Discussion of Fund Policy at Second Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
October 1976
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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—Willy De Clercq

I want to report to Governors on the two meetings held by the Interim Committee since last year’s Annual Meeting, the first in Kingston, Jamaica, on January 7–8, 1976 and the second last Saturday, October 2. These two meetings, which I had the honor to chair, were the fifth and sixth meetings of the Committee since its establishment by the Board of Governors on October 2, 1974.

The topics on which the Committee focused its attention at its Jamaica meeting were the world economic situation and outlook, the policies of the Fund on the use of its resources, a number of issues relating to the Sixth General Review of Quotas and to the disposition of a part of the Fund’s gold holdings, and, last but not least, the proposals for amendment of the Fund’s Articles of Agreement.

The Jamaica meeting took place at a time when recovery from the severe international recession of the 1974–75 period was already under way in much of the industrial world. In the circumstances, the Committee agreed to call on the industrial countries, especially those in relatively strong payments positions, to conduct their policies so as to ensure a satisfactory and sustained rate of economic expansion in the period ahead while continuing to combat inflation. At the same time, special concern was expressed by the Committee about the deterioration in the external position of the primary producing countries, especially the developing ones, and the difficulties of many of them to maintain an adequate flow of imports in 1976 and to follow appropriate adjustment policies.

In the light of its assessment of the world economic outlook, the projected pattern of international payments, and the availability of financing from other sources, the Committee was able to agree, after considerable discussion, that the Fund should take the following actions regarding the use of its resources and the granting of balance of payments assistance to developing countries:

First, it was agreed that, until the effective date of the second amendment of the Fund’s Articles, the size of each credit tranche should be increased by 45 per cent, which meant that the total access under the credit tranches should be increased from 100 per cent to 145 per cent of quota, with the possibility of further assistance in exceptional circumstances. The agreement reached in the Committee was put into effect by a decision taken by the Executive Directors on January 19, 1976.

Second, it was agreed that the necessary steps should be taken to establish the Trust Fund to provide balance of payments assistance on concessionary terms to members with low per capita incomes. In May 1976 the Executive Directors adopted a Decision and an Instrument establishing the Trust Fund, and have since then taken decisions to enable loans to be granted.

With respect to the disposition of part of the Fund’s holdings of gold, agreement was reached on the simultaneous implementation of (1) the restitution of one sixth of the Fund’s gold to members on the basis of quotas, and (2) the disposition of another sixth for the benefit of developing members, with the sales of gold by the Fund as Trustee to be made in public auctions over a four-year period. It was understood that the Bank for International Settlements would be able to bid in these auctions. These understandings provided the framework for the decisions of the Executive Directors under which the Fund has already held three auctions.

The Sixth General Review of Quotas had been the subject of consideration at previous meetings of the Interim Committee. In Jamaica, the Executive Directors presented to the Interim Committee a report on the review including proposed increases in the quotas of individual members. The Committee considered and endorsed the recommendations contained in the report and the proposed resolution to be submitted to the Board of Governors. It also agreed that, within six months after the date of the adoption of the proposed resolution on increases in quotas, each member that had not already done so should make arrangements satisfactory to the Fund for the use of the member’s currency in operations and transactions of the Fund in accordance with its policies. The proposed resolution was submitted to the Board of Governors on February 20, 1976 and was approved by it, effective March 22, 1976.2

Finally, with regard to the amendment of the Fund’s Articles, the Committee was able to find solutions to the few remaining issues on which the Executive Directors had sought its guidance. Most of the issues had already been solved through the arduous efforts of the Executive Directors, who were able to take into account the understandings that had been reached by members in negotiations among themselves or in the Committee. The Committee in particular welcomed and endorsed the new provisions of the Articles of Agreement on exchange arrangements that had resulted from the breakthrough achieved in bilateral discussions.

In accordance with the understandings and the expectations of the Committee, in March this year the Executive Directors submitted to the Board of Governors for their approval a proposed amendment of the Articles of Agreement together with a report containing an extensive commentary on the proposed modifications of the Articles. The proposed amendment was approved by the Board of Governors under a resolution adopted on April 30, 1976. The proposed amendment is now before the members of the Fund for their acceptance.

In the Jamaica meeting as in all previous meetings of the Interim Committee, a major part of the attention of the Committee had to be devoted to what is its second task under its terms of reference, namely, to consider proposals by the Executive Directors to amend the Articles of Agreement. Now that full agreement has been reached on the second amendment, the Committee will be able to turn increasingly to its first task, which is “to supervise the management and adaptation of the international monetary system, including the continuing operation of the adjustment process, and in this connection to review developments in global liquidity and transfer of real resources to developing countries.” (Let me say, by way of an aside, that I hope the Committee will never have to turn to its third task, which is “dealing with sudden disturbances that might threaten the system.”) The meeting held here last Saturday was, therefore, the first in which the Committee could give its full attention to the world economic situation and the adjustment process.

The discussion on these subjects was penetrating and frank, indeed to an extent that could not be fully reflected in the communiqué. There was a gratifying measure of agreement on a number of important points. Let me recall some of these.

(1) Industrial countries should give priority at the present time to the reduction of inflation; this is essential as a condition to establish a basis for sustained economic growth and reduction of unemployment.

(2) In view of the necessary constraint on demand management policies in the industrial countries, special efforts are indicated to support the development effort of the developing countries, such as the reduction in trade barriers to the exports of these countries and an increased flow of aid.

(3) The recovery in the world economy has created conditions favorable for the adjustment of external imbalances, and adjustment action by both deficit and surplus countries is, therefore, now urgent and opportune. The Committee set out some guidelines for such adjustment by both deficit and surplus countries and indicated that such adjustment could be promoted, in the context of the use of the Fund’s resources, by larger use of the credit tranches and the extended Fund facility.

(4) The Committee also emphasized the tasks of the Fund in the areas of surveillance over the exchange rate policies of members and all aspects of international liquidity and asked the Executive Directors to report back to it on both of these subjects.

There is, of course, a close connection between the work of the Committee on the situation of the world economy and its concern with the financial activities of the Fund. On this latter subject the Committee noted the very large expansion in use of the Fund’s resources as a consequence of large payments disequilibria and the likelihood that there might still be a need for large use in the near future. In this context the Committee discussed a number of measures to enhance the liquidity of the Fund.

I would like to say in conclusion that in my opinion the activities carried out by the Committee over the past year show that it is a very useful addition to the structure of the Fund. I would think that this view is shared by all members of the Committee. Many of the solutions reached or recommended by the Committee have already been translated into action in the course of the current year. The understandings reached with respect to the working of the international monetary system may not provide such clearly visible results, but I would rate them of equal, and perhaps in the long run of even greater, importance.

The tasks of the Committee are continuing, and I hope and expect that the experience of collaboration that has already been established will continue to bear fruit in future years.

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

Although all Annual Meetings of the Bretton Woods family are important events in the financial world, it is no secret that we always look forward with special pleasure to the meetings away from Washington, and I want to thank our hosts, the President, the Minister of Finance, the Central Bank Governor, and the people of the Philippines, who have made it possible that we continue our habit of meeting elsewhere every three years and who have given us such a wonderful welcome in Manila.

Before speaking on behalf of the Netherlands Government, I take the privilege of addressing this meeting on behalf of the European Economic Community. This privilege falls to me since the chairmanship of the Council of Ministers is at present held by the Netherlands. We would like to extend our sincere thanks to the Government of the Philippines for their gracious hospitality in this beautiful and friendly city of Manila. Already this meeting has served to dedicate a special place in our hearts to this hospitable country.

A recovery of the business cycle is clearly under way in the countries of the Community. We expect this recovery to continue in 1977. The level of unemployment, however, is still considerable and in some member countries even growing. In order to reduce unemployment and to ensure that the recovery will be sustained, the Community will direct its policies toward stimulating productive investment and reducing inflation. Special attention will be given to reducing national budget deficits and liquidity creation. These medium-term aims of the Community have the support of the social partners. In order to promote the achievement of a parallel economic development in all member countries, several ideas are being discussed at this moment to strengthen the internal economic and monetary cooperation in the Community. An important objective of these proposals is a Community contribution to a successful recovery of world economic activities.

With regard to international monetary questions, the Community is of the opinion that the January meeting of the Interim Committee in Jamaica has contributed to an improvement of international monetary relations. We believe that it has made a substantial contribution to solving the financing problems of developing countries, and that, together with the upturn in the business cycle, this will help these countries to maintain economic progress. More generally, the Community will continue to seek further improvements in its economic relations with developing countries, both in the framework of the Conference on International Economic Cooperation which is now taking place, and elsewhere.

We agree with the view of the Managing Director of the Fund that a better control of international liquidity is necessary. The member countries of the Community will continue to cooperate with the IMF to foster internal stability, to improve the international adjustment process, and to reach a system of more stable exchange rate relations. In particular, we believe that the IMF should be given wider and more effective power of surveillance on the operations of the international monetary system in accordance with the provisions of Section 3 of the new Article IV of its Articles of Agreement and its stated aim of assuring orderly exchange arrangements and promoting a stable system of exchange rates.

