Discussion of Fund Policy at Second Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
October 1977
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Statement by the Governor of the Bank for Belgium—Gaston Geens

Before speaking on behalf of Belgium, I have the privilege of addressing you on behalf of the European Communities since my country currently holds the presidency of the Council of Ministers.

Despite certain encouraging signs, the world economic situation continues to provide cause for concern. The Community notes that some progress has been made toward reducing inflation, but further efforts will be required in order to ensure sustained and lasting growth.

The Community is seriously concerned by the upward trend in unemployment, in particular of young people, and is exploring the possibility of speeding up lasting economic recovery without rekindling inflation. To this end, it considers that closer cooperation, both at the world level and within the Community, is essential in order to promote sustained expansion of activity, which should reduce unemployment without entailing the risk of a further upsurge of inflation.

On the one hand, this assumes that industrial countries in a satisfactory payments position act so as to pursue an appropriate expansion of domestic demand within the limits fixed by effective anti-inflationary policies. On the other hand, deficit countries must pursue effective stabilization policies and thus allow resources to be transferred to the foreign sector.

The Community recognizes the important role of the Interim Committee in encouraging such an adjustment policy and in assuring that the financing means available to members of the IMF are adequate to support an orderly adjustment process.

In this regard, the Community is pleased with the agreement to set up a supplementary financing facility in the IMF designed to assist those member countries whose balance of payments difficulties are large in relation to their quotas. We regard it as a positive step that, in order to promote international monetary stability, the major surplus countries have agreed to participate in this international action. We are satisfied that this facility contains an adequate degree of conditionality, and it is particularly welcome that stand-bys under the facility will allow a rather longer period of adjustment than has been usual in the past. This will help ensure that the resources will be used in the best interests of the international community.

The Community thinks that the work on the seventh quota revision, which should be finished by February 9, 1978 at the latest, should result in proposals for an increase in all quotas of a size and nature suited to the world situation.

The Community thinks that a decision on new allocations of SDRs would be premature, at least as long as the IMF Executive Board study on all aspects of the SDR is not completed. It does not appear that financing problems for the next two or three years will arise from a general shortage of liquidity as such. On the contrary, liquidity held in reserve currencies has recently further increased. This uncontrolled expansion of unconditional liquidity also raises the problem of the composition of liquidity.

The Community considers that the SDR must be strengthened in order to progress toward the objective of making it the principal reserve instrument of the international monetary system. It hopes that the study being carried out in the IMF on the characteristics and use of the SDR can progress sufficiently for constructive decisions to be taken in this field right from the first meeting of the Interim Committee in 1978.

I will now deal with development problems. As you know, the European Economic Community has spoken with a single voice in the North-South conference. This has often allowed the Community to take the initiative with proposals, some of which met with general agreement. This was the case for the establishment of a common fund with purposes, objectives, and other constituent elements to be further negotiated in the UNCTAD. Moreover, the Community originated the Special Action Program for individual low-income countries facing general problems of transfer of resources. In this framework, the Community has committed itself to transfer to a special account of the IDA $385 million, equal to more than one third of this special aid. . . .

I would now like to speak to you as Governor for Belgium, and to discuss first the questions regarding the World Bank and then those concerning the International Monetary Fund. . . .

International Monetary Matters

Turning in conclusion to international monetary matters, I would like to focus my comments on three subjects: international liquidity, surveillance of exchange rates, and resistance to protectionist pressures.

(1) International Liquidity

Belgium notes with satisfaction the increasingly important role played by the International Monetary Fund in the financing of the monetary system and considers that this role should be strengthened even further. It is vital, indeed, that the provision of international liquidity not be left too much to the market, but that it be increasingly brought within the purview of an international institution such as the IMF. The Fund not only has the capacity to link the granting of credits to observance of programs likely to correct disequilibria in balances of payments, it is also better able to judge the adequacy of the volume and composition of international liquidity.

In view of all this, we welcome the agreement reached for implementing the supplementary credit facility of the IMF, and we have decided to share in its financing to the extent of SDR 150 million. This should provide the IMF—at a time when its liquidity in relation to exceptional needs is tight—with substantial funds that will enable it to continue its support activity in favor of countries that agree to implement the required adjustment policies. It seems important to us also for the oil producing countries to be fully associated under this new cooperation effort.

As regards the increase of Fund quotas, we consider that the increases should be equiproportional and of a scope and nature suited to the world situation to ensure, in particular, that there is no delay in completion of the seventh review.

We also share the feeling that a decision on new SDR allocations would be premature in view of the high global level reached by international liquidity, especially as the result of the strong growth of its “dollar” component. This autonomous growth of liquidity in reserve currencies warrants the attention of the international community. In that system it is, indeed, liable to constitute an element of instability and to have a detrimental effect on the stated objective of creating liquidity, for preference, under the control of the IMF. Such a development, in our opinion, is largely due to the fact that pursuit of the objective-many times reiterated on this platform—of making the SDR the principal reserve asset is jeopardized by the insufficient attractiveness of that reserve asset at the present time. We consider that any further steps toward new allocations of this instrument will be taken in the light of the judgment of the International Monetary Fund’s member countries regarding the quality of the SDR compared with other international assets.

The strengthening of the SDR, which appears necessary to us, will also signify implementation of a policy agreement formerly reached which stipulates that “the SDR will become the principal reserve asset and the role of gold and of reserve currencies will be reduced.” Under the Jamaica decisions, provisions were adopted to reduce the monetary role of gold. Since then, however, little has been done about improving the SDR, and no more has been said about reducing the role of reserve currencies. We dare to hope that by the time of the next Interim Committee meeting at the beginning of 1978, it will have been possible to make significant progress in these areas and, more specifically, insofar as the strengthening of the SDR is concerned.

(2) Exchange Rate Surveillance

We consider that in the course of the past year fluctuations among the rates of the major currencies, especially between the U.S. dollar and the European snake currencies, were excessive in respect of the divergencies observed in the evolution of basic economic conditions. Such gaps are harmful, not only because they affect the functioning of international trade and are liable to reinforce protectionist pressures, already forceful in a great many countries, but also because they often complicate the action of adjustment policies in the countries that are heavily dependent on others.

