Discussion of Fund Policy at Third Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
October 1976
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Statement by the Governor of the Fund and Bank for India—C. Subramaniam

At the outset I would like to thank the Government and the people of the Philippines for their warm welcome and generous hospitality so kindly extended to all of us, and the excellent arrangements made for this meeting. I have great pleasure in extending a special welcome to the Comoros, our newest member, and the observers from Cape Verde, Maldives, Sao Tome and Principe, Seychelles, Guinea-Bissau, and Surinam.

It is a matter of satisfaction that the recent trends and the prospects for the growth of world output and trade show considerable improvement over the performance of the world economy in 1975. According to available indicators, economic recovery in industrial countries seems now to be firmly established and, unlike 1975, the volume of world trade is expected to show a sizable increase in 1976. However welcome these developments may be, they must not distract our attention from the many sources of uncertainty and the deep-rooted structural imbalances which characterize the functioning of the international economic system. Unemployment and inflation rates in industrial countries still remain high by past standards. There is also the danger that the synchronization of recovery and economic expansion in major industrial countries may lead to a repetition of the boom-bust experience of 1972–74. And though there has been a moderate improvement recently in the external accounts of many non-oil developing countries, we cannot afford to lose sight of the fact that they are still faced with a most difficult and vulnerable external position.

I do not have to remind my fellow Governors how seriously the events of 1974–75 disrupted the orderly implementation of development programs in non-oil developing countries. The sharp increase in the balance of payments deficits of these countries and shortage in the flow of concessional funds left them with no alternative but to borrow abroad on commercial terms on an unusual scale. This has gravely aggravated their debt service problem, and their economies have become even more vulnerable than they were to sudden declines in capital inflows or export receipts.

In these difficult circumstances, and faced with these challenges, we in India have had to adopt harsh and politically difficult measures to stabilize our economy and our balance of payments. Through drastic cuts in domestic consumption we managed to increase our exports last year by 8 per cent in volume at a time when world trade declined by 4 to 5 per cent. Drastic measures to curb consumption of petroleum products have been taken. Through tough fiscal and monetary policies we have succeeded in bringing inflation under control and have also been able to impart a new element of dynamism to our agriculture and industry. As a result, our growth prospects have now improved. However, I must state that the effects of the domestic measures adopted by us can be easily neutralized by a deterioration in the international environment, such as an increase in import prices or uncertainty of aid flows.

The international community cannot but be seriously concerned that the current account deficit of the non-oil developing countries as a group is expected to remain as high as $32–33 billion in the next one year. Unless ways are found to finance this deficit in a manner which does not aggravate their already serious debt service problem, their growth prospects are bound to remain highly uncertain. This august body must take a serious view of a recent World Bank finding that low-income developing countries are unlikely to be able to attain a per capita growth rate of more than 2 per cent per annum during the next decade, even with a substantial expansion in their export earnings and improved policies to mobilize their internal resources. If this trend is allowed to persist, the gap between rich and poor countries will become a vast unbridgeable gulf.

Developing countries welcome the recovery in developed countries. But there is now irrefutable evidence that the gap between rich and poor countries cannot be narrowed without a basic structural reform of international economic relations. It is this recogntion which finds expression in the demand for a new economic order. As the Prime Minister, Mrs. Indira Gandhi, pointed out at the recent Conference of Heads of States and Governments of Nonaligned Countries:

Patchwork remedies are no substitutes for genuine reforms. We need a global perspective plan which will relate resources to human needs, and provide a system of early warnings of imbalances and disasters. Improved terms of trade and credit, easier access to markets, and better value for raw materials and industrial goods, are all essential to secure greater equity in the distribution of benefits.

In this context, we are disappointed at the results of the recent session of the United Nations Conference on Trade and Development and at the slow progress being made at the Conference on International Economic Cooperation in Paris.

The confrontation of earlier decades between the privileged and the poor within developed countries themselves appears now to be extending to the relations between developed and developing countries. Several developed countries which were wise enough to solve this internal problem amicably have profited as a result.

If the bitter and destabilizing consequences of such confrontation in the international field are to be avoided or minimized, it will be necessary for the developed countries to apply the lessons of their own experience to the international field. The most important action called for is adoption of effective measures which will help improve substantially the projected growth rate of low-income developing countries, and the poorer sections of their population, by increased aid and greater access to markets. The efforts of each developing country are, no doubt, of crucial importance, but need to be supplemented by international action. Developing countries have too long been buffeted between inadequate flows of aid and trade, neither of which has been forthcoming in the desired measure because of the real or supposed domestic difficulties of developed countries. This deplorable situation cannot continue for long.

The demand for a New International Economic Order can no longer be dismissed as utopian. It is my hope that our deliberations this week at the meetings of the Interim Committee and the Development Committee and at this Annual Meeting may help to rekindle hope and revive our faith in international economic cooperation as an effective instrument for reducing inequalities in income and wealth among the countries of the world. As was stressed by our Prime Minister at the Colombo meeting of nonaligned countries, India stands for promoting greater economic cooperation between developed and developing countries and not for economic confrontation. It is in our view crucial that the community of nations should jointly and peacefully achieve that elusive equation between global production and consumption that yields the right share for each nation.

As I see it, the most important task before us this week is to ensure that both the World Bank and the IMF are properly equipped to play their legitimate role in assisting the process of economic and social transformation of the developing world. . . .

. . . Events of the last two years have greatly added to the urgency of debt rescheduling being considered as an essential element of a policy of global economic cooperation. Debt rescheduling operations should be viewed in a long-term perspective as providing a much needed increase in the transfer of real resources for development. Short-term considerations, such as movements in reserves, or so-called ability to meet payments obligations, ought not to color unduly this long-term perspective. This issue needs to be considered in depth, and I would hope that the Development Committee will focus attention on it in the coming months. . . .

Coming to Fund matters, I am happy that, due to the initiative of Mr. Witteveen, the IMF took significant steps, particularly through the introduction of the oil facility and the liberalization of the compensatory financing facility, to meet the large deficits of member countries in the last two and a half years, following the sharp increase in oil and other prices. The oil facility was unfortunately short lived, but of great use while it lasted. The Managing Director, the Executive Board, and the staff deserve to be complimented for their unremitting efforts.

As we look ahead, an urgent task on which we must continue to focus attention is current account deficits of non-oil developing countries, which on the latest IMF estimates will still be running at the annual rate of $33 billion in the first half of 1977. This forecast is based on the assumption of a relatively large increase in the volume and value of the exports of these countries and a much smaller rise in the value of their imports. Even if these optimistic assumptions turn out to be correct, the persistence of an annual deficit in excess of $30 billion is a major cause for concern, particularly as the Fund’s oil facility is no longer available. The resources expected to flow to the most seriously affected countries from the Trust Fund will be less than envisaged earlier, will take four years to disburse, and in any case will be far from adequate. The liquidity of the Fund has by historical standards reached a very low level at a time when many of the developing countries will find it increasingly difficult to raise borrowings in the commercial market, because of their level of indebtedness, and the serious debt-servicing problems they are facing.

In this situation, the Fund should be able to replenish its liquid resources, and members with large surpluses should not remain averse to any reasonable measures considered necessary for this purpose. The second amendment of the Articles of Agreement and the new quotas should be made effective soon. It is also necessary to expedite the preparatory work for the Seventh General Review of Quotas, so that it will be possible to complete the work before the scheduled date of February 9, 1978. The quota increases in the past were inadequate in relation to the increase in world trade, and also failed to give appropriate representation to the greatly increased membership of developing countries in the decision-making processes of the Fund. Whereas in 1948, the Fund quotas amounted to 15 per cent of world trade, these will be only around 4 per cent of world trade, even after the forthcoming Sixth Review becomes effective. The number of developing countries in the Fund membership has gone up from the original 35 to over 110; their collective voting power unfortunately has not changed significantly. If these 110 developing countries with a population of about 2 billion continue to be relegated to the position of an unimportant minority, the Fund may be seriously handicapping itself in its task of achieving the kind and degree of international cooperation that is required to ensure equitable management of the monetary system.

I would like briefly to refer also to recent developments in international monetary reform. On the basis of the Jamaica agreement in the Interim Committee, which was basically in the nature of a prescription prepared and handed out by a group of rich countries, the prolonged process of drafting the second amendment of the IMF Articles has been completed. The draft amendment provides for greater flexibility to individual countries in their exchange rate policies, along with wider powers of surveillance to the Fund in this field, a framework to eliminate the central position of gold in the operations of the world monetary system, and a declaration of intent to give the SDR a central role. One cannot but be disappointed, however, that little or nothing has been done to strengthen the SDR. The various other steps will prove to be of great advantage to the developed countries, without significantly improving the situation of developing countries which face grave difficulties in a world of floating exchange rates. The developed and financially powerful countries can use the flexibility in exchange rates to their own advantage, and I cannot help feeling that it will be extremely difficult to work out a method and procedure for surveillance that is truly objective and could be administered evenhandedly. There is a risk that the developing countries will be placed under great pressure to adjust their exchange rates to correct their balance of payments imbalance, even at the cost of their impoverishment. The process of adjustment, about which so much has been said, will, I fear, bear more heavily on them than on the developed countries.

I would like to refer to my statement made at the last Annual Meeting that the measures taken concerning gold will vastly raise total international liquidity and particularly benefit the small group of industrial countries that hold over four fifths of the gold stocks. Already the distribution of international reserves is grossly unfavorable for the overwhelming number of developing countries, having regard to their needs and the inadequate facilities available to them for alternate sources of financing. It may be relevant to note here that the proportion of international reserves accounted for by gold, and held mainly by developed countries, will go up from 18 per cent in 1975 to nearly 40 per cent as a result of revaluation. It is, therefore, most important that the above arrangements should not be made the excuse for postponing the creation and distribution of liquidity through the allocation of SDRs in a manner appropriately advantageous to developing countries.

We have chosen these two unique international institutions to play a vital role in ushering in a new economic order in the world. On their successful functioning depends the future of the one billion poor to whom a moving reference was made by Mr. McNamara in his speech yesterday. The real question is: will those who are in a position to do so provide these institutions with the necessary means to fulfill objectives to which we stand pledged, namely, eradication of poverty and human degradation?

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

I wish to thank most warmly the Government of the Philippines for the splendid organization of our thirty-first Annual Meeting. I should also like to express my appreciation for the addresses by the Managing Director of the IMF and the President of the World Bank which outlined very well recent achievements and the main problem areas of the world economic and monetary order. Let me also welcome our new member, the Comoros.

World Economic Situation

Since our last Annual Meeting, the state of the world economy has materially improved. The worst wave of inflation-recession in the postwar period has given way to reasonable growth, and the pace of world inflation has substantially decelerated. These positive developments, however, do not mean that conditions have been restored for a sustainable and balanced growth of incomes without inflation. In fact, investment continues to be sluggish, inflation rate differentials are still quite large from country to country, the shocks caused by the energy crisis have not yet been reabsorbed by many countries, and disequilibrating factors of a structural nature are still present and might impair over the medium and long run the stability of international economic relations. Moreover, there is a risk of renewed tensions on resources as business cycles in individual countries appear to be moving in approximate synchrony.

While, overall, the economic situation is better than last year’s, the world payments situation remains a cause for serious concern as there are important imbalances among industrial countries and huge current account deficits by developing nations as a group, which could hamper continued economic expansion. The economic recovery of the industrial world should help alleviate the balance of payments constraint in the emerging world. Nevertheless, these countries are likely to register again next year a $30 billion deficit in their combined current account. With their foreign indebtedness now totaling some $150 billion, their payments gap makes for an untenable situation which urgently requires new efforts by industrial nations and oil exporters.

In the three years since the abrupt increase in oil prices which caused a major structural change in the balance of payments of most countries, there still seems to be little agreement on how to share out the oil deficit, however defined, among oil importers. Thrusting the weight of the burden on the shoulders of the weaker members of the international community, many of which are in the developing world, does not seem to be an acceptable solution. Indeed, it not only makes for an unstable economic order, but it contains the seeds of international discord, and we all know that without a large degree of good will and cooperation among nations our collective problems cannot be alleviated, much less solved.

I have just mentioned that there are serious payments imbalances in industrial countries. Italy is a case in point. The difficulties in economic policy actions derive mainly from a change in the overall economic situation. Still, in the month of July we expected an expansion of gross national product (GNP) of 1.5 per cent and a balance of payments deficit of $2 billion. On the basis of the most recent estimates we forecast now a rate of growth of GNP in 1976 of approximately 4.5 per cent, a rate of inflation not exceeding 17 per cent, and a balance of payments deficit not lower than $2.5 billion. The high rate of inflation is due in no small part to the sharp depreciation of the lira in the first months of the year. The high degree of indexation of the Italian economy has blunted the usefulness of exchange rate depreciation since it leads rapidly to higher domestic prices.

