Chapter

Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
October 1973
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Statement by the Governor of the Fund for South Africa—Nicolaas Diederichs

I am glad to join with other Governors in expressing my gratitude to the Government and people of Kenya for the gracious hospitality which they have extended to us. The hospitality of Africa is traditional, but a special word of appreciation is due for the excellent arrangements which have been made for our convenience and comfort.

I should also like to associate myself with the congratulations extended to Mr. Witteveen on his appointment, and to assure him of our cooperation and support in his difficult task.

It is to me a source of gratification and pride that this Annual Meeting should be held on African soil, and I believe that this marks a milestone in the development of the African continent. As Mr. McNamara has said, “Africa is the continent of the future, where many of the greatest development opportunities of the years ahead are going to be found.” . . .

In its own field the Fund can also play an important part in development. Here I have in mind greater technical assistance to developing countries in monetary and fiscal matters. Fund missions to developing countries for annual consultations should perhaps spend less time on broad descriptive surveys and more on exploring ways in which the authorities may be assisted in strengthening their monetary and fiscal systems to meet their development needs.

As far as the activities of the Fund are concerned, the two main documents before us are the Annual Report and the Outline of Reform submitted by the Chairman of the Committee of Twenty.

The Annual Report of the Fund contains much that is encouraging, especially in regard to the rate of economic growth in both developing and developed countries and the expansion of world trade.

At the same time, the Report expresses concern about the persistently high rate of inflation in most countries. It goes so far as to say that: “Among the difficult tasks of economic management facing most members of the Fund . . . none is more urgent, or of greater significance for the longer run, than that of finding a solution to the problem of controlling and reducing inflation.”

With this view I wholeheartedly agree. Apart from the harmful internal effects of inflation, I have already mentioned its eroding effect on the real value of development aid, and I would also emphasize the interaction between inflation and the international monetary disturbances of recent years. Some of the international monetary developments of this period, in particular the excessive increase in reserve currency holdings, have undoubtedly been a major cause of world-wide inflation. At the same time, inflation has helped to bring about monetary unrest, not least by diminishing confidence in currencies generally.

This brings me to the Outline of Reform. Let me say immediately that I consider the reform of the international monetary system to be an urgent matter. The present state of affairs is not satisfactory. As the Fund Annual Report points out, key elements of the Bretton Woods system are no longer being observed and, in particular, international currency relationships lack firm foundation in an internationally agreed set of rules or code of conduct. Since exchange rates are intrinsically a matter of international concern, there is accordingly a need to bring exchange rate policies and practices under the framework of a system founded on international agreement and commanding general support.

It is true that, despite the currency crises and uncertainties, world output and trade have expanded during the past two years. But this affords no ground for complacency. When the present cyclical upswing in the main industrial countries comes to an end, possibly next year, or if the U. S. balance of payments improves considerably, which it must do if payments equilibrium is to be restored in the world, the international monetary system will probably be subjected to severe additional stresses and strains. This might well lead to competitive devaluations, downward floats, increased restrictions on trade and current payments, and other undesirable developments, which could have extremely harmful consequences for the world. It is important therefore that agreement should be reached on the main elements of monetary reform in time to forestall developments of this kind and to restore confidence.

Unfortunately, the Outline of Reform before us makes it only too clear that, while the Committee of Twenty and the Deputies have worked intensively on various aspects of the reform and have made some progress, some of the most basic issues have not been resolved. These include the issues of convertibility, consolidation of the overhang of reserve currencies, the role of presumptive reserve indicators in the adjustment process, the management of reserves, floating exchange rates, gold, the nature and valuation of the proposed new SDR, and the link between SDRs and aid to developing countries. Moreover, the positions of some of the major industrial countries on many of these matters are at present far apart, and the prospects for early agreement on the main issues do not seem particularly favorable.

I must also record my doubts as to the wisdom and workability of some of the reform proposals currently being considered by the Committee. One of my main concerns is that the new system on which agreement is now being sought will have a strong inflationary bias and will therefore suffer from the same basic defect as the de facto dollar standard of recent years. And this at a time when, as the Fund Annual Report has confirmed, the most urgent economic problem facing the international community is worldwide inflation.

My basic reason for fearing a continued inflationary bias is that acceptance of some of the main proposals before the Committee will mean that the balance of payments constraint on inflationary overspending and on excessive capital outflows through reserve creation will remain weak. The proposed system of adjustment, for example, may well penalize surplus countries for following more successful anti-inflationary policies than other countries, and thereby weaken their incentive to curb inflation. At the same time, deficit countries will be “let off the hook” too easily, instead of being induced to take appropriate measures to restore domestic and external equilibrium. Similar effects will probably flow from the excessive exchange rate flexibility which might well be a feature of the new system. Finally, if we are realistic, can we ignore the real danger of too many SDRs being created in the proposed new system?

There are other aspects of the Outline of Reform which give me concern. Take, for example, the proposal for the establishment of a reserve indicator structure which might be used, presumptively, to activate pressures. Apart from the great practical difficulty of reaching agreement on such a structure, I doubt whether, in the light of the experience of the past few years, it would really serve a useful purpose. A reserve indicator, after all, is not necessarily a good index of the basic balance of payments or a reliable signal for action on exchange rates or other measures.

I also have serious doubts about the desirability and usefulness of pressures in general. Even over the past few years, can we really believe that pressures would, for example, have induced surplus countries to appreciate their currencies to a greater degree than has actually taken place? I am quite certain that pressures of a type which would produce an open confrontation between the Fund and the country concerned would not help to achieve the results we desire. The whole experience of the Fund over the years has been that a great deal can be achieved by consultation and suasion. We should also not lose sight of the automatic adjustment forces operating on most deficit and surplus countries. I believe that the Committee should lay greater emphasis on consultation and cooperation rather than on coercion.

On reserve assets, it is clear that primary reserves play a pivotal role in any system of convertibility or asset settlement. The Outline states that the SDR will become the principal reserve asset and that the role of gold and of reserve currencies will be reduced. This is easily said but not so easily achieved. Is there anyone in this illustrious gathering who can now tell us exactly what this new SDR really is which has already been chosen as the cornerstone of the future monetary system? Obviously, much still remains to be done to clarify, and to reach agreement on, the nature of the SDR in the reformed system. Moreover, if it is to be the principal reserve asset, it must be universally known, universally acceptable, and command universal confidence and credibility—not only among monetary authorities but also in the wider financial community. None of these attributes can be enforced by decree. They can only develop through an evolutionary process which must inevitably take time.

The other primary reserve asset is gold. The Outline does indeed recognize that gold will remain within the monetary system, but I should have liked to see it take a more positive view of gold’s role, especially in the considerable period which must elapse before SDRs can become the main reserve asset in fact as well as in principle. Whatever gold’s ultimate monetary role may be, the immediate facts are that it commands general confidence, that it can play a useful stabilizing and disciplinary role in the monetary system, but that it is prevented from doing so by its present unrealistic official price.

Of the three solutions for gold mentioned in the Outline, the first envisages the retention of the present official gold price with freedom for monetary authorities to sell, but not to buy, gold on the private market. The second envisages the abolition of the official gold price, with freedom for monetary authorities to deal in gold with one another at a market-related price and to sell, but not to buy, gold on the market. The prohibition on gold purchases on the private market which is common to these two solutions would, I believe, betray a lack of confidence in the ability of the SDR or of reserve currencies to stand comparison with gold as a reserve asset. It would in any event be unenforceable in practice, since purchases of gold could be made by some entity other than the official monetary authority. It would also be an asymmetrical and unjustified interference with the right of a country to choose the form in which it holds its reserves. There is little reason to doubt that such a prohibition, like so many other attempts to reduce the monetary status of gold prematurely, would fail, and this failure would impair the credibility of the whole system.

Of the three solutions for gold mentioned in the Outline, the logic of the situation therefore points to the third, which would abolish the official gold price and permit not only gold transactions between monetary authorities and gold sales on the private market, but also gold purchases on the market by monetary authorities.

Much better even than this third solution, particularly in its effect on confidence and credibility, would be a substantial increase in the official price of gold. This is not mentioned in the Outline but the force of circumstances may well still bring it about. It is simple, straightforward, and, as I have previously argued at these meetings, would be of immense benefit to the monetary system and the world community.

I return in conclusion to our major and fundamental problem of inflation which affects all countries. If inflation proceeds unchecked, no international monetary system, however ingenious, can succeed. If most countries succeed in curbing inflation, then international monetary stability will be so much easier to achieve. Effective action against inflation requires discipline—not a popular word nowadays, but we who are responsible for monetary policy know how necessary it is. The message which goes out from this Annual Meeting will be sadly incomplete if it does not emphasize the need for monetary discipline as an essential condition for stability, prosperity, and successful monetary reform.

Statement by the Governor of the Bank for Israel—Moshe Sanbar

This is not the first time we meet in the shadow of an international monetary crisis. None can doubt the urgent need for effective reform of the monetary system. Nevertheless, important as this matter is, it should not lessen our concern with finding new and better ways to solve the long-standing problems of development. . . .

Despite long and arduous work, the Committee of Twenty has yet to reach a consensus on a program for reforming the monetary system. It is to be hoped that the long-awaited reform will be agreed upon without undue delay, so that confidence in the monetary system can be restored.

Within the framework of the discussions of the Committee of Twenty, my country has put forward a suggestion concerning the role of gold in a reformed monetary system. Together with many other nations, we believe that gold should be gradually demonetized and SDRs constituted as the primary reserve asset, as well as the ultimate numeraire, of the reformed system. As suggested in our memorandum, demonetized gold could, in the hands of the International Monetary Fund, act as a much-needed stabilizer to lessen the harmful effects of disequilibrating capital movements, to mop up excessive international liquidity, and to shore up currencies under speculative pressure. Short-term equilibrium could thus be restored, without harmful effects on other currencies. We believe this goal could be attained, if the stock of demonetized gold were to be sold periodically to the Fund by national financial authorities, under terms and timing to be fixed by the Fund, in line with prevailing market conditions at the time of each sale.

It is necessary, we believe, to provide the Fund with increased powers which will permit it to intervene, where necessary, in order to restore stability and confidence in the system.

Mr. Schweitzer, in his inspiring and devoted service as Managing Director of the Fund, has led that institution through extremely difficult times. He has done much to lay the necessary foundations for reform, and for this we all express our sincere gratitude and admiration. Mr. Witteveen has now undertaken this weighty task at a most difficult time. We are certain that under his leadership and guidance, and with the joint effort of all concerned, an acceptable solution can be attained.

Finally, I would like to express the appreciation of the Israel delegation to our host country, Kenya, which extends to us such wonderful and warm hospitality. The assembly of the meeting here in Kenya should be, to all of us, a symbol of the cooperation between the developing and the developed countries. I hope that this symbol will guide us all throughout our activities.

Statement by the Governor of the Fund and Bank for Brazil—Antônio Delfim Netto

This meeting in beautiful, dynamic, and wise Kenya, which under strong leadership has forged a new nation, has a symbolic significance. The emergence of the new independent states in Africa is certainly one of the foremost political manifestations of the latter half of this century, attesting to the desire of people to rule their own destinies.

I speak to you in the name of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela, and the Philippines. We are more than 300 million people also deeply engaged in the struggle to improve our standards of living.

We are engaged in a tripartite reform exercise that comprises three areas: international monetary system, trade arrangements, and transfer of real resources to the less developed countries.

Latin America and the Philippines regard it as extremely important that the work on how to promote the flow of real resources from developed to developing countries be conducted by the Committee of Twenty, composed of political decision makers.

Before I go on to address myself to the question at hand, it is useful to clarify that the question of the link, already ripe for political decision with the continued unanimous support of the developing countries, and the issue of credit facilities in favor of developing countries are subject to special work and attention.

It should be remarked that while the international monetary system and the trade arrangements are means—and important means—to promote world trade and employment and economic development, the transfer of real resources affords a direct attack on the problem of promoting the growth of the poorer nations. This is important not only from their point of view but also that of the rich countries, if one accepts the so-called one world approach.

In a nutshell, the issue is that, it being to the country’s advantage to maximize its domestic savings, the additional capital available is a vital element to expedite economic development.

The objective, however, is not only to promote growth, but—as importantly—to do it in a fashion which is sustainable over time. This is where official development assistance has a significant role to play among the different ways of financing the flow of real resources.

The dismal state of official development assistance is well publicized, not only in relation to the past but also to the future. Indeed, if one were to assess the record of official development assistance over the 1960s, it would be relevant to note that out of a cumulative increase of gross national product for the decade, which exceeded the level which had been achieved in 1960 by about US$5,000 billion, only less than US$15 billion was directed to the transfer of resources through official channels.

The ultimate problem has been exhaustively identified, namely, lack of leadership to carry out the task. The channels to provide development finance, though imperfect, were there to be used, if there had been the disposition to do so.

In a much simplified abstraction of reality, it can be shown that a developing country, receiving each year external savings to the extent of 3 per cent of its gross domestic product, and maintaining a domestic savings effort which would finance about 85 per cent of total investments carried out in the economy, would have a capital accumulation, over the course of a generation (about 25 years), of between a third and a half as much, over and above the increase in the capital stock which would take place in the absence of the absorption of real resources from abroad.

And more than that, together with the additional stock of capital, the citizens of the country could have at their disposal, to allow the improvement of their standards of living, an additional amount of consumer goods and services of 40 per cent to 60 per cent as much, over and above the betterment which would already be possible, if there were no appeal to external savings.

