Discussion of Fund Policy at Fourth Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
October 1976
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Report to the Boards of Governors of the Bank and the Fund by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee)—Henri Konan Bédié

The Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries was set up by a resolution that you adopted in Washington in October 1974. I should like now briefly to summarize the work done by the Development Committee during the 12 months since the Annual Meetings in Washington in 1975.

The Development Committee owes its origin to the convergence of two major factors. First, the developing countries had brought home the point, throughout the work of the Committee of Twenty, that trade and development problems formed an integral part of the overall problem of reform of the international monetary system. Second, the evolution of the international economic situation had made it necessary to create such a forum.

Since the Annual Meetings in September 1975 the Development Committee has met twice, simultaneously with the meetings of the Interim Committee, on January 9 in Jamaica, and last Sunday in this splendid conference center.

During its first year the Committee devoted a large part of its attention to the more pressing problems of the developing countries, in view of the new difficulties of an exceptional size and acuteness that they faced. The Development Committee speedily lent its support to the proposal for establishing the Trust Fund since set up by the Interim Committee and the Executive Directors of the IMF. But it was recognized also that the Committee’s essential role would be to give attention to longer-range problems, i.e., the capital needs of the developing countries and the necessary machinery for satisfying them. Thus, the Committee unanimously supported the establishment of a new development financing facility, the World Bank’s Third Window. But even with this unanimous support, the Third Window target of $1 billion has not yet been attained, because the contributions to its subsidy fund have remained inadequate in spite of the Committee’s repeated appeals to the donor countries.

At the Jamaica meeting the Development Committee examined the various aspects of the use of Trust Fund resources and considered the initial findings of its Working Group on access of developing countries to private capital markets. It also endorsed the need for a substantial increase in the resources of the international and regional development financing institutions, particularly the International Development Association (IDA).

At its October 3 meeting the Committee reviewed constructively two important questions: capital market access by the developing countries, and adoption of its work program for the coming months.

I should like now to summarize briefly the main points of the discussions concerning transfers of real resources, before drawing one or two conclusions.

First of all, at each of these meetings the Development Committee made an analysis of the economic situation of the developing countries. The persistence of exceptionally high current account balance of payments deficits in the developing countries continues to be cause for real anxiety, particularly since the prospects for the next few years are hardly encouraging. The countries have financed these deficits by drawing down reserves and, in particular, by massive recourse to high-cost commercial loans which have increased their external indebtedness and their debt service burden. The poorest developing countries have experienced practically no growth in per capita income since the end of the 1960s, while the creditable performances of the middle-income countries have been substantially slowed by the economic crisis the world has just passed through.

The Committee also devoted special attention to ways of improving the terms of resource transfers, particularly as regards the goals for volume of official development aid and the measures taken to achieve them. The Committee decided to set up a second working group, which will submit specific recommendations in this field and on the role of adjustment in the development process. This second working group will also study the proposal to set up an International Resources Bank under the aegis of the World Bank and will present its conclusions at a future Committee meeting.

The Committee further recognized that official aid to the developing countries is insufficient in aggregate terms and stated its firm conviction that the Fifth Replenishment of the resources of IDA should take place in good time to allow IDA to maintain continuity of its operations beyond June 30, 1977. Moreover, many members of the Committee took the view that IDA V should be sufficient to ensure an increase in real terms in relation to IDA IV, although there had been no evidence of any appreciable progress since the Jamaica meeting last January.

The Committee also accomplished particularly constructive work on the question of access by the developing countries to private capital markets. Last Sunday it adopted a number of recommendations prepared by the Working Group set up by the Committee at its Paris meeting in July 1975. These measures relate first of all to liberalization of access to the markets of the capital exporting countries, to the extent that the balance of payments situations of the latter permit. The capital exporting countries will also afford favorable treatment to developing country borrowers on those markets with regard to the floating of issues and placement in the issues calendar; they will also, up to certain amounts, endeavor to keep developing country borrowers outside their quota limits. Other recommendations were also adopted concerning the removal of legal and administrative barriers.

The Committee also urged the development financing institutions to expand their co-financing operations as a means of augmenting private capital flows to the developing countries. The Committee recognized the need to strengthen technical assistance activities to developing countries that wish to enter the private capital markets, and recommended that the International Finance Corporation (IFC) consider expanding these activities.

Finally, the Committee decided that the Working Group should pursue its work and present new recommendations on the question of multilateral guarantees, the proposal to establish an International Investment Fund, and improvement of the existing reporting systems on private capital flows.

I can state with conviction that the establishment of the Development Committee was a valuable step. The bringing together around the same table of 20 finance ministers, representing the industrialized, the oil exporting, and the developing countries was a constructive innovation. I have accordingly been asked to present to you, as Chairman of the Committee, a draft resolution,2 approved by the Committee, extending its life for a further two years.

In conclusion, I should like to reiterate that, while the analysis, review, and study together of the economic problems of the developing countries is a necessary and indeed a useful stage, it is no more than a stage.

Whatever the efforts undertaken by the developing countries in the internal management of their economies—and these efforts are many and real—they stand in urgent need of substantially increased external assistance. It matters little in the final analysis, as Mr. McNamara said yesterday, what form this external assistance has to take. The volume of this external assistance, combined with the sincere efforts of the developing countries themselves, must be sufficient to meet the fundamental challenges of underdevelopment. It is not ideas that are lacking, but the commitment and the political determination of all the donor countries, both traditional and new.

The Development Committee was set up to impart thrust to and serve as a catalyst in the mobilization of the necessary efforts to attain this position. There are some who have voiced frustration about the results achieved by the Committee during the last two difficult years. Personally, I believe these opinions reflect not only a certain lack of understanding of the role and powers of the Committee vis-à-vis the two institutions but also, and more particularly, the very unequal performances of the donor countries and the lack of any real political commitment.

Without the essential global political will to increase transfers of real resources rapidly and substantially, the frustrations of the developing countries will persist. I venture to hope that the entire international community is conscious of its responsibilities in the eyes of history.

That, at all events, is my hope, and one that I express loudly and clearly as I come to the end of my term of office as the first Chairman of the Development Committee.

Statement by the Governor of the Fund for the Central African Republic—Marie-Christiane Gbokou

I am greatly honored by the confidence which the African Governors have shown in me this year by appointing me their spokesman, and in that capacity I have to express before this honorable assembly the concerns and anxieties of our vast and rich continent whose development is hampered by obstacles inherent in the tensions which have characterized international economic relations in the last few years.

Before fulfilling my formidable mission I should like, on behalf of the African Governors, to convey to His Excellency, Ferdinand Marcos, President of the Republic of the Philippines, and to the First Lady of the Philippines, as well as to the Government and the gallant people of the Philippines, our most fraternal greetings and our sincere appreciation of the warmth and efficiency with which they have welcomed us here. The enormous efforts which they have made to provide us with ultramodern facilities and the perfect technical organization of this meeting cannot but ensure the success of our work. I should also like to take this opportunity to congratulate and welcome the delegations of Guinea-Bissau, Surinam, Papua New Guinea, and the Comoros, who are attending our meetings for the first time.

At our last Annual Meetings in Washington the African Governors emphasized the economic difficulties which were hampering the development efforts of their continent. The world-wide inflation was continuing to drive up the cost of our imports; the deterioration in our terms of trade was accelerating from one year to the next, while the flow of real resource transfers from the industrial to the developing countries was steadily declining. Moreover, our capacity to finance the imports so sorely needed for our economic development was limited by trade restrictions.

Since then, our problems have only become worse. After having deteriorated by 13 per cent in 1972, our terms of trade declined by a further 17 per cent in 1975. The burden of our external debt is now reaching intolerable proportions and is severely jeopardizing all our investment programs. The excessive cost of imports has forced us to introduce rigorous tax reforms, which have had an adverse impact on the growth rates of our economies. The cumulative effect of these developments has confronted most of our countries with serious balance of payments disequilibria.

This recessionary situation, which our young developing nations have been facing for so many years, is the consequence of a deliberately indifferent attitude toward their welfare that the more affluent members of our international community have always displayed.

Although all countries have been affected to a greater or lesser degree by the present economic situation, there is no doubt that the industrialized countries could expand their development aid programs beyond the present level. At a time when official development assistance should increase, it remained stationary in real terms at 0.32 per cent of the gross national product of the Development Assistance Committee countries until the end of 1974. An insignificant rise in official development aid was registered in 1975.

The adjustment of our current payments was accomplished to some extent by reducing our small foreign exchange reserves, but especially through massive recourse to external borrowing, often available only on onerous terms in private financial markets. Hence, Africa’s external public debt spurted from $9.2 billion in 1967 to $28.5 billion in 1974. This has meant a considerable aggravation of the debt service burden for a number of African countries, a burden now equal to 20 per cent of export receipts for some of them.

Other estimates place the balance of payments deficit of the non-oil exporting developing countries in the neighborhood of $40 billion for 1975. According to a recent estimate by the United Nations Conference on Trade and Development (UNCTAD), the net flow of capital to these countries will have to rise to about $85 billion annually, at current prices, if they are to achieve an annual growth rate of 6.6 per cent for the period 1976–80, and thus to reach the 6 per cent objective set for the second development decade. The needs of the most seriously affected countries are estimated at $30 billion, or three times the volume of capital made available to those countries in 1975.

It is therefore undeniable that, if we wish to reach the objective set for the second development decade and the New International Economic Order, suitable measures should be taken at both the national and the international levels to enlarge the transfer of real resources to the developing countries. Unfortunately, the principal industrial countries seem little disposed to play a major role in this direction.

The indifference of the industrialized countries to the basic problems of the Third World was clearly demonstrated at the fourth meeting of UNCTAD in Nairobi last May. The establishment of a new international order, including all facets, such as commodities, technology, finance, and monetary relations, was dealt with in an exhaustive precise document entitled the Declaration of Manila, and presented to the conference at Nairobi by His Excellency, President Marcos, Chief of State of the Philippines. In addition, the UNCTAD Secretariat distributed explanatory notes in support of the Declaration. Neither these notes nor the various addresses made at the lengthy negotiating sessions had the slightest success in eliciting a positive reaction from the large industrialized countries. Hence, the Fourth Conference on Trade and Development was definitely a missed opportunity.

The situation is even more discouraging as regards the results of the Conference on International Economic Cooperation being held in Paris. The committees created to deal with raw materials, development, energy, and finance have been stymied by the negative attitude of the rich industrialized nations toward all proposals made by the developing countries. The gap separating the two parties remains very wide, and the prospects for achieving concrete results are not encouraging.

