Discussion of Fund Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1974
Statement by the Governor of the Fund and Bank for Western Samoa—F. P. S. Saili
This is the first meeting since Western Samoa became a member of the World Bank Group and, under these circumstances, it is felt appropriate to make some brief comments.
I recognize that my country is indeed a small one, but would stress that problems facing all such developing countries are no less difficult because their size happens to be small; and because of our extremely limited domestic market it is impossible for us to ever hope to be fully self-sufficient and so we must therefore rely on an increasing volume of international trade in order to achieve sustained economic development. It must be stressed that the development aspirations and needs of the individual do not change with the geographic size of the country in which he happens to live. The undesirable effects of international inflation and an unstable international monetary system have just as much impact in real human terms on an individual living in a small developing country such as Western Samoa as is the case for individuals living in much larger developing countries. Our economic problems, therefore, cannot and must not be isolated because of our size, but are just as real for us as they are for the rest of the developing world.
We have been most appreciative for the technical assistance in various areas provided by the International Monetary Fund, and we are most grateful for the Fund’s rapid response to requests for technical assistance that we continue to make from time to time.
Western Samoa hopes to obtain its first International Development Association credit very soon and we trust that this will mark the beginning of further inputs of vitally required financial assistance from this organization. An additional input of capital for the remaining years of this decade is essential if our country is to meaningfully raise the standard of living of its people. Our Third Five-Year Plan which is due to come into effect on January 1, 1975, seeks to increase our productive capacity as its prime objective, and in order to achieve this aim it will be necessary to have access to outside capital on grant or concessional loan terms.
Instability in the international monetary system and a seriously high level of international inflation are affecting nearly all countries of the world, and the combined effects of these two forces have caused particular disruption of plans for economic and social improvement of many developing countries.
My people have been prepared to make considerable sacrifices in the interest of economic development. My Government has taken certain measures aimed at stabilizing our economy and prices and we are following a very strict wage policy to try and ensure that the effects of imported international inflation are mitigated internally as much as possible. In this respect, I note that Mr. Witteveen indicated that he considered the time was suitable for industrial countries to utilize price and income controls. International inflation is surely one of the most serious problems presently frustrating development efforts of the poorer countries and it is noted that many of these countries have shown admirable self-restraint in imposing strict internal price and income policies. If the industrialized countries would emulate the price and income controls imposed by many of the developing countries, such action at the present time would surely go far toward reducing their own level of inflation and thus the level of international inflation. The concept of wage increases only following productivity increases is surely of universal applicability at the present time.
I would strongly commend and support the action of the Fund’s Managing Director and the OPEC countries in establishing a Fund oil facility and an OPEC loan fund through which a portion of oil monies can be recycled. These facilities for recycling should be expanded and it would also seem essential for loans to be made available from these sources on soft terms, especially to the least developed countries.
The Fund’s recent action in raising the interest rate on the use of the Fund’s resources in the General Account is regretted, as is the increase of interest rates on the use of special drawing rights. This change is definitely to the detriment of developing countries. We do welcome, however, the establishment of a new extended facility for the use of the Fund’s resources under which developing countries will be able to receive longer-term balance of payments finance. It is unfortunate that the Committee of Twenty was not able to come forward with an agreed solution to a problem of a link between special drawing rights and development finance, but it is reassuring that this vitally important matter has not been permanently abandoned but is one of the items for further consideration by the Interim Committee.
The recommendation of the Committee of Twenty to set up an Interim Committee of the Board of Governors is a most positive approach. Strong support for this Interim Committee by all developing countries and smaller developed countries would seem essential if these countries want their voice to be effectively heard in international monetary matters. This Interim Committee must take a bold, dynamic, positive approach and should receive strong and continuing support from all Governors and the Fund’s staff, so that it can provide a vehicle through which all of the International Monetary Fund countries, developing and developed, small and large, can assist with the long-term reform of the international monetary system. It is thus considered that the Interim Committee deserves the strongest support from all Fund members and Fund staff to ensure that it does become a meaningful, flexible, and dynamic body effectively working toward international monetary reform and the solution to other factors inhibiting the transfer of real resources to developing countries. It is to be hoped that the Interim Committee will study the present organizational structure of the Fund and Bank and the present effectiveness and administrative capacity of these organizations to deal with current needs and problems in our rapidly changing world.
I am concerned with the form which the Annual Meetings have come to take and perhaps some changes might be worthy of consideration. I suggest that, although all delegates are vitally concerned to listen to the statements from the Joint Chairman, the head of state of the host country, the Managing Director of the Fund, and the President of the Bank, perhaps there need only be enough additional read statements from Governors to last the first two or three mornings. All other Governors wishing to do so could table their statements. All afternoons could be left free for smaller meetings to take place, but on each of the “unused” mornings a matter of current international monetary concern could be discussed. Such a discussion could be started off with brief comments (which support a previously circulated paper) by a world authority in the field or by a previously selected Governor with particular knowledge and practical experience of the topic to be discussed. Following this introduction, Governors would have the opportunity to speak, comments from all Governors being restricted to a maximum time limit. Finally, future meetings could perhaps place some limitation on the size of delegations and the number of special guests attending.
My country is in a position where technical assistance from the Fund and concessional loan assistance from the Bank is of enormous importance to the fulfillment of our development aspirations. We are believers in self-help and consider that Samoans are the best people to solve the particular problems of our country. However, the need for competent technical advice on specialist matters and the need for additional finance to increase the productive capacity of our country are obvious to all of us. For these vital ingredients of the development process in our country, it is with great appreciation that we can look to the Fund and the Bank for some assistance. In this respect the keynote addresses given by Mr. Witteveen and Mr. McNamara show that, under the able guidance of these two dynamic and dedicated men, the Fund and the Bank will continue to play a vital and responsive role in world monetary matters.
Statement by the Governor of the Fund for Indonesia—Ali Wardhana
The year under review, as always reflected with care and thoroughness by the Fund and the Bank in their Annual Reports submitted to us, was a year characterized by great stresses and strains without much hope for marked improvement in the remainder of 1974 or possibly even in the coming year.
I would like to commend highly Mr. McNamara and Mr. Witteveen for their success in safely steering the Bank and the Fund through the troubled waters of international and development finance. They have succeeded, in the face of numerous and unpredictable odds, to safeguard the most essential functions of their institutions. I should include in my praise the two Executive Boards and their staffs for their tireless efforts to develop devices necessitated by ever-changing, and at that sometimes worsening, circumstances.
Let me congratulate you, Mr. Chairman, for your nomination as Chairman. We are proud to have you, a widely experienced representative of a developing country, in the chair, and we are confident that your wise guidance will make our meeting a success.
My remarks are related to three interdependent areas which, moreover, cover or affect the activities of the Fund and the Bank. They are the world economy, the international monetary regime, and the plight of the less developed countries.
The world economy in 1973/74 seems to be in the worst shape since the end of World War II. Inflation, sluggish growth, and balance of payments problems have been with us in varying degree and form. They have become a world-wide problem.
Let me from the outset state that I do not believe in a world-wide depression as in the 1930s. Unlike in the 1930s we do not have a collapse of prices subsequent to a deliberately strong deflationary policy based on a wrong interpretation of facts and a wrong understanding of equilibrium. After Keynes we know that equilibrium does not necessarily generate full employment. The major countries do have the means to thwart a repetition of the 1930s, and statistical data have improved substantially allowing them to keep track of the actual shape of their economy. However, it remains prudent to have contingency plans as some countries already have, but such plans should be coordinated internationally. Coordination and cooperation on an international basis have never been more needed than now.
There is undeniably a deceleration of growth everywhere, in some countries and sectors more than in others, but if one studies the data presented by the Fund and the Bank and such other institutions as the OECD, there seems to be no unused productive capacity on a large scale simultaneously with a serious breakdown of demand. Let me, for instance, mention the figure of real GNP growth for 1973, which according to the Fund’s 1974 Annual Report was 6½ per cent for the developed countries and 7½ per cent for the less developed countries (1972–73). Some further decline may be expected for 1974, but so far no alarming dips have been registered. The only exception seems to be the stock market which, however, may be connected with psychological fear rather than the actual performance of business enterprises.
The problem of inflation is a different one. In the industrialized countries it has reached a figure of 12 per cent; in the developing countries the figure is even higher. Increasing prices are detrimental to economic growth, which they erode, but more importantly they are a threat to the subsistence of the common people, especially in the developing countries. I therefore agree that combating inflation for the sake of protecting the incomes of the common people and of a sound and sustained real economic growth should receive priority. We are used to wielding demand policy as a weapon by trying to blend fiscal and monetary policies in an adequate manner. At that the matter is not, under the present circumstances, to reduce demand but to limit its expansion. However, demand policy should be supplemented by supply management as well. This aspect has not been fully explored. Basic commodities such as food and fertilizers ought to be made more available and productivity stepped up. The Fund’s Report also touches on incomes policy. In my humble opinion an incomes policy can only be permanently effective if there is a common understanding between the relevant sections of the society and the government that restraint, and therefore a reordering of claims on resources, are for the benefit of all. This is a political and not so much an economic problem, which consequently has to be solved politically within the framework of each country’s political system. No stabilization program aimed at the restoration of equilibrium can be implemented without sacrifices. It usually leads to a temporary setback. The problem is that every sector would like to see those sacrifices shifted to others. It is necessary that the government persuade its citizens to share the common burden, although of course the weak should bear less than the strong.
Permit me to make one or two other observations with regard to inflation. I do not agree with the view that the rise of the price of primary products was one of the causes for inflation in the industrialized countries. It is inflation itself, already existent in those countries with all its psychological fear for more inflation, which exercised a larger demand for primary products. The market of these products is imperfect with the imperfection on the side of demand. The oil problem is in a different category.
The problem of the balance of payments needs serious attention. The fact of large deficits and large surpluses does not contribute to an orderly development. Again, the balance of payments is related to inflation, and its reduction will improve its position. A complicating factor is the substantial increase of the price of oil, a problem for which the world has still to find a solution. The Rome communiqué strongly recommends financing deficits arising from oil rather than adjusting one’s economy to it, because the latter may lead to a depression. A substantial shift of resources is taking place which somehow has to be absorbed by the relevant economies. I do believe that after the shock waves have receded and emotional feelings have calmed down, an atmosphere of cooperation will prevail which should be conducive to finding mutually acceptable arrangements. This is essential for the restoration of equilibrium and the resumption of balanced growth.
Let me now turn to the international monetary regime. The present regime has been dominated since 1971 by the de facto replacement of the Bretton Woods system by one of generalized floating. This, like the fact of higher prices of oil, is the reality of the present, and neither nostalgia with regard to the past nor speculation or hope with respect to the future would alter it. What we need is to establish as much order and stability as possible in the present situation of floating rates and to gradually probe our way toward a more permanent and better system as, for example, envisaged in Part I of the Outline of the Committee of Twenty, which states, inter alia, that the main features of the international monetary reform will include an “exchange rate regime based on stable but adjustable par values and with floating rates recognized as providing a useful technique in particular situations.” Unless we accept the law of the jungle, we must look for ways and means to establish orderly conditions governed by rules or guidelines agreed upon internationally.
It seems to me that two kinds of recommendations made by the Committee of Twenty should be further explored. One is related to the multicurrency intervention system and the other is the use of the guidelines on floating. When we speak about floating, nobody thinks any more of the so-called clean floating. Every country manages its floating and intervenes in the market. There should be an agreement on who is supposed to intervene and further, how, when, and to what extent one intervenes. It seems to me that short of intervening by way of SDRs, which would be possible only if we were again in a par value regime, the multicurrency intervention system should be studied by the major countries. This system will introduce more discipline as necessary, especially in a period in which major countries with reserve currencies are not yet willing to adopt the obligation of convertibility.
Another recommendation is related to the guidelines for the management of floating exchange rates which have been agreed on but not yet put into practice by major countries. I recognize that inflation and unsettled balance of payments conditions may not be too conducive to the implementation of harmonizing intervention and of reaching target zones envisaged in the guidelines, but we must make a beginning while meanwhile forcefully tackling the problem of internal and external balance.
