer upon a competent body ample powers for interpreting the text of a simplified frame agreement. It is within such a body, with the participation of all the developed as well as the developing countries, that the community will be able to work together on the economic evolution of the world and seek solutions to the problems that are bound to arise.

Statement by the Governor of the Bank for the Netherlands—W. F. Duisenberg

The last time we gathered outside Washington Mr. Witteveen was the Governor for the Netherlands. We now greet him as the new Managing Director of the International Monetary Fund. Mr. Witteveen, my countryman, has been chosen to succeed Mr. Pierre-Paul Schweitzer. I would like to take this opportunity to pay my country’s respect to Mr. Schweitzer who has dedicated so many years of his life to the promotion of the Fund’s objectives. I warmly welcome Mr. Witteveen’s statement that he intends to continue the tradition of service in the international community set by Mr. Schweitzer in speaking forthrightly and doing his duty without fear or favor.

We are grateful to the Republic of Kenya for the hospitality it extends to us in this beautiful city of Nairobi. We would also like to greet the two new members of the Bank and the Fund, the Bahamas and Romania. We are very pleased and proud that Romania has chosen to join our constituency.

My Government intends to increase the level of official development expenditure to 1.2 per cent of gross national product in 1976. Our total development expenditure will include official development aid plans, net both of amortizations and of interest payments, and other expenditure for international development cooperation. In order to implement the latter we intend to finance part of a restructuring of our domestic production from these funds to contribute to a better international division of labor in favor of the developing world.

Within official development aid expenditure we intend to give a higher priority to multilateral aid, this being more effective and less dependent on political preferences in both the donor and recipient countries. . . .

The first subject is the debt problem. We fully endorse Mr. McNamara’s opinion that the increasingly severe burden of external debt is one of the major difficulties facing many developing countries. We feel that this problem cannot be solved on an incidental basis: integrated debt and credit policy is necessary. The study which is being prepared by the intergovernmental group of UNCTAD on this problem may be helpful to formulate such a policy. In the meantime we must see what can be done now. A modest but nonetheless important role in this field can be played by the Bank Group. We appreciate the very useful coordinative and intermediary role played by the Bank in discussions between developing countries seeking debt relief and their creditors. The Netherlands Government is willing to participate actively in these discussions and is prepared in this connection to make funds available within the development budget. . . .

And, finally, I want to express my appreciation for the fact that during the past year the Bank’s Board also treated the subject of policies toward countries highly dependent on exports of primary products. At the same time the International Monetary Fund embarked upon an exploration of a possible improvement and extension of the facilities for the compensatory financing of export shortfalls and buffer stocks. These important problems merit careful study. Close cooperation between the Bank and Fund and also with the Food and Agriculture Organization seems to be particularly called for in this field.

The last point I mentioned dealt with one of the many areas which form a link between the World Bank Group and their Bretton Woods sister, the International Monetary Fund. We hope that it will be possible to create still another link between the International Monetary Fund and development assistance, within the framework of an agreement on the reform of the international monetary system. My Government is ready to accept and support proposals in this field as long as these would not endanger the functioning of our new monetary system which is not only important to the developed countries, but as much and possibly even more to the developing world.

Upon turning to the International Monetary Fund, I should first like to thank the Executive Board for the great deal of work they have done in the past year—which has been so very difficult from the monetary point of view—and for the Annual Report they have produced. It gives a clear picture of monetary developments during the period covered.

Talks on the restructuring of the international monetary system have dominated our activities in the past year. It is not my intention, however, to go into all the aspects of that subject now. What I should like to do is to focus attention on the experience we have gained in the years passed with floating exchange rates and on the lessons which we may perhaps draw from that experience.

At first glance, our experience with floating exchange rates would appear to be not unfavorable. So far, neither the employment situation nor economic growth would appear to have been adversely affected by floating exchange rates; that fact in itself might be taken as indicating that the changes in exchange rates have corresponded more or less with the basic positions of the most important countries. Domestic policies seemed to be no longer upset by serious short-term speculative movements of capital, a circumstance which enhanced the effectiveness of internal monetary policies. However, the European countries maintaining fixed exchange rates among themselves did experience certain problems in this respect.

At first glance, it would appear that the private sector has now become accustomed to floating exchange rates. Most of the ills generally ascribed to floating exchange rates, e.g., trade wars and unjustified devaluations aimed at improving one’s own competitive position, so far seem to have been conspicuous by their absence. On closer inspection, however, I do not feel we should be too optimistic concerning the working of a system of floating exchange rates.

The experience of the past period has taught us a number of things. In the first place, and in my mind this is the most fundamental point, floating exchange rates have not really increased countries’ autonomy with regard to their internal policies. Many of those countries which did concentrate on internal policy objectives experienced excessive movements of exchange rates which adversely affected their internal equilibrium or their competitive position.

Second, the period concerned does not cover a complete business cycle. It only covers a rising phase in global economic activity, with most industrial countries keeping in step with one another. In such circumstances, a country’s competitive position is determined not only by price increases but also by such factors as quality and particularly by delivery periods. Consequently, incorrect exchange rates need not necessarily give rise to problems. If, however, the present pace of expansion were to slacken or if the economic situation should show signs of weakening, the system of floating exchange rates would very probably begin to show an ugly face. Full employment is a high priority for national governments; if it were put in jeopardy, governments might conceivably resort to manipulating exchange rates for the benefit of their domestic policy, and the drawbacks of the present system of floating exchange rates would then appear fully and clearly. These objections to floating exchange rates are linked with phases in the business cycle but there are other serious drawbacks inherent in the system. Experience to date shows, for instance, that the market rates do not necessarily reflect the basic balance of payments situation. In the case of a few important currencies we observe an overreaction as a consequence of low short-term elasticities, which has resulted in excessive appreciation or depreciation. Consequently, some of us here have already encountered one of the negative aspects of a system of floating exchange rates, namely, the inflationary effect of excessive devaluation relative to the basic position of a currency. As a result of the low short-term elasticities of imports and exports and the initially unsettling effects of a change in exchange rates, the balance of payments adjustment process is seen to operate fairly slowly and so to occasion overreaction.

This is then reinforced by psychological factors; some currencies are regarded as candidates for revaluation and others as candidates for devaluation and, consequently, their exchange rates drift still further from economic reality. A fairly long time may pass before the market becomes aware of this reality and before counterforces emerge. Occasionally, this gives rise to violent fluctuations in exchange rates. Violent fluctuations may even occur from day to day; the currency market frequently reacts nervously in view of the uncertainty with regard to future developments in exchange rates.

