Discussion of Fund Policy at Fund Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1969
Statement by the Governor of the Fund for Austria—Wolfgang Schmitz
Since our meeting of last year, we have gone through a period which has been and still is full of critical situations, not quite envisaged by the founding fathers at Bretton Woods 25 years ago. All these events appear to me to be often confirmed signs that the adjustment process does not function quite satisfactorily; our international monetary system certainly seems to be in need of some improvement.
It is a really unique situation that, during this Fund Meeting, the delegates instead of greeting each other with “Good Morning!” exchange the most recent information on the premium on the deutsche mark just reported from the markets in Europe.
One major step forward has almost been completed: the Proposed Amendment of the Articles of Agreement has become law, and the necessary majority of Fund member countries have declared their willingness to participate in the Special Drawing Account. I am quite aware that we here are witnesses to a turning point in monetary history, namely, the deliberate creation of a new type of reserve media geared to the probable need of the international monetary community as determined by common sense and consent. It is to be fervently hoped that the inclusion of SDR’s in the resources of international liquidity will contribute to the effectiveness of the adjustment process.
However, the discussions about possible improvements in the international monetary system dealt not only with liquidity but with other topics as well. May I recall that a year ago I, among others, mentioned the necessity for a greater flexibility in our exchange rate system. On that occasion, I proposed that the Fund should study this problem. The Fund staff and the Executive Directors have, in the meantime, indeed, thoroughly examined this question, and it is my opinion that their studies and discussions have contributed essentially to clarifying the views on the subject and on its intricate connections with related problems.
These studies were finally reflected in the Annual Report, which displays the customary high standard of the Fund staff, and which was presented by the Managing Director in his lucid speech on Monday. The chapters dealing with the insufficient working of the mechanism of exchange rate adjustment gives a clear analysis of the main problem of our present monetary system. It discloses not only the open-mindedness of the Fund as to new ideas, but also the readiness of that organization to tackle the tasks in front of us. I entirely agree with the proposal of Mr. Schweitzer and of the Executive Directors to continue their study to investigate further whether a limited increase in flexibility of exchange rate variation would be desirable and attainable with the necessary safeguards, and by what means any such increased flexibility might be achieved, including even limited changes in the present mechanism of exchange rate variation.
I am grateful to the Managing Director for having invited the Governors to express their views on this topic this week. Following his invitation, I should like to make a few remarks. In our search for ways and means to attain a greater degree of flexibility, we find ourselves confronted with a number of new problems that should be subjected to further investigation. Let me enumerate some of them: Should greater flexibility be limited to those countries that are in need of it? Perhaps we could reduce the uncertainties consequent upon a general move to greater flexibility, which cause apprehension in some quarters, by subjecting to such a system only those countries which hold the opinion that more flexible exchange rates would assist them in adjusting their economies.
Secondly, there is the question of the intervention by monetary authorities in the exchange market. Should they be allowed to intervene or not? In my opinion, the full degree of freedom to intervene within the permissible margins should be maintained as at present. For instance, the markets of small countries are usually narrow and can easily be disrupted by single large transactions. One of the outstanding features of the present system is that it not only inflicts upon member countries the obligation to intervene as soon as the exchange rate has reached the intervention point, but that it also allows action within the margin, at the discretion of the monetary authorities.
Thirdly, what, really, are the chances that action will be taken more frequently, as envisaged by the present language of the Articles of Agreement? We probably could spare ourselves the trouble of searching for new instruments, if it were feasible to gain greater flexibility by making more frequent use of the facilities already available to us under the present system. As experience has shown, however, such a practice involves the need to overcome obstacles of a political, economic, psychological, traditional, and other nature, and these factors have proved—at least in the past—to be of such importance that I doubt whether it would be possible to achieve this goal by tacit agreement on a mere reinterpretation of the pertinent provisions in the Articles of Agreement. I do fear that, without more forceful measures, such as textual changes, the result would not be satisfactory.
In the discussion on the optimum technique to be followed in order to achieve better flexibility, a variety of instruments has so far been considered. Nevertheless, at the present stage it would appear rather premature to prefer one device over another. In the light of the discussion thus far, it would seem difficult to recommend the use of a particular instrument in a given situation, as the motives calling for smoother adaptation are manifold, and it might be difficult to find any one device appropriate in all situations. I therefore think the Executive Directors also should be invited to ascertain whether it would not be wise to leave the choice of the appropriate instrument to the discretion of the Fund, in close consultation with the countries concerned. Such procedures may also strengthen the position of the Fund. Regardless of the method ultimately chosen, I think that the Fund should play the leading part in the decision making. I should like to remind you that the merit of Bretton Woods is not only the achievement of having established a system of fixed par values but, above all, the fact that it was successful in setting up an international organization to take care of the interests of the world’s monetary community. Our most serious endeavors should be devoted to the aim not only of maintaining this authority but of strengthening and enlarging it.
Finally, may I be permitted to say a few words on the forthcoming increase of quotas. I share, of course, the opinion that quotas should be raised in the near future to enlarge the conditional liquidity of the Fund, in order to keep pace with the growth of the world economy in past years. As far as my own country is concerned, I think that Austria should also obtain a reasonable share of the amount provided for selective quota increases. In this context, account should be taken of the rapid progress Austria has been able to achieve during the last few years in the growth of her economy, her stable and strong currency, and her considerable position as a creditor country vis-à-vis the Fund. It should also be noted that Austria has always been ready to cooperate fully with the Fund in all international monetary matters.
Statement by the Governor of the Fund for China—Kuo-Hwa Yu
Mr. Chairman, I wish to associate myself with other Governors in expressing my admiration for your able chairmanship in conducting this memorable Annual Meeting. In the history of the Fund, 1969 will long be remembered as a year of intensive accomplishments. This is the year in which we have adopted an important and far-reaching amendment of the Fund Articles of Agreement and effected significant changes in the Fund Rules and Regulations. This is the year in which the new facility based on special drawing rights has come into being. Also, this year the Fund celebrates its twenty-fifth anniversary. For a quarter of a century, the Fund has played an increasingly important role in helping to maintain a relatively stable payments system, during a period of dramatic social change and rapid economic expansion. On behalf of my delegation, I wish to congratulate Mr. Schweitzer and Mr. Southard and their staff, as well as the Executive Directors, for their hard work and solid contributions.
Much has been said and written on the special drawing rights, and I do not believe I should take the time of this meeting to reiterate what has already been recorded or gone into print. Now that the special drawing rights are on the threshold of becoming operative, however, I would like to make two observations, as a matter of emphasis.
In the minds of people in the developing countries, there has been some lingering doubt as to how much benefit they can derive from the institution of the new facility. Most developing countries are small countries with none-too-large quotas and none-too-large gold and foreign exchange reserves. Since the allocation of special drawing rights will generally be in proportion to quotas and the designation will generally be in proportion to reserves, most developing countries will receive only small allotments of special drawing rights and, at the same time, will assume only small obligations under designation. Most developing countries, therefore, are apt to get the impression that their interest in the special drawing rights is minimal. May I ask the indulgence of my fellow Governors to submit that this impression is not quite correct, and that the developing countries have perhaps as much at stake as the developed countries in the institution of the special drawing rights.
During the last two years, we have witnessed the devaluation of two key currencies, the effects of which reverberated throughout the financial fabric of the world. Countries with key currencies constitute by far the largest markets for products, and, whether we like it or not, most developing countries have more trade with the developed countries than among themselves. The stability of key currencies is thus essential to the maintenance of orderly world trade for all countries, developed and developing. If the institution of the SDR’s helps in making more liquidity available to world trade as a whole, which we feel sure it would, and if it helps the key currency countries refrain from resorting to measures destructive to world trade in a time of temporary balance of payments deficits, which we hope it would, it would seem logical to conclude that the creation of the new facility will prove to be beneficial to developing and developed countries alike.
Recently, there has been some criticism of the SDR’s among professional economists, to the effect that the operation of the SDR’s may postpone the exchange and other economic adjustments necessary to cope with balance of payments deficits, and, in this sense, it may even prove harmful in the long run. The answer to that, of course, is that the use of the SDR’s does not obviate the necessity for internal economic discipline, when and where such economic discipline is needed. The SDR’s may facilitate economic adjustments and may allow enough time for such adjustments to take effect; but obviously the scheme cannot take the place of needed internal economic adjustments.
The novelty of the SDR’s tends to overshadow other accomplishments of the Fund. The Annual Report has recorded a year of unusual international financial stress and strain, and, through its operation of the general drawing rights and its counsel to, and participation in, other international financial arrangements, the Fund has undoubtedly played an important role in reducing the severity of world financial tension.
Among the innovations introduced by the Fund, we wish to mention specially the decision of the Executive Directors, in pursuance of a Resolution adopted by the Board of Governors last year, to extend assistance to members in financing international buffer stocks of primary products. In addition to compensatory financing, which has increased in volume substantially in 1967 and 1968 but whose total amount is still relatively small, the Fund stands ready to assist members in financing international buffer stocks and to waive the limit on purchases that raise the Fund’s holdings above 200 per cent of quota, where appropriate.
The buffer stock approach and the compensatory financing approach toward stabilization, of course, are both intended to deal with short-term instability in the economy of primary producing countries brought about by factors beyond their control. Buffer stock deals with specific commodities and compensatory financing deals with export fluctuations in general; the two approaches, therefore, are complementary. Both fulfill a definite need. Export fluctuations, however, may not be caused by primary products alone, and the major technical advantage in compensatory financing lies in that it can be used with respect to the proceeds of all exports—agricultural, mineral, and industrial. As diversification is generally recognized as a desirable economic objective of developing countries, we agree with the Fund staff paper that compensatory financing will, for the foreseeable future, have to continue to play a major part in the financing of fluctuations in export earnings.
As the Fund staff paper well pointed out: “Insofar as the Fund’s liquidity has been under a certain strain in recent years, Fund operations under the compensatory financing facility and, more generally, Fund operations with the primary producing countries have not been responsible to any major extent. Outstanding drawings of the less developed countries fluctuate little and show only a slowly rising trend in amount.” Extension of the interpretation and scope of compensatory financing will tend to increase the service that the Fund may render to developing countries. We submit that further liberalization in terms of that facility will prove of great benefit, to both the Fund and the developing countries alike.
Before concluding my remarks, I must take this opportunity to express, on behalf of my delegation, our thanks to the host country for its genuine and sincere hospitality, which makes our visit very pleasant indeed. Personally, I always feel happy to revisit this beautiful capital city on the occasion of the Fund-Bank Annual Meetings, to renew old friendships, and to make new ones.
Statement by the Governor of the Fund and Bank for South Africa—Nicolaas Diederichs
It gives me great pleasure to join in the welcome extended to the new members of our institutions, and especially to the representatives of our neighbor, Swaziland, who are taking part in these meetings for the first time.
Special Drawing Rights
As Mr. Schweitzer and several Governors have indicated, the prospect of the implementation of the special drawing rights scheme in the near future makes this Annual Meeting an historic occasion. Our appreciation is due to all those who have labored so long and so hard in preparing the ground for this scheme, and particularly to the Executive Board and staff of the Fund.
South Africa has followed developments in this field closely and has itself recently become a participant in the Special Drawing Account. I would be less than frank, however, if I claimed to have any great enthusiasm for the SDR scheme at this time. I do not. This is partly because, for reasons which I do not intend to repeat here today, I am more than ever convinced that an increase in the official price of gold would, on balance, be preferable to an activation of special drawing rights, especially since it would combine an increase in liquidity with the preservation of international monetary discipline. But, even leaving the gold issue entirely aside, I cannot bring myself to share the view held in some quarters that the proposed activation of SDR’s will constitute the key to the solution of the world’s present monetary problems. As many authorities have acknowledged, SDR’s do not provide an instant and total solution even to the problem of liquidity. At best, given certain basic assumptions to which I shall refer again, SDR’s may play a supporting role in improving the operation of the international monetary system. Also, they do very little to help the developing countries in their balance of payments problems.
I hold these views on SDR’s largely because, in analyzing the causes of the present difficulties in the international monetary field, I would join those who attach particular importance to the inefficient working of the balance of payments adjustment process during recent years. This deficiency, in turn, must, in my view, largely be attributed to two factors. In the first place, deficit countries have not acted early enough and with sufficient determination to curb excess demand and inflation in their economies by means of monetary, fiscal, and other measures. Secondly, where fundamental balance of payments disequilibrium has arisen, exchange rates have not always been adjusted at the right time and to the right extent.
These conclusions are not new, but now that there is a proposal for an early activation of special drawing rights, I believe that new emphasis should be placed upon these basic truths.
It will be recalled that the Articles of Agreement lay down special preconditions for the first activation, in particular, the attainment of a better balance of payments equilibrium, and the likelihood of a better working of the adjustment process in the future. I think it was wise to lay down these preconditions for the introduction of a novel and untried element of international liquidity, and I must confess to some doubt as to whether these conditions have been fulfilled. Be that as it may, the very least that we, as Governors of the Fund, should do at this particular moment in time is to stress that the international monetary problems of recent years can only be overcome if the adjustment process functions better in the future than it has done in the recent past. Nations will have to apply fiscal and monetary policies with more alacrity, determination, and coordination, and at the same time see to it that the effectiveness of these measures is not blunted by excessively protectionist policies, monopolistic practices, etc. And exchange rates will have to be realistic. No one should get the impression that the International Monetary Fund considers activation of special drawing rights in any sense a substitute for either better internal stabilization measures or an appropriate alignment of exchange rates.
The Fund has always had the reputation that it stood for such virtues as sound stabilization policies and financial discipline, and it derived its great authority in the world of finance from this reputation. Nothing could do more to damage this reputation and this authority than the misuse of the SDR scheme in order to avoid or postpone necessary adjustments of policy. In this respect a great responsibility rests upon the main deficit countries and particularly the two main reserve currency countries.
More Flexible Exchange Rates?