In addition, the Development Committee was established two years ago. We hoped that it would facilitate an expanded transfer of real resources to the developing countries. Although this Committee stimulated the establishment of the Third Window at the World Bank, a number of industrial countries have not contributed to this facility and oppose its being given a permanent status. The African Governors insist on the need to strengthen the operations of this facility, which is of considerable importance to their countries. They therefore urge that its program be set up on an annual basis, as is the case with the Bank’s general program, and that the amount of money intended for the facility be larger than it is now.

Despite the difficulties which this institution is facing, we in Africa remain convinced that the Development Committee is the most suitable forum for discussion at a high political level of matters relating to the transfer of real resources. . . .

It is undeniable that the World Bank alone cannot meet all the needs of the poor countries. The problems we must face can be solved only with the help of all countries. In this connection we wish to congratulate the members of the Organization of Petroleum Exporting Countries (OPEC), whose financial assistance to the poor countries totals 2.5 per cent of their gross national product. We appeal to them to continue demonstrating this generosity in the future. We invite the industrialized countries to follow the example of the OPEC countries, as well as the no less praiseworthy example of Sweden and the Netherlands, whose development aid programs surpass the target of 0.7 per cent set by the United Nations.

The experience of the present economic situation shows the need to help poor countries diversify their economies. The African countries which today account for only 0.6 per cent of world industrial production greatly need increased assistance to expand their share to at least 2 per cent before the decade comes to an end. It is apparent that the industrialization of the poor countries calls for technology adapted to their resources. It is equally clear that we, for our part, must contribute effectively to the conception and adaptation of a technology that meets our needs. We invite the World Bank and bilateral aid agencies to give priority to the problem of transfer of technology in their operations in our countries.

I should like to turn now to the monetary problems which, along with the economic problems we have been discussing, our countries have been facing in the last year. The Declaration of Rambouillet, published last November by the Heads of State and of the Governments of the United States, the United Kingdom, the Federal Republic of Germany, France, Japan, and Italy, led us to believe that a new era in exchange rates was about to dawn and that the system of floating exchange rates would soon give way to a system of relatively stable exchange rates.

Despite the Jamaica agreements, the international monetary system has since then experienced a series of violent, erratic fluctuations in the rates of exchange of certain major currencies, engendering considerable uncertainty and imposing privations on the African countries whose currencies are linked to those major currencies. Most of our countries therefore find themselves in a situation in which they can no longer maintain either the purchasing power of their currencies or the value of their exchange reserves and export proceeds.

We therefore feel that we ought to draw the necessary conclusions from this experience. First, we can no longer have confidence in, or rely upon, decisions relative to the international monetary system—decisions taken in restricted forums where our interests are not protected. Further, we have always contended that such decisions can be sensible and effective only if they enjoy consensus in the world community, for which the International Monetary Fund is the forum.

Second, the experience of recent years once again illustrates the dangers inherent in the system of floating exchange rates. The risks as well as the uncertainties associated with it are very costly to the concept of an orderly, stable international monetary system. In addition, while the developed countries are better prepared to absorb without risk the effects of erratic exchange rate fluctuations, the same is not true of the developing countries, whose room for maneuver in this area is limited. Our fears regarding the floating exchange rate regime have very recently been substantiated, and now we are more convinced than ever that the survival of the international monetary system depends on a prompt return to a system of stable but adjustable exchange rates. Without such a system and effective surveillance by the Fund, applied to deficit member countries as well as surplus member countries, we can expect only chaos.

Third and last, our recent experience reinforces our conviction that the creation of a Substitution Account in the Fund is an urgent necessity. Through such an account, we could keep most of our exchange reserves in SDRs, which constitute a relatively stable reserve asset, and thus escape the risks and uncertainties associated with the maintenance of our exchange reserves in the major national reserve currencies.

Turning now to the intervention of the international community in the critical situation in which the developing countries (which are innocent victims) find themselves, the International Monetary Fund has reacted by providing for greater use of its resources, thus facilitating the adjustment process. Our medium-term and long-term objective is to promote a new economic order which will contribute, among other things, to the growth of world trade, the setting of remunerative prices for our exports and stable prices for our imports, the elimination of discriminatory restrictions on trade, the equitable and appropriate distribution of international liquidity, and the development of an international monetary system based on stable but adjustable exchange rates. All these objectives, in the framework of international cooperation and trust and of a sincere political will, could promote the growth and development of the African economies and the return to healthy, balanced balances of payments.

While striving to achieve this objective, however, we would ask international financial organizations and friendly governments to provide us with appropriate financial and technical assistance to facilitate the adjustment process. That is why we regret that the Fund terminated the oil facility in 1975. Despite its rigorous conditionality, this aid has proved a significant means of financing much of the oil deficit of certain non-oil producing member countries of the Fund. We must, however, deplore the fact that the developing countries were able to obtain only a third of the money available through this facility because some developed countries, though they could have found other sources to finance their deficits, used this facility instead, and because of the criteria and methods used to determine access to it.

We note with satisfaction that the Subsidy Account, which was established last year to handle the voluntary contributions of Fund member countries with strong balances of payments and which is designed to reduce the cost of 1975 oil facility drawings for Fund members categorized among the most seriously affected developing countries, has already begun to make disbursements. We also note with satisfaction the commitments to the Subsidy Account already made by several member countries and the contributions made by some of them. We believe, however, that total commitments to date are modest; if the goal of the Subsidy Account is to reduce appreciably the real interest rate charged on drawings under the 1975 oil facility by the most seriously affected countries, contributions will have to be more substantial both in their size and in the number of contributors. We therefore invite all member countries with a strong balance of payments or in a position to contribute, especially those which have not yet made a commitment, to give their active support to the Subsidy Account through substantial commitments and contributions.

We appreciate the decision taken last December by the Executive Directors of the Fund to liberalize access to the compensatory financing facility. Nevertheless, we sincerely hope that, when the compensatory financing facility is next reviewed, invisibles will be included in the base for calculating export shortfalls. We should also like to stress the fact that access to the compensatory facility should never be denied to members with a proven export shortfall merely because their total authorized drawings under this facility during a given period, or their total actual drawings, have reached an arbitrarily fixed sum.

The enlargement of the Fund’s credit tranches, giving its members greater access to utilization of these resources, modest as it is, is a step in the right direction. This enlargement (which has benefited all countries) has been effected because of the deterioration in countries’ balance of payments situations as a consequence of the protracted world inflation and recession. Considering that the recent economic recovery has been slower than expected and less far-reaching than had been hoped, that it will take some time for the economic recovery in the industrial countries to be reflected in a growth in demand for primary products, and that in particular that the expected increase in the IMF quotas of the African countries is quite negligible, we ask that present tranche policies be maintained even after the increased quotas have entered into effect. We also suggest that the stricter conditions imposed on access to the higher credit tranches, which have tended to discourage their use by the African members, should be progressively liberalized in light of the particular economic circumstances of each member country. Until this is done the countries will have no choice but to resort to restrictions on imports and other current payments, thereby running counter to the Fund’s basic objectives.

The fact that in three years only two applications under the extended Fund facility have been approved shows that either access to this facility is strictly limited by the Fund or the conditions attached to it are extremely harsh and unnecessarily prohibitive. We request that the Fund review the provisions of this facility as soon as possible with a view to making some of these conditions more flexible.

While we applaud the setting up of the special Trust Fund, we wish to stress that unless the countries with strong balance of payments positions contribute generously to it, the profits on the sale of gold which are to be allocated to this Fund for the benefit of the underdeveloped countries will be completely inadequate in the face of their enormous balance of payments needs. Moreover, it is regrettable that the conditions laid down for utilization of the resources of this Fund are those of the first credit tranche. The fact that an eligible member that wishes to draw on the resources of the special Trust Fund has to prove that it has balance of payments problems and that it is making the necessary effort to resolve them, limits access to the Trust Fund resources. What we are asking is that, in assessing the balance of payments needs of the underdeveloped countries and the efforts they are making, the Fund give them the benefit of the doubt.

In addition, we regret that there is no provision for the granting of nonreimbursable assistance by the Trust Fund. We hope that at the appropriate time the Trustee of the Trust Fund will study the question of making nonreimbursable grants to certain developing countries, particularly those classified as most severely affected.

We continue to support the buffer stock facility and request that its machinery be simplified and made less restrictive. Furthermore, we think that this facility should embrace all similar institutions already set up by Fund members.

We are also concerned about the excessive importance attached by the Fund to the provisions of the Rome communiqué of the Committee of Twenty asking all countries to refrain from imposing new or tightening existing trade and payments restrictions. We accepted this condition of access to the oil facility because of the special circumstances that led up to its creation. However, since the oil facility no longer exists, we see no justification for extending this condition to use of other Fund facilities set up to meet totally different situations. We believe that the General Agreement on Tariffs and Trade is the institution best placed to deal with this problem.

Our experience with the Sixth General Review of Quotas has been rather disappointing. We found the review procedure too long, arbitrary, and very complicated. Since the Seventh Review has to be completed within three years following the entry into effect of the Sixth General Review of Quotas, we suggest that the Seventh Review begin without delay. We seriously believe that the Seventh Review should aim at a number of objectives, among which the most important, in our view, is improvement of the criteria and methodology used in determining members’ quotas.

Finally, the African Governors wish to express their complete support for the latest recommendations of the Ministers of the intergovernmental Group of 24. They request that the Interm Committee and the Development Committee, as well as the administrative authorities of the Fund and the World Bank, take maximum possible account of these recommendations in their future work.

It is beyond question that some progress will be made in 1976 in reforming and strengthening the international monetary system. We note with satisfaction the changes initiated in the characteristics of the SDR and in the expansion of the role assigned to it, together with simplification and expansion of the various types of financial operations and transactions of the Fund, making possible a greater utilization of its resources in 1976 by a number of developing countries.

We have already stressed the additional improvements that should be made in the monetary system, and we are convinced that our Managing Director, whose unflagging efforts have made this progress possible, will be able to conclude successfully the delicate and essential task that remains to be accomplished. We take this opportunity to pay solemn tribute to him and to congratulate the Executive Directors and staff at the Fund for their important contribution to the study of these difficult problems. . . .

With these thoughts I shall close my remarks, in the hope that, by having chosen a woman to speak for it, Africa will at last be heard by this meeting and by the entire international community.