Let us move to a second positive aspect, and it has to do with the availability of finance to enable the transfer of real resources, insofar as official development assistance is concerned. It is estimated that during the decade of the 1970s, the annual gross domestic product of the affluent nations will grow, in constant prices, from US$2,000 billion in 1970 to approximately US$3,500 billion in 1980. Assuming, just for the sake of argument, that during the same decade of the 1970s, the 0.7 per cent target were to prevail—a subject to which we will revert later on—the total amount of official development assistance available would be close to US$200 billion. This would represent approximately a tripling of the funds available for development finance that flowed in the 1960s (about US$60 billion). This analysis gives a somewhat more optimistic picture than the doubling effect that tends to be simplistically associated with an elevation of the current 0.35 per cent relationship of official development assistance to gross national product to the 0.7 per cent target level, due to the fact that, at the margin, over the last decade this relationship was only 0.26 per cent.

To bring about a change in the climate that pervades development finance will require a work of partnership between the transferors and the transferees in the flow of real resources. This work of partnership involves the problem of the ultimate freedom of choice of policy mixes by the national authorities in the recipient countries, who have the responsibility of promoting economic development, and the advice which national and international development finance agencies feel entitled to dispense, together with the funds which they provide.

There is no question that a genuine dialogue over objectives and policies between the two parties in this grandiose play can be beneficial to both. It would be helpful if the development finance agencies had in their highest policy-making staffs representation from the borrowing countries. The dialogue is a useful antidote to the overgeneralization of naive analyses, and “pet” theories on the part of officers who are not politically accountable to the people that constitute a nation.

One has to be aware that there can be such a thing as excessive reliance on the so-called concept of policy “leverage.” After all, it should not be forgotten that, as a rule, developing countries finance the bulk of their investment expenditures, and that they, more than anyone else, worry about the best use to which they are putting the capital they employ through their own self-help. It is only natural that the recipient country should have the benefit of the doubt as to what is best for their people.

Let me immediately remark that this preoccupation is not an idiosyncrasy of developing countries which receive official development finance. It is an attribute of a responsible government, be it affluent or poor. This sensitive question has clearly surfaced in the current negotiation of monetary reform, where it became quite clear that countries want to retain the freedom of choice to determine the adjustment action to bring about balance of payments equilibrium, while taking into account the repercussions of their action on other countries. This is a position advocated by all countries, large or small, developed or developing.

Let me move now to some of the specific points.

(1) Official development assistance has to be sensibly organized in terms of multiyear commitments.

(2) Project and program financing and the untying of the bilateral programs will also have to be dealt with.

(3) Thought must be given as to how funds committed are protected against inflation, by the time they are disbursed.

(4) The whole question of access to capital markets of the developed countries has to be focused upon, so that the flow of official development finance, which is at the base of the financing of the transfer of real resources, can have a multiplier effect in terms of the latter total, which can be financed sustainably over time.

This leads us into the area of external indebtedness. It is difficult to find any single issue pertaining to the flow of real resources to developing countries where myths, misinterpretation, and mistakes are so prevalent.

One can state flatly not only that the external debt will be there, but that it will grow over time. The rate of growth of the debt will depend importantly on the financial terms which characterize the indebtedness.

It is not helpful, in this context, to point to the absolute size of the external debt of developing countries. Even references of a more sophisticated nature to the famous debt service ratio are meaningless, if they are not associated with the international reserve position of the countries, and to the many other relevant factors. They are, at best, very crude measuring rods which can lead to great misunderstandings.

The crucial concept in this matter is that of external debt management of the country. There is nothing wrong with external indebtedness or its growth, provided it is well managed.

The crux of good management is proper scheduling of maturities, visibly high reserves, and dynamic exports. In this connection, the recognition given by the World Bank to the damaging effects of the delay of the wealthy nations in dismantling discriminatory trade barriers deserves our great appreciation. And for external debt management, official development assistance plays a vital role, with its relatively more favorable terms. . . .

As to the political commitments themselves which could be made, some gnawing questions will have to be clearly answered:

  • —Is the 0.7 per cent target really commensurate with the massive job to be undertaken?

  • —If what we seek is the transfer of real resources, should not the target be defined net of interest payments?

  • —Would it be wise, in terms of eliciting the desirable response of the creditor countries, to envisage putting a certain degree of backbone into the political commitment?

As to the distribution of official development assistance among developing countries, the latter as a group are aware of the particular problems of what have been called the least developed countries. The developing countries have already given concrete evidence of this awareness by agreeing unanimously that within the link system, there should be preferential treatment for that particular group of countries. But help for the least developed countries must not be achieved by mechanical cutoff points for the less unfortunate ones.

Moreover, as has been said, official development assistance, at the base of the financing arrangements related to a country’s absorption of real resources, can be a means of creating conditions for actual or potential access to international capital markets. In this way, there is a saving on the amount of official development assistance needed to take care of the financing of a given level of the transfer of real resources to the developing countries as a whole. . . .

Statement by the Governor of the Bank for Belgium—Willy De Clercq

I should like first of all to thank the Kenyan authorities for the warm welcome extended to this assembly. To Mr. Witteveen I would convey our very best wishes, for himself and for the organization he has been called upon to direct in particularly difficult circumstances. I also wish to express once again on this occasion our gratitude to Mr. Schweitzer for the eminent services he has rendered the international community for the past ten years.

Last year at this same time many of us expressed the hope that an agreement on the important elements of the reform might be forthcoming in Nairobi. We must note that this is not the case, even though real progress has been made and various options for working out a new system have been carefully defined by the Committee of Twenty.

At this point, it must be said, the responsibilities lie at the political level. In this connection I am glad that when the Committee of Twenty met here in Nairobi we set ourselves the goal of bringing our work on reform of the international monetary system to a successful issue by the end of July 1974.

I should like to concentrate today on three questions: the main components of the reform, regarding which there are divergences of opinion; the place of Europe in the new monetary system; and finally, the role of the World Bank.

Reform of Monetary System

1. The exchange rate system

Although we have adopted the “fixed but adjustable exchange rates” formula, it is obvious that we are not yet in agreement on the degree of flexibility to be incorporated into the new system.

To tell the truth, we are afraid that after having experienced a system in the past which at times, it must be admitted, was too rigid, in which fixed exchange rates were sometimes confused with immutable exchange rates, the new system may incline too much to the opposite direction, that of being too flexible. In particular, if the right to float were to be generally recognized in the new system without any limitation being applied, as regards either duration or the nature of the exceptional conditions deemed to warrant it, the very principle of “fixed but adjustable exchange rates” would become devoid of meaning.

We have had ample experience of this free floating system over the past few months. As the Annual Report of the International Monetary Fund cautiously puts it, recent experience makes us wonder to what extent floating rates do reflect the underlying trends and, therefore, lead to a pattern of exchange rates corresponding to the actual situation.

Our reply to this is that floating rates seem to us to be a very poor reflection of the fundamental equilibria. Floating rates are not only influenced by commercial transactions, but can also be affected by sudden speculative movements of capital. Is it reasonable that such speculative movements should influence the flow of international trade, and hence the jobs of millions of persons throughout the world? We are convinced that it is not. The events of the past few months, moreover, have speedily shown us to be right. As a result of speculative movements and noneconomic factors, the dollar has become distinctly undervalued. Such a situation would not be acceptable for a long period. There is no need for me to add that floating seriously hampers industries in setting their production programs, because they do not know what the supplies they have to purchase abroad will cost or at what price levels they will be able to sell the manufactured products. The same applies in the case of over-frequent parity changes.

2. The adjustment process and convertibility

Allow me to recall here the significance which we attach to the convergence of views which we felt we noted at the end of last July in Washington. As we see it, a collective judgment of the International Monetary Fund is needed to establish the necessity of an adjustment. We are, however, prepared to grant a leading role to the reserve indicator in this global judgment. As regards pressures, these should only be applied to countries which have not aligned themselves on the recommendations of the International Monetary Fund, whose intervention should constitute the first step in the adjustment process.

We are in favor of strengthening the powers of the Fund to make the adjustment system stricter and to reduce the scale and duration of imbalances; we also believe that the convertibility system in connection with the settlement of deficits should be equally strict.

For the countries of the European Community, convertibility is one of the essential matters and we regret that not much progress has been made in this field to date. Our aim is that all countries should settle their deficits in the same way and that there not be unforeseeable variations in global reserves on account of the deficits of certain Countries, as has been the case in recent years. This situation constituted the chief deficiency of the old system and contributed to the world-wide inflation we are now experiencing. It would be inconceivable for the new system we are setting up not to include provisions against the errors and excesses of the past.

We are ready, on the other hand, in the interest of symmetry, to envisage constraints that could be placed on excessive creditors. These could possibly be required to deposit their excess reserves with the Fund. However, this desire for symmetry should not be taken so far as to relieve debtor countries of their obligations in regard to convertibility.

Finally, a stricter adjustment and convertibility system does not exclude certain forms of flexibility in the system, such as international credits. Such flexibility will moreover be necessary if a country in difficulties should find it necessary to have recourse to floating.

3. Primary reserve assets: a third essential matter

The aim is that the special drawing rights should become the main reserve asset of the reformed system. Obviously, we must not disregard the considerable difficulties in the way of achievement of this aim. As we see it, the central role of SDRs implies in particular the existence of a strong International Monetary Fund capable of enforcing a certain discipline in balance of payments. We are far from that at the moment. In this connection it seems important to us that a formula should be found which could strengthen the power of the International Monetary Fund and thus give it greater authority.

For us, the essential condition for placing SDRs effectively at the center of the system is that they should be made attractive. Two formulas are compatible with this principle. In the one, the value of the SDR is linked to a strong currency or a group of strong currencies. If the SDR is strong, its interest rate could be relatively low. In the other, the capital value of the SDR is linked to that of an average of currencies. In the latter case, the interest on the SDR would be in line with the market rate. We prefer the first formula, which would ensure that certain currencies do not appreciate vis-à-vis the SDR, occasioning periodical disruptive conversions of SDRs into other currencies. We must ensure that the SDR does not in the future run into difficulties like those besetting us now, through lack of a sufficiently clear and universally accepted set of regulations.

A third formula has been put forward in certain quarters, that of an SDR not linked to a group of currencies whose value would be determined by the extent of revaluations and devaluations and which would only carry a low interest. We consider this formula, which implies a weak SDR, as entirely incompatible with the aim of making the SDR the center of the future system.

The other important matter is the role of gold. Any redefinition of this role must be based on the principle stated above: that the SDR must become the center of the system and that there can be no question of introducing a new form of gold-paper and gold-metal bimetallism, in which the SDR and gold would be in competition.

The role of gold will therefore have to be gradually downgraded. This will not be easy, knowing the importance of gold in the reserves of numerous central banks. This downgrading can only be gradual, also, in order to enable the SDR to progressively fill the central role assigned to it. And it goes without saying that this reduction of the significance of gold can only be effected in practice if the SDR as created is an attractive asset to hold.

4. The question of how the developing countries’ interests should be taken into account in the reform

One of the problems arising here is whether or not we should create a link between SDRs and development aid.

Our position on the subject is well known: we are in favor of a link achieved through the intermediary of the international development agencies. Our main argument in favor of the creation of a link is that transfers from developed to developing countries are manifestly inadequate. The net amount of public aid for development expressed as a percentage of the gross national product was 0.34 per cent in 1972. This, then, represents less than half the objective of 0.70 per cent of gross national product set by the United Nations and officially or unofficially accepted by most of the developed countries. In this respect, I should like to emphasize that Belgium, at present, has contributed 0.58 per cent, as a result of which it comes third among the countries of the Committee on Development Assistance.

To those who have expressed fears about the effect that the link may have on confidence in SDRs, we would reply that, in our view, the link in no way endangers the SDR system, provided it is a system with teeth. The greatest threat to confidence in SDRs, we believe, lies not in the link but in a definition of the SDR which is lacking in consistency. In other words, if the SDR is sufficiently attractive it will elicit confidence, and the fact that some SDRs are allocated to agencies such as the World Bank is not likely to detract from that confidence.

I will conclude this first section of my remarks by stressing that it is essential to pay greater attention to the internal coherence of the new system envisaged than to the position it occupies in the contingent concerns of each country. Whether our country is large or small, surplus or deficit, rich or poor, rich in reserves or lacking them, each one of us has an inestimable interest in the restoration of an international monetary order based on stability and cooperation.

Role of the European Community

We are convinced that the formation in the world of large groupings such as the European Community is not only compatible with reform but will effectively contribute to the achievement of a better balanced international monetary system than the Bretton Woods system.

It seems to us, to our regret, that the discussions in the Committee of Twenty—both at the Ministerial and at the Deputy level—have not sufficiently taken into account the progressive creation of integrated groups like the economic and monetary union in Europe. We realize, of course, that this European unification is not as yet an accomplished fact. But it would seem to us unwise, in a new international monetary system formulated for the long term, not to take this European monetary union, which will sooner or later become a reality, into consideration.

This would have various implications for the new system, particularly the following:

  • (1) regarding the adjustment process, in which connection it would be advisable to bear in mind the European Community as a whole and the role to be played by the European Monetary Cooperation Fund with respect to the problems of intra-European balance of payments adjustments;

  • (2) regarding settlements and convertibility, where we should be mindful of the present situation as concerns both the multiple intervention system itself and the intra-European settlements system;

  • (3) regarding capital movements, with respect to which the special links between European countries should be able to provide backing for rights, obligations, and any specific measures that may be required. . . .

