Discussion of Fund Policy at Closing Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1969
Statement by the Governor of the Bank for Afghanistan—Mohammed Enwer Ziyaie
It is once again a pleasure to participate in these Annual Meetings and renew my friendship with the distinguished Governors and delegates represented here. I would also like to take this opportunity to welcome those representatives who are participating for the first time.
During the past year, actions affecting developing countries in the field of international finance have been mixed. On the one hand, the special drawing rights amendment has been approved and the number and amounts of loans by the World Bank to developing countries have been increased. On the other hand, however, we have witnessed a further decline in bilateral aid to developing countries and an increase in the interest rates on loans made by the Bank. . . .
The allocation of scarce financial resources by developing countries on scheduled debt service poses a major problem in that it decreases the amount of capital available for development purposes. This can be overcome by concerted action on the part of the recipient country and the lending agency. We must look to the developed nations for trade liberalization as sources of the foreign exchange which the developing world requires—and will continue to require—both to service its debts and to expand its investments. For this reason capital lending programs must be combined with trade opportunities if debt schedules are to be met without impeding economic progress.
On our part, Afghanistan has, within the last several years, taken steps to improve the situation. A liberal Foreign Investment Act was passed and, to date, has attracted a number of foreign businesses. The Government’s incentive program for our major export earners—karakul, cotton, and wool—has accelerated production and we expect increased foreign exchange earnings from these exports in the coming years. Additionally, recognizing our own responsibilities for increasing development expenditures, the Government has, within the past year, adopted a number of new and additional revenue measures, and is planning to submit a comprehensive land tax proposal to the next session of Parliament. . . .
The close relationship between problems of economic development and monetary problems has been demonstrated again during the past year. As noted earlier, the growing cost of borrowing on the world’s capital markets, where interest charges have reached unprecedented levels, is a major concern of developing nations. At the same time, world monetary developments have given increased cause for concern. The need for strengthening the present monetary system is apparent. Therefore, Afghanistan welcomes the approval of the special drawing rights scheme. We feel that until now, however, the opportunities to use the provisions of the scheme to generate development assistance have not been fully exploited and urge efforts to assure that the twin goals of liquidity and development be maximized. We are equally concerned about the decision to adhere rigidly to the Fund quotas in establishing the formula for drawing rights, especially when the needs of the small-quota developing countries are so great. We would hope that the formula may be subject to greater flexibility in the future. In any instance, what is needed immediately is the implementation of the special drawing rights facility in a manner fully consistent with world trade and financial needs. Monetary reserves should be created at least equal to the expansion of world trade. Given its dependence on adequate demand for primary commodities, the developing world should insist that these criteria be met.
We also expect that certain consequences will result from SDR activation. The systematically planned expansion of the world’s monetary reserves should in part alleviate the balance of payments problem for the developed nations, thus permitting an increase in the flow of development capital to the developing countries. Deliberate reserve creation should remove the major barrier, the transfer problem, which separates the increased wealth of the developed world from the pressing needs of developing countries.
We are also mindful of the problem relating to the stabilization of prices for primary products. A step in the right direction has been taken with the decision of the Board in June to liberalize compensatory drawing provisions for Fund members. We look for further initiatives in the field.
Statement by the Governor of the Bank for the Philippines—Eduardo Z. Romualdez
… I should now like, if I may, to say a few words about the Philippine economy.
This past year the growth in our real GNP has been satisfactory at 6.2 per cent. But certain structural problems have developed from the pattern, pace, and direction of our past economic growth. These defects were reflected, first, in the structure of our manufacturing; second, in the treatment of agriculture; and third, in the lopsided character of our external debt.
The manufacturing structure was the result of our emphasis on the establishment of light domestic processing to replace imports of finished goods. These enterprises were fairly heavily protected and their operations oriented almost exclusively toward serving the domestic market. The levels of protection were also such as to induce a proliferation of small competing plants and a tendency toward excess capacities.
One of the effects of this structure has been to render our balance of payments extremely vulnerable to any expansionary measures that we might pursue to stimulate more rapid growth.
Our Government is now attempting to remedy the situation in several ways: first, by providing special incentives for the consolidation of enterprises and the integration of processing plants with more basic manufacturing where this is found economic; second, by providing incentives for the promotion of exports—particularly of manufactures involving heavy labor inputs; third, by exploring opportunities for developing complementarities with other countries in Asia.
