Chapter

Discussion of Fund Policy at Second Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1974
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Statement by the Governor of the Fund and Bank for Ireland—Richie Ryan

I desire to express our gratitude to our hosts for their warm hospitality to us who are privileged to be present in their most pleasant national capital. I would like, too, to record our appreciation of the genuine concern expressed by the United States, not merely in words but in kind, for peoples in less advantaged areas. Those that have and those that want seldom take a common view of problems. Those that give and those that receive seldom see difficulties in the same light. This meeting will be enhanced by responding honestly to the encouragement expressed this morning by the distinguished President of the United States to pool our ideas and efforts in combating the unprecedented economic evils which now threaten our interdependent world.

For the past few years the joint meetings of the Fund and Bank have, at least in formal session, been somber occasions. The Governors have conducted a postmortem on the collapse of the Bretton Woods arrangements and have not found it possible as yet to put any coherent and workable system in their place. This is most disappointing in view of the time and thought given to the problem. While lack of success is attributable in part to the turmoil of recent times which made it difficult to find firm ground in a very fluid environment, we should acknowledge at this meeting that failure is also due in part to the absence of the political will necessary to match the gravity of the problems confronting the world economy.

The Annual Report of the Executive Directors of the Fund gives a thorough and realistic assessment of the current situation. Even before the sharp rise in oil prices at the end of last year, 1974 promised to be a year of considerable difficulty, combining a continued rapid rate of inflation with a slowdown in the rate of economic growth. The increased oil prices have had the effect of compounding these problems and also of leading to a massive shift in the structure of international payments. The analysis and policy prescriptions of the Executive Directors are well argued, and I fully support, in particular, their judgment that present circumstances call for “international cooperation of a quality rarely achieved in the past.” I think I would substitute “never” for “rarely.”

Never previously in the history of man, except as a consequence of world-wide war or during the depression of the 1930s, has the world suffered such an economic upheaval. We should recognize the problems as unprecedented, and produce radical new remedies to deal with them which take account of our mutual interdependence.

The Annual Report rightly assigns priority to reducing the present inflationary pressures which are threatening the economic and social foundations of all member countries. Unprecedentedly high inflation has been accompanied by unprecedentedly high interest rates, even though in many countries the real returns received by investors are low or indeed negative. High interest charges, appropriate and indeed inevitable though they may be in present circumstances, impose serious economic and social costs. Not least of the beneficial consequences of a slowing down in the pace of inflation would be the consequential reduction in interest charges, a reduction which would be welcome to governments and individuals alike.

Deeply entrenched inflationary expectations cannot, however, be eradicated easily or quickly and no one nowadays would countenance massive deflation as a form of shock therapy. What is called for is a medium-term strategy in which all countries, using the whole range of policy weapons at their disposal, try to bring about a better balance between world demand and supply. In the immediate future it is appropriate that caution be exercised so as not to overestimate the rate at which economic growth can be sustained. Any tendency to take undue risks for the sake of quick results could exacerbate future difficulties. Moreover, the fact that, in the short run, some choice is required between growth and price stability should not obscure the long-run harmony between these two objectives.

The consequences of universal inflation and radical changes in the balance of trade make the risks of policy miscalculation even greater. The distinction between oil and non-oil deficits becomes unreal when, together, the foreign borrowing they involve is too difficult or too onerous. It is imperative that, in the course of the inevitable adjustments, mutually destructive policies should be avoided. In the immediate wake of the oil price increases, the Committee of Twenty emphasized the importance of avoiding beggar-my-neighbor policies. The appropriate distribution of the burden of adjustment between surplus and deficit countries remains a vital issue. If recession is to be avoided, a great share of the responsibility must rest with surplus countries, whether these be oil producers or oil importers. So that deficit countries may not be forced into taking excessive deflationary measures, surplus countries must either expand demand or increase the level of their capital outflows. The Fund can play a decisive role in ensuring that the adjustment process takes place in a fair and orderly fashion.

Appeals for cooperation have usually a somewhat ritualistic quality. In the immediate future what is required is a constructive approach to problems as they arise. A clear example of helpful pragmatism was the Managing Director’s initiative in proposing the oil facility—one of the few examples in recent years of concrete and realistic achievement in international monetary affairs.

Recent changes in the world economy have, of course, far-reaching implications for the World Bank Group as well as for the Fund. The sharp increase in the amounts and cost of capital now needed to finance development projects poses a problem for very many countries, and particularly for those developing countries which have been hardest hit. The new forecasts of capital requirements for these countries—as given in the excellent analyses prepared in the Bank—are little short of staggering. If significant amounts of capital are not made available at a tolerable price, the result could be disastrous, in human as well as economic terms, for many countries. Every effort must be made to mobilize and allocate equitably the funds needed. It is clear from the Annual Reports that the World Bank Group is intent on making a major contribution to this work and, indeed, has already begun to do so. The President of the Bank, the Executive Directors, and the staff are to be congratulated on the positive manner in which they have risen to the challenge. I hope that the Joint Ministerial Committee will also make a significant contribution. . . .

We meet in a very worried world. While we are troubled by the immediate problems which face us, we must, at the same time, from this conference, give hope to our people, and our capacity to build confidence will depend directly on our sincerity at this meeting in finding a solution.

Statement by the Governor of the Bank for Mauritania—Sidi Ould Cheikh Abdallahi

According to an old African proverb, an ant thought to itself one day: “When we are together, we can lift the cricket’s leg.” For a long time Africa has been cherishing deep aspirations toward unity, aspirations which make it want to regroup its forces by eliminating gradually the various obstacles which the colonial powers have tended to put in its path. It is this continuous search for African unity which has conferred on me the great honor to address you today in the name of Africa.

In effect, the African group decided last year in Nairobi that, as from 1974, its chairman would express the African viewpoint on the important questions to be discussed at this assembly of the Fund and the Bank.

The year just past has been of prime importance for the Fund, of prime importance for the Bank, and of prime importance for the world’s economy. Last September, at Nairobi, the uncertainties weighing upon the international economic order gave rise for concern about the growth of most countries, particularly for that of the developing countries. We know today that the increase in the price of oil, cereals, certain raw materials, and manufactured goods, which has magnified an already alarming inflationary situation, has disorganized the economies of certain countries and required of all of them considerable efforts at adaptation. A recent World Bank study indicates that 800 million people with an average annual per capita income of less than $200 will see their standard of living further reduced. In most African countries, growth is already slowing down and the balance of payments situation is deteriorating. We cannot overemphasize the economic difficulties which we have to face. We are therefore following with interest the efforts made both by the Fund and by the Bank to find appropriate solutions.

Mr. Chairman, distinguished Governors, permit me to submit to you our thinking regarding the activities of the International Monetary Fund and the World Bank Group over the past year.

These views, I should point out, are consistent with those expressed by the African heads of state and government in the solemn declaration they adopted at their 1973 meeting in Addis Ababa marking the twentieth anniversary of the Organization of African Unity.

With the end of the work of the Committee of Twenty, present circumstances highlight the significance of the problems of the reform of the international monetary system and call for the following remarks. From the numerous reports submitted by the African representatives of the Committee of Twenty to their governments, it became clearer each day that the concerns we felt did not elicit the urgency among certain major countries that we sought. The African position, as you know, has always been based on a global conception of the reform of the international monetary system, grounding itself in the resolutions that gave rise to the establishment of the Committee of Twenty and whose principal aim was the harmonious development of international trade.