Statement by the Governor of the Fund and Bank for Mexico—José López Portillo

I am the spokesman for the Latin American countries at the meeting of Governors of the International Monetary Fund. Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Peru, Uruguay, and Venezuela share the same aspirations as Kenya, this hospitable country, whose economic and social problems are so similar to those we have faced in Latin America.

It is particularly significant that this historic meeting should be held in this beautiful country, which symbolizes Africa’s efforts to build a just, modern, and balanced society.

I congratulate the Executive Board of the International Monetary Fund on the excellent Annual Report it has submitted to us and its entire staff for their work during the past year. As is rightly stated in the Report, the last few months have seen an upsurge in the level of world-wide economic activity, which unfortunately has in turn been accompanied by severe and widespread inflationary pressures, exchange crises, massive speculative movements of capital, and unprecedentedly high rates of interest.

It so happens, though, that imbalance among the powerful, unless good sense and respect for the rights of others prevail, is a propitious climate for the adoption of unilateral and arbitrary positions of force and for tensions that heap still further problems upon the already beleaguered developing world, which is not strong enough to solve them but nonetheless has good grounds for calling attention to them.

The position we state before this gathering is one inspired by the affirmation of reason, the confirmation of rights, and the quest for universal well-being.

We say farewell to our friend and distinguished international civil servant, Pierre-Paul Schweitzer, who for ten years has applied his great intelligence to the struggle to ensure that monetary cooperation becomes a rule of conduct for all nations. We welcome and promise our unstinting support to the new Managing Director, Mr. Johannes Witteveen; one of his first tasks must be to ensure that during the transitional phase of the current international monetary reform the Fund is able to study and adopt rules and working procedures that will allow it to regulate such vital areas as exchange rates, currency floats, and exchange controls, and to adopt operating procedures that will facilitate the transactions of the General and Special Drawing Accounts.

We recall that it is exactly a year ago now that the Committee of Twenty was created. It was called upon to study and submit recommendations on the reform of the international monetary system. The meeting of Governors set as its objectives the promotion of world trade, the maintenance of high employment levels, and the mobilization of resources for development, all under conditions of stability.

Latin America wishes to state most emphatically that this Committee must carry out the reform with the fullest participation of the representatives appointed by all its member countries. We reject the idea that a minority group, even within the Committee, should discuss and decide upon the substantive elements of the reform. This would be a deplorable and gratuitous rebuff to all those who expressed the desire that the monetary issues should be examined by a group representing all countries, in the appropriate international agency. In this day and age, among the agencies that hold the reins of world economic order, there is one long-standing matter that should be settled by now: the powerful nations belong to mankind and not mankind to the powerful nations.

The report by the Chairman of the Committee of Twenty indicates progress on many aspects of the reform. It is therefore possible to present to the world a clearer picture than we had a year ago, and on this we congratulate the Committee of Twenty and its Bureau. Some of the key questions have been defined and clarified, but they have yet to be decided upon. It is clearly the duty of this meeting of Governors to provide guidance so that the Committee can carry on its work. It is therefore appropriate to offer some reflections on certain worrying tendencies in the discussion of monetary reform.

One of the chief purposes of the reformed monetary system is to create a smoothly functioning adjustment process for economic disequilibria. This implies that domestic or external monetary or fiscal policy measures must be taken in good time to avert both large and persistent surpluses or deficits in external payments and inflationary or deflationary situations. The adjustment process should embody each country’s obligation not to export its problems, or rather to solve them without taking undesirable measures harmful to the international community.

We accordingly support an equitable adjustment process where the responsibility for taking steps to correct disequilibria rests on large and small alike, whether they are in surplus or deficit and whether or not they are reserve centers, and where this responsibility is not automatically triggered by the movement of one or more indicators, since although they are useful in gauging the degree of disequilibrium they cannot identify either the countries that caused it or the actual root causes themselves. This is why assessment by a committee is essential, since it is the only way to ensure that the diagnosis is accurate and the adjustment efficient and fair.

It is noteworthy in this connection that some countries or groups of countries are overemphasizing purely mechanical aspects of the system, replacing a defunct gold standard by supposedly new gold rules to be applied among themselves. They forget that the attainment of coordinated objectives in terms of full employment, price stability, promotion of international trade, and mobilization of real resources for development is more likely to come from the work, understanding, and common policies of a steering body properly incorporated into the International Monetary Fund, than from any adjustment imposed by indicators, whatever they may be, or by a lack of resources. We therefore most strongly recommend that the responsible national authorities should participate fully and at the highest level in the work of the consultative body that decides on the need for adjustment, and what countries should adjust, and that recommends the general external and domestic policies to be adopted. Naturally, it is the exclusive responsibility of the national authorities to chart and implement their domestic economic policy within the general framework of the recommendations that they helped to prepare.

We also detect undue concern to provide for symmetry for all countries in aspects of the adjustment mechanism, the pressures that trigger it, and convertibility. Unless this concern is toned down, there is a danger that it will immediately collide head-on with the hard facts of the world economy, in which asymmetry is the rule in the economic structure of different countries, in the greater or lesser degree of dependence of their balance of payments, in their exchange structures, and in their trade and capital flows. Because of this, the small and the developing countries often have to tailor their policies and measures to conform to those adopted by a particular reserve center, rather than to the position of their economies as gauged by the pertinent indicators or to the general measures dictated by the symmetry of the system.

These structural differences, the rigid dualism between the domestic and the external sector, and the specific priorities of development policies make it essential that there should be safeguards that take account of the special characteristics of the small or the developing countries.

Compulsory settlement in primary assets and the use of the reserve indicator, which signals the need to assess a situation of economic disequilibrium, are certainly instruments we agree are necessary, though not sufficient in themselves, to avoid the shortcomings which have now prompted us to devise a new monetary system. However, it would be absurd if one of the ways of achieving these objectives were to involve limiting the use that our countries make of their foreign exchange reserves in order to secure external financing for their development.

We should not lose sight of the fact that in the ten years up to 1971 the shortage of resources became worse: the transfer of official development assistance, according to a World Bank survey, declined from 0.53 per cent to 0.35 per cent of the gross national product of the industrial nations. The developing countries therefore consider it highly prejudicial that any attempt should be made to avoid the pressures of world liquidity by preventing them from using their foreign exchange balances, which are at present a supplement to the financing they receive from abroad. This explains their support for a mechanism, such as the substitution arrangements, which enables them to retain in their foreign exchange reserves sizable balances in the currencies of the industrialized countries. By the same token they oppose restrictions on the free operation of the Euro-dollar and Euro-currency markets, which supplement the inadequate financing that the industrial nations and international agencies provide for world economic development.

Notwithstanding this, we feel it is desirable for the smooth operation of the new system that central banks, in handling their official holdings of foreign exchange, should take account of these disequilibrating capital movements from one country or one currency to another.

More important in fact than measures to control the money markets is the coordination of monetary policies and the adoption of an effective adjustment system, that will avoid constant or excessive outflows of resources abroad due to current account deficits and lack of confidence in the value of domestic currencies. It is similarly a matter of priority to devise arrangements for neutralizing the risk of international transfers of the excessive foreign exchange balances at present held by the international community. We therefore consider that agreement within the Committee of Twenty on an effective system of convertibility based on the substitution mechanism has been hampered by the failure to arrive at a separate agreement beforehand on the problem of voluntary consolidation through “funding” of surplus international liquidity—consolidation, that is, which does not create additional special drawing rights which might obstruct the substitution mechanism for the new foreign exchange balances.

These issues are all of great interest to the developing countries, and we have repeatedly proposed them for discussion within the Committee of Twenty where they ought to be taken into account. However, one basic goal that has so far been totally disregarded in the study of international monetary reform is the transfer of sufficient real resources to the developing countries on appropriate terms.

The Latin American members of the Group of 24 do not visualize monetary reform as an isolated process but as a three-in-one process aimed at restructuring the bases of the world economy. To achieve this we think it is indispensable that, simultaneously and in a coordinated manner, the international monetary system should be reorganized, a mechanism should be instituted for the transfer of an adequate volume of real resources to the underdeveloped nations on appropriate terms, and arrangements should be put into effect for increased liberalization of world trade, so as to give the developing countries greater access to the domestic markets of the industrialized nations.

It is therefore impossible to accept the statement that the draft Outline of Reform presented to this meeting of Governors by the Committee of Twenty now covers the main aspects of the reform, or the assertion in the report made to the Governors by the Chairman of the Committee that the general structure of the new system has now been defined. These assertions are unacceptable to more than two billion of the world’s inhabitants, since the Outline has bypassed the problem of transferring sufficient real resources for development. The Outline refers only to the link, which deserves our full support, but which generates resources for development only as and when special drawing rights are created. Nevertheless, it is gratifying to have heard at this gathering that the majority of Governors of the industrialized countries have expressly decided to tackle this basic issue.

In other areas of international monetary reform ways are being studied in which to set up specific mechanisms to deal with their different aspects. We consider it essential to make concrete progress toward institutionalizing the transfer of real resources, both official and private, to the developing countries. The process of balance of payments adjustment among industrial nations calls for certain instruments, and we are agreed on that; however, in the case of the adjustment process between the industrial and the underdeveloped countries, an appropriate transfer of real resources for development, which for some countries represent a large proportion of their foreign exchange receipts, must form an integral part of the new system. How it should be integrated is a question that should be properly examined within the Committee of Twenty.

For Latin America, a monetary reform that does not provide for the transfer of real resources to the developing countries is unacceptable. For Latin America, an adjustment process that does not provide equitable treatment for the countries which are members of the community, taking account of the individual characteristics of those countries, is unacceptable. For Latin America, a system of convertibility that unnecessarily limits the free management of international reserves, and the opportunities for the developing countries to use them to further their growth, is unacceptable. For Latin America, the desire to institute consolidation mechanisms that will lead to overcreation of special drawing rights and thereby restrict our countries’ participation in the creation of new liquidity is unacceptable.

We face the challenge of building a new economic order based on a code of conduct that clearly and freely defines the rights and duties of nations in the fields of currency, development financing, and world trade, and that will enable us to overcome poverty. This will not be achieved as long as the decisions continue to be taken exclusively by the major economic powers against a background of circumstantial problems and under the constraint of short-run cyclical considerations.

The Committee of Twenty which we set up is a forum for multilateral discussions and for joint decision making with respect to the world-wide financial problems we face. This forum provides for due weight to be given to the interests of all countries and for a proper balance between the solution of cyclical problems and the solution of long-term problems in the world economy. Latin America is determined to live up to its full responsibility in playing its part in the process of building a new economic structure that will support a better world for all mankind.

Statement by the Governor of the Fund for Togo—Edouard Kodjo

It seems that it is humanity’s constant fate to be forever torn between fear and hope.

We are aware more than ever today of the truth of such a statement at a time when the uncertainties which weigh on us, far from lightening, do not cease to multiply, even although there are now glimmers of hope on the horizon which, we believe, presage a less troubled morrow.

In this connection, these annual discussions of the International Monetary Fund and of the World Bank Group are taking place at a turning point when everyone is acutely aware of the dangers of the situation which still prevails and the need to find a truly valid solution to the troubles besetting the international community.

More than all the others, the poorer peoples feel the fear; more than all the others, they want to believe in hope.

It is on behalf of these peoples that I have the honor to speak.

In my capacity as Chairman of the Council of Ministers of the West African Monetary Union formed by the Republics of Dahomey, Ivory Coast, Niger, Senegal, Togo, and Upper Volta, I should like first of all to assure the Government and people of Kenya of the feelings of gratitude, pride, and admiration we experience in considering their achievements and the quite simply exceptional organization of these meetings which are being held for the first time in our continent. There is no better way of bringing honor to Africa, demonstrating its ability to chart and follow its own paths to development, affirming its maturity and proclaiming its serenity.

The contrast is then striking between the brilliant African success which today serves as the backdrop for our work, and the—unfortunately most modest—consideration given to Africa in the decisions of our institutions and those of our committees, whose past activity we are required to assess here and whose future actions we have to orient.

Cooperation between nations has no point unless it enables the less well endowed among them to make themselves heard, not simply to provide an audience, still all too often a sparse one, for their spokesmen, but to ensure that their living conditions, their particular needs are taken into consideration by the nations that are more powerful because they are more fortunate.

Who among us would dare to assert that this was how it was, during the past two years, in the field of international financial cooperation, which is that of our institutions?

It will, therefore, be easier to understand why we, more particularly than others and perhaps more intimately, oscillate between fear and hope.

For it is becoming increasingly clear both at the level of the Fund and at that of the Bank Group, that while the foreseeable development of policies and institutions may lead to interesting prospects for our countries, the present situation and certain trends already becoming perceptible cannot but be sources of serious concern for us.

This is the case with the international monetary system, on the one hand, and with the development policy of the Bank and its affiliates, on the other.

At the level of the international monetary system, the current prospects of reform do not lead us to forget the realities of today.