The dimension of the balance of payments deficit, which exceeds the one previously expected, is not acceptable: it is the consequence of a rather sustained recovery of the Italian economy. In this context, the Italian Government has presented to Parliament an economic program which emphasizes the presence of two very stringent constraints: the need to restore equilibrium in our external accounts and to reduce the structural deficit of the public sector. The Government has proposed necessary measures of adjustment, with the reduction of consumption of goods that more directly affect the balance of payments (oil products, foodstuff, paper), the increase of tariffs and publicly administered prices, and the increase of public revenues, especially by reducing tax evasion.

The events of the last 10 days of September, which have disrupted the exchange markets, have had negative effects on our currency: the value of the lira has declined from Lit 840 per dollar on September 13, to Lit 859 on September 30. On October 1 it dropped to Lit 872, a decline of 3.8 per cent relative to September 13.

In these circumstances actions to stabilize our economy have been accelerated, after an appeal to the country by the Prime Minister. The Interministerial Price Committee has decided to increase, effective immediately, the price of natural gas and certain oil products. Moreover, it has been decided, with the agreement of the social partners, to increase in the next 15 days rates of public utilities, and certain administered prices and taxes, by a very substantial amount.

This measure will, on the one hand, reduce consumers’ purchasing power and, on the other hand, improve the financial position of public corporations, thus reducing the pressure that such entities exert on the Treasury. Current public expenditures for the year 1977 have been reduced by Lit 100 billion. Taxes on tobacco products have been raised, and will lead to increased revenues of an amount of Lit 150 billion.

The Italian Government has agreed with the European Economic Community to phase out gradually the 50 per cent deposit requirement on foreign exchange purchases, starting from October 15, so as to terminate it by April 15, 1977. This has partly influenced the behavior of economic agents, who expected termination of the deposit by next November.

As a consequence of this measure, and of the decline of the lira, the authorities have adopted restrictive monetary policy measures, which are needed until the fiscal and price actions mentioned above will fully exert their effects. On September 30, bank reserve requirements were increased by 0.5 per cent for an amount of Lit 550 billion. The discount rate of the Bank of Italy has been increased, effective Monday, October 4, from 12 per cent to 15 per cent, which will raise the rate on central bank advances to approximately 18 per cent. Compulsory financing in foreign exchange of exports with delayed payment has been raised from 30 per cent to 50 per cent of the value of exports. The Council of Ministers, in its meeting of October 1, has decided to introduce a tax of 10 per cent, effective for 15 days, on foreign exchange purchases.

Ten months ago in Jamaica we put the final touches to the lengthy and difficult process of reforming the international monetary system. My Government believes that the Jamaica accord represents the best compromise solution obtainable under the circumstances that have prevailed in the monetary and financial scene over the last year.

The new charter of the Fund, for which Italy has initiated ratification procedures, contains two essential features, admirably combined. First it restates with the necessary emphasis the basic principles of an international code of conduct which often in the past have not been adhered to. It is gratifying to note that in the midst of dramatic changes affecting the political, social, and economic fabric of our countries, the international community could agree once again on a broad range of policy objectives covering the adjustment process, the management of exchange rates, and international liquidity. At the same time, however, the Articles of Agreement now embody an element of flexibility and discretion that should enable the Fund to deal effectively with developments that might hamper the smooth functioning of the international monetary system. This should prevent the cumulation of imbalance that led to the demise of the Bretton Woods system.

It would be indeed sad to realize that, after having completed a major reform, our policy actions are still affected to a great extent by the rigidities and the asymmetries of the old regime. The problems that we are going to be confronted with in the near future are serious and difficult ones and they are not amenable to simple univocal solutions. We should therefore rely more than in the past on international cooperation and consultation to improve our mutual understanding of individual country problems and to design appropriate policy measures.

Implementation of the Jamaica Agreement

One major aspect of the Jamaica agreement which calls for further work is how to make the adjustment process more symmetrical. Without uniform treatment of all members the adjustment process places undue pressure on deficit countries, especially on those that need recourse to the Fund’s resources. I believe the Fund could play a decisive role in dealing with the adjustment process, provided it is capable of designing an effective strategy to be applied to surplus and deficit countries alike. Such a strategy should be developed within the firm surveillance over exchange rate policies and practices of all members that under the new statutes the Fund is required to exercise.

A more symmetrical adjustment process is closely linked to the state of, and prospects for, international liquidity. While fully recognizing that deficit countries have to adopt domestic stabilization policies to return to equilibrium, one cannot ignore the fact that the world is still confronted with oil-related structural surpluses and deficits which cannot be corrected in the short term. By their very nature, they will have to be financed. Opinions may differ as to the adequacy of international liquidity. The Annual Report of the IMF points out that it has become increasingly difficult to assess such an adequacy in the present situation of large imbalances and generalized floating, also because experience has shown that floating does not reduce the need to use reserves for intervention purposes. Yet, this is a problem that cannot be ignored, given its implications for the adjustment process. We should be able to look ahead and evaluate whether existing mechanisms of liquidity creation are likely to result in adequate liquidity, and whether it would be appropriately distributed by countries and by reserve assets. On this score the lesson of the recent past is disquieting. Liquidity creation has been left largely to the capacity and willingness of private banks to finance payments deficits of both industrial and developing countries. The maldistribution of reserves has increased because of the structural disequilibria connected with the energy crisis.

Moreover, in looking at international liquidity, we should not forget one of the main objectives of the reform, namely, making the SDR the central reserve asset of the system. In this context we have noted with satisfaction that the Interim Committee intends to review all aspects of international liquidity and to discuss this topic at a later meeting. It would seem appropriate to us that the issue be discussed at the Committee meeting scheduled for next April and we believe that on that occasion the Committee should evaluate the role of the main reserve assets in the reformed monetary system, and discuss ways for the international community to resume control over the creation and distribution of international liquidity on a multilateral basis. Regarding the Fund’s program of gold sales, I wish to associate myself with the remarks made by the Chairman of the Interim Committee, Minister De Clercq, and the Canadian Minister of Finance, Mr. Macdonald.

Problems of Developing Countries

Let me now turn more specifically to the problems of the developing nations. These problems are of such magnitude that they might hamper the proper working of the international economic and monetary system. In 1973–75 the developing nations managed to achieve an average real growth rate of over 5 per cent per annum. But we know that averages are misleading. In fact, while the annual rate of growth in certain countries was 6–7 per cent, in others, all too often the poorest of all, was only 2–3 per cent, virtual stagnation on a per capita basis. For the third year in a row, less developed countries will also have to meet, among other problems, current account imbalances of a size unimaginable only a few years ago. Alleviating the difficulties confronting particularly the poorest nations of the group becomes every day a more urgent and pressing necessity. The solution of their problems is not an easy one as it requires not only the firm commitment of all countries but also a much closer coordination of the efforts of various international organizations operating in the aid field. The task before us is immense, and yet it cannot be postponed any longer if we want to avoid major disruptions both in the economic and social structures of the poor countries and their negative repercussions on world trade and financial flows.

Last year the flow of public and private capital from the member countries of the Development Assistance Committee to less developed countries surpassed 1 per cent of their total gross national product; this ambitious target has been met for the first time. The members of the Organization of Petroleum Exporting Countries, too, have greatly increased their aid to the developing world and we hope that they will continue to do so also in the future. The World Bank and regional development institutions have also expanded their loans to less developed countries. Yet a policy of trying to finance through loans the huge current account deficits of the developing nations cannot be relied upon indefinitely. Industrial nations and oil exporters will have to make a conscious effort to improve access to their markets for less developed countries’ exports. Much has been achieved in this field in recent years, especially by the European Economic Community, but more has to be done to favor less developed countries’ industries.

The development efforts of individual countries as well as the assistance of multilateral development institutions and of industrial countries should be increasingly geared to encourage exports and to expand agricultural production, and to avoid the flight from the land into the squalor of urban ghettos. In this connection, the redirection of the World Bank’s loans have to be applauded as they tackle directly the root of the problem in many developing countries. . . .

Statement by the Governor of the Bank for France—Bernard Clappier

The sumptuous surroundings of our meetings and the traditionally extremely warm welcome of our Philippine hosts are a good omen for the success of our assembly. This is most gratifying, indeed, and we very much hope that the reality will confirm our expectations. It is a great pleasure for me to welcome here the new members of our group, and more particularly, the Comoros, with whom we have been united for so long.

Last year, the world’s economy was in a crisis that had seen no precedent in the previous 30 years. While the magnitude of the crisis was worrisome enough, the nature of the crisis gave even greater cause for concern, for what was taking place was a combination of a decline in production and trade with a high rate of inflation.

Today, most economies are on the upswing. The improvement in economic activity that began in the second half of 1975 intensified in the first six months of 1976. But if inflation has lost some of its strength, it has not yet been stifled, and is showing signs of a resurgence in some countries. This inflation is the major problem facing us today. For, as we know, a lasting expansion is not possible in our countries as long as monetary imbalance persists. It would be in vain to expect the improvement in the international monetary system, as essential as it is, to yield its full benefit before there is greater price and currency stability.

It is therefore necessary to recall the disturbances which inflation provokes in international settlements before examining the policies that are needed.

I. Inflation is a major cause of the disturbances in the international payments system

The international payments system continues to be unsettled. This is evident chiefly in the magnitude of balance of payments imbalances, in the deep and frequent disturbances besetting the exchange markets, and in the worsening of the particular situation of the developing countries.

1. The magnitude of balance of payments imbalances

Balance of payments imbalances remain at high levels.

The slowing of economic activity in most industrial countries led to a sharp reduction in their current account deficits in 1975. There was a parallel reduction in the surpluses recorded by the oil exporting countries.

The implementation of recovery plans as early as the fall of 1975 brought about a sharp increase in the imports of the industrialized countries in 1976. Though their exports also recovered strongly, the result was a considerable growth in their deficit on current account, which for the member countries of the Organization for Economic Cooperation and Development alone could reach some $20 billion this year, as compared with a little more than $5 billion in 1975. At the same time, the current account surplus of the oil exporting countries is likely to rise to $50 billion from last year’s $40 billion. Finally, despite a $7 billion reduction, the deficit of other countries will probably total $35 billion this year, including $20 billion for the developing countries.

Hence, the imbalances in international payments are very far from being overcome. There remain considerable problems of adjustment, hardly any smaller in size than in 1974 after the quadrupling of oil prices.

The seriousness of the situation is worsened by the fact that the imbalances are being financed under conditions which may not be conducive to the return of world economic stability. For instance, in financing balance of payments deficits, there has, paradoxically, been very little recourse to official exchange reserves. In this connection, can it be deemed normal that official gold holdings cannot be mobilized between central banks on acceptable terms?

As regards conditional credits from the IMF, their use remains highly limited. A portion of the deficits has been financed by the development of unconditional IMF credit facilities, while the lion’s share of the payments deficits in the last two years has been covered by international loans extended by commercial banks. It is true that this means of financing has made it possible, in the short term, to solve the problems that had arisen without an intolerable contraction in the level of economic activity. But financing of this type involves serious dangers.

In the first place, it contributes to an uncontrolled growth of international liquidity. Moreover, because of the relative ease of obtaining international bank loans, some countries may have failed to take the early internal adjustment measures required to right their external accounts. Thus, the growth of this type of lending leads, in some cases, to a relaxation of the monetary and budgetary discipline which is needed more than ever.

2. Disturbances in the exchange markets

While inflation is a major cause of international payments imbalances, it is also an underlying factor in the disturbances that beset the exchange markets.

Thus, the exchange market’s behavior seems to be based nowadays on an alleged “law” according to which, in a system of floating exchange rates, the differences in inflation rates between countries should gradually be erased by contrary movements of exchange rates. It follows that economic agents constantly bet for or against a currency, anticipating its inflation rate. The fact is that monthly trends in consumer price indices are very dubious indicators of trends in a country’s external competitiveness. Nevertheless, this belief plays a decisive role today. Moreover, speculative anticipation by economic agents amplifies the size of exchange rate movements, so that, as a result, the market reinforces internal trends which ought, instead, to be corrected.

These erratic exchange rate fluctuations have adverse effects. A fall in the exchange rate on the market is reflected, even before the slightest impact is felt on export volume, in an immediate rise in the cost of imports. Thus, in the first phase, the external depreciation of the currency aggravates the internal inflation rate. These two phenomena follow and reinforce each other, setting in motion a cumulative process at the end of which the currency’s exchange value continues to fall. As experience has shown, such excessive, disorderly movements distort the conditions of trade and could, if we do not watch out, jeopardize the growth of world trade. It is therefore justified for the Fund’s new Articles of Agreement to require the member countries to “promote a stable system of exchange rates.”