Exchange rates are sometimes affected by factors which have nothing to do with economic reality. On the other hand, governments have found it very difficult indeed to counteract the unwarranted anticipations of the market with regard to the long-term development of currencies.

We are, I believe, entitled to draw the conclusion that the exchange market alone is incapable of establishing an orderly system of exchange rates. The market stands in need of clear guidelines if it is to achieve this goal; official intervention to keep exchange rates within agreed margins is essential. On the other hand, it is evident that exchange rates must be adjusted in good time when there is a fundamental disequilibrium, since otherwise the rates will exert a disruptive influence on economic relations and will have to be altered in the end. The very recent revaluation of the Netherlands guilder, which was not in any sense forced upon us by the market, must be seen as a timely adjustment to an emerging basic imbalance.

The dangers inherent in the present world monetary situation make it necessary for agreement to be reached speedily on a system of fixed exchange rates which can be adjusted in good time.

Finally, I would like to draw attention to a particular problem of floating rates, namely, the uncertainty concerning the valuation of Fund facilities and in particular of the SDR. I find it a strange anomaly of the present situation that the Fund has recognized de facto the existence of floating rates, without at the same time drawing the logical conclusion of this situation for the rules governing the valuation of the SDR. As the Managing Director has stated in his opening address, a solution to this problem is both urgent and of importance for the reformed system.

I am particularly concerned about one of the transitional problems which confront us, that of reserve currency balances. This is a matter which will be dealt with by the Committee of Twenty, but I would like to say something about it here. As I see it, present-day reserve currency balances, particularly dollar balances, can be divided into three categories, namely, normal working balances, currency reserves that represent excess liquidity to the world as a whole, and currency reserves that are part of the global liquidity needed to finance short-time balance of payments deficits.

It is, I believe, generally agreed that only a minor proportion of existing currency reserves is required as working balances. The gradual reduction of the role played by reserve currencies implies that outstanding balances should be reduced to the level of normal working balances. It will then be easier to bring the creation of international reserves under international control. Of the remaining reserve currency balances, the amount in excess of the global need for international reserves will have to be eliminated by conversion into long-term loans to the reserve country.

It is unlikely, however, that it will be possible to achieve a sufficient level of consolidation if it is to be arranged bilaterally on an entirely voluntary basis. It is unlikely that this will be completely acceptable to the holders of reserve currencies, since they would be required to exchange a large, and in some cases even a very considerable, proportion indeed of their liquid reserves for nonliquid claims on reserve currency countries. Consequently, I feel that there should be some link with the consolidation of the third, the intermediary category of outstanding dollar balances, namely, that proportion which must be maintained to supply the world’s demand for international reserves but which exceeds what would be needed for working balances. This third category should remain as an international reserve, but not in the form of currency balances. The problem could be solved by converting the reserve currency balances into SDRs through an IMF substitution facility created for the purpose.

Conversion into new SDRs of a proportion of currency reserves to be agreed upon would have to go hand in hand with the bilateral funding of currency reserves. The proportion would have to be determined on the basis of estimates of the excess of international liquidity. If such a system were adopted, the holders of currency reserves would on the one hand derive some benefit from being able to convert part of their currency reserves into SDRs, while on the other hand they would have to make a sacrifice by seeing part of their reserves converted into long-term assets.

I would like to end by expressing the hope that the international community will succeed, during the coming crucial year, in rebuilding a strong and equitable international monetary order.

Statement by the Governor of the Fund for Swaziland—R. P. Stephens

First of all, Mr. Chairman, let me associate myself with those who have wished you well for chairing this august gathering of distinguished Ministers of Finance, financial experts, economists, and other celebrities. Yours is a challenging task. I want particularly to thank the Kenyan Government for the warmth of their welcome, and for the splendid arrangements for this meeting. The kindness accorded to my delegation is especially appreciated. I wish also to congratulate the Kenyan Government on this wonderful hall and building, which in conception and execution is in my experience unsurpassed elsewhere in Africa. I also wish to congratulate Mr. McNamara and Mr. Witteveen on their appointments.

International monetary reform is a matter of very great urgency; neither its importance nor its priority for the developing nations can be overemphasized. This, however, does not appear to be the case for the developed nations. The reasons are not far to seek. The deleterious effects of the present monetary crisis are unequally distributed. For instance, the developing countries export a greater proportion of their gross domestic product—60-80 per cent while the industrial giants export a lesser proportion, 8–20 per cent. The problems are thus amplified for the poorer nations. The need for reformation is, therefore, not ranked in the same manner by the developing and developed nations. The developed countries do not feel the pinch to the same degree as the developing countries.

The world is currently experiencing a boom. This is generally a period of rising prices. The prices of manufactured goods are, however, rising more rapidly than the prices of raw materials and agricultural products. As a result, there is a general transfer of resources from the developing to the developed countries because of worsening terms of trade. This being the case, the need for reform cannot be equally felt.

A word of caution is necessary. The present boom is not likely to go on forever. Experts forecast that by the end of 1974 a downswing may be experienced. There is, therefore, need for the developed countries to start thinking seriously about reaching agreement at the earliest opportunity on this matter of monetary reform.

The continuously deteriorating terms of trade represent a form of exploitation of developing countries by the developed countries. It is important that serious consideration should be given to this problem by the relevant international organizations.

This leads me to an important issue, that is, the interrelationship or complementary nature of monetary and trade matters. The problems facing the international community in these fields cannot be solved in isolation. It is very important to note that the General Agreement on Tariffs and Trade has come out with a declaration on trade as a guideline for future negotiations. On the other hand, the International Monetary Fund, which is responsible for monetary matters, is nowhere near agreement. This goes to prove the old adage that ministers of finance tend to be conservative. While on the subject of the General Agreement on Tariffs and Trade, I would like to point out that the GATT Declaration does take into consideration the special problems of developing countries. Will the Fund be left behind in the current world trend? Will ministers of finance allow their conservative nature to prevail in the face of reason? I would like to remind you of what Sir Stafford Cripps once said when he was Chancellor of the Exchequer, and I quote: “It is not opportunity knocking at our door, but it is history battering it down.” This quotation, although it was made in different circumstances, appears to me apt on this occasion.