Statement by the Governor of the Bank for Belgium—Willy De Clercq

Economic Situation

Our discussions at least year’s meeting in Washington took place in an atmosphere of profound anxiety. This time we have some grounds for optimism. The world economy is now climbing out of the worst recession since the 1930s. While we can feel relief at the economic recovery now under way, we must also recognize, however, that this recovery still poses some very difficult problems. The major challenge facing most of the industrial economies is how to counter inflation more effectively while at the same time taking active measures to reduce structural unemployment. This combination of two evils—inflation and unemployment—is a relatively new phenomenon in the annals of economic history.

It is essential, and the IMF’s Annual Report stresses this point, that the industrial countries maintain firm control over the economic recovery so as to ensure that it does not degenerate into a short-lived boom. In other words, we must establish the foundations for sustained balanced growth, and we must pursue a cautious economic policy in order not to reawaken inflationary pressures that would make the recovery no more than temporary.

What instruments do we have available to achieve our objectives? Monetary policy should be called upon to play a moderating role in the recovery. The countries expecting the largest balance of payments deficits and where inflationary pressures are strongest should be the first to employ this instrument. To be fully effective, monetary policy must be backed up by an appropriate budgetary policy designed to bring about a gradual reduction in their sizable deficits. While these deficits were justified in the depths of a recession, they are no longer acceptable in a recovery period. This restrictive policy should stress reduction in government expenditure rather than increased taxation, which would only add to inflationary pressures.

Prices and incomes policy can, we feel, also play a significant role in most of the developed countries in helping to achieve noninflationary growth. This necessity has, in any event, been clearly perceived by the governments of the member countries of the European Economic Community, which arrived at constructive agreements with their social partners in the Community in Luxembourg last June.

Furthermore, we are also convinced that the fight against inflation requires more systematic management of the system of floating exchange rates. Such management should not exclude a voluntary policy aimed at lessening the excessively violent and disturbing fluctuations to which certain currencies have been exposed. In this aspect in particular, an active monetary policy can play a valuable role.

Recent events have, we feel, indicated certain limits to the system of floating exchange rates. It is illusory to think that floating rates can, by and of themselves, re-establish economic equilibrium in the short term. There is a risk that the current disparity in rates of inflation will be automatically perpetuated when the currencies of the so-called weak open-economy countries depreciate, as the resultant higher import prices will, in turn, raise costs.

However, I want to be properly understood here. While I regret the fact, I do recognize that, under present conditions, a return to fixed par values seems out of the question. We would be deceiving ourselves to think otherwise. We also agree that, if any exchange rate policy is to be successful, it must be accompanied by an economic policy designed to stabilize the underlying conditions of the economy.

The point that we wish to emphasize, however, is that countries should make increased efforts to regain equilibrium through internal adjustments and that it is in their interest, if basic economic conditions allow, for them to pursue an active policy of exchange rate stability.

This is, in fact, the policy we are pursuing in Belgium. We have taken a number of measures in the budgetary, income, and monetary fields to defend the participation of the Belgian franc in the European monetary snake. We know very well that if we let the Belgian franc depreciate, we would only increase the rate of inflation. Hence, floating would not solve any of our problems: on the contrary, it would remove a useful constraint in our struggle against inflation. We are all the more determined to pursue this course as our balance of payments position is sound and fully justifies our maintaining the stability of our currency vis-à-vis those of major trading partners. That is why I wish to restate here, in unequivocal terms, our fundamental support for the European monetary snake. Despite the troubles that sometimes beset it and despite the skepticism of certain observers, the snake remains an invaluable aid to stability for those participating in it, and we hope that its role can be strengthened in the future.

The other aspect of the challenge facing many of the industrial countries today is the rise in structural unemployment. One of the main causes of the extension of this type of unemployment in countries such as Belgium is—as we see it—the fact that, because of the sharp rise in unit labor costs in particular, the pace of investment has slowed and the emphasis has been on rationalization rather than on expanding production capacity. Thus we need a policy that will encourage investments. A policy of moderation for all incomes and success in the fight against inflation should help to enhance the profitability of investments.

This policy should help us to reduce unemployment, which imposes a heavy burden on our people and represents an enormous waste of resources. It should also ensure sustained growth for our economies and enable us to make the necessary transfers of real resources to the non-oil developing countries.

This brings me to the two topics which I wish to discuss with you in greater detail, namely, the activities of the World Bank and international monetary matters. . . .

. . . Our participation in this facility [the Third Window of the World Bank] has been submitted to Parliament for approval, as has our contribution to the IMF Subsidy Account. We hope that other member countries will follow our example, so that the targets set by the Bank and the Fund can be reached within the near future. . . .

In concluding this part of my speech, let me emphasize that, despite the impact of the crisis, Belgium has insisted on increasing the total volume of its official aid. For 1975, this amounted to 0.60 per cent of its gross national product (GNP)—0.10 per cent more than in 1974. Our budget estimates for 1977 are based on a contribution equivalent to 0.62 per cent of GNP.

As regards the total flow of public and private resources, the World Bank’s Annual Report rightly points out that Belgium was among the seven countries whose total resource transfer represented over 1 per cent of GNP.

International Monetary Matters

The past year was marked by important achievements from the point of view of both the development of the International Monetary Fund and the evolution of the international monetary system. To mention only a few: completion of the negotiations on the amendment of the Articles of Agreement, the decision on the quota increase, establishment of the Trust Fund, extension and enlargement of the oil facility until February of this year, creation of the Subsidy Account, liberalization of the compensatory financing facility, and the temporary expansion of access to the IMF’s resources.

Nevertheless, I am convinced that it would be a mistake to sit back and feel satisfied with these achievements, and to conclude that nothing else remains to be done.

In my view, we should initiate a new process of reflection which should lead to decisions in two areas: international liquidity and the management of floating rates.

International Liquidity

With respect to the first of these two areas, the recent amendment of the Fund Articles indicates the two objectives that we have to pursue: first, to improve the surveillance of international liquidity, and second, to make the special drawing right the principal reserve asset of the international monetary system. As these objectives seem very remote at present, all of us will need to reflect and then decide jointly on concrete measures that would bring us closer to their achievement.

(1) The role of the special drawing right

In order to make the SDR the principal reserve asset, it will be necessary to reverse the relative importance of the roles played by the dollar and the SDR in the creation and circulation of international liquidity. This reversal cannot be achieved overnight.

The recent amendment of the Fund Articles, which makes the conditions for using SDRs more flexible, constitutes a step in the right direction. However, the current provisions concerning the effective yield of SDRs tend to penalize SDR holders by making their capital value and yield lower than those of dollars invested in the money market. An increase in the effective yield of the SDR is thus an essential condition for making it a true reserve asset.

(2) Better surveillance of international liquidity

One of the major objectives in creating the SDR was to provide the international monetary system with the means necessary to ensure a conscious, deliberate, and responsible growth of the volume of liquidity. Rather than bringing us closer to this objective, the last few years have clearly moved us further from it.

We shall have to reflect anew on this vital subject, and this process of reflection should raise some questions as to the desirable volume of reserves, their distribution among countries, the different assets held as reserves, the share of the conditional element in the total volume of liquidity, the role of the other public or private financing sources, and finally, the control of liquidity.

On this last subject, the Managing Director, Mr. Witteveen, developed some very interesting ideas, during a speech in Frankfurt last October, which should be pursued further and expanded. In examining possible forms of control, he stated:

. . . I am thinking, for example, about the idea of harmonizing the composition of international reserves and the concept of an appropriate degree of asset settlement. . . . Such an approach might aim for the regulation of international liquidity by countries agreeing to hold a certain minimum proportion of their international reserves in the form of SDRs. Adjustments in the aggregate volume of SDRs and/or in the reserve ratio would then also bring about international management of the global amount of international reserves.

In my view, this is the direction in which the Fund’s work should proceed. In this connection we must also endeavor to reinstate the Fund in the central role which it ought to play in the supply and distribution of international liquidity.

Management of Floating Rates

The general objective for exchange rates, as stated in the amended Fund Articles, is to “promote a stable system of exchange rates.” Clearly, the foremost means of assuring this stability, as emphasized in the new Article IV, is for each member to “endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability.” Thus, the return to exchange rate stability can best be assured by promoting the return to stability of all our economies.

It seems to us, however, that it would also be useful to work toward a better international harmonization of policies directly affecting exchange rates. Floating does not relieve the authorities from the need to take measures to counteract exchange fluctuations which are not warranted by the underlying economic conditions. It is not necessarily a question of intervening more extensively in the foreign exchange markets, but rather of making more active use of the other instruments that can enhance stability, especially interest rate policies and controls on capital movements.

We already have the Guidelines for the Management of Floating Rates, adopted in June 1974. These should be worked out in greater detail and strengthened, especially as regards the role of capital movements. The present rules for the management of floating rates hardly take into account the special impact which these movements can have on exchange rates. It is imperative, therefore, that the Executive Directors of the Fund endeavor to develop a new approach to this question as soon as possible.

In concluding my remarks I should like to remind this assembly of the dual challenge which we, as Finance Ministers, are facing on the international level:

  • —On the one hand, we must contribute to improving the economic situation of the poor countries. In this context, I firmly hope that the North-South dialogue will yield concrete results in the near future.

  • —On the other hand, we must promote the return to greater international monetary stability through appropriate domestic and exchange policies.

It is on the basis of our response to this dual challenge that we will be judged by the international community. Let us hope that the judgment will be a positive one.

Statement by the Governor of the Bank for Malaysia—Tengku Razaleigh Hamzah

It is my great pleasure and honor to participate in the thirty-first Annual Meetings of the International Monetary Fund and the World Bank, and to address you today for the first time in my capacity as Governor of the World Bank for Malaysia. I wish to thank the President of the Republic of the Philippines for his kind words of welcome and to express my gratitude to the Government and the people of the Philippines for the warm and generous hospitality they have extended to us. A special word of thanks should go to the Philippine Government and to all the people who, I have been told, practically worked round the clock, to ensure that this magnificent convention center was ready for these Annual Meetings. To the staff of the Fund and the Bank I would like to offer my congratulations for their efficiency in organizing this meeting. My reading of the traditionally well-written and comprehensive Annual Reports of the Fund and the Bank has impressed on me the vigorous activities they have undertaken over the years in preparing the Reports, which in no small measure are due to the efforts of our Executive Directors and the staff of the IMF and the World Bank. May I also take this opportunity to express a very warm welcome to our new member, the Comoros.