In this connection the Fund should become instrumental in promoting the adoption by member countries of economic policies that would improve domestic economic stability and, in consequence, contribute to the desired orderly development of exchange markets. Concerning the question of Fund liquidity and Fund resources for use by member countries, we are of the opinion that the decision about quota increases reached in Jamaica, and currently in the process of being ratified by member countries, should provide all that is needed in the near future to cope with the normal demands of the Fund, certainly if all member countries and in particular those with balance of payments surpluses make their quota subscriptions in national currencies freely usable.

However, if large drawings are to take place in the near future the Fund should be able to increase its liquidity rapidly and adequately by activating the procedures and mechanisms provided for such cases that have already been successfully used in the past.

I am now speaking as Governor for the Netherlands. Last year was an important one for the International Monetary Fund. The agreement reached on the amendment of the Articles of Agreement is in my opinion an important milestone on the road to a more far-reaching reform of the international monetary system. I want to thank the Managing Director and the Executive Board for the way in which they completed this immense task. The staff has done an outstanding job.

Unlike last year, when the Annual Report gave a gloomy picture of the world economy, the worst of the world-wide recession seems over now. The substantial upswing in world trade this year is most welcome. In spite of this positive development, a number of problems demand our attention. We have to remember that the upswing has not yet developed with the same speed in all countries. Besides, with economic recovery on its way, we are still confronted with historically very high rates of inflation. The problems connected with the high level of structural unemployment should not be underestimated either.

During the economic recovery our primary task has to be prevention of new inflationary pressures and reduction of inflation rates to a more reasonable level. In this respect we agree completely with the Annual Report, where it says (on page 18): “. . . recent experience indicates that, unless the currently high rate of price inflation is brought down and inflationary expectations are greatly reduced, the effects of policies aimed at stimulating growth and employment are likely to be short lived. Pursuit of policies that seriously aggravated the problem of inflation could lead to a disorderly situation requiring sharp reversals of course.”

In this context, the Dutch Government has reduced the rise of the public sector expenditure in its medium-term planning, while government deficit financing will also be diminished considerably. Monetary policy will be aimed at preventing pressures arising from the monetary sector. Experience of the last few years has shown that budgetary and monetary policies are often insufficient and that strong price and incomes policies are unavoidable.

Looking at the prospects of continued economic recovery next year, we find consumers’ expenditures and renewed Stockbuilding at present the greatest stimuli for this process of recovery. However, these factors alone are insufficient to maintain recovery in the period ahead. We must pay special attention to the conditions that guarantee a permanently high level of investment. The rise in investment expenditures is of vital importance for reducing the level of unemployment. For that purpose we recently announced an extensive package of measures to stimulate investment, notably via relieving the fiscal burden on enterprises.

Now that the first stage of the international monetary reform has been completed, we must ask ourselves what the task of the Fund will have to be in relation to the international monetary system in the coming years. I want to mention three issues in particular.

In the first place, the exchange rate system. Our experience with a system of floating rates has not been unfavorable. Development of prices and effective exchange rates show that the deteriorating economic situation of many countries did not on the whole lead to competitive depreciations, while exchange rates adjusted rather smoothly to diverging economic developments in the various countries.

However, recent years were sometimes characterized by excessive exchange rate fluctuations, within a very short period of time, which were not justified by more fundamental movements. Management of exchange rates has proved to be indispensable to prevent these short-term fluctuations. Moreover, the threat which depreciating exchange rates may mean for open economies in an inflationary world became very obvious last year in a number of cases.

Depreciation of a currency is sometimes inevitable when a country with a relatively high rate of inflation must adjust its level of costs to that of its competitors. But depreciation also causes an inflationary impulse which, especially in open economies, will tend to make the initial adjustment largely ineffective and require new adjustment of the exchange rate.

My Government attaches great importance to the European snake arrangement. We realize, however, that the international community is not ready for such strict commitments and that, therefore, floating will be with us for some considerable time in the future. Experience has shown the necessity for active national management of floating rates and for international surveillance over these national policies. We consider it very important to implement our commitment to charge the Fund with the surveillance of exchange rate policies of member states, as laid down in Article IV of the new Articles of Agreement. This could be done by making the already accepted Guidelines for the Management of Floating Exchange Rates operational. In this context I attach great importance to the well-known fact, supported again by our recent experience, that exchange rate management cannot be pursued through intervention in the exchange market only or even primarily. Monetary policy plays an important and, in my view, a more important role. In the short run, monetary authorities can break a speculative attack on their currency by accepting the monetary implications in the money market of a loss of reserves. Examples of this can be found in recent experience of the countries in the snake arrangement. But also in the longer run, development of exchange rates is influenced to an important extent by monetary policy. This experience leads to the conclusion that in the process of further study of the application of guidelines for floating, explicit attention should be paid to monetary policy as an instrument for exchange rate management. I am happy to note that the IMF staff has already devoted some studies to this subject. I hope that this important policy issue will be discussed more intensively now that the Board has solved most of the legal and institutional problems in drafting the Articles.

Closely connected with the elaboration of guidelines for floating, I see as an urgent matter the question of development and control of international liquidity. We all have an interest in preventing the inflationary pressures that arise from excessive international liquidity. Even if such excessive liquidity will affect in the first instance only the surplus countries, other countries will eventually be faced by the inflationary consequences as well. For, surplus countries will at a certain point prefer an appreciation of their exchange rate to a further accumulation of international reserves and a further increase in their domestic liquidity. Such appreciation of the surplus countries implies an inflationary pressure to the rest of the world. Therefore, in the end the whole world takes an interest in controlling the creation of reserves. In this connection the suggestions made by the Managing Director some time ago about agreements on the composition of reserves deserve careful attention and further study. If we wish to control international liquidity, we must consider ways to limit the foreign exchange component of monetary reserves. This raises anew the question of asset settlement, which has not been resolved in the amendments.

As a third subject requiring our attention in the next few years, I mention the function of the IMF as a credit-granting institution. It is gratifying to note that the figures in the Annual Report indicate that the role of the Fund was reinforced last year. For the period ahead, greater emphasis has to be placed on promoting effective adjustments in the balance of payments of member countries. Adjustment, rather than financing, should be the focus of the Fund in the coming years. In my opinion the Fund should play a very important role in this process. I am happy to see that the revisions of the compensatory financing facility at the end of last year have led to a better functioning of this facility and that the facility appears to be a substantial source of financing balance of payments deficits to the benefit of the primary producing developing countries. In this context, it is necessary to keep the development of the liquidity position of the Fund under constant control to guarantee that the Fund remains a healthy and reliable monetary institution. . . .

Let me end, Mr. Chairman, by recalling an old economic law which says that total welfare is maximized when international trade follows comparative advantage. This holds for international institutions as well: let the World Bank continue its efforts in the field of development financing, with the IMF concentrating exclusively on its specific functions in the monetary area.

Statement by the Governor of the Bank for Norway—Per Kleppe

Speaking on behalf of the five Nordic countries, it gives me great pleasure to join previous speakers in thanking the people and the Government of the Philippines for the excellent arrangements for this meeting and the gracious hospitality extended to us all.

Since we met last year we have witnessed an encouraging progress in the world economy. There is, however, still a long way to go before reasonably acceptable employment levels have been reached. More than a year after the upswing has started, about 5 per cent of the labor force in developed countries is still unemployed, and trends in employment are particularly disquieting for its less industrialized parts. Continued high rates of inflation are one of the obstacles we have to fight in order to improve this position. In the opinion of the Nordic countries, the social strain and economic waste implied in the figure I mentioned is such that it should be a first priority goal of all our endeavors to maintain a sustained recovery until unemployment has been reduced to a more tolerable level. This fundamental purpose of our efforts should be kept in mind also when we discuss the activities of the Fund, to which I now will turn.

There is an obvious lack of balance between countries in our present recovery, which could be expected to lead to considerable demands upon the Fund’s resources in the coming year. It is natural that the position of non-oil developing countries is of particular concern to us in this connection, as they continue to run high deficits at the same time as those among them, which up to now have financed their deficits from private capital markets, may find it increasingly difficult to continue to do so. But it should not be forgotten that some industrialized countries and more developed primary producers are also likely to draw upon the Fund.

Until the increase in quotas will become effective and add to the Fund’s resources, the liquidity position of the Fund may become very strained. Members ought therefore without delay to comply with the agreement reached in Jamaica to make their currencies usable by the Fund under the provisions of that agreement.

I think we may expect a continued need for the use of Fund resources also beyond 1977, and that the question of their adequacy therefore will remain on the agenda. It should be recalled that the compromise reached in the recent quota discussions implied an increase which was far below the amount suggested by many members, including the Nordic countries. When the size of the quotas is discussed again soon, it should not be forgotten that the influence of the Fund upon the economic policies of members is closely connected with its ability to give assistance of significant magnitude.

The amendments certainly contain important elements of a reformed monetary system, not least the replacement of gold by the SDR as the basis for the system. This process can only take place, however, to the extent that we succeed in the demonetization of gold and in controlling the reserve creation through reserve currencies. Only then can room be made for new issues of SDRs. We note with satisfaction that the Fund’s gold sales have taken place without any attempts at pegging the gold price, and we trust that the sales will continue according to the agreed principles.