The third area on which I would like to make a few comments is the plight of the less developed countries. The Reports of the Bank and the Fund give ample data on their very difficult situation. Inflation, slow growth, balance of payments problems, and uncertain exchange markets have a more serious impact on the less developed countries because they usually have smaller financial margins with which to cushion the shocks shaking their economy. On top of that the specter of hunger caused by natural disasters looms over many countries.
It is necessary to assist them since the world is small and no country can live, unaffected, in splendid isolation.
A first requisite is that the relevant countries should do everything possible to put their own houses in order, with a view to creating an appropriate climate for both development and balance of payments purposes. Mr. McNamara is fighting an uphill battle in his efforts to secure an adequate amount to continue supporting the growth of the economies of the less developed countries. He has been able to attract part of the surpluses of oil exporting countries for that purpose. Mr. Witteveen also was successful in establishing the oil facility in the Fund to finance part of the relevant countries’ balance of payments needs. Oil exporting countries have to be commended for their willingness to alleviate the plight of countries in need. Both Mr. McNamara and Mr. Witteveen should be encouraged to continue their efforts, which also should be directed toward developed countries, especially those with a strong balance of payments or reserve position. And governments should, as they agreed in Rome at the beginning of this year, refrain from cutting their aid flows. I would like to express my appreciation to the Secretary-General of the OECD for his efforts to stress the need for a continuation of assistance to the less developed countries.
The Fund, apart from the most helpful oil facility, has recently established the so-called extended Fund facility which will provide the less developed countries with somewhat longer-term financing for their balance of payments deficits besides normal drawings under stand-by arrangements and other existing special facilities.
But the need of the less developed countries for financing their balance of payments and economic development has become much larger under the present circumstances. A lower demand for their products is expected in view of the “stagflation” in the major countries and of rising import prices, including oil, food, and fertilizers.
There seem to be two types of financing required in connection with both the shorter-term need of the balance of payments and the longer-term need for development purposes. Soft loans or grants should be made available to the least and most affected developing countries; those in a stronger position could be provided with assistance on more conventional terms.
Governments are the main source for grants and financial resources on DAC or IDA terms. At the other side of the spectrum is the capital market, in which at present more money is available but of a short-term character; on the other hand, there is much greater demand for longer-term financing emanating from the developed and the stronger developing countries alike. The problem of recycling is crucial, and I wonder if we should not allow the Fund and the Bank to borrow on more normal terms. It will be easier for the less developed countries to borrow from the Fund and the Bank, and presumably the cost will always be somewhat lower than the market. The Fund could use the oil facility for that recycling purpose and the Bank could issue bonds at higher rates than at present. I do not know if a “soft window” is possible in the Fund. If it is so, I would like to support it. IDA resources in any case should be increased.
The Fund’s Report also alludes to the probability that global liquidity may not be as abundant as before. Serious thought must be given to increased unconditional liquidity in the form of a new allocation of SDRs, hopefully including the establishment of the link and also to enlarge the size of the Fund as a source of conditional liquidity. Moreover, the problem of gold should be further analyzed with a view to finding a solution equitable to all countries.
These are a few of the observations which I would like to make with regard to the plight of the less developed countries, which is related to problems of the world economy and the international monetary situation. In the appropriate forums, such as the Interim Committee, the Fund and Bank Joint Ministerial Committee, and of course in the Executive Boards, continuous attention should be paid to them.
Let me end my intervention by welcoming a friendly neighbor of my own country, Papua New Guinea, which shortly will join our rank. I also would like to express my deep appreciation to the Government of our host country, the United States, who as befits its great tradition of hospitality, has again provided us with everything we need for our comfort and the successful conduct of our Annual Meetings.
Statement by the Governor of the Fund for the United Kingdom—Denis W. Healey
First let me follow Mr. Witteveen in expressing a warm welcome to Papua New Guinea, something which gives me very special pleasure as a fellow representative of the Commonwealth.
Our debates this year are inevitably dominated by the somber but realistic statements made yesterday by Mr. Witteveen and Mr. McNamara. We should all be grateful that we have men of such wisdom, experience, and compassion to guide our work.
The last 12 months has undoubtedly been the most turbulent year for the world economy since the 1930s. Very few countries represented here have escaped the consequences of this economic earthquake, although, speaking as a politician, I suspect we all find it difficult to persuade our domestic electorates that the problems which we face are in fact world problems, stemming in the main from causes which can be dealt with only by action on an international scale. In fact, the responsibility for making sure that the tragedy of the 1930s is not repeated in detail over the next few years rests on us collectively—the finance ministers and central bankers gathered in this room today. Posterity will not forgive us if we fail in this responsibility.
Mr. Witteveen emphasized the central dilemma we all face by pointing out that while the increase in oil prices has given added impetus to the inflationary spiral already under way, it has also brought about potentially deflationary effects. The problem is not one of inflation alone but rather of what he called “stagflation” or even “slumpflation.”
He was right to warn us that if we seek solutions to this problem by exclusively national measures, there is a real risk that we may generate international repercussions which result in a severe and prolonged recession—a recession which, in addition to its disastrous consequences for employment and output in our countries, would also seriously hamper our fight against inflation.
It gives me some satisfaction to record that, whatever may be urged in quarters which carry no responsibility for action, there is not one government represented here which believes that it would make sense to attempt to deal with the inflationary pressures from which we all are suffering by measures which would be likely to produce mass unemployment.
I welcome in particular the recent statement of Secretary Simon to the Senate Budget Committee that though demand would have to be held slightly below potential output in the interests of fighting the problem of inflation, massive unemployment was not required. For none of us can hope to avoid disaster if there is a severe recession in the United States.
I now pass to the problem in which our organizations must be most directly concerned—the consequences for the international monetary system of the fact, so clearly stated by Mr. Witteveen, that because of their present inability to absorb imports to the value of the oil they export, the major oil exporting countries will this year realize an aggregate current account surplus in the range of $60–80 billion, and that this surplus will be matched by deficits on the part of oil importing countries throughout the world. In these circumstances the oil importing countries as a group cannot eliminate their overall current account deficit in the short run. Attempts to do so would only reallocate the deficit among the oil importing countries and might lead to a serious contraction of world trade and economic activity.
I only wish that the inevitable implications of this fact were more widely understood. We must, of course, avoid wasting any source of energy. Conservation must be a major element in our approach to this problem. But however successful we may be in reducing our demand for oil by conservation, if we were to limit our imports of oil to what we can pay for year to year by exports we would create bankruptcy and unemployment on an unprecedented scale. So we must accept deficits on our balance of payments of a magnitude hitherto unthinkable, and we must finance those deficits by borrowing. This will be inescapable until the time when the oil exporting countries are capable of accepting goods and services to the value of the oil they export and in repayment of the debts we have incurred meanwhile.
The central problem therefore facing us as members of the International Monetary Fund is to ensure that countries with these inevitable balance of payments deficits on oil account will be able to cover them by borrowing. I fully support Mr. Witteveen’s insistence that this problem does not relieve those countries which have a deficit resulting from their trade in products other than oil from the obligation to eliminate their non-oil deficits. We in Britain have made substantial progress in this regard this year. Nor does it relieve those countries which have a non-oil surplus from the obligation to take the measures necessary to enable the non-oil deficit countries to achieve a balance in their payments. Governments with a strong external position have every interest in letting their peoples increase their real consumption by permitting their imports to increase.
But although we must individually all seek to achieve a neutral balance of payments on non-oil account as fast as possible, it will be physically impossible for the consuming countries as a whole to achieve a neutral balance of payments with the oil producing countries as a whole for several years to come, except by sharply restricting their imports of oil and at the expense of mass unemployment and a collapse of production. Such a course would not only produce catastrophic political consequences in the consuming countries. It would also lead to a collapse in the world demand for oil—and for other commodities—which would rob the oil producers of the advantage which they believe they have derived from the increase in oil prices over the last 12 months. And the worst sufferers of all would be those developing countries whose economic progress depends above all on a high level of world demand for their products. This is why at the meeting of Commonwealth finance ministers in Ottawa last week we stressed in our communiqué the overriding need to avoid the spread of difficulties through actions and policies which might ease the problems of one country at the expense of worsening those of other countries.
The problem then which confronts us all, whether we are oil producers or consumers, is to find some means by which the oil consuming countries can continue to finance the purchase of the oil on which they depend to maintain production at tolerable levels. In other words, we must find some means by which the oil consuming countries can borrow the so-called petro-dollar surpluses of the oil producers in proportion to the deficits which they will incur if they maintain adequate oil imports.
Unfortunately, for reasons which we all understand, the petro-dollar surpluses of the oil producers, although they are likely to be held somewhere in the consuming countries, will be distributed in ways which bear no relation to the distribution of the oil deficits. The problem of recycling these petro-dollar surpluses so as to match the needs of the countries with oil deficits is therefore one of critical importance, not only for the oil consuming countries but also for the oil producers.
At this moment we are little more than half way through the first year of this crisis and existing mechanisms for recycling the petro-dollar surplus have operated with remarkable efficiency. The private banking system in the consumer countries, operating in particular through the Euro-markets, has met the need, with some assistance from bilateral borrowing agreements between individual consumer and producer countries. I hope and believe that the private banking system will continue to play a major role in this recycling, a task now rendered easier by progress which has recently been made by our central bankers in monitoring these vast capital movements and in establishing responsibility for dealing with any disturbances which may arise.
But I doubt if any of us believe that, as the scale of the recycling problem increases, it will be possible for the private international banking system to handle the whole problem on its own. We can already see difficulties arising in the Euro-currency markets—in the extent of maturity transformation, in the willingness of banks to accept deposits, and above all in the capital ratios of major banks. These limitations are founded on prudence and in some cases on law. We would all be unwise to ignore them.
These are problems for what is often called the developed world. But Mr. McNamara has given us a startling insight into the scale of the problems now facing the less developed countries. If I may I would like to pay tribute now to the dedication with which he has compelled the wealthier among us to face problems it is all too easy and tempting to ignore.
He reminded us of what we in the developed world too often fail to realize—that whatever our problems, the countries which are suffering most, in human terms, from the recent increases in the prices of oil, fertilizer, and foodgrains are the poorest, with per capita incomes averaging less than $200 a year and with populations totaling one billion. Those of us who are more fortunately placed should recognize that the stability of the world in which we live will be seriously endangered if we fail to take practical steps to deal with the burdens now imposed on them. . . .
In the immediate future the UN program of emergency measures is of great importance to all countries badly hit and, in particular, to the poorest. I earnestly hope that all countries more fortunately situated will be willing to contribute to this program.
Mr. McNamara’s statement pointed out how great an increase in official development assistance would be needed in the coming years if the poorest countries were to achieve even a modest rate of per capita income growth: I think that, in a situation in which concessional funds are inevitably likely to be much smaller than the need for them, we should increasingly concentrate them on the countries whose needs are greatest.
I welcome the setting up of the new Development Committee. This should help us to deal more effectively in both the short- and the longer-term with some of the problems of all developing countries. I hope that the new Committee, with its special links with both the Fund and the Bank, will range widely over the whole field of development finance.
But although the problem facing the developing countries is more acute, that which faces the developed countries is very much larger in scale. It may constitute a more urgent threat to the stability of the international economy. Of the total deficits which are the counterpart of the oil producers’ surpluses, industrial countries are at present incurring some $50–65 billion a year.
I have referred to the contribution which the private banking system can make to the recycling of the petro-dollar surpluses and to the growing limitations of this mechanism. In particular, I doubt whether any country which might become a major recipient of petro-dollars beyond what is required to meet its own oil deficit would welcome the problems which such an inflow would create for its domestic policy on interest rates. And I doubt if it would wish to assume a national responsibility for recycling those deposits when it is clearly desirable that this responsibility should be internationally shared.
In fact we need a variety of mechanisms to supplement what the markets can achieve by themselves. Direct bilateral borrowing from oil producers has already played, and will no doubt continue to play, a useful supplementary role. There might be opportunities for the BIS to mobilize funds. The members of the European Economic Community are currently examining a possible scheme for Community borrowing. The recent proposal by the Federal German Government for an international investment bank could also help us here.