We have during the first half of this decade gone through a most turbulent and difficult period, during which the world economy was plagued with unsettling foreign exchange crises, enormous balance of payments disequilibria, sharp fluctuations in the prices of primary commodities, world-wide inflation, and the most serious and prolonged recession in the last 40 years, with unprecedented levels of unemployment in many countries. Through these difficult times, we have seen a number of significant changes in the world economic order. The Bretton Woods system was subject to close scrutiny, culminating in the fifth meeting of the Interim Committee in Jamaica this year when a wide-ranging number of issues crucial for the future evolution of the international monetary system were agreed upon and are embodied in the second amendment to the Articles of Agreement of the International Monetary Fund, which is now in the process of being ratified by our respective governments. These developments have imparted to us some useful lessons. It seems to us in Malaysia, and I am sure to many others, that the most striking lesson is that the continued healthy growth of the world economy, especially in the developing countries, can only be nurtured within a stable international monetary environment.

While developing countries should rely on their own resources as far as possible to attain economic growth, domestic resources are hardly adequate given the pressing problems of unemployment, poverty, malnutrition, and squalor faced by them. Hence assistance is essential. This is the crux of the matter, for without outside assistance many development projects might not even get off the ground. The joint IMF-IBRD Committee on the Transfer of Real Resources to Developing Countries, or the Development Committee, was formed in 1974 to examine the issue of such transfers to the developing countries. While we do recognize that a lot of effort has been put in, the progress of the Development Committee has been most disappointing. As a developing country, Malaysia would recommend that the overall approach and entire mechanism for the transfer of real resources to the developing countries must merit a fresh look and new mechanisms created to attain the resource needs of the developing countries. . . .

. . . I would strongly urge the international community to consider seriously once again the question of stable commodity prices. The stabilization of commodity prices has always been a subject of concern to Malaysia and I am sure to many other developing countries. Indeed, if we believe that in the New International Economic Order there should be a deliberately organized and systematic transfer of real resources from the developed to the developing countries, and if we believe in the private enterprise system, stability in the prices of commodities which the developing countries produce and market in the developed countries, may provide a generally acceptable solution to the problem of transfer of real resources from the developed to the developing countries.

We should recognize that the erosion of the resources of the raw material producing countries has been brought about by serious and continual deterioration in the terms of trade of these developing countries. Larger and larger volumes of raw materials, on the production of which our survival depends, are needed to purchase less and less of the goods and services without which our economic development will cease. The real problem, it seems to me, therefore, is how to replace these resources with transfers of new real resources to the raw material producing countries to enable them to continue to produce the raw materials which the world needs, and at the same time enable them to earn a fair margin with which to promote a level of economic and social development that would ensure a rising standard of living for their peoples. And it seems to me that the private enterprise system and the operation of market forces could well be harnessed toward these objectives.

Buffer stock arrangements operating in the private sector with readily available funds to finance them could be useful mechanisms to achieve these objectives. The successful operation of the International Tin Agreement, which establishes a tin buffer stock, is a classic example of what can be done through cooperation between the producers and consumers of a vital raw material and which has achieved some transfer of resources to the producers of tin, certainly to Malaysia, the world’s biggest producer. It has been able to maintain its tin industry all these years to meet the world’s needs and at the same time to contribute its share of revenue for the economic development of the country.

I warmly thank the President of the World Bank for his continued support for buffer stocks and welcome the initiative of the United Nations Conference on Trade and Development in proposing an integrated program for commodities, including a Common Fund for the financing of international commodity stockpiles. We know only too well that finance can be a stumbling block for the establishment of international buffer stocks. It has been estimated that we need a sum of $3 billion to launch the Common Fund, $1 billion from capital subscriptions and $2 billion from loans. This sum may appear large by itself. But if we recall that at least two thirds of the world’s population lives in developing countries where poverty, unemployment, disease, and squalor are rampant, I suggest to you that the price is not too high.

It is also most disheartening to us that a more positive attitude has not been forthcoming from the International Monetary Fund on the provisions governing drawing on its buffer stock financing facility. I am referring to the restriction placed by the Fund on direct financing of international buffer stocks. I fail to understand the need for a narrow interpretation of the role of the Fund in this regard when flexibility has characterized the operations of the Fund in many other respects. . . .

Turning now to the subject of reform of the international monetary system, there are aspects of the reform package about which I have serious misgivings, particularly the question of exchange rate flexibility, which is the key feature in the new system. I recognize that under the present circumstances a certain measure of flexibility is imperative and am glad to note that, according to the Fund’s Annual Report, there has already been a tendency over the past year toward smaller week-to-week and even day-to-day exchange rate fluctuations than in the previous two years. Developing countries, especially those dependent on trade, cannot overemphasize the importance of stable exchange rates to promote the expansion of world trade. While the current provisions in the Fund permit floating, I would call upon the large industrial countries, whose influence on world exchange markets is maximal, to help to ensure orderly exchange rates during this transition period. I certainly welcome the provision under Article IV of the proposed Articles of Agreement that, when conditions are suitable, there should be a return to a par value system based on stable but adjustable rates.

It has been argued that a floating exchange rate system should eliminate the need for reserves for balance of payments financing. But in practice, we know that very often the exchange rate of a currency cannot be left entirely to market forces. Intervention by central banks to smooth out excessive fluctuations in exchange markets is a common feature known to us all. Apart from serving to stabilize exchange rates, international reserves perform a much wider role in developing countries. In a broad sense, these reserves constitute resources much needed for financing their economic development. It is the inadequate consideration of this wider role of reserves that adds to the negative side of the reform package. What we have now, in practice, is a virtual abdication of the reserve-creating function of the Fund and an increasing reliance on private commercial banks to meet the liquidity needs of countries. To meet the oil situation, which resulted in serious disequilibrium in the world’s balance of payments, the Fund created the oil facility as an emergency measure. This facility, which has been terminated this year, only met the needs which form the tip of the iceberg, so to speak. The Fund, in its Annual Report, confirms that “in the financing of any given external deficit, many countries have come to rely to a greater extent on international borrowing.” It is small consolation for the majority of developing countries that the international capital markets have managed to restore world balance of payments equilibrium when the end result has been that they have been landed with a mounting debt servicing problem for those of them who are supposedly creditworthy to borrow from private capital markets, or have slowed down their development programs for those who have been unable to borrow. It is no exaggeration that developing countries generally emerge worse off in a situation where world liquidity creation is left to private markets.

As fellow Governors will recall, one of our main objectives in international monetary reform is to enshrine the special drawing right as the principal reserve asset. In the Proposed Second Amendment to the Articles of the Fund, we have given it additional qualities to make it the centerpiece among international reserve assets. Yet, it is plain to me that by allowing private capital markets to meet the bulk of the financial needs of countries, we are, in fact, denying the opportunity for a speedy development of the SDR. The Fund’s Annual Report has pointed out that, since 1972, the reserves of the vast majority of countries have shown little increase. For the non-oil countries, reserves grew by only 2 per cent annually in 1973–75. The reserves-imports ratio of the developing countries has been falling for the last three years. It is true that we have just completed our Sixth General Review of Quotas in the Fund, and increased them by nearly SDR 10 billion to SDR 39 billion. Until the quota increases take effect, we have provided for a 45 per cent increase in the access of members to their credit tranches in the Fund. We have also liberalized the compensatory financing facility and established the new Trust Fund. However, we must not forget that, on the one hand, all these are conditional facilities, the use of which developing countries will have to justify strongly in order to obtain what must be a meager amount when compared with the drawings on the Fund by the developed countries. On the other hand, the provision in the amended Articles to allow central banks to deal in gold at market-related prices would accentuate the imbalance in the distribution of reserves between the developed and developing countries and create an irreparable gap. For many developing countries, this shortage of resources has been a major setback to faster growth and development. With the adoption of a more rational approach to the growth and distribution of international liquidity, I am sure the additional output of goods and services, which should be generated for raising the standard of living of the poor and not for promoting further conspicuous consumption, will be more than adequate to match the growth in world liquidity and need not necessarily lead to world inflation.

I feel that the international community must take a hard look at the implications of the package of reform. This package must not add to the overwhelming odds which the developing countries are already facing and which must be overcome to achieve a faster rate of economic development. Being an open economy, Malaysia, like many other developing countries, is extremely vulnerable to the vicissitudes of the international environment. In July this year, we embarked on the third of our five-year development plans, in which we aim to muster our resources to reduce the incidence of poverty in the rural as well as in urban areas, encourage and support private domestic and foreign investment in order to assist the full utilization of our country’s abundant natural resources, and restructure the ownership of wealth and income patterns in our country. But to achieve these objectives, we must be assured of a stable international environment where there is steady demand for our exports. It makes our planning and implementation of projects all the more difficult if we are uncertain of how our export earnings are going to be affected by drastic movements in the exchange rates of our trading partners, over which we have no control. More important, an uncertain environment will certainly inhibit business expansion and foreign investment, which is greatly needed to complement the domestic efforts of developing countries.

As in the case of the proposals for reform of the international monetary system, I suspect that it is the lack of determination which is responsible for the failure to find satisfactory solutions to the problems of developing countries. It was political will at the Interim Committee meeting in Jamaica early this year that cut the Gordian knot of the many outstanding issues of reform. In the final analysis, therefore, it is political will which will be the crucial factor in international relations, and it is my fervent hope that this would be forthcoming so that we can move closer to, though we may not yet be able to achieve, the ideal of accelerating world economic growth and a better distribution of its benefits in a stable international environment.

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

Let me, as Alternate Governor of the International Monetary Fund and the World Bank for Spain, begin by saluting the beautiful and noble country that is the venue for our meetings this year. In joining in the general appreciation of the courteous and generous welcome extended to us by the people and the Government of the Philippines, may I stress the special pleasure it gives me, as a Spaniard, to find myself in a land, and among a people, to which we in Spain feel so close, in spite of the distance that separates us, bound as we are to them by such strong ties of history and of friendship.

We wish to congratulate the Managing Director of the International Monetary Fund and the President of the World Bank on the quality of the Annual Reports they have presented in their respective areas of competence. In reading these Reports, however, we cannot help feeling anxious about the serious problems that confront the world economy. It is true that the picture has improved in some ways since the last meeting. A good number of industrial countries have succeeded in emerging from the deep recession, which reached its low point in the early part of 1975. And the revitalization of their economies has exerted, through the recovery of world trade, a favorable impact on the difficult situation of the developing countries. Nevertheless, the seriousness of the disruptions that the world economy has suffered in the last few years, and the magnitude of the adjustments that remain to be made, highlight the inadequacy of what has been achieved and the poverty of the expectations before us.

