Chapter

Discussion of Fund Policy at Fifth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
October 1976
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Statement by the Governor of the Bank for Nepal—Bhekh B. Thapa

It is my pleasure to address the joint Annual Meetings of the International Monetary Fund and the World Bank in this beautiful capital city of the Philippines. On behalf of my delegation, I extend heartfelt thanks to the Government and the people of the Philippines for the hospitality and courtesy with which we have been received and for the excellent arrangements made for the meeting. We are grateful to His Excellency, the President of the Philippines, for his inspiring and thought-provoking address.

It appears as though we are meeting for the first time in recent years amidst signs of improving economic health in many parts of the world. The world economy has shown slow but sure signs of recovery. The inflation, though still continuing at an unacceptable rate in many countries, is by and large more manageable today than two years ago, and the recession in industrialized countries with its adverse consequences to world trade and economy is turning toward recovery. Even the developing countries taken as a group appear to have been able to achieve a rate of growth in their gross domestic product which is respectable. These conclusions can, however, be misleading. If, on the one hand, the economy of the industrialized world has yet to gain vitality in order to measure up to the growth rate of a decade ago, on the other hand, the cost of even the modest growth to the developing world has been abnormal: mounting indebtedness, huge deficits in current accounts, and financial stringency. Much worse is the situation when we consider the case of the least developed among the developing countries. Here, in many cases, the economy has failed to register even nominal growth in per capita terms. As a result, over the last ten years, the disparity in per capita incomes has continued to get wider, not only between the developed countries and the developing world, but among the developing countries themselves as well. As is clear from Mr. McNamara’s statement, while the average income in the middle-income developing countries was 4.8 times higher than in the poorest countries in 1965, it is 6.3 times higher in 1975. Therefore, as my sovereign, His Majesty, King Birendra, pointed out in Colombo six weeks ago, “The problem of economic imbalance between the developed and the developing countries is an acute world problem. But no less acute seems the problem of the imbalances which prevail in the ranks of developing countries themselves.”

It has been reported that during 1975 there has been an improvement in the transfer of resources to developing countries; net disbursement—on account of official development assistance—increased from 0.34 per cent to 0.36 per cent of the gross national product (GNP) of the member countries of the Development Assistance Committee and the total flows of resources amounted to a little over 1 per cent of their combined GNP. This may be a welcome development in overall resource flow. But the flow with concessionary element having increased only nominally, the least developed and poorest countries have little to cheer about. That the commitment of International Development Association (IDA) credit in real terms this year fell short of the commitment of the previous year warrants some sober thinking on the part of all of us who are assembled here in the fulfillment of a common cause. I need not elaborate that, should this trend continue, the economic imbalance may get unmanageable, forever subjecting the people in the least developed and poorest countries to an inhuman living standard. Replenishment of the soft-term funds of the multilateral institutions is therefore a matter of special concern to us. I take this opportunity to urge the member countries of the industrialized world to fulfill their pledges for the Fourth Replenishment of IDA funds as soon as possible. Even more important, however, are the negotiations on the Fifth Replenishment of these funds. I hope that these negotiations can, indeed, be completed by March next year, so that IDA operations can continue without any disruption when the current committing authority comes to an end a few months from now. After many years of cooperative efforts in this forum and others, such as the United Nations General Assembly and the United Nations Conference on Trade and Development, we cannot tolerate a prospect of drying-up of concessionary financing when the need is one of expanding it considerably. It is unfortunate that the achievements of our own Development Committee in exploring potential sources of finance and establishing ways and means for the increased flow of resources have met with little success so far. Nevertheless, given the basic understanding and good will that exist amongst us all, there is no reason why we cannot hope for better results in days ahead.

Turning now to an important development concerning international assistance to my own country, I am gratified to inform you that a meeting on coordination of development assistance to Nepal, convened by the World Bank, is to be held in Tokyo toward the end of this year. I am looking forward to the opportunity of sharing with the representatives of many donor countries and agencies ideas and information on Nepal’s development strategy and resource needs in the course of that meeting. Nepal not only seeks increased external assistance but, more importantly, it wants to use such assistance in an effective manner in the attainment of its development goals. We therefore expect that a permanent forum will emerge where we can better coordinate the efforts of my own Government with that of others associated with Nepal’s development programs. Nepal, which has a rather short history of economic development efforts, has now come of age in respect of its ability to manage programs of economic development. It is therefore at an opportune moment that this forum is coming into being.

Turning now to the monetary issues, reform exercises have still to go a long way toward establishing a new world economic order. Contrary to hopes, the long protracted negotiations in the Interim Committee and the deliberations made and agreements reached in Jamaica, though helpful, have not yet been able to bring about a turning point in the monetary history of the world. However, the decision to enlarge the credit tranches and to establish the Trust Fund should be regarded as a positive step. The various facilities of the Fund, including the extended Fund facility, are designed to accommodate the needs of the member countries. But the stringent conditions attached to these do not give a sense of comfort. The constraints which the member countries now face and will continue to face in the future make it necessary to determine a better way of helping them, including the liberalization of the conditionality of purchases in successive credit tranches and under the extended Fund facility. Here too, special attention to the needs of the least developed among developing nations is called for.

We consider the making of an explicit provision for greater flexibility in members’ choice of exchange rate arrangements a positive outcome of the Jamaica meeting. We believe that the management of exchange rates should be carried out under the direct surveillance of the Fund and the conditions should be laid down. Both the developed and developing countries should cooperate fully to avoid the “beggar-thy-neighbor” attitude, with an aim of achieving a stable domestic system. However, as the developing countries are in the “price stability versus growth” dilemma, they should be provided with some leeway in their choice.

The Trust Fund, another outcome of the Jamaica meeting, would, it was hoped by the members, lessen the existing balance of payments problems of the developing countries with the profits from the sale of the Fund’s gold. But obviously, the accepted arrangements will favor the big quota countries more. It is estimated that, even taking into account the restitution of the Fund’s gold to member countries and the benefit accruing from the Trust Fund, the gold arrangements would raise the reserves of the Group of Ten by more than $60 billion, while only about $7 billion would accrue to the developing countries taken as a group. The new resources may make the developed countries feel that there will be no need for creating additional liquidity. Such a situation will greatly diminish the jurisdiction of the Fund over the management of international liquidity. In particular, this will adversely affect the decision on the creation and allocation of special drawing rights. This might retard the growth of global liquidity. The agreed objective of promoting the special drawing right as the central reserve asset of the reformed system will also be deterred. Therefore, for an equitable distribution of additional liquidity among the members of the Fund, more effective arrangements should be introduced into the international monetary system to meet the liquidity and resource needs of the developed and developing countries adequately.

Before I conclude, I have great pleasure in joining other fellow Governors in welcoming the Comoros and other new and prospective members. Every year, we have been pleased to welcome new members to this community. At the same time, it is the considered opinion of my delegation that the distortion that has persisted in the representation of China in the Fund and the Bank must be corrected as soon as possible. My country fully supports the rightful claim made by the People’s Republic of China and urges that these august institutions should follow the example set by the United Nations and other specialized agencies.

Statement by the Governor of the Bank for Pakistan—Rana Mohammad Hanif Khan

Let me first associate myself with the distinguished Governors who have preceded me to express my delegation’s sincere appreciation to the Government of the Philippines for making such excellent arrangements for our meeting in this magnificent building as well as for their warm welcome and generous hospitality. We will carry away with us happy memories of our sojourn in this beautiful city. We have been deeply impressed by the inspiring address by the President of the Republic of the Philippines, His Excellency, Ferdinand E. Marcos, and are most grateful to the First Lady of the Philippines for gracing the inauguration of this conference with her presence. I would also like to join my fellow Governors in congratulating Mr. Witteveen on the statement made by him which ably focused on the most pressing problems facing the world economy today. Mr. McNamara has given a graphic picture of the bleak future facing the teeming millions living in the poorest countries. We deeply appreciate his sincere and forthright appeal to world conscience for saving a quarter of mankind from degrading poverty.

The Annual Reports of the International Monetary Fund and the World Bank offer a remarkably frank and objective assessment of the main trends during fiscal year 1976, in economic, monetary and development fields. Viewed in the context of the constraints in which they had to operate, the initiatives taken and the contributions made by the two organizations constitute solid achievements. However, these commendable efforts could only marginally alleviate the progressively deteriorating economic conditions of the developing countries.

The current account deficit of the non-oil developing countries which amounted to $9.9 billion in 1973, escalated sharply to $28.4 billion in 1974, and increased further to $37 billion in 1975. According to the Annual Report of the Fund, the year 1976 is going to be another year of large current account deficits for these countries of the order of about $32 billion. The emergence of these huge deficits has given rise to a grave problem of adjustment for this group of countries. Heavy borrowing from abroad has raised their outstanding external debt and debt servicing liability to an inordinately high level in relation to their gross domestic product and current export earnings. The sharp rise in their international indebtedness has the potentiality of seriously aggravating their debt servicing problem. Notwithstanding large borrowings from abroad, a number of developing countries had to run down their already meager foreign exchange reserves in 1975 in an effort to sustain the volume of imports needed for development and essential consumption. Besides, the real value of their external reserves has been substantially eroded by the continuing inflation in industrially advanced countries which are their main sources of supply for imported goods. The severe deterioration in the terms of trade suffered by the non-oil developing countries and their balance of payments difficulties have exercised a dampening effect on their growth rates.

It is now evident that, the crisis of the recent past has had its worst manifestation in the poorest and the least developed countries, where a large part of the world’s population lives. In the last three years the economic growth in these countries has not kept pace with increasing population, resulting in total stagnation. It is now widely recognized that the problems of underdevelopment, poverty, and inequality are inherent in the international economic structure and mechanisms and that, without drastic modification in the present world economic order, the less developed countries cannot attain even a modest rate of growth. The secular deterioration in their condition is mainly due to structural inequities of the existing international economic order. The recent crisis has demonstrated quite conclusively that the massive economic power of the affluent countries and the inherent bias of the existing trade and financial system in their favor enable these countries to easily shift the burden of adjustment to the poorer nations. According to the Fund’s estimates, despite a number of internal and external adverse developments, the industrial countries have managed to bring about a marked swing of some $29 billion in their current account balance of payments, from a sizable deficit of $9.6 billion in 1974 to a big surplus of $19.4 billion in 1975, while, as I have already indicated, the current account deficit of the non-oil developing countries continued to increase at a rapid rate. The recovery of the industrialized countries from recession, which is currently under way, is expected to bring a certain amount of relief to the developing countries in 1976, but it cannot solve their basic problems. The fact is that our countries are suffering, not on account of certain ephemeral factors, but on account of the existing international economic order operating relentlessly against them. While the present system has brought unprecedented prosperity to the industrial countries in the postwar period, the developing countries, as eloquently pointed out by Mr. McNamara, have remained condemned to an absolutely low standard of living. The global income inequalities have continued to widen. In consequence, the developed market-economy countries appropriate about two thirds of total world income, while they have only about 20 per cent of the world population. On the other hand, the poorest developing countries, with some 30 per cent of world population, have only 3 per cent of world income.

The inequities of the present international order have been clearly brought out during the course of discussions in the UN General Assembly Special Sessions and the recently held UNCTAD IV. They have also been forcefully delineated in the North-South dialogue in Paris. The developing countries have put forward a number of suggestions to reorient the world economic order in the fields of trade, finance, and transfer of technology. Unfortunately, progress has been stalled by lack of sympathetic response on the part of developed countries, and the status quo with all its inequities continues to prevail. In the field of trade, developed countries have continued to maintain trade barriers on goods originating from developing countries in the form of tariffs, quotas, and other measures. The tariff structures which discourage processing of raw materials in developing countries have not been altered.