3. Effects of world inflation on developing countries

International inflation has a particularly severe impact on the situation of the developing countries. Many of these countries are highly vulnerable. Dependent on imports, especially of capital goods, they see the price of their imports rise but are generally unable to bring their trade back into balance by expanding their exports adequately. Since their exchange reserves are small, they can maintain the level of their real income only if they are willing to finance their expanded payments deficit by borrowing, that is, by going more deeply into external debt.

Of course, the effects of inflation are attenuated by the world’s economic recovery, which is accompanied in particular by an expansion of the developed countries’ imports and by a recovery of raw material prices. But the fact remains that the consequences of inflation are not symmetrical; they are worst for the poorest countries.

II. The policies that are needed

In view of these consequences of inflation and of the resulting imbalances in the monetary system at large, various steps must be taken. Their purpose should be to re-establish the economic balances, improve the financing of payments deficits, and strengthen the surveillance mission of the Fund. They must be accompanied by measures of solidarity with the developing countries.

1. The pursuit of economic balances

The unsettled condition of international payments can be lastingly improved only if our economies function in a sound manner. It is detrimental to the equilibrium of the international monetary system for certain countries to settle down into inflation. The pursuit of policies of monetary stability must therefore be a priority task for our countries.

It must be recognized, however, that the industrialized countries have not yet succeeded in reconciling the pursuit of a sustained, regular expansion of economic activity with adequate stability in general price levels and in the value of their currencies. The reason may stem from the fact that inflation is largely structural in origin.

How is it possible, for example, to achieve the necessary moderation in growth of income if the distribution of national income is excessively unequal? In an economy in which there is too wide a disparity in income levels, each social category tends to align its demands with those of the more advantaged sectors; this contagion effect is an unbalancing factor. A reduction in inequality is not just an objective of social equity; it is also a necessary endeavor if the sound functioning of the economy is to be reconciled with the maintenance of reasonable freedom in collective bargaining. By the measures it has just adopted, France has shown its determination to attack resolutely the immediate and deeper causes of inflation.

2. A return to normal financing of payments imbalances

At the international level, the objectives of fighting against inflation and strengthening the stability of the payments system call for a rapid return to more normal conditions of financing balance of payments deficits. The last years have witnessed a significant growth of unconditional credit facilities. For the period 1975–76, the share of unconditional drawings on the IMF increased sharply again, reaching 93 per cent of total drawings. This situation is cause for concern.

In order to cope with the sudden profound payments imbalances that arose in early 1974, it was of course essential for the Fund to acquire appropriate means for mitigating those imbalances—means that met the urgent temporary needs created by the new situation. In our view, these means must remain temporary and exceptional. For the future, the credit facilities which the IMF places at the disposal of countries experiencing payments difficulties should go hand in hand with the conditions required for a return to equilibrium in those countries’ external accounts.

3. Exercise by the IMF of its surveillance mission over the international monetary system

Under the Bretton Woods Articles of Agreement, the Fund was vested with the mission of overseeing the compliance by member countries with the monetary system’s rules of good conduct and, if necessary, of penalizing violations thereof.

The amended Articles provide a new framework of action for the IMF. A task of a pragmatic nature is assigned to the Fund by the new Article IV—that of ensuring “the effective operation” of the monetary system while overseeing the way each member country fulfills its obligations. It is important for the Fund to carry out fully its new mission of “firm surveillance” from as positive a standpoint as possible. This means, in our view, that the firm surveillance should pertain not only to exchange policy in the strict sense, but also to the general economic policy conditions underlying it.

In short, since the purpose of the mission assigned to the Fund is to improve the functioning of the process by which international payments are adjusted, that is, to prevent the overvaluation or undervaluation of currencies and competitive devaluations, the Fund should exercise its firm surveillance equally over surplus countries and over deficit countries.

This orientation is dictated by the Articles themselves; in addition, it would contribute to the realization of the Fund’s basic objectives. Each IMF member has committed itself, among other general obligations, to endeavor “to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability.” Respect for this basic commitment seems more than ever a prerequisite for reducing payments imbalances and further stabilizing exchange markets.

Finally, during the interim period in which the member countries are free to choose the exchange arrangements they wish to apply, the Fund must take care, in order to assure equal treatment of all member countries, to exercise its surveillance in comparable conditions, regardless of the exchange regime adopted.

4. Strengthening solidarity with the developing countries

I now come to the policies which must be pursued or undertaken in order to help the developing countries solve the grave problems facing them. This is an area to which France attaches particular importance. These problems cannot be solved without an effective strengthening of international solidarity. Solidarity must be pursued in two complementary directions. The transfer of real resources to the developing countries must be expanded, and the methods of transfer must be adjusted so as to increase their efficiency. In addition, the organization of world trade must be improved.

(a) An expanded transfer of real resources is needed to meet the need of the developing countries for external financing, since that need has grown considerably in the last two years.

Of course, a major effort is under way to strengthen the role and means of the Fund and the World Bank so as to meet this need. In this connection, it is worth recalling the measures that have been taken or have begun to be applied since the start of this year:

—The increased flexibility of compensatory financing, which France had firmly supported, and the enlargement of the ordinary credit tranches in anticipation of the quota increases mean a significant expansion of the opportunities for drawing upon the Fund.

—The World Bank’s Third Window, which is supported by national contributions, came into being about a year ago. France intends to contribute to it in the near future.

—Finally, the Trust Fund, intended to provide special balance of payments assistance to the developing countries with the lowest per capita income, was created last May. However, the decline in the price of gold since the IMF gold sales got under way is cause for concern, especially insofar as it reduces the resources of the Trust Fund. It is therefore important to make very sure that the IMF gold sales take place in the best possible technical conditions, so as to maximize the profits derived from the sale of the metal.

Additional measures should also be taken in the near future. . . .

—The activities of the regional development banks make a further complementary contribution to the cooperation effort. Our country, which is greatly interested in these institutions, will shortly adhere to the Inter-American Development Bank and the Special Fund of the African Bank. We should like to take this opportunity to pay tribute to the fruitful work these institutions have accomplished.

—Finally, I should like to stress the importance that France attaches to the international goal, reaffirmed on a number of occasions, of allocating 0.70 per cent of gross national product to official development assistance.

It is highly desirable and wholly justified, that a larger number of member countries of the Development Assistance Committee make the necessary effort to approach that goal.

Alongside the expansion of official development assistance, we must seek ways of channeling a greater volume of private capital to the developing countries. The Development Committee is dealing with this problem and has set up a special working group to examine the question of access by the developing countries to capital markets. The studies conducted on this subject should be pursued, particularly those concerning schemes of multilateral guarantee of borrowings by developing countries.

(b) The financial effort in favor of development should be accompanied by measures to improve the organization of international trade.

These measures should, in our view, be directed first of all to the fundamental problem of organization of the raw materials markets. France has many times stressed the value of actions to stabilize the prices of basic commodities, for the development of both the producing and the consuming countries. At the last United Nations Conference on Trade and Development in Nairobi, we put forward precise proposals for the conclusion of agreements covering a wide range of products. We hope that these proposals can lead to extension of the mechanisms which exist at present for certain products. They contain safeguards to ensure that the action of the buffer stock agencies does not distort the long-term evolution of commodity prices and/or lead to the accumulation of excessively large stocks. The conclusion of agreements of this kind would be usefully supplemented by the setting up of a central fund with the twin purposes of facilitating transfers and equalizations between the specific funds and of managing possible supplementary resources in the form of contributions by international agencies or capital market loans.

The question of raw materials, as well as many other matters concerning relations between the industrialized and the developing countries, are currently being discussed and studied by the Conference on International Economic Cooperation, taking place in Paris. We hope that a sufficient number of points of agreement will emerge during the work of this conference to enable it to arrive at positive conclusions within the time limits proposed.

Among the topics under discussion, that of indebtedness is rightly giving concern to a number of countries. It is true that the level of indebtedness is becoming too high in a growing number of countries and that such a situation is unhealthy. But it is important that this problem be dealt with in such a way as not to impair the credit standing of the developing countries on the world markets. For its part, the French Government considers that in dealing with these problems we should maintain the case-by-case approach that has proved effective on numerous occasions. It wishes to affirm here and now that it is ready to examine the situations that arise in a spirit of good will and active cooperation and with all the flexibility required by the circumstances. This pragmatic approach naturally does not exclude the application of general principles, which France is willing to help to define. The fact remains that the real solution to the problem of the excessively high debt levels of the developing countries lies in increasing and improving transfers of real resources.

In concluding, I should like to stress that inflation is not only a problem faced by each of our economies individually; it is also a collective problem, which calls for common attitudes and common solutions. Naturally, it is up to each government to take whatever measures are effective at the national level. These demand determination and courage but also continuity, for habits and behavior patterns have become adapted to inflation and they cannot be corrected overnight. But there is a danger that the efforts of some countries may be jeopardized by the inaction or passivity of the others. Failing to act would increase exchange rate instability and international payments disequilibria; and in the long run it would risk compromising the development of foreign trade and, in the last analysis, the common good.

Statement by the Alternate Governor of the Bank for the United Kingdom—Sir Douglas Wass

I begin on a note of thanks and a note of apology. Like others, I thank President Marcos and the Government and the people of the Philippines for the warm and generous welcome we have received in Manila, and for the excellent and carefully prepared arrangements which have been made for these meetings.

My apology is for the absence from this meeting of the U.K. Governor for the Fund, Mr. Denis Healey, who was, until last week, fully expecting to attend and was greatly looking forward to this occasion. He has asked me, Mr. Chairman, to express to you, to all the Governors, and to the heads of the institutions whose Annual Meeting this is, his personal apologies and sincere regrets.

The World Economy

On the world economy, I have little to add to the lucid and penetrating exposition given yesterday by Dr. Witteveen, but I should like to emphasize four points.

First, it is of paramount importance that the recovery be sustained. Growth has faltered a little in the main industrial economies in midyear. But provided it is temporary, this may mean that in the longer term the pace will be steadier, and the advance accordingly more stable and more sustained. On balance that still seems to be the most reasonable view. But if the pause in the recovery continues, corrective action will need to be taken by those countries whose balance of payments enables them to do so.

Second, recent events have taught us, if indeed we did not already realize it, that inflation is one of the most virulent threats to economic growth and economic health. A decade ago it might have been possible to hold the view that the choice of policymakers lay between growth with inflation on the one hand and stagnation with price stability on the other. Today that view lies in ruins. Inflation, at any rate on the scale we have suffered in the past four years, has proved to be the canker of our economies, destroying confidence in consumers and producers alike, depriving business of cash, and creating fearful social tensions.

But third, in our concern to combat inflation, do not let us forget that the present high levels of unemployment are a source of great anxiety for all our governments. No one could be complacent about the extent and scale of the problem if it were to persist. And by common consent it seems that in most countries there is little prospect of an early return to the levels which prevailed in the 1960s. This is a challenge to economic management, to the will and discipline of our peoples, and to cooperation between governments.

My fourth point—and I was particularly pleased to hear the emphasis given by Dr. Witteveen to it—is the need for all the industrial countries to contribute to the adjustment process. Those still in deficit must certainly continue their efforts to return to balance. But the counterpart is that the industrial countries enjoying a strong balance of payments position must be prepared to see their surpluses run down and to avoid any action which retards the adjustment process. There is no practical alternative to this; the only other major surplus countries are oil producers, whose aggregate surpluses seem likely to continue for some time; and there should be no question of the industrial world as a whole improving its balance of payments at the cost of further detriment to the non-oil developing countries.

The U.K. Economy

I turn now to the British economic situation, all the more relevant in view of the recent decision of the U.K. Government to seek the Fund’s assistance. We have given priority to curbing inflation. There is no unique way of defeating inflation because inflation does not have a unique cause and none of us can claim to understand fully the causal mechanism. But in Britain, by last year it was clear that the main engine of inflation was the excessive growth of employment incomes, and policy to deal with inflation was therefore concentrated directly on this factor. The policy of pay restraint which was adopted in the middle of 1975, and which has now moved into a second and tougher phase, was not something devised and imposed upon the country by the Government. It arose from a reaction within the trade union movement and within the country generally against the excessive increase in wages and out of recognition of the damage which inflation inflicts on the body economic. And that was its strength. That organized labor in a free society has been able to exercise such a large degree of self-discipline provides remarkable evidence of the growing understanding of the truth of what I said earlier.

But just as inflation does not have a unique cause, so a policy of incomes restraint alone is not enough. It must be accompanied by strict monetary and fiscal policies. We have indeed in Britain this year, despite a continued rise in unemployment, taken steps to tighten both monetary and fiscal policies.