This conception still seems to us the only valid one, although it has become necessary under the pressure of events to resign ourselves to an undefined concept called the interim period.

We have noted that the conclusions of the work of the Committee of Twenty, as currently presented, stem from the difficulties met by the Committee in reconciling long-term reform with the urgent need facing all of us to find a quick solution to the problems of the hour. In this regard, we are pleased with the efforts of the Committee which have enabled us, by their rapidity and effectiveness—accepting a pause which we hope will be brief—to institute a new valuation system for the SDR and to put into operation formulas which could enable us to tackle the problems of balance of payments deficits more effectively.

Since the start of the reform exercise, Africa has demonstrated its interest in seeking a just, equitable solution to the problems raised by the international monetary uncertainty. At the Nairobi meeting, the African Governors were able to express their viewpoints on all aspects of the reform. Today, we wish to indicate our profound disappointment and solemnly affirm that we cannot endorse an international monetary system, or even give our support to immediate measures, which would not attend to the transfer of real resources to the developing countries, and especially the establishment of a link between the SDR and development assistance. We are deeply concerned in this connection with the initiatives taken by certain countries to solve the gold problem outside of the Fund.

We are in fact convinced that the creation and control of global liquidity are essential for the world’s economy and should be the responsibilities of the international community acting through the Monetary Fund. This would eliminate any risk of uncontrolled creation of liquidity by the deficits of certain reserve centers or by unilateral increases in the price of gold. Outside the context of a common solution, the disturbances that would arise in respect of the volume and distribution of liquidity would be a source of concern to all the developing countries and in particular to Africa.

That is why we are pleased with the practical measures recently taken to make the capital value and yield of the SDR more attractive and more competitive, until final provisions of the reform are presented. But we must emphasize that the use of SDRs remains subject to numerous constraints, such as the reconstitution requirement. Freed of such restrictions, the SDR will be better able to play the active role it is supposed to play.

Regarding the proposals pertaining to convertibility and management of exchange reserves, there is still much work to be done. We are, however, opposed to any asset system that will give the reserve centers the right to determine when, how, and within what limits Fund members which are not reserve centers may use or hold exchange reserves. We have looked in vain for the symmetrical protection in this provision to which all countries—reserve centers or not—may lay claim.

Another aspect of liquidity has to do with the resources of the International Monetary Fund. The need to respond to the appeals of deficit countries calls for an increase of some 70 to 100 per cent in those resources. In this context, future quotas should guarantee the effective participation of all groups and all members of the International Monetary Fund in the use of resources and in the decision-making process. In view of the rapid development of the socioeconomic context, the Fund should revise its methods of calculating quotas and should adapt itself to the new political realities. It would be desirable in any case to avoid a quota structure that does not substantially reflect or provide for certain fluctuations in reserves and the increased importance of the developing countries.

The disappointment we have just expressed about the results of the work of the Committee of Twenty is somewhat tempered by the proposals now before the Board of Governors for establishment of an Interim Committee and a Development Committee. Creation of the Interim Committee would be useful if it proved capable of constructively and effectively attacking the problems within its jurisdiction; it must, in other words, become a viable political authority in which problems can be examined realistically and in depth in order that more permanent solutions can be found to take into account the special problems of our countries. In this line of thought and in view of the disastrous consequences of the generalized spread of floating exchange rates, we must expect the Interim Committee to elicit a discipline which would permit a gradual return to a system of fixed but flexible exchange rates.

We shall not end this part of our statement without expressing our satisfaction with the speed with which the Fund has set up two temporary facilities, one to meet the energy crisis, the other to react to the medium-term structural problems posed for the balance of payments of the developing countries.

Before turning to the Bank’s activities, I wish to say a word about inflation, an evil which is making it evermore difficult to achieve a balance between a rise in wages and a rise in productivity. Certainly, as we have already mentioned, the causes of this phenomenon do not lie only in recent developments regarding the price and supply of certain products. The impact of earlier devaluations and the consequences of monetary uncertainties are at the root of the persistent and menacing world inflation. Maintaining interest rates at a high level makes the situation still more difficult; this combination of factors makes it practically impossible for most of our countries to borrow on capital markets. We must therefore rely chiefly on recycling mechanisms. The oil facility is one of them, but others must be developed and made operational to meet the needs of our countries for financial resources on favorable terms. . . .

While these are hard times for all developing countries, they are particularly hard for the poorest countries which depend to a very large degree on concessionary aid. It has been estimated in a recent World Bank study that in order to raise the growth of these countries to approximately 2.1 per cent per capita per annum for the remainder of the decade concessionary assistance from the developed countries and OPEC members would have to be maintained at approximately the same share of GNP as in 1973. And at anticipated rates of inflation, this objective will require an increase in disbursements of concessionary assistance, in current prices, from $12 billion in 1973 to $18 billion in 1976 and $30 billion in 1980.

It is our belief that the international community must live up to this challenge. Speaking for Africa, a continent that presently bears the burden of the worst effects of the prevailing economic crisis, I wish to make a special appeal to all well-off nations to rededicate themselves to providing the necessary and urgent assistance to the needy countries. Most African countries fall under this category. For the drought-stricken countries in Africa, the increases in oil prices came at a time when their economies were near collapse as a result of a severe and prolonged drought. This is especially so for the Sahelian countries and Ethiopia. While they are unable to take advantage of the high commodity prices, their food import requirements have increased drastically. And at a time when their foreign exchange earning capacity has been sharply reduced, they are faced with ever-rising prices of imported materials required for development projects. . . .

I am well aware that there is another international agency primarily charged with looking after the problems of trade between countries. However, given the present difficulties of the developing countries, and because of the close link between trade, aid, and development, there is no doubt that the liberalization of trade barriers could be of tremendous assistance to farmers and would foster the efforts of the Bank to extend the gains of development to the rural areas. Thus the Bank must begin to play an active role in efforts designed to ensure better and stable commodity prices and the liberalization of trade. . . .

Before concluding, I would like to come back briefly to one important matter concerning the International Monetary Fund: that is the question of African representation on the Executive Board.

Every election year there is uncertainty as to whether the two African seats are both going to survive. Let us remove this uncertainty once and for all. In this connection the current reform exercise affords a unique opportunity for the Bretton Woods Articles of Agreement to be modified so as to assure African representation as in the case for certain subcontinents. It is therefore the earnest request of the African Governors that the Interim Committee of Governors should include this subject on its agenda.

To conclude, let me express the sincere hope of the African countries that this assembly, in its endeavor, will seek and work out concrete solutions to the difficult development problems which the poor countries are facing today. In this effort, African countries pledge their active cooperation.

In fact, what is required is the building up of a new international economic order which will permit 800 million poor people around the world to achieve at least a minimum level of progress. If the rising inflation, the prevailing monetary uncertainty, the worsening of the terms of trade, and the declining trend of development aid are not corrected, the poor nations run a tremendous risk of falling into despair: this may lead to failure of international solidarity and therefore to the jeopardy of peace in the world.

