Discussion of Fund Policy at Fifth Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
October 1977
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Report to the Boards of Governors of the Bank and the Fund by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee). Cesar E. A. Virata

In addition to the report I have submitted to the Boards of Governors, I wish to make a few remarks about the tasks we will jointly undertake in the Development Committee. This responsibility can be discharged only with your full support. The task before us is not easy, but on its satisfactory resolution hangs the fate not only of some 750 million people at present living a life without basic necessities or hope, but also the future peace and prosperity of the world.

I need not dwell at any length on the world economic scene which is well described in the documents prepared by the World Bank and the IMF and is well known to you. While there have been some marginal improvements in some of the world economic indicators, extreme poverty in many parts of the world continues to pose a challenge and concern which we all share. The current and prospective high rates of inflation, slow growth, and a high rate of unemployment generate legitimate concern about the social and political consequences and create a general atmosphere of uncertainty and lack of confidence adversely affecting much needed growth in investment and reducing the desired expansion in world trade.

There is a marked increase in the current account deficit of the non-oil developing countries which is estimated at some $30 billion for 1978 compared with $25-26 billion in both 1976 and 1977. While this large deficit may be manageable in the aggregate, it will confront some individual countries with serious problems of balance of payments adjustment and external debt.

The cumulative effect of this situation threatens the process, or at least the pace, of recovery of the world economy and prolongs the agony of those who are most seriously affected and whose future growth prospects are jeopardized. The projected annual growth rate of 1.7 per cent per capita for the low-income countries up to 1985 was considered unsatisfactory and unacceptable by the Development Committee and unless improved it will mean that these countries will be subject to prolonged hardship. This has emerged as a major issue requiring the urgent attention of the international community and the Development Committee intends to pursue it vigorously. Thus, while the low-income developing countries will need larger flows of concessional assistance in support of their own resources, the middle-income developing countries will have to rely more on receipts from exports, on access to capital and money markets, and on private investment, including foreign private investment.

I cannot emphasize strongly enough the importance of export revenues for developing countries. Mr. McNamara, Mr. Witteveen, and other distinguished speakers have already referred to this vital aspect of the development strategies of our member countries in some detail.

Exports are important not only for the middle-income but also for the low-income developing countries. After a long and difficult process, several developing countries have become exporters of manufactured goods because they are able to produce them at a lower cost than would be possible in the industrial countries. To their disappointment these developing countries are confronted with the fear that a revival of growing protectionist tendencies in various forms, such as voluntary restraints, orderly arrangements, and quotas, would hamper the possibility of continuing their process of industrialization and modernization. I consider these tendencies self-defeating in the long run and a threat to world development efforts. It is important that a liberal trade framework not only survive but be improved for the good of the world economy.

As past events have shown, the world economy is indivisible and world economic issues are interrelated. Therefore, no isolated measures, or measures restricted to any one group of countries, can be expected to provide a satisfactory or lasting solution for the benefit of all. It is with this conviction that I welcome the initiative of a study of world development issues by the World Bank as announced by Mr. McNamara. This will provide a basis for a continuing and comprehensive review of development problems—their complexities and their linkages—and the impact of alternative internal and external policies of development in countries at various stages of development together with an analysis of their implications and cost. The study could, and I hope will, become a primary focus of the Development Committee’s future activities.

As regards its future work, the Committee agreed at its meeting last Sunday to undertake a program of work which, besides the study of world development issues which I have already mentioned, will include important issues such as official development assistance in all its aspects, the coordination of the role of multilateral development institutions, the role of private overseas investment, the stabilization of export earnings, and access to capital and money markets, including the role of borrowing in financing development. We have made this selection on the basis of the suggestions made by the members at our April meeting and in the light of the conclusions of the CIEC discussion in Paris. In preparing our short list, we have selected topics of priority in relation to the present situation and future prospects of the developing countries for which the Development Committee appears to be the most appropriate forum; these topics are both urgent in the context of the world economic situation and are ripe for ministerial discussion. Let us remind ourselves that the Development Committee is not primarily a debating society nor a study club but an organism whose discussions should lead to concrete policy decisions.

The Development Committee, consisting as it does not only of representatives of the member countries of the World Bank and IMF but also the heads of all the international organizations concerned with development, remains in my judgment a most useful forum for constructive dialogue at a high political level among developed countries, oil exporting countries, and other developing countries in the fields of development and transfer of resources. It has made some progress on a number of specific issues and, what was perhaps more important in its earlier phase, it has contributed to the broad understanding of the international economic situation and the development problems with which we are faced. It now enters a critical stage with the shifting of its focus to long-term and more fundamental problems of development. Success here will depend on a united, dedicated, and sustained effort by all the member countries, both rich and poor. I urge and seek your support in the accomplishment by the Committee of the task which lies ahead.

Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System. Denis W. Healey

It is customary for the Chairman of the Interim Committee to report briefly on the Committee’s activities to the Annual Meeting of the Board of Governors of the International Monetary Fund. I am submitting the following report to the Board of Governors in my capacity as Chairman of the Committee.

Since its meetings in Manila last year, the Interim Committee has met twice—once in Washington on April 29, 1977, and again last Saturday, September 24, 1977. The first of these meetings—the eighth to be held by the Interim Committee—was under the Chairmanship of Mr. Willy De Clercq. Governors will wish to know that one of the first actions taken by the Committee last Saturday was to send to Mr. De Clercq a message expressing the Committee’s gratitude for the energy, skill, and good humor with which he conducted the Committee’s proceedings and thereby succeeded in contributing greatly to its work. It is indeed an honor for me to follow such a distinguished leader.

At its meeting in Washington last April, the Committee carried out an extensive review of the world economic situation and outlook. While it welcomed the general improvement in the world economy, there was concern at the continuing high level of unemployment and inflation in many countries. In these circumstances, the need was for demand management policies to be directed toward dealing with problems of inflation and the balance of payments in the belief that success in these areas would make for a better performance over time in terms of economic growth and employment.

In reviewing the international adjustment process, the Committee noted that large payments imbalances persisted and urged that the process of adjustment should not be delayed. It was important for industrial countries in relatively strong payments positions to ensure a continued and prudent expansion of domestic demand, and for these countries, as well as others in a strong balance of payments position, to promote increased flows of long-term capital exports. More generally, the Committee called on members to make special efforts to improve market access for the exports of the developing countries, to increase the flow of official development assistance, and to resist tendencies toward restrictionist trade policies.

It was at the meeting of the Committee in April that agreement was reached on the need for a supplementary financing facility and on some of its main features. It was also agreed that there was a need for an adequate increase in Fund quotas under the seventh general review and that the Executive Directors should pursue their work on this subject. With respect to the SDR, the Executive Directors were requested to report on the possibility of an SDR allocation to the Committee early in 1978 and to review the characteristics and uses of the SDR.

At its ninth meeting, held last Saturday, the Committee again focused its attention on the world economic outlook and policy issues. At this meeting, it was evident that economic recovery had been slower than had been expected earlier in the year. Although many countries had made progress toward their objectives of stabilization and growth, economic activity in a number of industrial countries was faltering. Unemployment and rates of inflation remained at unacceptably high levels, and the slower expansion of economic activity was being accompanied by a deceleration in the growth of world trade.

In its discussion of the problems affecting the developing countries, the Committee noted that the deceleration in world trade was having an impact on their export earnings, which had also been adversely affected by the marked declines in primary product prices in recent months. There was particular concern to ensure that adjustment measures by developed countries should not reduce the transfer of real resources to the developing world.

The Committee reaffirmed its view that tendencies toward protectionist trade policies were unacceptable from an international point of view and should be strongly resisted. It stressed the importance of achieving a successful outcome of the current Multilateral Trade Negotiations in Geneva and the early conclusion of agreements that would benefit all countries, particularly the developing countries.

With respect to national economic policies, it was agreed that all countries in relatively strong external positions should make every effort to ensure adequate growth of domestic demand compatible with containing inflation. The Committee expressed regret that growth of domestic demand in some of the larger industrial countries had lagged behind the targets and expectations of their authorities, and it welcomed the expansionary measures recently announced by several governments. As the results of adjustment action became progressively more evident, an increasing number of countries would be able to bring their inflation and balance of payments problems under control and thus would be strong enough to make their contribution to growth of the world economy.

The Committee reiterated its view that 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, reaffirming 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. It was recognized that structural problems were important in the economic situation of many countries and that there was a need to develop appropriate energy policies.

In its discussion of the provision of official financing to deficit countries, it was noted that such finance should be provided in sufficiently large amounts and under appropriate conditions, and should permit adequate time for necessary adjustment. The Committee welcomed the completion by the Executive Directors of their work on the establishment of a supplementary financing facility, noting that a number of members and official institutions have expressed their willingness to make available to the Fund resources for the financing of the facility of about SDR 8.6 billion, equivalent to approximately $10 billion. In view of the need of some members for prompt financial assistance on the scale envisaged under the new facility, the Committee urged all potential participants in the financing of the facility to complete as soon as possible the necessary action that will bring the facility into operation at the earliest date possible. At the same time, it was agreed to request the Executive Directors to pursue their consideration of the possibility of a subsidy, perhaps through voluntary contributions, that would be related to the charges payable by members determined by the Fund to be in difficult circumstances.

The Committee noted the report of the Executive Directors on the Seventh General Review of Quotas and their intention to give priority to this matter in their work after the Annual Meeting. Executive Directors were asked to submit appropriate proposals to the Committee at its next meeting, together with draft recommendations to the Board of Governors.

On the question of whether a further allocation of SDRs would be advisable at the present time, the Committee reaffirmed its request to Executive Directors for the submission of a report at the Committee’s first meeting in 1978. It also reaffirmed its request to the Executive Directors to review the characteristics and uses of the SDR so as to promote the purposes of the Fund, including the objective of making the SDR the principal reserve asset in the international monetary system.

The Committee expressed concern at the delay in the entry into force of the proposed second amendment of the Fund’s Articles of Agreement and in the increases in quotas under the Sixth General Review of Quotas. In view of the importance for members and the international monetary system of the entry into force of the amendment and the increases in quotas, the Committee once again urged all members that have not yet accepted the amendment, or consented to the increases in their quotas, to do so at the earliest possible date.

Finally, I might note that the Committee had thought to arrange its next meeting during March. It now appears that the date originally thought of would be difficult for a number of members. Accordingly, I am in touch with the Managing Director and I hope to be able to announce a generally acceptable time for our meeting before we adjourn this week.

Perhaps I may be permitted one final, personal observation. I have had the privilege of participating in the work of the Committee since its inaugural meeting in 1974. I have always found our discussions to be frank, pertinent, and instructive, and there is no doubt in my mind that in deliberating complex policy and political questions, the Committee plays an invaluable role in promoting a better understanding of our individual viewpoints and in helping to resolve some of the many difficult problems that confront us in the world today.

