Discussion of Fund Policy at Fifth Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1974
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Statement by the Governor of the Bank for Pakistan—Mubashir Hasan

The Annual Reports of the International Monetary Fund and the World Bank Group offer a remarkably frank and objective assessment of the main developments during the 1974 fiscal year in the economic, monetary, and development fields. The initiatives taken and the contributions made by the two organizations constitute solid achievements of which they can feel justifiably proud.

I would like to place on record my felicitations to Mr. Witteveen and to Mr. McNamara for the dedication and vision with which they have conducted the affairs of their two organizations under most difficult circumstances. Their Boards of Directors and members of the staff deserve to be congratulated for their commendable performance. . . .

The current situation has major implications for the economies and politics of the developed countries as well. The developed nations can no longer count on the continued availability of that portion of their wealth which was derived from low prices of commodities exported by the developing countries. The organization of production in the developing countries is threatened with disintegration as the low wages paid to their workers and the higher prices of the inputs charged by the developed countries are making it increasingly difficult for them to export, as it would no longer be economically feasible for them to produce. Such a development will threaten the economic existence of a very large part of our planet.

The question naturally arises as to how long a period can the rich and the poor nations go on like this. Can the developed nations go on consuming more and wasting more and charging for their labor as they do and producing less than what they are capable of doing and still hope to remain unaffected? History tells us that such situations cannot for long endure. Only recently the President of the United States declared that “throughout history nations have gone to war over natural advantages such as water, food or convenient passages on land or sea,” and in the present situation the President foresaw a threat of “the breakdown of world order and safety.” The origins of many a major conflict in history are traceable to economic and social inequities and exploitation of the weak by the strong.

Is it not tragic that it is mainly when nations have plunged themselves into wars that there has been a sudden spurt of creative activity on the production front? Men and women have toiled day and night instead of working five days a week and achieved technological breakthroughs which have tremendously boosted production and helped usher in new eras of prosperity later on. Of course, winners emerge from wars as losers and losers are obliterated. And then international organizations are created to expand trade, to maintain employment and real incomes, to correct maladjustments in balance of payments, and to reconstruct and develop economies on a more equitable and just basis. Eras of reconstruction and production are opened in this changed economic framework. It was precisely in such circumstances that the Bretton Woods institutions came into being. The question before the world today is whether the destruction and bloodshed that a global conflict involves is really a prerequisite to a spurt in productive activity by nations and to a restructuring of the international economic order on a just basis. Must the nations first make the terrible sacrifice of human life and property before they bring themselves to taking those hard decisions which alone would save mankind from starvation and death? Time alone will provide answers to these questions. But it is clear that it is only through international cooperation on the basis of equity and justice that major catastrophes can be avoided.

Turning now to the more specific issues before us, I must express my appreciation of the steps taken by the management of the Fund to assist the developing countries in their balance of payments problems. The new oil facility, which has already taken shape, has provided relief to a number of countries, including my own. The scheme has the potential of playing, however, a much greater role in the adjustment process than presently envisaged. The duration of the facility, presently limited to two years, needs to be extended till such time as the affected countries are able to attain a reasonable equilibrium in their balance of payments. The quantum of assistance available under the facility to oil importing countries also needs to be increased by relaxing the present restrictions on its maximum use.

The introduction of the extended Fund facility is another welcome move. Here again the drawing limits need to be broadened. The extended facility should be wholly additional to the financing available under the ordinary credit tranches, or else the maximum access to the Fund’s resources under the new facility should be suitably enlarged.

During the past few years, the international monetary system has been shaken to its very foundations. While the Committee of Twenty accomplished a great deal by way of unravelling many a tangled issue and produced a number of constructive suggestions in the field of international monetary relations, which deserve our appreciation, I cannot help but express the feeling that, both in its general approach and in respect of its specific recommendations for the interim period, it has not taken full account of the pressing problems of the developing countries and has failed to accommodate some of their strongly held views. For instance, the question of establishing a link between development finance and SDR allocations, which had been thoroughly examined and whose technical feasibility had been fully established, does not form part of the interim reform package. Similarly, despite the repeated pleas made by the developing countries for a sufficiently equitable improvement in the quota position and voting power of developing countries in the International Monetary Fund, nothing substantive has emerged so far. The viewpoint of the developing countries in respect of several other elements of international monetary reform has also not found acceptance. I hope that the Interim Committee of the Board of Governors of the Fund, which is to start functioning shortly, will be able to find early solutions for the pending issues to the satisfaction of both the developed and the developing countries. . . .

The setting up, by common agreement, of the joint Fund-Bank Development Committee also raises hope that the crucial problem of promoting the net flow of real resources to the developing countries will now receive concentrated attention. For the Committee to be able to evolve a really comprehensive set of measures, it would be necessary that its work program include a thorough review of the amounts and quality of official development assistance, of the policies and procedures of multilateral development finance organizations, improvement of access to financial markets in general, and international financing schemes for commodity regulation and price stabilization. It is important that the Committee should approach its mandate in a spirit to create the framework of a new order of international economic cooperation, without any preconceived notions and without catering to any vested interests. It is also important that some concrete proposals should emerge before we meet again next year, so that our efforts to set up this Committee during our current deliberations become a prelude to action and not a substitute for it.

Statement by the Governor of the Fund and Bank for Jamaica—David Coore

My remarks this morning will be confined to matters affecting the Fund and I will be expressing the views not only of my own country, Jamaica, but also of the Bahamas, Barbados, Guyana, and Trinidad and Tobago.

Having been privileged to participate in the work of the Committee of Twenty over the past two years, I share the regret which others have expressed that the major objective which the Committee set itself of achieving a meaningful reform of the international monetary system has not been completed. While it is true that the work of the Committee was made more difficult than originally anticipated by the unforeseen upheavals which have occurred in the world economy during this period, the fact is that our failure to devise a satisfactory reformed monetary system has left us largely unable to cope quickly with the consequences of these upheavals and has contributed to the general feeling of bewilderment and confusion which is not the least of the ills from which we now suffer.

Nevertheless, we can point to some accomplishment from the labors of these past two years. The group for which I speak attaches very great importance to the establishment of the Interim Committee, which will have the task of guiding and managing international monetary matters in the period between the Annual Meetings of the Board of Governors. We hope that this institution will be used to the fullest extent possible and that we never allow ourselves to slip back into the situation whereby a few of the major countries take the major decisions among themselves and present the rest of us with a fait accompli.

It is also heartening to note that an Outline of Reform has been prepared on which a new system can be built. We would expect that countries will be guided in their balance of payments adjustment measures by the principles set out in Part I of that Outline. It is also vital that the guidelines for floating exchange rates and the operation of controls should be faithfully observed. It would seem to be generally accepted that unless these guidelines are observed we could plunge the world into the worst recession it has ever seen. We do not share the view that this is an exaggerated fear: it is a real danger. The point has been made that the present inflationary situation hurts the developing countries even more gravely than it does the developed countries. This is true. It is equally true that a world recession would cause hardship and distress in the developed world but in the developing world would lead, in many instances, to total disaster at the individual human level and vast social and political upheavals at the national level.

We join, therefore, with those who have made the point that the fight against inflation, important though it is, must not be carried out by measures which involve creating any slowdown of economic growth in the developing world. The situation in the developing countries is such that there is no question of being able to mark time; we must either keep moving forward or we slip back. It is therefore quite unrealistic to ask developing countries to adopt policies or to accept conditions of assistance which involve a conscious reduction in the pace of the economic growth we are attempting to sustain.

I would now like to comment on two specific aspects of the activities of the Fund: the first is in relation to the oil facility. We pay warm tribute to the initiative of the Managing Director of the Fund in having conceived this mechanism and for the energy and drive with which he has sought to make it a reality. It is one of the few genuinely constructive strategies that has been devised to deal with the balance of payments problem that faces most oil importing countries at the present time. Because it is such a valuable idea, it is important that its potential should be fully exploited and that every effort should be made to so refine and perfect it as to ensure that it truly fulfills the purpose for which it was intended.

It appears to us that the oil facility as it stands at present may fall short of its objective for two reasons: it may fail to obtain the necessary funding because its borrowing terms are not sufficiently attractive. Second, it may fail to give relief where it is most needed because its lending terms and criteria are too rigid. The oil importing countries which have balance of payments problems cannot be lumped together and treated in the same way because there are very important distinctions to be made between them. Some of these countries have strong economies and can sustain borrowing both in the short and in the long run at market-related interest rates. Others are at the other end of the spectrum: they have weak economies which could not sustain 7 per cent interest payments on the substantial sums that they would want to borrow for any long period of time. There is yet a third group in between which can live with a 7 per cent interest rate. It therefore appears to us that the proposal made by the Chancellor of the Exchequer of the United Kingdom has merit and should be accepted. We would wish to take the proposal one step further, however, and suggest that the Fund consider establishing the oil facility at three levels. At the first level it would lend at market-related rates, as the Chancellor has suggested; at the second level it would lend at its present rate; and at the third level, which would be available only to the very poor countries, it would lend at a concessionary rate of, say, 3 per cent. While the number of countries requiring this third-level borrowing may be large, the amounts that they will require, owing to the small size of their economies, will be relatively small in proportion to the amounts required by countries that would borrow at the first level. By fixing a lending rate at the first level realistically, having regard to the money market conditions, it should therefore be possible for the Fund to offer terms to potential contributors that are more attractive than it is doing at present. In this way the oil producers would obtain a secure investment at reasonable rates and, consequently, the Fund is likely to find its resources increased: it would then be able to operate the two modified concessionary lending programs for the two groups of developing countries that I have identified. An oil facility constructed in this way and using more flexible criteria than it does at present for determining qualification for borrowing could, we believe, provide a true recycling mechanism on a scale sufficiently large to make a genuine impact on the world problem.

Speaking as the representative of a group of countries which would fall, we think, in the middle range of the three-tier system, we accept that the better off among the developing countries have just as great a moral obligation to make some contribution to helping the poorest in the world as do the developed countries and the major oil exporters. We would also wish to emphasize that the criteria for allocating loans from the oil facility should not be so rigid as to penalize developing countries which, pending the establishment and operation of the facility, have tried to keep their own economies going by borrowing relatively large sums at the high rates of interest that have been prevailing. In other words, a country should not be penalized in relation to its access to the oil facility because it took steps in self-protection at a time when it was uncertain whether any such facility would ever come into existence.

It is our view that in determining whether access to the oil facility is justified or not, the Fund should look first at the country’s current account balance of payments situation plus capital inflows that could be regarded as normal in that country in the light of previous historical experience and disregard borrowings that were made in excess of those amounts under the stress of the critical circumstances that arose from the occurrences of this year.

We also support the view already expressed by other developing countries that a further review should be made of the recently approved extended Fund facility. The decision of the Board is very welcome but still it has not taken into account the very serious and special circumstances of the present time, and we support the proposal that the limit on drawings should be increased to 300 per cent of Fund quotas.

My group welcomes the formation of the Development Committee. It is heartening to note that there will be an institutionalized body specially charged with the task of setting up and regulating the transfer of resources from the developed to the developing countries. We must confess, however, that we find the terms of reference of that Committee as they stand at present somewhat imprecise, and we recognize the danger that the Committee could degenerate into a glorified research group accumulating masses of papers and, perhaps, performing a cosmetic role in the on-going struggle of the developing countries to achieve a more equitable distribution of the world’s resources but, in itself, accomplishing little of real value. For this reason, we welcome the statement made by the Group of 24 in which they sought to express their understanding of the purpose and objectives of the Committee and we believe that the general acceptance of that statement of understanding will put the future work of the Development Committee on the secure foundation that is desired. We also believe that the success of this Committee will depend in large measure on the continuing critical scrutiny of its work by the developing countries. We in the developing world will have ourselves largely to blame if we allow the Committee to fail in its avowed purpose.

The problems with which all our economies are presently beset are grave indeed. Everyone has expressed the view that they can only be solved by cooperative action. The machinery for such cooperative action exists. The will to act cooperatively has been expressed by all at this meeting. I sincerely hope that when we meet next year it will be manifest that we have matched our actions to our words.

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

It is a privilege and an honor for me to participate once again in the Annual Meetings of the International Monetary Fund and the International Bank for Reconstruction and Development. I come here after a most useful debate last week in Ottawa on the great topics of the day among the finance ministers of the Commonwealth.

I wish, first of all, to thank the President of the United States for his thoughtful words of welcome.

There are four crucial and interrelated problems that confront us at the present time.

First, there is the very high rate of inflation now deeply embedded in most countries. We cannot be certain what the consequences of that inflation will be. We must contemplate the possibility that, if it is not checked, it will lead to a prolonged period of slow and inefficient economic growth and high unemployment, to a disruption and contraction of international financial markets, to a weakening of the financial systems of individual countries, and to increasing social unrest and loss of confidence in the strength and stability of political institutions. This could mean, too, a contraction in the flow of real resources to countries in dire need of them.

The second problem is the emergence of an economic slowdown in many countries arising in varying degree from the indirect effects of the inflation and the higher costs of energy and from the effects of policies designed to restrain inflation. There is genuine concern lest this slowdown develop into a general reduction of output and widespread unemployment. Neither big countries nor small could benefit from such a development.

The third problem is that of managing the payments imbalances of unprecedented proportions which have suddenly erupted. Associated with the current account imbalances is the problem of providing for the financing of deficits out of surpluses. This so-called recycling of funds is crucial to the effective financing of the payments deficits that so many member countries cannot avoid. It will take years for the ultimate transfer of real resources to the oil producers to be made. This recycling is required on such a mammoth scale and affects such a number and diversity of countries as to constitute the most difficult widespread financing problem the world has ever seen.

The fourth problem is the crisis to which many developing countries have been brought by world inflation, slow growth, and the higher cost of oil, fertilizer, food, and manufactured goods in terms of their primary products. The real growth of the poorest of these countries is being reduced to zero or worse. In human terms this means untold suffering. It means deprivation, despair, and starvation.

These problems must concern us all. They cannot be resolved by confrontation. We have to work together in dealing with them. From my meetings with finance ministers of many countries, including those from the diverse countries of the Commonwealth, I feel that there is widespread awareness of the urgency of these problems and the fragile state to which the world economy has been carried. There must now be the political will to generate a positive, constructive, and immediate response.