In agriculture, fresh opportunities for spectacular growth have been provided by the new high-yielding varieties of rice. These are varieties that offer increases in yields of 200 to 300 per cent, and for this reason the varieties have been called “miracle rice” varieties. The increases in yields, however, are achieved not by any effortless miracle, but through fairly fundamental changes in methods of cultivation, adequate water and proper water control, heavy doses of nitrogenous fertilizers, insect control, rigorous weeding.
The technological “revolution” has thus had to be accompanied by an organizational “revolution.” In crop year 1967-68, about 13 per cent of our rice lands were planted to the new high-yielding varieties. The harvest from this 13 per cent accounted for 22 per cent of our total rice production in that year.
The exploitation of the new opportunity has only barely begun. Further application will require expanding our irrigated area, strengthening agricultural extension, machinery for dispensing supervised farm credit, carrying out land tenure reforms, expanding and reorganizing the facilities for handling storage, drying, milling, transporting, and merchandising of grain.
The forms in which external financing was raised to meet the requirements of our past development have also placed us in debt-service difficulties. We have relied too heavily on deferred equipment credits and commercial bank financed short-term trade credits. In recent years, the payments of interest and amortization on these have exceeded fresh inflows of funds.
We are now in the process of analyzing our external debt structure to determine how this might best be restructured to enable us to meet our obligations faithfully and at the same time accommodate the large requirements of future growth. . . .
Statement by the Governor of the Bank for Nicaragua—Guillermo Sevilla Sacasa
Twenty-five years ago, delegates from 44 countries of five continents, of all races and political and religious creeds, had just met at Bretton Woods to participate in the Conference of the United Nations and the nations associated with them called by President Franklin Delano Roosevelt for the purpose of laying the ground-work for postwar economic collaboration in the interest of peace and prosperity for all nations.
The war of liberation was at its peak. The democracies were battling their aggressors. The armed forces of the allied powers were dealing devastating blows to Hitler’s Germany. All the delegates were guided by the firm purpose of contributing to the preparation of a permanent program for economic cooperation and peaceful progress. “The program you are to discuss,” said President Roosevelt in his message of welcome to us on July 1, 1944, “constitutes, of course, only one phase of the arrangements which must be made between nations to ensure an orderly, harmonious world … it concerns the basis upon which they will be able to exchange with one another the natural riches of the earth and the products of their own industry and ingenuity.”
And the President added: “Commerce is the life blood of a free society. We must see to it that the arteries which carry that blood stream are not clogged again, as they have been in the past, by artificial barriers created through senseless economic rivalries. Economic diseases are highly communicable. It follows, therefore, that the economic health of every country is a proper matter of concern to all its neighbors, near and distant. Only through a dynamic and a soundly expanding world economy can the living standards of individual nations be advanced to levels which will permit a full realization of our hopes for the future.”
It was a beautiful message, worthy of its distinguished author. We delegates who had come to Bretton Woods realized how strong the arrangements that the nations were to work out together would have to be to guarantee an orderly and harmonious world. The experience of the last 20 years had shown the destructive effects of currency instability and trade dislocation.
We all felt that the placid atmosphere of Bretton Woods would help the friendly powers, united by a common ideal, to work together in a spirit of cordiality and cooperation.
All of us still had memories of the tragedy of monetary chaos, of restrictions of all kinds imposed on international trade, of the system of blocked currencies, of economic isolation, of competition instead of cooperation between central banks, and of widespread unemployment that had posed another serious threat.
We were all fully aware that we had met together with the objective of establishing the broad lines of an economic understanding among nations that would provide the world with a guarantee that the tragic events of the period between the wars would not occur again.
We were well acquainted with the two major propositions that were the principal subjects for consideration at the Conference: establishment of an International Monetary Fund which was to provide a stable and equitable structure of exchange rates in order to ensure the expansion of trade and the development of international markets; and creation of an International Bank for Reconstruction and Development, which was to promote international investment.
From the complexity of the monetary and financial problems, it became apparent that the task of the Conference would necessarily be as difficult as it was important.