We fully realize that the exercise of an adequate surveillance over the formation of exchange rates is not confined to intervention by the authorities in exchange markets according to immutable, carefully codified precepts. A spirit of cooperation is, above all, what needs to be developed and gradually strengthened among the responsible authorities.

We believe in giving the International Monetary Fund the means with which to carry out successfully the mission that has been entrusted to it in this sphere, with all the discretion that is indispensable. The national authorities, in turn, must show evidence of their determination to counteract erratic movements in their currencies by measures including, when warranted, appropriate intervention in the market.

Of course, in the last analysis, an improved equilibrium in foreign payments and greater stability of the exchange markets will be achieved by an appropriate use of domestic adjustment policy instruments. Over the short term, however, industrial countries ought to agree to make more active use of instruments likely to contribute more directly to exchange stability, especially interest rate policies and the regulation of capital movements.

As far as we are concerned, we continue to attach prime importance to the proper functioning of the European snake. For us, there is a mutual reinforcement between a policy aimed at basic equilibrium in the balance of payments and the implementation of a strategy for defending the stability of the Belgian franc vis-à-vis the currencies of our principal partners.

(3) Resistance to Protectionist Pressures

Parallel to our desire for a greater stability of exchange rates, we have at all cost to reinforce our vigilance against protectionist pressures that are a consequence of rising unemployment. As was recently stressed by our Prime Minister, Mr. Tindemans, we have to resolutely oppose those pressures if we do not wish to return to the destructive rivalries of the 1930s.

In concluding, I would like to pay tribute to Mr. Witteveen for the remarkable impetus he has given to the International Monetary Fund in a difficult period, and for the great services rendered to the international community. It is only right that the supplementary financing facility is called the “Witteveen Facility,” giving a personal note to this new mechanism. We also regret very much the decision of Mr. Witteveen not to accept, next September, a renewal of his term.

We are all very grateful to him for everything he has done already and for what he will do next year as Managing Director of the International Monetary Fund.

Statement by the Governor of the Fund and the Bank for Japan—Hideo Boh

It is a distinct honor for me to state the views of the Japanese Government before this distinguished audience for the first time as Governor for Japan. I should like, first of all, to express my deep appreciation to the United States for its courtesy and hospitality. I also should like to extend my hearty welcome to the representatives of Guinea-Bissau and Seychelles, our newest members. I am pleased that Surinam, Maldives, and São Tomé and Principe have applied for membership in our organizations.

Entering the decade of the 1970s, the world economy was soon rudely awakened by two crises: the monetary crisis and the oil crisis.

Before these crises, we were sailing on a prosperous voyage, supported by fixed exchange rates and stable supplies of oil and primary products. These two changes, however, created a furious storm and broke the compass, after which we were compelled to reconsider the basic structure of the world economy. International balance of payments have deteriorated drastically, prices have risen rapidly, and recession has been prolonged. We are now confronting a period of disturbances unprecedented in the history of the postwar world economy.

Thrown into the stormy sea, each one of us has concentrated our efforts with the greatest use of our collective wisdom. We have applied the spirit and the framework of international cooperation to the maximum extent possible. As a result, we succeeded in drawing a chart establishing the future course of our new international monetary system in Jamaica. At the same time, we have overcome many difficulties and have survived the severe test of inflation and recession. At present, I am glad to note that the world economy is definitely in process of recovery.

Nevertheless, despite this recovery, I must caution us all by observing that the aftermath of the crisis remains in a variety of forms.

First, plant and equipment investment is lagging, and consumers are cautious in spending. Autonomous recovery in the private sector thus seems to be feeble. Under such circumstances, unemployment is still a serious concern to us all. In particular, the problem of unemployment among young people is a cause of frustration in many countries.

Second, while demand is generally weak in each of our economies, the rate of inflation varies according to country. In some countries, inflation is still high; in others, which seem to have succeeded in keeping inflation under control, cost increases have been exerting strong upward pressure on prices. An inflation syndrome resulting from prolonged inflation still persists deep in our mind.

Third, sizable budget deficits are a serious problem in many countries. If such a situation remains unchanged, a tremendous burden might be shifted to future generations. We economic policymakers must also respond, within the limited government resources, to the diversified needs of our citizens by placing more importance on the better quality of life.

Finally, a discrepancy in the pace of balance of payments adjustment is emerging. Throughout the world, one sees a tendency toward polarization between the countries in stronger payments positions and the countries facing balance of payments difficulties.

In short, all these factors are creating uncertainty for businessmen, consumers, and governments and in international relations. We are living in a time of uncertainty, lacking a firm confidence in the future course of our economies, although trying our best to discover new equilibria.

The most important and urgent task before us is to restore and strengthen confidence in the prospects for our economies. This can only be done through the framework of international cooperation and solidarity since we are inextricably bound together in today’s world.

We, who are responsible for economic policy and management, should aim at harmonization between domestic needs and international requirements. In today’s world of growing interdependence, if one country yields to the temptation of protectionism in pursuing its own benefits, it would cause a great loss, not only to the world as a whole, but also to one’s own country. We reject protectionism. The nightmare of the 1930s must not be allowed to come back.

At this juncture, and in view of the foregoing, I would like to refer to the efforts that Japan has been making toward harmonization between domestic needs and international requirements.

First and foremost is Japan’s effort to achieve concurrent internal and external equilibria by generating domestic demand.

We have experienced three years of moderate economic recovery since the spring of 1975 when our economy bottomed out. However, the present process of recovery in Japan alternates between progress and pause. It lacks the strength of autonomous recovery in private domestic demand, which was characteristic of the past economic recoveries of Japan during the period of high growth.

In order to cope with such a situation, we have introduced various stimulative measures, centering up to now on the expansion of public investment, a fiscal measure which engenders large demand-creating effects. Government expenditures for the current fiscal year will increase 17.4 per cent, which far exceeds the nominal growth rate of 13.7 per cent envisaged in the official economic outlook. Furthermore, government expenditures on public works will increase 21.4 per cent, and front-loaded disbursements have been encouraged in order to ensure their earliest possible effects on the economy. These already adopted measures have gradually been permeating each sector of our economy, and we are beginning to see the signs of favorable results of these measures in our economic activities.

