Chapter

Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
October 1977
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Statement by the Governor of the Fund for South Africa—Owen P. F. Horwood

I wish to join with other Governors in expressing appreciation to the distinguished Managing Director, Mr. Witteveen, for his contribution to the work of the Fund. We have learned with regret of his decision to relinquish his post next year, and we wish him Godspeed for the future. At the same time I should like to congratulate Mr. McNamara on being reappointed President of the World Bank for a third consecutive term.

The Executive Directors and staff of the Fund and the World Bank deserve to be congratulated on the exceptionally high standard of their respective Annual Reports this year. Unfortunately, the picture of world economic conditions painted by these lucid and informative Reports, although in some respects better than that of last year, is far from satisfactory. The world economic situation is still characterized by subnormal economic growth rates, high unemployment, excess plant capacity, widespread inflation, and, in many countries, persistent balance of payments problems. The real disturbing feature is that this is the position which prevails after two years of so-called cyclical economic upswing in the main industrial countries.

Clearly there is something wrong in the world economy. Moreover, as the Fund’s Annual Report candidly puts it: “In the short run, the scope for improvement in this situation is limited.”

The first aspect of the present world economic scene which I find particularly worrying is the failure of private fixed investment in plant, equipment, and construction to increase according to the normal cyclical pattern. I would not describe the situation as one of “Keynesian secular stagnation,” but it is a fact that in most countries profit expectations have for some time now been an inadequate spur to capital outlays. Certainly there has been a widespread lack of business confidence. This state of affairs is also reflected in the depressed conditions on the major stock exchanges in the world.

The reasons for this lagging investment are not entirely clear and appear to differ from country to country. They include political and economic uncertainties, the energy problem, the effect of expected wage increases and cost-price relationships in general on the profitability of investment, and the difficulties created for business by governmental and private action in the environmental field.

A second disturbing feature of the present situation is the growing protectionism in the field of international trade. In the circumstances this is understandable—from an individual country’s point of view, the continued existence of surplus capacity and unemployment inevitably leads to increased pressure for measures to encourage short-term import replacement. For this reason, I would not be surprised to see a proliferation of protectionist measures in one form or another if the world economic situation does not improve soon. From an international point of view, of course, one must agree with the Fund’s Annual Report that restrictions on trade would not provide any real solution to the present economic problems and could have “effects destructive of prosperity in the world economy.” However, in my view the main responsibility to avoid increasing protectionism rests on the major industrial countries, rather than on the developing countries. It is up to the industrial countries to set the example in this respect and to take measures to expand international trade.

A third disconcerting feature of the present world economic scene is the overhang of international indebtedness which threatens many developing and some industrial economies. Some countries, including my own, have been successful in adjusting their balance of payments deficits, instead of merely financing them. But many others have continued to run abnormally large current account deficits and have, in the words of the Fund’s Annual Report, “relied on external borrowing at rates and costs that were not sustainable, either from their own standpoint or from that of their creditors.” Considerable use has been made of credits from commercial banks and there has been a shortening of maturity schedules and a rise in interest costs. The result has been a disproportionate increase in debt service payments to be charged against receipts from export earnings and from net inflows in capital.

Opinions differ as to how critical this international debt problem has become. Although I am not a member of the “doomsday school” in this respect, I do believe that the dangers inherent in the present situation should not be shrugged off too lightly. The transformation of the international structure of payments surpluses and deficits brought about by the oil price increases, together with the expanded role of commercial banks and other private sector institutions in recycling the resultant massive oil surpluses, have created a new situation in which a series of international defaults could disrupt the functioning of the international monetary system.

All of this brings me to what is clearly one of the crucial issues before this year’s Annual Meeting, namely, the extent to which Fund-Bank member countries should now adopt a more expansionary policy stance. I have for years been on the side of those who have argued that the basic cause of world inflation since the mid-1960s has been excess demand, and that this excess has been related to the substantial increase in international liquidity produced from time to time by large deficits in the balance of payments of the United States. It was on this expanded liquidity base that an inordinate amount of domestic bank credit and money came to be created. I was therefore pleased with the general tenor of the speeches made by Governors at last year’s Fund-Bank Annual Meetings in Manila, which emphasized the importance of curbing inflation through restrictive fiscal and monetary policies and which rejected the notion of any long-term “trade-off” between inflation and unemployment. I also welcomed the emphasis placed on balance of payments adjustment as opposed to mere financing.

Basically my views on these matters remain unchanged. Indeed, not-withstanding the considerable costs involved, the success attained in my own country during the past year in improving the balance of payments, largely through the application of restrictive monetary and fiscal policies, testifies to the validity of this conservative approach.

However, in the changed circumstances of today, the logic of this same approach now leads me to add my voice to those arguing for moderate additional economic stimulation in those major industrial countries which do not suffer from balance of payments constraints at this juncture. Excess demand is an evil, nationally and internationally, but insufficient demand in countries with relatively strong balance of payments positions is also undesirable. If these countries cannot afford to adopt an expansionary policy stance, which countries can? For these reasons I believe that measures to bring economic growth rates in these countries closer to the targets set earlier this year can now be justified.

Against the background of the serious economic problems which have continued to confront Fund and Bank members, I am especially gratified at the improvement during the past year in the economic situation of my own country.

Although the rate of economic growth in South Africa has declined, our balance of payments on current account has been transformed from a substantial deficit in the earlier part of 1976 to a large surplus in the first half of 1977. In addition, we have made progress in reducing the inflationary pressures in our economy. These achievements can be ascribed in large measure to the application of fiscal and monetary discipline.

In these respects we have fared better than most other countries in the group referred to in the Fund’s Annual Report as the “more developed primary producing countries.” Nevertheless, we continue to share many of the problems experienced by this group, which has been particularly adversely affected by a cumulative deterioration in its terms of trade. For members of this group further improvement in their principal markets, i.e., the main industrial countries, is therefore of special importance.

Another problem for members of this group, as well as other developing countries, is that of managing their exchange rates in a world of floating currencies. Whatever the merits of a system of floating rates for the large industrial countries, it presents serious difficulties for the smaller countries. This is abundantly clear from the section in the Fund’s Annual Report dealing with the growing diversity of exchange practices. As I have argued before, the present system of floating rates cannot therefore be regarded as the ideal universal solution, and I believe that this matter calls for further attention.

In conclusion, I wish to refer to the valuable role which the Fund continues to play in providing conditional liquidity to member countries, particularly in the present situation of abnormal payments imbalances. I therefore welcome the new facility associated with the name of the Managing Director, as well as the proposed further increase in Fund quotas.

Statement by the Governor of the Fund and the Bank for Western Samoa—Vaovasamanaia R. P. Phillips

Before commencing my remarks I wish to join other Governors in extending a special welcome to the Governors of Guinea-Bissau and Seychelles, which have become members since last year’s meeting. Seychelles, like Western Samoa, is a small developing island country, with whom we share a number of common problems.

It is indeed gratifying to note that the international community is starting to focus attention on the problems peculiar to smaller island economies. It seems necessary for international organizations to realize that these economies suffer from a number of constraints which are unique to them. Particular problems would include the fact of geographic isolation, small domestic markets, very limited natural resources, and dependence on the few sources of foreign earnings which are often unreliable and volatile. Therefore, the economies of small island countries tend to be very sensitive to outside events and changes in the world economic situation. Such economies thus tend to be extremely fragile. Special development techniques are required for these countries. In dealing with small island developing countries it is therefore necessary for international organizations to display sensitivity and flexibility.

It is with disappointment that we have observed the delays in, and frustrations of, achieving significant tangible results from the continuing dialogue aimed at a new economic order. We find it hard to understand the lack of appreciation of the urgency of the situation on the part of some of the developed countries. In the world today there are over 650 million human beings existing on a per capita income of less than $50 per annum. This fact alone, and more immediately the human degradation and suffering behind it, points to the fact that the status quo is unacceptable and basic international economic structural changes are urgently required. It seems that an appreciation of urgency and political will are still needed to implement the basic international economic reforms required.

We appreciate that it is important for developed countries to consolidate their own economies and control their own internal inflation. It seems unfortunate, however, that a significant number of developed countries are not prepared or able to impose the same discipline of wage restraints in their own economies as has been required, of necessity, by many developing countries.

It would seem to Western Samoa that among the most urgent and important requirements for the developing countries are commodity arrangements, trade liberalization and access to markets, increased development assistance, and expansion of international financial institutions.