In the context of resource flows to developing countries, we are pleased to note that the members of the Organization of Petroleum Exporting Countries have continued to play a vital role. Commitments from this group increased sharply from $1.5 billion in 1973 to $8.6 billion in 1974. During 1975, notwithstanding a substantial decline in their current account surplus, their aid commitments rose further to $9 billion. Disbursements also rose from $1 billion in 1973 to $4.6 billion in 1974 and $5.6 billion in 1975, representing a substantially larger proportion of their gross national product (GNP) as compared with the traditional donors. The net flow of official development assistance from the latter has shown very little rise in real terms since 1967, and declined as a ratio of GNP of the member countries of the Development Assistance Committee over almost a decade and a half from 0.53 per cent in 1961 to 0.30 per cent in 1973. It is gratifying to note that some improvement has been registered in the last two years and that official development assistance has now reached 0.36 per cent of the GNP of the donor countries. However, this was considerably short of the agreed target of 0.7 per cent and essential requirements of the developing countries. The problem will not be solved through increased reliance on market sources and private initiative, as this would lead to mounting reverse flows and render the task of external debt management even more difficult. For overcoming the present resource constraints of the non-oil producing countries that are most severely affected, principal reliance has to be placed on a massive increase in the transfer of public resources on soft terms, and a significant proportion will have to be in quick-disbursing form.

It is clear that, unless there is a fundamental reorientation of the international economic order, the developing countries will continue to face bleak economic prospects. The present system, with its built-in tendencies to accentuate international inequalities and with its denial to the less developed countries of adequate participation in international economic decision making, could, in the absence of radical restructuring, lead to recurrent crises. Indeed, not only the developing, but the developed countries also need a new order to ensure the continued growth of their prosperity, which would increasingly depend on expanding markets in the Third World. The long-term interests of the developed and the developing countries are not incompatible, and it is not beyond the capability of enlightened statesmanship to build a new dynamic and equitable structure of creative partnership. Unfortunately, despite the widespread recognition of the vital need to refashion the international economic order, not much has been done to bring it about.

It is in this context that the Prime Minister of Pakistan has proposed the convening of a conference of all the countries of the Third World at the highest level to take stock of the situation with a view to devising an appropriate strategy for resolving the stalemate that exists in international economic relations. It is most essential that no time should be lost in averting a potentially disastrous confrontation between the “haves” and the “have nots” and evolving a system of global economic partnership to the mutual benefit of all nations.

While the basic problems of the developing countries await a proper and durable solution, the World Bank and the International Monetary Fund have tried to alleviate these problems through certain ad hoc measures. The IMF oil facility, for example, provided valuable balance of payments support for two years. It is unfortunate that agreement could not be reached on its extension for a further period, though there is a real need for its continuation for a longer period. However, a temporary enlargement of access to Fund facilities has taken place through the widening of credit tranches and a certain liberalization of the compensatory financing scheme. The Trust Fund is also in the process of being put into operation, though the magnitude of assistance from this source is not very sizable. While we appreciate these measures, there is need for more substantive action. In view of the fact that balance of payments deficits of non-oil developing countries will remain sizable for quite some time, there is a case for longer-term widening of IMF credit tranches. The compensatory financing scheme needs to be improved further. To make it of greater value, it is necessary that export shortfalls be calculated in real terms. Very little use has been made so far of the extended Fund facility, which is due to its rather stiff conditionality. It is necessary that conditions governing its use be reviewed and made more flexible.

A related problem to which the Fund should give greater attention is the management of international liquidity. The growth in international liquidity has been very unevenly distributed in recent years. After 1972, the reserves of the vast majority of countries have shown little further increase. In fact, as the figures given in the Fund’s Annual Report show, the reserves of non-oil developing countries did not show any net increase between the end of 1973 and April 1976, though global reserves increased by about 33 per cent in that period. The reserves of non-oil primary producing countries actually decreased by SDR 0.4 billion in 1975 and the ratio of these countries’ reserves to total reserves came down from 16 per cent in 1973 to 13 per cent in 1975. In this context it is necessary to give serious consideration to a fresh issue of special drawing rights. The whole purpose of the SDR scheme is to help improve the management of international liquidity and to avoid situations in which reserve stringency leads to intensification of import controls and other trade-destructive practices. Viewed in the global context also, a situation seems to have arisen which calls for creation of SDRs to supplement existing international liquidity. The ratio of world reserves to world imports is considered to be a major indicator of reserve adequacy or reserve stringency. Figures show that the ratio of world reserves to world imports, which was 34 per cent in 1973, stood at 28 per cent in 1975. In the case of non-oil developing countries, the ratio had gone down from 34 per cent in 1973 to 23 per cent in 1975. A fresh issue of SDRs appears to be warranted in such a situation and will help avoid proliferation of restrictive trade practices which are beginning to manifest themselves.

At the same time, in view of the highly skewed distribution of international liquidity and the desperate need of the developing countries for additional resources, the possibility of establishing a link between the allocations of SDRs and development finance should be reviewed. . . .

Now, I would like to draw the attention of my fellow Governors to a matter that requires our serious consideration. We find that, in the documentation of the conference, the delegation from Taiwan has been shown as the representative of China. Please permit me to put the record straight by referring to Resolution No. 2758 passed by the United Nations General Assembly in its twenty-sixth session, which clearly stipulated that only the People’s Republic of China represents the great Chinese people. The Resolution further decided, and I quote, “to restore all its rights to the People’s Republic of China and to recognize the representatives of its Government as the only legitimate representatives of China to the United Nations and to expel forthwith the representatives of Chiang Kai Shek from the places they unlawfully occupy in the United Nations and in all the organizations related to it.” We would strongly urge that action should be taken accordingly, and the lawful rights of the People’s Republic of China should be restored in the International Monetary Fund and the World Bank.

In the preoccupation of the international community with the worst postwar recession from which, fortunately, we are now recovering, the fate of the developing countries has tended to be pushed into the background. Recovery, however, does not necessarily mean a lightening of their burdens. If anything, their problems, some of which I have referred to, have been further aggravated. We earnestly hope and expect that the International Monetary Fund and the World Bank will take the lead in helping to resolve their difficulties and making this interdependent world a better place for all of us to live in.

Statement by the Governor of the Bank for Iceland—Matthias A. Mathiesen

It gives me great pleasure to join previous speakers in thanking the people and the Government of the Philippines for the excellent arrangements for this meeting and the gracious hospitality extended to us all.

Speaking on behalf of Denmark, Finland, Iceland, Norway, and Sweden, I would like to make a few remarks related to the activities of the Bank and its affiliates. At the time of our meeting last year there seemed to be reason to believe that the international community had recognized the pressing need for additional development assistance and other measures to bring about more equitable relations between rich and poor. The Seventh Special Session of the General Assembly, convened at the same time as our Annual Meeting, recognized the need for further action. Then we had the meeting of the United Nations Conference on Trade and Development in Nairobi and we have the ongoing North-South dialogue in Paris and the activities of the Development Committee of the Bank and Fund, to name a few of the most important international forums. And yet after more than a year of intense debate we find to our disappointment—and more importantly at the cost of lost opportunities for the developing nations—that there is no agreement on concrete general measures to increase the flow of assistance. At the same time there are even signs that official development assistance is declining, expressed as a percentage of gross national product of the developed world. . . .

Statement by the Governor of the Fund for Costa Rica—Bernal Jiménez M.

I am greatly honored to address the Annual Meeting of the Governors of the International Monetary Fund as the representative of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela. On behalf of the Governors of those countries and of the peoples of Latin America and the Caribbean, I extend cordial greetings to the Chairman of this meeting, the Managing Director of the Fund, and the delegations participating in this great meeting.

I join the distinguished speakers who have preceded me in thanking the Philippine Government and the people, in particular His Excellency, President Marcos, and the First Lady of the Republic, for the extraordinary kindness they have been showing us. The common ancestry which this beautiful country shares in so many ways with our region makes us feel here as if we are in the great Latin American family.

Our main concerns at our meeting last year were the world-wide recession and inflation. We are pleased to note today that the industrialized countries made important progress on both fronts in 1976. As a result of its own economic experience, Latin America understands perfectly the dilemma posed by growth and inflation, and hopes that efforts to resolve it will be characterized by a gradual approach so that, while the struggle against inflation is not neglected, measures are taken to assure that the economic recovery is solid and steady. In this connection, although world trade has revived with the recovery, most developing countries are only now beginning to feel the favorable effects. In Latin America the growth rate was extremely low in 1975, and will continue to be so in 1976. This means that the economic recovery will not get under way until early 1977.

The slowing of the world’s inflation rate has had a positive effect on Latin America’s economies. But it is even more important to note that we have adopted decisive policies of adjustment, including internal fiscal and monetary policies, with the result that the rise in price levels has begun to slow down. In addition, a strong movement is under way in the region toward application of more realistic policies in the areas of prices, interest rates, and exchange rates; this should help to redirect resources toward the external sector and to bring back historic rates of growth.

On the other hand, the annual deficit on current account in the last three years has been triple that of 1973. It is expected to reach about $14 billion in 1976. To finance a deficit this large, it has of course been necessary for the countries of Latin America to borrow on international capital markets. It is indispensable that the developing countries have adequate access to those markets if they are to alleviate their balance of payments deficits. We therefore urge the industrialized countries to improve the terms and conditions of access to their financial markets and to eliminate the obstacles that still exist in some of them.

In his opening address, the Managing Director of the Fund recognized that commercial banks have provided a valuable service to the world’s economy by facilitating the transfer of financial resources to the deficit countries. With respect to the countries of Latin America, international banks have shown their confidence in our economic future by extending loans that strengthen our ability to export. The banks grant these loans after carefully studying the borrowing countries’ economic conditions and prospects. Their long experience and their pragmatic view of our circumstances fully qualify them to make such studies. Hence, we do not share the idea that commercial bank loans should be linked to the Fund’s contingent credit arrangements. We believe that the Fund has specific functions in the balance of payments area; they cannot and should not be confused with the complementary role of development financing, which the modern international banking system is fulfilling more and more effectively.

We believe that the International Monetary Fund in its financial activities in recent years has met the major credit requirements of its members by establishing the oil facility, slightly liberalizing compensatory financing, and temporarily expanding the credit tranches. The greatest success of the Fund’s financial policies has definitely been the oil facility, thanks primarily to its flexibility and second to the fact that it is not directly subject to the quota limit.

The recent liberalization of the Fund’s compensatory financing was another important step in alleviating the financial problems of the non-oil commodity producing countries, just when the effects of the world recession were beginning to erode their export receipts. Still, the volume of lending has not kept pace with the magnitude of the export shortfalls. We therefore urge that this facility be further liberalized by significantly improving the calculation process, expanding quota limits, and making other temporary shortfalls directly eligible for financing—among them shortfalls in income from tourism, which is a major item of export of services for many of our countries.

In comparison with the expansion of the two facilities I have just mentioned, the enlargement of the Fund’s credit tranches has not produced the effects hoped for by the international economic community. In our view the limited use of these resources is due to the excessive conditions that were set, especially for the higher credit tranches.

Nor has the extended Fund facility been an effective mechanism for channeling resources, in part because of its lack of flexibility and in part because of the difficulty many countries are having in drawing up medium-term financial programs in an uncertain world economic environment. We think that this credit line could be a very useful tool for attacking the financing and stabilization problems of the developing economies; but, if this objective is to be achieved, the facility will have to be made more attractive through a reduction in its conditionality. In the meantime, we believe that the amount to which members can have access must be increased in a manner similar to the temporary expansion of the credit tranches.

