Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1969
Statement by the Governor of the Bank for Pakistan—Nawab Mozaffar Ali Khan Qizilbash
I would first like to compliment Mr. McNamara and Mr. Schweitzer on their inspiring addresses in which they have once again demonstrated their deep and realistic understanding of the major economic issues which are still confronting the world. I would also like to avail myself of this opportunity to congratulate the managements and the staff of the Bank and the Fund on producing such excellent and comprehensive Reports covering their activities for an eventful year. It is gratifying to note that these two institutions have expanded their role and have further improved the framework for dealing with the various problems falling within their respective spheres of responsibility.
Two major problems continue to disturb international economic relations. Firstly, the financial world is periodically subjected to strains of international currency crises, and, secondly, the relationship between the developed and the developing world has not yet reached a point where the developing countries could obtain adequate resources, on a continuing basis, for their steady development. These problems with all their ramifications are by now quite familiar and have been discussed at length in various international forums, including the Annual Meetings of the Bank and the Fund. It is unfortunate, however, that, in spite of international recognition of these problems and the need to find some permanent solutions, international economic relations continue to be dominated by misgivings and apprehension.
These issues were foremost in the minds of the framers of the Bretton Woods Charter. The Fund and the Bank were conceived as the principal institutions for maintaining orderly international financial relations and ensuring balanced economic growth in the world. The fact that we are still exercised over these problems a quarter century later underlines their complexity and the immensity of the task that was entrusted to these institutions. Nonetheless, as the Reports bring out, we have by now acquired much greater experience in handling these problems and evolved an informed policy approach for meeting the problems which continue to arise. . . .
The declining levels of foreign assistance in the face of increasing requirements pose extremely serious problems of adjustment for the developing countries. In Pakistan, we have experienced the impact of a sharp decline in foreign assistance levels over a short period of time from 1965 to 1969. This greatly narrowed our options and many painful adjustments had to be made. In an attempt to protect economic growth, we concentrated our attention on agriculture and industrial production and in the process had to deny some much needed resources to social sectors like education, health, and urban housing. The attempt for mobilization of domestic resources on a large scale to protect the growth rate placed an inevitable squeeze on consumption in the urban areas. This was a significant factor in the economic and social unrest which we witnessed earlier this year. Pakistan’s experience during the last decade shows that even a sustained growth rate of 5 Vi per cent per annum over a period of ten years and a cumulative increase of over 60 per cent in GNP can be outstripped by the rising expectations of the masses. There has to be, therefore, a better blend between economic growth and social justice, and the single-minded pursuit of economic development unaccompanied by adequate investment in the social sectors seems no longer practicable. In this context, foreign assistance can greatly enlarge our options and help resolve the inherent conflict between the requirements of rapid economic growth and the dictates of social justice. . . .
We have been talking year after year of the volume and terms of foreign assistance. Considering the rapidly growing debt servicing burden of the developing countries and the compulsion for making larger investment in the social sectors, the question of quality and character of foreign aid have assumed graver dimensions. As recognized in the Bank’s Report, the proportion of grants and grant-like assistance from DAC countries in the total official assistance declined from about 60 per cent in 1966 to less than 55 per cent in 1967. The average interest rates increased from 3.1 per cent to 3.8 per cent over the same period. The present monetary situation in most of the industrial countries is likely to add further to the debt servicing problems of the less developed countries through a rise in the general level of interest rates.
… It is our hope that developed countries would, as stressed in the Fund’s Report, make greater use of fiscal policy for purposes of demand management. This would enable interest rates to be brought down and World Bank lending rates to be kept at reasonable levels. . . .
The time has also come when the world community should give serious thought to the rising debt servicing burden of the developing countries. If the decade of the 1970’s is not to witness a critical debt repayment situation, the developed world should anticipate the emerging problem and provide for it through concrete policies. . . .
The problem of aid flows and the terms of assistance cannot be isolated from the over-all monetary situation in the world. We have, therefore, a special interest in the smooth functioning of the international monetary system. It is heartening that the major industrial countries have reached an agreement on the amount of special drawing rights to be created for an initial three-year period. This is a major event and constitutes a constructive and significant step in the direction of strengthening the existing international monetary system. And here I must acknowledge the great contribution which Mr. Schweitzer has made in bringing the SDR scheme to fruition. The activation of SDR’s will no doubt serve the highly useful purpose of supplementing world monetary reserves, but it is difficult to assess as yet the contribution it would make to a better working of the international monetary system. This would depend entirely on the policies pursued by major industrial countries. The developing countries had in the past urged a specific link between SDR’s and development finance. However, even though the developed countries have not agreed to a formal link, they can help enlarge the availability of development finance on better terms by making available to the developing countries a certain percentage of SDR’s allocated to them.
In connection with the quinquennial review of the Fund quotas for 1970, a question may arise whether there is need for a sizable increase in country quotas when the SDR scheme is shortly going to be activated. It should not be overlooked that the share of the less developed countries in the SDR’s would be much smaller compared to that of the developed countries. Only 28 per cent of total SDR’s created would go to as many as 86 developing countries. Many of the less developed countries would also not be eligible for selective adjustments in their quotas. In order to make the general quota increase meaningful for the developing countries, a realistic approach would be that the general increase in quotas should not be less than 30 per cent.
Stabilization of prices of primary products is another important field which is of great interest to most developing countries. The Fund and the Bank were requested to study the ways in which they could participate “in the elaboration of suitable mechanisms involving balanced commitments on the part both of the producing and of the consuming countries, and devote the necessary resources thereto.” While it is encouraging to note that both the Fund and the Bank are prepared to contribute to a solution of this problem, the actual responsibility which they would be willing to accept under the plans drawn up by them fall far short of the requirements of the situation. The Fund will not involve itself in the financing of any buffer stock scheme directly, and its assistance to member countries for buffer stock operation will need justification on balance of payments grounds. Repayment period for the buffer stock facility, regardless of the price cycle of commodities and the future prospects of their exports, will, as in the case of ordinary drawings, remain limited to from three to five years.
The Bank’s role is still more restricted, confined as it would be largely to analysis and study of problems relating to market access and competitiveness of primary products. What the developing countries need is a simple and automatic mechanism which will protect their balance of payments from shortfall in foreign exchange earnings from exports due to circumstances beyond their control, so that they can proceed with the implementation of their development plans in a smooth and orderly manner. I can only hope that the Fund and the Bank will continue to address themselves to this problem with a view to evolving more effective measures for its solution.
Statement by the Governor of the Fund and Bank for Jamaica—Edward Seaga
. . . Since we are now concluding this Development Decade and are poised to enter the next, quite obviously this year is the proper time to contemplate the success or failure of the sixties, with the hope that we shall learn from this exercise new strategies for the seventies. Indeed, the Pearson Committee, which will present its eagerly awaited report to us tomorrow, has been given the task of making this very assessment. I hope my brief observations will throw some light on development strategies for the seventies as seen through the eyes of one developing country.
We all recall that the Development Decade of the sixties began with a target of 1 per cent of the GNP of wealthy nations to be set aside as official capital flows, in one form or another, to poorer countries.
But what are the facts? In 1961, the amount of official flow in this direction of development was $6.2 billion; this represented 0.5 per cent of the GNP of developed countries; we may therefore say that we started at the half-way mark. But by 1968—the latest figures available—this amount had increased to $6.9 billion, which represented 0.4 per cent of the GNP. Eight years later, therefore, we have managed to accomplish the development miracle of moving 0.1 per cent backward towards our target.
However astonishing this might be, let me hasten to say that the full story is not yet told. At the same time that official capital flows from rich to poor nations were of the order of less than $7 billion per annum, the world was actively spending $150 billion per annum for arms and the means of destruction—over twenty times as much as was devoted to the development of two thirds of suffering humanity.
If we need to be still more impressed by the path that we are pursuing and where it is leading, let me further amplify the trend.
In the first six years of this decade, per capita income in the wealthy countries grew by more than $200 per annum. Compare this with the similar growth over this period among the poorer nations—$7 per annum. Can we draw any other conclusion from this than that the gap between rich and poor nations is widening?
By the end of the century it is expected that per capita income in developed countries will double to $3,600 per annum; correspondingly, what will happen to the growth of per capita income in the developing world? How far will it move from its present level of $90 per annum?
A better way of asking this question, in order to lead us to the possible area of solution that I wish to propose, is to ask us to try to comprehend the astronomical increase in capital flows which would be required if we were to multiply per capita income in the poorer nations by twenty times in the same period of thirty years, an accomplishment which would do no more than maintain the present level of difference in per capita income between countries rich and poor.
If this is an exercise in statistical imagery, it is intended only to make use of the same license poets are given, not to force rhythm or rhyme, but to spell out the single fact that, at the pace we are moving, by the targets we have set, by the trends we have noted, by the true results we may now really expect, we are in fact faced with a future of futility.
The spark of light beamed on this gathering by President McNamara in his expansion data on lending and borrowing revealed yesterday can now be understood, as I said earlier, as commendable, because it is a distinct reverse on the trends of stagnation of the present.
But how many others will meet the challenge of real expansion of programs? Would it not be alarming to find that, against this background of unfulfilled expectations and unmet needs, at least one major developed country had reached the stage where annual inflows from the debt servicing of Latin American borrowers had now exceeded their total outflows of aid to that area per annum? Yet this stage has been reached, and it would be more than useful to know whether it has also been reached by other developed countries in other areas. . . .
Let us, in this assessment, not overlook the fact that this problem is compounded by the escalation of interest rates that has been the fearful experience of most countries which have become set in their expectations of relative stability in the cost of money as a part of the cost of development.
Here let me pause to reflect that, in times of unimagined movements in rates of interest and uncertainties in the international monetary field, the calm hand of the IMF has given the vital reassurance that, somewhere, someone cares. Mr. Schweitzer must feel great satisfaction that, in some measure, his problems will ease with the birth of special drawing rights and the added flexibility they will provide to relieve monetary strain. . . .
The purpose of this presentation, however, is to do more than create a recognition that the present course, despite expansionary trends in some quarters, must no longer raise hopes in us that it will provide the future which two thirds of humanity seeks; the real purpose is to go beyond recognition of the limitations of present development strategy to make proposals which might assist in making the next decade more meaningful in growth and development.
It is in this context and against this background that I now make these observations.
It is not intended here to ignore the fact that stable and improved prices of primary commodities are a major way of moving money from developed to developing countries. But it is recognized that this concept has been fully bespoken elsewhere, as well as in this forum. Among other stabilizing measures being introduced elsewhere, both the Bank and the Fund have this matter before them at this session for the attention of Governors.
What is proposed is to turn attention to an area which could conceivably carry the potential of significantly increased movements of funds in the right direction, given certain specific arrangements.
I speak of private investment.
Official capital flows now approximate a ratio of 7 to 5 with private capital flows from developed to developing nations. This alone suggests room for much expansion.
The existing pattern of private investment, however, is riddled with many impediments, which decrease opportunities, involve frustrations, and drain interest.
If there is to be a successful mobilization of private resources to add to the pool of official resources which have more or less leveled off in percentage, in the face of increasing expectations, several important changes will have to be made in method, policy, and legislation.
Time does not permit any exhaustive treatment here, nor is this necessarily the forum for detailed discussion, but certain important features must be recognized:
(1) The traditional pattern has rested largely on the initiative of the private investor in seeking the opportunity and establishing his enterprise. Many countries seeking such investors have had their success at what might be called “spear fishing”; by contrast, “net fishing” has a wider scope, which can be more effective. The latter group of countries works through institutions, often at both ends of the line. In the case of a developed country, governmental initiative has led to the creation of institutions like the Commonwealth Development Corporation or the Commonwealth Development Finance Company, which are supported by public and private sources and invest overseas in public and private institutions or corporations. I commend the model, and I hope that the announcement by President Nixon in his message to Congress in May of this year on new directions in foreign aid, announcing the establishment of the Overseas Private Investment Corporation, is intended to operate on this basis. Similar institutions in other capital-exporting countries could add in significant measure to the channelling of investment funds.
But the real virtue of such institutions is that, as “net fishers,” they capture the investor who does not want to go it alone or get involved in the process of investigation or establishment; they attract institutional and individual investors who will participate in properly established and managed investment organizations.
(2) Conversely, developing countries need to establish public and private institutions capable of dealing with overseas public and private investment corporations. Here again, the prime advantage is to remove the search for partners on an individual, time-consuming, and often frustrating basis. Development banks common to many countries—now also a part of the Jamaican scene—are essential in this framework.
(3) The philosophies of old must be abandoned. The days of wholly-owned foreign enterprises are rapidly passing; joint venture is the new pattern. Likewise, the days of government-established institutions being considered outside the ideological realm of private investors are gone; in many countries, public institutions must pave the way for private sector developments, which are eventually encouraged to participate, because the degree of sophistication of the capital market in many such countries has not, in most cases, attained a full range of flourishing private institutions. As President Nixon pointed out in his message: “Each nation must fashion its own institutions to its own needs.” . . .
(4) Finally, more harmonization of government policy with government treaties and legislation is required. While promoting the policy of joint ownership to U.S. investors, the U.S. tax authorities reduce tax rates on Western Hemisphere corporations only if they hold at least 90 per cent equity in U.S. hands. Double-taxation treaties, historically based on agreements between economic equals, must now be rewritten in the light of unequals treating with each other, in which developing countries must secure the right—originally denied them historically when they did not control their own administrations—to fully tax incomes arising in their economies. Removal of these inequities and anomalies does away with the contentions and double taxation which frustrate the strongest desires.
We are looking only one decade ahead—a mere ten years—while men are setting targets fifteen years in advance for scientific probes. Perhaps, in the context of barriers now being broken with imagination, determination, and courage, as men open the doors of Heaven itself, we may, by comparison, in the mere span of one decade on earth, feel ashamed to move with timid steps in a field fertile for giant thought and action.