Some progress has already been made toward the establishment of international buffer stocks for a number of commodities and the creation of a common fund to finance these stocks is now somewhat closer to implementation. Any progress in stabilizing prices of commodities produced by the developing world will play a vitally important role in assisting these economies to plan their development in the future. The concept of indexation of commodity prices is a difficult one but should be pursued.

An immediate halt is necessary to the growing tendency toward protectionism by certain developed countries. What is required is increased access to the markets of developed countries for imports from the developing countries and reduction by developed countries of tariff barriers for imports from the developing world.

It is with disappointment that we note that only a handful of developed countries have met their aid target of 0.7 per cent of GNP agreed to at the United Nations some seven years ago. The further target agreed to of 1 per cent of GNP by 1980 seems now to be almost unattainable. It does not seem unreasonable for the developing world to see the attainment or otherwise of these previously agreed aid targets as being a test of sincerity on the part of the developed countries. The gap between the rich and poor countries is widening—at a time when total aid transfers in real terms between rich and poor countries are in fact declining. The aid targets set would not impose any unreasonable strain on, or economic dislocation of, the industrialized countries, but realization of these targets is seen as much more than an increase in the transfer of resources from the developed to the developing world—it is seen as tangible proof of commitment to international equity and alleviation of the plight of poverty facing more than one fourth of the human race.

Western Samoa has various comments to make concerning the expansion of international financial organizations.

Insofar as the International Monetary Fund is concerned we support a seventh quota increase of at least 50 per cent.

We would like to see further liberalization of the compensatory financing facility and liberalization of conditionality insofar as the supplementary financing facility is concerned. Provision should be made to allow certain of the poorest developing countries to be eligible for an interest subsidy on the supplementary facility.

We welcome the recent discussion concerning a further issue of special drawing rights, which would be very acceptable to most developing countries. We endorse any actions that will strengthen the special drawing right as a major international reserve currency and support efforts toward a link between the special drawing right and development finance. . . .

I would like to place on record my appreciation of the dedicated work of the Managing Director of the Fund, Mr. H. J. Witteveen, who has so ably steered us through a very difficult period. It is with sincere regret that we note his decision not to make himself available for a renewal of his term of office with the Fund.

We have always appreciated the positive and helpful response to our various requests and problems from the management of the International Monetary Fund and World Bank. We recognize the very positive role these organizations are playing in the world today. We view with urgency the need for increased transfer of resources from the developed to the developing countries and believe that the International Monetary Fund and the World Bank will continue to play a vital and leading role in this transfer.

Statement by the Governor of the Fund for Italy—Gaetano Stammati

I wish to begin by expressing our own gratitude to the Government of the United States for its hospitality and courtesies and our appreciation for President Carter’s address to our assembly. We have also listened with interest to the address of President McNamara, which once again gave us a stimulating analysis of crucial aspects of development problems.

Before commenting on economic developments in Italy and the world, I would like to pay a personal tribute to Managing Director Witteveen for all he has done, during these difficult years, to strengthen the world’s monetary system and international cooperation. His competence, dedication, and personal accomplishments deserve our praise.

Developments in Italian Economy

When I addressed our Annual Meeting last year in Manila, Italy was in the midst of a severe economic crisis: the balance of payments had sharply deteriorated and inflation was accelerating at a rapid pace. Both developments were, to a certain extent, the consequence of earlier attempts to stimulate domestic demand and lift the economy from the recession, by means of reflationary monetary and fiscal policy measures. Moreover, unit labor costs were rising at a much faster pace than in competing countries. As expectations deteriorated, a foreign exchange crisis was precipitated in October.

That crisis strengthened our determination to carry out the comprehensive measures of economic stabilization the Government had outlined upon taking office two months earlier; negotiations were then resumed with the IMF for a stand-by arrangement in support of our program, and these were successfully completed last April.

The government action was three pronged: credit was made scarce by the introduction of ceilings on bank loans and interest rates were allowed to rise to record levels; purchasing power amounting to nearly 3 per cent of GNP was absorbed through additional taxation and higher prices for public utility services, thus helping to strengthen public sector finances; modifications of the wage indexation system and measures to increase productivity were agreed upon with the social partners in order to contain the rise in labor costs.

The effects of these measures have been striking. The annual rate of increase in consumer prices has been brought down from 22 per cent in 1976 to 15 per cent in the period January-July 1977, and a further deceleration has taken place in the most recent months. The balance of payments, which showed a current deficit of $2.8 billion in 1976, has improved since January moving into balance in the second quarter. We now expect the current account to be in equilibrium for the year as a whole, and possibly to show a small surplus, as against a $500 million deficit projected in the stand-by arrangement.

The implementation of the stabilization policies has helped to restore confidence in the Italian economy. In fact, during 1977 the exchange rate of the lira has enjoyed a remarkable degree of stability, despite the abolition, according to the schedule set by the Government, of the import deposit scheme and of the special tax on foreign exchange purchases, which had been introduced at the height of the foreign exchange crisis. Since January there has also been an inflow of short-term capital of about $3.5 billion, which, coupled with the good current account performance, has enabled Italy to increase its foreign exchange reserves by about $4 billion to $7.1 billion at the end of August. Moreover, Italy has repaid about $1.8 billion to private and official creditors, of which about $1.1 billion was to the IMF.

These achievements, however, have had a cost in terms of output and employment. Since March of this year there has been a sharp decline in industrial production of both consumer and investment goods. The number of workers employed by large corporations has declined by 1 per cent, continuing a trend that started over two years ago. As a result of the fall in industrial production, productivity also declined in the second quarter. Unit labor costs have thus begun to rise again.

Under these circumstances, we fear the emergence of recessionary conditions which would hinder the continued implementation of our program. We are aware that the success of our strategy rests mostly on the consensus of the social partners and on the support of the Parliament. While we are determined to continue the pursuit of the stabilization objectives, the viability of our strategy in the present international economic juncture is now being increasingly questioned. Given the balance of payments constraints and the desirability of reducing inflation, we must follow a policy of containment of domestic demand, which would result in a modest growth of our GNP. This we are prepared to accept. What we are not prepared to accept is zero or negative growth, as this would make a situation untenable both economically and socially. Such an occurrence can be avoided, in our view, only through a better functioning of the international adjustment process which would alleviate the external constraint which dictates the course of our own economic policies. As the deliberations of the Interim Committee have shown, there are reasons for concern on this score.

World Economic Situation and Adjustment Process

The present state of the world economy is an uneven mixture of positive and negative aspects. Inflationary pressures have abated and inflation differentials have narrowed. However, unemployment and idle plant capacity are still very high. Investment demand continues to be insufficient to set in motion a self-sustainable recovery in industrial nations. In the Third World, the gap is widening between a small group of “higher-income” countries and the poorest ones. The former have managed to get through the 1975 recession without sacrificing their growth objectives, owing to their diversified economic structures and ability to attract foreign capital on a sustainable basis, while the latter have suffered a dramatic setback in their development efforts. International payments are still substantially unbalanced, more than three years after the oil price hike. The prospect that oil surpluses of around $30 billion a year will persist well into the 1980s points to a picture in which the Third World and the smaller developed countries will continue to incur large deficits and accumulate debts.

We regard this unsatisfactory situation as resulting from the fact that the strategy to which we committed ourselves in the aftermath of the oil crisis and on which so many hopes were pinned has not worked. The Managing Director himself in his opening statement to this Meeting has acknowledged that the expectations on the functioning of the adjustment process have not been realized, and that a shift in emphasis of economic policies is now required.

Indeed the recovery that has followed the deep recession of 1975 has proved to be a weak one. After a strong upturn in the first half of 1976, real GNP of industrial countries grew only by 3 per cent in the second half of that year. Output growth resumed at a brisker pace in the first quarter of 1977, but a slowdown in economic activity and in industrial production has been recorded in several countries in the most recent months. I take this as an indication that the deceleration of the upswing that had been generally forecast for the second half of this year might well be more pronounced than expected and thus lead to recessionary conditions extending into 1978. On balance, the stance of demand policies has not succeeded in creating the conditions for a resumption in investment activity, which is essential to remove the structural causes of the stagflation experienced during most of the 1970s.