Statement by the Governor of the Fund and Bank for Japan—Masayoshi Ohira

I would like to begin my first address as the Governor for Japan by expressing my thanks to the United States for its hospitality for our meeting. I also welcome our most recent members in the World Bank Group, the Governors for Western Samoa and Barbados, and the delegates from Papua New Guinea whose membership in the Fund and the World Bank Group will be approved at this meeting.

My tribute is due to the Managing Director of the Fund, the President of the World Bank, the Executive Directors, and the staffs of the institutions for their hard work in the past year. The challenges which Mr. Witteveen has faced in the last 12 months must have been more severe than those that befell his predecessors during the first year of their terms of office. Mr. Witteveen deserves our congratulations for his commendable performance at the start of his difficult assignment. . . .

While it is always difficult for us human beings to foresee the future precisely, the violent change which shook the world economy in the months immediately after the Nairobi meeting have made all of us who are responsible for the management of national economies realize the dangers and the unpredictability surrounding our job.

Because of the sudden and sharp increase in prices of major, internationally traded primary products, the world balance of payments and the international price structure have undergone drastic and unforeseen changes. Most countries which rely on the import of such products have begun to suffer very large deficits in their balance of payments. Particularly serious was the damage suffered by those countries whose balance of payments positions were already weak due to the burden imposed by economic development.

During the past year there have been unprecedented changes in the scale and direction of international capital flows. Strain and uneasiness were brought into the international money and capital markets. The malignant inflation which had already begun to affect the world was aggravated by international commodity price increases.

Progress toward international monetary reform, which is one of the major agenda items of this meeting, was also significantly affected by the changed situation. Owing to the fundamental change in the world balance of payments structure, and the general floating of major currencies, the early realization of a comprehensive monetary reform is no longer feasible. Under present circumstances, it is not realistic to envision the establishment of an ideal arrangement for a par value system, adjustment process, asset settlement, etc.

The Outline of Reform, submitted by the Committee of Twenty, frankly admits that the situation has changed. What the Committee realized was that the establishment of a new monetary system is nothing like building a castle by waving a magic wand. Rather, it should be an evolutionary process starting from reality and working patiently toward the ultimate goal. The Committee thus agreed on various measures to be taken immediately in order to set the process in motion. Some of these measures have already been implemented.

How long it will take for us to reach the goal, how many twists and turns we may encounter on the way, I would not dare speculate. Nevertheless, I am ready to endorse the approach taken by the Committee, namely, to start the process of reform under internationally concerted initiative while recognizing the difficulties we face at present.

Some people have expressed their disappointment with the results of the Committee’s work on the ground that the full establishment of the new system is not an immediate possibility, and that the immediate steps agreed on lack substance.

I think that this view fails to take enough account of reality, and I cannot subscribe to it. In my understanding, there is a consistent principle underlying all the immediate steps adopted. That is the principle of strengthening the Fund and of establishing a realistic monetary order through the international consultation and surveillance of the Fund with rules for cooperation among member countries. I support this principle.

The immediate steps agreed on are concrete and substantive. It is envisaged that a new Committee of the Fund and the World Bank will be established to study the broad question of the transfer of real resources to developing countries. It is expected that the Committee, which will be composed of ministers responsible for the management of national economies, will play a significant role in the international efforts to solve the urgent task we have now. Also, at a time when all the major currencies are floating, it is quite important to maintain a realistic monetary order by better management of the floating exchange rates. Thus, it was highly commendable that a set of guidelines were agreed upon for that purpose. Furthermore, the proposed pledge by member countries not to impose restrictions on current transactions for balance of payments purposes is particularly timely.

I consider that the agreement on the immediate steps was a significant accomplishment in view of the uncertainties that surround us now. I strongly hope that all member countries would cooperate closely so that the immediate steps be implemented as expected and take effect satisfactorily.

The difficulties we face are unprecedented and serious. It is by no means easy to tide over the difficulties, and quick action is called for. I would like to put particular emphasis on the following two points:

First, we must win the fight against malignant inflation.

If we leave the present inflation uncontrolled, the economic growth and political stability of the world will suffer a severe blow.

Everyone wants relief from inflation. The crucial point is that we have to give them confidence that the sacrifices they are asked to make in their fight against inflation will not be in vain. Such confidence will never be created without a resolute and determined policy stance on the part of those of us who are responsible for the management of national economies.

I hasten to add, however, that prudent judgment will be called for in order to eschew the danger of a world recession which could result from a hasty search for quick results in our effort to curb inflation. Our national economies have become so closely interdependent that countries can no longer be allowed to follow policies which will export recession or beggar their neighbors.

Another point is that the balance of payments structure of the world, which has suffered a devastating change since last fall, must be stabilized as quickly as possible. For that purpose, it is vital to find ways through which the oil money can be recycled to the paying countries in a stable and orderly fashion. For instance, such problems as inflation, political or social unrest, and the fear of economic stagnation will certainly hinder smooth recycling. Therefore, it is obvious that countries desiring the reflow should make the utmost effort to remove those obstacles. At the same time, it is strongly hoped that oil exporting countries will give active consideration, within a broad and long-term perspective, to ways of generating a well-balanced and diversified recycling. The confusion which is inevitable when a stable and orderly reflow fails to occur will eventually involve the whole world—oil exporters and importers alike.

It is gratifying to note that oil exporting countries have been making a valuable contribution to facilitate the reflow of oil money, mainly to the developing countries through the Fund and the World Bank. I believe it is everyone’s wish that the Fund and the World Bank continue their best efforts to help increase such a flow. I strongly hope that a stable and orderly reflow will be generated by international initiative and cooperation.

I would like to avail myself of this opportunity to give a brief explanation of recent economic developments in Japan.

The effects of the demand restraint policy pursued since last year have gradually permeated the economy and, since last spring, price increases in Japan have decelerated to some extent.

However, we have to watch carefully for the possible repercussion of higher energy and industrial materials prices and of the large wage increases awarded earlier this year. We must also continue our vigilance over the future development of consumption expenditure and investments. Therefore, I think we still have to continue our policy of demand restraint.

The Japanese balance of payments, which had registered a large surplus until 1972, has been dramatically transformed by such various measures as the revaluations of the yen, active stimulation of demand, expansion of imports, and encouragement of capital outflow. The basic account of the Japanese balance of payments in 1973 showed a deficit of $9.9 billion, compared with a surplus of $2.1 billion in 1972. The deficit incurred during the first eight months of this year already amounts to $9.3 billion.

It is obvious that the sharp increase in oil prices has precipitated the deterioration of the balance of payments. It is estimated that for Japan the increase in payments for oil imports will amount to more than $10 billion annually. In order to forestall the excessive deterioration of our external position we introduced successively, since the end of last year, measures for the improvement of the balance of payments. As the result of these measures, which include the relaxation of controls on capital inflow and the amendment to earlier measures for the encouragement of capital outflow, the long-term capital account has shown considerable improvement in recent months. Also, some signs of improvement have become noticeable in the trade balance. However, the situation still does not seem to warrant optimism and we need to continue our efforts.

In this connection, I would like to stress particularly that Japan will try to ensure that her efforts to improve the external balance will not impose any additional burdens on her trading partners.

Japan needs the reflow of oil money. But it will try to obtain the reflow in a manner compatible with international order. Japan needs the gradual improvement of its current account. But it will try to achieve this by measures other than an intentional export drive or import restrictions. Japan supports the proposal made by the Committee of Twenty that member countries should not impose restrictions on current transactions for balance of payments purposes, and I declare herewith that Japan subscribes to the pledge.