Statement by the Governor of the Fund and Bank for Japan—Takeo Fukuda
The Annual Meetings of the Bank and the Fund have always provided us the stage to meet and to work together for the advancement of the world economy in the spirit of international cooperation. We are proud of many successes achieved here in the field of economic development and international monetary affairs.
Our meeting this week will be a particularly important and, I may say, historic one, because, by our decision to allocate special drawing rights at this meeting, we are taking another important step into a new international monetary system, where supplementary reserve assets are to be deliberately created and managed internationally for the first time in history.
It is a great pleasure for me to be able to participate in this memorable occasion.
Let me first touch on the present economic situation of the world. Rapid expansion and financial imbalance were, as pointed out in the Fund Annual Report, the main features of the performance of the world economy during 1968 and the first half of 1969. It is really encouraging to note that, in spite of disturbing factors in the currency situation, the economies and trade of major industrial countries, as well as of the world as a whole, continued to expand much more rapidly than was generally expected.
In the process of such developments, however, imbalances both external and internal have of late become increasingly evident in the economies of many industrial countries. The problems they face are not the same, of course. But it is essential that a better degree of equilibrium be restored in the international payments situation of those countries through proper management of their economies. Flow of real resources from those countries to the developing nations can then be ensured, thus enabling well-balanced growth of the world-wide economy. In this regard, I would like to stress the heavy responsibilities of the major developed countries and to urge strongly that they should not spare any efforts to improve the working of their adjustment process.
It is by no means an easy task to attain in a compatible way two basic objectives of the world economy, that is, growth and stability, which are also among the purposes of the Fund as envisaged in Article I of the Agreement and toward which all of us have to make strenuous efforts.
The past year has witnessed a number of encouraging signs of progress in the development of international monetary affairs, although there still exist many problems requiring further endeavors on our part.
Among other things, it is a significant and historic event, as I said before, that a consensus is about to be reached on the activation of SDR’s, which will clear the way to make a successful approach to the problem of meeting international liquidity needs. I believe the establishment of the SDR system will over time facilitate smoother functioning of the balance of payments adjustment process.
Therefore, it is a matter of primary importance that we adopt at this meeting the formal Resolution in accordance with the proposal of the Managing Director to allocate $9.5 billion over the period of three years.
At the Annual Meeting of 1965, I pointed out the importance of creating new reserve assets in order to assure expansion and prosperity of the world economy, and advocated that this problem be tackled on a gradual and practical basis by supplementing, not supplanting, present reserve assets; that new reserve assets not be linked too closely with gold; and that the creation of such assets be effected through the Fund to meet global need.
SDR’s in their completed form as we have before us today seem to be broadly in line with my original thoughts.
In future management of this new kind of liquidity, we should try to establish confidence in SDR’s as good assets through the efforts and cooperation within the Fund of all participating countries.
With the activation of SDR’s, the international community is now capable of providing the appropriate amount of reserves necessary for the growth of the world economy without depending too much on the economic performance of a particular country or on a natural product like gold whose supply is physically limited. Since SDR’s are to be created according to our deliberate plan and managed by ourselves, the institution to which we entrust such an important function, the IMF, must, I stress, be a strong and sound one. The Fund should respond to its expanded new responsibilities and should adapt its functions and resources accordingly. In this sense, I look forward to the strengthening of the Fund as the pivot of the international monetary system to enable it to meet such challenging tasks.
It was in consideration of such need to strengthen the Fund that we have consistently been urging early adjustment of Fund quotas with emphasis on selective increases.
It is my strong desire that the proposed Resolution be adopted at this meeting so that the adjustment of Fund quotas may be realized as soon as possible.
The Annual Report of the Fund, referring to the changes in the international monetary situation since the time of the establishment of the Fund, points to the fact that the emergence of international short-term capital movements in such enormous amounts presents one of the most critical problems of the international monetary system today.
This problem is somewhat related to the role of exchange rates in the adjustment process of balance of payments, but I should like first to touch upon the problem of short-term funds.
It is well known that movements of speculative capital have aggravated swings of balance of payments in many countries during the recent disturbances in the exchange markets. Maintenance of confidence in the currencies affected, needless to say, is the basic element needed to cope with such speculative movements of short-term funds. Effective employment of appropriate monetary policy and utilization of adequate amounts of international credit facilities are also indispensable means to meet such a situation. However, I also think that recourse to more direct measures to limit and to restrain such capital movements is justifiable under special circumstances. I do not think such measures are inconsistent with the spirit of the Fund Agreement.
In recent months there have been a number of ideas presented concerning changes in the present exchange rate system. Some argue that defects in the current fixed exchange rate system have been one of the major causes of recent international monetary problems. So far, we have not undertaken thorough study among ourselves on this subject, but these proposals apparently have theoretical as well as technical weaknesses, and none of them appears to be operational. Any proposals inconsistent with provisions of the Fund Agreement seem to me rather difficult and unrealistic in view of the complex procedure for amending the Agreement.
The role of exchange rate flexibility in restoring international equilibrium is, at any rate, rather limited, and international balance of payments difficulties can only be fundamentally overcome through improvements in the economic management of the countries concerned. Unless accompanied by appropriate discipline of member countries in the management of their economies, no exchange rate system can hope to function well.
The existing exchange rate system has provided the basis for the world economy to achieve unparalleled prosperity during the last quarter of a century. It is my opinion that the question of changing the exchange rate system can and should be resolved within the framework of the present system through improvement in management and operations. In addition, I should like to emphasize that the maintenance of a given parity is probably in most cases the most realistic and persuasive policy objective conducive to proper management of an economy.
I would now touch on the subject of gold. As the Managing Director mentioned in his concluding remarks last year, gold will continue to play a major role in international liquidity. Although the two-tier system has functioned well since its introduction in the spring of last year, the uneven distribution of monetary gold and a certain bias for gold in many countries has, in fact, made gold extremely illiquid. With the activation of SDR’s, gold will surely become less important as international liquidity. However, maintenance of a happy coexistence of gold with other kinds of liquidity is essential for the sound working of the international monetary system for some time to come. This problem needs further study and, in this connection, I expect the Fund will expedite the review of its policy on gold transactions.
With the possible slackening of economic activities of major industrial countries from the second half of 1969 into 1970, I fear that economic assistance to developing countries will slow down. Symptoms are already visible in the actual performance of economic assistance of some of the major industrial countries.
However, it is most important to ensure the flow of resources to developing countries for their economic development, since the prosperity of the world economy cannot be attained without sound growth of these countries. . . .
It is also a matter of much satisfaction that the Fund and the Bank have considered and adopted ways and means to help cope with the problems of primary products.
While it remains a matter of concern to see hostilities arising from time to time somewhere on the earth, I am pleased to note increasing signs of peace returning in Asia. It is my belief that if the wisdom and energy of all mankind were devoted to the peace and prosperity of the world, developing countries in Asia and in other parts of the world, which have two thirds of the world population, would be freed from poverty and stagnation and thus would enjoy more affluent and hopeful living. This is the very objective which developed as well as developing countries should aim at with concerted efforts in the coming decades, and Japan is prepared to play her part and share her due burden, placing particular emphasis on the closer countries in Asia.
With this in mind, Japan has continued her efforts to expand and to improve her economic assistance despite insufficient accumulation of wealth in both private and public sectors and consequent strong demand in the domestic economy for public social investments. Total net outflow of financial resources in 1968 marked an increase of about 23 per cent over the previous year, and, in terms of absolute amount, it has now exceeded $1 billion.
It is my desire to continue our strenuous efforts in the coming years to increase and improve our aid, both quantitatively and qualitatively, our economic resources permitting.
I believe that the bright and promising future of the world can only be brought about when the efforts of developed nations are matched by self-help efforts on the part of developing countries, all working together for world peace and prosperity to achieve growth with stability in developing countries.
Lastly, I should like to make some comments on the current economic situation in Japan.
Since we met here last year, the Japanese economy has had another year of favorable development and strong growth.
However, the pace of demand expansion has been gaining momentum lately, with a resultant sharp rise in domestic prices. I fear that, should the economy continue to expand at the present rate, its long-run stable growth might be impeded. Some precautionary measures were therefore taken on the monetary front just a month ago. I believe that they will be sufficient to forestall any overheating and thus contribute to a sustainable growth of the economy. The early detection of domestic imbalances and subsequent prompt action to correct them are, I think, important to a smoother adjustment. I will continue to follow this principle in conducting fiscal and monetary policies to sustain a high level of growth of the Japanese economy which will, I am sure, in turn contribute to the continued development and growth of the rest of the world.
In conclusion, I wish to express my sincere hope that the World Bank Group and the International Monetary Fund will have another year of successful accomplishments in their respective fields of activity.
Statement by the Governor of the Fund for the United Kingdom—Roy Jenkins
I am glad to have the privilege of again addressing the Governors of the Fund and Bank. We are very grateful for the warm welcome which the United States affords to our meetings when they take place in Washington.
I join the Managing Director in greeting the newcomers to this gathering, and especially the Governor for Swaziland and his colleagues as they attend for the first time as representatives of a new member country from the Commonwealth.
Special Drawing Rights
The central business of the present gathering will be the first decision to allocate special drawing rights. This decision has been the subject of much discussion over a long period. Its significance is fully commensurate with the amount of time and trouble which has been devoted to its achievement. Today I make three comments.
First, I place on record the wholehearted support of the United Kingdom for the Managing Director’s proposal for activation. There has at times been a fear that the introduction of SDR’s would reduce the pressure on countries in balance of payments deficit to take appropriate action. I am therefore happy to be able to report today that the United Kingdom has made good progress in its adjustment process, and has no thought of using SDR’s as a reason for faltering on the road to its completion.
When I addressed this meeting in 1968 the measures taken to rectify the U.K. balance of payments had so far led to disappointingly few visible results. The improvement in our position since then has been faster than last year I dared to predict. The policies which we have adopted are now showing their success. The United Kingdom has moved into substantial balance of payments surplus, I believe decisively so. Since the period before devaluation in November 1967, our exports have grown in volume twice as fast as our imports and three times as fast as our manufacturing production. Our personal consumption and public expenditure have in combination been kept virtually flat. As an end product our balance of payments on current account has been transformed from a deficit at a rate of over $ 1 billion a year before devaluation to a surplus in the past three months at a rate of $1 billion a year. No doubt the exceptionally good visible trade figures which we were able to announce for August contained some special features. But the results over a longer period encourage us to believe that we can now look forward to a period of sustained surplus. That is a central aim of our policy. The United Kingdom has a substantial volume of international indebtedness. Our improving position has this year enabled us to make a substantial start on the repayment of debt. We intend to continue that process and not to relax on the threshold of success.
My second comment is that in addition to the importance of SDR’s as a step forward in the development of the monetary system, they are scarcely less significant as an example of international cooperation to attack and solve a world problem of genuine complexity. Here perhaps I may be permitted to express my welcome for the announcement that France will, after all, ratify the scheme.
Third, a word about the relationship of special drawing rights with development assistance. There has been disappointment in many developing countries that the SDR scheme as it has emerged does not provide for any formal link with aid. I do not wish to reopen this matter today, but, although no formal link has been established, I am hopeful that the contribution of the SDR scheme to the world’s liquid resources may help to create more favorable conditions for the growth of development aid. . . .
Another important step forward in the last year has been the Fund and Bank report on the stabilization of primary product prices. We welcome this report as representing a practical and useful response to the Rio Resolution.
Greater stability in the world monetary system, vastly desirable though that is, will not in itself solve the problem of the enormous gap between the standards of life of the industrialized countries and the less developed. . . .
Exchange Rate System
I come now to a subject much discussed over the past year and to which the Managing Director referred yesterday: the question of the exchange rate system and whether any new developments are now appropriate in this field.
After the Bonn conference last November I told the House of Commons that, in spite of the great achievements made possible by the Bretton Woods structure, the time had come to consider both the objectives of international monetary arrangements and the institutions for implementing them. A large number of proposals has been canvassed with varying degrees of enthusiasm. I welcome this debate. These are questions of the greatest importance. They should certainly not be forbidden subjects. They need careful study and discussion, taking into account—and I stress this—the interests of developing countries as well as those of the developed world. The United Kingdom welcomes the general intention that discussions should proceed. In particular, we support the proposal that the Executive Directors of the Fund should continue their study of the matter.
I do not wish today to anticipate the result of these studies, which are bound to take time and to cover far more ground than could be discussed this week. But the Managing Director has invited views on this topic and I offer the following.
First, we have to start by recognizing that at least until fairly recently the present system has on the whole worked well. And even the excessively frequent upheavals of the past few years have so far concentrated their damage, not on world trade, to serve which is the primary purpose of the monetary system, but on the public reputation of the system and on the nerves of finance ministers and central bankers. But no one can be certain whether these upheavals are signs merely of a passing and sustainable disorder or symptoms of a more deep-seated disease, which could soon become dangerous to the whole purpose of the system. In any event it is highly desirable, if possible, to get rid of the discomfort, whether it be passing or more fundamental. The question is not whether improvement is desirable—clearly it is—but whether there are recipes for change available which would prevent a repetition of recent crises, without attendant and unacceptable disadvantages. I believe we can now focus discussion on certain specific issues.
No recent argument or event has persuaded me that a system of total freedom, with all rates floating freely without government intervention, is either desirable or durable. In most economies, the sectors engaged in foreign trade are too large, and therefore the effects of movements in the exchange rate too great, for governments to surrender control of them to so-called market forces: this must always remain a matter of policy choice and decision. But a system in which governments were constantly or even sporadically intervening without obligations as to parities could be at least as unstable. The evidence of the past is that periods of fluctuation and uncertainty arouse strong pressures for a return to stability; and this is likely to be even more true in the modern world with its increasing interdependence and in which so many countries are looking for greater, not less, stability in market prices in order to plan their development. I do not believe that events in Germany in the past twenty-four hours, welcome in themselves, in any way contradict this argument. There is an impressive degree of agreement on the main point among governments and central bankers, and also among those concerned with the actual conduct of foreign trade.