Similar considerations spring to mind in respect of the many proposals made during the past year for a more flexible exchange rate system than the present Bretton Woods system of stable parities. I have already expressed support for the view that exchange rates should be properly aligned, that in cases of fundamental disequilibrium they should be adjusted without undue delay and to the right extent. Open and orderly devaluations are clearly preferable to excessive reliance on direct trade and payments restrictions, which, in effect, are tantamount to disguised, disorderly, and discriminatory devaluations. And, although the Bretton Woods system makes specific provision for changes in par values where justified, I recognize that proper use has not always been made of this provision in recent years. It is possible that a small widening of exchange margins or other changes in the system to make exchange rates more flexible might help to improve the working of the adjustment process. On the other hand, serious practical objections can be raised against these proposed changes. I am, however, prepared to support the suggestion that the Fund should undertake further study of these possible reforms.
But even if the objections to which I have referred can be overcome, we should not delude either ourselves or the outside world that any of these changes would provide an “easy” solution to the problem of the adjustment process, in the sense that they would somehow make it unnecessary for nations to keep their own houses in order. Exchange rate changes by themselves can never be a substitute for monetary and fiscal measures to regulate demand. Indeed, in the inflationary world in which we live, the adoption of a more flexible system of exchange rates could easily intensify inflationary tendencies if adequate demand management policies were not simultaneously applied. Some of the best known proponents of more flexible exchange rates realize and stress this all the time, but I see a real danger that the misleading impression might be created that a new, more flexible system of exchange rates would somehow provide a relatively painless cure, and therefore increased freedom, for inflationary overspending.
It is important that we should not convey the wrong impression, even inadvertently. Our message should be that, whatever decision is taken regarding an early activation of SDR’s, and whatever merit may ultimately be found in a more flexible exchange rate system, such changes would not, by themselves, provide the solution to the present international monetary problems. It would be a pity if this meeting were to go down in history only as the occasion on which the first activation of SDR’s and the further study of the exchange rate system were considered. It would surely be better if it were also remembered as the meeting which underlined the paramount importance, with or without more liquidity and under any system of exchange rates, of effective internal stabilization policies.
Now a word about quotas. I believe a good case can be made out for an increase in this well-tried form of conditional liquidity. The gold subscriptions associated with such an increase would, furthermore, help not only to augment but also to strengthen qualitatively the liquidity of the Fund itself. I think it would be appropriate to bring about this increase in such a way that relative quotas reflect more accurately the present relative importance of member countries in the international financial sphere. Increases based exclusively or even principally on the relative positions of member countries 25 years ago would surely not reflect a realistic approach.
Gold, SDR’s, and the Two-Tier System
I turn now to the subject of gold and its place in the present structure of international finance. The founding fathers at Bretton Woods recognized realistically the fundamental role of gold in the world monetary system, and they wrote that principle into the Articles of Agreement. I believe that that principle is even more important today. The coming of SDR’s does not mean that gold is being “phased out.” On the contrary, as the largest single element and strongest component of world liquidity, gold’s importance becomes even greater. SDR’s need gold to endow the system of which they will form a part with the confidence essential to their success.
It would therefore be a mistake to think of SDR’s as a substitute for gold. They are essentially a device to supplement international liquidity, and as the Managing Director said at last year’s Annual Meeting, “it is important at this stage to do nothing to undermine, and to do whatever is possible to strengthen, the traditional reserve components.”
It is for this reason that we attach importance to the principle that there should at all times be a possibility of a flow of gold into monetary reserves, and I am glad to note that Mr. Schweitzer, in his address to us on Monday, implied the continuance of such a flow.
We also attach importance to the principle that monetary authorities should be able to acquire monetary reserves in the form they choose; this seems to me to be an attribute of national sovereignty which national authorities should be slow to surrender.
The problem of what the Governor for Japan has called the “maintenance of a happy coexistence of gold with other kinds of liquidity” has still not been completely resolved. I am hopeful that, with cooperation and good will, a solution can be found, and South Africa is certainly ready to make its contribution to such a solution.
The past year and a half has taught us a great deal about gold and the working of the international monetary system. When the institution of the two-tier gold system in March 1968 was later interpreted by some as an attempt to demonetize gold, many governments and central banks rightly reacted strongly against this interpretation. This culminated in a series of statements by Governors at last year’s Annual Meeting, which left no doubt that crucial importance was still attached to gold. Subsequent events continued to provide evidence of the confidence placed in gold by monetary authorities and others. The reluctance of monetary authorities to deplete their gold holdings, and indeed their eagerness to augment them, give eloquent testimony to this confidence. In that respect, it could be said that the working of Gresham’s law is already in evidence.
This period has naturally brought problems for South Africa in the marketing of its gold. I believe that we have been able to overcome these problems while continuing to act responsibly and with the fullest regard for international monetary stability. Basically, we have been able to do this because the world continues to recognize the pivotal role of gold in the international monetary system.
Statement by the Governor of the Fund and Bank for Luxembourg—Pierre Werner
Since 1945, the world has lived, as far as monetary strategy is concerned, under the Peace of Bretton Woods. This means that the rules set up in the Articles of Agreement of the IMF, especially concerning the fixity of parities and the compulsory international consultations on changes of par values, have proved to be of great efficacy and scope. This period coincides with an extraordinary growth of international trade, and there is no doubt that there is a cause-effect relation between these two phenomena.
It is true that this era of quiet fronts has been troubled from time to time by incidents, e.g., in 1949 with the devaluation of the pound and other currencies, but the settlement of these perturbances was prompt and short. It is also true that since the beginning there were controversial views and doctrines on the international payments system, or partial aspects of it, such as the price of gold. Nevertheless, up to 1960, these remained academic and stimulated more mental than financial speculation.
Let us not forget this outstanding achievement of the monetary system throughout two decades, even if, for obvious reasons, a new thinking has to be devoted to some aspects of its philosophy. In the interest of world trade, we could not afford an arbitrarily floating monetary system. Especially we should avoid being dragged into a competitive currency war by which we would fall back to a restrictive pattern of trade.
Oddly enough, it was the full convertibility of the major currencies achieved in 1958, which after some time shed a stronger light not only on weaknesses in the general payments system but also in the financial policy of a number of countries. It became clear that full convertibility, together with fixed parities, involves the need of an efficient and reliable adjustment process to correct imbalances which appear in the course of time. This adjustment involves political action and determination which may be lacking.
Consequently, we have been witnessing, for a little more than five years, growing concern regarding the adequacy of current policy in monetary matters along two lines : (1) consequences of the disequilibrium in the balance of payments of the major reserve countries; (2) speculation on and proposals for an international monetary reform. Both, of course, go together.
Since our last meeting, the world and, especially, Western Europe have experienced much unrest and nervous strain in connection with monetary speculation. This development has culminated in the events of the last few days in connection with the deutsche mark, which give our discussions on monetary reform a very practical aspect, but without allowing for definite conclusions on some fundamental issues, e.g., the acceptable limits of exchange rate flexibility. We shall learn more about it in the next days.
We are faced this year with very important Resolutions, especially one concerning the activation of special drawing rights.
There is still much disagreement between economists as to the need and volume of additional reserve liquidities. The fear of adding to world inflationary tendencies has not completely to be ignored and commands great caution.
I am satisfied with the approach given to the Managing Director’s proposal, which is before us. The creation of reserves should not be considered as a creation of purchase power ex nihilo. The economic reality behind the currency veil, especially the expanding world trade, has to be considered. This means that the allocation of special drawing rights should follow, mutatis mutandis, the guidelines and discipline which have been set also for credit expansion in our national economies. The drawing rights are still, and will remain for a long time, a superstructure on existing reserve means. Gold, in my opinion, cannot quickly be dismissed as a fundamental reserve asset and remains, above all, an anchor of stability and a value of reference. Nor will the use of some national currencies as reserve assets be completely dismissed insofar as the economic potential of those countries and the demand for their currencies for payments in the world market endow them with a special role, which, however, is not immutable.
The SDR’s cannot only act as a lubricant in a soundly developing international trade, but they might indirectly contribute to an improvement in the acutely shrinking capital markets.
It is essential that the amount of SDR’s should be fixed with very great caution, in order to leave the opportunity for gaining valuable experience in the handling of them without excessive risk.
I consider the decisions to be taken on SDR’s as being of great historical importance. They open a new field of development and experience, under which man’s ingenuity can exert its capabilities.
I should like to make a few remarks on the current discussions on means of improving the international payments system by adopting a higher degree of exchange rate flexibility. This thinking touches the basic philosophy of the Fund’s Articles of Agreement.
I understand that the Executive Directors have not, at this stage, reached conclusions as to whether the system could be improved by certain changes in the direction of greater flexibility in the adjustment of exchange rates and of par values.
I quite agree that this study should be continued in the light of the present needs. A fluctuating change can be useful in special cases within moderate limits and on a temporary basis. But a larger, or even universal, rule of this kind might totally upset the whole monetary system as well as international trade relations.
May I, therefore, add a few points of concern about the outcome and suggest that they be examined.
1. The flexibility of par values and even a crawling peg system are not an alternative to the internal adjustment process. The insensitive gliding of parities could even prevent countries from making the necessary fundamental adjustments needed in their economies, because it takes off much of the psychological shock of devaluation.
2. We should not forget the needs of the international capital markets. Developments in recent years, and especially the growing Euro-currency capital market, show clearly that monetary stability is a decisive factor in the international flow, not of hot money, but of real capital for long-term investment needs. Besides, the rates of interest will tend to rise under conditions of uncertainty in the appreciation of the nominal value of bonds and securities. The capital markets engage only in assured standards of value.
3. There is a third aspect which is worthwhile considering, i.e., the relations within monetary blocs and economic unions.
I cite in this connection the well-known report published in 1963 by the Brookings Institution on the balance of payments of the United States for 1968. While advocating at that time a modified flexible exchange rate system as an alternative to monetary reform, the authors of the report expected it to be used only between blocs, particularly in the relations between a dollar-sterling bloc and an EEC bloc, with relatively fixed rates within each bloc.
As a matter of fact, the normal evolution in, for example, the European economic union should be moving toward fixed rather than fluctuating exchange rates. Fixed rates, on the other hand, suppose a deliberate integration of monetary policies, of which the members of the Community are becoming aware as a result of the problems raised by their agricultural policy. The progress which has to be made in the forthcoming years in the EEC on monetary integration will largely influence the whole international payments system, and—this is a hope and a goal—contribute to a greater stability in the whole world.
Concluding my remarks, I should like to congratulate the Managing Director and the staff on the vitality shown by the Fund during this year and their endeavor to shed more light on the necessarily intricate and mysterious facts of monetary theory and practice.
Statement by the Governor of the Fund and Bank for Chile—Carlos Massad
I have the honor to speak on behalf of Argentina, Bolivia, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Uruguay, Venezuela, and Chile.
At this Annual Meeting, held in the twenty-fifth anniversary year of the establishment of the Bretton Woods institutions, we wish to express our satisfaction at the entry into effect of the amendments to the Fund’s Articles of Agreement, establishing the special drawing rights as a new reserve unit and thereby creating a mechanism for the adoption of more rational decisions in the matter of international liquidity. This represents the culmination of a long process of discussion, characterized by the acceptance of our insistence that the views be heard of both the industrialized and the developing countries. During the course of these discussions, certain industrialized countries indicated that it would be for them to create the new liquidity, for distribution among themselves. Latin America and the Philippines rejected the idea of any form of discrimination, and we can now confirm that both the nature of the new liquidity and the procedures laid down for its distribution are basically in line with those positions.
The decision to activate the mechanism with effect from January 1, 1970 should help to brighten the future for the developing countries, which, because of insufficient international liquidity, have recently had to put up with trade restrictions and with the twin disadvantages of scarcity and high cost of capital to finance their development. It was a group of industrialized countries that originally decided on the amount and distribution over time of the new liquidity, and its scarcity can henceforth no longer be an argument for limiting transfers of real resources to the developing countries and for imposing trade restrictions. At the same time, we regret that the first period has been cut to three years instead of the five years provided for in the Amendment; we trust, however, that long before the end of this first period the Managing Director of the Fund will formulate a new proposal for the next period.
Latin America and the Philippines have followed with close interest the progress of the studies on primary products carried out by the Executive Directors and experts of the Fund and the World Bank over the past few years. We greatly appreciate the Fund’s concern over this matter, and, particularly, the decision of its Executive Directors to extend Fund financing to international buffer stocks. We endorse the principle that drawings against this financing be completely separate from the drawings members make in exercise of their normal rights. We are aware that the decision adopted, like any decision of this kind, represents merely a palliative form of solution to a problem of a very generalized and deep-rooted nature. Moreover, we cannot disguise the fact that its effectiveness is limited by the manner of application of the principle that utilization of Fund resources is a temporary measure. The terms of payment of the credits to finance buffer stocks could be expanded, as could compensatory financing, and the possibility should also be studied of extending the latter to cover a decline in income other than that from tangible exports.
Our recognition of the positive steps taken must not prevent us from stressing also some of the problems that beset the international monetary system and, within the system, those that affect the conditions under which the relationships between the industrialized and the developing nations are at present evolving.
First of all, we must reiterate our concern about the orientation of the changes made to the Articles of the Fund with respect to operations on its General Account. Many of these are of a technical nature, or else serve to ratify policies hallowed by long use. We hope, however, that the Fund authorities will not only keep to the intention they expressed when proposing these changes, namely, that the Fund’s rules and practices will not become more restrictive, but that they will also continue the progress made over the past few years toward greater liberalization and flexibility, and the elimination of practices discriminating against the developing countries.
In this connection, positive steps have also been taken recently in the form of stand-by arrangements with industrialized countries. We particularly endorse the generalization of the use of procedures such as the addition of safety margins to the quantitative ceilings for defining financial policy, or the fixing of such ceilings in sufficiently large amounts within a cohesive program. In order properly to determine these limits it is essential that the Fund intensify its studies designed to improve understanding of the principal financial variables and of their effect on prices, balance of payments, employment, and economic growth in each country. Our countries have no time to lose in their task of accelerating development and achieving and maintaining a stable economy. A great deal of progress remains to be made in strengthening our knowledge if the instruments of economic action designed to achieve these objectives are to be fully effective.