Our ambitions for reform at the time when the Committee of Twenty was established went, however, considerably beyond what has been achieved up to now. Conditions in the world economy may not yet be such that a more comprehensive reform can be carried through, but we know from experience that it is a time-consuming process to reach any major agreement in this field. We should therefore not wait very long before we take the Outline of Reform down from our shelves and see what we can do next. There are two fields in particular where an early progress ought to be made.

One is to find ways and means to control the creation and flow of international liquidity. As long as a solution to this problem is not found, any achievement with respect to global monetary stabilization will be under the threat of global uncertainty.

It is of no less importance to improve the adjustment process and the symmetry in the obligations of deficit and surplus countries. This becomes even more important if and when we succeed in gaining better control of global liquidity. Even if the problem does not present itself in the same manner today as it did under the par value system, experience has shown that we still need a policy for exchange rates with a corresponding need for sharing of policy obligations. This goes beyond our present guidelines for floating, the importance of which has been rather uncertain up to now. The improved surveillance procedure under the amended Article IV covers a wider scope and should prove useful for greater symmetry.

Under the present system, countries which find themselves in balance of payments difficulties have tended to rely too much on downward drifting exchange rates, often with contagious results. Although conditions and possibilities vary from country to country, it is undeniable that currency depreciation aggravates inflation and hence increases social and political tension.

A country which is in the process of reducing its rate of inflation through internal adjustment measures often cannot expect very quick results. Generous international credit may, therefore, be necessary and acceptable.

These considerations should be taken into account in the Fund’s surveillance of exchange rate policies. But surveillance cannot be restricted to these aspects. It will have to include all elements of importance to a country’s external position. However much the Fund’s lending capacity is increased, deficit countries can never be relieved of their obligation to take the necessary corrective steps in their own economies. And it is of equal importance that the effect upon the international community of persistent surpluses of some countries be borne in mind, both by the countries themselves and by the Fund. To represent the international conscience in such matters is about the only means of influence the Fund has on surplus countries.

The Nordic countries believe that the Fund has an indispensable role to play in the international coordination of economic policies and in lending activity. The latter has been expanding in recent years, both in volume and in forms. If we are now entering a less turbulent period in the international economy, we think it may become worthwhile to review the different forms of lending which are practiced to see if some simplification may be possible, anyhow in a somewhat longer run.

In such a reconsideration it should be borne in mind that among the four organizations which hold their annual meetings here, the Fund has a specific role to play as a monetary agency. It should in this capacity pay particular attention to some of the special needs of developing countries. But their needs are of a character and size which make monetary arrangements inadequate. And such arrangements can in no way relieve the industrialized countries of their obligation to contribute to the necessary narrowing of differences in living standards throughout the world. . . .

Statement by the Governor of the Fund and Bank for Canada—Donald S. Macdonald

Permit me to join those who have expressed their appreciation to the Government of the Philippines for the gracious hospitality which has been extended to us all. I would also like to welcome Papua New Guinea, the Comoros, and Seychelles to these meetings and to membership in the Fund and the Bank.

Past progress toward alleviating poverty leaves us little reason for pride or satisfaction. However, in spite of differing views on most issues, there exists a widespread desire to ensure that economic systems be made to function for the betterment of all.

This desire led to an agreement on the proposed amendment of the Articles of the Fund and larger Fund quotas. I therefore, in that respect, look back on the year as one of significant achievement. In the session of the Canadian Parliament which will commence as I return to Ottawa, I intend to introduce the necessary legislation to adopt the amended Articles.

The desire to improve the system also led during the past year to a very general re-examination of the present international economic system and to the development of a number of new approaches. Serious economic difficulties in developing countries added urgency to the search in a number of institutions for new ways to relieve their financial burdens. Canada has been privileged to participate actively in that endeavor. We will continue to do so. For example, important discussions concerning the Integrated Program for Commodities will result from UNCTAD IV. They will be of particular interest to Canada as both a major importer and exporter of commodities. We intend to play our part in seeking solutions to individual commodity trade problems.

In sharing the chair of the Conference on International Economic Cooperation (CIEC), Canada has had a special opportunity to become fully aware of the major tasks that lie ahead and of their complexity. The next phase of CIECs work, which is to develop recommendations for action, will not be an easy one. However, with the present work program I am confident that CIEC can make positive progress on the problems before it.

These initiatives, and others which have originated within the United Nations framework, such as the Conference on Human Settlements, have all focused international attention and engaged political support. But the question must be asked: have we in place the necessary institutions to carry those political resolutions into action and realization? The poor will not be helped by conferences and rhetoric alone.

I am not urging a proliferation of new institutions for the implementation of programs. Exactly the opposite. This is an appropriate moment to examine with a critical eye whether existing institutions are capable of being the most effective instruments for carrying out policy. In allocating responsibilities, we should be prepared to bypass quite ruthlessly institutions which have not shown a capability of effective action. We must also make certain that institutional responsibilities are not blurred by duplication. The millions who are looking with hope to an improvement in their lives from these meetings will not tolerate administrative incapacity or bureaucratic feuding. What is more, additional duplication, whether of institutions or effort, will not be tolerated by the public on whom we depend for moral and financial support. The funds available for development assistance must survive strong demands for restraint in public spending.

In terms of appropriate institutional response, it would, for example, be relevant to begin thinking of how best to build on and carry forward the important work of CIEC. Plans should soon be made to transfer some of CIEC’s deliberations to other existing forums. The Development Committee and the Interim Committee, supported by the accumulated expertise of the Bank and Fund staffs, could continue some aspects of the work of CIEC on the basis of a sound presentation of issues. The Report of the Executive Directors of the Bank and the Fund on the Development Committee has mentioned this as a possible appropriate role for the Committee. I endorse this view and see it as a possible means for extending some of the results of CIEC to all the members of the Fund and Bank.

Instead of calls for new institutions, let us focus on the improvement of existing institutions and build on their experience to make them adaptable to new situations. The Bank and the Fund have in the past, and must in the future, play an integral and leading part in managing the international economic system. . . .

Mr. Chairman, as you are aware, the Commonwealth Finance Ministers have just concluded their deliberations in Hong Kong. I have been entrusted by my colleagues at that meeting to be their spokesman in expressing to you—and to all of the delegations here—the view of Ministers of Finance of the Commonwealth that there should be a further general increase in the capital of the World Bank and an early and successful conclusion of the negotiation for the Fifth Replenishment of the International Development Association. . . .

I have been, and will be, expressing Canadian views on certain other matters discussed at the Commonwealth Meeting. I should like at this time to speak of Commonwealth views on certain other topics.

The Ministers had before them a further report by the Commonwealth Group of Experts on the New International Economic Order. While there was obviously not unanimous agreement on all the experts’ recommendations, Ministers agreed that the report could make a valuable contribution to international discussions on such issues as commodities, debt, and industrial cooperation and that many of its recommendations were practical and amenable to early implementation.

Members of the Commonwealth also discussed the balance of payments deficits of non-oil developing countries and many Ministers felt that further steps should be taken to review the terms of access to, and the adequacy of, existing IMF facilities, including the question of conditionality.

I have noted the concerns expressed by Governors at last year’s meeting over the high rates of inflation. The progress we have made since then is encouraging even though we have yet to win the fight. Relatively high rates of inflation interfere with the process of recovery of employment and output in both developed and developing countries. Further reduction of inflation rates therefore remains a high priority for us all. Indeed, because of the international aspects of inflation, including the possible relationship between inflation and changes in international liquidity, the international community will undoubtedly expect the Fund to provide ongoing analysis of the problem.

The initiatives and achievements of the Fund over the recent period of economic disturbance have, fortunately, reaffirmed the central position it occupies in the international economy. This comes out very clearly from the 1976 Annual Report of its Executive Directors. On a policy level, the IMF guided and focused the discussions on amendment of the Articles and the quota increase. I wish to emphasize that I am impressed by the way the Fund led the discussion on this issue. The results obtained should encourage us to address other problems that still remain. In particular, Canada is anxious that the operation of exchange systems and the necessary adjustments of payments imbalances develop in an orderly way with the IMF playing its essential role of monitoring and surveillance.

The reform exercise, through the medium of the Interim Committee, brought Ministers together and directed discussions at a particular goal—the amendment of the Articles. The value of the Interim Committee was clearly demonstrated and we must use it to improve the management of world economic and monetary affairs. More specifically I believe that the Committee is uniquely suited to address itself to surveillance of the system in general at the political level. Reform itself is never complete. I would hope that the Committee will continue to give political leadership in the further evolution of the international monetary system.

At present, the monetary system is, in my view, functioning reasonably well. Floating rates have been very helpful in this connection and probably saved us from much worse developments. Without them I fear we would have seen widespread adoption of trade and exchange restrictions in futile efforts to protect rates that were inappropriate in a swiftly changing environment. There have been instances in which one might have questioned whether exchange rate movements have been excessive. There have also been doubts expressed as to whether some rates have been adequately responsive to market forces. There may well be need to discuss specific situations from time to time and this is why Canada supports strongly the surveillance responsibilities vested in the Interim Committee of the Fund. But if the Committee is to perform this function, there needs to be a comprehensive analysis of the principles by which the Committee should be guided in this work. Indeed, the development of these principles is, in my view, one of the challenges facing the Directors in the coming year, and I would urge the Managing Director and his Board to give this matter their close attention.