At this meeting we will be establishing an Interim Committee which it is intended shall become a permanent Council of the Fund. This Committee will strengthen the Fund by bringing the political judgment of members more closely to bear upon the problems at the center of the Fund’s concerns. Canada welcomes the formation of this Committee. It should meet regularly and in special session, if necessary. It should maintain a continuing surveillance of the exchange rate system. It should provide the political forum in which the defenses can be mounted against resort to policies by some member countries that are seriously harmful to others. The question of the meshing of countries’ fiscal and monetary policies should be high on its agenda. In particular, in this regard, it should address the question whether the fiscal and monetary policies of countries strike the appropriate balance in this period in which inflation is accompanied by a slowing down of real growth.

The Interim Committee must also be concerned with the adjustment of the payments imbalances in the world economy. In particular, it should address the question of recycling. Recycling is already taking place through many channels. The private markets have made and are making a notable contribution. Specific channels to direct funds to the developing countries are being opened up by the World Bank through its five-year lending program, by the regional development banks, and by the oil producers themselves. The Fund is making a contribution through its normal type of operations and through the oil facility. I am pleased that the GAB will be kept in place and operational so that it can play its role. I expect that the extended Fund facility will soon be providing medium-term credits. But the problem is to ensure that the money flows where it is most needed. If we do nothing, only the countries with the highest credit standings will be served by the recycling process. What we have to assure is that other countries are not left out. We should examine carefully the further role for governments through the Fund or otherwise. We should study urgently whether an extension of the present oil facility that would borrow and relend money at commercial interest rates is called for. And we must give continuing attention to the means of serving the needs of poorer countries for recycled funds at a much lower interest cost.

We shall also be establishing at this meeting a Development Committee of the Bank and the Fund. It should turn a new and powerful light on one of the most serious and persistent problems of our era. It will have to address itself to those aspects of the recycling process that particularly involve the needs of the developing countries most adversely affected by the events of the last year.

The staff of the World Bank has estimated that, given current circumstances, to restore development momentum in the poorer countries, a massive increase in Official Development Assistance (ODA) will be required between now and the end of this decade. To do this will require an increase in ODA funds from the $9.4 billion of 1973 to about $24 billion in 1980. What would be the consequences of not achieving this? What are the options and the strategies for achieving it? There is a clear need here for close and on-going interplay between the expertise in the World Bank and the national decision makers who will compose the joint Development Committee.

Canada regards the formation of the Interim Committee of the Fund and the Development Committee of the Fund and the Bank as of major importance. But their success will depend on how effectively we use them. If we regard them as important, as worthy of occupying a position of high priority in our own individual sets of priorities, then these new structures will have a chance of being successful.

My message today can be summarized in the following way. We currently face monumental problems that demand increasingly more effective cooperative action. We are making good headway in establishing the institutional framework for that action. Whether that action will be forthcoming will depend on how determined we are to use the structures we have so painstakingly set up over the past two years. This is our responsibility. It is my hope that we shall be able to say next year that we recognized the challenge and met it. The time for rhetoric is over.

Statement by the Governor of the Bank for Malaysia—Hussein bin Onn

The opening sentence of the 1974 Annual Report of the International Monetary Fund appropriately sums up, in my view, the present state of the world economy. Indeed, we are “in the throes of a virulent and widespread inflation, a deceleration of economic growth … and a massive disequilibrium in international payments.” So serious has the problem of inflation become that it is now no longer simply a matter for economists to ponder. Given the present two-digit rate of world inflation, this contagious disease poses a threat to the survival of elected governments and has even spread to infect the very foundations of western society. But governments can no longer deal with this problem within the confines of their own boundaries. There is a present and pressing need by nations to cooperate and pursue a global strategy to curb the deeply embedded inflationary trends, before lasting damage is inflicted on the world economy.

As one of the youngest among you in terms of experience as Minister of Finance, I hope to be forgiven in expressing a firm belief that inflation is not unavoidable: all we need is the determination and courage to take the steps necessary to avoid it. Given the international character of the present inflationary situation, the primary responsibility to make the necessary adjustment must rest with the major industrial countries.

There is no running away from this central hard fact. Unfortunately, the record of their efforts so far has not been too encouraging. As a politician, particularly one just emerged from general elections recently held, I understand only too well the harsh political realities that underlie the indecision and reluctance of elected governments to undertake what must be done against inflation. This situation makes it that much more difficult to launch a coordinated and clear-cut global strategy. As a result, the prudent are similarly subjected to the miseries of the imprudent.

For us in Malaysia, inflation is an experience very much foreign to us. Since our independence in 1957, the rate of inflation averaged no more than 1 per cent annually. However, in 1973 the rate of inflation averaged 10.5 per cent and provided a traumatic experience for the population. The annual rate of price increase in July 1974 was 17 per cent. Despite the careful pursuit of positive monetary and fiscal policies on a national scale, we were not immune to this highly communicable disease. Import cost inflation now prevails in Malaysia and there is virtually nothing we can do about it. For the first five months of this year, the price of our imports was 40 per cent higher than in the same period last year. Today, economies have assumed such interdependence that only the governments of the largest countries are in some position to control their own destiny. On the other hand, countries remain too independent politically to be willing to cooperate in mounting an international effort to control the effects of the international trade cycle.

Within the perspective of inflation and rising petroleum prices, and the emerging massive disequilibrium in international payments, it is heartening to note that the Committee of Twenty changed the course of its work on reform of the international monetary system and related issues to meet the pressing needs of the time. I note with satisfaction the Committee’s final report, together with an Outline of Reform, indicating the general direction in which the international monetary system could well evolve and proposing that a number of positive steps be implemented immediately. It is also gratifying to note the efficient coordination and high degree of cooperation at which the Executive Board of the Fund has worked with the Committee to have so very promptly acted on a set of important decisions that would significantly change the character and direction of Fund operations and practices. Although we do appreciate that it was not possible for the Committee to determine the full details of all aspects of the reformed system, particularly in view of a number of areas in which no agreement had been reached, we are nevertheless disappointed that, in the light of developments that have taken place in the world economy, certain important aspects of reform affecting the interests of the developing countries in particular had to be relegated for further study and review. We recognize that the Committee had envisaged that arrangements in many of these areas should be implemented as and when the Fund judged it feasible to do so. But much groundwork continues to be necessary before we can reach that stage. In the meantime, it is essential that the Fund in particular, in concert with the Interim Committee of the Board of Governors on the International Monetary System when established, must continue to devote the same vigor and thoroughness to the reconsideration of outstanding issues, with a view to their early implementation. On our part, we will support all efforts to ensure that further work on longer-term reform will proceed with the maximum speed and efficiency.

I note with particular interest Mr. McNamara’s opening remarks on how inflation has eroded the real value of aid received by the very poor in particular and the adverse impact on growth and social equity of the continuing deterioration in the terms of trade of the developing world. The more worrisome aspect is, of course, the gloomy prospects forecast for the years ahead. The President of the Bank talks of the trend toward a decline in the terms of trade of virtually all the developing countries, with the exception of the petroleum and mineral producers, by the end of this decade. Surely we cannot allow this expectation to come to pass. For many decades we have been handing over, year after year, increasingly larger amounts of our primary products in order to obtain in return imports of machinery, equipment, and other manufactured goods essential for development. This situation must not be allowed to persist. The time has come for us to mount an international effort to ensure stable relationships between the prices received by the developing economies for their primary products and those paid by them for the manufactured goods and technology of the industrial world. On our part, the developing countries will have to stand ready to agree to stabilize the prices of a list of primary commodities at remunerative and equitable levels by international decision. But it is not enough to do just this. To be effective, the industrial countries must also come forward on a global basis to stabilize, or even reduce where appropriate, the prices of manufactured goods, especially their machinery and equipment. It is only through the conclusion of an international contract of this type that we can hope to prevent inflation from persistently unleashing its destructive influence on the world economy. I know this is not an easy proposition to undertake. But life is not supposed to be easy. Given the political will to act, and we need to act now, I am confident that a practical solution that is fair and just to all can be arrived at. . . .

Statement by the Governor of the Fund for Israel—Yehoshua Rabinowitz

In many respects the past year was an uncommon one for the world as a whole, and for its monetary system in particular. In the prevailing circumstances, and in the face of mounting difficulties, the management and Executive Directors of both the Fund and the Bank deserve our highest appreciation for their continued efforts to establish an efficient monetary and development system in the world. This task is still far from completion.

The achievements of the Committee of Twenty are certainly noteworthy. However, those who optimistically hoped for quick and definite solutions, when the Committee of Twenty was established two years ago, were probably disappointed. True, problems were defined, possible solutions examined, and attempts made at conciliating opposing views. However, the deliberations on international liquidity and monetary reform did not keep pace with actual developments in international economic life.

It is more obvious than ever now that it is not enough to tackle problems on the monetary front alone. The world economy as a whole, and frequently spheres far transcending economics per se, are involved. It is imperative that any solution reached takes into consideration the specific problems and special conditions prevailing in the various economies.

During the past year small and poor countries were the hardest hit by the rise in food prices, the energy crisis, the instability of exchange rates, and the unrest of monetary institutions. These countries are limited in their ability to overcome such difficulties without the help of the larger and richer economies, which are expected to play a major role in the endeavors to stabilize the world economy. Nations large and small, developed and developing, are now, more than ever, interdependent. Solutions must therefore be found jointly.

The creation—as has been suggested—of a Council and an Interim Committee, to advise the Fund on matters of principle and policy, may serve this purpose. Representation of small and developing countries on this Council should be secured in a way that may enable them to participate in its work in a significant manner, so that they may feel that they are full partners in the taking of decisions which have such an important impact on their economies.

The Fund should play the leading role in any reformed monetary system. In order to meet this challenge it has to promote the establishment of mechanisms for solving urgent problems, so that it is not maneuvered into a position where it merely gives its post factum approval to developments determined by the markets, or by decisions taken in other centers of power.

The Articles of Agreement should be so amended as to enable the Executive Directors and management to apply the Fund principles with the flexibility required by changing conditions and circumstances.

One sphere which calls for greater flexibility is the adjustment of Fund quotas. I urge that a more dynamic approach be considered in the coming review of quotas, and that not only past developments in each economy be taken into account but also foreseeable development trends. Likewise, consideration should be given to shortening the period between regular quota reviews. Or alternatively, that allowance be made for more frequent and meaningful changes in quotas, in periods between the reviews, where justified.

It seems that the developed world is well aware that the existence of extreme poverty in one part of the world alongside wealth and over-consumption in another is unacceptable because of moral and practical considerations alike, as it endangers the economic and political stability of the world.

The problem of securing an adequate flow of investment capital to developing countries has become more urgent in recent years. This problem is a very acute one in the lesser developed countries, as well as in those that have passed the first stages of development. A continuous flow of development funds will enable such countries to consolidate their past gains and to proceed to higher stages of development. A halt in the development may cause repression, with all its implied economic and social repercussions.

Another immediate task facing the world financial organizations is to ease hardships caused by the oil crisis and by the rise in food and fertilizer prices. The timely suggestions put forward by the Managing Director and the establishment of the oil facility are important contributions to the solution of these problems. It appears appropriate to investigate the possibility of establishing a financial facility which will assist countries which were affected adversely by the increase of food and fertilizer prices, along the line of the oil facility.

Another field calling for action regarding developing countries is the expansion of their exports. An important step toward attaining this goal would be to alleviate the burden borne by developing countries in the refinancing of export credits. The establishment of an export credit guarantee facility, along the lines proposed by the Governor of the Bank of Israel, Mr. Moshe Sanbar, would benefit both importing and exporting developing countries. Several Asian, European, and Latin American countries voiced their approval for this concept at the recent UNCTAD Trade and Development Board Session. The World Bank should take a leading role in this endeavor, in cooperation with the regional development banks.

There is an urgent need for a high-level international forum for the coordination of activities of several international, regional, and national agencies in the development field, and for initiation and examination of new and even revolutionary ideas on development. We welcome the recommendation of the Committee of Twenty to create a high-level committee to deal with this subject.

International assistance cannot replace far-reaching efforts to be made by the countries involved. The developing countries themselves have to create facilities and adopt policies which will enhance their capability to overcome adverse development. Developing countries are expected to create the proper atmosphere for development, without which there is little chance for international assistance to achieve its goals.

My own country, Israel, has enjoyed continuous rapid economic growth since its establishment and, within a relatively short period, has built a sound social and economic basis for further development. These achievements would not have been possible but for substantial capital transfers, the application of advanced know-how in production, management, and marketing, and our determination to turn Israel into a modern industrial state, despite many obstacles.

The achievement of a lasting peace in our area will enable us and the region as a whole to transfer even more resources to the economic and social effort.

Israel was not immune to the repercussions of the world-wide economic disturbances. Our balance of payments, like that of many other countries, was affected adversely by world inflation, especially by the increase in the prices of oil and basic foodstuffs.

It is against this background that we took far-reaching anti-inflationary measures at the beginning of the year and again in July. These measures were intended to cool off the overheated economy, slow down the rise in prices, and narrow the gap in our balance of payments. These aims will be secured by cutting public consumption, introducing selectivity in the encouragement of investments, and curtailing unessential building activities; taxes have been increased and restrictive monetary policies introduced. At the same time, great efforts are being made to increase productivity of labor and capital in the manufacturing industries and in services.

Indicators seem to show that our economy is responding to the measures taken in the desired direction. First signs are pointing at a possible relief in demand pressures, while exports are maintaining their fast growth and imports in real terms are slowing down. In the last few months we enjoyed a slower rise in prices.

We have no illusions that inflation can be conquered swiftly, especially if food and oil prices do not drop as expected. Meanwhile, we have to learn how to live with a certain amount of inflation. The indexing of wages and of savings proved to be a valuable instrument in preserving a high level of savings and relative industrial peace in periods of fast rises in prices.

Looking into the future, we are confident that persistent national policies will enable us to restrict inflationary pressures originating from excess demand and narrow the gap in our balance of payments to reasonable dimensions. Meanwhile, we are in need of international economic assistance in the financing of our development projects and in covering the gap in the current account.

We are living in a period which might be a turning point in the economic history of modern times, a transformation from mere survival of norms and institutions into active forging ahead toward a better world.

We hope that all involved—the international organizations, the developed countries which have the means, and the countries in need—will live up to the call of the hour and contribute their share and effort to this end.