Without going this far, therefore, what can we do to counteract a tendency for desirable stability to shade into an excessive rigidity which hampers the adjustment process? Governments often face difficulties in reconciling their domestic policies and aspirations with suitable balance of payments objectives. Some of these difficulties—for example those associated with the unwillingness of surplus countries to lose reserves—may be mitigated by the activation of the SDR scheme. But there is a further factor. Imbalance arising from costs and prices moving differently in different countries can easily become persistent and affect a wide area of a nation’s trade. A state of fundamental disequilibrium then arises, and it is usually in the interest of the country concerned as well as of the international community to resort to exchange rate adjustment. But this does not always happen as quickly as it should; and the fact that in the past twenty-five years the Fund has seen sixty devaluations, and only three revaluations, suggests movement upwards may be even more sticky than movement downwards.
The analysis, if not the events themselves, was of course apprehended by those who devised the Bretton Woods system. But the development of the postwar world has been unexpected in several important respects. I doubt whether many of the founders envisaged either the full possibilities for growth in productivity and the speed of inflation in most developed countries, or realized the consequent opportunities for rapid divergence in the competitive positions of different countries. And with such divergence, in the absence of rate changes, has come much greater opportunity for fundamental disequilibrium.
Even though more frequent exchange rate changes in the past might have facilitated the adjustment process, it is not difficult to understand why governments have tended to resist them. One reason has undoubtedly been the effect of changes on the stability of domestic monetary systems as well as the disturbing effect on the international monetary scene as a whole of the prospective gains and losses to holders of currency balances. If we seek less rigidity in rates in order to facilitate the adjustment process, we must find some effective means of avoiding a consequent growth in destabilizing money flows.
Much useful discussion has already taken place about methods of introducing an acceptable degree of flexibility. Less attention has been given to methods of reducing flows of funds from one country to another when changes in exchange rates seem likely. I commend for consideration the Sterling Agreements concluded last year under which the holders of sterling balances have been given guarantees, in terms of the anchor currency, against capital loss arising from an exchange rate change; a guarantee which has been underwritten by the Basle Group of countries. There can be no doubt that this remarkable instance of international collaboration served to check a potentially dangerous situation following the devaluation of sterling. It has introduced an important measure of stability which in recent months has been of value not merely to the countries directly concerned but to the world as a whole. If some arrangement could be developed on a wider front, affecting currencies other than sterling, and with a somewhat more ambitious objective, to reduce not only the capital loss but also the capital profit which arises when exchange rate changes are made, we should have made an important step toward combining somewhat greater flexibility in exchange rates with less risk of undesirable side effects.
When we look at ways in which more flexibility might be introduced, we can, I think, dismiss quickly a substantial widening of the margins within which market rates may fluctuate above and below par values. By substantial widening I mean widening to, say, 5 per cent on either side of parities. This would, in my view, bring most of the disadvantages of the complete abolition of obligations concerning the maintenance of parities without the advantage of depriving the speculator of fixed points against which to calculate.
On the other hand, a very slight widening of the margins, perhaps to 2 per cent above and below par, could be useful. It would not make a significant contribution to balance of payments adjustment, but it would allow central banks a small but desirable increase of flexibility in market management, with a consequent greater ability to deal with speculation.
The other main proposals concern a prolific family of schemes usually described as the “crawling peg.” All versions are based on the belief that small but frequent changes in parities would be more palatable to governments, and that as a result we should avoid the need for larger, more dramatic, and more difficult changes in parities.
One version of this scheme would seek to make life easier for finance ministers by changing parities automatically according to a formula related to previous movements in market rates. I doubt if this version is realistic. Exchange rate management is an integral part of economic management and is likely to continue to be regarded by most governments as a matter of deliberate choice and political decision.
Alternative versions of the crawling peg are those in which governments might opt to change their parities by a series of small monthly steps totaling not more than about 2 per cent a year. Governments would announce in advance their intention to move their parities up or down over the course of the succeeding year; and interest rate policy could be adjusted to offset the incentive to short-term capital movements which would otherwise result.
Many consider that an innovation on these lines would leave governments in substantial control, but enable parities to be changed without disrupting the markets; exchange rate adjustments might then become a more sensitive policy instrument and thereby enable large misalignments to be avoided. It is suggested that this would especially help the situation in which costs and prices tend to rise at different rates in different countries, building up to a chronic balance of payments disequilibrium.
I am sure that we should study these ideas. Closer examination may show that the advantages are not without cost and that the kinds of decisions which governments would have to make in order to keep in line with imbalances as they emerge require that kind of immediate and accurate diagnosis which, regrettably, is so rarely available in practice. The nature of economic cartography is such that, while it is often easy to see where you were a year or two ago, the trend of the future is usually difficult to discern; often it is even difficult to know exactly where you are at present. I fear that imbalances calling for exchange rate adjustment, particularly those calling for downward adjustment, may often not be detected until they are too large to be corrected by an exchange rate adjustment of only 2 per cent a year. If gradually emerging imbalance could be forecast, many governments would prefer to try and deal with them by other methods: and only too often imbalances appear to emerge comparatively suddenly as a result, for example, of natural disasters, or sharp changes in the levels of costs and prices which reduce external income or alter competitive power.
Other problems could be listed. There are the legitimate worries of developing countries that too much flexibility in exchange rates would add to their difficulties. We also need to ensure that any changes would reduce and not increase speculation. All this points not to complacency but to the need for adequate and careful study. While it would not be desirable to make a sudden leap in the dark in so important and sensitive a matter, it would be at least equally undesirable to be afraid of the darkness being penetrated by the searchlight of enquiry and discussion. It is for this reason that I strongly support Mr. Schweitzer’s proposal for a study in which the United Kingdom will be glad to play a full and active part.
Our meeting this year coincides with a time of monetary disturbance. There have been four such periods during the past twelve months. During this year, and the immediately preceding ones, we have allowed international monetary affairs to be far too often in the headlines. I think the public wants to see our affairs back on the financial pages where they belong, ticking away calmly and efficiently in the background, with something more easily comprehensible in the front. That is the problem which now confronts us: to reassert our control over the monetary mechanism, and to prevent any inadequacies from frustrating the development of world production and trade. Unless we can do that we shall lose any reputations we may possess as competent technicians, and we may lose a good deal else as well.
This is a considerable but far from impossible problem. It is far less formidable than that which confronted our predecessors as economics ministers twenty or twenty-five years ago. Then they had to put together an industrial world half of which was nearly ruined and with little immediate experience to call on beyond the somewhat dismal history of the prewar decades. Today, we have an immense capacity for generating wealth throughout the developed world, though an immense need for it in the developing world, and twenty-five years of very considerable success behind us. We must not allow fear of our present limited problems to damage for the future that record of success.
Statement by the Governor of the Bank for Malaysia—Ali bin Haji Ahmad
A quarter of a century has gone by since the Bretton Woods Conference of July 1944 which gave birth to the International Monetary Fund and the World Bank. These twenty-five years have indeed been eventful years. The passage of time has neither diminished the need for these two organizations nor the magnitude of the tasks facing them. On the contrary, a wider and more influential role is now being given the Fund and the Bank. Today, we see the Fund undergoing a further evolution of its functions as it moves forward to undertake the creation of a new reserve asset, the special drawing rights, to meet part of the growing shortage of world liquidity. Of more direct interest to the primary producing countries is the fact that both the Fund and the Bank, in response to the Rio Resolutions, are making a new approach to assisting the stabilization of the prices of primary products.
Since our last meeting the international monetary system has gone through two further crises, which represent a new source of instability in the system and have their origin in the relative strength of the deutsche mark and the weakness of the French franc. Last month, the devaluation of the French franc removed part of the pressures in this area but the source of instability is unfortunately still present in the system and will continue to exist, unless all grounds are removed for speculation in the deutsche mark. If we also examine the crises that recently preceded these, namely, the devaluation of sterling in November 1967 and the run on gold in March 1968, we shall find that all these have essentially the same root cause, that is, an inability or reluctance on the part of the national authorities to take effective and timely measures to correct a fundamental disequilibrium in their balance of payments. In the interest of a more stable world monetary system, therefore, deficit countries must take appropriate measures, even if they are harsh, to correct their payments imbalance. At the same time, it is necessary for the surplus countries to be prepared to take more positive and timely measures in helping to facilitate the adjustment process. The world monetary system cannot function smoothly indefinitely when major currency countries fail to correct fundamental disequilibria in their balance of payments position. The last quarter of this century has shown that the Bretton Woods system of stable exchange rates has served well the economic and financial interests of the world at large, and, if there could emerge a greater diligence in observing the rules of the game, crises of confidence and speculation against the major currencies need not occur so frequently as in the past two years. To help achieve this objective, it would be useful that a serious appraisal be made of past actions and a search for new approaches which could aid national authorities in making their contribution toward this end.
Monetary crises and currency speculation are by no means the only source of concern, particularly if these increase the vulnerability of the reserve currencies. The nature of the measures taken to correct payments disequilibria is also of direct interest to the world at large. In this connection, we recognize that, insofar as the United States is concerned, there is a need for the authorities to control the growing inflationary pressures, as failure to do so will have adverse consequences not only for the United States but also for the rest of the world. We also recognize that an early establishment of equilibrium in the balance of payments of the United States is necessary to ensure a firmer and more widespread confidence in the present world monetary system. However, in pressing toward these objectives, the United States authorities seem to have placed emphasis on monetary restraint, thereby contributing to an escalation of world interest rates. For the world and particularly for us in the developing countries, this is a very unsatisfactory state of affairs. We are now faced not only with the continuing problem of having to step up the flow of financial resources from the developed to the developing countries, but also the additional burden of more costly capital. . . .
Stability of the world monetary system is one of the basic conditions for a greater flow of resources to the developing countries. From this standpoint, we also place considerable importance on the efforts of the major countries to correct their payments imbalance. In their search for measures to achieve this goal we urge these countries to be more selective and adopt only those measures that will have minimal adverse effects on capital flows to the developing countries. In this connection, it is interesting to note that the small payments surplus of the United States in 1968 was achieved because the measures taken had turned the United States, the main exporter of capital since the Second World War, into a net importer of capital. We hope this incongruous situation will only be temporary since its prolongation must inevitably reduce the flow of capital to the developing countries.
I now turn to the subject of international liquidity. We are about to take a very important step in deliberately augmenting world reserves. On this matter, it bears repeating that we in the developing world have always been given a limited role in the decision-making process and that we shall also be given an unreasonably small portion of the special drawing rights to be created. We have always questioned the logic and even the morality of this because we consider that the magnitude of our needs for liquidity are not necessarily reflected by the size of our quotas in the International Monetary Fund. While we hope and expect this inequitable basis of allocating special drawing rights to be changed in the near future, we feel that the effects of this system should also be mitigated in the meantime. One approach that has considerable merit is for the major industrial countries to set aside for purposes of development aid the equivalent of a portion of what they will receive in special drawing rights. This is not a new proposal but one on which Governor Colombo of Italy called for serious consideration at the last Annual Meetings.
When we consider the various assessments of the liquidity needs for the next three years that may be met by allocations of special drawing rights and note the wide differences between the various estimates, it is perhaps also not out of place to suggest here that further work is necessary to develop more refined methods for conducting future exercises of this kind. This seems to me to be a fundamental aspect of the process of deliberate reserve creation if special drawing rights are to serve their basic purpose.
In the field of conditional liquidity, action is now being taken to increase the quotas of Fund member countries for the next five years. For the developing countries, one of the major sources of liquidity is the resources of the Fund, and the degree of their access to this source is determined by the size of their Fund quotas. Whatever formulas for distribution are decided upon, I hope that at least the following basic principles are observed. Firstly, there should be a significant general increase in quotas for all members. Special increases over and above this general increase may be accorded to those members whose needs are evident. Of paramount importance, however, is the fact that the over-all effect of both general and special increases should not be to result in the developing countries having a reduced proportionate share of the total Fund quotas. On this last point, it is needless for me to say that the present share of the quotas of developing countries, at 28 per cent of the total, is already small and should not be reduced further.
As one of the primary producing countries, Malaysia has been looking forward to the solutions that would emerge from the Resolutions we approved in Rio de Janeiro two years ago. The Governors of the central banks in Southeast Asia have also presented the managements of the Fund and the Bank with two joint memoranda, setting out our common position on these matters. With the completion of the action by the Fund and the Bank and the decisions taken by their Executive Boards at the end of June, our central bankers have made an assessment of these policy decisions. It is sufficient for me to point out that the policy decisions constitute only a modest advance instead of what should have been a bold and comprehensive approach to the problems of commodity price stabilization. With the approval of the Rio Resolutions, our hopes were raised that at last something of significance was going to emerge to solve the price stabilization problem. I regret to say that the initiatives shown by the Fund and the Bank have been considerably circumscribed by the respective Articles of Agreement of these institutions. Until we are prepared to break out of the confines of legal fetters and change the Articles of Agreement where necessary and appropriate as in the case of the creation of special drawing rights, the problems of price instability will continue to plague primary producing countries and, if I may say so, also the consumer countries. It is therefore heartening to see that the Executive Directors of both the Fund and the Bank recognized the need for a future review of the policy decisions. I hope that this review will be carried out within a reasonable period of time and that the Fund and the World Bank will adopt a more progressive and positive outlook.