I wish to turn briefly to one specific point. My delegation will support any proposal which will effect a transfer of resources to the developing countries. We are of the opinion that the link, properly conceived, would at least ensure some transfer. I am conscious of the fact that the SDR must essentially be a monetary instrument, but this is not an exclusive function. SDRs can assume other beneficial roles, e.g., a link between SDRs and development finance is possible. It is my belief that the fears which some developed countries have voiced in this regard are more imaginary than real.

On this question of the link I think it is important to distinguish between the link as such on the one hand and the extended Fund facilities on the other. While extended Fund facilities are desirable and would assist developing countries, the link is conceptually different. I would like to make a plea that these two proposals not be dealt with as though they were in any way alternatives.

I think the proponents of the link are agreed that it must contain an aid element. If this is to be so, the rate of interest must not be prohibitive. My delegation appreciates the fact that a new interest rate must be used in order to make the SDRs attractive to hold. However, the interest rate must not be so high as to prevent the developing countries from using them. In addition to the question of the rate of interest, there is the intricate question of the valuation of the SDR. This will need careful consideration.

I have touched on a number of general issues and on only one specific issue, i.e., the concept of the link. I have not delved into the other specific proposals, not because they are less important but because they have been adequately dealt with by others. However, before I conclude my remarks on questions related to the Fund, I would like to make two general remarks. First, the world has seen a number of international monetary systems, e.g., the gold standard and Bretton Woods. All these systems were inherently good and all of them broke down because the industrial giants did not, when it suited them, play the game according to the rules. The system which we are now considering will have to have more elaborate rules. What guarantees are there that everyone will play the game strictly according to the rules? Are we not setting up a system which is doomed to fail from the very onset? I am aware of the various proposals such as adjustment indicators, international pressures, etc. I think to answer these questions we should ask ourselves another question, and that is, to what extent have trade sanctions been successful. I support the idea of a super board as long as it will have effective representation from the developing countries. They stand to lose more proportionally. I think the conception of a Group of Ten must be buried forthwith. The function of the Group of Ten appeared to us to have been not merely to usurp some of the powers of the Fund, but it also met to break all the rules in the book, in complete disregard for the developing countries. . . .

In conclusion, let me welcome our new members, the Bahamas and Romania. Welcome.

Statement by the Governor of the Bank for Austria—Hannes Androsch

I would like to begin my remarks by expressing the deep appreciation of the Austrian delegation for the overwhelming hospitality we have received from the Government of Kenya and the City of Nairobi. We are most grateful that this important meeting can take place here for the first time in Africa and especially in this booming and industrious country, showing us the enormous success the people of Kenya have achieved in such a short period of history.

I cannot address this distinguished gathering of Governors without a grateful recollection of the former Managing Director of the International Monetary Fund, Mr. Pierre-Paul Schweitzer. He has performed his duties in an outstanding way, and it is my privilege to pay tribute to this man to whom the Fund is deeply indebted.

I would also like to welcome the new Managing Director of the Fund, Mr. Witteveen, who will have the difficult task of transforming his organization according to the new monetary system.

As some of my fellow Governors have already done, I would also like to welcome Romania and the Bahamas as new members in our community.

The year under review has been characterized by considerable activity in the field of international monetary affairs. Most of the activity, however, was caused by forces we have not yet learned to control.

In the endeavor to cope with the wholly unsatisfactory condition of the international monetary scene, the members of the Committee of Twenty reached understanding in July on some major points, though in a very general outline. Anyway, this gave rise to at least some optimism and to some hope for solutions to be achieved in a not too distant future.

Today, after several discussions at various levels, we have to state that we failed to make any substantial progress.

This situation is not only unsatisfactory and disappointing. More than that, it is highly dangerous, economically and politically alike. First of all, the present condition of international monetary matters means continuing the invitation to world-wide speculation that has proved to be so harmful to sound economic development.

Second, it represents one of the most serious impediments to the fight against an inflation that has reached world-wide dimensions. If we lose this fight, how could we prevent the world’s economy from tailing off into recession?

Third—and this without doubt is the point to worry most about—the present situation shows every sign of undermining people’s confidence in the values of their incomes and savings, confidence in future economic performance, confidence in the safety of their jobs, and confidence in political leadership. Once this confidence is shaken, social unrest and political upheavals are the potential consequences—consequences from which former generations suffered so badly.

To lead the world out of the present monetary dilemma and to restore and maintain confidence on a broad basis, I don’t think we should start out by discussing over and over monetary and banking techniques, important as they may be.

But all these discussions seem to be hardly relevant as long as the various political groupings and blocs keep sticking to their positions.

So what we really need first, in my opinion, is a readiness for political compromise. Once the politicians have agreed to meet somewhere in the middle of the road, it should not be too difficult a task for the financial experts to set up a new technical framework.

If we don’t want to create a lack of confidence in all the work that we are doing in this Fund community, we have to press urgently for reaching political compromise. There are various reasons for this: First, an extended so-called transitional period would be a grave danger to the confidence I have in mind; second, a “benign neglect” approach of governments to all the pending monetary and financial questions would mean not to stand up to their political responsibility; third, we have to be aware of the fact that the unsolved monetary problem is only one aspect of economic relations between nations. Trade, investment, aid, and so on, present a huge number of questions that have yet to be settled; and finally, confidence, as I see it, includes confidence in political leadership. Don’t let us go away from Nairobi with the question of the qualification of our political leadership left unanswered!

Let me now add a few comments on some more specific points.

Each country in this community has to carry its share in restoring international monetary order. However, there is a small number of countries which would have to play a key role in this effort; this is because of the overwhelming impact of their transactions in goods, services, and capital on the whole world economy. These countries should stand in the first line trying to reach political compromise.

In their deliberations to come, the Deputies within the Committee of Twenty should get clear guidance from their domestic authorities along the lines that have been agreed upon in principle between governments. Otherwise, the prospects do not seem to be too bright for progress at the Deputies’ level.

Disruptive capital flows have become a main concern of monetary authorities. Interest rate differentials or expectations of parity changes have greatly increased the mobility of funds. As long as these conditions prevail, a somewhat stable international monetary system seems unthinkable without a certain degree of control over capital movements. Moreover, our fight against inflation cannot succeed without exercising better and concerted control in this field. Speculative capital movements tend to impede anti-inflationary policies in the receiving countries and generate inflation. In this connection, I also wonder whether the policy of high interest rates which is sometimes advocated for domestic reasons is compatible with our fight against inflation.

In the discussions so far, the kind of future reserve media has been dealt with at some length.