We have repeatedly called attention to two important aspects of the adjustment process. As matters now stand, international discipline is not imposed with equal severity on debtor and creditor countries. Those clauses of the Fund’s Articles that provide for a currency to be declared scarce are too strict to have any practical application. Moreover, the balance of payments adjustment measures adopted by the industrialized countries when they get into deficit should be such that they do not jeopardize the sale on their markets of the export products of the developing countries, and do not impede or reduce the flow of funds or the movement of capital to those countries. None of these things has happened recently; in fact, restrictions and the discriminatory preferences have been maintained and strengthened and capital for development financing has become less readily available and more costly.
During the past two years, the par values of key currencies in international trade have been adjusted, and talks have been started concerning the best methods of handling such adjustments in the future. We think that a greater degree of cooperation between the more highly developed creditor and debtor countries in applying suitable internal policies will correspondingly alleviate the pressure on their parities. Nevertheless, the way in which the concept of “fundamental disequilibrium” has implicitly been applied has contributed to the establishment of trade restrictions and, on occasion, to exaggerated recourse to monetary policy. We believe that this matter should be given careful attention by the multilateral agencies, particular stress being placed on the need for greater international cooperation and due account being taken of the special characteristics of, and differences between, the various countries and groups of countries.
While recognizing the advantages of fluid financing of the international payments system for the trade and development of all the economic regions of the world, we have to admit that this is only one of the factors that affect world trade and the developing countries in particular. The structure of trade, the direction of its flows, and the distribution of its benefits among the participants are, in our opinion, basic elements that far outstrip the purely monetary question. In order to solve these problems, the more advanced countries must abolish or reduce restrictions and dumping practices, and must facilitate access to their markets, on a nonreciprocal basis, by the manufactures and semimanufactures of all the developing countries.
In view of the prospective first distribution of special drawing rights, which are assets received on a nonrepayment basis, it is timely to recall once again the need to increase contributions, on concessionary terms, to the international financing agencies. Voices have been raised in certain countries, and in agencies such as UNCTAD and CECLA,2 in favor of the idea of linking the creation of new liquidity, directly or indirectly, with the transfer of real resources for development. We support this idea, inasmuch as it implies an increase in untied loans and transfers and a longer-term decision as to their amounts. The world is today much farther away than it was eight years ago from the goal of flows of funds and foreign capital totaling 1 per cent of gross national product of the industrialized countries.
The Executive Board of the Fund is now studying the general review of quotas in the Fund. World trade has almost doubled since 1961, while quotas in the Fund have experienced only a general increase of 25 per cent. It is therefore imperative that the quotas be adjusted to take account of the need for a larger volume of financing of operations. Furthermore, this review, based on events in the world between 1962 and 1967, will not be effective before 1971, by which time world trade will certainly have expanded greatly.
The increase must be effected on the basis of a nondiscriminatory system, and must in no way tend to diminish the over-all importance of the developing countries in the Fund, taking into account also the desirable selective adjustments. The Fund should also institute an early study and review of the factors taken into account in determining the quotas in the Bretton Woods formula, and of the relative importance of each, so that the conditional liquidity needs of the developing countries can be adequately reflected in them and be satisfactorily met.
The importance of the quota increase stems from the fact that the monetary system requires, in addition to the external assets that constitute unconditional liquidity, adequate credit facilities for dealing with balance of payments problems of individual countries.
The industrial countries, and a few developing countries with substantial reserves, have established among themselves a network of arrangements by the use of swap and other operations directed at providing them with the necessary credit when they have individual difficulties in respect of external payments. On the other hand, for the developing nations that do not participate in these networks of financial arrangements and that do not have sufficient reserves to do so, the principal method of solving their individual problems is to use the drawing facilities they have in the International Monetary Fund, and these drawing facilities are limited by the amount of the quotas.
In recent years, the question of decision making on problems arising in the international monetary system and its operation has come to the fore, as has the question of desirable reforms in that system. The question had already cropped up before the Annual Meeting in 1966, when a solution was found in continuing studies and seeking formulas for coping with this problem at joint meetings of the Executive Board of the Fund and representatives of the Group of Ten. The solutions arrived at up to this time, and the way in which basic issues in regard to international liquidity or the operation of the international monetary system have been resolved in many cases, tend to create doubts concerning the efficacy of the organization that was established by the member countries for that purpose. If the International Monetary Fund was created to be, among other things, a forum for consultation and decision making on these matters and all member countries are represented in it, it is naturally the institution that should make the important decisions on subjects appropriate to it. Latin America and the Philippines, inspired by the need for maintaining and strengthening the principle of international cooperation, appeal to the Group of Ten countries with the request that the multilateral organization not be deprived of its full authority and that participation in it of all its members be actual fact.
Latin America has been engaged in a process of economic integration that is vital for its development. The countries of the Central American isthmus have already made great progress in that direction, and the countries of the Latin American Free Trade Association, although with a slower procedure, are trying to follow the same path. Recently, the countries of the Andean Group of LAFTA have set themselves more ambitious integration goals.
In the financial sphere, the Central American Clearing House has been operating with much success since 1961, most payments made in the area being channeled through it. The LAFTA countries have established a system of payments by means of reciprocal credits that are granted bilaterally between central banks and that are cleared periodically through a multilateral clearinghouse.
It is an honor for me to report to this Board of Governors two recent additional steps made in this field, modest at the beginning, but with great prospects for the future. The five Central American countries have agreed to create a Monetary Stabilization Fund for reciprocal support of their balances of payments so as to maintain exchange systems that are stable and substantially free. For their part, the LAFTA countries and the Dominican Republic have signed in Santo Domingo an agreement for establishing a system of aid for central banks that have temporary liquidity shortages owing to the process of integration.
These arrangements, which reaffirm the self-help proposition, also contemplate a system of consultation that will contribute to an increasing harmonization of financial policies with a view to integration.
But the resources that the countries themselves can mobilize are insufficient to solve this and other problems raised by integration and development. Therefore, we believe that the International Monetary Fund should give even more decided aid to the efforts Latin America is making in these fields. The first allocation of special drawing rights provides a good opportunity for this. Specifically, the definition of “other holders” and of the conditions on which both these and participants may use the special drawing rights can help the Latin American countries to step up the reciprocal aid that they have already agreed to provide.
The problems that the international community faces today in the financial field, and in many others, call more than ever for strengthening of the multilateral mechanisms in which all the members are participants. They constitute a challenge to the intelligence and the imagination of many of them, rather than of just a few. They call for recognition of the interdependence of nations and, therefore, of the need for collaboration among them, and for a clear understanding that the gap cannot continue to widen between the living standards of the more developed and the developing nations. The Latin American countries and the Philippines trust that the multilateral agency which is the center of the financial system will have the support of all its members in continuing to bring greater flexibility into its policies, adapting them to changing national and international circumstances, and seeking at all times for opportunities to support to the maximum possible degree the efforts that our countries are making.
Statement by the Governor of the Fund for the Democratic Republic of Congo—Albert Ndele
At the last three Annual Meetings of the Fund I have made a point of acquainting you with my country’s interest in reform of the international monetary system. Today our efforts have resulted in the progressive allocation of a substantial amount of new reserves, distributed to countries in accordance with their economic importance, and created by a rational process of collective decision. In its spirit and in its procedures, this system of reserve creation very precisely fulfills the requirements for lasting progress in the international payments mechanism that I have had the opportunity of defining here on several occasions, stressing the need for a solution that would take account of the solidarity and complementarity of the interests of industrial countries and of developing countries.
While we have good reason to rejoice at the success achieved by an international cooperation that respects the mutual interests of the different countries, we should also bear in mind that our decision can be evaluated by world public opinion at its full worth only if we present it for what it is, without seeking to give it a significance that transcends it. In particular, we should not overlook the fact that the special drawing rights facility does not, as such, provide a solution for the international monetary crisis that we are going through, and that it should not, in my opinion, cause us to refrain from adopting a substantial quota increase at next year’s quinquennial review. These are the two main problems of present interest that we are facing.
The Annual Report brings out clearly that the crisis in the international monetary system results from the effects on external payments of deficiencies in the demand management policies of the industrial countries. The difficulty of managing domestic demand, at the right time and in the proper proportions, by an appropriate mix of fiscal and monetary measures, has maintained extreme creditor and debtor positions in this group of countries, calling for the adoption of measures that exercise a prejudicial effect on the situation of other countries, both industrial and less developed. This situation has been made more serious, as the Annual Report very aptly brings out at the end of Chapter 2, by the fact that the governments of the industrial countries have increasing difficulty in making their public opinion accept the application of the Fund Agreement, which provides for exchange rate adjustment as a remedy for fundamental surpluses or deficits. Countries whose development depends on inflows of external savings and exports of primary products have already been seriously affected by the consequences of this state of affairs, and in particular by the excessive recourse to monetary policy measures, since the cost of capital has increased to the point of raising the cost of loans at the IBRD and since many industrial countries have had to reduce their development assistance, without the surplus countries’ offsetting this reduction by a complementary effort.
The use of special drawing rights is not a corrective for these deficiencies in the balance of payments adjustment process in industrial countries, since this new form of reserves is intended to remedy a situation of general deflation, rather than the effects of policies dictated by manifest inflationary pressures. Moreover, recourse to special drawing rights to remedy the present crisis may induce certain countries to postpone the adoption of measures that would really put their houses in order. As to compensatory financing and stabilization arrangements benefiting primary exporting countries, they can at the very most act upon the consequences of excessive fluctuations of demand in the industrial countries, not on their cause.
The remedy for the present international payments crisis should be sought by way of a more systematic coordination of the industrial countries’ economic policies, both within the smaller groupings of these countries and within the Fund itself. In this regard I would like to see the Fund play a more active part in the prevention of situations of crisis such as the present one. Its action can no longer be limited to granting a stand-by and setting up stabilization programs when the difficulties have already materialized. It should also be able to intervene on its own initiative, so as to recommend, at the proper time, the domestic policy measures necessary to check disequilibria before they reach the crisis stage. The moral authority of the Fund and the need for a more intensive international cooperation lead me to believe that the Fund can, to this end, gradually induce the countries upon which the proper functioning of international payments depends, by serious and sincere preventive consultations, to recognize certain common norms in the matter of external payments and to formulate mutually compatible policies of reserve accumulation.
The second important problem on which we need to take a stand in the immediate future is that of adapting the quotas to the needs of the next five years.
Let us first note on this point that the special drawing rights in no way diminish the amount of the quota increases that need to be effected, for this new form of unconditional and definitive liquidity is brought into play to meet a world need of reserves. The needs to be met by the conditional liquidity represented by the quotas, the purpose of which is to cover temporary and reversible reserve fluctuations by stand-by arrangements, are of a different nature.
It seems to me that two imperatives must dictate our quota increase policy. On the one hand, we must preserve the present proportions among the members, which seem to me to reflect correctly, in general, the needs and the relative importance of high-income countries and developing countries; it would in any case be unthinkable that the influence of the latter should diminish in the Fund at the very time that they are attaining more substantial income and foreign trade. On the other hand, it is imperative, while maintaining the relative importance of groups of countries, to determine the individual quota increases by taking account of the foreseeable movement of foreign trade, income, and reserves of the various countries in the course of the coming five years. In certain cases, and that of Congo in particular, the quota was fixed initially at a minimum level that took account of the uncertainties regarding the evolution of a young country, all of whose structures were bound to undergo profound changes following its independence.
The data relating to 1967, which were used to determine the theoretical quotas, cannot yet fully express the movement in progress; it seems certain that all the economic magnitudes to be taken into consideration to determine the quotas will reach an entirely different level in the course of the coming five years. I hope, therefore, that in fixing the new quotas we can break away from an overly static conception and give full consideration to the shifts that are taking place in economic activity and liquidity requirements.
Statement by the Governor of the Fund for Viet-Nam—Vu-Quoc-Thuc
I am greatly honored to address this Twenty-Fourth Annual Meeting of the Bretton Woods institutions. On behalf of my delegation, I wish to convey the highest esteem of our Government to the Managing Director of the Fund, to the President of the World Bank, and to the staffs of the two institutions for their outstanding performance during the past year; I wish also to express our gratitude for the valuable technical assistance which has been provided to us by the Fund over the years.
As I join you in this last meeting of the sixties, I would like to review briefly with you the situation of the world and of our country during 1969. The Fund’s Report characterizes the year as one of rapid economic expansion and financial imbalance, while the Bank’s Report reveals that, during the same year, developing nations have as a whole experienced a real GNP growth rate of 5 per cent, thereby meeting the economic target of the Development Decade.
Unfortunately, however, because of exceptional circumstances, Viet-Nam has not been able to participate fully with other developing nations in this progress. With a heavy drain on national resources to meet the requirements of very survival, we have recorded a very small growth rate in recent years, barely keeping pace with the growing population. While economic development under the conditions of warfare must be seriously limited, the destructive effect of inflation has borne heavily upon us, producing economic and social disequilibria of serious dimensions.
Facing the inevitable difficulties of war, we have taken courageous measures in the monetary and fiscal fields, as well as in exchange reforms, with valuable technical assistance from the Fund over the years to contain inflation. Although our efforts have not been crowned with success—mainly because of the factors operating on the supply side—we have thus far been able to prevent galloping inflation.
In the face of the consequences of destruction, however, we have not failed to entertain the utmost desire for reconstruction and development. During the past years, Viet-Nam has played an increasingly important role in the promotion of regional economic cooperation, especially the development of the Mekong River Basin and the establishment of the Asian Development Bank. We have been eager to join other nations, for we believe that economic cooperation is the only road that will lead to prosperity.
More than ever before, this same spirit of cooperation is strengthened at this historic meeting because of the new measures to be taken by the two institutions. The Fund is prepared to augment the world’s financial assets, both by actual creation of unconditional liquidity through activation of the SDR’s, and by the intention to increase conditional liquidity through an increase in general quotas. Side by side with the Fund, the Bank is about to launch new measures recommended by the Commission on International Development to narrow the widening gap between the rich and the poor nations. Because of the unprecedented character of this meeting, therefore, I wish to join my fellow Governors in making some brief comments on these matters.
In regard to the activation of the SDR’s, we believe that the new facility has moved the Fund from a defensive position to a dynamic commitment. From this date on, the Fund’s emphasis will no longer center only on the defense of an orderly monetary system and an equilibrium in international balances of payments, but will also include a dynamic commitment to create liquidity in order to support the growth of world trade and, ultimately, the development of world economy.