Furthermore, the Japanese Government announced a comprehensive package of economic measures early this September. The comprehensive package we are determined to implement includes additional investments on public works and other stimuli, raising the total scale of such works to approximately $7.5 billion, and reduction of the official discount rate to 4.25 per cent, the third reduction this year. By implementing these measures, we are aiming at a sustainable recovery of the Japanese economy. At the same time, we are pursuing our policy goals in various fields. We intend to take necessary measures designed to stabilize employment and to adapt the industrial structure to the important changes in the economic environment. In spite of sizable budget deficits, the Japanese Government is firmly determined to launch the comprehensive package of economic measures. We decided to take action for two reasons: first, to attain stability and equilibrium in our domestic economy, and second, to contribute to a sound development of the world economy. The real growth rate of 6.3 per cent attained by Japan in 1976 was the highest among the industrial countries. A target of approximately 6.7 per cent is estimated for the fiscal year 1977, resulting from the accumulated efforts in the past and the expected efficacy of the new measures.

Nevertheless, our efforts in this direction must not undermine our fight against inflation. The annual increase in consumer prices in Japan stands at a rather high level. Accelerating inflation cannot be lived with. We must resolutely follow the path leading to sustained non-inflationary growth, even if it requires untiring and painstaking efforts.

In addition, last week the Japanese Government decided on external economic measures. Needless to say, we have been doing our utmost in the fields of trade, capital transactions, international financial cooperation, and development assistance. The external economic measures that we are determined to pursue vigorously as an integral part of the comprehensive package of economic measures will certainly consolidate our efforts to date. We will actively participate in the Tokyo Round of Multilateral Trade Negotiations. We will explore various possibilities to further promote imports. I do not wish to see our exports cause a serious market disruption for our trade partners. I am pleased to note that the amount of capital being raised by non-Japanese in the Tokyo market has been expanding rapidly, and it is noteworthy that a substantial part of that capital has been flowing into developing countries, either direct or through international organizations.

Now, I would like to state my views on the activities of the International Monetary Fund.

First, let me refer to the problem of exchange rate stability. More than four and a half years have elapsed since generalized floating took over from the fixed rate in the international monetary system. The floating system with its flexibility and resilience has been well adapted to changing economic situations. Consequently, we have been able to avoid unnecessary disturbances in the world economy. I believe that the generalized floating system is basically useful and effective in the present situation. But in the short run, floating exchange rates tend to be overcorrected, irrespective of the underlying economic factors. In this regard, I would like to stress the importance of the Fund surveillance over exchange rate policies that was agreed upon by the Fund’s Interim Committee last spring. The Japanese authorities have been letting the exchange rate be determined by market forces, intervening in the market only to smooth out short-term disruptive movements. Our policy and practices are completely consistent with the principles incorporated in the Fund’s surveillance over exchange rate policies.

In my belief, exchange rates generally reflect the underlying economic factors of each country. They should not be regarded as an instrument to gain an unfair competitive advantage in the international economy. All of us desire exchange rate stability, and yet, fundamentally, it can only be achieved through each nation’s efforts to stabilize its domestic economy. The strict discipline in economic management, particularly that of major countries, is crucial here.

Next, let me turn to the problem of replenishment of the Fund’s liquidity. The Fund’s liquidity should be replenished in principle through quota increases. Thus, I earnestly hope that the second amendment of the Articles of Agreement of the International Monetary Fund and the Sixth General Review of Quotas will be brought into effect at the earliest possible time. I also wish to proceed as quickly as possible with the Seventh General Review of Quotas. It is fair and equitable to make a special adjustment in the Seventh General Review of Quotas in cases where quota shares of member countries are seriously out of line with their relative economic position in the world economy.

We are extremely pleased that it was agreed to establish the supplementary financing facility. This enables the Fund to extend its financial support to those countries facing serious and large balance of payments deficits, as a temporary measure, until the Fund’s liquidity is satisfactorily replenished through quota increases. The facility is a crystallization of the remarkable initiative and imagination of Dr. Witteveen, Managing Director of the Fund, and the cooperative support of both the industrial and the oil producing countries. I am happy that Japan has committed its support to this new facility in order to contribute to the restoration of confidence in the world economy. I sincerely hope that it will be operational as soon as possible. Needless to say, the establishment of the facility should not discourage our efforts to increase Fund quotas. . . .

At this time, I would like to express my views on development assistance. Efforts toward self-reliance are vital to establish the stable growth of the developing world’s economies. At the same time, it is needless to say that official development assistance on concessional terms plays an important role in such development.

Japan has rapidly increased the amount of its official development assistance as its economy has grown, and Japan will make further efforts to increase its official assistance, both in effectiveness and substance, in the future as well. I can assure you that Japan will concentrate its efforts on more than doubling the amount of its official development assistance in the next five years. It is in this spirit that we decided to subscribe to the share of $114 million in the Special Action Program agreed upon by the Conference on International Economic Cooperation. Our share represents more than 10 per cent of the total amount of $1 billion envisaged in the Program.

Many people in developing countries are still living in absolute poverty. It is the most urgent task before us in today’s world to meet the basic human needs of these people. What we have to do now without hesitation is to lift these people up from hunger.

Almost two thirds of the population of developing nations inhabit rural areas. The greatest emphasis should be placed on development of the agricultural sector, particularly the expansion of food production. In my analysis, this is the crux of a global development strategy.

For its part, Japan intends to put more stress on agricultural development in bilateral economic cooperation. Japan has already been providing food assistance on a grant basis. In addition, Japan initiated a program in fiscal 1977 to provide grants for developing countries in order to support their plans to increase food production. Consequently, the total amount of our food assistance on a grant basis has more than doubled.