Statement by the Governor of the Bank for Ecuador—Jaime Moncayo García

I speak both for myself and for my country when I say that it is a great honor to be addressing this important meeting on behalf of Argentina, Barbados, Bolivia, Brazil, Colombia, Costa Rica, Chile, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Panama, Paraguay, Peru, the Dominican Republic, Trinidad and Tobago, Uruguay, Venezuela, and the Philippines.

At the eleventh meeting of the Governors for Latin America and the Philippines, held last week in Mexico, reference was made to the special significance of this period in the world’s history, in which we are all being made aware of the immediate and unavoidable need to establish a new international economic order that will promote cooperation, do away with injustice, and prevent any future recurrence of situations of conflict and crisis such as we are experiencing at present.

There is no doubt that the system of international economic relations set up at Bretton Woods at the end of World War II has not been flexible enough to permit alteration and adjustment to cope with present circumstances or to satisfy adequately the just aspirations of the developing countries. It is true that it has provided the basis for a period of unprecedented economic and technological progress, but it has also widened the gap between a few powerful countries and the underdeveloped world in terms of well-being and opportunity.

During the past decades, the Latin American countries, along with the other developing countries, have been engaged in a determined and never-ending struggle at all levels of economic life, in particular with a view to obtaining fair and stable terms for their products and natural resources, ensuring an equitable and real transfer of financial and technical resources, independent of political considerations or influence, and establishing principles and rules of conduct and international cooperation designed to guarantee the increasing well-being and social justice of all peoples, as a sound basis for peace and general economic stability.

Regrettably, the response from the developed countries has not been sufficiently prompt or far-reaching, with the result that progress has been slow and difficult and on too small a scale to allow for the remedying of the basic problems.

We have now reached the time when action must be taken to redress the balance. The most developed economies can no longer continue to obtain raw materials at unfairly low prices, impose restrictive trade policies and practices on the manufactures of the developing countries, or minimize transfers of technology and real resources. Among other effects, these attitudes have led those economies into consumption patterns in which resources in short supply are wasted or squandered, and into the apparent belief that the rules of the game will continue indefinitely to be in their favor.

To counteract this situation, and as an unavoidable step along the road to change, the developing countries are waging a concerted war to obtain fair prices and equitable terms of use for their natural resources. Their efforts have so far produced considerable success. Their work is threatened, however, by certain attitudes that are incompatible with the search for the human solidarity, exchange of ideas, and cooperation that are necessary if we are to overcome the present crisis and prepare ourselves for survival and a time when all human beings will enjoy liberty, dignity, and self-esteem.

The serious imbalances in the development pattern, the inequities of international trade, and the phenomenon of inflation are the major problems of the day. They can be solved only through coordination on the basis of a vigorous international effort that must be undertaken in parallel with the efforts being made by each individual country to satisfy its own requirements and meet its own goals.

The world-wide problem of inflation, which arose even before the increase in oil prices, deserves special attention because, we believe, it does not represent an option that can be accepted or rejected, or a purely monetary or economic phenomenon, but is rather the result of multiple structural and social factors. The fight against inflation must not lead to a further aggravation of the injustices and strains to which the weakest of us are subjected. This means that the most powerful must assume their responsibilities fully, in an effort of genuine and sincere international cooperation, observing the principles of the Charter of the United Nations and those that we wish to establish without delay in the Charter of Economic Rights and Duties of States.

It is necessary to inject new strength and dynamism into the work of the World Bank and of the other international and regional finance institutions, bearing in mind that their effectiveness depends fundamentally on the resources at their disposal and on the political will of the member countries, and also that, in the face of development imbalances and the strangulation of trade, the transfer of financial and technological resources to the developing regions is still a practical solution and top-priority measure which should be implemented on a larger and more effective scale than in the past.

The need consequently arises to create new mechanisms for the transfer of real resources to the developing countries through the international agencies, and particularly the World Bank.

The Joint Committee on the Transfer of Real Resources should set itself up as an effective means of meeting the requirements of the developing countries, and, in addition, should serve to orient and create new policy guidelines in both the International Monetary Fund and the World Bank.

The purpose of this Committee is not to deal with matters affecting only one group of countries, since it has links with the entire international community, its aims being inseparable from those of a balanced and durable financial system. The reform of international economic relations could not be considered as total if, by ignoring the threefold nature of the problem, it were limited to only two of its aspects—trade and finance—and were to disregard the third one, i.e., the transfer of real resources. A logical function of the Committee must also be to identify suitable mechanisms for maintaining the real value of exports from the developing countries.

The longer-range problems, which also deserve the Committee’s attention, manifest themselves in the vast inequality in the distribution of wealth in the world today, and are magnified by the current trend toward reduction of the already small flows of official resources to the less favored countries. In 1965 that flow represented a scant 0.44 per cent of the gross domestic product of the industrialized countries in the DAC, whereas in 1973 it fell to 0.30 per cent of their gross domestic product, as indicated in the World Bank’s latest Report.

To enable the Committee to achieve its desired objectives quickly, it should have a full-time secretariat and should provide for the permanent presence of UNCTAD and of other international agencies directly concerned with the transfer of resources, especially the regional development banks. . . .

The greater the participation of all member countries in planning the policies and operations of the World Bank and the International Monetary Fund, the better will those policies and operations be conceived and accepted. It is therefore advisable that the voices of the developed countries and those of the developing countries on the Board of Executive Directors be in the greatest possible balance. This means that membership on the Boards should not be linked to voting power; on the contrary, the principle of a minimum, guaranteed continental representation should be fully implemented. Under this principle, each developing continent would be represented by a minimum of three members, independently of the voting power of its respective countries. Latin America strongly proposes that this principle be formally recognized. . . .

We do not expect spectacular solutions at this meeting. We do expect an objective, constructive view of the international economic situation and of the prospects for action to overcome today’s most serious problems, with a renewed political will leading us in harmony to the establishment of a new international economic order, leaving aside selfish practices and narrow attitudes in regard to the legitimate aspirations of the peoples in developing countries.

Statement by the Governor of the Bank for Greece—Xenophon Zolotas

I am deeply moved that after an absence of seven years I am again able to address this meeting, as I did before, as the representative of a democratic nation. My gratification, however, is overshadowed by the grave concern I feel over the state of the world economy, a concern that I share with previous speakers, the Executive Directors of the Bank and Fund, as evidenced by their Annual Reports, and Messrs. Witteveen and McNamara.

The world economy is indeed in the throes of a virulent inflation, accompanied by threatening signs of recession and massive disequilibrium in international payments. Under these conditions, the international economic community is in danger of losing its sense of purpose in economic and financial questions.

Most countries have shown remarkable self-restraint in the formulation of policies that might have adverse repercussions on the world economy. However, as the strain of economic dislocation mounts, the pressure to ignore the common good risks becoming increasingly greater and leading individual countries to attempt to safeguard their own position through measures that may contribute to the ruin of all.

I strongly support the view expressed in the Annual Report of the Fund on the need for a clear-cut strategy, especially by industrial countries, to deal with the inflation problem, before it gets further out of hand. Aside from other well-known reasons, the need for action is urgent because the faster the rise in prices, the more drastic the anti-inflationary measures tend to become, and the greater the danger of overshooting the target, thus causing a recessionary spiral. What is needed is a judicious mix of monetary, fiscal, and incomes policy measures. More particularly, excessive reliance on credit deflation should be avoided, because it tends to discourage productive activity without necessarily preventing further rises in prices. But the fight against inflation can only be safely and effectively carried out if coordinated at the international level. A sine qua non condition for such coordination is to secure overall consistency in balance of payments targets of countries and regions. In view of the newly emerged pattern of huge external surpluses and deficits, this is one of the most difficult tasks ahead of us.

In this context, financing the oil deficits by recycling the financial savings of oil exporting countries calls for special attention. We are faced here with a complicated form of the familiar problem of transfers, due mainly to the inadequacy of financial mechanisms and international coordination. Prompt action is required to organize the financial relations between oil deficit and oil surplus countries on a sound basis. In this respect we welcome initiatives to institutionalize the process of recycling under the auspices of international institutions.

The Bank and the Fund can and should play a special and important role. Being the only truly world-wide financial organizations, they are particularly well-suited to serve as vehicles for channeling funds from those of their members which can make them available to those who need them, either to meet pressing balance of payments deficits or to sustain their development effort. In the Fund’s oil facility and the Bank’s expanded borrowing and lending activities, we have seen a good—though a rather modest—beginning. A much larger borrowing and lending program is needed for both institutions so that they can make—in their respective spheres of competence—a contribution commensurate with the magnitude of the problem.

The question of the transfer of real resources to developing countries is an old one, but its new dimensions and urgency deserve the most serious and favorable consideration by the industrial countries. It is indeed no longer a problem of simply assisting economic development, but of securing the very survival of a large segment of humanity. Joint efforts by traditional donor nations and oil exporting countries are required here and now.

Prompt action on the financing of oil deficits and on the transfer of resources to developing countries is crucial in view of the rapidly deteriorating situation in the international capital markets, with signs of disquieting and accelerating strains becoming more and more evident. The disruption caused to these markets in the early 1970s by the impact of wide movements in exchange rates has been recently compounded by the enormous volume of liquid funds channeled to them by oil producers and by the effect of inflation on the attitude of depositors. As a result, there is a heavy concentration of funds in the short-term end of the market, preventing the banking institutions from playing their intermediary function effectively, without the risk of a serious liquidity crisis.

An ominous state of uncertainty has thus been created on a very large scale, which has led to interbank and bank-to-customer confidence being badly shaken. The situation is such that there has even been some talk recently of the possibility of a replay of the collapse of the 1930s.

It has often been said that the crisis of 44 years ago was to a large extent attributable to the fact that central banks at the time were not sufficiently aware of the importance of their role as lenders of last resort. This is not a particularly comforting thought, if due account is taken of the fact that an important sector of the world’s banking system, which handles an enormous volume of funds, is not under the effective control of central banks.

I am referring to the gigantic Euro-currency market which, however, proved to be an important instrument of financing in the 1960s. In view of this, increased credit risks have to be shared internationally and new and unconventional forms of fund raising by international institutions are necessary, along with international surveillance and some degree of regulation, for the purpose of preventing excessive foreign exchange positions on credit commitments not compatible with the maintenance of an adequate level of liquidity.

If confidence is to be sufficiently restored so as to permit the Eurocurrency market to play again an effective role on a sufficient scale in recycling funds, urgent consideration should also be given to the means of establishing an adequate liquidity pool under international management; this could provide, in the event of a major world liquidity crisis, the guarantee or lending support required to prevent an all-destructive chain reaction.

Restoration of confidence and a sense of security will be necessary to avert the emergence of a destructive crisis. We have to provide without delay persuasive evidence of the ability and willingness of world economic leadership to face promptly, decisively, and cooperatively any threat.

In this brief statement I have tried to depict the realities of the present, without undue pessimism. Indeed, I am still hopeful that none of today’s complex economic problems facing the world is insoluble, provided a high degree of international cooperation and solidarity is attained. I trust the statesmanship of world leaders to engender the appropriate political will.

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

I join my fellow delegates in thanking the Fund and the Bank managements for the excellent arrangements they have made for this meeting in Washington. I thank the President of the United States for the welcome he extended to us and for the guidelines he gave for the solution of the pressing problems of today.

This last year has been a very difficult year for the world economy. Mr. McNamara has very aptly stated that the series of changes which have occurred have been of a magnitude previously associated only with major wars and depressions. World-wide inflation, disequilibrium in international payments, and reduction in development assistance have thrown forward a big challenge to the stability of the global economic system. I applaud the patience as well as the vision with which the Fund and the Bank have tried to meet this challenge. Mr. Witteveen deserves our appreciation for his hectic first year as the Managing Director of the Fund. Another year of Mr. McNamara’s dynamic leadership and abiding interest in the special needs of the poorest countries calls for commendation.

The unprecedented price hike in the commodity market that began in 1972 has presented the problem of sheer survival to countries like Bangladesh. Our food bill has gone up by three times in the case of wheat, and five times in the case of rice. The edible oil bill has gone up by over four times, the fuel bill by about five times, and shipping costs by nearly four times. Our essential items required for clothing and housing have registered similar price increases. The country is faced with the problem of meeting the payments gap for import of essential consumer items, not to speak of investing in building up capital stock.

The effects of inflation, the commodity price hike, and slow growth in industrial countries, which Mr. McNamara has emphasized, can be very easily visualized from the economic scene that prevails in Bangladesh today. Bangladesh has been particularly unfortunate because of other reasons as well. Bangladesh emerged out of the ruins of a war, and then successive natural calamities have struck the country one after the other. Then again, while some countries have enjoyed the benefits of a price hike, the commodities exported by Bangladesh, such as jute, jute goods, and tea, have been completely bypassed by it. It seems extremely urgent that the will of the nations of the world should focus attention on price stabilization.

In the long run, we must evolve a pattern of relative prices which would not be based on exploitation of scarcities and which would ensure that the effects of changes in relative prices on distribution of income within and between nations would not cause tensions or dislocation of economic life. Similarly, declining terms of trade confronting poorer developing countries must somehow be either counteracted or compensated by international action. While we welcome heartily the five-year program of the World Bank providing for a substantial increase in the flow of resources to the poorer countries, we apprehend that without a program of price stabilization its real value would be hopelessly inadequate. I would urge the Bank to initiate studies and action programs in this respect in association with other concerned international agencies.

I find it particularly disquieting that slower growth in industrial countries, combined with other factors, brought down the rate of expansion in export volume of non-oil developing countries to only 3 per cent compared with 8 per cent in recent years. It is unfortunate that at the same time official development assistance from the DAC countries to less developed countries as a group declined by 6 per cent in real terms in 1973. Measured as a percentage of GNP of DAC countries, the total value of this assistance also declined from 0.34 per cent in 1972 to 0.30 per cent in 1973. This occurred at a time when the acceleration in the rate of flow of development assistance should have provided an offset to the diminution in the rate of expansion of the export volume of the non-oil exporting developing countries. Coupled with worsening of the terms of trade experienced by these countries, the above-mentioned two factors have greatly affected development efforts in the poor countries of the world. Development imports in these countries are required to be kept at such a low level that it is becoming difficult to sustain economic growth sufficient to keep pace with population growth. Countries like Bangladesh are experiencing payments difficulties on so large a scale as to constitute a serious threat to their external stability.

