Discussion of Fund Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1977
Statement by the Governor of the Fund for Indonesia—Ali Wardhana
Since the breakdown of the Bretton Woods system, policymakers all over the world have been preoccupied with monetary reform, exchange rates, balance of payments adjustment, and after 1973, with the problems of the most serious postwar recession from which we have now, on the whole, emerged. Other developments were also taking place, but they do not, as yet, attract the attention which they in fact deserve. I am referring to the problems of economic development of developing countries. Those problems, so far, have not substantially affected the centers of economic power, and their longer-term nature makes them perhaps less dramatic and relatively less pressing in comparison with events related to monetary and balance of payments matters.
However, their importance cannot and should not be underestimated. After all, they affect the majority of the people of the world, living in adverse conditions, of which, according to the present World Bank report, hundreds of millions are from birth poor and destitute. The desire of the less privileged majority of the world to gain a standard of living more compatible with human dignity is growing stronger every day.
While problems related to exchange rates and balance of payments stability and also cyclical developments should continue to occupy us, the economic development of developing countries must be moved to center stage. The more advanced countries are rightly concerned about the seemingly sticky problem of unemployment, but the magnitude of unemployed people in developing countries is much larger and in human terms far more painful. I am not so much referring to problems of financing economic development, the solution of which remains vital, but rather to the actual situation in developing countries as they progress in their search for a better living.
Let me begin to respond to a question which sometimes has been raised. Is it at all possible to make progress in the field of economic development? This year’s Annual Report of the World Bank reveals a few facts. Yes, developing countries have shown that they are able to develop. In fact a number of them were less affected by the recent recession—the poorest among them by increasing their domestic agricultural production, and higher-income developing countries by applying responsible adjustment policies supported by borrowing. The figures on GNP per capita growth rates in the period 1950-60 show an increase of 2.4 per cent, which rises to 2.6 in 1960-70 and to 3.4 in 1970-75. The respective figures for the OECD countries are 3, 4.1, and 2.3 per cent. The Fund’s Annual Report also confirms this situation.
The capacity for growth is therefore present and demonstrable. However, and here I come to the actual situation, the absolute per capita income is still very low and in a great number of developing countries the figures are dismally small, ranging from below $100 to $200 per annum. At that, one should not forget that per capita income is an average and many are living with less than the average.
As efforts to achieve growth proceed, the one dominant phenomenon surfacing from the process appears to be its lopsidedness. The economy, responding to inputs and the right fiscal and monetary policies, starts to expand, but some sectors expand more than others. Usually the stronger growth occurs in a smaller part of the economy.
I would like to state that no government in any developing country has ever, deliberately, aimed at such an outcome. When countries became independent their objective was to remedy the past with its skewed distribution of growth and income. In my own country one of the cornerstones of our nation’s philosophy is social justice. All governments of developing countries would like to see economic development proceed on as broad a front as possible.
Unfortunately, what happened was that in a number of countries either economic development took place in too small a sector or, where the emphasis was on equity, growth remained slow or stagnant because the cost of distributing income to the mass of the people could not be sustained by the economy.
The problem of economic development in developing countries, after the bitter experience so far, is therefore not growth per se or social justice per se, but as the Annual Report of the World Bank states it: “Growth with equity is the challenge.”
The increasing awareness in developing countries that the policies so far followed need correction in order to bring about changes in the emerging unequal growth is the most serious challenge to the governments and peoples of the relevant countries and of the world.
New priorities have to be set, new approaches have to be conceived, and new experience has to be gained in using both national and international resources.
All this is easier said than done. What is clear is that following the pattern of the countries in the developed North, as many did in the past, did indeed lead to growth in some, and to more equity in others, but not to growth and equity simultaneously. Incomes, accumulated in a few sectors, unless sustained for a long period and thereafter corrected by social measures, do not trickle down adequately and quickly enough to the majority of the people. Social measures alone, aimed at equalizing incomes, also do not prove to be satisfactory due to the lack of sustained growth. Unemployment remains high in spite of some growth and some equity because the multiplier effect remains regretfully small in both cases.
It seems clear that the priority should be given to reducing unemployment in those sectors in which it is high. In the majority of developing countries the countryside is teeming with unemployed and underemployed people, and also, increasingly so, the complex of their large cities.
At least four prerequisites remain necessary to be fulfilled. One is related to population control, the other to adequate food. The remaining two are an adequate infrastructure and increasing investment in health, housing, and education.
There should always be room for traditional enterprises, which did and do generate more employment and more income, but they have to be supplemented by efforts on a large scale which would bring development direct to the sectors of the unemployed and underemployed poor.
There is no pattern in economic history that can be followed, and policymakers in developing countries and also those outside those areas should therefore try to invent a new strategy to achieve growth with equity and equity with growth simultaneously. For example, we have gained some experience with regard to the preparation, evaluation, and financing of ordinary projects, but our experience in developing the countryside should be definitely substantially broadened. In my country, in our pursuit of our goal of growth and social justice we are—so far successfully—experimenting with providing resources to the thousands of villages spread over the length and breadth of our land, but we feel that much more can and should be done. Agricultural development is necessary, but eventually also industrialization. How to use the countryside for the purpose is a problem. Smaller-scale industries seem to be a logical approach because they involve more people and can be scattered over large areas. But what about technology, economies of scale, and therefore competitiveness? And then, what about the urban unemployed?
So far the world as a whole is not yet fully aware of the process of change which is emerging in developing countries. As I said before, it is understandable because we have been so preoccupied with monetary and balance of payments problems, with adjustments, and with the business cycle. They are all relevant and they need to be solved because otherwise economic development will be hampered, including that of developing countries. However, the time has come when we should bring the new problems as they emerge in developing countries to the forefront of our attention. After all, the world as a whole cannot grow and prosper if a large part remains depressed, because goods have increasingly to be produced to sustain growth and goods need markets and purchasing power, which is insufficiently available if so many millions of people remain poor.
The time to devote more, far more attention to the problems of developing countries seems to be favorable. The international monetary situation, after the breakdown of Bretton Woods, appears to be settling down. We do not have an ideal, and perhaps not even too comfortable a situation, but we are spared the violent crises in exchange markets of the earlier part of this decade. Also, the recession, while not entirely over, has receded, and although there are still serious problems of inflation and unemployment in the industrial countries, the situation has improved. There remain the problems of the balance of payments for some industrial and a great number of developing countries. In this respect the supplementary facility in the IMF, for which we have to credit the Managing Director, Dr. Witteveen, and donors from the industrial and oil exporting countries, will to a great extent, together with the envisaged quota increase and hopefully a second SDR allocation, assist countries to finance their balance of payments deficits.
What is worrisome is the possibility that the cyclical improvements, at this stage not including all industrial and developing countries, will falter. Signs of protectionism as a means to strengthen the balance of payments and safeguard employment are increasing. This self-defeating policy would harm the flow of goods from developing countries and in the end it would lead to a downward spiral of growth.
Altogether, however, conditions have become easier, and the time therefore is more suitable to ponder over some pressing, basic, and longer-term problems presented by the changing situation and needs of developing countries. Resources, domestic as well as foreign, remain as necessary as ever. In view of the need of the developing countries to increase the rate of growth significantly, we would like to support a substantial increase in the capital of the IBRD. We sincerely hope that all member countries would be in full and early support of an increase of about 100 per cent to maintain the Bank lending rate at a level of approximately 7 per cent. However, we should also emphasize the change in objectives, in orientation, in development strategy and policy. The terrain is uncharted, much thought has to be given to attaining the goal of growth with equity and equity with growth. If the international monetary system has required much time and much thinking, policymakers in the developing and developed world should gird themselves for the task to find a coherent set of guidelines to steer the development process toward the new objective to step up growth and consequently incomes among the poor. . . .
Coming now to the end of my intervention, allow me to bid farewell to the Managing Director of the Fund, Dr. Witteveen, for whom our present gathering is his last one. While we fully respect his personal reasons for not serving a second term, we nevertheless deeply regret his decision. The international monetary community will definitely miss him. He has done a splendid and sterling job during the four years he has served the Fund. When the world was plunging into a recession under extraordinary circumstances, it was he who suggested refraining from resorting to a beggar-thy-neighbor policy. He also initiated the oil facility which proved to be of great assistance. He steered the second amendment and the sixth quota review to a conclusion. It was under his guidance that the compensatory financing facility became meaningful; he pleaded for a balanced approach to the twin problems of inflation and unemployment; and, in the fourth year of his assignment, he initiated another proposal, namely, the establishment of the supplementary financing facility, which I believe in honor of him we should now call the Witteveen facility.
Finally, I would like to express our gratitude to our host country, the United States, which again has extended to us its warm hospitality and has enabled us to conduct our business in such a pleasant and efficient manner.
Statement by the Governor of the Fund and the Bank for India—H. M. Patel
It gives me great pleasure to participate again in the Annual Meetings of the World Bank and the International Monetary Fund after a lapse of nearly two decades. During this interval I am happy to note that the activities of the two institutions have greatly expanded. This is both a recognition of the increasing interdependence of the world economy as well as a tribute to the growing spirit of international economic cooperation.
Before I go further I would like to extend a very warm welcome to the newest members, Guinea-Bissau and Seychelles, and the observers from Surinam, Cape Verde, São Tomé and Principe, and Maldives.
The international economic crisis of the early 1970s dealt a severe blow to an orderly expansion of the world economy. The collapse of the Bretton Woods system of fixed exchange rates, the strong upsurge of inflation, and a radical change in the pattern of international payments in the wake of the oil crisis had profoundly disturbing implications for the health of the world economy. We were all very fortunate that, at the time of this massive crisis, these two institutions were led by two men of great vision, courage, and devotion in the persons of Mr. McNamara and Mr. Witteveen. Both of them have made an outstanding contribution in reshaping the policies of their respective institutions and in promoting the cause of international economic cooperation against heavy odds. The news of Mr. Witteveen’s decision not to seek a second term came as something traumatic. The remarkable qualities of leadership displayed by Mr. Witteveen as the Managing Director of the IMF have made a deep impact on the evolution of the international monetary system in recent years. We, as a developing country, will always remember with gratitude his deep understanding of our problems and sympathy for our aspirations.
The world economy has no doubt recovered from the recession of 1974-75. However, we cannot but be seriously concerned about the underlying weakness of this recovery. There was a welcome revival of growth rates in major industrial countries in 1976, which contributed substantially to the growth of 11 per cent in the volume of world trade in that year. From current indications, there is likely to be a considerable slowing down of the rate of growth of both the national income and the volume of world trade in 1977. Rates of inflation as well as unemployment still remain at intolerably high levels. The structure of international payments still displays an unsustainable abnormal trend. It is all the more disturbing to note that no immediate solutions are in sight to resolve problems of unemployment and inadequate capacity utilization coexisting with unusually high rates of inflation. In such an environment, the growth prospects of developing countries, notwithstanding vigorous self-help measures by them, are bound to be highly uncertain. The fact that, despite a significant deterioration in their terms of trade, the current account deficits of non-oil developing countries are no higher in real terms than in 1967-72 is an indication of the harsh adjustment measures which they had to adopt in the face of unsustainable imbalances. Their capacity for further adjustment is severely limited and insistence on such adjustment will greatly affect their ability to deal with the massive problems of underemployment and unemployment that are facing them. This vital fact must not be lost sight of when we consider international monetary issues this week.
We are no doubt living in highly uncertain times. But there are also great opportunities if we have the vision to seize them. At a time when there is a sizable excess capacity in the industrial countries, the real cost of increased transfer of resources to developing countries would be very small. When other internal stimuli to increase economic activity in industrial countries seem to be rather weak, increased transfer of real resources to developing countries could well act as a powerful means of stimulating employment and greater capacity utilization in the developed countries. Thus both enlightened self-interest and the spirit of international solidarity suggest that an adequate transfer of real resources to developing countries should constitute an essential component of any viable international strategy for achieving world prosperity. I sincerely hope that our deliberations this week will be animated by this spirit.