There is a saying in Buddhism that “helping others helps oneself,” which means that benefits for others and for yourself are, in essence, inseparable. Your benefits will be realized only after you bring benefits to others. One who looks to his own selfish interests to the disregard of others, however capable he may be, can never attain Nirvana. That is the spirit of Buddhism. In today’s world, where interdependence is essential for our existence, this is an aphorism we have to keep in mind and to embody in our daily efforts.

With the spirit of international cooperation and solidarity, we must intensify our collective efforts to achieve a shared prosperity for all. In this time of uncertainty, we should begin our task by restoring confidence in our societies with patience, ingenuity, and courage. Japan, for its part, is committed to such ideals. Together, let us set sail on a new and prosperous voyage.

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

A feeling of uncertainty over the economic outlook overshadows our meetings again. The major industrial countries have not been able to reenter a path of sustained growth and there are signs that economic activity is slowing down again. The phenomenon of “slackflation” continues to beset the industrial world. Efforts to reflate the economy only through demand management have resulted in accelerating inflation without succeeding in bringing about a steady economic revival and a significant reduction in unemployment. On the other hand, efforts to control inflation depress economic activity and lead to socially and politically unacceptable unemployment levels.

The longer this situation lasts, the more dangerous it becomes. The industrial world cannot afford to allow high rates of inflation and unemployment to become chronic phenomena without running serious social and political risks; it is even possible that in the long run free democratic institutions might be undermined.

How are we, then, to confront this situation? How to revive the economy and reduce unemployment without generating new inflationary pressures? I think the solution lies in investment management policies in conjunction with demand management.

In the past, investment management has been subordinated to aggregate demand management, and this has worked satisfactorily in previous recessions. However, in the context of the present psychological inflationary climate and uncertainty, this approach has not worked; private fixed investment has not responded adequately. This difference between the current and past recessions is the crucial reason why industrial economies continue to orbit in the vicious circle of “slackflation.” In addition to cautious demand management, we therefore need investment management if we want to pull the economies out of this stalemate. Investment will increase productive capacity and improve supply conditions and thereby avert inflation in the coming years.

The present weakness of investment demand cannot be considered merely as a cyclical phenomenon. Indeed, the combined effect of a number of factors has created an unfavorable climate for investment, at a time when there is a pressing need for structural adjustments requiring large capital outlays for sustained noninflationary growth. I wish to indicate some of the factors which, I believe, are crucial in this context:

  • —The chronic inflationary climate and the unpredictability of demand management policies in the face of conflicting aims have increased the degree of market uncertainty and have undermined business confidence. Particularly, persistent inflationary expectations, a kind of disease that one might call “inflationitis,” is at the root of the problem.

  • —Inflation has created confusion and uncertainty regarding the relationship of accounting profits to investment yields.

  • —Investment costs have escalated faster than prices of final output.

  • —The dramatic increase in the cost of energy has affected investment plans adversely.

  • —Conservation and environmental considerations, implying increased marginal capital-output ratios, have greatly added to the cost of new investment.

The last two factors are of particular significance; they have rendered unreliable our ordinary measurements of capacity utilization, capital-output ratios, and productivity. If we are to overcome the effects of the environmental crisis and prevent further deterioration of the quality of life, considerably more investment per unit of output will be required than in the last 30 years. Moreover, the adjustment to the present and prospective high energy costs will necessitate substantial amounts of new investment. This process must be accelerated if we are to restore the flexibility of supply, necessary for the expansion of production under conditions of price stability.

It is by now clear that a substantial increase in the share of productive investment in GNP is essential in order to bring about an increased elasticity of supply in the short run and a return to historical trends of long-term growth. For this purpose, we urgently need an investment management policy in addition to demand management.

By investment management policies I do not mean increased government interference in private business decisions; nor a permanent change in the relations between governments and business. I mean a proper mix of government policies as a transitional measure designed to provide adequate stimulus for private fixed investment of the type and quality that is required and for the period that such stimulus is necessary.

Several countries have applied incentive schemes mostly in relation to regional development policies. A whole arsenal of measures, such as investment tax credits, investment grants, and allowances or state guarantees, has been used for such purposes. The precise mix should be determined by each government in the light of the particular circumstances prevailing in each country.

In addition to any such specific measures, however, I believe it is important to eliminate the effects of inflationary drag on investment so that only real profits would be subject to taxation. In a market economy, a major investment effort, such as the one we need now, can only succeed if we create and sustain profit expectations.

In order to achieve quick results, we may also have to reconsider priorities and time schedules of social investment, particularly in relation to the requirements of environmental policies. The cumulative damage of decades of unregulated rapid industrial growth on the environment cannot be made up overnight, nor should the burden fall exclusively on a particular sector of the economy.

It is my firm belief that only a proper combination of demand and investment management policies will ensure the resumption of healthy growth and a reduction in unemployment, and will thus pull the industrial world out of the vicious circle we have been living in since the last recession.

On the monetary front, an important development of the past year has been some reduction in inflation differentials among the major industrial countries. From the point of view of the world economy, most significant has been the progress made by the United States in controling inflation. However, although the world is in effect on a dollar standard, the burden of maintaining order in the international monetary system must not be considered exclusively an American responsibility. All major industrial countries should contribute in a spirit of cooperation and solidarity toward maintaining orderly conditions in foreign exchange markets by resisting tendencies to manipulate the exchange rates. This is what they have been repeatedly pledging in conference after conference. Now the new Article IV provides the institutional framework for international cooperation and surveillance over exchange rate policies, and it is hoped that it will mark a new era of orderly foreign exchange markets.

The preoccupation with inflation and unemployment in the industrial countries and with the need for maintaining order in the international monetary system should not be allowed to affect the maintenance—and indeed the expansion—of capital flows toward the developing countries.

The shift of surpluses from industrial to oil exporting countries since 1974 has significantly changed the terms, the sources, and the distribution of financing available to the non-oil developing countries. Whereas prior to the oil crisis the bulk of the flow of funds to the latter countries consisted of official financing and export credits guaranteed by capital-equipment exporting countries, increased recourse to private sources, particularly to the Eurocurrency market, has taken place. According to BIS estimates, three quarters of the financing of balance of payments deficits in 1976 was provided by these procedures. Total outstanding debt of non-oil developing countries amounted to about $180 billion by 1976 and it is projected by the UNCTAD secretariat to exceed $250 billion by the end of 1978. These developments have created concern over the vulnerability of the financial markets and the possibility of undesirable developments.