My country fully supported the proposed Amendment to the Articles of Agreement. However, we do not fail, at the same time, to express our hope for continued improvement in the evolution of the SDR’s. As we all know, the effect of the SDR’s as the scheme now stands will ultimately relate more to the payments and reserve positions of the large quota holders; nevertheless, these holders are also the ones who have access to other sources of liquidity, if and when the- need arises. Furthermore, we feel that a balanced growth of conditional and unconditional liquidity is necessary, as we believe that the present adjustment process is still the best safeguard of the world monetary system, and that, in this respect, the Fund still has a central role to play.
Because of the availability of the new liquidity resulting from the implementation of SDR’s, we also hope that more international resources will be available for development assistance. In this context, it may be desirable for the World Bank to undertake new measures to increase equity aid to developing nations, in order to compensate for the relative gain by the advanced countries as a result of the execution of the SDR’s.
On the question of quotas, we would like to lend our support to those who argue for a substantially larger Fund on the occasion of the Fifth Quinquennial Review. We believe that a bigger Fund, resulting in larger increases in quotas, would be beneficial for developing nations; this is so, not only because of the increase in existing liquidity, but also because of the conditional character attached to this type of liquidity, which will help in the formulation of monetary and fiscal policy, guiding these nations in their search for a better balance in their payments positions.
In our opinion, special attention must be given to the selective portion of increases designed specifically to adjust those quotas of individual members which are clearly out of line under the calculation based on the revised Bretton Woods formula. Consideration should also be given to development in individual countries, taking into account structural changes in their economies. In addition, the possibility of some additional modification of the formula itself may be envisaged. Mindful of the development of the Fund, we note that, due to the absence of data on current accounts in the balances of payments in the early days of the Fund, quota calculations, in practice, have been based mainly on trade accounts. As such, the formula appears to be of only an indicative nature, assisting only in establishing a schedule of relative, rather than absolute, quotas. This observation is particularly acute in exceptional situations such as that of Viet-Nam, where the non-trade items of current account are much more important than the trade accounts alone because of the large services entries in the balance of payments.
Finally, we hope that new steps will be taken by the Fund and the Bank to expand their efforts to stabilize the prices of primary products, especially to strengthen the financing of the buffer stock schemes.
Indeed, the future direction in which the SDR scheme and the price stabilization scheme will evolve, as well as the modus of increase in quotas, will have great bearing on countries such as ours. Although we have not so far resorted to either drawing on the Fund or borrowing from the Bank, we are greatly concerned with the potential line of international financial assets which will be available to us during the postwar era. As we have reason to believe that the dawn of peace has appeared on the horizon, we are prepared to embark on the difficult task of rebuilding the nation in a climate of stability—a task which will eventually require a staggering sum of financial resources of both domestic and foreign origin.
Against this background, we place high hopes in the success of these international financial institutions during the seventies, the decade when all of the countries represented in this forum would like to see the nations with exceptionally severe development problems actively joining the world community to advance along the road of prosperity, the decade when the Bank will directly assist such troubled nations in the task of reconstruction and development, and the Fund will assist them in their desire to return to a position of internal and external financial equilibrium.
We hope, indeed, that, at long last, the time has come for Viet-Nam to participate effectively in the growth of international well-being.
Statement by the Governor of the Fund for Upper Volta—Tiémoko Marc Garango
We are celebrating the twenty-fifth anniversary of the founding of the Bretton Woods institutions. On this occasion, this Annual Meeting has a particular importance. It is for me both an honor and a satisfaction to take the floor on behalf of the member countries of the West African Monetary Union, of which I have been made President. These countries are Ivory Coast, Dahomey, Upper Volta, Mauritania, Niger, Senegal, and Togo.
I wish to reaffirm the determination of these countries to continue cooperation with the Fund and the Bank, while at the same time hoping that these organizations will intensify their efforts for a greater contribution toward solving the problems of the developing countries.
Before speaking of the specific problems of each of the two institutions, allow me to refer to the decision taken by the Fund and the Bank on stabilization of prices of primary products.
I recognize that the decision taken by the Fund to finance buffer stocks of primary products is a new step in the history of that organization. After the creation of compensatory financing in 1963 and the recent establishment of special drawing rights, this new decision can be considered as proof that it is possible to adapt the Fund Agreement to political, economic, and social developments in the world of today.
. . . This first step taken by the Fund and the Bank, whose primary objectives, in our view, are the steady improvement of the standard of living of all member countries, of which three fourths are developing countries, should be the beginning of a more realistic and constructive policy in seeking fundamental solutions to the problems of underdevelopment. Indeed, we note that aid in the form of loans and grants from developed countries to developing countries is declining tragically. The objective of raising this aid to 1 per cent of the gross national product of the aid-granting countries, as accepted at the UNCTAD Conference in New Delhi, is far from being reached. It is also regrettable that time limits have not been fixed for the realization of this objective, taking into account the conditions and the political will of each donor country. Statistics of the Development Assistance Committee of the OECD show an alarming decline in public and private aid on behalf of the developing countries. To an increasing extent, trade is gradually replacing aid. Unfortunately, trade itself is handicapped by protective tariff and nontariff barriers maintained or augmented by the industrialized countries to the detriment of exports of primary or manufactured products from developing countries.
As to the Fund’s activities, the past year has been marked by the entry into force of the Amendment to the Articles of Agreement, modifying certain rules and practices of the Fund and creating the new special drawing rights facility. The member countries of the West African Monetary Union feel that this new addition to international liquidity, most of which will be allocated to industrialized countries, should facilitate the growth of world trade from which all developing countries would benefit. We hope that, through the special drawing rights, a supplementary solution will be found for financing balance of payments deficits, thus permitting the developed countries to contribute more to the financing of development aid.
We hope that it will be possible for the industrialized countries to consider opportunely the creation of an organic or other link between special drawing rights and aid to the third world. In this connection, we compliment and thank the Italian Government for its generous initiative, and we also welcome the interest shown in this problem by the Subcommittee on International Exchange and Payments of the Joint Economic Committee of the U.S. Congress. It is with the prospect of thus seeing a rise in the standard of living of all member countries, a fundamental objective of the International Monetary Fund, that the member countries of the West African Monetary Union are counting on taking the measures necessary to participate in the first allocation of special drawing rights.
The creation of special drawing rights within the Fund represents the recognition by its members of the inadequacy of reserves for financing international trade and payments, and has a complement in the other source of liquidity, the quinquennial quota increase. No judgment can be made on the order of size of the one without making a judgment of the size of the other. The quota review is therefore, in our opinion, a matter of special urgency, and we wish to support the draft Resolution submitted by the Managing Director for the approval of the Board of Governors calling for the submission of the Executive Directors’ report on the quinquennial review of quotas by December 31, 1969, at the latest.
In the hope of contributing to the discussions that will be continued on this problem in the weeks ahead, the member countries of the West African Monetary Union hope for the adoption of a formula that would permit the maintenance of a ratio of strength between developed and underdeveloped countries, and, if necessary, they would be prepared to accept a weighted formula for a general quota increase. As to selective increases, we hope to see all the countries of the third world accept the responsibilities represented by the increases to which they are entitled as a counterpart of the anticipated advantages.
It goes without saying that in an institution such as the Fund any review of quotas is inevitably closely linked to the problems raised by the representation of members on the Executive Board. In our opinion, however, there would be great merit in dissociating discussions on these two problems, while giving them parallel and simultaneous treatment. In this connection, we hope that solutions will be sought quickly for stabilizing the present structure of the Fund—in accordance with economic considerations to be sure but also on the basis of the geopolitical facts of the world of today: the Fund’s increasing role in the international sphere is hardly conceivable without a balanced representation of all continents. Indeed, after the Second World War, only the Latin American and the Indian continents were the main representatives of the “third world”; as we know, the situation is quite different today, and a guarantee of equitable representation should be found.
For this purpose, one may well wonder if, twenty-five years after Bretton Woods, it would not be desirable to raise the number of basic votes of each member country, a principle that the founders of the Fund had themselves considered necessary to write into the Articles of Agreement in their concern for reconciling the exigencies of a weighted voting system with the elementary rules of international law that sees equality for all states.
I wish to draw the attention of the members of this meeting to the impression one gets of the activities of the Fund during the course of this year in comparison with the last twenty-five years; one has the impression of a real capacity for adaptation to change. This capacity of the Fund to adapt itself constantly to the changing circumstances and conditions of the world economic situation gives its members reason for confidence, and it should therefore be encouraged and strengthened in the future in an ever-closer spirit of international cooperation.
. . . Unless appropriate measures are taken by both the industrialized countries and the developing countries, it is to be feared that the decrease in aid will reach a point where debt service of the developing countries will absorb in its entirety the net aid received from the rich countries. Then net aid will be reflected in a flow of financial resources from the developing countries to the industrialized countries. . . .
Finally, I wish to express my hopes for the success of the recommendations of the Pearson Report. We are convinced that the creative imagination of the authorities of the Fund and Bank, in cooperation with other international organizations, will find appropriate solutions for the problems specified.
In conclusion, we can say that we have had a promising year in respect of both the Fund and the Bank. These institutions have followed an innovative and dynamic course, and we have no doubt that, mindful of their objectives of raising the standard of living of the populations of member countries and especially the developing countries, they will continue their efforts at adaptation to the requirements of these fundamental objectives.
Statement by the Governor of the Fund for Ethiopia—Menasse Lemma
I would like to start my remarks by expressing appreciation to the Managing Director for the clarity and the excellence of the Report of the year under consideration.
The year under review has witnessed an upsurge in world trade and economic activities. At the same time, financial difficulties and crises in the exchange markets were prevalent.
It is not necessary, I think, to deal at length with the results of the year and I prefer to limit my remarks to the prospects for future developments, namely, quota increase, special drawing rights, and exchange rates.
The discussions that are to take place imminently on the increase of quotas are very important, especially for the developing countries. I would, therefore, submit to the attention of the Executive Directors the proposition that a new look at the criteria utilized since Bretton Woods for the determination of quotas is urgently called for. We can no longer divorce development from trade; they are interdependent. It is, therefore, logical to expect that development needs also be taken into account in the forthcoming discussions. Further to this, I would like to take this opportunity to mention that policy decisions should remain with the Executive Directors; one has the impression that decisions are not always in their hands, that this prerogative is being taken over by groupings of the highly industrialized countries, and that on some important issues the Fund is left to face faits accomplis.
I believe that the creation of special drawing rights is a step in the right direction and we are to approve it at this meeting. There is no need to repeat the arguments for or against SDR’s or to consider whether this scheme is a bonus for deficit countries. However, even at this late hour I would like to mention that a more equitable basis for the allocation of SDR’s, taking into account the needs of the developing countries, should be found. Should this not prove feasible at this stage, I would support the idea that an adequate percentage of the created SDR’s be channeled in some way, perhaps through IDA, for development endeavors. If we fail in this objective, serious dangers and real perils that may hamper the efforts of the second Development Decade lie ahead. Economic historians may judge this meeting severely should SDR’s become identified in the mind of the people as a scheme devised for the benefit of the rich countries.
After all that has been said and written for or against floating exchange rates, I feel it necessary before concluding to say that this important issue needs all our attention. I think that the rapid expansion in development and world trade in the post World War II period owes much to the present fixed exchange rate system; a return to floating exchange rates would encourage sterile speculations harmful to the further expansion of trade and investments—mostly at the expense of the developing nations.
In conclusion, I thank the Managing Director and the staff of the Fund for the work and the results of the past year and also thank the Government of the United States for its usual hospitality.
Statement by the Governor of the Fund and Bank for Australia—Leslie H. E. Bury
This has been an exciting and a memorable Annual Meeting. Exciting, because we have met at a time of change in the international financial scene. We have been “where the action is.” Memorable, because the financial institutions to which we belong have demonstrated yet again their ability to move with the times, and in so doing advance further in fulfillment of the purposes for which they were established.
This is most heartening to one like myself who was associated with the work of the Fund and the Bank in earlier days. Since then there has been much change. I can only say that I like what I see. Of course, we are confronted with problems:
There is much evidence of continuing disequilibrium in international payments.
The adjustment process is not working as smoothly or as quickly as might be wished.
Inflation seems to have accelerated in major industrial countries.
Rates of interest have risen to extreme heights.
As the Fund Annual Report points out, there has been a marked decline over the past four or five years in what it calls “the degree of global reserve ease.”
This is a formidable catalogue of difficulties. And yet there are notable exceptions to record:
The 12 per cent increase in the volume of world trade between 1967 and 1968 was the highest on record.
The combined industrial production of the industrial countries grew at an annual rate of 9 per cent between the first and second halves of 1968.
The exports of primary producing countries increased at an annual rate of 13 per cent between the first and second halves of 1968.
The less developed areas of the world had a $1 billion increase in their official reserves in 1968.
Thus while we have had various forms of imbalance, we have also had growth—in trade, in production, and in real incomes. The important thing now is to achieve greater stability in international payments to underpin and sustain this growth.
Various propositions are before this Board of Governors, and I would like to say, very briefly, where Australia stands in relation to them.
Special Drawing Rights
First, I may say that Australia gives full support to the proposal for allocation of special drawing rights at the rate of $9.5 billion over the three years 1970 to 1972. The Australian Treasurer, Mr. McMahon, has always been a strong advocate of special drawing rights and we consider Mr. Schweitzer’s figure to be a reasonable one. We must congratulate those in the Fund, and outside, who have worked on this scheme. It represents a major step forward in Fund history. The idea of having a new form of reserve asset which could be used in a rational way to supplement other forms of reserve assets has long been studied and debated. Many doubted whether the necessary international cooperation would be forthcoming to bring such a scheme about. Events have proved otherwise.
Of course, along with the issuance of SDR’s there will have to be continuing efforts on the part of member countries to achieve and maintain balance of payments equilibrium. And we will all have to take care not to fritter away the benefit of this additional liquidity through failing to control inflation. The French Minister of Finance has warned us against “taking a trip” on SDR’s and I have no doubt Mr. Schweitzer will ensure that this does not happen. Similarly we watch with sympathy and interest the efforts being made by the United States to dampen inflation and, whatever temporary difficulties this may involve for some of us, the whole world has a profound interest in the ultimate success of these efforts in preserving the value of the dollar.