In the uncertain climate for their economic growth, the non-oil producing developing countries had placed much hope on the outcome of the Conference on International Economic Cooperation which concluded in Paris last June. The results of the Conference have been described as being “more limited than had been hoped for at the outset.” This could very well be the understatement of the year. No progress was made on the important and urgent question of alleviating the heavy debt burden of the developing countries. With regard to the establishment of a common fund for raw materials, there was agreement merely to continue further negotiations for its establishment in the United Nations Conference on Trade and Development where no progress seems to have taken place so far. The only outcome of any substance from the Conference was the agreement among developed countries to provide an amount of $1 billion in a Special Action Program for low-income countries. Viewed in the context of the total flow of assistance to the developing countries, this agreement can only be considered as very disappointing.
The latest Development Assistance Committee figures show that official development assistance declined once again as a percentage of gross national product (GNP) of donor countries from 0.36 per cent in 1975 to 0.33 per cent in 1976. It was also lower in real terms. In any global strategy for the alleviation of poverty, the role of international cooperation through adequate resource transfers from the rich to the poor countries can scarcely be overemphasized. It is, therefore, essential that each developed country adopt a time-bound program to fulfill the internationally agreed official aid target of 0.7 per cent of GNP. Simultaneously, adequate attention must be paid to the need for untying of aid as a means of improving the quality of development assistance. There is also an urgent need to adopt a new bold and imaginative generalized approach to the solution of the chronic debt service problem of developing countries. A failure to find an effective solution to this problem will greatly add to the uncertainty and difficulties already faced by the developing countries in implementing their development plans in an orderly manner. . . .
Earlier I referred to the persistence of large imbalances in international payments. In this context, we welcome the outcome of the initiative taken by the Fund’s Managing Director, Mr. Witteveen, to set up a supplementary financing facility of the order of SDR 8.6 billion, that is, about $10 billion. I wish to congratulate those who have made this possible through their contributions, in particular Saudi Arabia. Member countries with balance of payments difficulties whose requirements cannot be met through the Fund’s regular credit tranches will now be able to draw on this supplementary financing facility. I hope this facility will be administered in such a way as to benefit as many needy developing countries as possible without unduly rigid conditions. There should be an urgent examination of the need to provide an interest subsidy for drawings from this facility by the low-income developing countries. It is also necessary to complete at an early date negotiations on the seventh quota review. In our view, there is ample justification for a minimum increase of 50 per cent in the Fund quotas. Furthermore, in any process of quota revision, there should be no reduction in the share of non-oil developing countries in the decision-making processes of the IMF. The temptation to turn the IMF into a rich man’s club must be firmly resisted.
While on the subject of international monetary questions, I can scarcely avoid referring to the gold question. The Interim Committee has already agreed to a phased removal of gold from the center of the international monetary scene. In pursuance of this objective, the Fund has been auctioning a part of its gold holdings through monthly auctions making the profits realized available to a Trust Fund for the use of developing countries in need. We believe that the time has come when the member countries of the IMF should agree to sell all the remaining Fund holdings of gold and earmark the profits thereof for providing assistance to the developing countries.
The international monetary scene in recent years has been characterized by a number of cooperative endeavors to deal with the emerging problems. However, the measures adopted so far have fallen far short of the needs of the international community. They have been piecemeal in nature without the mark of a genuine reform. We need to take an integrated view of monetary reform, trade, and development. Any worthwhile international monetary reform must fully take into account the imperative need to move toward a new international economic order. An essential element of such a monetary reform must be, as the Interim Committee has already agreed, making the SDR the main international reserve asset. Recent events have clearly shown that resort to floating exchange rates does not necessarily diminish the need for additional international liquidity. In the last few years, the world’s requirements for increased liquidity have been met largely by reliance on the private financial markets. This is neither a very satisfactory nor a very equitable arrangement. We therefore strongly support a substantial fresh allocation of SDRs at an early date.
I must also voice my concern at some recent restrictive tendencies on the trade front. It is disturbing to note that new restrictions are being imposed on goods exported from developing countries. For instance, the exports of textiles and garments from developing countries are facing stringent quota restrictions. These will surely tell on their export earnings and worsen their balance of payments difficulties. It would be particularly unfortunate if the first attempt to diversify exports away from primary commodities meets with barriers at the very moment of its success. The burden of adjustment to changes in the international economic situation should not, through ill-conceived protectionist policies, be transferred from the stronger to the weaker shoulders, particularly when developed countries have far greater resilience. Let not free trade lose all the virtues, which have been so vociferously preached to the developing countries, at the first whiff of some need for internal adjustment. Poorer countries in the international community need a congenial trade atmosphere in order to pursue policies which could result in faster rates of growth for their economies and thus ensure a reasonable standard of living for their populations.
In an interdependent world, there are important linkages between money, trade, and development. It is essential that in any reform of the international monetary and trading systems, the interests of developing countries are not lost sight of. Our deliberations must be guided by the knowledge that true integration of the world economy is unthinkable unless there is a conscious effort to narrow the gap between the rich and the poor countries. There is no doubt that this is not an easy task. But we cannot give up the struggle simply because the journey ahead is rough and difficult. Surely, without a certain sense of adventure and vision, nothing worthwhile has ever been achieved in human affairs. Modern science and technology have made it possible as never before to ensure that chronic poverty need not be the inevitable lot of the majority of mankind. It is up to us to accept the challenge of devising appropriate institutional arrangements to convert what is feasible into a living reality. That is why we were deeply moved by President Carter’s firm commitment in his remarks yesterday to the goals of world development and his concern for some one billion people who suffer from absolute poverty.
Statement by the Governor of the Fund for the United Kingdom—Denis W. Healey
First let me echo the general feeling in this hall and express my personal pleasure at Mr. McNamara’s acceptance of a third term in his most onerous responsibility and my regret at Mr. Witteveen’s decision to retire next year. International organizations have rarely enjoyed the services of men of such energy, wisdom, and dedication.
As you know, Britain’s financial position has been transformed in the last nine months. We have, in fact, as the Managing Director said in his press conference three days ago, established the financial conditions for a steady improvement in our economic performance. The most visible sign of the progress we have made lies in the strength of sterling and the increase in our official currency reserves, which now stand at record levels. We have recognized that some of these inflows are of a short-term nature and cannot be relied on as permanent. But they do demonstrate a revival of confidence in Britain. They show that others believe we are pursuing the right policies to deal with our major economic problems.
We have given overriding importance to getting our rate of inflation down. For we believe that this is a necessary condition for achieving our other economic and social objectives. Perhaps it is worth reminding you, however, that the progress we have made this year in this and other fields owes much to decisions we took long before our negotiations with the IMF last winter. We had already begun to curb the runaway growth of public expenditure by the summer of 1975 and the cash limits we imposed in 1976 on the bulk of public spending have been strikingly successful in ensuring that our decisions in this field were observed. The public sector borrowing requirement was reduced substantially last year both in cash terms and as a proportion of our GNP. We have maintained strict control of our monetary aggregates over the whole three and a half years since the increased price of oil first hit us hard at the beginning of 1974.
Following the notable success of the first stage of our voluntary incomes policy, which helped to cut our rate of inflation by half, the second stage, which began in August last year, produced an increase in earnings of under 9 per cent—only half as high as the increase in prices over the same period. I will not deny that this has imposed great strains on our trade unions. But we were able substantially to reduce its effect on living standards by reductions in income tax. And although our trade union movement found it impossible to accept a third year of incomes policy as fully structured as the previous two, they have agreed that the return to normal collective bargaining should be an orderly one. And we have already demonstrated as a government our determination to secure the necessary moderation in pay increases.
Meanwhile our inflation rate is now recovering from the malign effects of last year’s deterioration of sterling, the rise in world commodity prices, and the effect of the drought in Europe. Our underlying rate of price increases fell early this year to about 1 per cent a month and in the third quarter is likely to be less. Unless some new external factor knocks us off course, we have a good chance of getting our inflation rate into single figures in the early part of next year.
As the Prime Minister told our Trades Union Congress the other day, an inflation rate still close to 10 per cent is no grounds for complacency. We shall not be satisfied until we have reduced it to the sort of levels which were familiar in the early 1960s. But we can take at least a modest satisfaction in the progress we have made already. And we are determined to protect and extend the gains we have made in combating inflation now that we can take advantage of our success to expand activity.
The second field in which we have made very substantial progress in the last 12 months is our balance of payments. This too owes much to measures we took to hold down both private and public spending over the last three years. Our current account is now moving into surplus. The increasing flow of North Sea oil enables us to look forward to a healthy balance of trade right through the 1980s—although much of our surplus will be needed to redeem a large accumulation of overseas debt. But we have already seen a significant increase in our exports of goods other than oil. Since the second half of last year we have moved an additional 1 per cent of GDP into the balance of payments.
As I have said, much of the progress we have made in the last 12 months has its roots in policies adopted long before our last autumn’s discussions with the IMF. But there is no doubt that the measures which we took last December made a decisive contribution and tipped the balance of world confidence, not least because their endorsement by the IMF established our international credit on a firm foundation and enabled us to reach agreement on the handling of the sterling balances. The consequential stabilization of our exchange rate at a somewhat higher level than a year ago has helped us to get inflation under control and has further strengthened the financial basis of our economy. We are thus able to survey our prospects and those of the world as a whole in a somewhat more objective posture and to begin considering, as Mr. Witteveen has suggested, whether we can make some modest contribution of our own toward ensuring that the world recovery does not peter out.
For our prospects, like those of every country represented in this hall, depend critically on restoring the world economy to health. I would therefore like to say a word about each of the three dimensions of the international economic problem—the maintenance of adequate demand, the underlying problems of structure, and the financing of the deficits which remain inevitable while the problems of demand and structure are being dealt with.
First, demand. I do not think it is easy to dispute the Managing Director’s conclusions on this aspect of our common problem. As he admitted, the bias toward restriction in the aggregate demand policies followed in recent years, or as he put it, the belief that governments “should not shade policy risks on the side of growth,” has led to undershooting national targets and has failed to achieve a rate of economic growth sufficient to permit a gradual reduction in unemployment. And the continuing rise in unemployment in nearly all the industrial countries has brought a rising danger of protectionism which, if it is not checked, could bring a world crisis like the 1930s, with particularly disastrous consequences for the developing countries. That is why it is so important to bring the multilateral trade negotiations to an early and successful conclusion.
Yet unless there is now a significant increase in aggregate international demand, unemployment will continue to rise and the pressure toward protectionism may become irresistible. The stronger countries which still have large surpluses have as powerful an interest as they have a duty to take the lead—not only because they are particularly dependent on free trade but also because the disappointments of the last year or two have increased uncertainty in their own countries and discouraged investment. This, if I may quote the Managing Director once again, implies the need “to adjust policies in time to avoid cumulative deviations from an equilibrium path over the medium term.”
The United States has made a major contribution to maintaining world activity by successful growth in 1977 in line with the London Summit target. The United States has accepted and is still accepting a substantial current account deficit. Part of this has been due to increased oil imports, some growth of which was unavoidable in the short term as economic activity increased. But a large part of the deficit has been and will be attributable to more non-oil imports, to the benefit of other oil consuming countries. The United States needs parallel action by other major economies to assist it in keeping up this contribution and I welcome the action which the Japanese and German Governments have now taken, for this as well as other reasons. I regret only that these measures seem unlikely to do much for growth in 1977.
It may well be true that in some countries fiscal measures are less effective in increasing demand than they used to be—that a higher proportion of tax cuts are saved than in the past or that spending authorities fail to make full use of increased authorizations. But this is surely an argument for increasing the scale of fiscal measures above what used to be regarded as necessary to produce a given increase in demand rather than doing less.
On the other hand, I wonder whether we have not in the past, when considering the need for an expansion in aggregate demand, concentrated too much on the growth of GDP as its main indicator and paid too little attention to the sources of that growth. For example, there is no net advantage to aggregate demand in the world economy if the stronger surplus economies rely on exports to achieve their target rate of growth. When the oil consuming countries as a whole are wrestling with the need to prevent the surplus of the oil producing countries from imposing unnecessary deflation on the world, a large and persistent surplus in a major oil consuming country, when it is achieved at the expense of other oil consuming countries, makes the situation worse, not better. It is an increase in domestic demand of the surplus countries which is needed, not an increase in their exports.