As we assemble here today, we see ourselves on the threshold of a more conscious and united effort to meet the momentous and growing problems that keep us from achieving a larger measure of world prosperity. We must, however, recognize that the measures we are now prepared to take are yet far from adequate or bold. If this awareness is shared by all, a more prosperous tomorrow now lies within our grasp. If not, we shall stand convicted by future generations as lacking in the will and cooperation necessary to turn this single step into a giant stride.
Statement by the Governor of the Fund and Bank for the United States—David M. Kennedy
I am honored to address this annual session of the International Bank for Reconstruction and Development and the International Monetary Fund. The accomplishments of the quarter century since Bretton Woods reflect both the foresight of those who set these institutions on their initial course and the outstanding leadership that has guided their destinies over the postwar years. The President of the World Bank, Mr. McNamara, and the Managing Director of the Fund, Mr. Schweitzer, are carrying forward in this great tradition.
Anniversaries are a time for looking back on past achievements —and those of the Bank and the Fund are indeed impressive. But today is even more a time for looking ahead to the challenges of the next 25 years, for setting new goals, and for appraising our methods for reaching them.
. . . The 1970’s are sure to require some new emphasis in the development process. But, in approaching the new decade, we must also deal forcefully with key problems already upon us.
For instance, the external debt problem has become acute. Debt reschedulings testify that the burden of debt servicing is already weighing too heavily on some countries. But debt reschedulings, in themselves, provide no general solution. Instead, debtors and creditors alike must aim to avoid unmanageable levels and structures of external debt. Assistance on realistic concessionary terms must be provided from a broader range of donor countries. Recipient countries, for their part, must see to it that they help create a climate in which funds can be efficiently used and internal development flourish.
We must also seek better ways of meshing development finance with the needs of balance of payments adjustment. When, as at present, a number of large providers of aid must simultaneously deal with problems in their international payments, the flow of real resources should not be interrupted. At the same time, balance of payments surpluses should more readily be put to work for development purposes, on appropriate terms.
The problem of coordination looms ever larger as the regional development banks grow side by side with the world-wide institutions. The variety of institutions now at work to complement national efforts makes it essential that we more consciously seek improved ways to fit the pieces together in mutually complementary and reinforcing ways.
I wonder, too, whether simple numerical targets for development assistance by industrial nations do not divert too much attention from the quality of the aid provided and the techniques employed.
Finally, I must emphasize that the building and expansion of new economies—as well as of old—must be achieved in a manner consistent with outward looking trading and financial practices—practices which our predecessors launched when they adopted the Bretton Woods proposals and their trading system counterpart, the General Agreement on Tariffs and Trade.
In this connection, I am glad to hear the Managing Director’s statement that the Fund will be prepared to reinforce its collaboration with international institutions which have special responsibilities in the field of trade and aid.
I am acutely conscious of the fact that the climate for orderly economic growth everywhere will be enormously affected by the success with which we in the United States guide our own economy.
Looking back over the past decade or more, I believe there is room for some satisfaction. The 1960’s have brought virtually uninterrupted growth of real production in the United States at the historically high rate of about 4½ per cent a year. Despite evident flaws in the record, we also managed to maintain over that same period of time a somewhat better degree of internal price stability than nearly all of our major trading partners.
Nevertheless, when President Nixon and his Administration took office, the inflationary process was well entrenched. Quite simply, the United States failed to respond with sufficient vigor in making available, without inflation, the resources required by the Viet-Nam conflict at a time of sharp increase in other public expenditures. Moreover, our traditionally strong trade surplus had almost vanished.
Some countries have no doubt welcomed the larger export markets that are the counterpart of the recent surge in U.S. imports. Forced growth in the U.S. markets under the pressure of inflation cannot, however, be a sound basis for sustained payments equilibrium. Moreover, we recognize that the pressures on our own money markets have contributed to the world-wide upward racheting of interest rates.
Those same market pressures have been reflected in a massive flow of private short-term capital to the United States. This has tended to keep the dollar strong in the exchange markets, and to hold down or reduce foreign official dollar holdings. But short-term capital inflows are not an effective substitute for a stronger payments structure, solidly rooted in a current account surplus large enough to support a steady flow of aid and foreign investment.
President Nixon has made control of inflation his first domestic priority. The basic strategy of his Administration for achieving this goal through the coordinated use of expenditure, tax, and monetary policies is by now widely understood.
Those policies are not—nor did we anticipate that they would be—painless. The President has pledged a strict limit of $192.9 billion on budget spending during the current fiscal year, a figure below congressionally authorized ceilings. To keep within that limit at a time of higher costs all along the line, and despite social programs that demand larger financing, we have had to cut $7.5 billion from program levels planned in the budget submitted to the Congress last January. Significantly, the expenditure total planned for the entire fiscal year allows for virtually no increase from the current rate of defense and civilian spending. This restraint is being achieved at a time when the Viet-Nam conflict is continuing, but, looking ahead, let me assure this audience that the people of the United States are solidly behind President Nixon in his efforts to bring about a just and honorable peace in Viet-Nam.
We have continued the 10 per cent income tax surcharge through the remainder of this calendar year and have requested the Congress to maintain half of that surcharge for an additional six months. We are also moving to eliminate the special tax credit for business investment. These revenue measures, combined with the control on expenditures, are designed to produce an over-all budgetary surplus of nearly $6 billion—the largest in 18 years.
Meanwhile, the expansion of money and credit has been slowed sharply. Our lending institutions are unable to satisfy fully the demands for credit, and the effects are being felt on important sectors of the economy. Where possible, we have moved to ease points of excessive pressure, such as those on housing activity. But we are determined to maintain the basic thrust of our restrictive policies until the overheating is visibly dissipated.
Eight months ago, we knew that controlling inflation without precipitating a serious recession would be a long and difficult process. It requires holding the rate of public and private spending below the basic trend of growth in capacity and output, thereby relieving excessive pressure on our resources. That process is now well underway, and we anticipate further slackening in the quarters immediately ahead.
Clearly, a reduced rate of growth is not a long-term policy objective. But it is essential to an effective attack on inflation, and it should be a prelude to renewed growth at a sustainable pace.
Experience warns us that the trend of prices—particularly of services and consumer goods—levels off only after a considerable lag behind other business indicators. So far, we can see only scattered and not wholly conclusive signs of an easing of price pressure.
In these circumstances, it is not time to shift gears. I believe we are realistically aware of the inevitable risk on either side of the course we have set for ourselves. But all our planning is rooted in the basic proposition that the firm and persistent application of appropriate fiscal and monetary restraint can lead us past those shoals into calmer waters.
Tension and pressures have also been evident over recent years in the international monetary system, and speculative outbursts have recurred. Indeed, it is a tribute to the underlying strength of the system devised at Bretton Woods and to the spirit of cooperation nurtured by the International Monetary Fund that disturbances have been contained and that world trade and payments have continued to grow at a rapid rate.
Yet we still face the challenge of moving in a coordinated way to close the persistent imbalances in trade and payments among the major countries that have contributed so importantly to the monetary strains. There can be no escape in this process from the need for effective national economic policies.
I have already commented upon the circumstances in the United States. In the case of the United Kingdom, we have highly encouraging evidence that the underlying trend in its balance of payments is noticeably improving, and a current account surplus has been re-established. France has, within recent weeks, launched a program to complement the adjustment in the franc parity. Consequently, there is a real improvement in the prospects of important countries which have experienced an erosion of their external positions over recent years.
It is vitally important that this recovery not be slowed by an unwillingness of countries in a strong position to see a decline in their trade balances. Sizable trade surpluses happen to be highly concentrated among only a few countries. We look to these countries not only to refrain from resisting adjustment but, where possible, to take actions of their own to assist and encourage it.
Certainly, solutions should be found other than internal inflation, and the prescription appropriate for one country may not be suitable for another. But it is equally clear that, in each case, much could be done to spread and diffuse existing surpluses in ways that support both the broad objectives of freer trade and internal stability. Import controls, systematic tying of aid, failure to share fully in the burdens of defense, preferences for domestic production, export incentives, and inhibitions on capital exports are all out of place for countries with current account surpluses ranging as high as 2 or 3 per cent of domestic production. The processes of international consultation and cooperation embedded in the IMF might well be reviewed to assure that the policies of chronic surplus countries are subjected to the same searching evaluation that is more or less automatically given to deficit countries.
Strong ties of trade and investment, close links between financial markets, and the rapidity of communication and transportation in the modern world make each country highly sensitive to developments abroad. Yet we live in a world of nation-states, each of which seeks to preserve a degree of economic independence. We must face the facts of differing emphases in national policy objectives, changes in the structure of industry and population, cyclical excesses or deficiencies of internal demand, the economic consequence of social disturbances, and rigidities of costs and prices. Any of these factors can become a source of disturbance and uncertainty. At least temporary imbalances are inevitable, and every country wants to preserve some margin of liquid financial resources to buttress its freedom of action.
Our international monetary arrangements will serve us well or poorly to the extent that they can absorb and diffuse sources of strain on exchange markets, provide effective incentives for national adjustment, and thus maintain an efficient and durable mechanism for the finance of trade year in and year out. It is one of the great strengths of the present system that, through the years, it has demonstrated a capacity to evolve and grow in response to changing needs.
Indeed, in adopting the first amendment to the IMF Agreement since Bretton Woods, we now stand on the threshold of a fundamental development: the creation of a new reserve asset—the special drawing right. We are indebted to those who years ago not only foresaw the potential need for supplementing the traditional sources of reserve creation, but who worked tirelessly to translate general concepts into concrete reality.
Their efforts could not have come to fruition at a more opportune time. I believe the Fund’s Annual Report, and even more the report embodying the Managing Director’s proposal for activation of the special drawing rights, make amply clear that the contingency against which we have been planning has now arrived. The United States, therefore, fully supports the proposal to move promptly to meet the acknowledged need for growth in international reserves through activation of the new facility. We particularly welcome the sense of conviction and confidence that enables us to move forward to use this new instrument in substantial amounts, reasonably commensurate with need.
I recognize, but do not share, the concern expressed by some that fresh additions to world reserves might delay the necessary adjustment of payments imbalances. I am persuaded that, in fact, the opposite is true. Without a timely supplement to world reserves, the efforts of deficit countries to eliminate those deficits could be made more difficult, and could even be frustrated, by actions taken by other countries to safeguard their existing reserves. Moreover, I can assure you that, for the United States, the activation of this facility will in no way diminish our efforts to bring inflation under control.
As we enter this new era of managed reserve creation, SDR’s will have to find their proper role within the total complex of reserve assets and credit facilities. There is no doubt in my mind that, within the basic framework of the amended Fund Articles, we will jointly demonstrate our ability to use this new reserve asset constructively—in the same spirit of cooperation that was essential to its development.
SDR’s have properly been at the center of attention in recent discussions of international liquidity. However, the regular drawing rights in the IMF also have an important role to play. The approach of the period of quinquennial review makes this an appropriate occasion for surveying the size of Fund quotas. Preliminary discussions indicate that a number of questions remain to be resolved before a concrete proposal can be presented to the Governors. I feel certain that this matter can be satisfactorily resolved within the framework of a reasonable increase in the over-all size of the Fund at an early date.
The clear progress we are making in dealing with the provision of international liquidity must not divert our attention from other sources of strain. I have already noted that the process of international adjustment has not been working with full effectiveness, and that the difficulties in this regard are in large part a by-product of inadequate or inappropriate domestic policies.
At the same time, I believe we must recognize that events themselves have raised new questions as to the appropriate role for adjustments in exchange rates—not as a substitute for, but as a complement to, other policies. I have particularly in mind the range of proposals for “limited flexibility” to which Mr. Schweitzer alluded yesterday.
These proposals all look to less rigidity in the exchange rate mechanism than has in fact developed in the practices of industrialized countries. Some suggested approaches would, in practice, affect only a handful of currencies, or would introduce largely technical changes in the management of exchange markets. Other versions—such as those for a very substantial widening of exchange rate margins—would appear to introduce so large an element of uncertainty, and be so at variance with the basic objectives of the Fund, that they probably do not need to occupy our attention.
Certainly, in the United States we have reached no conclusion on the desirability of any particular proposal. I would, however, like to share with you some of the relevant points that, on the basis of our own review of the matter, we believe should be kept in mind in further investigations in this area.
In the first place, the various plans for “limited flexibility” in exchange rates seem to pose formidable technical and policy problems that will require careful study over a considerable period by national authorities, as well as international monetary bodies, before any consensus is possible.
Secondly, well-conceived changes, as part of their basic design, should reduce incentives for speculation, or make it more costly. Thus, if it is to be successful, any proposal must come to grips with the difficulty of confining changes in exchange rates within carefully defined limits, while providing enough flexibility to reduce the need for, and expectations of, large abrupt changes in parities.
Third, we should not lose sight of the fact that any reasonable scheme to remove undesirable rigidities in exchange rates would have to be built upon the foundation of responsible and appropriate internal policies, so that the need for large and discrete changes in parities should arise even less frequently than in the past. Similarly, the world would continue to require an orderly growth in reserves and credit facilities, to facilitate the maintenance of parities within established and relatively narrow ranges.
Fourth, given the pivotal role of the dollar in the international monetary system, the initiative for even limited exchange rate adjustments would continue to lie with countries other than the United States. As a corollary, we must guard against the possibility of encouraging a bias toward devaluations.
It is implicit in these comments that we believe that proposals for limited flexibility in exchange rates offer no panacea for present problems. Nonetheless, the increasingly widespread discussion of these ideas in this country and abroad reflects a real concern over the need to facilitate, over a period of time, a better working of the adjustment process. In concept, these proposals seek to preserve and enhance the basic stability of the system as a whole precisely by breaking down unnecessary rigidities and inhibitions to orderly change, when change is necessary.
In this light, efforts to define and develop techniques of limited flexibility need not be looked upon as radical new departures from the mainstream of developments in the monetary area. Instead, they seem to me to fall within the framework of orderly and evolutionary change and of multilateral monetary cooperation.
