Chapter

Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1974
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Statement by the Governor of the Fund and Bank for Australia—F. D. Crean

I welcome the fact that Papua New Guinea has applied for membership in the Fund and Bank. I am also pleased that Western Samoa and Barbados have now joined the Bank.

The economic problems facing the finance ministers at this twenty-ninth Annual Meeting are of a size and complexity unprecedented in the history of the Fund and the Bank.

What is to be done about these problems? I venture to say that no one really believes he has the answers. But there are two general principles which I believe we should observe in the period ahead.

One is that we should have regard to the effect on others of whatever courses of action we may decide to pursue individually ourselves.

The other is that we must keep one another informed as to what we are doing and, insofar as it is practicable, as to what we are proposing to do. The interrelationship of the world’s economies was never more evident than it is today.

Interim Committee

One outcome of the discussions on reform of the international monetary system has proved to be extremely timely. I refer to the resolution for the establishment of the Interim Committee.

It is timely for a number of reasons. We will be going through a period when the economic situation will be changing rapidly. In all probability it will be a situation which will not be covered by the principles and practices of the International Monetary Fund as they exist at the moment. We will be facing situations which will call for quick and decisive action in our respective countries at the political level. For all these reasons regular international consultations at the ministerial level would probably have been desirable even if the Interim Committee proposal had not come out of the monetary reform discussions.

I have noted, of course, that a smaller group of ministers (the G-5 as it has come to be called) has begun to meet together at frequent intervals. The contribution which such a group can make in present circumstances is clear enough. But the Interim Committee will constitute a wider forum and this will be particularly helpful to those ministers who do not come within the G-5, but who nevertheless have a responsible role to play in the international monetary system.

Inflation and Recession

Of the major issues confronting us, none is more important than the growing evidence that inflation is proceeding apace, while general recession is becoming more and more of a threat. Individual countries will take different views as to which of these economic problems deserves our first attention. We must somehow devise practical policies which will at the one time deal with both. My Government has made it quite clear that it will not use unemployment as a trade-off in the fight against inflation. Australia’s demand management policies must start from a base which provides for maintenance of growth and employment opportunities. It was in accordance with that policy that I recently brought down a budget which provided for an expansion of expenditure in the public sector to take up a slack emerging in the private sector. Meanwhile, of course, the Government is pursuing a policy of attacking the upward spiral in prices and wages through more direct means. To the extent that Australia maintains domestic activity while fighting inflation, we will avoid adding to world-wide recessionary tendencies.

Disequilibrium

Another major issue which confronts us is that of balance of payments disequilibrium. The figures here are so well known I will not repeat them. However, I do wish to pick up a point made by Mr. Witteveen. He said, “what is perhaps not so well understood is that oil importing countries, while having to accept a huge current account deficit as a group, should continuously press ahead with appropriate adjustments, on current and capital accounts, in relation to each other.” There are many reasons for accepting this view which is, of course, in no way in contradiction to the terms of the Rome communiqué.

First, the balances of payments of some countries are in disequilibrium quite apart from the effects of the rapid rise in oil prices. There is no reason why adjustment to the non-oil deficits should be deferred.

Second, some countries have been much more heavily hit by the increase in oil prices than others. Irrespective of the proportions which this relative increase in oil prices may prove to have in the longer term, it would make sense for such countries to begin to accept that they will have to improve their trading balance with other oil importing countries. As a consequence, they will have to accept the worsened terms of trade which that involves.

Third, there is the fact that all oil importing countries will have to accept, sooner or later, that they cannot finance the higher cost of oil imports indefinitely by borrowing abroad. So it may be as well to start on the process of domestic adjustment in the recognition that oil is now a dearer commodity and that production patterns and consumption patterns may have to change accordingly in the medium if not the short term.

The exchange rate adjustment measures we have taken recently had more to do with the first than the third of the above considerations. Our reserves were running down at a rate that could not be sustained. This run-down of reserves, however, was largely attributable to the fact that an across-the-board reduction in tariffs and successive appreciations of the Australian dollar helped to turn a significant balance of payments surplus into an equally significant deficit. Oil prices did not play a major part in this turnaround. Australia’s recent 12 per cent devaluation therefore is fully within the spirit of the Rome communiqué.

Recycling

For those countries hardest hit by higher oil prices, whatever the level they may finally settle at, adjustment of production, consumption, and trading patterns will take time. In the interim, recycling will be an important policy issue.

Developed countries as a group will probably obtain all the capital they require as a result of the normal functioning of the capital markets. It is less likely, however, that the private markets will distribute this capital among individual developed countries in accordance with the need to finance oil deficits. It is even less likely that the private markets will, in the normal course of events, be able to make capital available on appropriate terms, including appropriate maturity dates. So recycling arrangements of the kind Mr. Witteveen has in mind may very well be necessary.

Many of the developing countries are in a different category. The Fund’s special facility is providing a helpful means of channeling capital to them at rates below commercial rates. However, it is clear that some developing countries cannot afford to pay even 7 per cent to finance oil imports.

It is one thing to make facilities available to developing countries for financing oil deficits. It is another thing for developing countries to produce the additional real resources required to service such financial transfers.

Aid

Mr. McNamara has made the point that it is the developing countries that have been hardest hit in relative terms by the increase in oil prices. Although most of the developed countries have themselves been seriously affected by increased oil prices, it nevertheless remains true that the case for aid from developed to developing countries is probably stronger now than it ever was. In fact, of course, the aid effort of developed countries as a group has fallen away in real terms. Efforts should be made to reverse this trend. Equally, the aid efforts of the oil exporting countries will be particularly important in the period ahead.

My own Government is determined to increase its aid efforts, even though price inflation is running ahead strongly and reserves have been declining rapidly. In the budget presented to Parliament two weeks ago, provision was made to increase expenditure on economic aid abroad in 1974–75 by 31 per cent. This will bring the aid vote up to about US$450 million. Included in that total is a special additional contribution of about US$50 million for grant aid to those countries most severely affected by the increase in oil prices and related developments. It is expected that Australia’s official development assistance will be in the region of 0.6 per cent of GNP this year.

But as well as ensuring more adequate financial flows we must think seriously about a number of factors influencing development which go beyond the provision of finance. Are we doing all we can to ensure the transfer of appropriate technology to developing countries? Are we doing all we can to assure access in our markets on fair terms for the commodities and raw materials exported by developing countries? Are we tailoring aid projects in developing countries to the type of resources available in those countries? Are we providing adequate and appropriate technical assistance to developing countries? In the final analysis it is man and not money that is the engine of development.

The questions which could be raised are many. I believe that the joint Development Committee, like the Interim Committee, is another timely product of the discussion on monetary reform, and I warmly support the draft resolution on this matter. The joint Committee should present an opportunity of putting consideration of the development issue on a new plane.

The problems of development go far beyond the question of financial flows. Financial flows are a first and essential consideration. But in the end what we are striving for is not just material progress but much more importantly the enrichment of the life of the human race.

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

Let me begin by joining previous speakers in expressing the gratefulness of the Austrian delegation to the Government of the United States for the courtesies and the hospitality we have received here. Let me express my appreciation to the management and to the staff of the World Bank and the Fund for the efficiency with which they have prepared this meeting. And let me also extend our welcome to Papua New Guinea as a future member in our organizations.

As you certainly will recall, it was the vision of a solidly built and well-functioning monetary order we had in mind when we set up the Committee of Twenty two years ago. In the meantime, however, the course of events has taught us to become more modest, not only concerning the scope of our ambitions but also concerning the period of time envisaged to have them materialized.

Where do we halt now? What are the underlying factors of the world’s economic and social situation of today? First of all, I think it is fair to say that we are still far from the point where we can consider the bill as settled that results from the changes in the overall energy situation. It is true that dramatic upsets in the productive and social structures of our economies could be avoided from a merely technical point of view.

We have, however, to be clearly aware of the consequences for our external payments positions as well as of the consequences for the potential, the methods, and the institutions for financing the exchange of goods and services. Looking from that point of view at the enormous changes in the prices for energy and raw materials, it is my strong belief that the true test the community of nations has to stand lies still ahead. This, I think, applies to the quantity and to the quality of the production of goods; it applies to income and to wealth of nations in the long run; and it applies to ways and means of coping with the necessary financing. There is no need to stress that for the poorest of our member countries these questions are of vital importance.

The most obvious feature of the present economic and social situation of our countries is the tremendous rise in prices of almost all goods for production and consumption as well.

As a consequence, it follows that curbing these price increases has become the number one task of economic policies now and in the near future.

It would perhaps aid our deliberations, and it would also help our endeavors to gain the active support of the public, if we would distinguish between the term “inflation” as traditionally used and the dramatic increases in the price of oil and certain raw materials we recently witnessed. These price increases are of the nature of a tax which reduces the real income of the people concerned. Their impact only becomes “inflationary” in the traditional sense if people try to shift the real burden by compensating wage and price increases. If “imported inflation” is not to trigger off “homemade inflation,” we have to avoid any such compensation as mentioned before.

In their attempts to curb further increases in industrial and consumer prices, the overwhelming majority of the developed countries have adopted restrictive fiscal and monetary policies in the past couple of years. For two main reasons we have to be aware, however, that measures of this kind—important and inevitable as they are—cannot do the whole job:

First, fiscal and monetary restraint cannot give sufficient relief to an economy that has to depend on highly priced imported goods, such as oil and raw materials.