At this point the problems of international demand management become inseparable from some of the structural problems which now complicate our task. The Managing Director rightly referred to the fact that, I quote his words, “many industrial countries need to develop an active policy for structural re-orientation and rationalization of manufacturing industries; this should be done,” he added, “with a clear objective of providing more room for imports from developing countries and helping to bring about a favorable climate for the international division of labor in a free trade system.” I can only endorse this view in the strongest possible terms. Indeed, if this structural rationalization between the industrial and the developing countries could be achieved, the need for a resource transfer through the international institutions would be that much less.
But there is also need for a structural rationalization among the industrial surplus countries themselves so as to increase their propensity to import and make their growth less dependent on a large export surplus.
This is perhaps an uncomfortable thought for the countries concerned. But there could be a far more uncomfortable reality if the inability of some big oil consuming countries to take their fair share of the global deficit leads to the disruption of exchange rates or to growing unemployment in the other oil consuming countries.
For there is one structural problem in the world economy of which we have all been conscious since 1974, although I believe we are only now reaching a real consensus on how to deal with it. I refer of course to the inevitable deficit for the rest of the world arising from the fact that the oil producing countries are together likely for some time to earn some $30-40 billion a year more than they are able to spend on imports.
I doubt if there are many in my audience today who still hold the view so often heard in 1974 that market forces on their own would make this problem disappear. The international community is at last beginning to accept the need for further action to enable us to live for some time yet with this oil-generated structure of surpluses and deficits in international payments.
And I think we are now more realistic also about the sort of action needed. Three years ago the Annual Report of the Fund stressed that in this situation the countries with strong payments positions should not expand their economies too much. It argued that the burden of the adjustment should fall on the weaker countries. They were urged to solve the problem by cutting back domestic demand.
The message from the Fund now is rightly a different one—that the stronger countries must lead the way back to full employment and must be joined by the less strong as they get their inflation rate under control. I hope no one still argues that the problem of the oil surpluses must be solved through adjustment by the deficit countries alone. For there is obviously no remotely tolerable level of economic activity at which the world’s demands for energy could be reduced to the point where the revenues of the oil producing countries equaled their ability to absorb imports.
I shall discuss the problem of financing the deficits which are the inevitable counterpart of the oil surpluses in a moment. But there is also a structural answer to the problem, in more intensive action by the oil consuming countries both to reduce their demand for imported oil and to develop domestic sources of energy. We in Britain can claim to have made a useful contribution here. We have incurred substantial costs in order to develop North Sea oil and are now reaping our reward. The output of North Sea oil this year will already be worth about $5 billion. It will rise to $10 billion by 1980. Without it the OPEC surpluses would be that much higher or world activity might have to be that much less. In this sense North Sea oil is helping everyone. I hope Alaskan oil will soon be making a similar contribution and that the U.S. Government will be successful in its wide-ranging program for reducing America’s demand for imported oil. We will all benefit from that success.
These are the main structural problems affecting the international economic scene. I do not pretend that it will be easy to correct them or indeed to deal with all the domestic structural problems which are now affecting economic performance in the industrial world. But until these structural problems are dealt with, the world economy will be able to meet the economic needs of its peoples only if the deficit countries are enabled to finance their deficits without undue restriction of activity and demand. It is in this field that the Fund and the World Bank have the most critical role.
The commercial banking system has rightly played the main role in financing these deficits until now and has shown immense resourcefulness and flexibility in doing so, but there are obvious risks in excessive and continuing dependence on lending by commercial banks and in any case it is only a relatively small number of countries who can count on having this kind of finance available to them on an adequate scale. The poor countries can rarely meet their needs in this way. That is why I hope that the supplementary financing facility will soon be in operation and welcome in particular the substantial contribution made to it by the oil surplus countries. But I believe we also need a substantial increase in IMF quotas to provide a permanent increase in Fund resources. The Commonwealth heads of government have already called for an increase of at least 50 per cent. I must admit that even new sources of official financing on this scale will be no more than modest in relation to the need. The Witteveen facility will provide some $10 billion spread out over as much as five years.
Since the Fund can call on only a portion of finances provided by its membership at any one time, a 50 per cent increase in quotas equivalent to about $23 billion would in effect provide only a few billion dollars extra a year. This has to be set against aggregate oil surpluses running to several tens of billions of dollars each year.
I know that some of my colleagues are concerned about the conditions attached to Fund drawings. There might be advantage in further discussion of this question. My view is that conditionality must be flexible and realistically related to the problems of our member countries and that, in present world circumstances, it is very important that the time scale of adjustment should be realistic. It is no good increasing the Fund’s resources if those who need them most are unable to accept the conditions for their use.
As I have said, the increase in the Fund’s resources I have mentioned is certainly not excessive in relation to the deficits which are the counterpart of the OPEC surplus. If those deficits are increased by a further $10 billion a year or so through the large current account surpluses of Japan—and to a lesser extent of the Federal Republic of Germany—the problem could prove insurmountable. That is why it is so important, as I said earlier, that they should achieve their promised growth targets by increases in their domestic demand from which the rest of the world can benefit rather than from increases in exports which simply compound the problems of the rest of us. The stark fact is that unless these countries can reduce their surpluses, or at least play the main role in financing the deficits which reflect them, the necessary structural changes in their economies will be imposed by external forces because their customers will be compelled either to deflate or to restrict their imports. None of us wants to travel down that road.
But even if we do achieve the necessary expansion of world demand, if we do make progress on the structural problems I have mentioned, and if we do arrange secure financing of the deficits inevitable during the period of adjustment, economic progress in the developing countries may still be incapable of meeting the basic human needs of their peoples. This problem requires special action which is not limited to that recently agreed at the Conference on International Economic Cooperation. . . .
If there is one lesson to be learned from our painful experiences over the last few years, it is that the world economy is indivisible. None of us can prosper for long if others are in misery. I believe that the speeches from the rostrum in the last two days have shown that we have begun to learn this lesson and that we are not too proud to admit the need to adjust our policies when those policies are clearly failing to meet the objectives we have set. If so, we can look forward to meeting here in a year’s time with a far brighter prospect than we face today.
Statement by the Governor of the Fund and the Bank for the United States—W. Michael Blumenthal
We meet at a time of doubt about the world’s economic future. The legacy of the oil shocks of 1974, inflation, and the deep recession of 1974 and 1975 poses questions of whether our system of international economic cooperation can endure.
The main points I want to make are these:
—the world economy has begun to recover from staggering blows;
—we have in place a strategy for sustained recovery, and that strategy is working;
—and we will succeed—though success takes time—if we continue to act together and do not lose our nerve.
The effective functioning of the institutions that bring us together today—the Bank and the Fund—is a critical part of that cooperative effort.
The U.S. Economy
I will first report to you on the condition of the U.S. economy.
I am pleased that we are continuing to make solid progress. We have recorded economic growth of 7.5 per cent for the first quarter and 6.2 per cent for the second.
We expect to meet our target for real growth during 1977 of over 5½ per cent and we expect continued strong growth in 1978.
We have reduced our unemployment rate by about one percentage point and so far this year we have created more than 2 million new jobs.
Inflationary pressures are diminishing, despite the adverse effects of an unusually harsh winter. Consumer prices rose at the rate of more than 8 per cent in the first half of the year. We expect the rate to decline to less than 5 per cent in the second half.
We also have problems—serious ones. Unemployment is much too high. Creating new jobs to bring it down is a top priority. Despite our progress, inflation also remains too high. We know well how difficult it is to break the inflationary cycle. Business investment, though increasing, is weaker than it should be. Energy consumption and oil imports are excessive.
Our current account deficit is likely to be in the range of $16-20 billion. In part, the shift in our current account position since 1975 has been caused by our heavy consumption of oil. But it is also a consequence of the comparatively high rate of economic growth in the United States and more restrained expansion in many other countries.
We are determined to correct our problems. The expansionary effects of new programs for public works and public service jobs will show up strongly in coming months. We have undertaken a series of measures to keep inflation under control and to bring it down.
President Carter will soon present tax proposals that will include important new incentives to stimulate business and encourage higher productivity. We are urging Congress to complete action on legislation which will encourage energy conservation and increase domestic energy production. That program will be an important first step. But more will have to be done to limit demand and, especially, to develop new domestic energy supplies.
We look to countries with payments surpluses to expand their economies to the maximum extent consistent with the need to combat inflation. Such moves are essential to a smoothly functioning international economic system. We are encouraged by expansionary measures decided on or implemented in recent weeks.
The Strategy of Cooperation
The international economic system is under stress because of the need to adjust to wide variations in national economic performance, high energy costs, and large imbalances in international payments positions.
A broad strategy to facilitate these adjustments has been agreed in international discussions. The guiding principle of that strategy is cooperation. It calls for symmetrical action by both surplus and deficit countries to eliminate payments imbalances. It calls on countries in strong payments positions to achieve adequate demand consistent with the control of inflation. It calls on countries in payments difficulties to deploy resources more effectively so as to bring current accounts into line with sustainable financing.
One point is clear. If this strategy is to succeed, the oil exporting countries will have to show restraint in their pricing. This is an essential element of international cooperation and is in the interest of the oil exporting and oil importing nations alike.
We also need to resist protectionist pressures. Most importantly, we must work for the successful completion of the Tokyo Round of the GATT negotiations.
The IMF, with its key role at the center of the international economic system, must be in a position to help countries carry out the agreed strategy.
This requires first of all that the Fund have adequate resources.
The United States has formally consented to the increase in its quota agreed to in the sixth quota review. We urge others to act promptly so that the increased quotas can be put into effect without further delay.
We welcome the new supplementary financing facility to provide an additional $10 billion for nations whose financing needs are especially large. We intend to press for prompt legislative authorization of U.S. participation.
A permanent expansion of IMF resources for the longer term is also needed. We will work for agreement on an adequate increase in Fund quotas during the seventh quota review.
The second requirement is that the Fund use these resources to foster necessary adjustment. As the supplementary financing facility recognizes, serious imbalances cannot be financed indefinitely. Current account positions must be brought into line with sustainable capital flows. The facility retains the central principle that IMF financing should support programs that will correct the payments problems of borrowers, not postpone their resolution.
In today’s circumstances, that process will in some cases require a longer period of time. Consequently, the United States supports the provisions in the new facility that introduce flexibility in determining the pace of adjustment.
In large measure, this comes down to a question of balance and judgment in the Fund’s operations. The Fund cannot avoid its responsibilities to press for needed changes, nor, on the other hand, can it be rigid and inflexible in requiring adjustments. The course it must steer is often narrow and difficult.
I believe that, on the whole, the Fund has carried out this responsibility with skill and sensitivity. I am confident it will continue to condition the use of its resources in a reasonable and equitable manner, taking into account the needs and circumstances of individual countries as well as the particular conditions in the world economy today. It is not a matter of whether the Fund attaches conditions, but what kind. In individual cases, there will be a need to adjust the emphasis between deflationary measures and policies for the redirection of resources to productive investment and improvement of external accounts.
Third, we must bear in mind the influence of the actions of the Fund on the flow of private capital. It is inevitable and right that the private capital market will continue to play the dominant role in financing imbalances.
At the same time, banks, in their lending policies, are increasingly looking to the existence of stand-by arrangements with the Fund. These arrangements, with their stipulations about domestic economic and external adjustment policies, can considerably strengthen nations’ creditworthiness.
A greater availability of information may also prove useful and feasible. The Executive Board is currently examining the question of how the system might be strengthened by greater private access to factual information produced by the Fund, on a basis that respects the confidential relationships between the Fund and its members.
I believe that in general it is important to explore possible methods to make sure that private and public flows of capital are compatible with each other. This, too, is a way of strengthening the international financial system.
The responsibility of the Fund goes beyond its operations in support of countries in payments difficulty. The amended Articles give the Fund an important, explicit role in overseeing the operations of the system as a whole and in exercising surveillance over the exchange rate policies of its member governments.
The principles to guide the Fund in carrying out these responsibilities reflect widely held views, and a consensus has also been reached on the procedures to be used. It is underlying economic and financial factors that should determine exchange rates. That is recognized.