The activities of the Fund on a practical level have been timely. As the recession pushed more and more countries into balance of payments difficulties, the Fund’s expanded lending under the compensatory financing facility and the enlarged credit tranches have continued to provide a financial cushion to help countries to avoid restrictive trade measures. As a result, the liquidity of the Fund has dropped to a low level. I must say frankly that I am concerned about the financing of the Fund programs. There may well be difficulties for the Fund in meeting its commitments if more countries do not, as a matter of urgency, make their currencies freely usable for Fund transactions. The entry into force of new quotas, the economic recovery, and the provisions of the amended Articles will all have a beneficial impact on the liquidity of the Fund. But this will take time and will not solve the problem we are facing right now. I would consequently hope that member countries would make appropriate arrangements with the Fund for the free use of their currencies as soon as possible.

The Fund has also made progress in selling some of its gold for the benefit of developing countries. However, the benefits to those countries have declined with the drop in the price of gold. I am anxious that the Fund’s program of gold sales should have as little effect on the gold market as possible. Our Executive Director has asked that the Fund examine, as a matter of urgency, whether the present inflexible pattern of the gold auctions makes the maximum contribution to this objective. I would, on this occasion, urge the Executive Directors to carry out this examination and to make any warranted changes in the auction program.

The international economic system cannot function well unless its members act responsibly. In terms of the transfer of resources from developed to less developed countries, this means that such resources must be allocated and utilized in an effective and efficient fashion and that the total volume of resources so transferred must continue to grow. In terms of the international monetary system, it means action in accordance with procedures as they have been agreed and as they may be evolved in the Fund. All of us have a high stake in the establishment of a stable and growing international economy. All of us must help ensure that the developing countries, and particularly those whose people have the greatest need, will experience visible benefits from such prosperity. This is a continuing challenge.

Statement by the Alternate Governor of the Fund and Bank for Japan—Teiichiro Morinaga

When we met last year, we had a number of difficult tasks before us. The principal among these were seeking a way out of the world-wide recession and trying to establish a new international monetary system to replace the Bretton Woods system.

Today, I am highly gratified in being able to share with all of you the satisfaction of the notable progress we have made over the past year toward the solution of these problems.

International Monetary System

In the first place, our efforts over the last several years to reconstruct the international monetary system finally bore fruit in the Jamaica agreement of January this year. Thus, the second amendment of the Articles of Agreement of the International Monetary Fund is now before us. During the long course of those discussions, the existence of considerable differences of views among us became apparent. However, the genuine efforts of all of us to pursue the common positions rather than the differences allowed us to finally emerge victorious. We can certainly take pride in having successfully challenged this test on the human potential for harmony and inventiveness.

In the present environment where the world economy continues to harbor many uncertainties, the new international monetary system which we have agreed on will enable us to deal flexibly with the realities. The new agreement is indispensable for the stable and enhanced growth of the world economy. Bearing this in mind, we completed the necessary domestic procedural requirements with our best efforts and notified the Fund of our acceptance of the second amendment last June. We earnestly hope that the second amendment will come into effect as quickly as possible through early legislative ratification by all member countries concerned. This is furthermore vitally important in the sense that it will pave the way for the early implementation of the Sixth General Review of Quotas, which will provide the Fund with the needed resources for responding adequately to the needs of many countries still suffering from acute deficits in the balance of payments.

The second amendment of the Articles of Agreement is certainly a significant achievement in our cooperative endeavors toward the reform of the international monetary system. Yet it marks only a first step. It is, so to speak, the skeleton of the new system and, in a way, is a framework shaped to meet the current needs. Many problems remain to be resolved, such as measures to stabilize the exchange markets, the nature of primary reserve assets, convertibility, the management of international liquidity, and the effective control of speculative capital flows. Furthermore, each country will choose, when the new agreement becomes effective, the exchange rate arrangement appropriate to its specific environment. It behooves us to carry out a comprehensive study of these numerous problems in the future to attain our common objective of establishing an international monetary system capable of preventing disorder caused by arbitrary acts of individual countries. And in this connection, we should of course take into account the work done and left unfinished with us by the Committee of Twenty.

As we stand on the starting line of the new international monetary system, I wish to stress particularly the international and domestic responsibilities that we member governments have.

First of all, a member country must obviously not seek to enhance its interest at the expense of other member countries. This responsibility is particularly great for those countries which have a large influence on the world economy. They must share among them the responsibility of supporting the new system in accordance with their economic strength.

Second, we have yet to attain an international monetary system based on a solid and stable framework. Until that objective is realized, each member government must protect its citizens from the destabilizing effects of world economic developments or international monetary disturbances. In particular, exchange market stability is of obvious and central importance for the maintenance of stability in a nation’s economic activities and external transactions. In the event of speculative movements of funds or leads and lags creating abnormal aberrations or distortions in the demand and supply conditions in the foreign exchange market, the monetary authorities should clearly be expected to step in and take appropriate action.

Recently there has been increasing demand for the holding and use of yen from abroad. It is from these considerations I mentioned above that we have gradually accommodated these demands.

The World Economy

I now wish to turn to the present state of the world economy.

At the last Annual Meeting, our main concern was how to find our way out of the world-wide recession which was of such depth, width, and duration as we had never experienced in the postwar period. Ever-declining industrial production, a high rate of unemployment, inflation that continued to surpass the permissible limit, persistent balance of payments imbalances, the especially acute difficulties of the developing countries—all of these complex and interrelated problems have made the planning and implementation of countercyclical measures of member countries extremely difficult.

Since the beginning of this year, however, world economic conditions have steadily improved, and it looks quite clear that the world economy is finally in the process of steady recovery. Although a significant decline in the unemployment rate has yet to be observed, industrial production has been rising and price increases have moderated. This recovery has been reflected in the increased demand for primary products, which, in turn, has been contributing to the improvement in the balance of payments of the non-oil producing developing countries.

There are, nonetheless, still some overshadowing clouds on the world economic horizon. To begin with, some industrial countries, as well as many of the non-oil producing developing countries, are yet some distance away from recovering equilibrium in their balance of payments. Second, even as the economic recovery got under way, a warning signal was already up on price movements. Third, the governments, both central and local, have been running large deficits. Finally, although we are confident that the world-wide recession is almost behind us, sectors such as private plant and equipment investments that will have an important economic impact over the longer term have yet to recover from their depressed situation.

Management of the Japanese Economy

With these points in mind, I wish now to touch upon the management of the Japanese economy.

Having bottomed out in the spring of last year, our economy has since been on a gradual and moderate recovery path. Especially, since the beginning of this year, both production and shipment have recorded a substantial gain, supported by the expansion of domestic demand coming from private consumption and private housing construction, and the increase in export demand. Although the pace of recovery has somewhat moderated recently, the economy continues to be in the process of recovery.

As regards prices, while consumer prices have stabilized, wholesale price increases have been slightly accelerating. We are hence carefully watching price movements. In dealing with the dual hardships of global inflation and recession, we have learned an invaluable lesson. That lesson is that our highest policy priority should be to avoid the recurrence of inflation.

With respect to fiscal policy, it is quite clear that our most urgent task is to eliminate the budget deficit within the shortest possible time period. Unless sound fiscal management is re-established, we cannot expect the full restoration of confidence, either internal or external, that is necessary for the stability and development of our economy.

Balance of Payments Problems

Now I would like to take up the problem of the balance of payments.

Following the unprecedented large increases in oil prices in late 1973, substantial imbalances in the world’s balance of payments structure were created. It has certainly been reassuring to find that these imbalances have not been beyond our reach for solution, owing on the one hand to the adjustment efforts of the countries affected, and on the other to the discreet pricing policy followed by the oil producing countries. Nonetheless, despite recent signs of some improvement, the balance of payments of developing nations remains in difficulty. Furthermore, there are also some developed industrial countries that have not yet fully restored equilibrium in their balance of payments.

In speaking of the restoration of balance of payments equilibrium, I am not envisaging the form of equilibrium where each and every of the 129 members of the Fund shows neither surplus nor deficit. A specific country will inevitably produce a surplus or deficit depending upon the prevailing economic circumstances. For the purpose of adjusting such imbalances, timely and disciplined management of domestic economic policies is, in my view, of utmost importance. Exchange rates will fluctuate reflecting the economic strength of a country, and its role in balance of payments adjustment is also important.

In this connection it is essential for us to recognize that considerable time and effort are required for the adjustment effects of economic policy measures, whether internal or external, to work themselves through. For this reason, an understanding attitude is especially called for on the part of member countries regarding the measures undertaken by a specific country to restore its balance of payments equilibrium.

The history of our economy in the postwar period has been one of recurrent cycles of an expansion phase, a deterioration in the balance of payments, the adoption of a policy of economic restraint, the recovery of balance of payments equilibrium, and then on to the next expansion phase. More recently, the sharp rise in oil prices in late 1973 dealt a particularly severe blow to our economy, since it is dependent on imports for a predominant part of its energy needs. The effect of the oil price increase on our balance of payments was very substantial, our current account deficit for 1974 and 1975 combined amounting to as much as $5.4 billion.