Second,—and in the long run even more important—restraints exercised over extended periods may cause serious setbacks in overall efficiency and productivity of an economy. In a dynamic economic pattern mere standstill clearly means setback.

There is no doubt that, in order to reduce a high rate of increase in prices, the aim must be a slowing down of an overheated economic expansion. I cannot see, however, any economic reason nor any political, social, or moral justification for policy measures which envisage the creation of unemployment as a means of restoring price stability; especially when there is no guarantee whatsoever nor even an indication that a certain rate of unemployment will help to achieve this goal.

We must be sure, of course, of one very important prerequisite if we want to succeed in cutting down the high rates of price increases from which we suffer at present in the industrialized world: nations as well as individuals, business as well as labor will have to reduce their expectations on further increases in income, for the very simple reason that we have to enhance greatly our efforts to tap our own domestic energy resources and to develop methods of conserving and saving energy and other resources.

In one way or another, each country is faced with accelerating and widespread price rises and consequently with shrinking rates of growth and massive disequilibria in international payments. We are, however, for obvious reasons, also facing a phenomenon one might call the “internationalization” of economic and social problems. To solve these problems we must therefore strive with all our vigor for a comprehensive scheme of international cooperation. I have no doubt that this can be accomplished only by a top-level alliance of good will based on political compromises.

The solution of the present world economic problems therefore can only be attained beyond the realm of mere economic measures, beyond fiscal and monetary techniques. The problems all of us are facing are highly political problems, nationally and internationally alike. Political action and political agreement are consequently the foremost prerequisites of any solution that might be found. Otherwise the revival of beggar-my-neighbor attitudes will be difficult to avoid. There were times when men were longing for the one world. In a sense one world is now confronted with a set of similar problems.

Let me now return briefly to my opening remarks. I think that the development of the world economy in the past two years has clearly indicated that we have not yet reached a stage where we can think of setting up a permanent new international monetary order. We deeply appreciate the efforts the Committee of Twenty has taken. The Committee succeeded in laying down the basic ideas of a future monetary system. One of the most important aspects of international monetary cooperation is reflected in Article IV, Section 4(a) of the Articles of Agreement. The obligation of member countries laid down there can be called a pivot for international monetary cooperation.

We expect that the Interim Committee will start soon with its work. And we hope that the Joint Fund-Bank Development Committee will be of real help to member countries in the third world, i.e., to all those who are unlucky enough not to have natural resources at their disposal. Here again I think international cooperation will find a broad field for useful activities. Some very important and valuable contributions have already been made. The facilities set up so far, however, can only give some relief—they cannot solve the pending problems. An effective cooperation of oil producing, developed, and developing countries will be the only way to a lasting solution. It seems conceivable to me that countries which recently accumulated considerable amounts of foreign exchange reserves should be invited to pay special attention to the needs of the very poor. My country will be prepared, too, at any time to offer institutional assistance to methods that might be introduced.

In numerous other respects we are glad that the Interim Committee will have the opportunity to study developments and various alternatives very carefully. This would prevent premature formulations which most probably would be irreversible in the future. Let me comment very briefly in this context on suggestions that have come up concerning the future treatment of gold held by central banks. The future role of gold is a very complex and politically sensitive matter. For members holding certain amounts of gold, the development of the market price has to be considered as an offset for the lack of yield on these assets. It has also to be considered as an offset for the sometimes substantial losses resulting from depreciation of reserve currencies.

There has been some discussion of compulsory transfer of profits resulting from gold sales by the Fund in the private market or in an indirect way to other agencies. Taking into account some other suggestions, such as gold being treated like any other commodity, the transfer of profits from market sales would not be fair as long as this regulation would be limited to gold and would not include other primary products, such as, for instance, crude oil.

It would be desirable if committee work would also give consideration to future lending operations between creditor and deficit countries. I admit that it will be difficult to protect creditor countries against losses by formal guarantees. It would therefore be up to the receiving countries to pursue an economic policy that is consistent with such operations.

I think that work that has been done so far by the Committee of Twenty has to be judged from a realistic point of view. So far, it has not been without success, especially because it has minimized the hazards of overnight foreign exchange crises and of considerable market turmoil.

The future of our monetary system depends on a realistic conduct of business and on the readiness to cooperate on an international basis in a sincere manner. This should not be considered as a burden, but as a matter of mutual interest for all of us.

Statement by the Governor of the Bank for Yugoslavia—Momcilo Cemović

… The International Monetary Fund has, despite the very difficult conditions under which it was working, also accomplished good results, though it did not realize the expectation of completing the reform of the international monetary system. However, the Fund succeeded in completing notable actions, such as the extended Fund facility and the oil facility schemes.

I very much appreciate the efforts by the management and the staff of our institutions in achieving the mentioned results.

The problems faced by the international community nowadays have not been solved adequately, and day after day are becoming more and more serious. For that reason a gathering such as the Annual Meetings of the Fund and the Bank attracts great interest from all member countries involved in overcoming current economic difficulties resulting from the grave crisis of the existing system of economic relations. The more so, since that crisis could lead to a confrontation of a political character.

It is becoming increasingly evident that the economic problems of the world cannot be adequately solved within the existing system of international economic relations which proved to be obsolete. Therefore, my country, as well as other developing countries, persistently advocates the creation of a new international economic order with global solutions based on complete equality and respect of the interests of all countries.

The interdependence of the present world makes it indispensable that solutions should be worked out through a process of continuing negotiation and cooperation of all countries. The practice of adopting decisions within a limited group of countries and imposing them on the others has always led to an even deeper crisis and could not provide lasting solutions.

Documents of the Special Session of the UN General Assembly on Raw Materials and Development adopted by consensus, pointed out the direction to be followed and aroused new hopes that the process of creating a more equitable system of economic relations would be accelerated.

It is well known that the Committee of Twenty has reached agreement on some issues pertinent to the functioning of the international monetary system in the interim period. Numerous important issues have, however, remained unresolved. These relate primarily to the position of developing countries and their relations with the developed ones. Without neglecting the significance of the agreed solutions, I have to point out clearly that the conditions for establishing a new economic system, for which we are aiming, have not yet been met. Unfortunately, we are still far away from reaching this objective. That is why I would urge the Interim Committee and the Joint Ministerial Committee to accelerate the work to complete the comprehensive system of international monetary and financial relations.

I consider the agreement on the valuation of and the interest rate on the SDR in the interim period useful, and expect that it will contribute to the relative strengthening of the role of special drawing rights. The implementation of the agreed guidelines for the management of floating exchange rates should contribute to the stabilization of foreign exchange markets. In the process of operating these guidelines, both the specific conditions of foreign exchange markets of developing countries and the impact of exchange rate changes on their economies should be fully respected.

I regard the establishment of the Interim Committee of the Board of Governors of the Fund to be the expression of the need to continue and intensify the practice of consultations and negotiations on all important international monetary issues in a body adequately representative of the member countries. The creation of the Interim Committee should serve to intensify attempts to reach more lasting solutions in the monetary system, adequately reflecting the interests of all member countries. In that context, I would like to draw attention to those elements of the system of particular interest to my country and other developing countries which have not been included in the package of measures adopted for immediate implementation.

Present quotas and voting power in the Fund do not properly reflect the needs and importance of the developing countries in the world economy, nor their ability to contribute to the solutions concerning current problems of external adjustment. They also do not reflect their needs for access to balance of payments financing. A substantially higher share of the developing countries in the revised quotas and voting power in the Fund is needed to meet the principles of democracy and efficacy in our institutions.

The positive decision to establish a link between the allocation of SDRs and additional resources for development is long overdue. I strongly urge that the decision on the link be taken without further delay, and by February 1975 at the latest.

The solution of the problem of gold should not threaten the prospects for the implementation of the link. It has to be in accordance with the agreed objective that SDRs should become the principal reserve asset. The solution should not accentuate the existing inequitable distribution of world liquidity. For that reason, any steps which could be taken to that effect must provide instruments to ensure that countries with small amounts of gold in their reserves share the increase in liquidity without delay and in adequate volume. Discussions on and preparations for a decision on gold, as on other important issues, have to take place within the Fund and not in a limited group of countries.

The content of work and the policies of the Fund and the World Bank Group for the next year will, of course, by and large be determined by current developments in the international economy. These developments, characterized by protracted and generalized high rates of inflation, a slowdown of economic growth, and unprecedented imbalances in international payments, are very perturbing indeed. Although the difficulties facing all countries are serious, there are significant differences among countries with regard to the degree of adjustability of their economies, and possible consequences of current developments, as well as their possible ability to contribute to the solution of the problems. The differentiated position of individual countries and groups of countries results primarily from the different capacity of their economic structures to adjust to the changing conditions related to the level of their development. But these differences are accentuated by unequal availability of adequate means of international support to member countries for overcoming the difficulties. The developed countries are making substantial use of the increased funds flowing to international financial markets. Considerable financial support has been provided to some of those countries through bilateral arrangements, and similar actions on a regional basis have been announced. The developing countries may rely on these sources only to a limited extent and/or under less favorable terms. Therefore, the multilateral support that can be provided through the Fund and the World Bank Group is of crucial importance.