This brings me to the question of the recycling of surplus funds. From the natural process of recycling the less developed countries have very little to gain, because surplus funds naturally flow to developed industrial countries. But unless a substantial part of the surplus funds is diverted to developing countries, the promise of a better life, which President Ford has mentioned, will be nothing more than a mirage. The oil facility, even though its terms are hard, has been almost fully utilized by less developed countries. For the future, it is essential to expand this facility and also to soften its terms. In addition, massive capital transfer to less developed countries is essential to bring about structural changes in their economies—changes without which disequilibrium in balance of payments cannot be cured. While for the developed countries the problem is essentially financing deficits, for the underdeveloped countries it is a problem of resource shortage. I firmly believe that resource transfer to developing countries must be accomplished by both the traditional donors and the new surplus countries.

At the risk of repetition, I must emphasize that the quality of development assistance has a great deal to do with the current situation. The tremendous balance of payments difficulties of the less developed countries can be met only by program assistance. In this connection it is gratifying to note that the extended Fund facility has now been created. I only hope that the administration of the facility will truthfully reflect the purpose for which it has been created. I sincerely hope that this facility will really offer special assistance to countries in need in a forthright and forward-looking manner.

Once again, I note with great concern that the already heavy debt burden of the less developed countries has increased to $99 billion in 1972. This cannot be allowed to grow any further. It is essential, therefore, that resource transfer is effected through concessionary aid. In this connection, I welcome the establishment of the Joint Ministerial Committee on the Transfer of Real Resources. We have a number of studies on the modalities of transfer of resources and also on the quantum of resources required by the less developed countries. What is most urgently needed now is the political will of the countries to undertake to transfer sufficient resources. I hope the Ministerial Committee will be able to take that political decision.

It is unfortunate that the Committee of Twenty on monetary reform could not achieve as much as we would have liked it to accomplish. Let us hope, however, that the Interim Committee of the Board of Governors will be able to carry forward the tasks initiated by the Committee of Twenty. There are two tasks of immediate importance, namely, the Sixth General Review of Quotas and the establishment of the link between SDR creation and development finance. On the question of quota review I am firmly of the view that Fund resources should be substantially increased, and in the decision-making body the large block of less developed countries, including the oil countries, should be given a more prominent voice. The acceptance of the concept of the link in the changed circumstances of the great need for additional development finance should not brook any further delay. This is a question which has been debated for years, and here again all that is needed is the political will of the international community.

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

At our last year’s meeting in Nairobi a number of us voiced grave concern regarding the trends in international trade and the functioning of the Bretton Woods institutions. The 12 months that have just passed have unfortunately in no way allayed our fears. I would even venture to state that the apprehension besetting the international community has become more extensive and more diversified.

In fact, during the first half of 1974 world inflation accelerated, spurred on particularly by the recent energy crisis, which had an unequal impact on the various countries concerned. Likewise, balance of payments maladjustments among the major industrial nations aggravated the disequilibrium of some of these, accentuating the downward trend in world production. In addition, financial aid to the developing countries, showing hardly any increase in 1974, will scarcely suffice to cover the increase in the cost of hydrocarbon imports for those of the developing countries that are not petroleum producers.

From many points of view, these developments are dangerous. Unless we are careful they could jeopardize the international cooperation that our generation, little by little, has been able to establish—a cooperation opening up prospects of a more equilibrated economic world founded on understanding. We are in danger of being led astray into antagonisms that could seriously impede this promising process and trigger off conflicts most certainly injurious to all. I myself am convinced that no one in this august assembly would wish to see such a desolate outcome. This is why it seems desirable to me that, in the vast monetary and financial domain such as that encompassed by the mission of our institutions, we should continue with faith and perseverance to study the reform of the international monetary system, including the present problems, with a view to rapidly restoring confidence in international liquidity and organizing its distribution in harmony with the legitimate needs of all countries.

If I may be permitted, while associating myself with the statement made by the Minister of the Republic of Mauritania on behalf of all the African countries I should like to make further reference to a few matters of particular importance for the Republic of Zaïre. As far as concerns the activities of the International Monetary Fund, I shall be commenting on the complex question of the world inflation and its incidence on the economies of developing countries, and briefly evaluating the efforts of the Committee of Twenty in the matter of reform of the international monetary system. . . .

According to the Report presented by our Executive Directors and in the OECD’s economic forecasts, in 1974 the rate of inflation in the industrial countries will attain a high level exceeding on average 10 per cent per annum. Bearing in mind the fact that the developing countries’ capital and suppliers’ goods are largely obtained from the industrial countries, we can deduce from this that the average rate of inflation in these countries as a whole will be even higher, and the Fund’s Report estimates it at 35 per cent.

One of the factors of the evolution of prices in the industrial countries is incontestably the fluctuation of prices for primary products which, themselves, respond to the ratio of world supply and demand for these products. At the end of last year this phenomenon was certainly amplified by the increase in petroleum prices resulting from the successive decisions of the OPEC countries to raise the selling prices for this product. In the industrial economies, the increase in consumer prices resulting from this measure is in turn engendering a second wave of price increases, provoked by demands for the maintenance of the level of wage earners’ real incomes. As soon as this demand is satisfied, the infernal spiral of inflation is set in motion and tends to push prices persistently and increasingly higher.

The higher prices for manufactured goods also, of course, apply to exports to the developing countries, at the same time entailing an increase in the foreign exchange value of these countries’ imports. As experience has shown for a number of years, exports of primary products other than petroleum are rarely accorded such favorable terms. In fact, export receipts are closely dependent on world prices, the level of which fluctuates from one month to the next in accordance with the normal supply and demand for these products—a supply and demand sometimes influenced by speculative movements. Accordingly, the terms of trade for these products in relation to manufactured products, over the short run, manifest an erratic development and definitely depreciate in the long run.

Compounding this imported inflation, of course, are all the price rise factors of domestic origin typical of developing economies, on which I do not wish to expatiate in these remarks but which are often associated with structural deficiencies in equipment and technology.

This is why inflation is not an exclusive concern of the industrial countries; it affects developing countries to a much greater extent because it diminishes yet further their already low per capita income and reduces their future prospects of development.

To finance the acquisition of capital and suppliers’ goods, the developing countries must very often have recourse to external bilateral and multilateral resources. Since these flows of aid have not increased for several years, and have even declined in real value, external assistance to the nonpetroleum producing developing countries will probably be entirely devoted to financing the increase in the additional payments for imports of petroleum and other products.

If—as several economic forecasts indicate—the current surplus of the OPEC countries for the year 1974 will amount to some $60 billion, the counterpart of which would eventually be broken down between $40 billion in current deficit for the developed countries and $20 billion for the other developing countries, the agonizing question arises as to how the latter group of countries can finance such a large current deficit which, in all probability, could recur in the next few years, if not by a further reduction of their income.

The International Monetary Fund has endeavored to assure the recycling of part of the oil currencies by borrowing from the OPEC countries. Without minimizing the efforts of our institution, to which I pay enthusiastic homage, it must be recognized that the mobilizable funds will undoubtedly fall short of the immense needs of the developing countries. This is due to two factors. First, although their present absorptive capacity does not allow them to use their financial surpluses, the countries holding petro-currencies still have considerable needs for development. And, also, the conditions of security and of remuneration that they consider as requisite for their loans exceed the means of the average borrowing country.

We must therefore devise new formulas capable of combining attractiveness and security for the investments. Could not one possible course consist in a progressively larger share, by OPEC countries wishing to invest their financial resources, in development projects devised and put into operation with the participation of industrial countries in other developing countries? For the OPEC countries such an association would be a guarantee of the rational utilization of resources loaned and, by the returns to be gained from the investments, would help facilitate the adjustment process for industrial countries’ payments balances.

Without a doubt, the recycling of the oil currencies calls for urgent action by the international community, so that the young countries most affected by the oil crisis may be aided as rapidly as possible. However, we should not forget that the financing needs of these countries often entail longer-term efforts and an effective coordination between the various intermediary financial institutions.

It was because of inflation, and the distortions it has caused on the exchange markets and in the functioning of the Bretton Woods institutions, that in this same building in September 1972 we set up a Committee charged with studying the reform of the international monetary system, from whom we expected to have recommendations for the implementation of a new international monetary order.

The report that the Committee has prepared for us makes references to the difficulties it encountered in the course of its work and the considerations that guided its choices within the framework of the mandate we gave it. The general section of this report describes the essential features of a new, reformed system, founded on an effective adjustment of the payments balances and an improvement of the functioning of the exchange rate and convertibility mechanisms, the adoption of an appropriate numeraire as the center of the system, and the promotion of the transfer of real resources to the developing countries.

The developing countries themselves are on the whole favorable to these rules of good conduct inasmuch as they are sufficiently flexible to take each country’s particular features into account and are applicable to all members alike in a spirit of wholehearted international cooperation.

One of the positive results achieved by the efforts the international community has made in the last two years is undoubtedly the expansion and improvement of international consultation. Yet we should realize that this experiment is still in the beginning stages. It needs to be reinforced, particularly by greater political good will. While striving to preserve the interests of our own individual countries, we must look to the realization of the goals bringing advantages to the community as a whole. To this end, we must satisfy ourselves that solutions to the problems concerning all members are sought with the participation of all.

The work of the Committee of Twenty over almost two years has shown that the young nations are able to reconcile the concerns of the international community with their own specific interests. It is in this context that one should interpret our endorsement of the decisions reached by the Committee for this transitional period. I am referring particularly to the establishment of the Interim Committee of Governors, the creation of special machinery to assist member countries in dealing with the effects of higher oil import prices, guidelines to be followed with regard to floating exchange rates, and the valuation of SDRs.

Other questions pertaining to both the interim period and the long-range system will require further study within the Board of Executive Directors in order to achieve as soon as possible the necessary consensus before they can be implemented. These questions include, I regret to say, the problem of the transfer of real resources to developing countries. This question, which has already been studied in depth by small working parties and by the Deputies of the Committee, ought to have been among those resolved by the Committee which I listed earlier. In my humble opinion, the technical aspects of this problem have been so thoroughly explored that the problem of the transfer of real resources ceases to be a technical question. Its solution will now depend on the compromise that our respective states will be able to accept at the highest level. The developing countries are impatiently awaiting the completion, by next February, of the studies that will hopefully remove the small number of misunderstandings still persisting on this subject. We are also convinced that the joint Bank-Fund Committee should be able to speed up decisions within our institutions.

My foregoing remarks lead me to say a few words about the institutions of the World Bank Group.

I mentioned earlier the need to coordinate the efforts of the international agencies in order to improve the effectiveness of their world-wide operations. I personally was struck by what I might term the absence of the Bank in the work of the Committee of Twenty. It is frequently said that it is the task of the International Monetary Fund to act in support of member countries only when they run into short-term balance of payments problems, and that all medium-range questions are the exclusive province of the World Bank Group. Even if such an approach remains basically true, it now seems somewhat out of date, to say the least.

This comment is based, first of all, on an historical observation. Since the Committee of Twenty was first set up, the idea of progressive lengthening of the terms of Fund loans has been gradually gaining ground within the institution itself. In addition, the conditions which prevailed at the time of the establishment of the Bank and the Fund in 1944 have changed considerably since then. The countries present at Bretton Woods were unaware of quite a number of problems which face us today. I am thinking in particular of resources for the financing of development. Most of the difficulties of the developing countries which appear in the guise of temporary imbalances that can be corrected by the courses of action conventionally taken by the Fund are in fact often more serious and are related to structural deficiencies. For this reason it is important to reduce the barriers that separate the two institutions. . . .

The Bank cannot remain indifferent to the problem of the recycling of oil monies. The steps taken by the Fund to which I referred earlier should be supplemented by specific Bank action on terms which may be more suited to the needs of the young nations. We note with satisfaction the recent placements of funds with the Bank by certain Middle East countries. We likewise note with satisfaction the efforts that have been made to secure the replenishment of IDA resources.

In the four years in which I have had the honor to represent my country in our institutions, I have on countless occasions expressed my fears regarding the growing external debt of the developing countries. The grave problems raised by this burden assume a more menacing aspect with each year that passes. For 1974 the current deficit of the non-oil producing countries is estimated at $20 billion; this will be a crushing addition to their present outstanding foreign liabilities. Those non-oil producing developing countries that have some experience in the financial markets of the industrialized countries have in recent months witnessed a sizable increase in their debt burden as a consequence of the spectacular rise in interest rates on those markets. For this reason, we must also seek new formulas in this field. A number of suggestions have been put forward in the past. For my part, as one possibility for a transfer of resources, I should like to see the Bank shouldering the cost of development loans.

In conclusion, may I express the hope that international cooperation and consultation, strengthened by the political will to solve common problems, will be intensified within our institutions.

One field in which cooperation should act without delay is in promoting effective transfer of real resources to developing countries. I have a feeling that further technical studies are unlikely to advance the discussions.

Cooperation could also play an essential role in recycling petrocurrencies to the countries most severely affected by the recent energy crisis. The association which I suggested earlier could, to my mind, serve as the catalyst establishing a new tradition for investments by the new category of holders of financial resources represented by the countries of the OPEC.

The solution we find to the problems of the distribution of international liquidity and the transfer of real resources to the developing countries will—I am convinced—be decisive in determining long-term stability and peace in the world.

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

And, so, the time of disenchantment has come. Where are the promises of yesteryear for a world in perpetual expansion? What has become of the assurances so often renewed by our experts who by an extrapolation and in an idyllic vision of past trends produced figures of constant reassurance for our future? I seek in vain, in the present figures reflecting a somewhat dour actuality and an increasingly harsh reality, the hope awakened in our hearts only recently by the adoption—in time of euphoria—of a new strategy for economic development. But now is the time of gnashing of teeth and of disillusionment.

The siren song of ease and euphoria is silenced. Unfortunately the new panorama is anticlimatic: generalized inflation, a striking deceleration of the rate of economic growth, and disorder in international payments. And on the horizon are dark storm clouds of world-wide bankruptcy. To be sure, we have to be careful not to play Cassandra. It is good form to stick to pacifiers and anodynes in this assembly. But you must admit that a generalized crisis is on our doorstep. Of course, it is possible to speechify at length, and it is easy to occupy ourselves with assigning the responsibilities. The dispute regarding responsibilities as to the origins of this crisis seems to us to be labor in vain if its purpose is not to bring to the bar of world opinion a few sick countries—yes, merely sick from the malady of justice.