After entering this year our current account balance turned into surplus. This was due on the one hand to favorable export growth, and on the other to moderate recovery in imports. Import growth was moderate because imports did not respond promptly to the rise in industrial production due to the high level of inventories of imported raw materials. However, this is a temporary phase and will not last for long. Imports will accelerate as the economic recovery proceeds, and we expect the current account to steadily move into equilibrium.

I wish to add in this connection that our imports from the developing nations have been steadily increasing, and we expect that we shall be able thereby to contribute substantially to the restoration of equilibrium in their economies.

Furthermore, our country is prepared, as far as the improvement in our balance of payments permits, to cooperate through the IMF in assisting deficit countries in their efforts to rectify their balance of payments position. We intend also, from this point of view, to actively participate in the study to assist the IMF in meeting its financial needs. We shall furthermore be seeking ways to smooth the flow of funds to countries in balance of payments deficit through, for instance, active use of our capital markets. . . .

Direction of the Development Strategy

In making an assessment of the development strategy, I recognize there exists a view that takes the ratio of official development assistance to gross national product as the only indicator to evaluate a country’s aid performance. I consider this approach rather formalistic and not necessarily well refined. The volume of Japan’s official development assistance has grown ten times in the last eleven years. Accordingly, our share in the aggregate official development assistance of member countries of the Development Assistance Committee has increased from 2.0 per cent to 8.4 per cent during the same period. In this context I would like to reaffirm our determination to continue to make our best efforts for the enlargement of our official development assistance to the extent our economic circumstances will permit.

I would like to touch next upon some important aspects of the development problem in general.

The first aspect I wish to cover is the increased access of developing countries to the world capital markets. I consider it particularly important to explore measures to complement the credit standing of those countries which are about to graduate from international development finance institutions, so that they can raise necessary funds for development from the world capital markets. In this connection, we are prepared to support the proposal made by the Development Committee that the World Bank and the regional development finance institutions assist the fund-raising efforts of developing countries through the active utilization of their guarantee functions prescribed in their respective Articles of Agreement.

The second aspect is the importance of the role of agricultural development in the development strategy. Almost two thirds of the population of the developing nations is living in the rural area, while in some developing countries the concentration of population in urban centers is creating serious problems. In light of this situation, I believe that rural development projects of the employment-generating type should be given much more emphasis than in the past within the overall development strategy.

Moreover, the food crisis that has overtaken the world in the past several years has made even more clear the vital importance of the problems of agriculture and food. In these circumstances, it is quite appropriate that the World Bank and other international development finance institutions have been increasing their commitments substantially to agriculture and related sectors. I strongly hope that they will continue their efforts in assisting agricultural development, based on the realities of the developing countries and paying due regard to their diverse social and cultural heritage. For our part, we intend to place even more stress than in the past on agricultural development in our bilateral economic cooperation activities. Furthermore, we believe that the International Fund for Agricultural Development will play a major role in dealing with the world’s food problems, and as a result of this belief, we have expressed our intention earlier to make a significant contribution to this Fund. We hope the necessary requirements for the Fund will be met soon and its activities started in the near future.

As the third aspect of the development strategy, I wish to take up the population problem in the developing countries. Little needs to be said regarding the fact that the rapid population increase in the developing countries has been nullifying the fruits of development and has been the source of many difficulties. In view of the importance of the population problem and the present serious conditions, I believe that, in addition to the self-help efforts in this field by the developing countries, it is particularly important to emphasize that more active cooperation of the World Bank and other international financial organizations, together with developed countries, is urgently needed in dealing with this problem.

As the fourth and final aspect of the development strategy, I particularly welcome the spirit of “dialogue” that has gradually emerged over the last year as an underlying tone between the North and the South. When we consider the profound significance of the word “interdependence,” it is clear that no country can press its views one-sidedly without paying due attention to the others. It is the spirit of mutual concession through mutual understanding that the world community is now seeking from its members. I firmly believe that we can find a harmonious solution to the mutual advantage of both the North and the South regarding the current problems of commodities and debt provided that we take on these problems in the spirit of “dialogue.”

Concluding Remarks

During the past year, we have overcome through mutual cooperation high hurdles which at first seemed insurmountable. Yet, when we turn our eyes to the future, greater and more difficult problems are awaiting us. Although we are reasonably confident that we have emerged from the world-wide recession, a firm consensus is yet to be established on the future direction of the world economy.

As for the international monetary system, we have reached agreement on the new Articles of Agreement of the IMF which will serve as a framework. It will be our next task to study what contents to put into that framework. On a broader horizon, I believe our task in the coming years will be to establish common objectives, in respect to both global economic management and the international monetary system, that would conform to new global values and shared aspirations, and would set the future course for the world economy. Only through such efforts can we expect to establish firm and long-lasting mutual confidence among the nations of the world.

The interdependence among countries has and continues to be deepened. We are now living in a world where mutual cooperation is more essential than ever before in world history. We must not bring the “law of the jungle” into the world community. In this world, cooperation is the law of life; anarchy the law of death. We intend to give our best efforts as a member of the world community to share in this responsibility.

Finally, I wish to extend my heartiest welcome to the delegates and the peoples of the Comoros, Seychelles, Guinea-Bissau, and Surinam who have newly joined or are expected to join shortly our activities. And let me express our sincere gratitude to the Government and the people of the Philippines for having invited us to this scenic city of Manila and for having welcomed us so cordially.

Statement by the Governor of the Fund and Bank for Ireland—Richie Ryan

I join with others in expressing to the President and the people of the Philippines our sincere thanks for their generous hospitality and for the opportunity to meet in their beautiful land the great Filipino people. We reciprocate their greeting to us by wishing them “Mabuhay.”

The Managing Director and several speakers have rightly welcomed the improvement in the world’s economy since last we met but have nevertheless identified several weaknesses. The distressing aspects of the recovery from the recent global recession are the unevenness of the rate of recovery and the unique combination of high inflation and high unemployment. Too many countries, Ireland included, are still finding it difficult to achieve sustained recovery with lower inflation and increased employment. The huge policy dilemma is that unless the current high rate of inflation is reduced, the effects of policies aimed at stimulating growth and employment are likely to be short lived. At the same time, unless we apply measures consistent with demand management constraints to reduce unemployment, the economic recovery will be an empty experience for many, and especially for young people who bear such a large proportion of the burden of unemployment. But if political institutions are to survive the economic and social pressures of these times, lower unemployment cannot be purchased by public spending requiring unacceptably higher taxation that would in turn fuel inflation, thereby aggravating rather than relieving the problem.

Just as the severity of economic recession was unevenly apportioned among different countries, so also are the fruits of economic recovery. While most surplus countries continue on the road to sustained recovery, many of the deficit countries are having great difficulty in generating resources to finance necessary development and in managing their balance of payments problems. These problems are made worse by a very significant increase in the cost of servicing external debt following extensive but necessary foreign borrowing in recent years. The alternative to foreign borrowing, namely, severe restrictions on current payments and transactions, could have resulted in a deepening of the recession and in even greater unemployment.

The absence of resort to widespread restrictive policies indicates a growing acceptance of the interdependent nature of our problems. Surplus countries can strengthen this acceptance by improving access to their markets for deficit countries. While there is a lot more that surplus countries should be doing at this stage to assist the recovery of the deficit countries, the peoples of deficit countries will themselves have to practice restraint to improve their own competitiveness and therefore their ability to expand exports.

The problems of recession obliged many countries, including Ireland, to depart temporarily from the normal basis of prudent borrowing, namely, to use borrowed funds for productive investment purposes. While borrowing to maintain consumer demand during the recession was justifiable and necessary, it cannot be entertained for any prolonged period without building up serious trouble, if not disaster, ahead for the debtor countries. Governments everywhere are facing political difficulties as they endeavor to adjust economic, financial, and fiscal policies in keeping with the longer-term interest of their citizens. It is therefore imperative that responsible international organizations spell out clearly and courageously the prescription for economic recovery, even if unpleasant medicine is required.

Since our meeting in Washington last year we have reached agreement on an increase in IMF quotas. Until this increase becomes operative, access to the Fund’s normal credit has been expanded. We have also been able to agree on a generally acceptable amendment to the IMF Articles, in particular those relating to exchange arrangements and gold. It is to be hoped that this second amendment now going through members’ legislatures will be ratified as soon as possible.

I do not wish to imply that I see the completion of the second amendment as a panacea for our past and future problems. There is a lesson to be learned from the early 1970s. Then the economic boom was accompanied by an unprecedented rise in international reserves which, by way of their impact on the world money supply, accommodated massive inflation. The role of the Fund to date has been seriously restricted by its lack of control over global international liquidity. If we fail to tackle this problem, I fear that it will be impossible to achieve sustained noninflationary growth in the medium term.

We have seen a substantial expansion in the use of the Fund’s resources in the past two years. This has inevitably put pressure on the Fund’s liquidity position which will be intensified by the current British and other large applications. Special arrangements may be necessary if the Fund is to meet these applications without cutting back on its assistance to other countries which need it. In any event I consider it essential that those countries with relatively strong balance of payments and reserve positions which have not yet made their currencies usable by the Fund should do so as soon as possible.