We need not look for one complete and final answer. But I regard the problem as urgent, and at least for the next phase I think we should be wise to use existing institutions. As Mr. Witteveen said yesterday, there is an overwhelming case for the International Monetary Fund to accept a further role in the recycling of the petro-dollar surplus. Mr. Witteveen has already established in the Fund a useful oil facility amounting to $3.5 billion which should be of particular value to some of the developing countries. I believe there is a powerful case for establishing a much larger facility through which a significant proportion of the petro-dollar surplus can be firmly invested in an international organization so that we have a basis on which we may cooperate over the distribution of finance among the consuming countries.
My concept is of a new facility in the Fund for the investment of petro-dollars attracting an interest rate which would reflect the strength of the obligation offered by the Fund without being concessionary like the rate in the present facility at the time when it was negotiated. The consumer countries would benefit from the cooperative recycling of the oil surpluses, while the producers would have the advantage of investing in an excellent asset in the form of a claim on the International Monetary Fund. I propose that Mr. Witteveen and the Executive Board should now consider how it might be possible to build on the existing facility for this purpose. I would hope that the results of this study would be completed in time for the new Interim Committee to consider this question not later than the end of this year.
I do not deny that this concept raises difficult and unfamiliar problems in many fields. We would be wise to move one step at a time and to see how we go, learning from experience as the facility expands. For we should see this operation as a continuing process, not simply a once-for-all transfer. It will develop in stages as the funds accrue to the oil producers and the needs of the consumers grow in parallel.
Of course this concept neither can nor should provide the whole answer to the recycling problem. But it would have many advantages. In particular, it would for the first time engage producers and consumers alike in a continuing dialogue about at least one aspect of the problem which has developed from the massive increase in oil prices last year. This dialogue would start from the recognition of a certain common interest which links consumers and producers, and I believe that it could lead to constructive discussions on other aspects of the problem.
For the time being, however, it would stand by itself as a useful contribution toward the recycling of the petro-dollar surpluses. One condition only I would set for the achievement of this minimum objective. Nothing which is agreed along these lines should be allowed to diminish in any way the real advantage for the developing countries of the facility which the Fund has already set up. On the contrary, I would hope that we can reach agreement within the framework of this new facility for a further extension of assistance to the less developed countries. The oil producing countries might well feel that the creation of a major new facility in which to invest a large part of their earnings with exceptional security at nonconcessionary rates would enable them to make more funds available at concessionary rates to the developing countries. At the same time the wealthier oil consuming countries might well find it easier to increase their aid to the less wealthy countries if their anxieties about financing their own oil deficits can be reduced. There are in fact three groups of countries affected by this aspect of the crisis—the oil producers, the developed oil consumers, and the less developed oil consumers. None of these groups can hope to survive the crisis without grave damage unless the needs of the other two are met. I believe that a new Fund facility of the nature I have outlined could help to improve the situation for all three groups at once. I hope it will commend itself to this Annual Meeting.
Statement by the Governor of the Fund and Bank for the United States—William E. Simon
Our recent Annual Meetings have reflected encouraging changes in the international economic scene. Three years ago, our attention was focused on the New Economic Policy introduced by the United States to eliminate a long-standing imbalance in the world economy. Two years ago we launched a major reform of the international trade and payments system. Last year we developed the broad outlines of monetary reform.
This year circumstances are different. We face a world economic situation that is the most difficult since the years immediately after World War II.
Our predecessors in those early postwar years responded well to the great challenges of that period. I am confident we can also respond appropriately to the challenges of our day. But first we must identify the issues correctly.
Let me declare myself now on three of these key issues.
First, I do not believe the world is in imminent danger of a drift into cumulative recession—though we must be alert and ready to act quickly should the situation change unexpectedly. I do believe the world must concentrate its attention and its efforts on the devastating inflation that confronts us.
Second, I do not believe the international financial market is about to collapse. I do believe that situations can arise in which individual countries may face serious problems in borrowing to cover oil and other needs. For that reason we must all stand prepared to take cooperative action should the need arise.
Third, I firmly believe that undue restrictions on the production of raw materials and commodities in order to bring about temporary increases in their prices threaten the prosperity of all nations and call into question our ability to maintain and strengthen an equitable and effective world trading order.
The Inflation Problem
With respect to the first of these issues, it is clear that most countries are no longer dealing with the familiar trade-off of the past, balancing a little more or less inflation against a little more or less growth and employment. We are confronted with the threat of inflationary forces so strong and so persistent that they could jeopardize not only the prosperity but even the stability of our societies. A protracted continuation of inflation at present rates would place destructive strains on the framework of our present institutions—financial, social, and political.
Our current inflation developed from a combination of factors: in addition to pressures emanating from cartel pricing practices in oil, we have suffered from misfortune including bad weather affecting crops around the world; bad timing in the cyclical convergence of a worldwide boom; and bad policies reflected in years of excessive government spending and monetary expansion. As financial officials, we cannot be held responsible for the weather, but we must accept responsibility for government policies, and we must recommend policies that take fully into account the circumstances of the world in which we find ourselves.
In today’s circumstances, in most countries, there is in my view no alternative to policies of balanced fiscal and monetary restraint. We must steer a course of firm, patient, persistent restraint of both public and private demand, and we must maintain this course for an extended period of time, until inflation rates decrease. We must restore the confidence of our citizens in our economic future and our ability to maintain strong and stable currencies.
Some are concerned that a determined international attack on inflation by fiscal and monetary restraint might push the world into a deep recession, even depression.
I recognize this concern, but I do not believe we should let it distort our judgment.
Of course, we must watch for evidence of excessive slack. The day is long past when the fight against inflation can be waged in any country by tolerating recession. We must remain vigilant to the danger of cumulative recession. But if there is some risk in moving too slowly to relax restraints, there is also a risk—and I believe a much greater risk—in moving too rapidly toward expansive policies. If we fail to persevere in our anti-inflation policies now, with the result that inflation becomes more severe, then in time countermeasures will be required that would be so drastic as to risk sharp downturns and disruptions in economic activity.
There is a tendency to lay much of the blame on the international transmission of inflation. Certainly with present high levels of world trade and investment, developments in any economy, be they adverse or favorable, are quickly carried to other economies. But that does not absolve any nation from responsibility to adapt its financial policies so as to limit inflation and to shield its people from the ultimate damage which inflation inflicts on employment, productivity, and social justice in our societies.
Financial Mechanisms To Recycle Oil Funds
In addition to inflation, public concern has centered on methods of recycling oil funds and on whether we need new institutions to manage those flows.
So far, our existing complex of financial mechanisms, private and intergovernmental, has proved adequate to the task of recycling the large volumes of oil monies already moving in the system. Initially, the private financial markets played the major role, adapting in imaginative and constructive ways. More recently, government-to-government channels have increasingly been opened, and they will play a more important role as time goes by. New financing organizations have also been established by OPEC countries. Our international institutions—and specifically the Fund and the World Bank—have redirected their efforts to provide additional ways of shifting funds from lenders to borrowers. The Fund responded rapidly in setting up its special oil facility.
In our experience over the period since the sharp increase in oil prices, three points stand out:
First, the amount of new investments abroad being accumulated by the oil exporting countries is very large—we estimate approximately $30 billion thus far in 1974.
Second, the net capital flow into the United States from all foreign sources, as measured by the U.S. current account deficit, has been small, about $2 billion so far this year. During the same period our oil import bill has been about $12 billion larger than it was in the comparable period last year.
Third, markets in the United States are channeling very large sums of money from foreign lenders to foreign borrowers. Our banks have increased their loans to foreigners by approximately $15 billion since the beginning of the year, while incurring liabilities to foreigners of a slightly larger amount. This is one kind of effective recycling. And while some have expressed concern that excessive oil funds would seek to flow to the United States and would require special recycling efforts to move them out, the picture thus far has been quite different.
No one can predict for sure what inflows of funds to the United States will be in the future. But it is our firm intention to maintain open capital markets, and foreign borrowers will have free access to any funds which come here. The U.S. Government offers no special subsidies or inducements to attract capital here; neither do we place obstacles to outflows.
Nonetheless, some have expressed concern that the banking structure may not be able to cope with strains from the large financial flows expected in the period ahead. A major factor in these doubts has been the highly publicized difficulties of a small number of European banks and one U.S. bank which have raised fears of widespread financial collapse.
The difficulties of these banks developed in an atmosphere of worldwide inflation and of rapid increases in interest rates. In these circumstances, and in these relatively few instances, serious management defects emerged. These difficulties were in no way the result of irresponsible or disruptive investment shifts by oil exporting countries. Nor were they the result of any failure in recycling or of any general financial crisis in any country.
The lesson to be learned is this: in a time of rapid change in interest rates and in the amounts and directions of money flows, financial institutions must monitor their practices carefully. Regulatory and supervisory authorities too must be particularly vigilant. We must watch carefully to guard against mismanagement and speculative excesses, for example, in the forward exchange markets. And we must make certain that procedures for assuring the liquidity of our financial systems are maintained in good working order. Central banks have taken major steps to assure this result.
Although existing financial arrangements have responded reasonably well to the strains of the present situation, and we believe they will continue to do so, we recognize that this situation could change. We should remain alert to the potential need for new departures. We do not believe in an attitude of laissez-faire, come what may. If there is a clear need for additional international lending mechanisms, the United States will support their establishment.
We believe that various alternatives for providing such supplementary mechanisms should be given careful study. Whatever decision is made will have profound consequences for the future course of the world economy. We must carefully assess what our options are and carefully consider the full consequences of alternative courses of action. The range of possible future problems is a wide one, and many problems can be envisaged that will never come to pass. What is urgently needed now is careful preparation and probing analysis.
We must recognize that no recycling mechanism will ensure that every country can borrow unlimited amounts. Of course, countries continue to have the responsibility to follow monetary, fiscal, and other policies such that their requirements for foreign borrowing are limited.
But we know that facilities for loans on commercial or near-commercial terms are not likely to be sufficient for some developing countries whose economic situation requires that they continue to find funds on concessional terms. Traditional donors have continued to make their contributions of such funds, and oil exporting countries have made some commitments to provide such assistance. Although the remaining financing problem for these countries is small in comparison with many other international flows, it is of immense importance for those countries affected. The new Development Committee which we are now establishing must give priority attention to the problems confronting these most seriously affected developing countries.
Trade in Primary Products
For the past two years, world trade in primary commodities has been subject to abnormal uncertainties and strains. Poor crops, unusually high industrial demand for raw materials, transport problems, and limited new investment in extractive industries have all contributed to tremendous changes in commodity prices. Unfortunately, new forms of trade restraint have also begun to appear.
In the past, efforts to build a world trading system were concentrated in opening national markets to imports. Clearly, we need now also to address the other side of the equation, that of supply.
The oil embargo, and the sudden and sharp increase in the price of oil, with their disruptive effects throughout the world economy, have, of course, brought these problems to the forefront of our attention.
The world faces a critical decision on access to many primary products. In the United States we have sought in those areas where we are exporters to show the way by maximum efforts to increase production. Market forces today result in the export of many items, from wheat to coal, which some believe we should keep at home. But we believe an open market in commodities will provide the best route to the investment and increased production needed by all nations.
We believe that cooperative, market-oriented solutions to materials problems will be most equitable and beneficial to all nations. We intend to work for such cooperative solutions.
Prospects for the Future
In the face of our current difficulties—inflation, recycling, commodity problems—I remain firmly confident that, with commitment, cooperation, and coordination, reasonable price stability and financial stability can be restored.
The experience of the past year has demonstrated that although our economies have been disturbed by serious troubles, the international trade and payments system has stood the test.
Flexible exchange rates during this period have served us well. Despite enormous overall uncertainties, and sudden change in the prospects for particular economies, exchange markets have escaped crises that beset them in past years. The exchange rate structure has no longer been an easy mark for the speculator, and governments have not been limited to the dismal choice of either financing speculative flows or trying to hold them down by controls.
Another encouraging fact is that the framework of international cooperation has remained strong. Faced with the prospect of severe balance of payments deterioration, deficit countries have on the whole avoided shortsighted efforts to strengthen their current account positions by introducing restrictions and curtailing trade.