We knew that the Fund and Bank Agreements would have a large influence on the economy of all countries from the moment these organizations began operations. Let us recall the economic axioms of which Secretary Henry Morgenthau, Jr., Secretary of the Treasury of the United States, and Permanent President of the Conference, spoke to us. He said, first of all that “prosperity has no fixed limits. It is not a finite substance to be diminished by division. On the contrary, the more of it that other nations enjoy, the more each nation will have for itself.”
The other axiom of which Mr. Morgenthau spoke to us, a corollary of the first, was that “prosperity, like peace, is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others.”
“Poverty,” he continued, “wherever it exists, is menacing to us all and undermines the well-being of each of us. . . . All of us have seen the great economic tragedy of our time. We saw the worldwide depression of the 1930’s. We saw currency disorders develop and spread from land to land, destroying the basis for international trade and international investment and even international faith. In their wake, we saw unemployment and wretchedness—idle tools, wasted wealth. We saw their victims fall prey to demagogues and dictators. We saw bewilderment and bitterness become the breeders of fascism, and, finally, of war.”
We delegates who participated in that historic event at Bretton Woods recalled the four international monetary conferences held in Paris in 1867, 1878, 1881, and 1889, and the one held in Brussels in 1892. We recalled that the first one arrived at no practical result and that bimetallism was the main topic of debate at the others.
We were reminded how, from 1900 until before World War I, the monetary system functioned admirably, as a general rule, under the gold standard, with a world banking structure that had London as its center and operated on the basis of Great Britain’s formidable creditor position.
Then, unfortunately, came the war that brought about the dislocation of the commercial and financial system, and from 1919 there was an increase in prices that made return to monetary stability difficult.
At the end of World War I many countries had abandoned the gold standard and their currencies were depreciated compared to the dollar; the return to parity was one of the problems that concerned the statesmen of the time, and the International Conference of Brussels was called in 1920 to discuss the exchange situation.
We remembered many other important events that occurred in the world before the Bretton Woods meeting. We delegates all felt optimistic at the opening session of the Conference.
The institutions created at Bretton Woods have carried out a task worthy of recognition and commendation during the last 25 years.
I pay tribute to all the public-spirited men who have directed them and contributed to their development and success from their high positions.
I also pay tribute to all those who have served as technicians in these institutions, providing know-how for the missions and studies entrusted to them.
I pay homage to the memory of all those unforgettable men who gave valuable cooperation to these institutions and who are no longer with us.
Some of us who participated in the Bretton Woods Conference are present at this meeting. I mention among them Dr. Luis Machado, who took part as delegate of Cuba and who has been continuing his magnificent work since we elected him a Director in Savannah in 1946.
My congratulations to the staff of the Secretariats of both institutions, to Mr. Hebbard, Secretary of the International Monetary Fund, and Mr. Mendels, Secretary of the International Bank for Reconstruction and Development, who have been so efficient as well as so generous to the Governors of the member countries.
In celebrating the twenty-fifth anniversary of the Bretton Woods Conference, and as one who had the exciting experience of participating in it, I wish to express the keen interest that I have always had in the development of the two institutions created there. What to some of us must have seemed a dream conceived in the scholarly minds of such eminent figures of world renown as Lord Keynes and Harry D. White is now a reality. The Fund, as an operative and practical institution for monetary cooperation, has not only fulfilled its purpose of avoiding monetary chaos, but also provided guidance and direction to its members, to a greater extent than was expected.
In Latin America, for example, the Fund has established closer and more direct relations with the countries of that area, and has functioned effectively as financial advisor, contributing to strengthening the growing belief that sound, well-planned fiscal and banking policies are essential elements on which economic development can be safely based and carried out.
I salute with high esteem its distinguished Managing Director, Mr. Pierre-Paul Schweitzer, and the members of its qualified technical staff with whom we have had friendly and profitable contacts for many years. . . .
It has been a personal satisfaction to me to be given this opportunity to speak here, to indulge in a pleasant recollection of the Bretton Woods Conference, and to mention however briefly the magnificent accomplishments recorded throughout their successful careers by the International Monetary Fund and the International Bank for Reconstruction and Development, which are held in such high esteem throughout the world and with which we feel such close bonds.