Conditions in foreign exchange markets have been far from satisfactory in recent years. Severe fluctuations in exchange rates have posed serious problems for many countries, especially for those smaller countries like Ireland for whom, because of their large external trade, stability in exchange rates means so much. It is regrettable that the guidelines for floating, suggested in the IMF and agreed upon more than two years ago, were not more strictly observed. There remains, therefore, the formidable challenge to the international financial community to establish greater stability in exchange markets. Stable domestic systems are, of course, a prerequisite for orderly exchange arrangements. In all of this it must be appreciated that there is an even greater obligation on large industrial countries to pursue policies conducive to more stable exchange conditions. While a stable international financial system requires strong roots that are properly nourished in member countries, such a system needs a proper international environment, to be provided by the Fund, in which to grow. Much will depend on the International Monetary Fund in its role of overseer. . . .

The foundation stone for building a new international financial order has now been laid. It is up to us to work this system so as to facilitate the further development of a stable responsible order and avoid the recurrence of those problems which have bedeviled the international financial community in the past.

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

It is a great pleasure for me to participate again in this joint Annual Meeting of the Fund and Bank, particularly because this year our venue is in Asia, and in this lively cosmopolitan city of Manila. I wish to join my fellow Governors in expressing my sincere gratitude to the people and the Government of the Philippines for their warm welcome and to His Excellency President Marcos for his inspiring opening address. I also would like to join with others in extending a hearty welcome to Papua New Guinea as a new member of the Fund and Bank.

May I also take this opportunity to extend my deep thanks to Mr. Witteveen and Mr. McNamara for their dynamic and untiring efforts toward structuring a new international monetary system, relieving the pressure on the external payments of member countries, and expanding the transfer of resources to developing nations.

The Fund and Bank Annual Reports point out that the economy of the industrial countries as a whole is well on the way to recovery from its most severe recession in four decades, while the developing countries are still, to varying degrees, in the midst of readjustments to the economic shocks which engulfed them in the past two years. With reduced real income and mounting external debt service payments, the economic outlook of many non-oil developing nations is indeed bleak. Nevertheless, the prospect, both in the short and longer term, will and can be improved if more fundamental and comprehensive cooperative efforts are made between the industrial and developing nations, and additional resources are transferred in time from the industrial to the developing economies.

In this connection I wish to stress that the major industrial countries should recognize their responsibilities for maintaining the stable and orderly expansion of the world economy, which will, in turn, enable individual nations to strive for a more outward-looking external policy to expand global trade in general and to reduce the payments gap between the industrial and developing nations in particular. It is desirable, in this regard, that the restrictive import measures often adopted by the industrial countries in the recent past on imports from the developing countries be relaxed and liberalized.

In consonance with these national and international cooperative efforts, the desire of developing nations for self-reliance will be fulfilled if these nations pursue appropriate economic policies to increase domestic savings, promote export earnings through diversification, accelerate the industrialization process, and expand agricultural production. The longer this development process is delayed in developing countries, the lesser will be the chance for the international economic system to operate in harmony.

I wish to compliment the Interim Committee on the fruitful work done by its members. Because of its wise and patient work, the Proposed Second Amendment of the Fund Articles of Agreement is in the hands of the member countries for ratification. This amendment will provide better working arrangements for instituting a durable new international monetary system under a markedly different international climate from that prevailing at the time of Bretton Woods. I believe that all of our member countries wish to put this amendment into effect as soon as practicable.

With respect to the Development Committee, it has also rendered valuable services in the past two years. In the light of urgent needs for transferring additional resources to developing nations, I feel that this Committee’s work should be extended for another two years.

Now, I would like to offer my few observations on the second amendment of the Articles of Agreement and its operational guidelines. First, inasmuch as the developing countries will continue to face difficulties in payments adjustments, international reserve management, and transformation of their economic structures, it is highly desirable for the Fund’s operations that the unique economic circumstances that may face developing countries be specially taken into account in applying the provisions of the new Articles to the Fund’s surveillance over exchange rate policies and the use of currencies of all member countries. Also, in the light of a relative decline in Fund liquidity, a new pattern of distribution of international liquidity, and an increasing need for access to the Fund’s resources by member countries, particularly for the less developed countries, I think that the prospective share of developing countries in the Fund quota is inadequate. In this regard, an additional creation of special drawing rights should be considered in the near future, according special regard to the needs of developing member countries.

Second, I welcome the recent liberalization of the compensatory financing facility and the provisional extension of the credit tranches, which have contributed materially to the payments adjustments of member countries. However, in order to meet more adequately the temporary resource needs of primary producing countries at such times as world economic conditions deteriorate abruptly, I think there is a genuine need for further improving the compensatory and the buffer stock financing facilities.

Third, I wish to note particularly that despite the pronounced intention of liberalizing the restrictive regime under the Fund’s Articles and of adhering to the spirit of the Rome communiqué, there has been an increasing tendency to introduce nontariff restrictions on the import of manufactured goods from developing countries. Although this may not be its domain, I urge the Fund to find ways and means to ease such practices. . . .

In conclusion, we are and will be living in a world in which nations are becoming more interdependent. The lessons we have learned from the past economic turmoil suggest that we can build a better world community for the benefit of all nations, whether big or small, if we better comprehend the global issues in their entirety and act upon them collectively with due responsibility by all concerned.

Statement by the Governor of the Fund for New Zealand—R. D. Muldoon

I join the other speakers in thanking, on behalf of my delegation, the Government and the people of the Philippines for their warm welcome and hospitality. I acknowledge and thank the Managing Director of the IMF and the President of the World Bank and their staffs for their considerable effort and success in providing financial assistance for the many countries still experiencing severe financial shortfalls. Outstanding drawings and disbursements from the Fund and Bank are at an all-time high and reflect the essential role of the two institutions in the field of international financing.

New Zealand and the International Economic Scene

Economic expansion has once more resumed in the industrial world, and the industrial countries are absorbing more imports from the primary producing countries. For the first time in three years the massive current account deficit of the primary producing countries has not increased, although it is still expected to be $42 billion compared with $51 billion last year.

While this improvement is welcome, it still leaves most primary exporters with untenable balance of payments positions. This is the result not only of continuing unsatisfactory prices and access for many primary exports, but also of the impact of world inflation on their import prices. New Zealand again finds itself seeing these issues through the eyes of a primary producer as do so many of the developing countries. We have this special problem in common with them.

The effects of the international recession of 1974 and 1975 were severe for the New Zealand economy. Stringent measures were essential to hold government expenditure and to adjust economic activity to a more viable level. Recently we have experienced a small improvement in our balance of payments as the strengthening economy in the industrial world results in an increase in the prices of our export products. During 1976 the rise in our export prices edged ahead of rising import prices, whereas in 1975 import price rises eroded away any improvement in the export sector. Our recovery will still lag behind that of the industrial countries.

That New Zealand has not resorted to restrictive measures of any consequence in the import field is an indication of our belief in the principle of international trade cooperation, despite the continuing restrictions confronting our primary exports in industrial countries. These unjustified restrictions create considerable difficulties for New Zealand’s economic progress.

The message is very clear for New Zealand and the rest of the primary producing world. The way out of our economic difficulties is by trading. To do this we must have markets and prices for our products that are considerably more stable than in the past.

Official Development Assistance

As I have mentioned, New Zealand is still confronted with serious economic difficulties, and as New Zealand’s capacity to expand development finance is inevitably governed by its own economic strength, there has been a temporary slowdown in the expansion of our official development assistance. This slowdown was not adopted lightly, and New Zealand will resume progress toward the target of 0.7 per cent of gross national product as soon as economic circumstances allow. That depends on the willingness of our trading partners to lift restrictions to enable us to sell more to them.

In allocating its official development assistance New Zealand has attached priority to sustaining significant growth in absolute terms in bilateral aid to our near neighbors in the South Pacific. Almost 60 per cent of our total bilateral aid will be directed to the South Pacific in this financial year. This reflects not only New Zealand’s geographical proximity to the countries of the South Pacific but more importantly, our close ties with those countries as more of them move to independence.

Deficit Financing

The massive external deficits of primary producing countries placed a considerable strain on all sources of international loan finance. The international banking system responded well to the challenge and can be congratulated on the extent to which the deficits were financed. The Fund and Bank stretched their resources to the limit to make up the shortfall. Balance of payments finance requirements are likely to be high for a further year or two, and I would hope that the Fund in particular will continue to make its drawing facilities readily available. Accordingly, New Zealand welcomes the measures designed to increase the Fund’s liquidity and has agreed to the New Zealand dollar being freely usable in Fund transactions. We were also pleased to see the compensatory financing facility liberalized and the Trust Fund established.

The Fund and the International Monetary System

New Zealand accepts the introduction of the amended Articles of Agreement and has legislated accordingly. It is our hope that the revised Articles will help to restore the IMF to a stronger position in the international monetary system and will enable it to adopt a more positive role in supervising international financial arrangements. New Zealand believes that an increase in international financial and economic cooperation will be essential during the next few years if the continuing economic expansion is to occur in a balanced and controlled manner and if world trade is to continue to expand.

The Fund is in the best position to provide the necessary lead to the international monetary system in the expansion process. We particularly welcome the new Article IV and are pleased to hear of the continuing discussions that are occurring between major countries on the evolution of the exchange rate system and on balance of payments adjustment. I hope that full agreement on these matters can be reached soon.