The truth is that humanity is at the mercy of the demons of its inventions and its technology, subject to the uncontrolled power of certain remedies that are not accompanied either by the vision of their consequences or by new means to correct them.

Alternately Prometheus and Satan, ever tossed between invention and destruction, man is still that unknown who with his iconoclastic power shatters the vase he himself has wrought, who burns what he formerly adored.

The international community, I am convinced, has the resources to obviate the grave deficiencies of the present situation.

I personally believe that humanity poses no problems, knows no problems, which it is incapable of resolving—on condition that the devil-take-the-hindmost attitude of today is replaced by true cooperation. And also on condition that we transcend the present piecemeal mechanisms, the economic panaceas, and the short-term artifices, and induce the experts to exercise their ingenuity in long-term reflections.

Cooperation, prospects for the future, so many appeals always insistently made by the poorer nations, so many hopes they have nourished—be these stabilization of raw material prices, increased transfer of resources to the third world, or better organization of international financial markets—are so many things remaining unheeded in the wind of the egoism of the rich countries, because it costs nothing to ignore them, nothing to postpone them to the morrow, or forever, nothing to neglect them. But now comes the time when the world is turned inside-out and topsy-turvy.

It is on behalf of six West African states which now have, for ten years, been exercising a monetary community in complete freedom and which recently, in these turbulent times propitious to centrifugal forces, reaffirmed their conviction and their faith in the soundness of their economies and in their common destiny; it is, therefore, I say, as President of the Council of Ministers of the West African Monetary Union, a monetary organization shared by Dahomey, Ivory Coast, Niger, Senegal, Togo, and Upper Volta, that—as last year—I have the honor to speak.

First to thank our host country and its President, who has graciously honored us with his visit. To congratulate Mr. Konan Bédié, one of those African officials who does honor to our continent by the masterly fashion in which he presides over our discussions and for his clear insight into our problems. Then to express our thinking on the world economic situation and particularly the situation of the economies of the Sahelian countries of Africa. And, finally, recalling the statement of the spokesman for Africa, to plead for a new economic order for money and development.

The inflation experienced by the world economy poses a challenge to our time and to the ingenuity of mankind. We had actually imagined that, since World War II, we had left behind us the shores of monetary tumult and economic commotion. We did indeed think that we had devised suitable remedies to contain for good and all the pressures underlying the ebb and flow of the prewar economy. But now as we witness the reappearance of that inflationary gangrene which threatens to destroy our economies we are obliged to seek, before it is too late, corrective measures calling not so much for dexterity and tightrope walking as for greater vigor and rigor.

But is it yet agreed that the causes have been correctly identified? Let it be clearly understood, in this connection, that we place ourselves on record as being absolutely opposed to the theory that has been developing for some time and in regard to which every effort is made to give it a reverberation out of proportion to the reality, a theory that tries to impute to the rise in the prices of commodities, and particularly petroleum, the primary—if not exclusive—responsibility for the present inflation. Last year in Nairobi, well before the increases in oil prices, the international community was already uttering cries of alarm at the development of the inflation that was then no longer rampant, but already galloping. This present inflation has a long history. Manifestly, its origin is to be found in the economic policies which sought, in unbridled monetary creation, the best means of assuring continuous growth and full employment. Because the assurance of expansion and full employment was wanted, at the least possible cost, not enough heed was paid at that time to the risks of the disequilibrium facing us today.

The fight against inflation engages the participation of all; the responsibility of all nations is involved in it; it must be related to all aspects of the phenomenon. In this regard, it would be maleficent to place all the blame on imported inflation while ignoring the internal mechanisms of profound disequilibrium. It would be pointless to fix only on raw materials and petroleum products and to call for a reduction in their prices which would be annihilated by the effects of the maintenance and the increase of high wages in the developed countries where the persistent inflationary psychology engenders intolerable expectations and demands. What is needed, then, is a return to moderation of appetites, and we are gratified at the efforts—which appear to need reinforcement—made to this end with a view to first containing and then overcoming inflation.

It is not the least of paradoxes that for us developing countries, particularly those I have the honor to represent—some of which are among the most sorely afflicted by natural disasters and the present generalized price rises—the fight against inflation in the short run is as costly, as burdensome, and as gravely mortgaging on our economic future as inflation itself.

We developing countries are receiving the full force of inflation, as our enormous needs for capital goods compel us to open our frontiers to the world economy. When it reaches us, this inflation is greater than in the countries of its origin, as it is increased by freight charges—the rises in which are often very much larger than are truly warranted. Our payments balances and our international reserves are already undermined by this inflation; but what is even worse for us are the measures being taken to combat inflation, viz., high rates of interest, together with the temptation to impose restrictions and to withdraw within national boundaries, which may entail a reduction in aid and harden the terms available from international sources of financing.

Given the present situation, what has the international community done, and what can it do?

Each country has, naturally enough, first sought to deal with its own problems. What could be more normal, one may ask. But we must beware the perils inherent in “every man for himself.” There are not enough words in any language to warn the international community adequately against the risks of isolated actions that will lead from protective measure to protective measure, from barrier to barrier, from restriction to restriction. The final result—autarky and national self-sufficiency—would negate the century-long efforts of mankind toward interdependence, and if this were to happen we developing countries would once again be the first victims.

We have also noted, here and there, attempts at agreement between groups of nations. To date, however, these common actions have not been able to conform to the imperatives of the new spirit of interdependence that should in future characterize international economic relations. How could things be otherwise, if problems affecting the whole world continue to be discussed in narrow, sheltered circles and decisions of world-wide import continue to be taken without the participation of those who have too long been left behind in the race for economic well-being.

The Fund has continued its efforts toward long-term international monetary reform, but has also managed to take steps to deal with matters of the most pressing concern. It has approved two facilities, one to meet the energy crisis, the other to deal with the structural problems of the balances of payments of developing countries. Through its spokesman, Africa as a whole has informed you of its satisfaction with the speed and diligence with which the Fund has worked to set up these new facilities. It falls to me, speaking on behalf of the countries which I have the honor to represent, most of which are suffering from the twin scourges of drought and the international monetary crisis, to draw your attention to the restrictions and conditions imposed on use of the oil facility which make it impossible for the poorest countries to benefit from it. As regards the extended Fund facility, it is to be hoped that, when it is adopted, steps will be taken to satisfy the express reservations made by the African Executive Directors against the attempts in some quarters to undermine the effectiveness of a formula which they helped promote, to their credit.

But we must turn away from cyclical concerns, from isolated actions. The time for clever technical solutions without any daring future projection has passed.

The time has come to incorporate the actions of the Fund and the Bank in a grand design that can provide the international financial community with a durable basis, an unshakable foundation, an underpinning that will arouse the admiration of future generations. The Fund and the World Bank cannot remain oblivious to the psychological and geopolitical change that is sweeping the whole of mankind. This change is called “independence within interdependence.” It speaks both to our hearts and to our minds. Mankind is finding out that it has never before been so one, that people have never before been so dependent one on the other. Justice, respect, dignity, sovereignty over national resources—claims we have long put forward—now seem to be finding some echo in the hearts and in the minds of the inhabitants of the rich countries. The Fund and the World Bank must realize this and draw the necessary conclusions: their conference rooms must resound to the same diapason as was heard at the recent Special Session of the United Nations on Raw Materials and Development.

For the Fund this means, in the short term, that the forthcoming revision of quotas must be implemented in such a way that powers of decision, hitherto reserved to the major powers, are reallocated so as to reflect not only the new distribution of world wealth but also the profound aspirations of the third world.

This also means that reform of the international monetary system must continue to receive all the attention it deservedly merits. It must be looked at in the new spirit of global economic interdependence and must therefore respect the following principles which the developing countries have always stoutly defended:

  • —symmetry of rights and obligations;

  • —establishment and control of international liquidity by the entire international community;

  • —transfer of real resources to the developing countries;

  • —establishment of a decision-taking process that will more equitably reflect the aspirations of the poor countries for greater well-being.

To put it more bluntly, this means that reform of the international monetary system, with all its highly interesting aspects (process of effective, symmetrical adjustment, better functioning of rates of exchange, cooperation to limit disequilibrating capital flows, improved international management of liquidity, a primordial role for SDRs, etc.) will be of even more interest to us if the problem of the link is settled. We shall only subscribe to this reform if this matter, which is of vital importance to us, is not relegated to oblivion in a plethora of committees set up to avoid having to deal with the basic point at issue. We refuse to be forever fobbed off by the international community. . . .

Finally, in the new economic order of currency and development which we propose, there will be new responsibilities. The new situation created by higher prices for many raw materials has placed new powers into the hands of countries that had hitherto stood silent in the concert of nations. Let us hope that they will understand and accept that these new powers also imply new obligations.

The era of the finite world has begun. This idea was expressed by Paul Valéry quite a few years back when he discovered that, with the end of the great age of explorers, the world that he imagined to be infinite had begun to shrink and had revealed its true image of a single entity, a single community of brotherhood and solidarity.

But who since then has been able to harbor the illusion that the entire history of mankind represents a continual progression to even greater brotherhood and that the era of injustice was gone forever?

For my part, I am willing to believe that the era of justice has begun. I invite you all, particularly the representatives of the industrialized countries, to accept this pregant idea and to draw from it all the appropriate consequences for the organization of the activities of our community.

Above the cries and lamentations that fill the air and the fears and anxieties that hold us in thrall, we witness the arrival of the era of cooperation, the era of indispensable solidarity.

Statement by the Governor of the Fund for Egypt—Ahmed Zandou

Mr. Chairman, thank you for giving me the floor to address my fellow Governors. In the first place, I wish to express our appreciation of your opening address in which you have elucidated the various problems confronting the world economy today. I would also like to express our thanks to the Managing Director and to Mr. McNamara for their illuminating addresses in which they have dealt in an eloquent manner with international monetary issues and the serious problems facing the developing countries, and we compliment them for the excellent Annual Reports submitted to the Boards of Governors. Finally, a word of thanks ought to be conveyed to the Committee of Twenty and their Deputies, as well as to all those who have contributed to the Outline of Reform and to the elaboration of immediate steps to be introduced for the interim period.

Since our last meeting in Nairobi, the world has witnessed many developments, among which mention may be made of the spreading of inflation on an unprecedented scale, the continued flotation of the leading currencies, which threatens to be the rule rather than the exception for some time to come, and the disruption of international payments as a result of the energy crisis coupled with the substantial increase in oil prices, leading to the emergence of new problems of challenging dimensions. Those developments did not only have their impact on domestic policies in various countries but had such far-reaching effects on international relations that the need for closer international cooperation in the monetary and trade fields became more pressing than ever before—a fact on which the Fund’s Annual Report places particular emphasis.

Coming to our business today, I have a few general remarks to make in respect of some aspects of international monetary reform before dealing with the issues of particular interest to the developing countries. While developments to which I have referred did not make it possible to attain complete agreement on a final blueprint on international monetary reform, the program of immediate action for the interim period was an inevitable but prudent compromise. The latter program, coupled with the transfer of controversial and unsettled issues to the annexes, and the attention paid to developing countries’ interests indicate an improvement in the Outline. However, I hasten to add that, without the settlement of the major areas of disagreement, and without devising appropriate means to ensure the increase in the flow of real resources to developing countries, the contemplated international monetary reform would not be achieved. It goes without saying that the achievement of such an objective requires a great deal of international cooperation as well as political will on the part of the industrial countries and oil exporting countries.

As far as the Outline itself is concerned, we are in agreement with the general principles of a reformed world monetary order based on cooperation and consultation within the framework of a strengthened International Monetary Fund. The main features of such an order embrace an effective and symmetrical adjustment process, better international management, and distribution of global liquidity, with the SDR becoming the central reserve asset and numeraire of the system, and the promotion of the transfer of resources to developing countries. In this respect we welcome the addition to paragraph 4 of the Outline of a provision to the effect that when applying adjustment measures care shall be taken to protect the net flow of real resources to developing countries. But the point should be made of the lack of adequate commitment on the part of deficit developed countries not to reduce access of developing countries and international development finance institutions to their financial markets nor to reduce the volume of official assistance or harden its terms. Similarly, surplus developed countries are not obligated to increase aid and relax restrictions on access to their financial markets. Moreover, while a review by the Council and the Executive Board of the aggregate net flow of real resources to developing countries is provided for, no mention is made of corrective action in case of an unsatisfactory performance by the donor countries.

Regarding the adjustment process, we recognize that it is the responsibility of both the surplus and deficit countries to adopt appropriate policies for effective and timely adjustment. There is no doubt, however, that the present oil situation raises complex problems for oil importing countries which require a different approach to the question of adjustment. On the other hand, little external adjustment is required in the case of oil exporting countries in the short run, as the Fund’s Annual Report rightly remarks. In fact, they will be mainly concerned with possible ways of investing their accumulated huge surpluses abroad as well as their developmental spending at home.

As for the establishment of the need to adjust, the assessment by the Executive Board would be based on all the relevant factors denoting the emergence of imbalance, including the use of reserve indicators, but it should be noted that the Outline still unduly attaches major importance to disproportionate movements of reserves. As regards the application of graduated pressures to countries in large and persistent imbalance—whether surplus or deficit—we believe that the application of such pressures to deficit countries in the manner suggested in Annex 2 is not at all equitable. With the exception of reserve currency countries, the deficit countries may be already so overstrained by the loss of reserves that they can hardly bear additional pressures in order to adjust, such as the raising of charges on borrowing from the Fund, the restriction of the use of the Fund’s resources, or the withholding of all or part of future allocations of SDRs.

Moreover, while account will be taken of the special characteristics of developing countries that make it difficult for them to adjust, there is no explicit provision in the Outline that developing countries will actually be exempted from the need to adjust and will not be subject to the application of pressures pertaining thereto, the more so as their role in the adjustment process can hardly make any significant contribution to the correction of international imbalances.

The assertion in the Outline that the exchange rate mechanism will remain based on stable but adjustable par values, with surplus or deficit countries allowed to make par value changes promptly and to resort to currency floating in particular cases with Fund authorization, is a basic prerequisite for the reformed system designed to do away with the rigidity attributed to Bretton Woods in this respect. The guidelines for the management of floating exchange rates should contribute to the maintenance of orderly relationships in the foriegn exchange markets. This would be achieved by preventing or moderating sharp and disruptive fluctuations through intervention under the Fund’s surveillance. It is our understanding that these guidelines will be applicable only to independently floating currencies and not to currencies that are pegged to others.