Over the past two financial years the money supply on the broad definition grew at only about 10 per cent, well below the rate of growth of nominal incomes; and for this financial year the Government has indicated that the rate of growth should be no more than 12 per cent. Of course, as other countries have found, there are bound to be month-to-month fluctuations; but recently, after a very moderate growth earlier, there has been some acceleration which gave cause for concern. So new measures were taken last month: interest rates, both short and long, were moved upward, and further special deposits were called to restrict bank liquidity. This set the stage for successful open market operations and the very large sales of government bonds made in late September will have an important moderating effect on monetary expansion.

We have also substantially tightened fiscal policy. Although the U.K. public sector deficit is, as in other major countries, swollen by the effects of the recession—lower tax revenues and higher unemployment benefits—these factors do not fully account for its excessive size. It cannot be allowed to continue at present levels and it is of paramount importance that it should be sharply reduced as recovery gets under way. To this end, measures were introduced in July to reduce the prospective borrowing requirement from its present level by £2½ billion, or from 9 per cent of gross national product in this financial year to 6 per cent in the next.

This was a very substantial move at a time of high and rising unemployment, with economic recovery still in its early stages. But it was necessary to enable the shift of resources into the balance of payments and investment to take place. This is the heart of our strategy. We are still running a large balance of payments deficit on current account—a problem which has been exacerbated by capital outflows and by the weakness and instability of sterling, particularly in the last few weeks. We also suffer, as we have long suffered, from too low a rate of industrial investment. We are determined to secure the necessary improvement in our external accounts and ensure that our expansion will be led by exports and investment. For this purpose, the cuts we have made in our public sector deficit will provide the room, while our strong competitiveness and our industrial strategy should be the motive force. To help us to finance our current deficit while the process of adjustment is being completed, we are applying for a drawing of our remaining credit tranches in the Fund.

International Monetary Fund

I now turn to the Fund itself and to the international monetary system. Much has happened in the past year and we have learnt more about how floating exchange rates work in the contemporary world. We have come to understand the limits to the ability of governments to manage rates, if they wish to do so, in the face of market pressures. But we have yet to define more precisely the role of the Fund in this matter and, in particular, how it is to exercise the task of “firm surveillance,” which will be imposed upon it by the amended Articles. Here too I believe we must proceed pragmatically. The United Kingdom wishes to see the IMF play a central and constructive role in the question of exchange rates. But it would be better to begin modestly and build up the role of the Fund gradually than to attempt too much at the start.

As for the Fund’s resources and the question of international liquidity, this is a subject which will require much thought in the coming months. The financial position of the Fund in the short term is not unsatisfactory, although we must be ready to consider new measures if demands for the Fund’s resources develop more strongly than we now foresee. It is a matter for concern that relatively little use has been made recently of the drawing rights upon the General Account in the Fund, and I think the reasons for this need to be examined further. This is something we should look at in connection with the discussions about the next quota review, which I believe should begin before long. . . .

Statement by the Governor of the Fund for Indonesia—Ali Wardhana

While it is gratifying to learn from the Annual Reports of the Fund and the Bank that the world economic outlook is improving, it seems neither prudent nor wise to be complacent. The general situation may give reason for satisfaction but only to a certain extent. We have recently been informed that a kind of pause has set in which requires policies to resume the momentum of recovery. At the same time, even in the strongest economies unemployment and inflation remain at too high a level. If such is the situation in the developed world, it is easy to understand that developing countries, highly dependent as they still are on cyclical and structural conditions in the industrialized countries, are necessarily in less good shape. They managed in the years 1973 until 1975 to survive price increases of capital goods and of primary products including oil, shortages of food and fertilizers, and the recession-cum-inflation originating from the industrialized countries; but many of them only achieved a level of growth of 2.8 per cent, which is hardly sufficient to absorb their increase of population. Moreover, the cost paid was high. Reserves were run down and heavy borrowing had to be resorted to, thus burdening their future. It is understandable that the voices for improvement, for progress—in fact, for rapid emancipation—became louder, more persistent, and more strident also.

The Fund and the Bank as international agencies having at their disposal technical know-how, financial resources, and, over the years, experience should and could in my opinion do much more to alleviate the plight of the poverty-stricken part of the world.

Let me make it clear that in desiring to improve their situation, developing countries should adopt responsible policies conducive to generating and absorbing their own savings and resources expected to flow from abroad. The Bank’s Report examining the period from 1973 to 1975 mentions a number of sensible measures introduced by it in the field of demand policy, of price and exchange rate adjustment, of incentives to the agricultural sector, and of population control. Such policies have to be continued.

The Fund is mainly concerned with the working of the monetary system which implies two sets of operations logically interrelated with each other. The monetary system is supposed to provide for an adequate framework to promote payments to flow without interruption and thus ensure an increase in trade and consequently employment, incomes, and the development of resources. Its second function is to assist countries encountering temporary payments imbalances to restore equilibrium by providing them with resources to facilitate adjustment.

After four agonizing years of deliberations the Fund succeeded in reaching agreement in January 1976 to revise and replace the Bretton Woods system. Article IV of the Fund’s proposed Articles of Agreement agreed to in Jamaica, which is the heart of the reformed system, leaves countries free to choose their own exchange regime. However, Article IV also states that in order to allow the system to serve its purpose, namely, to promote financial and economic stability, two conditions have to be fulfilled. Countries will have to continuously develop orderly underlying conditions and to ensure orderly exchange arrangements, including the promotion of a stable system of exchange rates. They are under obligation to collaborate with the Fund, which has the duty to exercise surveillance over the international monetary system.

The time has come for the Fund to develop an adequate framework for the collaboration mentioned in Article IV. In my opinion that collaboration should not only relate to the policies of individual members but also some form of harmonization of domestic and exchange policies of countries, especially those whose decisions have a major impact on the financial and economic situation of the world and on developments in exchange markets. Last but not least, the Fund must make a serious beginning in facing the problem of global liquidity, the creation of which is at present beyond international control.

As I said, the Fund has a second duty related to the surveillance of the monetary system. It provides liquidity for the purpose of adjusting temporary imbalances. The Fund’s 1976 Annual Report mentions imbalances in a few industrialized countries and in a great number of developing countries. An amount of $32 billion has been mentioned for 1976 as far as the non-oil less developed countries are concerned, which is not much less than in 1975. Meanwhile, the Fund also indicates that the ratio between global reserves and imports as well as between the Fund’s quotas and imports has decreased.

There is a need to increase the Fund’s liquidity in order to enable it to assist imbalances to be overcome. One major source of liquidity is the amount of quotas. The Fund is expected to examine quotas in 1977 in order to meet the requirement to complete the next review beginning in 1978. I believe that the Fund is well advised to substantially increase the amount of quotas in order to make it more commensurate with the development of imports. The Fund’s quotas represent the so-called conditional liquidity. It seems advisable also to look into the matter of unconditional liquidity. I would like to repeat my plea of last year, namely, to consider seriously a modest second allocation of SDRs which would definitely not contribute to inflation but would demonstrate our seriousness in promoting SDRs as the main reserve asset. I would also strongly plead for the abolition of the reconstitution requirement.

Allow me, before making specific observations related to the World Bank, to draw attention to a financial need which could be taken care of by both the Fund and the Bank. So far, the Fund has not been able to play a significant role in financing buffer stocks. For years primary producing countries of the less developed world have been pressing for buffer stock schemes which they rightly feel will enhance their self-reliance. To stabilize prices within certain ranges to be agreed upon is similar to the desire to have orderly exchange developments. The short-run fluctuations of export prices affect both the balance of payments and development plans of less developed countries. I would like to urge the Fund to seriously review, and as soon as possible, its buffer stock financing facility and to encourage the Bank to participate in the financing of buffer stock schemes once they are established and internationally recognized. I am glad to note that the Managing Director in his address to our meeting made reference to the matter. . . .

I express the hope and confidence that the advanced countries will be willing to recognize the enormous problems faced by the developing world in its search for more employment, for increasing incomes, and for a better life for its people, the majority of whom are deprived of so much. At the same time I should also mention that a number of them are already giving valuable assistance to some developing countries. However, the number of both donor and recipient countries should and, in my opinion, could be further enlarged. Only yesterday His Excellency President Marcos in his eloquent address reminded us of the needs of the poor which for the sake of human dignity should be met as speedily as possible.

Before concluding, permit me to express our deep appreciation to both Mr. Witteveen and Mr. McNamara, including their dedicated staffs, who have tried so hard in the difficult period now hopefully about to be over to enable their institutions to be of assistance to so many of us. If my proposals are heeded, their hands will be strengthened to meet the still large needs of the world.

I also would like to welcome our new members, Papua New Guinea and the Comoros, whose presence broadens the circle of our international family. May I finally give expression to our feelings of warm gratitude to the Government and the people of the Philippines for their exemplary hospitality and for the splendid arrangements provided by them for the comfort and benefit of all of us.

Statement by the Governor of the Bank and Alternate Governor of the Fund for the Philippines—Cesar E. A. Virata

Before anything else, I would like to add my humble welcome to that extended to you by His Excellency, the President of the Republic of the Philippines, and our First Lady. It is our sincerest hope that your visit to our country will not only be fruitful from the standpoint of the business of the Annual Meetings but also personally memorable and rewarding.

It is now my privilege to speak for the following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela, and my country, the Philippines.

The countries of Latin America and the Philippines, with the rest of the developing world, have been adversely affected by the economic events of the last few years. By the adoption of courageous and timely policy measures, however, they were able to reduce the adverse effects of such economic pressures and to maintain not unreasonable rates of growth given these circumstances. . . .

For the countries for whom I speak, as well as most other developing countries, the achievements of the Bank Group occurred at about the time that forces extraneous to these countries operated to erode whatever gains they had achieved in previous years.

The events to which I refer are familiar to all of you. These were the twin specters of world inflation and recession, resulting in sharp deterioration in the terms of trade of most of the developing countries. These were invariably translated into large deficits in the current accounts of their balance of payments. To finance these deficits, many developing countries had to tap short-term and medium-term borrowings from private markets in order to supplement whatever official assistance was made available. If the momentum for growth that our countries had previously achieved is to be maintained, they will have to continue to rely on the support of private capital and on official bilateral and multilateral financing.

At this time, the world economy has begun to show signs of recovery. We look forward to recovering the momentum that we have lost. But we now begin from a position of relative disadvantage. Mr. McNamara in his speech yesterday pointed out that the external debt service ratios of middle-income developing countries have registered some deterioration. And while we have resolved to institute even stronger internal measures to effectively manage our external debt and expand our exports, there is no way by which we can regain lost ground without infusion of fresh long-term capital into our economies. . . .

Resolution of the issues we have raised will help improve the process of resource transfer to developing countries. We therefore urge early positive action on them. In this connection, we strongly support the continuation of the Development Committee as a forum in which these issues and other urgent matters on resource transfer can be dealt with at the decision-making level. . . .

In closing, I would like to take this opportunity to thank the Boards of Governors of the Fund and the Bank for entrusting us with the responsibility of providing the facilities for this Annual Meeting. My Government is honored by this trust and has exerted every effort to fulfill this commitment in the same manner that we have tried our best to keep our commitments to the international organizations. We hope our efforts have measured up to your expectations. If the Governors should wish to consider Manila again for future meetings of various committees, we will most welcome it and I can assure you that with the experience gained in this meeting we will further improve upon what we are doing for this meeting.

Statement by the Governor of the Fund and Bank for the United States—William E. Simon

Once again, it is a distinct honor for me to address this distinguished body. We are fortunate to meet in this beautiful land, a nation known for its traditions of warm hospitality and a nation with which the United States has long maintained the strongest of ties and the warmest of friendships.

There is an old Chinese saying, eloquent in its simplicity, which merely says: “May you live in interesting times.” Without a doubt, we who are gathered here today have lived through some very interesting times together. The period since I joined the U.S. Treasury nearly four years ago has been one of extreme tension, even danger, in international economic affairs. Repeated shocks threatened the traditions of cooperation that are the foundation of world trade and investment, as well as general stability. Differences among nations over principles and objectives brought into question our ability to preserve a free and open international trade and investment system.

We have witnessed the development of an inflationary virus stubbornly resistant to our attempted remedies; we have experienced an oil embargo and price increases that disrupted the world economy; and we have lived through the deepest international recession of the postwar era.

We have done much to meet these challenges—but even more remains to be done. Today I would like to discuss both the progress we have made and the challenges we still face.

One of the characteristics that marked this troubled period was a growing recognition of our mutual interdependence. More than ever before, people around the world began to understand that the economy is at the heart of the body politic and that every shock it receives will ultimately be felt in terms of social and political—as well as economic—instability. The result of this new understanding has been that, despite all of the divisive economic pressures unleashed on the international scene in the last four years, international cooperation has not broken down and indeed, in one important area, major reform has been achieved—the first comprehensive reform of the international monetary system since Bretton Woods.