I congratulate Mr. Pierre-Paul Schweitzer, Managing Director of the Fund, and Mr. Robert S. McNamara, President of the Bank, and express my praise for their distinguished work and the deep appreciation of my Government and of myself for their outstanding individualities.
Statement by the Governor of the Bank for Denmark—P. Nyboe Andersen
The international monetary system should serve a double purpose. First, the system should create opportunities for a rapidly expanding international trade and, secondly, it should induce countries to respect certain fundamental rules of the game in adjusting their economies to internal and external disturbances.
On the whole, our international monetary system after the war has been able to meet these conditions. The International Monetary Fund has been a cornerstone in monetary cooperation ever since Bretton Woods, and still is.
In our cooperation within the Fund we are now entering a new period with the activation of the special drawing rights. I think one can say that now, for the first time, we aim at deciding jointly what should be the appropriate amount of international liquidity. Denmark, like the other Nordic countries, has always supported the idea of special drawing rights and we regard the activation of the scheme as an important event in the history of international monetary cooperation.
At the same time we are now facing the question of the quinquennial revision of the member quotas of the Fund. My Government supports a reasonable increase in quotas not in order to make it possible for member countries to avoid necessary adjustments but in order to give them time for adjusting their economies without being forced into the use of policy measures not compatible with the fundamental rules of the game.
We must admit that right now the international adjustment process is working in a way that is not altogether satisfactory. Several speakers have already pointed to the tremendous increase in international interest rates which may well force a country to accept changes in its monetary policy that would not be needed from the viewpoint of its internal economy. The system also suffers from the damaging consequences of excessive international speculative capital movements. There is no doubt, therefore, that certain reforms in the international monetary system might be useful, and it is only natural that this question is now being studied carefully by the International Monetary Fund. In my opinion there is certainly no need to change the fundamental principles behind the Bretton Woods Agreement. On the contrary we have to preserve those principles. This, however, does not necessarily exclude the possibility of finding ways and means to increase the efficiency and thus even the stability of the system.
I would not like to conclude my short statement without taking the opportunity on behalf of the Danish Government to express a warm appreciation to the Boards of Governors for their decision to hold the next annual meeting in Copenhagen. My country is, indeed, both honored and pleased by the prospect of hosting such a prominent and very important international gathering. I can assure you that the Danish authorities are most anxious to provide the 1970 Annual Meetings with all facilities needed for the deliberations. We shall also endeavor to give you agreeable surroundings for your stay in Denmark. So I wish all of you a happy reunion in Copenhagen in September 1970.
Statement by the Governor of the Bank for Turkey—Cihat Bilgehan
It is a great pleasure for me to have the opportunity of addressing this distinguished gathering of the Governors of the International Monetary Fund and the International Bank for Reconstruction and Development.
I thank you, Mr. Chairman, for your comprehensive opening remarks, to which we have listened with great interest.
I would like to express my appreciation to Mr. Schweitzer and Mr. McNamara and their staffs for their excellent Annual Reports.
Now, I would like to dwell on some points concerning the Fund and the World Bank.
. . . My country is one of those which needs to further improve the training of her labor force and augment the means of foreign payments. Turkey has conducted her development efforts, for the last seven years, through five-year economic plans. No doubt almost all developing countries have to face certain difficulties in implementing development plans. Here, I would like to state that with the experiences gained during the past seven years, I may venture to say that my country presents a good example of planned development. The average growth rate was 6.7 per cent per annum in constant prices during the first plan period, close to the plan target of 7 per cent. The average rate has been 7.5 per cent for the last four years. The percentage of growth for the industrial sector has reached 11.5 per cent. The fact that all this has been accomplished with a modest price increase demonstrates that economic development may well be achieved with price stability.
The development strategy of the second five-year plan envisaged the development in a mixed economy benefiting from all available domestic and foreign resources. Within the guidelines of this principle, private enterprise has engaged in increased activity and has become a major factor in development, especially in the field of industry.
One of the main objectives of the Turkish development plan is to reach a stage of rapid and sustained growth with her own resources. In this connection, great importance was attached to the achievement of the balance of payments of Turkey, and certain measures were taken in this direction during recent years. Thus, Turkish exports have shown an increase of 12 per cent during the first eight months of this year compared with the same period of 1968.