In order to allay these fears and at the same time to secure and expand the flow of funds to developing countries, the creation of an international loan-insurance scheme, inspired from the national export guarantee mechanisms and the OECD Support Fund, might be worthy of consideration.

The bulk of the funds needed by these countries will continue to be provided in the foreseeable future out of the OPEC countries’ surpluses through the intermediary of the international banking system.

In such a scheme, the industrial nations and the OPEC countries would provide their collective guarantee to loans extended by international private banking institutions to developing countries. This could be subject to a global limit distributed among the guarantors so that each guarantor country’s maximum commitment would be known at all times.

The guarantee would be extended at the request of the banks providing the loan and the premium should be paid mainly by the richer countries in order to avoid placing an additional burden on the borrowing country.

Similar to the prevailing practices of national export credit guarantee institutions, the proportion of the loan covered by the guarantee could vary depending on the borrowing country. It is particularly important, however, that the criteria should be such as to favor those countries which are in greatest need and which present better prospects for utilizing appropriately the channeled resources. The cooperation of the Fund and the Bank in this connection would be of great value. Ways to put this cooperation into effect should be explored. At the same time, since the purpose of the scheme is to facilitate and expand the channeling of funds to developing countries, care should be taken to avoid making the terms of Eurocurrency loans more cumbersome.

I do not think I can go into details at this stage. I only wish to point out some of the main attractive features of this plan.

Given their increasing needs for resources in addition to official aid, the advantages of such a plan to the developing countries are obvious. For the industrial countries, on the other hand, it would provide a means of enhancing the demand for their capital goods and thus ensure the steady expansion of their economies. International trade would also grow considerably. One further advantage of the scheme is that it will not require the payment of any funds by the guarantor countries, other than their share of the premium. Thus, it will represent no fiscal burden for them except as and when the guarantees may be called, and this should be rather rare.

Concluding, I would like to express my deep appreciation to the Managing Director, Mr. Witteveen, for succeeding in establishing the supplementary financing facility which will substantially strengthen the Fund in providing assistance to member countries with serious payments imbalances. My appreciation also goes to Mr. McNamara for his continuous efforts to mobilize increased development assistance, particularly for the poorer countries. Finally, one cannot but commend the staff of the Fund and the Bank for the high quality of, and devotion to, their work.

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

It is my great pleasure to meet again the distinguished representatives of the member countries, and I would like to take the opportunity to welcome to this Board the countries which have joined the IMF since the last Annual Meetings—Guinea-Bissau and Seychelles.

Turning at first to the economic developments it is regrettable to see that since our last Annual Meetings these developments have fallen short of our expectations. The expected—or perhaps I should say the hoped-for—strong and general recovery of the world economy has not materialized. Already last year I was somewhat cautious in judging future economic development.

Today the world economy is rather differentiated and characterized by the existence of favorable but, on balance, more adverse signs. The inflation rates have been reduced somewhat faster than expected, and the adjustment of unsustainable balance of payments deficits has improved only in some of the developed and developing countries. On the other hand, we have witnessed a marked slowdown in the growth of output and trade in the industrial countries. Moreover, on top of that there has been a widespread rise in unemployment which was already too high. Every country being in a position to counteract this development should enact measures to alleviate this serious problem.

I take this position from the point of view of a smaller country that is heavily dependent upon economic developments elsewhere. We are enjoying increasing employment, and other leading economic indicators are not bad either: for 1977 real growth will be about 4 per cent, the inflation rate is down to 5.5 per cent, and industrial investments are within the high medium-term average. Nevertheless, we are concerned about future developments in the light of the deterioration of our external position. This situation has been primarily caused by sharply increased imports. Measures for redressing the unsatisfactory current account deficit are already under way.

May I, in this connection, express my strong belief that in order to achieve an effective adjustment it is absolutely necessary to change the real conditions of the underlying economic activities, especially in view of the energy situation. In my opinion, it is—if at all—only of little help to resort to a change in the exchange rates or the exchange rate regime instead. In fact, from the experience so far it is even doubtful whether the present system of more or less flexible exchange rates has a better adjustment adaptability than the former one.

In this connection, I believe it should be mentioned that the shift to the new system has altered the mechanism by which the economic influences are transferred from one economy to the other. In addition, in analyzing developments since 1971 we note that the disequilibria in the international community have grown considerably. Although increasing energy imports account for an ever-rising portion of these disequilibria, the total amount and the continuing development cannot be attributed solely to the dependence on energy. It is obvious, however, that far-reaching energy programs are strongly needed to help overcome, or at least alleviate, the structural deficiencies our economies are confronted with. Although every effort in this direction is appreciated, it must also be noted that huge trade balance deficits caused by these very imports are an inadequate means to stimulate the world economy.

My country’s situation with respect to the main trading partners fits perfectly into a global perspective. Due to sluggish internal demand several main trading partners try to balance their weak domestic economic situation through stepped-up export activities, often accompanied by aggressive marketing strategies. These activities, however, result in excessive imports for the other countries and thus bring about considerable difficulties with regard to their external positions. In addition, this situation is worsened by protectionist measures in important economies, either unilaterally or within the framework of multilateral economic associations. In this context, it is quite clear that the repercussions of protectionist measures hit smaller countries most of all.

Permit me, at this point, to reiterate a trivial truth. The export performance of one country depends solely upon the import capacities of the trading partners. In addition, unutilized capacities and unemployment in the industrialized countries contrast sharply with the import needs in the Third and Fourth Worlds.

The unresolved economic and social problems within and among both the developing and industrial countries pose a serious threat to a peaceful global development. If no ways and means can be found to alleviate these problems, political stability might be threatened in many places.

Aside from all the fruitful efforts and endeavors within the World Bank and regional banks, I strongly believe that—similar to what had been done after World War II in the framework of the Marshall Plan—more generous moves and stronger efforts are needed to overcome this serious problem.