Combating inflation requires all countries to reconsider a viable ex ante agreement on the participation of social factors in distribution of income and to remove some structural imbalances in their economies. In the developed countries, such an undertaking may rely on the relatively high standard of living and large total savings in the economy. In many of the developing countries, particularly in those most severely affected, the minimum subsistence level for a high proportion of the population has become endangered and the countries are on the edge of external liquidity. There is no doubt, therefore, that the main responsibility of the international community and of our institutions is to urgently provide substantial additional resources and extend effective aid to the least developed and most seriously affected countries.

A number of developing countries have themselves undertaken considerable efforts and sacrifices during the last decade to attain some economic progress. In order not to completely erode these results, such countries require in the current situation international cooperation and support in obtaining sufficient finance on terms which would not unduly burden their development perspective. Otherwise, those countries would be forced to take undesirable and restrictive measures of external adjustment. Such a course would be harmful not only to their development but also to their relations in the world economy in general.

The Fund and the Bank to some extent have been aware of the gravity of the situation facing the developing countries. I welcome the first results of their efforts in this respect, and would mention here the activity of the Fund and the personal involvement of the Managing Director, Mr. Witteveen, in particular, in establishing and arranging conditions for the operation of the oil facility. The same attitude has also led to the present decision on the extended Fund facility.

However, it is quite clear that the steps undertaken are insufficient compared with the dimension of the current problems, and that the measures for promoting the transfer of real resources to the developing countries on a long-term basis have not yet been created. In that context I would like to emphasize and remind you that one of the principal objectives of the reform of the international monetary system was, pursuant to the agreement reached in the Committee of Twenty, to promote the net transfer of real resources to the developing countries. Unfortunately, the respective measures were not included in the interim package for immediate implementation. In such a situation, the Group of 24 has recommended the creation of the Joint Ministerial Committee for the transfer of real resources to the developing countries, to secure the continuation of the work on that aspect of the reform of the monetary system. I was satisfied with the agreement reached on that point in the Committee of Twenty in June of this year. I urge that the basis for the operational terms of reference of the new Committee be the elaboration of measures and policies to promote the additional transfer of real resources to the developing countries and the monitoring of actions to implement such conclusions. The work of the Joint Ministerial Committee should be complementary to and support the work of the United Nations, and should encourage and support the current actions for the same purpose undertaken by the United Nations, developed countries, oil exporting countries, and the nonaligned countries.

Inflation has become a disrupting and widespread world problem. I share the assessment contained in the Annual Report of the Fund that the main responsibility for halting inflation rests on the major industrial countries, although it is, of course, expected that all other countries should contribute to these efforts. This, however, does not relieve the industrial countries of their major responsibility to ensure that the maintenance of growth and employment in the present situation is achieved by measures which would not hinder access to their markets, in particular for exports from developing countries. On this I have to say with regret that some of the developed countries have introduced restrictive import measures which have considerably affected exports from my own country and made our position more difficult. The danger of such an attitude is profound and general in nature. The slowing down of the growth of world trade and, in particular, the lagging behind of the export rate of developing countries, as well as the recently renewed trend of deterioration in their terms of trade, are of particularly great concern.

In the June meeting of the Committee of Twenty the voluntary pledge by the developed countries not to introduce or intensify the existing restrictions on trade and payments for balance of payments purposes without prior consultation with the Fund was welcomed. It was made known, however, that many of the developing countries were not in a position to undertake such a pledge, owing to the specifics of their adjustment process and to the great uncertainty regarding the volume and terms of the financial support to be provided through international arrangements. For that reason we require that the adoption of the pledge should remain on a voluntary basis. Accordingly, the Fund should avoid the practice of putting pressure on developing countries in financial difficulties demanding that they undertake obligations with which they cannot comply. A situation where numerous developing countries become unable to utilize the Fund’s resources, despite their pressing needs, should be avoided. The choice for their adjustment policies should not be unduly limited. Both would be harmful to the role of the Fund in the coming period. Current difficulties must not jeopardize the implementation of the agreed principle in the Outline of the Reform that “wherever possible developing countries will be exempted from controls imposed by other countries, particularly from import controls and controls over outward long-term investment,” as well as that “the special circumstances of developing countries will be taken into account by the Fund in assessing controls which these countries feel it necessary to apply.”

One can see that the increase of global liquidity was rather small last year. At the same time the real volume of transactions and prices in particular became considerably higher. In my opinion, the conditions for a new regular allocation of SDRs will be fulfilled in the following months. Hence, it would be desirable that the Managing Director of the Fund initiate the necessary preparations to that effect. I would also like to express my appreciation for the efforts of the Fund management to increase the lending capacity of the Fund. However, what is necessary is to increase the unconditionally available liquidity of each member country and not only its borrowing capacity. Therefore, the need for a new allocation of the SDRs is fully justified.

These are some of the elements of Fund policy that I consider indispensable in order that measures undertaken reflect the interests of developing countries in a more balanced manner. Otherwise, the danger of confrontation instead of cooperation in dealing with problems of international economic relations would be increased. In this respect I would recall that my Government is strongly in favor of cooperation through the existing institutions of the United Nations. The constructive approach of the Group of 24 in the monetary negotiations has proved that such an attitude is shared by all the developing countries. . . .

Finally, I wish to welcome the new and future members of the Fund and World Bank Group.

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

I believe that all of us here are aware that the world economic and financial situation is without doubt the most difficult that the international community has known since the end of the Second World War. Five disturbing elements go to make up this state of affairs: an unprecedented rate of inflation, combined with a slowing down of economic activity in a number of countries, a serious balance of payments turnaround, uncertainty on the financial markets, and, last, a dramatic situation affecting the poorest of the developing countries. The sudden spectacular rise in oil prices is the principal, though not the only, cause of each of these five phenomena.

The current situation is very well analyzed in the excellent Reports of both the International Monetary Fund and the World Bank. I shall not therefore take up time in making analyses, but shall rather point out certain elements of solution.

The Poorest of the Developing Countries

I shall start with the last of the five problems I mentioned: the dramatic situation of the poorest countries. These are, relatively speaking, the most deeply affected by the spectacular rise in oil prices and by the fertilizer and grain shortages. What is more, the short-term prospects for these countries can hardly be termed favorable, in view of the slowing down of economic activity in the industrialized countries.

The World Bank Report expresses very clearly the situation when it states “… one point is clear: the prospects for the economic and social progress of a large number of developing countries have been seriously jeopardized. The jeopardy is greatest for those that are poorest. Without a considerable effort by the international community, 800 million people around the world can expect almost no improvement in their conditions of life for the rest of the decade. For hundreds of millions more, the improvement will at best be meager.”

The international community cannot remain inactive in the face of such a situation. The Technical Group on the Transfer of Real Resources has prepared for the ministerial Development Committee a list of measures to be taken in favor of those countries that are the poorest and the most seriously affected by the present crisis. The aim of the first recommendation is to ensure success for the UN Emergency Operation in favor of these countries. I believe that all the wealthy countries, whether they have been wealthy for a long time or whether they have only recently attained that status, have a joint obligation in this respect.

As you know, the European Economic Community proposes to contribute $500 million to this $3 billion fund. I hope that all other potential contributors will do all they can to make this emergency fund a reality as soon as possible. We in Belgium have already set aside funds in our budget as our contribution to this European effort. . . .

Although our prime concern is to attend to the urgent needs of the countries most affected by the oil crisis, we must also initiate a new international approach to the financial situation of the developing countries and the entire problem of the transfer of resources from the richest to the poorest countries. I believe that an international situation in which extreme wealth for some countries coexists with the most abject poverty in others is not in accordance with the principles of justice for all. As at the beginning of the century, when it was necessary to examine the situation of certain strata of the populations of the developed countries, we have now to do the same at the world level, with the situations of entire countries under review.

It was with this in mind that I spoke, at the meeting of the Committee of Twenty in Rome last January, in favor of the creation of a forum where the rich nations and the developing countries, through their financial representatives, could work together on formulating concrete solutions to the problems of the transfer of real resources. I am delighted that the resolution setting up this committee has been presented to us at this meeting. It goes without saying that this resolution has our full support.

I shall close this part of my address by saying that our concern for the problem of the transfer of real resources is not only a matter of principle. Indeed, in Belgium we are hoping, despite current economic difficulties, to increase our public development aid from 0.51 per cent of GNP in 1973 to 0.62 per cent in 1975.

Monetary Problems

I shall now turn to the monetary problems. In the face of the international difficulties now being encountered by all countries, we must at all cost avoid a return to the practices of the 1930s, in the form either of trade restrictions or of competitive monetary depreciation. This danger is very real, which is why we have subscribed to the declaration in which the Fund aims to avoid an escalation of restrictions on trade and payments.

To this same end we have also supported elaboration of a code of good conduct in the matter of floating currencies. What is most important in this field is that the behavior of all currencies be subjected to a sort of mutual surveillance in which the Fund has to play an important role in order to prevent anarchy on the exchange markets.

I should nevertheless like to stress that where exchange rates are concerned, we are still in favor of the Committee of Twenty’s principle of stable but adjustable parities. Floating rates must be regarded only as an exception. In present circumstances, they are a necessary last resort, the disadvantages and dangers of which are becoming more and more evident. It is with the aim of maintaining a certain degree of stability that, despite the skepticism of many, we have remained faithful to the European monetary agreement, maintaining narrow margins of fluctuation among several European currencies. So far this agreement has worked well.