The important changes that have taken place in relative prices of raw materials, manufactures, and productive factors make it necessary to carry out a reallocation of resources consistent with the new price structure. A resumption of investment activity appears to be a prerequisite for the needed reallocation of resources. It should be encouraged by keeping global demand in the stronger and the surplus countries closer to the level of potential supply than is now the case. In the absence of such a policy, the adjustment process in deficit countries would have to be carried out in a dangerous context of underutilization of resources and of slow growth. This would be intolerable for many countries and would also reinforce the emerging protectionist tendencies underscored in the last GATT report.

I may add that it is precisely to avoid such danger that at the Downing Street Summit it was agreed to commit the participating governments, and I quote from the final declaration, “to targets for growth and stabilization which… should provide a basis for sustained noninflationary growth worldwide.’’ It was further agreed that countries adopting reasonably expansionist targets for 1977 “will keep their policies under review and commit themselves to adopt further policies, if needed, to achieve their stated target rates and to contribute to the adjustment of payment imbalances.”

The spirit of that Summit, which calls for constant review and timely action, warrants at this time a shift toward policies designed to stimulate economic activity in the leading countries that are not affected by balance of payments constraints. Concrete steps by these countries are becoming all the more urgent now that major deficit nations in Europe and elsewhere are living up to their commitment of adjustment and stabilization. The new U.S. administration has taken determined action to meet its international economic responsibilities. However, signs of uncertainty in the momentum of the U.S. recovery are being detected, and it is to be hoped that they do not anticipate the emergence of a more pronounced slowdown. In Japan and the Federal Republic of Germany, the authorities are introducing measures to check the unsatisfactory evolution of economic activity recorded in the last few months, and it is important that they do not hesitate to take further steps if the stimulus they are now imparting does not prove adequate.

To the extent that the need to preserve monetary stability in surplus countries is deemed inconsistent with action to speed up the pace of economic activity, balance of payments adjustment will have to be stretched over a longer period of time. This recognition has been one of the reasons for setting up the new supplementary financing facility in the IMF. To facilitate adjustment, surplus countries should also be prepared to expand long-term investment in productive activities in a greater number of countries than has so far been the case.

If economic activity picks up in the stronger countries, there will be scope for a moderate relaxation of the present restrictive stance in a number of deficit countries, without necessarily giving rise to renewed inflationary pressures, as there are wide margins of unused labor and capacity. In fact, in some countries a resumption of output growth might indeed contribute to checking the rise in unit labor costs and to improving the climate of industrial relations.

In calling for a more active approach to economic management in present circumstances, we are aware that an element of risk is involved, but we cannot and should not disregard the signals for action emanating from a deteriorating economic environment.

The IMF and the International Monetary System

The fortunes of the IMF have recorded a remarkable turnaround since Jamaica. Following the rather unspectacular conclusion of the reform exercise, it was often argued that floating exchange rates had deprived the IMF of its main function, and that the Fund had been turned merely into a forum for debating international economic issues. Of course this view implied that the international adjustment process would work in a satisfactory manner and that capital markets would meet without difficulty the financing requirements of member countries.

We now know that this has not been the case and that the IMF will continue to play a crucial role in promoting the adjustment process by monitoring the policies of members under its new powers of surveillance and by providing needed balance of payments assistance. In this spirit, last spring, I greatly welcomed the proposals of the Managing Director which called for an increase in the volume of conditional liquidity and indicated the opportunity of creating some unconditional liquidity to meet the demand for reserves. Given the composition and distribution of international reserves, I took the view that a substantial increase in official liquidity, mostly of a conditional nature, was warranted.

The implementation of these proposals has so far progressed unevenly. The supplementary financing facility has been established, and we welcome it as a significant achievement in the field of international monetary cooperation. We note, however, that its present size is much smaller than originally envisaged.

Regarding quotas, let me say that I consider the seventh review as a good opportunity to provide the Fund with the resources needed to foster the adjustment process. To this end, quotas should be raised substantially. A major increase is required because private capital markets, which have played a major role in recycling oil funds, cannot be relied upon to provide the resources required by deficit countries and in the interest of the adjustment process. It should also be taken into account that the purchasing power of the Fund’s resources has declined in the past, and that the decision taken on the seventh review will determine the size of the Fund for the next five years.

In recent years the Fund’s lack of liquid resources has necessitated the creation of special facilities financed through Fund borrowing. While this has been necessary and helpful, such an ad hoc approach to increase official finance has created a climate of uncertainty as to the volume and availability of such finance, which has not encouraged orderly financing of payments disequilibria. Therefore, we believe that periodical quota increases should again become the primary source of IMF financing.

Concerning the distribution of the seventh quota increase, our preference goes to the linear method as the least likely to entail drawn-out negotiations, even though Italy is among the ten or so countries for which a substantial increase in relative quotas would be warranted, according to calculations made with formulas used by the Fund.

Turning now to the SDR, I would like to say that I regret the unlucky fate that has befallen this reserve asset. Ten years ago it seemed that the world monetary system could hardly survive without SDRs. Now, the SDR is little more than a unit of account. The view that the SDR can be revived simply by “strengthening” it in some complicated way is not, in my opinion, well founded. Whenever the possibility of future allocations of SDRs is discussed, loud voices are raised to recite the countless damages such a decision would inflict on the international monetary system. If this is the case, then we should conclude that there is no place for the SDR in the world today.

I do believe that the SDR has a role to play and I hope that the comprehensive study now being made by the Executive Directors on all aspects of this reserve asset will not be confined to an analysis of the present SDR, but will also explore the functions it could have as an instrument to control the growth of international liquidity—as suggested by the Managing Director some time ago.

Finally, I am happy to inform you that the Italian Parliament will ratify during this week the second amendment of the Fund’s Articles of Agreement and the sixth quota review. . . .

Statement by the Alternate Governor of the Bank for Malaysia—Richard Ho Ung Hun

I wish to tender the sincere apologies of the Minister of Finance, Tengku Razaleigh Hamzah, for not being able to address this important gathering personally, owing to urgent commitments at home, which necessitated his early departure soon after the opening ceremony of these joint Annual Meetings.

Allow me now to join fellow Governors who have preceded me in recording our thanks to Mr. McNamara and the management of the World Bank for the excellent work done during the past year. A great deal of work has been put in on improving the lot of the very poor, and Malaysia shares the confidence reflected in his address yesterday as President of the World Bank. I also wish to go on record to pay tribute to Mr. Witteveen for his able guidance of the Fund and many member countries through a period of very complex monetary and financial problems. Malaysia regrets his decision not to make himself available for another term as Managing Director, but we wish him well.

We meet here today in the midst of recent developments in the world economy which continue to give us cause for concern. Most countries still face the problems of serious inflation, slow growth, and high unemployment, while many also experience balance of payments difficulties.

This far from happy picture in the international environment has adversely affected the economy of the developing world. For many developing countries, the continuing need for stable and sustainable economic growth has compelled them to incur substantial borrowing, resulting in a mounting external debt burden. Of significance is the fact that an increasing amount of such borrowing has been obtained from private sources on terms they can ill afford. This problem has become especially acute for the poorest of the developing countries, and for them the only way out of this difficulty seems to be a rapid mobilization of international efforts to provide additional resources on concessional terms.

In view of this, it is appropriate that this assembly of Governors, who are largely responsible for the orderly functioning of the world economic and monetary system, address itself with a renewed sense of urgency to the problems facing our world today and, in particular, those affecting the developing countries and take active steps to overcome them. In this regard, I would like to suggest three areas in which Governors may wish to focus their attention over the next few days.

First, steps should immediately be taken to promote a faster rate of expansion in private investment and world economic growth, and for this it is essential that there be rapid trade expansion. Both theory and experience have shown us that the unprecedented economic progress during the period after World War II was based on rapidly expanding world trade. It is in such an environment of trade expansion that opportunities are generated for undertaking new investment and creating more employment.

Instead there have emerged protectionist tendencies in several countries. This is a matter of grave concern as protectionism by its very nature is merely a short-term palliative and not a long-term cure for the problems of excess capacity and unemployment. On the contrary, it will only lead to a contraction of world trade resulting in stagnation of world economic growth such as the world saw in the early 1930s. For the developing countries in particular, many of whom are dependent on exports to generate the resources for financing their development, protectionism may indeed prove to be the last straw.