In the longer run, we look forward to reinforcing this framework of cooperation through a broad-gauged multilateral negotiation to strengthen the international trading system. In the Tokyo round, we hope to reach widespread agreement, both on trade liberalization measures—helping all countries to use resources more efficiently through greater opportunities for exchange of goods and services—and on trade management measures—helping to solidify practices and procedures to deal with serious trade problems in a spirit of equity and joint endeavor. It is gratifying that more and more governments have recognized the opportunities—and the necessity—for successful, creative negotiations on trade.
We in the U.S. Government recognize our own responsibility to move these negotiations along. Early last year we proposed to our Congress the Trade Reform Act to permit full U.S. participation in the trade negotiations. It is clear that in the intervening months the need for such negotiations has become all the more urgent. We have therefore been working closely with the Congress on this crucial legislation, and we shall continue to work to ensure its enactment before the end of this year.
In the whole field of international economic relations, I believe we are beginning to achieve a common understanding of the nature of the problems we face. There is greater public recognition that there lies ahead a long, hard world-wide struggle to bring inflation under control. Inflation is an international problem in our interdependent world, but the cure begins with the policies of national governments. Success will require, on the part of governments, uncommon determination and persistence. There is today increasing awareness that unreasonable short-term exploitation of a strong bargaining position to raise prices and costs, whether domestically or internationally, inevitably intensifies our problems.
Finally, I am encouraged that our several years of intensive work to agree on improvements in the international monetary system have now begun to bear fruit. The discussions of the Committee of Twenty led to agreement on many important changes, some of which are to be introduced in an evolutionary manner and others of which we are beginning to implement at this meeting.
For the immediate future, the Fund’s new Interim Committee will bring to the Fund structure a needed involvement of world financial leaders on a regular basis, providing for them an important new forum for consideration of the financing of massive oil bills and the better coordination of national policies. The Interim Committee should also increasingly exercise surveillance over nations’ policies affecting international payments, thereby gaining the experience from which additional agreed guidelines for responsible behavior may be derived.
Moreover, discussions in the Interim Committee can speed the consideration of needed amendments to the Fund’s Articles of Agreement. These amendments, stemming from the work of the Committee of Twenty, will help to modernize the Fund and better equip it to deal with today’s problems. For example, the Articles should be amended so as to remove inhibitions on Fund sales of gold in the private markets, so that the Fund, like other official financial institutions, can mobilize its resources when they are needed. In order to facilitate future quota increases, the package of amendments should also include a provision to modify the present requirement that 25 per cent of a quota subscription be in gold. Such an amendment will be a prerequisite for the quota increase now under consideration. And the amendment will be necessary in any event for us to achieve the objectives shared by all the participants in the Committee of Twenty of removing gold from a central role in the system and of assuring that the SDR becomes the basis of valuation for all obligations to and from the Fund.
Preparation of an amendment to embody the results of the current quinquennial review of quotas offers us still another opportunity to reassess the Fund’s role in helping to meet the payments problems of member nations in light of today’s needs and under present conditions of relative flexibility in exchange rates.
The trade pledge agreed by the Committee of Twenty provides an additional framework for cooperative action in today’s troubled economic environment. It will mitigate the potential danger in the present situation of self-defeating, competitive trade actions and bilateralism. The United States has notified its adherence to the pledge, and I urge other nations to join promptly in subscribing.
The new Development Committee, still another outgrowth of the work of the Committee of Twenty, will give us an independent forum that will improve our ability to examine comprehensively the broad spectrum of development issues. We look forward to positive results from this new Committee’s critical work on the problems of the countries most seriously affected by the increase in commodity prices and on ways to ensure that the private capital markets make a maximum contribution to development. . . .
The most prosperous period in the history of mankind was made possible by an international framework which was a response to the vivid memories of the period of a beggar-my-neighbor world. Faced with staggering problems, the founders of Bretton Woods were inspired to seek cooperative solutions in the framework of a liberal international economic order. Out of that experience evolved an awareness that our economic and political destinies are inextricably linked.
Today, in the face of another set of problems, we must again shape policies which reflect the great stake each nation has in the growth and prosperity of others. Because I believe that interdependence is a reality—one that all must sooner or later come to recognize—I remain confident that we will work out our problems in a cooperative manner.
The course which the United States will follow is clear. Domestically, we will manage our economy firmly and responsibly, resigning ourselves neither to the inequities of continued inflation nor to the wastefulness of recession. We will strengthen our productive base; we will develop our own energy resources; we will expand our agricultural output. We will give the American people grounds for confidence in their future.
Internationally, let there be no doubt as to our course. We will work with those who would work with us. We make no pretense that we can, or should, try to solve these problems alone, but neither will we abdicate our responsibility to contribute to their solution. Together, we can solve our problems. Let me reaffirm our desire and total commitment to work with all nations to coordinate our policies to assure the lasting prosperity of all our peoples.
Statement by the Governor of the Fund and Bank for France—Jean-Pierre Fourcade
Before speaking on behalf of the French Government, I should like, at the request of the member countries of the European Economic Community, to express certain common viewpoints held by those countries on the matters to be discussed at this Annual Meeting. This privilege falls to me this year since the chairmanship of the Council of Ministers of the Community is held by France during the current six-month period.
First of all let me say a word on the work accomplished by the Committee of Twenty. The proposals made in the first part of the Outline of Reform are geared toward the future. They represent a substantial effort of concerted thought and imagination. The task is unfinished. It would hardly have been possible, in the present situation, to do much more than what has been done. For the short term, the member countries of the Community appreciate the agreements reached; for example, those on the Interim Committee and the Development Committee. The proposals on these matters match the hopes of the European Economic Community. Moreover, the members of this Community are aware of the need to make the technical adjustments to the rules governing the International Monetary Fund which will be essential to ensure in the near future the proper functioning of that institution. In the longer term, they intend to continue to devote all their efforts to seeking balanced and more far-reaching measures to complete the reform of the international monetary system.
Above and beyond the reform of the international monetary system, there are the problems of the world economic and monetary situation to contend with. I shall surprise no one by saying that the world economy is menaced by a crisis that could well have grave consequences. All countries might become victims of simultaneous inflation and stagnation. The nations are resolved to meet this danger head on. They are trying, and will continue to try, to harmonize their national policies in order to make them more effective. In so doing, they feel that they are not acting in their own interests alone. They feel that they are contributing to the achievement of equilibrium and progress in the world economy.
In this field, an important role falls to the activities of the international organizations. Thus the European Community supports the efforts made by the Fund and the World Bank, and hopes that they will continue to develop their endeavors in this direction, in particular with respect to the orderly recycling of capital.
Being aware of its responsibilities vis-à-vis its member countries, the European Community is currently studying the possibility of participating on its own account in recycling operations. The action it might take in this connection should be regarded as a supplement to international efforts in this field, and not necessarily as limiting their scope.
Last, I should like to stress the very special interest of the European Community in development problems. In addition to the individual efforts of its member countries, the Community as such has recently strengthened its program of action concerning the developing countries. The Community has taken several steps designed to increase its already considerable contribution to those of the developing countries that have been the most affected by the recent evolution of the world economy. Accordingly, the Community has launched the idea of making an international effort within the framework of the United Nations, in conjunction with contributions by the other member countries of that organization. In addition, the Community has more than doubled its program of food aid, which will exceed $300 million in 1974. For the longer term, it is currently working on completing the negotiations held during the past few months with 44 African, Caribbean, and Pacific countries with a view to establishing a new form of association. Besides stepping up financial aid and providing common lines of action on industrial cooperation, the Community intends to grant sizable commercial concessions without any reciprocal arrangement. In addition, the parties to the negotiations plan to set up in the crucial sphere of raw materials trading a system for stabilization of commodity export earnings. Progress has also been made toward drawing up a global European policy for development assistance at the world level.
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I feel greatly honored to have been entrusted, as the successor to Mr. Valéry Giscard d’Estaing, with making known to this meeting the position of the French Government on the reform of the system of world payments. Nevertheless, my sense of gratification is tempered by the climate of anxiety and concern that pervades our deliberations. We have come together to compare ingenious ideas on how to devise an arrangement that will properly order monetary life without suffocating it. But are we sure we have enough time to clarify our ideas, compare our viewpoints, and set in motion a successful system of reform?
The serious balance of payments disequilibrium affecting many of us, surging inflation, anxiety on the financial markets, fears concerning employment and economic activity, the danger of contraction in world trade, the deprivation of many of the developing countries unfortunate enough to be without oil deposits of their own—these are the problems of the day. And it is in this awareness of the importance of the responsibilities which are now incumbent on each one of us that I should like to talk to you about the international monetary system.
I therefore propose to discuss the immediate problems that require solution. But I cannot forget that we have to hasten to find a formula for a renovated international monetary system that will be acceptable to all.
I. The Immediate Problems Call for Energetic Action
The 1974 Annual Meeting is marked by anxiety—an anxiety that centers on four major themes: payments imbalances caused by the rising cost of essential raw materials; inflation; international capital movements; and development financing. How serious are these problems, and how is it suggested that we meet them?
A. The Problems
The upsurge in the prices of certain raw materials, principally oil but also cereals and other commodities, that we have been witnessing for a year, has overturned the balance of payments situation throughout the world. Disequilibria measured in tens or hundreds of millions of dollars last year have now, by an abrupt change of scale, become deficits expressed in billions. This radical change soon had visible effects on domestic price levels in economies dependent on oil imports. The countries concerned are becoming fearful about trends in economic activity and employment. A certain anxiety is beginning to be felt regarding commercial competition, i.e., the future of trade. The problems of international liquidity have become much more acute.
Inflation, regarded by some as one of the causes and by others as one of the consequences of increased oil prices, is a world-wide affliction, however we look at it. The misdeeds and the anxieties to which it gives rise among people, businesses, and governments are common knowledge. As Governors of the Fund and the Bank, you all spend part of your time combating this scourge in your respective countries. We must be aware that this battle that each one of us is waging on his home front is decisive at the world level for balance of payments adjustments and the system of currency parities.
The payments deficits and accelerated inflation have given a new dimension to the problem of capital movements. The oil producing countries, whose exchange resources exceed their import requirements by a very wide margin, have a financing capacity which, depending on the ways in which it is used, can provoke good or evil effects. All, or nearly all, of the speeches made at the last Annual Meeting mentioned, and with justification, the perils that threaten the world trade and payments system as a result of the enormous volume of capital that is transferred from one place to another and from one currency to another. The risks inherent in the volatility and the destinations of capital, and the uncertainties surrounding the financing of current payments deficits, are considerably greater today.
I have just spoken of the risks and dangers inherent in increased oil prices, inflation, and speculative, movements of capital, in tones appropriate to the Minister of Economy and Finance of an industrialized country. Those of my colleagues who represent non-oil producing developing countries will be speaking on these matters with even greater concern.
As Mr. Konan Bédié remarked in his excellent opening address, these countries, being the most deprived, are the most exposed to present risks. We must bear this observation in mind and remember it when we start to look for solutions.
Those, then, are four major challenges which are hurled at us today. And our time is limited. What must we do? What must be undertaken at this time in order to meet the challenges successfully?
B. The Responses
The reform plan prepared by the Committee of Twenty contains a number of proposals to this end—a new valuation of the SDR, strengthening of international consultation, surveillance of international liquidity, an Interim Committee of Governors. That is a significant set of innovations. But it can be no more than one element in our response to events. We have many other things to accomplish; I shall now mention four major lines of action along which they could be organized.
1. A more efficient fight against inflation. The payments imbalances occasioned by higher oil prices and inflation call above all, in each of our countries, for a judicious management of short-term economic policy. That is basic, and we can rest assured that events would bring it rudely home to us if we lacked the wisdom to discern it ourselves. The new magnitude of the burdens besetting the trade balances in so many of our countries and the overly fast rate of increase in our costs call for a very special effort to get the situation under control through our budgetary and monetary policies. Measures in this direction must be taken with determination, but they should be parceled out with enough moderation and mutual agreement to avoid rupturing the mainsprings of our economies. The idea that depression might be regarded as a means of achieving equilibrium is unacceptable. We do, on the contrary, wish to adopt new measures better adapted to the present characteristics of inflation.
The measures taken by the French Government, particularly the special tax on inflationary management and the ceiling placed on the total monetary value of oil imports, at a level compatible with the correction of our trade imbalance, testify to our will to bring influence to bear on the behavior of the economic agents while safeguarding employment and investment.