However, it is not enough simply to make the commitment that there will be no return to the practices of the 1930s. What is necessary is concrete action that will create favorable conditions in which the countries will be in a position to honor that commitment.

The Fund oil facility, developed thanks to the dynamism of the Managing Director, Mr. Witteveen, to whom I should like to pay tribute here, can play a valuable role in this respect. However, the resources of the facility are limited compared with the immense problem of capital recycling that needs to be solved. During the past few months, I believe we have all observed the role played by the international capital market, but we have also become more sharply aware of its limits. This is why the Monetary Fund will perhaps have to consider new recycling mechanisms. We have also become more aware of the need to supervise this international market. I shall come back to this subject in a few moments.

If we do not want the countries in difficulty to be forced to take restrictive measures, it is essential not only that they have access to the necessary credit facilities but also that they can utilize effectively all the types of reserves that they have, including gold, in order to cope with their balance of payments disequilibrium.

As you know, the Common Market countries have adopted a common approach to this problem. Their proposals call for freedom in gold transactions, at prices close to the market price. Not only are these proposals compatible with the decision to make special drawing rights the pivot of the system, but they should also help to achieve this goal by depriving gold of its “special” status. It is our sincere hope that between now and the next Annual Meeting these European proposals will meet, at the world level, with the fastest and largest possible assent.

There is another problem affecting international liquidity on which we shall have to reach a decision shortly: I am referring to the increase in Fund quotas. It goes without saying that it is no easy matter to evaluate new conditional reserve requirements within the present system of controlled floats. However, we do consider it important that the proportion of international liquidity whose creation is subject to rigorous conditions be increased within overall international reserves. This should contribute to greater economic discipline at the international level. We could therefore support a significant increase in quotas, without necessarily going quite as far as the staff of the Fund. Such an increase would have to reflect the increased role and responsibility of the oil producing countries in the international financial system. Attention would also have to be paid to the size of the quotas of the non-oil producing developing countries, together with the other problems relating more specifically to those countries—in particular the link, a topic on which I have already expressed my position.

We hope that the two new committees that are to be set up—the Interim Committee and the Development Committee—will be fully able to carry out the tasks assigned to them. In this context, we would regret any institutionalization of the practice of holding meetings of the “big five,” as this might appear to be a substitute for existing international or regional institutions, and might entail more confusion than cooperation.

Among the problems that could usefully be examined is supervision of the exchange operations of financial intermediaries. Given the present climate of uncertainty on the financial markets, we believe there is a pressing need to strengthen and, if possible, harmonize existing national controls. We also feel that this is essential to strengthen supervision and cooperation at the international level. In this context, there should be a clearer definition of the responsibilities of the monetary authorities in the event of the failure of a financial intermediary.

This is an extremely delicate and sensitive field, but we must be vigilant and take our precautions in advance. Two points are, we feel, essential: we must be able to ascertain rapidly the international consequences of an accident so as to be ready to act without delay; and we must also take steps to ensure that individual actions aimed at self-preservation do not bring about a contraction of the international market which would be highly prejudicial to everyone concerned. In this respect, should consideration not be given to establishing a central international body to cover bankers’ risks?

I should also like to say a few words about the gradual reform of the monetary system. Experience over the past few months has shown that progress can be achieved if, instead of trying to set up a completely overhauled system in one move, we work on adapting specific aspects of the existing machinery to present-day conditions. The new definition of the SDR and the adoption of more realistic criteria for determining its interest rate and the remuneration on reserve positions in the Fund are notable examples of progress of this type. They are not enough, however: the very least that is required, in application of the recommendations of the Committee of Twenty, is to adopt the amendments to the Articles of Agreement of the Fund needed to allow SDRs to be used for settlement of the increased quotas, since obviously no country will be willing to use gold for this purpose.

A larger and more significant package of amendments can, in our opinion, be envisaged only if it is balanced and satisfies the essential requirements of all the parties that have participated in the negotiations on reform of the monetary system.

Prospects for Economic Activity

I should like to conclude by discussing the prospects for the world economy. Following the growth of excessive pressures on the demand side in 1973, particularly as a result of the monetary disorders of recent years, the authorities in most countries took countermeasures. The oil crisis and the anti-inflationary policies that have been followed have produced a notable reduction in demand pressures in many countries.

It is very difficult to forecast what the level of economic activity in the industrialized countries will be in the months to come, and the experts have come up with often contradictory prognoses. We do feel, however, that there is a real risk of an excessive slowing down of activity in the industrial countries. We are also aware that the situation differs greatly from country to country. However, it is to be feared that after letting excessive demand pressures build up in 1973 we may cut back demand too much in 1975. We must at all costs avoid adding the specter of mass unemployment to the existing injustices of inflation. Thus, our room for maneuvering is limited, and in the realm of cyclical policy what is required is improved coordination between the leaders of the developed countries. I hope that this meeting will provide the opportunity for this.

Finally, in order to avert the risk of a serious recession, the oil producers must fully recognize their responsibilities and adopt an attitude that will help to lower the flames of world-wide inflation, instead of adding to them. If they do not adopt such an attitude, it will be not only the developed countries that will suffer but the whole of mankind.

Conclusion

Let me end on a hopeful note. While it is true that the international situation is difficult, it is also true to say that better and more far-reaching cooperation has grown up since the war. Our best hope lies in this readiness to cooperate, this willingness to understand one another, this desire for a meeting of minds between reasonable and responsible people. If, at this turning point in economic history, we cannot display these qualities, then all of us here—representatives of developed countries or poor countries, of oil producing countries or oil consuming countries—will be the losers.

I hope and believe that we shall realize, while there is still time, the grave perils implicit in the present international economic and monetary situation and that we will display the virtues of cooperation, courage, and imagination. The well-being of hundreds of millions of human beings is at stake.

Statement by the Governor of the Bank for Norway—Per Kleppe

Speaking on behalf of the five Nordic countries, I shall confine myself to some comments on the economic situation with which we are confronted and more particularly on its impact on monetary reform. My colleague from Sweden has, in a separate statement, dealt with matters related to economic development.

We are most seriously concerned about the grave social and economic consequences of a continuation of rapid inflation. Some restraint on demand may well be advisable in order to reduce inflationary pressures. Considering, however, that the weakening which has already occurred in the level of activity by and large has eliminated earlier excess demand, there is now reason to pay equal attention to the danger that persistent policies in this direction, if followed simultaneously in a number of major countries, may provoke general recession. Our actions must, therefore, be directed toward averting the hazards which are threatening on both sides. We should not conduct economic policy on the assumption that we can solve one problem at a time: first inflation, then whatever unemployment our deflationary policies in the meantime may have produced. Experience with respect to combating inflation, mainly by reducing the level of activity, is not promising. A consequent increase in unemployment may easily provoke such social and political resistance that governments again will be forced to overstimulate the economy, jeopardizing any hard-won progress toward greater price stability.

The fight against inflation will have to take different forms depending on circumstances in various countries. In many instances, measures on a selective basis to eliminate structural imbalances and bottlenecks will have an important role to play. It would also appear that a direct approach toward an understanding between the social partners and government concerning nominal incomes and prices could, in many countries, make an important contribution to greater price stability. Internationally, the lack of stability in exchange rate relationships may have added fuel to inflation.

The dramatic shifts in international payments this year appear in general to have accentuated already existing payments problems. Countries which traditionally have been in a strong balance of payments position have managed fairly well, while conditions for many countries with big pre-oil deficits have become more difficult. The latter will naturally also meet the biggest problems when turning to private markets for financing these deficits. Two fairly obvious conclusions for international economic policy follow from this situation.

First, it is necessary that the industrial countries with strong positions relax their policies of restraint or shift to expansionary policies, even though this may lead them into temporary deficits. The potential inflationary effect of a more expansionary policy could in many cases be neutralized through fiscal measures with a direct impact on prices.

Further, it is of equal importance that renewed and increased efforts be made in order to achieve a well-organized recycling of the huge assets which will accumulate in surplus countries. Obviously, the international banking system, which has performed a valuable service in the past months, will still have an important role to play. It should be a natural requirement that governments and central banks cooperate to assure its proper functioning by suitable control and support. It is apparent, however, that the recycling problem is too big for the private markets to solve. Direct bilateral recycling is also subject to fairly narrow limitations. Therefore, we shall have to resort increasingly to various multilateral arrangements. This is a field in which the Nordic countries see a case for prompt and concerted action in the interest of oil importing and oil exporting countries alike. We sincerely congratulate the Fund and its Managing Director on the establishment of the oil facility. The amounts which have until now been subscribed to it can, however, be only a modest beginning in financing the deficits which the oil importing countries probably will have to run for several years to come. In this connection, the constructive ideas put forward by Mr. Healey ought to be seriously considered.

Speaking on behalf of my own country, Norway, which next year will become a net exporter of oil, we will contribute to the oil facility from 1975. We will still be running a considerable deficit on current account that year and our contribution will, therefore, be limited to SDR 50 million. We are, however, prepared to raise the amount in following years.

Through expanded multilateral arrangements the recycling in favor of less developed countries should also be improved. Transfers on more concessional terms will be required for the poorest among them. Increased emphasis on multilateral recycling should also meet the oil exporting countries’ desire for diversification of their assets, both with respect to categories and countries.