Second, immediate steps should be taken to increase the flow of real resources to the developing countries, especially for projects in the socioeconomic field. It is through development on a broad front that we can ensure an improvement of the standard of living for those in the developing world. I wish to emphasize that life with basic needs such as adequate food, shelter, and facilities for personal development should be the legitimate right of every human being. Often we are overly preoccupied with political rights. While these are important, they have little meaning if we cannot meet the legitimate economic needs of our people. . . .

In view of the pressing need for additional resources in the developing countries, we would strongly appeal to the donor countries not to allow the recent slowdown in their economic activity to adversely affect their aid programs. This, I fear, appears to be the case, since official assistance of members of the Development Assistance Committee, both in real terms and as a percentage of GNP, has fallen in the past year. Despite difficulties encountered, the developed countries should fulfill in earnest the UN target of providing 0.7 per cent of their GNP as aid to developing countries because of the pressing need for such assistance. While the case for such aid is clear, it is perhaps not inappropriate to ask the developing countries to take measures in their domestic economies to ensure that the maximum benefits may be derived from this aid since ultimately the primary role and initiatives for development rest with themselves.

Third, steps should be taken to ensure that the reformed world monetary system leads to a stable and orderly international monetary environment, which is a prerequisite for trade expansion and economic development. In this connection there is a pressing need for the International Monetary Fund to provide adequate resources for balance of payments needs in a flexible manner.

Concern has been expressed that in recent times there has been a marked increase in borrowing from private commercial banks for balance of payments support. The increased need for such commercial credits for balance of payments financing is an indication that the facilities of the International Monetary Fund are inadequate. The decision to establish the supplementary financing facility, therefore, is most timely, and I would like to congratulate Mr. Witteveen, the Managing Director, for his active and innovative role in securing resources for the establishment of this additional facility. In view of the magnitude of the borrowing needs, however, even this new facility may not be enough. The Seventh General Review of Quotas should therefore be completed as a matter of urgency. Thus the importance of the need for a substantial increase in the resources of the Fund, and for special increases in the quotas of those member countries which are playing an increasingly large role in the operation of the international monetary system, bears repeating.

It should be the vital concern of all of us that the eloquent speeches heard within this hall be translated into meaningful measures which will ensure that the fruits of growth reach the very poor, and quickly, by embarking upon more projects aimed at poverty eradication and the closing of the gap between the haves and the have-nots. Let us not be carried away by our own eloquence in economic abstractions, lest we fail to distinguish the woods from the trees. For the very poor, poverty is very real, and I am confident that this stark fact must be constantly borne in mind and viewed in the cold light of rationality in our deliberations. For our ultimate objectives are, after all, that those who hunger must have food, that those who thirst must have drink, and that those who are naked in the face of the elements must have shelter. Without this basic freedom from want, even elementary social services such as education and health belong to the realm of dreams and hopes. Such are the realities of the problems we face that we cannot afford to fail in our efforts which have already come a long way toward fruition from the early days when men of conscience, vision, and good will first conceived the idea of the IBRD, now more simply and widely known as the World Bank.

Statement by the Governor of the Fund and the Bank for Canada—Jean Chrétien

I am conscious that I begin my service as Governor for Canada of the Fund and the Bank at a time when governments face particularly difficult and urgent economic decisions.

In the last year some progress has been made in getting the world economy back on track. Rates of inflation are now somewhat lower. There is real economic growth in most countries. The volume of international trade continues to expand and the balance of payments situations of many countries have shown some improvement.

But as we know in Canada progress on these fronts has not been good enough. A considerable atmosphere of uncertainty continues to make the economic advance hesitant and unsteady.

Canada may not be untypical of many other countries. Certainly our rate of inflation is still too high and is impairing the growth of employment and trade that we need. In Canada we have too many people out of work, particularly young people. Continuing high levels of unemployment are, I know, a matter of serious social as well as economic concern in both developed and developing countries.

Although the correction of the massive payments imbalances in the world is proceeding, much more needs to be accomplished. The external imbalances of certain nonindustrial economies and some developing countries remain especially acute. In many developing countries the continuing need for more long-term capital constitutes an obstacle to progress. There is a limit to the role which short-term commercial credit can play in these circumstances, helpful as such credit is.

The Fund and the Bank are particularly appropriate forums in which to focus on these issues. These institutions were designed to help overcome these problems by providing balance of payments assistance in the one instance and development funds in the other. The Fund and the Bank have served the world well. But we must continue to adapt their policies and procedures to meet the growing and changing needs of the members.

A crucial problem, of course, will be the adequacy of the Fund’s resources to provide adjustment assistance in these difficult times. The recent agreement on the establishment of the supplementary financing facility is a major step forward. I am sure that the creditors in the facility will ensure that the resources they have promised will be made available promptly. With these resources in hand the Fund will be able to furnish necessary financing for countries with particularly large and persistent balance of payments problems. This new arrangement will give such countries the time and incentive to take the difficult steps necessary to improve their payments structure. It will thus help materially to strengthen the international economy. Because we shall all benefit from this result, Canada is pleased to be able to be a contributor.

The next major step in providing resources for the Fund will be a further general increase in quotas. I know that we have not yet come to an agreement on all matters relating to the Seventh General Review of Quotas, but I sense a disposition to complete this work as soon as possible. We should try to bring our discussion of this to a successful conclusion within the next few months so that we can ensure that the lending role of the Fund will not be impaired after the supplementary financing facility ends.

It is important that the Fund’s resources be sufficient to enable it to play its role. But if we are to get our economies functioning properly, governments must provide a framework of policy that not only offers the right incentives for private decisions but which also inspires the confidence to take risks and make commitments. In the final analysis it is up to each country to pursue policies that are appropriate and effective.

The Secretary General of the OECD has raised an important question here in Washington this week. He asked whether certain countries should not now be adding further stimulus to their economies. It strikes me that this is the right question to be asking at this time. I have sensed that many of you share this reaction. Of course it would be most unwise to inject stimulus where that would merely make inflation worse. But the time may be at hand for a reappraisal of our policies. When I assumed my duties as Minister of Finance a few days ago I took the view that one of my first duties should be to re-examine the setting of our economic policies in Canada. I intend to complete this review just as quickly as possible.

Let me come back to the role of the Fund. The turmoil in the international economy in recent years may require somewhat longer adjustment periods. Indeed this is explicitly recognized in the supplementary financing facility. But the basic purpose of the Fund, to provide temporary balance of payments financing on appropriate terms and conditions, remains unchanged. To confuse Fund assistance with long-term development financing can only aggravate our problems. In considering increases in the resources of the Fund and the Bank we should therefore seek to provide each institution with the resources it needs to perform its specialized role. . . .

Let me say in conclusion that, after what we have been through in the last few years, we are all more conscious of our mutual interdependence. Developing countries depend on prosperous markets in the industrialized world; prosperity in industrial countries is reinforced by stronger growth in the Third World. We must work together to achieve our potential. We will have to be hardheaded and practical but I think we can do it.

Statement by the Governor of the Bank for Algeria—Mohamed Seddik Benyahia

The questions evoked by the agenda for these Annual Meetings are of special significance in the present world context, composing as they do one of the aspects of what is called by general agreement the North-South dialogue.

This dialogue was initiated in global fashion at the Paris conference which, whatever else it did, gave official sanction to the idea that it is necessary to establish a new economic order. What had seemed insoluble appeared to be possible and desirable; the germs of confrontation that had shown a tendency to spread were no longer inevitable. It became clear that, by objective dialogue, adequate solutions could be found for the problems of all parties concerned.

Do we need to give an evaluation of the results of the Paris conference? Every one of us in this room knows what they were. I believe that those who participated feel we missed an opportunity to seek, by joint endeavor, real solutions to the problems which, by their nature, cannot be resolved without global consideration of all the interests at stake.

It was unrealistic, of course, to think that negotiations—even if they had been as untroubled as one was entitled to expect—could lead to a drastic change in situations that became entrenched long ago.

However, from this experiment we received affirmation of the idea that dialogue was possible and that it was the course to be adopted in any event. This is followed up, in part, in various international forums including our own. And the International Monetary Fund and the World Bank are agencies in which some of the essential aspects of the problems confronting developing countries are discussed.

This being so I should like to analyze, in light of the hopes and viewpoints of the developing countries, what these two institutions—each in its own domain—have initiated, proposed, and achieved, before I go on to discuss their forecasts concerning their own future and the ways and means they envisage for providing a more effective and innovative response to countries’ needs.