Statement by the Alternate Governor of the Bank for Spain—José María López de Letona

For two years now, Spain has been occupied in the great effort to build a future for itself in a climate of peace, civil liberty, and democracy. The course we have embarked on is long and difficult because, as you are aware, political institutions cannot be changed like a theater set; neither are democracy and civil liberties firmly secured by isolated acts, but by the gradual acquisition of social habits, political practices, and appropriate modes of thought. And our economic difficulties are inevitably affecting this process of political transformation.

In this sphere, our problems are similar to those faced by many other countries at present: high inflation fed by a rising spiral of costs and prices, a heavy deficit in the current account balance of payments, high unemployment, and the type of problem associated with alterations in the supply and demand structure imposed by the new set of relative prices prevailing in the world economy since the rise in energy costs. In addition, however, our situation has certain peculiar characteristics, due, for the most part, to our political evolution. It was only after the difficulties strewn along the road to the general elections had been surmounted, and after the elections were finally behind us, that we could plan an in-depth attack on the economic imbalances that had burdened us for more than three years.

The Spanish Government recognizes that our economy must moderate its inflation rate progressively and reduce its external deficit as the prerequisite conditions for finding a new path of stable development with low unemployment rates. In July, the Government began to implement the adjustment processes by which to accomplish these objectives and has now formulated a general economic policy program, to be submitted to Parliament immediately. It is based on acceptance of sacrifices we deem necessary, the will to make our economy more flexible and our society more just, and the desire not to add to the protectionist tendencies now threatening the world economy. We expect results from this program that, although gradual, will prove substantial and solid. And like other countries with similar problems and aims, we are confident that international cooperation, carefully channeled by those countries with greater strategic weight in the world economy, will evolve from its present precarious situation in such a way as to facilitate our efforts and not hinder them.

We live under a system in which the different economies are closely connected and where no national economic policy can be formulated and implemented independently of the world economic context in which it is set. But this international context has recently been such that it tends to introduce downswings which are a serious obstacle to the adjustments attempted by countries in difficulties. It is right to request deficit countries to adopt policies that will reduce their imbalances. But it is not reasonable that the large industrial economies should simultaneously elude cooperating to achieve an appropriate distribution of disequilibria in current account balances of payments; by doing so, they would provoke an asymmetrical adjustment and throw too heavy a burden on the deficit countries.

No one can rightfully ask the countries which have succeeded in imposing order in their own houses with regard to the difficult matter of inflation to embark on policies highly likely to reignite inflationary pressures. Countries in difficulty must today urge the surplus economies, in the name of international cooperation, to ponder whether more expansionary policies than those now being followed would indeed have inflationary effects. They must urge them to examine in depth whether the path they are following is the most appropriate, considering the repercussions of their decisions on other countries.

The world economy is going through difficult times. If the countries in the international community—all countries, those in deficit as well as those in surplus—do not make a joint, simultaneous effort to establish a pattern of current account balance of payments disequilibria more reasonable than the present one, we risk making realities of the grave dangers now threatening the world’s economic system.

Improving the structure of current account disequilibria is not enough because the basic global imbalance is of such a nature that it must be able to endure if a collapse of the world economy is to be avoided. And this raises the problem of financing it through channels less unstable than those which international markets can now offer—although we should not fail to recognize the effort made by those markets in the last few years. We must be grateful for the work done by the Managing Director of the International Monetary Fund to establish a supplementary line of credit to help attack the problems of financing the global imbalance. We all owe a deep debt of gratitude to Mr. Witteveen, and must regret his decision not to continue with the Fund. But we must be aware of certain points: first, that the size of this credit line for the next two years is manifestly inadequate; second, that no matter how large—within feasible limits—the facility might become, we would be left with the problem of financing a substantial part of the imbalance and, hence, of placing in a more stable manner a significant part of the surplus countries’ excess funds; and, third, that the credit line must not be linked to a high level of conditionality that would make of it a means of imposing drastically depressive policies on deficit countries, without regard to the economic, social, and political repercussions on them.

It is therefore vital that the International Monetary Fund substantially expand its resources through adequate quota increases and other mechanisms that provide it with the financial means to meet its growing responsibilities. And the Fund must interpret these responsibilities in the context of problems which can be remedied only through adjustment processes more long-lasting than those of the past.

If the international community fails to make a serious effort to cooperate in this area, we risk still greater evils, which would work to the detriment of all of us, and not the least of which is the revival of protectionism that the International Monetary Fund has recently been reporting with growing concern. For what is at stake is of such importance that it surpasses the interests and concerns of any individual country.

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

We are again holding the Annual Meetings of the World Bank and IMF faced with a world economic situation which does not inspire optimism and is burdened with persistent troubles.

The growth of world trade is unsatisfactory, unemployment rates remain high, and dangers of both inflation and protectionism are increasing seriously. All this adversely affects the developing countries in particular.

The balance of payments deficits of non-oil producing developing countries remain at very high levels, causing the indebtedness of a large number of these countries to reach dimensions detrimental to their development prospects and to the world financial system as a whole.

In our opinion, the roots of this grave situation lie in the present system of international economic relations. World economic progress conflicts with division of the world into blocs, and with the increasingly harmful consequences of great concentration of power in a few countries, and extreme poverty in a great majority. The inequitable position of developing countries in international economic relations is jeopardizing the integrity of world markets so important to the growth of world economy.

It is for this very reason that we view the decisions of the Sixth and Seventh Special Sessions of the UN General Assembly on the necessity of establishing a new international economic order as a precondition not only for faster advancement in developing countries, but for a sustained growth of the world economy, equitable international cooperation, and a more stable world peace. Developing countries made a great effort in this direction in the recently concluded Paris conference. However, that opportunity to make a breakthrough in establishing new relations was not used satisfactorily. Among other issues, the entire field of financial and monetary problems remained unresolved. The lack of political will on the part of most influential developed countries has slowed progress in solving these problems. Work on the reform of the international monetary system is at a stalemate on all substantial issues.

In the absence of adequate solutions for the transfer of real resources, as well as the absence of an increase in “reserves to hold,” which should have been provided through the allocation of SDRs, developing countries had to borrow large amounts, thus raising the burden of their indebtedness. We consider the new allocation of SDRs indispensable in view of both the present liquidity situation and the agreed objective of making SDRs the main reserve asset in the reformed system. The distribution of the newly allocated SDRs should take account of the special needs of developing countries through the link.

We consider that the greater role of the IMF in supporting the balance of payments adjustments of member countries should not depend on exceptional arrangements, such as the supplementary financing facility. Member countries should enable the IMF to replenish its resources in a timely and orderly manner. We, therefore, urge a substantial increase of quotas under the seventh review. In this connection we reiterate our position that the role of developing countries should be increased in the decision-making process of our organization.

Development financing should be ensured by a larger transfer of resources to developing countries. We therefore urge the developed countries to substantially increase the official development assistance and accept an early date for meeting the 0.7 per cent target.

Obviously, we need much more determined efforts to establish an international monetary system capable of solving current serious problems, and in particular of promoting the growth of developing countries. . . .

Allow me to point out to this meeting the importance of decisions reached at the Fifth Conference of Nonaligned Countries in Colombo for the future economic cooperation among the nonaligned and other developing countries. We expect that cooperation to be supported by the decisions and policies of our organizations.

We have always supported and worked for a constructive dialogue between the developed and developing countries. However, we consider that the principles and atmosphere of negotiations can be strengthened, and the undesired confrontation avoided, only if some concrete results are achieved in establishing equitable international economic relations.

Statement by the Governor of the Bank for Egypt—Abdel Moneim El Kaissouni

… Knowing the pressures on your precious time I shall limit myself now to mentioning for your kind consideration the following three points:

  • 1. The gap between the per capita income in the advanced countries and the developing countries is fast becoming dramatically wider and wider. With the rapid development of international means of communication and the ease of comparing living standards between one country and another, we create an explosion of hopes and expectations which cannot be fulfilled and which leads inexorably to discontent, frustration, and grave social, political, and economic difficulties on an international basis. I believe it is our urgent duty to do our utmost to remedy this state of affairs before it is too late.

  • 2. In attempting to help the less developed countries to improve their standard of living, not only should the flow of assistance on a concessional basis be considerably augmented, but serious technical assistance should patiently be given for the implementation of their development programs until such time as they can implement their own programs efficiently and rapidly.

  • 3. In giving the less developed countries sound and proper advice for the improvement of their financial and monetary policies, we should not overlook the fact that political and social considerations may prevent the rapid implementation of such policies. An austerity policy may be possible in an advanced country with a high standard of living. It may not be possible in a less developed country where poverty does not leave much room for austerity except on a patient and gradual basis and when coupled with a serious program of economic growth.

* * *

It is a great pleasure and an honor to participate in these Annual Meetings of the Boards of Governors and to address the distinguished Governors. At the outset, I wish to congratulate you, Mr. Chairman, for the penetrating opening address in which you have placed emphasis on the various international issues of particular importance to this meeting. I wish also to express our appreciation to Mr. Witteveen and to Mr. McNamara for their stimulating addresses. To the Executive Directors I would like to convey our thanks for the excellent Annual Reports of the Fund and Bank presented to this meeting. Finally, the Interim Committee and the Development Committee are to be complimented for the work achieved in the past year.

Before I turn to a discussion of a few issues, I would like to point out that my remarks should not detract from the importance of the points raised by the distinguished spokesman on behalf of the African Governors of the Fund and the Bank who has been persuasively and eloquently pleading the cause of the African Group.

The year since the last Annual Meeting witnessed the resumption of economic growth in the industrial countries, though with a temporary “pause” in the latter part of 1976, coupled with the persistence of high rates of inflation and unemployment. Large disequilibria in international payments also persisted, though with some changing pattern within the different countries of the world, advanced and developing.

According to data published by the Fund, the rate of growth of real GNP in industrial countries reached 5.3 per cent in 1976 after the negative results of the preceding two years and is projected at 4.5 per cent for 1977, which is almost equal to the average annual growth rate for the period 1962-72. For the non-oil primary producing countries the rate of growth of real GNP in the more developed ones recovered to 3.1 per cent in 1976 and is projected at nearly the same rate for 1977, against an average annual rate of increase of 6.1 per cent for the five years ended in 1972. In the least developed countries the same rate recovered to 5.1 per cent in 1976 and is projected to reach 5.7 per cent in 1977 compared with an average annual growth rate of 6.1 per cent in the period 1967-72, with the African and Middle Eastern countries falling below the average growth rate. This should corroborate the view that developing countries are not getting commensurate benefit from the world economic recovery. Although their need for growth is much greater, the net result is that the gap between the per capita income in the advanced countries and in the less developed countries becomes wider and wider with all the social, economic, and political effects inherent in such growing disparity.