Not quite so much has been said about the quinquennial review of quotas. This does not have the novelty of the SDR scheme. But it is in some ways just as important. The conditional liquidity which ordinary drawing rights provide is the very basis of the Fund’s operations. Indeed, the need to increase quotas is, to some extent, reinforced by the proposal to activate the SDR’s. We must maintain some balance between the unconditional and the conditional forms of liquidity administered by the Fund.
Various problems will arise, no doubt, during the course of this review. But the central problem is the total amount to be added to quotas and how it is to be allocated between countries and between groups of countries. For reasons particular to our own economy, we have always set great store by the additional strength which Fund drawing rights give to our reserve position. Not being a large gold holder, we regard our gold tranche position in the Fund as constituting a vital part of our official reserves. And being an exporter of primary products, subject to all the whims of nature and overseas markets, we have always attached importance to our credit tranches in the Fund as a defense against recurrent swings in our balance of payments. Indeed, some years ago, we negotiated a special increase in our Fund quota for that reason. We would not wish to see that special increase lost in any general review and we would wish to participate to the fullest extent possible in the allocation of new quotas.
In circumstances where we are all concerned about shortcomings in the balance of payments adjustment process, it is not surprising that the question should be asked whether Bretton Woods needs bringing up to date in the matter of exchange rate policy.
All I wish to say on this is that Australia would urge caution. By all means let us study this matter in its various ramifications-—though I fear it may not be sufficiently appreciated just how wide those ramifications could be. But let us not forget that the system of pegged rates was, in its time, a very great achievement. The system was established to protect world economies against the ravages of competitive exchange rate depreciations such as ran riot in the thirties. Of course, things have changed since that time—particularly in respect of employment levels—so countries may not be driven by desperation, as they often were then, to resort to such devices. But having got rid of the plague and erected safeguards against it, we should be careful about weakening those safeguards, even in limited degree. Any change which permitted wide flexibility in exchange rates would certainly bring with it as many problems as it solved. On the other hand, small changes may have so little impact as to be scarcely worth making. I am concerned that greater flexibility may encourage rather than discourage the speculative flows which have been associated with the disturbances of recent times.
It is well, no doubt, that there should be further studies on this subject. But they should be strictly objective studies, directed to exploring and assessing the matter. There should be no presumption that the existing system needs to be changed or that the object of the studies is to find ways of altering it. . . .
A good deal of work has been done by the Fund and the Bank in the commodity field. In our opinion this exercise has been worthwhile. The Fund and Bank have modified their policies and practices in order to assist the process of stabilizing commodity prices. And apart from anything else, the work they have done will help draw public attention to this problem. The urgent need, however, is for the industrial countries to reduce their protection and adopt more liberal trading policies toward the importation of raw materials and foodstuffs.
In this respect I am pleased to note that the Fund will pay increased attention in future to commodity policies in the course of its consultations with producing and consuming countries alike. The Fund hopes that “this approach will encourage action toward the removal of barriers to the exports of primary producers.” That could only be helpful to the general level of commodity prices. A 1 per cent improvement in the export prices of primary products would add the best part of half a billion dollars to the income of developing countries. The difficulties are not to be underestimated. But the potential rewards are enormous.
Statement by the Governor of the Fund and Bank for Zambia—E. H. K. Mudenda
Like the previous speakers my delegation welcomes the new members, Swaziland and Southern Yemen, as well as the observer delegations from Cambodia, Equatorial Guinea, and the Yemen Arab Republic.
Last year I said that we were happy to be associated with a group of financial institutions which meant so much to so many of our fellowmen. The achievements which the Annual Reports of the International Monetary Fund and the World Bank Group reflect, indeed, give us cause to feel proud of our membership in these institutions. I wish to congratulate the Bank and the Fund for their success. I would now like to comment briefly on some of the more important matters relating to the operations of these institutions.
The activation of special drawing rights, on which agreement will no doubt be officially reached by the Board of Governors at this meeting, is a significant step forward in meeting the inadequacy of international liquidity and the problems stemming from it. If one looks back at what appeared to be the interminable discussions on the special drawing rights, one recollects that, in the initial stages, doubts were expressed about whether there was a real shortage of liquidity at all. Today we have moved a long way from that position. Several recent indicators, such as the growing restrictions on payments, instability of exchange rates, and a widespread preference on the part of the deficit countries for acquiring debts rather than losing gold or foreign exchange—all these indicate that there is a shortage of liquidity. That, in spite of the initial controversial views among the members, an agreed solution could finally be arrived at is testimony to the ability of the International Monetary Fund to mold the international monetary system into the desired shape. All those involved in steering these discussions toward a finally acceptable solution deserve to be congratulated.
Even at this stage, however, shades of differences of opinion might persist, as regards, say, the amount of special drawing rights to be created, or the length of the basic period, or the linking of special drawing rights with aid to developing countries. But I do not regard these as important. What is important is that a new instrument to meet the shortage of international liquidity has at last been forged and this instrument could, if considered desirable and in the light of experience, be reshaped according to the needs of the situation.
Looking at the special drawing rights from the point of view of the developing countries, to the extent that the special drawing rights promote international trade, developing countries could benefit. However, I would urge that special consideration needs to be given continuously to the problem of how the creation of new liquidity in the form of special drawing rights could be linked with the needs of the developing countries.
This question brings me to the next important issue, namely, the increase in quotas. It is gratifying to note that there has been a certain degree of agreement for a general increase in quotas at the next regular quinquennial review. This quota increase, which is complementary to the special drawing rights activation, raises some problems regarding the relative share of the developing countries. If the bulk of the increase in quotas is claimed by the developed countries, the result will be like the biblical saying that to those who have, more shall be given. The imperative need to replenish the liquidity of the developing countries need not be emphasized. It would therefore seem reasonable to have a two-tier general quota increase, with the developing countries increasing their Fund positions by, say, 25 per cent on aggregate, while the developed countries could accept a raise of 15 per cent. At its inception, the Fund did not have much scope for being generous to the developing world. But now that this occasion has arisen, I hope the Fund will demonstrate its involvement in assisting the developing world. In addition to such two-tier increases, it is also essential to consider the case of a number of developing countries which might qualify for special increases in accordance with their relative economic strength.
With its plan for providing buffer stock financing, the International Monetary Fund can be said to have introduced a new dimension into commodity price stabilization. The importance to the developing countries of stabilization of prices of primary products at a remunerative level can hardly be overstressed. This plan seeks to assist member countries to pay for international buffer stocks of commodities, when and where these are set up to iron out price fluctuations. This facility is in addition to the existing export compensatory financing facility, which is designed to help countries over temporary, and unavoidable, fluctuations in their export earnings.
The range of commodities for which buffer stocks are feasible on an economic basis is not very extensive; thus, in practice, the intervention of the Fund is perhaps not going to mean much for the primary producing countries. However, the indirect benefit of the scheme might be considerable. The Fund has emphasized that the main answer to the commodity problem lies not so much in buffer stocks as in arranging to establish and maintain a more rational supply-demand relationship. The Fund has therefore committed itself to take a much greater interest in the commodity policies of all members, particularly of those of developed countries. Such interest in the commodity policies that have an unfavorable impact on developing countries is likely to have a salutary effect on the over-all levels of export prices of primary commodities. It is in this sense that the scheme may confer a more general benefit on the developing countries.
The international monetary scene is clouded by a number of problems. World interest rates have escalated to record levels. The imbalances in international payments, far from diminishing, have worsened. Currency uncertainties still haunt the financial world, and the question of introducing an element of flexibility in exchange rates is receiving renewed interest. I earnestly hope that the International Monetary Fund will continue to apply its energies toward the solution of these problems. This is important to the developing world because international financial uncertainties cannot provide the climate in which sustained growth rates could be assured. . . .
Both the Fund and the Bank have made good progress so far. I am confident that this good performance will not only be maintained but improved upon in the coming year.
Statement by the Governor of the Fund for the Netherlands—Jelle Zijlstra
Did the world come closer, in the past year, to monetary equilibrium? An affirmative answer would evidence too much temerity.
Since the Annual Meeting of 1968, a number of events have occurred which again have demonstrated the fact that the imbalances that have developed with increasing intensity since the mid-sixties have not yet come to an end. Much attention has again been given in the past year to the question of whether these imbalances are mainly attributable to the policies of individual countries or to shortcomings of the international monetary system. I am convinced that the fault mainly lies with the defective and divergent policies adopted to combat inflation. This does not alter the fact that possible improvements of the international monetary system must in principle always be welcomed.
Evidence of deficient policies in many countries is mainly provided by the disquieting price inflation in 1969, which the Netherlands also has unfortunately not been able to avoid. The price trend in the United States deserves special attention, as this country occupies such a central position in the international monetary system. Without the fundamental restoration of internal and external stability in the United States, monetary strains and crises v/ill remain unavoidable.
Therefore, we must all hope and expect that the present struggle against inflation will be energetically continued until it has achieved its goal. That goal will only then be achieved, when not only inflation itself but also inflationary expectations have been eliminated.
In the struggle against inflation, monetary policy, in conjunction with other instruments, must play an important role. Only with the aid of an effective monetary policy, aimed at the restriction of credit, can equilibrium be re-established. Indisputable evidence for this is provided by the present encouraging progress being made in the United Kingdom. The stringent monetary policy at present being pursued in the United States must therefore be welcomed; the resultant increase in interest rates should be accepted. However, one gains the impression that certain elements of American monetary policy bear more heavily on the level of interest rates outside the United States than is strictly required. In particular, I am referring to the rise in interest rates in the Euro-dollar market which considerably exceeds that in the interest rate level in the United States itself, especially since the first quarter of this year. This is a result of the manner in which monetary restrictions are being applied in the United States. The excessively high level of interest rates on the Euro-dollar market has an impact on financial markets outside the United States that could be objectionable for a number of countries. Therefore, I would appeal to the American authorities to aim at reducing the disparity between the Euro-dollar market rate and the corresponding United States domestic rate of interest, while persevering with the restrictive monetary policy that is required. The measures already taken in the form of the application of reserve requirements to the Eurodollars that have been borrowed are a step in the right direction.
Mr. Chairman, there is not only cause for concern. During the past year there was a gratifying advance with regard to the evolution of the international monetary system. I am, of course, alluding to the fact that, thanks to the ratification by a sufficient number of countries, the system of special drawing rights became effective. I note with satisfaction the recent decision by the French Government to ratify the scheme. The proposal to create $9.5 billion of SDR’s in the next three years has our approval. In this way a beginning can be made with the judicious incorporation of SDR’s in the present reserve structure.
The Articles of Agreement of the Fund require another quinquennial review of Fund quotas in 1970. We consider it desirable that this review be undertaken, mainly for two reasons. First, in order to strengthen the General Account of the Fund in an appropriate relationship to the growth trend of world trade and payments, thus making the volume of conditional liquidity more adequate to the rising global need for secondary reserves. This argument calls for a general increase of quotas. Second, in order to adjust individual quotas which as a result of changes in the relative economic growth of member countries have become clearly out of line. This argument calls for selective quota increases in a number of cases. We are prepared to give our full support to the Resolution submitted to us by the Executive Directors, inviting them to give this subject their early attention and make specific proposals on it before the end of this year.
In the limited time allowed to me I only wish to make the following further observations. I think the general replacement of the present system of fixed exchange rates by fluctuating rates should be rejected for many reasons.
Moreover, it seems advisable to me that more intensive use should be made of the existing possibilities in the system of fixed exchange rates for changing parities. I would have no objection to a form of confidential but active guidance by the Fund in this respect.
Finally, the various suggestions for more frequent but limited parity changes continue to demand our attention. In this connection I shall concentrate on the so-called crawling peg, in particular on the so-called nonautomatic variants. With the Chancellor of the Exchequer, I share the opinion that the automatic variants should be dismissed on the grounds he mentioned. In appraising the many ingenious versions of the system currently circulating, it is of essential importance to distinguish between crawling downward and crawling upward. A country that was to opt for a downward crawling peg would be on a hazardous track. The danger is great that such a system would have a negative influence on the inclination to pursue a policy directed toward re-establishment of equilibrium. This is all the more serious because a declining parity would in fact call for a more stringent policy.
These objections do not apply to the upward version of the “crawling peg.” The “crawling peg” in the upward version may be a solution for the problems of countries that wish to protect themselves against inflationary developments in the rest of the world. It must be kept in mind, however, that a sizable fundamental disequilibrium will always have to be countered by a normal change of par value. In any case, the introduction of such a system could be considered only after elimination of serious imbalances that might still exist. The possibilities for application seem, therefore, slender for the time being, even disregarding the technical complications, which are certainly not without weight.
Nevertheless, we are prepared to cooperate toward studying solutions to these problems.
It is tempting to consider briefly the recent events in Germany. After everything that has occurred so far, and in the present circumstances, I regard the temporary suspension of intervention within the normal margins as a contribution toward restoring international monetary equilibrium. Still, I would like to express the hope that Germany will be able to revert as soon as possible to a fixed parity system as required by the provisions of the Articles of Agreement.
Statement by the Governor of the Fund for Nepal—Yadav Prasad Pant
At the outset, let me welcome the new members of the Fund and thank you, Mr. Chairman, for your inspiring address in which you have focused on the international problems we have to solve over the years.
The Annual Report prepared by the staff of the Fund gives a very useful review of the world economic situation in both the developed and the developing countries. In this respect, the very refreshing and illuminating address given by the Managing Director, Mr. Schweitzer, has set the tone of our deliberations. In the period under review, there have been some encouraging developments in the international economic situation, yet some basic contradictions and constraints, embodied in the inflationary pressures in the industrialized countries and the total payment imbalances, still persist in most countries. The turbulent economic situations of the past have not yet settled down and I endorse the views expressed by the Managing Director that the alleviation of these strains demands persistence with corrective measures and coordinated approach in the fiscal and the monetary fields. We, on our part, in recent years, have been trying hard, within certain limitations, to give careful attention to the appropriate mix of fiscal and monetary policies.