Ever since large payments deficits appeared and the outlook became less promising, we have repeatedly voiced our concern regarding the need for adjustment in the Fund’s resources and liquidity to enable it to participate, on the most favorable possible terms, in the introduction of adequate adjustment measures. The majority of developing countries, virtually devoid of replacement resources, see the Fund as a preferential lender which by virtue of its nature and purpose can adapt its assistance to the particular situation of each of its members and help them avoid adjustment measures entailing unbearable consequences for their economies.

The initiative of the Fund, namely the creation of a supplementary facility, allays our anxieties in principle. But the conditions for its activation by most of the members make us doubt its true capabilities. Knowing the number of developing countries that have had access to the higher credit tranches under the normal drawing procedures, one can well imagine that only a privileged class will have recourse to it in practice.

Without entering into detailed criticism of the terms of the conditionality built into this facility, it will surely suffice merely to recall to what extent certain adjustment measures, onerous even when applied to developed economies, can be insupportable when applied to economies with a level of growth that is already distinctly inadequate.

A solution might have been for the new facility to base conditions for access to its resources on the specific situation and needs of the developing countries. That was not done because the objection made, as in the past, was that it would violate the principle of nondiscrimination. But is it not another form of discrimination, although de facto nondiscrimination, to stipulate conditions that one knows in advance can be met by only one category of the membership.

In these conditions, the question arises as to whether the new facility is to be a practical and supplementary instrument of Fund assistance to all its members, or whether it is soon to join the extended facility in the array of collection instruments. Part of the answer to this question is to be found in the undertaking by the Fund’s Executive Directors to reexamine the conditions for access to this new facility. The decision they adopt in this connection will enlighten us on the rest.

However this may be, clearly it is rather the increase of quotas that should bring about a significant increase in the Fund’s resources. We think the discussions on the seventh review should take into account the lessons of the recent past. At Kingston, despite the large extent of the acknowledged need for covering foreseeable balance of payments deficits, agreement could only be obtained for a moderate increase, with, further more, a refusal to envisage any possibility of a distribution of special drawing rights. The situation has evolved to the extent that it has become necessary to reach rapid unanimity on the need to improve once more the resources of the Fund. But this should not be a repetition of the experience of the sixth review; the rate of growth to be agreed between us should really correspond to the foreseeable needs of the years to come.

We, for out part, believe an increase of the order of 100 per cent would be the most appropriate. We also consider that if this new increase is to be introduced as soon as possible, that aim should not result in jeopardizing, or in casting doubt upon, the qualitative conditions on which such an operation is to be effected. The aim of expeditiousness does not exclude other considerations, especially if we remember the slow progress toward the implementation of the sixth review.

If we wish to ensure that the IMF remains an institution entirely at the service of the world economy, it is vital for members (who, often by dint of tremendous hard work, organization, and austerity, attain occasionally high rates of growth) to be able to find in the Fund the necessary additional resources to cover the larger needs entailed by the pursuit of their programs. That is why we prefer a selective distribution of the increase, taking into account the progress achieved by each member and its relative position in the world economy. And it must be emphasized that, specially applied to an appropriate number of developing countries, a selective increase could aim at maintaining, if not improving, the real relative position of the Third World countries as a whole in the decision-making process within our institution, as it now exists as the result of the operation of the last review. . . .

The actions taken by the international agencies and the improvements that could be made in their operations would not in themselves lead to a general solution of the problem of development, since development is an all-embracing process.

Let us examine what we find in the reports prepared by our institutions. They show that the future of the developing world is more uncertain than ever, and that all of these countries share certain problems.

They have succeeded, in varying degrees, in adjusting their balance of payments only by adopting policies that have required considerable effort and sacrifices, obliging these countries to reconsider their growth objectives and in some cases their development model. According to reports prepared by the International Monetary Fund, most of them suffered a fall in their growth rate between 1973 and 1975. In 1977 they have again seen a deterioration in their terms of trade—a 6 per cent decline with respect to the 1967-72 period. This factor alone is costing these countries 1 per cent of their gross national product because of the reduction in the purchasing power of their exports.

In the short term, a further deterioration in the terms of trade is already projected. We thus face the immediate possibility of an increase in the already substantial financing requirements of these countries, at a time when the structure of financing has already changed for the worse, with all the implications this has had for their policies.

For the medium and long term, the World Bank’s projections indicate that the external situation of the developing countries is bound to worsen. The noteworthy decrease in grants (from 20.7 per cent to 14.4 per cent), the maintenance of loans from public sources at their present level (32 per cent), and the much larger share of private loans (rising from 29 per cent to 43 per cent) could paradoxically make many developing countries more dependent ten years from now than they are today on external resources obtained on favorable terms.

The conclusions of the analyses are meant to indicate that acceptable growth rates are ensured. However, they are based on a mere continuation of past trends and on an assessment of the resources that are to be made available to the developing countries. Such a pragmatic approach makes it impossible to respond to the minimum needs of the peoples of the Third World, which can be met only if precise objectives corresponding to specific stages of the development process are established, and if the international conditions that those objectives imply are created.

Because there are many who say that they support the goal of eliminating what the President of the World Bank has called absolute poverty, it is necessary to find answers to the following questions: Within what time period should this objective be achieved? Will we then be in a position to mobilize the volume of external resources needed and in the form required? And if the answers lead us to allocate almost all of the public resources now available to countries in that category, what will happen to the other developing countries? It is obvious that for the latter, only an increase in public resources will enable them to strengthen their position in the capital markets.

In point of fact, we believe it necessary to establish a number of basic objectives. I do not intend to propose a specific program here. Nonetheless, I consider that one of our basic objectives should be the establishment of a system capable of mass production of the goods and services needed by our societies. We must therefore make our decisions within a logical framework compatible with the rational development of all the developing countries, and requiring us to specify the time by which the income curves will no longer diverge.

In calling to mind the general problems of development in this forum, I am well aware that we will not find the answers to all the questions I have raised in our institutions. I am not unmindful that the overall concept of the transfer of real resources led us to establish the Development Committee. Our task would be incomplete if we failed to at least mention the other areas which are affected by the putting into effect of a transfer of real resources, and which give us so many opportunities for concerted action.

In the financial area, mention should be made here of the need to meet the goal of 0.7 per cent of GNP for official development assistance. At the same time, the resources that each industrial country can bring into play within the context of its specialized institutions, both by opening up access to these resources and by reducing their costs, should be re-examined, especially at a time when the developing countries could contribute to the better functioning of the developed economies, through the additional activity that would be generated by the implementation of their development programs.

With regard to increased access to capital markets, it is urgent that the restrictions of all kinds, imposed by countries protecting their markets, be lifted for the developing countries. Furthermore, measures to increase the borrowing capacity of the developing nations should be devised so as not to jeopardize the positions that some of those countries have gained with great effort. Even when these objectives have been achieved, there is a risk that the increasing external indebtedness of the developing countries will lead rapidly to a closing of access to these markets, which they have worked so hard to penetrate. For this reason, I believe it is imperative to seek a continuing improvement in the current balances of the developing countries, particularly through the elimination by the industrial countries of tariff barriers and restrictive conditions that adversely affect exports of manufactured goods from the developing countries. This objective requires a solution as regards the desirable types of integration in the world economy, and correction of the problems that many developing countries face because of the extent and nature of their participation in international trade. Such an approach, if generally adopted, would be in the interests of all parties concerned; and I am convinced that the developing countries would prefer trade to aid.

Finally, real progress seems difficult to achieve unless the means are sought, at each stage, of carrying forward and consolidating the process of development. I am thinking particularly of the effects of inflation, with all it implies for the maintenance and improvement of the purchasing power of exports, and of the formation of national savings that are stable and sufficiently large to enable the Third World countries to effectively control the basic factors that condition their economic development.

This leads me to conclude that the North-South conference was a logical step in the course of events, not an accident of history, and that its agenda and work methods were entirely acceptable. All that is lacking is the political will to achieve success.

Without this will, a shift of the discussion to other organizations, however well qualified their experts and whatever their motivation, will yield only partial results. I hope that the continuation of this dialogue and a more thorough study of the problems will lead to a direct and open general discussion among informed and responsible representatives of all the parties interested in putting an end to the disparities that so deeply divide our world.