While we recognize that the Fund has played an important role in financing substantial balance of payments deficits in the last three years, we fear that it may not have the ability to carry out financial policies of similar scope in 1977. It is expected that the financial problems of the developing countries will continue to be critical in the second half of 1976 and in 1977. The balance of payments deficit on current account of those countries is estimated at $29 billion for 1976 and at $30 billion for 1977. This indicates that the strong demand in recent years for Fund resources will continue through 1977. But there is less possibility that the Fund will be able to meet these needs adequately, in the absence of a parallel growth of its ordinary resources and in view of the termination or substantial reduction of suitably large and flexible special credit lines, such as the oil facility and compensatory financing.

In this context, we understand that there should be a degree of conditionality governing access to Fund resources in the present stage. Latin America feels, however, that the conditions should apply equally to industrialized and developing countries and, in any case, should be adapted to world economic circumstances, taking account of the fact that the demand for the developing countries’ exports remains inadequate, that the adjustment undertaken by the surplus countries is still incomplete, and that international liquidity is heavily concentrated in a small number of oil exporting countries whose capacity for absorption is limited.

Unfortunately, the status of the Fund’s liquidity could prevent it from meeting fully the foreseeable financial needs of the member countries. The relevant reports indicate that, with the usable currencies now available to it, the Fund would barely be able to meet the foreseen requirements of the raw material producing countries, yet an industrialized country has recently applied for a large credit, and it is possible that others will also see themselves in need of turning to the Fund to finance their balance of payments deficits. We therefore deem it necessary that the Fund’s ordinary liquidity be augmented, activating the General Arrangements to Borrow in such a way that the needs of the industrialized countries taking part in those arrangements can be met. At the same time, we urge member countries that have not yet made the necessary arrangements with the Fund to hasten the process by which their currencies will be made usable, in accordance with the commitments entered into when the decision on the Sixth General Review of Quotas was adopted. The possibility of obtaining funds on capital markets and from surplus countries could also be explored, and the possibility of universalizing multilateral swap arrangements could be examined.

Another area in which the Fund should expand its operations is the financing of capital movements. It is well known that the industrialized countries and some developing countries have large networks of swap facilities. However, erratic speculative capital movements, divorced from economic realities, do not occur only in industrialized countries, for middle-income countries are becoming more and more susceptible to disequilibria of this type. We think that the Fund should consider granting short-term loans to offset these speculative capital movements. The legal obstacles that exist in this matter could be overcome either through interpretation or through the creation of special facilities compatible with the Fund’s Articles of Agreement.

Another matter of serious concern to Latin American countries is the overall situation, the distribution of official reserves, and the inadequacy of those reserves in relation to present world economic conditions. Total reserves rose during the last three years at an average annual rate of about 10 per cent—far below the growth rate of international trade transactions which, in the same period, was close to 25 per cent. Total reserves increased by almost SDR 58 billion from the end of 1973 to June 1976. It is interesting to note that only 4 per cent of the increase was accounted for by the non-oil primary producing countries. This shows how little they have benefited from the unusual expansion of world reserves.

As important as the relative inadequacy of global liquidity is the fact that the growth of liquidity is accounted for primarily by increased official holdings of reserve currencies. This is not consistent with the principles adopted by the Committee of Twenty on this matter, which called both for a strengthened role for special drawing rights and for a gradual reduction in the role of gold and of reserve currencies in the international monetary system. Thus, instead of gradually becoming the principal reserve asset, the SDR has been losing ground in relative terms; at present it constitutes only 4 per cent of total international reserves.

From these considerations we conclude that corrective measures are urgently required both to adjust total liquidity to the needs of the monetary system and to assure implementation of the reforms to which I have referred. If the role of the SDR is to grow in the future, a portion of the new international liquidity that is created must be in the form of SDRs.

With respect to conditional liquidity, its inadequacy can be shown by simply looking at the ratio of Fund quotas to world imports in recent years. While the ratio averaged 10 per cent in the period 1950–60, it is barely 5 per cent today, despite the planned increase under the Sixth General Review of Quotas. A comparison of these figures shows how inadequate the previous adjustments of Fund quotas were, and how necessary it will be to correct the trend by substantially increasing the quotas under the Seventh Review, on which discussion is to be concluded by February 1978. We maintain also that the Seventh Review must enlarge the role of the developing countries in relative terms as well, so as to reflect their importance in the world economy; to this end, the formulas used to determine the quotas of individual member countries must be altered to take account of the weighting of the different facets of their economies.

Turning to the reform of the international monetary system, while we are pleased that the negotiations on the second amendment of the Fund’s Articles of Agreement have been concluded, we must acknowledge that for Latin America the reform is incomplete. Since it lacks provisions on convertibility or settlement in assets, contains no arrangements for the creation or composition of international reserves, and assures neither equity in the adjustment process nor the transfer or institutionalization of real resources, the amendment fails to satisfy our aspirations for a total reform of the monetary system.

The most important change introduced by the second amendment is that relating to exchange systems, because it is the one that will most affect the member countries’ decisions in the area of economic policy in the future and because it confers on the Fund new powers of surveillance over the international exchange system. We are confident that these new powers will be exercised evenly, for otherwise the Fund will run the risk of producing untoward influences, contrary to the principle of equality that must guide the adjustment process between industrialized and developing countries and between surplus and deficit countries.

It is vital in our view that the policies governing supervision and control of the exchange system now under study in the Fund be applied to all members whether they have floating or linked exchange regimes and with due regard to their individual circumstances. This means that in its application of principles and in its surveillance over compliance with obligations, the Fund will have to pay attention to the specific conditions in the developing countries, since those conditions do not significantly influence developments in exchange markets, and will have to scrutinize and evaluate more thoroughly the exchange policies of the industrialized countries that have a decisive impact on the world economy.

It is encouraging to note that steps are being taken in the transitional period to mobilize the Fund’s gold immediately, with three auctions having been held already, and that the first direct restitution will take place next December. We further hope that the Trust Fund will make its first loans to the beneficiary countries in 1977 and that in the same year the Latin American countries will receive the direct transfers due to them from the profits obtained by the Fund through sales of the metal.

We recognize, however, that the holders and producers of gold in the area, as well as the beneficiaries of the Trust Fund, have been hurt by the fall in the price of gold to which the auctions may have contributed. Therefore, although the IMF, pursuant to the mandate of the Interim Committee, must sell the gold over a four-year period, we think it prudent to recommend that, in carrying out the mandate, the Fund weigh the damage that an accelerated decline in market prices could do to those countries’ economies. The sales program should seek, on the one hand, to maximize profits and, on the other, to refrain from damaging the economic and financial situations of the countries concerned.

With respect to special drawing rights, the second amendment contains a number of changes that could facilitate their use. Since the policies governing their allocation have not been changed, however, the creation of SDRs remains subject to the requirement of medium-term inadequacy of global reserves. This is a criterion lacking in vision and realism, for it ignores the needs for reserves of the developing countries. Moreover, since the limits on designation and reconstitution remain in effect, so, basically, do the restrictive clauses governing the use of SDRs. Thus, the changes made are much less important than those not made.

In summary, of all the proposals with which we are concerned at this meeting, the one which seems most important to Latin America is that of a substantial increase in Fund resources. Our Fund will not succeed in becoming the center of the monetary system or be able to carry out its new functions effectively and fairly unless its resources are appreciably enlarged by the Seventh General Review of Quotas. The worst result would be a Fund diminished in its resources and stricter in its surveillance and conditionality.

Latin America believes that, under the reformed system, the Fund should exercise equitable surveillance of exchange regimes, taking account of the particular circumstances of the developing countries, as expressly recognized in the negotiations on monetary reform. We therefore reiterate our view that the Fund must establish practical mechanisms for promoting an adjustment process that is equal for all member countries, regardless of their level of development or their balance of payments situation.

It is Latin America’s view that the conditionality of the Fund must be applied equitably to all countries, a basic guiding principle being that the imposition of an excessively rapid adjustment on the developing countries could prove detrimental to their minimum growth requirements.

The facts demonstrate that the countries of Latin America and the Caribbean have made tremendous efforts to overcome the difficult obstacles created by the world economic crisis of recent years. We have courageously fought inflation and succeeded in maintaining growth rates, preventing a retrogression that would have been a terrible prospect for our peoples. We look toward the future with optimism, confident in our ability to cope. But our success will depend to a crucial extent on the cooperation and understanding that the international community shows in the coming years.

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

We meet today in the capital of one of the developing country members of the Fund and the Bank. It is an indication of how fast some of those developing members are developing that the arrangements made for this Annual Meeting by the Government of the Philippines have been so efficient and so effective.

I welcome those members of the Fund and the Bank attending this Annual Meeting for the first time. In that respect I think particularly of our friend and neighbor, Papua New Guinea.

I also note with pleasure the presence here today of an observer from the Republic of Seychelles, which will very soon become a full-fledged member of the Fund.

Since the last Annual Meeting the course of the world economy has not been without its difficulties. Member countries have experienced lower rates of economic growth, higher levels of unemployment, and higher rates of inflation than at any time since World War II. Balances of payments have in many instances been out of equilibrium. A few oil exporting countries have enjoyed notable surpluses. A few industrial countries have achieved a sufficient adjustment so as to build up strong balance of payments positions again. For most countries, however, basic balances of payments have continued in excessively large deficit.

But despite—or perhaps because of—these difficulties, a great deal of progress has been made during the past twelve months. There has been progress toward reducing world inflation. There has been progress toward restoring sustainable growth of the world economy, on the prospects for which so much else depends. But above all there has been progress toward a better understanding of our common problems and toward the emergence of a remarkable degree of consensus about the basic approach which has to be taken toward those problems.

Behind all these problems there has been a common thread—inflation. It is inflation which has produced the fall-off in growth in the developed countries. It is that falling off in growth which has produced the unacceptably high levels of unemployment in those countries. It is that falling off in growth which has also reduced the demand for, and the prices of, the exports of the developing countries and has thereby put their development programs at risk. It is inflation which has produced the continuing uncertainty and, at times, even turmoil in the exchange markets. It is inflation, above all, that has now reduced the policy options open to us. With the growing recognition of this central role of inflation, policies have gradually begun to rebuild our earlier shattered hopes. Although there is still a long way to go, rates of inflation are now declining.

In association with that, and despite some slowing of the pace in recent months, the industrialized economies are now growing again at a moderate pace. So far from deploring that degree of moderation, or voicing appeals for speeding up further the pace of recovery, we should be expressing our satisfaction that the recovery is presently proceeding at a pace which seems likely to be sustainable and that it now seems likely to bring with it further benefits in terms of the slowdown of inflation.

It is true that, although employment is rising, unemployment remains deplorably high and seems likely to do so for some time, until the continuing lift in our economies can begin to make inroads into it.

The economic problems of inflation, recession, and unemployment, which most of us have been experiencing, have at least had one positive benefit. They have concentrated all our minds upon the underlying nature of those problems and the remedies which can appropriately be applied to them. I say this against the background of the meeting of the Interim Committee, the statements on the economic situation by the Managing Director of the Fund and, to the Interim Committee, by the Secretary-General of the Organization for Economic Cooperation and Development (OECD), and the comments already offered by many Governors.

What the Managing Director has said is—and I quote:

An important lesson of recent experience is that nothing could be gained by combating unemployment through expansionary policies that would intensify inflationary expectations. . . . restoration of a reasonable degree of price stability will be necessary to establish a durable basis for better economic performance.

In very much the same vein, the Secretary-General of the OECD has said:

Except in the very short run, lower unemployment cannot be bought at the cost of ever higher rates of inflation . . . what is required is relatively cautious demand management policy aimed at achieving a moderate but sustained expansion.