In particular, we are anxious to see greater stability in the exchange system and an increased degree of discipline in economic policy matters. It must be recognized that the amended Articles simply facilitate less discipline by those not willing to take politically difficult decisions. There is no substitute for sound national economic management, and to the extent that political expediency diminishes this, so will a move to a more just international economic order be delayed. There must be greater coordination of monetary policy and increased responsiveness in controlling inflation. New Zealand supports these objectives and will continue to cooperate with the Fund in seeking to move toward these goals.

Statement by the Governor of the Bank for Thailand—Amnuay Viravan

At the outset, I wish to express our gratitude to the Government and the people of the Philippines for bringing us all together in the lovely city of Manila for the present Annual Meetings of the IMF and the World Bank. I am sure that our deliberations will be enhanced in this ASEAN setting and ensure the continued economic and financial cooperation between developed and developing countries to bring about the betterment of the masses of the developing world. I would also wish to express our warm welcome to the new member countries, Grenada, Papua New Guinea and the Comoros and, similarly, the Socialist Republic of Viet Nam to the IMF and IBRD family. . . .

Since 1973, developing countries have been burdened by a series of events largely beyond their control. World trade and investment cutbacks have severely hampered developing countries having no primary energy sources, especially in the reduction of export incomes. Increased costs of imported capital goods severely delayed urgent development projects and many countries had no recourse but to seek additional financing at market rates or to postpone them. The level of capital and concessional assistance from the developed countries still remained far below the increasing requirements of the developing countries. The recourse to international financial markets at commercial rates, on the other hand, has added substantially to the already heavy debt servicing problems of developing countries. . . .

Thailand has truly benefited from the assistance of the IMF and the World Bank. . . .

I wish to express our full support for the second amendment of the Articles of Agreement under ratification by the members of IMF, which sets forth new steps in the areas of international monetary cooperation. We welcome in particular the agreement giving the buffer stock financing facility the same status as the compensatory financing facility. Furthermore, we would like to urge that the requests by members for drawings should be considered with greater flexibility to ensure its full effectiveness when the buffer stock facility becomes operational.

Similarly, it is our hope that further steps will be taken to liberalize the compensatory financing facility. For example, the real value of the export shortfall should be used in the Fund’s formula for calculating the amount of drawings on concessional terms for balance of payments financing. Thailand has made use of this facility in the past year to cover a substantial current account deficit. Liberalization of the terms would enable the Fund to respond more positively to meet the liquidity and resource needs of many developing countries.

The outlook for all of us at this meeting looks far brighter than in the past, but many problems still lie ahead. The needs of the teeming millions in the developing world must be met, but this can be achieved only by true cooperation among us all. Let us hope that it can be done.

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

I join the previous speakers in expressing my gratitude to the authorities and the people of the Philippines for their cordial welcome and their feelings of friendship and warm hospitality.

I would also like to express my deep appreciation to Messrs. Witteveen and McNamara for the sound appraisal of the latest developments on the world monetary and economic fields this morning. Since we last met in Washington and after the Jamaica agreements, the international environment improved, and the recovery now under way in the industrial countries augurs well for the promotion of adjustment by deficit as well as surplus countries. In addition, the second amendment of the Fund’s Articles of Agreement, which the Board of Governors approved a few months ago and is now before our Governments for acceptance, will definitely help the functioning of the international adjustment process. In particular, the obligations regarding exchange arrangements contained in the new Article IV represent a major step forward for the establishment of an international “code of operation”—a prerequisite for closer economic cooperation and solidarity which is so urgently needed.

The experience of the last few years has demonstrated that high inflation rates entail large price and cost differentials and that the correction of their effects requires appropriate adjustment of the exchange rates. The resulting unrealistic rates have often brought about unwieldy changes in the domestic economic variables. Thus, in a free floating system, an internal disequilibrium is created, which tends to produce a perverse adjustment to the speculatively induced external disequilibrium. No doubt neither free floating nor an inadequately managed float can prevent those speculative capital movements from causing prolonged exchange rate distortions and internal dislocations.

Floating has not completely prevented recurrent monetary crises caused by speculative explosions, although it has mitigated their effects; monetary anarchy continues as the international financial markets are still dominated by “speculocracy.” Under present conditions, only a system of rational floating, coupled with a sufficient degree of coordination of monetary policies mainly by the major industrial countries, could safeguard international monetary order. Guidelines should be set up that would discourage intervention aimed at manipulating exchange rates to gain competitive advantage. To this end, monetary authorities should allow market rates to move gradually and smoothly to reflect the impact of inflation rate differentials and structural imbalances, but resist destabilizing speculative outbursts by means of collective offsetting action. Appropriately managed floating could resiliently weather sporadic speculative attacks and achieve de facto relative stability in exchange rates, without a de jure inflexibility of fixed rates, which present a constant invitation to riskless speculation and a source of recurrent financial and monetary upheavals.

At this point it should be emphasized that orderly exchange conditions could be ensured if high inflation rates and the resulting wide inflation differentials were suppressed. So long as the subversive inflationary tremors continue, no international monetary superstructure can hold, and the present international monetary nonsystem will continue indefinitely.

Recent monetary agreements have failed to deal with some of the major causes of disequilibrium in the international monetary system. We still lack arrangements for controlling the expansion of international liquidity and a mechanism for ensuring a symmetrical adjustment process, both so strongly recommended by the Committee of Twenty. These deficiencies are interlinked for two reasons: on the one hand, a lack of symmetrical pressure on reserve currency countries to correct persistent balance of payments disequilibria leads to inordinate expansion of world liquidity, and, on the other hand, the existence of excessive liquidity delays the adjustment process.

Moreover, the uncontrolled expansion of the Eurocurrency market allows nonreserve currency countries with payments deficits to increase unilaterally global reserves by borrowing in those markets, and thus to defer in many instances the required corrections in their domestic economic policies. As a result, countries with access to the Euromarkets avoid using the conditional facilities of the IMF, thus depriving the Fund of the means to ensure the discipline of its members. It is imperative that control of international liquidity, supplied on a conditional and nondiscriminatory basis, be restored to the Fund.

In these circumstances, any sensible discussion of the control of international liquidity is associated with the central role played by the dollar since the last war. It is possible that this role would diminish if a common European currency were created. It is also possible that an improved SDR might, in part, play this role. Nevertheless, such possibilities will take years to materialize; meanwhile the dollar will continue its role as the leading reserve, intervention, and transaction currency of the world’s monetary system. Indeed, the present system might be called a “de facto dollar standard” which, however, is inherently unstable.

These considerations indicate the need to reform the existing international monetary infrastructure in such a way that responsibilities will be shared more equitably among the major industrial countries. In this context, a careful examination should be undertaken of many interconnected lines of action, such as a more symmetrical asset settlement, a better system of controlling international liquidity, the promotion of the SDR as the primary reserve asset, the ensuring of an adequate flow of development capital, and the establishment of a more effective system of multilateral surveillance.

At this time it would be premature to present an all-encompassing scheme, since neither political acceptability nor technical agreement on its contents appears likely. This should not preclude, however, the possibility of exploring the requirements toward further strengthening the efforts for stability and growth. At this time, the deceleration of inflation in most industrial countries and the moderate but sustainable recovery of the U.S. economy favor such efforts.

The international community should face the challenge originating in a world moving toward a multicurrency structure as is evidenced by the increasing international use of some currencies other than the traditional reserve ones. The emerging reserve role of several strong currencies, as delineated in the Annual Report of the Fund, should be favored so that the stability of the international financial markets will be promoted.

Among the many ideas that could be considered in order to institutionalize those trends, I would like to mention a multicurrency scheme that I had proposed under different circumstances in 1961 and which might be helpful.2 Modified to suit present conditions, it would call for multicurrency reserves and intervention, guided but not forced by an organization such as the Fund. Multicurrency intervention is not meant as a means of defending a band of stable but adjustable par values, as the Committee of Twenty has considered it, but as the indispensable armory of a rational float, in accordance with guidelines to be adopted under the amended Articles. It would relieve the dollar from the exclusive burden of being involuntarily implicated in any financial trouble of every other currency. Multicurrency reserves will introduce for the first time a symmetrical adjustment process for all reserve currency countries. This in turn might hopefully induce them to implement monetary policies aiming at achieving both domestic and external equilibrium.

A multicurrency scheme would call for all major industrial countries to allow their currencies to become reserve assets. They should be prepared to build up gradually sufficient balances in major convertible currencies which would be used as a masse de manoeuvre in the exchange markets. Incidentally, this would also eliminate the present disparity in foreign exchange policy weapons between the United States and other industrial countries.

The whole system could center around the Fund, whose organization and experience would provide a solid foundation. Day-to-day decisions might possibly be delegated to a standing committee which could be reporting to the Council foreseen in the amended Articles of the Fund. Weekly committee sessions would continuously review monetary and economic developments and exchange rate policies of the participating countries.

The Fund should be authorized to accept deposits from member countries in convertible currencies other than their own. Furthermore, a fixed percentage—or even one graduated with size—of the reserves of each country might be agreed in advance to be kept in the form of Fund deposits. These, although freely usable in case of need by the owner country, will be redeposited by the Fund in a way designed to counteract temporary unsettling conditions or deficits not requiring corrective balance of payments adjustments. In parallel, the possibility of a ban on placements of official reserves in the Euromarkets should be considered.