Statement by the Governor of the Fund and the Bank for Australia—Phillip R. Lynch

I would like at the outset to join other Governors in applauding Mr. McNamara’s reappointment as President of the World Bank and in regretting that the IMF will not have the considerable benefit of Mr. Witteveen’s leadership beyond the completion of his present term. I should also like to welcome the Fund’s newest members—Seychelles and Guinea-Bissau—to the Annual Meetings. It is very encouraging that the Fund’s membership is continuing to expand on the basis of the capacity of countries, regardless of their size, to undertake the obligations of membership.

The central issue at these meetings is the progress of economic recovery. This gathering needs no reminding that progress in restoring economic health to our nations has been slow. But it is important that we do not lose sight of the reasons why that has been the case. The basic factor is that many economies developed deep structural distortions during the early 1970s. In particular, real wages outstripped productivity and the profitability of business enterprises was squeezed. Government spending grew rapidly and large public sector deficits led to excessive monetary expansion. These problems manifested themselves in heightened inflation and inflationary expectations, in loss of confidence among investors and consumers, and in reduced employment.

We need to correct these distortions in order to be in a position to resume a more rapid growth path. Most economies have set about that task on a medium-term basis. Fortunately some of the major countries have achieved notable success on this front. They have, in particular, significantly lowered their inflation rates—though I am sure they would prefer to see them lower still. As noted by Managing Director Witteveen, however, the pace of economic recovery in the industrial countries has been disappointingly slow and unemployment remains very high. It is clear that a higher rate of growth in world activity next year is desirable within the framework of the medium-term strategy.

The stronger countries must now aim for faster growth of domestic demand. There seems to be an emerging view that this can be done without rekindling inflation. Faster growth in the stronger countries will, in turn, be of assistance to those countries with continuing significant inflation or external deficit problems which need to maintain firm restraint on domestic demand until these difficulties have been brought under control.

However, all countries—including those which must now push ahead at a faster rate—need to have continuous regard to the basic problem of inflation. That message is crystallized in the following paragraph from the latest communiqué of the IMF Interim Committee: “Policies in all countries should be directed as a minimum to avoiding a resurgence of inflation and in many countries to reducing inflation rates which are clearly excessive.” The reason for this is, as noted by the Interim Committee, that “current rates of inflation… in almost all countries… were still much too high to be considered acceptable.” Even in the industrial countries, the average rate of price increase in the first half of 1977 remained almost 3 percentage points above the average annual rise of the 1960s. Among the nonindustrialized countries, the inflation problem remains more pervasive.

In commenting on the economic situation of primary producing countries, the IMF Annual Report—the quality of which again pays tribute to the high caliber of the Fund management and staff—notes “the linkage of high inflation and slow recovery in real economic activity among the more developed primary producers is by no means incidental.” My own Government is very conscious of this relationship. Equally, like others, we are very concerned about the continuing high level of unemployment, and the human distress which it produces. This reinforces our view that the stronger economies need to ensure, by their own policies, that world economic activity is expanded more rapidly next year.

However, significant gains in reducing unemployment must also be made by further reducing rates of inflation. In addition, it needs to be recognized that structural problems have been a feature of our recent unemployment experience and, consequently, that much of our current unemployment cannot be permanently reduced by manipulating aggregate demand. It is therefore essential, within the context of the medium-term strategy, that specific measures be directed toward overcoming these structural problems and that labor market policies be given appropriate priority. We must look to these solutions because, as most of us know from our own experience, governments grappling with high rates of inflation cannot spend their way out of the unemployment problem.

Since taking office in November 1975 we have progressively reduced the rate of growth of government expenditure to a point where, in current circumstances, a responsible spending base has been achieved. By doing this the federal budget deficit has been reduced by more than $2 billion and room has been made for major taxation reforms that will increase the incentive to work and to become more skilled, thereby enhancing national economic growth. All this has been done in a continuing context of fiscal restraint. In terms of GDP, the deficit has been cut from 5 per cent in 1975/76 to an estimated 2½ per cent in 1977/78. Growth of the money supply has been reined in from 20 per cent to, prospectively, less than 10 per cent per annum. As a result, we have made substantial gains on the inflation front.

In the first half of 1977 consumer prices in Australia rose at an annual rate of around 9 per cent. That increase was actually lower than the average increase recorded by our major trading partners. There remains a vital need—arising mainly from domestic economic considerations—to further improve our price performance, which remains short of our good record in the 1960s. This need is fully recognized in the Interim Committee’s most recent communiqué, which states: “Demand policies in countries with relatively high inflation or seriously weak external positions should place primary emphasis on combating inflation and improving the balance of payments. The Committee reaffirmed its belief that for these countries this was not only necessary in present circumstances but over time would yield the best results for growth and employment.”

Inflation’s principal evil lies in its damaging effects on the normal pattern of domestic economic activity, in particular on the behavior of private consumers and investors. Inflation also tends to unfairly redistribute domestic income away from those ill-placed to protect themselves against its effects. In the light of these considerations my Government intends to continue to pursue policies directed at bringing inflation fully under control while maintaining an appropriate level of growth in output and activity. We are confident that, on the basis of this strategy, the recovery in activity which is now under way will strengthen in the period ahead.

The actual course of economic activity in Australia will, as is the case for the large number of small open economies represented here, be dependent to an important degree on the course of events in our trading partners. I referred earlier to the desirability of strong countries making a greater contribution to world economic growth next year. This is an important objective, not least because of the need to achieve a more satisfactory rate of expansion in world trade. As a primary commodity exporting country, Australia has a direct interest in a healthy world trading situation. Moreover, provided stronger growth in world output and trade can be achieved in a manner compatible with containing inflation, it would facilitate the external adjustment process. There is a clear need for faster progress in this area. At the same time we must ensure adequate financing of world trade and payments.

There has been considerable debate during the year on the need to strengthen the role of the Fund in the difficult economic environment affecting members today. The IMF Interim Committee has just completed a useful discussion on the appropriate size of the Seventh General Review of Quotas. Changes in international monetary and financial arrangements—such as the widening of private credit facilities and the greater flexibility of exchange rates—make it difficult to judge by how much quotas should be increased. What is clear is that, over the past five years, world reserves have increased very substantially—and broadly in line with the increase in the value of world trade. Due allowance should also be made for members’ increased access under various Fund facilities, including the new supplementary financing facility.

The basic financing problem facing us at present is less a lack of total international liquidity than an insufficiency of the type of liquidity that is provided on the basis of domestic economic policies that further the external adjustment process. It is against this background that we have supported the establishment of the supplementary financing facility. It will enable the Fund, rather than the private financial markets, to provide finance to countries with programs designed to overcome the inflation problem.

For similar reasons we support a further significant quota increase. The question of the distribution of increased quotas tends to be controversial. We have only recently come through the difficult negotiations associated with the Sixth General Review of Quotas. In the light of our experience with that review, there is wide agreement that at this stage further attempts to realign quota shares could be divisive for the Fund. Given the proximity of the present review to the sixth review, I consider it important on this occasion that we proceed on the basis that members receive the same proportional increase in quotas. . . .

The Australian Government is committed to working toward achievement of the ODA target of 0.7 per cent. Australia’s aid allocation is well above the DAC average and in most recent years, including the current one, we have been able to provide increases in real terms. In 1977/78 Australia will provide approximately $470 million in ODA, almost entirely in the form of straight-out grants, the greater part of which is given on an untied basis. At the same time we are further improving the terms on which our ODA is provided to developing countries. Australia recognizes that an indication of its aid intentions in the medium term is of considerable assistance to major recipients in their forward planning. Several important areas of the bilateral program have now been directed into multiyear commitments, notably aid to Papua New Guinea, ASEAN, and South Pacific countries. Similar arrangements have been concluded with a number of major multilateral bodies. . . .

On a different level, Australia recognizes its obligations to the rest of the world in relation to the development of much needed energy resources. That is one reason why the Australian Government has decided to allow development of uranium resources to proceed, subject to appropriate environmental and other safeguards—particularly as regards waste disposal—being met. In addition, of course, we are encouraging development of Australia’s rich coal reserves, and a new oil pricing policy is intended to foster conservation of known petroleum resources, as well as exploration for and development of new fields. Australia’s contribution in these vital areas will help to ensure that the development process is not interrupted on account of shortages of basic energy resources.