Turkey is one of those countries which will cease to need concessional loans in the near future. The achievement of this goal depends mainly upon obtaining adequate foreign aid to supplement her own resources.
The Fund Annual Report mentions rising interest rates, the reasons for them, as well as their adverse impact on the developing countries. In view of this fact, one cannot help expressing satisfaction for the realization of the new replenishment of the International Development Association’s resources.
The long discussions on the insufficiency of international liquidity have brought us to a satisfactory stage, thanks to the efforts made by the Fund management and the understanding shown by its members, through the establishment of the special drawing rights facility. We sincerely hope that its implementation will help the expansion and balanced growth of world trade, which is one of the most important objectives of the Fund.
Statement by the Governor of the Bank for Guyana—P. A. Reid
We are running out of time. And I am not referring to this meeting. The world is running out of time. The development of its resources is not proceeding fast enough to provide reasonable living standards for the larger part of its inhabitants—a vast multitude, growing with frightening rapidity.
The twin institutions which the Bretton Woods Agreements established twenty-five years ago have essentially, in my view, a simple, single and basic purpose—that of facilitating the flow of trade and capital between nations—so that, by their cooperative effort, they might achieve what each working alone might fail to attain: the better life for all.
We have made progress since then. I do not deny this. Indeed, these meetings and these institutions have a great deal to be proud of. But the pace is too slow, the effort is dwarfed alongside what remains to be done. We have the science and the technology for achieving higher living standards. Indeed, we have achieved very high living standards in some parts of the world. That is just the trouble. With the triumphs of science and technology, people have reached the moon. But, in their aspirations to higher living standards, the undeveloped nations are still waiting for take-off.
The less developed world, on the average, achieved growth rates of 5 per cent over the past year. Nearly one half of this is swallowed up in population increase, so that we are dealing with increases in per capita income on the order of 3 per cent. If this rate is maintained, we should more than double the average per capita income of developing countries by the year 2000. What does this mean, in terms of hard money? The average per capita income of these countries is at present $100, so, we are speaking of average incomes on the order of something over $200 by the year 2000.
At the other end of the scale, the average per capita income of the developed territories is about $1,800 and is expected to rise to $3,600 by the year 2000. It is demonstrably clear that, while incomes in the developing countries are painfully creeping up, the gap between their incomes and those of the industrialized countries is growing apace. . . .
Many developing countries have supported such schemes as the SDR’s and ICSID and institutions like UNCTAD in the hope that they would derive some benefit from them, but have eventually realized that this could not be the case.
It behooves us therefore to harness every idea, every means, to the task of improving living standards in the less developed countries of the world. The fact is that, with the best will in the world, the neglected multitudes of the human race cannot, by their own efforts alone, raise themselves out of their misery.
My country is a case in point.
It derives a large part of its GNP from exports and must obtain by importation from other countries a large part of the goods and services it needs for investment and consumption. It has what the economists call a very open economy, inviting the rest of the world to come and trade for our mutual advantage.
It is also an underdeveloped country, both in relation to the developed countries and in relation to its own potential for development.
Guyana is using its own resources to the utmost in this respect. Its taxation effort in order to build up public savings and the cooperative endeavor of its people to develop the country are ample proof of this. It is even putting its leisure time to work by way of self-help projects. But, in spite of this, it cannot possibly find, in its own resources alone, all the capital that is required to sustain a satisfactory rate of economic growth. It must therefore look abroad for a large part of the capital it needs for economic growth.
But my country is only one example. By far the greater number of the countries represented at this meeting are in the same situation.
For these reasons Guyana supports the scheme of special drawing rights. The world economy must not be frustrated (by what is, after all, a mere liquidity problem) in its efforts to expand international trade and the flow of capital from developed to the underdeveloped countries. We must realize the world’s full productive potential to the mutual advantage of all—both the developed and the underdeveloped countries. But I confess to great disappointment that the scheme has not been weighted more toward its development potential.
The very same reasons impel me to support the proposal for increased Fund quotas, but I shall expect the proposals to deal fairly with the underdeveloped countries. . . .
Another feature of the underdeveloped economy which needs attention is the narrow base of industries which supports it. That is why the work of the staff and Executive Directors on the problems of stabilization of primary commodity prices is particularly useful. Guyana supports, in general, the proposals which have emerged from this study—particularly those involving the use of World Bank funds to finance plans for diversification of the economies of the developing countries and the use of World Bank and Fund resources, both of money and staff, in organizing and financing international commodity arrangements for primary products….