Data cited in the IMF report serve to illustrate the magnitude of the adjustment needs facing particularly the developing countries. As rightly pointed out by the Ministers of the Group of 24 in their meeting last April, the decline in the deficit of the non-oil developing countries since 1975 has entailed painful adjustment measures. However, the deficit is still of such dimensions that it raises serious financing problems for the majority of these countries in view of the growth of their external indebtedness and the mounting burden of debt service, unless the supply of concessional and other forms of sustainable financing were expanded and greater access to developed countries’ markets ascertained. Regarding the adjustment strategy in the industrial countries, the burden has to be shared between the surplus and deficit countries. Those in strong payments position may allow their currencies to appreciate and increase the outflow of long-term capital and aid, while those in deficit have to achieve more stable underlying economic conditions and improve their competitive position through depreciation of exchange rates.

Although the floating of currencies, which has been with us for some years now, may have made possible a more flexible exchange rate structure and thus contributed in a certain way to the adjustment process, instability of exchange rates is not a virtue and the sooner the return to more stable conditions the better. It is gratifying that the Executive Directors have reached agreement on the principles and procedures for the guidance of members’ exchange rate policies and for the Fund surveillance over these policies, which shall assume greater importance with the implementation of Article IV when the second amendment of the Articles becomes effective.

Turning to the question of international liquidity, the growth of its volume, composition, and distribution and the role of the Fund as supplier of conditional liquidity deserve a few remarks. It should be noted first that despite the increase in 1976 in developing countries’ reserves, their share in total international reserves remained practically unchanged at some 16 per cent.

Moreover, as far as the adequacy of reserves is concerned, the international monetary system has witnessed important changes since the first allocation of special drawing rights, including the changed role of gold, the generalization of currency floating, and the substantial growth in private bank financing which may have affected reserve needs. However, as a result of the remarkable expansion in world trade in recent years the ratio of international reserves to world imports has continued to decline and will deteriorate further with the projected increase in world trade this year. The persistence of large imbalances in international payments has also brought to the fore the question of inadequacy of international liquidity and the importance of augmenting the financial assistance to be provided by the Fund. In fact agreement was reached by the Interim Committee last April on the main features of a supplementary credit arrangement of a temporary nature to enable the Fund to expand its assistance to members, and the discussions conducted by the Managing Director with potential lenders were crowned with success. In this way additional resources could be mobilized by the Fund to meet members’ needs for supplementary financing for the next few years pending the implementation of quota increases. The new facility should improve confidence in the international monetary system, especially if private bank lending on the present scale is not maintained, and should strengthen the role of the Fund in promoting adjustment in member countries by the adoption of appropriate stabilization policies. However, in resorting to this facility developing countries should be considered as a special case in the sense that lower conditionality should be applied to loans granted to them under the facility, while considering the possibility of subsidizing the interest charged on such loans especially for the low-income countries.

Apart from the supplementary financing facility, the ordinary resources of the Fund should be substantially augmented so that the Fund may play a greater role in future financing of balance of payments deficits. We are in agreement with other developing countries for considering a doubling of members’ quotas in the forthcoming seventh general review especially now that the ratio of total Fund quotas to world imports has fallen to a very low level even after taking into account the pending sixth increase in quotas. In the meantime we support a selective increase of quotas of the Arab oil producing countries, if it is so decided, in conformity with their present financial position in the world economy, provided of course that they accept such an increase. Moreover, in view of the disproportionately low level of the non-oil developing countries’ quotas, we believe that the calculations of the voting power associated with the quota structure should be revised and a new formula devised in order to increase their voting share in total quotas. In the meantime the extended arrangements should be maintained until the Seventh General Review of Quotas has been implemented. Lastly, a second allocation of special drawing rights should be seriously considered. The allocation of SDRs would not only be beneficial to developing countries, but it would strengthen the role of the SDR as the principal reserve asset in the international monetary system. In this respect the pending review by the Executive Directors of the characteristics and uses of the SDR as requested by the Interim Committee is commendable. Serious consideration should also be given to the question of the link between the allocation of SDRs and the provision of additional assistance to developing countries.

As far as the last point is concerned, it is to be pointed out that total official and private net flows from DAC countries to developing countries amounted to $39.5 billion in 1976 with a slight fall compared to 1975 while the ratio of such flows to the GNP of DAC members retreated from more than 1 per cent to 0.95 per cent. Resource flows from OPEC countries also continued at a high level reaching $7.5 billion in 1976 of which two thirds were at concessional terms. Net flows of official development assistance, to which developing countries attach special importance, remained practically unchanged in current dollars at $13.7 billion, while its ratio to the GNP of DAC countries, notwithstanding the good performance of some donor countries, slipped back to 0.33 per cent in 1976 as against the UN target of 0.7 per cent. However, the continued growth in the external debt of the less developed countries and the increase in the burden of debt servicing, partly as a result of large borrowing from banks at higher costs coupled with the shortening of maturities, are giving them serious concern. Increased flows of financial assistance on concessional terms, better access to the markets of developed countries, stabilization of prices of primary commodities, and debt relief measures should constitute a package deal in a multidimensional international approach to this problem. . . .

Finally, I wish to seize this opportunity to place emphasis on the existing close relations between my country and the Fund and World Bank and the assistance obtained so far, of which mention may be made of the stand-by arrangement with the Fund earlier this year and the active participation of the Bank and IDA in the development efforts of Egypt. The Bank also chaired last May a meeting of the Consultative Group for Egypt for which we are grateful both to the sponsor and to the various countries which graciously participated. Concomitant with such assistance which is enhancing confidence in our economy, substantial financing has been arranged with the Gulf countries through the Gulf Organization for Development in Egypt, as well as with other friendly countries. Egypt has been suffering from balance of payments difficulties and from internal inflationary pressures for the past few years. To tackle these problems various measures have been taken in many fields within the framework of an “open-door” liberalization policy. However, substantial modification of economic and financial policies had to be initiated with a view to adjusting the course of our economy. The stabilization efforts were given further momentum this year with the new measures introduced in the economic, fiscal, monetary, and credit fields with the support of the Fund coupled with an enlarged capital inflow from various sources to meet our development needs and to improve the maturity structure of external debts. In the meantime the law regulating the investment of Arab and foreign capital in Egypt has been amended in order to further encourage investors and to improve its implementation. The results so far achieved as regards the improvement of the balance of payments, the limitation of credit expansion within the ceilings established for the various sectors, the improvement of the budgetary situation, and the reduced reliance on short-term banking credit facilities—all bear witness to the successful performance of the new economic policy. An ambitious Five-Year Plan has been formulated and serious steps are being taken for its successful implementation.

To conclude my statement in a somewhat optimistic tone, I would like to stress that the medium-term prospects of Egypt’s external sector are good, thanks to the growing earnings from petroleum exports, Suez Canal dues, tourism, remittances of nationals working abroad, and the serious measures taken to implement a rapid and important growth of its economy. But substantial external assistance will still be needed in order to forge ahead with our economic reform and to achieve growth with stability.

Statement by the Alternate Governor of the Bank for Norway—Hallvard Bakke

I am speaking on behalf of Denmark, Finland, Iceland, Sweden, and Norway.

The Nordic countries are firmly convinced of the need to achieve more equitable relations between developed and developing countries. We regret that progress in the international negotiations on North-South issues has so far been slow and insufficient. The recent Paris conference made but few advances. There were, nevertheless, some positive achievements. We welcome in particular the concrete commitment to substantially increase the volume of aid which will bring us closer to the UN target of 0.7 per cent of GNP. It is high time that the declining aid trends should be reversed.

We would also like to stress that a fairer and more equitable sharing of aid efforts must be achieved. We think we are justified in asking that the larger industrial countries with strong economies or balance of payments surpluses should carry a greater share of the rich world’s aid responsibility. We recognize with appreciation the steps already taken by the OPEC surplus countries in respect to development aid and hope that in future they will continue to contribute financially to the various multilateral development organizations in accordance with their economic capacity.

Looking ahead toward continued North-South negotiations, the Nordic countries attach particular importance to progress on the pressing problems of commodities and debts. In this connection, let me point out some of the main measures we believe should be taken:

  • —implementation of an integrated program for commodities, as dealt with by UNCTAD IV, with a view to achieving an improved market stabilization for a whole range of commodities including the early establishment of a common fund to finance buffer stocks;

  • —the establishment of an additional soft-term arrangement for the compensation of shortfalls in the poorest countries’ commodity export earnings, as foreseen in the Nairobi resolution on the integrated program for commodities;

  • —agreement on international features which could provide guidance for the treatment of debt burden problems hampering the development capacity of individual developing countries. Special attention should be given to debt relief measures with regard to official aid credits to the poorest countries.

International measures of this kind are not sufficient in themselves. Changes in the world economic order will benefit the poor only if coupled with reform within countries. Determination to carry out such reform is, therefore, vital for the process of development.

Governments pursuing determined policies of redistribution of wealth and productive assets, such as land and capital, face a tremendous task. Their own resources are limited. Factors beyond their control unfortunately often thwart their development goals. Those developing countries must be able to rely on the active support of the international community.

During the last decade there has been a change in the approach to development. Instead of economic growth with supposed “trickle down” effects, new types of projects, directly aimed at the poor, have come into focus. Such a policy will improve the quality of life for millions of people in our own generation and will, at the same time, secure a sounder basis for new generations in the developing countries. . . .

Statement by the Governor of the Bank for Bangladesh—M. N. Huda

I have the privilege of addressing this distinguished gathering for the second time. Like many of my colleagues from the developing countries, we come to these meetings to explore solutions to the problems facing us in the effort to raise the standard of living of our people. Coming to the close of that decade of the 1970s, we cannot but say that the Second Development Decade has been very largely a decade of frustrated hopes, especially for the low income countries. The transfer of resources from the rich to the poor has been a topic of the most consuming interest, yet the problem of the resource gap of the developing countries remains difficult and in fact has deteriorated. The resource flow targets, first discussed in the 1950s and accepted with some reservation in the 1960s, have remained mere targets. Except for the tremendous expansion in the operations of capital markets and the emergence of OPEC as a donor group, there has not been any significant move to bridge the resource gap of the developing countries. The year just past has brought us no unmixed blessings. But what we have heard so far gives us some renewed hopes. The Annual Reports of the World Bank and the IMF show that the international development effort has seen one more eventful year and the international monetary system has survived one more crucial period. Under the competent and inspiring leadership of Dr. Witteveen and Mr. McNamara, the international monetary system and international development effort have continued to remain meaningful, and I have no hesitation in saying that our faith in these has been reinforced. This is no small achievement, and I extend heartiest congratulations to Mr. McNamara and Dr. Witteveen for their untiring efforts in this regard.