Again, looking at the pending questions from the standpoint of confidence, I think that gold cannot simply be argued away by economic common sense and just disappear from the monetary stage. Any change we might be envisaging in that respect would have to be introduced gradually. Anyhow, the present immobilization of monetary gold should not be continued for much longer. I therefore think central banks should be allowed to buy and sell gold at prevailing free market rates. This would not mean that monetary institutions would rid themselves of all the gold in their possession. Most of it would most likely remain in the vaults where it is stored right now. What we should take into account is that the agreement of March 1968, discontinuing the intervention by central banks on the gold market, served its purpose but has become obsolete since the United States abandoned convertibility.

The introduction of special drawing rights was a first step away from relying on the balance of payments deficits of one or two specific countries to augment international liquidity. I think, however, that we should pay attention to a suggestion made by the Minister of Finance of Japan, i.e., that we should try to find a name for this instrument that is more clearly understandable to the public than the term special drawing rights is. Only if there is broad understanding would this instrument find general recognition as money, thus again conveying confidence in itself.

I would imagine that the term ergor used for the newly created reserve money could very well serve this purpose. Derived from the Greek word for “performance,” it would be the binding link to the economy. The syllable “or,” on the other hand, would indicate the organizing power of money.

Any new order of international monetary and financial matters would be unthinkable without simultaneously dealing with the aid that has to be extended to the developing nations.

We shall have to pay due regard to these questions in connection with creating and distributing new reserve assets.

At last year’s Annual Meetings I suggested that industrial states use part of their dollar overhang for financing development aid. This year it was a special privilege for me to sign an agreement according to which the Austrian Government provides a foreign exchange loan to the World Bank, the Asian Development Bank, and the Inter-American Development Bank to the overall amount of S 1 billion. The loan was extended for a period of 15 years at an interest rate of 4 per cent.

Austria believes that with this operation it has served a twin purpose: contribution to development aid on the one hand and reduction of its dollar surplus on the other. It was with pride and satisfaction that we learned from the President of the World Bank that there are indications of other countries following the Austrian example.

Looking at this marvellous Conference Centre shows what can be done in a developing country, but we don’t have to go far outside this city to see how many things still have to be done.

It therefore appears too simple to assuage our feelings vis-à-vis the poorer countries just by granting them financial aid. It seems to me hardly less important to let them participate in our knowledge and our experience much more than we have done before, either by supporting them with know-how on the spot or by inviting their sons and daughters to our home countries to be trained there.

Development aid must not be granted in a dogmatic manner, i.e., we should not restrict ourselves to aid on a multilateral or on a bilateral basis, but should try to get an optimal combination of both, for the good of the developing nations.

Our Kenyan hosts will allow me to borrow a word from their language: In striving for a sound international monetary order and on our way to a better development aid, “Harambee,” solidarity, should be our guide.

Statement by the Governor of the Fund for Bangladesh—Tajuddin Ahmad

It is indeed a great pleasure to be here in this august gathering for the second successive year. On behalf of my delegation let me express my sincere appreciation of the warm hospitality and the excellent arrangements made here for our meeting by the host country. The Joint Secretariat also deserves our hearty congratulations. We have, indeed, been inspired by unmistakable signs, evident everywhere, of the spirit of resurgence and dynamism among the African nations in which Kenya plays an important role.

We welcome the new Managing Director of the Fund, Dr. Witteveen. It is indeed gratifying that a man of his stature and background has been willing to take on this important assignment at a time when it is perhaps more demanding than ever before. On this occasion we remember with gratitude Mr. Schweitzer for his ten years of devoted service during a period of mounting problems in the international monetary system and for his contribution toward their resolution. . . .

We are somewhat disappointed that this meeting will not be in a position to take decisions on a new monetary framework. We reiterate that reforms that will enable stability in international dealings, promote trade, and contribute to growth in the developing countries cannot brook any further delay. We are encouraged in this regard by the decision of the Committee of Twenty to finalize the framework for reforms by July 31, 1974. The overall shape of the reforms is now sufficiently clear to permit conclusive negotiations at an early date. It is now a question of political will, especially on the part of the developed countries, to come to a speedy resolution of a few issues in question. We hope that this assembly will be in a position to give necessary directives and guidelines to the Committee of Twenty so that by next fall it should be possible to consider operative provisions of the reforms. Let us hope with the President of Kenya that the spirit of “Harambee” will prevail in our deliberations on monetary reforms.

We in Bangladesh reiterate that the reform of the international monetary system should embody a mechanism of stable but adjustable exchange rates, as agreed by the Committee of Twenty. All decisions on international monetary issues should take place within the framework of the International Monetary Fund. SDRs should become the primary reserve asset and should in future be created steadily without any gap. A link should be established between SDR creation and the provision of development finance. The allocative criteria for this additional development assistance should give special weight to the levels of per capita income and population of the developing countries.

We have noted with interest the concept of an extended Fund facility. Such a facility is welcome on more than one score. Medium-term balance of payments needs will no doubt be a claimant for this source of financing. But we find in it the possibilities of special assistance to many developing countries in areas where present arrangements require further augmentation.

In a new country such as Bangladesh, difficulties can easily arise in utilizing aid that is closely related to specific projects. There is necessarily a considerable time lag between aid commitment and its utilization. In the least developed countries this can be a problem for an extended period of time. Financing in the form of program aid to such situations can help bridge the gap in the flow of resources that may arise as a result of too rigid tying of all aid to projects. In some of the older and more advanced developing countries as well, program assistance is vital for growth in production. An extended Fund facility can surely provide a second institutional source for such assistance. I need not mention that we consider Bank lending in this respect very important and expect that it will continue.

The recent price movements have, no doubt, benefited some producers of primary commodities. But many countries such as Bangladesh find their terms of trade very adversely affected. The prices and volumes of their exports have not risen, in some cases they have even declined. Our purchasing power has been reduced by the debasing of the value of our international reserves. We are at the same time required to pay much more for our essential imports. In such a situation the existing facility of compensatory financing has proved to be too meager. The exercise on monetary reforms must pay special attention to this problem of terms of trade loss. The operative provisions we hope will provide a better Fund facility to meet this problem.