As I have noted, these devices have had no official sanction and are full of subtle and unsettled technical and policy questions. In sum, they are a long way from fruition, if, indeed, some variant proves practical at all in the end. But neither are these ideas something that we can, or will, responsibly ignore.
I therefore welcome the Managing Director’s statement, elaborating on the Fund’s Annual Report, that the Fund will be continuing its study and appraisal of these questions. The United States will actively participate in and contribute to such a study. We would hope that, during the coming months, the Fund will examine proposals for limited exchange flexibility, determine which particular proposals appear worthy of further attention, and set forth the major issues and considerations that would concern officials of member governments as they formulate considered judgments on such matters.
In conclusion, let me say the principal contribution of the United States to the stability and viability of the international monetary system in the present setting is perfectly plain—to bring our inflation to an end and to do so without sending shock waves of recession to every corner of the world. That is the main path we in the United States have set for ourselves. In participating in an examination of possible further improvements in our monetary arrangements, we will not be misled into thinking that we can dispense with that fundamental need.
Statement by the Governor of the Bank for France—Valéry Giscard d’Estaing
My remarks will be brief; I hope they will therefore be clear.
Our meeting is not only a social occasion giving us the pleasure of meeting old friends and of welcoming new ones, particularly today the Governors for Cambodia, Southern Yemen, and Swaziland. Nor is it an academic colloquy for the purpose of building up brilliant intellectual concepts. It is a reunion of statesmen who share the responsibility for the international monetary system, that is to say, for the prosperity and poverty of their contemporaries, and who, modestly and realistically, must look for the difficult paths to progress.
This is indeed the direction that Mr. McNamara and Mr. Schweitzer, in their excellent statements, have indicated to us.
In a world shaken by monetary insecurity, to fulfill our responsibilities three steps are required: ascertaining the defects of the present monetary situation; evaluating the possible outcome of the reform programs proposed to us; and, finally, appraising the results that can only derive from action taken by national governments.
I wish first, following the most interesting remarks of my colleagues, to point out what appears to be defective in our monetary mechanism.
1. When we look at the world payments system, we find its functioning unsatisfactory. The maladjustments that we note are often represented as the work of fate. This is not our view: fate is always invoked when determination is lacking. The periodic crises we experience are less the result of chance than the effect of resignation.
(a) The main cause of the difficulties encountered is the ineffectiveness of the anti-inflationary policies usually followed. Here lies the explanation of the increasing disparities noted between the cost-price structure of major countries. Not only have these discrepancies provoked transfers of reserves: the persistent deficits of certain countries and the desire of certain others to neutralize inflows of foreign currencies have resulted in the formation of a pool of “displaced capital” which, its national ties being severed, eludes all regulation and, in particular, escapes the knowledge of fiscal authorities.
The massive borrowings of the U.S. banks on the Euro-market have contributed to a steep increase in rates. European countries, catching the infection, have been forced to apply these rates on their domestic markets to prevent intolerable losses of reserves.
This escalation in the cost of money is yet more disastrous for the nonindustrial countries, whose development is slowed down and in real danger of being stopped. In the long run, it entails a serious menace of world deflation.
(b) However persistent or massive the external disequilibrium, most of the countries suffering from it have refused to make the necessary adjustments in their monetary parity. The result on the exchange markets has been a semipermanent crisis of confidence and a nervousness giving rise to persistent speculation in certain currencies, upgrading some and downgrading others. The mass of funds in movement is considerable; an orderly management of reserves becomes increasingly impracticable; and the fundamental rules of convertibility are no longer beyond question. The monetary disturbances that we are now witnessing result quite clearly from Fund members departing from the spirit of Bretton Woods, both in the field of exchange rate adjustments and with respect to capital movements.
Of course, any system has to evolve in the course of time, but the direction to be taken has still to be precisely defined. And since our purpose is not to submit to developments, but to guide them, we must examine whether the reforms that singularly fertile minds have devised in various quarters have any reasonable chances of leading us in the direction we must take.
2. Our agenda includes two particularly important topics: the review of quotas in the International Monetary Fund, and the activation of the system of special drawing rights. A third topic has been raised in the address by the Managing Director of the Fund and in the remarks of those of my colleagues who have spoken before me: the question of the possible benefits of certain adjustments to the present system of monetary parities. I propose to review each of these topics in turn:
(a) First of all, the impending review of the Fund quotas appears to us to be both important and timely. This review should bring about an adjustment of the total amount of the resources of the Fund to the expansion in the volume of international transactions; it will also correct the present imbalances in the distribution of quotas that are particularly obvious in the cases of certain countries. Our common monetary institution will thereby be strengthened.
(b) Secondly, I wish to inform you of the reasons for which France has taken the decision to participate in the activation of the SDR system. First, as the Managing Director of the Fund has so aptly reminded us, the system is now in existence: we have ourselves always considered that alongside conditional liquidities there was room in the modern world for a new reserve asset of an unconditional type, designed to supplement gold and foreign exchange in the holdings of the central banks. This was the purport of the proposal that we made for the creation of a collective reserve unit, or CRU. Second, France attaches the utmost importance to its ties both with its partners in the European Economic Community and with the African and Malagasy members of the franc area. A decision as fundamental as that of the implementation of the system of SDR’s necessarily called for the adoption of a common view.
Finally, we intend, by participating in the system, to place ourselves in a position to exert some influence on its evolution to ensure that it shall be managed in a rational fashion. We see, in fact, the international monetary situation as characterized, in the immediate view, rather by the threat of inflation than of recession. Under these circumstances it is only reasonable that the initial distribution of the SDR’s should be limited to a period of three years and to amounts which, though in my view substantial, are still within the bounds of acceptability. At the end of that period we shall have to evaluate the effects of the experiment, and examine in particular whether the creation of new liquidities has not led to relaxation of the efforts to eliminate deficits, as the distinguished Secretary of the United States Treasury has just given us assurance will not be the case. We shall then have to seek practical means of modulating the distribution of special drawing rights, to take account of the evolution of the other liquidities—in gold and in foreign exchange—and also of the progress made toward equilibrium in international payments.
(c) The suggestion of making the system of fixed parities more flexible has not been presented to us as a specific proposal. First raised in the academic realm, it is gradually easing through the door into this institution. We should be discourteous to refuse to give it our attention, the more so since it has a modish allure. But we should not forget that the fixed-rate system was adopted, after the hard blows that staggered the monetary community, to defend currencies against the pressures of all kinds that threaten their internal and external value. Since its implementation, it has given a remarkable impetus to international trade.
It is true that for some years now its implementation has met with certain obstacles of a rather different nature: at the political level, the reluctance of countries to make proper use of the existing arrangements for changing monetary parities; on the practical level, a series of provisions which—by confining the permitted fluctuations within very narrow margins—sometimes complicate current transactions. There may be an argument for easing somewhat the present mechanisms. The example of the recent decisions taken by the Federal Republic of Germany shows nevertheless that, in exceptional circumstances, this mechanism does indeed afford a certain degree of flexibility. The so-called rigidity of its rules does not in fact prevent a leading currency from finding its true parity through a short period of fluctuation. But we should energetically refuse to consider such arrangements as would result in the destruction of the very principle of fixed exchange rates. In these matters, the barrier separating convenience from disorder is quickly breached. Although by making certain purely technical mechanisms more flexible we may be able to strengthen the effectiveness of the system, on the other hand the introduction of excessive facilities or margins might insidiously change the monetary landscape in which we dwell. In this connection there is, for the EEC countries, an additional cause for concern: namely, the need for maintaining the conditions for the working of the Common Market, which cannot, obviously, survive daily fluctuations or “crawling” uncertainty.
For these reasons, France will not refuse to participate in the studies that might be undertaken. But we hope they will be carried out in full awareness of the real circumstances, and of the limitations entailed by the subject matter. In no case should we expect it to show us the easy way out—as it were, a sort of monetary LSD.
3. Our recent experience appears indeed to demonstrate that an adjustment of exchange parities is perfectly feasible within the present system, given only the will to act. In the situation of imbalance of the French economy that prevailed, the Government chose the realistic solution, consisting of the implementation of a systematic program of restoration of equilibrium on the basis of the monetary parity indicated by the facts. In the outcome, this experience has demonstrated that, provided its rate is well chosen and its timing sound, an adjustment of parity does not weaken the international monetary system but in fact tends to strengthen it. Thus, during the last few weeks the franc has been protected against the fluctuations that have affected the monetary system and from which it otherwise would not have been spared.
The program that we have put into effect utilizes a rational combination of the two kinds of action that lead to restoration of the equilibrium of domestic demand: bringing order into the public finances, and bringing monetary policy into line with a normal and stable rate of growth. The return to an orderly situation will be accomplished without impairing the freedom of foreign transactions and without disrupting the world monetary system. In this the French Government is remaining true to its high regard for the principles and disciplines of international monetary cooperation. The positive attitude adopted by its principal partners, and the support accorded to it by the International Monetary Fund, are expressions of the same spirit.
We must avoid reducing the problem to a single aspect by limiting international cooperation to only monetary problems: the tasks that lie ahead in the development field are no less pressing.
In this field, the results achieved are not satisfactory.
The fraction of gross national product earmarked by the industrialized countries for development aid is declining in almost every case. This tendency particularly affects government official aid, although in the case of France, in our policy of restriction of the public finances, we have deliberately spared our cooperation program. The stagnation of aid is only partially offset by the remarkable expansion of World Bank assistance in fiscal 1968-69 under the leadership of President McNamara; moreover, we find the present geographic distribution of lending unsatisfactory and we are urging an appreciable increase in the share received by Africa.
In the years ahead, rising interest rates and the relative scarcity of the world capital supply will pose ever-greater obstacles to the mobilization of new resources in amounts consistent with the objectives of the World Bank and with the debt capacities of the less-favored countries. Moreover, while the decisions taken in the matter of stabilization of the prices of primary products by the International Monetary Fund are satisfactory, we cannot say the same for those taken by the World Bank. These decisions are disappointing to us, for we believe that the developing countries will not be able to achieve the progress to which they rightfully aspire except to the extent that their positions on the markets are strengthened.
At a time when the gap is widening between an established and self-satisfied order and a reappraisal of traditional values, we must offer solutions that improve the existing state of affairs without raising hopes that would be doomed to disappointment. To perfect monetary technique without abandoning its disciplines, and to sustain development without seeking to evade the sacrifices that it entails—such must be the sober and realistic attitude of those whom fate has placed, in this unique era of change, at the meeting point of two worlds.
Statement by the Governor of the Fund for Italy—Emilio Colombo
The 12 months which have elapsed since our last meeting have been characterized by a strong expansion in the gross national product of the more advanced countries and by an unprecedented growth in world trade. These results, however, have been accompanied by inflationary tensions originating from the excessive demand conditions and increases in costs in the United States and in other industrialized Western countries, which, due to their economic weight, exercise a considerable influence on the world economy. The spreading of these inflationary tendencies has occurred with different lags, depending on the degree of resistance encountered in individual countries, and considerable divergences have arisen in the evolution of domestic prices and export prices as well. These divergences have been largely responsible for the worsening of the disequilibria in the balances of payments current accounts. Although such disequilibria have been offset—and at times more than offset—by capital movements, patterns of balances of payments have emerged which are clearly not sustainable or, at any rate, are not in conformity with the aims pursued by the authorities. Moreover, quite frequently destabilizing capital movements have been induced by the recurring and widespread fears that the par values of some major currencies might be changed. In November 1968, in May 1969, and even at present, the size and the suddenness of these flows have put to a severe test the stability of the international monetary system. Finally, in certain countries strong inflationary tendencies and the policies to restrain demand, largely centered on monetary policy, have caused interest rates to soar to record levels. This development is compelling countries such as Italy, which have current account surpluses, to modify their policy of stable interest rates; otherwise, they would either import inflation or tolerate massive outflows of capital.
Altogether, the over-all picture, by now strongly characterized by inflationary tensions, appears full of clouds and darkened by the prospects of dangerous involutions, forewarning symptoms of which one can already perceive. I refer here to the introduction by some countries of administrative controls not only on capital movements—which marks a regress from the achievements of the early sixties—but on the current transactions as well. If such an involutionary process were to be set off, we would see the segmentation of the world market, the standstill of world trade and foreign aid, and we would witness the disappearance of the conditions which have made national and international prosperity possible in the postwar period.
The causes of these unsatisfactory developments are to be found in the increasing complexity of the modern industrial economies and in the greater interchange occurring among the various economies, in the presence of inadequate instruments of domestic control and insufficient international cooperation, not to speak of the enormous resistance of the vested interests—consumers, wage earners, investors—to the adjustment policies. The careful examination of these causes could help us to determine the proper remedies and to develop the political will necessary for their application.
It has recently become evident that the adjustment process meets with increasing difficulties, not only in the case of conflicting internal and external aims—when a somewhat greater consideration for internal aims has to be accepted—but also in the absence of such a conflict, as in the case of an overheated economy with an external deficit or in that of a country in payments surplus with underutilization of resources. In all these cases, which the literature considers “simple,” tardy diagnosis and therapeutics, insufficient or imperfect dosage of demand policies, with second thoughts and indecisions in enforcing such policies, and, finally, the insufficient response of internal demand have been responsible for the exasperating slowness of the desired adjustments. In the future it will be necessary to take into account the greater resistance which the consumers are in a position to offer to the authorities’ policies, by varying their propensity to spend. Indeed, shifts of this kind are today possible as a result of the increased proportion of the consumers’ financial assets relative to their disposable income. Furthermore, certain perverse effects of the adjustment policies which have emerged, even in so-called simple cases, deserve further consideration. For instance, we have witnessed that productivity has decreased during a period when restraint was sought or that excessive salary increases were granted when expansionary policies were pursued. However, we should not give up hope, in spite of the setbacks which income policies have suffered in these last few years. Instead, we should be strengthened in our conviction that a logically consistent solution to these problems lies, besides the correct management of global demand, in a responsible dialogue between the social partners.