Permit me to join other distinguished delegates in welcoming the trends of recovery that the world economy has witnessed in the recent months, and to hail those countries which have shown sagacity and farsightedness in initiating and persevering in this recovery process. But this recovery seems to be halting, if not tapering off. Some of the industrial countries are still haunted by the fear of inflation; so much so, that there is considerable reluctance to stimulate their economies. The current investment lag is also a matter for serious concern. However, there are signs that the major industrial countries, through collective leadership, are seeking to harmonize the domestic and international economic policies of their respective countries with a view to sustaining the growth of world trade and the world economy. In this hopeful scene there seem to be small dark patches of cloud looming on the horizon. I am referring to the protectionist mood that is raising its head in some of the industrial countries in order to meet the difficulties that some of the domestic industries of those countries have experienced. The Fund’s Annual Report has rightly remarked that resorting to restrictions on trade would not provide a real solution to the problem but would, on the contrary, be destructive to world prosperity. In particular, this would have a serious adverse effect on the payments situation and adjustment process in the developing countries. We therefore welcome the announcement by the President of the United States of his Government’s commitment to the objectives of world development and the concern of his Government for those who live in absolute poverty.

We note with great concern that in recent years the rate of growth of the developing countries has been only 3.7 per cent and for the low income countries it has been only a meager 1.1 per cent. As we find from the massive documentation prepared for the meetings of the Group of 24, the Development Committee, and the Interim Committee, and the Annual Reports of the Bank and the Fund, the prospects for growth in the developing countries for the period until 1985 are not at all encouraging. For the low income countries, the prospect of growth in the coming decade is less than 2 per cent. This is a far cry from the internationally accepted growth target for this decade. We note from a study prepared by the World Bank that if the OECD countries can grow at the rate of 5 per cent, the developing countries could grow at a rate of 7.8 per cent. In our view, this is a tremendous possibility and has great policy implications for the developed countries. It will be a real tragedy if an opportunity for doubling the GDP of the developing countries in about ten years should be allowed to go by default. It is in this context that we support the proposal for setting up an international commission for study of world development issues, and welcome the decision to initiate work on a world development report. We hope the proposed studies will explore these possibilities and produce concrete action programs.

It is disappointing to find that the ODA of DAC members has declined further to a level of .33 per cent in 1976 from a level of .36 per cent in 1975, when the need for accelerated capital inflow to the poor countries is admitted on all sides. What is needed is a time-bound commitment by individual donor countries concerning the extent of sacrifice they can tolerate for the benefit of the world as a whole, and the poor countries in particular. It is also disappointing that untied aid still accounts for only a little over 50 per cent of ODA from the DAC countries. Tied aid not only reduces the value of external assistance greatly, but also gives rise to slow disbursement and occasionally the transfer of inappropriate technology. These difficulties should be recognized, and a time-bound program of untying should be adopted by the donor countries.

The low income countries were also not successful enough in seeking resources in the capital markets unlike their more fortunate brethren in the middle income countries. As a result of the shortfall in flow of resources:

  • —debt service liability of the poorer developing countries like my own has been higher than the increase in their export earnings;

  • —imports by the low income countries like my own had to be drastically restricted;

  • —planning for development has become extremely difficult due to continued deterioration in the terms of trade and uncertainty in the flow of resources.

We have noted with great appreciation the reference in the speeches of Mr. McNamara and Dr. Witteveen to the need for rationalizing development policies within the developing countries. Institutional arrangements exist for monitoring the development policies followed by the developing countries. The Bank and the Fund in the process of channeling their assistance are in a position to continuously monitor their development policies. What is important is to look for institutional arrangements for monitoring the flow of resources, particularly official development assistance, so that the internationally accepted targets continue to be meaningful. Experience of the last decade prompts us to make such a proposal. . . .

While efforts are being made for mobilizing long-term development assistance, short-term balance of payments difficulties overwhelm these efforts in many low income countries like my own. In recent years, low income countries like Bangladesh have gone through the adjustment process through sacrifices in consumption, malnutrition, social tensions, high rates of inflation, and declining per capita incomes. This has happened in spite of the temporary relief provided by the oil facility, Trust Fund, and OPEC balance of payments support. The new initiative taken by the Managing Director of the IMF to launch the supplementary financing facility is most timely and praiseworthy, even though it must be recognized as only another stopgap measure. It is gratifying to note that arrangements have been finalized to marshall resources, though not as large as was originally proposed. It is also gratifying to note that this facility will offer credit for a longer period and the resources will not be used primarily to meet the needs of the developed countries. But it is unfortunate that the great bulk of the supplementary financing will be linked to normal tranche drawings and will suffer from strict conditionally, and thus will not relate to the needs of the developing countries. We hope that it will be possible to review the entire range of conditionally and come up with pragmatic solutions in the light of current realities of the adjustment process. We also urge that the charges for this credit should be subsidized for the developing countries through interest subsidy or other measures.

We have been following with great interest the developments concerning the Seventh General Review of Quotas. We would like to recommend an across-the-board quota increase by not less than 50 per cent, and preferably by 75 per cent, in 1978. We would also like to see that the quota adjustment does not reduce the overall share of the non-oil developing countries.

It is a matter of regret that while developing countries have long awaited a fresh issue of SDRs, the Fund has indicated that it is not in a position to make a proposal regarding the allocation of SDRs for the third basic period starting January 1, 1978. It is true that developments like the larger availability of private commercial credit and floating exchange rate policies have led to some increase in international liquidity. But it need hardly be mentioned that costs of mobilizing such additional resources are not sustainable from the standpoint of developing countries and the distribution of liquidity has been further skewed. In such a situation I would like to voice my Government’s anxiety about the delay in the further creation of special drawing rights. The allocation of SDRs would not only strengthen the long-term stability of the international monetary system by increasing the availability of resources, but also help achieve the objective of making the SDR the principal reserve asset of the international monetary system. . . .

Before I conclude I would like to underscore the urgency of taking the following concrete measures:

  • (i) Special programs for low income countries where 20 per cent or more of the population lives in absolute poverty.

  • (ii) Time-bound commitment by individual donor countries on transferring the accepted target of GNP as official development assistance.

  • (iii) Time-bound programs for untying of development assistance by donor countries.

  • (iv) A beginning to ensure the continuity of aid flows by establishing a mechanism under which IDA-type multilateral funds (e.g., IDA, IFAD, ADF, SOF, etc.) can have automatic replenishment at definite intervals at an increased rate, at least until the end of the next decade.

  • (v) A mechanism for providing relief on official debts to the developing countries in general, and to the low income countries in particular.

  • (vi) Improving the management and the operational cadres of the World Bank by drafting qualified people with field experience from the developing countries.

  • (vii) A time frame for reviewing the conditionality of Fund facilities and for providing interest subsidies for the supplementary financing facility.

  • (viii) The provision of additional resources at the disposal of the Fund by increasing quotas substantially and making a further allocation of SDRs, both during the current fiscal year. . . .

May I in conclusion express our deep gratitude to President Carter and his administration for their warm welcome and hospitality, compliment the Bank and Fund staff for their excellent work of documentation and arrangements for our meeting, and wish Mr. McNamara a most fruitful third term and Dr. Witteveen health and happiness in his retirement.

Statement by the Governor of the Fund and the Bank for Sri Lanka—Ronnie de Mel

I consider it a great privilege to participate in the Annual Meetings of the Bank and the Fund for the first time and to have this opportunity of addressing this distinguished assembly as the representative of the new Government of Sri Lanka, which assumed office in July this year with a majority unprecedented in the parliamentary history of my country.

Permit me at the very outset to welcome the appointment of Mr. McNamara for a third term. This is a fitting tribute to his untiring efforts to promote world economic development and international cooperation. It is with profound regret that we note that Mr. Witteveen will not be seeking a second term. This assembly will no doubt join with me in paying a tribute to his contribution to increasing international monetary cooperation and particularly to the establishment of the supplementary financing facility, which will no doubt play an increasing role in the adjustment process of the deficit countries.

We also welcome President Carter’s speech and his firm commitment to the goals of world development, especially in relation to the billion who constitute the world’s absolute poor. In this respect, the President of the United States has provided an element of valuable support for the basic human needs strategy which in one way or another has received the continuing attention of Mr. McNamara over the past several years. We see the proposal to set up a high-level international commission under the chairmanship of the former Chancellor of the Federal Republic of Germany, Herr Willy Brandt, as being essentially complementary to these initiatives. We must hope that the work of this commission will focus on the major structural changes required in the rules governing the operation of the world economy in the 1980s.

Let me divide, as is customary in these meetings, my remarks into sections concerning both the Bank and the Fund. Nevertheless, I should preface my comments by saying that in a certain sense, this division seems artificial; both institutions although formally divided de jure have to cooperate in ensuring corresponding domestic adjustment efforts and the realization of an overall pattern of payments surpluses and deficits that is consistent with an adequate level of world economic activity.

I think that the final communiqué of the Commonwealth countries (which is a microcosm of this body comprising developing and developed countries), which was issued after the conference in Barbados last week, captures the essence of the problem in three short sentences. I quote: “Ministers warned that the non-oil developing countries do not have the capacity to finance the large deficits which are projected for them. What is required is a willingness to share equitably in the deficits which are a corollary of the projected surpluses. A major immediate contribution should be made by a deliberate program of economic expansion directed toward expanding international trade by industrialized and surplus countries, coupled with a transfer of resources in real terms to developing countries, as a basis for sustained stimulus to economic activity both in the developed and developing countries.”

In this context we find most encouraging the measures being adopted by certain surplus countries already, to revive what Mr. Witteveen has told us is a “pace of recovery that has faltered.” We agree that all of us gathered here have a mutual interest in promoting recovery without rekindling inflation. It is only on the basis that the fear of a resurgence of inflation can be set at rest that the pleas we have heard for additional issues of special drawing rights, for measures to increase real resource transfers to developing countries, and, in particular, for ensuring an adequate capital increase in the World Bank, and the suggestions made for at least a 50 per cent general increase in quotas in the IMF—all of which proposals I need hardly say we unequivocally endorse—can find a sympathetic echo in the minds of surplus countries. Yet it remains difficult for us to understand the paradox, to which attention has already been drawn by the distinguished Governor of Sweden, namely, the declining share of official development assistance by surplus countries against a background of global excess capacity accompanied by an increase of absorptive capacity for aid among many non-oil developing countries.

In regard to the structural surpluses of nonindustrial countries it is essential that more durable solutions should be sought in the period that lies ahead of us. The system has in the past relied heavily on recycling these surpluses through the private banking system but this has had the unfortunate effect of adding to global liquidity in national currencies, undermining to that extent a role for a reformed SDR by reinforcing fears of inflation.