I believe we all acknowledge that in carrying out these new provisions the Fund will have to approach its task cautiously. These are uncharted waters. History is by no means an adequate guide to the future. Only by experience will it be possible to test the principles we have established and to modify them where it is proven necessary. It is evident that the Fund’s effectiveness in this area will depend on the genuine support of its members for the principles it develops.
I believe the Fund is in an excellent position to undertake this new role. It is now time for the member countries of the IMF to act by approving the amended Articles and bringing these provisions into effect.
Problems of Development
Establishing conditions for sustained growth and strengthening the financial adjustment processes are the most pressing intermediate-term issues facing the world economy. The critical long-term problem, however, is to assure economic growth with equity in the developing world.
President Carter spoke yesterday of the strong commitment of the United States to help in the effort to meet the basic human needs of the world’s poor. President McNamara gave us a picture of the magnitude of the task.
Action is required by both industrial and developing countries.
The most important contribution the industrial countries can make is to achieve adequate, sustained economic growth in the context of an open international economic system. In the past year the oil importing developing countries have improved their trade position by $8 billion as a result of the export opportunities arising from the growth in the U.S. economy. An acceleration in the economic expansion of other industrial countries would provide comparable benefits. For such benefits to be realized in the future, markets must be open and protectionism resisted.
Healthy economic conditions in the industrial world will also facilitate the flow of capital to meet productive needs in the developing countries. In this connection we must review our efforts to assure adequate access to private capital markets.
In addition, specific actions must be taken to facilitate the growth of developing countries.
A substantial increase in the transfer of official capital to developing countries is necessary. The United States will do its share. Congress has authorized over $5 billion in contributions to the international development banks and has supported a sizable increase in bilateral assistance. We are prepared to begin formal negotiations in the Board of Executive Directors of the World Bank leading to a general increase in its capital.
We must work together to strengthen arrangements for stabilizing earnings from raw material exports.
We must also approach the management of international indebtedness, not as a crisis, but as a short-term and medium-term balance of payments problem. We can draw encouragement from the fact that the aggregate current account deficit of the oil importing developing countries declined in 1976 as the world economy began to recover. Where individual countries face severe balance of payments problems, the new supplementary financing facility will help to facilitate adjustment.
Actions by the industrial countries are only part of the story. The real payoff lies in the policies adopted by the developing countries. This is not surprising. Four fifths of the investment capital of developing countries is mobilized from domestic savings. Domestic policies will determine not only how much savings can be mobilized in the future but also how efficiently resources are used and how effectively the developing countries can take advantage of an expanding international economic environment.
The development partnership requires not only healthy global economic conditions that will enable the developing economies to grow, but also efforts by the developing countries to assure that the benefits of growth are enjoyed by their poorest citizens. . . .
Looking ahead, the Bank and the Fund have a vital and expanding role to play in the international economic system. Their record entitles them to strong support and they shall have it from the United States.
I must point to a problem, however, that concerns both the Bank and the Fund. My Government’s continued ability to support these two institutions will depend on their efficient administration. Most importantly, we must resolve the issue of proper compensation policies for their staffs and Executive Directors.
On salaries there is need for restraint. More generally, it is essential to overhaul the entire compensation system of these institutions—as well as the systems of other international organizations—to meet today’s realities. We hope that the Joint Committee set up to review the situation will enable us to move to such a new system. We must not permit this issue to threaten these great institutions.
As I conclude my comments, it is a matter of deep regret to the United States and to me personally that as the Fund crosses a threshold into a new era of operations, it will lose the valued services of its Managing Director, our trusted friend, Johannes Witteveen. He has guided the Fund with firmness, fairness, imagination, and good sense.
He deserves a large portion of the credit for the great progress the Fund has recorded in recent years, and he leaves the institution strong and fully capable of meeting its new and challenging responsibilities. I join other Governors in expressing our thanks.
We have a formidable agenda before us and one that we should approach with a sense of hope and resolve. The necessary actions are difficult but the potential gains are immense. Pursuit of sound economic policies domestically and adherence to open and cooperative policies internationally will see us into a new period of economic progress and equity, worldwide.
Statement by the Governor of the Fund for Cameroon—Marcel Yondo
The African nations, united in their diversity, have given me the high honor and great trust of serving as their spokesman this year, to express their concerns before this meeting. But it is my country, Cameroon, that Africa is so honoring through me.
Many obstacles strew the path of the African nations toward development, keeping Africa under the shadow of misery and preventing it from sharing in the benefits of the economic recovery that is beginning—not without difficulties—in some developed countries after one of the most serious crises to shake the international economy in recent years.
You know what these obstacles are: the mounting deficit in the balance of payments, the increasingly burdensome external debt, the appalling low standard of living. It is a sad fact that Africa has the largest number of countries with annual per capita income of less than $100. Even more serious is the steady fall in the per capita income of many countries for more than a decade.
One may justly ask whether the international community finds it in its interest to remain heedless of these ills that beset the African economy. It is to everyone’s advantage that the chain of solidarity that binds the nations remains unbroken, so that misery will not be joined by despair, the wellspring of frustration.
After recounting the problems that Africa faces, I would like to take up the question of the resources and operations of the World Bank and the International Monetary Fund. But first of all, allow me to discharge the happy duty of welcoming Guinea-Bissau, Maldives, São Tomé and Principe, and Seychelles as members or prospective members of the family of the World Bank and the Fund.
In recent years the world economy has been sorely tried by monetary instability, a severe and persistent inflation, and the worst recession that it has suffered in many years. Nonetheless, it is encouraging to note, in reading several recent economic reports, that the inflation is slackening and that an economic revival is under way in the industrial countries. We are likewise heartened to see that some developing countries as well are experiencing a reassuring expansion of economic activity. But I am obliged to point out that this economic recovery is not a universal phenomenon. Because we always speak of blocs, such as that of the developing countries and that of the developed countries, it is easy for us at this kind of meeting to overlook the particular situations of some countries.
In a number of countries, including those for which I speak, the economic tribulations that have overwhelmed the world in the years just past have only aggravated the problems that Africa has faced for more than a decade, and there is no sign that these problems will soon be resolved.
In particular, the balance of payments of the African countries shows a growing deficit. While the overall current account deficit of the non-oil exporting countries fell from $38 billion in 1975 to about $28 billion in 1976, that of the African countries rose from $5.1 billion to $5.4 billion in the same period, despite the complex and onerous adjustment measures adopted by the African nations. Moreover, the deficit is expected to be about $6 billion in 1977. These deficits have been financed by massive drawings on net reserves and by an inflow of private and public capital which has swollen the external debt of those countries. The restrictions which severely limit access to the capital markets of the developed countries, and the steady shrinking of official development assistance, continue to prevent most of the African countries from financing the increasing costs of essential projects that can enable their economies to attain an acceptable rate of growth and level of development.
We deplore the fact that a number of industrial countries are beginning to impose restrictions on their imports, which may well jeopardize the emerging industries of Africa. Such an attitude is contrary to the principles that should govern world trade; not only is it unlikely to favor the industrialization of Africa, it can also dampen the spirit of cooperation with regard to the Third World.
Even today, the per capita income of several African countries remains below $100. From 1960 to 1975 the annual growth rate of these countries averaged only 2.6 per cent, and the figures at hand indicate that for 1976 the rate was not even 2 per cent. With an average annual population increase of 3 per cent, it is evident that for more than a decade per capita income in many African countries has declined steadily.
The suffering usually involved when income falls, especially when that income is at a level as low as $100 a person, is difficult to imagine for those who have always enjoyed a very high standard of living. Partly for that reason, insufficient attention has been given to the misery faced by the people of these countries in the distribution of bilateral and multilateral assistance for development.
The facts that I have just mentioned have convinced us, the representatives of the African countries, that we cannot rely indefinitely on foreign financial and technical assistance to solve our problems. We must endeavor to establish and strengthen our own institutions in order to transform the present economic order that keeps our economies under the domination of those of the powerful countries, which do not take our problems into account when they make decisions that affect our future.
As part of our efforts to participate in international decisions affecting our economic performance and our welfare, we have taken an active role in the discussions on the establishment of a new international economic order. All of us are aware of the problems that have arisen and the disappointing results of the Conference on International Economic Cooperation that has just closed in Paris. Its only accomplishments were the decision to set up a joint fund whose purposes and other conditions are to be negotiated within UNCTAD, the commitment by the developed countries to contribute $1 billion to a special program of aid for certain low-income countries facing general problems in the transfer of resources, and the promise to grant assistance for the development of infrastructure in the developing countries, especially those of Africa. The peoples of Africa dare to hope that a decade of transportation, communications, and telecommunications will be declared, and that its objectives will be achieved. Another disappointment would do the international community no credit.
In our opinion, it is regrettable that agreement has not been reached on most of the proposals concerning structural changes in the international economic system or on certain proposals of the developing countries regarding the establishment of an emergency fund to meet urgent problems. As for the crucial problem of indebtedness, the developed countries have refused to grant the moratorium requested by the developing nations.
As part of the effort we are making to increase our autonomy, we intend to set up institutions that will enable us to deal with our economic problems more effectively. We will endeavor to strengthen existing finance and aid agencies and to establish new ones.
We have resolved to increase economic cooperation among our countries. Recently, measures have been taken to establish an African reinsurance company with headquarters in Nigeria, and an African center for monetary studies is being organized in Senegal. We are also carrying on an exchange of views in the subregions of Africa with the aim of setting up payments unions or agreements. These initiatives do not mean that we are trying to detach ourselves from the rest of the world. On the contrary, we hope that in this way we will be better able to cooperate with other countries, developed as well as developing, in dealing with the problems that we face periodically. Moreover, for the establishment of these institutions we will seek technical assistance from multilateral agencies and countries in a position to help us.
In the meantime, we will continue to require external development assistance to finance our immediate needs. In this connection, I am obliged to point out that the trend of public aid for development continues to be disappointing. In 1976, the volume of official aid provided by the members of the Development Assistance Committee (DAC) was about $13,741 billion, which represented an increase of 1 per cent in nominal terms with respect to 1975 and a substantial decrease in real terms. The proportion of public aid for development in the gross national product (GNP) of the DAC countries declined from 0.35 per cent in 1975 to 0.33 per cent in 1976.
Such a trend can only compel us to call upon the industrial countries to bend all their efforts so that the objective of at least 0.7 per cent may be achieved. In this regard, we offer our warmest congratulations to Norway, Sweden, and the Netherlands for having surpassed that target. We would also like to express our gratitude to the members of the Organization of the Petroleum Exporting Countries (OPEC) for their continuing assistance to our countries. We urge these countries and the others to continue their efforts and to increase their aid.
The African Governors believe that during the next stages in the development of Africa, primary emphasis should be placed on the management by Africans of the resources earmarked for the development of their countries. One of the African agencies best suited to play a major role in the forthcoming decade of development is the African Development Bank. The Bank and its affiliated fund have acquired a technical capacity, experience, and expertise of particular value for dealing with local conditions and the specific problems of the region. Aware of this capacity, the Bank and its affiliate, the African Development Fund (ADF), have drawn up programs that are extensive yet realistic in terms of the growth of their lending capacity as well as the expansion of their operations. The Bank’s program is based on a greater mobilization of the resources of the member countries and an increase in borrowing abroad. For the ADF, the basic task is to obtain, from the participating states, an effective and realistic replenishment of its resources, taking into account the imperative needs of Africa’s development. The African Governors are grateful for the active and unstinting support that the participating states have given to the ADF since its establishment. They hope that future action to replenish its resources will be attuned to the needs of more rapid and comprehensive development, within the context of the present world inflation. Therefore, they earnestly invite the international community to support the ADF, calling upon the participating states to fix their contributions for this purpose. . . .
Allow me to say a few words on the Development Committee before going on to IMF matters. This Committee is now in existence and no one will deny that its results have fallen far short of what we had expected or would have liked to see. Of course, this situation is not due to any lack of ideas on the part of the secretariat. No, it is we who are guilty of lacking the necessary political will to take the measures that could have been taken. We ask the member countries, particularly the industrial ones, to intensify their efforts so that the Committee may fulfill its role and succeed in stimulating an increase in the real flow of resources to developing countries.