I wish now to express my views on the activities of the World Bank Group and the problem of development assistance.

The drastic change in the world economic situation since last fall has seriously affected all countries of the world, developed and developing alike. In particular, owing to balance of payments problems and inflation, many of the developing countries without oil resources face tremendous difficulties in carrying out their development programs. The severest blow was dealt to the poorest countries. Some of these countries, burdened further by the increasing shortage of food, are suffering a decline in living standards and are even appealing that their physical survival as nations is in danger.

Thus, the tasks that are most urgent are to stabilize, as quickly as possible, the economic conditions of the most seriously affected countries and to secure a smooth flow of funds to other developing countries.

The volume of Japan’s economic aid as a whole has expanded rapidly. Japan was the most seriously affected among the developed countries by the recent oil crisis, and a host of difficulties confronts us. Nevertheless, Japan will make every possible contribution to international efforts to overcome the crisis the world faces. Our aim for the future is to augment our aid with a proper balance between quantity and quality. Thus, for the time being, in our aid policy, the primary emphasis will be placed on the improvement of quality rather than on quantitative expansion.

We have recently announced $100 million worth of additional aid to the most seriously affected countries under the United Nations Emergency Program, and further efforts will be considered if necessary. The success of such a program, which is easy to discuss but hard to execute, depends on international support. It is hoped that other countries will also make their utmost effort to advance the program.

It is evident that conditions in the most seriously affected countries are critical. There is no assurance that the financial needs of such countries will be adequately met by bilateral aid arrangements alone. Therefore, it is strongly hoped that the World Bank and other international development finance institutions will participate actively in this operation from a global standpoint and demonstrate their strong leadership. . . .

For the past quarter century the world economy as a whole has achieved steady growth and development, though not without many ups and downs. However, some people are worried that the age of growth is now over and that the malignant inflation, anxiety over the future, and distrust and egoism among nations might put us into a dark age of stagnation and confusion. Some even point to resemblances between the present and the 1930s.

There is no denying that we are confronted with many difficulties. Nevertheless, I do believe that, by wisdom and cooperation, by technology and adaptability, we will be able to overcome the difficulties and to regain the confidence about the future of the world economy.

It is our common determination that we should never repeat the tragedy of the 1930s. The crucial factors which reinforce our determination are that we are now fully cognizant of the importance of international cooperation, and that we now have places and opportunities for dialogue. At this meeting, at the Joint Committee, at the Interim Committee, and in many other forums and on many other occasions we can have a frank and thorough exchange of views and we can discuss how to cope with the situation.

The degree of economic interdependence among nations is now beyond all comparison with that which existed in the 1930s. The effects of our own external policies rebound against us with amazing speed. It is no longer possible to victimize other countries with impunity. Pars in toto est.

International cooperation should no longer be a subject for pious hopes. We know the survival of the world economy depends upon it. We know the stage is ready for this cooperation to function. As a wise man said, Concordia vincit. What remains is that we step on to the stage with the will to perform.

Statement by the Governor of the Fund for Nicaragua—Roberto Incer B.

I have the distinction and the honor to address the meeting of Governors of the International Monetary Fund as spokesman for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Dominican Republic, Uruguay, and Venezuela. On behalf of the Governors for those 20 countries, I have pleasure in offering greetings to the Chairman of this meeting and to the Managing Director of the Fund.

The problems that have afflicted the world economy during the seventies, and which have become particularly severe during the past few months, must be regarded as representing not only a crisis but also a challenge. Looked upon as a crisis, these problems demand an unprecedented effort of international cooperation; as a challenge, however, they offer an excellent opportunity for remodeling the patterns of economic relations between developing and developed countries on new bases of justice and equity.

The present economic situation is marked by the magnitude, and the effects, of the accelerated inflationary process in the industrialized nations, the generalized disequilibria in their balance of payments positions, and the sudden change in their terms of trade. These problems are nothing new to the developing countries, whose attempts to achieve rapid economic and social progress have frequently been foiled by the inflationary impact of rising import prices, inadequate international financing of their balance of payments deficits, and a persistent deterioration in their terms of trade. In the present world situation, the prospects for the attainment of economic development by those countries are dimmer than ever.

In our opinion, the events of the past year bear out the traditional belief of the developing countries, which contend that international economic relations and an equitable distribution of the benefits thereof are as crucial to the well-being of nations as are the efforts made by the people themselves to assure their own welfare. For this reason we believe that, faced with the challenge of the present situation, in which the developed nations have come to share, if only temporarily, the chronic problems of the developing economies, the international community will be able to devise means to counteract inflation as well as new and imaginative systems of cooperation to combat economic backwardness.

The anti-inflationary measures of the industrialized countries are certainly necessary to ensure proper functioning of the world economic order. However, we feel obliged to express our serious concern and reservations with regard to the effect of such stabilization policies on trade relations between the raw materials producing countries, on the one hand, and the producers of manufactured goods, on the other.

These anti-inflationary measures in the industrialized countries are having a greater effect on the prices of primary products than on those of their own manufactures, which show no sign of abandoning their upward trend. It should be remembered that the demand for raw materials is very vulnerable to the deflationary policies of the developed countries, and in some cases the situation is aggravated by trade restrictions.

In fact, the results for the past three months seem to show that the principal effect of the anti-inflationary measures has been on the prices of primary products. Since their upswing in 1973, the consequence of a widespread increase in world demand, these prices have been following a rapid and continued downward trend, except for a few cases in which favorable conditions of demand, or the support policies of the producing countries, have made it possible to continue to charge remunerative prices.

When a country is making an effort to stabilize its economy, it will usually take steps to prevent a disproportionate distribution of the internal burden of the adjustment, or else to ensure that adequate compensation is available. The world-wide struggle against inflation should be based on similar principles and goals. It would be unacceptable for the world economy to return to its former trend of stable prices if the new conditions of equilibrium implied a structure of relative international prices involving an even more unfair deterioration in the terms of trade of the majority of the developing countries. Steps must therefore be taken to prevent the anti-inflationary policies from being reduced to a “zero sum” game in which some countries flourish as a result of world price stability at the expense of others whose welfare is impaired thereby. We feel that the present situation should also give birth to formulas that will ensure a definite and continued improvement in the relative prices of primary products.

While acknowledging all the difficulties of the present situation, we believe that it is useful to emphasize its negative aspects only to the extent that this makes it possible to adopt policies designed to solve these difficulties. But we should also warn that if this emphasis is not accompanied by positive action there is a risk that it will serve only to heighten the fears of further inflation and depression that are now pervading the private decision-making forums throughout the world economy.

The vicious circle of the present crisis, together with the accompanying crisis psychology, cannot be effectively broken except by the adoption of a new international economic order comprising not only rules of conduct designed to reconcile the different national interests but also a series of positive actions in the field of world economic cooperation. As part of the new international order provision should be made for effective participation by all nations in the decision-making forums, reform of the monetary system, equitable distribution of the burden of international adjustment, equitable allocation of compensatory financing, improved terms of trade for primary products, and transfer of real resources for development purposes.