The endeavor to improve balance of payments adjustment can and must include restraining measures; but it would be fruitless if the combined impact of the measures were first to halt the growth of production and trade in the world. We are not prepared, however, to allow an excessive rise in the price of oil to jeopardize the very foundation of our economies. A ceiling fixed on the total monetary value of oil imports marks the extreme limit which we cannot exceed in 1975 without gravely affecting the fundamental equilibrium of the French economy.
2. A generalized recycling of capital. Furthermore, the control of capital movements must not remain a mere subject of speeches; it must soon give rise to significant collective action. This is a matter preeminently pertaining to the sphere of international cooperation. The cooperation must be exercised at several levels and in accordance with varied procedures. In this regard, we must first emphasize the importance of the role which could be played by the International Monetary Fund. As an association of all components of the international community, the Fund obviously constitutes the most appropriate channel for recycling. This means that lending operations, of the type recently set up in conjunction with the oil producing countries, should be expanded. In this connection I endorse the proposals presented by Mr. Healey and I hope the Managing Director of the Fund will be able to put them into operation very soon. It also means that, in the coming revision of quotas—which should be large enough to enable our institution to cope with its growing responsibilities—a significant increase in the share of the petroleum producing countries would be in the common interest.
It is the hope of the French Government, in regard to this revision, that the increase in the amount of funding will be substantial. In addition, special attention should be given to the needs of the most seriously affected developing countries, and the increases should be distributed in such a way as to guarantee the Fund’s effective liquidity as well as possible.
Financing and development institutions with a membership composed of several closely related countries can play an important role in the redistribution of capital. It is to be hoped that they will expand their borrowing. In this connection I am thinking, among other prospects, of the operations which, I hope, will soon be carried out by the European Economic Community.
The establishment of a recycling mechanism meeting the wishes of creditor countries regarding both the instruments and the terms of investment is an urgent need. But it will not obviate the need for an effort, which must also be undertaken quickly, to discipline disequilibrating capital movements as far as possible. Such movements existed and were growing long before oil prices rose. The rise in oil prices only increased the extent, and hence the dangers, of this phenomenon. The steps to be taken in this connection lie within the jurisdiction of the central banks acting in coordination. We have recently made progress in this field. It must continue, for that is the best answer we can give to the anxiety in financial circles and to the slump in the stock markets.
3. Abolition of special status of gold, i.e., treating it as a monetary asset among others. Today’s payments imbalances direct us more clearly than ever to examine the international liquidity problem in a more pragmatic than doctrinaire manner and with a will to succeed. This concern is especially applicable to the question of gold.
In relation to the Fund’s Articles of Agreement, the problem will be posed during the coming revision of quotas. The French Government believes that the matter should not be the object of a piecemeal approach, dependent on the circumstances. It must be treated on a global basis. Following a recent agreement, some timid but significant progress has just been made. France hopes that further steps will promptly be taken toward the effective utilization of a reserve asset which must, more than ever in present circumstances, play an active role in settlements among central banks. It would indeed be unrealistic, unfair, and hence unreasonable, to freeze, on account of anachronistic rules, an important component of the world’s reserves. If I may again state the French position: the special status of gold should be eliminated, that is to say, it should be treated like any other monetary asset. The concept of an official price, which no longer has any meaning today, should be discarded, and gold should be carried on the books at its true value. Central banks should be free to buy and sell gold at a price derived from the market. Finally, it would not be desirable, in our view, for the Fund to be authorized to sell the gold received from its members. On the contrary, the Fund’s gold should constitute an essential guarantee for the development of the borrowing operations to be carried out more and more actively by the Fund on international markets—the need for which I stressed a moment ago.
4. Increase in development aid. Inflation, the increasingly high risks attendant on capital movements, and the uncertainties pertaining to international liquidity cannot justify the view that the problem of development is less pressing. Far from diminishing its urgency, they underline and accentuate it, as with the ministers of finance of the Franc zone we stated quite recently in Paris. That is why France maintains and reaffirms its support for the establishment of a link between aid and the creation of liquidity. A new Ministerial Committee is going to be established jointly by the Fund and the World Bank. It is an important step on the road to an improved knowledge of the facts and a greater coordination of efforts. This Committee, sitting—as is appropriate—at the ministerial level, will be able to devote useful deliberation to the study of the so very numerous problems which have not yet been satisfactorily resolved, such as the link of which I have spoken, the financing of the regularization of raw materials prices, and the recycling of capital through multilateral aid institutions.
But, beyond institutions and committees, old or new, what counts in the development sphere in the long run is the volume of funding made available for it and the extent of the effort put forth by the more developed countries. And here, words cannot replace action. International objectives have been set regarding both public aid and private financial flows. These objectives must be reached. France, for its part, is trying to reach them. . . .
Those, then, are the immediate problems. But the concrete solutions I have just advocated would have only limited effect if a renewed monetary order did not soon emerge. International public opinion would not understand how a meeting of so many high-quality experts could fail to put together the elements of an effective and universally acceptable reform of the international monetary system. We have in our possession the Outline of Reform adopted by the Committee of Twenty in Washington last June; we must put it into operation and strengthen its basic elements as soon as possible.
II. The Lines of Action for the Future Must Be Confirmed
For the French Government, the plan of reform submitted to us is inspired by good intentions. These still need to be specified and reinforced. I would like to address my remarks to the following considerations: stability, modernization, equality, and solidarity.
To take action to establish a new international monetary order, as soon as possible—this is the primary concern. To reject disorder and be resolved to have order means first and foremost that one expresses an attachment to certain fundamental principles, and primarily to the stabilization of exchange parities. How many opinions, wise or superficial, have been formulated in the last few years in regard to this rule! And, above all, what blows have been aimed at it, in actuality! Its reign is suspended at the present time. But the practice of floating rates, while it may be regarded as an inevitable evil for the time being, will never constitute an acceptable response to the profound exigencies of a sound international payments system.
It was with regret that France, following so many other countries, found it necessary last January to discontinue intervention on its exchange market to defend the par value of its currency. The reasons for this decision have been so clearly described by the French authorities that I need not recapitulate them. But it would be vain to seek in this provisional measure the slightest sign of any adherence to the principle of floating rates. The experience of the last few months, furthermore, demonstrates that floating, in present circumstances, adds an element of instability particularly unfavorable to the development of world trade. When it does not paralyze transactions, generalized floating encourages transactors to cover themselves to an increasing extent against exchange risks and hence to incorporate in their costs an element of additional increase. So it is of fundamental importance to return as soon as possible to a stable exchange rate regime based on precise rules for convertibility and on an effective control of disequilibrating capital movements. The restoration of monetary order and the very future of international economic relations depend on it. This is why the French Government placed most particular stress, in its recent initiative for European monetary reform, on the need for a return to a concerted exchange rate regime within the European Community.
The authors of the plan of reform have very clearly manifested a will to modernize. Here again, we must approve their approach, which is directed to three main levels.
First, there is the matter to which I have just referred, the regime of exchange parities. The preference accorded by the French Government—above and beyond the contingencies of the present moment—for stability of exchange rates does not cause it to wish simply to return to the past. In the old international monetary system, the prescriptions of the Articles of Agreement of the International Monetary Fund on this subject were often applied over-rigidly. In some cases, economic and social progress were needlessly sacrificed to the currency, while at the same time appetites for speculation were stimulated and eventually satisfied. This method of managing currencies would be an anachronism today and tomorrow. Greater flexibility is necessary, and this is why we acquiesced in the idea that the fixed parities should be made more easily adjustable in the future.
In the second place, there is the need for bringing up to date the composition and utilization of what are called the primary reserve assets. The idea of introducing a universal instrument for transactions and reserves, the value, issue, and use of which should be determined by the concerted will of the members of the Fund, conforms to our conception of monetary progress. Our wish is for the special drawing right to constitute the center of the new system. Its real value should be defined and maintained in such a way as to obviate any deterioration of the instrument.
And, finally, there is a need for bringing up to date the institutional structure and means of action of the International Monetary Fund, to enable it to discharge its functions in the best possible way.
The plan of reform emphasizes equality of the rights and obligations of all participants in the international monetary system. In our view, the progress that can be made insofar as equity is concerned will also contribute to the effectiveness of the future world payments system. France has consistently expressed in the past its hope that monetary prerogatives or privileges will be done away with, and thus will approve any joint decision aimed at this objective. It considers it desirable that balance of payments adjustment be sought in cooperation between creditors and debtors, within a framework of symmetry of effort and in not too automatic a fashion, which would introduce an element of rigidity that would prove untenable in the long run. Just as persistent deficits have to be eliminated by corrective policies, appropriate measures will have to be taken to correct structural surpluses.
The fourth concern underlying the Outline of Reform, solidarity with the developing countries, enjoys the particular favor of the French Government. The future world monetary system must help these countries solve their payments problems better than heretofore. They have just suffered a violent blow with the sharp increase in the price of energy, cereals, and raw materials. They must not continue in the future to be the perpetual victims of the international payments system. The Outline of Reform is not sufficiently explicit on the practical implications of the increased solidarity it professes. Over and above my earlier remarks on the link and on special credit mechanisms, I wish to stress the need to take the special problems of the developing nations more comprehensively and more effectively into account.
These, then, are the lines of action proposed by France. They do not release any of us from the obligation to take the necessary recovery measures within our own spheres of responsibility. But the implementation of these proposals should give positive responses to the concerns being voiced all around us.
At certain times in the life of every individual or nation, deliberate inertia or a calculated wait-and-see policy may be a shrewd attitude to adopt. This should not be the case in the present situation of the world trade and payments system. We fully realize that there are limits to our command over events. We also recognize that the common interests that unite us do not preclude certain differences of view. But we simply must take concrete action in all those areas where agreement exists and try to narrow down as much as possible our areas of disagreement. Time is not working in our favor. We must act quickly if we are to ensure that the dominant feeling at our next Annual Meeting will not be one of regret at opportunities missed.
Statement by the Governor of the Fund for Italy—Emilio Colombo
First of all I should like to join previous speakers in thanking the United States for extending to us once again its warm hospitality. I should also like to express my gratitude to Minister Ali Wardhana and to the Chairman and Vice Chairmen of the Deputies of the Committee of Twenty for their unstinting efforts in the cause of international monetary reform and for having produced a valuable Outline, the main recommendations of which are embodied in the composite resolution before us, to which goes our full support.
Only a year ago in Nairobi we discussed at great length how best to restructure the Bretton Woods system. Since then, the change in the world economic order has been little short of dramatic. For the first time, virtually all industrial countries are suffering the consequences of two-digit inflation. Supply bottlenecks have developed in many a sector, raising doubts about the world economy’s ever-expanding capacity. The fourfold increase in the price of oil has had an enormous impact on the balances of payments of practically all countries, both developed and developing.
Today’s high rate of inflation is an explosive mix of excessive aggregate demand, cost-push, and supply-constraint factors, which is not easily amenable to correction with traditional anti-inflationary tools. The current cooling of the economies of the industrial countries, whose simultaneous upswing in 1972–73 was an important cause of many of today’s problems, should help to slow down inflation. The curtailment of aggregate demand, coupled with the need for huge investments to alleviate supply bottlenecks and to develop additional energy sources, will make for a very slow growth, if any, in consumers’ income in the period ahead. For the first time in a generation, governments may not be able to satisfy people’s expectations for a continuing improvement in living standards, with the risk of serious repercussions on the social and economic stability of many countries.
These problems are compounded by the completely arbitrary effects of inflation on the distribution of income. If to the problem of income distribution within countries we add the even more difficult one of income redistribution among countries through price increases, there is further reason not to be optimistic about our capacity to control inflation and to prevent tears in our social fabric. But the indispensable fight against inflation should not make us lose sight of the dangers of increased unemployment. Since countries with non-oil deficits and high rates of inflation are compelled to pursue restrictive demand management policies, it would be appropriate for other countries to expand their internal demand. Otherwise, there is the risk of a world depression.