The international economic system is now truly universal, involving all countries, large and small. Between 1950 and 1975, the level of trade among market economies increased from $50 billion to $800 billion. This dramatic expansion of the world economy has coincided with the creation of scores of new nations and new centers of economic power. The price and supply of energy, the conditions of trade and investment, the expansion of world food production, the technological base for economic development are today the shared concern of every nation. And it is clear to me that we will either move forward with trust and cooperation or we face the dangers of retreating into economic instability and nationalistic conflict.

So far, we have followed the correct course of cooperation. And much of our progress is the result of the efforts of the men and women gathered here today. Speaking for myself, I am grateful for the chance that has been mine to serve with you—on behalf of my Government but also on behalf of the ideals we all share—during this period of re-examination and searching. I am also grateful for the education afforded me over the past four years—for both the many lessons learned willingly and the few learned not so willingly. But, above all, I am thankful for the high rewards of personal contact and friendship with you, my colleagues, and for the sense of genuine accomplishment that has grown out of our work together.

This brings me to the work that remains to be done, the task before us is a fourfold one:

  • —we must restore and maintain economic stability in our domestic economies;

  • —we must make the reformed international monetary system work;

  • —we must tackle with increased courage and understanding the difficult problems of development; and

  • —we must continue to work for a free and open world trade and investment order that is essential to a shared prosperity for all.

As we work together to achieve international economic progress, each nation must follow responsible domestic policies to avoid disrupting both its own economy and inevitably those of other countries. Because of its size, this is particularly true of the U.S. economy. Following the most severe economic recession of the postwar era, the United States is now one and a half years into a healthy and balanced economic expansion. If erratic shifts and excesses of government actions are avoided, this expansion will continue well beyond 1976, although the rate of growth will naturally tend to moderate.

The strength of the current expansion that began in the spring of 1975 is indicated by the increase in real output of goods and services, which has averaged 7 per cent during the last four quarters. The rate of inflation, as measured by the gross national product (GNP) price deflator, has dropped from a peak of over 12 per cent in 1974 to the 5 to 6 per cent zone throughout 1976. Employment is at a record level of 88 million workers, and 4 million new jobs have been created since the upturn in the economy, although the unemployment rate remains far too high, reflecting the lagged effect of the recession and the extraordinary surge of new workers into the labor force. Despite the wide fluctuations in quarterly statistics, it is clear that a healthy expansion can be continued if policies focus on the longer-term goals of reducing both inflation and unemployment.

As expected, personal consumption has provided the basic trust for the growth throughout the current recovery. Business spending did not accelerate as quickly as originally anticipated, but outlays for plant and equipment now appear to be improving and inventory buying is up to expectations. Government spending at all levels seems to be better controlled, and the strength of export sales has continued, although imports are now rising more rapidly. This has resulted in a swing in our balance of trade from a massive surplus in 1975 to a substantial deficit in 1976. The United States views this shift with equanimity because we recognize that it reflects the sharp increase in imports that has occurred as our economy has moved from recession to expansion. This adjustment is a proper reaction to changing economic conditions that the international monetary system can handle well if we do not seek to offset the effect of natural market forces.

The recovery to date has remained well balanced. It was never anticipated that specific sectors of the economy—such as automobiles or housing—would dominate the recovery, although sales of domestic cars have been somewhat stronger than expected, which partly explains the accelerated pace of spending early in the year. Nor have widespread capacity constraints or severe raw material shortages appeared at this stage of the recovery.

Best of all, fiscal and monetary policies have been carefully monitored to prevent the excesses that led to renewed overheating of the economy following the temporary benefits of faster growth.

While many called for more government spending and significantly faster expansion of the money supply in 1975 and even this year, the President strongly resisted. As a result, the recovery has proceeded to this point without building up excessive demand pressures for increased output or fiscal and monetary policies which would lead inevitably to a repetition of the familiar boom-and-recession sequence. This unfortunate pattern could be repeated, of course, if unwise policy adjustments are made to turn the economy toward excessive near-term growth. But this negative result can be avoided if responsible policies are followed. We fully intend to guard against a return to the stop-and-go policies that have disrupted the U.S. economy in the past.

Looking to the future, we expect the economic expansion in the United States will continue in 1977, but at a somewhat reduced pace. This is a proper pattern because continuation of the rate of output gains in the 6 to 7 per cent zone over an extended period of time would inevitably overheat the U.S. economy, once again leading to a new round of inflation, followed soon afterward by recession and unemployment. Output gains in 1977 should be in the 5 to 6 per cent zone as output of the economy gradually returns to its long-term rate of growth.

Personal consumption will continue to be the basic strength of the U.S. economy, since it comprises two thirds of the total GNP, but the rate of increase in this sector will undoubtedly slow down. Business investment and continued modest gains in housing construction will provide most of next year’s thrust for additional growth.

We expect inflation to remain in the 5 per cent to 6 per cent zone. This is a most unsatisfactory level of price increase and our nation must not and will not accept it. Employment growth should continue, although not as rapidly as during the last eighteen months, and the unemployment rate will continue to decline, particularly as the extraordinary growth in the labor force slows down.

In summary, while there are several worrisome problems to contend with, the likely overall course for the U.S. economy is favorable, assuming fiscal and monetary policies remain responsible. The key to achieving this relatively optimistic goal will be how well inflation is controlled. A resurgence of inflation would quickly erode both consumer confidence and actual purchasing power, which would restrict the personal spending that creates the driving force for the entire economy. In turn, business firms would curtail their spending plans, which would erode current economic growth and delay the capital investment necessary for achieving our national goals, particularly the creation of new jobs.

In short, we must guard against a resurgence of inflation if we are to avoid a premature disruption of the economic expansion. This fundamental approach is not based on any obsession with a particular goal but is a realistic recognition that inflation destroys economic stability and leads to recession and unemployment. There never was and is not now a choice between inflation and unemployment. That concept is a fallacy. The real choice is between making steady progress on both inflation and unemployment or of returning to the stop-and-go economic policies that have failed to provide the needed stability in the past. Every nation faces this same problem and we must all strive for more responsible solutions.

The New International Monetary System

I have said in the past that the most important single price in the United States is the price of our dollar. The same is true of every national currency. The foreign exchange value of a country’s currency plays a significant role in determining what is produced—exports and imports, the location of production facilities, and capital flows. All of these vital economic factors are, to varying degrees, a function of the exchange rate—the price of a nation’s money. This is why it is important, especially during a period marked by pressures for income redistribution, and a period dominated by industrial, corporate, and national drives for more, that we develop a well-functioning monetary system rather than a series of makeshift ad hoc arrangements.

A system means an agreed charter—a basic understanding among nations on the principles of behavior—that provides the framework within which we operate. But such a charter is only the beginning. Over time, the development of a system also involves the development of a code of behavior based on generally agreed-upon principles. Such a code must adapt to changing circumstances, but in any case must always adhere to the agreed broad principles.

What are the alternatives to this type of system? One alternative involves specific rules but no agreement on underlying principles. In the absence of any anchor of principles, this would mean a process of continuous negotiations and new rules. Another alternative would be to have no agreement on either principles or codes. In the United States this is referred to as the “law of the jungle.”

It is not naive to believe in the need for an operating monetary system. It is not even idealistic. To me, it is the essence of pragmatism. Some of you can recall the disastrous process of competitive devaluation so prevalent in the 1930s that became enshrined in the phrase “beggar-thy-neighbor.” We have learned and relearned that the law of the jungle means that we all lose, regardless of size, power, or efforts at isolation.

We all recognized this at Jamaica. That was why we agreed on a system. Before describing the results of our efforts and discussing implementation of the system, I think it would be useful to review what we want from a monetary system—what should it provide? There are three overall objectives.

First, the system has to be designed so that it facilitates the international flow of goods, services, and capital. It should be an open, liberal system that enables us to capture the benefits of international trade, the paramount benefit being the higher living standards for all that result. It should facilitate the transfer of capital and ensure its most efficient use, the end result again being higher living standards for all. Most importantly, the system has to operate continuously. Its success must not depend on just the right combination of favorable circumstances. It must be more than a fair-weather system. It must be able to function in the economic and financial equivalent of hurricane weather.

Second, the system in both its design and its operation must have a built-in equilibrium. It should engage forces that reduce tendencies toward permanent disequilibrium, in the form of structural surpluses or structural deficits in current accounts. The symmetry of which I speak cannot simply be designed—it must be operational, a system that looks perfect on the drawing board but fails in actual performance is no answer.

Third, the system must help rather than hinder individual efforts toward economic stabilization—it must encourage stability rather than foment instability.

The efforts of this group have, for almost four years, been concentrated on designing an international monetary system that will meet these objectives. We have now completed that work. The framework is built. The architecture is complete.

Together we have constructed an international monetary system that is sound in structure, right in approach, and complete in a constitutional sense. That system remains firmly centered on the IMF, and firmly based on the liberal trade and payments philosophy of Bretton Woods. It remains a global system, in which all members subscribe to the same standards of responsible international behavior, and in which all members are treated uniformly. We have a system which has flexibility and resilience and which can function well in the years ahead without further structural amendments.

We have changed, and changed profoundly, both monetary doctrine and the structure of the monetary system, in a way which better conforms to present objectives. Three fundamental alterations can be highlighted—the approaches toward adjustment, exchange stability, and gold.

Influenced heavily by the imperatives of experience, we have come to realize that exchange stability cannot be imposed or forced on nations by the establishment of fixed exchange rates. We have embraced the concept that stability will result only from responsible management of underlying economic and financial policies in our countries. We see more clearly that market forces must not be treated as enemies to be resisted at all costs, but as the necessary and helpful reflections of changing conditions in a highly integrated world economy with wide freedom for international trade and capital flows. We recognize—as proved by events in many countries in recent years—that without stable underlying economic and financial conditions, no amount of exchange market intervention will assure stability, but that with stable conditions, little or no such market intervention would be needed.

The new system thus calls for each of our nations, large and small, developed and developing, to concentrate on achieving sound, noninflationary economic growth. There is no other answer to our desire for stability. Also, we must each permit our performance in domestic policy to show through—to assure that governmental efforts to resist or moderate the operations of market forces do not distort our relative economic positions and become a source of instability once again. This applies of course to avoidance of the use of controls over international trade and payments, long a basic objective of the Bretton Woods system. But it also applies as much or more to governmental action to restrict the operations of market forces through the exchange rate mechanism.

In short, a country with an unsustainable deficit should resort to internal stabilization acompanied by exchange rate change in response to market forces; a country with a tendency toward surplus should not simply accumulate reserves but should allow its exchange rate to move in order to accommodate these fundamental adjustments of others. Only then can we have effective international adjustment and the built-in equilibrium and stabilization which an international monetary system requires. The inexorable fact is that the implementation of our new system—or any system—will succeed or fail as a consequence of the soundness and prudence of the policies our individual governments pursue. There is no other source of stability, no external entity to which nations can turn as they address the challenges they face today.

Our historic decision to phase out the monetary role of gold and to provide for a greater role for the SDR also is a source of strength in the reformed system. By doing so, we eliminate a major element of instability in the monetary system. Removing gold from the center of the system, eliminating the requirement that gold be used in IMF transactions and agreeing to initiate the process of disposing of IMF gold, the Group of Ten agreement to avoid pegging the price of gold or increasing total holdings are all steps toward realism and a more rational as well as stable monetary system.

While we have made fundamental changes, the Jamaica agreements constitute a reform and not a revolution. Our changes are less of a grand design than Bretton Woods, and appropriately so. We have not discarded all the concepts or replaced the institutions of the Bretton Woods order.

Most importantly, the IMF retains a unique and indispensable role in the provision of conditional credit. It is a different role from that of 30 years ago, reflecting the different world of today, and the growth and development of private international capital markets which now do and should provide the bulk of international lending. The Fund’s financing is today more clearly a supplement to other sources. But the conditionality of IMF lending places on that institution a special role and special responsibilities which are critical to international adjustment and a smoothly operating international monetary system.

It is to the operation of our monetary system that we must now shift our attention. The construction of the system, the architecture, has been an essential step. It has been an intellectually stimulating exercise. But we must move ahead to the operational stage. We must, on the basis of the principles of our new constitution, develop workable operating practices. No aspect of the IMF’s work is more important.

A central feature in the operation of our new monetary system is the IMF’s surveillance of members’ exchange rate policies. The new Article IV places heavy emphasis on IMF surveillance to assure that members comply with Fund obligations and that they avoid manipulative exchange rate practices. It is essential to the successful functioning of the system that this surveillance be performed in a sensible and effective manner. Working out the techniques of surveillance is the Fund’s next major task.