The communiqué of the Interim Committee, reflecting as it does a general consensus of views of 20 members, in turn representing all of the member countries of the Fund, came to this conclusion—and again I quote:

. . . The Committee believes that in present circumstances the restoration of a reasonable degree of price stability will be necessary to establish the basis for sustained economic growth and the reduction of unemployment. Accordingly, the Committee is of the view that policies in the industrial countries at the present time should give priority to the reduction of price and cost inflation. This would require fiscal and monetary policies in these countries that would provide effective control over the expansion of aggregate demand. . .

Speaking earlier this year at a meeting of the OECD Ministerial Council, Secretary Simon of the United States put it this way:

The policy errors of the past and our hopes for the future force us to recognize a basic reality: inflation is the greatest threat to sustained economic development and the ultimate survival of all our basic institutions. . . . If we are to sustain the output of goods and services and reduce unemployment, we must first control inflation.

I take heart from the fact that Finance Ministers from so many different countries, having such very different circumstances, have spoken with virtually one voice in recognizing the basic reality of which Secretary Simon spoke. This remarkable consensus on the appropriate policies to be pursued is in fact directly reflected in the domestic policies of my Government. The present Australian Government came into office at a time of unparalleled difficulties in both the domestic and international economies. The futility of past efforts to lift the level of economic activity by using the traditional methods of budgetary deficit and monetary expansion had been clearly demonstrated. As budget deficits increased and money supply expanded, what happened? Rates of inflation increased, business investment slumped, consumption fell away, balance of payments deficits grew larger, and unemployment rose sharply and persistently.

Many things have not been properly understood about the workings of the economic system in recent years. Among them is the way in which continued high rates of inflation destroy confidence—the confidence of the entrepreneur, the wage earner, and the consumer.

The Australian Government is convinced that, first and foremost, we must pursue economic policies which will remove the destructive assumption that inflation will continue or even progressively increase. To destroy the inflation-recession syndrome we must reverse the policies of unbridled growth in government expenditures, unrestrained budgetary deficits, and permissive monetary expansion. We must pursue firm fiscal and monetary policies and, in the course of doing so, recognize the vital role of the private sector. Capital must be allowed to earn a return, and risk-taking and enterprise must be rewarded. At first sight, policies of fiscal and monetary restraint which set our faces against inflation, even though unemployment remains unacceptably high, are not immediately attractive to the community. At such a time, continuing emphasis upon policies designed to bear down upon inflation has an appearance of harshness.

People are concerned—and rightly so—at the social effects of high continuing levels of unemployment, including their possible longer-run effects upon work attitudes. My Government shares those concerns. But what we have all learned—and learned so painfully—over these past few years is that in these inflationary times governments cannot spend their way out of the unemployment problem. No longer can governments buy less unemployment at the expense of higher inflation. It is inflation which is producing the unemployment. Until we solve the one, we will not solve the other. Governments can print money, and over the years they have become only too used to doing so. But governments cannot print jobs. It is in part the continual yielding by governments to the incessant clamour for more expenditures by governments in this area or that which has enfeebled our private sectors and reduced their capacity to produce the jobs which are needed.

We are therefore embarked upon our present course of reducing inflation because—whether we like it or not—it is the only way we can set our respective economies back on the track of a sustained improvement in their rates of growth and a sustained reduction in the level of unemployment.

In the context of our debates in this and other forums, we have heard a lot of late about the need for “political will” on the part of governments. If there is one area in which political will on the part of governments is important, it is in this area—of sticking to the only policies which will, in the longer run, produce acceptable results.

Obviously, we cannot stop our inflations overnight, but a further—and continuing—reduction in the rate of inflation is essential to sustained growth and prosperity.

We must not be timid in our application of the fiscal and monetary policies required to achieve this objective. For example, as the Fund Annual Report has said:

. . . current rates of monetary expansion are still in double digits in most of the industrial countries, and will need to be reduced considerably if a return to reasonable price stability is to be achieved in the next few years.

In this and other respects we have to resist demands for a return to the fiscal and monetary policy attitudes which are what, fundamentally, have produced our present troubles. From the viewpoint of the international monetary system, also, this is all of the greatest importance.

We have spent a great deal of time over the past few years considering ways and means of reforming the international monetary system. Some have been disappointed with what has been achieved. Initially, some of us were looking for an outcome much more novel, much more drastic, and no doubt very different from the Articles of Agreement of the Fund we have known for so long.

In the end, a greater realism has prevailed and the revisions to the Articles that members of the Fund are currently putting before their legislatures are relatively modest in scope. So far from finding that disappointing, I think that it is a credit to the process of international consultation that, in the end, a kind of pragmatic common sense prevailed. The monetary system of the future will not be the result of legal or authoritarian dictates. It will evolve in accordance with the needs of changing circumstances. I believe that the revised Articles provide all the scope that is necessary at this time for such gradual evolution of the system in the period ahead. I say this in part because, basically, what has been wrong with the international financial scene in recent times has had little to do with the system. What has been wrong has been that, individually, in many many cases, we have let our national financial situations get out of hand. We have sowed the seed of domestic inflation and we have reaped the international whirlwind of chaotic exchange markets and instability of exchange arrangements.

The fundamental importance of the internal economic balance to the achievement of external financial balance has perhaps been recognized most clearly in the revised Articles dealing with exchange rates. I make particular reference to the introductory section, for which I believe we have largely to thank our French and American colleagues. In that section, the fundamental importance of internal stability to the achievement of external exchange rate stability is stressed. That, I believe, is a basic truth. It needs to be more widely recognized, but it also needs to be more widely acted upon.

The Fund is an institution which is intended to provide temporary financial support to members in the event of balance of payments difficulties which, by their nature, are not expected to be of long duration. That is a vital role, but it is necessarily an essentially limited one. It is necessarily limited because of the revolving nature of the Fund’s resources. There has, however, been a tendency in recent times for the Fund to be asked to take on responsibilities which go beyond that role, and to take on some of the character of an aid institution. That is a trend which I believe should be resisted.

There are of course temporary and pragmatic exceptions. A case in point was the oil facility. This was established at the time of the sharp increase in oil prices which was imposed early in 1974. That action had violent effects on the balances of payments of many—indeed most—countries. A rechanneling of finance, through the Fund, from the oil exporters to the oil importers, on rather longer terms than the Fund would normally accommodate, helped to tide members over a difficult transitional period. But we now have to accept that temporary financial expedients of that kind must come to an end—and have indeed done so. Higher energy costs are here to stay. What is needed is not finance, but adjustment by the oil importing countries to higher oil prices.

In the same way, the Fund has been helping to finance balance of payments deficits on a large scale over a period when inflation has been rampant and balance of payments deficits for that and other reasons have been severe. The time has now come, however, when the Fund may have to apply rather stricter conditionality to borrowings by members in the ordinary credit tranches. It may have to do that in any case for internal reasons—and here I have in mind the problems of the Fund’s own liquidity.

Beyond that, however, the time has come for an approach to conditionality that more closely matches our analysis of the fundamental problem. The Fund, having recognized the fundamental importance at this time of resisting inflation, has to have policies which effectively encourage member countries to pursue policies directed to that end. We now need more emphasis on adjustment of internal economic policies and less on financing of external deficits. To the extent that countries are successful in countering the internal forces of inflation, so are their external financing needs likely to be reduced.

Until recently there would perhaps have been a tendency to suggest that what I have been saying relates only to that one fifth or so of the Fund membership which is commonly classified as developed—and not to the four fifths or so other members who are classified as developing. I believe such a view would be incorrect—and I also think that an increasing number of the developing countries have come to the same conclusion. Adjustment is in some ways even more relevant to the economies of the developing countries than it is to the developed countries. This is so whether we consider long-term adjustment issues, such as the reallocation of resources called for in response to higher energy costs, or shorter-term issues, such as demand management policies. If international aid is absorbed in financing, directly or indirectly, balance of payments deficits in developing countries instead of building up a resource base for their longer-term development, then the aid will be seen to have been largely frittered away. In the long term, the financial institutions and the donor countries will lose their enthusiasm for providing aid on such a basis.

I say this in the spirit of concern and sensitivity that Australia has always shown for the needs of the developing countries. My Government is deeply concerned about the extent of absolute poverty that exists within the developing nations and by the huge differences between the incomes of those countries and those of the developed world. The record shows Australia’s aid performance as a particularly good one in relation to that of other donors. Australia is also one of the few donor countries which gives virtually all of its aid in grant form. This year, despite the very difficult budgetary circumstances in Australia, we have provided in our recent budget for real growth in our aid expenditure. Our official development assistance this year will be in the order of $0.5 billion—virtually all, as I say, in grant form.

We have supported appropriate improvements to the various financial facilities in the IMF, including the compensatory financing facility, the extended Fund facility, the buffer stock financing facility, the oil facility, the Interest Subsidy Account, and the IMF Trust Fund financed by sales of gold held by the IMF. We have also contributed to the Third Window facility of the Bank and to the recent replenishment of the resources of the Asian Development Fund. We have indicated our support for the International Fund for Agricultural Development. We have supported these and other initiatives because they seem to us to be practical and workable proposals which would result in a sensible advance in the resource transfer effort and which were compatible with basically maintaining the present international economic system.

In this, as in other respects, we believe that the preservation of the essential elements of the present economic system continues to hold the greatest hope for economic progress for us all. There must be a sensitivity and responsiveness to the legitimate interests of the developing nations. There must be commitment to supporting those proposals that will realistically assist the developing nations in the international economic community. But the fostering of the illusion that redistribution of the world’s existing wealth will resolve all problems serves no one’s interest. What is fundamental is soundly based international economic growth. Equally important is the pursuit by developing countries of domestic policies which foster enterprise and initiative. For example, I do not find it easy to reconcile expressions of dissatisfaction with growth performance, export prospects, and the outlook for the balance of payments with the simultaneous pursuit of discouraging policies toward private capital—whether from domestic or overseas sources—which could help to resolve all these problems.

I state these propositions because, as my Prime Minister has recently said, unless we do frankly say these things, then all of us run the risk of raising unrealistic expectations which would inevitably be shattered. Countries such as Australia, despite their own domestic economic difficulties, can seek to maintain and expand the level of their development assistance—and we have done this. But, in the end, it is undeniable that the capacity of the industrial countries to aid the development process—whether through the international lending institutions or in other ways—has been weakened by the circumstances about which I was speaking earlier.

Our first task is to deal with the inflation which has been undermining our own economic performances and, in the process, undermining our ability to perform in the aid fields also. The continuing pursuit of soft policy options has led us to the point where we no longer have any options. . . .

In these and other respects the tasks before us, both in the international monetary and international development fields are enormous. The first essential for dealing with those—or any other—problems is to get our analysis of them straight. I believe that, as a result of the intensive and continuing dialogue we have been pursuing with each other in the forums of the Fund and the Bank, and elsewhere, we are now closer to achieving that than we have seen for many years. I hope—and believe—that we can build further upon that in the year ahead.

Statement by the Governor of the Fund and Bank for Jamaica—David H. Coore

I join with my colleagues in expressing deep pleasure and appreciation for the welcome we have received from the Government and the people of the Philippines and the splendor of the setting that they have provided for our meeting.

My remarks today will be confined to matters relating to the Bank and I will be speaking not only on behalf of my own country, Jamaica, but on behalf of my Caribbean colleagues in the Bahamas, Barbados, Grenada, Guyana, and Trinidad and Tobago.