Effective participation by the developing countries in the decision-making process must be a condition sine qua non of the new economic order. The creation of the Committee of Twenty for the purposes of monetary reform was a laudable step in that direction; however, we are concerned by the formation of nine exclusive groups among the most developed countries, which are to take major decisions regarding operation of the monetary system. The time has come when recurrent economic problems can no longer be dealt with on ad hoc bases that take into account only the individual interests of a small group of countries and relegate to second place the justified aspirations and interests of the great majority of nations.

In addition, the efforts of the Committee of Twenty in the field of monetary reform have shown that without a clear, decisive political will significant progress toward creation of a new world economic order is impossible. For the Committee proved unable to crown its work with adoption of an institutional framework consistent with the objectives and aspirations which lay behind its creation. Moreover, some of the thinking expressed in the Committee fails to face the pressing needs of the developing countries.

This cooperative effort, to which the Chairman and Vice Chairmen of the Deputies contributed effectively, nevertheless enabled the international community to lend its support to several partial measures, which were later adopted by the Executive Directors of the Fund in order to alleviate some of the difficulties in the current situation. Thus, it was possible to establish the new oil facility and extended credit facility. These mechanisms, though useful, are insufficient; they do not constitute satisfactory overall solutions. Some of their features are unnecessarily restrictive and will have to be revised; but we are confident that the general orientation revealed by these new facilities will contribute to the search for solutions compatible with the magnitude of the problems of the developing countries.

A new international economic order also requires an appropriate, equitable distribution of the burden of adjustment. Present economic circumstances imply a structural change in the balance of payments of almost all countries, since those accustomed to having a surplus on current account are now facing a deficit. This lends growing significance to international transfers of capital and to the policies relating to them.

This maladjustment can be corrected only by a set of measures aimed at closing the gap, in part through an adjustment of the domestic economies and in part through financing of the remaining imbalance. Both mechanisms for closing the gap require a closer collaboration among countries, since the adjustment measures cannot be adopted without adequate mutual agreement and evaluation of their consequences for the weaker members of the community, while at the same time avoiding the concentration of financing in a few countries. With regard to the latter element, we regard it as vital that there be established international arrangements of financial intermediation which, within the recycling process, isolate the cost and use of surplus financial resources from the jurisdiction of national monetary authorities, so that these resources may be shared in a manner compatible with the equilibrium of international payments in the world economy.

In the first eight months of this year, recycling operations were reflected in an apparent growth of international liquidity through the use of reserve currencies, concealing the fact that there was actually a liquidity squeeze and that an additional allocation of special drawing rights would therefore be justified. Moreover, the need to compete for surplus financial resources on the markets of the industrialized countries resulted not only in a reduced availability of funds for the developing countries, but also in upward pressure on interest rates, thus aggravating the burden of their external debt.

We would add to the foregoing that, in view of the indications that the international financial markets cannot continue to conduct recycling operations of the magnitude required, it is becoming evermore necessary and urgent to supplement those markets with an adequate enlargement of the volume of resources in the Fund’s oil facility for 1975 and to improve the terms of access to the facility.

In a broader context, we support a substantial increase in the Fund’s own resources through the enlargement of quotas now under consideration. We hope that this occasion will also serve to break the rigid quota structure which reduces the effective participation of the developing countries in the Fund’s decision making and arbitrarily limits the benefits derived by our countries from its credit facilities and from the allocation of special drawing rights.

On the institutional level, the Interim Committee of the International Monetary Fund must give high priority to assuring, within the adjustment process, an adequate flow of real resources to the developing countries. This task, which would deal with the problem in its global dimension, must of course be complemented by the establishment of practical, concrete, permanent mechanisms for promoting the mobilization of resources for the developing countries, as clearly illustrated in the items of the program of work, supported by the developing countries, for the new Joint Ministerial Committee of the Fund and the Bank on the Transfer of Real Resources—namely, amounts and quality of official assistance, improvement of access to financial markets, policies of international development institutions, maintenance of the real value of the exports of the developing countries, and special assistance to the countries most affected by the current situation. These functions complement, rather than duplicate, those of the Interim Committee. We therefore believe that the Fund should take an active part, by no means limited to a secondary role, in the work of the Joint Committee.

With respect to the proposed amendments of the Articles of Agreement of the Fund, we believe that priority should be given to creation of a link between the allocation of special drawing rights and the financing of economic development. Some of the amendments would also be integral components of the process of adapting the Fund to present circumstances and would benefit the majority of the member countries. Those pertaining to improvement of the terms of acceptance and transfer of SDRs have our strong support, as do those which would mobilize the Fund’s gold holdings and facilitate the additional subscription and payment resulting from a quota revision.

Finally, I want to seize this opportunity to express, as a Central American, our sincere gratitude to the countries of Latin America and the Caribbean and to Spain for the speed with which their central banks came to the assistance of our sister Republic of Honduras to alleviate the effects of the national disaster of two weeks ago on the balance of payments. In an exemplary collective effort, those central banks decided last week, at their meeting in Mexico City, to offer medium-term financial assistance similar to that offered by them last year after the earthquake that destroyed the capital of Nicaragua.

I view this as a demonstration of the way in which words and promises of international cooperation can be translated into concrete action among the members of the Fund. The collective assistance offered to Honduras renews our faith in the solidarity which should, now and always, constitute the principal motivation of the international community represented here.

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

Mr. Chairman, let me join others who have spoken before me in congratulating you for your thoughtful statement at the beginning of our meeting. The past 12 months have been a traumatic experience for the world as a whole and, in particular, for the developing countries like mine which are most seriously affected by a massive adverse movement in their terms of trade. The hopes and aspirations of these countries for accelerated growth of their economies and improvement in living standards of their people have suffered a setback in the absence of determined and decisive international action to enable them quickly to adjust to the new realities. Our business in this meeting will remain incomplete if we do not address ourselves to the problems facing these countries and make a determined advance toward their solution.

For many developing countries, the rise in the world prices of oil, fertilizers, foodgrains, and raw materials in the last year or so has imposed an unprecedented structural change in their balance of payments. India, for instance, faces a situation in which nearly 80 per cent of its export earnings will be spent this year on imports of three commodities: oil, fertilizers, and food. The very large increase in our import bill compared with last year is a consequence of the rise in world prices. On the other hand, many of India’s exports have not participated in the world commodity boom. Several developing countries are placed in a similar position.

The current balance of payments problems of these countries are compounded by the uncertainty with regard to the future. The developed countries, themselves plagued by large deficits in their current accounts, are still not agreed on the kind of measures which they need to take to avert economic disaster for the world as a whole. There is a danger of adjustment policies being pursued by these countries in response to their own national interests to the detriment of the economic well-being of the rest of the world. I would like to flag this as one of the most serious problems facing the world today.

We are disappointed at the outcome of various international efforts which have been mounted over the past several months to meet the crisis facing the international community. The Special Session of the United Nations General Assembly has called for the establishment of a new international economic order and the UN resolution has spelled out a number of measures both for the short run and over the medium term. The progress in implementing these measures has been tardy. We do not know when the proposed Special Fund will be established. We do not know if it will be established. The Emergency Operation which was to have been implemented by the beginning of last July is still seriously short of the target set for it; but we hope that meaningful support will be forthcoming for it in the course of the year.