Some have said that precise guidelines for IMF surveillance of members’ exchange rate policies should have been delineated in the Article. I disagree. The Articles, after all, are meant to serve as an international constitution, not a commercial contract. Even if we were agreed on precise guidelines, it would be wrong to incorporate them in the Articles—we learned from Bretton Woods the difficulties of a charter containing detailed rules.

But more importantly, it is neither appropriate nor possible to undertake this important job of Fund surveillance through the application of detailed rules and formulas. Such formulas cannot be equitably applied to economies that differ as profoundly as in the IMF membership. Where the largest member has a gross national product some 60,000 times larger than the smallest; when some have no capital markets while others have highly developed and sophisticated markets; where price elasticities and income elasticities can vary widely, rigid formulas simply will not work.

Similarly, I do not agree with those who would call on the Fund to delineate hard and detailed rules by which each member country’s performance with respect to exchange rate policies would be judged. We do not have the capability, the experience, or the knowledge to develop such a set of rules to be applied across a broad spectrum of individual national situations.

Nor would I agree with those who would call on the Fund to attempt to determine a set of “target” exchange rates toward which each nation’s policies should be directed. There are those who believe that a comparison of statistical data on prices or costs in individual countries can reveal appropriate exchange rates. That approach is subject to insurmountable difficulties, both theoretical and practical. While it may indicate that some rates are inappropriate, it cannot be depended on to indicate what rates are proper. It is tantamount to continuous renegotiation of a par value system, based on statistics which are of necessity both partial in coverage and backward-looking in approach. In practice, it may prove to be nothing more than a veiled approach to a return to fixed rates.

There are those who are nostalgic for the good old days and may translate this nostalgia into a desire to return to the par value system, thinking that fixed rates would bring stability. I would suggest that such beliefs are an illusion. Think again of the chaos and disorder of the closing years of the Bretton Woods system. Think back to those days of market closures which disrupted trade and commerce. Remember, too, the hurried attempts to patch together some solution so that markets might open again. Think back to the duration and difficulty of the Smithsonian negotiations and the tensions associated with those negotiations. Then think back over the last four years of unparalleled flows of money, massive increases in oil prices, inflation, recession, balance of payments problems. Just imagine the old par value system trying to accommodate those strains.

The Fund should, in its surveillance of members’ exchange rate policies, proceed by a careful and evolutionary approach. It should cultivate more fully its consultative processes and refine its procedures for monitoring countries’ behavior. Rather than adopting a sweeping, preconceived, rigid economic code, we need to construct, through a case-by-case approach, a common law based on case history. If we proceed in this manner, we will be able to delineate broad principles of behavior that can be elaborated on the basis of experience. The development—and the acceptance—of these principles cannot be forced. But over time workable codes can be expected to emerge, through consultation with members and through the monitoring of their activities.

I urge the Fund to proceed cautiously in this work. The world faces a new situation, in some ways a dramatically different situation from the past. In this case the lamp of history may not provide the best light to guide us in the future. Our experience is drawn from a past that may not be fully relevant, and our attempts to distill this experience into detailed blueprints for the future may be more harmful than helpful.

The adjustment process is another area in which action is imperative. The international financial system has performed the task of recycling funds from surplus countries to deficit countries with efficiency. The elasticity of our financial system has provided us with the time to correct structural maladjustments. This time must not be wasted. Recycling of funds from surplus countries to deficit countries can continue only to the degree that countries borrowing to finance external deficits can obtain credit. This in turn can only persist so long as lenders remain confident that borrowing countries can repay specific obligations on schedule and service their overall debts.

Frankly, we have not made sufficient progress toward adjustment. Although there have been cases of countries adjusting to higher oil prices and global recession, a substantial number of countries have preferred to delay adjustment and borrow abroad to finance consumption, and have thus continued to run the large external deficits which first appeared three years ago.

Unless there is some dramatic change in the outlook, the world payments pattern next year will strikingly resemble that of 1974—the first year of abnormally high oil prices. Indeed, if the oil producing nations take, as is now rumored, the dangerous step of again raising the price of oil, it would seriously aggravate an already troublesome economic and financial situation. Even without an increase in oil prices, the aggregate surplus of the members of the Organization of Petroleum Exporting Countries (OPEC) in 1977 will again be $50 billion or more, while deficits in the industrial member countries of the Organization for Economic Cooperation and Development would be on the order of $35 billion, and the oil importing developing countries in the range of $12 billion to $15 billion.

The 1974 deficits were successfully financed—to the surprise of many doomsday forecasters—as the international financial system displayed unprecedented flexibility and resourcefulness. However, we are approaching 1977’s look-alike payments numbers under substantially different circumstances. Aggregate OPEC surpluses of nearly $150 billion from the beginning of 1974 to the present have been reflected in increased external debt by oil importers. The bulk of the heavy international borrowing has been of short-term to medium-term maturity, and will in many cases need to be rolled over or refinanced. And as debt grows to finance the continuing deficits, an increasing number of countries which have delayed adjustment will approach limits beyond which they cannot afford to borrow and beyond which prudent creditors will not lend to them. This is a serious matter and it cannot be ignored by lenders or borrowers.

There is still time to act, but we must be cognizant of the choices. One unrealistic possibility that has been mentioned involves widespread debt forgiveness or rescheduling. In reality, this is no choice at all. From time to time circumstances may require a debt rescheduling on the part of an individual country. But a wide-scale approach of this type involving a number of countries or even several in a group can only result in substantial damage to practically all international borrowers. Lenders would regard—I think appropriately—such an approach as ipso facto increasing the risk attached to new lending operations. The result would inevitably be a reduction in the availability of private credit to broad categories of countries, a reduction that would inevitably have a widespread contractionary effect on economic activity.

Another dangerous alternative that has been mentioned by some would be to create large amounts of new official liquidity—a kind of international monetary printing press. Ironically, this would have the same effect—it would ultimately be contractionary, although in the first instance it might have an expansive effect. Eventually, and probably with more speed than many suspect, the creation of excessive international liquidity would destroy the stabilization efforts which many of us have under way. For, in the United States, and I believe in many other countries, we have found that a high rate of inflation and prosperity are mutually exclusive.

The third course—and the only one which I believe holds the promise of success—involves a combination of adjustment by individual countries, some slowing in the rate of private international lending and moderate provision of official financing on a multilateral and conditional basis. Fortunately, a floating exchange rate system can respond to changes in underlying economic and financial conditions in a climate devoid of crisis. The resultant flexibility provides a useful tool for adjustment. But it is only effective when linked with meaningful programs of domestic economic and financial stabilization. There is no substitute for such adjustment, and countries that do adjust can look forward to durable, noninflationary growth. The IMF can contribute to this process of adjustment. The Fund has both the expertise and the financial resources to assist in the development of overall stabilization programs and provide conditional credit to bridge the time from the start of an individual country’s stabilization effort to its favorable end results.

It seems to me the only way that we can proceed without damaging ourselves and our friends and neighbors is to hold to this third course and immediately introduce where needed appropriate policies for adjustment.


Our approach to the international monetary system has placed responsibility for the achievement of international monetary stability on the domestic policies pursued in each country. Our approach to economic development also places primary emphasis on the policies and efforts of each individual developing country.

At the heart of our policy is the concept of shared prosperity. This concept involves a mutually beneficial approach to development in today’s interdependent world. In application, this approach means not only direct aid but, most importantly, a liberal trading and investment system.

We do not regard indirect resource transfer schemes—such as generalized debt rescheduling, price indexing, and commodity funds—as the best means to provide resources to the developing world. To the contrary, such proposals are likely to lead to inefficiencies and distortions which will make most, if not all, worse off.

I have already commented on the likely adverse impact of broad debt rescheduling schemes. With respect to commodity policy, we have stated on many occasions that we favor a case-by-case approach to the problems of individual commodities, and in particular a careful examination of the applicability of the buffer stock approach. Specifically, we must ascertain whether the operation of a buffer stock is likely to lead to improved market operations or to a structurally higher level of prices for the commodity involved.

If it leads to structurally higher prices it helps a few countries, including those developed countries that are producers, but it hurts the larger numbers of consuming countries, both developed and developing. Even in the case of developing countries that produce the commodity, the “help” provided has a high cost. Funds used to finance the build-up in inventories could have been used for development purposes. To the degree that an artificial price level results, incentives to develop and use substitutes increase. Perhaps most important, the producing country allocates labor and capital to production on the basis of an artificially high and unsustainable price.

In the area of direct resource transfers, the United States has long been in the forefront of those assisting in the economic and social progress of the developing world. Much of what we have done has been governmental—through our bilateral as well as multilateral aid programs such as IDA.

I can assure you that the United States will continue its leadership in this area. Not only will we continue, but we will strengthen our bilateral aid programs, and we will continue our strong support for the international development banks. Our commitment to IDA and to a financially strong IBRD cannot be questioned. With respect to the regional banks, I am pleased that we have just received funds from the Congress to join the African Development Fund. We are now participating in a major new replenishment in the Inter-American Development Bank. Here in Manila—the home of the Asian Development Bank—it is particularly gratifying to reiterate U.S. support for that institution. I was pleased to note, in a recent Development Committee report, that loan commitments in all these banks will increase from $8.3 billion to about $12.6 billion from 1975 to 1980, or 50 per cent, with the concessional share of the total increasing.

The American partnership with developing countries and development prospects of all countries depends even more importantly on our trade and investment links. The world-wide demands for capital in the period ahead will be massive and the competition fierce. Countries which wish to attract investment capital will find that establishing the proper domestic climate is essential. Countries which raise impediments to capital flows will simply not be able to meet the competition. The experience of many countries illustrates how this can properly be done. Countries and peoples as varied as the Taiwanese, the Brazilians, and the South Koreans have dramatically raised their living standards and expanded their economic base. They have done so not only because of the amount of help they received, but because of the care and self-discipline they used in putting that help to work. Others can do the same, but only with the realization that developmental help involves a partnership and—like all partnerships—requires the best intentions and the best efforts of both partners in order to succeed.

We must all recognize that individual national economies can best achieve the goal of sustained noninflationary growth in a free and open international trading system. We need an open world market to allocate raw material and capital resources efficiently in order to supply abundant goods and services to all of our people at noninflationary prices. All the aid we can give will not help if it does not foster a prosperity shared by all. Achieving such a prosperity will require the close cooperation of both industrial and developing nations. We must, therefore, join together aggressively in the multilateral trade negotiations to take concrete and significant steps to eliminate tariff and nontariff barriers to trade.

As these areas for cooperation between developed and developing countries evolve toward greater mutual advantage, we must preserve the fundamental principles—such as reliance on market forces and the private sector—on which our common prosperity depends. Solutions must be dynamic and have widespread benefits. Thus, we must seek increased production and improved efficiency, not just transfer of wealth. Development assistance should be thought of, not as an international welfare program to redistribute the world’s wealth, but as an important element of an international investment program to increase the rate of economic growth in developing nations and to provide higher living standards for the people of every nation.

In a sense this can be thought of as a process by which developed countries devote a portion of their savings to developing countries. The impact of this type of direct transfer depends on the amounts involved, the uses to which these funds are put, and the effectiveness with which the recipient countries implement development efforts. If these funds are devoted to financing a higher level of consumption than a given country can earn, it means only a short-lived improvement in living standards; if these funds are devoted to investment, the result will be a permanent gain in well-being. This is especially the case in a system which allocates financial resources to areas of maximum benefit.

More specifically, in considering how the present system might be improved to the mutual benefit of all nations, we should be guided by the following principles:

—Development by definition is a long-term process; increased productivity, stemming from capital formation and technological advance, is the basis of development, not transfers of wealth which can only be one time in nature. Foreign aid can help, but such aid can only complement and supplement those policies developing countries adopt, which in the end will be decisive.

—The role of the private sector is critical. There is no substitute for a vigorous private sector mobilizing the resources and energies of the people of the developing countries.

—A market-oriented system is not perfect, but it is better than any alternative system. In general the effort should be to improve conditions for the developing countries—both internally and externally—by removing unnecessary and burdensome government controls, not by imposing additional barriers and impediments to market forces.

—A basic focus must be on increasing savings and making the institutional and policy improvements which will enable the financial markets to channel those savings into activities that enhance the opportunities for people to live better lives. . . .


In meetings such as these we naturally and inevitably concentrate our attention on international issues of great significance—providing for a reformed international monetary system, or determining future policies of important institutions such as the IMF and the World Bank. In the final analysis, however, what really counts for each of our countries and for the world economy is how efficiently we all manage our own domestic affairs. International cooperation provides a framework of opportunity; individual countries in various ways and to varying degrees seize that opportunity. In all countries—developed and developing, industrial and agricultural, oil-rich and resource-poor—economic policymakers are confronted with many similar kinds of issues and dilemmas. A country’s performance is not predetermined by its level of income or stage of development alone. Just as pertinent is how the tough issues of economic policy that we all face are resolved.