Most of the industrial countries have succeeded in reactivating their economies. But as soon as their processes of reactivation have begun to consolidate, they have tended to adopt less expansive or frankly moderating monetary and fiscal policies in order to hold their ground in the fight against inflationary pressures. I do not propose to defend the practice of strongly expansive policies which, if inflation should recur, would only generate fleeting stimuli and in the long run would hamper achievement of the goal of continued expansion of the world economy. Nevertheless, if in present world economic conditions the large industrial countries adopt excessively prudent policies in spite of the fact that they have high unemployment, ample idle production capacity, and large balance of payments current account surpluses, what kind of effort and sacrifice are being asked of the less fortunate countries which are still struggling to complete their processes of adjustment?

Both the Annual Report of the Bank and that of the Fund present what I think can be described without exaggeration as a dramatic picture of the problems with which the non-oil exporting developing countries are wrestling. The growth through which they are to escape from poverty is being impeded by external deficits that impose on them levels of indebtedness that they cannot support for very long. An excessively slow rate of expansion in the large industrial countries which have best overcome the crisis that still bears so painfully on other economies can further darken a horizon already shadowed by the threat of financial crises and trade restrictions and, in the last analysis, by a widening of the gulf that separates the rich from the poor countries.

I recognize the dangers posed by the inflationary climate that still characterizes the world economy, and I agree that its progressive elimination is a basic prerequisite for normalization of that economy. But I believe that the better situated industrial countries possess margins for expansion which they ought to exploit carefully, in their own interest and that of the rest of the world. Likewise, I believe that those industrial countries that are still wrestling with serious difficulties should make every endeavor to overcome them without resorting to trade restrictions which could set off chain reactions. And I believe also that while the relative prices of basic primary commodities should reflect prospective scarcities, in the interest of the very development of the world economy, the producing countries that control their prices should, in present circumstances, use this power with extreme caution. For it is in the interest of all that the present inflationary tensions gradually disappear, without being reactivated from time to time by sharp fluctuations in basic commodity prices.

In any event, the magnitude of the adjustments that remain to be made, and the risks involved in the excessive growth of recourse by the deficit countries to the private financial markets, point to the desirability of maintaining financial flows based on international cooperation. The conditional nature of this financing is all very well, provided that its conditionality is interpreted flexibly, bearing in mind that in many cases the present external disequilibria go beyond the criteria that have traditionally guided this conditionality.

Finally, I should like to say that the assessment given in the Annual Report of the Fund of how the system of floating exchange rates has worked recently seems to me to be unduly generous. It is true that the relative exchange fluctuations have tended to adapt themselves to inflation rate differentials. But the latter have in turn been affected by exchange rate fluctuations accentuated by speculative operations, so that exchange rate variations have tended to become cumulative, thus contradicting the basic argument cited in favor of floating rates—namely, that they tend to promote equilibrium. We must not hark back to fixed exchange rates in the present circumstances; but let us avoid showing complacency in the face of the serious defects we are observing in the floating rates system.

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

It gives me great pleasure to note that our family of nations represented at this meeting has increased with the membership of the Comoros and several other prospective members. I hope that next year we will have the privilege of welcoming to this august body the legitimate representatives of other countries.

For most of the countries represented here, the last 12 months were a trying period because of inflation, recession, and exchange rate fluctuations. While the situation in industrialized countries is showing signs of improvement, the prospects are indeed very gloomy for the developing world. The huge current account deficits which the non-oil developing countries have experienced in recent years are expected to continue in the foreseeable future, thereby aggravating an already difficult problem. While the Jamaica reforms and their aftermath were expected to provide some relief to the developing countries, these expectations have been belied. The agreement on gold accentuates the already regressive distribution of international liquidity, inasmuch as it favors those who already have adequate liquidity. In the upshot, non-oil developing countries, by and large, continue to be faced with severe shortages of international reserves.

Proposal for SDR Denominated Deposits

Developing countries have found it difficult, in a period of international monetary disorder, to identify appropriate exchange rate systems. Time and again, their exchange rate policies had to be improvised to meet the volatile situation. A few of them—including my own country—have pegged their currencies to the SDR, so as to moderate the exchange fluctuations.

While the SDR is meant to become the principal reserve asset, the weak international surveillance over creation of fresh liquidity and the absence of a substitution account have prevented the SDR from assuming its intended role. Although there are difficulties in immediately expanding the role of the SDR, I feel that a beginning may be apposite at this juncture. Developing countries could be encouraged by appropriate incentives to peg their currencies to the SDR. These countries could be provided special facilities akin to some of the benefits provided to countries pegged to reserve currencies. Although the Fund cannot provide all the facilities that central banks of reserve currencies provide to their constituents, it should be possible, for instance, to offer higher rates of interest to countries pegged to the SDR. Such countries could place a part of their foreign exchange reserves with the Fund as SDR-denominated deposits as distinct from SDRs per se, and the rate of interest on these deposits could be equal to the full weighted average of short-term money market rates in major countries. The SDR is increasingly being accepted in international transactions. Furthermore, some loans are denominated in SDRs and a few banks are already accepting deposits denominated in SDRs. Thus, it would be most appropriate if the IMF, which issues SDRs, were to accept SDR-denominated deposits from its constituents.

Currency Budget

The amended Articles of Agreement establish an obligation for all members to enable the Fund to use their currencies. As a member of the Fund which has already completed the legislative procedures to put the amended Articles into force, we accept these obligations. However, the case of small export-oriented economies, with transient balance of payments surpluses, requires considerable caution in the use of their currencies for the Fund’s currency budget. While a small developing country ought to be proud to be considered creditworthy for inclusion in the currency budget, this should not carry with it a penalty in terms of a zero or low rate of interest on the foreign exchange reserves “impounded” by the Fund. There is a strong case for concessional treatment for such developing members included in the currency budget. Thus, they could be granted the same rate of interest as would accrue on the SDR-denominated deposits suggested earlier.

Special Facilities of the Fund

In recent years, we have opened up many special windows for the developing countries—the compensatory financing facility, the buffer stock facility, the extended Fund facility, the temporary oil facility, and the newly created Trust Fund. But, apart from the compensatory financing facility, the conditionality incorporated in these facilities renders them virtually unusable for most developing countries.

The compensatory financing facility has been of considerable help to developing countries. While I see no objection to the use of this facility by such developed countries as suffer from export fluctuations, I cannot help but note that almost 40 per cent of drawings during 1976 have been by developed countries, as compared with an average of around 10 per cent during the period 1963–75. Moreover, a country with a history of high export growth rates has a better chance of qualifying for the compensatory financing facility than a country which has a history of low growth rates. In estimating the need for assistance under the compensatory financing facility, the Fund does not consider export fluctuations, with respect to commodities, on the grounds that the Fund is concerned with the overall balance of payments of a country. It is therefore strange that the facility should also avoid any evaluation of the export earnings in real terms. If the fluctuations in real export earnings are to be taken into account, then logically the problem of export fluctuations should be disaggregated with respect to commodities, and price and volume fluctuations considered separately. Let me illustrate the point with reference to my own country. Mauritius was devastated by a cyclone in 1975 and one third of our sugar crop was wiped out. Yet, under the compensatory financing facility, we did not have an export shortfall, as the loss in export volume was neutralized by the totally unrelated special price offered by the United Kingdom to all their Commonwealth sugar suppliers. In 1976, we have suffered a precipitous decline in prices, but as our export volume has risen, we are again to be deprived of help from the compensatory financing facility. I would urge that the compensatory financing facility should be revised to enable countries to draw on the Fund either for export volume shortfalls or for export price declines, while of course establishing that the export shortfalls are generated by factors reasonably beyond their own control. Further, the facility should cover not only visible exports but also items like tourism, in respect of countries heavily dependent on such invisibles.

The debt servicing problem of non-oil developing countries is becoming increasingly acute. As in the case of the temporary oil facility, it would be useful if the Fund were to consider introducing a special debt servicing facility to assist countries in smoothing the humps in debt servicing.

Gold Sales and Trust Fund

We welcome the establishment of the Trust Fund. When it was approved, it was broadly envisaged that the profits of gold sales would be around $80 per ounce. A sharp decline in the price of gold would substantially reduce the resources available to the Trust Fund. I therefore suggest that, to the extent the gold sales fail to realize the resources initially envisaged, there should be some mechanism for increasing other resources for the Trust Fund, such as voluntary contributions or direct transfers from the General Account. Furthermore, the Fund should explore means of maximizing the profits from gold sales. Auctions may be one way of selling the Fund stock of gold. However, other methods, such as direct sales in the markets and variation of the amounts and periodicity of auctions, should be envisaged. The Fund should build up the necessary expertise to operate efficiently in a highly speculative market.

Some of my suggestions could encounter difficulties because of established rules and regulations and legal ramifications. However, under the able leadership of Mr. Witteveen, the Fund has shown great ingenuity in finding unusual solutions to unusual problems. I feel confident that the management of the Fund will be able to initiate action expeditiously on these proposals. . . .


This is a crucial year in many respects. The world is undergoing tremendous changes in every sphere—changes which I am glad to say are for the good of mankind at large. I have no doubt that the fresh wind which is blowing all over the world will also benefit our own institutions. My colleagues from both the developed and developing countries have shown their appreciation of our mutual problems and have displayed their will in tackling these problems. This attitude will go a long way in creating a better environment for the future generation. Our meeting in Manila will be long remembered both for the gracious hospitality received and the momentous decisions taken.

Statement by the Governor of the Fund for Guinea—N’Faly Sangaré

In spite of the beginning of a recovery in the economies of the developed countries, this meeting is taking place in a climate of world-wide uncertainty, which makes the monetary problems even more pressing than in the past, as also is the question of financing development in the countries of the Third World. The future of international cooperation is at stake.

It is true that the efforts made in the last few years by the International Monetary Fund and the World Bank under the dynamic and wise leadership of the Fund’s Managing Director, Mr. Witteveen, and the World Bank President, Mr. McNamara, have enabled our countries to find solutions to their balance of payments and development finance problems that are less constraining, but still are not sufficient. In fact, these institutions themselves have felt the effects of the international economic situation, which have prevented them from achieving the anticipated results.

First of all, as regards the international monetary situation, it must be recognized that despite the real progress made—thanks to the work of the Interim Committee for monetary reform—no satisfactory solution has been found so far to the crisis which erupted in August 1971. Inflation still persists in the industrial countries, severely eroding the value of the currencies of most of these countries themselves and at the same time jeopardizing the young economies of the developing countries. This situation has led the industrial countries to resort to widespread floating of their currencies, frequently in an uncoordinated fashion, to overcome their monetary difficulties—a practice which is highly prejudicial to the economies of the developing countries. In addition to destabilizing our import and export prices, floating affects the level of our foreign exchange reserves and adds to the already crushing burden of foreign debt service on our weak economies.