A second obstacle to the proper functioning of the adjustment process has been the reluctance of governments to change their par values, even when the existing rates had become manifestly inadequate in the presence of situations of fundamental disequilibrium. In these cases, there is a tendency not to apply the Articles of Agreement, or to apply them only belatedly when serious external events have put the reserves under severe strain. The governments’ resistance to changes in par values has been strengthened by the difficulties inherent in the application of the scarce currency clause under the Articles of Agreement, as a result of the present integration of the markets and, indeed, by the relative ease in financing deficits. This resistance is not likely to be overcome if one takes into account the extent of the interests which may gain or lose as a result of a change in par value.
Third, the volume of short-term funds liable to be shifted from one country to another—also a result of expectations which differ from actual interest rate differentials—is increasing considerably. The reasons can be found in the continuous expansion of the private sector’s financial assets, in both absolute terms and in relation to GNP, which are liquid or easily mobilizable, in the increased resourcefulness of businessmen and savers, the greater sophistication of the instruments employed, and the expansion of multinational corporations which manage their funds with centralized criteria. Moreover, when the stimulus derives from fiscal incentives or from the lack of attractive investment opportunities at home and especially from expectations of par value changes, the movement of funds may very well assume a torrential force.
Finally, we cannot ignore the shortcomings of international cooperation in the field of economic management. As opposed to what happened in the thirties, cooperation has made considerable progress and acquired great merits in paving the way to the solution of the serious crises which have occurred in the international monetary system. This has been accomplished without lacerations to that connective tissue which is the economic interchange among countries. We cannot help noticing, however, that such progress has been confined mainly to the financing of disequilibria rather than to their prevention. One can already draw some satisfaction from the fact that the various countries are conscious of being in the same boat at the time when the seas are rough, but sailing would certainly be smoother and easier if they did not wait for a crisis to occur in order to take collective charge of the helm.
There is, therefore, a wide range of problems to which a solution should be given with a certain urgency if we wish to prevent the emergence of increasingly more serious malfunctions in the international monetary system, and to avoid a setback in the economic development and prosperity of the world.
There is need, first of all, to supply the world economy with an adequate volume of conditional and unconditional liquidity.
After the Washington agreement of March 1968—the success of which can hardly be put in doubt today—it is a certainty that in the future gold will play only a limited role in the system. This function will be determined not so much by the physiological needs of the system itself as by considerations of political expediency, more specifically, the desire to help solve the problems facing gold-producing countries, until industrial uses will completely replace the monetary function of the metal. The currencies which are presently used in the financing and in the settlement of international transactions will continue to be used—perhaps increasingly—in this function. They will also continue to be employed as intervention currencies—a function in which they presently cannot be substituted (this is especially true of the U.S. dollar). However, these currencies are destined to be utilized less and less as reserve currencies. Reserve positions in the Fund, the so-called gold and super gold tranches, are the by-product of the financing of external imbalances and do not necessarily reflect the objective needs of the system. Therefore, the future is for the special drawing rights. The Managing Director, after thorough consultations, has submitted for our approval in this session a carefully thought-out and well-grounded proposal for the first activation of this new reserve instrument. We are aware of the importance of this action, which is bound to give a new turn to the orientation of international monetary relations. We are about to take part in the voting with the conviction that this new instrument will become in the future the main component of world reserves. It is indeed necessary that the SDR’s continue to be allocated in amounts which are compatible with the smooth functioning of the adjustment process and that they be wisely spent, pari passu with other reserve assets. Different behaviors, such as the creation of excessive amounts of SDR’s in order to cope with transitory difficulties, or a marked preference to dispose of SDR’s rather than other reserve assets, would make a second class of reserves of SDR’s, thus being prejudicial to their success. We are ready to rely fully on this new instrument and to include it in our first line of reserves.
Finally, while we are about to participate in a decision having so great an importance, we cannot help but regret that some features of the system, the utility of which appears now more evident, have been at the last moment sacrificed in the hope, that we shared at the time, of achieving the unanimous consent of all the countries which participated in the negotiations. I refer here to the acceptability by the Fund of SDR’s for gold subscriptions and the clause which allowed, under a special majority, the use of SDR’s in other operations and transactions. We welcome today with the utmost satisfaction the willingness of France to participate in the scheme. At the same time we express the hope that the clause which I have just mentioned and the other provisions aimed at enhancing the flexibility of the system may be reintroduced and included in any revision of the amended Articles that we should decide upon in the future.
With regard to conditional liquidity, its volume should be kept in line with that of unconditional liquidity. We believe that the quinquennial review, which is to be concluded within the next few months, must provide for a substantial global increase of quotas in order to adapt the size of the Fund to the financing needs of world trade which have greatly increased during the last few years. The quinquennial review should also give proper consideration to the need, often neglected, to make a major adjustment in relative quotas, without reducing, however, the voting power of the less developed countries. We are ready to provide active support, at both the political and technical levels, to this revision, which we believe should be concluded in the shortest possible time. Needless to say, we also expect that the quota of Italy will be brought in line with its increased economic and commercial importance.
On the whole, the problem of international liquidity seems to be heading toward a satisfactory solution, even if during the transitional period, which will last until SDR’s have come to play a predominant role in the system, we will be confronted with the problem of the coexistence of various reserve assets, a problem which we have considered on past occasions and for which we have offered possible solutions.
There are three questions which remain largely unresolved.
The first one relates to the adjustment of external disequilibria. Our approval of the Managing Director’s proposal to allocate $9.5 billion of SDR’s during the next three years is based on the hope that this allocation will further promote the attainment of a better balance of payments equilibrium, as well as the better working of the adjustment process. As it is, the external disequilibria, although changing in their structure, remain important, and the likelihood of a satisfactory working of the adjustment process seems to be reduced. Nevertheless, it is on the success of our efforts in this direction that not only the final success of the SDR’s but also the preservation of international economic cohesion depend. A realistic structure of exchange rates is certainly one of the necessary conditions for the success of the working of the adjustment process. We shall, however, make little progress if the political will to review par values, in accordance with the Articles of Agreement, were to be lacking when the par values are no longer compatible with the maintenance of external equilibrium. If, as a consequence of a standstill resulting from conflicting interests and economic forces, the formation of such a political will should fail to materialize, it would be necessary to recur to automatic or semiautomatic mechanisms which are either put into motion by market forces with the concurrence of central banks or with reference to changes in reserves during a particular period. I intend to recall here the so-called crawling peg, about which useful suggestions have already been made during this meeting. In our view, such a system should be aimed at correcting price divergences which still arise due to an inadequate degree of cooperation and policy coordination in relation to the level of integration already achieved. By saying so, we intend to reaffirm our unfailing loyalty to a system of stable exchange rates. We intend at the same time to caution that, in the context of a progressive widening of the international range of prices and in the absence of initiatives for the harmonization of targets and economic policies, the instability of international economic relations may derive from the excessive rigidity of exchange rates rather than from the adjustment of rates.
The problems which arise in connection with the crawling peg are extremely delicate and complex. Any decision in this field must be accurately thought out and should be preceded by thorough research. The Fund has, however, been engaged for some time in a study of the exchange rate system. We intend to contribute fully to the continuation of this preparatory work by the Fund.
The second problem deals with the need to give new, vigorous impulse to international monetary cooperation. As I have previously mentioned, cooperation aimed at the financing of balance of payments disequilibria to help countries in balance of payments difficulties has made much more progress than the cooperation aimed at the prevention of the disequilibria themselves. If there is the desire to improve the adjustment process, it is necessary that, at least among the main industrial countries, there exists a closer harmonization of the medium-term targets of economic policy and a greater coordination of the decisions which must be taken in order to pursue these targets. It is only through such an intensification of cooperation, for which firm political will is required, that we could succeed in eliminating, or at least in limiting, the rise of price differentials which in time would inevitably call for the adjustment of par values.
Finally, there is the question of recycling those funds, mainly of a short-term nature, which shift from one country to another in ever-growing amounts and with increasing rapidity. It is indeed true that the increased mobility of capital is the price which the industrial countries are paying for a fuller integration of the national economies. It is also true, however, that this phenomenon is causing increasing difficulties in the management of monetary policy. During the past few months, in the face of massive and sudden movements of funds across the frontiers, several proposals have been put forward aiming at the recycling of funds which have flown out of the reserve-losing countries. The difficulties which proposals of this kind—including those suggested by Italy—have encountered stem from the fact that the countries involved are understandably reluctant to commit themselves to an automatic recycling system without the guarantee that jointly formulated adjustment policies will be undertaken in a framework where medium-term economic objectives are harmonized.
Ultimately, therefore, the problems which I have just mentioned —adjustment, cooperation, and the recycling of short-term wandering funds—appear to be tightly interwoven. The system will continue to be subjected to recurring crises and tensions if the speculative capital movements are not neutralized. The attainment of this objective requires a new start in international monetary cooperation which should aim at the prevention and correction of the disequilibria rather than at their financing. Furthermore, it is necessary to extend to the community of industrialized countries in an effective manner the principle contained in the EEC Treaty, whereby the determination of the exchange rate is a matter of common interest. Finally, speculative capital movements should not influence the determination of exchange rates, hence the need to prevent them from occurring and, if necessary, to finance them.
Italy has always considered the problem of the emerging countries with interest and special understanding, due to the analogies which in the past existed, and to a certain extent still exist, between these countries and certain Italian regions. In this particular period, our interest in these problems is enhanced by the studies and the initiative which are being undertaken at various quarters in preparation for the second Development Decade.
Among these problems, the stabilization of the prices of primary products is again brought to our attention this year. We would like, first of all, to express to the Executive Directors and staff of the Fund and the Bank our appreciation for the work they have done in singling out the specific financial measures and other practical steps which can be taken by the two institutions to help solve this problem. In this field we must recognize that our institutions can play only a secondary role. Specifically, a greater role for the Fund than the one suggested could easily be incompatible with the safeguarding of its resources and with the essential monetary functions which characterize the Fund. But at most we could envisage, in the light of future experience, that the Bank might decide, as the Executive Directors indicated in their resolution, to make a further effort to solve the problem. One of the suggestions which has been made, is that the Bank finance additional buffer stocks previously supported by the Fund, should these require finance for a period of more than three to five years.
. . . We have in mind the opportunity of broadening the Bank’s consultation procedure by making it more regular. These consultations should not be dependent on either the likelihood of immediate intervention by the Bank or the examination of predominantly technical matters. The purpose of such consultations, which would supplement the ones held annually by the Fund, would be to examine the medium- and long-term problem which face member countries. They should also include the study of solutions to such problems by singling out and applying those instruments and financial policies which would be most conducive to a greater mobilization of funds and to a better use of local financial resources, in the framework of a longer-term international financial perspective. . . .
On the subject of the relationship between the industrial and emerging countries, I suggested last year that, following each allocation of SDR’s, the major industrial countries should agree to make, in a manner to be agreed upon, a contribution to the IBRD or IDA equivalent to a portion of each country’s SDR allocation. This suggestion, which has also been discussed within the Group of Ten, appears to have received a very favorable response from the UNCTAD and has aroused interest in the Bank and its affiliates. We continue to believe that it is worthwhile to examine the possibility of implementing this proposal. One of its advantages is that, without the need to amend the Articles, some mitigation would be introduced of the rigidity of the parameter—the Fund quotas—which has been chosen as the basis for the allocation of SDR’s. Balance of payments permitting, we do not exclude a unilateral implementation of this proposal.
Allow me now to make a few remarks on the present situation of the Italian economy.
After having registered an average surplus of $800 million during the past five years, the Italian balance of payments has swung into deficit in 1969. This reversal is due to a large increase in the net capital outflow, while the 1969 current account will show a surplus roughly equal to that of 1968. The outflow of capital has been greatly accentuated by the large increase of interest rates which has occurred in the international market. This has widened the differentials over domestic rates, which for a long time had been kept unchanged in order to stimulate the recovery of investment and to maintain a certain equilibrium in the financial market. The present capital outflow, however, has attained a level which in the long run is not compatible with a balanced growth in the Italian economy. The monetary authorities have consequently had to accept a moderate increase in domestic interest rates. They have, however, decided not to resort to measures conflicting with the liberalization policies which the Italian authorities are pursuing.
The strong upsurge in the capital outflow has occurred at a time when the current account was showing a definite trend toward a decrease in the surplus, following the rise in public expenditure and the measures taken to stimulate private demand. Private demand, which had weakened somewhat in 1968, has resumed its rapid expansion in both private consumption and investment. As a result, imports have been increasing at an estimated rate of 25 per cent, or somewhat more rapidly than exports. These rates of increase, however, hide different tendencies, as the growth of imports is increasing while that of exports is decreasing.
These developments prove that the elimination of the current account surplus does not necessarily cause the capital account deficit to disappear. This consideration brings out the difficulties in the present context of the Italian economic policy of reconciling domestic needs with the international situation.
The recent expansion of aggregate demand is reflected in the acceleration of the rate of growth, which, in real terms, will be in the region of 7 per cent. Domestic prices have also increased more rapidly than in recent years, although at about 3 per cent the yearly average increase is still moderate.
During the second half of 1968, prices were already showing a tendency to increase. At that time, however, the system was not yet severely strained either by an excessive level of aggregate demand or by large increases in labor costs. Tensions later developed, first in the agricultural sector, largely as a consequence of the introduction of the EEC common policy, and subsequently in raw materials, where prices had considerably increased on world markets. Some tensions also developed in the construction sector because of a revival in building activity which was the result of administrative measures rather than market forces.