During the last few years, the problems faced by the primary producing countries have been engaging our serious attention, and it is heartening to note that the Fund has established a new facility that may contribute, to some extent, to lessening the serious economic problems. The constant fluctuations in the markets for primary products have always posed enormous difficulties for developing countries. In this respect, I would like to support the views expressed by a number of fellow Governors to the effect that more sustained collective efforts, accompanied by a coordinated attitude on the part of the developed countries, are still needed with regard to the solution of this problem in the coming years.
I appreciate the intention of the Fund to give increasing attention to the problems of primary commodities, particularly in respect to examining the trade policies of industrial countries vis-à-vis primary products. In this respect, it is imperative that the Fund should extend its role in influencing the industrial countries to adopt a more helpful attitude when formulating their trade policies on primary commodities. We consider that any examination by the Fund of the trade policy of industrially developed countries should also include, besides primary products, processed agricultural products and manufactured and semimanufactured goods, as these are important avenues for the economic diversification of primary producing countries.
The special drawing rights, to be approved by this meeting, indeed constitute the most novel type of cooperation ever evolved to solve the international monetary crisis. As I mentioned at the last Annual Meeting, Nepal has already accepted the scheme in principle and we are now in the process of ratifying the Amendment to the Articles of Agreement of the Fund in accordance with our constitutional provisions.
I do not mean to go into any details of the SDR scheme worked out so precisely by the Group of Ten in their last meeting. I have, however, some feeling that there are certain aspects which will have to be seriously considered, particularly from the standpoint of the developing countries as of right now. As one of my fellow Governors has rightly stated, the SDR question seems to have been exclusively an affair of more developed nations. Under the present arrangement, the SDR’s are to be allocated according to the Fund quota basis. Therefore, the greater portion of the SDR’s would obviously go to a few developed countries, while the share of developing countries, which form the largest group in the Fund, is proportionately very small. Thus the contribution of the SDR’s to solving the payments problems of the developing countries will be relatively very small. I strongly share the views expressed by the Governor for Indonesia to the effect that the balance of payments problems and development needs of developing countries are more indistinguishable than is the case with the developed countries.
I would therefore like to suggest that a part of the SDR’s be passed on to the International Development Association to be used exclusively to finance development activities in the developing countries according to their resource needs, or that a separate arrangement be made in order to facilitate the use of an adequate portion of the SDR’s to finance the development needs of the developing countries. Since all such countries will use the SDR’s for paying for imports from the developed countries, the SDR’s would ultimately be available to the developed countries. This increase in international liquidity as a result of the issue of the SDR’s can make the maximum contribution to the expansion of international trade, while at the same time making possible an enlargement of aid to the developing countries.
At the same time, it is also necessary that the SDR’s be issued in amounts large enough to meet the need for growing world reserves, and the developed nations must pursue policies that keep international inflation within tolerable bounds. It is obvious that a stable international economic situation is dependent, as stated by Mr. Schweitzer in his opening remarks, on “adherence to appropriate financial policies and their careful coordination among the major countries.” In other words, much of the stability in the present monetary system is basically dependent upon the elimination of the balance of payments deficits of the major developed countries. At the same time, the new facility will have to be greatly strengthened by both the developed and the developing countries.
Finally, speaking for my own country, I would like to state that Nepal has been trying to make steady economic progress. The pace of growth has been quickening in recent years. Our payments position is favorable, as reflected in the trends in our increasing foreign exchange reserves. In view of the present comfortable payments situation, Nepal will not be making any drawings on the Fund for some years to come. The technical assistance and other advisory services we have been receiving from the Fund have so far been very useful to us. We still look forward to receiving in future, also, more sustained technical and other advisory services in specialized fields, which may provide a valuable guide to our financial and monetary management.
Statement by the Alternate Governor of the Fund for Ireland—T. K. Whitaker
As far as the international monetary system is concerned, the outstanding development of the past year has been the speed with which it has been found possible to implement the scheme for special drawing rights. For some time the need for the deliberate and controlled creation of international liquidity has been apparent. The evidence provided in the opening chapters of the Fund’s Report this year confirms that this innovation is most opportune. The recent acceptance of the scheme and the decision to issue special drawing rights at the beginning of the coming year represent a major advance in international cooperation, the full implications of which may not be felt for a long time to come. Our congratulations are due to the Managing Director of the Fund and to all those whose energy and determination have made these developments possible.
An initial tendency toward conservatism in the rate of issue of special drawing rights is understandable and should help to promote active international use of the new medium.
Steady and controlled expansion of international liquidity is, however, a solution to only one part of the problem: it is also desirable that attention should be paid to the possibility of increasing the contribution which appropriate and timely changes in exchange rates may make to the balance of payments adjustment process. Experience shows that efforts to redress a fundamental imbalance by methods other than a change in parity may be unduly prolonged, with the result that unnecessarily severe restrictions are placed on the free movement of goods and capital. Deflationary measures and controls on trade and capital flows are matters of considerable inconvenience to the countries which introduce them. Their impact is, however, also keenly felt by other, smaller economies, particularly those which are dependent upon external trade for growth in output and employment and in which, accordingly, the wastage occasioned by a sudden and significant reduction in export and development possibilities may be substantial.
With this in mind I would be glad to see the study of this question by the Fund actively pursued. While I am aware that current views on this problem do not appear capable of easy reconciliation, I feel that recent events have amply demonstrated the ability of the Fund to bring complex matters to a successful conclusion. I support the specific terms of reference for the study suggested by the Managing Director in his statement on Monday last.
Whatever form an increase in flexibility might take, its primary aim should be to establish a situation where recourse to restrictions on trade and capital flows would be significantly reduced; controls of this nature offend against the fundamental principles upon which the International Monetary Fund is based. It is important, however, that any move toward greater flexibility should not impair the essential stability of the international monetary system nor provide the basis for a weakening of internal discipline. Many countries may wish to retain the convenience of a fixed relationship with a major currency and, at the same time, to be saved the ill effects of large changes in their parities with other currencies, preceded, perhaps, by restrictions on their access to customers and capital.
Although growth in international liquidity and an improved adjustment mechanism are both eminently desirable, they are, of course, not sufficient in themselves. Appropriate domestic policies will always be necessary. It is, however, reasonable to expect that some easement of extreme rigidities in exchange rates would smooth the working of the international monetary system.
Statement by the Governor of the Bank for Belgium—Baron Snoy et d’Oppuers
Once more this year, the activities of our institutions merit our satisfaction, and their directors and staffs deserve our gratitude.
They deserve more than I shall mention here—in deference to your appeal for brevity. . . .
The climate of monetary insecurity that has prevailed in the last few months has not prevented international transactions from increasing at a rapid pace. But we should have no illusions about this. It is obvious that countries, in the pursuit of their economic, financial, and monetary policies, must take appropriate measures to assure their equilibrium if the monetary system inaugurated at Bretton Woods is to continue to afford the world an expansion of production and of trade that is essential for social progress.
I think there is no need for me to enlarge on the remarks authoritatively and pleasingly made from this platform, with reference to the work of the International Monetary Fund, for the purpose of diagnosing the present difficulties. Nor need I dwell on the establishment of the special drawing rights or the question of an increase in quotas.
The Belgian Government is convinced that the gradual creation of special drawing rights in moderate amounts can remedy the shortage of international liquidity. It takes pleasure in pointing out that, within the framework of international monetary institutions that have proved their worth and their competence, it will now be possible to transcend mechanical rules and resolve in a rational, concerted manner a problem essential to the harmony of international relations.
To turn to the quinquennial adjustment in quotas, this has now become a question of the moment. The rapid evolution of trade and the increasing interdependence of economies have swiftly brought about a situation in which the wide extent of balance of payments movements demands an adjustment in quotas. The Belgian Government believes that it is time to consider making an over-all adjustment and is prepared to take an active part in research on an adequate distribution of the total amount among the various members.
I should like to speak for a little longer on the ideas expressed by Mr. Pierre-Paul Schweitzer in his opening remarks and by various speakers from this platform on the subject of greater flexibility in monetary parities. It is true that this concept has received much favorable consideration for some months now. It has met with the approval of certain very brilliant academic circles, and has been found attractive in some political quarters, and has been cited by several of my colleagues as an idea worthy of our attention and of more detailed study.
I have no objection to a detailed analysis of the merits and the disadvantages; however, I would venture to remind you, as does the Fund’s Annual Report, that the stability of exchange rates at realistic levels constitutes an essential contribution to the balanced expansion of international commerce, and that the determination of the rate for each currency is a matter of international concern.
The notion of flexibility necessarily introduces a note of relativism into the principle of stability, which has been the basis of the functioning—in itself very remarkable—of the international monetary system for 25 years now. How far should this relativism be carried and on the basis of what measure would it be incompatible with stability? Would we not run the risk of slipping and be tempted to relax our standards in domestic monetary policy?
I clearly see the argument of those who accuse governments of deferring essential monetary adjustments for purely political reasons; the governments would find it an easier and less unpopular course to have mild and palliative adjustments made year after year. But the temptation to put off painful decisions is not the only one to which governments are exposed. Should it be replaced by the temptation to act too late against inflation because a slide in par value might disguise the consequences?
I should like to give a warning to those who expect too much from flexible exchange rates. I ask them to remember that security and, therefore, the development of international relations are linked to stability in exchange rates. This is an even more sensitive point for countries which, having an open policy to the outside world, export a considerable share of their production. For these countries, even a limited degree of insecurity in agreement currencies soon becomes intolerable.
Furthermore, can governments allow the level of their currencies to be dependent on external circumstances over which they have no control whatever? Can mobile parity in currencies vis-à-vis one another be acceptable when there are no fundamental disequilibria between the economies? Can we even partially renounce this international control function which, since Bretton Woods, has kept pace with the development of international monetary cooperation?
These, nevertheless, would be the direct consequences of a mechanism providing for flexibility in the exchange rates.
I have very frankly shared with you my concern regarding a proposal that might, at first sight, seem an attractive one. I venture to hope that, in the forthcoming study, it will be examined objectively and with all the caution that such a fundamental issue requires.
Statement by the Governor of the Bank for the United Arab Republic—Hassan Abbas Zaki
I thank you for giving me the floor to address my fellow Governors. Since we last met here in Washington we have had a very eventful year for the international monetary system in general and consequently for the International Monetary Fund in particular. The controversy over the revaluation of some currencies, especially the deutsche mark, the suggestion for introducing flexibility into the fixed exchange rate system, the continued imbalances in the external payments positions of the key-currency countries, the network of rescue swap operations and recycling arrangements of short-term funds, and last but not least, the devaluation of the French franc—all bear witness to the fact that the international monetary system has continued to be under serious strain.
It is, therefore, gratifying that, in spite of the difficulties encountered during the first stages of negotiations, the Proposed Amendment to the Fund’s Articles of Agreement actually entered into force on July 28. Shortly afterward, the special drawing rights became a reality. These steps, together with the decisions of the Executive Boards of both the Fund and the Bank in respect to possible action in the field of stabilization of prices of primary commodities, as well as the proposed increases in Fund quotas, may well be regarded as courses of action commensurate in importance with the occasion of the twenty-fifth anniversary of Bretton Woods.
Looking back on those years, there is no doubt that much has been achieved by the International Monetary Fund. Indeed, one could hardly imagine how the world economy would have shaped its course in the postwar period without the Bretton Woods Agreement and the whole structure emanating therefrom. If the performance of the international monetary system did not rise to the level of the hopes entertained, the founders of Bretton Woods should not be blamed for not having been able to predict international developments 25 years thereafter.
This having been said, I would like to make a few remarks on the subjects which occupy our minds at this meeting. Much controversy has arisen in respect of the need for reforming the par value system established at Bretton Woods, and various suggestions have been advanced for greater flexibility. We believe that floating rates can be detrimental to the smooth expansion of international trade and may eventually lead to trade restrictions and controls on capital movements. We do not exclude the possibility of considering reasonable reform of the par value system. Moreover, the U.A.R. delegation is in agreement with the emphasis placed by the Executive Directors in the Annual Report on this matter; namely, that any eventual changes should preserve the essential characteristics of that system, which remain today as beneficial to the world as they were when written in the Articles of Agreement 25 years ago—that stability of exchange rates is a key contribution to the balanced expansion of international trade, and that the determination of such rates is a matter of international concern. Mr. Schweitzer has recently explained that the trouble often arises from the fact that, instead of making use of such provisions as they are embodied in the Fund’s regulations, which outline the rights and procedures of altering parity rates, some rates have been maintained even though they had ceased to be appropriate, thus contributing to the persistence of payments disequilibria, speculation, and exchange crises.
Turning to the question of quota increases and special drawing rights, the U.A.R. delegation supports in principle the proposed increases in Fund quotas. Nevertheless, we cannot but repeat once more what we mentioned last year regarding the unfavorable position of the developing countries in this respect. Despite the considerable variety of formulas elaborated for the calculation of members’ quotas, we find that the proposed general and special increases still leave developing countries today as they were more than 20 years ago. They are allocated an inadequate share in the Fund’s aggregate resources, and consequently their potential right to use such resources is limited, in spite of their acute need for increased liquidity. With the activation of the special drawing rights and their allocation in accordance with quotas, the need for relatively larger increases in the quotas of developing countries becomes more obvious today than it has ever been. Indeed, a rough calculation seems to show that the share of some twenty developed countries in Fund quotas would advance from 70 per cent at present to 73 per cent when proposed general and special increases are implemented in accordance with the staff calculations. This means that the allocation of SDR’s to the greater majority of Fund members would be confined to slightly over one quarter of total allocations. It should be noted that the actual benefits to be derived by the developing countries from their share of special drawing rights will be further minimized due to the reconstitution provision which envisages reconstituting 30 per cent of their allocation of SDR’s. For this reason a two-tier system of quota increases should be devised, through which developing countries receive a higher share in the increase of quotas relative to the share of the developed countries. This may be a step toward rectifying the status quo of the developing countries.