Unfortunately, however, the Interim Committee decided at its Kingston meeting to legalize floating, which has such adverse effects on the world economy in general and on the developing countries’ economies in particular.

The delegation which I have the honor to lead believes that this deplorable compromise of Kingston can be accepted only as an interim remedy, pending a satisfactory final solution which would restore greater monetary stability. In our view, the regime adopted at Kingston is inconsistent with the purposes of the Fund, which are, among others, “to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.”

Therefore, during the transitional period, pending a successful outcome of the efforts to be undertaken and sustained in pursuit of the Fund’s objectives, it would be desirable for the Fund to seek ways of expanding its assistance to member countries whose external payments deficits will undoubtedly increase as a result of the floating of the principal currencies. I feel this needs to be emphasized once more, as this concern lies at the heart of the responsibilities of our institution.

I should like to mention, in this connection, that the oil facility established in 1974 had enabled the Fund to mobilize substantial additional resources which should normally have benefited those members having the greatest need for assistance. Unfortunately, however, after the first drawings had been effected under simple and acceptable conditions, the provisions governing access to this new facility were made so stringent that many countries were denied drawings, even though they had an urgent need.

The developing countries with chronic balance of payments difficulties have had access to only one third of the resources available through this facility, with two thirds being absorbed—unjustly, in our view—by industrial countries which could have found other resources to finance their external deficits.

It should also be pointed out that the Fund has recently established a number of facilities which had initially raised our hopes, but the conditions governing access to them were subsequently made so difficult and so stringent that most of the countries for which they were originally intended were obliged to do without them, even though they were facing serious problems, more often than not due to inflation outside their own region.

The same applies to the oil facility, as we have just seen, as well as to the extended Fund facility for medium-term assistance to countries whose balance of payments deficits are caused by underlying structural disequilibria, and also to the buffer stock facility. Similarly, the conditions governing access to the newly created Trust Fund should be made as flexible as possible in order to give all developing countries easier access to its resources.

Furthermore, the conditions for drawing under the compensatory financing facility, which were liberalized in Kingston, and the conditions for making drawings in the credit tranches, which have also been enlarged, should likewise be made more flexible so as to enable each of our countries to make drawings as soon as a balance of payments need arises.

As regards cooperation between Guinea and the Fund, my delegation welcomes the fact that this is being continually strengthened.

The strict monetary policy measures adopted by the Guinean Government, especially since its monetary reform of October 2, 1972, have enabled my country to improve its domestic economic and monetary situation. The most recent Fund consultation mission to Guinea was able to note the significant progress achieved by the Guinean authorities in this field. The Government of the Republic of Guinea is having the mission’s recommendations carried out carefully, but obviously only insofar as they are compatible with the norms of social justice accepted by our people. The encouraging results of the economic, financial, and monetary policy pursued by Guinea under the guidance of our President Ahmed Sékou Touré justify our faith in the future. . . .

May I express the hope that this meeting will take appropriate decisions on the various points that I have raised, as the questions currently before the international community are in need of urgent, bold, and equitable answers.

Our peoples are legitimately aspiring toward development, and as we all know, the needs of people are ever expanding and infinite. We must therefore display imagination, resolve, and good will in laying the true bases for the more rapid development of our nations in order to meet the legitimate aspirations of those whom we represent.

Before concluding, I would like to congratulate the representatives of Seychelles and Guinea-Bissau who are with us for the first time today. My delegation is also pleased to see that the Comoros and Papua New Guinea have become members of the Fund and of the Bank.

I would not like to leave this platform without expressing my delegation’s sincere thanks to the people and the Government of the Philippines for the warm and friendly hospitality they have extended to us in this beautiful and charming city of Manila.

Statement by the Governor of the Fund and Bank for Tanzania—A. H. Jamal

On behalf of my delegation may I please ask you to convey our very warm appreciation to the Government and the people of the Philippines for their wonderful hospitality and deep courtesy which they have accorded us ever since we arrived in this country. We have been overwhelmed with kindness and generosity everywhere.

At the outset please permit me to say that we are most gratified that the authentic voice of the courageous Vietnamese people is at last to be heard in the deliberations of these meetings. We are also particularly happy that we are to be joined by our brothers from Papua New Guinea, Guinea-Bissau, Seychelles, the Comoros, and Surinam. We most keenly look forward to listening soon in these meetings to the authentic voice of the People’s Republic of China.

In taking the floor to address Governors of the Fund and the Bank, I do not in any way wish to detract from the very substantial and pressing points already made by the spokesman on behalf of the African Governors of the Fund and the Bank, the distinguished and gracious Governor from the Central African Republic. Indeed, it must remain the hope of all those who are concerned with the issues of international stability and justice for the least developed, that the pleas made by African Governors, year after year, do not fall on deaf ears.

In choosing to speak at this juncture, I wish to address myself to certain aspects of the contemporary international economic situation and to express a very deep anxiety that major industrialized countries appear to be bent upon taking a course which must inevitably lead to frustration and despair for the developing countries without conferring any lasting advantages on the rich.

In the first place, there does not seem to be any serious realization on the part of the rich countries that the continued dependence of the recently decolonized countries on the industrialized economies has become an inexorable process. This is in the wake of the pre-emptive strike delivered to the body politic of the poor by the formidable combination of technology and capital, and the mobility of financial resources propelled by major financial institutions, including the International Monetary Fund itself.

The fundamental characteristic of this process is that, whether there is a recession or prosperity in the developed world, the developing countries’ dependence on it becomes ever more entrenched. The frightening thought is that the industrialized countries may believe this dependence on them to be in their interest, at least in the short run. Since, however, the long term is so many short runs put together, do we realize what we are heading for?

The 1976 IMF Annual Report, necessarily dealing with the short term, is a masterpiece of understatement as far as the developing countries’ circumstances are concerned. Referring to the onslaught of inflation and recession in the industrialized countries—and it might have added the license to allow the exchange rates to float—the Fund Report contains these soothing words: “The adjustments of the primary producing countries to these developments have been difficult and, in many cases, less than fully successful.”

Although I cannot say that the IMF must be joking, I must confess that in my view the developing countries must accept their share of responsibility for allowing things to come to pass in this way.

The Proposed Second Amendment to the Articles of the IMF amply illustrates the extremely difficult point the international community has reached. When, in the wake of the surrender of developing countries at Kingston, the IMF technicians put together the text of the second amendment with great dispatch for the Governors to vote on by April 30, as Governor of the Fund representing Tanzania, I voted for the amendment.

I must admit we did so with extremely mixed feelings, indeed most reluctantly. In any event, we could not have affected the issue at that late hour.

To begin with, it appeared to us, perhaps on hindsight, that the developing countries made a major error of judgment in accepting the dichotomy of their fundamental interests through the establishment of the Interim Committee on the one hand and the Development Committee on the other hand. We, who should be protesting the loudest at the continuing pretense that monetary matters, trade matters, and the issues of development are even conceivable in isolation of one another, allowed ourselves to be dissipated at a critical point in time. Why did this happen? How did it happen?

So many things, happenings, deliberations, and decisions are kept out of sight or hearing of developing countries. There are possibly many missing gaps in my assessment. Nevertheless, the bare bones of the matter seem to be something like this.

Those who were at one time foremost in championing the International Monetary Fund with its requirement of disciplines regarding exchange rates and monetary stability, at some point in time, perhaps in the 1960s, found it in their own interest to pursue policies in contravention of these implied and explicit requirements.

Initially, it was the domestic policy of expansion for whatever purposes, including Viet Nam, which led to inflationary pressures. Subsequently, the logical consequence of exchange rate movements could not be avoided. Those who possessed the power to ignore the IMF did so.

When the rest of the world community began to protest at being sidestepped, and at the sidestepping of the IMF itself, which owes its own creation to the genius of the free market economies, something had to be done to regain respectability. When the clamor of UNCTAD III approached close, the world saw feverish diversionary activity. The Interim Committee became the mechanism for contriving what could be described as the great historical consensus, while the Development Committee, poor thing, limped along looking for some crumbs that might come its way.

Of course, over the period much technical work was carried on to deal with the demonetization of gold, the further elevation of the SDR, the increase of quotas, the elaboration of compensatory financing, and so on.

So, at some point the political values underlying the work of the Interim Committee and the shadowboxing work of the technicians had to converge, as it happened, in the form of the proposals for the second amendment.

The second amendment represents a tragedy. Not because it confers respectability on the license already exercised in full measure by the all-powerful with respect to exchange rates. This is tragic enough. The fundamental point of objection is that, having endorsed this freedom for the major economies, it makes no countervailing provision for those who are totally helpless as they remain exposed to the blizzards unleashed by the floating exchange rate economies.

Even without the second amendment, even when the industrialized countries reasonably conformed to the rules of their own game which they themselves established at Bretton Woods, there has been an increasingly mounting case for specific provision to be incorporated in the Articles to take care of the needs of those countries which achieved independence in the last 20 years or so, and particularly the poorest. The case has existed, though it has gone by default, for making very special provisions in the Articles of the IMF beyond Articles VIII and XIV, to ensure that young, newly born, struggling economies are not only not placed in a straightjacket tailored to discipline the more rugged developed economies, but also that these young economies are given continuing compensating replenishment as they contend with a totally unequal overpowering environment not of their creation.

Surely, when a deliberate step is contemplated to institutionalize the freedom of the already free rich, there should be given some clear demonstration to repair this historical default, late as the hour of the day is. How do we dare claim that we are even paying lip service to the emergence of a new economic order, when all we do is to give our formal blessing to the status quo ante?

Incidentally, it is a grotesque demonstration of lack of concern for the developing countries that to the extent that the World Bank may be disposed to fill in this hiatus by giving program loans, it should be constrained from doing so precisely when the IMF itself is denied the countervailing capability to deal with the needs of the tender economies.

Neither the ordinary credit facilities, nor the so-called special facilities have more than a fleeting chance of ending up in the service of these tender economies. Indeed, performance has proved this indisputedly.