International monetary reform would hopefully facilitate a freer flow of development assistance under more liberal terms. With more flexible rules for changing exchange rates and other improvements in the adjustment process, the balance of payments constraint that has proved an obstacle to an adequate flow of aid from certain major countries should be very much lessened. In addition, the improvements in the adjustment process simultaneously with the establishment of the link should make it possible to accelerate the transition from bilateral to multilateral aid, so much more useful from the standpoint of the recipient countries. It should also help to ease the conditions under which aid is granted, and hence the debt burden which to many developing countries is very onerous.

We must congratulate Mr. McNamara for bringing to the notice of this august gathering very forcefully a number of disconcerting facts about the current international economic situation which are having very deleterious effects on the poorer nations, such as continuous trade barriers against poor countries, considerable shortfall in official aid flow below the target of 0.7 per cent of the gross national product of the rich countries, and the mounting external debt service problem of the developing countries. The inability or the unwillingness of the rich countries to transfer a mere 2 per cent of their incremental income in the coming years for the purpose of alleviating mass poverty in the poor countries poses indeed a moral crisis for the world community, a crisis which cannot but fail to heighten the tensions between the rich and the poor world. There is an urgent need, more than ever before, for farsightedness and generous vision on the part of the rich world. What the developing world fears is that there are tendencies in the opposite direction. Indeed, the recent detente between the major powers in the political field, in some cases backed by increased economic cooperation among them, has generated a feeling among the poor countries that their needs and problems would be forgotten. We hope this does not occur because this indeed will divide the world irretrievably between the rich and the poor. . . .

I shall not comment in any detail on the two Annual Reports. The Fund Report, as usual, provides a most useful review of developments in the world economy. . . .

We are grateful to both institutions for the assistance they have rendered us in the course of the past year. The Fund has made available compensatory financing facility to help cover the shortfall in export receipts that resulted from the war and its aftermath. . . . We are happy for the close working relationships we have established with both institutions and for the technical assistance and advice they are continuously providing.

May I once again express my gratification to be present at this important meeting. I am sure that the International Monetary Fund and the World Bank and its affiliates will thrive in years to come, and that their operations will continue to be of increasing benefit to countries in all parts of the world.

Statement by the Governor of the Fund and Bank for Zambia—J. M. Mwanakatwe

The current Annual Meetings of the Boards of Governors of the Bank and the Fund have assumed a special significance to us in Africa because they are taking place for the first time on African soil. This symbolic event recognizes the growing stature of African economies in the international economic system and the important role which our countries have to play in the evolving of a better and improved economic order.

Mr. Chairman, I therefore congratulate you on your election to this high office. We are proud that a representative of the Third World is presiding over this august assembly whose deliberations, in the context of the complex problems which the world economy faces today, may well be of historic importance. I also wish to congratulate the Governor for Kenya, and through him His Excellency the President of the Republic of Kenya, Mzee Jomo Kenyatta, and the Government and people of Kenya for making superb arrangements and providing excellent facilities for the conference. Our heartfelt thanks are due to them for the warm, spontaneous, and traditional Kenyan hospitality accorded to us.

I also extend a most hearty and cordial welcome to our new Managing Director, Mr. Johannes Witteveen, who takes over the leadership of the International Monetary Fund at a moment when the international monetary system is undergoing a major upheaval of the establishment order and in the creation of a system which is more suited to the diverse and often conflicting interests of a wide section of the world community. I am confident that in this demanding task, which requires not only mastery of technicalities but also tact and wisdom, the invaluable experience and background which he possesses will be an immense force for the good of all members of the Fund.

Fortunately, Mr. Managing Director, your task has been made a great deal less onerous by your worthy predecessor, Mr. Pierre-Paul Schweitzer, under whose most able guidance we have endeavored, albeit without success so far, to find satisfactory solutions to the current international monetary problems. I pay homage to Mr. Schweitzer for the constructive manner in which he guided all of us in the right direction. Today we have a clearer view of possible solutions. As a Governor from one of the developing countries, I am particularly grateful to Mr. Schweitzer for having forcefully injected our interests into the discussions on the economic reforms. I fervently believe that the contribution made by him to our cause and our just aspirations will not be forgotten for a long time to come.

When we met last year in Washington, our sentiments in regard to the progress made in the previous year in the field of the international monetary situation were marked by dissatisfaction and disappointment. Last year’s meeting had, however, taken the momentous decision to establish the Committee of Twenty. This was a healthy departure from the erstwhile tendency to confine to a few countries the decision making on issues which had implications for the entire world.

It is not my intention to present a catalogue of the achievements or failures of the Committee so far. This task has already been most ably performed by Governor Ali Wardhana. However, the events during the past year have tended generally not to justify the hopes raised a year ago. The Committee of Twenty has met four times since it was established, the last meeting having taken place last Sunday here in Nairobi. I cannot say that any serious breakthrough has taken place in our efforts to find lasting solutions to our problems nor was that anticipated. The events of the past two days clearly show, however, that a solution to the problem is not yet in sight. There is ample evidence that we lack the political will to make the necessary decisions for ending once and for all the pernicious uncertainties of the present monetary situation.

The key to success in our efforts, distinguished Governors and fellow delegates, lies not so much in the technical virtuosity of the alternate formulas, but in the willingness on the part of the more fortunate of us to understand the problems, needs, and requirements of others who are in comparatively disadvantageous circumstances.

There is a fundamental need on the part of those countries which can well afford to take bold decisions to overcome the lingering doubts regarding the harmful effect these decisions may have on their economies. One cannot help asking why, when the whole system is in turmoil and is endangered daily with growing complications and fears of ultimate breakdown, decisions are still being taken within the constraints of narrow national self-interest. What is being dangerously overlooked is the fact that the continued uncertainty in the monetary field, characterized by indefinite floating of currencies, recurrence of pressure on major currencies and their devaluation or revaluation, etc., has damaged and will continue to damage the interest of these very countries even more than any reasonable bold decision which they may take today.

From the point of view of justice and equity alone, is it not reasonable to assume that compared to the shattering burden which developing countries are now forced to bear, any eventual disadvantage to the developed countries because of “concessions” given would only be of a marginal nature? Why must it be assumed that, in the unlikely event of these bold decisions misfiring from the point of view of the developed countries, the process would be irreversible or that the developing countries would themselves be so inconsiderate as not to agree to such modifications as may be necessary?

What needs to be emphasized and to be underlined is that the time for deliberations, debate, and expounding of theories is now over. What the world needs today are decisions—decisions consistent and in conformity with basic principles which must be evolved on the considerations of fair play, justice, and equity. If the faith of the world community, and particularly of the developing countries, is to be restored in an international monetary system, some basic decisions must be forthcoming in the shortest possible time and not left to be taken over an inordinate length of time.