The events of the last two years have vividly demonstrated the need to step up food production and to secure a more equitable distribution of available world supplies in a period of scarcity. The World Food Conference in Rome will have to go into these questions in depth. It is clear that a rational management of the world food economy cannot be secured by a blind reliance on market forces. We think that the present trading arrangements will be totally inadequate to meet the situation and new trade and transfer systems will have to be devised to ensure an equitable distribution of the world’s food supply among the nations of the world. This is a tremendous challenge facing the international community and we hope and trust that the major food exporting and the developed countries will not shirk their responsibility in this area which affects the very lives of millions of people inhabiting the globe.

It is, I think, generally recognized that the present and prospective imbalance in the food situation facing the developing countries requires vigorous efforts to augment domestic production in the developing countries. The modernization of agriculture in these countries requires a multidimensional approach embracing institutional changes as well as greater reliance on modern science and technology. It has been our belief in India that no solution to this problem can be effective without attention being given to the needs of the small and marginal farmers. Unfortunately, our present efforts to increase production are very seriously affected not only by the constraints on the availability of fertilizer but also by the steep increase in their prices. The developing countries’ share of world consumption of fertilizers being a modest 6 per cent, it should not be beyond the ingenuity of the international community to insulate supplies to developing countries from uncertainties attaching to world production and prices of fertilizers. There is clearly a need for a mechanism to ensure that minimum essential requirements of developing countries in respect of food, fertilizers, and fuel are met at prices they can afford to pay.

The Fund and the Bank face major challenges during the coming year in the areas of their direct concern—the international monetary system and development finance. We are conscious of the useful contribution made by the Committee of Twenty to the task of monetary reform; but I have no hesitation in saying that even the Committee would share the disappointment which is rightly felt among the developing countries at the fact that aspects of reform of special concern to developing countries have received inadequate attention. We welcome the proposal to establish the Interim Committee of Governors of the Fund and hope that it will speedily complete the remaining tasks.

As I see it, the immediate task facing this Interim Committee will be to secure acceptance of some of the proposals of most direct interest to developing countries. It would not suffice, however, for the Committee to propose a limited number of amendments to the Articles of Agreement without addressing itself to the vital questions of the future of SDRs, the need for global liquidity, and, more important than all, the need for establishing an effective link between SDR allocation and development finance. I believe I am right in saying that developing countries are united in their insistence that they find it impossible to endorse a package of amendments to the Articles of Agreement unless it includes meaningful decisions on the question of the link.

In the meantime, we are happy that the Fund management and the Board have taken the initiative to deal with some of the problems facing the developing countries. The establishment of the oil facility was made possible by the untiring efforts of the Managing Director and the cooperation extended by the oil exporting countries. We continue to be concerned, however, about the high cost of this facility which makes it difficult for many countries to have recourse to it except as a matter of last resort. The extended Fund facility also does not fully meet the needs of the situation. It does not provide adequate additionality in terms of resources nor is it for a substantially longer period than normal drawings. Above all, it is a matter of concern that the use of the facility has been made highly conditional.

On the role of gold and its price, it is clear that a policy should be evolved that will serve harmoniously the interests of members of the Fund, those holding gold as well as others. We recognize that member countries have their national interests; but organizations such as the Fund are established to reconcile the national interests of members for the common good. In that spirit, it needs to be stressed that gold price policies should be formulated cooperatively within the world community, taking fully into account the liquidity requirements of countries which hold hardly any gold.

I am happy that there has been general agreement on the proposal for the establishment of the Joint Ministerial Committee of the Fund and the Bank to deal with the question of the transfer of resources to the developing world and fulfilling the broad obligations of the international community to the task of economic development. In my view, the Committee should deal with all aspects of the question of development finance: the amount and quality of aid, the problem of mounting external debt of developing countries, and the need for suitable arrangements for funding institutions such as the International Development Association. I believe there is now an international consensus that the primary task before the Committee is to address itself to the urgent problems faced by the developing countries most affected by recent events.

The general studies prepared by international institutions in the course of the last year have helped a great deal in focusing attention on the nature and magnitude of the requirements of external capital during the next few years. The resource gap facing these countries has, however, widened and until such time as a more equitable environment for the growth of their trade can be created, a substantial increase in the transfer of capital from the developed to the developing world will be needed. In this context, I must express serious concern at the continuing high rates of interest in the world capital markets, which increase the cost of borrowing and which also tempts even development agencies such as the World Bank to reflect the high cost of funds in their own lending rates. The needed transfer of resources and technology will have to be primarily on terms which do not compound the already burdensome problem of debt service. . . .

There is need to recognize that the world can move to an era of meaningful international economic cooperation only if the developing countries are given adequate status and share in the working of international institutions, including the Fund and the Bank. A review of Fund quotas is due very soon and some preliminary consideration of the question has already occurred in the Board of Directors. While there may be merit in giving due weight to the economic strength of countries in the determination of Fund quotas, we cannot accept that this criterion should predominate. The fact that developing countries will have to have recourse to the Fund’s facilities, and on an increasing scale in an uncertain world, points to the inclusion of the criterion of need in the determination of the quotas. For several developing countries, debt service obligations constitute a severe strain on their balance of payments. The present formula for quota determination takes no account of this; nor does it give adequate weight to the poor or the least developed countries. The need for equity in the distribution of quotas is all the greater since the allocation of SDRs is related to the distribution of quotas. It is significant that the number of developing countries in the membership of the Fund has grown many times since Bretton Woods, and yet the share of developing countries in Fund quotas has by and large remained constant. There is need to redress this imbalance by a conscious political decision.

Closely connected with this subject is the question of the size of the Fund itself. There has been a phenomenal growth in the world trade from the days of the Bretton Woods Agreement. It has been our belief—and we have expressed it clearly in the early stage of the debate on the subject—that the present volume of world trade and correspondingly larger need for global liquidity justify a substantial increase in the size of the Fund.

Let me conclude by saying that the problems facing the international community in the coming years are going to be immense. The world is at a crossroads. One way is for the developed countries to remain preoccupied with problems of trade and adjustment among themselves with little or no concern for what is happening in the rest of the world; for the world, therefore, to continue to endure the present inequalities between the rich and the poor and for resources of the world to be enjoyed only for the benefit of the few. We can only hope that this is not the way which will be taken; for that way lies political and economic disaster. The other way is that of meaningful international cooperation which can be strengthened only on the basis of statesmanship on the part of all countries concerned. Today, more than ever before, the world needs such enlightened statesmanship. Indeed, we have come to a stage where there is really no alternative.

Statement by the Governor of the Fund and Bank for Korea—Yong Hwan Kim

It is a great privilege and personal honor for me to address this distinguished assembly today. At the outset, let me join my fellow Governors in expressing my sincere thanks to you, Mr. Chairman, and to Mr. Witteveen and Mr. McNamara, for your cordial reception and welcome. I also wish to express my deep appreciation to the President of the United States of America for his very warm welcome to us.

I am pleased to note that the work of the Committee of Twenty resulted in a final report accompanied by an Outline of Reform. This work was carried out during a period of great economic and financial uncertainties. I commend the long and hard deliberations of the Committee and also the ensuing endeavors of the Executive Directors of the Fund.

Although this Committee is to be dissolved, the work must continue until a workable and durable international monetary system is agreed and fully implemented.