(a) The spectacular recovery of the economies of the highly industrialized countries over the past year, with the maintenance of a high level of activity and a very high growth rate (7 per cent on average) has been accompanied by a world-wide rise in prices which the uncertainty generated by the international monetary situation has only aggravated. Now the fact that the developing countries have to purchase practically all of the capital goods they need is well known. This means that our countries have been particularly hit by the staggering rise in import prices, made worse by the higher freight and insurance rates. Economies which had previously been relatively stable have become zones of imported inflation. The developing countries, which are not in a position to do much to counter this form of inflation, are thus bearing the still disastrous consequences of a situation which they in no way helped to bring about.

This imported increase in price components is aggravated by a hardening of the terms for obtaining external capital, for which the interest rates at international level are fixed by the big industrial countries according to considerations of their own alone.

The rise in interest rates has not only put up the cost of external loans, but has also caused multinational enterprises to hesitate about helping with the financing of their branches in developing countries; and what is more, it has encouraged holders of funds in those countries to place them outside in the most highly industrialized areas, thus causing an unnatural flow of capital from the countries with greatest need of it to those which should need it least.

The simultaneously induced and speculative rise in commodity prices cannot in any way be considered as compensation because, by the same token, this rise is temporary and should be corrected, as is frequently forgotten, to take into account the fall in value of the quotation or contract currencies.

The inability of countries such as ours to avoid the harmful effects of monetary fluctuations is even more apparent in the consequences of such fluctuations on our external indebtedness. The periodical modifications of parities and the disordered variations in exchange rates resulting from the “general float” system are all factors which aggravate our external indebtedness.

It seems apposite to note here that while it can be considered normal to require the developing countries to bear the variations in currency exchange rates in respect of loans freely contracted by them in the capital market, the same cannot be said with regard to loans granted to them, in a currency not of their choosing, by international institutions whose very purpose is to assist them and who, by the volume and diversity of their operations and their technical capability, are in a better position to limit and bear exchange risks.

Hence the present functioning of the system raises serious fears for our countries, but we retain the hope that the reform of the international monetary system will enable us to base our economies on more stable and sound foundations.

(b) Without judging in advance the results that will finally be achieved, a word of appreciation will not be out of place for the work of the Committee of Twenty and its Deputies.

At this stage, it appears opportune to lay particular stress on certain points which, for our countries, are crucial.

To begin with, no one will be surprised if countries such as ours, however fundamentally attached to the Bretton Woods institutions, refuse to support reforms that would not take any account of their deep aspirations. Cooperation presumes that at all times the interests of all be considered in the most strict fairness and that reciprocal concessions can be made if necessary. Taking this line, we consider that the new monetary order should:

  • —lead to a system of parities that are fixed but adjustable within reasonable limits which, while abandoning the extreme rigidity of former years, would avoid the laxity of the present by stabilizing the exchange market. The present system of floating which seemed to hold promise for a moment is now clearly outdated; in the future, floating should only be an exceptional recourse authorized by the Fund alone.

  • —return to the principle of convertibility, an obligatory, multilateral and symmetrical convertibility which would be imposed on all currencies widely used in international transactions once a flexible consolidation system for dollar balances is set up.

  • —lead to mechanisms in which SDRs would have a central role as reserve assets while the monetary role of gold would be steadily reduced and finally eliminated.

  • —establish, and this is of primary importance for our states, a link between SDRs and development financing. A system of substantial allocations of SDRs leading to net transfers of resources to developing countries must be one of the foundation stones of the new monetary order.

This transfer of resources would perhaps be such as while perhaps not to solve, at least to attenuate the problems of the President of the Bank, who has to beg without ceasing for the funds necessary for the continuation and expansion of the work of the institutions of which he is in charge.

In this field of the development of multilateral aid we again find fear and hope. . . .

These are the concerns which weigh on us in the midst of this transition period when we are called upon to forge a new and lasting order. Without falling into naïve optimism, while avoiding the trap of unjustified pessimism, the African countries feel that the time has come when we shall see great changes. They wish to take part at all levels in the different consultation and decision processes, particularly in times of crisis. They want to assist actively by means of their qualified manpower in the higher management of our common institutions and believe they should receive more sizable assistance from the international community for the development of their economies.

Need I add that they are counting in particular on Mr. Witteveen, whom we all welcome and all congratulate on his election, and whom we wish success in the measure of our expectations. At the same time, we would voice our very special appreciation of his valiant predecessor, Mr. Pierre-Paul Schweitzer, who gained all our hearts by his intelligence, his humanity, his courage, and his sense of fairness.

It is up to men of courage to break the fetters of fear in order to release hope. May we work together to be worthy to be ranked, by future generations, with such men.

Statement by the Governor of the Fund and Bank for Australia—F. D. Crean

It is a sign of changing times and of changing attitudes that this Twenty-Eighth Annual Meeting should be held in Africa. The Government and people of Kenya have made this event possible, and we thank them sincerely for their warm hospitality.

The President of the World Bank has referred to a gross deficiency in the flow of official development assistance to developing countries.

I must make it quite clear that my Government, for its part, has no intention of slackening its aid effort. We have never believed overmuch in aid targetry. It is not easy to devise any completely satisfactory statistical method of measuring aid effort. In any case, we have always believed in performances rather than promises. But I do record here that we have exceeded the financial aid target of 1 per cent of gross national product in two of the last three years, and we are very close to achieving the official aid target of 0.7 per cent of gross national product. Our official aid figure in 1972 was 0.61 per cent, and we have promised to reach 0.7 per cent. This we will do. We have started off well enough in the present Government’s first budget with a 19 per cent increase in the official aid vote.

Mr. McNamara has listed as a second major difficulty the increasingly severe burden of external debt on developing countries. This is a difficult problem. Private capital flows finance an important part of the flow of resources from developed to developing countries—somewhere around one half. It is an inevitable consequence of continuing net private capital flows to developing countries that their external debt should rise.

One thing governments can do, however, is ensure that they themselves make no more than a minimum contribution to the build-up of external debt of developing countries. This they can do by giving as much of their official aid as possible on grant and grant-like terms. In Australia’s case, I am happy to say, virtually all our aid has been supplied on a grant basis.

The real problem about rising debt is not so much that it is rising as that the developing countries have difficulties in servicing it. In particular, they have difficulty in expanding their exports to developed countries. Without that expansion, it is fair to say that the servicing will not take place. It is one of the paradoxes of the modern world that developed countries lend to developing countries and, at the same time, maintain all sorts of barriers against their trade and so prevent them from acquiring the means to repay.

Such matters have been taken up in principle in the ministerial discussions on trade in Tokyo. The link between the monetary and trade fields has been fully recognized there, and due regard has been paid to the interests of developing countries. Pending completion of these trade negotiations, however, it is up to all of us to do what we can in practice to facilitate the exports of developing countries.

Australia, for its part, announced in July 1973 a new preferential scheme involving periodic cuts in duties on imports from developing countries. I would also point out that these preferential cuts will be superimposed on the 25 per cent cut in general tariff rates on imports from all countries announced in August 1973.

Taken in conjunction with the two upward revaluations of the Australian dollar in the past nine months, conditions should be more favorable for developing countries to export to Australia than in any previous period I can recollect. To round off our program for facilitating imports from developing countries, I should mention that a new facility is being set up to give developing countries practical help in extending their markets in Australia and making the most of the concessional treatment available to them. My Government is sincere in its wish to see a healthy expansion of imports from the developing countries.

The process of facilitating the growth of developing countries has many aspects. I have been mentioning a few raised by Mr. McNamara. The economies of the developing countries can be equally affected, however, by matters coming within the field of responsibilities of Mr. Witteveen.

Levels of world economic activity will have an important bearing on the ability of developing countries to grow and prosper. The industrial countries have been expanding rapidly in recent times, and world trade has been growing.

This has had favorable effects for developing countries in the shape of a healthy demand for many of their exports of commodities and raw materials.

It has also had unfavorable effects, however, in the boost which it has given to the forces of inflation.

The developing countries lack the sophisticated techniques available to the industrial countries for offsetting to some extent the adverse consequences of these price rises. It is clearly a matter of importance to all that the developed countries succeed in their efforts to moderate the forces of inflation. Inflation is a problem which concerns us all, though each of us has to tackle it primarily by taking action within our own economies.

We are all equally concerned with the other major issue which will be occupying Mr. Witteveen in the months ahead, and that is the issue of monetary reform. It is noteworthy, I believe, that this community of interest has been confirmed through the creation of the Committee of Twenty on which both developing and independent developed nations like Australia are represented.

In some respects, the Committee of Twenty has made significant progress. Certainly I believe this is so in regard to discussions on the adjustment process.

Australia has always argued that, as in the case of inflation, our first efforts to deal with payments imbalances and monetary crisis must start at home. We have argued that if countries in surplus would only see the futility of building up unwanted reserves, and if deficit countries would only recognize the dangers of the excessive creation of liabilities, many of the problems which beset us would diminish to manageable proportions.

Australia has been prepared to follow its own advice. We have revalued twice. We have placed severe controls on capital inflow. We have had a 25 per cent across-the-board tariff cut.

Our only reservation as regards the treatment of the adjustment process in the First Outline of Reform relates to the use of reserve indicators. We do not believe movements in reserves should be regarded as an automatic indicator of the need to apply pressures on member countries. We have the gravest doubts about the efficacy and wisdom of such a course of action, and the matter remains unresolved, as the Outline indicates.

The other area where there is still a good deal of uncertainty is the area of asset settlement. We have not attached the same importance to this aspect of monetary reform as some other countries. I will not go into the details of this rather complicated aspect of the reform discussions here except to say two things.

The first is that Australia is vitally concerned when it comes to the question of some kind of consolidation of existing currency balances. Australia holds a good deal more of its reserves in the form of currencies than most other developed countries, and we therefore have more at stake. We have always been steady holders of currencies, and we have never contributed to speculative runs against currencies by moving official balances in times of stress. We have noted what the U.K. Chancellor of the Exchequer had to say about the adoption of a code of behavior in respect of reserve management, and we think this could be a constructive approach.

The second is that Australian willingness to participate in an asset settlement scheme, and we would wish as far as possible that it should be a voluntary rather than a mandatory scheme, must depend in the final analysis on the status of the reserve asset—the SDR, which we are being asked to accept. Australia, in a spirit of compromise, would go along as far as possible with the general consensus. But if the SDR is to be the center of the system, it must be as attractive as, or more attractive than, any alternative reserve asset. If the SDR is weak, asset settlement will break down.

The developing countries have suggested that the monetary system of the future should be designed in some way to benefit directly the interests of developing countries. I understand this point of view, and I am sure that ways and means can be found of achieving this. Our record shows we are in favor of additional transfers of resources to developing countries.

One proposal designed to assist developing countries directly is the suggestion that there should be a positive link between the issue of SDRs and aid for developing countries. The problem here is that the SDR has to be accepted by the world as a whole as a reserve asset of the first quality. There are legitimate fears that a link will introduce other than monetary considerations into the question of the volume of issue and the valuation and rate of interest of SDRs. We do not have a closed mind on this matter. We are neither for nor against the link. We are very anxious that the operational aspects of a link should be examined properly along with other aspects of reform in order to ascertain whether some form of link can be devised which can safely be accepted from the point of view of monetary reform. We do wonder whether it might not be better to establish the SDR first, as the center of the monetary system, and when the SDR is working effectively to consider then the adopting of a link.

May I conclude by saying that I welcome very much the addition of the Bahamas and Romania to the list of Fund members. The Bahamas is particularly welcome to us as a member of the Commonwealth. Romania is equally welcome to us as a member with a different background and experience. The Fund can only benefit from such a broadening of membership. We have to remember that one third of the world is outside the Fund.

Statement by the Governor of the Fund for Nigeria—Alhaji Shehu Shagari

Mr. Chairman, I wish first to join you and other speakers in congratulating our new Managing Director, Mr. Witteveen, on his appointment. I thank him for his well-balanced address and wish him well in this challenging assignment. . . .

I will now turn briefly to the International Monetary Fund. Our views on the basic essentials of a viable international monetary system have been expressed over the years in several forums and are on record. In addition, we are associated with the views on the reform system expressed in the past few days by the Commonwealth Finance Ministers, the Group of 24, and the African members of the Board of Governors. We only hope that by July 31, 1974, agreements on all the essentials of a reform system will have been reached. Nigeria—and indeed, Africa—is willing to contribute its share of the political will and vision necessary to make July 1974 a memorable date in monetary history.

Continuing international monetary crises cause particular difficulties for all developing countries. We continue to face the worst combination of factors, among which are drought, floods, imported inflation, unstable trading conditions, and depreciating foreign exchange assets. Even petroleum exporting countries like Nigeria have not escaped the adverse effects of these developments. The benefits of the price increases that the members of the Organization of Petroleum Exporting Countries squeeze out of the petroleum importing countries as compensation for exchange rate fluctuations are wiped out by inflationary forces before we secure them. From our point of view, these factors make it imperative for the international community to reach an early settlement of the monetary question.

In conclusion, Mr. Chairman, I would like to join you and other distinguished Governors in expressing our appreciation to the Government and people of Kenya. The excellent facilities which they have placed at our disposal are and will remain a source of pride to Africa.

Statement by the Governor of the Bank for Malawi—D. T. Matenje

It gives me great pleasure to address this august assembly today here in Nairobi in the Kenyatta Conference Centre. That we are holding these meetings here in Nairobi not only demonstrates the great progress that Kenya has made since independence, it is also symbolic of the great forward strides that have been made by the new independent nations of Africa since the middle of this century and particularly during the last 10 to 15 years. I wish to express to the President and to the people of Kenya my gratitude, and that of my delegation, for the warm hospitality and the pleasant and efficient arrangements for our sessions with which we have been received in this thriving capital.