The multicurrency design renders possible for the alternating deficits of several reserve centers—rather than the persistent deficit of a single country—to become sources of world liquidity. This characteristic minimizes the conflict between quantitative expansion and qualitative deterioration of reserve assets. Moreover, the ample availability of internationally managed reserves will enhance confidence in the stability of financial markets, as the Fund will gradually be universally perceived as a kind of “lender of last resort” in case of a major threat against the international financial community.

The multicurrency scheme is not incompatible with the important role that the SDR has to play as it provides for the substitution of any excessively available reserve currency or any other unwanted reserve asset into SDRs. In this regard, although member countries will be freely allowed to substitute foreign exchange holdings for SDRs, if a particular reserve currency is substituted at an excessive rate, the Fund will examine the situation with the affected country of issue and should be able to impose conditions similar to those which are presently envisaged for stand-by lending.

It should be repeated that it is not the purpose of the multicurrency scheme to supplant the SDR but to facilitate in bringing about orderly monetary conditions until the time is mature for it to become the center of the international monetary system.

A variation of the proposed scheme would call for a matching of surpluses and deficits of the participating reserve centers and thus implies the necessity of a strong internal adjustment process. In parallel, any increase in world liquidity would be exclusively effected through SDR allocations. I do not plan, however, to examine this modification, because I do not consider it as politically feasible in the foreseeable future.

Finally, any international monetary system which does not provide for a satisfactory solution to the adequacy of the supply of development capital to the less advanced regions of the world is neither just nor viable in the long run. Therefore, an agreed percentage of the reallocation activities of the Fund, implied by the multicurrency scheme, should be connected with subsidized loans to developing countries. Furthermore, I would like to mention that the restoration of a reasonable degree of price stability, which is a prerequisite for sustained economic growth and employment, could not be attained without the cooperation and solidarity among the major industrial countries and those countries of the developing world, all within the framework of a firm surveillance of their respective policies by a Fund with enlarged responsibilities and scope.

In concluding, I would like to express my appreciation for the quality of the work performed by the staffs of the Fund and the Bank, which proved to be an indispensable prerequisite for the successful conclusion of the negotiations that led to the revision of the Articles of Agreement.

Statement by the Governor of the Fund for Malta—Daniel M. Cremona

On behalf of the Government and the people of the Republic of Malta, I salute the President, the Government, and the people of this enchanting country and thank them for their kind hospitality. I would also like to congratulate the organization of this congress for the excellent facilities they have put at our disposal.

An analysis of the world economic situation during the period since last year’s Washington meeting reveals an unchanged scenario of complex problems to which an effective solution has yet to be found, albeit against the background of a somewhat improved economic climate. As has been well brought out in the Fund’s Annual Report, 1976 is proving for the world economy the first year of recovery from its most severe recession in four decades. The process of recovery in the industrial countries is now well established, with production expanding and inflation tending to ease, though admittedly from very high levels. A by-product of the incipient recovery has been the increased buoyancy of primary commodity prices and the improved prospects for the export earnings of primary producing developing countries resulting therefrom.

While we welcome these developments, we cannot but emphasize, both as a consumer developing country and as a member of the Group of 77, the great dangers inherent in the current economic upswing. Relief at the cyclical recovery in world output and trade, and at the consequent improvement in the terms of trade of the developing countries, should not be allowed to divert our attention from the structural imbalances of the existing system and from the imperative need to pursue the objectives of the New International Economic Order. Indeed, we have only recently, at UNCTAD IV, had yet another example of the great divide which separates the expression of noble ideals and their active pursuit. The uneasy compromise reached at Nairobi revealed once more that the political will to bring about a truly equitable world economic order exists in only a few of the countries in whose power it is to secure and put into practice the necessary structural changes, both at national and international levels. The problem was correctly diagnosed at the Group of 77’s recent Colombo meeting, when it was agreed that the breaking-up of the resistance to the struggle for the new order represents the primary task of the nonaligned and other developing countries.

Apart from the increased tempo of world economic activity, the past year has also witnessed some important developments in the area of international monetary reform, and particularly in the Fund’s capacity to meet members’ requirements. In this sense, the approval by the Board of Governors of the Proposed Second Amendment of the Articles of Agreement was a major step forward in adopting the Fund and its operations to present-day conditions. We welcome in particular the provisions relating to the reduction in the role of gold, changes in the SDR designed to enhance its role as a major reserve asset, and the simplification and expansion of the types of financial transactions which can be conducted in the Fund’s general operations. The rules concerning exchange rates, however, open the way for the institutionalization of floating, albeit controlled, and this, as we have reiterated several times and as recent experience has clearly demonstrated, is inimical to the interests of developing countries. The recent fresh turmoil on the foreign exchange markets has demonstrated this further.

Also worthy of note during the past year was the completion of the Sixth General Review of Quotas, which acknowledged the new distribution of world economic power, and which will substantially increase the access of member countries to the Fund’s resources. Other positive developments were the temporary enlargement by 45 per cent of the size of each credit tranche and the liberalization of the compensatory financing facility. Here again, however, our approval is subject to reservations. For while the Fund has taken some steps to increase the flow of liquidity to countries facing payments difficulties, the cost of the finance thus made available remains relatively high and only serves to accentuate the borrower’s debt servicing problems. The large capital inflows to the non-oil developing countries during the past few years, often borrowed on terms harder than those for official development assistance, have left behind them a legacy of enormous debts which seriously threaten the development prospects of these countries. It is therefore necessary that this problem be tackled by an appropriate conference, so that a coordinated effort can be made at finding a compromise final solution, rather than the present piecemeal approach which tends to perpetuate the problem. In this context, it is obvious that any arrangement on debt relief can only be considered satisfactory to the extent that it is accompanied by measures designed to protect the export earnings of developing countries from the kind of exogenous factors which in the past have forced countries to become heavily indebted. As far as the Fund is concerned, it is unfortunately true to say that the “transfer of resources” objective embodied in the project of international monetary reform has not been actively pursued.

Allow me to bring to your attention the problems imposed by the existing world economic order on developing countries which, like Malta, lack an industrial base as well as raw materials, and whose economies are particularly open to outside influences. This category of countries has been severely affected by inflation and recession, but is nevertheless considered ineligible for concessionary assistance by international organizations, such as the Trust Fund and the IBRD. This leads us to reaffirm our belief that the prevailing emphasis on such criteria of need as gross national product per capita, balance of payments performance, and the level of external reserves is wrong and is working to the great disadvantage of middle-income developing countries which, though they have moved forward a little, have much further to go. To ensure a more objective and just assessment of need, more emphasis should be placed on such factors as the size and openness of an economy, the import content of its exports, the depletability of its resources, and the lack of raw materials and energy resources. Furthermore, access to special funds created to stabilize raw material and commodity prices for developing countries which are consumers of commodities should be made more broad and automatic. Such countries, of which my own is a prime example, should be given automatic compensation when raw material prices are raised through action under commodity arrangements. Otherwise such countries, through reform in this area, would be getting the worst of both worlds. At the same time we call upon the Fund to include in the program of monetary reform, in the context of the new role of the SDR, measures designed to protect the purchasing power of the reserves of developing countries, including those which fall in the category described above.

In an imperfect world, many developing countries are making strenuous efforts to improve their situation through self-help. Improvement in this context does not mean simply achieving economic growth, an increase in the total wealth of a country. Economic growth, unless it is socially oriented, is not merely meaningless, it is positively harmful. This is why over the past five years my Government, while striving to increase total wealth, has striven even harder to reduce disparities of income and wealth in order to make our society progressively less unequal and more humane. While driving home the need for self-help by all, especially the least advantaged, we have sought to ensure that government measures gave impetus to the objective of achieving a fairer society. We shall continue to pursue this policy in the years ahead.

I must submit that the international community, too, should apply itself more seriously to such an approach. Each and every country among us must, in the first instance, help itself. The engine of progress must first be fired internally. But persisting deep-rooted economic imbalances in the international community, coupled with a turbulent environment within which the rich have an inbuilt head start can make even the most earnest and strenuous of attempts at self-help seem futile.

This is why bodies such as the International Monetary Fund, and the World Bank as well, must not merely reflect the existing state of balance in the world economy. Such bodies must supply the thrust for a fundamental restructuring and reordering of international economic and social relations to bring about an ever fairer and less unequal world. Though much is said, all too little has as yet been done. It is the duty of all of us, and particularly of the stronger among us, to make fresh efforts in this direction and to do so not merely out of a regard for others but also out of the conviction that this objective is the best basis for a better and more peaceful world in which the interests of all our countries, all our peoples, are best served.

October 4, 1976.

See pages 295–99.

X. Zolotas, “Towards a Reinforced Gold Exchange Standard,” Bank of Greece, Athens, 1961; “The Multicurrency Standard and the International Monetary Fund,” Bank of Greece, Athens, 1963; “Remodelling the International Monetary System,” Bank of Greece, Athens, 1965; and “Alternative Systems for International Monetary Reform: A Comparative Appraisal,” Bank of Greece, Athens, 1965.

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