Insofar as the non-oil developing countries are concerned, it is indisputable that by and large their present situation is critical and their immediate prospects dismal. World Bank studies indicate that there has been a stagnation in the growth rates of the poorest developing countries and a small and inadequate growth rate in the middle-income developing countries that are not oil producing. There is no present indication that any significant improvement can be expected in the near future. From International Monetary Fund studies we learn of continued high balance of payments deficits on current account faced by the non-oil developing countries at a level of $32 billion estimated for 1976. There is no indication that these enormous balance of payments deficits will be declining in any significant way in the years ahead.

Due to the necessity for accelerated borrowings over the last three years, particularly on short term, the debt service burden has increased and will be approaching unmanageable levels in the next few years. As President McNamara has pointed out, in the case of the middle-income developing countries, interest payments on debt services will be increasing from $5.2 billion in 1975 to some $12.5 billion in 1980. What is even more serious is that debt amortization is projected to escalate from a figure of $6.1 billion in 1975 to some $22 billion in 1980—three and a half times the 1975 level. As a percentage of exports, debt service will be increasing from 17 per cent in 1975 to 25 per cent in 1980. It should be noted that this increase in debt service burden of non-oil developing countries is a direct consequence of the adjustment process they have had to make in the light of the increase in oil prices and the increase in the cost of manufactured commodities and represents the effect on the developing countries of the much-applauded recycling process through private commercial lending.

At the meeting of the Committee of Twenty in Rome in 1974, I pointed out that, in the absence of any mechanism specifically tailored to the particular circumstances of the non-oil developing countries, the impact of increased oil prices and the general rise in the prices of manufactured goods would destroy their prospects for economic growth and indeed jeopardize the maintenance of such development as had already taken place. In the period since that time the oil facility and the availability of commercial credit have ameliorated the situation but it has not been cured. It has to be appreciated that, given the basic weakness and the structural rigidities of the economies of most developing countries, the so-called adjustment process is more difficult and takes a longer time than is the case with the industrial countries. . . .

We do also feel that the Bank can play a significant role in dealing with external debt problems of developing countries. No development finance institution can ignore the critical nature of the debt service problem. The Bank does now play a useful role in its leadership of debt consortium groups who provide assistance in debt management policies of developing countries. The debt question has been the subject of an UNCTAD IV Resolution and is being carefully examined in the Paris forum of the North-South dialogue. We do feel, however, that both the Bank and the Fund, which are involved in a practical and operational way with debt matters relating to the developing countries, should join in the search for appropriate solutions to alleviate the debt service problem. My colleague, Governor Macdonald from Canada, has spoken collectively for the Commonwealth countries on the consensus reached at the recent Commonwealth Finance Ministers meeting in Hong Kong on the subject of the International Development Association, the need for a World Bank capital increase, and other matters dealt with in the report of a Commonwealth experts group. We wish to emphasize the Commonwealth Finance Ministers’ view that international organizations should take the lead in bringing about a meaningful consideration of appropriate debt relief to developing countries. We fully accept the distinction between official debts owed by governments to governments on which political action could be taken and private debts where private lenders are involved and there is need to maintain confidence. The report of the Commonwealth group of experts adumbrates a practical approach to both these categories and we support its recommendations.

In addition, positive steps need to be taken to encourage an expanding flow of longer-term private capital to those developing countries that are not eligible for concessional funds. The suggestion has been made in the Development Committee that the Bank might activate its existing power to guarantee bond issues by developing countries. We are also convinced that a separately funded multilateral guarantee facility with voluntary contributions largely of callable capital administered by the World Bank could play an important role in stimulating the flow of private capital to the threshold countries, namely, those countries that are creditworthy, but are not well established on the capital market. We hope that the Working Group on access to capital markets will continue its search for a solution along these lines.

So far, I have been dealing with steps which we feel ought to be taken right away and it is fair to say that there appears to be a reasonable measure of agreement on these proposals among both the developing and the developed countries, although there may be individual differences of emphasis and degrees of urgency. I would like, however, to take this opportunity to look at the matter from a longer-term perspective. It is imperative that the Bank should begin to consider now a strategy that goes beyond the exigencies of the immediate future. In this connection, I would wish to mention three areas which deserve study at the present time.

The first area is the future role of the Development Committee. It has been agreed that the Development Committee should continue for the next two years as a joint committee of the Bank and Fund and a program of work has been laid out for it. I think it is necessary, however, to begin now to consider how the Development Committee ought to operate on a permanent basis so that when the time comes for review in 1978, the preliminary work would have been done. It is our view that the Development Committee ought to occupy the same position in relation to the World Bank that the Interim Committee occupies in relation to the Fund. We would therefore like to put up for consideration the view that the Development Committee should become a forum for discussions and decision at the political level of issues that relate to the activities of the Bank, and that it should more and more be used as a means whereby decisions can be taken at the political level in between general meetings of the Board of Governors of the Bank on matters related to Bank activities. We see this as an extension of the concept that attained general acceptance at the last meeting of the Development Committee held on Sunday, namely, that the Development Committee’s effectiveness is enhanced to the extent that it concentrates on limited and specific areas of activity. We would therefore urge that this approach to the future of the Development Committee be given careful consideration so that the ground can be well prepared for a decision to be taken when the time for formal review of its activities comes around in 1978. . . .

Statement by the Governor of the Bank for Israel—Moshe Sanbar

At the outset, I would like to express to our host, the President and the Government of the Philippines, our admiration of the highly successful arrangements made for this conference in this beautiful city of Manila. I also extend a warm welcome to the new members, Papua New Guinea and the Comoros.

The global repercussions of the economic events of the past few years clearly point to a growing interdependence in the world economy. This is amply evident from the whirlpool effect of the recent “recession-cum-inflation.” However, there have been major differences in the severity of its impact on individual economies and considerable disparity in their ability to recover from its effects.

Many of the non-oil developing countries—and my own country is among them—are still attempting, with only limited success, to adjust their economies to the changed situation. They are, for the most part, still plagued by serious balance of payments difficulties, and their debt-servicing problems have been aggravated. Most of them have been hit not only by rising import prices, but also by the sharp decline in their export earnings and by the need to borrow heavily in international capital markets on hard terms.

The magnitude of these problems is forcefully reflected in the Bank and the Fund Annual Reports, which we have before us. I wish to express my sincere appreciation to Mr. McNamara, Mr. Witteveen, and their staffs for these excellent Reports. They have presented us with both a lucid analysis of the facts and a well-balanced discussion of the various methods adopted by the Bank and the Fund to deal with the complexities of the current situation.

To help its members cope with the grave economic problems confronting them, the Fund has moved forward in a positive innovative manner. In order to enable them to absorb the initial shock of sharply increased oil and oil product prices, the Fund created the oil facility. To this have been added the compensatory financing facility, the Subsidy Account, the extended Fund facility, and the Trust Fund. In creating this array of instruments, the IMF has tried to meet the needs of countries with different levels of development and of gross national product per capita. For the initiative and flexibility it has shown in this period of global economic disequilibrium, the IMF is to be highly commended. . . .

The promotion of exports is the central target of Israel’s economic policy. We are trying to achieve it by a suitable foreign exchange policy and a periodical devaluation of the Israel pound, reflecting the rate of inflation in Israel relative to the rate in major countries we trade with.

In order to enable the transfer of resources to export industries, we restrict local demand—especially private and public consumption—by implementing strict fiscal and monetary measures. We also encourage savings and capital formation from domestic sources. Nevertheless, the Israel economy suffers from a high rate of inflation and serious difficulties in the balance of payments. In the absence of sufficient development loans from abroad, the rate of economic growth has considerably declined in the last three years.

Despite the slowdown in economic activities, we have managed to limit unemployment, and our income distribution may be considered among the most egalitarian in the world.

Last but not least, may I share the sentiments expressed by the Chairman in his opening address for a just peace in the Middle East, which will be a cornerstone for the economic and social prosperity of the region as a whole.

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

It is indeed a great satisfaction to hold our Annual Meetings this year in such a hospitable and wonderful country. I wish to extend my gratitude to President Marcos, the Government, and the people of the Philippines for the exceptionally favorable conditions surrounding our stay and work in this city. Allow me, also, to take this opportunity to welcome the new member countries of our institutions.

During our last Annual Meeting in Washington, the important Seventh Special Session of the General Assembly was taking place at the United Nations, promising to open a new phase in our joint efforts toward solutions of world economic problems. That meeting opened a new dialogue between industrial and developing countries, strengthening the belief that by joining efforts we could reach concrete solutions along the lines of the proposals stated in the important documents adopted.

However, in spite of efforts made during the UNCTAD IV, the Conference on International Economic Cooperation in Paris, and other gatherings, and despite positive effects of the process of recovery in the industrialized world, expected concrete solutions were not reached for the urgent problems of world economic relations, and particularly for the increasingly grave problems of the developing countries.

The widening of the gap between the industrialized and developing countries represents the most serious cause of economic, social, and political confrontation in the world today. This was re-emphasized recently at the Fifth Summit of the nonaligned countries in Colombo. That meeting came to the conclusion that there is no true dialogue between the developed and developing countries on monetary and financial issues, which are the most important part of global economic relations.

In resolving their problems, the developing countries are increasingly relying on their own resources and efforts and on mutual economic cooperation. In addition, they are ready and willing to continue the dialogue and the economic cooperation on equal terms with industrial developed countries. Under the circumstances of growing global interdependence, the accelerated development of developing countries is a substantial and inseparable part of the further evolution of the world economy. That evolution can be implemented by changing the existing economic relations within the New International Economic Order.

Grave concern arises from the fact that there is no consistent international monetary system adequately reflecting present political and economic needs and realities. This certainly contributes to the further aggravation of world economic problems. Latest developments in international monetary relations prove clearly that work on the reform should continue without delay or hesitation.

The equity of the system should first of all reflect the participation of the whole international community in the decision-making process in the IMF and other financial institutions.

In Jamaica, an increase in quotas of only 32.5 per cent came after a five-year period of unchanged quotas. When the rise in quotas is compared to the increase in world trade, it is clear to what extent the possibilities of the Fund’s helping member countries in balance of payments difficulties have decreased in relative proportions.

Therefore, in order to increase the resources of the Fund, there is need for a further increase in Fund quotas, whereby the developing countries would be accorded a substantial increase in their share in the total volume of quotas.

Decisions reached in Jamaica and the second amendment of the Articles of Agreement of the International Monetary Fund do not provide solutions to the key issue of international liquidity. It continues to be created outside the IMF and in an uncontrolled fashion. The developing countries seek the creation of international liquidity through the SDR. Therefore, a new allocation of SDRs is indispensable, and further steps should be taken toward making it a central reserve asset of the international community.

In this connection, the Group of 24 expressed its belief “that the reform of the international monetary system will be resumed and that special consideration should be given to the interest of the developing countries, particularly as regards the need to introduce a link between the allocation of SDRs and the flow of financial resources to developing countries.”

A matter of particular concern is the fact that during the last few years, a considerable worsening has occurred in the structure of financing of the developing countries through an increase in short-term commercial borrowing under unfavorable conditions with a simultaneous decrease in long-term financing. This aggravated further the already acute problem of the indebtedness of many developing countries. Therefore, the need for long-term financing of the developing countries and solution of the problem of indebtedness of those countries experiencing difficulties has become more important than ever. If ways and means are not found to meet these problems, the forthcoming period will be one of serious development crises in those countries, with grave consequences for world trade and the current process of recovery. . . .

We should take this opportunity to give credit and express our appreciation to the management and the staff of the World Bank and its affiliates and the International Monetary Fund for all their endeavors and vigorous efforts. Acknowledging this, we realize that their task was certainly rendered more difficult by the general economic instability and uncertainty in the world, as well as by insufficient support from some member countries.