I have, together with many others, complained of the slowness with which the Committee of Twenty has worked. It is time now to examine the reasons for this slowness. We all know the enthusiasm of Governor Ali Wardhana to make the Committee of Twenty an effective forum for resolving conflicting viewpoints on proposals for reform. What, then, is the cause of slow progress?

It is because certain countries have persistently resisted some of the basic requirements of a reformed system. For instance, the technical arguments for the demonetization of gold are generally agreed to be overwhelming. At the March meeting of the Committee of Twenty, it was agreed that the SDR should become the primary reserve asset of the system; and yet some countries are still fighting a rearguard action for the retention of gold, for reasons, one suspects, which are not unconnected with the large proportion of gold in their own official reserves, or the existence of a gold mining industry within their frontiers.

Again, a cornerstone of the reformed system must be the creating of an adjustment mechanism which does justice to both surplus and deficit countries, rather than imposing a one-way deflationary burden on deficit countries only. I hope that this principle has been accepted since the July meeting of the Committee of Twenty, and yet the notion still persists in some quarters that there is some neomercantilist virtue in running a surplus rather than a deficit.

But perhaps the most glaring example of humbug in the monetary discussions, and certainly the one with which my Government is most concerned, is the question of the link between SDRs and development finance. Ever since the monetary reform discussions started in earnest last year, lip service has been paid to the need for a reformed system to provide for adequate transfers of real resources from the developed countries to the developing countries. Yet progress on this vital subject has been absolutely nil. The allocation of SDRs for the second basic period has been stalled on the pathetic grounds that there would be excess world liquidity as a result.

And yet out of an increase of about US$103 billion in world reserves since the end of 1969, SDRs contributed a mere US$11 billion. Once again one suspects that the interests of certain countries with more than adequate reserves are being allowed to dominate those whose need for liquidity is still pressing. I noted with interest the passage in the Fund’s 1973 Annual Report which draws attention to the fact that, during 1972, African countries’ reserves grew by only 8 per cent on average, while the total adjusted for U. S. holdings of foreign exchange increased by 19 per cent. The Report comments on page 43 that “even though total calculated excess reserves were quite high . . . the majority of countries did not have excess reserves.”

I feel very strongly that it is high time attention was refocused on the link. Various attempts have been made to divert attention from this issue. First we were told that the main bones of contention—the adjustment mechanism, reserve assets, convertibility, exchange rates, etc.—must be settled. Then came the extended Fund facilities proposal, advocated by certain developed countries, more or less openly as a substitute for the link. How can credit be a substitute for a once-for-all resource transfer? How can conditional facilities be a substitute for the redistribution of reserves in favor of those with a reserve need? How can anyone pretend that the attitude behind these proposals amounts to anything more than a halfhearted attempt to assure a more adequate flow of real resources to developing countries?

What is the background against which the link proposal has been made? In the first place, according to the recent World Bank paper transmitted to the Committee of Twenty Deputies, the flow of capital to developing countries fell from 0.95 per cent of creditor countries’ gross national product in 1961 to 0.73 per cent in 1972. Moreover, most of the decline was in official development assistance, which largely represents the concessionary element in capital flows, and which accounted for 60 per cent of the total over 1961–66 and only 48 per cent in 1967–72. The same paper shows that, over the period 1967–71, debt service payments for developing countries as a whole accounted for nearly 50 per cent of their inflows of foreign exchange and over 10 per cent of export earnings.

Developing countries are being forced to borrow at commercial rates of interest on the Euro-currency markets, a development which is not necessarily bad in itself, but which is a serious source of monetary instability if conceived of as a substitute for official concessionary assistance. Developed countries should also note very carefully that the failure of aid flows to match developing countries’ needs has led many governments to increase taxation of foreign enterprises and to restrict the outflow of profits and dividends. It will be impossible for developing countries to safeguard their balances of payments without introducing more such measures, if the flow of development assistance is not available.

Every international reserve asset that has existed has implicitly given rise to a link of some kind. Both gold and national currencies have conferred on their producers a privileged access to real resources. It is entirely appropriate that, under a reformed system with internationally supervised reserve assets, there should be an equitable sharing of the benefits as well as the costs. This, in a nutshell, is the case for the SDR-aid link, a case which, by any objective assessment, is overwhelming.

The attitude of my own country to the monetary reform proposals put forward by the developed countries will depend crucially on whether or not a direct-allocation type link proposal is incorporated. Developing countries on the Committee of Twenty have repeatedly stated that the global allocation of SDRs must be decided on the basis of global liquidity needs. The link proposal concerns only the distribution of liquidity thus created. So there can be no possible fear that the existence of a link would prejudice world monetary stability. Those who think it might would do well to reflect on the apparent consequences for world monetary stability of the Bretton Woods system and the excess world liquidity which it eventually brought about. Developing countries can hardly be accused of having created or condoned that situation.

On Monday of this week, our new Managing Director of the Fund emphasized that: “It is imperative that we approach this task of building a new monetary order with the urgency it demands.” I entirely support his plea and I can assure him of cooperation from members representing the developing countries. The “will” required to take positive decisions must be forthcoming from the developed countries if any progress is to be made in the near future.

The fact that developing countries are now represented on those international bodies which discuss and propose reforms is unquestionably a sign of progress. However, we remain with the problem that the Fund’s own institutions and voting system take insufficient account of the developing countries as a whole. One way or another, it seems inevitable that the Fund must become a more effective body, especially if the discussions of the adjustment process, with or without objective indicators and the application of “pressures,” are to be carried further. It is essential that the developing countries continue to have at least as strong a voice on such a revamped Fund as they have on the present Committee of Twenty.

I have deliberately refrained from commenting in more detail on other aspects of the reform proposals. This was because, in the time available, I felt it proper to re-emphasize those aspects of the reform which most concern Zambia and other developing countries. This does not mean that we are indifferent as between the various alternatives. It simply means that discussion of them must now take much fuller account of the developing countries than hitherto. We shall be judging the reform program as a whole according to the contribution it makes to reducing the gap between rich and poor countries. For, as I said at the outset of my address today, this meeting will be judged by the extent to which it engenders full commitment by all of us to promote a more balanced and integrated world economy. . . .