Unfortunately, good economics is not always perceived to be good politics. My experience has been that politics is an art with a high rate of discount. And while the payoff to good economics is real, it takes time. This lag, as the economists call it, is a politician’s nightmare. Fortunately, I think that more and more people now understand that this is the case—and I sense growing suspicion of the proposed instant solution, the quick fix. In a world of unlimited demands and limited resources, finance ministers not only are inevitably unpopular, but indeed cannot afford to be popular. We are frequently required to be the bearers of bad tidings to our political masters—to reiterate the unpleasant but inescapable fact that resources are scarce while wants are limitless. It is our lot, whatever our country’s economic system and whatever its circumstances, to speak out for financial responsibility—to call for prudence in an age of fiscal adventure.

Announcement of dramatic new programs is greeted with great fanfare; the management of sustained stable growth is a bit like watching the grass grow. Yet, in the end, it is sustained stable growth that does the most good.

To be sure, for a time an increased inflow of real resources from abroad may enable a country to postpone the hard choices among competing domestic claims, in the process running down assests and/or accumulating debts abroad. But sooner or later, the bills come due—the adjustment I have spoken of earlier has to be made. There simply is no substitute for the hard decisions and the careful husbanding of resources that finance ministries traditionally espouse.

As we meet today we can point to tangible evidence that we have been more than nay-sayers over this past year and more. In the monetary area, through our collective efforts, we have put into place a new structure for the international monetary system, one with the flexibility to accommodate rather than impede the efficient working of the international economy so that trade and capital can serve their full role as engines of economic growth and progress. In trade we have made progress in the multilateral trade negotiations to reduce barriers and ensure fair and orderly rules for the international trading system. In energy, the industrial countries have joined together to coordinate efforts to reduce our dependence on imported oil. We have also established a framework of cooperation with the oil producing countries. In the relations between developed and developing countries, we are fashioning positive cooperation that will further strengthen the world economy. Finally, we have all avoided restrictions on the free flow of capital at a time when pressures existed to create impediments.

In my stay at Treasury, I have seen the world economy pass through some extremely rough weather. Our management, though imperfect, has enabled us to survive—and a bit more.

We survived in the sense that our economies did not collapse, markets continued to function, and we avoided a wave of restrictions on flows of goods and capital among nations. This achievement in itself was considerable. But beyond that, the foundation we have laid can lead to a great deal more—if we do the right things from here on.

We all know that the present situation has both risk and opportunity. We should not fear the risk and we must not fail to grasp the opportunity. Much has been accomplished—much remains to be accomplished. With determination, we can now strengthen the foundation of individual economic stability. With courage, we can eliminate restrictions on trade and investment, in recognition of our interdependence. With patience, we can work together and find the proper balance of opportunity and responsibility for rich and poor alike that is essential in today’s world.

Let us commit ourselves here in Manila to this effort. As we do, I believe we can all look to the future—a future of shared prosperity for all—with confidence.

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

It is my great pleasure to join the previous speakers in expressing my gratitude to the people and the Government of the Republic of the Philippines for the hospitality and courtesies extended to us in Manila. I would like to congratulate this country for having built this impressive Philippine International Convention Center. I feel entitled to this statement, because we have got similar facilities under construction in our capital, Vienna, for the purpose of the United Nations. I would also like to extend a special welcome to our new member, the Comoros.

When comparing the economic situation at the time of the 1975 Annual Meetings with the one prevailing now, it can be readily said that a change for the better has been brought about. Most of the industrialized countries have succeeded in overcoming the most severe economic recession since the 1930s, and it seems that economic recovery is well on its way. Whereas a year ago our main objective still was to continue efforts designed to combat recession in the absence of the long-hoped-for economic upturn, we must now concentrate all our activities on placing economic recovery on a broader and more sustainable basis.

At this point I would, however, be reluctant to accept a position of any rash and unfounded overconfidence in the present economic recovery. The reasons for my somewhat cautious evaluation of the economic developments are the following: (1) Unemployment still continues to be intolerably high; (2) economic recovery starts from an unprecedentedly high level of inflation averaging over 7 per cent in the industrialized world; and (3) the danger of a sudden price increase of a single commodity is threatening the economic upswing.

This year’s Annual Report of the IMF contains a recommendation that expansionary measures designed to reduce unemployment should be taken only after careful consideration for the need of checking inflation. However important this warning against the danger of an again accelerating inflation might be, the overriding objective of our efforts must be the concern to combat unemployment or—to put it in different terms—to maintain a high level of employment, not only for economic but also for humanitarian and therefore political reasons. I may stress this point, although Austria, in 1975, did not experience an unemployment rate of more than 2 per cent and the overall employment figures have been improving continuously ever since. At the same time, we were able to range at the bottom of the international inflation statistics with a gross national product deflator of 8.5 per cent in 1975 and 6 per cent this year.

To bring down the rate of inflation is absolutely necessary as a prerequisite to reach the goal of full employment. In addition to a country’s internal measures, cooperation at the international level should be intensified in order to fight inflation successfully and to bring about and safeguard sustained economic growth on a global basis.

The last two years have thrown light on the problems individual economies have been confronted with. Developments of these two years have clearly shown that the concepts, ideas, and instruments of the last century are inadequate for solving the problems lying ahead of us in the decades to come. What we have been accustomed to describe as “national or political economy” has become a global endeavor. Particularly the relations between the industrialized countries and the nations of the Third and Fourth World bear testimony to the importance of and the need for an international approach.

It was a painful experience in the past to see how measures taken by one country or a group of countries could almost dislocate the entire structure of the world economy. Hence, it was clearly demonstrated how interdependent national economies have become.

Initiatives have already been taken in the past, but constructive decisions will have to be found in the immediate future.

One of the fundamental problems stems from the tremendous balance of payments imbalances, a situation which in the long run can neither be solved by merely creating additional international liquidity nor through the indexation of commodity prices. I am convinced that a fair solution to this pending problem can only be found via income stabilization for the primary commodities producing countries and through increasing aid for the nations lacking resources. A just solution to the problem is indispensable so that all parties concerned would benefit from it. Cooperation in this field would be another example illustrating the extent to which international agreements complement national measures.

Austria is prepared to contribute to the common efforts in assisting the developing countries. We support the Fifth IDA Replenishment and capital increases of both the World Bank and IFC. We have already joined the Special Fund of the Asian Development Bank and are about to join the Inter-American Development Bank. We have contributed substantially to the oil facility and are ready to contribute our share to its Interest Subsidy Account. With legislative measures soon to come, our central bank will be put into a position to participate in this additional activity of the Fund with the amount of SDR 2.3 million.

To underline Austria’s efforts in and cooperation with the international community I am happy to inform you that, as of April 1976, our net creditor position has improved considerably—in relative terms, we rank fourth in the super gold tranche.

Thanks to their unique position and structure, the Bank and the Fund have always been a platform for international cooperation based on the exchange of a broad spectrum of views. After the collapse of the Bretton Woods system, the IMF has shown a remarkable ability to adapt its policies to rapidly changing circumstances. This applies to both its financial activities, such as the oil facility or the compensatory financing of export fluctuations as well as to its approach to the reform of the international monetary system.

The amendment of the Articles of Agreement takes us an important step forward. Especially Article IV should provide the means to guarantee the smooth functioning of the mechanisms required for international cooperation, provided that the member states are prepared to renounce some of their sovereign rights. The firm surveillance by the Fund should become practicable, especially in view of the fact that in times of difficulty the case of every country would be given due regard and consideration.

In conclusion, I would like to make a final remark: since the early 1970s the world has undergone profound changes. High food prices, sharp rises in raw materials and energy costs, especially skyrocketing oil prices—in short, soaring inflation—have been the major factors adding to the most severe economic recession since the end of World War II. Neither the gloomy picture drawn by one side nor the overall optimistic expectations of the other side have proved true. In reality we have succeeded in managing many problems and more or less overcoming the recession. Future prospects look brighter now. With more important tasks before them than ever, the four organizations represented here today have greatly contributed through their efforts to this achievement.

Statement by the Alternate Governor of the Fund and Temporary Alternate Governor of the Bank for the Federal Republic of Germany—Karl Otto Poehl

I have to apologize for the absence of Mr. Apel. Mr. Apel regrets very much that the federal elections in the Federal Republic of Germany have prevented his coming to this Annual Meeting. He has asked me to convey his greetings to you, Mr. Chairman, and to all the distinguished delegates. It is with the greatest pleasure that I am in this country in which cultures have met and mingled for centuries. I thank the President, the Government, and the people of the Philippines for all the hospitality they offer us.

Last year’s Annual Meeting was still clouded by world-wide recession. Today, recovery, which a year ago was just beginning to find form, has now taken on vigor and depth in many countries, including my own, where we expect this year 6 per cent real growth of gross national product (GNP), 4 per cent inflation, and a further reduction of unemployment. While the economy of the Federal Republic of Germany was brought back on a growth track, it provided the necessary support for our trading partners. Even during the recession in 1975, the Federal Republic of Germany’s imports, measured in real terms, registered an increase of 2.6 per cent. This trend escalated during the first eight months of the current year; imports were even soaring by 17 per cent. Developing countries drew more than proportionate benefits from that, as imports from this group (excluding oil producers) rose by 5 per cent in 1975 and by 22 per cent in the first eight months of 1976. Thus, the Federal Republic of Germany has contributed to overcoming the recession in other countries. Our current account surplus (including official transfers) has continued to decline this year; at present it is equivalent to 0.5 per cent of our GNP. I do not think this can be called a large current account surplus and it has been over-compensated by private capital exports.

The securing of a sustainable growth rate calls for economic discipline: governments will have to reduce the budget deficits which they purposely incurred during the recession. Money supply has to be kept under careful control. Decisions on incomes must take due account of productivity.

As Mr. Witteveen rightly emphasized in his introductory statement yesterday, inflation is not the appropriate inducement for economic growth, nor does it bring about lasting relief from unemployment, which is still a severe problem in many countries. Experience has shown that the contrary is true. People in most countries have recognized that inflation is a dismal game with never any winners. In fact, governments embarking on economic stabilization programs have increasingly gained public support.

Economic growth and stability also are by far the best forms of assistance the industrial countries can extend to the developing world. It is gratifying to see that quite a number of the “more advanced developing countries” have managed to steer their economies effectively through the recession. In fact, taken as a group, they were even more successful than most of the industrial countries (if one takes their remarkably high real GNP growth of 6.4 per cent per annum during 1973 to 1975 as a basis for comparison). The external accounts of many developing nations even recorded a noticeable improvement this year.

I fully agree with the several speakers who emphasized the need for an expansion of public aid. But we also need a climate of confidence conducive to increasing the flow of private investment into the developing countries.

The borrowing activity of the World Bank on the German capital market can demonstrate what credit standing and confidence in a borrower can do: during the past 15 months, the Bank has borrowed deutsche mark equivalent to well over $1 billion, not counting substantial borrowings from the Deutsche Bundesbank, thus reaching the impressive figure of $3.4 billion debt by the Bank due in deutsche mark. . . .

I am pleased to note that the question of a selective capital increase [of the World Bank] is about to be settled according to the well-established practice of parallelism with IMF quota increases. As far as the new proposals that have been made for a further strengthening of the Bank’s capital, I agree that this question has to be kept under review and that member countries should not hesitate to take the next step as soon as possible. . . .

Free trade and capital flows prosper best in an environment of confidence in the stability of monetary relationships. In Jamaica we recognized that this kind of confidence would best be created if trading partners followed converging lines of domestic economic policies. The Fund’s Annual Report clearly and convincingly supports this philosophy.

Floating rates are not the cause but the result of the instability. I am convinced that floating has shielded the international community from falling back into a nightmare of trade restrictions and from a resurgence of capital controls.

Recent exchange rate movements seem to have taken the right direction, even if some of these movements appear to be exaggerated. But after all, we ought to acknowledge as a fact of life that opinions formed in the exchange markets are not necessarily identical to government opinion, and that government opinion has often proved to be less than convincing.

At any rate, the German Government is basically satisfied with the floating system, not merely because it is the only one we can presently afford, but because it greatly assists the economic adaptation which we need so urgently.

We are, no less than others, desirous of exchange stability and we definitely believe that this must be achieved on the basis of domestic stability everywhere. We fully support the work undertaken by the Fund to implement Article IV with the objective of more effective surveillance of exchange rate policy. We would, however, expect the Fund to focus its attention also on the surveillance of “underlying economic conditions,” and not just on intervention policies.