I would now like to raise some matters relating to the International Monetary Fund. In examining the outstanding events that have dominated the international monetary scene since the Manila meeting, we have never lost sight of our immediate objective, which is to ensure that the multilateral efforts in various spheres are not only exercised to the overall benefit of the members, but that they also give adequate consideration to the special circumstances of developing countries, especially those of Africa. In the medium term, our aims continue to be the ones several times enunciated in these and other international meetings: to promote an appropriate world economic order, with remunerative prices for our products, and to open up nonrestrictive access for our exports; to avoid disturbances caused by imported inflation and by inequitable manipulation of the exchange rates; to achieve sustained growth and a rational distribution of international liquidity; to minimize the effects of departure from an international system of stable but adjustable exchange rates and rapidly to return to such a system as soon as circumstances permit. Any progress made on these fronts will usefully supplement the efforts made both by us and by other bilateral and multilateral agencies to promote in our countries the expansion and harmonious growth of income, employment, and commerce.
The year now ending has seen the emergence of a number of important factors having a bearing on the activities of the International Monetary Fund. It was a comfort to experience relative calm on the leading exchange markets during this period—a relative calm brought about by the efforts of countries whose currency plays a leading role to coordinate their monetary and intervention policies. This being so, such cooperation is to be welcomed, as long as there is no violation of the fundamental rule that says all important discussions on these questions shall be held under the auspices of the International Monetary Fund. We deem it encouraging, then, that international agreement has been reached on the principles and procedures governing firm surveillance by the International Monetary Fund over members’ exchange regimes and practices. However, considering that the economies and other circumstances of members, particularly Third World countries, are fundamentally heterogeneous, we for our part would stress how vital it is that the Fund apply those principles and procedures with the special circumstances of developing countries particularly in mind.
It is certain that in the present floating system the adjustment process has not been effective enough, partly because “the currencies float.” Exchange policies have a role to play in the adjustment process just as much in Africa as elsewhere; but they should be regarded as forming an integral part of the global strategy of economic policy options in the various countries and examined in the light of the conditions and institutions of each of those countries. Experience in recent years has revealed the existence of a link between exchange rates and internal equilibrium in countries where the external sector is relatively important. When foreign transactions bear a relatively high ratio to GNP, in the absence of an overall stabilization policy the depreciation of the exchange rates can easily add to the pressure on costs and prices without bringing about a lasting improvement in the country’s performance. Since in most African countries the adjustment can only be gradual, we believe in the use of internal measures to keep down cost and price increases. We think that at the present time such internal adjustment policies would be more appropriate than mere modifications of the exchange rate, because it is not enough to correct a disequilibrium on current account merely by manipulating the exchange rate.
The deficit countries should exercise surveillance over their production costs and global demand, while surplus countries should stimulate their domestic demand without provoking inflationary pressures.
The evolution of policies to govern use of the Fund’s resources is still a matter of capital importance for the viability of our economies, and that is why we are following very closely the IMF’s activities in this area. Regarding use of the Fund’s resources in the context of the tranche policy, we once again reiterate requests we have previously made, i.e., that the conditions attached to drawings on the Fund be flexible and take due account of the problems and peculiarities of developing countries. A rigid, doctrinaire approach in this matter could jeopardize its fundamental role of furnishing members the proper amount of assistance required, when they need it. We are sorry to see that, after so many years’ experience, only a small number of members have so far benefited from the extended Fund facility. We are sure that in Africa, as in other developing areas, many countries are encountering the long-term or at least medium-term structural adjustment problems for which the extended facility was designed. We would urge that in the coming period the IMF management exercise greater flexibility in applying the requisite procedures and conditions, so that more of our countries may benefit from the Fund’s assistance under this facility.
As to the use of the Fund’s resources under other arrangements, we think it encouraging that a great many countries have made use of the Fund’s assistance in the past year under the compensatory financing facility. There is no doubt that the changes—in any case, marginal—made in this facility in response to repeated demands from developing countries have increased its usefulness in present circumstances. So subsequent modifications should take into account the changes that have occurred in our export prices in relation to the manufactured products we import. We firmly hope that a review of this facility will make it evident that trade in services is no less important and no less subject to exogenous fluctuations than trade in goods.
Moreover, so as to minimize economic fluctuations that are harmful both to the countries in which they occur and to those countries’ trading partners, it might be useful if producers and consumers alike would systematically seek means for improving the stability and efficacy of the specific commodity markets. Speaking more generally, in the interests of producers and consumers, improvements could be made in the procedure for consultations between countries on economic development processes in general and on their interactions.
As to other multilateral aid facilities administered or managed by the Fund, we note with satisfaction that the IMF gold sales are proceeding without difficulty and that they are bringing considerable resources into the Trust Fund. It is important, we think, that the usefulness of assistance through recourse to Trust Fund facilities should not be weakened by rigorous operational requirements in the form of conditions imposed by the Fund for drawing on the Trust Fund. The general orientation of countries’ economic policies, and not necessarily a financial program formally agreed with the Fund, should be an adequate basis for drawings on the Trust Fund. As regards the effects of oil price developments, we consider that the continuing assistance under the Subsidy Account is promising; we hope it will be maintained in the coming period and that members capable of contributing will continue to do so. Likewise, the usefulness of this facility would be very much increased if, when pressing needs arise, the subsidy rate could be raised above the 5 per cent level hitherto applied.
The spirit of cooperation that the Fund has shown in the past encourages us to think that the major problems confronting us can be resolved to the general advantage of the members. However, this optimistic feeling should not cause us to minimize the complexity of the matters involved. First, on the question of new allocations of special drawing rights, it is of vital importance to ensure that the leading industrial countries do not lose sight of the main objective. In our opinion, the need to make the SDR the main international reserve asset is so important that no considerations as to the size and distribution of any one allocation should slow down progress to the achievement of that objective. The disturbances that have generally affected a world exchange market based on one or two leading national currencies have revealed what dangers the international community would incur if it were unable to devise an international reserve asset that can advantageously replace national currencies. In the wider context, we firmly believe that we should not miss the opportunity of associating the creation and allocation of SDRs with the financing of economic development in developing countries.
Africa, insofar as it is concerned, has noted the introduction of the Witteveen facility. For this facility we have to thank the Fund’s Managing Director and his untiring endeavors, which we here acknowledge.
We would also congratulate the developing countries, particularly OPEC countries, who, in the present circumstances, have contributed to its creation.
It is regrettable, however, that the conditions for access to this supplementary credit are so rigid as to debar African countries, despite the fact that they should be among the most favored beneficiaries. It is therefore vital to make these conditions flexible as regards both their interpretation and their application, in order that our members may really make use of this new credit facility.
Furthermore, if our countries are not to be compelled to increase yet more the burden of their foreign debt servicing, the financial assistance granted by the Fund under the new facility should be aimed at helping members as their balance of payments needs require, rather than on the narrow basis of the distribution of quotas, as has generally happened under the IMF’s conventional assistance programs. Besides, in accordance with the saying that help should be given to those who need it most, the African Governors earnestly appeal to the industrial countries that can easily use other sources of financing to refrain from absorbing the lion’s share of the resources available under the new facility.
We also attach great importance to the Seventh General Review of Quotas now under way. This should not only provide the Fund with the basic liquidity essential for its operations but should also permit members to obtain increased financial assistance from the agency. We think that a very substantial increase in the Fund’s capital is necessary on the occasion of the Seventh General Review of Quotas; on the whole, present circumstances clearly justify an increase of about 100 per cent of quota.
To deny that an increase of this size is necessary at this juncture would be equivalent to imagining that the comfortable reserve position of a small group of countries represents the general interests of the international community.
As to the distribution among countries of the quota increase to be agreed under the seventh general review, in spite of the changes taking place in the world we still must recognize that the principle we have just enunciated needs to be observed: the general interests of the worldwide community must be safeguarded. In the wider context, we think that the maintenance of an equiproportional distribution of quotas and use of a differential technique, rather than the traditional approach, would be the only formula according with the amended Articles and with the fundamental desire of our countries for the implementation of a more equitable economic order.
In conclusion, we firmly hope that the views I have just expressed to this august assembly, which reflect the position and the judgment of all the African Governors, will be taken into consideration when we have to adopt decisions on the important questions submitted to us. We are happy to note the endeavors of the Fund’s Executive Directors and management who, during the recent difficult years, have evidenced a great capacity to respond to the needs stemming from the uncertainties inherent in world economy and finance. This experience encourages us to hope for a recovery of the world’s economy and to believe that henceforth, and in any event more than before, it will help promote the sustained economic growth of our countries. That is the hope I express in the name of Africa.
Statement by the Governor of the Fund for France—Robert Boulin
Fifty years ago the French writer Paul Valéry said: ‘The time of the finite world is beginning.” We, today, might add: “The time of the finite economy has begun.”
In recent years we have all awakened to a new reality—despite all the differences that still separate our countries, all economies throughout the world are closely interconnected. I would even say that we have experienced the truth of this in two regards, simultaneously.
First, we have realized that none of our countries, during the economic crisis that developed in 1974 and 1975, was in a position to act alone and to save itself by its own resources: never before, I believe, has this interdependence been so profoundly and distinctly felt.
Then, too, recent developments in the relations between industrial countries, oil producing countries, developing countries, and planned economy countries have made us appreciate that this interdependence is no longer, as in former times, a matter of proximity and kinship; we all know now that the only economic horizon is the blue rim of this earthly globe. Universalism is no longer the sole prerogative of the thinker. It is also characteristic of production, of trade, of money, and of all the economic and financial life for which we assume responsibility in each of our countries.
Is not this the very significance of our Annual Meeting? Like all groups that are growing stronger, this one has far overflowed the bounds of the institutions that brought it into being. Now, its existence can be felt in everyday life, but let us remember it was the World Bank and the International Monetary Fund that first carried the torch.
Before proceeding to comment on the questions of the present time, may I take just a brief moment to comment on this revolution. Despite all the challenges it poses for us, it appears to me irreversible and beneficent.
As philosophers, let us acknowledge that this worldwide integration stimulated by the ferment of economic activity and trade is heightening the capacities of mankind. The emergence of the consciousness that we share common problems indicates a sense of solidarity that historians will doubtless recognize as a fundamental turning point.
As politicians, let us admit that increasingly open frontiers and the more and more numerous links forged by trade and exchange of all kinds are powerful guarantees of peace and understanding. Is there any friendship pact with surer and more far-reaching effects?
And last, as accountants—for a Minister of Economy and Finance needs to know how to count—let us realize that the standard of living all over the world is largely dependent on the development of an international economy in which countries are accessible to one another and each nation takes its rightful place.
This being so, our first concern should be to conserve what we have gained, conscious of the catastrophic effects of any backsliding. If there is one positive aspect, in these days when the results of our irksome efforts sometimes seem disappointing, it is certainly the fact that the worldwide outreach of our economies is standing the test. This in itself is a substantial result. While we may not regard it as spectacular, let us refrain from trying to undermine it. And let us not forget that there is some point in attempting to preserve the fruits of 25 years of dogged progress in a widening economic sphere. Nothing less is at stake than the peace of the world and the well-being of nations.
In these days of a gloomy economic scene and moral disquietude I thought it would be useful to reiterate this profound conviction at the beginning of my remarks. It is the principle underlying our work and the raison d’être of our assembly, despite all the day-to-day difficulties and routine work.
If some people are getting the impression that these opening words are far removed from the realities of today’s world, I can disabuse them straightaway. In point of fact, I believe that as Governors of the International Monetary Fund we have to concentrate on what the experts call the balance of payments adjustment process. Its proper functioning is the prerequisite for the continuance of an open trade and payments system. And I think we have some reason for concern with regard to the slowness of the process.
As you will remember, in 1974 the international payments system confronted the most enormous disequilibrium it has ever had to absorb in conditions of free trade and payments. The disequilibrium was considerable in amount and disseminated worldwide. We all knew that this unprecedented situation was a challenge that we could not fail to meet. A balance sheet of claims and debts within the world community cannot provide a solution: at some time current transactions, visible and invisible, will have to be restored to equilibrium. We have all realized, too, that long years would be required for this.