It gives me no less pleasure to join my fellow Governors in extending, on behalf of my country and my delegation, our very warm welcome and congratulations to Dr. Witteveen on his election as the Managing Director and Chairman of the Board of Executive Directors of the International Monetary Fund.

Next, I wish to express our thanks to the Executive Directors for their excellent Annual Report on the past year of the Fund. The events described in the Report have been dramatic. We all have felt the impact of the powerful combination of the strong economic expansion of real output which took place in all industrial countries at the same time; the rapid inflation that accompanied it and still threatens to spread despite the efforts made so far to contain it; and the profound monetary unrest which has deeply disturbed international economic relations. There is no scarcity of analysis and statements on these developments, and I would wish to focus on only two topics.

The Executive Directors observe that the present situation is characterized by a “lack of firm foundation in an internationally agreed set of rules or code of conduct” and that it is therefore “not consistent with one of the prime conceptions in the founding of the Fund—that exchange rates are intrinsically a matter of international concern.” We very much agree. However desirable increased flexibility is in the reformed system, this “prime conception” will remain indispensable. It is not too much to say that the most recent experience has shown us that in these matters neglect of it is likely to be far from benign. Malawi has always accepted and continues to accept the sacrifices which are unavoidable in reaching the goal of internationally arrived-at agreements whose benefits we believe will outweigh the costs of essential compromises.

This leads me to my second point. We welcome the special attention which the Executive Directors have given to the impact on the developing countries of recent international monetary development. The added uncertainties and the additional cost to us of adaptation to the monetary crises which were not of our own making have become a burden on our countries in addition to the enormous strains which our efforts toward rapid and sustainable development have been imposing on our people.

This has been especially true for countries like Malawi, which had achieved domestic economic stability during the process of development, which had succeeded, that is, in avoiding threats to this stability of their own making. We lack the options, open to more developed countries, of forward hedging against the erratic exchange rate movements elsewhere, and of frequent rate changes of our own, without upsetting domestic and trade patterns.

The current widespread inflation has compelled us to import the instability which with great effort we had avoided in the past. Forced adjustments not commanded by our own requirements threaten the steady progress of our development effort.

It is therefore with growing anxiety that we observe the protracted negotiations for the reform. No doubt the Committee of Twenty is working with intense labor to bring these negotiations to a successful conclusion. The issues of the reform are of enormous complexity and we congratulate the Committee on the success so far achieved. But we cannot but emphasize the pressing urgency of completing this work, which we feel to be of special importance for developing countries like Malawi. . . .

Statement by the Governor of the Bank for Greece—Constantine Michalopoulos

It is a challenging experience to address, as I do for the first time, this assembly of the top financial leaders of the world community.

In the first place, I would like to stress that it is with particular interest that we heard the address to this year’s Annual Meetings of the illustrious and most respected leader of this rapidly developing and beautiful country, President Kenyatta—an address touching not only upon the major monetary and economic problems, but especially on the way these problems affect the developing countries.

On behalf of my delegation, I wish to join previous speakers who have expressed satisfaction at the accession of the Bahamas and Romania to the Bank and the Fund. I also wish to thank wholeheartedly President Kenyatta himself and the Kenyan authorities for their warm welcome and hospitality in holding our first gathering in Africa. We see this, our gathering here, as a tangible symbol of the growing importance of the African continent in world affairs and, more particularly, as a manifestation of the fact that this country, Kenya, is an expanding center of international conferences.

The relationship between my country and the peoples of Africa dates back to the dawn of history. Herodotus, the Father of History, left us an imaginative description of Africa in his era. Since then, the close bonds of friendship and cooperation between the people of Greece and the peoples of Africa have steadily gained in strength.

Greece has entertained with the African peoples traditional bonds of friendship and affection. This friendship and cooperation have been and are being expressed in the way in which Greeks, some of them established in Africa for generations, have always participated in the progress, in the endeavors, and in the very life of the countries where they reside—their second homes. They have struggled and are struggling hand in hand and in a brotherly manner with the peoples of Africa, of which they consider themselves an integrated part, so that independence, so dearly attained, may be fulfilled in all its aspects.

It is significant that our deliberations are held, at this critical juncture of the world economy, in a developing country and in a continent where millions of people face hardships and deprivations, and are striving earnestly for personal fulfillment. My thoughts turn also to the human sufferings during the recent great drought in West Africa and the necessity for the international community in helping out the stricken areas.

We have now reached the stage where a number of decisions should be made in allocating new resources in different ways and in discontinuing old patterns of distribution that contain the seeds of resentment and social unrest. The reluctance of countries to accept limitations on sovereignty is not, of course, confined to the monetary sphere. In a situation, however, of recurrent conflict of the rules of the International Monetary Fund with what members regard as vital national interests, we need the courage and the political will to accept a minimum of discipline and the limitations which may lead to a new and durable monetary order.

During the recent GATT meeting in Tokyo, we underlined that the question of international monetary stability is closely linked with the issue of world trade and its further liberalization and expansion. The efforts in the spheres of both money and trade are parallel and aim, in the last analysis, at common objectives: the establishment of a balanced and sustained world economic growth through the solution of these two most sensitive and baffling of problems—the maintenance of free and expanding trade among nations and a better functioning of the exchange rate system.

In his opening address Monday morning, our Chairman reminded us of the sense of urgency in the task of the Committee of Twenty. It is therefore necessary that their work be accelerated so that the issues of the international monetary system may be settled by the time set in their latest communiqué.

In taking note of the First Outline of Reform, I wish to endorse on behalf of my delegation Mr. Wardhana’s report and the future program for work of his Committee and their Deputies with regard, apart from the problems of adjustment and convertibility, to the various other important but unresolved issues of the reform. I wish to express the earnest hope that a final text of a new monetary system will be approved at our next Annual Meetings.

It is not my intention to go into a detailed examination of the draft Outline of Reform nor to identify the major issues for decision. But I would like to stress that a reformed system, while benefiting all nations, should take due account of the special circumstances and needs of the developing countries, and especially the least developed among them. These countries struggling to attain decent standards of living are much more exposed to all sorts of risks and uncertainties. It is essential, therefore, that appropriate safeguards for their protection should be embodied in the new arrangements, ensuring them also of an increase in the flow of real resources. The time has come for the establishment of a link between the allocations of special drawing rights and development aid. While we agree on the necessity of this link, it is our point of view that the amount of SDR allocations should be determined solely on the basis of global liquidity requirements, in order that the SDR would remain the most important international asset and be an effective instrument of control of world liquidity.

It is clear to us all that agreement on an effective reformed system is of the utmost importance. The monetary upheavals the world has recently experienced are, more than ever, pointing to the necessity of a better coordination of national economic policies within the framework of the international payments mechanism. What I have in mind is the lack of reconciliation of domestic policies aiming at such targets as economic growth, employment, price stability, and external payments equilibrium. As we all know too well, the absence of such reconciliation has resulted in a world-wide price inflation and in damaging payments disequilibria. In this connection, one should perhaps not forget that the small countries, and especially the developing ones, have suffered losses for which they are far from responsible. As it is said in the Fund’s Annual Report, and I quote “a change in the relationship between the currencies of major countries might have as a consequence direct changes in relationships among the currencies of a large number of members.”

At this point, allow me to express the belief that all efforts to establish a monetary system which may reflect accurately and serve justly the needs of our community largely depend for their success on the power and efficiency of the institution which Professor Witteveen has been unanimously elected to head.

In this context, I wish to extend my warm congratulations to Professor Witteveen, whose abilities and talents are known to all, as Managing Director of the Fund. I would like to assure him of our trust and confidence while he is performing this high function. . . .

It is our sincere hope that these meetings will contribute effectively to the establishment of a new sound and durable monetary order, which in the last analysis is an important prerequisite for the safeguarding of economic, and therefore social, balance in the world, on which peace itself rests. I can assure you that this is the spirit in which my delegation is committed to work.

Statement by the Governor of the Bank for Burundi—Joseph Hicuburundi

As I rise to address this august assembly, I should first like to express my most heartfelt thanks to the Kenyan authorities and to the entire people of this country for their magnificent and kind hospitality to us. One cannot but admire the impressive efforts they have deployed to welcome to their beautiful capital this first meeting of our institutions to be held on African soil and to ensure the full success of our work. The extent of what they have achieved in so short a time has made of what could have initially seemed like a gamble, a matter of great and legitimate pride for all Africans.

I should also like to express our appreciation of the former Managing Director of the International Monetary Fund, Mr. Pierre-Paul Schweitzer who, for ten years, and often under trying conditions, presided with great tact and competence over the functioning of that noble institution. I also want to take advantage of this opportunity to welcome the new Managing Director, Dr. J. Witteveen. It is my earnest desire that he shall meet with much success in the exacting task he is assuming of directing the Fund at a time when it is engaged in a transition which has to result in a new monetary order. . . .

Located in the heart of Africa, with no outlet to the sea, Burundi is one of the world’s 25 poorest countries. The average income of our population is below the US$100 mark. Our resources are extremely limited and our degree of industrialization inadequate. We are therefore one of the many countries making up the Third World, that Third World which Mr. McNamara has defined as some hundreds of millions of persons who are not only considered as poor in the statistical sense but also undergo daily privations which erode their human dignity to such a point that the statistics cannot register it.

This brief summary of our day-to-day cares will show why we attach so much importance to the work of these meetings. For we know that this forum constitutes an open window on the world, as for those whose voice and significance on the international political stage are small, it provides the opportunity to endeavor to attract the attention of the world to the enormous problems assailing us. . . .

. . . We want to see the existing mechanisms perfected and made more flexible in such a way that they will allow a better distribution of financial resources in favor of the particularly unendowed countries such as ours, and this without adding to the debt service burden. For over recent years the external debt servicing burden has increased twice as rapidly as the export earnings of the underdeveloped countries. Now, if the lending terms harden, there will be no way out. We would therefore suggest to the developed countries that they should improve the terms and make more flexible their procedures regarding development aid in order to approach the debt problem in a new way that will be both more generous and more realistic.

The less advanced countries, and among these, the landlocked countries, request special consideration with provisions that will take account of their low incomes, on the one hand, and their disadvantageous geographic position, on the other. I do not feel that this must be classed as charity, but rather as an act of humanity the purpose of which, modest but significant, would be to enable the Third World to rise from all-pervading destitution to tolerable poverty.

We still believe that one of the means for facilitating this relative improvement would be to find an equitable and lasting solution to the already extensively discussed problem of commodity prices. These prices would have to be fixed at a level that would allow the buyer a reasonable profit while ensuring adequate remuneration for the producer.

Moreover, a leitmotiv running through all the arguments in favor of development is the speeding up of industrialization, which will enable us to reabsorb our unemployed, to become competitive on world markets with products incorporating a higher value-added component, and to improve our balance of payments by means of higher foreign exchange earnings and correspondingly lower external expenditures. Now, in this field, one of the first initiatives to be taken by the developed countries should be to do away with the discriminatory measures taken to date in respect of manufactured products from Third World countries. Mr. McNamara has placed special stress on this idea, stating that there is no valid economic reason for the developed countries to fear either the economic expansion of the disadvantaged countries or the appearance of new currents in the international trade in manufactured goods.

On the economic plane, Africa includes a certain number of countries among the smallest and poorest in the world, for whom the problems of growth are particularly serious. Now, current trends, if they are confirmed and continued, will push the development of the Third World to the back of the stage as regards general policy decisions taken at international level. True, the global statistics show that the developing countries have succeeded in slightly accelerating the growth of their national incomes: but this improvement—besides relating primarily to the countries which produce raw materials of strategic importance such as oil—has in no way reduced in absolute terms the gap separating the developing ones, because in the countries which are still in the early stages of their development the annual increase in per capita income has not even reached one dollar.

When the goals to be achieved during the Second Development Decade were fixed, the developed countries stated that the external aid to be provided between now and 1975 in the form of public development aid would amount to 0.7 per cent of their gross national product. Now, and I am quoting Mr. McNamara, for the first half of the decade this percentage has been of the order of 0.35 per cent, i.e., half of the target set. Does this mean that the 0.7 per cent goal was too ambitious? Far from it, if one considers the continual increase in the global incomes of the developed countries.

The development aid effort on behalf of the poor countries, and particularly the poorest among them, has not been effective, not because of lack of goodwill to come to grips with the problem, but because their appeal was not sufficiently heard.

We are aware of the fact that there is no miracle solution. Even if the commodities produced by the underdeveloped countries were to obtain extensive access, at really good prices, to the markets of the developed countries, even if aid were to reach 1 per cent, even if the debt burden were reduced, this would not transform our countries into Gardens of Eden, but we should at least have loosened the stranglehold of crushing poverty and finally caught sight of the light at the end of the tunnel.

As regards monetary matters, you know that the uncertainty pervading the international exchange markets augurs ill for the economic prospects of the developing countries. The international monetary system is certainly in a transition stage, but right now the floating exchange rate system has not in any way helped to solve the basic problems of a reform which is both necessary and urgent.

Commissions are deliberating on this reform, as we know, and we give our encouragement to the Committee of Twenty in their search for courageous and generous solutions.