The increase in prices, together with the exceptionally high outflow of capital, makes for a rather complex situation. The economy continues to be orientated toward its maximum potential expansion, and caution must be exercised in order to avoid the emergence of disequilibria, which would be prejudicial to the continuity, and consequently to the final attainment, of the highest possible rate of economic growth.
In celebrating the twenty-fifth anniversary of the creation of our institutions, we must pay homage to the foresight of our founding fathers. Some of our present difficulties stem in part from our many successful achievements which have surpassed the original expectations. This must strengthen our determination to pursue the path of yet greater international cooperation.
Statement by the Governor of the Fund for India—L. K. Jha
I should like, at the outset, to express my warm appreciation of the thoughtful addresses by you, Mr. Chairman, and by Mr. McNamara and Mr. Schweitzer. These addresses have given us not only the broad canvas on which we have to draw but, in fact, the outlines of the picture we would wish to see emerge at the end of our discussions. It is in the fitness of things that in what should be the silver jubilee year of Bretton Woods we are poised to break fresh ground in the Fund by the creation of SDR’s, and in the Bank with the presentation of the Report of the Pearson Commission.
Acceptance of the SDR scheme marks the beginning of a new era in internationally managed money. We, in India, have consistently lent our support to deliberate reserve creation as a major step forward in the direction of evolving a more progressive and more rational international monetary system.
Having said this, I cannot but share with my fellow Governors the concern we have felt over some aspects of the matter. All too often there has been a tendency to look at the SDR question as if it was exclusively an affair of the more developed and more advanced nations. A good deal of the discussion and the more crucial negotiations have taken place outside the forum of the Fund where no one from the developing world was present. As a result, the question of a formal link between the creation of international liquidity and development finance has been shelved, even though developing countries, which account for over 80 per cent of our membership, and at least some of the developed countries support it. We propose that this matter should be considered afresh. Some kind of a link should be forged between the creation of international reserves and the transfer of resources from the rich to the poor, particularly since inadequacy of reserves has in recent years been an important cause of the deterioration of the quality and quantity of aid.
… I have no doubt that, even without a formal link, Mr. McNamara will not let the Part I members of IDA forget that, with the activation of the SDR scheme, their ability and obligation to augment the resources of IDA are much greater.
Coming to the quinquennial review of quotas which we are discussing at this session, I would like to emphasize first of all that this review is quite independent of the activation of SDR’s; and one wishes that it had been kept so. Unfortunately the two issues seem to have got mixed up. While we fully support and welcome the agreement reached on SDR’s, we are unable to endorse the kind of thinking that seems to have gone on in regard to the review of quotas. The quotas serve more than one purpose. They seek to define the legitimate need of a member for access to the resources of the Fund. They take into account the Fund’s need for currencies. They reflect the kind of weight a member should have in the decision-making process of the Fund. And now they are to provide the basis on which SDR’s are to be allocated. On the criterion of the need for conditional and unconditional liquidity to supplement their own reserves and the importance of giving them an adequate say in the decision-making, the developing countries deserve a much larger share in total quotas than at present. Unfortunately, the formulae adopted for determining quotas—formulae which, if I may say so, have not been subjected to proper discussion or scrutiny—are such that they penalize the poorer countries for their very poverty. Poor countries with extreme shortage of resources cannot afford to lock up real resources for acquiring gold or foreign exchange. If, relatively speaking, their GNP and trade figures are declining, we should redouble our efforts to improve their position rather than follow a formula which would continue to subject the developing countries to a double disability in the Fund.
Let me be more specific. Twenty-five years ago, almost all developing countries, except those of Latin America, were under colonial rule. Since then, year after year, developing countries have been joining the Fund-Bank family. Even at this session we welcome the Governors for Swaziland and Southern Yemen and representatives of Cambodia, Equatorial Guinea, and the Yemen Arab Republic. Numerically, developing countries account for over four fifths of the Fund’s membership. Yet their relative quotas are not much above one quarter. If all the developing countries had in 1944 been independent and attended Bretton Woods, if at that time the world community had been as conscious of the importance and possibilities of accelerating economic development through international cooperation as it is today, there could be no doubt that the share of the developing countries in Fund quotas, and therefore in Fund management, would have been much larger than what it is today. It is not enough, therefore, to preserve the relative strength of the developing countries. What is necessary is to ensure that the position of developing countries, individually and collectively, improves substantially in consonance with the changed status and responsibilities of these countries. Finally, let us remember that in this field a quick decision is no substitute for a sound one. If we are not able to find a generally acceptable answer, let us not do anything hasty. . . .
Let me not be misunderstood. I am not suggesting that the developing and developed countries represent conflicting interests. The Fund-Bank Boards provide a forum for a dialogue rather than a debate. The point, however, remains that in the task of identifying the problems of development as they emerge, and in seeking the right solutions to them, representatives of developing countries need and deserve a better voice. . . .
Yet another problem which has been causing us concern is that many of our exports of manufactured goods, especially products of our engineering industries, have to be competitive not only in regard to price and quality but also in the matter of credit to the customer. It is not within the means of a developing country to offer long-term credit at low rates of interest. The recent resolution of the ECOSOC on the refinancing of exports from developing countries needs the earnest consideration of the Bank and it will no doubt have the help and cooperation of the Fund as well as the regional development banks in this. In this context there is a strong case for at least the partial untying of bilateral aid so that supplies from developing countries are eligible for financing under bilateral aid programs in the same way as they are under multilateral aid programs.
I think it is also fair to say that, despite all the attention given to commodity problems, we are not within sight of any effective international action to protect and stabilize the terms of trade between primary and manufactured products.
Time will not permit me to give other examples of the kind of special problems that need to be tackled. Such problems keep on arising as we go; the important thing to ensure is that those primarily affected by them have an adequate voice in devising means to tackle them.
In conclusion, may I stress that we are entering the second quarter century after Bretton Woods and also the second Development Decade. In that context I have expressed some of my anxiety and concern. I hope the second Development Decade will have a better record than the first one. I am sure many new and constructive responses on the part of the Fund-Bank setup will be called for in the next few years ahead. The Pearson Commission’s Report, which we are eagerly looking forward to, will spell out, I am sure, the most important areas where such constructive and quick responses would be necessary. We labor under no illusions. The destiny of the developing world will be determined mainly by the wisdom and sacrifice of its own people. For these efforts to succeed speedily and in peace and harmony with the rest of the world, it will be necessary constantly to strengthen the spirit of international cooperation which has characterized the Fund-Bank family so far.
Statement by the Governor of the Bank for Canada—Edgar J. Benson
We meet here in Washington twenty-five years after the Fund and Bank were founded. The architects of these great institutions had experienced a far darker past and faced a much gloomier prospect than we do today. The economic chaos of the 1930’s had been succeeded by the wholesale destruction of the war. The world was fragmented, and a new world had to be built; a world in which ideas, goods, and capital could freely move. In these twenty-five years, the growth of output and trade has surpassed even the great expectations of the founders. And this growth has been accompanied by an equally remarkable growth of international cooperation in the fields of trade, finance, and economic affairs. A great number of newly independent countries have joined the world community and are striving for economic viability and development.
Within the field of international monetary affairs, the Fund has provided a code of behavior which has guided its members in their pursuit of the common interest. It has provided a framework for international cooperation, and its relations with its members have greatly improved in range and quality.
The Fund has evolved significantly in the first quarter century, and it is to the credit of the organization that it continues to expand its capacity to evolve.
The most important business before us is to approve the Managing Director’s proposal for the activation of the scheme for special drawing rights. This is a good scheme, which provides us with a rational framework within which we can manage the growth of international liquidity. I am also convinced that the Managing Director’s proposal is a good proposal, and that our decision will bring about the creation of a proper amount of SDR’s over the next three years. I am much heartened by the evidence that the proposal will be overwhelmingly approved. I am even more deeply impressed by the fact that we have committed ourselves for the future to cooperative action in the management of world reserves. This will surely be judged by historians as one of the great strides forward in the evolution of the Fund, and of the international monetary system.
A closely related item on the agenda before us deals with the size of quotas in the Fund. Canada supports the resolution which calls upon the Executive Directors to undertake the fifth review of quotas and submit proposals by the end of this year. We share the confidence of the Managing Director that a general increase in quotas of meaningful size and appropriate selective increases can be agreed upon.
I have spoken of the achievements in which we can all feel a sense of pride and a source of satisfaction. But it is obvious that we are faced with very serious problems. Inflation has become a serious problem in most of the major industrial countries and is one of the prime causes of balance of payments difficulties. Even as we speak, the foreign exchange markets are unstable and disturbed.
As a result of the revolutionary advances in transport and communications, each of us is affected in greater or lesser degree by the policies of others. The task of achieving national economic objectives in an interdependent world is one of momentous proportions. This growing interdependence requires a growing degree of cooperation in the choice of national economic policies. I believe that the Fund must play a central role in this pursuit of harmony.
While we may legitimately take pride in the fact that under the Fund system international trade has revived and prospered, we recognize that we have to work actively at maintaining and improving the system. In developing the Fund system we have learned a great deal about cooperating as nations in economic policy matters. If we have acquired what is virtually a habit of cooperating, that is all to the good, for perhaps more than ever we need to work together in coping with our problems.
The Managing Director has suggested that the studies of the present exchange rate system should be continued. We support this suggestion. We must always beware the tendency to assume that what has been must continue to be. There are some lessons which past experience may have for us as we review the system. The first of these is that the basic principle that exchange rates are by their nature an international matter is as true today as it was twenty-five years ago. The value of a country’s currency is obviously of vital importance to itself. But it is also of great interest to its trading partners. The second is that the Fund system already provides scope for appropriate exchange rate changes once countries are convinced of their necessity. The system has also shown that it can accommodate special circumstances which arise from time to time. The third is that, if national governments fail to follow sound economic policies, no exchange rate system will work satisfactorily.
There is no doubt in my mind that the main problem facing the industrialized countries today is the problem of inflation. It is my principal concern in Canada. Inflation is increasingly recognized as unacceptable in its immediate and domestic consequences, and as profoundly dangerous for the balance of payments. Inflation becomes much more difficult to eradicate when inflationary expectations have become entrenched. Fiscal and monetary policies have to be applied persistently and supported by the responsibility and restraint of all sectors of the community. Inflation in the industrialized countries is reflected in rising prices of manufactured goods and in high levels of interest rates. Both of these are properly matters of concern to the developing countries, so it is in their interest, as well as in the interest of the industrialized countries, that inflation should be stopped. . . .
In the past year the Executive Directors of both the International Monetary Fund and the World Bank took important decisions toward the resolution of commodity problems. These measures should help countries to diversify production, to strengthen the competitiveness of their primary products in world trade, and to participate more effectively in arrangements aimed at stabilizing world prices. The policies of the Fund and the Bank should complement the efforts of other countries and international agencies in this field. The need for continuing close consultation between the Fund and the Bank will, of course, be most important as experience is gained in implementing these decisions. . . .
There is increasing recognition of the necessity of tackling the structural problems of developing countries. While progress is being made in a few modern sectors, frequently there is stagnation in those occupations and traditional industries which employ most of the population. Conditions must be created which offer a real prospect for these people to move up from their present marginal level of subsistence. . . .
Canada also attaches high priority to the role of science and technology in the development process. More than 98 per cent of global expenditures on research and development are currently taking place in industrialized countries and are not designed specifically to meet the needs of developing countries. It is inconceivable that the ultimate goal of development can be achieved unless we redress this imbalance. . . .
The need for a qualitative improvement in performance and policies is clear and immediate. This applies to the developed countries and developing countries alike. The world-wide scarcity of capital makes it inevitable that the economic performance of the developing countries will increasingly determine the share of resources that is made available to them. . . .
Statement by the Governor of the Bank for Indonesia—Ali Wardhana
Contrary to expectation and hope, the devaluation of the pound in November 1967 did not produce the envisaged results, either for the United Kingdom or for the world. In the year under review, balance of payments deficits and surpluses of the major countries continued generating crises which threatened to tear apart the intricate fabric of the international monetary system. Reserve currencies remained weak, and the May 1968 events in France, as well as the position of the deutsche mark, set off waves of uncertainty affecting the money and capital markets of the world and, consequently, international trade and economic development. As we may remember, eventually the French franc was devalued, without, so far, contributing substantially to lessen the prevailing uncertainty. With respect to the recent decision of the German authorities to let the rate of the deutsche mark float for the time being, I can only hope that more stable conditions will be restored shortly.
In such a setting, monetary authorities felt obliged to increase interest rates. . . .
Indonesia, last year, reached a stage in which my Government’s decision, determination, and political will to establish monetary stability have, at long last, borne fruit. Measured by the yardstick of history, two and a half years is a short time to convert an inflationary rate of over 800 per cent into one of manageable proportions, but, to us who had to go through that period, time often seemed to stand still. In this connection, I would like to thank Mr. Schweitzer, the Fund Board and staff for their deep understanding and their readiness to support us and for their tireless efforts in assisting us to overcome the many obstacles on our road to monetary stability. However, monetary stability would become meaningful only on an ever-increasing level of economic activity; my country has reached this stage of having to maintain stability while developing the economy. We are embarking on development activities based on a modest but realistic Five-Year Plan, mainly directed toward the use of our natural resources and the creation of industries related thereto. In our effort to develop under stable monetary conditions, we need the continued understanding and support of institutions like the World Bank, the IMF, and the Asian Development Bank. We also need the cooperation of countries interested in us: firstly, with respect to such a settlement of our debts, mainly inherited from the past, as will not burden our development efforts; and, secondly, we are hopeful that they continue providing us with the technical and financial assistance without which our development program would be difficult to execute.
My country does not stand alone in its struggle to combat inflation and to grow under stable conditions. Many others are making the same endeavor, and the rise of developing countries in Latin America, in Africa, and in that huge part of the world, Asia, may well prove to be the most traumatic historical event of our present century. However, the developing world cannot grow unless the developed countries continue also to grow under stable conditions.