It goes without saying that an effective solution cannot be found in any form of confrontation but only in a widespread and thorough cooperation among all parties concerned. Austria has always been prepared to contribute to the common efforts in assisting the developing countries. We have joined the Asian Development Bank and the Special Fund of the Inter-American Development Bank and have, considering the size of our economy, substantially contributed to the oil facility. The new Articles of Agreement are before the Austrian Parliament. The Fifth IDA Replenishment was adopted in Vienna this year and the legal procedure for its implementation in Austria is under way. The quota increases of both the IMF and the World Bank will be ratified this year. We are glad about the successful negotiation of the Witteveen facility as an additional instrument of the Fund. This new supplementary financing facility will probably be large enough to handle the major existing imbalances. Consequently, the Fund would need no more than an appropriate across-the-board increase of quotas to meet the demands of member countries that are facing the usual, temporary balance of payments imbalances. In this context, I would hope very much that, in the discussion of the seventh quota review, selective quota increases can be avoided, since the comparative economic conditions of the member countries have not changed so dramatically in the last two years as to warrant drastic changes in relative quotas.

At this point, I would like to express my sincere appreciation to the Managing Director of the Fund and his staff who performed an excellent job in an extremely difficult period with economic and monetary problems. It is only with great regret that we see Mr. Witteveen leave his post in the Fund.

Summing up my brief remarks on the present state of the world economy, I want to stress that to the extent that external deficits have been reduced and inflation rates improved, more countries are getting into a position to envisage expansionary measures without the risk of a recessionary backdrop. Above all, policymaking must concentrate on all those activities that aim at structural improvements so as to adapt the production capacity, transport systems, energy supply and consumption, and so forth, to the far-reaching changes that have occurred in the past several years.

There will be no quick solutions or easy answers and, equally, it will be impossible to reach these targets on a national basis. International cooperation is needed. The Annual Meetings give us the framework within which we can start and continue our common efforts.

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

Let me begin by echoing the words of other speakers in expressing my sincere gratitude to the Government and people of the United States for their gracious and unfailing hospitality each time the joint IBRD and IMF Annual Meetings take place here in Washington.

I take particular pleasure today in offering my warmest welcome to Seychelles and Guinea-Bissau who have recently joined the IBRD and the IMF, thus establishing closer relations with member countries in our common pursuit of economic prosperity.

At this point, I would also like to pay tribute to the inspired leadership of Mr. McNamara, President of the World Bank, and Mr. Witteveen, Managing Director of the Fund. Through their creative and dedicated work, they have made a far-reaching contribution to international economic stability during the last year, particularly in helping member countries achieve economic growth and improve their balance of payments.

In reviewing recent economic trends, it appears that the pace of world recovery, which had gained momentum in the latter half of 1975, is starting to show some signs of faltering. Many member countries continue to suffer from high inflation and unemployment. The non-oil producing developing countries, in particular, are still faced with severe and growing current account deficits, with every indication that these deficits will pose a problem in 1978. In contrast to this, however, the current account balances of the majority of the developed nations continue to improve.

In the light of this growing disparity in the relative prosperity of various member nations, I believe that the stability and growth of the world economy as a whole rests to a large extent on the actions that the industrial nations take to stimulate their economy activity, for example, by increasing investment.

It is my view that a reduction in the high rates of unemployment and an acceleration in the rate of economic growth cannot be brought about without an easing of inflationary pressure on the one hand and the promotion of moderately expansionist policies on the other. If the advanced countries take this line of approach, they will be contributing greatly to supporting the developing nations in moving toward external equilibrium and equitable economic growth.

This is especially true in view of the increasing interdependence among the nations of the world. When a large and powerful nation throws a stone into the pond, the ripples can overturn the fragile economies of the developing world. Similarly, expansionary domestic policies by the advanced countries, even if moderate ones, work through the system and materially assist in promoting balanced economic growth and the elimination of poverty throughout the world.

I cannot stress enough the need for greater resources from both advanced nations and international institutions to be channeled into the economies of the developing countries. I firmly believe, too, that this course of action will ultimately turn out to benefit not only the recipient countries but both rich and poor nations alike.

I would contend that the advanced countries should, on the one hand, bring about an increase in the flow of concessionary funds by rapidly raising their contributions to the official development assistance target of 0.7 per cent of GNP and, on the other, help to remove the restrictions which at present inhibit developing countries in international capital markets. . . .

The importance and influence of the IMF has grown greatly in recent years, and I believe that the Fund should be given added powers to assist member countries overcome short-term balance of payments problems.

There is no doubt in my mind, however, that the first priority for us all must surely be to create an international climate in which developing countries can greatly increase the volume and value of their exports. This will of course entail the full and active support of the advanced economies.

It goes without saying that the provision of direct aid cannot compare with the exchange of trade in providing a base for economic development. I would make the analogy that while direct aid may provide the bricks, external trade represents the vital cement that poor nations urgently need to build secure and lasting economic prosperity.

I think it is important that we all bear in mind that the new trade barriers erected by some industrial nations during the past two or three years have constituted one of the principal sources of hardship for the developing countries. These new barriers have in some cases set back years of hard work in countries where the painstaking progress toward industrialization and the elimination of poverty are just beginning to take root.

It is of paramount importance, therefore, that the advanced nations take the appropriate measures for immediate action to remove or alleviate the various tariff and nontariff barriers on imports from developing countries.

Now, let me touch on several important issues concerning the Fund’s affairs.

First, I welcome the decision to establish the supplementary financing facility. I am sure that this facility will prove to be of great assistance to the member countries, particularly those with large deficits, in prompting them to take the appropriate measures to restore equilibrium and will also extend the valuable consultative role of the IMF. Moreover, besides its primary function of facilitating international payments adjustments, I believe it will also improve confidence in the international financial system as a whole. I would like, therefore, to congratulate Mr. Witteveen and his staff most sincerely for pioneering this valuable new facility. I would also like to express my gratitude to the OPEC nations and developed countries which have already promised to support it, and I will look forward to more surplus member countries participating in this line of credit in the near future.