However, there are important questions that have not yet received all the support required for the implementation of an equitable, harmonious, and lasting monetary system. Such areas as the return to a universal convertibility of currencies, the consolidation of reserve currency balances, the degree of flexibility to be accorded to the exchange rate system, and the control of movements of floating capital are still shadowy and undetermined.

But there should be an end to the uncertainty hanging over the future, and we should avoid any reappearance of the recent monetary disturbances, by which the economies of our developing countries were the first to be affected. Since August 1971 these countries’ terms of trade have deteriorated, their reserves have lost their value, and the burden of their foreign debt has increased, and all these factors are additional obstacles to their chances of economic development. Just compensation should be made for what these countries have had to suffer on account of the disordered state of a system for which they are not responsible and which they cannot influence.

Another demand we must make is that the introduction of the reform of the monetary system include effective provisions such as to promote a transfer of real resources from the rich to the poorer countries in the interests of their development.

The President of the African Development Bank said in this connection, not very long ago, that any plan for monetary reform, to be acceptable, must include provisions aimed at promoting a transfer of real new resources to the developing countries.

We are gratified, therefore, that the Committee responsible for the reform has already unanimously acknowledged the principle of taking into account the interests of the developing countries. We would like to reiterate the hope, often expressed in this forum by the spokesmen for our countries, that the problem of the establishment of a link between special drawing rights and development financing will be resolved in a manner satisfactory to all. The developing countries consider it essential for this link to become an integral part of the rehabilitated monetary system.

Whether we try to define either the needs of development or the bases for a new equilibrium in the international monetary system, in both cases the necessity to improve the distribution of wealth between the developing countries and the rich ones becomes apparent.

In concluding, I would first like to remind you of the remark made in this connection by Mr. Pérez-Guerrero, Secretary-General of the United Nations Conference on Trade and Development, when he said that if prosperity is to last, it must be shared!

And lastly, it is an appeal to reflection that I would make to this august assembly. When the soil dries up and becomes barren, that is bad. But what the man of the Third World fears even more than this today is the drying up and the barrenness of hearts.

Statement by the Governor of the Fund for Argentina—José B. Gelbard

It is an honor for the Argentine delegation to be here today in Nairobi, the lovely and lively capital of the Republic of Kenya. This beautiful country has given us a warm welcome and extended its hospitality to us in the finest tradition of Africa, which displays a character all its own among the community of nations.

We offer our sincere thanks and expressions of solidarity to its President, its Government, and its people.

Speaking for the Government of the Republic of Argentina, we wish to endorse the statements made by the distinguished Governors for Mexico and Brazil on behalf of Latin America and the Philippines, in which they expressed views on various aspects of the international monetary system and of development aid, inspired by our common desire that they should be based on harmonious and just principles.

As a continental Latin American country, we are desirous of participating on a permanent basis in the highly important evaluations and decisions affecting Latin America as a whole.

Now that Argentina has entered into a new stage, its Government, elected by the free and full will of the people, considers it opportune to make known here its opinion regarding the matters currently preoccupying the international monetary community.

I should therefore like to refer to the reform of the international monetary system, to the position of the exchange markets, and to the action of the World Bank.

Our country has on various occasions expressed its interest in seeing an early and equitable reform of the international monetary system. It is essential that a new monetary order be established which, within a context of cooperation and consultation, will provide the bases for a solid and sustained growth of international transactions and full development of the productive resources of all countries.

The international monetary system is but one of the factors governing and affecting international transactions, and therefore, for the aims of cooperation and equity to be embodied in the reform, it must be a full, all-round reform. Supplementary provisions are needed in the areas of international trade, capital movements, investment, and the net transfer of resources, with special reference to access for developing countries’ products to the markets of developed countries and the setting-up of machinery to moderate the inherent instability of their external transactions.

The draft Outline of Reform presently under discussion is only the first stage of this process, but we must state frankly that, while substantial progress has been made in elucidating the difficult technical problems connected with monetary reform and in arriving at agreement on some points, we cannot be satisfied with the degree of progress achieved. The points of interest for the developing countries which have been firmly settled are few. The different aspects of the functioning of the system have been outlined, but no agreement has yet been reached on the majority of them. This being the case, we note with satisfaction the establishment of a date for implementation of the reform.

The developing countries suffer from a general shortage of external resources, which restricts the full utilization of their productive factors. We consider that there are three ways in which the new system can help to reduce this shortage of resources: (a) by facilitating an increase in our exports, for which our products will need greater access to the developed countries’ markets, together with a more efficient and equitable functioning of the adjustment process that will prevent persistent balance of payments disequilibria; (b) by facilitating the flow of capital to our countries and access to the international capital markets, and at the same time limiting disruptive movements; and (c) by establishing provisions for the effective transfer of real resources, either in the form of direct aid, credits from international institutions, or through liquidity-providing mechanisms. This will help to offset the unfair transfer of income at the international level facilitated by the Bretton Woods system.

The structural inability of the underdeveloped countries to obtain through trade the media of exchange that would enable them to finance their development has brought about a rapid and sustained increase in their financial liabilities. The cumulative external debt, with rising interest rates making its amortization ever more difficult, is a factor whose significance should form one of the problems that will have to be discussed in the course of future debates on the reordering of the international monetary system.

On the basis of these ideas we should like to mention some of the criteria which Argentina feels to be valid in the matter of monetary reform. These criteria are based on the need to reaffirm the basic principles of political sovereignty, equality between countries, and economic independence.

One of the areas of greatest interest is the functioning of the balance of payments adjustment process. We are for an adjustment system that is efficient and equitable. Efficient in order to prevent persistent balance of payments disequilibria, and equitable in order to avoid the injustices of a rigid and egalitarian treatment of all countries.

We consider that the present status of the draft reform on this subject is not yet satisfactory. We recognize that substantial advances have been made, in particular the exclusion of any form of automatic action, but we feel that the draft still assigns excessive importance to the reserve indicators. We agree that these can be useful in aiding understanding of disequilibrium situations, but it cannot be claimed that one single indicator, or a group of them, can adequately reflect the positions of economies in general.

We also consider that the draft does not recognize sufficiently explicitly the necessity of taking the special characteristics of the developing countries into account when assessing adjustment needs.

In this connection, we reject the use of automatic formulas and we support, with the limitations we have already noted, having balance of payments disequilibria identified by means of a general appraisal. Such assessments, on a confidential and routine basis, will have to take into account all aspects, background data, and projections necessary for better understanding of the position of a particular country, and should be supplemented by an assessment of the world payments and liquidity position and of the net transfer of resources to developing countries.

The special assessment meetings, if held, should be limited to the cases having major international repercussions.

We fully endorse the principle that the selection of the instruments for adjustment should be a matter for each country to decide by itself.

We consider that measures should be adopted in the trade field that will strengthen the effectiveness of exchange policy as an adjustment instrument. We support the introduction of procedures that will make it possible to effect exchange rate modifications freely, when these will not have major international repercussions.

It is necessary to provide the system with some mechanism that will ensure symmetry between deficit and surplus countries. In this context, we consider that the application of financial pressures could be appropriate in the case of surpluses, when these are excessive and persistent. We reject the application of pressure on deficit countries—with the exception of the reserve centers—because countries in deficit are already under more than enough inherent pressures as a result of their loss of reserves.

In regard to convertibility, we consider that there should be established, to begin with, a system of general convertibility that will guarantee that no country can finance balance of payments disequilibria by the issue of its own currency, while ensuring at the same time the maximum of freedom for countries to select the composition of their international reserves.

There can be no doubt that to facilitate the re-establishment of a general system of convertibility and to ensure the principle of settlement in assets, mechanisms will have to be established that will make it possible to consolidate part of the reserve currency balances held. We reject any form of obligatory consolidation, as this would imply a limitation on the freedom of choice regarding the composition of reserves. We only recognize such limitations as are essential for the full development of SDRs.

The close relationship existing between the adjustment process and the convertibility mechanism emphasizes the need for more satisfactory handling of international liquidity. We consider that the methods and procedures currently used to determine the system’s liquidity needs, particularly the amounts of special drawing rights to be created, should be revised and improved so that they take into consideration long-term elements, the influence of short-term phenomena, and the consequences of their distribution among countries. The revision should also encompass the Fund’s credit facilities, with a view to making these more flexible and, in addition, to expanding the use of the credit tranches: increasing their amount, extending the period for their use, and appreciably attenuating the conditions for their use so that it will not be subject to predetermined policies. We support the establishment of a special credit account to which countries should have universal and unconditional access to cope with speculative movements of capital.

We support an exchange system based on stable but adjustable par values. We also agree that, in certain conditions and in special circumstances, the floating of currencies may prove to be a useful instrument.

The adoption of such a system requires the introduction of an intervention mechanism, to guarantee the stability of the exchange rate at an international level, and the establishment of a code of conduct in case of floating.

It is indispensable that an urgent, complete study be made of the various alternatives for intervention, since the implications of this go beyond the mere intervention mechanism and extend to most of the areas of reform, particularly those of special interest to the developing countries.

Disequilibrating capital movements cause serious problems in the functioning of the international monetary system. We believe that all countries should contribute to reducing the scale of these movements and to the tempering of their effects. However, flows of funds for development should be excluded from these controls, because obviously, on account of their nature, they do not contribute to instability and any suspension or delay in receipt of these funds would seriously damage long-term development plans. The developing countries are very vulnerable to these capital movements, and hence it is vital for us to have full freedom to impose controls when market conditions and the situation of our economies makes this necessary—including controls on transactions, in accordance with Part IV of GATT. The Outline of Reform, while mentioning some of these possibilities, is not sufficiently explicit on the subject. We believe that exceptions in favor of the developing countries should be clearly specified in the new Outline.

We reaffirm our support for the establishment of a link between the creation of SDRs and aid for development. We fully support the documents approved by the Group of 24 in Washington and forwarded to the Committee of Twenty last July.

Another aspect of interest for our country is the area of decision-taking by the Fund. We think the present system should be reformed by the creation of a Ministerial Committee that can meet, in case of need, whenever decisions of a political nature are called for. We reject the idea of a nonresident Board. The developing countries must be adequately represented at all decision-making levels, and their voting power must be increased. We therefore support a revision of the methods and procedures currently in use for the periodic determination of quotas.

We support the principle that SDRs should be the axis of the new international monetary system, that they should become its numeraire and gradually become the principal reserve asset. We think gold and the reserve currencies should play a decreasing role in the new system.

If this is to be achieved, SDRs must be endowed with features that make them attractive in comparison with other instruments of international liquidity, but not so attractive as to provoke their immobilization or hoarding.

We think that many of the provisions regulating the use of SDRs at present are unnecessary. In particular, the provisions on limits of acceptance obligations and the reconstitution obligation should be immediately eliminated.

As regards gold, we support the proposal that the monetary authorities be able to sell, but not buy, gold on the market at market prices. The authorities should not be able to effect transactions among themselves at a price other than the official one, which should be maintained and not be subject to uniform increments.

The second subject to which I wish to refer briefly is that of the situation of the money markets. In the year that has passed since our last Annual Meeting we have witnessed a new realignment of parities, new crises, and—more serious yet—the simultaneous floating of several of the leading currencies. The present system places our countries in a very vulnerable position and introduces elements of instability that are reflected on our markets.

The root of the problem is that the competitive position is modified by factors having no connection with our balance of payments needs.

For all these reasons, we think it absolutely essential that the necessary measures be adopted to normalize the markets and to return as soon as possible to a system based on stable par values. . . .

Statement by the Governor of the Fund for Mauritius1Veerasamy Ringadoo

In the first part of our statement, let us dwell upon some aspects of the international monetary reform, with particular reference to the Third World. In the second part, we will briefly touch upon problems of the small farmer, to which Mr. McNamara has so forcefully drawn our attention.

The central theme of our argument in the sphere of monetary reform will be the following. First, in the recent discussions on reform, our attention has been focused on the immediate technicalities thus clouding our vision from the broader perspective of substantive issues involved. Second, we are afraid not much fundamental thinking is being done, even in the Committee of Twenty, about the international monetary mechanism as it affects the Third World. Our plea, therefore, is that we should not confine our discussions merely to the labyrinthine intricacies of the mechanism of the international monetary system, but be guided by the broader objectives which the new mechanism should be designed to achieve. The “money illusion” to which we refer in relation to national economies is equally relevant to the international system; whether a system is good or bad is judged not by its intrinsic merit but by the totality of whether, for example, it encourages international trade, capital and investment flows, development assistance, access of developing countries to markets in the developed part of the world, etc. It is this broader vision, we would like to emphasize, which should guide our approach to the designing of the new international monetary system.

Speaking in a much wider context, one can say that such lack of vision is not the exclusive “virtue” of thinkers on international monetary reform. The trials and tribulations of the two thirds of mankind inhabiting the Third World do not seem to have been able to evoke the right degree of sympathetic response from the developed world. While landing man on the moon is hailed as a supreme achievement of modern science and technology, the fact that millions have to go without food even today is forgotten. Would diversion of a small part of resources spent on space research to more mundane matters such as flood control, control of cyclones, artificial rain-making, reversal of the brain-drain from the less developed countries to international agencies and developed countries, ensuring a fair price to the primary products of the less developed countries, etc., be more beneficial to mankind? Similarly, at present about US$200 billion is spent annually on defense, which is one of the major uses of the world resources. Compared with this figure, official development assistance, which seems to have tended to decline in more recent years, is in the region of, say, US$8 billion. Against this background, when the question of the SDR-aid link is brought up—incidentally, one might venture the guess that the link resources might at best be in the region of, say, US$2 billion or US$3 billion—the Third World is told that the SDR-aid link will be highly inflationary in its effects. Again, while prophets of eco-doom are busy making this earth—“only one earth”—habitable for future generations, the fact that a significant section of the present generation may not survive because of the sheer shortage of food supply does not appear to matter much. The main purpose of our raising these much wider issues is to lend a proper perspective to the deliberations on monetary reform.