The 1974 Annual Reports of the Fund and the Bank, and the opening speeches made by Mr. Witteveen and Mr. McNamara this morning, indicate that large and sudden increases in the prices of oil, foodgrains, other primary commodities, and related industrial goods are exerting a disruptive impact of unprecedented magnitude on the world economy.

Amid this turmoil, it is indeed heartening to observe that the chief executives of both institutions, Mr. Witteveen and Mr. McNamara, have played dynamic and creative leadership roles in coping with the extraordinary situation.

I appreciate the Fund’s initiative in introducing the oil facility, which is already providing balance of payments support to member countries. In this regard, I would like to commend the oil exporting countries and Canada for providing so quickly the financial resources needed to support the facility.

However, this facility as presently constructed will not be able to ensure anything like an adequate flow of funds to developing countries during the next few years. I wish to suggest, among others, that the facility be extended and enlarged until such time as continuing channels are established for recycling of oil dollars, and that special consideration be given to developing countries in determining future allocations of funds under the facility.

The Fund has also endeavored to enlarge its facilities for meeting the developing countries’ balance of payments difficulties, including introduction of an extended Fund facility. It is hoped that this facility will play a significant role in assisting member countries with special structural problems.

With regard to the Joint Ministerial Committee on the Transfer of Real Resources, I wish to welcome its establishment and look forward to its reviewing all aspects of the broad question of the flow of real resources to developing countries and its making concrete suggestions for appropriate measures including the SDR link.

One of the most serious problems facing the world today is inflation. The rate of inflation we are currently experiencing not only creates grave economic, financial, and social problems on a global scale but also hinders the stable and efficient operation of the international monetary, trade, and payments systems and impedes the steady growth of the world economy. All countries, therefore, have a very strong interest in finding early and effective solutions to the problem of inflation.

In this connection I am in full agreement with the views Mr. Witteveen expressed in his speech this morning that excessive anti-inflationary measures must not be allowed to generate international repercussions resulting in severe and prolonged recession. He rightly pointed out that “the emergence of severely recessionary conditions not only would be harmful in itself, but also could be expected to have a counterproductive effect in the fight against inflation.”…

In concluding, the suggestions I have made above are mainly addressed to the Fund and the Bank Group. However, the situation now confronting us is far too serious and complex to be left to these two institutions alone. It demands concerted action by all member countries of both institutions, rich and poor, industrialized and nonindustrialized, oil producing and non-oil producing, if substantial improvement can ever be made. It calls for farsighted vision, wisdom, political courage, and solid international cooperation on the part of leaders of all member countries.

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

At the present juncture, with the serious problems of the world economy threatening the daily life of each of our peoples and peaceful coexistence between nations, this meeting would be missing its purpose if it did not recognize the new responsibilities that our present situation has thrust upon it.

The last 12 months in the history of the world have magnified enormously the distance that separates us from our last meeting in Nairobi. The premise on which our organization was founded and has worked effectively has passed into history. This justifies our existence even more strongly. Our objectives remain and today they include the key to survival of world order.

However, the interpretation of human progress and well-being that we have served for the past 30 years has revealed its limitations and defects in terms which preclude any nostalgic return to the past.

Our efforts to develop world-wide prosperity by increasing the international movement of goods and capital, promoting equilibrium in international payments and the transfer of resources to developing countries have undeniably borne fruit. Our economy has become truly global. Consequently, every nation is suffering from the present difficulties and the uncertainties that lie in store in the immediate future.

The ambitious formulation of policies of constant growth has introduced a deep-rooted inflationary component in the dynamics of the economic situation, very different from any cyclical fluctuation. Monetary order cannot be restored with adjustments that seek to implement or revive old ideas.

But we are not here to bewail the past together. We are here to give evidence of the powers of decision and the willingness to accept risks and sacrifices that the international community must display in this situation.

The problems are well known: the violent upheaval that has occurred in the world’s economic structure due to the new prices of energy and many raw materials; the presence of a universal inflationary mentality nourished by a general expectation that costs of production, interest rates, and consumer prices will go up; and the confused and critical imbalance in the international payments system, with the resulting inability of the financial markets to master this new situation in a rational and lasting manner. Despite this, honesty requires us to point out that the generalized system of floating exchange rates has helped to avert certain even greater problems that might otherwise have occurred.

Given this picture, our organization cannot be merely a forum for ideas and abstract discussions. The world rightly demands that we take concrete action.

The basic outlines of this major task are, to my mind, briefly as follows:

(1) The national policies of our respective countries are debated within the limits of their own effectiveness. A world-wide problem cannot be countered with isolated or unrelated measures. The generalization of a system of restrictive monetary policies, following the classical format, may be more or less indispensable, but it does not get to the root of our problems. Monetary policy cannot by itself bear the whole weight of our problem. If we are to avoid an irreparable downturn in world-wide prosperity, what is needed are strong wage and price policies keyed to international approaches to growth reflecting levels of employment and international trade.

(2) The pervasive nature of inflation requires decisive action as a prior requisite for any national or global economic program. But we must realistically assess the structural roots of inflation, the limitations of the instruments at our disposal, and the social and production costs of restrictive policies applied indiscriminately. The elimination of world-wide inflation will require a longer time than would be desirable and thus we must draw up a realistic program for sustained action if we are to avoid the disappointments of failure of any precipitate step.

(3) We must recognize that recent events have brought about a major redistribution of world resources. And we must proceed realistically from the basis that this new situation is essentially irreversible. The transfer of resources and technology and aid programs for the poorer countries must reflect new approaches to global equilibrium.

(4) A rapid reordering of the system of international payments to reflect the new circumstances will require a responsible attitude on the part of all countries, both debtor and creditor nations, in the near future. The present imbalance cannot be allowed to persist into the medium term. Readjustment in the assignment of international financial resources is of concern to everyone and especially to those who will be in a position to accumulate such resources, since the system will become progressively less secure if instability and lack of trust prevail. For this reason, possible solutions must be examined and decided on a truly international basis. Any nationalist solution arrived at by interest groups or blocks of countries would carry within it the seeds of failure.

(5) We cannot underestimate the risks that the future may hold. Our problems cry out for an answer. As the months slip by, the situation will not only become less and less tenable but a realistic solution will become progressively more difficult to achieve.

(6) The Fund and the World Bank must meet this problem by adopting a new approach based on their past record of achievement and the position of trust they enjoy in the international community; in this way, both time and money will be saved. But the organs of the two institutions, required to take more far-reaching and vital decisions in the future, must respond with up-to-date procedures reflecting the present relative weight of the various countries. Dilatoriness in adjusting quotas and limits on the composition of the governing bodies would be incompatible with an organization called upon to take effective action on the world economic scene. In saying this I am merely reiterating the repeated complaints of the Spanish authorities.

What we need is not to return to the past but to establish a new concert of nations to ensure coexistence and progress. This policy must have regard to new realities; new sets of conditions; greater equity in the allocation of world resources; greater service to mankind, with the emphasis placed on the quality of the progress made; and on the environment, which we must preserve and enrich for the human race.

The only solution to this problem today is by consensus and compromise on the part of all the world’s nations. And this cannot be imposed, either by the virtue of our technical arguments or by the might of interests.