The resumption of general convertibility and consolidation of excess reserve currency balances is another crucial issue which deserves a comment. It is of the utmost importance that the aggregate volume of official currency holdings be kept under international surveillance and management in the Fund. This issue, however, has been complicated by the large accumulation of foreign exchange reserves by the oil exporting countries. Such accumulation raises many problems requiring special arrangements for recycling and for the transformation of liquid funds into long-term investments, taking the interests of developing countries into consideration.

Turning to the program of immediate action recommended by the Committee of Twenty and concomitant decisions taken by the Executive Board, an important step has been made for a transitional period, pending the elaboration of a new world monetary order, when agreement on the unresolved issues would have been finally reached. Apart from the Interim Committee of the Board of Governors of the Fund and the Joint Fund-Bank Ministerial Committee, the decisions adopted by the Executive Directors have covered very important and urgent issues, including the guidelines for the management of floating exchange rates, the establishment of the oil facility to assist member countries facing payments difficulties as a result of increased costs of oil imports, the interim valuation of the SDR on a basket of currencies, and the extended Fund facility. This facility, designed to supply member countries with balance of payments support in larger amounts and for longer periods than permitted under prevailing policies, will be of particular importance to developing countries and will bridge a gap in the Fund’s lending regulations. We also urge further liberalization of the compensatory financing facility as far as the rules of drawing and repayment are concerned, together with the extension of its coverage to other aspects of current transactions which should be eligible for similar financing in certain cases.

As regards the draft amendments of the Articles of Agreement which are having the careful attention of the Executive Directors, we are in agreement with the proposals so far made. They are brought about by the sheer necessity of accommodating the steps taken for the interim period as well as of adapting the Articles to vastly changing conditions compared with the time when the Bretton Woods structure was first erected. The establishment of the Council of Governors with decision-making powers ensuring the participation of developed and developing countries in the management and adaptation of the monetary system, the imparting of flexibility to various provisions, including those covering the use of Fund resources and the allocation and cancellation of special drawing rights as well as operations and transactions in them, the legalization of currency floating—all bear witness to the importance of the proposed amendments. However, the application of uniform rules to all Fund members is not equitable to developing countries and runs counter to their interests. For this reason we suggest the insertion of a new section in the Articles, dealing with the special status of developing countries so that the application of the rules and practices of the Fund would not strain them with further burdens.

The interim valuation of the SDR, higher interest rates, and the proposed amendments should pave the way for consolidating special drawing rights as the principal reserve asset and numeraire of the future international monetary system, with the role of gold and reserve currencies gradually reduced. The rise in the rate of interest is, however, detrimental to developing countries unless special treatment is provided for them. Moreover, a question of particular importance to these countries in respect of special drawing rights is that of the link between future allocations thereof and the flow of additional development finance from developed countries.

We agree that future allocations should be based on global liquidity needs, but in view of the inequitable distribution of international liquidity, coupled with their relatively greater need for reserves, developing countries should receive a larger proportion of direct SDR allocations than their present quotas in the Fund permit. While the technical feasibility of the link has been thoroughly explored and a wide measure of international agreement has been established, a final decision should be taken without further delay.

This having been said, I wish to refer to another important issue, namely, the allocation of special drawing rights for a second basic period. In view of the large imbalances in international payments caused by oil developments and the maldistribution of reserves, this question should be seriously considered with due regard to better and more equitable distribution criteria. In actual fact, and despite the apparently excessive volume of global liquidity and the recent improvement in the share of developing countries, the rate of growth of reserves has declined in the past year. As the Fund’s Annual Report reveals, a reserve stringency seems to be emerging which may call for action by the Fund, including the possibility of a new allocation of SDRs.

In the meantime, the quota structure of the Fund should be revised with a view to securing to developing countries a larger share in quotas and in voting powers corresponding with their needs and increasing importance in the world economy, especially as far as oil exporting countries are concerned. In this way, their role in the management of the international monetary system would be enhanced, while ensuring non-oil exporting countries greater access to the Fund’s resources, as well as a higher proportion in future allocations of special drawing rights without prejudice to the link.

Developing countries are facing serious problems which are aggravated by world-wide inflation and by the oil situation. In addition to the inadequacy of the flow of real resources to sustain their economic development, they are threatened by a substantial resource gap as a result mainly of the increase in the cost of oil imports causing a substantial deterioration in the current account deficit of the non-oil developing countries. The Fund’s Annual Report strikes an alarming tone when it states that official financing facilities and arrangements are clearly not adequate for the developing countries even with the new oil facility. Despite the efforts being made by international and regional organizations, the United Nations, and the major oil exporting countries, the Report leaves no doubt that the needs for concessional capital and grant assistance remain very large, particularly in terms of the prospects for the next few years. . . .

To conclude my statement, it gives me pleasure to place on record the close and growing cooperation between the Arab Republic of Egypt and the Fund and the World Bank. The balance of payments support and loans supplied by these institutions, together with the assistance provided by friendly countries, within the context of a reoriented policy of economic liberalization, would help us continue our development projects and sustain our efforts for the reconstruction of devastated areas—after a long war of liberation of occupied Arab lands. With the reopening of the Suez Canal to international navigation and the establishment of free zones, my country would have contributed to world peace and prosperity.

Statement by the Governor of the Bank for Portugal—José da Silva Lopes

This is the first time that I have had the honor of taking the floor at an Annual Meeting of the International Monetary Fund and the World Bank. It is not my intention to make a long speech, but I would like to acquaint you briefly with the position of my Government as regards these institutions and the main problems on the agenda.

Before doing so, however, I would like to address my congratulations to the Managing Director of the Fund, to the President of the Bank, and to the Executive Directors and to the staff of both institutions for their efforts in seeking solutions to the problems of the present international economic and financial situation.

Portugal is at present involved in a process of great political, social, and economic adjustment, after the overthrow, last April, of a regime which was isolating my country from a large part of the international community.

The Portuguese Government is making serious efforts aimed at the introduction of democracy in our political life, at the reduction of social and economic inequalities, and at the effective decolonization of territories which had long been under Portuguese administration. These efforts are adversely affected by the unfavorable international economic situation which we are all facing at present. Because of its small dimensions, the efficiency of the Portuguese economy is largely dependent on international relations. The new Portuguese Government is, therefore, deeply interested in the strengthening of international economic cooperation, both of a multilateral and a bilateral nature. We will respect scrupulously all our previous international engagements and are prepared to accept new ones, within our capabilities, which may contribute to a better world economic order.

I will not dwell on the extremely serious problems of the world economy which have been so aptly described in many of the statements that we have heard here. These problems create great difficulties as regards international economic cooperation, but at the same time they make this cooperation more necessary than ever. The Fund and the Bank have done their utmost to find the solutions required under the present circumstances. I refer specifically to the action of the Bank which led to the considerable expansion of multilateral aid and to the studies and negotiations of the Fund to help member countries to overcome the difficulties of the present international situation. This year we witnessed the introduction and implementation of the oil facility and, a short time ago, the implementation of the extended facility. Portugal has availed itself of neither of these facilities, but it does not underrate the advantages of the new margin of action which is now at its disposal. It is to be expected in particular that the new facilities will contribute to the alleviation of the economic hardships of the developing countries with serious balance of payments difficulties. I am of the opinion that the Outline of Reform prepared by the Committee of Twenty, is a good basis for the future work to be done in the field of international monetary cooperation. It is encouraging that the main objectives of reform remain those of stable but adjustable exchange rates and of convertibility. I only regret that the present world economic situation does not allow us to progress faster toward these objectives.

Nevertheless, I set all my hopes in the work of adaptation of the monetary system entrusted to the Interim Committee of the Board of Governors. Two essential tasks in the management of the international monetary system are incumbent on this Committee: the consultations on the functioning of the adjustment process and the control and management of global liquidity.

The consultations, although on an experimental basis, may have an important and decisive role in the adjustment process. The need for them is strongly reinforced by the problems of world-wide inflation, deceleration of economic growth, and massive imbalance of international payments, so impressively described in the Report of the Fund.

As regards the management of international liquidity, I believe that the Interim Committee should give adequate priority to the problem of gold. I am convinced that, whatever its future may be as a monetary standard, the role of gold in the international monetary system will continue to be important in the near future.

I am pleased to state that the Portuguese Government is at the moment taking the required internal steps for Portugal to become a participant in the Special Drawing Account. This decision was taken in the light of the general policy of the new Portuguese Government of developing and strengthening international economic cooperation.

We hope that a conclusion may be reached within the envisaged period concerning the Sixth General Review of Quotas. I think that an effective action in this field is essential to keep the Fund’s resources in line with the desired growth of world trade and payments. My country has the utmost interest in taking advantage of the sixth review to increase its quota in the Fund to a level better adjusted to its position.

I share the view of those that maintain that a link should be established between aid and the creation of liquidity. When I take this position I am not thinking primarily about the interests of Portugal itself, although international economic support is also necessary to my country. In this respect I am thinking mainly about the African states and territories which have been under Portuguese rule and which are now in the process of decolonization, with the firm support of the Portuguese Government. The economies of some of these states and territories are experiencing great difficulties, particularly in their balance of payments. It is to be expected that the Fund and the Bank may, in due course, after the necessary institutional arrangements, contribute to the alleviation of the existing economic hardships of those states and territories. . . .

This assistance may help us in participating more fully in international and economic life. Portugal is highly interested in contributing, according to its ability, to the strengthening of the solidarity among nations, a task which is now more indispensable than ever.

Statement by the Alternate Governor of the Fund for Argentina—Hernán Aldabe

Speaking on behalf of the Government of the Argentine Republic, I wish to state here that we share the basic views contained in the statements presented by the Governors for Nicaragua and Ecuador on behalf of the countries of Latin America, which highlight the aspirations of our region for an international economic order based on principles of equity.

After two years of intensive work the Committee of Twenty has completed its labors. The deliberations of this Committee, under the inspiring chairmanship of Mr. Wardhana, have revealed the importance of participation by the developing countries in all procedures aimed at delineating or adopting partial or total aspects of the international economic order. We should also like to thank the Chairman of the Deputies for his work in seeking out points of agreement between the various participating countries.

Given this fact, and in light of the present international economic situation, the Government of the Argentine Republic deems it necessary to make known here its views on certain aspects of the work of the Committee of Twenty, reflected in part in the composite resolution submitted to the Board of Governors. I shall refer first of all to the present international situation and then go on to consider the composite resolution.

Argentina considers it essential, in the present economic situation, to recognize clearly the dangers in the economic, financial, and international payments fields which could well result in a far-reaching reduction in levels of economic activity that would further aggravate the already acute problems presented by inflation. This situation, which has its root cause in internal disequilibrium in the main industrialized countries, has spread to the entire international community. Unless a clear policy of international coordination and consultation is arrived at, the situation threatens to interfere with trade flows, development aid, and the movement of capital to those countries whose economies are the most vulnerable.

It is essential that agreement be reached quickly on a just distribution of the burden of the adjustment world-wide, so as to ensure that the countries with the greatest absorptive or reactive capacity do not pass the burden of the adjustment on to their weaker brethren. It is also essential that all international agreements concluded on this subject be respected by the signatories, so as to ensure that individual countries, or groups of countries, do not evade their responsibilities—as is happening at present—by applying policies in restraint of trade that will curtail the exports of the countries most seriously affected.

Our country takes the view that the recent measures adopted by the European Economic Community to restrict exports of meat to the Continent represent inexcusable violations of the spirit of the Rome agreement and the voluntary commitments entered into within the framework of the Committee of Twenty and the OECD.

Although some of the agreements reached at the Rome meeting have not yet formally come into effect, it is obvious that the actions in question violate the spirit of all those agreements and by their manifest inequity represent one of the severest forms of pressure, with the further aggravating factor that, in this particular case, they damage the interests of countries which did not cause the problems facing the international community.

Our country recognizes that the international monetary system is only one of the aspects governing and affecting international transactions and that, if it is to achieve its objectives of cooperation and equity, the reform must of necessity be comprehensive. Consequently, supplementary agreements must be adopted in the areas of international trade, movement of capital, and transfer of real resources, with special reference to access for products from developing countries to markets in the developed countries and to the establishment of mechanisms to reduce the inherent instability of the external transactions of our countries.

I shall now go on to discuss the composite resolution submitted to the Board of Governors. This incorporates the principles set forth in Part I of the Outline of Reform and, although it does not prescribe them in mandatory fashion, it does state that countries should, where feasible, observe the principles contained in Part I of the Outline.

As we pointed out in the Committee of Twenty, our country has certain basic reservations regarding Part I of the Outline of Reform, particularly with regard to pressures, the adjustment process, the determination of the rate of exchange, and controls. We said at the time that we would not make any comments, provided Part I was construed as being without legal status and no portion thereof would be implemented without prior discussion and approval by all the member countries.

Nonetheless, since the composite resolution states that Part I “indicates the general direction in which … the system could evolve,” our delegation is obliged to reiterate the following basic points of our position:

(a) The determination of the need for adjustment, and also the choice of the adjustment instruments, is solely the province of the country affected.

(b) The need of not adopting procedures which may harm developing countries also covers the area of possible suggestions on the need for adjustment. It is obvious that suggestions regarding adjustment may be necessary and even useful for those countries whose international importance so requires it, but it is evident that the internal and external repercussions of suggestions to these countries are not the same as in our own. The countries with a weaker economy are not, in general, in a position to adopt measures of a compensatory nature, which is why the suggestions of an international institution may assume the character of an imposition or of an intolerable pressure.

(c) Evaluations made in the future must be of a confidential and routine nature, taking into account such aspects, antecedents, and projections as may be necessary to improve understanding of a particular country’s situation and will need to be supplemented by an evaluation of the world situation as regards payments, liquidity, and the transfer of real resources to developing countries. Any special meetings that may be held for evaluation purposes should be limited to the countries having the greatest international impact.

(d) As regards pressures, we emphasize that the position of our country is one of strong opposition to the application of any type of pressure on the developing countries, in the understanding that any loss of reserves already of itself constitutes an extreme form of pressure.

(e) In the matter of controls on current and financial transactions, we would again state that the developing countries must be able to apply them when they think it necessary for the sound functioning of their economies.