Second, against the current background of the upward trend in international trade and the growing imbalances in member countries’ external payments, the Seventh General Review of Quotas has become a priority. I know there are two views on quota adjustments: one view is that increases should relate directly to the quotas fixed in the sixth general review, and the other is that special adjustments should be made for those members whose quotas are seriously out of line with their relative positions in the world economy.

I appreciate the time-consuming and complicated nature of making selective increases in quotas and would certainly not wish to delay the next increases. However, it is more important to ensure the effective operation and organization of the Fund by adjusting member countries’ quotas to reflect their relative positions. For this reason I strongly urge that the next quota review place great emphasis, as far as is practical, on moderating the inconsistencies which exist and thus improve the quota structure.

Third, the resolution of the Board of Directors relating to the IMF’s function of surveillance over member countries’ exchange rate policies is a timely move. It will give the IMF additional power to ensure that member countries coordinate their policies and avoid adversely affecting other members or disrupting the international monetary system. However, this surveillance should be conducted with a degree of flexibility, and consideration must be given to the particular circumstances of developing nations. . . .

In conclusion, I would like to say that a spirit of cooperation and persistent endeavor has seen us safely through times of hardship in the past. I have every confidence that these same qualities together with an attitude of self-sacrifice and a determination for action on the part of all member countries can now pave the way to a better future.

Statement by the Governor of the Bank for Sweden—Gösta Bohman

It is an honor for me to speak as representative of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden.

We are meeting in a time of uncertainty in the world economy. The rate of growth in industrial countries has not increased sufficiently to ensure a sustained recovery from the world recession of the past few years. As measured against the OECD growth scenario, 1977 now seems to have become the second year of underachievement. And at the same time, we have not managed to reduce the rate of price increases to a satisfactory extent.

These problems of the world economy have hurt most nations. Among the industrial countries, problems at present are particularly pressing for a number of the smaller ones.

Looking back we can see that the external accounts of the smaller industrial countries combined have deteriorated year by year, while the trend for most major countries has been a different one. There are several reasons for this.

While several important countries chose a very cautious policy, the smaller ones have, in general, tried to safeguard employment during these difficult years through a relatively expansionist demand policy.

Small and open economies are, in general, more vulnerable to developments abroad than those of many other countries, among other things because of a large marginal propensity to import.

Taken together, the smaller industrial nations have been forced to take too high a share of the OECD deficit. The burden of adjustment in the world economy following the oil price shock of 1973 has, to a very high degree, been placed on the smaller countries.

If we are going to set the world economy on the right course again, it is imperative that there be more rapid growth in those countries with strong external positions. Some measures in this direction have recently been taken, but we are far from confident that these will be sufficient. We are especially worried by the generally weak development in fixed investments in business.

We feel that there is room for more expansion in countries with strong external positions. Their low rate of capacity utilization makes this possible without the risk of an increase in inflation. Some further expansion might even reduce inflation by releasing productivity reserves built up in industry during the recession.

A well-functioning adjustment process requires that expansionary measures be directed to a greater degree toward domestic demand, thereby reducing current account surpluses. Further, in certain cases exchange rate changes may play a constructive role in the adjustment process.

Without major contributions of this kind to the adjustment process the foreign trade of many countries will be seriously hampered. There are already unfortunate signs of a new mercantilism. One element in this development is the resort to various types of aid to export and to import competing industries, which will further hamper an efficient international division of labor. Moreover, this is not in line with the declaration of the London Summit, the OECD trade pledge, and the declarations in the GATT and the EFTA.

The danger in that situation is the emergence of a deflationary spiral and more widespread protectionism. With continuously high unemployment in industrial countries only a marked increase in the rate of growth can reduce the risk of aggravating such adverse tendencies.

As unemployment is also due to structural factors, a reduction in the continuing high unemployment cannot wait until the cyclical economic situation has improved. Active measures to secure employment are, therefore, important both in deficit and surplus countries.

The adjustment process should also be seen in relation to trade and capital movements between developed and developing countries. It stands out as a paradox that last year the official development aid (ODA) of the deficit countries as a percentage of GDP generally was maintained or even increased, while industrial surplus countries as a rule showed a declining share. This paradox has to be regarded against the background that industrial countries’ production capacity is underutilized at the same time as developing countries have great unsatisfied needs.

The slowness of a general economic recovery has complicated the adjustment for most deficit countries. This situation calls for a strengthened role for the IMF, relating to financial assistance and participation in the working out of adjustment programs for individual member countries. A considerable increase in the Fund’s resources is necessary in order to meet existing and future financial needs and to strengthen the Fund’s advisory role. The Nordic countries note with great satisfaction that the negotiations concerning the supplementary financing facility have been brought to a successful end and hope that this facility will come into operation as soon as possible.

It should be remembered, however, that special arrangements such as the supplementary facility must be of a temporary nature. We should avoid being unduly dependent on such arrangements. Instead we should concentrate on strengthening the Fund’s liquidity on a permanent basis.

The structure of the Fund’s operations has become unnecessarily complicated as a result of all the special arrangements with different rules that have been established in recent years. This structure may in individual cases limit the flexibility in channeling the Fund’s resources in an effective way.

Furthermore, various special arrangements also increase the risk of deviations from the principle of uniform treatment which the Nordic countries are anxious to safeguard. Consequently, in future the main emphasis should be upon ordinary quota increases.

The creation of new credit facilities without a corresponding strengthening of the Fund’s liquidity has substantially reduced its holdings of usable currencies. Requirements from borrowing countries are and can be expected to remain substantial. In the light of this situation the Nordic countries consider that the large quota increase originally proposed by the Fund staff was not excessive. If, however, a more limited total increase in quotas, say 50 per cent, should be a prerequisite for avoiding selective increases, the Nordic countries are prepared to support this. In all circumstances selective quota increases, if they prove to be necessary, should be limited to those countries whose quotas are most seriously out of line.

The members of the IMF have undertaken to promote the objective of making the special drawing right the principal reserve asset. Against this background, the Fund’s study of possible new allocations of SDRs and improvements in their characteristics should be considered in a positive spirit. Possible new allocations would in any case be so limited that fears of inflationary effects can be disregarded.