It is essentially a grave political problem. To tackle it as I hope, we need to offer the world confidence and hope. We have to eliminate the first cloud on our horizon—doubt concerning sincere and positive international cooperation. The world is not going to give us such trust gratuitously. Like all forms of trust, it has to be won. So, what I ask for and expect from the leaders of our institutions and from all of you is resolute good will, and at the same time I offer on behalf of my country cooperation without reservation. I believe we have recently given adequate proof of this cooperation in the form of the decisions adopted on the occasion of the monetary realignments of 1971 and 1973; a notable fidelity to the guidelines of the Rome communiqué of January 1974; an effective and real contribution to the currency budget of the International Monetary Fund; a maintenance of economic activity without application of any measure restricting commercial interchanges; and a policy of aid and cooperation vis-à-vis a large number of developing countries.

And, last of all, I should like to thank you for the attention with which you have heard my remarks which, I stress, are dictated solely by a profound and sincere spirit of true international cooperation on the part of my country.

I should like to hope we should be equal to our responsibility in this time in history.

Statement by the Governor of the Fund and Bank for New Zealand—H.G. Lang

I would like to begin by thanking the Managing Director of the Fund and the President of the Bank, together with the staffs of their respective institutions, for their considerable efforts during recent months to alleviate the increased distress of those countries most seriously affected by current events.

Since last year’s Annual Meetings in Nairobi, the international economic situation has deteriorated sharply. Rates of inflation in most economies have reached alarming levels with little sign of easing, despite a general slowing in economic activity. The latest OECD forecasts for member countries are for continuing price increases with little real growth in output during the rest of this year. These prospects place many primary producers, which in the main are developing countries, in a particularly precarious position. They are faced with continually increasing prices for the manufactured goods they must import, while at the same time the outlook for the export prices of many primary products is unfavorable. Indeed, if the recession in general economic activity in the industrial countries worsens, prices of those commodities which are now high or satisfactory can be expected to fall dramatically. Mr. Chairman, you yourself, Mr. Witteveen, Mr. McNamara, and other Governors have dealt more effectively than I could with the problems of inflation, international monetary reform, recycling, exchange rates, commodity price stabilization, and, above all, increasing the transfer of real resources to developing countries.

The major point I want to stress today is that any further tightening in the major industrial countries is likely to have disastrous effects on the economies of primary producers and developing countries. I propose to do this by discussing briefly recent developments in New Zealand.

There has already been a severe reversal of New Zealand’s terms of trade. This reversal is of such magnitude that we would face an absolute decline in national income if we endeavored to achieve balance in the foreign exchange current account solely by measures of demand restraint. But the New Zealand Government considers that such a degree of restraint is in the best interests of neither New Zealand nor its trading partners. We recognize that the level of activity in the economy must be kept within the limits imposed by our ability to earn foreign exchange in the longer run, but we also believe that adjustment to the terms of trade deterioration must involve a run down of foreign reserves and substantial overseas borrowing.

I am not discussing what has happened to New Zealand from a selfish viewpoint. In the case of my country, restraint of demand will reduce activity from a very high level. The running down of reserves is starting from a point of strength, and the raising of foreign loans represents the utilization of a borrowing capacity inherent in the basic wealth of the country.

The adjustments required of us will be uncomfortable, to say the least, but our concern, and the concern of all members of this organization, must be for those primary producing countries which have not the reserves of economic strength which are needed to absorb the adjustment forced on them by deteriorating terms of trade. The people of those countries, in some cases already suffering severe deprivation, will have their standards of living reduced still further. Common humanity demands that those of us who are better placed do not adopt policies which will bring this about.

The New Zealand Government therefore appeals to the industrialized countries to recognize the need to sustain activity in their economies at a level which will avoid too severe an effect on the foreign trade of developing countries. In particular, I would like to draw attention to the depressive effect on the demand for primary products and other commodities of intensive monetary restraints which have a particularly severe effect on inventories. In this and other forums, countries have been asked to avoid trade and payments restrictions as a means of overcoming current account deficits, but we must also accept that the overzealous use of deflationary monetary policies in the fight against inflation has very detrimental effects on the level of international trade.

Economic activity can only be maintained at adequate levels if the surplus revenues accruing to the oil exporting countries are recycled to the oil consuming countries by way of loans or investments on reasonable terms.

The developing and smaller countries have already encountered difficulty in borrowing adequately to meet their immediate balance of payments requirements, compared with those countries that possess well-developed capital markets. The Fund is to be congratulated for its efforts to recycle part of the oil surplus to consuming nations in such a way as to ease the increased import burden of these countries. The impact of current events on the poorest countries is particularly severe, and present economic conditions threaten to nullify much of the development that has occurred in recent years. Higher costs of imports will absorb much of the development assistance that these countries can expect to receive during the coming year. The efforts of the World Bank in securing funds from the oil producers for relending to the developing countries is a valuable contribution, but clearly is insufficient in the light of the magnitude of the new burden that has been placed upon them.

For our part, we will continue to increase aid disbursements to attain the aid target of 0.7 per cent of gross national product. This year the Government has increased the allocation for spending on aid by over 60 per cent. Later this week, New Zealand will formally sign the Articles of Agreement of the International Development Association. For some years, we have been making voluntary contributions to the Association and are now contributing to the Fourth Replenishment of its resources. However, our efforts will be concentrated mainly on the smaller nations of the South Pacific, with which we have an especially close relationship. The urgent need for these countries is development that will expand employment and lessen their dependence on imports. In conjunction with our official aid programs, therefore, my Government has recently embarked on a policy to encourage the establishment, by the New Zealand private sector, of suitable activities in the South Pacific which can provide employment and increase living standards. This policy will be conducted in close cooperation with the island governments concerned. This is positive evidence of New Zealand’s determination to assist developing nations.

Although the Committee of Twenty concluded its work without being able to implement many of the reform measures that have been under consideration, the main objective of comprehensive reform of the international monetary system should not be lost sight of. In this respect, the establishment of an Interim Committee of the Board of Governors of the Fund, prior to the establishment of a permanent body, is to be welcomed. Given the truly international scale of present-day economic difficulties, effective international cooperation is more necessary now than ever before.

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

Two major questions today face the international community in regard to development cooperation: to render efficient assistance to developing countries most seriously affected by the economic crisis and to pursue the efforts to establish a new international economic order. The World Bank Group is called upon to play an important role in both these fields. It has already changed its lending policies to respond better to the urgent needs of the poorest countries. The five Nordic countries—on behalf of which I make this statement—sincerely welcome this decision.

As to the second matter, I wish to recall that the Special Session of the UN General Assembly half a year ago declared that the international economic order should be founded on such principles as equality of all states, sovereignty over natural resources, and full and effective participation of all countries in solving world economic problems. The declaration further stressed that the role of the United Nations system should be strengthened in international economic cooperation. The five Nordic countries support this declaration. It is in this perspective that we view the present discussion of setting up new institutions for development cooperation. The Development Committee, establishment of which is foreseen during this Annual Meeting, must be a part of the overall effort to implement the declaration. We hope that the expectations of positive results from the work of the Committee, not least expressed by Governors representing developing countries here, shall be met. It is with the understanding that it shall not engage in duplication of work or encroach on existing universal organizations that the Nordic Governments will vote in favor of the proposed Committee. . . .

September 30, 1974.

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