At the same time, we are witnessing trends to move important decisions concerning international monetary and financial problems away from the IMF. My country is wholeheartedly in favor of a further strengthening of the role of international financial institutions.

The attainment of the internationally accepted goal of economic growth of the developing countries obviously requires a significant increase in the volume of transfer of real resources. This clearly indicates the crucial importance of the role that the Joint Bank-Fund Development Committee has to play in this field. To be more effective and successful in its future activity, the Committee should give priority to the proposals formulated in the last communiqué of the Group of 24. We consider also that the Committee should be given the necessary support by the developing countries.

I trust that with awareness of our responsibilities and by exerting joint efforts in a spirit of cooperation, we shall succeed in finding adequate solutions.

Statement by the Alternate Governor of the Fund for Mexico—Ernesto Fernández Hurtado

Mexico joins with special warmth in the cordial greetings extended to the hospitable and progressive-minded Philippine people, with whom it has enjoyed close relations that date back more than three centuries to the Manila galleon and have grown ever stronger with the passage of time.

We concur in the statement made by the Governors for Costa Rica and the Philippines, on behalf of our group of countries, with respect to vital questions affecting the International Monetary Fund and the World Bank. I do not, therefore, propose to go into the matters amply dealt with in their statements. Instead, I shall take this opportunity to comment on the underlying purposes of a number of far-reaching measures adopted recently by the Government of Mexico, aimed at fundamental readjustment of Mexico’s economy.

The Annual Reports by the Executive Directors of the International Monetary Fund and the World Bank, and the brilliant speeches by Mr. Witteveen and Mr. McNamara, have provided extremely useful guidance for our discussions with respect to the most suitable policies for the near future.

In reviewing recent experiences of inflation and recession by our countries we note that, just as the origin of world inflation was initially associated with the expansionist policies of a few large reserve currency countries, in which the increased world liquidity was more of an effect than a cause, so also we find that the recent prudent and moderate management of monetary policies and of public receipts and expenditures by those same countries has helped substantially to lower inflation and reactivate world economic activity.

Because of the concern to reduce rapidly the high levels of unemployment once world economic recovery was established, excessive efforts were made to accelerate economic activity which have already shown that they are more likely to generate new inflationary pressures and growing balance of payments deficits and thereby to impede rather than promote solution of the unemployment problem. In these circumstances, wage policies pushed too fast, in view of the impossibility of raising productivity in the short term, have simply helped to aggravate problems without producing any increase in wages in real terms. This gives particular relevance to the observation by the Managing Director of the Fund that it is more important, henceforth, to follow economic adjustment and balance of payments policies. For some large and a number of middle-sized countries, where the phenomenon of inflation itself has more or less already reduced the demand, in real terms, of wide segments of the population, such policies are even more necessary.

The combating of inflation does more to raise employment levels and correct balance of payments deficits than does an expansionist policy. The latter is frequently counterproductive. Nothing exerts such a depressive effect on real economic activity than sustained inflation.

The international financial institutions can and must play an important role in the economic adjustment programs of their member countries, when the latter so request. The combating of inflation, and the impact of this on the balance of payments, are frequently complex, as are the causes of inflation itself. Nevertheless, it is hard to understand why countries that do not need to adopt economic adjustment programs have to be subject, in the normal process of obtaining external financing for their economic development, to the prior conclusion of agreements with the Fund—agreements which relate to cyclical economic problems and not to long-range development problems. Membership in the Fund would in truth operate as a constraint for a developing country that needs a constant flow of external financing.

In a world in which both international savings and financial resources and the conditional and unconditional liquidity needs themselves of the countries are growing and must continue to grow, it is difficult to imagine the Fund’s future work being dependent on inhibition or a better level of appraisal by the commercial banking system in international financing operations.

From this standpoint, a more constructive idea would appear to be that the International Monetary Fund should have a closer and more direct relationship with national authorities, enabling it to consider, and at the appropriate time express opinions on, more suitable economic and financial policies in the light of the prevailing national and international economic situation.

The timely opinion of the Fund concerning national economic and financial plans would make it possible to examine the consistency between monetary and financial policies as short-term instruments and development and job-creation policies. Failure to understand this relationship often leads to the belief that heavy expansion of public current expenditure, or of public investment, permanently financed by domestic and external credit resources, can generate a continuous process of economic advancement and rising employment. The concepts underlying these policies have repeatedly been refuted by practical experience in all countries, which does not prevent them from continuing to be advocated. The resulting inflation and increased balance of payments deficits, financed by external borrowing, demonstrates—sometimes too late—that these high levels of public expenditure ought to be financed basically by means of higher volumes of domestic savings and fiscal revenues that do not discourage private investment.

Like other countries, Mexico has gone through these experiences. It has reaped substantial benefits from a process of continuous expansion of domestic savings and investment. It has also been able to observe the adverse effects of public and private expenditure inadequately supported by domestic resources and savings.

On the basis of a savings rate that rose from 7 per cent of gross product at the beginning of the 1940s to an average of 18 per cent in the early 1970s, Mexico raised its productive investment rate from 7 per cent of gross product in the first period to 20 per cent in the second, with only moderate assistance from external resources and without suffering inflation. In this way an average annual rate of economic growth of over 6 per cent in real terms was attained. Per capita income and productivity rose steadily over the period, in spite of a population growth of over 3 per cent a year. This continuous increase in the percentage of capital expenditure and its application to highly productive investment, have been and continue to be, real permanent factors of progress in Mexico’s economy; indeed, they have even improved in recent years.

Unfortunately, in spite of the very favorable behavior and trends in public savings, public investment, and balance of payments that Mexico has enjoyed over this very long period, the orientation of public investment during the 1960s neglected certain important fields such as petroleum, electric energy, and agriculture. With the rapid growth in the population and expansion of the domestic economy, this meant that major bottlenecks appeared in these fields, together with insufficient absorption of urban and rural manpower.

The result was to limit the economic prospects for sustained economic growth and balance of payments equilibrium. These bottlenecks had to be eliminated. To this end, the present administration carried out a broad program of public investment and expansion of current public expenditure.

However, with the onset of the world-wide recession of 1973–74, it was felt that it would be desirable to step up the public sector efforts to mitigate its effects on the national economy and to avoid the consequent unemployment by means of an intensive current and capital expenditure program, financed in large part by expansionist credit resources, both domestic and external. At the same time, strong wage increase pressures arose, together with domestic price increases that rose faster than the general world rate.

When world inflation moderated in 1975, the effort to offset the effects of the recession on the domestic economy, although it has obviated the situations of recession that had arisen in other countries and ended with bottlenecks in the basic productive sectors, has produced a situation of maladjustment in the domestic economy. Thus, prices and wages had risen too sharply relative to those of other countries, the public sector deficit already represented a high percentage of national product, and a significant decline had taken place in net public sector savings, thereby necessitating excessive recourse to domestic and external public financing and a reduction in real terms of financing to the private sector, thereby limiting the dynamism of the latter.

The resulting inflationary situation was inconsistent with the national policy of improving income redistribution. Accordingly, following a thorough investigation of the causes of the disequilibrium and the observation that exports had not responded in the expected degree in spite of the recovery that had occurred in the world economy, the present administration decided to adopt a radical economic adjustment program of sufficient scale, firmness, and duration to ensure its success.

The program, which was launched on September 1, does not consist merely of adjusting the exchange rate; it is designed to correct all the causes of economic disequilibrium and to restore healthy economic growth accompanied by long-range improvement in the real incomes of the population. It accordingly covers the more vital areas of the economy: external competitiveness, prices and wages, and, in particular, the necessary re-establishment of a level of public sector savings adequate for reducing fiscal disequilibrium to manageable proportions without reducing the levels of the public investment needed by the national economy.

Neither the timing nor the magnitude of the exchange rate adjustment was allowed to be determined by speculation. The adjustment was effected at the right time and by a system of carefully regulated flotation. The present magnitude of the exchange adjustment—60 per cent in pesos and 40 per cent in foreign exchange—is more than sufficient to restore the external competitiveness of the economy. The free transferability and convertibility of the peso were confirmed by the Government, together with unrestricted support of the liquidity and soundness of the public and private banking systems, as has traditionally been done for more than 40 years.

Specific measures of taxation of imports and exports were introduced in order to reduce the exchange rate impact on domestic prices and thereby mitigating the pressures for excessive adjustment of wages and profits.

Interest rates will be kept above the world levels in order to hold national savings within the absolute convertibility of the Mexican peso in relation to other currencies. In the financial field, a policy is already in operation for controlled growth of bank credit in order to coordinate the growth of private demand with the moderation of the public sector, within the financial parameters of the program.

Firm action was taken concerning prices. Following the exchange adjustment, domestic prices have undergone a relatively moderate increase; the prices of raw materials and essential consumer goods continue to be regulated by strict reference to the increases in their costs. This has made it possible to limit the wage increase to only one third of the exchange adjustment; this was essential to sustain the efficacy of the effective devaluation and to restore external competitiveness to domestic productive activities.

A fundamentally important aspect of the program is the decision to reduce the public sector deficit to levels that can be financed without difficulty from domestic resources and that do not call for excessive external financing.

In line with the basic objective of adjusting the public sector deficit, it is planned to limit current expenditure and the necessary measures for that purpose have already been adopted. There will be no increase in the number of posts not connected with highly productive investment, various agencies operating in the same field will be consolidated, and excessive increases in nominal salaries in the public sector will be restrained.

Finally, in order to conserve the domestic and external credit of the entrepreneurial sector at all times, it has been decided, following implementation of the exchange rate adjustment, to apply specific fiscal and monetary measures to protect the resource flow and payment capacity of all public and private enterprises with large foreign exchange debts. In addition, the assets position of public enterprises with large foreign exchange debt positions will be protected.

Mexico is proud of the credit it has received both from the international agencies and from the world financial banking system. Its carefully thought out procedures of contracting and access to markets, its productive utilization of credit, and its scrupulous compliance with its amortization and interest obligations justify the financial support Mexico has received during the last decades. The decision to carry out with firmness a program that attacks the various causes of inflation when it is considered economically and politically necessary is to be expected of a country which is committed to sustained progress and the preservation of its capacity to pay and its sound international credit.

In these circumstances, the support accorded by the Managing Director of the Fund at the request of the Mexican Government, on the basis of the economic adjustment program, for various kinds of assistance, including the extended Fund facility, for a total of approximately $1,200 million, is particularly significant.

This program, whose structure and three-year quantitative goals have been appraised and approved, must be regarded by both the Mexican and the international community as further proof of the Mexican Government’s accurate assessment of the origin of the economic problems the country has faced and of the proper strategy for dealing with them, and of the resolve of the Government itself to promote, by the most suitable means, the progress and continuous improvement of the standard of living of the Mexican people.

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

Since becoming a member of this august institution in 1972, we have in all the Annual Meetings reiterated the demand of the less developed countries for greater equity and justice in a New International Economic Order. Indeed, what better forum can there be than this gathering of pragmatic policymakers who have the capability not only to influence but also to decide on the size and quality and the direction and dimension of both bilateral and multilateral aid, the flow of international investment, the control of inflation, the financing and adjustment of payment deficits, and the problem of debt relief issues which are fundamental in any conception of an equitable order.

We are grateful to you, Mr. Chairman, for your very thoughtful statement and to Mr. McNamara and Mr. Witteveen for putting the world economic outlook and the monetary and developmental problems in proper perspective, highlighting the special needs and requirements of the poor and the middle-income developing countries. We very much welcome these candid and forthright statements and would like to record our appreciation of the leadership qualities displayed by them.