The Witteveen facility has to be viewed as a short-term response to the problem in order to discipline countries which have overborrowed but the monies that have been raised so far are far from adequate in relation to the amount targeted. There is undoubtedly room for improvement in regard to the conditionality of both the Witteveen facility and the extended Fund facility, although there is increasing evidence that the Fund is taking account of social and political realities in particular cases and in particular countries. It may well be that the amounts which surplus countries are willing to contribute to multilateral facilities may be larger if the conditionalities involved and the pace of adjustment involved were more compatible with sociopolitical reality.

One remedial suggestion to attract such funds that has been made is that countries in structural surplus should be enabled to lock up their capital in perpetuity in the form of real consols whose rate of return is indexed against world inflation. This means that, in effect, countries in surplus will part with the right to recover their capital for an adequate real return and this poses obvious difficulties. On the other hand, many such countries prefer to undertake joint ventures on a basis of equity investments, which unfortunately are particularly slow to implement, as a way both of hedging against inflation risks and of permitting the recovery of the capital sum in the market place at a time of the investor’s choosing. It should not be beyond the realm of practical imagination for a scheme to be devised whereby countries in structural surplus are offered an investment instrument which could go a long way toward protecting their capital against inflation and at the same time provide for the return of the capital that would have been borrowed. The one suggestion I would make in this area is that serious thought be given within the Fund and Bank complex to the devising of such an instrument.

I turn now to the grey area between the Bank and the Fund of which I have spoken. We support the need to ensure that periodic IDA replenishments do not suffer from the uncertainties that currently plague them. One of the more welcome developments of the international monetary reform has been the recognition that all countries, and not merely developing countries, require a rather longer period of time within which to bring about the necessary domestic adjustment in their economies. Existing facilities for this are still too limited to ensure that the time period for effecting adjustment is right or adequate. It is true that the extended Fund facility now envisages a three-year program of adjustment. If, as one would hope, more countries were to have recourse to this facility, there is scope then for complementing it with a more systematic replenishment of IDA resources so that the World Bank could also complement the role of the Fund; and second, to link the extended Fund facility to the export expectations underlying a medium-term plan. In other words, the direction of reform that I would envisage is for the aid element in a medium-term program of adjustment to be reinforced by more assured IDA replenishments, while the export earnings element of foreign exchange resources would be insured against by seeking to link the facility to the relevant export norm. All of this follows from a recognition of the central fact that the process of adjustment does not divide neatly into the institutionalized compartments we have at present, namely, the Fund and the Bank; and the orderly development requires mechanisms that involve the closest possible cooperation between institutions which are geared to, after all, the same basic purpose. Having said this, I want, at the same time, to dispel any illusion that my remarks may have created that we wish to convert the Fund into a development agency. Its role as financial disciplinarian must always remain paramount. What is at issue is not the fact of conditionality but the nature of conditionally and to ensure that the conditions are built into a set of reformed medium-term adjustment facilities. . . .

My only interest in emphasizing this is that my own country, Sri Lanka, has been long regarded as being somewhat of a model country in terms of the physical quality of life index, a concept that has now been widely publicized by the Overseas Development Council. Sri Lanka has, inter alia, a literacy rate of 82 per cent, life expectancy of 68 years, and an infant mortality average of 45 per thousand. Yet, premature adjustment in a country such as ours, and no one denies the reality of having to adjust, must inevitably lead to a sacrifice of nutritional standards, unless adequate time is afforded to substitute productive employment for the consumption subsidies that are given in Sri Lanka. There is, in fact, a genuine case for adjustment discipline with Fund support within a framework of facilities, which although improved compared with three years ago is still inadequate, to be geared—if social dislocation is to be avoided and a framework of liberal democracy preserved in the land—simultaneously to poverty focused programs by the World Bank.

What all this leads one to suggest in the territory of the Bank, as distinct from the Fund, is a set of criteria for aid allocation that differs in some degree from past procedures. My suggestion is simply that World Bank, and indeed Aid Group, assistance might be apportioned on a basis which takes adequate account of a country’s quality of life on the basis of either targets which countries might be willing to set for themselves or in terms of a reward for recorded accomplishments. I am saying this because, in practical terms, the need for adjustment is often expressed as a need to increase public savings, which is the only variable over which any government has a measure of significant and statistically accurate control. Yet it is precisely in this area that an undue compression of public savings can impair the quality of life of any country and reduce the nutritional standards already achieved to politically and socially unrealistic levels. What we are looking for, in short, within the Fund and Bank framework is a combination of adjustment measures that is complemented by an adequate program of productive employment creation to protect the needs of the absolute poor.

Finally, a word on how we see our tasks ahead in Sri Lanka. The new Government in Sri Lanka is pledged to restore a more liberal economy with greater reliance upon private initiative, both foreign and local, in order to implement a well-planned program of development to bring about the needed domestic adjustments within a reasonable time. The new Government in Sri Lanka is also deeply committed to parliamentary democracy, human rights, and social justice.

In the view of my Government, we in Sri Lanka have continued to depend far too long on commodity assistance handouts at government-to-government level—for a whole decade in fact—without any prospect of the domestic policy changes required to phase out that dependence. My Government intends to introduce these domestic policy changes, to move albeit slowly and gradually from consumption to investment, savings, and development. Once the necessary guidance and support from the IMF is forthcoming, we would be looking for assistance from friendly countries for the most part during a difficult transition period when the agreed policy framework is being established.

Several important elements of the new policy are already in place. First, we have introduced a strong monetary policy involving for the first time a positive real rate of return—an 18 per cent interest rate for deposits for an 18-month period with no return to any depositors for earlier withdrawals. The fundamental rationale behind an anti-inflationary policy is that nothing is more disruptive of investment and confidence than the entrenching of inflationary expectations consequent upon a money supply increase that was inordinately high in a pre-election year in my country.

Second, we are making our exchange rate more responsive to the underlying trends in the economy. And third, we have defined in precise geographical terms a 200 square mile area close to our main sea and air port within which a free trade zone or an economic recovery authority will operate in order primarily to generate the new export development that is required in association with both local and foreign investors. This will rely heavily for its success upon the rich human resources available in abundant measure in Sri Lanka. The authority will be empowered to work out negotiated concessions with investors so that we can have investment with long-term interest in the country’s economy. We are also preparing the necessary framework concerning the legislative and fiscal guarantees that are customary for all investors to expect these days and an institutional mechanism for speedy decision-making. My Government is, therefore, on the path to making the right decisions that have been long overdue, and the value of this experiment is that, given a helping hand from the outside world and appropriate time for adjustment, a country that has shown a demonstrable willingness to help itself will have been able to make a success of it within a democratic framework.

Finally, let me summarize my country’s viewpoint on the issues with which I have sought to deal.

  • 1. We share the concern displayed at these meetings for reviving the world economy without rekindling inflation.

  • 2. In that context, we endorse the need for:

    • (a) an adequate capital increase in the World Bank;

    • (b) a general increase of at least 50 per cent in IMF quotas;

    • (c) additional issues of suitably reformed SDRs;

    • (d) measures for increasing real resource transfers to developing countries.

  • 3. We see the need for a more durable solution to the problem of the structural surpluses of nonindustrial countries than has been evident in the past and would suggest the exploration, within the Fund and Bank complex, of the question of a suitable investment instrument.

  • 4. We support the closest possible cooperation between the Fund and the Bank so that developing countries can have the facilities necessary to effect needed domestic adjustments over an adequate time period without sacrificing their development efforts while preserving a framework of liberal democracy; this would no doubt imply certain revisions to the currently existing extended Fund facility in conjunction with provisions for IDA replenishment on a more assured basis.

  • 5. We fully support the developmental strategy outlined to us in Mr. McNamara’s opening speech and see in this an area for combining Fund-supported adjustment discipline with poverty-focused programs under World Bank auspices.

  • 6. We see the need for the evolution of a set of criteria for aid allocation which takes adequate account of a country’s quality of life.

  • 7. We see the new Government in Sri Lanka as restoring a more liberal economy with greater reliance being placed upon private initiative within an agreed policy framework involving the country, the Fund and Bank complex of institutions, and the Aid Group.

Three essential elements of that framework are already in place: (a) an anti-inflationary monetary policy; (b) an exchange rate that is responsive to the underlying trends in the economy; (c) the establishment of a 200 square mile export zone, close to our main sea and airport, which we trust would launch Sri Lanka into a new era in its development.

Let me conclude my remarks by thanking you, Mr. Chairman, the Fund and the Bank, and also the President and Government of the United States for the excellent arrangements made for this Annual Meeting. We in Sri Lanka hope that the economic despair and gloom that beset the world in the last few years will gradually be dispelled by the growing spirit of cooperation and interdependence among developed and developing countries.

Statement by the Governor of the Fund and the Bank for Barbados—J. M. G. M. Adams

It is a distinct honor and privilege for me to speak to this Thirty-Second Joint Meeting of the Boards of Governors of the World Bank and the International Monetary Fund. My remarks will be confined to matters relating to the Bank and I will be speaking, not only on behalf of my own country, Barbados, but on behalf of my Caribbean colleagues in the Bahamas, Grenada, Guyana, Jamaica, and Trinidad and Tobago.

I join with my colleagues present here today in expressing my deep pleasure and appreciation for the welcome we have received from the Government and people of the United States and for the magnificent setting they have once again provided for our meeting.

Since our last meeting, some countries have enjoyed a limited recovery from the recession, but for many it has been a year of deepening despair. While the industrialized countries have been able to adjust fairly quickly and smoothly, the non-oil developing countries have been unable to avoid the continuing large current account deficits in their balance of payments, and in these circumstances a willingness to share equitably in the deficits which are a corollary of the projected surpluses is, in our view, urgently required.

To this end, a major immediate contribution can be made by a deliberate program of economic expansion directed toward expanding international trade by industrialized and surplus countries, coupled with a transfer of resources in real terms to developing countries, as a basis for sustained stimulus to economic activity both in the developed and developing countries. A further contribution could be made by increasing the flow of funds to international and regional institutions. These steps would allow time for the adjustment processes now under way to yield results. In the longer term this process of adjustment needs to be supported by major improvements in the terms of trade for commodities through trade liberalization and by improved access to world markets—particularly for manufactured goods—with special emphasis on the position of developing countries.

The observed trend in a number of developed countries toward the increasing use of various protectionist measures—a trend inevitably sustained by the slow pace of recovery from recession—poses dangers to rich and poor alike. The tendency is even more to be regretted because restrictive policies bear heaviest on developing countries. The stark reality of the consequences of deteriorating balances of payments is that developing countries are being called upon to bear first the burden of sharply increased oil prices, and then the major share of the burden of adjustment of developed countries’ restrictions on developing countries’ exports.

It would seem that the international community has but one of two choices: either to abandon the goal of improved living standards for developing countries in the face of massive and growing balance of payments disequilibrium, or to seek international agreement for alleviating the burden by arrangements for financing an increased proportion of this debt.