While it is true that the struggle against inflation is mainly a domestic one, the problems raised by the large and abrupt increase in the price of oil must be dealt with essentially at the international plane. When oil prices were raised, many an expert forecast that countries would encounter few difficulties in financing their oil deficit. It was argued that, since the world is a closed monetary system, oil revenues would immediately be invested in consumer countries, with little impact on international reserves. Indeed, some went so far as to suggest that, should oil exporters place their funds in the Euro-markets, world reserves would tend to increase thanks to the well-known multiplier mechanism of those markets. With aggregate world reserves not decreasing, went the reasoning, there could at most be a problem of maldistribution of reserves should the reflux of oil money not match individual countries’ oil deficits. All this, however, was not supposed to cause any real problems because of the vaunted capability of the Euro-markets to intermediate between lenders and borrowers, whatever the maturities of the assets and liabilities of Euro-banks. Finally, many forecast that oil prices would soon trend downward.
Unfortunately, as we feared from the very beginning, this panglossian view of the oil crisis has not been borne out by events. Instead of falling, oil prices have actually tended to rise. Net reserves of oil importing countries have fallen rapidly. Great strains have been placed on the stability of international capital markets after only one year of oil deficits, and a growing number of countries, especially those which also have a non-oil deficit, face serious difficulties in raising the necessary finance.
The shift from a fixed to a floating exchange rate system has removed the safety net provided by assured official interventions at the margins. This has greatly increased risks in uncovered foreign exchange operations, and it will continue to do so even with the application of the guidelines for floating recently adopted by the Fund. The casualties of a number of small to medium-sized banking institutions have raised for the first time in some 40 years the specter of a chain reaction of failures of commercial banks dealing internationally. Although the trend of Euro-currency business is being concentrated in the circle of the 50 or so top banks with a wide international branch network, there are growing problems in handling the oil funds. Difficulties have arisen, inter alia, because of the different maturity structure of their liabilities and assets and of their inadequate capital base.
Central banks of the main industrial countries have reacted by tightening bank supervision and foreign exchange regulations. But the essential element which gives confidence in a domestic banking system, namely an assured lender of last resort, is lacking in Euro-markets. Although central banks are beginning to take cooperative steps in that direction, much remains to be done.
The access of many countries to the resources required to finance their oil deficits has thus turned out to be severely limited only a few months after oil prices were raised. Clearly, international laissez-faire economics will not do in the circumstances. Without collective action by all the governments concerned there is a danger of a drift into beggar-my-neighbor policies of the sort that led to the trade wars of the 1930s. Within oil consuming countries there is a growing willingness to help one another. But with a global oil deficit of some $65–70 billion this year alone, only limited financial assistance is possible within this group of countries. Clearly, we shall have to rely on oil exporters being prepared to provide the necessary funds at appropriate terms not only this year but also in the years ahead.
We believe, however, that the experience of the last few months has confirmed the judgment that several of us expressed at the Rome meeting of the Committee of Twenty. We then felt that the sudden and sharp increase in oil prices would make the international monetary system truly unmanageable. If we want to avoid the system’s breakdown and its negative repercussions on all members of the international community, especially the poorest and the weakest, we must arrive at an agreement between consumer and producer countries to fix a price for oil at a level which is bearable for the world’s economy. The period ahead will thus require great political imagination and cooperation. We feel that the necessary negotiations should be held within international organizations or within institutionalized groups, so that all countries may have an opportunity to play a useful and constructive role. The new Interim Committee of the Fund appears to us to be the most suitable forum for these important discussions.
A pragmatic, multipronged approach is needed forthwith to solve the problems raised by the oil crisis. Some elements of this approach are already in place, for example, the Fund’s oil facility, expanded lending by development financial institutions, the renewal of the General Arrangements to Borrow, central bank cooperation in the Euro-markets, and the initial mobilization of gold reserves.
It is regrettable that the oil facility, which is undoubtedly one of the best technical instruments to reconcile the long-run interests of oil exporters and oil importers, has so far been provided with only about 5 per cent of the 1974 oil surplus. Surely it would be most desirable for all concerned to expand greatly the oil facility. The renewal of the General Arrangements to Borrow has ensured that the Fund will continue to have available substantial financial resources with which to assist members in balance of payments difficulties. But the Fund’s capacity to provide a large volume of conditional liquidity in a period in which the international payments system is under great strain should be strengthened by increasing quotas to around SDR 45 billion. Furthermore, the Fund should be encouraged to seek additional resources by borrowing directly on capital markets.
The forthcoming increase in Fund quotas raises the problem of gold subscriptions, which under the Articles of Agreement have to be made at the metal’s official price. This is obviously not possible. The Articles therefore will have to be amended to allow countries to use SDRs in lieu of gold to fulfill their subscription obligations, something I had proposed as early as the 1969 Annual Meeting. Such an amendment is all the more urgent now, for on it depends the successful completion of the increase of Fund quotas. An alternative proposal, although not mutually exclusive, would be to allow members to make subscription payments entirely in their own currencies. The solution of this problem, however, touches on only one aspect of the more general problem of gold, which should be considered without delay with a view to achieving the full mobilization of the gold component of official reserves.
But the revision of the Articles of Agreement should not stop there. We have noted the list of amendments suggested by the Committee of Twenty in the Outline of Reform. We believe that the amendment exercise, which the Executive Directors have already initiated, provides an opportunity for the Fund to examine a wider range of issues which may require modification of the present Articles in the interim period. In other words, we should not confine ourselves to the amendments proposed by the Committee of Twenty nor preclude the possibility of dealing with them according to their degree of urgency, provided the package we eventually agree on is a balanced one.
Finally, many feel that there is a present, not to say a prospective, shortage of international liquidity, especially in view of the increasing maldistribution of reserves and the fact that there is no evidence that the system of managed floating exchange rates has reduced the demand for international reserves. Consideration should therefore be given to a new allocation of SDRs, at least to the extent that oil producing countries indicate their willingness to accept them in payment for oil. The recent changes in the valuation and interest rate of the SDR have certainly made it an attractive asset, and its attractiveness could be further enhanced if anachronistic provisions such as the reconstitution obligation and the acceptance limits were abolished.
Let me now turn to the problems of the developing world, which is especially hurt by the current strains of the international monetary system. Many developing countries, which require continued access to international capital markets to finance their growing resources gap, are now encountering nearly insurmountable difficulties in raising funds. Given the harsh realities of the marketplace, it will be necessary for governments and international development institutions to increase their loans and grants to ensure that developing countries manage to weather the storm. This is why we have given our full support to the five-year program recently proposed by Mr. McNamara, which envisages directing soft-term lending mostly toward the least developed countries and giving special attention to the agricultural sector. However, the lending plans of the World Bank, like those of many other international development institutions, are growing mostly nominally, with lending in real terms showing little increase. In this connection, the large loans that a number of oil exporting countries have recently made to the World Bank are certainly welcome.
There is a need for better coordination of the activities of the Fund and the Bank in the field of development assistance. We support the establishment of the extended Fund facility and we hope that its terms and conditions can be further improved after the initial phase of experimentation, although we fear that there might be overlapping and competition with the program lending of the Bank. We support the establishment of the joint Development Committee which will coordinate all the initiatives undertaken by governments and international organizations in the field of the transfer of real resources. The Development Committee will certainly examine all possible ways of increasing the quantity and improving the quality of development assistance. We trust that it will concentrate its initial efforts on how to provide immediate relief to the so-called most seriously affected countries. The difficulties facing these countries truly constitute an international emergency, being so critically dependent as they are on an adequate flow of concessionary assistance to tide them over the extremely difficult period ahead.
I should now like to say a few words about developments in my own country. There is little doubt that Italy has been the industrial country hit hardest by the oil crisis. The fourfold increase in oil prices came at a time when our economy was expanding very rapidly and had both internal and external disequilibrium. This fueled inflationary pressures and made our balance of payments deficit hardly manageable. It quickly became apparent that domestic demand had to be curtailed. The fiscal and monetary measures that in February—when we agreed on a stand-by program with the Fund—we thought would cut demand adequately soon proved to be insufficient, illustrating the difficulties that economic forecasters face in these troubled times. Therefore, in May we established a temporary import deposit requirement, which we plan to phase out early next year, to restrain the growth of the monetary base. In July, we introduced a major fiscal package, which on a yearly basis should increase revenues by over $4 billion or about 3 per cent of 1973 GNP. As a result of these policies, our commitments under the Fund stand-by arrangement will be fully met.
Indeed, this comprehensive set of financial measures is beginning to show the expected effects. During the last three months, the rate of increase of imports has been reduced, exports have continued to increase, and our foreign exchange losses have been stemmed. Altogether, we estimate that in 1974 the current account deficit will be about $8–8½ billion, well over half of which will be due to the higher oil prices.
Since monetary and fiscal measures operate with a lag, the full impact of our policies will be felt only in 1975. The curtailment of domestic demand, besides further improving our balance of payments in 1975, should also make for a lower rate of inflation, which this year we fear will be of the order of 20 per cent. Whatever real growth we may achieve will be largely dependent on the growth of our exports, which in turn will depend crucially on world demand. This confirms the need for countries with a more favorable economic situation to allow their domestic demand to grow at a rate appropriate to the world’s economic cycle.
The domestic policies we have adopted cannot by themselves bring our economy back into external and internal balance. Italy’s predicament illustrates well the urgent need for a new impetus to international cooperative measures along the lines we have indicated.
Statement by the Governor of the Fund and Bank for Sri Lanka—N. M. Perera
The Fund and the Bank are meeting at their annual conference at a time when the countries of the world are facing the gravest economic and financial crisis of all time. The great depression of the early 1930s was bad; this critical situation is infinitely worse. Both have the common feature of being man-made. What man makes, man can unmake. If our afflictions are of our own making, we should be able to find the remedies, granted the will and the determination. What better institutions do we have than the Bank and the Fund, with the cooperation of the United Nations, to forge these remedies? The eyes of the world are focused on us. Can we deny the teeming millions in the developing countries of the solace that regular employment and decent living conditions offer by our failure to find these remedies?
I am particularly appreciative of the analysis which Mr. McNamara gave us yesterday of the problem as it concerns the neediest part of the world. Mr. Witteveen’s analysis is a valuable diagnostic supplement to this—concerning the problems of economic management in the short term and the need for policies in the developed countries which check inflation while simultaneously circumventing recession. At the same time, I applaud the neutrality of their analysis. The world has called in vain for an adequate international scheme for protecting and expanding the real value of export earnings of developing countries for the past several decades now. Sri Lanka in particular has, in Mr. McNamara’s graphic phrase, been “locked … into a long-term deterioration in its terms of trade” resulting from the stagnation of her export earnings in tea and a rise in import prices. It is the failure of the international community to respond adequately to this kind of challenge that has created a situation where countries with the capacity to defend the real value of their earnings from scarce resources had no choice but to join together in a concerted action.
I came to this conference after participating in two other important meetings. The first one was that of the Commonwealth finance ministers held in Ottawa. It focused its main attention on the world-wide inflation that is proving so disastrous to the stability of the economies of both the affluent and the poor countries, albeit with uneven effect:
4. They emphasized that the present problems of serious inflation, the marked slowing down of growth and increasing balance of payments deficits, aggravated the problems of poverty already faced by the developing countries, and even threatened the maintenance of minimum viable conditions for millions of people in these countries. They stressed that the pressing dangers of the present situation create an immediate need to raise international cooperation to new levels of effectiveness.
7. Ministers noted the problems which had arisen not only from rapid increases of prices in the course of world-wide inflation, but also from sharp changes in the relative prices of different goods and services. Recognizing the dangers inherent in confrontation in trade matters, they called for a bold international approach to establish more stable price relationships which would ensure equitable and remunerative returns for primary producers while taking account of the legitimate interests of consumers.
This conference also expressed its disappointment at the slow progress in the field of monetary reform.
10. Ministers reiterated the view they had expressed at their 1973 meeting in Dar es Salaam, that reform of the international monetary system should promote a greater and more assured transfer of real resources to developing countries. There was widespread agreement that a link between the creation of SDRs and development assistance should be an integral part of the reformed system. Ministers urged early consideration by the proposed Interim Committee of the IMF Board of Governors of the modalities of establishing such a link.