The alarming reality of absolute poverty made so conspicuous in the statement of Mr. McNamara is a matter of great concern to us. For 750 million people in the category of absolute poor, the second development decade holds out no hope of any progress or salvation from deprivation. The overall growth rate in the developing countries as a group, and in the least developed and most severely affected countries in particular, has been dismally poor, and this has aggravated the miseries of the people below the poverty line. Even extraordinary efforts will be of no avail now to accomplish much during the remaining years of the decade. But the least that is warranted by this situation that President Marcos calls the “global rebellion of the poor” is an increase in capital flow with immediate effect. In the case of official development assistance this increase has to be very substantial indeed. A minimum increase of 100 per cent will barely achieve the target figure of 0.7 per cent of the gross national product of the rich countries for the rest of the decade. Mr. McNamara has rightly pointed out that this capital flow, even on an accelerated scale, will reflect only a very nominal participation in the investment efforts of the developing countries and a very insignificant sacrifice on the part of the rich world. The challenge before us is whether there is the political will to achieve such a kind of partnership.

Aid is indeed an important instrument, but not the only instrument for achieving accelerated growth in the developing countries. We in Bangladesh have been trying our best to improve our lot by introducing a package of economic, fiscal, and monetary reforms. A series of stringent and forthright measures have yielded salutary effects on the rate of inflation, domestic production, and savings and exports. Yet we are awfully short of resources necessary for pulling us out of the degradations of poverty. National efforts in such cases have to be complemented by resource transfer. . . .

The problem of mounting debt burden has been with us for a long time. During the recent years of payment crisis, particularly in 1974 and 1975, the position of the non-oil developing countries has become very critical. Though there has been a moderate improvement in the current account deficit of these countries in 1976, this does not in any way alter the fact that most of these countries continue to be in a difficult financial position. The developing countries are in need of an increased net flow of resources. Such an increase cannot neglect the issue of debt relief or debt rescheduling. The effort of the developing countries to obtain an agreement in principle from the creditor countries that debt relief and debt rescheduling are significant steps in increasing the net flow of aid has so far not met with any success. I would like to reiterate the urgent need for such an agreement. This is an appropriate subject for deliberation in the Development Committee, and we urge that the Committee, through its Working Group, establish close liaison with the United Nations Conference on Trade and Development (UNCTAD) in this respect. . . .

The reforms proposed under the second amendment of the IMF Articles of Agreement, even though they fall far short of our expectations, hopefully will bring about greater resource transfer and some semblance of monetary stability. Of particular interest to us are the establishment of the Trust Fund and the Subsidy Account, the review of the quotas which accords a marginally higher share to the developing countries in the decision-making process of the Fund, the modification of the compensatory financing facility, the proposal for the increase in Fund resources, which is not adequate, and the interim liberalization of the credit tranche facility. We welcome and appreciate these measures brought about by the joint efforts of the members of the Interim Committee and the Executive Directors of the IMF. We would like to record our appreciation of the services of Mr. Turner, the former Chairman of the Interim Committee and Mr. De Clercq, the present Chairman, under whose leadership the reforms have been approved and new facilities created.

The fate of the Trust Fund is causing us considerable anxiety. We are doubtful about the adequacy of the resources that can be generated for the Trust Fund. We hope that ways and means can be found to make up the deficit which is almost certain to appear. We also note that the conditionality for access to the newly created Fund facilities are severe and need to be urgently reviewed by the Interim Committee and the Fund Executive Directors. This is a demand that was widely endorsed at the meeting of the Commonwealth Finance Ministers in Hong Kong last week. Further, we are of the view that a rigorous adjustment process will be unfavorable to the developing countries whose deficits must be financed through resource transfer. In the context of inequitable distribution of international liquidity we feel that selective allocations of SDRs should receive high priority. This will, on the one hand, strengthen the role of SDRs as the principal reserve asset and, on the other hand, provide for resource transfer to the less developed countries. The link proposal has been cold-shouldered far too long. We urge that this be examined on a priority basis by the Development Committee and the Interim Committee.

We feel that our efforts to ensure adequate transfer of resources from the rich to the poor developing countries should be broken down into specifics. While deliberating and negotiating broad agreements on resource transfer, transfer of technology, commodity price stabilization, and debt relief in various international forums such as the UNCTAD and the Conference on International Economic Cooperation, we should not lose sight of these specific issues referred to earlier. It is our belief that satisfactory resolution of these issues will have a positive impact on resource transfer through the channels of the World Bank.

We have been touched by Mr. McNamara’s reference to the need for each of us to ask ourselves what we have done for the one billion people “trapped in absolute poverty.” The question could not be raised at a better time. From the effort of the individual comes the political will of nations. We in the least developed among the developing countries come to these meetings to discover that political will among rich nations in what we have been told is an interdependent world. In the absence of such a political will uncertainty about the future of the “absolute poor” will continue not only in the long and the medium run, but also in the rest of the second development decade. We are racing against time in our effort to break the vicious circle of poverty and we can only hope that we shall not opt to lose the battle. Let history record for posterity that we lost no opportunity.

Before I conclude, I would be failing in my duty if I did not place on record our deep appreciation for the most excellent arrangements that the Government of the Republic of the Philippines made in connection with this meeting, for the personal interest taken by President Marcos and the First Lady, Mrs. Imelda Marcos, and for the most elaborate hospitality accorded to us in this friendly country. We are also grateful to the Joint Bank-Fund Secretariat for their efficient handling of the details of this meeting so far away from their headquarters. I would further take this opportunity to welcome all the new members of the Fund and the World Bank, and would very much like to see that the People’s Republic of China get its rightful place in these august institutions.

Statement by the Governor of the Fund and Bank for Sri Lanka—Felix R. Dias Bandaranaike

First of all, I should like to take this opportunity to thank the President, the Governor, and the people of the Republic of the Philippines for the warm and generous hospitality extended to all of us and for the excellent arrangements made for the success of this Annual Meeting of the Fund and the Bank. As spokesman for the Group of 77, His Excellency, President Marcos, in presenting the Manila Declaration to UNCTAD IV in Nairobi this year, proposed the adoption of a new economic order embodying universal principles of justice, fair sharing, mutual understanding and cooperation, the protection of the weak, and freedom from the domination of the strong. It is therefore particularly appropriate, I feel, that we should be meeting here, in Manila, to take important positions concerning the Fund and the Bank. I should also like to welcome to our midst our newest members, the Comoros and Viet Nam. It is also a matter of singular pleasure for us that we shall be able to welcome very shortly Seychelles, who are present here as observers, and we also look forward in the near future perhaps to the People’s Republic of China taking its rightful place as a member of this family of nations in the Fund and the Bank.

The context for our discussion has been set by the addresses we have listened to from Dr. Witteveen and Mr. McNamara, whose reports have been objective and sensitive to the problems and the harsh realities of the poorer developing countries like my own.

Dr. Witteveen made the point that, in the immediate aftermath of the oil crisis, it was imperative that payments imbalances should be financed for developing and developed countries alike, in order to prevent the downturn in world economic activity that might have otherwise occurred. Developed countries have, in his view, by and large succeeded in adjusting to a higher import price level in a purely arithmetical sense, with the result that the counterpart of the surplus of jil exporting countries has now turned out to be the deficit of nor oil developing countries. Dr. Witteveen has contended further that the time has come for non-oil developing countries to attempt a process of more rapid adjustment because the continued financing of their deficits could hamper the process of demand management and the control of inflation by developed countries, which is rightly seen as an imperative necessity, if the conditions necessary for steady investment and growth in the world economy are to be established. Dr. Witteveen added that policies aimed at stimulating growth and employment cannot succeed in the long term unless inflation is controlled. In the hard choice between controlling inflation and stimulating growth, the former must take priority. He has recognized at the same time that the process of inflation control in developed countries proceeding simultaneously with more rapid adjustment by developing country economies can cause a slowing down of world economic growth and has prescribed rightly that developed countries should, as an offset to this, undertake a reduction in their barriers to the exports of the developing countries. I, myself, would add, indeed, that exchange rate adjustment by developing countries would be stultified unless such export access is available.

No one—least of all the developing countries, committed as they are to a process of collective self-reliance—can be said to be owed a living over the longer haul. Development must always be the responsibility of individual countries themselves and they must accept the necessary adjustment disciplines. However, developing countries, for more than a decade, have called for the dismantling of the trade barriers that affect their exports. It would be politically naive to think that such dismantling would be accepted, let alone implemented, in a reasonably short space of time. Moreover, the type of barriers that face the developing countries’ exports nowadays are mainly quantitative in character and are more difficult to dismantle. They continue to block the effectiveness of exchange rate changes as a mechanism for balance of payments adjustment through export promotion. If developed countries pursue demand management policies as suggested, in the interest of controlling domestic inflation, at the same time denying export access to developing countries, while the latter are compelled to adjust by means of exchange rate changes, it is virtually certain that world economic activity will slow down, and present pace of recovery from the recession will be halted. If Dr. Witteveen’s argument calling upon developing countries to adjust to their oil deficits, rather than to seek financing for them, were to be accepted, then it is imperative that there should be a prior commitment on the part of developed countries to implement immediately and in short order, measures of import liberalization. It is only after this becomes an accomplished fact that orderly adjustment measures taken by developing countries can hope to succeed.

There is a second reason for my cautious attitude toward asking developing countries to adjust in the manner demanded by traditional Fund disciplines. In the case of a developed country, where production capacities are sufficiently diversified to allow a change in relative prices to switch production from domestic consumer needs to exports, exchange rate changes would have a ready impact in correcting payment imbalances. On the other hand, in the case of developing countries, whose economies are relatively more rigid, exchange rate changes take considerably more time to promote investment in new production capacities of the right kind—a case of the lag which the U.S. Secretary of the Treasury, Mr. Simon, described as a politician’s nightmare.

It was in recogntion of these structural differences between developed and developing economies that the IMF instituted the extended Fund facility which sought to provide greater support than is normal from the Fund—and for a longer period—on condition that the recipient country undertakes to implement a sequence of appropriate policies. The fact that only two countries have so far felt able to draw on this facility testifies to its present emptiness, and the Group of 24 has already gone on record as saying that the facility is likely to remain so, unless conditionalities are considerably diminished. The facility has to take account not only of the time lag between investment in export-oriented industry and the resulting output, but also the complex political realities of developing countries in relation to the timing of corrective actions. The Jamaica communiqué makes it clear that the “domestic, social and political policies” of developed countries are to be taken account of by the Fund when it comes to surveillance of exchange rate systems; and this happens also when it comes to the mobilization of bilateral facilities and safety nets outside the Fund to support key countries in balance of payments difficulty. No such realism is built into the international institutional framework for dealing with the deficits of developing countries. It is therefore not surprising that developing countries seek to escape the rigors of Fund conditionality by seeking to borrow from commercial and Eurocurrency markets. This would further aggravate the problem of controlling the expansion of international liquidity. The number of countries, however, that have the capacity to borrow in this manner are indeed few.

It is imperative for the Fund to take a more realistic view of the working of the adjustment process of the developing countries by providing developing countries with reasonable access to Fund resources if it is to bring the expansion of global liquidity under IMF control. I am saying this because the practical way for developing countries to accomplish their transition from adjustment to development would be through intelligent recourse to the extended Fund facility. Otherwise, the gains of absolute—and therefore premature—adjustment through the IMF may be bought at the cost of the absolute impoverishment of the poor in developing countries, against which the Bank has very correctly set its face. The bridging finance for the transition from adjustment to development through whatever channels it is provided, be it through the IMF Trust Fund and other facilities or the Fifth IDA Replenishment or increases in the capital stock of the Bank, there must necessarily be better official aid performance from rich countries which have hitherto failed to measure up to expectations.