Economic growth is taking place in the industrialized countries at a rate which makes the rich relatively richer and the poor, poorer. But with few exceptions, their growth is beset by the lack of monetary stability. Much thought has been given to remedying the situation. The Bretton Woods system, with its philosophy of stability and freedom, came under criticism. Even a complete overhaul of the present system was advocated. I believe that such an overhaul needs an appropriate climate, which is not available at present. Bretton Woods was conceived after a world war, and, if we look around, major and drastic changes nearly always take place after some kind of a dramatic event. Our own monetary reform came in the wake of a political upheaval. But, apart from the absence of an appropriate climate, I do feel that the Bretton Woods system is still adequate for taking care of our present situation. It is aimed not at rigidity but at stability. It allows parity changes in cases of fundamental disequilibria. It may, perhaps, even permit some further flexibility, provided that it would not generate fluctuations leading to unstable conditions, thus defeating its very purpose. But, even if parity changes, already permissible under the system, had been resorted to more frequently and more promptly, and even if other changes might be introduced into the system, with a view to obtaining a somewhat greater margin of flexibility, conditions of imbalance created by excessive demand—with its frequent corollary of cost pressures—cannot be remedied without a consistent domestic policy aimed at budgetary and monetary restraint.
It is obvious that international monetary stability should be achieved as soon as possible because the recurrence of crises, originating in regard to the pound, the franc, the dollar, or the deutsche mark, has detrimental effects not only on the countries concerned but also on us in the developing world. Such crises affect, on the whole, our inadequate monetary reserves, our trade, the flow of capital, and hence our entire economic development. Instability in the money and capital markets also hampers the activity of such institutions as the World Bank and the regional development banks in Asia, Africa, and Latin America.
Some alleviation will, of course, be obtained from the activation of SDR’s now proposed to us. This unconditional liquidity will add to the means of combating fluctuations. But, again, as in the case of parity changes or even in the case of a parity reform, the need for corrective measures at home cannot be replaced; on the contrary, the breathing spell should be used to implement them as forcefully and speedily as possible. We of the developing countries will not directly gain much from the activation of SDR’s, tied as they are to our meager quotas. The Board of Governors of the Fund has, by adoption of the Amendment of the Articles of Agreement, rejected the idea of a linkage between SDR’s and development needs. For the time being, this matter has to be considered closed. However, some basic inconsistencies will continue to attract the attention of economists and financial people. One may wonder if the distinction between liquidity needed for balance of payments and that needed for development purposes is not rather artificial, at least as far as developing countries are concerned. The balance of payments position of these countries does not as yet reflect the actual needs of their economy so that, in their case, balance of payments and development needs are more indistinguishable than in the case of the developed countries.
Another rather striking feature is that developed countries not in need of extra liquidity are receiving SDR’s as well. It is true that their use is dependent on balance of payments needs, but, in ordinary life, an enterprise neither seeks nor obtains extra credit facilities from a bank if it has already ample means at its disposal. Instead of the present system of distribution, conceptually at least, it seems feasible to allocate SDR’s only to countries in need of additional liquidity. We have taken a bold step unprecedented in monetary history; let us be open-minded in seeking to perfect it. In this respect, I would like to comment briefly on the idea of a transfer by developed countries of part of their SDR’s, either directly or indirectly, to developing countries. Under the present Articles of Agreement this is hardly possible, but, if at any future date such action would be practicable, I hope that the amount transferred will be added to, and not included in, the 1 per cent of GNP urged by the United Nations. After all, the spirit of that recommendation is a transfer of national resources, not of resources created ex nihilo.
Alongside the activation of SDR’s, we are also considering an increase of quotas. I feel that it is wise and timely to request the Board of Executive Directors to formulate positive recommendations. Unless conditional liquidity increased simultaneously with unconditional liquidity, the structure of the Fund would become unbalanced and its position weakened. Also, developing countries, having a poor share of SDR’s, are in need of greater access to unconditional liquidity. However, in engaging ourselves in this quinquennial review of quotas, we have to bear in mind another aspect of it, related to the voting power of member countries. Any decision on an increase of quotas should also be aimed at preserving a balance between the position of developed and developing countries in the Fund and the Bank and on their Boards of Executive Directors. Substantial general increases side by side with the special increases envisaged mostly by the developed countries and the possibility of raising the basic votes seem to be warranted under the present circumstances.
It is gratifying indeed to note that the Bank and the Fund, having had to operate under the difficult circumstances of last year, could still summon up enough energy to meet the deadline of the Rio Resolution of 1967 pertaining to the problem of the stabilization of prices of primary products. My regional colleagues from Southeast Asia have requested me to express our appreciation for the action taken by the Bank and the Fund. However, we must say, in all frankness, that the hopes and expectations engendered in Rio are far from being realized, and that only a modest beginning has been made. We feel that the Fund might have considered further liberalization of the compensatory financing facility, as a logical supplement to the buffer stock financing facility now made possible. The period of financing also should be related to the export situation, rather than to the Fund’s practice of observing a period of three to five years.
On the other hand, these limitations of the Fund’s facilities could have been mitigated by the Bank, as far as stocking operations are concerned, for instance. But the Bank’s attitude is uncertain. It could have been more positive in extending complementary financing where the Fund is unable to go further. We realize that the provisions of their charters and certain established practices in both institutions are a kind of limitation on wider action. We are therefore glad that the whole scheme will be kept under constant review, and we hope that, at some future date, the necessary revision will be made.
I have come to the end of my remarks. I would like to express our warm appreciation for the hospitality which we are enjoying from our host country, which has put its splendid facilities at the disposal of this Annual Meeting. Let us hope that the coming year will show great progress in the field of the adjustment process, so that international monetary stability may at long last prevail, to the benefit of economic development and progress.
Statement by the Governor of the Fund for New Zealand—R. D. Muldoon
Firstly, I wish to congratulate the Executive Directors and the management of the Fund on another year’s successful activities. The operations of member countries with the Fund reached record levels for both purchases and repurchases, and technical assistance programs were broadened and strengthened. The international financial system during the year has been subject to more uncertainties than for a considerable time, and on occasions there were acute crises, but the influence of the Fund has been one example of international cooperation which has clearly had a stabilizing effect.
We have watched with interest the extensive study on exchange rate adjustments undertaken by the Fund. It is important at this time to point out the very great achievement of the Fund in carrying out so effectively its task of maintaining a high degree of currency stability during the many years since its establishment. By and large, the present system of exchange rate management has worked well until comparatively recently, and even in recent times this has been an area of extensive and fruitful international cooperation. It may well be that the time has come for some adjustments to the system, but we in New Zealand, because of the fact that international trade plays such a major part in our economy, believe that currency stability is of vital importance. We could not therefore support a proposal such as the “crawling peg,” which, as a by-product of a move toward easier adjustment, produces a continuing state of moderate uncertainty.
One major step which will help to advance world trade and assist international liquidity is the scheme for special drawing rights. New Zealand fully supports the proposal to activate special drawing rights from January 1970. We also attach great importance to an equitable increase in quotas in a way which does not reduce the voting strength of the smaller and the less developed nations. We believe that there should be a general increase of at least 25 per cent.
Despite the difficulties of the past year in the field of monetary affairs, the volume of trade increased throughout 1968 by a record 12 per cent from the depressed level of the previous year. A large part of this rise was due to increased exports of primary producing countries, which expanded at an annual rate of 13 per cent from the first to the second half of 1968. Unfortunately, as pointed out in the Fund’s Annual Report, New Zealand did not share in the slight recovery in terms of trade of the primary producing countries; in fact, the terms of trade became less favorable for New Zealand for the fifth year in succession. In spite of this, New Zealand’s balance of payments has responded well to the firm but flexible measures of restraint instituted following the severe decline in export prices in 1967. As a result of the recovery in the external accounts, it has been possible for New Zealand to repay most of the short-term loans raised to cover the crisis situation which existed in 1967, including voluntary repurchases from the International Monetary Fund.
The assistance of the Fund at that time enabled us to continue with the Government’s policy of liberalizing import controls and to embark on new policies and incentive schemes designed to improve the structure of the economy and increase the rate of economic growth. The Government has adopted the export and other targets set by the recent national development conference, based on the efficient and economic expansion of production for the domestic and export markets. . . .
Expansion of the New Zealand economy is, however, dependent upon the growth of world trade and the availability of an adequate amount of long-term development capital. The present unsettled state of the capital markets is a barrier to the achievement of the goal of higher living standards in very many countries, and the high cost of external borrowing is a marked deterrent to growth in developing countries. Monetary restraints in the United States have caused pressures on other capital markets, and more recently have given rise to American banks borrowing of Euro-dollars in efforts to alleviate the credit squeeze. In consequence, interest rates on the Euro-dollar and other international markets have reached unprecedentedly high levels, causing other industrial countries to increase their interest rates. This stringency and high cost in international capital markets generally is of concern to many countries, including New Zealand. The major problem which New Zealand faces, however, is that most capital markets are closed or restricted. All this is preventing New Zealand from growing at anything approaching its full potential while long-term capital cannot be obtained in sufficient volume. . . .
As a primary producer, New Zealand shares the concern of developing countries that the institutions with responsibilities for the development of the international trade and payment systems have been much less successful in liberalizing agricultural trade than trade in industrial products. There has been no world-wide acceptance of more liberal trading practices in agricultural products. While we generally welcome the Fund’s new facility for the stabilization of commodity prices, it seems that it will have no direct effect on temperate agricultural commodities which comprise the major part of New Zealand’s exports. Many of the problems of developing economies and the need for such stabilization schemes would be overcome if the major industrial nations faced up to the internal political problem of curtailing protectionist policies in the agricultural field. These policies must be seen as ultimately destructive, not only of international good will but of economic stability in the very countries which implement them. Agricultural advancement in developing countries demands greater stability in markets than has been apparent in the past. A study of the problem of stabilization of commodity prices which was completed during the year, and, arising from this, the action taken by the Executive Boards of both the Bank and the Fund should make some contribution to the solving of the problems facing primary producing countries experiencing sharply fluctuating receipts for their exports. It remains the New Zealand view that the solution to this problem lies primarily in the establishment of sensible arrangements to facilitate, rather than stifle, international trade in these products. These arrangements will differ from commodity to commodity. For some, international commodity agreements will be the answer, and we hope that efforts toward reaching such agreements will be assisted by the action taken by both organizations. The problems and the policies which create world headlines are those of the major industrialized countries. We in these organizations would do well to remember that not only those problems but even the remedies which are proposed may sometimes cause much more dangerous situations and have much more damaging results in the economies of the smaller and less affluent nations which frequently have no voice in the councils of the great. If we create a system which simply provides stable growth for the great industrial powers and which simply permits the rich to grow richer while the poor remain poor, we are not only failing in our purpose, we are sowing the seeds of far more dangerous problems for ourselves in years to come, and for future generations. . . .
Statement by the Governor of the Bank for Spain—Juan José Espinosa
My sincere congratulations to the management, staff, and Executive Boards of the Bank and Fund. The great work carried out during the last twelve months is recorded in the Annual Reports that we have before us today, and also in the brilliant addresses of Mr. McNamara and Mr. Schweitzer. It has not been an easy year, but it has been one in which progress has been steadily made on the path of international cooperation and in the difficult struggle to raise the standard of living of the entire world population.
In welcoming the new countries that are joining our institutions, I wish most especially to ask you for an affirmative vote on the membership of the Republic of Equatorial Guinea, with which Spain feels united by special bonds of fraternity. I am grateful for the collaboration rendered by the Fund staff to this end. . . .
Today we can also feel gratified by the creation of new ways of approaching the chronic problem of instability of commodity prices. The decisions adopted by this assembly at past meetings are now being supplemented by, among other things, proposed technical assistance measures for the establishment and financing of buffer stocks, diversification of production, and alternative uses of primary products.
However, to be consistent in the search for possible ways of assistance, one has to consider that there is a very wide range among developing countries and that the same measure may have a marked effect on one group or area while it is totally inoperative or premature for another. Greater stabilization of the prices of primary products will give equilibrium and a substantial impetus to the primary producing countries, but it cannot add anything significant to the effort of the semi-industrialized countries. . . .
All this leads me to believe that international cooperation provides the answer to the challenge facing present-day society, the society, the solution to the problems of economic progress, and the gradual elimination of the political tensions arising from the inequitable distribution of income and wealth.
As to the International Monetary Fund, I am in full agreement with Mr. Schweitzer that the special drawing rights facility will come into operation at an opportune time. There is no doubt that the destruction of international liquidity induced by the anticipated improvement in the balance of payments of reserve currency countries could lead to an accentuation of the crisis of the international monetary system. Therefore, the rational and deliberate creation of a new international asset should start a new chapter—and I would say a very important chapter—in the history of our common effort for a monetary system at the service of the international community.
Special drawing rights, however, will not reduce the increasing need for conditional liquidity. I refer to the problem of increasing substantially the resources of the Fund. The next quinquennial review of quotas provides, as the Annual Report states, “a welcome opportunity to enlarge the over-all size of the Fund by means of both general increases of a reasonable size and selective adjustments necessary to bring the quotas more into line with the present relative international economic importance of members.”
My country, which supports a general increase, also attributes great importance to selective increases, not only because of our stated interest in adjusting our quota in line with the strong increase in Spanish economic aggregates, but also because we consider that a relative quota structure better adapted to present realities will redound to the benefit of the Fund itself and hence of the international monetary system of which the Fund will continue to be the keystone.
I do not wish to conclude without stressing the importance of the work being carried out within the Fund and emphasizing the need to continue it in order to adapt the international monetary system to the needs of our time.
September 30, 1969.