The second meeting was that of the Group of 24 on September 28, 1974. This meeting also expressed concern at the generalized inflation that prevailed in the world, combined with the prospects of a recession that would create problems of shattering poignancy to the developing countries. By the way, I listened to the speech of Governor Simon of the United States and I regret that I do not share his optimism. I am amused that it should come from a person who hails from a country that set in motion the inflation from which we are suffering. This situation could only be met by “the cooperative efforts of the international community as a whole, and with anti-inflationary national policies that took into account the repercussions on other countries, and particularly the problems faced by the developing countries.” The ministers of the Group of 24 “reiterated their view that the recommendations of the Committee do not represent an adequately balanced approach. They pointed out that Part I of the Outline was only a broad conception and reaffirmed their understanding that no part of it will be implemented without the explicit endorsement of the entire membership of the Fund.” On the Joint Ministerial Committee for the Transfer of Real Resources, the ministers felt that the “text did not fulfill the expectations of the developing countries either with regard to the mandate of the Committee or its procedures.” I would absorb too much time were I to go into the details of this communiqué setting out what the ministers understood to be the scope and nature of the operations of this Committee. They asserted that the Committee should give priority to “(a) the problems of the countries most seriously affected by the current economic situation, (b) access to capital markets and the promotion of the flow of capital resources to developing countries, (c) protection and expansion of the real value of the export earnings of the developing countries.”
Ministers reaffirmed “their view that [the extended Fund] facility could not be considered as a substitute for the link and emphasized once again that a final decision to establish the link should be taken without further delay and, in any event, no later than February 1975.” As one wag would have it, “we asked for the link and we got a Committee.”
You will see from my previous remarks that the overwhelming majority of, if not the entire, developing world is dismayed by the endless meanderings of our international institutions. The 800 million of whom President McNamara spoke are hoping against hope for positive action that would relieve them of the impending calamity. Are we doing enough? Are we not dawdling too much? Are all our institutions conscious of the urgency of the moment? Or are we not enmeshed by too many rules and regulations? We continue to produce excellent learned theses. We pile up endless reports. Some officials who visit us think they are more interested in our welfare than we are. They lecture to us in all seriousness and sometimes we wonder whether we are back again in the lecture room. Some even pontificate about our politics. In all humility we know what is good for our country. We are interested and profoundly concerned in our welfare. We know what is good for our country, but it may not be practical nor timely. All of us are not dictatorships. I have a lurking suspicion that some officials would like us to be dictatorships, because often they speak in glowing terms of their achievements. We are democracies. We have political constraints. This implies that we cannot ask the people to bear burdens beyond a certain limit. Masses will not forgo all present pleasures for future benefits. They will forgo some and to a certain extent. Thus far and no further without social upheavals.
Yet I think we have made some progress. For the last four years we have pleaded for a different approach to progress and development. The distribution of wealth was more important than the arithmetic of the GNP. It was exhilarating to hear President McNamara being motivated along the same lines, and the stress he placed on income distribution and his effort at concentrating capital formation in the so-called poverty sector, the bottom 40 per cent of the population. As Prime Minister Trudeau aptly remarked recently, “answers to problems were no answers at all unless they conferred benefits on ordinary human beings.”
President McNamara will be interested to hear of the success of the land reform carried out in Sri Lanka, without any civil disturbances. It brought over half a million acres of land into government hands, and absentee landlordism has been eliminated. Most of these lands will be run as cooperative farms or given to needy and landless peasants. Apart from the increase in production, apart from the higher standard of living to the marginal peasant, the psychological impact has brought new life to rural Sri Lanka. This is real progress that can never be measured by all the arithmetic of the GNP.
It is the invasion of this concept into the thinking of our institutions that augurs well for the future.
It is this new resurgence that has enabled us to make a real drive toward self-sufficiency in food. Rice and subsidiary crops constitute about one fifth of Sri Lanka’s gross domestic product. In 1960 we imported 50 per cent of our rice consumption; today this is down to 30 per cent, and policy measures, including institutional reforms and increases in the government-guaranteed purchase price from 14 cents to 33 cents a bushel between February 1973 and July 1974 can confidently be expected to accelerate the trend toward self-sufficiency. Total bans on the import of subsidiary foodstuffs like potatoes, onions, and chilies have produced dramatic increases in the output of these items. Government programs are in hand to extend this process of import substitution to dairy farming, sugar, and fisheries with AsDB assistance. Two indices may serve to highlight the results thus achieved: first, the import content of private consumption has fallen from 21 per cent in 1966 to 10 per cent in 1972 and to 7.6 per cent in 1973; second, per capita imports of goods in real terms have fallen from $15.50 in 1966 to $9 in 1973.
I have adverted to our experience because I am confident that some of even the most seriously affected countries have enough basic strength and resilience and a commitment to social and structural change to ride out and adjust to the present crisis, if only the international community musters not unreasonable amounts of interim support. Moreover, in our present preoccupations with immediate problems, we must not forget that crises notoriously breed opportunities which may only be too dimly perceived at a time when one is in the throes of a crisis. Let me therefore look, in however visionary and impressionistic a manner, toward this remoter, i.e., post-1980, perspective.
The development of the third world has hitherto been largely a process of dependent development. It has been more or less the casual and unplanned by-product of the trade cycle of the OECD countries and both the recent boom and now the threatened slump in commodity prices is simply a reflection of this. Moreover, in many parts of the world another sort of dependence has grown in intensity. The transnational corporation has increasingly become the vehicle for industrial development providing both the cash and the know-how; and the implications of this for the concentration and abuse of economic power, the character of the industrial development that has resulted, and its impact on life styles in the third world have been the subject of intense concern in the United Nations and other forums.
Action to deal with these problems has hitherto been in large part piecemeal in character. In the United Nations the developing countries have called time and time again for an attack on the commodity problem, for the enhanced transfer of real resources, for improved market access, and a more appropriate transfer of technology, but so far with little positive and concrete response other than a proliferation of institutions.
What the present situation has resulted in is the emergence of a real form of countervailing power in some part of the third world and it is this, paradoxically, which can create the opportunity for international cooperation on an equal and pragmatic basis, as distinct from the unreal verbal confrontations which have disguised the real dependence of a previous period. The third world—and the newly rich countries are no less part of the third world—has an opportunity to deal with the developed world on a more constructive basis than it has had in the past over that wider range of issues hitherto tackled piecemeal. More directly, there is now a historically unique potential for welding newly available finance resources with the know-how possessed by developed economies and the labor and resources of the third world on terms that are consistent with the new development philosophies that have emerged—national self-respect and regional self-reliance—an opportunity created by the divorce between sources of finance and sources of know-how. Many developing countries—and I refer particularly to those most severely affected—have the capacity, once the immediate crisis is surmounted, to move also into new areas of export promotion with a definite possibility of ending their payments imbalances. Speaking of my own little country, for instance, the traditional staples—tea, rubber, and coconut—which comprised 90 per cent of export earnings a couple of years ago, are now down to 75 per cent. In large part this is the result of new growth in nontraditional exports and the new situation can only enhance the prospect of export diversification. Comparing 1970 with 1973, new exports of industrial goods and gems and earnings from tourism have expanded from virtually nothing to $50 million this year. Countries with depletable resources would want, no doubt, to look to the day when they would have developed an alternative economic base through enhanced real capital formation. They can, therefore, be expected to think in terms of joint ventures to serve their expanding internal markets and to guarantee them assured supplies of key imports. They may well find investment opportunities of more lasting value in third world countries with substantial absorptive capacities than continuing to lend their surpluses to developed country financial markets. Mr. McNamara’s reference to the requirement for fertilizer investment of some $6–10 billion is of special significance in this connection. The efforts of the developing countries to produce more food is being hampered by a world-wide shortage of fertilizers. There is obvious need to create new production capacity, and I think the Bank should give greater attention to the possibility of assisting in the creation of new fertilizer production capacity. Over the longer haul, what has to be recycled is not so much funds into the developed world but know-how from the developed world.
It is difficult to endorse the manner in which the quinquennial review of quotas is being undertaken. It is not calculated to inspire confidence in the oil exporting developing countries nor in the non-oil exporting developing countries. It is possible to agree with the general thrust in the Fund’s Annual Report that there is a need for a substantial increase in the availability of conditional liquidity. The quota review exercise should attempt to satisfy this need by a substantial increase in the size of the Fund. This alone is not enough. Some means must be found to redress the existing maldistribution of liquidity in the world, whereby those who most need liquidity get a smaller share and those who do not need it get and hold on to an excessive share. I refer especially to the need for increasing the availability of conditional liquidity to the less developed non-oil exporting countries. This could be done by an increase in their share of the quotas. At the same time consideration of the Fund’s own liquidity would require that oil exporting countries, too, should have their quotas increased. Such a redistribution of an enlarged Fund would be more equitable, and, while meeting the conditional liquidity needs of its needy members, would help in maintaining the Fund’s liquidity. It would also give a greater say to the developing countries in the decision-making processes of the Fund and would reduce the danger of a few countries, in groups of five or ten, taking decisions with scant regard for their repercussions on the rest of the world.
One further matter to which I would like to advert is the amendment to the present provisions concerning gold. I have been informed that the Executive Board has not yet been able to have a preliminary discussion or even a seminar on possible new arrangements for gold. Meanwhile, some of the member countries appear to be working out solutions to the problem of gold. This is, to say the least, disappointing. I think we should reiterate the mandate given to the Executive Board by the Committee of Twenty so that the international community as a whole, and not a few members, will make attempts to find solutions to the problem of gold in a manner acceptable to the entire international community.
May I conclude with the fervent hope that this crisis may yet be a blessing. If we unlearn the tardiness, if we jettison obsolete economic concepts, if we treat human lives as more important than statistics, if we rise to the urgency of the moment, and if we bring a new approach to the solution of human problems, then this crisis may yet see the dawn of a new era of hope to the poverty-stricken masses of the world.
Statement by the Governor of the Bank for Germany—Hans Apel
World inflation has, regrettably, become an almost perennial theme at these gatherings. But never in the lifetime of the Fund and the Bank has inflation posed a more universal threat to the world’s economic and social system. We are, indeed, beginning to realize that inflation endangers the well-being of mankind. Economic progress and democracy depend on social justice. Stable money is one essential condition of social justice.
We need to act with determination to restore stability, avoiding, of course, undue unemployment, but accepting, if necessary, a temporary slowdown of economic growth. We must face up as well to the need for structural change, which is a prerequisite for economic progress in our advanced economies. Recent developments in world trade and in the terms of trade have added momentum to these changes. It would be dangerous to cover up problems of adaptation with inflationary policies. Stability and orderly structural change, accompanied by social security and social justice, are the essential requirements of continued economic growth and future well-being.
We shall, however, attain economic—and political—stability only if account is taken of the profound change in the world-wide distribution of incomes, brought about by the upsurge in the prices of oil and other commodities. Surely relative prices can and will change again. But for the time being it is necessary for individuals, economic groups, and governments to adapt their expectations to the changed circumstances and to refrain from claims which cannot be met from available resources. This holds true both domestically and internationally.
The international aspect is of utmost importance. The industrialized world has to accept its share in solving the enormous problems of the developing countries. But we alone cannot solve them, as we are victims of the oil price explosion, too. This must be kept in mind in connection with the question of oil price levels and their consequences for all of us.
My Government has responded to the new push of inflationary pressures at a very early stage. We have been able to reduce price increases below last year’s level in spite of the cost explosion on world markets. We have regained the position of a rear guard in the international price convoy. Nevertheless, the German economy has maintained a moderate rate of growth, and we expect a further pickup in 1975 when our national net tax burden will be reduced by 1½ per cent of GNP in connection with a comprehensive tax reform.
My country accepts the particular responsibility it bears—together with others—for world trade and high levels of employment. We are prepared to counteract any undesired slowdown in economic activity, and we have the necessary means at hand. But I am convinced, at the same time, that Germany—by trying to remain an anchor of stability—is rendering a service to the international community in its struggle against inflation. It is inflation and excessive cost increases that create the danger of recession, not policies of economic stability.
Our German current account surplus is largely due to the world-wide scramble for goods, financed by amply available world liquidity. I would like to see it reduced, and I expect, indeed, a significant reduction in the second half of this year. But there can be no hope of restoring international equilibrium unless economic policies in all our countries converge toward the aims of maintaining high employment and regaining price stability. The better world-wide price increases are brought under control, the more our German market will be able to absorb the exports of other countries. For the time being, exchange rate flexibility has helped us to maintain overall equilibrium. Germany’s current surplus has been more than offset this year by capital outflows.