With the special drawing rights duly accepted, there is a pressing need—perhaps more than ever—for the smooth and effective functioning of the international adjustment process, with a view to a timely correction of payments imbalances. For without the successful implementation of adjustment policies the mere creating of additional reserves—though desirable and necessary—would not in itself suffice to achieve a better international equilibrium. The developing deficit countries, with their persistent need for large capital inflows, should be recognized as a special case. For this reason, special turnover taxes on exports and similar restrictions resorted to by surplus developed countries should not be applied vis-à-vis developing countries.
As far as the stabilization of prices of primary products is concerned, there is no doubt that the new decision taken by the Executive Directors in respect to financing contributions to international buffer stocks heralds a new era in the Fund’s functions and policies. By enlarging the scope of the compensatory financing facility so that the combined drawings under this facility and the buffer stock facility taken together would reach 75 per cent of quota, the Fund is certainly treading new ground in extending assistance to its members. . . .
We hope that the endeavors of the World Bank Group and the Fund in this connection will bear fruit in the near future. However, as the Executive Directors’ Report points out, action by the Bank Group, or any form of external financing for that matter, would not constitute a complete answer to the whole problem. Other international measures would still be needed to achieve further progress in the areas of trade and international commodity arrangements, and we hope that the international community would give heed to these views. The decision of the Fund that, in future consultations with member countries—particularly industrial countries—more attention will be given to commodity policies and their impact on trade in primary products should prove a useful contribution in this connection.
One or two additional remarks may still be opportune in this regard. Firstly, we believe that this occasion might have been seized for a new reorientation in the Fund’s policies with a view to pursuing a more sympathetic appreciation of the special difficulties of the developing countries. Since the additional assistance under the buffer stock arrangements would be provided to a relatively small group of countries, would it not have been possible and equitable to expand the compensatory financing facility, especially for countries which would not derive direct benefits from the buffer stock arrangements? As the joint upper limit for drawings under both facilities is set at 75 per cent of quota, this limit, in our view, could just as well have been set for either of the two drawing facilities.
Moreover, in our statement last year, we raised the question of extending automaticity to include the whole area of compensatory financing facility, once it has been established that a member is entitled to it. Now that this facility is involved in the decision regarding buffer stock financing, we believe that it should be reviewed once more, taking into account the suggestions made by UNCTAD II in 1968 and referred to the Fund for consideration.
We also referred in that statement to the need for a more flexible attitude on the part of the Fund in the provision of assistance to developing countries, and advanced some suggestions in that respect. We hope that serious consideration will be given to these suggestions, with a view to introducing the necessary changes in the Fund’s rules and practices. With the Amendment to the Articles of Agreement duly accomplished, such changes should not prove beyond what is possible. . . .
To conclude my statement, it gives me pleasure to welcome the new members joining the family of our institutions.
Statement by the Governor of the Bank for Somalia—Sufi Omar Mohamed
I would like first of all to express my deep appreciation to the United States Government and people for the traditional friendliness with which they have welcomed us into this great city of Washington, the headquarters of the Fund and the Bank.
I would like also to join my fellow Governors who expressed their appreciation of the excellent work done during the last year by the Executive Directors and the staffs of the Fund and the Bank.
May I join my other colleagues in welcoming the new members of our organizations who are attending this gathering for the first time.
This year’s Annual Meeting is of particular interest because important issues which profoundly contribute to world monetary stability and economic development will be discussed and implemented.
… I wish to reiterate our last year’s proposal that a portion of the Fund’s and Bank’s net income be devolved on IDA to improve its financial situation by providing the funds required for projects that have been pending for a long time. . . .
Coming to the subject of price stabilization for primary products, I would like to express my appreciation to the Fund’s study group for their efforts at finding a workable solution to this problem. The new facility of buffer stock financing will greatly enhance price stabilization in these countries.
I turn now to the international monetary situation characterized by payment difficulties, inflationary and internal disequilibrium in many countries, currency crises, deficiency of international liquidity, etc. Somalia’s delegation welcomes the imminent activation of the special drawing rights facility, for we believe that the introduction of this scheme into the international monetary system will have positive effects on the world liquidity problem, more than any other measure such as just increasing the price of gold, which, in our opinion, would not settle the question, but, indeed, would result in irrational benefits for a few countries. Gold must gradually cease to be a monetary instrument and be confined to industrial uses, since it does not reflect the volume and trend of economic transactions.
My delegation notes with great satisfaction that the Executive Board has already proposed the activation of the SDR facility which, if approved, will be introduced on January 1, 1970. I wish to mention that my country was among the first members to ratify the Amendment of the Articles of Agreement establishing the special drawing rights. I would like to state that my delegation agrees to the proposal set forth by the Managing Director to allocate the SDR’s for a basic period of three years in the initial phase. I am confident that, with the activation of the SDR’s, the shortage of international liquidity will be eased and this will further contribute to greater expansion of world trade.
Since the foundation of the Fund, we have continued with the present fixed exchange rate. It appears desirable, therefore, to have more flexible exchange rates that will control the limited unfavorable trends in payments situations. This, in turn, would avert the persistent crises in the foreign exchange markets. In this connection, we would request the Fund to pursue its present study of this problem more intensively.
Finally, I am pleased to note that Governor Colombo of Italy has this year again raised the important subject of the interdependence of industrial and developing countries. His suggestion that, when SDR’s are allocated, each of the industrial countries should agree in a concerted formula to contribute to the Bank or IDA a portion of its SDR allocation, is of significant importance to the financing of these development institutions. I hope that other industrial countries will endorse this proposal of Italy’s; and that those countries whose balance of payments positions permit may take the lead in implementing this suggestion by the first allocation period of the SDR’s.
Statement by the Governor of the Fund for Paraguay—César Barrientos
We recall with great satisfaction that this year our institution celebrates its first quarter century. In these 25 years, filled with vicissitudes and upheavals in a constantly changing world, the efficacy of those illustrious representatives of 44 countries who, with great foresight and spirit of cooperation, created the International Monetary Fund at the Bretton Woods Conference, has been put to the test countless times, always with success. That Conference, in the words of Lord Keynes, had the enormous responsibility of “finding a common measure and standard, and a rule for general application that would not be burdensome to anyone.” Therefore, we now render homage to those founders and to all those who since then have contributed with their intelligence and effort to give life to our great institution.
The Government of Paraguay, having noted the Annual Report of the Managing Director, Mr. Pierre-Paul Schweitzer, has entrusted us with the mission of ratifying it fully, with our commendation for the activities carried out, all of which strengthens our faith and confidence in the future of our institution.
During the past year we have found some felicitous solutions and made concrete progress in strengthening our international monetary system, and it makes us happier that we have found these solutions and this progress within the International Monetary Fund, showing that it is and will continue to be the appropriate institution for solving our international monetary problems on a multilateral basis.
Special Drawing Rights
The Amendment of the Fund’s Articles of Agreement will enable the institution to face the future, and the Government of my country, considering that it is the appropriate solution, has approved and ratified it by a law issued by the National Congress.
Unquestionably, the special drawing rights, by supplementing existing reserve assets in gold and foreign currencies, will constantly guarantee an adequate level of international monetary reserves and, on being transformed into backing for international liquidity, will undoubtedly constitute, directly or indirectly, a most important aid for developing countries.
Stabilization of Primary Product Prices
This is a topic of vital importance for the agricultural economy of Paraguay, which is based on the production of raw materials. For this reason, we entertain the hope that parallel measures of financial support will be determined jointly for providing a feasible solution to the problem of stabilization of commodity prices on the basis of the study conducted by the Fund and Bank.
International Monetary Reserves
In the current year Paraguay renewed its stand-by arrangement with the Fund, under one of the clauses of which a stand-by credit of $7.5 million was placed at our disposal, thus providing us with a second line of reserves that we can use in case of temporary difficulties. Nevertheless, and although we for our part have fulfilled and will continue to fulfill all the provisions of the arrangement, we have, as in previous years, fortunately not made use of the stand-by arrangement and expect to end the year without using it.
Exports and Trade Balance
The sizable differences that have been recorded in recent years between imports and exports stemmed mainly from the use of external loans in the form of imports by the public and the private sectors, the former to support various public investment programs and the latter to meet needs for industrial equipment and for agricultural mechanization which is being introduced in our country, all in connection with the effort the National Government is making to promote economic development.
Balance of Payments
For the reason given above, despite the disequilibrium of our trade balance, our balance of payments, despite some tendency toward disequilibrium, shows a small deficit, owing to capital movements.
Nevertheless, the increasing strain of our external debt servicing has heightened to the extreme our anxieties with regard to the composition of this debt. That is why we are insisting, and will continue to insist, on the need for long-term credits that will enable us to maintain better equilibrium in our balance of payments.
The Government of my country has partly remedied this situation by the adoption of monetary regulations, although at no time has it had recourse to any that would constitute exchange restrictions.
Our dilemma, and the undertaking we are about to make, is that of solving the problem of the balance of payments without relaxing the rate of the country’s economic growth.
At the Governors’ meeting held in our capital in 1966 we expressed our satisfaction at the decision adopted by the Fund on compensatory financing to be granted to members experiencing difficulties in their balances of payments on account of temporary shortfalls in export income and, in particular, temporary shortfalls suffered by the primary producing countries.
Although Paraguay has not made use of this mechanism, we are gratified by the duplication of the drawings that each country can make in relation to the quota it pays.
Exchange operations, as I have said, are continuing normally without restrictions of any kind. The free exchange regime that my country has maintained since 1957 has been strengthened. While the commercial banks have met in full the demand for foreign exchange to pay for imports and other requirements of the private sector, the official banks have done the same for the needs of the State and have also punctually dealt with the servicing of the external debt.
My country’s Government will maintain the stability of our currency as it has been doing in the last ten years. Despite the obstacles that have been encountered in placing basic exports even on traditional markets, Paraguay has fulfilled all its foreign exchange commitments and is resolved to continue to do so through measures that it is putting into practice to expand exports and also find substitutes for certain imports.
The monetary issue amounted to
This growth reflected basically the increase in domestic banks’ holdings, since the external sector has tended to contract.
The Central Government has just granted a concession to an important U.S. oil company to prospect and explore a large area of the Paraguayan Chaco, and it opens its doors to any firms wishing to invest in other areas still available, whose characteristics give good reason to presume the existence of oil in the Paraguayan Chaco.
The Paraguayan Government considers that, with the assistance of foreign capital, it will be able to take this important step.
This year 50,000 hectares of wheat were harvested under a plan which aims to bring the area under cultivation to 100,000 hectares within the next four years, making Paraguay self-sufficient in this vital cereal. Last year 22,000 hectares were under cultivation, with an average yield of 1,200 kilograms per hectare; the efforts made this year enable us to forecast the same success.
Export Promotion Center
The Central Government is keenly endeavoring to increase exports of primary products, and, to this end, is striving to expand the marketing area for these products by finding new markets.
To give an institutional character to the work of promoting our exports, an agency has been set up to be responsible for coordinating these objectives; it will promote the expansion and diversification of traditional goods, particularly the export line of value-added goods.
Fiscal policy has been conducted in a continuous endeavor to assure balanced growth in the economy, at the same time decreasing the deficit in the balance of payments. In this connection, we have endeavored to balance the general budget without halting the infrastructure program that is being carried out very successfully.
However, we shall not achieve total success until we find the way to overcome the temporary drop in revenue that will be experienced in consequence of a total tax reform, which we are presently carrying out. It is with regard to this that the Fund can again give important assistance to developing countries that find themselves in such circumstances.
We very sincerely thank the Government and people of this great nation, the United States of America, for their hospitality in allowing us to hold our meeting in this beautiful city. In the name of the people and Government of Paraguay, we convey best wishes for the happiness and prosperity of all our sister nations represented here. Our sincere gratitude is given, in particular, to the Managing Director and all the staff of the Fund for the help they have given us in the past year; it is our wish that wise decisions may be taken at this meeting that will serve to give further strength to our institution.
Statement by the Governor of the Bank for Sierra Leone—M. S. Forna
I should like first to convey my delegation’s sincere appreciation to the President and Government of the United States for the warm welcome and great hospitality they have extended to us during our stay in this historic capital. I also wish to thank the staffs of the Fund and the Bank for the truly excellent arrangements and facilities provided for us at this meeting.
I have listened with great attention to the addresses of the President of the World Bank, Mr. McNamara, and the Managing Director of the Fund, Mr. Schweitzer, and I must say that I am greatly reassured by their impressive grasp of the manifold problems and challenges that confront their respective institutions and their courage and imagination in facing them.
The past twelve months have been characterized by a series of monetary crises and by an appreciable degree of international collaboration in offsetting their adverse repercussions. . . .
A continuing problem facing developing countries, one which appears to have been intensified by the rising trend in world interest rates, is that of debt servicing. In many countries, debt servicing payments actually exceed total receipts of new assistance. There is therefore a great and urgent need for a review and revision of lending terms.
Latest figures indicate that the increase in world production and trade, which became evident in the beginning of 1968, has continued through the first half of 1969. The importance of this trend for the developing countries cannot be overexaggerated. Exports from the primary producing countries appeared to have continued strong in 1969, and yet prices of some primary products have continued to drop. This brings me to the all-important question of the stabilization of commodity prices. I wish to congratulate the staffs of the Fund and Bank, and the Executive Directors, for completing the second part of the studies on Stabilization of Prices of Primary Products within the stipulated time. I trust that developed and developing countries will together marshal the will and the vision to tackle this problem judiciously.
Of equal importance is the problem of international liquidity and the stability of the international monetary system. The special drawing rights scheme, which we hope will be activated shortly, will supplement both dollars and gold in providing additional international liquidity. In the long run the effectiveness of the new facility rests essentially on international support and cooperation and the acceptance of the special drawing rights as equivalent to gold. Once put into operation, the strain on the reserves of some countries will be eased.
This, however, cannot and must not be regarded as the final solution to the problems we are facing now. The search for a much more concrete and equitable system must continue. The special drawing rights scheme will not provide a solution to all our monetary problems, although it will make a very substantial contribution to strengthening the international monetary system. I am inclined to support the conclusions of the Geneva conference of international monetary experts held in April 1968 that “to restore confidence in currencies, effective action must be taken immediately to end excessive domestic monetary expansion wherever it exists and persistent deficits in balance of payments.” For while increases in reserves such as may be achieved by the activaiton of the special drawing rights scheme are vital, adequate funds for the settlement of imbalances are no guarantee of an orderly international monetary system. Proper and realistic economic policies on the part of both deficit and surplus countries are clearly the only foundation on which international trade relations can attain stability. . . .