Based on World Bank studies, the total medium-term and long-term debt outstanding of the 81 principal developing countries was estimated to be $169 billion with another $50 billion outstanding in short-term liabilities of one year or less maturity. While total developing country reserves grew to $72 billion at the end of 1976, those of non-oil developing countries stood at $41 billion and their annual debt service obligations at $17 billion. The low-income and middle-income countries have experienced a marked increase in their debt service to export ratios and a decline, in real terms, in the net transfer of resources. The debt servicing for this group of countries represents a heavy burden on scarce foreign exchange resources. What little adjustment this group of countries was able to make was done only at severe cost and the process is still incomplete. . . .

Much of what I have said so far relates to issues that call for this urgency of attention, but I would like to take this opportunity to look at the matter from a longer-term perspective.

First, the Development Committee. We have already referred to the severe balance of payments problems that non-oil developing countries have experienced and will continue to experience and the long-term structural changes in their economies that are required to solve the problems. Up to now the Bank and the Fund have been attempting to coordinate their efforts to deal with these problems on, I venture to suggest, a rather ad hoc basis, and without much success. It seems to us, therefore, that the time has come to consider new ways of ensuring that the increasing need of these countries for medium-term and long-term finance on flexible terms is met. We believe that the Development Committee should now be mandated to give first priority to a study of the ways in which the Bank and the Fund could act to put into place effective institutional arrangements for assisting, more adequately and more appropriately, the efforts of the non-oil developing countries and primary producers in making the structural adjustments to payments problems which have been so seriously aggravated by the steep increases in the international prices of oil and other essential imports.

Of course, we are already on record as suggesting that the Development Committee should be a forum for discussions and decisions at the political level of issues that relate to the activities of the Bank, and that it should more and more be used as a forum where such decisions can be taken in between general meetings of the Board of Governors of the Bank. . . .

Statement by the Governor of the Fund and the Bank for Mexico—Julio Rodolfo Moctezuma

Latin America’s position has been clearly and brilliantly set forth by the distinguished Governors for Argentina and Brazil. I shall therefore confine my remarks to the specific case of Mexico.

For the past ten months a new administration has guided the political and economic destiny of the Mexican people. President López Portillo, who was Governor of the International Monetary Fund and the World Bank for Mexico, has inaugurated an era of tranquility, confidence, and security and has rekindled a common desire to achieve the high purposes that have been laid down for our community.

Mexico comes to this meeting with ten months’ experience in dealing with the most serious crisis that the present generation of Mexicans has known. The combination of inflation, unemployment, contraction of international trade, recession, and deficiencies in the financial system undoubtedly took many of the countries represented here by surprise. In the case of Mexico, the eruption of the crisis was accompanied by the loss of an exchange rate parity that had remained stable for 22 years.

When the drastic change in the parity of the currency occurred, the flight of capital, which had been under way for more than a year, became massive. Coupled with this was the withdrawal of capital from the Mexican banking system, which was also very heavy. Inflation rose to unprecedented levels, reaching 5 per cent in October and 6 per cent in November.

The new Government assumed office on December 1, 1976. The new President of the Republic, José López Portillo, set forth the basic points of his program in his inaugural address, called upon the people for their help, and inspired a recovery of confidence and the support of the nation.

The Government immediately began a reorganization of the administration of the public sector, a matter of particular importance in a country whose public agencies and enterprises have grown in numbers and operate in such diverse economic fields as petroleum, railroads, electric energy, iron and steel, and urban transport.

In preparing its budget, the new Government clearly stated its intention to manage public expenditure rigorously and with strict observance of the priorities that the country demanded.

In order to regulate a basic aspect of financing the Public Debt Law was enacted, strengthening the participation of the Congress in determining the structure and limits of internal and external credit and introducing a proper system of programming.

Financing by the banking system has been organized so as to ensure the availability of credit for productive investments in priority sectors. The new system makes resources available for use by small and medium-scale entrepreneurs and for support of a basic products program.

The economy has been reactivated on the basis of a joint effort of the Mexican people through a strategy known as the Alliance for Production. The Alliance has been given key support by the workers, who have deliberately limited their demands. For entrepreneurs, the commitment consists of investing and creating jobs. In several branches of industry, those with the greatest impact on economic development, this investment effort has already begun.

We have adopted an incomes policy that has strengthened the role of the State in the economy. As a result, the increase in public sector revenue has exceeded our expectations.

After the worst of the crisis, we have succeeded in significantly reducing the rate of inflation, which has recently been held to 1-1½ per cent a month. There has been a noteworthy improvement in the balance of payments, the deficit having been reduced by about one third. Confidence in the financial system also has increased, which is reflected in a significant rise in bank deposits. This strengthening of the financial support of the economy has required a systematic policy of incentives for saving and investment, the establishment and strengthening of mechanisms to attract savings, and the stimulation of the securities market.

A substantial reduction has been achieved in the rate of increase of external borrowing. The external debt of the public sector had multiplied fivefold during the previous four years, reaching nearly $20 billion. In 1976 alone, external credits totaled $6 billion. In contrast, the target set for 1977 is $3 billion.

Mexico has met its external debt commitments promptly. I am pleased to tell you that my country has received an excellent response from the international banking system in its lending operations this year.

As part of the program laid down by the new administration, which clearly states the long-range objectives for the country and deals with the crisis of the moment, we have complied with the agreement concluded with the International Monetary Fund, as its missions to Mexico can attest.

The results of the measures taken by President López Portillo have surprised many observers.

We believe that we have dealt successfully with the most critical aspect of a difficult situation. But much remains to be done to guarantee collective prosperity and well-being. In the months and years ahead our task will be to continue the economic discipline that has been instituted, to promote saving and productive investment, to generate employment and production, and thereby to achieve a more sound and just economic system.

In another connection, it should be remembered that up to 1976 the proven reserves of petroleum in Mexico were estimated at 6 billion barrels. Recent research has identified the extent of enormous deposits of petroleum and gas.

At the beginning of this year the proven reserves within our territory were fixed at 11 billion barrels. Subsequent exploration has added more than 3 billion to that figure. Research and exploration are continuing with a view to re-evaluating the real and proven potential of the Mexican deposits.

As you know, Mexico nationalized its petroleum 40 years ago. Since then my country has been able to develop a rationalization policy for petroleum exploitation and the processing techniques. It has now acquired considerable technological expertise in all areas of petroleum and petrochemical production. The Petroleum Institute is widely recognized as a research and engineering center of the highest quality by reason of its contributions in this field.

Furthermore, investments are being made in an amount that will make Mexico a very important producer and exporter of primary and secondary petrochemical products in a few years’ time.

The situation I have described evokes a crucial problem. The projects on which Mexico is engaged in connection with the latest discoveries of petroleum call for extraordinarily large investment programs, and a suitable material and technological infrastructure for their development exists in my country. However, in the next few months it will be requiring additional credit not envisaged when our arrangement was concluded with the International Monetary Fund, for these discoveries are more recent and entail modifying the initial program.

We do not hold that petroleum constitutes the basis of our country’s economy, or that it will do so in the future. Mexico has an infrastructure and capacity for expansion in the areas of agriculture, mining, and industry. In all these fields of economic activity the nation has skilled human resources to exploit the existing resources and to make them productive for the benefit of all.

An adequate management of petroleum products will be an additional element in President López Portillo’s economic policy, not only enabling Mexico to come out of the present standstill but also stimulating its development, bringing its balance of payments into equilibrium, and guaranteeing the country’s capacity to make payment on its international obligations. It will thus be in a position to accomplish effectively the long-term aims it has set for itself, giving the people remunerative, productive employment and satisfying the purposes of the nation as regards social justice.

I am convinced that the case of Mexico, by reason of the characteristics I have described, can be considered exceptional in the international context. We are moving out of a critical condition to a situation in which we shall be able to overcome factors having a negative impact on the proper functioning of the economy.

But Mexico, like the great majority of countries, is affected by the present world situation of inflation and unemployment.

In Manila a year ago, the experts diagnosed a recovery of the economic system. Good omens indicated that the world economy had, during the previous year, emerged from the worst crisis in 40 years. The expansion of production, a lessening of inflation, and the growth of world trade were indicators permitting a moderate optimism.

But the predicted expansion in the rate of economic activity has yet to become a reality. The Annual Reports submitted to these Meetings by the authorities of the IBRD and the IMF compel us to submit to a realistic examination of the state of the various national economies and the outlook for the international system.

By and large, the prevailing features are the increase in prices, an inability to expand production and reduce unemployment, the protectionist trend in international trade, and the deficit on current account of a great many countries. The negative effect is accumulating and worsening with the phenomenon continuing over time.

For the developing countries, with their frail economic structure, the slowness of recovery means deferring the legitimate hope of a sound functioning of their national programs.

Structural solutions effective over the medium term are required to alleviate inflation and unemployment and to make adjustments in the external sector of the economy. This standstill in economic expansion should be no more than an incident in the process of accomplishing global objectives. For that purpose, concerted action is required. It is the only way to ensure that the various economic policy instruments act harmoniously and without hindrance. It is the only way to reconcile the fundamental interests of developing countries and industrial nations. And only by concerted action will it be possible to lay the foundations of a stable and equitable order.

Statement by the Alternate Governor of the Bank for Pakistan—A. G. N. Kazi

It is gratifying that the overall economic conditions in many parts of the world show distinct improvement compared with the conditions two years ago. After stagnation in 1974 and a decline in 1975, the gross national product (GNP) of the industrial countries registered significant growth in 1976. The volume of world trade also expanded following a sizable decline in the previous year. However, certain features of the current economic situation still give cause for concern. The level of unemployment in most developed countries is still distressingly high. Inflation is still a serious problem. The speed of economic recovery has recently slowed down. The disconcerting coexistence of relatively slow growth, sluggish investment, and high unemployment with persistent inflation constitutes a major challenge for the world economy. We are, however, heartened by the statement made by President Carter that effective steps will be taken to counteract the recent manifestations of sluggishness in the U.S. economy, which will contribute to the general economic well-being of both developed and developing countries.

For the poorer non-oil producing developing countries, the prospects of progress remain clouded. A critical problem facing these countries is how to accommodate the large balance of payments deficits being experienced by them. The current account deficit of these countries at $26 billion in 1976, though smaller than the unprecedented level of $38 billion reached in 1975, was still sizable and three times as large, in nominal terms, as it was during the early 1970s. The projections for 1977 do not indicate any improvement in the situation. Continuance of such large deficits over the past three years has given rise to a rapid increase in the international indebtedness of these countries. The proportion of borrowing on hard terms has also increased. The heavy burden of debt servicing is now acting as a serious constraint on their economic growth.