The proposals of the second amendment regarding the SDR’s role in international monetary relations are not objectionable. But as the proposals stand, the developed countries could choose to deal in gold, in SDRs, or in each other’s currencies, depending on their own needs. This is yet another provision for flexibility for the rich, which leaves the poor with no recourse at all. And reconstitution of the SDR, which is a real problem for the poor developing countries, still remains an obligation. Even in this marginal respect, there is no relief. Much more disastrous for the developing countries is the absence of any link between SDRs and development. Indeed, once the second amendment becomes a fait accompli, the industrialized countries could be able to put forward further amendments which could have the effect of jettisoning the link with development for all time to come.

I must confess that if I have understood this implication correctly, the international community is allowing a historical opportunity to slip from its hands.

By refusing in such a determined and obdurate manner to seize upon a device for the automatic transfer of reserves through deliberate diversion of world liquidity toward the areas of greatest need, the rich of the world are in my view becoming altogether shortsighted. The world has had ample experience of economic crises which at their worst have caused violent conflict. Why are we hesitating to seize an opportunity to build a stabilizing process into a new system?

The second amendment further contemplates the possibility of a decision-making 20-member Council to take the place of the Interim Committee at some future date. If this Council had been in existence today, presumably the second amendment would have been endorsed without reference to the Governors today in 1976. On the one hand, we seek a New International Economic Order and, on the other hand, we contemplate three, four, or ten years hence a possibility of a 20-member Council dominated by the rich, having powers of making crucial decisions on behalf of the 129 members of the IMF.

I venture to express the view that we are bound to lack credibility in our insistence for the need of a new economic order, if at the same time, we applaud the second amendment. The IMF has an efficient apparatus at its disposal. The statesmen of the industrialized countries have the power of endowing it with a capability to take care of the whole complex spectrum of economies now performing in the world. The already prosperous wish to maintain their prosperity through freedom. The still poor wish to develop, by breathing freely, as all newly born need to do. If this is not made possible, the future is not difficult to forecast. It is not in the interest of anyone to drive the poor to the wall. And it is a wholly self-deceiving exercise to spend energy on wooing a few of the developing countries at a time. The permutations and combinations of the interplay of relationships will create more problems than the rich believe they have the power to solve. Simpler rational remedies are available. But not in the spirit of the second amendment.

Indeed, it is precisely because it is necessary to reform existing institutions without any further delay that we have to ensure they do not now, at this critical juncture, move in the opposite direction. It is easy to take the cynical view that nothing can prevent our international institutions from going the way history’s dinosaurs have gone. Why worry? “Après moi . . . ,” and so on.

On the part of my country, we would not wish to take such a self-defeating view. Time, critically short as it is, is still available, and we would hope that there will be yet serious re-thinking on the part of the international community, even as the second amendment receives the necessary endorsement of member states.

The critically short time has to be seized while it is there. It immediately means two things. First, genuine and meaningful compensatory financing which not only takes into account the export price shortfalls in relative terms but also the optimum need to acquire the critical range and quantum of imports of what may be described as a developing country’s critical import development basket. It is totally misleading to measure the escalation of the prices of such a group of imports by referring to the index for manufacturing goods. The actual movement of prices of plant, machinery, spares, technology, technical services, and shipping, compounded by the specialized intervention of financing houses, tell an extremely grim story.

No international mechanism could ever have been intended to ensure that surpluses be earned by all members at one and the same time. Indeed, if the advice and the admonition given by the IMF were to be complied with by all members in accordance with their respective optimum capability, we would still be left with vast disparities of economic gains and losses in actual performance. Such a result would lack both equity and justice for the simple reason that historical accumulation of capital and technology and control over markets, combined with military supremacy in the hands of the few must necessarily yield grossly uneven results.

So, if we must speak meaningfully of an adjustment process, it is absolutely essential to supplement the admittedly essential efforts of the individual societies with a very deliberate sustained international mechanism for compensatory financing to bring about the necessary balance. If the world community cannot control, create, and direct world liquidity purposefully to deal with this fundamental historical disequilibrium then we have failed to move toward a new economic order.

If there is to be conditionality it has to be subjected to those in whose hands liquidity continues to accumulate through gravitation. . . .

The whole global process of decision-making, affecting so many millions without any effective voice, has contributed now to the creation of the Fourth World. This group of world citizens is without any hope of being effectively heard.

Tanzania belongs to this Fourth World. We, at home, are not running away from taking hard decisions. Indeed, what we are deliberately endeavoring to do could make many governments lose office. We will continue to take hard decisions—cutting expenses, depriving ourselves of bare necessities even, so that we can maintain the momentum of development. In this effort we continue to be helped by progressive forces all over the world. Many enlightened governments have accepted the bona fides of our people in attempting to make ourselves self-reliant. This group of cooperators has been recently joined by progressive oil producing countries who are giving us their sympathetic attention. We deeply appreciate this help.

But in the final event, we must stand or fall by our own efforts. That is not the issue, however. The issue is whether the environment encircling us will allow us to make the magnitude of adjustment called for.

Stability will not be achieved on rhetoric. These Annual Meetings must not be allowed to be rituals. Rituals are attractive and even more romantic when they have stood the test of time. That test is now upon us.

Statement by the Governor of the Fund and Bank for Luxembourg—Jacques-François Poos

The Annual Meetings of the Fund and the Bank provide an opportunity for the monetary and financial authorities of more than 120 countries regularly to review the world economic situation and to discuss the great problems that arise in the field of international economic and financial relations. Our meeting this year is taking place in a slightly more optimistic climate than that of the previous two years, for the economic situation is on the road to recovery following the most serious recession the world has known since the 1930s.

The Annual Report of the Executive Directors of the Fund estimates that the volume of world trade expanded in the first half of 1976 by about 10 per cent, compared with a contraction of some 4–5 per cent during the year 1975. Generally speaking, this recovery in world trade is benefiting both the raw materials and energy exporting countries and the exporters of manufactures. It should appreciably improve the export earnings of a number of developing countries and thereby reduce their balance of payments financing needs. It must, however, be borne in mind that this general trend masks numerous sectoral or regional problems as a result of which the economic situation has not yet improved to the same degree in all countries.

Luxembourg’s economy, heavily dependent on the iron and steel industry, is still suffering from the adverse effects of large surplus production capacities at the world level. The recent economic crisis has demonstrated once again the basic importance of international consultation in this highly capital-intensive industry. My Government therefore supports the initiatives of the Commission of the European Communities in this field—initiatives which should be supplemented by consultation among the leading steel producing regions of the world.

In the present economic situation, we observe with concern the development of protectionist practices and exchange restrictions, measures which strike hardest at the countries oriented toward the export of industrial products, which as a result are no more than marginal suppliers in relation to local producers, who frequently receive preferential treatment. The Fund’s Annual Report confirms that most countries have avoided adopting general import control measures. But this does not mean that new protectionist measures are not present in many countries. Moreover, as the Fund’s Annual Report brings out, many countries have also, in order to sustain their exports, adopted certain measures, such as subsidies, tax relief, preferential financing facilities, and export and exchange-risk guarantees, which obviously distort competition and which usually operate to the disadvantage of the small countries. My Government therefore fully supports the efforts of the Fund directed at avoiding the introduction of protectionist measures and at maintaining healthy competition in international trade.

The short-range economic prospects of most countries are dominated by the simultaneous persistence of very high unemployment and very high inflation.

Recent experience has unfortunately shown that the classical instruments of regulation of demand, of monetary policy, even of price control, are inadequate to win the battle against employment and inflation. Analyses by eminent economists have, moreover, demonstrated the growing importance of the structural causes of inflation.

Thus, the report of a panel of experts under the chairmanship of Mr. Maldague, Belgium’s Planning Commissioner, prepared at the request of the European Commission, calls on governments to attack the real causes of inflation, such as social inequities, misdirected public expenditures, lack of planning of multinational corporations and failure to dovetail them into national systems, and so on. The great merit of this study is that it repudiates the superficial explanations of the phenomenon of inflation, such as the famous “wage-price spiral,” and goes to the very roots of this evil.

Henceforth, combating inflation will mean reviewing and adapting our development model, our way of life, our intersectoral relations. In order to create a pattern of less futile and less ostentatious consumption, and to foster the satisfaction of collective, cultural, and qualitative needs at the expense of purely quantitative consumption and demands, we shall have to shorten the income pyramid, improve the quality of life, protect and better inform consumers, combat waste, and so on.

The fight against inflation will, moreover, call for strict organization of competition: it will be necessary to avoid prices being fixed by the most powerful producer by reference to the costs of the least efficient enterprises. To this end, price control at the world level should focus on the multinational corporations. Following the example of what is done in my country, should not the announcements of increases in the prices of certain key products be generalized? This presupposes the setting up of an international supervisory and decision-taking authority, and we are a long way away from achieving that, even within groups of countries with common objectives, such as the European Economic Community.

Yet galloping inflation, combined with a high rate of unemployment, threatens to undermine the bases of our economies to such a degree that we must delay no further in undertaking the necessary effort of rethinking and in embarking on the required structural reforms.

Pending elimination of the structural causes of inflation, the countries of the European Community have adopted a medium-range strategy consisting in setting precise goals for economic growth, employment, and price stability, and in enlisting the social partners in the implementation of this policy. In Luxembourg, the Government has patterned its policy on this same strategy, and thanks to very close cooperation between the public authorities and the social partners, the rate of total and partial unemployment did not rise above 1.5 per cent in 1975, whereas industrial production fell by 22 per cent from the previous year.

The rate of increase of prices has slackened somewhat, to below 10 per cent at the end of the first half of 1976.

But the results of national efforts to bring order into the economy are obviously greatly influenced by international factors. In that context, international monetary and financial relations, and the development problems of the majority of the countries of the world, play a special role.

In the last few years most countries have incurred balance of payments deficits of an unprecedented magnitude as a result of the accelerated inflation and economic recession, aggravated by a simultaneous marked increase in the prices of oil products. The industrial countries, on the whole, were able to improve their balance of payments position in 1975; however, the same is unfortunately not true of the non-oil developing countries, which incurred a deficit on the order of $51 billion, of which $37 billion was accounted for by the least developed nations. The most perverse effect of the severe economic crisis of 1975 has thus been to further lower the standard of living of the poor nations. The situation of these countries can nevertheless be expected to improve in 1976, especially as a result of the increase in their export proceeds.