Over the last quarter of a century, we have witnessed a rapid growth in the international economy and unprecedented prosperity and greater stability in the international monetary system. I think it is but fair to attribute some of the credit for these achievements to the Bretton Woods institutions. These institutions have widened and deepened their participation in the international financial and monetary scene and also in the internal economies of member countries.
As we look to the future, there is every indication that the dynamic initiatives which these institutions have displayed in the past will be maintained and that these institutions will remain at the forefront of the movement for internationalization as well as institutionalization of the framework for stability and growth of the world economy. We sincerely hope that the spirit of international cooperation which made it possible for the Bretton Woods Conference to have achieved such tremendous success will continue to prevail in all our deliberations now and in the future.
Statement by the Governor of the Fund for Tunisia—Hédi Nouira
In the international monetary world, as in the world of fashion, innovation is the thing. Each year has its parade of original and audacious concepts, at least one of which catches on.
For a number of years we have listened to a wealth of highly varied and sometimes extremely divergent proposals for reforming the international monetary system. These proposals, which all demonstrated great ingenuity, have finally culminated in the creation of SDR’s.
It has recently become fashionable to speak of fluctuating—or better still, floating—exchange rates.
Such a desire for ventilation seems to be quite “with it” in the era of short skirts. And since the tide of progress can never be checked, we are asked to be realistic and to move with the times.
Nevertheless, this means ignoring the lessons of the past.
A number of countries have allowed their rates of exchange to float over relatively short periods, in the hope of finding either a temporary or a permanent solution to their problems.
This experiment has proved inconclusive in most cases. It is true that the system was of some use when conceived as a provisional measure designed to help countries which, because of their high rate of inflation, could neither maintain their par value nor find a new one.
It was soon realized, however, that this provisional measure had to be short-lived, since the floating par values caused prices to fluctuate considerably, disrupting commercial relations, hampering investments, and giving full encouragement to speculation.
The return to fixed par values, which came about fairly quickly, was consequently welcomed with sighs of relief.
But now this cause is being taken up again with renewed vigor. One is led to believe that experience, as a famous writer once said, is merely a pretext for committing the same errors over again.
It is now proposed, more or less indirectly, that we go back on the Bretton Woods principles and place ourselves in a position of instability, in which the secret of our well-being and the key to all our problems are apparently to be found.
A number of subtle formulas have been devised, all of which share a contempt for the present system of fixed exchange rates and a desire to make the official par values more flexible.
Whether fluctuating, floating, or gliding, these formulas give rise to many well-founded objections which I shall leave for the specialists to enumerate.
Is such an insecure position really guaranteed to re-establish the climate of confidence that we all need so much? I believe some doubt is justified here.
Nor is it very clear how prices and, more particularly, wages can be allowed to fluctuate freely, at the mercy of the autonomous and unpredictable movement of the exchange markets, which is largely determined by psychological, hence subjective, phenomena. One needs a good dose of optimism to believe that wage movements can be reversible—a logical assumption to be drawn from the idea of a system of floating exchange rates.
Nor is there any proof at all that the par value resulting from a free exchange market would bring about the necessary equilibrium between a country’s foreign trade and the other basic facts of its economy, particularly since the par value is determined by external and largely subjective factors.
The system of “automatic gliding parities” seems to be the most popular, but it still gives rise to a number of major objections.
Firstly, it seems very unrealistic to determine the rate of exchange according to an automatic calculation based on past developments alone. This would, in fact, presuppose that the economic, monetary, and even political and psychological conditions prevailing at a given time will be almost identically reproduced in the future.
We should then find ourselves in the position of military strategists—always one war behind.
Secondly, it seems risky to determine the par value of a currency on the sole basis of exchange-market trends. Such a rate could not possibly bring about an equilibrium between the basic facts of the economy: mainly employment, prices, and wages.
Lastly, the gliding parity system loses a great deal of its significance in that it only admits of very limited fluctuations above or below the official rate.
Such a restriction would only make sense in the case of very stable currencies whose par values are very close to their equilibrium point.
In the case of the weaker currencies, that is to say, of the majority of currencies, this restriction on fluctuation margins would make it impossible to know any actual market trends which, in a framework of greater freedom, would have given rise to much more clearly defined fluctuations.
The proposed “crawling peg” formula is therefore likely to produce rates corresponding neither to actual market trends nor to the internal equilibrium points of the economy.
In any case, it seems that the disadvantages of the floating parity systems envisaged up to now far outweigh any advantages they might offer at either national or international level.
It is in fact to be feared that the end result of adopting such formulas will be not to introduce a certain automaticity in the equilibrium but to create a climate favorable to the continued depreciation of most of the world’s currencies.
Indeed, it seems that the upholders of this system are more anxious to avoid all the fuss and bother of internal monetary disciplines, with all their various concomitant measures that are continually being adjusted to the economic situation, than to encourage a true national and international monetary equilibrium.
It is an indisputable fact that the system instituted by the Bretton Woods Agreements has up to now been effective and reliable, despite certain inevitable defects.
World trade has developed to a remarkable extent over the past twenty years, and the number of devaluations of major world currencies has, on the whole, been very small.
The one decisive merit of the floating parity system is that, sooner or later, it will lead us back to fixed exchange rates.
However that may be, I wish, as the representative of a developing country, to express my country’s apprehension in the face of the possible adoption of any of these formulas.
In my opinion, it is both dangerous and undesirable for the rate of exchange, which should logically emerge from the over-all trends of a country’s economy, to become an autonomous and uncontrollable element against which the other economic facts would have to be adjusted, at the risk of making any development policy both incoherent and disorganized.
Countries such as mine, which are making considerable efforts to set their economies on the road to development, find it very necessary to avoid the wastage resulting from disorganization and to regulate—indeed to program—their efforts in order to achieve their objectives.
They cannot therefore be very happy at the prospect of putting their economic destiny at the mercy of the capricious movement of floating capital and of international speculation, however sophisticated.
They are already suffering only too bitterly from the uncertainty of several natural and economic phenomena. Unpredictable weather conditions and the instability of world prices of raw materials, inter alia, continue to present difficult problems which they have not yet succeeded in solving. A floating parity system would only serve to aggravate their distress, particularly since their close dependency on certain key currencies means that, at their level, the variations are likely to be greater and therefore more keenly felt.
Those countries which have managed to struggle to the surface and, with great effort, to keep their heads above water are likely to be carried helplessly toward the unknown shores of some vague land of plenty where the joys of a providential equilibrium are apparently in store for them.
Those countries which have unfortunately not yet learned to swim, however, are very likely to sink to the bottom.
It has sometimes been said that international monetary problems are the concern of adult countries, and that nations still in the infancy of their development must at least adapt themselves, if not actually submit, to their elders’ decisions.
Such an idea is contrary to the spirit of international solidarity that reigned at the time of the establishment of those institutions which have brought us together today.
In this field, as in many others, the thing that is most needed is a strengthening of collaboration and cooperation among countries—all countries—regardless of the economic and political weight they carry in the world.
Statement by the Governor of the Fund for Southern Yemen—Mahmoud Ushaish
I would like to thank the honorable Chairmen, Mr. McNamara, President of the International Bank, Mr. Pierre-Paul Schweitzer, Chairman of the Executive Board and Managing Director of the International Monetary Fund, and other fellow Governors for the welcome extended to my country. I would also like to express my gratitude to all the staff in the Bank and the Fund for the guidance and cooperation extended to us in all the preparatory work before attaining full membership in these esteemed international institutions.
With the permission of the honorable Chairmen and my colleagues, I ask to be permitted to depart, in this first Annual Meeting at which my country is represented, from the general theme embodied in similar statements in which the affairs of the Bank and Fund normally are discussed, and allowed to put before the meeting an up-to-date, brief statement of the historical phases through which the economy of my country has passed through its long period of occupation. . . .
The first tremendous task which faced the emerging revolutionary Government was the unification of the hitherto divided country. This was not an easy task to undertake. Artificial barriers had to be broken down, and true unity has only been achieved as a result of boundless sacrifices by our people and as a culmination of hard and arduous efforts. . . .
In addition to the technical and administrative problems inherited, the territory was left in a grave financial situation in which instead of its dependence on British Government grants and subsidies of nearly £30 million per annum all told before independence, the Republic was suddenly reduced to dependence on its local revenues of £6 million per annum, with at the same time a bill of £30 million per annum for the public and military services.
To face the problem my Government had to undertake some very drastic corrective measures a few months after its emergence, with the purpose of bringing some balance to the absurd budgetary situation inherited, and within 12 months after independence it was able to achieve a reduction of about 50 per cent of its budgeted expenditure and has at the same time managed to raise its local revenues by about 25 per cent. This was achieved by resort to several unpleasant measures whereby all government expenditure was reduced to the bare essential minimum for the running of government machinery, including the reduction in salaries of all government civil and military personnel ranging from 6 to 60 per cent. Various tax resources were tapped and pressure was brought to bear on both the public and private sectors with a view to bringing within the taxation net all evading persons and institutions who during the colonial rule managed to escape payment. This was by no means an easy task, and now, nearly two years after independence, these measures have reached a point of saturation.
A government—any government—is not only required to maintain an acceptable standard of public services, but it has also to provide for the expansion of such services where they already exist and to provide them in areas devoid of them. To give you a glimpse of the ever-rising social commitments to be faced, the student population in the Republic has risen from 75,000 in 1967/68 to a figure of 105,000 in 1968/69; the number of hospitals and health units during this same period has gone up by 25 per cent and further expansion is foreseeably demanded. The State is unable to meet these demands. The economies effected cannot be stretched any further and no other revenue resources are likely to materialize, especially as the full effect of the stringent austerity measures undertaken are beginning to show their mark on the volume of trade and the resultant weakness of purchasing power among the Republic’s population.
After independence, the country found itself with heavier responsibilities deriving partly from economic conditions at home and partly from monetary conditions abroad and the need to establish new contacts overseas; secondly, there is a lack of knowledge and wide misunderstanding abroad concerning the preindependence background of the area and especially about the way in which Southern Yemen’s present economic and social situation has developed; thirdly, this situation is unique in its gravity and, my Government believes, merits the consideration of all people of good will. . . .
For almost all the period of colonial rule the prosperity of the area was bound up with the growth of the Port of Aden; for this reason and, since the country’s future much depends on the reactivation and development of the port, some commentary is appropriate here.
The administration of the port was left to an autonomous body, the Aden Port Trust, established as long ago as 1888. Although concerned with the general running and development of the harbor as a whole, it is noteworthy that at no time was it responsible for all port activities. The handling of cargo from ship to shore, lighterage, and other major functions remained a jealously guarded monopoly of certain expatriate companies.
The activity of the port and the key position of Aden from the commercial angle did not, unfortunately, lead to any industrialization (with one major exception). One or two trading companies evolved skilled and organized establishments for the ordering and distribution of goods in the entrepôt trade and for sale to ships’ passengers, etc. The maintenance of this apparatus during the present depression is a difficult problem for all concerned and one of which the Government is fully conscious. But, in general, companies earned profits and took them away.
Long before the evacuation had been completed, however, the economy had suffered the hammer blow of the closure of the Suez Canal in June 1967. At one stroke the main artery of the country’s trade was cut and the most hopeful prospect of economic progress was destroyed. The flow of shipping was reduced from about 500 vessels a month to the average of 100 or less (these being predominantly small merchant ships plying along the Arabian and African coasts).
It is a grave fact even now, two years after the closure, that the Suez Canal remains shut. Countries in the Red Sea area, above all Southern Yemen, have suffered serious disabilities from the blocking of a vital trade route. For Southern Yemen it must be said that, until traffic through the Canal can be resumed, the country has to be considered in economic terms as a “disaster area.”
At an earlier stage in 1966 the British Government had offered the defunct Federal Government interim aid of approximately SA £20 million annually for three years. After the Federation had disintegrated, the offer previously made by the British Government was retracted and the British Government only offered SA £12 million of aid for the six months to May 31, 1968, with no guarantee of continuation. The situation in the summer of 1968 was, therefore, that, little more than six months after independence, Southern Yemen was left to fend for itself.
On November 18, 1967, sterling was unilaterally devalued from the old parity of US$2.80 to a new parity of US$2.40 per pound sterling. The widely held belief that most other sterling area countries would follow suit as in 1949 soon proved incorrect. Many of them remained at their old parity in terms of gold. For the Republic, however, the course was predetermined by the facts of the situation. On November 20, the dinar had to be devalued in line with sterling. This was not just because the national currency was linked with sterling at par, but the compelling factors were the almost entire dependence on sterling in the external reserves and the predominantly sterling orientation of the country’s traditional trade. Further, it would have been rash for the Republic to risk a possible “overvaluation” of the dinar in the minds of the public within and outside the country at a time when the full rigors of the new economic situation had to be faced.
All the same, the devaluation was a further blow. It involved overnight an effective loss of external purchasing power in U.S. dollar terms to the country and to the Government (in respect of its own external assets) of $7.2 million, i.e., roughly SY £3 million in all at the new rates of exchange.
As previously stated, with the absence of any form of aid which was available to the country before independence, the Government of the Republic has faced a bitter task. It is being tackled with courage and resolution; but the burden of expenditure in all fields remains heavy. It is with this challenge in mind, this clarity of vision and objectives, that my country has determinedly forged ahead since its independence, in order to bring about social justice and achieve independent economic stability.
Yet, in order that my country may cause real development to be triggered in earnest, it would require, and should require, all the economic, financial, and technical assistance it can muster. It is with great hope and confidence that we turn to our friends in these international institutions—the good-willed people of the international community—to come to our aid and assistance, to help us overcome our problems, and set on the way to progress and prosperity a well-deserving emerging nation, to live within reason and participate in the elevation and well-being of mankind as a whole.
October 2, 1969.
Comisión Económica Coordinadora Latinoamericana.