My country does not shirk the responsibility it has in a strong balance of payments position. The Federal Republic of Germany provided substantial amounts of balance of payments assistance on a bilateral basis; it also took part in multilateral arrangements for deficit countries within the framework of the European Economic Community and the IMF. Despite some serious reservations, the Federal Republic of Germany also ratified the safety net of the Organization for Economic Cooperation and Development and supported the Jamaica decision to extend IMF credit tranches. The access to our capital market is completely open and many foreign countries make use of it. Last but not least, the Federal Republic of Germany did not resist the appreciation of the deutsche mark—measured as effective appreciation against trading partners—by more than 50 per cent since 1969, by about 27 per cent since 1972, and more than 10 per cent since the beginning of this year. And I subscribe to the communiqué of the Interim Committee, that “exchange rates should be allowed to play their proper role in the adjustment process.”

We would very much welcome the IMF assuming a larger role in future financing of balance of payments deficits. So far, its regular facilities have been used amazingly little. Only six members have drawn on the second credit tranche where conditionality really begins. To me, conditionality is not an irksome intrusion into the spheres of national autonomy, but a helpful guide to better stability performance and a useful instrument of improving the adjustment process, and it gives new strength to the credit standing of the debtor country. Like Mr. Witteveen, I would consider it a healthy development if balance of payments credits extended by commercial banks and even by monetary authorities could be geared to IMF drawings and to their conditionality.

Summing up, the Federal Republic of Germany is fully prepared to participate in the adjustment process. We do this by keeping our markets open, by fostering imports and capital exports, by allowing our exchange rate to adjust, by reducing unemployment, and by pursuing economic growth. But I wish to make it quite clear: we will not accept adjustment by inflation.

Statement by the Governor of the Bank for Algeria—Abdelmalek Temam

It is with great pleasure that I address this honorable assembly which comes together each year to discuss the problems confronting the international financial community and the solutions and approaches developed to deal with the economic, monetary, and financial disturbances that have characterized our world in the last few years.

I feel that at this time—more than five years after what has been called the “legalized destabilization” of the international monetary system—we can attempt to draw up a balance sheet of the monetary and financial actions undertaken at an international level within the framework of efforts to reorganize the world economy. Drawing up such a balance sheet is not easy, as the structure of international economic and financial relations is marked by vast disparities among the principal groups of countries participating in international trade.

Nevertheless, I feel that such a balance sheet is useful and necessary because it could illustrate “à contrario” the benefits which the international community as a whole will certainly derive from the implementation of a genuine political will to bring about change—a will born not from the search for partial solutions to problems of national interest, which are often contradictory and of a short-term nature, but from the search for global solutions, taking into account the long-term interests of the international community as a whole.

It was in this spirit that Algeria requested at the end of 1973 that an extraordinary general assembly of the United Nations be called to examine all aspects of the raw materials problem within the framework of a global reform of the international economic order. The purpose of this proposal was by no means to secure short-term advantages for certain groups of countries to the detriment of other groups, but to correct the functioning of a set of factors impairing world-wide economic equilibrium and, thus, the development of nations. As is frequently emphasized, if the economic and social gap which divides mankind into two unequal blocs—one affluent and the other poor—continues to widen, the world will be faced with increasingly serious threats in the future. Numerous scholars and researchers who are concerned about this situation share, in this respect, the concern of Third World advocates of a reform of the international economic order.

The extraordinary assembly of the United Nations on raw materials and development in April 1974 did, in fact, initiate a process of continuous world-wide negotiations among the major trading nations. Since then these negotiations have been carried on at different levels within previously existing frameworks or new ones, such as the Conference on International Economic Cooperation.

This process of continuous negotiation, which was initiated by the countries of the Third World on the occasion of the oil price adjustment, is fully consistent with the spirit of the Havana Charter drawn up in 1948 in the wake of the economic havoc wrought by World War II. In the areas of trade and employment, this Charter had called upon the United Nations to contribute to “equilibrium and growth of the world economy” by safeguarding access to markets, sources of supply, and means of production for all countries “under equal conditions” so as to stimulate industrial development in each country without discrimination.

Until a few years ago, however, international economic negotiations had been largely limited to negotiations among industrial countries, as a consequence of the rapid recovery of the industrial countries’ economies in the 1960s, the tensions of the Cold War, and the structural weakness and dependency of the economies of the newly independent nations. The increase in the number of independent nations, the growing awareness of the problems of underdevelopment, and then the economic depression in the industrial countries and the energy crisis, contributed to resuscitating the true spirit of the Havana Conference.

The debate on the reform of the international monetary system was first opened in the mid-1960s by certain theoreticians, and with lively controversies on the role of the dollar as a reserve currency. The decisions taken by the U.S. authorities in August 1971 clearly caused the collapse of the Bretton Woods system and ushered in a period of far-reaching monetary instability calling for an urgent reform of the system as a whole.

It was in response to this need for reform that the Committee of Twenty was established by the IMF Board of Governors Resolution of July 26, 1972. In this advisory Committee the Third World countries were represented in proportion to their electoral representation in the Fund. Despite this, however, effective negotations on international monetary problems tended to take place within the framework of an increasingly restricted group of industrial countries, originally the Group of Ten and more recently the Group of Five. The way in which the Fund Articles of Agreement were amended in the last few months shows, once again, that the effective decisions on international monetary matters continue to be made by a small number of countries on which the various consultation procedures established within the Fund or elsewhere have but a very limited impact.

The reforms embodied this year in the Fund Articles, as well as the various measures adopted, constitute a first step toward recognition of the changes that have occurred in the world economy and in this sense reflect very well the current interim period of the monetary system.

It seems to us, however, that, rather than preparing the changes which the international community as a whole would like to see in the future, these reforms are placing two major obstacles in the way of a sound and equitably distributed growth of world trade. First, the industrial countries themselves have been unable to find basic solutions to questions of vital importance for the functioning of an international monetary system, such as the composition and allocation of reserves, the elasticity and control of international liquidity, exchange rate margins, etc. This, of course, leaves us with some major uncertainties for the future.

The second obstacle is not unrelated to the first: the reforms introduced in favor of the less developed countries (Trust Fund, Subsidy Account, conditional expansion of the compensatory financing facility, increase in quotas and their partial redistribution in favor of the oil exporting countries) do not, in the eyes of the less developed countries, constitute a qualitative change that could enable them, eventually, to enjoy conditions of true equality in international trade and in the distribution of world industrial growth.

This concern on the part of the developing countries is aggravated by the restrictions certain leading industrial countries are attempting to place on the activities of the World Bank and by the uncertainty that surrounds the replenishment of the resources of the International Development Association. The problems currently besetting the Bank and its affiliates seem to confirm what is at best a wait-and-see attitude on the part of certain industrial countries that play a key role in the functioning of the Group with regard to the problems raised by the persistence of underdevelopment, even though these problems are basic to the future of the world economy.

This same wait-and-see attitude is also evident in international economic negotiations at other levels. It is sometimes attributed, in concrete terms, to the desire on the part of the industrial countries to see the members of the Organization of Petroleum Exporting Countries (OPEC) provide an even greater share of the Third World’s financing needs, as in the case of the International Fund for Agricultural Development. We feel it necessary to point out here that this attitude is fully consistent with the desire of certain countries to divide the nations of the Third World and set them one against the other. All that they are succeeding in doing, however, is to delay the solution of problems that are becoming more acute in the meantime. How can one also fail to mention the inequity of trying to make a group of countries, themselves among the ranks of the developing nations and with an aggregate gross national product (GNP) equivalent to not more than 5 per cent of the GNP of the industrial nations, bear the same financial burden as all of the industrial nations combined.

It is common knowledge that the OPEC countries have never, at any time, shirked their international economic responsibilities. The manner in which they have managed their temporary financial surpluses has provided the industrial nations with the liquidity required for the proper operation of their economies during the period of energy price revision. What is more, they are currently devoting at least 3 per cent of their GNP to development assistance, as compared with only 0.36 per cent for the industrial countries. It should also be pointed out that assistance from the OPEC countries is granted without any countervailing flow of funds, unlike aid from the developed countries, most of which flows back in the form of purchases of goods and services. At the same time, the financial reserves of the OPEC surplus countries are being steadily eroded by the loss of purchasing power resulting from the constant rise in the prices of industrial products and capital goods.

The improvement in international trade that has occurred in recent months, attributable to the revival of economic activity in the industrial nations, must not become a reason for the major industrial countries to sit back and be satisfied with interim solutions that are intended more to treat the effects of the maladies affecting the world economy than to deal with their underlying causes. The studies carried out and the ideas advanced during the consultations and negotiations that have been under way at various levels without interruption over the past few years can, nevertheless, open the way to far-reaching reforms in the world economy. However, debates on procedural points, arguments about what is to be included on the agenda, and uncompromising attitudes on the part of certain major world trading powers cannot be allowed to continue to hold up the implementation of these reforms.

The areas these reforms are to cover and the various aspects of their implementation have now been clearly defined, both in the United Nations Conference on Trade and Development (UNCTAD) and by the Conference on International Economic Cooperation. They relate to the means of removing obstacles to development: improved operation of the market for commodities; maintenance and improvement of the terms of trade and hence of export earnings; transfers of technology and reduced cost of access to technology; diversification of agricultural production and improved yields. Implementation of these reforms will obviously require a return to international monetary stability and development of the international financial system along lines such as will assure the developing countries of proper access in terms of their economic potential, their natural resource base, and their needs. Only under such conditions can the countries of the Third World achieve substantial and sustained progress in their development efforts.

In this context, the Bank and the Fund—as the two agencies in the international community with the widest experience and the greatest resources in financial, monetary, and development matters—ought to assume a more dynamic, more autonomous role. Without relaxing their strict standards, which have been the secret of their success, it is nonetheless their responsibility to translate into reality the aspirations for change and adjustment expressed in other international forums.

To this end, the executives and specialists who manage our two organizations should not hesitate to involve the Fund and the Bank gradually in the process of implementing the New International Economic Order, the object of which is linked to that of the organizers of the Havana Conference, namely, to assure all states of a fair share in the expansion of international trade and of the fruits of industrialization. The manner in which the developing countries—and also most of the industrial countries—have behaved proves that the severest of crises can be solved through responsible cooperation. For this reason, the inequalities in representation that still persist within the Fund and the Bank must not be allowed to continue to hold up their normal development, as desired by the international community, toward growing participation in the development of the Third World.

The Outline of Reform of the Fund prepared by the Committee of Twenty, together with the work of its various technical groups, brought to the fore the various problems relating to the evolution of the Fund’s role, both with regard to the nature of the link and as regards the mechanisms for substitution or adjustment. What we should now like to see would be for all the member states to encourage the committees established for the studies on reform of the monetary system to continue their work further, because to our mind they represent an appropriate level of discussion, intermediate between such global forums as UNCTAD or the Conference on International Economic Cooperation and the two institutions with the largest resources and the greatest experience, namely, the Fund and the Bank.

Development financing should no longer be regarded as separate from the international monetary and financial system. With the present arrangement, the advantages of the system are in practice reserved for the already industrialized nations. In reality this runs counter to the needs felt within the international community and thus to its interests. Industrialization of the Third World, which is vital in the long run for the continued expansion of international trade, cannot succeed unless the developing nations are assured of appropriate conditions for development finance and balance of payments adjustment.

The development process is a world-wide process. The fragmentation of efforts in this field helps to maintain the duality of structures, both national and international, responsible for the continued existence of inequalities. Over the past 30 years, under highly unfavorable conditions, the developing countries have shown that they can accept the strictures under which the financial markets operate, strictures that must apply to any form of economic development. Accidents in the debt service performance of these countries have in actual fact been few and far between, having regard to the rapid increase in the number of borrowers and the expanding volume of this debt. However, the terms on which financing is provided (both duration and interest rates) still have to be rendered appropriate to the conditions of development and industrialization; action is likewise needed to stabilize export proceeds and to provide adjustment mechanisms in the event of external deficits. Such action is entirely consistent with a sound international monetary and financial system that will assure all countries of equal access to the resources available.

Here I cannot but express the concern of most members of the international community at the obstacles of various natures which still block the path to reform of the world economy. It is to be feared that some of the more pessimistic economic forecasts may come true in the near future if we do not succeed quickly in laying the bases for understanding and harmony in international economic relations.

For this reason, I shall conclude my remarks by appealing to this assembly to ensure that the reforms brought about in 1975 and 1976 in the international monetary sphere do not simply perpetuate the past with a few minor changes, but rather open the way to the future. We must redouble our efforts and undertake additional studies in an endeavor to translate into practice the wishes of the international community. The eyes of the world are on us again this year and I express the hope that our work will help to widen the paths of international cooperation, to harmonize the negotiations going on at various levels, and to arrive at basic solutions to the world’s economic problems.

October 5, 1976.

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