May I, Mr. Chairman, extend to Dr. Witteveen our sincere appreciation of the outstanding services he has rendered to the Fund.

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

Economic growth slowed down appreciably during the second half of 1976, and appears to have stayed at a low level during this year. The Annual Report of the Fund emphasizes—in my opinion correctly—the impact of a disappointing development of gross fixed investment in industrial countries. Investment failed to take over the role of stockpiling, which served as the main stimulus to recovery at an earlier stage.

I am not too optimistic about the longer-term prospects. The international economic recovery has a narrow basis, supported as it is by only a relatively small number of countries. To strengthen their external position many deficit countries have to follow restrictive demand policies. This obviously has a depressing effect on the rate of economic growth in the world as a whole. Moreover, uncertainty exists on the extent to which investment in the industrialized countries will pick up and contribute to the process of recovery.

In my opinion, recent experience has taught us that more expansionary budgetary policies as such provide no guarantee for sufficient growth of investment in fixed assets on a more permanent basis. A reduction of the high rate of inflation and structural improvement of profits are indispensable as well, and under present circumstances of equal or even more importance than the general expansion of aggregate demand. My country has made considerable efforts in both areas and will continue to do so.

I will now turn to the international adjustment process and to the related issues of exchange rate policy.

In the past decade exchange rate policies have moved from one extreme to another. Under the par value system exchange rate adjustments were considered an ultimum remedium. To the extent that this implied a willingness of countries to adjust their domestic policies rather than their exchange rate, this attitude was a positive factor contributing to international stability. But sometimes, and particularly in the 1960s, when the effects of structural shifts began to show up in fundamental disequilibria in balances of payments, and when inflation rates started to diverge quite markedly in different countries, unrealistic exchange rates were maintained for too long. This in turn led to the collapse of the par value system. After 1973, the world moved to the other extreme, in the sense that floating became widespread and targets for exchange rate policy were rejected.

The new rules for Fund surveillance contain no reference to exchange rate targets at all; this is in contrast to the 1974 guidelines which asked countries to form—if possible—a reasonable estimate of the medium-term norm for their exchange rates, and to resist movements in the market rates that appear to deviate substantially from that norm. In the new rules for Fund surveillance these ideas have been completely eliminated.

I deplore this development and I would urge that we try to find a better compromise between the pre-1971 system and the present proposals. We all know full well the shortcomings of exchange rate rigidity such as the world had known until 1971. But, on the other hand, I do not agree with the view that exchange rate developments should be left completely to market forces and that the task of the monetary authorities should be limited to smoothing out so-called erratic movements.

In my opinion exchange rate relations should reflect underlying competitive positions as much as possible. Ideally, they should not, or at least not strongly and systematically, be affected by cyclical differences or by interest rate differentials between countries. Exchange rates that are distorted by cyclical differences and that insufficiently reflect competitive relations entail important risks in the present situation. In countries with a weak cyclical position and a high rate of unemployment, the export industry may be further depressed by an appreciating currency. This might lead to protectionist tendencies with their inherent dangers of escalation.

Moreover, freely floating exchange rates will aggravate the problems of countries with relatively high rates of inflation and balance of payments deficits in restoring internal and external equilibrium. The effectiveness of exchange rate changes as an instrument of economic policy is reduced by the high degree of indexation which presently characterizes many national economies. The Annual Report correctly points out that under these conditions there is some truth in the vicious and virtuous circle theory. Exchange rates reflect economic developments and economic policies, but they also influence these factors, especially in open economies. This feedback of the exchange rate to the national economy in my opinion implies the need for internationally consistent exchange rate targets and for international coordination, especially of monetary policies which so strongly affect exchange rate developments.

Consistency in policies is required not only in order to ensure orderly exchange rate developments, but also for the orderly financing of balance of payments disequilibria. This aspect is very important with respect to the creation of reserves. There is a broad international consensus on the theory that reserve creation should not depend upon incidental disequilibria, but upon common decisions. The “raison d’être” of the SDR is the desire to achieve a rational system of international reserve creation. This implies an adequate control of all other forms of reserve creation. I do not agree with those who hope that this can be realized by a mere creation of SDRs. As long as national policies and international coordination of these policies are not directed toward the control of other forms of reserve creation, the SDR cannot play the role it should. Consensus on new allocations will then be difficult to achieve. I would regret very much if the SDR—the embodiment of the effort to achieve a regulated reserve creation for the first time in monetary history—were to founder because of our inability to control competing sources of international liquidity. This is a real danger which is often underestimated.

I am glad that an agreement has been reached on an important strengthening of the Fund’s position in the international financial system by the establishment of a supplementary financing facility. The necessity for the Fund to draw upon additional resources through borrowing from a small number of member countries has, once more, drawn attention to the Fund’s unfavorable liquidity position. On various occasions we have stressed the negative developments in this respect. I would like to emphasize the need to pay more attention to this problem and its implications for the forthcoming quota negotiations.

The Executive Board has recently discussed the relationship between the Fund and private banks. In my opinion some form of cooperation could be a positive factor in the adjustment process and could help to prevent severe disturbances of the international financial system. An exchange of information on the economic situation of debtor countries—with the concurrence of the country concerned—may be useful in this respect.

I am very reluctant about more formal cooperation between the Fund and private banks in the form, for example, of joint credit-granting and the establishment of a “fall-back” mechanism. Coordination should not lead to a mixing of responsibilities between the Fund and private banking, which could be detrimental to the independence of the Fund and to the responsibilities of the international banking system. I have no objection, however, to parallel financing by private banks. In this way private credits are directed toward those countries already using the facilities of the Fund, which implies that they are willing to conduct their financial and economic policies in accordance with the Fund’s general principles and with whatever specific policy conditions they have agreed with the Fund to observe.

Before turning to the second part of my speech I would like to commend the staff of the IMF and its Managing Director for the excellent way in which they have performed their duties during the past year. I would like to use this occasion to pay a special tribute to Mr. Witteveen. We deeply regret that he has decided not to be available for a second term. . . .

September 26, 1977.

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