The two institutions which we are discussing at the meeting today have a direct effect on our economies. While I recognize that international institutions cannot be run on an ad hoc basis, I do believe that their operations must become more adaptable and flexible and change with the changing needs of the members. I have two particular aspects in mind. First, the assistance which is available to our countries from the International Monetary Fund is mostly inadequate and short term and is highly conditioned on a wide variety of presumptions which are totally disproportionate to the assistance offered. The conditions, in fact, become an imposition which almost impinge on the concepts of sovereignty of states. I would imagine that a more reasonable and pragmatic approach would guide considerations in this regard.

The second aspect I have in mind is the need for a provision in the working of the World Bank and the Fund to take note of sudden abnormal situations which develop in member countries from time to time and which create serious adverse economic repercussions. These are caused both by natural disasters such as famine, drought, etc., or are man-made, such as the situation we face in Zambia today. Much good work done by the assistance obtained from these institutions in the past is undone by the delayed reaction to meet such emergencies. I do not say that there is no response on account of such happenings but I maintain that this response is not quick enough and is not adequate in any meaningful manner.

Statement by the Governor of the Fund for Pakistan—Ghulam Ishaq Khan

The Annual Reports of the World Bank and the International Monetary Fund have, as in the past, provided us with a clear and objective analysis of the main developments in the world economy during the last year. Although the developing countries fared somewhat better in 1972–73 compared to the preceding year, there was hardly any progress toward the solution of the chronic problems that beset them. In fact, some of the very factors that brought them some gains brought in their wake new problems, particularly problems of adjustment in the monetary field, which their economies were ill-equipped to handle.

No doubt the poorer countries recorded, on an average, a growth rate of about 6 per cent in 1972, but even this “impressive” growth rate, as the World Bank Report describes it, could not, when population growth is taken into account, have any perceptible impact on the lives of the people inhabiting these countries. With the fall in food production and the unprecedented rise in food prices, the per capita availability of food in many a country of the underdeveloped world, hardly sufficient ordinarily even for bare subsistence, suffered further decline, causing widespread misery. The year also witnessed considerable increase in the export earnings of the less developed countries, but the purchasing power of these earnings was seriously whittled down by inflation in the developed countries. As a consequence of the boom in world commodity markets there was a substantial accretion of the foreign exchange reserves of these countries. But, here again, there was a serious erosion in the value of these reserves as both dollar and sterling, the two currencies in which the bulk of their reserves are kept, weakened further in international currency markets. As the currencies of a number of developing countries are tied to the dollar or sterling, they also suffered an effective depreciation which adversely affected their terms of trade. The almost chaotic conditions in international currency markets and the intensification and spread of inflation in developed countries were two other developments which created serious problems of adjustment for the less developed countries.

The longer-term outlook also remains far from encouraging. It is well recognized that paucity of resources for development is one of the major bottlenecks in the way of faster growth and improvement of social conditions in the less developed countries. It is also recognized that to overcome this problem, developing countries need substantially enlarged flows of foreign assistance on terms suited to their repayment capacity, as well as better access to foreign markets. However, the flow of financial resources to the developing countries, which never attained the internationally agreed minimum targets, was even more disappointing during 1972. The total net flow of resources from the member countries of the Development Assistance Committee to developing countries and multilateral agencies rose in 1972 by about 7 per cent in terms of U. S. dollars. However, measured in national currencies, the increase was only of the order of 2 per cent. Making a further adjustment for price increase, the real volume of total flows in 1972 is estimated to have actually fallen by about 3 per cent. As a share of members’ gross national product, the total flow declined from 0.78 per cent in 1971 to 0.73 per cent in 1972, one of the lowest figures since 1967. What is more discouraging, the proportion of official development assistance to total assistance also declined rather than increased in this period, falling from 0.35 per cent in 1971 to 0.34 per cent in 1972; the relative proportion stood at 0.44 per cent in 1965. . . .

As for the terms of foreign assistance, though some softening was in evidence in 1972, it could hardly be termed as significant. The practice of tying aid continued to remain widespread, and little progress was made toward enlarging the scope for procurement in developing countries, though because of the improvement in the balance of payments and reserve positions of a number of donor countries, circumstances favored the adoption of more liberal policies in this respect.

The dominance of lending on commercial or near-commercial terms in the global aid policies, particularly when account is taken of the high cost of supplies under tied aid and repayment in convertible currencies, has been mainly responsible for the emergence of a serious debt problem for a number of developing countries. In 1971, for 81 developing countries studied by the World Bank, over 50 per cent of the fresh disbursements of foreign loans and assistance was absorbed by servicing of the past debt. Unless this trend is reversed, a point will soon be reached when aid relationship will cease to provide any net accretion of resources to the developing world.

The 1973 realignment of exchange rates and subsequent changes in exchange rate relationships have also increased the real burden of debt service payments for many developing countries. The impact has been particularly severe in the case of countries having specially close financial ties with Western European countries and Japan, whose currencies have appreciated substantially. The burden of discharging debt obligations to multilateral lending and financial institutions has also increased, as portions of some World Bank loans are denominated in currencies other than the dollar, and the dollar equivalent of countries’ repurchase obligations to the Fund has been raised to the extent of the increase in the official dollar price of gold.

Faced with these problems, developing countries have been emphasizing the need for a coordinated approach to the problems of international monetary relations, trade, and development assistance in various forums. The constitution of the Committee of Twenty had raised the hope that, in the process of the international monetary reform exercise, adequate attention would be given to the problems of developing countries, not only in the monetary field, but also in the spheres of trade and development finance, as was required of the Committee by its terms of reference. Considering the complexity of the international monetary issues, the Committee has no doubt made some progress. But the outcome of the reform negotiations so far remains unsatisfactory from the viewpoint of developing countries. Discussions at the various meetings of the Committee of Twenty have been dominated by the problems of developed countries, and issues vitally affecting the developing countries have received only peripheral consideration. The question of increasing the flow of real resources to developing countries, although recognized by the international community as an integral part of the reform exercise, has as yet received scant attention. The question of the link alone has been debated, and though developing countries have with one voice expressed themselves in favor of the link and also the form it should take, it still does not command the acceptance of all the major developed countries. It is time for a political decision to be reached on the question of the link. I must add, however, that the link, even when established, is by no means likely to provide a complete answer to the problem of promoting the flow of real resources to developing countries. Other supplementary measures also, therefore, need to be considered on a priority basis.