The main characteristics of the new exchange regulations adopted at the Jamaica meeting are the freedom of choice that countries are given with regard to their exchange rate regimes, the flexibility of the mechanisms for adapting to changing conditions, and the surveillance of exchange rate policies by the Fund. In general, these characteristics have made it possible to shield the international monetary system from excessively violent disturbances or aggressive devaluations. Despite firm intervention by the monetary authorities, however, erratic exchange rate fluctuations have occurred in some cases, especially with certain Common Market currencies. While this situation was successfully coped with, thanks partly to the solidarity among Common Market members, reflected in particular in the floating of Community loans for the benefit of Italy and Ireland, efforts to stabilize exchange relations among the nine countries have so far unfortunately not been crowned with success. Past experience has shown that the achievement of this goal is strongly dependent on restoration of internal economic equilibrium in the countries concerned; it is thus a medium-term goal.

Nevertheless, my Government continues to believe that the return to greater stability of exchange relations in the world must remain a high-priority goal of the Fund’s member countries and that the establishment of regional zones with exchange rate stability contributes to achievement of this goal. From this point of view, the European snake certainly plays a positive role, both on account of the beneficial effects it has on trade flows among participating countries and the constraints the system imposes with regard to budgetary and domestic monetary discipline.

In the same context, the mechanism of the dual exchange market of the Belgian-Luxembourg Economic Union has made it possible to absorb effectively the repeated internal pressures inevitably generated within the system by speculations on an increase in the exchange rate of the deutsche mark.

On the whole, the experience of the last few years has amply demonstrated the soundness of this provision of the new Article IV of the Fund’s Articles of Agreement on exchange rate obligations, which prescribes that members shall endeavor to direct their economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability. In short, exchange rate stability can be attained, not by intervening in the exchange markets or imposing exchange controls, but by correcting and stabilizing domestic economic conditions.

The understandings reached in Jamaica with regard to exchange arrangements can thus be regarded as the most appropriate under present economic and political conditions, and the same applies to the agreements reached on provisions for expanding the Fund’s credit facilities.

Since 1974 the oil facility has played an extremely important role in financing the balance of payments deficits arising from the oil price increase. Luxembourg has, moreover, considered it important to participate in the Interest Subsidy Account which was established to reduce the real cost of the oil facility to those less developed members regarded by the United Nations as most seriously affected.

Given an increased demand for the Fund’s resources, partly due to the fact that some countries have attained their private debt ceiling, it is obviously of particular importance that the currencies of all surplus countries should be usable in Fund operations. My Government therefore approved a first drawing in Luxembourg francs, which was effected last August, and we shall likewise be prepared to honor any similar obligations that may arise in the future.

During the coming months the problem of how to finance their external deficits is likely to remain a major cause for concern in many countries.

The mechanisms of the international financial markets, especially of the Euromarkets, have proved to be useful and effective channels for such deficit financing. This should continue to be the case in the future, provided that both the financial establishments and the competent authorities continue to safeguard the stability and security of these markets. In this respect, Luxembourg favors the creation of a system of international risk centralization and greater cooperation among the competent authorities, with a view to safeguarding the dynamism and flexibility of operation of these markets.

Furthermore, the question of international liquidity must be considered from every aspect, including the impact of increasing the volume of reserve currencies, as well as the role of the SDR and gold.

In this respect there have been doctrinal controversies over the importance of the multiplier effect of Eurocredits. Only a more precise study would in all likelihood permit a more accurate understanding of this phenomenon by placing it in a world-wide political setting.

The last section of my remarks will deal with the special position of the developing countries and the activities of the World Bank.

The figures I quoted earlier with regard to balance of payments disequilibria show that the countries facing the most difficult problems at the moment are the group of developing countries, and in particular the least developed countries.

The Fund’s expanded credit facilities have certainly served largely to assist these countries. The Trust Fund receiving the profits from the sale of part of the Fund’s gold holdings should also provide additional assistance. However, this will require a procedure for selling this gold that is sufficiently flexible to take account of developments on this specific market, as otherwise there is a risk that the additional resources of the Trust Fund will be rapidly depleted.

Valuable though such short-term aid can be, the developing countries require more lasting transfers of resources from the rich countries. This whole subject is currently being discussed in the North-South dialogue, and we are very pleased that this dialogue has recently been resumed. My country, as a member of the European Community, played an active role in the conference during the first half of this year, and had the honor of supplying one of the two joint chairmen of the Commission for Financial Affairs of the Conference on International Economic Cooperation. Thus, Luxembourg was able to give proof of its awareness of the problems facing the developing nations, particularly those most seriously affected.

In seeking to establish a New International Economic Order, there is a need to modulate the different formulas for development aid to take account of the situations of the various groups of countries and their needs and potentials. Efforts should be made in this spirit to resolve the issue of external debt, which was the subject of a resolution at UNCTAD IV in Nairobi. In the same spirit, we must endeavor also to increase the volume of official development assistance and at the same time to channel a larger share of this increase to the countries facing the greatest difficulties. In the same spirit again, steps should be taken to facilitate access to capital markets for countries that are sufficiently creditworthy and to promote direct investments under terms that respect national sovereignties, while at the same time providing reasonable assurances as to the safety and protection of the capital invested. . . .

While Luxembourg’s official development assistance has not yet reached 0.7 per cent of GNP, as is the case with such countries as Sweden and the Netherlands, my Government is endeavoring to step up its effort substantially. Thus, above and beyond the efforts I have already referred to, and various initiatives of a bilateral nature, it is prepared to consider participating in the various regional development banks. In this context, I should like to indicate to these banks that it would be to the benefit of all concerned if their minimum quotas could be adapted to take account of the true capacities of small countries to contribute funds.

In concluding these remarks, it only remains for me to express the hope that this meeting will strengthen international monetary and financial cooperation and that we shall be able in 1977 to approach the targets of stability and development that we have set for ourselves.

Statement by the Governor of the Bank for Singapore—Hon Sui Sen

May I first join my fellow Governors in expressing our gratitude to the Government and the people of the Philippines for the warm hospitality extended to us and to congratulate the Government for their magnificent convention hall and the excellent arrangements and facilities they have provided for this meeting. I would also like to join in the welcome extended to Papua New Guinea and the Comoros.

We are meeting this year in a relatively improved world economic situation and outlook. Economic recovery is well under way in the industrialized world and inflation has been reduced below double-digit levels. However, we remain concerned that inflation, though moderated, is still at a high level. The non-oil developing countries continue to experience grave balance of payments difficulties which seriously aggravate their debt problems. Concern over this situation has spread from official circles to the private multinational banking community with disquieting undertones in international capital markets.

The Bank and the Fund both are confronted with the more immediate and urgent problems of the very poor countries in the developing world. They have increasingly concentrated their attention and resources on the financial and development problems of this large group of developing countries. This approach is not unnatural, and we are all in sympathy with this order of priority, which has the objective of bridging the gap between the rich and the poor countries. However, in the process of assisting the very poor developing countries, we fear a tendency by both the Bank and the Fund to lose perspective altogether on the special problems facing the middle-income developing countries. It would be unfortunate if the encouraging growth and development of these countries in the recent past were to be undone.

Last week I was privileged to share in the deliberations of the Commonwealth Finance Ministers in Hong Kong. Our spokesman, the Minister of Finance of Canada, Mr. Macdonald, has already spoken of the anxiety of the Ministers over the plight of the poorest developing countries. Concern was expressed that many developing countries have had no improvement in living standards in the 1970s, with some even experiencing a decline.

There was also recognition given to the middle-income developing countries, with Ministers calling on international financial institutions to “pay due regard in their policies and programs to the special problems of the middle-income developing countries particularly the small and resource-poor island economies, and not to rely exclusively on a calculated per capita income criterion in determining their resource needs and eligibilities.”

It was reassuring, therefore, to hear President McNamara in his opening address devoting attention also to the problems and solutions facing the group of middle-income developing countries to which Singapore belongs. In its realism and depth, his analysis of the problems and issues facing the middle-income developing countries has broad relevance for Singapore. I note, for example, the finding of a World Bank study that the manufactured exports of the middle-income developing countries are likely to grow at a much lower rate of 10 to 11 per cent over the next ten years, compared to the 18 per cent in the decade ending 1974. I would like to draw particular attention to, and strongly support, his recommendation that developed countries should liberalize developing countries’ access to their markets with a definite program over the next ten years. That developing countries may expect an increase in export earnings of $30 billion annually from the elimination by developed countries of tariff and nontariff barriers lends strength to his recommendation. I hope progress in this direction will be seen in the multilateral trade negotiations.

In contrast with this enlightened economic evaluation, I am disappointed to note, in some areas of operations of both the Bank and the Fund, the increasing use of convenient but misleading criteria, such as per capita income and foreign reserves instead of a technical evaluation of individual developing countries’ special problems and circumstances. I view with concern, for instance, certain suggestions made in the Fund and the Bank that Singapore is more developed than developing, based on the mechanistic use of the per capita income criterion. This is too simplistic an approach, reflecting a lack of appreciation of our special circumstances when determining our eligibilities and obligations. Insufficient consideration has been given to the small physical size and the poverty of resources of Singapore’s island economy, its very open economic structure and its great dependence on external markets and imports of food, energy, raw materials and capital goods, and foreign investment and technology. The Fund and the Bank should recognize that in these circumstances there is little margin for error and no agricultural and natural resource buffers to cushion the economy against economic shocks such as have occurred during the last few years. Although we have done well enough in the past, there is unfortunately no guarantee of continued growth in the future unless we remain always adaptable and competitive in an increasingly restrictive world environment. I would like, in this respect, to urge the Fund and the Bank to use more effectively the technical resources of their area economics departments to provide a proper technical evaluation of their member countries instead of uniformly and rigidly applying misleading, though convenient, rules of thumb in their assessments.

Turning to matters related to the reform of the international monetary system, while we must accept what progress is possible, we cannot help but view with some skepticism the practicality of a number of features embodied in the second amendment of the IMF Articles of Agreement. In particular, the future role of gold and other reserve assets and the establishment of a code of conduct with effective Fund surveillance remain uncertain and are left to evolve over time. Gold in official holdings valued at market prices remains a large proportion of international liquidity. The monetary role of gold in Fund operations has been eliminated without providing assurances that SDRs will in practice be an appropriate and acceptable substitute for gold in terms of improved reserve asset characteristics and availability. In practice, reserve currencies continue to dominate the use of international liquidity. The stability of the international monetary system remains closely tied, as in the past, to the fluctuations of the economies of reserve currency centers. Floating exchange rates have introduced some flexibility, but it remains to be seen whether the Fund can exercise effective surveillance over countries whose actions have wide international repercussions.

In conclusion, I would like to commend the Bank and Fund for the lucid and thorough manner in which their Annual Reports were prepared for the meeting.

October 5, 1976.

See page 308.

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