The losses suffered by several important banks have created a mood of caution in the financial markets. This is not wholly unwelcome; it is certainly desirable that bankers have been reminded to stay within the limits of prudence in their activities on foreign exchange markets.
The German banking system is under close supervision and generally sound. Nevertheless, we are improving safety precautions even further:
—We have placed narrow limits on the open foreign exchange positions banks may hold;
—we have just created a specialized institution to assist banks when they are unduly short of liquidity;
—we shall strengthen the supervision of banks and limit the credit risks which they may incur; and
—we have made proposals to the financial community on a general deposit insurance scheme.
These measures are being complemented by understandings among a number of major central banks on improving the transparency of the Euro-markets and on meeting the liquidity needs of financial institutions. I regard these understandings as a significant step forward in re-establishing confidence in international banking. But more needs to be done to prevent banking business from escaping national surveillance and from taking refuge in places where standards of behavior and credit control are lowest.
On the whole, our international arrangements have stood up remarkably well to the oil price shock. World trade is flourishing. Competitive exchange depreciation and the escalation of trade restrictions have generally been avoided. This is the harvest of close international cooperation. It is of vital importance that this cooperation continue. We will actively support, therefore, any useful initiative which can strengthen further international economic and monetary cooperation, such as the creation of the Interim Committee and of the Development Committee. Similarly, I hope that a large number of Fund members will find it possible to subscribe to the declaration on the avoidance of trade restrictions.
The financing of the new payments imbalances constitutes an unprecedented challenge to the international monetary system. True, most countries have so far been able to cope with these imbalances without major strains. Financial markets have demonstrated a remarkable capacity to intermediate between surplus and deficit countries. They can continue to play this role if both capital importing and capital exporting countries follow policies which maintain confidence. However, there are limits to what the markets can do. The desire of oil producing countries to invest their surpluses profitably and safely must be reconciled with the legitimate need of the international community to ensure economically sound and stable capital flows and to keep political and social structures intact.
This aspect is of utmost importance. Nobody can be interested in endangering or even destroying our social structures or our democratic basis without replacing them by something better. Those who create chaos and economic anarchy intentionally or by ignorance should not believe that their particular interests and their future will remain unaffected. All of us bear, in these months and years, a tremendous responsibility for the future of mankind. And here again my country will not stay aside in any effort to solve our common problems.
The international organizations have an important task in this context, and I am glad that they have risen to the challenge. I wish to pay tribute to the Managing Director of the Fund and the President of the World Bank for the farsighted initiatives they have taken. The two institutions are especially qualified to assist in the recycling of oil funds: they offer attractive, internationally guaranteed investment outlets, and they can channel the funds obtained to those countries which need them. I wish to encourage the Fund and the Bank to continue on this course and, in particular, to place special emphasis on borrowing from oil producing countries. The two organizations should study all possibilities with care and make realistic proposals in due course. This is not only a question for technical experts but a highly political one which has to be seen in the wider context of the relations between oil exporting and oil consuming countries, their common interests but also their differences of opinion and need.
It would seem appropriate to accord oil producing countries a role in our institutions more in line with their position in the world economy. I am prepared to support an increase in the shares of these countries in Fund quotas, Bank capital, voting rights, and in the work of these institutions in general. Incidentally, such an increase would strengthen the voice of nonindustrialized countries as a group. I would also hope that all oil producing countries would become contributors to IDA.
A final remark on the financing of present imbalances: What we need is the channeling of the new surpluses—directly or indirectly—to countries with oil-induced payments deficits. The Fund’s oil facility has been tailored to this purpose. Other channels should be explored and utilized. I see merit in the creation of a specialized investment institution, operated jointly by oil producing and oil consuming nations, that would facilitate the placement of oil revenues in a stable and mutually advantageous manner. But I see no similar need for a general increase in international liquidity. The Fund as the guardian of the international monetary system should not, by its own action, engender new inflationary pressures.
In all our concerns with national and international problems which are certainly increasing in number and in weight, we must never lose sight of the enormous difficulties the less developed countries are confronted with. It is, above all, the poorest developing countries with few raw materials who see their outlook for development dangerously dimmed. . . .
My Government fully realizes that the need for cooperation and development will become even more pressing. We will continue to keep our markets open to the products of developing countries in the spirit of an international division of labor. Trade is still better than aid. We believe in the principle of open partnership and are prepared, jointly with other donor countries, the developing countries, and the multilateral institutions, to undertake all efforts to pursue the aims of the Second Development Decade.
We are living in one world. No one can ignore the problems of his neighbors, or he will have to bear the consequences. This is the chance and the challenge Of ours: solving our problems together! We are ready to participate!
Statement by the Governor of the Fund and Bank for Romania—Florea Dumitrescu
Allow me, first of all, to thank the Executive Boards and staffs of the International Monetary Fund and the International Bank for Reconstruction and Development for the Annual Reports and the other documents which have been presented to us, as well as those who have collaborated in the preparation of this important meeting.
Our meeting takes place in a period when economic problems generally, and monetary and financial ones in particular, constitute for governmental institutions, as well as for the increasingly large sectors of public opinion, primary objectives of interest and concern. The 1974 Fund Annual Report rightly qualifies the present situation as being the most complex and serious that has faced national governments and the international community since the end of World War II.
The situation of the developing countries during this period is a subject of special concern. Under the conditions of growing interdependence between states, the maintenance of the gap separating the developing countries from the advanced ones constitutes, from the economic point of view, a factor of economic instability, narrowing the world market and disturbing the development of all states. As is emphasized in the Annual Report of the World Bank, the present critical conditions have seriously jeopardized the prospects of economic and social progress in a great number of developing countries, a fact that not only maintains but accentuates further the existing economic gaps.
This is why Romania considers it necessary to intensify the efforts of all states for the establishment of a new economic order, based on the principle of full equality in rights and equity. As the President of the Socialist Republic of Romania, Nicolae Ceauşescu, has stressed, “we consider that we should take an active part—and all states regardless of their size ought to participate actively—in solving the problems of international life, in the fight to establish a new order which will permit the progress of each nation.”
Of course, the new international economic order implies, besides the creation of new financial and monetary relations, the implementation of profound changes in other fields too, aiming at intensifying the efforts of all peoples to turn to better account their own material and human resources, the observance of the rights of all states to their national wealth, the establishment of a fair rate between the prices of raw materials and those of industrial products, the realization of equitable commercial transactions, without artificial barriers, the assurance of the access of all states both to raw materials and to modern technology, and the extension of economic, technical, and scientific international cooperation.
It also appears more and more evident and of a truly general interest that it is necessary for developing countries to be assured a more rational and equitable participation in the international division of work to grant them preferential treatment, as favorable as possible in commercial, financial, and exchange fields, and in the transfer of technology and unconditional aid in increased amounts and on conditions adequate to their needs and level of development. . . .
As an integral part of the new international economic order, the monetary system must answer to the same imperatives of the development of all states, of the reduction of the gap separating the developing countries from the developed ones, and the establishment of democratic relations based on equity.
As a consequence of the fundamental disequilibrium which affects the world economy and of the different interests which appeared during the debates in the Committee of Twenty, the reform of the international monetary system—in which the countries saw an important factor of improvement in international economic relations—is still far from providing an acceptable solution. In saying this I do not want to deprecate the value of the work of the Committee of Twenty, but reality is what we know it to be.
As a developing country attaching special importance to the consolidation of the movement toward understanding and large-scale international economic cooperation, Romania is concerned by the fact that—while discussions on reform are making little headway—the tendencies to instability and uncertainty in the financial and exchange fields are increasing, speculative practices in the areas of capital flows, costs of credits, and prices are becoming more widespread, inflationary phenomena are increasing in many countries, unilateral actions are more and more frequently being taken, without regard to the interests of other states, and new commercial restrictions are being introduced damaging the general economic development and further aggravating the situation of the developing countries.
Because of all these developments we express our conviction that it is absolutely necessary to intensify efforts to elaborate and implement in close collaboration the reform of the international monetary system in a manner which will respect the interests of all states.
We consider it very important that the adjustment of international financial and exchange relations should be effected in close conjunction with the creation of the premises for a regular development of commercial relations, by means of the abolition of restrictions and discriminatory practices as well as by the elimination of unfair policies of the industrial countries toward the less developed countries producing raw materials.
We also consider that the future international monetary system should determine the establishment of an equitable rate between the different national currencies, with real par values based on economic laws, changeable solely if some well-grounded reasons arise and only on the basis of internationally agreed criteria and formulas, with exchange rates leading to the stability and security of commercial exchanges and international economic cooperation.
All countries, both those with balance of payments deficits and those with surpluses, should proceed with resolution to bring their balances into equilibrium and should renounce speculative actions or measures designed to transfer their own domestic and balance of payments difficulties to other states, more particularly the developing nations.
In the same context, we feel it necessary that, at the same time that studies proceed on the role of gold, consideration be given to basing reserves in foreign currency on realities, on material assets, on the volume of economic transactions, on internationally agreed criteria and rules, so as to ensure the necessary financial resources, in normal conditions, for the unhampered development of international trade.
In the light of the above and in view of the present situation which shows clearly that the major problems of the international community can no longer be solved by just a group of states, we are firmly convinced that no monetary system can be created—and certainly cannot function properly—except with the active and equal participation of all countries, regardless of their political, social, or economic system, level of economic development, or size.
That is why we believe that all the proposed organizational forms for the activities of the International Monetary Fund and the World Bank will have to ensure the participation of all states on the basis of full equality of rights, and that decisions on the main problems concerning all states will be taken by mutual agreement. At the same time it is necessary that the representation of member countries in the management bodies of the Fund and the World Bank—whether by election or by appointment—should be effected by applying the principle of alternation according to agreed rules, thus conferring on each member country the possibility of taking an active and direct part in the work of these important international bodies. We also consider it necessary that the Executive Directors and their Alternates in the Fund and the World Bank be from different countries.
For the same reasons, we consider that the functions of the Interim Committee, as well as the proposed Council of Governors and the Joint Ministerial Committee on the Transfer of Real Resources to Developing Countries—intended, as Mr. Witteveen pointed out, to increase the capacity of the Fund and the Bank to coordinate assistance to those countries which most require it—must be defined and delimited as precisely as possible so that according to the principle of the democratization of the activity of the international bodies, the final decisions related to the main problems within the purview of the Fund and the Bank are left to the Boards of Governors.
As regards the Interim Committee and the Council of the Board of Governors we consider that the members of the Committee and the Council should be chosen, within the groups, from countries other than those from which the Executive Directors come.
Finally, I want to emphasize on this occasion too that, for the organic integration of the future international monetary system in the new international economic order, Romania is in favor of increasing the role of the United Nations and of all its specialized agencies, for the initiation of unitary actions and for better correlated efforts, in order to find and apply steps which meet the best interests of international cooperation for development.
By reason of all it has done and intends to do, Romania is deeply interested in establishing a new climate in international relations, favoring the liquidation of underdevelopment and the extension of international economic collaboration and cooperation. The Romanian people are working passionately to develop the economy of their country and to enhance continually its material and cultural level. Expressing the outstanding efforts made in this direction, Romania continues to spend for the needs of its development more than 30 per cent of its national income.
Our present achievements give cause for satisfaction but we are fully aware of the gap between our country and the economically developed ones. Programs and prognoses for the economic and social development of the country over the next five to ten years, and in some fields up to the end of this century, are being prepared and considered at the national level in order to eliminate the present gap.
The future development of our national economy is conceived in the context of extending economic relations with other countries and intensifying collaboration, both bilateral and multilateral.
This is the direction in which Romania’s relations with the Fund and the World Bank have been developing continuously and we want to see them further developed.
I would like to state here that Romania is absolutely determined to contribute—according to its possibilities, as actively as it can—to the efforts of the international community to solve the problems regarding the establishment on a new basis of international financial monetary relations.
We further intend to play our full part in all the activities of the Fund and the World Bank.
Acting in this way, we are convinced that we are serving the present and future interests of the Romanian people, and taking our place beside other states in the establishment of more equitable and stable international economic relations and efforts to achieve a fairer and better world.
October 1, 1974.