The issues which I have dealt with will all require international cooperation on a broad scale. Our ability in this respect, which has made a decisive contribution to economic progress throughout the postwar period, may be put to its most serious test in the next years to come. The new Interim Committee will immediately be faced with arduous tasks in surveying and guiding the development in international payments. We consider that the present urgent problems make it even more essential that the new Committee, uniting its efforts with the Executive Board, accelerates the continuing reform in order to reduce the risks for new disturbances.

Among the measures proposed by the Committee of Twenty, the Nordic countries attach particular importance to the implementation of the main elements of the Fund procedures for reviewing the adjustment process such as they were constructed to function under a more fully pledged reform.

Another part of the interim package that we would like to emphasize is the recommendation concerning cooperative action to limit disequilibrating capital flows. Within the framework of the revision of the Articles of Agreement, continued efforts will also have to be made in order to solve the complex issue of gold. We believe that any interim solutions to this problem should be consistent with the agreed long-term goal of terminating gold’s monetary role. This implies a need to revise the provisions of the Articles relating to gold and also to break the link between gold and the SDR.

The Nordic countries consider the current work on a revision of the Articles of Agreement to be of great importance. An adaptation, at least partially, to the changes in the monetary sphere during the last years will undoubtedly augment the possibilities for the Fund to supervise the system effectively. On the other hand, we would like to underline the desirability of avoiding excessively detailed provisions in the Articles. Such provisions should rather be included in other instruments that could be adjusted more easily.

In this connection, I would like to mention that, as we are about to review the Articles anyway, it would be desirable to abolish the obsolete division between Article VIII and Article XIV countries. This, as we know, originates from the situation immediately following World War II.

As we are of the opinion that the Fund should play a central role both in the surveillance of international payments and liquidity and in assisting members in emergencies, we are in favor of a substantial increase in the Fund’s resources. The Nordic countries consider that an increase in the total quota by some two thirds would not be excessive. Such an increase would bring about a welcome improvement in the Fund’s capacity to contribute to the financing of imbalances which may well turn out to be even greater in the years to come. We think it would be advisable if part of the overall quota increase were reserved for allocation through negotiations with a view to rectifying, or at least narrowing, present or expected disparities between countries.

The discussion at this Annual Meeting has already highlighted much of what could be done to promote a better collective mastering of the complex problems with which we are confronted in demand management, recycling, and monetary reform. Action will be needed in all these closely interrelated fields. If we fail to agree on the necessary steps we will have lost this opportunity to manage the development of the world economy. Therefore, we must act before we are overtaken by events.

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

The international monetary scene is even cloudier today than it was at our last meeting in sunny Nairobi. I need not dwell on the international monetary problems of today and tomorrow. They have been stated and analyzed clearly in the Fund’s Annual Report. This most complex and serious set of economic problems affects all our countries and we are therefore all only too familiar with them. I would just like to stress once again that I attach the greatest importance to avoiding beggar-my-neighbor policies, especially in dealing with the balance of payments effects of the rise in oil prices. In this spirit, my country has signed the trade declaration proposed by the Committee of Twenty and it has quite substantially increased its public expenditure, while at the same time lowering the tax burden.

The uncertainties of the economic and financial world outlook have led the Committee of Twenty to propose neither a full reform nor extensive amendment of the Articles of Agreement at the present time, but a gradual process of reform as circumstances permit. I am in full agreement with that approach as well as with the main lines of the report.

The Fund, as well as the individual members, will face a difficult period ahead, which will require the same unrelenting and constructive efforts, the imaginative thinking and the political wisdom which the Managing Director and the Executive Board have exhibited in the past years. I want to congratulate the Fund in particular on the important decisions that have been taken on the valuation of the SDR, the establishment and activation of the oil facility, the institution of the extended Fund facility, and the guidelines for the management of floating exchange rates. I would like to devote a few minutes of our time to this last subject in particular.

It is only realistic to expect that widespread floating will continue for some time. The Committee of Twenty has recognized this, but it has at the same time agreed—and I fully support that view—that countries with a floating exchange rate accept a number of obligations which serve essentially the same purposes as those implied by the par value system. Adjustment policies, and in particular the management of floating exchange rates, will be guided by the general principles spelled out in the outline of the reformed system, and will be subject to surveillance in the Fund.

I attach great importance to these commitments. As I indicated in my intervention last year, the failure to establish viable procedures to ensure the international consistency in the policies of individual countries creates grave risks of mutually harmful actions that may endanger the sound development of international trade and investment upon which our continued welfare depends to such a large and increasing extent. If backed up by the political willingness to make the process of international consultation and Fund surveillance work in practice, the commitments into which we have entered in connection with the Outline of Reform could be a powerful force to contain such mutually harmful actions, and to create an international monetary order, different in form but similar in substance to the order envisaged in the original Bretton Woods system. This implies, among other things, that countries should take such prompt and adequate action, domestic or external, as may be needed to avoid protracted payments imbalances. In choosing among different forms of adjustment action, countries should take into account repercussions on other countries as well as internal considerations.

I am particularly gratified that the guidelines for the management of floating exchange rates provide a basis for a constructive dialogue between the Fund and individual member countries on their actual exchange rate policies and in particular on their objectives for the exchange rate beyond the short run. A dialogue between the Fund and individual countries, centered on the concept of a target zone of rates, could be a very fruitful way to prevent a situation from developing in which national policies of exchange rate management are basically inconsistent. I would urge that this dialogue be carried out on as confidential a level as possible, preferably in bilateral contacts between the Managing Director or his senior staff and the authorities of the country concerned. Exchange rates are by their very nature a matter of the greatest confidence. In practice, a full and frank discussion of national exchange rate policies and targets is impossible in a multilateral forum, such as the Interim Committee or even in the confidential circle of the Executive Board.

In saying this, I certainly do not wish to create the impression that I would want to reduce the functions of the Executive Board; quite the contrary. The periodic review in the Executive Board of developments in the world payments situation and of adjustment policies is more than ever necessary to keep the international monetary system together. We should be very careful not to diminish the effectiveness of the Executive Board, that ingenious alloy of national representation and independent responsibility to the international community. Especially for the smaller countries, the Executive Board constitutes a forum in which their voices can be heard, which might otherwise be drowned out in the power play of larger national interests. My one grave concern about the Outline of Reform is that the very broadly defined mandate of the Interim Committee and, a fortiori, of the decision-making Council in the future system will in fact detract from the status and the effectiveness of the Executive Board. I sincerely hope that we can prevent any such development which I would consider a great step backward in international monetary cooperation.

Before turning to matters concerning the World Bank Group, I would like to comment very briefly on the question of amendments to the Articles of Agreement.

I feel that a distinction has to be made between two kinds of amendment. First, there is a minimum package of interim amendments needed to make it possible for the Fund to operate in the years to come and to provide the Fund with enough of its own sources of income to keep up the high standard of its machinery without anticipating ultimate reforms. Second, there is a package of amendments intended to form part of the reform of the international monetary system in the longer term.

In my view there need be little difference of opinion as to the necessity for amendments of the first kind. I particularly have in mind alternatives to the obligation to deposit gold in the event of quota increases or on accession to the Fund. As far as the amendments belonging to the second group are concerned, it is not only necessary that each proposed amendment be judged on its own merits but also that a continuous analysis takes place to see whether the whole package of proposals is a balanced one and especially whether it contains a harmonious combination of flexibility and discipline. As long as such a result cannot be obtained it seems to me undesirable to carry out this second category of amendments.

There is one area in which the Committee of Twenty has made little progress, partly perhaps because it is a matter which concerns both the Fund and the World Bank. I am referring to the transfer of real resources to less developed countries, including the possible creation of a link between SDR allocation and development aid, consistent with the essential characteristics of the SDR. It is especially disappointing that it has not yet proved possible to reach agreement on this point.

However, the developing countries will already be able to benefit from the creation of the oil facility and the extended Fund facility and hope that discussions on that broadening of the existing compensatory financing arrangements will soon produce results. Unfortunately, it has never got as far as a really fundamental approach to the problem of integrating the expansion of the net flow of real resources to developing countries with a reformed monetary system. The Committee of Twenty has explicitly recognized the desirability of this. Consequently, the Committee of Twenty asked the Managing Director of the Fund and the President of the World Bank to make proposals for the establishment of a Joint Ministerial Committee of the two institutions. Its terms of reference would be to continue the study of these problems and recommend measures for carrying out its conclusions. The proposals of Mr. Witteveen and Mr. McNamara are now before us and we shall have to take a decision about these proposals at this meeting.

The Netherlands Government supports the establishment of the Joint Ministerial Committee, but recognizes the danger that a new committee might duplicate the work of other institutions in which development problems are discussed, especially in the framework of the United Nations and UNCTAD. Nevertheless, we feel that a committee which is competent to deal with both monetary and development issues, and which has a close institutional link with the Fund and the Bank, can perform a useful function. It has become clear in recent years how much monetary problems affect matters in developing countries. I consider it of great importance that more account be taken of this interaction and that the developing countries will have the opportunity to call attention to their specific problems in such a Committee.

The close connection between events in the monetary sphere and development aid emerges very clearly from the Annual Report of the World Bank. The Bank has made a major contribution in the past year toward ensuring that funds which could not be absorbed by the oil producing countries were channeled to those developing countries which had been hit by the rise in the price of oil and other raw materials. In this way it enabled the flow of capital to the developing countries to be maintained, despite the fact that a large number of developed countries had to contend with balance of payments deficits due to the increase in the price of oil. The Bank proposes to extend its activities still further in this respect, and the Netherlands welcomes such a move wholeheartedly. . . .