I should like to emphasize that these opinions are inspired by the need to reaffirm the basic principles of sovereign policy, economic independence, and equity between nations; we should not fail to recognize that, as discussions in the Committee of Twenty progressed, the content of Part I was improved in successive versions and, therefore, today includes a number of points with which we are in agreement.

The composite resolution presented to this Board of Governors contains points of view supported by the Government of the Argentine Republic and others that are not accepted. Furthermore, nothing is clearly established as to the extent of the obligatory nature of this resolution, nor how it will influence future decisions adopted by the Executive Directors in managing the International Monetary Fund’s relationships with member countries. In view of this, the Government of the Argentine Republic concludes that it must abstain from voting in favor of the composite resolution because of the possible implications of some aspects of the fourth resolution and the eventual role that the first resolution may assign to Part I of the Outline of Reform in the future.

At the same time, in view of the vital importance our country attaches to the reform of the international monetary system, we uphold the view that any decision on the functioning of the Fund should take the form of amendments, and this means, in the Argentine institutional system, that the final decision will be taken by our National Congress.

I would not like to let this opportunity pass without reiterating Argentina’s support for the recent creation of a new special account in the International Monetary Fund to finance balance of payments disequilibrium of the structural type or requiring a longer period of time for correction. This decision may be regarded as a positive step. However, in our opinion it still contains very important features requiring improvements. In particular, we believe that less restricted access should be provided to the new service and it should be explicitly stated that the administration of the new facility requires the definition of criteria different from those hitherto used by the Fund in its policies related to the use of the resources in the General Account. It is evident that the lasting solution for structural problems may occasionally call for measures that, in the short term, run counter to what the Fund has normally considered to be adequate policies.

We think this measure should become the first step in the direction of making more flexible the policies relating to the use of the Fund’s credit facilities, inasmuch as the extent of their automaticity is increased and their conditionality substantially decreased, so that no type of subordination to policies predetermined by the International Monetary Fund is implicitly required.

As regards the new oil facility, we think the Fund should continue its search for new and additional sources of funds with which to alleviate the effects of increases in the price of fuel on payments structures. We support the recent revisions of the methods of calculation regulating access to this account. It is indispensable for these methods to be based on the most recent statistical data, which are those best measuring the impact of the increases in petroleum prices.

Finally, we should like again to express our support for an early revision of the structure of quotas that recognizes the true importance of the developing countries in the international community.

Statement by the Governor of the Fund and Bank for Fiji—C. A. Stinson

I am pleased to join with you, Mr. Chairman, and other speakers in expressing our appreciation to our hosts. I also extend a special welcome to the observers from Papua New Guinea.

I would like to join colleagues who have spoken earlier in expressing concern for the present confused state and trend in the world economy. As we are all aware, the world has over this century moved very rapidly and inevitably toward near absolute economic interdependence among nations. Never in world economic history have economic decisions of countries, particularly the economically strong, been so vitally important to, and able to affect in a very real and sometimes rude way, the daily lives of millions of people elsewhere.

As colleagues know, since the Korean conflict of the early 1950s, the world has experienced a long period of relative price stability. Then, suddenly, in late 1972 the world was rudely awakened by a sudden and very rapid acceleration in general price levels. During the early 1960s the average rate of inflation in the industrialized countries was about 2.5 per cent per annum. By the first half of 1974, this figure had risen to the alarming level of 12 per cent per annum. This is, of course, just the average, and we constantly read about expectations of 20 to 30 per cent inflation in a number of countries for the current year.

At a time when so many are working toward a possible solution, it is sad to note that numerous scaremongers have now entered on the scene. Numerous books have been written and other public utterances have been made, sometimes by respectable organizations and individuals, about the pending world economic doom. Such actions have done harm in molding expectations, making people act in ways which in themselves exacerbate inflation.

The sad thing about world inflation is that it affects countries differently; the weaker a nation, the harsher its effect. The economically strong are able to cushion themselves from it and in many cases may even work toward improving their positions at the expense of the economically weak.

Like the World Bank and the International Monetary Fund, I believe that the present world inflation problems can and must be solved. In the short term, of course, supply difficulties of primary commodities due to natural factors such as adverse weather will from time to time provide impulses which blossom into periodic world inflation. However, given the will by the economically stronger nations to accept that their policies should have as an objective the achievement of world economic stability (policies which in the short term may be politically difficult ones to sell internally), an improvement, I believe, could be achieved.

The International Monetary Fund, in its comprehensive 1974 Annual Report, talks about the introduction of appropriate demand management policies by the industrialized countries. The Report recognizes that at this point in time a rapid dampening of demand in these countries toward alleviating inflation will adversely affect world employment and exports of the less developed countries. Although the Fund appears to advocate the acceptance of increasing unemployment for the amelioration of world inflation, I believe that a delicate balance between the two economic ills should be the aim. In this connection, I would suggest that emphasis should be shifted more and more toward policies which promote increasing productivity and production and away from fiscal and monetary policies aimed at excessively depressing demand. Such policies should be supported by incomes policies tailored for productivity—indexed increases in incomes.

As a politician, I am aware that these kinds of policies are not very palatable prescriptions. However, the extent of this problem is such that it should be tackled—and collectively—with boldness.

The world economic scene this year is confused by yet another new phenomenon. This year we shall have a trade imbalance of a size unprecedented in history. We are told that the oil exporting countries will collectively accumulate a surplus of about $65 billion. We are also informed that the burden of this imbalance of the less developed oil importing countries will appear in the form of a collective deficit approximating $17 billion. It is true that this imbalance could be brought toward some degree of equilibrium through recycling funds from the oil exporting to the oil importing countries. But it is of concern that the bulk of the funds is being recycled outside of the international financial institutions of the Fund, the World Bank, and the regional development banks. Without increased involvement by these institutions, the less developed oil importing countries will be completely exposed to the ravages of the international capital markets, with consequent large increases in their external public debt burden which, for 1972 alone, had increased from $85.1 billion to $99.4 billion for the 86 less developed countries recently studied by the World Bank. To assist them through their short-term imbalance, the less developed countries will become increasingly dependent on the Fund. But this overdraft facility cannot continue indefinitely, so that more effort must be given by them toward increasing their capacities to export and substitute on imports. For this they will rely heavily on the World Bank and regional development banks to provide the necessary long-term capital. As these institutions’ ability to help is directly related to their share of capital of the recycled funds, the Fund and the World Bank are to be commended for their efforts of recent months in this direction. Let us hope that their future efforts will meet with greater success and positive response from countries concerned.

A word about the oil surplus funds which are being recycled through the private financial system. Most of these funds are likely to continue to flow through the markets of London, New York, Zürich, and Germany. The deficit oil importing countries will continue to be starved for funds if secondary flows are not allowed to continue freely out of these four important financial markets. We would hope that this process would continue unhindered and that appropriate policies would continue in the countries concerned.

The mounting oil-generated deficit in a number of important industrialized donor countries is one of major concern to less developed nations. This trend has begun to affect the attitude of donors toward increasing aid flows, not only bilaterally but multilaterally as well. Its effect on the less developed countries, already heavily burdened with overseas debt and mounting deficits, could be extremely serious.

For the first time we are now beginning to talk about inflation and recession in the same breath. The word “stagflation” is of very recent origin and one unknown in textbooks written prior to last year. The recent large increase in oil prices, manufactured goods, and other commodities is equivalent to the imposition of heavy taxation on our various economies. I believe that the consequent influence on dampening demand with associated deflationary effects is substantial. Signs of recession in a number of countries have begun to appear. In my own country, the building industry, the one that is always the first to feel the winds of economic change, is already under a lot of strain at present. Redundancy is now becoming a daily occurrence. I understand that other countries are experiencing the same thing. While we have to take the present situation as given, let us hope for a growing realization that actions by some of us which trigger off deflation elsewhere will, in view of the interdependence I mentioned earlier, result in an economic downturn for all of us.

I congratulate the Bank and the Fund on the imaginative way in which they have acted to counter the present difficult world economic situation. The less developed countries will rely even more heavily on them during the months ahead. The introduction of the Fund oil and extended facilities is very timely. I congratulate the surplus countries who have begun to support these facilities. . . .

Let me conclude by re-emphasizing that the solution of our present world economic problems requires political vision and good will. It requires the fostering of the spirit of compromise and the willingness to sacrifice some of our national interests for the common good. Without it no world economic blueprint, however technically brilliant or perfect it may be, can ever succeed.

Statement by the Governor of the Fund for Malta—J. Abela

It is becoming an unfortunate recurrence that the pleasure we all derive from coming to this annual gathering is to a considerable extent marred by the persistent atmosphere of debilitating crisis which has prevailed in recent years and which has reached a frightening, almost unparalleled intensity in recent months.

For some years now we have been seeking, in all frankness not with any resounding success, a far-reaching and reasonably lasting fundamental reform of the international monetary order, an order practically torn to shreds through the vicissitudes of a world economy which has seemed, at times, to lose whatever inherent stability it had enjoyed at least since the last war.

Running parallel with the disorder in the international monetary system has been a nagging widespread inflation which through the late sixties and the early seventies manifested itself as a phenomenon under various, at times confounding, guises. We now have reached a stage where the situation is terrifyingly clear.

The world monetary order is still fluid. The process of international monetary reform which last year seemed on the horizon is still without adequate substance. True, the ad hoc Committee on Reform of the International Monetary System and Related Issues carried out a great deal of work, and I join in expressing thanks to our colleague, Mr. Ali Wardhana, and to Mr. Morse and his colleagues for their unstinting efforts. Let us hope that the Interim Committee on the International Monetary System, with whose setting up we agree, can move on to even more concrete terrain on the outstanding unresolved issues. Also welcome was the first move toward the establishment of the SDR as the principal reserve asset with the introduction of the SDR valuation based on a basket of 16 currencies.

But in the main, it is, I think, not unfair to say that the fundamental reform of the system we have all been aspiring to is still a thing of the seemingly distant future. As in the future, too, remain the definite steps required toward the creation of a suitable aid link which will take into account the general and specific circumstances and needs of the less developed and poorer nations. The introduction of the extended Fund facility in the light of the extremely serious situation which developed in the last year is useful. But much more is required, particularly when we take into account the fact that the net flow of financial resources to the less developed nations in 1973 remained at the previous year’s level.

In this context, while I too agree that a substantial increase in Fund quotas is necessary, I strongly subscribe to the view that the method of allocation of the additional quotas must not be the old, highly unsatisfactory method. The needs of the developing world and of small economies, particularly those, like mine, based at the moment on very depletable resources, must be fully recognized in making any new allocation. Equally, I suggest that it must be fully recognized, too, that per capita GNP is not a satisfactory yardstick in assessing the total standard of living and development and liquidity requirements of a country.

International monetary reform and progress toward an aid link have been somewhat thrust into the background as inflation has surged forward as the most immediate, most dramatic, most threatening problem we now face: a problem of which the oil price crisis is only the latest facet. But I contend that the absence of fundamental reform itself makes the problem of inflation all the more acute, particularly in its consequences for the poorer and smaller countries, such as Malta.

Times for us are particularly hazardous. Those of us who came from small or economically weak, open economies are fully exposed to the assaults of imported inflation. We are being ravaged by a streaking inflation which is stripping us of our hard-won progress, if progress we have made at all. At the mercy of an escalating international price level, many of us have an inadequate volume and pattern of goods and services for export with which even to attempt to compensate for the soaring cost of the products we are forced to purchase on the international markets. Our foreign currency reserves, reserves which are either low, or which are built up through depletable resources, or both, have to bear the brunt of our deteriorating terms of trade and worsening balance of payments position. And here lies another danger which is compounded by the absence of fundamental monetary reform. For not only are our reserves being attached through imported inflation, the inflation which rages in all the reserve centers is at the same time tearing away at the real value of the reserves we hold. This is a pincer movement in operation whose effects could be disastrous. Thus while inflation threatens all of us, for in this sense at least we are truly one world, it threatens the less developed, poor and small nations all the more.

The point is, what is to be done? And it is this that meetings such as ours try to discover. Some state or imply that the world economy can be stabilized only at the cost of higher unemployment and a lower rate of economic growth than has been customary in recent years. There may be a lot of economic truth in this and we are probably in a position where we have few choices left to us, both because of the gravity of the situation and also because many of the known alternatives have been tried and have failed. At the same time, we would probably be committing a grievous mistake if we opted only for an economic solution, ignoring the potential social consequences. Attempts at demand management which aggravate an incipient recession can only create social tensions which make the overall situation worse. This is not to say that demand management should or could be ignored. But on its own it is not enough, and the best hope for a solution to the incessant inflation lies elsewhere.

I suggest that a two-pronged solution along the following lines is called for.

First, the primary sources of the present world inflation must be attacked, and let us not forget that the cost of the products supplied by the industrialized countries have been rising at times even faster than the cost of, say, oil. The vicious circle of commodity and commodity-input-derived inflation must somehow, somewhere be broken. The better able to break it, if only because they at least have a larger protective buffer to fall on, are, I feel, the industrialized countries. I am sure that once the ring is broken at that point, the developing countries, who are naturally much concerned with their terms of trade, will then also contribute their full share to smash the vicious ring.

Then, however, the secondary sources of the current inflation must also be tackled. I would reiterate that the main secondary source of inflation—labor costs—cannot be tackled by raising unemployment. This so-called solution sadly misses the point that economic relations are underpinned by human relations. To ignore human relations, as any solution including an increase in the level of the jobless does, is to abandon hope of any real solution.

The problem of rising labor costs is best tackled, I suggest, by a widely publicized, manifestly just prices and incomes policy. Such a policy, to stand a chance of being effective where others were not, and to meet the requirements of today’s world inflation, should be implemented for a specific period. I further suggest, moreover, that to be effective within the required world context it should be introduced simultaneously in the leading industrial nations. To avoid the threat of beggar-my-neighbor policies, why not try a “jointly with my neighbor” approach?

Can this be possible? We shall not know until we try. What we do know is that we have an awesome problem on our hands and not to try to solve it by novel means where other means have not worked is to remain cliff-hanging as at present.

Attempts at recycling oil surpluses and so on, are, of course, necessary in the short term. But recycling will not reduce the dizzy height of the cliff we stand on, nor make our precarious position on the cliff any safer. The immediate aspects of the current problem, though they must be tackled, must not make us in any way lose sight of the essential necessity for the long-term solution.