Our present task, then, is the vigilant surveillance of the progress of this adjustment process, if the world economy is not to be allowed to settle down into a state of imbalance that could become structural or, at any rate, chronic. If such were the case, in fact, in the long run this situation would be fraught with dangers of commercial, monetary, or financial distortions, calling into question the fundamental gains whose price I have described.
Now, what do we find? Following a year, 1975, of diminished imbalances due to the repercussions of the economic crisis on trade, 1976 was marked by a swing back to a large surplus in the oil producing countries and an even larger increase in the current deficit of the industrial countries.
For 1977, experts are predicting at this time a quasi-stabilization of the oil producing countries’ surplus on current account and of the current deficit of the non-oil producing developing countries. And they anticipate a yet larger deficit in the industrial countries’ current account.
We cannot help feeling, therefore, that the progress achieved in four years toward the adjustment of payments balances is still very little and, let us admit it, less than what we expected.
Furthermore, the evolution of payments by main groups of countries does not reveal the profound disparities in the situation of their individual members. With protracted disequilibria in some countries, the deficit or surplus tends to become a permanent feature of their overall balance sheet.
Let us not become inured to this. If such a trend were to continue for a long time the results would most certainly be massive financing problems, greater instability of currencies, and, in the end, very serious repercussions on the levels of activity and employment.
Then, being aware of the existence and extent of these shortcomings, it is our task both to find the ways and means for more rapid adjustment and to adopt the necessary precautions in coping with the present difficulties. In this connection there are three points I wish to emphasize.
The first is an axiom backed by evidence and experience. Appropriate domestic policies are essential to a restoration of external equilibrium. This conviction was very much cherished by the founders of the International Monetary Fund. It is in no way outdated, and it should be remembered now when various countries, if they are not careful, could either be drawn into dangerous deficit or pile up large surpluses.
I know that some countries’ freedom of maneuver is restricted by their concern not to worsen the employment situation, and that of others by a hesitation to stir up renewed inflationary pressures. In spite of this, I am persuaded that in pursuing our common objective of a return to better equilibrium in world payments we must still combine the resolute and complementary efforts of the deficit countries and the surplus countries.
The former need to control cyclical factors of inflation by a prudent management of global demand and a strict control of the money supply. But also, a considerable improvement in the situation of the economic units must be sought, by striking at the structural roots of inflation.
As you know, France has resolutely pursued this course for the past year. I will not describe our policies again, but will confine myself to reporting that they have begun to bear fruit.
—For a year the franc has, on the whole, remained stable. To our mind, that is a most significant achievement.
—Now that the trade deficit is being absorbed, our current payments in 1977 should show an imbalance less than half that of 1976.
—Internally, the slowdown in pay increases, in observance of the rule regarding the strict maintenance of purchasing power, is an accomplished fact.
—In line with the aim of stabilizing the liquidity rate of the economy, the creation of money is being strictly controlled.
—Public finance management is being oriented in the direction of a gradual return to the traditional rule of equilibrium, and the social security deficit has been made up.
—The rise in prices, which was a steep 13 per cent one year ago, has been brought down to a much lower level for the past year, and now all the circumstances favor a more pronounced slowdown.
—The Government has abstained from drastic deflationary measures for a year and has consistently taken the necessary measures to assure maintenance of a moderate rate of growth, which will be obtained in 1977.
—Although one of the industrial countries with lowest unemployment, France is experiencing a real problem in this regard. The Government has formulated a direct action program that will make it possible to tackle the problem without running the risk of renewed inflation.
But the French Government is very much aware that these first results can be consolidated and reinforced only if the past year’s efforts are continued. No one is more conscious than it of the time required for a genuine recovery from the inflationary ills that were afflicting our economies.
Therefore, my country maintains this same orientation in its policies and is making a lasting contribution to the international adjustment process.
But experience leads France to hope that the surplus countries, too, will contribute actively to the process, by stimulating their own demand in appropriate ways.
Generally speaking, these countries at present manifest a rate of growth that is tending to slow down, high unemployment, underutilized production capacity, and often very sizable payments surpluses.
Of course, they must be watchful to ensure that boosting their domestic operations does not cause inflation to flare up again. But they now seem to have considerable room for maneuver and to be in a position to make a substantial contribution to the upholding of world demand and the reduction of international payments imbalances.
I am therefore pleased to see the initiatives recently taken in this direction.
It is these efforts—difficult, I know—that will advance us along the path to adjustment. But they cannot produce effects and develop unless two conditions are fulfilled, and I would like to dwell on these at this point.
First, instability on the exchange market must be avoided. I want to make it plain that the freedom of choice that IMF members are given under the new Articles must not lead to license or disorder.
The experience of recent years has clearly proved, I think, that exchange rate fluctuations are not the only relevant factor in effecting the adjustment in payments balances. In any case, could anyone ever have believed it would be that easy? Quite the reverse—we have noted that excessive exchange rate fluctuations were not only unable to solve the problem but even aggravated it by linking together the depreciation of the external value of the currency and the rise in domestic prices. There is nothing surprising about this, in our economies that are now wide open to the outside and in which imports comprise a sizable component of purchases unaffected by fluctuations in relative prices.
It is for this reason that—without of course denying that the movement of exchange rates must play a role in the adjustment process—it seems to me that the contribution floating currencies can make in the development of this process is often limited, sometimes negative. This happens whenever this system gives scope for erratic movements or, at the other extreme, manipulation of the exchange rates. Both the erratic movements and the manipulation can seriously damage members’ economies by jeopardizing their stabilization efforts on the internal scene.
In light of the above, France is gratified that the Executive Directors of the International Monetary Fund have adopted rules for observance by members in implementing their exchange policies, and arrangements for the firm surveillance to be exercised by the Fund on exchange policies. This decision should make it possible to counteract excessive short-term fluctuations on exchange markets, to prohibit manipulations of the rates with a view to obtaining inequitable advantages, and thus to assure greater stability on the markets, under the new Articles whereby members undertake to “promote a stable system of exchange rates.”
A second prerequisite for advancement in the direction of adjustment resides, it seems to me, in the improvement of financing facilities for balance of payments deficits. In recent years the financing requirements of deficit countries have, for the most part, been met by recourse to private operations, either bank loans or bond issues. This to all intents and purposes has effected a recycling of means of payment between the surplus countries and deficit countries. And there is no doubt that this marks a very important stage in the evolution of the international payments system, which is now better able than in the past to assure, in itself, the transfers of capital that are the counterpart of current operations.
I have no doubt that these facilities will continue to satisfy the surplus countries and largely to cover the foreseeable needs of the deficit countries.
Nevertheless, I see two limitations to these mechanisms.
First, there is the question of the risks that may be assumed by the financial intermediaries or the holders of capital. When a borrower’s indebtedness reaches a certain level, recourse to public intervention mechanisms is obviously necessary.
The second limitation relates to the fact that in massive deficit financing through private channels there is no provision, in advance, for the use of a conditionality that institutions are better able to define and to administer. Therefore, the borrower may be induced to fail to take the necessary internal adjustment measures.
Finally, this form of financing contributes to an uncontrolled expansion of international liquidity. It is in this way that the volume of international liquidity has tripled since 1970, the increase being mainly due to the expansion of reserve currencies held by the central banks.
From these findings, and as far as I am concerned, I draw the following conclusions.
It does not seem to me that there is a global need for supplementary liquidity. On the contrary, in the present situation the creation of new liquidity would be likely to raise doubts in people’s minds about our willingness to defend monetary stability and to limit excessive liquidity creation.
Under these circumstances, the French Government believes that a new allocation of special drawing rights would not be timely.
On the other hand, the official mechanisms must be allowed to play a greater role in the financing of deficits. The countries with real requirements must be provided with more funds, the distribution of which will be controlled and subject to specific conditions for their use.
With this in mind, France has welcomed the proposal of the Managing Director of the International Monetary Fund for the establishment of a supplementary financing facility. Through a reallocation of funds, such a facility will make it possible to meet—on adequate conditions—the substantial needs that are bound to arise in any case in the years ahead. We hope that this facility can be established promptly.
Nevertheless, the new supplementary financing facility will be temporary. It should help us through the period until entry into effect of the Seventh General Review of Quotas, on which we hope to see agreement in the near future. We favor an increase in quotas because it is an economically sound means of replenishing the resources that the Fund needs in order to perform its function. A substantial increase will be necessary. Furthermore, to the extent that the sixth review is selective, we believe that the seventh increase should be equiproportional, which will enable it to be completed as quickly as possible.
We likewise note with satisfaction the contribution that has been made to a better allocation of funds, on two occasions this year, by the implementation of the General Arrangements to Borrow. But we find that the total amount of supplementary resources that can thereby be made available to the IMF represents, in relative terms, only a small part of international liquidity. Thus, an adjustment of this amount would be justified.
Before concluding, I would like to express our confidence in Mr. Witteveen, Managing Director of the International Monetary Fund, and say how much we regret his departure.
The foregoing are my observations on the functioning of the system of international payments. We have devoted lengthy discussions to its reform; we should now concern ourselves with its management. And let us not think that this will be an easier task, in the present—and in some ways exceptional—circumstances.
But as you know, in another area we have been called upon to exercise our talents as visionaries. I speak about the creation of the new international economic order to which the international community has given its attention for the past several years. We have certainly not yet come to an agreement on what this means—and how could it have been otherwise, when the problem is immense and directly affects the interests of every nation? Therefore, however divergent our positions may be within the array of economic powers in today’s world, it seems to me that we all believe in its necessity. Is not that itself a fact of great importance, permitting a different response to conflicts such as those that have afflicted the world in the past?
Such, in any case, is the conviction of France, which took the initiative of convening the Conference on International Economic Cooperation two years ago. I can assure you that our conviction has not changed. We attach fundamental importance to this new North-South dialogue, which should therefore be continued.
Allow me to note in passing that the gloom in the international community about the question of the new world economic order seems to hinder an objective approach.
It is true that on certain matters of special interest to the participants in the dialogue, and on which the discussion was not preceded by a long-standing tradition of working together, the Conference on International Economic Cooperation has not borne fruit. Because of this, there has undoubtedly been some disappointment.
Still, it seems to me that this starting point, while it has not led to agreement on everything, is a good one. I would like to make two remarks in this connection.
The first is that the dialogue has already shown that concrete results can be achieved. Thus, with regard to public aid for development, agreement has been reached not only on guidelines, but also on precise and detailed commitments concerning both the volume and the conditions of aid. In view of the importance of transfers of real resources in the development process, I believe that this agreement is quite significant. Likewise, with regard to raw materials markets—a key economic sector in most of the developing countries—it has been agreed that agreements will be sought on a product-by-product basis. In addition, the international community has undertaken to set up a common fund, in accordance with the integrated program for basic commodities adopted by the fourth United Nations Conference on Trade and Development. France, which made such a proposal at this meeting several years ago, very much hopes that the negotiations on the statutes and functions of the common fund will proceed rapidly.
My second remark is the following: even with regard to matters on which agreement has not been reached, the Conference on International Economic Cooperation has played a particularly useful role. Within a new framework free of past constraints, and within a climate of cooperation in which all viewpoints could be expressed, the conference has made it possible to recognize the critical problems that make our economies a single community, as I said at the outset. The map of this new world has been drawn. History has taught us that the voyages of the explorers portended new times. I believe that we can invest the Paris conference with a significance of this kind.
In this spirit, we have agreed to continue the dialogue in all appropriate international forums. Some of the problems identified naturally involve the institutions that are meeting here. It is to these problems that I would now like to turn.
First of all, I must emphasize that we regard the volume of aid as of central importance.
Needless to say, an increase in flows of private capital to the developing countries is a positive contribution to the success of their efforts. I am therefore pleased that the work done within the Development Committee to expand the access of these countries to capital markets has led to key recommendations, the implementation of which should bring useful results. In particular, we hope that the guarantees offered by the World Bank and regional development banks will help creditworthy borrowers to overcome the difficulties that they may face and to assist them in making use of those markets.