We will, of course, be relying in considerable measure on foreign private capital to finance development of our natural resources. I consider there may be scope for developing countries to make increased use of such capital for their own development and I am particularly pleased that the Development Committee has decided to adopt an Australian suggestion that a study be made of the role of private foreign investment in the development process. Such investment can provide an important supplement to the resources of developing countries and thus enable them to increase their living standards at a faster rate than would otherwise be possible. . . .

Statement by the Governor of the Fund and the Bank for Luxembourg—Jacques F. Poos

A year ago early signs of an upturn in the first six months of 1976 warranted a certain optimism. This feeling has not been borne out by the evolution of the economic situation, and the remarks of Managing Director Witteveen have confirmed that the outlook is still disquieting.

This persistence of economic uncertainty at the international level is resulting in difficulties for countries with an open economy.

In this connection, please allow me rapidly to describe how the economic depression is affecting the Grand Duchy of Luxembourg. I shall also refer to the development of international liquidity and the conditions for covering international deficits.

Finally, it is evident that the depressed world economic situation is not calculated to solve the problems of developing countries. The operations of the World Bank will therefore be analyzed in the light of this evolution.

As regards the international economic situation, we have noted with interest that most of the large industrial countries are aware of the risks of stagnation and that they have therefore launched programs to stimulate the economy.

Unfortunately, unemployment showed a further increase in 1977, attaining a rate of 5.5 per cent in the industrial countries. This extremely high rate cannot be sustained in the long run without social disruption.

Unutilized capacity amounts on average to 10 per cent of GNP; investments have still not returned to their level before the crisis. Inflation, stabilized at too high a level, flares up at the slightest relaxation of vigilance.

This situation has had serious repercussions in Luxembourg, always largely dependent on the iron and steel sector despite diversification efforts now in progress. Surplus capacity and the menace of unemployment are concentrated in this dominant sector.

Despite the initiatives of the European Community and rationalization endeavors, in 1977 the iron and steel sector will barely surpass its 1976 production level, already regarded as a historic trough. Nothing less than a concerted effort on the international scale can draw that industry out of its present stagnation. It follows that our GDP will increase by hardly more than 2 per cent this year and that the forecasts for 1978 are limited to 2.75 per cent.

On the inflation front, disparities are still very high. Thus, within the OECD, inflation rates range from 1 per cent to 22 per cent on an annual base, which obviously do not further the economic and monetary stabilization efforts.

In Luxembourg, the monthly consumer price index, with a within-year increase of 6.2 per cent by August 1977, is appreciably lower than the 1976 level. Unless an international flare-up pushes prices to new heights, this success in the fight against inflation should be confirmed.

Demand-pull inflation and wage inflation seem at the present time to be increasingly replaced by an inflation resulting both from the insufficient use of production capacity and from the repayment of profits, the profits being channeled into financial assets instead of used to reconstitute and expand productive capital.

In the face of this situation, a passive attitude is inopportune. Inflationary expectations must be actively combated. To this end there must not only be a regulation of demand, but also a regulation of supply.

At the London summit talks the major industrial countries were in mutual agreement that recovery should not be pursued to the detriment of the fight against inflation. Nevertheless, the slowdown in recovery could not be allowed to bring about a further increase in unemployment.

In the field of employment the Luxembourg Government has introduced additional procedures for consultation with the social partners. Its efforts have resulted in a plan of action in which the various measures are triggered by the attainment of successive levels of unemployment. This plan operates under the supervision of a tripartite commission that institutionalizes and continues a dialogue already initiated at the level of an economic policy committee. The results of this policy are conclusive: during the year 1977 Luxembourg had less than 0.6 per cent unemployed in ratio to its active population.

In view of the persistence of inflation and the rise in unemployment, increasingly large sectors of the public are questioning the efficacy of market arrangements for the improvement of this situation. Can our societies afford to debar a large number of unemployed from active life for any length of time?

In the fight against structural unemployment and inflationary expectations, it is necessary to establish medium-term and long-term goals. The role to be played by the private and the public sectors, and the distribution of their tasks, should be re-examined. The productivity of government departments should be improved, which is indispensable in restoring their image in the public eye. Demands for improved control of subsidies and grants, or social supervision of the evolution of productivity would also merit discussion.

Since 1974 the budgetary policy of the Luxembourg Government has been aimed at dynamic equilibrium in the medium term. This conforms to the recommendations on full employment and price stability drawn up by a group of experts headed by Professor McCracken, under the auspices of the OECD.

To create a climate favorable to investment, the Government has extended fiscal incentives and has established a National Credit and Investment Corporation.

A country that exports three quarters of its production is heavily dependent on the international situation. Luxembourg therefore welcomes the recent recovery measures adopted in particular by the Federal Republic of Germany to attain the proposed objectives. Indeed, it is vital for the leading industrial countries with favorable payments balances to attain the rates of growth established, by expanding demand within the limits of their anti-inflationary policies.

Dependence on international trade makes Luxembourg extremely vulnerable to any form of protectionism, overt or concealed. We endorse the recommendation of the OECD Council of June 23 and 24, 1977, which reaffirms the political commitment to avoid unilateral restrictive measures on trade, and also the artificial stimulation of exports. In fact, such measures would procure a temporary competitive advantage in comparison with the reprisals they would certainly entail. They would really penalize the weakest and poorest countries.

The Luxembourg Government is gratified, also, at the close surveillance to be exercised by the Fund over exchange rates. The small, open economies are particularly vulnerable to erratic movements of the exchange rates in a quasi-generalized floating system. This explains our attachment to the dual exchange market within the context of the Belgian-Luxembourg Economic Union and the European common margins arrangement (snake).

International adjustment is working in a form different from that at the beginning of this decade. It is no longer so much the industrial countries that are putting up the funds as the oil exporting countries, whose surplus does not seem to be expected to diminish despite endeavors to develop the absorption capacity of some of those countries. But the surplus oil exporting countries have recourse to the banking system of the industrial countries. These latter are therefore continuing to direct the necessary funds into cover for deficits on current account or the accumulation of reserves. This process of recycling the savings of the oil exporting countries at the initiative of the banking system, in which the Luxembourg capital market has played an active part, has functioned to the general satisfaction. The supply of funds for financing balances of payments has been sufficient to meet the demand in the normal way.

As for the problem of the availability of sufficient funds, Luxembourg welcomes the establishment of the supplementary financing facility, which gives borrowers access of last resort to the funds of the lending countries and enables the IMF to fully perform its role as intermediary in the international monetary system. Increases in quotas continue to be of capital importance for the operations of the Fund.

In Luxembourg, parliamentary approval of the latest increase in quotas will be obtained before the end of this year. We believe that the Seventh General Review of Quotas should be completed as soon as possible. So that the entry into effect of a new increase will not be delayed by long and difficult discussions, Luxembourg supports a reasonable and proportional increase.

The entry into force of the second amendment will expand the possibilities of utilization of SDRs. The Government of Luxembourg is gratified that it will henceforth be able to make use of SDRs independently of balance of payments requirements. It believes, however, that before a new allocation of SDRs is effected, their quality must be improved so that they may become the principal reserve instrument of the international monetary system.

The importance of the Fund is bound to increase. Furthermore, in the near future there must be a restoration of balance in financing between the banking system and the international agencies.

In the second part of my remarks I should like to speak about the situation of the developing countries and the activities of the World Bank Group.

It is encouraging to note that some developing countries have increased their per capita income by an average of about 50 per cent over the last ten years, either through their petroleum earnings or through their industrialization programs.

Moreover, some of these economies have continued to grow—though at a slower rate—even during the recession in the industrial countries.

Nonetheless, these scattered optimistic signs are not enough to brighten a picture that remains grim: the cost of imports, and especially that of services, has risen substantially. The terms of trade have continued to deteriorate in 1977. Surging population growth partly offset the overall growth rates. The stagnation of the world economy and the adjustment problems of the industrial countries have led to a decrease in unrequited transfers to the developing countries.

The depressed level of investment in the industrial countries has also been accompanied by a fall in direct investment in the poor countries, which have thus been obliged to rely very heavily on external financing. Almost a third of net public borrowing has been through the private market, and some countries have reached the limit of their borrowing capacity. It goes without saying that between a fair distribution of resources and security, the banks will choose the latter criterion for allocation. For this reason, it is the poorest countries that are bearing the costs of the world recession. Their access to the resources of the banking system is beginning to be subject to increasingly unfavorable terms.