There is urgent need for an increased flow of resources on concessional terms from the developed countries and multilateral agencies to the less developed countries. As was pointed out by Mr. McNamara in his forthright action-oriented speech, an expanded program of external capital aid along with domestic policy reforms is imperative if the poorer developing countries are to attain even the minimum desirable rates of economic growth. Official development assistance is the only effective instrument for transferring resources on concessional terms to support the development programs of low-income countries. It is neither feasible nor desirable for the poorer countries to borrow on hard commercial terms.

In this context it is rather disheartening to note that official development assistance in real terms declined in 1976 as compared with 1975. While the GNP of developed countries rose by 5.4 per cent in 1976, the official development assistance provided by the developed countries declined from 0.36 per cent of their GNP in 1975 to 0.33 per cent in 1976.

The emergence of OPEC countries as a significant new source of the concessional transfer of resources to developing countries has been one of the welcome developments in recent years. The aid disbursed by OPEC countries was about 3 per cent of their GNP, which is commendable considering the nonrenewable character of their wealth and the fact that they are themselves in the process of development. We also greatly appreciate the contribution made by Saudi Arabia toward the setting up of the supplementary financing facility of the IMF…

As I mentioned earlier, the non-oil developing countries are still faced with a sizable balance of payments deficit. In the preceding two years, on account of inadequate availability of external finances, a number of developing countries had to pursue economic policies designed to reduce the growth in the level of their imports with a view to bringing about some improvement in their balance of payments position. Since investment in these countries crucially depends on their capacity to import capital goods, the compulsion to cut imports is acting as a severe deterrent to capital formation and jeopardizing their growth prospects. It is necessary, therefore, that means be found to provide adequate balance of payments support to these countries so that the adjustment process may not impose an intolerable burden on their economies.

In this context, I am happy to note that the efforts of the Managing Director of the Fund to set up a supplementary financing facility to provide additional balance of payments assistance to member countries have borne fruit. The credit for this largely goes to Mr. Witteveen, and I would like to join my colleagues in expressing our appreciation of the manner in which he has guided the Fund through troubled times. In view of the severity of their balance of payments problem, non-oil developing countries are anxious that the facility be made operational as early as possible.

While we welcome the setting up of this facility, we are disappointed that the conditionality that attaches to the use of the facility is similar to that to which members have to conform while making use of regular Fund assistance in higher credit tranches. As is well known, very limited use has been made of Fund assistance in higher credit tranches by the developing countries on account of the strict conditionality that is attached to it. I believe the Fund management is cognizant of this problem and I am glad to learn that the Fund’s Executive Board plans an early review of the conditionality attached to the use of Fund resources.

I would also add that the supplementary financing facility would be a real help to the developing countries only if it is made available to them at a low cost. It is, therefore, of the utmost importance that means be found to reduce the cost of the facility for low-income countries. It is necessary that a subsidy account be set up for this facility as was done in the case of the oil facility.

It is also necessary to finalize the Seventh General Review of Quotas without further delay. There is urgent need for a substantial increase in Fund quotas. I would urge that, in this process, there should be no reduction in the proportionate share of non-oil developing countries.

It is now almost universally recognized that the problems of underemployment, poverty, and inequality are inherent in the existing economic structure and that economic betterment of the poorest nations cannot be brought about without a fundamental reordering of the present global economic system. The gap between the average income of the developed and developing countries has consistently widened, and there is no hope that under the present world economic order this gap will be narrowed down in the foreseeable future. Despite prolonged discussions and debates on various aspects of the new international economic order in several international forums, unfortunately no significant progress has been made in bringing about the required structural changes for reshaping the world economy. It has to be appreciated that the Third World is not demanding a drastic redistribution of the existing income and wealth of the developed countries. It is only seeking equality of opportunity and the right to share more equitably in future growth.

The developing countries find their frustration growing at the lack of progress in implementing the new international economic order and the failure of North-South dialogue to produce tangible results on most important issues of international economic cooperation. Three years have passed since the historic Sixth Special Session of the General Assembly formulated a package of minimum basic changes required in the international economic order to create a more just relationship between the developed and developing countries. We have gone through a marathon negotiating process in Paris on ideas and suggestions evolved in the General Assembly with highly disappointing results. The matter will have to be further considered in the appropriate organs of the United Nations. We would also welcome other positive steps in this regard. . . .

On account of the inequities of the present international economic order, the developing countries have had to bear a disproportionately large share of the sacrifices involved in the adjustment to recent developments in the world economy. What is particularly worrisome at the moment is the increasing trend toward protectionism in a number of industrial countries. Instead of liberalizing their trade policies to help developing countries overcome their problems, a number of developed countries have taken recourse to restrictive trade and payments policies which are aggravating their problems. It is evident that policies to counter high levels of unemployment, particularly in labor-intensive industries in the industrial countries, are finding expression in increased protectionism. Industrial countries have applied quantitative limitations on imports in the form of quotas and licensing procedures. In particular, a number of countries have taken measures to further restrict imports of textiles and garments from developing countries under the plea of preventing “market disruption,” a phrase of which the exact connotation is not clear to us. It should be recognized that the development process requires structural shifts in trade flows. The industrial countries should accept these shifts rather than resist them. With their advanced technology, diversified economies, and broad resource base, it should not be very difficult for the developed countries to find other ways and means to reduce unemployment without hampering the growth of the developing countries. Such protectionist policies are at variance with the policy statements of the developed countries and their commitments in such forums as the Tokyo Round of Multilateral Trade Negotiations. It cannot be overemphasized that developing countries would not be able to attain even modest growth targets unless, among other things, special measures are taken by the industrial countries to reduce barriers to exports from those countries.

Another pressing problem needing urgent attention is the management of international liquidity. The Fund’s Annual Report shows that official reserves increased from SDR 146.8 billion in 1972 to SDR 235.6 billion in May 1977. However, over this period there has been no increase in the holdings of SDRs with the result that the proportionate share of SDRs has consistently declined. This development is not consistent with the agreed objective of a gradual reduction of the role of gold and of reserve currencies in the international monetary system. This situation must be corrected if the objective of making the SDR the principal reserve asset is to be attained. The proportion of SDRs should be increased. At the same time, appropriate steps should be taken to enhance the reserve characteristics of the SDR.

The crisis of the recent past has had its worst manifestations in the developing countries on account of the structural inequities of the existing international economic order operating relentlessly against them. Unless there is a concerted effort on the part of the international community to reverse the present trends, the chances are that a number of developing countries will lose their economic viability and will face social upheavals of intolerable proportions. In this process the developed world cannot remain unaffected. What is urgently needed is a fundamental reorientation of the international economic order and a more imaginative approach to the problem of reordering economic relations between nations.

Statement by the Governor of the Fund for Mauritius—Sir Veerasamy Ringadoo

I would like to express to you, Mr. Chairman, my warm and sincere thanks for your eloquent address. As you so succinctly put it, “human needs are more than economic.”

We meet annually around this time of the year for about a week and then we part. Thereafter we keep ourselves apart until we meet again in the following year. For myself I have been attending such annual gatherings for ten consecutive years. During those years we have discussed a wide range of subjects. We have identified the problems facing both the developed and developing countries and advocated measures for resolving these problems. And when at the end of the year we take stock of our achievements we find that on balance our problems have multiplied despite our best efforts. We find that we have only scratched the surface, and the hard core remains unresolved.

It was long ago that the Pearson Commission produced an excellent report and the message conveyed was summarized in just three words: Partners in Development. It looks as if we have all forgotten this message. The theme of Mr. McNamara’s message can also be summarized in three words: Basic Human Needs. I am happy to note that this theme is in accord with the McIntyre report on the establishment of a new international economic order. The McIntyre report prepared by a group of commonwealth experts contains laudable and practical recommendations. I am strongly of the opinion that this report is a seminal document and should receive serious consideration by the international community. In fact, we already have good technical reports at our disposal but what is lacking is the will to implement the necessary measures. The study to be carried out by Mr. Willy Brandt should investigate in depth the gap between precept and practice instead of going over the same ground covered by the Pearson Commission and the McIntyre group. . . .

World Economic Situation

The stagnation in the world economy in recent years has left serious scars on the non-oil developing countries. Adjusting for the loss in the terms of trade, the increase in the standard of living in these countries has been small. The balance of payments deficits of these countries declined from $38 billion in 1975 to $25 billion in 1977. This reduction has been possible only at the cost of reduced gowth of output and employment. When rescaled to increases in prices and output, the non-oil developing countries are the only group whose combined deficit is no larger than the average for the five years ended 1972. This is a striking example of the severity of the adjustments which these countries have had to undertake in recent years.

Financing of Deficits

It is heartening to note that responsible opinion is veering to the view that the balance of payments deficits of the non-oil developing countries are not in themselves extraordinarily large when account is taken of the increase in prices and the real level of output. The basic problem is one of inadequate finance to meet the nominal increases in the deficits. May I be permitted to quote the Economic Counsellor of the IMF, who said that “far from decrying the amount of deficit, one should wish that it were substantially larger, under the right financing conditions.” Given that the structural shifts in the international payments system are likely to persist for some time in the future, it becomes obvious that if the IMF is to play more than a marginal role in the adjustment process there is a need for a major increase in the resources of the IMF as well as a meaningful change in the manner of its disbursements.

IMF Quotas

The global quotas under the sixth review are to be increased from the present level of SDR 29 billion to SDR 39 billion. The Commonwealth heads of government recommended in June 1977 that early and sympathetic consideration be given to a general increase in quotas of at least 50 per cent at the seventh quota review. In 1977 the global quotas would have been $115 billion under the revised Bretton Woods formula and $223 billion under the original formula. It is thus clear that the IMF quotas are becoming increasingly unrelated to the requirements as suggested by certain objective criteria. Over the years the inadequacy of the quotas has resulted in the introduction of the special facilities, but these have in total been insufficient to meet the financing needs. The Commonwealth heads of government proposal for an increase of at least 50 per cent in quotas is extremely moderate and I would support the view that the global quotas should be doubled and the share of the non-oil developing countries should not be reduced.

Compensatory Financing

The IMF compensatory financing facility is the one special facility which the developing countries have been able to utilize in recent years. The Commonwealth experts group has rightly argued for a substantial enlargement and effective liberalization of the present facility and the need to provide compensation for the shortfall calculated in real and not in nominal terms. These issues have been discussed time and again in international forums, but the end of the tunnel appears nowhere near to obtaining a consensus on compensation in real terms. While a complete overhauling of the compensatory facility does not appear to be on the anvil, a second-best solution would be to concentrate on certain specific features which could be immediately revised to improve access to the facility. The restructuring of the IMF compensatory financing facility could be faster than setting up an institution to handle a new facility. Pending a major reform of the compensatory facility, I would recommend the following for immediate action. First, the amount of compensation should be unlinked from the quotas and related to the total amount of the export shortfall. Second, the duration of IMF assistance should be extended from the present period of five years to seven years. Third, the interest rate on compensatory purchases should be reduced to match Trust Fund assistance.