Nevertheless, whatever progress can be made in this regard, we should be well aware that for many developing countries, and especially for the most impoverished ones, the volume of aid remains a decisive factor. The vicious circle of poverty cannot be broken by itself and growth, in order to be self-sustaining, first requires a takeoff in which external aid has a central role to play. Allow me to offer a few comments in this regard.
No one can deny that the present volume of official aid is far below what is required for the economic takeoff of the poorest countries.
The legitimate concerns that have been expressed about the quality of aid, in particular its conditions and its distribution, would be greatly eased if the international aid efforts were shared more equitably among the donor countries.
Likewise, the problem of indebtedness, which justly preoccupies the international community and which was discussed at length at the Conference on International Economic Cooperation, can really be solved for some countries only through an increase in the transfer of real resources.
It is precisely on this question—aid for development—that the Paris conference has opened up the most encouraging prospects. Indeed, all of the participants have agreed that public aid should be increased substantially and that the efforts of the donors should be all the greater to the extent that their relative performance has been weaker up to the present.
For its part, France once again affirms its commitment to the international objective that each donor country should allocate 0.70 per cent of its gross national product for official development assistance. We find that the effort made in this regard has varied considerably among the countries. We hope that the donor countries that are farthest from achieving this objective—and especially those that have the highest per capita incomes—will endeavor to meet it so that the total volume of aid will be increased and so that the common effort will be shared more equitably.
Having made this preliminary observation, I would now like to turn to the assistance that the International Monetary Fund and the World Bank are providing to the developing countries.
I have three comments to make in this connection.
First, greater flexibility in the operation of the compensatory financing facility—which France has firmly supported—has permitted a significant increase in drawings on the Fund. For 1976 and the first half of 1977, drawings on this facility totaled nearly SDR 2.5 billion.
Second, the World Bank’s Third Window, to which France has made a significant voluntary contribution, has made soft loans totaling $700 million to 26 countries.
Finally, the Trust Fund, thanks to the capital gains that it has realized in the first 12 gold sales, has begun to make loans to developing countries with the lowest per capita incomes. . . .
To conclude my remarks, I would like to emphasize the imperative need of our time: to strengthen cooperation among nations in the economic, monetary, and financial areas. I am aware that this idea of international cooperation has long been on our minds. But it must be more concretely perceived by public opinion and must be translated into even more tangible results. Cooperation among nations will enable the industrial countries to return to sound growth with external equilibrium. Cooperation among nations will enable the developing countries to overcome the obstacles that they face. It is this cooperation that France seeks. We will continue our efforts to make it a reality.
Statement by the Governor of the Fund and the Bank for Brazil—Mario Henrique Simonsen
It is a great honor for me to address this Annual Meeting of the Governors of the International Monetary Fund in the name of Argentina, Bolivia, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela, as well as my own country. On behalf of the Governors of those countries I extend the most cordial greetings to our Chairman, to the Managing Director of the Fund, and to all the delegations participating in this meeting. We have been saddened by the Managing Director’s decision that, at the expiration of his present term of office, he will not stand for re-election. His qualities of leadership, imagination, and intellectual brilliance have been decisive in firming the position of the International Monetary Fund in the most critical period which the international financial system has faced since the great depression. We must respect the reasons for his decision, but the international financial community will miss him grievously. We wish him and his family well for the future.
I should like to join the distinguished speakers who have preceded me in thanking the Government of the United States of America, which is once again our host, and in particular Secretary Blumenthal, for the welcome extended to us. We have been specially honored by the visit to our meeting and the speech which has been delivered to us by the President of the United States, whose words will constitute an inspiration to our deliberations.
At the last Annual Meeting we could note considerable progress in the recovery of both developed and developing countries. But we were concerned then at the very pronounced slowdown which was occurring in industrial countries during the second half of that year. This year we can note more rapid recovery in those countries during the first half of the year, though less than was expected earlier. In the second half also, growth is expected to be slower than foreseen earlier, despite additional measures of stimulation adopted recently by some of the industrial countries. Developments for the first half of 1978 are also uncertain.
Although our region as a whole has had more rapid growth in 1977 than in 1976, this is still far from satisfactory. While our region, like other less developed ones, must normally be expected to sustain somewhat higher growth rates than the industrial countries (this was indeed the pattern between 1967 and 1974), nevertheless, the lower the growth rate of the developed countries, the more difficult it becomes for us to sustain high growth rates for ourselves. The industrial countries are our principal customers and from them we must earn most of the foreign exchange needed to pay for the imports and services which we require. Furthermore, it is particularly worrisome to us that the growth rate of imports of industrial countries is expected to be only two thirds of the average for 1962-72. The consequence is an export growth rate for the less developed countries which is also lower than the earlier average. In 1977 this lower volume growth was offset for some countries by an improvement in the terms of trade; others had deteriorating terms of trade, however, and a general decline in them is expected for 1978.
There is no question that up to 1977 there has been a considerable improvement in the global pattern of current accounts, and the improvement has been particularly marked in our region. Also, there has been a pronounced change in the financing of the current account deficit in our region. Private direct investment, long-term loans received by governments from official sources, and medium-term borrowing from commercial banks permitted not only the financing of the current account deficit but also, as in 1976, a considerable accumulation of international reserves. Nevertheless, one cannot forget that this result was achieved, to a great extent, by very strong adjustment measures undertaken by many of our countries, and at some cost in terms of growth rates.
The disappearance of the current account deficit for the industrial countries as a group foreseen for 1978 and the persistence of the surpluses of some major oil exporters, who are unable to absorb them, pose a continuing problem. As long as some countries have persistent surpluses, others must have deficits, and the concentration of these deficits in the same countries—whether developed or less developed—for extended periods could lead to serious problems for them as well as for the world economy as a whole. Means must be found to finance a larger part of the deficits through direct investments and relatively long-term loans, and the deficits themselves must be shared by the industrial countries. This requires an expansion of demand in industrial countries, which need not be inflationary if it is accompanied by a liberalization of imports rather than the present very disturbing trend toward increased protectionism.
We recognize the sustained and substantial action undertaken by the major oil exporters to recycle part of their surpluses both directly and through the international financial institutions. At the same time, recognition has to be given to the role played by the private financial institutions, particularly the commercial banks, in recirculating surpluses to deficit countries. The Caribbean and Latin American region has been able to rely on commercial banks to a substantial extent. The responsible policy of borrowing countries has avoided the emergence of debt-servicing problems. The record of the borrowing countries in meeting their obligations has been unquestionably superior to that of borrowers in some sectors of the industrial countries themselves.
The role of the commercial banks, whose financial performance has benefited greatly from their operations in the developing countries, will remain important in the future for our region, even if additional official resources become available and new transfer mechanisms are established. The role of the commercial banks can be helped by countries making available an adequate amount of economic information. We wish to stress, however, that this is a role for the countries themselves. As last year, we categorically reject any role for the Fund in providing to nonofficial bodies anything except published statistical and institutional facts, i.e., it should not provide confidential information such as any judgments, forecasts, or analyses regarding the economic performance of countries. Such a role would impose on the Fund a responsibility which it is not in a position to bear.
On the other hand, we welcome the increasing role which the Fund has played and is continuing to play both as a source of balance of payments financing in this period of needed adjustment and as the central institution of the international monetary system. The mobilization of the Fund’s own resources through the reform of the compensatory financing facility has also played an important role in recent years and has been particularly helpful to the less developed countries, including many in our region. We look forward to a further development of this facility and to increased activity of the Fund’s buffer stock facility.
The establishment of the new supplementary financing facility is an important development; we owe the initiative to the drive and leadership of our Managing Director. We greatly appreciate the intention expressed by the potential creditors of the supplementary financing facility, that the resources at its disposal should not benefit only a few countries, but to a substantial extent the less developed countries. Whether it will in fact do so will depend very much on the manner in which the facility is managed. Supplementary financing will be available, along with the Fund’s own resources, under stand-by arrangements or under the extended facility. The programs will be for longer terms and will have a longer repayment period than stand-bys, even considering the helpful new practice of stand-bys of more than one year’s duration.
The supplementary financing facility thus enhances the attitude of the Fund, which we welcome, that stabilization programs, to be successful, must be gradual. The member country programs submitted to the Fund will be subject to upper-credit tranche conditionality, even though drawings under the supplementary facility, paralleling first credit tranche use, will be available without phasing. We regret that this latter use of supplementary financing will go into effect only after the present extension of tranches by 45 per cent will have lapsed. We are not convinced that all countries will be encouraged to use this new facility, to the extent that might be desirable, because of the way in which conditionality is applied.
We would like to take this occasion to make clear that we do not oppose—indeed we support—the principle of conditionality attached to the use of Fund resources, but we do feel very strongly that the criterion of conditionality should be reviewed. We would like to see the conditions which will be applied in stand-bys become more predictable and more uniform.
In expressing our satisfaction at the establishment of the supplementary facility we would, however, like to sound a warning or, rather, to repeat a warning which we have already given earlier. There is need for adjustment assistance of the kind which can be met by the Fund. But, above all, as long as structural surpluses persist, there is need for the deficits to be adequately balanced between developing and industrial countries and for a system which will make available long-term financing in increased amounts to the less developed countries.
The entry of the Fund into large-scale borrowing, so far only from central banks, is a new development. It does not, however, dispense with, rather it reinforces, the need for an adequate increase in quotas. The Fund’s borrowed resources can never be more than a supplement to its own resources. And, in order to borrow, the Fund must be able to dispose of callable resources of its own which add to the guarantee that lending countries have when they make their resources available to other member countries through the Fund.
We favor a new allocation of SDRs at an early date. We feel that the proper functioning of the international financial system requires that the SDR should gradually assume the central place as a reserve asset. If the SDR is not to fall into desuetude, the present situation cannot continue. It is now over five years since there has been any increase in the volume of SDRs. For this reason we think that an allocation of SDRs is urgently necessary. However, if SDRs are to constitute a welcome addition to the world’s liquidity, the SDRs must be made more attractive, inter alia by improving their operational characteristics.
Despite the abandonment of par values, the Fund has continued to play a crucial role as a regulator of international good behavior in exchange matters. In fact, the second amendment enhances the role which it will play in surveillance over exchange policies in the world with a view to ensuring as much stability as possible through stable underlying conditions.
Moreover, we feel that the Fund’s surveillance should concentrate on the exchange policies of the main trading countries, because it is their performance which affects the international financial community.
The principles on which surveillance shall be exercised must continue to evolve in a pragmatic fashion. The working of exchange rates in the adjustment process continues to present important challenges and the problem of sailing a safe course, avoiding both undue rigidity and unnecessary instability, has not been solved.
In this context, it is a preoccupation that the Fund cannot in practice influence all its member countries to the same extent to persuade them to contribute to the adjustment process. Issuers of reserve currency and countries in surplus can escape the effective surveillance of the Fund or feel it too late. This often imposes an excessive burden on the remaining countries.
Undoubtedly, Fund influence has been helpful in limiting the extent to which protectionism has been strengthened. Quite properly, the Fund has addressed itself to protective measures adopted for balance of payments purposes. Nevertheless, protective measures adopted by industrialized nations for other purposes have been just as harmful to the world trading system. The apparently natural way of measuring the effect of protection in terms of its impact on imports (of the country adopting them) does not properly reflect the harm which these measures can do to other countries. It would be more helpful to measure the effect of protection adopted for whatever purpose in terms of the harm it causes to the countries whose exports it affects.
A special word should also be said about the Fund’s gold sale program. This has gone smoothly, much more than many expected, and has permitted the accumulation of helpful amounts of resources in the Trust Fund, through which the Fund has added an aid function to its regulatory and financial intermediary functions. We regret that the Executive Board decided to exclude certain countries arbitrarily from the direct distribution of profits on gold sales.
We would finally like to reiterate our view that the effective governance of the International Monetary Fund depends on a representative Board in which each region can make its voice adequately heard. Our region, which has taken on increasing weight in the financial affairs of the world, is united in its determination to maintain its present level of representation in the Executive Board of the Fund.