The present discussions in the Committee of Twenty, quite frankly, do not seem to reflect fully this concern for the Third World. For instance, attention seems to have been concentrated on topics such as securing an effective regime of exchange rate adjustment, evolving a consultative mechanism which would trigger off adjustment action, and convertibility. We would like to underline that the interest of developing countries in these spheres is essentially indirect. If one traces the genesis of the recent problems of the adjustment process, it becomes clear that they have basically stemmed from imbalances between the developed countries. Unfortunately, the adverse repercussions of these problems have been thrust upon the developing world. As the 1973 Annual Report of the Fund brings out, the fact that the major currencies of the world are floating has had a destabilizing impact on developing countries, affecting them in ways unrelated to their own adjustment needs.

We regard the link between the SDR and development assistance as one of the substantive issues of reform. Surprisingly enough, the discussion on the subject in the First Outline of Reform released on September 24, 1973, could hardly be regarded as enlightening. In fact, the whole subject of link and credit facilities for the developing countries, it seems to us, has not been given the attention it deserves. Such discussion as there is in the last two paragraphs is sufficiently vague to prevent the reader from drawing any positive conclusions! For instance, on the link issue there is a big “if”: “If these arrangements . . .” (that is, arrangements to promote the flow of resources from the developed to developing countries) “. . . were to include a link between development assistance and SDR allocation . . .” (par. 34).

The point we are trying to drive home is that the mere inclusion of representatives of developing countries in the Committee of Twenty will not induce in them a sense of involvement in the reform exercise; such a feeling can only emerge if the issues directly relevant to them are accorded an equal importance.

Besides the SDR and development assistance link, there are several areas of interest to developing countries which require deeper study. For instance, is there any way of insulating the developing countries from currency disturbances originating from the developed countries? Would the establishment of regional clearing unions for the developing countries be of some assistance? In practice it may be possible to design clearing unions in such a way as to integrate them with the operations of the Fund. Further, the question of transfer of resources to developing countries could, as it were, be built into balance of payments consultations among developed countries.

There is one more interim problem to which we may make passing reference. Now that floating has become “respectable,” it may be some time before major currencies return to an “exchange rate regime based on stable but adjustable par values.” It would not be far wrong to say that we may have to live with currency instability for another two years or so. Protection of developing countries from these currency disturbances during this interim period therefore assumes paramount importance. Perhaps the Fund may think of instituting a currency guarantee agreement, somewhat on the analogy of the Sterling Guarantee Agreements. Our purpose in mentioning these subjects is not to offer any blueprint for reform but only to illustrate the areas which need to be explored fully. . . .

Statement by the Governor of the Fund for Paraguay—Carlos Chaves Bareiro

Speaking on behalf of the Governor for Paraguay, Minister of Finance General César Barrientos, I should like to begin by greeting you, Mr. Chairman, and the Governors, whom we have the pleasure of seeing once again still endeavoring to bring order into the international monetary system.

I should also like to convey greetings to the Government and people of Kenya, the first African country to host our meetings and one to which many countries of the Americas owe a debt of gratitude, since from it came many strong and hardworking arms whose fruitful labor enriched our lands.

More than half a decade of struggle against the international monetary crisis entitles us to consider that the solution is in sight, and that now more than ever what is needed is goodwill on our part, coupled with understanding and the ability to give and take in order to arrive at solutions that are fair and equitable for all.

Last year we were delighted that representatives of developing countries should occupy nine of the seats on the Committee of the Board of Governors of the International Monetary Fund, and time has proved that our feelings were well founded. Our countries have been able to make their voices heard, and the fact that we have not achieved all that we hoped is not the main thing; what is important is that both in Washington and in Paris we have exchanged opinions and experience in an atmosphere of understanding and, above all, that in the first week of September of this year agreement was reached on the form of the proposals to be submitted to this gathering, with a view to establishing very shortly the foundations of equitable reform and assuring sound monetary arrangements among all Fund member countries.

Our Government is fully convinced that the system set up at Bretton Woods should basically be continued, albeit with some modifications, and that the International Monetary Fund, which has been continuously extending the sphere of its services and which has played and is still playing such an effective role in the field of international liquidity and the monetary crisis, should be the focal point of the reshaped system and must retain its role of leadership.

We stand behind the Fund, which has shown that it can quell the most violent storms and demonstrated its ability to improve the monetary future of member countries.

We should like to take this opportunity to express our resolute support for the proposal by the developing countries that the special drawing rights be linked to external aid to our countries, and we are certain that, with the understanding of major countries such as the United States and the Federal Republic of Germany, we shall be able to link SDRs with the transfer of real resources.

The purpose of my remarks so far is simply to reaffirm my country’s position on these issues, about which the Latin American countries will be presenting a joint statement, to be made by the Governor for Mexico, Mr. José López Portillo, who has our full support.

Having said this, we should now like to report on the most recent achievements of Paraguay’s economic policy, which, on the monetary side, offers the most tangible proof of all the good that can be achieved within the Fund and with the Fund.

In accordance with the principles and purposes of the Fund, Paraguay has abandoned the bilateral payments system and replaced it by the multilateral system; it has dropped the exchange control system in order to switch to the free exchange system, and is today gathering the fruits of its faith and perseverance, after weathering some difficult periods.

The indicators so far in 1973 show that the economic expansion of 1972 has continued and that the increase in the gross domestic product will be 10 per cent, compared with 5.3 per cent in 1972.

This is being achieved thanks to the growing mechanization of agriculture and the introduction of new techniques, which together have made it possible to expand the area under cultivation, while favorable weather conditions have also contributed. Another factor was the higher level of banking activity, achieved thanks to the portfolios of the banks that we announced last year and to higher international prices for the raw materials and manufactures we export.

These factors made possible a marked increase in our exports, as a result of which by July of this year export earnings were already ahead of the total for 1972. Meat played the leading role here, while mention should also be made of a new export commodity, soybeans, which showed an increase in the first half of 1973, compared with the same period of 1972, of 56 per cent in volume and 231 per cent in value. There was also a sharp increase in exports of other products, such as cotton, coffee, lumber, and raw silk.

Although imports have risen, notably in the case of machinery, equipment, and motors, a sizable balance of payments surplus has been achieved, which is expected to grow still further before the year is out.

Consequently, there was an accompanying increase of more than 50 per cent in international monetary reserves over their 1972 level.

All this has made it possible to improve on the free exchange rate system introduced in 1957 by introducing a dual exchange rate, composed of the free market (banking) rate and the fluctuating free market (exchange brokers’) rate; there are no delays in payments of foreign claims and debts, which continue to take place at the rate of 126 guaranís per U. S. dollar—which has remained unchanged for the past 13 years.

True to the pattern of the last ten years, as the result of the trust inspired by Paraguay’s political, social, and monetary stability, savings deposits have again increased, reaching close to US$100 million at July 31, 1973.

In an effort to find improved channels for these savings, a savings and loan system for housing has been inaugurated in our country. This will help to alleviate the present housing shortage and at the same time provide increased employment.

The Ministry of Finance is constantly refining its systems of revenue collection and investment, and is seeking appropriate means of perfecting the tax system, so as to achieve the greatest possible equity commensurate with the principle of universal taxation. But it will not achieve full success unless, besides the technical assistance it receives from the international agencies, it also receives financial aid to tide it over the temporary drop in revenue that is to be expected when a complete tax overhaul is carried out.

In spite of this, in the first six months of 1973 a 15 per cent increase in tax receipts was achieved by comparison with 1972, which reduced the deficit originally forecast in the budget.

Paraguay’s economic situation has improved, even though the successive dollar devaluations have hit us hard and we have experienced imported inflation from the industrial countries in the form of higher prices for the products we need to continue our development process.

Viewed as another positive factor is the more dynamic performance of private sector investment, whereas up to a short time ago all investment was left to the initiative of the Government.

We said in 1968, in Washington, that President Stroessner’s Government would that year inaugurate the Acaray hydroelectric power plant at a cost of more than US$33 million, and now that Acaray II is at an advanced stage of construction we are proud to announce that, in close cooperation with Brazil, construction will shortly commence on the Itaipú hydroelectric power plant, the total cost of which will exceed US$2 billion. It will be the largest in the world.

What we know so far regarding its impact on the national economy, through the preliminary surveys and studies now under way, is that the project will require an input of about 1,000 tons of cement a day for seven years, will mobilize several hundred engineers and technicians, and may create jobs for as many as 15,000 workmen. However, prospects are that 100,000 people, or possibly more, will be able to settle in the project area. At this time the National Projects Office has identified eleven large-scale projects that will directly support the Itaipú works. These include cement, timber, iron and steel, sand, education and training of workers, tourism, electric power, foodstuffs, urban infrastructure, health, and access roads.

This plant, together with the Yacy-netá-Apipé plant to be built jointly with Argentina, will make us a major exporter of electric power and will permit the deconcentration of industries, which will now be able to move close to the sources of their raw materials.

Paraguay is closely following monetary events in the neighboring countries, but is not seeking to imitate them, being aware that what is good for them is not always good for Paraguay. For this reason, Paraguay will continue to pursue unwaveringly its policy of monetary stability, and will endeavor to improve its system from day to day, in order to achieve its cherished goal of development with stability.

Ten years ago we greeted Mr. Pierre-Paul Schweitzer as the new Managing Director, to take the place of the unforgettable Per Jacobsson. Time, which passes swiftly when one is in good company, obliges us today to bid farewell to Mr. Schweitzer, who has given the Fund a brilliant decade, despite the difficulties he has had to cope with. We shall always remember Mr. Schweitzer for his imaginative and creative gifts which he placed at the service of the Fund; and we shall remember him above all as a friend of the developing countries, since he oriented the compass of the ship he piloted so magnificently for ten years toward the less developed countries, and then gave them a slightly larger share in the operation of its helm. We thank Mr. Schweitzer for what he did for our institution and, in particular, for my country, and we wish him every success in the future.

We welcome Mr. Johannes Witteveen and it is our wish that, as he assumes responsibility for directing the Fund, the same guiding star which led his predecessor will shine for him too.

We congratulate the Executive Board and the staff on their achievements and we extend our thanks for their services to our country.

We reaffirm our faith in our institution, and in our ability to preserve it, and we continue to uphold its principles which my country, Paraguay, has always faithfully observed, with excellent results.

Statement by the Governor of the Bank for Paraguay—César Romeo Acosta

. . . We are even more pleased to observe that the financial assistance from the World Bank and its affiliates has been able to continue despite the background of inflation and international monetary crisis which has dominated the financial world over the entire period covered by the fiscal year we are today reviewing, notwithstanding the hopes placed in the corrective measures introduced, consisting in floating and exchange restrictions.

For the defensive measures adopted by various countries to insulate their economies from the inflow of speculative capital did not bring about the desired stabilization of the international monetary system, or check the upward trend of prices throughout the world.

The barriers set up between the different countries by the rationing of foreign exchange have done no more than aggravate the difficulties in the way of transferring investment capital.

The financial world has thus been caught up in a vicious circle. The obstacles in the way of capital investment occasioned by the rationing of foreign exchange fueled the demand for gold, and as a consequence of the interaction between the price of gold and the value of the dollar, the main world monetary markets experienced new and continuous disruptions in their foreign exchange markets.

In addition, the tardy introduction of the floating system for the chief world currencies made it impossible to damp down in time the inflationary rise in world prices.

We consider it more imperative than ever that we should redouble our efforts to ensure that the negotiations to institutionalize the monetary reforms needed to bring about a new, appropriate and more stable monetary order reach a favorable outcome as early as possible, in view of the urgency of the matter for the well-being of our peoples. . . .

Statement by the Governor of the Fund for the Philippines—Gregorio S. Licaros

At the outset, I would like to join our colleagues in expressing our appreciation for the hospitality and efficiency with which we have been received by our host country and to extend our special greetings to representatives of the newest members of the Fund, the Bahamas and Romania, who are attending this meeting for the first time.

The world has seen in recent years the disastrous consequences of imbalances in such aspects of human life as in environmental, social, political, and economic affairs. At the same time, although much still remains to be done, the world has nevertheless been heartened to note what can be and has actually been done so far through human determination, effort, and cooperation in overcoming these difficulties and in restoring and maintaining balance as progress marches on. Admittedly, effort and success have been considerable in some areas but sadly lacking in others; the degree of success in most cases being heavily dependent on the extent, direction, and resoluteness of effort and cooperation.

In economic affairs, imbalances in resource flows resulted in international monetary crises, followed by currency realignments and subsequent efforts to determine what reforms to institute in the world monetary system. These events have given rise to both anxiety and hope, particularly for developing countries. Anxiety because of the disruptive and negative effects of these events on world trade and investment flows, not to mention the development efforts of individual countries. And hope that the forthcoming reforms might not only correct the defects of the system but also minimize or eliminate from the basic rules the bias against any group or groups of member nations.