Furthermore, the extended Fund facility should be revised to accommodate longer-term export problems and should adopt a formula based on export shortfalls, not on a single year’s exports but on unexpected shortfalls below reasonable forecasts of export earnings which are internationally agreed in advance. The compensatory facility should also cover temporary variations in the need to import. If this is implemented, the facility would go a long way toward enabling countries to better adjust to changes in the international economy.

IMF Conditionality Practices

If the IMF tranche policies are to make a significant contribution to the financing of the balance of payments deficits it is necessary that the credit tranches be large enough and available at the appropriate time to enable a country to accept the conditionality attached to such assistance. Moreover, the degree of conditionality should be such that the social fabric of countries should not be damaged. The Fund programs do achieve a measure of success in improving the balance of payments position, but there is no evidence to show that they have any systematic effect either in improving or in worsening domestic performance in terms of either inflation or output. Given the exchange rate, the domestic credit expansion determines the balance of payments. The Fund should be reasonably satisfied that the promised path to correcting the balance of payments deficit is going to be achieved; any attempt to influence the content of the program could be judged improper. It should be possible to abandon the practice of requiring detailed stipulation of a set of targets for policy variables by concentrating on a very limited number of strategic targets in ensuring ability to repay. The present first credit tranche conditionality could be applied to the second and third credit tranches. To the extent that this is not acceptable, a compromise possibility would be to allow access to the second credit tranche with a waiver of detailed scrutiny to countries with a demonstrable record of satisfactory adjustment and repayment of IMF drawings in the past.

Buffer Stock Facility

The question of international buffer stocks has always raised many difficulties in international forums. Reflecting these problems, there has been only nominal use of the IMF buffer stock facility. The Conference on International Economic Cooperation has agreed in principle to the establishment of a common fund for raw materials, with further negotiations to take place in the UNCTAD. To the extent that countries make contributions to a common fund they should be entitled to make a purchase from the IMF. The Fund’s buffer stock facility is in need of a major review and the time is apposite for the liberalization of this facility. The IMF should consider permitting countries to draw on the facility to finance national buffer stocks. If a country’s eligibility under the compensatory financing facility is reduced because of accumulation of stocks, it should be eligible, under certain conditions, to make a purchase from the IMF under the buffer stock facility. Buffer stocks built up by consumer countries through imports should also be eligible for financing under the IMF facility, provided the Fund is convinced of a positive-sum outcome, which would give a gain to both producers and consumers.

Gold Sales

We are indeed glad to note that the gold sales by the Fund have been progressing well and that the IMF has reacted to market conditions and varied the periodicity, amount, and technique of auctions. I would urge that thought should now be given to fuller utilization of undisbursed balances held by the Trust Fund.

Small Open Economies

The adjustment process in the case of the small open economies is particularly difficult as the external sector looms large and the adjustment process causes a savage dislocation in these economies. These countries have to reduce their balance of payments deficits and have no option but to accept a high degree of imported inflation. Successful adjustment by these economies is reflected in a major slowdown in investment which inevitably means a cutback in the rate of future growth.

The question for these countries is not one of unconditional or conditional use of IMF resources but one of timely assistance. For a country which suddenly incurs a balance of payments deficit equivalent to, say, twice its IMF quota, the present restrictions on purchases under tranche policies and the compensatory financing facility are a serious impediment. I would therefore suggest that the IMF introduce a small open-economies facility under which countries with small quotas could have access to purchases from the Fund. Illustratively, if a country has a quota of SDR 2 million and has an export shortfall of SDR 2 million the country would be restricted to a purchase under the compensatory facility of only SDR 1 million (that is, 50 per cent of quota). In such a case the country should automatically be eligible to purchase SDR 1 million under the small open-economies facility. The total resources required for this facility would not be large, and this amount could be easily earmarked from the recently agreed supplementary financing facility. The small open economies are a casualty of the movement toward international economic integration. It would only be fitting if the international community would give special assistance to the financing problems of these countries. These countries should not be submerged in the structural changes sweeping across the international economy. I am sure that the Fund would give special attention in the coming year to the problems of these small countries and adopt Fund policies and procedures to accommodate the special characteristics of these countries. It is appropriate here to express our deep appreciation of the immense and valuable services rendered by Mr. Witteveen to the Fund, and we wish him well.

Finally, let me reiterate that the McIntyre report is a workable blueprint for action on the new international economic order, and I am sure that this report will become a locus classicus on this subject. What the newly appointed commissioners should do is to explore ways and means of implementing the new international economic order. The commissioners should not merely produce another report, and the advice I wish to offer is the one given to the man who asked the way to Oklahoma and was merely told “I wouldn’t start from here.”

Statement by the Governor of the Fund for Paraguay—Oscar Jacinto Obelar

It gives me great pleasure to address the Governors and representatives of the countries taking part in these Thirty-Second Annual Meetings of the Bank and the Fund and to offer a number of observations on questions of economic and social development, financial developments, and the international monetary system. In particular, I shall be talking about their effect on the developing countries, the efforts by these nations to deal with the situation, and the increasingly necessary understanding and support required of the developed countries if less favored areas of the world are to achieve new goals of progress and welfare. My basic premise will be respect for the individuality of each human being within the social context to which he or she belongs, with material things being viewed philosophically as a variable of higher, transcendent spiritual values.

Paraguay acknowledges the efforts made by the International Monetary Fund to deal with the burning questions raised by the behavior of the world economy. In certain cases, these questions are the cause of the social and political difficulties underlying the complex cyclical situations in the advanced countries, situations felt even more severely in the economies of related countries, given the vulnerability of their economic structures.

Throughout 1976, and so far in 1977, inflation, high levels of unemployment, and the distribution of disequilibria in international payments have been subjects of world concern. These distorting factors felt in the developed economies from the time of the oil crisis have had a still more serious effect in agricultural countries.

It should be noted that the International Monetary Fund’s efforts to help finance the member countries’ financial imbalances have helped maintain, and even improve, levels of employment, development, and growth within the bounds of the possibilities and constraints peculiar to each country.

The adjustment policy followed by the Latin American countries, which was an IMF priority, had satisfactory overall results during the second half of 1976 and the first six months of 1977, particularly with regard to the growth of their external trade and the improvement in their balances of payments.

The initial expansionary financial policies adopted by some of the Latin American nations were fortunately reversed soon after they were observed to be contributing to the acceleration of inflation and external imbalances.

Paraguay considers it extremely important to promote the IMF negotiations for the establishment of a supplementary financing facility to be funded by countries that enjoy a solid external position. We also consider the review of quotas to be timely, taking account of the financial needs of countries with less developed economies.

In our view, loans from this financing facility to member countries in serious balance of payments difficulties would hasten the recovery of their economies and reduce the effort required to secure that improvement.

Paraguay urges the international financial institutions, and the International Monetary Fund in particular, to continue their efforts to achieve greater international monetary stability, curb inflation, and mobilize financial resources in the developed nations so as to increase investment in the other countries, to the mutual benefit of both groups—all of this in a context of more equitable terms of trade. We suggest that every available means should be used to continue the spread of trade preference systems and to encourage the adoption of more practical methods to facilitate and increase the steady access of developing country products to industrial markets, while at the same time avoiding as far as possible the introduction of restrictive policies with their harmful and telling effect on the development process. Action of this kind will help to reduce unemployment and increase real income and saving, thus producing an improvement in investment indicators. It will also enable the developing countries to expand internal supply and will help to reduce prices and to stimulate an adequate growth of demand. In support of a trade preference system, we wish to draw attention to the fact that in November 1975 Paraguay signed the protocol on trade negotiations between developing nations that provides for the application of tariff concessions between signatories.

Analysis of the evolution of our economy in recent years reveals strong, uninterrupted growth, the fast pace of which has surpassed our best expectations. We see this as due in great part to the steady implementation of consistent policies, to the internal effort made by both the public and the private sectors, and to the invaluable, unfailing support given us in the past and at present by the international financial institutions.

As data in support of our statements, we shall merely refer to the behavior of certain important economic indicators for 1976 and to their development so far in 1977.

GDP grew 7.5 per cent in 1976, surpassing the average rate for 1971-76. This growth was distributed evenly among the different productive sectors of the economy.

It should be noted that the outstanding growth sector in 1976, and in this year as well, has been foreign trade. Paraguay exported 12 per cent more in the period January-July 1977 than it did in all of 1976.

For the same January-July period, imports increased by 14 per cent. As of July 1977, exports totaled $174 million, and imports $145 million. A favorable trade balance is expected this year for the first time since 1973. The goods contributing most to the growth of our exports are cotton fiber, seed for industrial use, beef, tung oil, and essential oils. Among the more representative import categories, machinery, equipment, and motors and means of transportation and spare parts have shown the greatest increase. These two categories top the import list, providing an indicator of the present growth rate of investment and internal fixed capital formation.

Net international reserves rose from $151 million in 1976 to $237 million on July 31, 1977—a figure exceeding that for total imports in 1976. This increase is due to the considerable expansion of exports, the bringing in of new capital, and the impact of the major hydroelectric project at Itaipú.

Monetary policy in 1976 followed the traditional course of allowing an adequate expansion of credit and of means of payment, consistent with the growth of the economy and stimulating private saving.

Money in circulation increased by 19 per cent in 1976, while it jumped 35 per cent between January and July 1977. This growth was based on the increase in net international reserves.

The price index went up 4.5 per cent in 1976—one of the lowest rates in Latin America, and in fact in the entire world. The rise from January to July 1977, however, was 8 per cent; the growth in demand and the expansion of the means of payment, stemming in part from the large influx of foreign exchange, contributed to this.

Public investment increased from 3.7 per cent in 1973 to 5.6 per cent in 1976. The growth of private investment is reflected in the benefits granted under Law No. 550/75, dealing with the promotion of investment. Those benefits increased by 90 per cent from 1975 to 1976. In addition to the benefits available under that law, elements contributing to the growth in investment were internal peace, monetary stability, confidence in a political system which respects private investment, and the high rate of expansion being achieved by our economy.

The financing of the public investment projects in the 1977-81 Development Plan will require an appreciable increase in saving and in borrowing from abroad.

The budget surpluses recorded since 1974 have contributed to the process of monetary stabilization in Paraguay.

In concluding, may we transmit the cordial, friendly greetings of General of the Army Alfredo Stroessner, President of the Republic of Paraguay, to our generous hosts, the Government and people of the United States. May we also express our gratitude to the officials of the IMF, and especially to the Managing Director, Mr. H. Johannes Witteveen. We respect his decision to leave the IMF, for as Managing Director he has earned our admiration for his great productivity, his personal concern with members’ problems, and his inestimable human qualities.

September 28, 1977

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