Statement by the Governor of the Bank for Iran—Hushang Ansary

I wish to begin my remarks by paying tribute to Mr. Konan Bédié, the Chairman of these joint Annual Meetings, for his eloquent and very constructive opening remarks. I also wish to welcome Papua New Guinea as an observer to these meetings and as a future member of the Fund and the Bank.

May I also take this opportunity to express the sincere appreciation of the Iranian delegation to the distinguished leaders of our two institutions, Mr. R. S. McNamara and Mr. H. J. Witteveen, for their untiring and courageous efforts in the past year—a year marked by grave and unprecedented problems in the world economy. I believe that the international economic community owes them a word of gratitude.

The speakers who have already taken the floor have extensively discussed the problems confronting us in these difficult and challenging times. These problems, whose urgent and satisfactory resolution is vital to the maintenance of world economic security and prosperity, make this assembly perhaps the most important one since the historic Bretton Woods Conference.

It is a sad commentary on the state of world affairs that a century marked for accomplishments beyond man’s wildest dreams is approaching its end at a time when the world at large is beset by an alarming and virulent inflation, a growing fear of global food shortage, a serious preoccupation with a possible breakdown of the international monetary system, and chaos in international economic order.

The circumstances that led to the emergence of those problems are not only complex; they have been in the making for many years. Their root causes must be sought not in the context of one particular development but in the complexities of the fundamental issues facing the world today—in the imbalances and inequities that have been allowed to persist in international economic relations since World War II.

These imbalances and inequities were primarily responsible for the accelerated economic growth of a handful of industrial countries through the transfer of real resources to them from the rest of the world in the form of cheap oil and other cheap raw materials.

It was possible to manipulate the price of oil from $2.17 to a low realized price of $1.30 between 1947 and 1970. Other raw materials and primary commodities fared no better. In contrast, we witnessed a steady rise in the prices of a wide variety of industrial products during the same period.

This, of course, was conveniently labeled the law of supply and demand, the principle of free trade. No one in the industrial world, then, spoke of price rigging. It bothered no one then that declining oil prices drained the oil producing nations of their natural wealth, and that rising prices of manufactured products made the struggle for development of the nonindustrial world almost meaningless. It mattered little that in the 20 years ended in 1971 the world, in fact, witnessed a drop in the relative value of food, oil, and other raw materials, set against a steady rise in the value of manufactured goods.

Now those incongruities have become counterproductive. Since the turn of the decade, the problems have been further aggravated by the heightening of inflation of the industrial countries. The record shows that the inflationary spiral was spearheaded by the rapid rise in the prices of industrial products long before the increase in the price of oil. The record further shows that the prices of such commodities as wheat, sugar, fertilizers, paper, petrochemicals, fibers, and many others peaked between four and fifteen times during this period.

In examining the effects of the rise in prices of various commodities, it is interesting to note that even at its present price, the possible share of oil in this year’s rate of inflation in the industrial countries, now estimated to reach about 14 per cent, is no more than an average of 1.5 per cent. It is pointless, therefore, to ascribe the problems of inflation in the industrial countries to the price of oil and to ignore the more important contributing factors that have combined to form the high rate of inflation in these countries.

Let me summarize some of these factors: (1) the loss of confidence within the international community since August 1971 in the stability of the world monetary system; (2) the introduction of floating exchange rates which helped resolve some of the capital flow problems but made it difficult for the developing nations to estimate the ultimate cost of their development projects; (3) the unusually high rate of economic growth in the industrial countries in 1972 and 1973 which strained the economies of these countries and brought considerable pressure on the world’s natural resources; (4) unfavorable climatic conditions which adversely affected the world food and feedstock supplies, and heavy speculation and unusually high stockpiling by some countries which aggravated the situation; and (5) manipulations by major international firms which seriously affected the prices as well as the supplies of industrial raw materials and manufactured products.

Let me now turn to the balance of payments difficulties with which a number of countries are faced. Essentially, of course, these difficulties are different in nature in the industrial countries from those in the developing nations. The industrial countries must recognize that, as cheap oil and other raw materials are no longer available, the situation calls either for a change in life styles, which would be a new experience, or an effort to do away with social ills and increase productivity. As His Imperial Majesty Aryamehr Shahanshah of Iran has often warned, permissive societies can no longer hope to maintain their high living standards. They must do away with the symptoms of excessive consumption. It is encouraging to note that a number of these countries have already chosen to follow this course.

As for the plight of the less fortunate countries, it is interesting to note that while so much is being said by the industrial countries about the effect of the price of oil on the import bill and the balance of payments of the developing countries, little mention is being made of the staggering impact of the phenomenal rise in the price of food, fertilizers, manufactured products, and industrial raw materials, which absorb the lion’s share of the foreign exchange earnings of the less fortunate countries. We should not lose sight of this important fact in seeking solutions to the problems of the developing countries. This, we feel, calls for an all-out prompt and coordinated action. In this, the mistakes of the past that led to the ever-widening gap between the haves and the have-nots must be avoided at all cost.

As the Shahanshah has indicated on more than one occasion, no nation can take pride in having an affluent society of its own in a world plagued with hunger, misery, disease, and untold problems for others.

In this context, may I draw the attention of the distinguished delegates to the fact that the Shahanshah of Iran was the first world leader to initiate a comprehensive aid program to the developing countries in their present plight and a recycling mechanism for the developed countries in their period of adjustment.

On a bilateral basis, the Shahanshah’s program includes extensive measures aimed at easing the problems of the less fortunate countries. In the continents of Asia and Africa, in less than eight months, this has taken the form, in highly concessionary terms, of assistance to a dozen countries. It ranges from aid in the development of natural resources to the implementation of manufacturing projects, reconstruction and rehabilitation schemes, and utilization of idle industrial capacities, as well as help in development and educational programs, balance of payments assistance, emergency aids, and, in some cases, outright grants. In the developed countries, the Shahanshah’s initiatives have been aimed at easing balance of payments difficulties. They have also taken the form of joint ventures in and outside of Iran as well as the prepayment of Iran’s loans to creditor countries. Furthermore, foreign financing of joint ventures in Iran has now totally shifted to the Iranian domestic market. This includes also the share of foreign participants who can now benefit from local financing.

In the multilateral context, Iran has been the first to announce its support of the Fund’s oil facility, and has financed one fifth of this facility’s resources. We have also made substantial contributions to the World Bank in the form of loans. More importantly, His Imperial Majesty has proposed the establishment of a new, neutral international fund based, for the first time in the history of international aid, on important new features. The fund, to be established with equal contributions by the OPEC members and the industrial countries, is to have a Board of Governors initially consisting of 12 of the OPEC members, 12 from the industrial countries, and 12 from among the recipients. The representatives of the recipients will have equal voice in deciding how the fund’s resources are to be used. Of the fund’s initial outlay of $3 billion, estimated in consultation with President McNamara and Managing Director Witteveen, Iran has already pledged a contribution of $150 million, a part of which was last week advanced to the UN Emergency Fund.

The total commitments by Iran in bilateral and multinational forms thus far have reached $7.7 billion. To appreciate the magnitude of Iran’s foreign assistance program, it will help to recall that during the entire period of the Marshall Plan total U.S. aid amounted, to the best of my recollection, to $13 billion. This constituted 0.8 per cent of the U.S. GNP for that period. In 1973, the total aid outflow of the DAC countries was no more than ⅔ of 1 per cent of their GNP. Against this background Iran’s total assistance program is expected to reach nearly 6 per cent of its GNP in the next four years.

Taking account of the huge financial requirements of the less developed countries to achieve a modest rate of growth, as depicted clearly yesterday by President McNamara, it is our hope and expectation that the developed countries will also do their share and increase their contributions in response to the increasing needs of the developing countries.

Parallel to the extensive assistance which will have to be forthcoming in the years to come, we all must recognize that remedies will not be lasting if they are designed to perpetuate the very system that has proved to be fragile and inadequate. For solutions to be both effective and durable, they have to be based on the lessons of the past and on the realities of the present world economic situation. The Shahanshah has again repeated his call for linking the price of oil directly to the rate of inflation in the industrial countries. This is in fact the most equitable way to deal with this problem and to promote efforts to keep inflation at a reasonable level. Once this is achieved, the disappearance of the inflationary mentality would bring about an atmosphere conducive to dealing effectively with long-standing issues and imbalances in international trade and to creating a dependable international monetary system fully responsive to the needs of a new world economic order.

In this context, there is need to re-examine ineffective institutional structures not only for the purpose of removing present inequalities but also to allow and encourage greater participation on the part of those capable of greater contributions. While on this subject, let me say that we welcome the initiative and the constructive attitude shown by some of the distinguished Governors today in proposing a more effective role for the oil producing countries in the management and the direction of the Bank and the Fund.

It is in this spirit that while the Iranian delegation supports the proposal to create a Joint Bank-Fund Ministerial Committee it has been our view that in selecting the members of this Committee there should be a departure from the existing system that favors a privileged few. We feel strongly that the purpose would be better served by allowing a more equitable representation of the industrial countries, the oil producing countries, and the recipient countries. Only in this manner do we believe such a Committee can successfully achieve its objectives in the transfer of real resources to the developing countries.