The use of private investment capital is expensive and unattractive, in view of the very high rates of interest now prevailing. It has been indicated that this may be partly due to the increase in inflationary demand in the United States and there is pressure on that nation to correct this. But developing countries hope that, in doing this, the United States will not disturb the demand for their exports, which are of vital significance to their economies. . . .
Statement by the Governor of the Bank for Burundi—Joseph Hicuburundi
The Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund give my country once more the occasion to express its satisfaction at the efforts and progress made by these two institutions in seeking a better world economic and monetary equilibrium.
Burundi, like all other countries, clearly understands the close economic interdependence of nations, and welcomes any effort aimed at reducing present distortions, whose consequences can only be prejudicial to the developing countries. . . .
As to the International Monetary Fund, my country has been able to appreciate once again the support it has been given to protect its currency and improve its balance of payments.
Over and above these privileged relations, we are following with the greatest interest the forthcoming activation of the special drawing rights, which we were one of the first countries to approve. We expect from them a new and substantial contribution to international monetary equilibrium. We also wish to see in them an important element in the struggle against underdevelopment if consideration is kindly given to all the possible extensions of this innovation in the area of aid to the third world.
This progress to which we wish to pay tribute, these hopes to which we warmly subscribe, should not, however, blind us to the fact that a problem, that, in our view, is essential, has not yet been solved satisfactorily. This problem is the steady deterioration of the terms of trade.
True, excellent studies have been written on this subject by the Bank and Fund staffs. Interesting possibilities have been examined: stabilization of export receipts, stabilization of prices by means of international buffer stocks, and possible financing of stockpiling activities in producing countries.
All this represents a first step toward concrete solutions of whose complexity we are well aware. But we must regret that this approach is slow and still inadequate in the light of the loss that producing countries have been suffering for so long a time.
Indeed, access to the Fund’s resources still seems to be too rigorously conditional. Moreover, the obligation to reconstitute the resources activated in a period of three to five years may not be consistent with the period of time necessary for the possible recovery of commodity prices.
We fear, in sum, that the measures envisaged concentrate more on limiting the consequences than on remedying the root causes of the deterioration. In this connection, one must recall, as the studies undertaken by the International Monetary Fund have stressed, that the policies followed by the industrial countries in regard to primary products are among the essential causes of the unfavorable development of world prices.
In conclusion, may I thank the authorities of the Bank and Fund for the competence and devotion that they constantly demonstrate in studying the problems of our times and express the wish that their efforts may be as successful in tomorrow’s tasks as they are in today’s.
Statement by the Governor of the Fund and Bank for The Gambia—S. M. Dibba
It is a great pleasure and honor to participate in the Annual Meetings of the International Monetary Fund and the International Bank for Reconstruction and Development this year in Washington, and I wish to thank our American hosts for the generous hospitality they are extending to us.
. . . The declining and fluctuating prices of primary commodities is a long-standing problem and has been discussed at length at every international forum in the last decade. We recognize that it is a complicated and many-sided problem, but to us in Africa it is a matter which deserves the highest priority. About 20 primary products make up some 70 per cent of Africa’s exports and some countries depend on one single primary product for their foreign exchange earnings. Further, exports of primary products have tended to expand at a much slower rate than exports of manufactured goods both in value and volume. Thus, between 1960 and 1968 exports of manufactured goods rose in value by 8 per cent, while exports of primary products rose by only 2 per cent. Under these circumstances we place great emphasis on commodity arrangements to reduce the amplitude of price fluctuation and to arrest the decline in price levels. . . .
The Government of The Gambia has already accepted the Amendment to the Articles of Agreement with reference to special drawing rights and has also undertaken all the obligations of a participant in the Special Drawing Account of the Fund in accordance with the laws of The Gambia and has taken all steps necessary to carry out these obligations. It is our hope that the increase in international liquidity through special drawing rights, while strengthening the international monetary system, will, at the same time, ensure a greater transfer of resources to the developing countries.