It is generally accepted that the rules of the game in international economic relations, whether in world trade or in the international monetary system, are decidedly biased against developing countries whose participation in their formulation is negligible or none at all. In world trade, for instance, developing countries, who have little or no control over market forces, often suffer adverse shifts in terms of trade which set them back further from their goals of stability and growth.

In Fund affairs, the present quota system has limited the developing countries’ contributions to, as well as participation in, Fund facilities and distribution of SDRs. Unless the quota system itself were changed to correct the bias, its continued application as the basis for SDR distribution would tend to widen the gap between developed and developing countries. The developing countries therefore look hopefully to the proposal to link SDRs with development financing as one means of promoting resource flows to developing countries.

In the matter of primary reserve assets, we share the desire to gradually bring SDRs into playing a more prominent role in a revised monetary system. This role, however, can be achieved not by legislating gold out of the system and replacing it, ipso facto, with a new and as yet undefined SDR, but by SDRs gradually acquiring the attributes of stability and interest-earning capacity so that in itself, it will attract the confidence a primary reserve asset ought to exude. Until this time comes, and during the transition period, we should continue to use gold and reserve currencies. In the case of gold, our position is either to have the present official price raised to at least the market price, or, if the official price is abolished, to allow monetary authorities (and the Fund) to deal in gold with one another at a “market-related price,” and to sell as well as buy gold in the market.

While considerable progress has been achieved by way of rapport and agreement in such areas of monetary reforms as the adjustment process, exchange rate mechanism, etc., the same, unfortunately, cannot be said of the linkage between SDRs and development financing. Nor has attention been focused on the correction or compensation for the bias against developing countries inherent in the rules of the present system.

Although this aspect of the problem has been duly recognized in the revised draft Outline of Reform under the heading, “the promotion of the flow of real resources to developing countries,” progress in this area has lagged far behind that achieved in the other areas. Indeed, there has been a perceptible tendency to treat this particular problem area as less urgent, less important, or even unrelated to the issues which are of primary concern to the developed group. The dissociation of this issue from the rest of the reform areas could cause delays which could extend, if not perpetuate, the bias against developing countries and create conditions which tend to exacerbate the imbalances and gap between developed and less developed groups.

The urgency of restoring stability and order in the foreign exchange markets in the face of the disruptions and distortions wrought on the economies, development plans, international trade structure, and prices in the developing countries and on the terms of exchange was underscored at the sixth session of the UNCTAD Committee on Invisibles and Financing Related to Trade. These developments called for the acceleration of the work on the reform of the international monetary system. In the meantime, as a prior step to a return to a convertible system, governments of developed countries were urged to adopt immediate measures in the exchange field, designed to achieve an orderly and reasonably stable period of transition.

Just as the creation and distribution of SDRs can affect the balance in world resource flows, the disposition of the dollar overhang can also provide a single solution to the problems of both developed and developing countries. A device for channeling the dollar overhang as loans to developing countries with proceeds to be spent in the United States could be set up to help solve the problem of the overhang itself as well as that of development financing and international stability.

To help cushion the negative impact of these developments on developing economies pending the implementation of procedures for the general untying of aid, the sixth session of the UNCTAD Committee on Invisibles and Financing Related to Trade also recommended the elimination of tying restrictions on official bilateral loans as soon as, and to the greatest extent, possible with regard to procurement from developing countries. Developed countries were also urged to untie, at least for procurement in member countries and other contributors, all future contributions to international development institutions.

If the world system is to progress at a faster rate on a more even keel, the slant against developing countries in the rules of international trade and payments must be reduced, eliminated, or offset to enhance the developing countries’ chances for accelerating growth and participating more actively and positively in the pursuance of the Fund’s objectives.

Statement by the Governor of the Bank for Singapore—Hon Sui Sen

I would like first of all to convey our congratulations to the Government of Kenya for being the host to the meeting in this pleasant city and to express our thanks for the courtesies we have received from them in that capacity. It is not without significance that a developing country is providing the environment to facilitate a meeting of minds on such an important matter as monetary reform. We are meeting at a critical period in the evolution of the international monetary system. The deliberations at this meeting may influence the work of the Fund and Bank beyond what can now be envisaged.

I would like also to join in the congratulations to Mr. H. J. Witteveen on his appointment as Managing Director of the Fund. The way ahead of him is complicated but with his vast experience and expert background I have confidence he will meet the challenges of his post.

The international financial environment deteriorated instead of improved since our Annual Meeting in Washington last year. Inflation has become more intense and inflationary expectations are strongly pervasive in the world. Interest rates have climbed to unprecedented levels. International exchange rate relationships are in an unsettled state. The severe strains and the monetary upheavals experienced by the world economy in the past year have raised fresh anxieties about the future. In the course of the past year countries have had to face a new assortment of problems and uncertainties arising in large part from the troubled international monetary situation. Changes in major currency values, floating exchange rates, and imported inflation—these were the challenges which countries, particularly developing economies oriented to international trade, had to contend with.

In Singapore, our economy had traditionally developed under an open trading and financial system. The swings and disruptions in the international economic and financial system inevitably have repercussions on our growth and our development efforts. Not being endowed with natural resources, the economy initially thrived on trade and commercial activities. In the last decade we devoted our planning and efforts toward strengthening the economic structure through a concerted industrialization drive. As part of the development program, considerable resources were channeled into manpower development to expand and uplift the skills of the labor force to meet the demand of modern industries. With a stable administrative and economic infrastructure and a dependable labor force, foreign investors were encouraged to establish manufacturing industries in Singapore. The economy was able to move progressively toward the establishment of industries utilizing more sophisticated technology and exporting to world markets. With more than a decade of industrializing efforts, we saw results in terms of quantitative employment creation as well as qualitative labor force development. In addition, the economy obtained higher growth in income with price stability. In recent years, Singapore also evolved a more definitive role as a hub of regional and international financial activities. This development was underpinned by the rapid growth of our external trade, the progress of export-oriented industrialization, and the domestic political and economic stability which provided the climate for international financial activities to be centered in Singapore.

We have thus kept our own house in essentially good economic order. The experience of the Singapore economy in the past decade has shown clearly that given a favorable global environment we can make progress. However, experience last year also demonstrated that our development efforts could be seriously retarded by adverse influences not of our own making and beyond our control. In the period, we had to make adjustments and adapt to the stresses in the international monetary situation and the pressures of imported inflation. Up to last year, our economic development had been characterized by remarkable price stability. Inflation was conspicuous only by its absence. It did not take on a practical meaning in our context. We maintained a stable wage policy and related increases in wages to higher productivity. With a policy of free trade Singapore imported its consumer, intermediate, and capital goods from the cheapest sources. We live with the rigors of a domestic monetary regime which is less inflation-prone than some because of the self-imposed discipline of 100 per cent gold and foreign asset backing for our currency issue. Notwithstanding these policies, inflationary pressures began to build up in the course of 1972, and continued into 1973. The economy felt the price effects of serious inflation in supplier countries and the upward float of the Japanese yen and the stronger European currencies. This was complicated by the general world shortage of food grains, particularly rice, of which, because of our limited natural endowments we are traditionally importers. The price of rice increased steeply. In addition, imported inflationary pressure also came with the marked inflow of foreign funds which contributed to the increase in domestic liquidity and money supply. We took a number of monetary measures to check or neutralize the excessive increase in liquidity but against the backdrop of global monetary instabilities, the inflow of foreign funds, attracted by the stability and strength of the Singapore dollar, persisted.

When the U. S. dollar devalued in the December 1971 currency realignment and again in February 1973, we maintained the gold parity of the Singapore dollar which has been unchanged since we became a member of the Fund in 1966. The second U. S. dollar devaluation in February this year did not restore international confidence in the dollar. When foreign exchange markets reopened in mid-March after the longest closure in history, we had to continue our support obligations in the foreign exchange market to prevent the Singapore dollar from moving beyond its ceiling. There was a further weakening of the U. S. dollar in international exchange markets in May and June in the context of the joint European float. As our currency was pegged to the U. S. dollar these developments brought about an artificially low value for the Singapore dollar. We decided to withdraw our support for the U. S. dollar on June 20, 1973. The artificial decline in the value of the Singapore dollar had to be checked to prevent a deterioration of our problem of imported inflation.

We are anxious for the early restoration of international financial stability. We will return to a fixed exchange rate as soon as the international monetary situation stabilizes.

We therefore look forward to an early agreement on international monetary reform. We have followed closely the deliberations of the Committee of Twenty. I wish to commend the work of the Committee and the leadership provided by the Chairman, the Honorable Mr. Ali Wardhana, and the Chairman of Deputies, Mr. Jeremy Morse. The Committee has identified the main issues and the alternative solutions in the First Outline of Reform. The technical spadework on the major issues has to a large extent been completed in the past year. Progress must now be seen in the negotiations for agreement on the main issues to restore confidence to prevent a relapse into a more chaotic international monetary situation. The negotiations on the reform have not moved at a satisfactory pace. I hope that the sense of urgency reflected at the meeting of the Committee on Sunday will lead to much speedier progress.

On the broad objectives of reform I fully support the position that the new monetary system should ensure the adequacy and continuity in the transfer and flow of resources to developing countries. Access to the capital markets of developed countries should also be made easier to developing countries.

The Committee has, in the mesh of conflicting interests, nailed the adjustment problem down to “cases of imbalance that individually or collectively have significant international repercussions.” The inadequacy in the adjustment process which was at the root of the demise of the Bretton Woods system was due solely to the fact that countries whose imbalances had international repercussions did not take the required corrective actions. I would like to emphasize that the problem arose entirely from the persistent imbalances of the developed countries. Recent international monetary experience has shown the way clearly that in a new adjustment process attention should be directed toward the imbalances of the larger economies of the developed countries. Developing countries, particularly the smaller economies, do not influence the overall international adjustment process. This fact should be taken fully into account in the consideration of pressures for adjustment action. The Fund would therefore have to be able to induce countries, that is, developed countries whose imbalances have significant international repercussions, to make the required adjustment promptly. The envisaged strengthening of the Fund would need to ensure this so that developing countries can look toward the Fund to prevent a recurrence of recent international monetary disruptions which have retarded the progress of their own development efforts.

On the reserves indicator in the adjustment process, we cannot agree to its use as a presumptive indicator. Adjustment action should be based on Fund assessment, and in the use of the reserves indicator in assessment recognition should be given to the special role of foreign reserves to developing countries, which is quite different from its relevance to developed countries. In our circumstances we need to maintain a level of reserves much higher than normally considered adequate by conventional criteria. The need to sustain a climate of confidence for investment, our limited resource base, and the open vulnerability of the economy to adverse external factors to which I had alluded earlier, dictate that as a matter of economic prudence we should have sufficient reserves to enable us to deal effectively with problems in lean years.

I am heartened by the note of understanding that is emerging in the Committee on the special position of developing countries. This understanding should be further strengthened. The First Outline of Reform has, in respect of controls, spelled out explicitly that: “Wherever possible developing countries will be exempted from . . . import controls and controls over outward long-term investment.” Also, the “special circumstances of developing countries will be taken into account by the Fund in assessing controls which these countries feel it necessary to apply.” The same consideration should be given to the position of developing countries in the adjustment process.

On the role of primary reserve assets, the objective of establishing special drawing rights as the principal reserve asset can be achieved only if the asset quality of SDRs is enhanced. Confidence in SDRs must be developed by design, through a deliberate improvement of the asset characteristics of SDRs which should not be inconsistent with that of an average group of currencies generally in use in international transactions. On the question of convertibility, countries holding currency assets should retain the freedom of choice to decide on conversion of these assets into SDRs. This discretion is vital to economic management in developing countries besides being essential for confidence to develop in SDRs.

The issues of monetary reform have been linked to negotiations on new arrangements for international trade. While the objectives of the two negotiations are similar in that both are directed toward improving the international environment to facilitate the expansion of world trade, the movement of capital, and freer access to markets and technology, the linking of the two negotiations could delay progress. I am glad that the spirit of compromise prevailed at the GATT talks in Tokyo earlier this month. However, while agreement was reached on the Declaration regarding the multilateral trade negotiations the same spirit of cooperation will have to be seen in the actual negotiations. While we look forward to fruitful results in the negotiations for trade liberalization we are anxious that difficulties that may arise in the negotiations do not lead instead to policies for trade restrictions.

Developments in the past year have been dominated by international monetary and trade questions. It has, however, not escaped us that the World Bank has emerged against the background of currency crises and the heightened pace of world-wide inflation with the achievement of its goal in total development assistance and improvement in its quality as well.

The problem of development inevitably has been exacerbated by the uncertainties and the broader trend of instability in the international environment. In countries where the deterioration of global financial conditions has created new development problems, the Bank would have to re-examine their needs in the light of these developments.

I believe both the Fund and the Bank are familiar with the economic progress of Singapore and how we are dependent, more than any other country, on a liberal and stable international economic framework to pursue our goal of improving our standard and quality of life. We look forward to a freer environment for trade and a more stable international monetary system to quickly evolve, to enable us to continue our active participation in world trade and in regional and international financial activities.

September 26, 1973.

Joint statement on behalf of the Governor of the Fund for Mauritius, Veerasamy Ringadoo, and the Governor of the Bank for Mauritius, Kher Jagatsingh.

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