Statement by the Governor of the Bank for the Federal Republic of Germany—Hans Apel
The worldwide economic recovery has lost momentum. This is certainly true for most industrial countries, and it has consequences for the developing world. In view of the high unemployment prevailing in most countries, we cannot afford to remain passive. It was exactly for this reason that the Government of the Federal Republic of Germany has now decided—for the second time this year—on measures to strengthen domestic demand. The earlier medium-term program for public investment in the order of DM 16 billion is currently being supplemented by tax relief measures and a substantial increase in government spending in 1978.
We are confident that the programs already under way and the ones currently under preparation, taken together, will accelerate economic growth again and enable the German economy to reach a growth rate of 4½ per cent in 1978. The public sector deficit will rise from DM 33 billion in 1977 to at least DM 47 billion in 1978, equivalent to roughly 4 per cent of our GNP.
I am not saying this merely to demonstrate our efforts to fight unemployment at home, but to make it clear that we do accept our responsibility for world economic activity. Over the past 12 months the deutsche mark has appreciated by 10 per cent vis-à-vis the 16 currencies of our most important trade partners. This must have consequences for our exports. We know, however, that we live in an interdependent world. We wish to play our part in overcoming the present cyclical and structural difficulties.
At the same time, we too came to Washington with some expectations. We are pleased to note that other industrial nations also responded to the slowdown of economic growth with appropriate domestic actions. Individual countries alone cannot ensure a continuous expansion of world economic activity no matter how heavy a weight they carry in international trade. This burden has to be shouldered by many countries. This Annual Meeting of the Fund and the Bank is, in our view, the appropriate forum to combine and to coordinate our various economic measures and efforts in order to enhance and reinforce their effectiveness.
International solidarity has stood its test in recent years. With our common efforts we have managed to cope much better with the worldwide difficulties than we ourselves may have believed at the time. The severe balance of payments dislocations experienced by many countries have at least been alleviated. Some countries, in fact, have mastered their problems remarkably well. Up till now we have avoided entering the perilous road of increasing protectionism. Beggar-thy-neighbor policies cannot be the response to the challenges of our time. We also made headway toward greater price stability.
A foundation for further progress has thus been established. In contributing to a continuing and steady growth of the world economy, the Federal Republic of Germany will always attach the greatest importance to keeping inflation in check. This guiding principle applies without reservation to our domestic economic policy. It equally determines our stand on issues before the IMF and the World Bank.
We are prepared to support the Fund in all its activities provided they do not alter the character of the Fund in supplying needed international liquidity without opening up new sources of inflation. With this qualification we are willing to agree to an increase in IMF quotas under the pending seventh review. But we must keep in mind that Fund assistance is primarily assistance in support of a country’s own efforts to pursue sound economic policies in close collaboration with the Fund. This collaboration, after all, is in the interest of the debtor countries themselves. By demonstrating their willingness and ability to tackle domestic economic problems, it will greatly improve their credit standing on international financial markets. Since our last Annual Meeting there have been impressive examples of the benefits countries can derive from such cooperation with the Fund.
We trust the Fund’s ability to take due account of any member’s particular economic situation. There is no reason to believe that the Fund, in negotiating with borrowers, would impose policy conditions that countries find impossible to meet. We are willing to bring the seventh quota review to a quick conclusion. We would like to introduce a new idea into the discussion on the quota adjustment. Instead of distributing the general quota increase evenly over all four credit tranches we propose to expand more than proportionately those credit tranches whose use is tied to stricter conditionality.
We also hope that the supplementary financing facility will soon come into operation. The Federal Republic of Germany has accepted a financing share of $1.2 billion. As in earlier special arrangements, it exceeds substantially our quota share in the Fund. This does not mean necessarily that we ask for a higher share in the Fund. But the size of the quota increase has to be related to the IMF’s liquidity position and the availability of creditor currencies.
Restoring a reasonable degree of economic stability, reducing the rate of unemployment, and speeding up the growth of the world economy will require a dual strategy. First, we need coordinated national efforts. We are convinced that in the Federal Republic of Germany we have explored and initiated whatever is possible at this time. World trade has benefited greatly from our persistent efforts to stimulate the economy. Between the first half of 1974 and the first half of 1977 the value of our imports rose by 34 per cent, our exports by only 20 per cent. Our current account surplus is estimated to shrink from its $10 billion peak in 1974 to $2-3 billion in 1977, equivalent to 0.5 per cent of GNP. This relatively small surplus on current account is more than offset by long-term capital exports and our basic balance is in deficit.
The second element of the strategy is international solidarity, not in words but in deeds. The IMF has to play a central role in this context. It has proved its effectiveness and its ability to prompt necessary action. The successful work of the Fund certainly reflects the skillful leadership of Mr. Witteveen. It is with great regret that we learned of his decision to leave the Fund. We respect this decision. We know that he has set high standards for his successor. . . .
Progress of the developing countries will very much depend on the improvement of the economic situation of the industrial countries and the growing integration of the developing countries into world trade. Also, trade among developing countries offers ample room for improvement. For the poorer countries, however, this will not suffice. There, indeed, an overall increase of ODA is warranted. My Government just decided to raise the development aid budget by 22 per cent. This rate of increase is more than double the average growth rate for the 1978 budget as a whole. . . .
There will be no easy solutions. The worldwide structural dislocations which can be overcome only gradually have aggravated the problems. But there is no reason to lapse into resignation. The close and active cooperation and solidarity practiced in recent years have helped us to make progress. What we need now is stamina, qualified judgment, and also patience. The tremendous economic and social difficulties of all countries do not only pose a challenge to our social order and its future, they also have brought about a degree of collaboration between nations that was unimaginable to earlier generations. My country stands firmly by its international commitments. If we assist one another then our present difficulties will give way to a prosperous and more equitable future.
Statement by the Governor of the Fund for New Zealand R. D. Muldoon
I, like previous speakers, am pleased to note that during the past year economic and financial conditions have improved in many countries. Recovery from the world recession of 1974-75 has continued in 1977, although—as recognized at the last meeting of the Interim Committee-it has been slower than expected and unevenly distributed. A further slight reduction in the external imbalance between deficit and surplus countries seems likely this year, but inflation rates generally remain unacceptably high, despite the persistence of substantial unemployment and excess plant capacity in most countries. As yet—with business confidence still badly shaken—there is little sign of a resurgence in investment, without which there can be no sustained growth in the world economy.
Such generalizations, however, mask the very wide disparities in the circumstances of individual countries. These are well known to us all. What concerns me almost as much are the widely differing views on general policy prescriptions needed to achieve adjustment and restore economic stability. With such a high degree of interdependence of the economic fortunes of individual countries, a cooperative approach is essential to achieve rational international adjustment.
Last year in Manila, the Interim Committee concluded that external payments adjustment should be symmetrical as between deficit and surplus countries. Both have a responsibility to implement domestic and exchange rate policies which will lead to a reduction in the present unsustainable external imbalances. But to what extent is this principle being followed?
Many deficit countries, including New Zealand, have been maintaining strict demand management and incomes restraint policies, along with other measures, designed to reduce inflation and to encourage a switch of resources away from consumption into net exports. These efforts have produced some commendable improvements in their external positions. In New Zealand’s case, the current account deficit has been reduced from in excess of 14 per cent of GDP in the fiscal year 1974/75 to less than 7 per cent in the fiscal year 1976/77. This has not been achieved without real social costs. Living standards in New Zealand have fallen sharply and the rate of unemployment, although low in comparison with some countries, is historically high. Yet despite our efforts, and those of other deficit countries, large external imbalances still remain.
I regret, however, that some “strong” industrialized countries have not managed to expand their economies to any substantial degree and are still running sizable surpluses. Too much attention is being paid to the financing of external deficits and adjustments by deficit countries, while far too little attention is being given to the root cause of those deficits and the resultant debt accumulation. It is forecast by the IMF that, although the surpluses of the major oil exporters will decline from an estimated $39 billion to an estimated $35 billion for the first half of next year on an annual basis, the industrial countries will move from a deficit of $1 billion to a surplus of $7 billion. We have then the continuation of these combined surpluses at a rate of some $40 billion for the third successive year after falling from higher levels in 1974 and 1975. The corresponding deficits will exacerbate the already existing debt servicing problems of a number of countries and add to the extent of adjustment required by deficit countries in order to achieve sustainable balance of payments positions.
I am particularly concerned at the persistent large deficits, in the more developed primary producing countries projected to continue at about $10 billion, and in the non-oil developing countries at $25-30 billion. Mr. Witteveen’s observation yesterday that primary commodity prices have declined markedly in the middle months of 1977 highlights our cause for concern. While this may help industrialized countries to reduce their inflation, it almost certainly implies some reduction in export earnings of the primary producing countries, including developing countries that can least afford it.
Despite these developments too many of us are saying with apparent resignation that these massive surpluses and deficits will be with us for some years yet. The result is of course that the debt service ratios of the deficit countries will continue to rise to an unacceptable level. These overall figures of about $40 billion should be compared with total ODA flows of about one third of that amount and increased indebtedness of the deficit countries of about two thirds of that amount.
While the Annual Report of the Executive Directors of the IMF is, I think, realistic in respect of the more developed primary producers, I believe that it is dangerously optimistic in respect of the non-oil developing countries. These massive deficits are not simply annual figures, they create a cumulative rise in debt. To speak euphemistically of an “adjustment process” which is of course largely one-sided is to obscure the reality that what is being required of deficit countries is in essence a reduction in their standard of living. Despite the dozens of international conferences that have taken place each year—all intended to improve the standard of living of the peoples of the developing countries both in absolute terms and in relative terms—the fact is that since 1973 the relative position of these countries has worsened. Conference after conference has concentrated on palliatives rather than cures.
In a country such as New Zealand it is possible, albeit with considerable difficulty, to deliberately reduce the standard of living of the people with no great damage to the democratic process. In many countries of the developing world, however, it is not possible and indeed in some of them democracy is a fragile plant. If the major industrial countries lack the political will to make the necessary adjustments, and many of them do, how much more difficult it is in the developing countries. Two things are essential. The first is not just a halt to expanding protectionism as many are advocating but a reversal of the protectionist policies which in some cases have been adopted for a very long time. Mr. Olivier Long said in his statement to the Interim Committee that the value of trade subject to new protectionist measures in the last three years alone has been equivalent to $30-40 billion per annum. There must also be a reversal of the massive decline in the terms of trade of the primary producers which has taken place since 1973. That these moves are politically difficult is accepted, but what must also be accepted is that to take these steps is in fact enlightened self-interest in the longer term.
In spite of the optimistic terms of the Annual Report it is in fact becoming increasingly more difficult to recirculate the proceeds of these continuing surpluses, and the ability of many countries to service accumulating debt is diminishing. The end result will inevitably be not just economic instability but political instability and a decline in the availability of markets in those countries for both industrial exports and oil. There is already less confidence in the international financial system than has been apparent for some time, and for the first time for many years we are hearing and reading instead of the term “rescheduling” the more ominous word “default.”
I believe that the supplementary financing facility established by the IMF will help some countries finance their deficit, although the terms and conditions on which it will be available may make it inappropriate for use by some of the countries who most need it. Again, it is a palliative rather than a cure. We cannot say to a poor country, “we will pay you much less in relative terms for your goods than we used to pay, but you need not worry as we will lend you the balance at market rates of interest providing you take steps to lower the standard of living of your people.”
New Zealand is uniquely placed to understand these difficulties because, while we have suffered more than most from declining terms of trade and the impact of agricultural protectionism, we have nevertheless the ability, and indeed the will, to make the adjustments that are necessary in the short to medium term. Given the pain and anxiety that it costs us, however, we can clearly see how much more difficult it is for the poorer countries. It is my earnest hope that much more attention will be given to the necessity for increasing the earnings of these countries; then correspondingly less attention will be needed to the financing of their deficits.
This question goes beyond the area of finance or even the economy in the broader sense. It is a political question of the greatest importance and it sits fairly and squarely on the Cabinet tables of all those countries in whose power it lies to work together to diminish these surpluses and deficits. I repeat, that to do so is in the long run simply enlightened self-interest.
September 27, 1977