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

The distinguished Governors for Ecuador and Nicaragua have presented to you the joint views of the Latin American countries participating in this meeting on the world’s economic crisis and the desirable approaches to various aspects of the problem, and it is the consensus of the Governors that the best contribution to solution of the international economic situation will require management of the national economies by the advanced countries and developing countries in such a way as to solve the problem without commercial or exchange warfare, and thus without aggravating the phenomena of inflation and recession.

In this spirit I take the liberty of offering a few thoughts on the programs we are conducting in Mexico to strengthen our development financing policies, to adapt them to the changing needs of the shared development on which we are embarked, and to extend the benefits of progress to the different sectors of the population, particularly the poorest farm workers.

The Government of Mexico has taken a decision that the harmful effects of inflation should not fall on the masses of the people. To this end, in an effort jointly planned by those involved in production, wages were recently revised to offset the deterioration in real income suffered by the labor force, and the laws were amended to provide for wage revisions every year rather than every two years as had been the case. In the agricultural sector, the inefficient, counterproductive policy of holding prices stable, which discouraged production, was abandoned. Now under development is a mechanism for linking cost increases and price increases, making it possible to maintain income-producing productive processes within more suitable channels and at the same time to avoid speculative practices and excessive profits.

The cornerstone of our economic strategy is a new development financing policy—the basis upon which we will be able to control inflationary pressures of domestic origin, curb those resulting from our international relations, and promote productive investment in priority projects and programs. Our purpose is to adjust the expansion of demand and the true availability of goods and services, to promote growth in public and private saving, to strengthen our productive capacity, and to use human and material resources more efficiently.

A restructuring of our electricity rates and an increase in the prices of petroleum-based fuels were carried out about one year ago. The true significance of this decision becomes apparent when we recall that these prices and rates had been frozen for more than a decade at levels out of keeping with rising costs. Despite appreciable increases in physical productivity, a shortage of domestic resources led to a progressive financial deterioration in the energy sector. We had ended up with the contradiction of a modern, technologically advanced activity accumulating financial deficits that required Federal Government support to the detriment of new investment and of educational and social expenditure.

Let us turn now to another phase of the new development financing policy, within the overall framework set forth by the Government at the very start—increasing the Government’s revenues so that it can meet the demands placed on it by the people without recourse to the apparently simple expedients of inflationary financing. The added revenues will be used for expenditure programs to which priorities have been duly assigned and the basic purpose of which is to strengthen the country’s productive, human, material, and technological base. The 1975 budget will fully incorporate these guidelines, with well-defined priorities and the efficient use of funds that the people transfer to the Government to advance the shared, independent development of the nation. Channeling of credit to the private sector for new priority investments can then be expanded, for the Government will have a greater supply of its own funds to draw on.

The impact of the tax measures must not fall on the lower-income groups. Among the higher- and middle-income groups in Mexican society there is an ability to contribute tax revenues which has not been well utilized. The latest information indicates that 60 per cent of the families in Mexico obtain their regular income from nonagricultural tasks. Among these families, 3 per cent of those with incomes above Mex$ 10,000 a month account for 15 per cent of consumption.

The purpose is to limit an excessive growth of consumption, at the same time avoiding the waste of scarce resources. The latter point is important in all its aspects, but today more than ever in the energy field. Inflation causes grave distortions in resource allocation; the allocation of scarce resources to socially unproductive investment must be discouraged.

The views on the world’s economy expressed by Mr. Witteveen, Managing Director of the International Monetary Fund, in his excellent opening address, are very close to our concerns. The world economy has passed through a period of turbulence in the last year. Inflation has accelerated everywhere, and efforts to curb it raise the dilemma that progress in controlling price increases could have repercussions on the overoptimism felt just a few months ago in regard to the recovery of growth rates in the industrial countries.

Those countries are experiencing slow, and sometimes even negative, growth, and prices and interest rates continue their upward course. To move ahead, Mr. Witteveen recommends limiting the growth of demand and, at the same time, implementing specific steps to improve supply conditions, strengthen competition, directly influence wages and prices, and, in general, attack specific problems and maladjustments. Financial mechanisms, both in the private banking system and in the strengthening and creation of official mechanisms, should be better adapted, so that disequilibrium in the balances of payments among countries can be promptly offset. In this process, the transfer of real resources to the developing countries should have top priority. . . .

We are hopeful that the international order will soon be governed by a code establishing economic rights and duties and, specifically on the basis of the mechanisms now being approved at this meeting, that the new systems of financing, as a right of the developing world, will come to represent an effective supplement to the individual efforts being carried out by the third world countries on their own account. So far as lies within its power, Mexico is prepared to continue to offer its cooperation to countries with a relatively lower level of economic development.

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

A review of the past few years shows that our deliberations at the joint Fund-Bank annual sessions have been focused on our efforts to resolve the increasingly many problems affecting member countries. Each year we were confronted by significant monetary and economic developments, some of which were domestic in their origin but international in their repercussions. In 1971, we saw the devaluation of the U.S. dollar and the introduction of economic measures by the United States to strengthen the dollar and to combat the problems of unemployment and rising prices. In the following year, we witnessed the dawn of the new era of floating exchange rates, when the pound sterling was freed from its fixed rate.

When we met a year ago we were concerned with the deteriorating international financial environment. We were faced with rampant inflation, interest rates at unprecedented heights, and unstable international exchange rates. Despite these difficulties, however, most countries enjoyed high economic growth rates, although by the second half of the year, a deceleration in the rate of growth was evident. As in 1972, discussion on international monetary reform during 1973 received priority, as it was accepted that there was urgency in improving the international monetary system and in providing an environment conducive to economic growth.

Today, the problems of the previous year seem pale in comparison with the current economic issues. These issues, if left unresolved, can only mar the fabric of our international economic order. The simultaneous economic expansion of several of the major industrial countries and the shortfall in agricultural output are recognized as major factors which added to the inflationary pressures during 1973, while anti-inflationary measures taken to reduce these pressures had limited effect. Shortly after our last Annual Meeting, the brewing energy crisis reached a critical stage. The substantial oil price increases further aggravated the problem of inflation.

In one way or another, most of us have been affected by these developments. The diversion of substantial liquidity to the oil producing countries raises the problem of the withdrawal of demand from non-oil producing countries from the international trade system. On the other hand, this is not being wholly offset by the relatively slower increase in demand by the oil producing countries.

To curb the acute inflationary problem and to rectify their balance of payments disequilibrium, many countries are adopting restrictive measures with consequent slowing down of economic growth. Some countries have also resorted to restrictive trade practices. Such actions have only adverse consequences for their trading partners, particularly developing countries dependent on trade. The Fund, being aware of the adverse consequences of restrictive trade practices, is in the process of amending the relevant Article of the Fund Agreement on this aspect, to minimize the degree of restrictive trade practices on the economies of the countries affected. If major countries continue with their deflationary policies, smaller economies have a very slim chance of showing improvement in their economic performance. The threat of a recession in these countries looms large. As a small nation, which is especially vulnerable to external influences, we in Singapore are inevitably affected by the restrictive economic policies of some of the larger nations. Our economic growth rate for the first half of this year was only 7 per cent, compared with 11 per cent for the whole of 1973. The slowdown could be further aggravated if our major trading partners continue relentlessly to pursue deflationary policies.

We appreciate that through the Fund and the Bank much is being done to cushion the impact of the adverse consequences of some of the developments of the past year. We note that the oil facility of the Fund has been drawn on. Countries which have reaped surpluses in their balance of payments have responded to the call to lend. For those hit by the oil price increase, recourse to the facility could mitigate some of the difficulties. It is observed, however, that the problem of the financing needs of deficit countries is a serious one. Central bank swaps and Fund drawings including the oil facility are likely to have limited effects, considering the magnitude of the projected deficit. A longer-term solution is needed. The effective recycling of oil funds has to be worked out. . . .

While the Fund has directed its attention largely to the more pressing economic problems requiring immediate solutions, we note with satisfaction that further progress has been made on the subject of international monetary reform. The work of the Committee of Twenty is undoubtedly appreciated by member countries. It is our expectation that the Interim Committee and the Council of Governors will be able to continue and to bring to fruition at an early stage the program of work initiated by the Committee of Twenty.

It is our hope that an early return to a more stable, if adjustable, exchange rate system can be achieved. In the first few months that it was in operation the floating exchange rate system appeared to have worked satisfactorily. Its expected undesirable impact on international trade and the uncertainty it creates did not come about in the early stages. The past few months have shown, however, that resort to such a system is not without its price. The number of banks which sustained substantial foreign exchange losses and those which in fact collapsed as a result of such losses can be traced to the risks involved in the floating exchange rate system. The freeing of rates from their former fairly narrow margins leaves much room for profit, but with it room also for errors. This system has demonstrated and brought out the inherent undesirability of deviating wholly from a fixed rate system.

The difficulties faced by the banking community have resulted in overprudence being practiced. The tightening of controls imposed by some authorities on foreign exchange dealings, through the imposition of limits and the raising of the standard of credit ratings of prospective borrowers, are causing the contraction of activities in international currency markets. In a situation of tight credit, slowdown in economic activity, and high financing needs by non-oil producing countries, the decrease in transactions in the foreign exchange market can only compound the difficulties which many countries are facing today. Therefore, while we welcome the Fund’s move in setting out the guidelines for the management of floating exchange rates, we should also work toward the return of more ordered exchange rates.

It is clear that the problems we face are complex and the solutions difficult. Only through cooperative efforts can we hope to overcome some of the difficulties. Our interdependence is becoming more obvious as we grapple with these problems. As for the Fund and the Bank, we must rely on them to play an increasingly larger role in assisting member countries, particularly the developing countries, to minimize the adverse circumstances which they have to contend with, as a result of developments beyond their control. I am confident that the Bank and the Fund, under the dedicated leadership of Mr. McNamara and Mr. Witteveen and with the support of the developed and oil producing countries, can succeed in meeting the challenges ahead.

Statement by the Governor of the Fund for the Syrian Arab Republic—Muhammad Imady

We are grateful to the management and staff of the International Monetary Fund and the World Bank Group for their valuable Reports which highlight the implications of the present circumstances for the international monetary system and for growth prospects, particularly in the developing world. I would like also to express our gratitude to the Committee of Twenty and its Deputies for their valuable contribution over the last two years to the work of international monetary reform. Unfortunately, the Committee was forced, under the circumstances that appeared late in 1973 and under the acute problem of inflation, to leave its work on reform unfinished and to concentrate on immediate problems. The program of action to deal with them is outlined in the composite resolution before us, which we are happy to endorse.

It is now generally expected that, as a result of the developments of late 1973, there will be a considerable shift in the pattern of payments imbalances. The figures are well known and often repeated and therefore I need not rehearse them here. Suffice it to say that the expected magnitude of imbalances will be such as to pose considerable problems in the field of adjustment. On the one hand, and owing to their limited absorptive capacity in the short and medium term, major oil exporters are expected to experience, for a time, a growing balance of payments current surplus which will have its counterpart in a current deficit of the oil consumers.

It follows that as a group the oil consumers would not be able to reduce their current deficit vis-à-vis the oil exporters. Consequently, it is very important that cooperative endeavors should be made so as to ensure an equitable distribution of the deficit within the deficit group, according to which the relatively strong will make concessions to the weak. It should be stressed here that, in agreeing to have a current and growing current surplus in their balance of payments, the major oil countries are producing more than they need and therefore have been acquiring financial claims on other countries, the value of which have been depreciating in real terms. Consequently, what is needed is to devise on the international level ways and means by which to encourage them to continue production and to ensure for them alternative income-earning assets that will stand them in good stead when their present oil reserves are depleted. The talk we hear at present as to the dire consequences of the present level of oil prices and the threat implicit in such talk is not helpful and would not contribute to international understanding. What is required in addition to creating inducements for them to continue oil production at present levels is to ensure that deficits are financed and that such financing is channeled at appropriate terms to the countries that are most in need. The creation of the oil facility in the Fund is indicative of their contribution in this field.

Besides the increase in the flow of direct investment abroad, the major oil exporters have taken a number of measures in the field of encouraging the flow of capital to third countries and to international and regional financial institutions, which undoubtedly will help in financing the expected deficits. Moreover, they have established new institutions and enlarged the scope of existing ones in order to provide development finance to developing countries.

We are fully aware that, for a number of developing countries, the financing of their deficits by providing loans at conventional rates of interest may not be adequate. What is required is to provide them with emergency relief in the form of grants or concessional loans that would enable them to obtain essential imports promptly. In its Special Session held in April this year, the United Nations recognized this fact when it called for the establishment of a Special Fund to start operations early next year and to provide emergency relief to a group of eligible developing countries to be determined in accordance with certain criteria. It should be stressed here that the major oil producers have been among the supporters of this Fund.

One of the most important economic problems facing the world today is inflation. Since the end of the Second World War and with the exception of certain countries, mixed economy countries, developed as well as developing, have never experienced such a high rate of price increases as is prevailing nowadays. The causes are various, and this is not the place to discuss them in detail. The expansion in economic activity throughout the world in 1972–73, the excessive wage pressures, the special supply shortages caused by the Asian and African droughts, and the considerable increase in the prices of petroleum and petroleum products; all these contributed to the present high rate of inflation.

The task of fighting inflation devolves mainly upon national governments. Perhaps some inflation is unavoidable in advanced mixed economy countries which are committed to a high level of employment and the required rate of economic growth.

The statement that a moderate rate of inflation is perhaps unavoidable in present-day mixed economies does not mean that the present rate should be tolerated. Indeed, if the special or microeconomic factors that operated in causing the present high inflationary rate ceased to exist or were moderated, there would be reason to expect a decline in the present rate of inflation.

As I mentioned earlier, the main task of moderating the inflationary rate will lie with national governments. They should devise policies geared to their national situations and which take account of the various factors causing their inflation. If the main causal factor in any given inflationary situation is an autonomous excessive increase in wages, it would be obvious that restrictive demand management policies would not alone be the right cure and a voluntary incomes policy that seems fair to all is called for. The record of incomes policies is not encouraging, but it seems to me that there is no alternative to getting the voluntary agreement of various income groups within the national state to exercise restraint and to abide by a certain agreed norm. . . .

October 2, 1974.

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