It is, therefore, not surprising that the countries which were among the poorest ten years ago are still lagging behind. A resurgence of protectionism would have its first effects on them.

In view of this situation, on June 23 the governments of the OECD member countries reaffirmed their intention to increase their official aid for development effectively and substantially.

The European Community, which is the foremost supplier of aid for development, is particularly aware of its responsibilities. Thus, agreement has been reached (at the initiative of the EEC countries) on the common fund envisaged in the comprehensive program of the UNCTAD for basic products.

The Community has thus played a key role in agreement on the need for specific action to assist the poorest countries. The proposal for such action, made at the Conference on International Economic Cooperation in Paris, is now being discussed actively within the Community and should be implemented early in 1978. The EEC countries, including Luxembourg, will contribute $385 million to a special IDA account. This action reflects the intention of the EEC members to increase the volume and effectiveness of their aid for development within the framework of an expanded international effort.

The Government of Luxembourg, aware that fundamental human rights go beyond the political and social context to embrace economic needs, reaffirms its intention to progressively attain a volume of public aid for development equal to 0.7 per cent of its gross national product.

The increase in aid provided by Luxembourg in recent years has always been far in excess of the overall budget increase. This willingness to do more has already been shown in its participation in the Third Window and in the Subsidy Account.

In 1978 the Government intends to make a special effort of the same kind at the international level. The provision for loans in the 1978 budget will be increased by about 72 per cent, while the overall budget increase is 8.8 per cent.

Luxembourg likewise supports the liberalization of regulations governing the operations of capital markets, which would facilitate the access of creditworthy countries. It favors the expansion of direct investment on terms guaranteeing respect for national sovereignty and, of course, providing reasonable assurance of the safety and protection of the capital invested. A means should also be sought to guarantee the stability of export earnings. The discussion of this subject could usefully be referred to the Development Committee.

While respecting the competence of the governing bodies of each institution, it would be in everyone’s interest to step up efforts to ensure a coordinated approach in the timetable and methods for increasing and replenishing the resources of the multilateral institutions. An exchange of views on this matter within a working group is certainly justified. . . .

In addition to the actions I have mentioned, the Government of Luxembourg reiterates its willingness to participate in the capital of the various regional development banks. For any of these banks, a setting of quotas at levels consonant with the actual possibilities of the contributors would be to the advantage of all parties concerned.

It only remains for me to stress once more our determination to support every effort to strengthen international monetary and financial cooperation. We regard this as the only means of preventing an overbearing selfishness that threatens to crush the weak and to provoke conflicts.

In this spirit, I sincerely hope that this Annual Meeting will enable us to reach a consensus on the goals of balanced growth that we seek.

Statement by the Governor of the Fund for Malta—Joseph Abela

A major feature of the proceedings at last year’s Annual Meeting in Manila was the widespead sense of satisfaction and relief expressed at the process of economic recovery from the worst recession the world had experienced in four decades. The numerous expressions of optimism were, however, tempered with doubts connected with the persistence of high unemployment and inflation levels which, it was feared, might prejudice the prospects for growth. We gather here in Washington fully aware that those fears were well founded. As we are reminded by the Fund’s latest Annual Report, economic growth rates are generally subnormal in a setting of high unemployment, excess plant capacity, and lagging investment. Inflation is also a widespread problem and it is often coupled with a weak external position. Even more distressing is the fact that the world rate of economic growth in 1978 is unlikely to differ much from this year’s, which itself is proving lower than that experienced in 1976.

The failure of the world economy to return to a stable growth path has been accompanied by a further drift toward the application of restrictions on current payments and transactions. This unwelcome development is well documented in the Fund’s latest Annual Report on Exchange Restrictions which concludes that import restrictions for protective purposes in industrial countries, as well as in the primary producing countries, appear to be at a perceptibly higher level than before the emergence of the recession in 1974. As the representative of a small, export-oriented developing country I cannot but share the opinion expressed recently by the Managing Director that this trend toward greater protectionism constitutes a potentially serious danger which could hamper the growth of world trade.

While joining other Governors at the Manila meeting in expressing relief at the cyclical recovery in world output and trade, the Governor for Malta warned on that occasion against the danger of allowing the meeting’s attention to be diverted from the structural imbalances of the existing system. Today, when the recovery has clearly lost its earlier momentum, thereby increasing the problems of several developing countries, the need to pursue the objectives of the new international economic order is even greater. In this context one cannot but express disappointment at the slow progress recorded by the recent North-South conference in Paris and at the meager results which it produced. Moreover, in the one major area where a measure of agreement was reached, that relating to commodities and the Common Fund, consideration does not seem to have been given to the problems of developing countries such as my own which are consumers of commodities.

I now turn to the Fund itself and to the international monetary system. Though the past year may be described as a period of consolidation following the agreement on the second amendment, much has happened which constitutes further progress in the process of reform. Thus, the first phase of restitution of Fund gold to members was successfully completed while two interim loan disbursements have already been made by the Trust Fund and the way is now open for the first direct distribution to eligible countries of the profits derived from the sale of a part of the Fund’s gold. In this regard I feel I should express the satisfaction of my Government at the fact that a middle-income country like Malta has been eventually considered eligible for participation in the distribution of profits. Such countries, which lack an industrial base as well as raw materials and whose economies are open to outside influences, have been and continue to be severely affected by international recession and inflation, but are nonetheless considered ineligible for concessionary assistance. For this reason we have long been stressing that the criteria of need currently in widespread use, such as GNP per capita and balance of payments performance, should not be adopted to the exclusion of other factors such as the size and openness of an economy, the import content of its exports, the depletability of its resources, and the lack of raw materials. We hope that this way of thinking will now find a more ready acceptance within the Fund as elsewhere.

Finally, the past year has also taught us more about the workings of floating of exchange rates and since, as a small developing country vulnerable to outside disturbances in the foreign exchange markets we are in favor of stable but adjustable rates, we welcome the Interim Committee’s recent agreement on principles and procedures for the guidance of members and for the exercise of Fund surveillance as a potential means of achieving such stability.

These positive developments in the area of monetary reform should, however, be assessed in relation to the urgency of the foremost problems facing us today, namely, those concerning the efficient management of the world economy and the simultaneous establishment of a new and more equitable relationship between the haves and the have-nots. In terms of their contribution to the achievement of these objectives the steps taken during the past year represent only a rather modest step in the context of the discussions which have been under way for a number of years. Thus, for instance, much ground remains to be covered in the areas of internationalizing control over liquidity creation and the establishment of the SDR as the system’s primary reserve asset. The latter aim can only be achieved when the necessary decisions are taken on the monetary gold stocks of the IMF and of national authorities and on the substitution of national currency reserves. It can hardly be said that much progress has been made in this direction.

Another source of disappointment during the past year has been the failure to introduce measures designed to increase the access of developing countries to the credit facilities of the IMF on easy terms and the establishment of a link mechanism between SDR allocations and development finance. We are all well aware of the persistence of large payments imbalances and of the heavy deficits of the non-oil developing countries in particular. This is also recognized in the Fund’s Annual Report where it is stated that “heavy demands for the use of the Fund’s resources might well materialize…and expansion of the Fund’s capacity to supply financial assistance… could contribute significantly to the promotion of international adjustment.” Under these circumstances, therefore, it is regrettable that the Fund’s new supplementary financing facility does not come up to the expectations of the developing countries who, through their representatives in the Group of Twenty-Four, had expressed the hope that the facility would have low conditionality.

Unless steps are taken soon to facilitate the access of the structurally weaker countries to the Fund’s resources, including the compensatory financing facility which, we believe, should also cover shortfalls in real earnings from invisibles, then many developing countries will continue to be discouraged from using the Fund’s resources. While sharing the conviction of many other members that the increase in quotas under the forthcoming seventh general review should be substantial, we believe that more important than the quantum of credit available at the present time is the degree of conditionality attached to these resources. The hope expressed in the Annual Report for the achievement of international adjustment and the maintenance of confidence in the international monetary system can only materialize if the structural weaknesses of several economies, often the legacy of the erstwhile policies of today’s so-called advanced industrial states, are righted with the help of ad hoc and long-term financial and other assistance by the international community. This is a major challenge for all member countries, particularly those in a position to influence the pace and the direction of the world economy. For, while all of us have a high stake in the establishment of a stable and growing international economy, it is only a few of us in whose power it is to materially affect developments.

September 27, 1977.

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