Here, I would like to say a few words on the subject of future allocations of SDRs. While the creation of SDRs must be based on the determination of global liquidity requirements, the manner in which the exercise in regard to the need for the issuance of SDRs is currently undertaken needs to be revised. The main deficiencies of the approach employed so far, on the basis of which allocations of SDRs were made in the first basic period and on the basis of which no allocations have so far been made for the second basic period, are that it uses a relatively crude method of projecting future need for liquidity on the basis of a simple, highly aggregative extrapolation of the past trend and disregards the distributional pattern of existing liquidity in judging the adequacy of the existing stock of reserves. I think it is necessary that more sophisticated criteria should be employed for determining the need for new liquidity and that adequate attention should be given in this context to identifying individual countries’ needs for additional reserves and the distributional pattern of existing liquidity.

It has been apparent for quite some time that, in order to improve the adjustment process and to ensure the compatibility of the balance of payments aims of different countries, it is necessary to strengthen multilateral surveillance of individual country actions having significant international repercussions. The developing countries have all along been of the view that decisions having far-reaching international repercussions should not be taken by a restricted group of countries, as has been the case not infrequently in the past, but should reflect the will of the entire international community. It is satisfying to note that deliberations of the Committee of Twenty have resulted in a consensus that the International Monetary Fund should be suitably strengthened to exercise effective multilateral surveillance. The Fund is a suitable forum for international decision making because it represents the interests of all member countries. However, we feel that the present quota structure in the Fund does not enable the developing countries to participate as effectively in the decision-making process as their importance in the world economy warrants. It is necessary that the quota structure be revised suitably to strengthen the voice of the developing countries in the councils of this world body.

In my earlier remarks I referred to the difficult problems of adjustment with which the developing countries are faced at present on account of the flux in international currency markets and inflation in developed countries. To combat inflationary pressures, developed countries have placed a greater reliance on monetary policy than on other demand management policies. This has led to an upsurge in interest rates which may militate against the softening of the terms of foreign assistance and may further aggravate the debt servicing problems of less developed countries. The economies of the less developed countries are being subjected to acute stresses and strains on account of these factors. I think it is vital that, side by side with the international monetary reform exercise, studies should be commissioned by the International Monetary Fund and the World Bank to find ways and means of insulating, as far as possible, the economies of less developed countries from the deleterious effects of inflation and high interest rates in developed countries.

Before I conclude, I must join my fellow Governors in paying a tribute to Mr. Schweitzer who, for ten full years, till his retirement at the end of August this year, rendered outstanding services to the international community in his capacity as the Managing Director of the Fund. Mr. Witteveen, who has succeeded Mr. Schweitzer, is specially equipped, by virtue of his vast experience in the financial field, to lead the Fund in the difficult period of transition through which we are passing till the international monetary system is re-established on a sound footing. I wish him all success in his new assignment.

I would also like to avail myself of this opportunity to thank the Government and the people of Kenya for the warm welcome and generous hospitality they have extended to us and the excellent arrangements that have been made for our meeting in this beautiful city of Nairobi.

Statement by the Governor of the Bank for Nepal—G. B. Karki

The continued instability in the international monetary system and the inflationary pressures remain our major problems of today. The developing countries continue to feel the burden particularly because the exchange rate adjustments have been unfavorable to them. This has adversely affected them not only in their debt servicing but also in their efforts toward expanding and diversifying trade. I am glad to note that some progress has been made in arriving at a consensus concerning some of the major issues and I commend Mr. Ali Wardhana and his colleagues in the Committee of Twenty for their efforts. The new timetable announced by the Committee appears reasonable and I have every hope that we will be able to meet next year in an atmosphere of stable international monetary situation. I am also confident that the solutions to be arrived at in such vital areas as adjustment process will take into account the special conditions and needs of the developing countries. . . .

Before concluding, I should like to join other distinguished speakers in expressing our sincere thanks on behalf of my delegation to the Government and the people of Kenya for the warm hospitality extended to us. We are particularly grateful to President Kenyatta for his thoughtful address yesterday.

Statement by the Governor of the Bank for Thailand—Serm Vinicchayakul

On behalf of the Government and people of Thailand, I wish to associate myself with other distinguished speakers in expressing our appreciation to the Government and people of Kenya for the excellent arrangements and the many courtesies extended to us at this session of the Annual Meetings of the International Monetary Fund and the World Bank Group in Nairobi. Considering the many issues of great importance to be discussed at these Annual Meetings, not the least of which is the issue of international monetary reform, it is significant that we are meeting in the capital city of a member developing country. This should augur well for our hopes that the wishes and requirements of all developing countries will be concretely reflected in the solutions of major economic and monetary issues.

I also wish to take this opportunity to extend a warm welcome to Mr. Witteveen, the new Managing Director of the International Monetary Fund, and to express our warm appreciation to the outgoing Managing Director, Mr. Pierre-Paul Schweitzer, for the dedicated service which he has rendered to the international community throughout the past ten years. I have no doubt that under the able guidance of Mr. Witteveen, the strengthened International Monetary Fund will help to promote expansion of trade and the groundwork for stability, especially for the less developed countries.

Regarding the international monetary issues which are uppermost in the minds of all of us present here, it is noted with concern that while the general framework of the reformed system has been defined, agreement has not been reached on several important points. Admittedly, these issues are complex and are not easy of solution, and political as well as economic factors are involved. However, while the world has by and large learned to live with uncertainties in regard to exchange rate measures, the prolonged absence of agreed rules and procedures for international behavior in these fields has resulted in unilateral actions and decisions being taken outside the framework of the International Monetary Fund. Developing countries have generally been excluded from this decision-making process in spite of the fact that these decisions affect greatly their trade and development.

In considering the framework of the reformed international monetary system as indicated in the First Outline of Reform prepared by the Chairman and Vice-Chairmen of the Deputies of the Committee of Twenty, it is gratifying to note that the special circumstances of the developing countries, as well as the need to promote the flow of real resources from developed to developing countries, have been recognized. However, this laudable objective remains to be translated into meaningful and concrete action. In this connection, we are dismayed by the continued opposition of some countries to the proposed establishment of the link between the SDR and development finance, notwithstanding contentions that the link can be established without incurring inflationary pressures and without damaging confidence in the SDR. . . .

In the brief period of this Annual Meeting, we are faced with a number of important items of deliberation which will require the full cooperation of all concerned. Let us look forward to a period of international monetary stability, an atmosphere which will be conducive to the economic and social development of all nations on an equitable and sound basis.

September 25, 1973.

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