Developing countries thus have no guarantee of assured access to export markets so as to make exchange rate adjustments worthwhile or feasible. In addition, they are denied, in effect, reasonable access to Fund resources, through the kind of conditionalities now insisted upon, as in the case of the extended Fund facility.

Views are divided today on whether or not world liquidity is adequate. Those who argue that it is excessive—and this argument finds clear support in the prevalence of inflation in developed countries—would be inclined to resist the creation of SDRs. On the other hand, there are those who would argue that there is evidence in today’s world economy of reserve stringency, particularly affecting developing countries, to which attention was drawn in Chairman Imady’s speech.

Moreover, there is no sense whatever in talking of a system based on SDRs as a principal reserve asset without keeping the SDR alive by continuity in its creation.

A practical way of reconciling these divergent points of view would be to seek an allocation of SDRs where the amounts are not substantial in relation to global liquidity, but are not insubstantial in relation to existing Fund facilities, on a basis where their distribution is weighted much more heavily in favor of developing countries. I would, therefore, endorse the 50 per cent share of additional SDR creation suggested by Mr. Imady for developing countries, so that, given the adverse effect of any tightening of Fund conditionality and in the absence of unrestricted access to developed country markets of developing country products, the momentum of world economic activity can be maintained. It is not that one is seeking to undermine the acceptance of adjustment disciplines under Fund auspices. It is simply that, in the absence of a fresh issue of SDRs in the face of the other political realities of the present situation, developing countries will be compelled to adjust in a manner which would result in world economic activity and their own development settling down at a lower level.

The opportunity of making a fresh issue of SDRs, which the situation I have outlined presents, could, in my view, be availed of to breathe life into a concept that surfaced and was indeed endorsed by the non-aligned summit in Colombo. The nonaligned countries being determined to establish a New International Economic Order within the framework of the United Nations, the IMF, and the Bank, thought in terms of the imperative need to bring reserve currencies under control with a view toward eventually establishing a countervailing currency not controlled by any one country but by the international community of nations. The SDR, if it were shorn of the limitations presently affecting its use as a genuine international currency, could serve as such a countervailing currency.

The opportunity of fresh allocations of SDRs at this time could be availed of to give the SDR more of the character of a currency by abandoning the reconstitution provisions, which the Committee of Twenty had already agreed. It seems to me that the ideas put forward by the Governor for Greece, Mr. Zolotas, for a multicurrency reserve system could constitute a valuable interim step toward the concept of a countervailing currency or a fully improved SDR.

The recent Colombo summit conference of the nonaligned nations reaffirmed the Manila Declaration and the heads of states of 86 non-aligned nations formulated their decisions as follows:

The reform of the international monetary system should incorporate a built-in mechanism to promote the flow of real resources from developed to developing countries and necessary measures to maintain the real value of currency reserves of the developing countries. These objectives involve concerted action by the developing countries within the IMF, the Bank and the United Nations system and elsewhere to restructure the present system of monetary and financial arrangements which will inter alia provide for a process of balance of payments adjustment and financing that will remove the inequities involved in the present system, reallocate and create international liquidity in ways which will mobilize resources for development, stabilize exchange rates, remove the dominant role of national currencies in international reserves, ensure parity in decision-making as between developed and developing countries and prevent the domination of any single country over decision-making, so that the system becomes more responsive to the needs of developing countries.

I am taking this opportunity to make available to the Governments, the Economic Declaration and Program of Action decided upon at the Colombo summit.

Statement by the Governor of the Fund for Paraguay—Carlos Chaves Bareiro

We have just heard the well-chosen remarks by Mr. Bernal Jiménez M., Governor for Costa Rica, who was appointed representative of the Latin American countries at the San Francisco meeting.

Our spokesman has performed his task magnificently, demonstrating that a dialogue among countries makes it possible, even in the most difficult of times, to improve the systems that provide the basis for international cooperation and unity. These systems are becoming increasingly important for the Latin American countries which, like the other regions of the Third World, are concerned about the continual widening of the gap between the advanced and the less developed nations, and which are aware of the accelerating growth of the industrial countries with which the countries of the less developed periphery are unable to keep pace.

May I use this distinguished forum of the thirty-first Annual Meeting of Governors to make a few comments on Paraguay’s behalf concerning the monetary system that we are in the process of reforming. I should also like to highlight some particular aspects of our country, whose systematic economic efforts based on internal peace, monetary stability, and anti-inflationary policies, constitute the moving force in our people’s social and cultural development. The Government of Paraguay has been endeavoring for 20 years to set a good example by pursuing policies consistent with the objectives of the International Monetary Fund, while drawing on its own experience in the sphere of economic, financial, and exchange policy. Thus, Paraguay has always been a faithful member of this august world-wide financial organization and has made the maximum use of the assistance received at the beginning. As on previous occasions, therefore, the delegation of Paraguay to this meeting of the International Monetary Fund wishes to express its full confidence in the continuous process of adaptation of the Fund and its conviction that our common interests will be safeguarded.

No one can doubt that the numerous difficulties besetting the world economy require a coordinated effort of cooperation among all countries, in which each and every one must participate. Given the present interdependence in the world, it would be illusory to think that one nation, or even one group of nations, could escape the adverse effects of our repeated crises through a deliberate policy of isolation. Nor can these crises be overcome for good unless the major powers adopt a fair and impartial approach.

While there can be no doubt that the poor nations are always the first to be affected by such crises, and are those who are affected most severely, sooner or later the whole world has to suffer their adverse consequences, to a greater or lesser extent.

Therefore, as members of the group of developing nations, and fully aware that our economic, industrial, and financial prospects are dependent on the international monetary system, we reiterate our plea that the industrial countries maintain and improve the mechanisms for providing assistance to the less privileged countries. We must truly believe in the solidarity of mankind and act accordingly; we must do away with the division of mankind into First, Second and Third World, by pursuing positive, honest, and constructive goals.

At this meeting in Manila, redolent of the memory of the Philippine national hero, José Rizal, to whom we pay due homage in the name of Paraguay, we must find a concrete answer to the desire—which is more or less a demand on the part of the Third World—to achieve a more just and equitable New International Economic Order which would ensure an adequate flow of resources to our countries and enable them to face new threats—a new order which would not, however, imply a sharp decline in global economic conditions, nor benefit some countries at the expense of others. We must adopt measures that will effectively bring about the transfer of additional real resources to all of the developing countries—and here some governments have already set a good example. Such cooperative efforts must be adopted on a global scale if we are truly to achieve lasting economic solidarity.

The establishment of the Trust Fund, which must not be delayed any further, will provide a means whereby the gold being sold by the IMF can make a real contribution to the progress of our countries. If this could be supplemented by contributions from the developed countries, the assistance would reach almost adequate levels.

We must point out, however, that we do not support the idea of making assistance, including assistance through the Trust Fund, dependent upon the per capita income of the recipient countries. We do not consider this the sole economic indicator nor the one which most adequately reflects the level of development reached by our countries. Other parameters could give a clearer picture of a country’s economy, e.g., industrial production indices, the balance of payments, or the level of technological advancement, and the absorptive capacity of the population, by country, region, or subregion.

Expansion of access to the IMF’s facilities is another important requirement that brooks no delay.

With regard to the amendment of the Articles of Agreement, we fully endorse the changes in the General Account eliminating the obligation on members to use gold in making payments to the IMF in respect of quotas and repurchases and the provisions designed to ensure that all currencies held by the Fund are used in its operations. We believe that the special drawing right will succeed in becoming the principal reserve asset, and we also believe that the provisions regarding stable but adjustable par values will prove effective.

We wish to express our appreciation for the work carried out to date by the Interim Committee, and we feel that there would be great merit in converting it into a permanent Council.

It will depend on our powers of imagination and decision whether this meeting in the Philippines will prove as historic as that held at Bretton Woods.

Turning to the situation in Paraguay, we wish to inform you that our economy is now experiencing a gradual recovery, after having had to deal with the negative consequences of the fall-off in external demand for its primary products and the loss of export proceeds as a result of the economic recession caused by the increase in fuel prices.

To give you an idea of the economic situation at the end of the first half of 1976, the statistics show that new monetary issues rose by 8 per cent, representing net purchases of foreign exchange by the Central Bank of Paraguay, while currency in circulation rose by 6 per cent, a drop of 3 per cent compared with the preceding period. This reflects the strong preference on the part of the public and the business community for channeling liquid funds into savings deposits. These deposits rose by 10 per cent, continuing the marked upward trend of the past; as a result, savings deposits stand at approximately the same level as currency in circulation.

The Government continued with the essential policy of containing inflation, since—as everyone knows—inflation can erode wages and salaries and wipe out profits and savings.

Total savings deposits in local currency amounted to ₲ 17,398 million on June 30, 1976 (equivalent to $138 million), while savings deposits in foreign currencies totaled ₲ 2,655 million (equivalent to $21 million). Thus total savings deposits amounted to ₲ 20,053 million, just a little less than the total of currency in circulation, which stood at ₲ 21,105 million on the same date. Exports were up slightly (by 4 per cent) compared with the first half of 1975, while imports rose by the same amount.

With regard to the balance of payments, the first half of 1976 produced a surplus of $25.1 million, continuing the tradition of growing surpluses started in 1970. These surpluses have added constantly to the strength of Paraguay’s external payments position. Net international reserves rose 19 per cent in the first half of 1976, bringing the total as of June 30, 1976 to $133.8 million. On December 31, 1975 these reserves had stood at $112.4 million.

In short, the economy has begun to recover gradually and the outlook is improving.

These developments have placed our country in a favorable position, and we feel justified in saying that we should have been assigned a considerably larger quota in the Sixth General Review of Quotas. In March 1976 the Board of Governors authorized an increase to SDR 23 million, which we consider inadequate. Paraguay would like to have its quota raised to SDR 38 million, which would give us increased access to the resources of the IMF.

The quota assigned to us is obviously below what corresponds to our situation, when one compares the importance of our country in the world economy with that of other countries. The Fund’s resources that we would obtain in this way would promote even further the rapid growth of our economy as a whole and of the external sector in particular. When we add to this the great prospects opening up from the exploitation of our hydroelectric resources, with the new power stations presently under construction jointly with our sister republics of Brazil and Argentina due to come into operation in a few years’ time, it is understandable that we are proceeding with our plans for the near future with faith, optimism, and confidence in the self-sustaining growth of our economy.

In light of the above, Decree No. 21,412 was issued on March 15, 1976 authorizing an increase of 100 per cent in Paraguay’s participation in the Fund, from SDR 19 million to SDR 38 million. We take the opportunity presented by this meeting to again ask the Board of Governors to approve a quota increase of that amount.

Within the concert of nations, Paraguay has always respected—and will continue to respect—international agreements and the principle of nonintervention in the domestic affairs of other nations. Under the dynamic and patriotic leadership of President Alfredo Stroessner, Paraguay is pressing forward, through a process of evolution, toward the goal of balanced social and economic development, with emphasis on specific priority fields and taking full account of the new situation that will arise with completion of the Itaipú Yacyretá hydroelectric power projects, the first of which will be the largest in the world.

Paraguay will welcome with open arms foreign investors wishing to cooperate with local investors in playing an active role in the rapid advancement of a small country currently experiencing the most important epoch in its history, whose goal has always been the well-being of all its inhabitants.

We wish to thank the Government and the people of the Philippines for their warm and friendly welcome and all those who have in any way contributed in making this meeting a success and the start of a new and more equitable economic order.

October 6, 1976.

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