It is our hope that this Committee, in conjunction with several other measures that we may adopt in this conference will serve as the first step toward the establishment of a new effective and longer-lasting international economic order.

Among the essential parameters of this new order are certain basic issues of great importance to both developing and developed countries. One of the issues of particular concern to the less developed countries is the adequacy of their quota shares in the Fund and the Bank. The present quota system, based at best on the antiquated economic realities of World War II, and more importantly upon the postwar political clout of a few industrial countries, is now patently unjust, reflecting neither the importance nor the needs of the less developed countries while distorting and exaggerating both the importance and needs of some industrialized countries. A decision on this matter is needed in order to guide the Executive Directors of the Fund in their Sixth General Review of Quotas. This is not only a question for the interim period but one of long-term and of fundamental importance to both the developed and the developing world. The particular case of oil exporting countries is of immediate and compelling significance in this regard.

Another matter of great importance to the future monetary system is the need to increase the transfer of real resources to less developed countries, including the possibility of establishing a link between SDR allocation and development finance. The avenues of action in this area are numerous. My Government welcomes the recent establishment of the extended Fund facility to assist the less developed countries in their longer-term balance of payments finance. We also hope that the oil facility, now fully established and operational, can be expanded and extended to include also the other surplus countries. Moreover, in view of the size and the nature of this facility, we believe that not only priority in using the facility should be given to the developing countries but also that the present concessionary terms be limited only to these countries. Any legal difficulty which may exist in this respect should be overcome with necessary administrative or other arrangements.

The future disposition of the gold issue can be yet another means of alleviating the less developed countries’ financial burdens. We have noted paragraph 24 of the Outline of Reform and fully subscribe to the conclusions of the Committee of Twenty that SDRs, and not gold, should become the principal reserve asset, and that the role of other international currencies should be reduced. But we wish to emphasize that any solution or arrangements on gold should be internationally agreed on and should not jeopardize the role of SDRs in the future reformed system. Such a solution should avoid increasing international liquidity abruptly and fueling the inflation. It should also avoid a skewed distribution of additional liquidity in favor of industrial countries.

On matters of trade and investment, we endorse the invitation to members to subscribe on a voluntary basis to the declaration concerning restriction of trade and other restrictive current account measures for balance of payments purposes. But we believe that some of the developing countries which may not yet be ready to subscribe to it fully at this stage should be given temporary reprieve.

A lasting world economic system should be based on present economic realities if it is to be able to cope effectively with the existing imbalances and inequities. This is a challenge which none of us here can ignore, belittle, or treat gingerly. And on this depends the creation of a peaceful, cooperative, and prosperous world.

Statement by the Governor of the Fund for Mauritius 1Veerasamy Ringadoo

I must begin by emphasizing that problems of international monetary reform—problems which will no doubt dominate the discussions at this meeting—should not be viewed from a narrow viewpoint, as say the purely technical problems of improving the adjustment process. Rather, they should be looked at from the much wider perspective of ensuring the stability of the world economic order. Such stability is today threatened by at least three factors, namely, the world shortage of food, the towering rise in oil prices which has disturbed the whole structure of the balance of payments, and the pace of world inflation. It is an irony in human history that in spite of all the spectacular progress in science and technology that man has been able to achieve, he is unable to produce enough food to meet this elemental need! This irony is heightened by the fact that even when some foodgrains are available on the world market, some countries may not be able to afford them because of the formidably high prices. Moreover, the ability of the developing countries to raise the production of foodgrains is impaired by the rise in fertilizer prices. I am mentioning these factors to underline the severity of the economic crisis through which the world is presently passing. Unless the economically powerful countries adopt a more outward-looking attitude, there is little hope for poor countries to emerge out of this economic disorder. I fervently hope that the spirit of transnationalism will permeate our discussions at this meeting.

Let me now turn to the consideration of international monetary reform. When the Committee of Twenty was set up in 1972, much was expected of it, particularly because it was regarded as a second Bretton Woods Conference. After two years of study and negotiations its final report comes as an anticlimax to such expectations. The Committee has not succeeded in developing a complete design for an international monetary system that would last for, say, the next 25 years. One gets the impression that events have overtaken the deliberations of the Committee. For instance, in a situation where most of the world’s major currencies are actually floating, to talk in terms of par values, however adjustable they might be, is tantamount to paying lip service to the concept of par values. Further, major issues like the link between SDR allocation and development assistance, and the eventual elimination of reserve currencies, have remained unsettled. Again, merely extolling the virtues of the one-world approach is not enough. The final outcome of the reform exercise should have reflected, but actually does not, an adequately balanced approach which takes into account the interests of the developing countries. Admittedly, some positive results have emerged, such as the eventual ushering in of the SDR standard and rules for floating. But beyond this, I am afraid the contribution of the Committee toward evolving a more stable and equitable monetary system cannot be regarded as substantial.

The disappointment is all the more great for the developing countries. For instance, in the case of the link between SDR creation and development assistance, although there was a large area of agreement, because of the obstructionism of one or two powerful countries, the Committee was not able to come out with a unanimous recommendation. It is necessary to repeat that such a link forms an integral part of monetary reform and that without the link, the reform package will have little meaning to developing countries.

Of course, I welcome the establishment in the Fund of two new facilities, namely, the oil facility and the extended Fund facility. But these facilities, even in combination, offer only marginal relief to developing countries. Only the link, to which I referred earlier, could provide real relief.

Another welcome feature of the recommendations of the Committee of Twenty is the proposed establishment of the Joint Ministerial Committee of the Fund and the World Bank, to carry forward the study of the question of transfer of real resources to developing countries and to recommend concrete measures to implement its conclusions. While fully supporting the establishment of the Ministerial Committee, I would like to add that the study need not be long and drawn out, and that some concrete action should be taken during the very first year of its operation.

While on the subject of reforms, I must also advert to the Sixth General Review of Quotas. The present quotas on voting power in the Fund do not reflect the needs or importance of developing countries in the world economy. Principles of equity and democracy demand that all developing countries should have a substantially higher share of quotas in the Fund than those that they presently command.

I will now take up for discussion another recent development, namely, the problem of recycling of the payments surpluses of petroleum exporting countries. In the discussions on this subject, the main attention appears to be concentrated on recycling these surpluses to developed countries. No doubt such recycling, to the extent that it will reduce possibilities of a recession in the developed world, would also benefit the third world. My point, however, is that this is not enough: more positive approaches to confer the benefit of the so-called petro-funds on the poor countries need to be fully explored. There are at least two reasons why the Fund should begin to play, in collaboration with the World Bank, a more active role in the recycling process. First, such recycling, if left to the private sector banking and financial institutions, may result in a disorderly flow of funds. This is apparently the position today, as can be judged from discussions that are going on about secondary recycling among developed countries themselves. The need for promoting a more orderly flow of such funds is thus obvious. Second, in view of the massive amounts involved, one wonders whether the private banking and monetary institutions would be able at all to absorb the funds in future years. The difficulties that some banks in Europe experienced recently lend further credence to this viewpoint.

In any case, I feel that the Fund is eminently suited to act as an agent to promote a more orderly flow of petro-funds. My own suggestion would be that the Fund, possibly together with the World Bank, might establish a sort of investment bank which would be designed to absorb these funds. The investment bank might also be in a position to offer to the depositors some sort of exchange guarantee. This bank could lend funds to the developed countries at commercial rates. There would also be a soft window of the bank to facilitate lending to poor countries at concessionary rates of interest. Of course, this is only a broad idea and the modalities of establishing such an institution need to be studied in depth. My purpose in raising this point in this forum will be served if this provokes further thinking on the subject.

Finally, I would like to draw attention to the problems of the poorer countries which have been most adversely affected by recent events such as the increase in the prices of foods and fertilizers. Here there is need for help on an emergency basis. I do hope that the Joint Ministerial Committee of the Fund and the Bank will immediately address itself to the task of finding ways and means to help such countries. More generally speaking, the developed world should respond to the call for help. In this context, the following words of Mr. McNamara are worth remembering: “But aid is not a luxury—something affordable when times are easy, and superfluous when times become temporarily troublesome.”

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

The Governor for Paraguay, our Minister of Finance, General César Barrientos, whom I once again have the honor to represent at this meeting, has entrusted me with the very special mission of conveying to all those present the warmest greetings from the President of the Republic of Paraguay, General Alfredo Stroessner, with his thanks for the great work you are doing to find a permanent solution to the problems of the world monetary system. Our President also sends his greeting to the people and Government of the United States who are offering us their hospitality this year.

Each year this meeting provides an exceptional opportunity for all countries, the rich industrialized nations and the poor developing ones alike, to come together to exchange views on points of common concern and make suggestions involving the aspirations and hopes of each of the parties with regard to the highly complex matters entailed in revision of the international monetary system.

On behalf of my delegation, I wish to repeat here the concern Paraguay expressed earlier this year, at the fifteenth meeting of the Board of Governors of the Inter-American Development Bank, held in Santiago, Chile on April 2, regarding the intention of the industrialized countries to raise substantially the price of gold to help offset the effects of the oil crisis. This action will simply increase international liquidity in a manner disproportionately favorable to the industrialized countries, and to the detriment of the developing countries. We therefore wish to state categorically that the increase in international liquidity should be achieved through proper allocation of special drawing rights.

We consider this possibility of increased allocations of SDRs to be a matter of great importance. It is obviously of concern to the developing world, and to Latin America in particular, since this mechanism is being viewed as a method of relieving the international payments problems of the developing countries. We wish to point out that, although these countries hold about 31 per cent of official world reserves and their Fund quotas (the basis on which the SDRs are distributed) amount to 28 per cent of the total, the bulk of these reserves are obviously concentrated in the Middle East and Asia.

Latin America has 5 per cent of the world’s total reserves and almost 9 per cent of the quotas in the Fund, which means that it receives almost 9 per cent of the total SDRs.

Fortunately, public opinion world-wide is shifting more and more in favor of linking SDRs to development aid, so that the allocation of SDRs should become more favorable to our countries.

The oil crisis, together with the inflation raging in the developed countries, has caused severe disruptions in the economies and balance of payments positions of the developing countries, sharply reducing their capacity to carry forward their economic development plans. Although the resolution adopted by the conference of OPEC held in Vienna in the first half of September has provided some relief, we are not yet free of the danger of further increases. For a commodity such as oil, which is vital for every nation, any further increase would have disastrous consequences for those developing countries that do not themselves produce any. We therefore repeat that the problem of international oil prices cannot be viewed in isolation from the monetary problem and should be considered by the Fund, since the best reform we might be able to hammer out could not survive the effects of further increases in the price of “black gold.”

As time passes, complex situations are superimposed one on the other, and increased importance attaches to the need to promote cooperation and consultation to achieve international equilibrium on a just basis. We are confident that the conclusions and recommendations of the Committee of Twenty, set up pursuant to Resolution No. 27-10 of July 26, 1972, will open new paths to international understanding between members of the Fund in monetary, exchange, and financial matters, so that its establishment can be viewed as a positive step forward.

At the Nairobi meeting we stated that our Government felt it desirable to retain the broad lines of the Bretton Woods system, with such modifications as present circumstances might warrant; the Committee of Twenty has reported at length on these guidelines.

The Committee has recognized the need to give priority to certain aspects of reform. In addition, under the present conditions of marked imbalances in payments, it is vital to step up consultation between the Fund and its members, so that the process of balance of payments adjustment can be truly effective and symmetrical within the proper functioning of exchange rates. It is also desirable to advance resolutely in the matter of cooperation so as to find answers to the problem of equilibrium in capital flows; the establishment of convertibility for the settlement of balances; consistency between adjustment, convertibility, and global liquidity; and the establishment of a system that will promote the transfer of real resources to developing countries.

The delegation of Paraguay considers that the system for the valuation of SDRs introduced on July 1 represents an important step toward the gradual reduction of the role of gold and the reserve currencies in the international payments system. The change in the institutional structure of the Fund and the establishment of the Council will help to advance other basic objectives of reform, such as arrangements for international trade, movements of capital, and aid for development.

In a different but related order of ideas, we welcome, as positive steps, the establishment of the extended Fund facility for loans to countries intended to help solve balance of payments and stabilization problems, together with the establishment of a Joint Fund-Bank Ministerial Committee to study the transfer of real resources to developing countries and make appropriate recommendations to that end.

On August 15 of this year, the President of the Republic of Paraguay, General Alfredo Stroessner, celebrated 20 years in office, based on the principles of national security, constructive peace, representative democracy, social and economic development, and monetary stability.

The economic and financial equilibrium that our country enjoys has contributed to the creation of major works of physical and social infrastructure, through the joint efforts of the Government, private enterprise, and the population at large.

We were extremely honored by the favorable comments expressed recently by the Fund following its examination of the Paraguayan economy. The Executive Board decision was worded as follows:

The Paraguayan economy gained considerably in 1972 and 1973 under the influence of favorable external factors. Real GDP, which had expanded by an estimated 5.3 per cent in 1972, increased substantially faster in 1973. The terms of trade moved strongly in favor of Paraguay, reflecting the large increases in prices for meat, as well as for many other primary commodities exported by Paraguay.

The resulting boost to the domestic economy led to a substantial strengthening in the financial position of the Central Government, which is expected to continue into 1974. The Fund welcomes the recent efforts of the Paraguayan authorities to raise additional revenue through taxation and improved tax administration.

Paraguay’s GDP grew by 7.2 per cent in 1973, and the increase in 1974 is expected to be of the order of 8 per cent. The process of transformation of the Paraguayan economy received a boost from the savings and investment devoted to the various sectors of the country’s economy.

The Government’s fiscal policy, which is administered by the Ministry of Finance, is geared to developing the economy within a framework of monetary and exchange stability, in such a way that financial stability overall contributes to sustained development.

The budgetary deficit was reduced significantly in 1973, compared with 1972. Receipts increased by 24 per cent, as against only a 10 per cent rise in expenditures, which helped to reduce the gap between total expenditures and income. This improvement was even more marked in the first half of 1974, with the national budget showing a surplus of ₲ 1,151.3 million for the period January to June, as compared with a deficit of ₲ 187.4 million in the same period of 1973. This helped to reduce the Government’s obligations to the Central Bank, resulting in a total net reduction in money circulation of ₲ 1,651.3 million.

This improvement in the Government’s finances has been a major factor in economic development and in the achievement of a favorable balance of payments, which in turn has helped to strengthen the country’s international reserves. The national budget was satisfactorily balanced, as a result of a vigorous fiscal policy and the progress achieved in controlling and administering the tax system. Among the chief goals of fiscal policy are the encouragement of exports through incentives for the production and diversification of exportable surpluses.

The program of support for farm and industrial production has brought about a sustained rise in imports, particularly of capital goods for the equipment of industry, farm mechanization, and expansion of the transport and communications systems. The increase in import prices, including essential capital goods and raw materials, particularly oil and wheat, has exerted severe pressure on the country’s balance of payments. The Government has taken timely measures to increase production so as to step up exports and keep the balance of payments in equilibrium.

In 1972 Paraguay imported goods to an f.o.b. value of $70 million, of which capital goods accounted for 46 per cent. This percentage rose in 1973, reflecting the higher prices of such articles, together with the higher cost of imports of agricultural and industrial inputs and petroleum products. Total 1973 imports amounted to $105 million, 50 per cent up from the previous year. In the current year, imports are again expected to be up by 50 per cent. Imports of consumer goods have been falling gradually, as the process of import substitution proceeds apace.

The expansion in farm production and exploitation of forestry resources, together with investments in other sectors of the economy, under the stimulus of special legislation and international lines of credit, helped to raise purchases from abroad to record levels.

Paraguay has received growing support from the international development finance agencies. The country’s economy and its basic services are being expanded through investments financed out of domestic savings and external loans. This is true of various sectors, such as electric power from the Acaray River, drinking water and sewerage programs for various cities and villages in the interior, the construction of low-cost housing, support for education, and investment in general economic development.

In the spirit of regional integration that underlies the foreign policy of the Paraguayan Government, positive progress has been achieved in developing treaties for the joint use of the hydroelectric potential of the Paraná River with Brazil and Argentina, through the Itaipú and Yacy-Retá projects, respectively.

The projects for tapping the hydroelectric potential of the Paraná River represent the maximum use of that river’s potential in this area.

The Itaipú complex will have a total installed capacity of 12.6 million kilowatts with 18 turbines, and its total estimated cost will be close to $4 billion. Work will start on this monumental project—which will be the largest in the world—in mid-1975, and the first turbine is scheduled to come on line in 1982.

The Yacy-Retá complex will have 30 turbines, and its cost is estimated at $2,458.1 million, of which $1,096.0 million will be in Argentine and Paraguayan currency. The distribution of this sum, which will be used to pay local labor, supply of materials, and costs, will be established between the two Governments.

The efforts of the Paraguayan Government to secure the integral development of the country are evidenced by a number of projects, including highway construction, telecommunications, educational development, housing construction, and support for the production and use of electric power. The Government has also authorized various companies to prospect for and produce hydrocarbons.

In order to promote the production of goods for export, the authorities have prepared the necessary programs for consideration by governmental financial and development agencies, particularly in matters pertaining to the expansion of output in the arable farming, livestock, and forestry sectors, and industrial infrastructure.

This policy is already bearing fruit, as a number of figures will show. In the first seven months of 1974, despite the difficulties encountered by our traditional exports on international markets, exports amounted to $92.2 million, representing a 6.8 per cent increase over the corresponding period in 1973. Imports totaled $70.8 million, up 24.1 per cent compared with July 1973, with capital goods still predominating. At July 31, 1974 our balance of payments showed a positive balance of $18.3 million, and we expect to end the year with a positive balance of $12.0 million. Our international monetary reserves have thus increased by 43 per cent between December 30, 1973 and July 31, 1974.

Paraguay, with its development-minded Government and the invaluable support of the entire populace of the country, is overcoming difficulties and mastering obstacles. In this task it can count on its stern resolve to progress and on the ever-growing support of the international financial agencies. Our country is therefore ever open to efforts to strengthen and improve machinery—such as monetary mechanisms—that can help secure progress. For this reason it will at all times remain faithful to international agreements reached and to be reached under the aegis of the International Monetary Fund.

We thank you for your attention and once again express our determination to provide unfailing cooperation. We also express our best wishes for the success of these discussions, and for all who are attending this meeting we wish a safe journey back home.

October 1, 1974.

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

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