Statement by the Governor of the Fund for Israel—Zeev Sharef
May I take this opportunity to express my deep appreciation for the devoted and untiring efforts of the Managing Director, the Executive Directors, and the staff in carrying out the necessary research and the preparatory consultations which enabled us to reach this important stage in the development of the monetary system.
I am sure that I express the hope of all of us that after having witnessed in 1969 the final consultations concerning the SDR’s we shall in 1970 see their practical implementation. We are confident that it will positively contribute to raising international liquidity to the desired level.
This increase in international reserve assets will serve the long-term global needs for increased unconditional liquidity, such need having been intensified since the middle of the 1960’s. We sincerely hope that this increase will also help to avert the recent trend toward further restrictions on trade and capital movements which have, in great part, stemmed from the inadequacy of international reserves.
However, even if for the record only, I would also like to stress our belief that the proposed supplementary reserves, which will be created by the SDR system, will not suffice to meet the needs of international trade and finance in the coming years. We believe that the underlying assumptions which served as the basis for the proposal were inadequate. Those assumptions were, on the one hand, too conservative about the future demand by the international community for liquidity, due to the increase in economic growth and international trade. On the other hand, it well may be that they were too optimistic about the extent to which supplementary reserves will be created out of traditional sources.
I feel that one more reservation should be mentioned. In the contemplated SDR system, no attempt is made to alleviate some of the special difficulties that the developing countries encounter in their foreign exchange reserves position.
We regret that suggestions to link the creation of the new “unearned” purchasing power with the general problems of developing countries have not been followed up. We assert that, after a decision on the creation of additional reserves has been taken—a decision which is based on the needs of international trade—the emphasis in allocation should be less on the existing wealth of individual countries and more on the needs of countries which are beginning their take-off.
Notwithstanding these reservations, however, it is our feeling that the actual implementation of the SDR system is the most important task ahead of us. Therefore we have voted in favor of the Resolution as presented by the Managing Director of the Fund. We further hope that, in a few years, when the SDR’s have become a permanent and accepted feature of international liquidity arrangements, it will be possible to reconsider the allocation system, and to attempt to achieve a solution that will also take into consideration the special needs of the developing countries.
The year 1970 will also witness the quinquennial review of the quotas of the member countries. Due to the great importance that we attribute to this subject, I would like to add a few remarks in this respect.
We think it unfortunate that the necessary preparations for the new quota allocation will not be finished before January 1, 1970. It means that in 1970 the SDR’s will have to be allocated on the basis of the country’s national income and foreign trade for the years 1958-62. Such an allocation of the SDR’s will certainly serve to perpetuate the distorted liquidity needs of those countries that since 1963 have enjoyed a high rate of economic growth and an expanding foreign trade.
This problem could be partially solved by retroactive adjustments on the allocation of SDR’s, but the proposal that has been submitted to us does not at present allow for such retroactive adjustments.
I would suggest that, in every year during which SDR’s are allocated, their allocation should be based on the total amount of SDR’s and distributed according to the quota of each individual country in that year. The amount of SDR’s allocated to that country in the past should be deducted from that amount. In this way, the total SDR’s allocated to an individual member will always be in the right proportion to the new current quota.
As to the coming quinquennial general adjustment of quotas, we suggest that it should be based upon the most recent data obtainable. The 1970 revised quota has even greater importance, since it will serve as a basis for the SDR allocations in 1971 and 1972. The inclusion of the 1968 figures will certainly contribute to a better representation of the liquidity needs of all Fund members. In addition, I believe that it would be desirable to readjust quotas more frequently—probably once every three years, instead of five, as at present.
I would now like to add a few remarks on the factors governing the distribution of quotas.
Almost since the establishment of the Fund, prolonged discussions have taken place concerning these factors and their relative importance. We know that it is not possible to solve the problems in this area at once. We feel, however, that two factors in particular should be specially considered.
Our present quotas are determined primarily by figures on imports and exports of goods. Imports and exports of services are ignored. We feel that, in the future, services should also be included in fixing the quotas. In general, it seems to us that no economic justification exists for a distinction between goods and services for the purpose of fixing the quotas. The international community has reached the stage where there are few, if any, problems in compiling data concerning the balance of services. We therefore suggest that the newly introduced Set II calculations should serve as the basis for the quota adjustments.
Another element that should be taken into account in establishing quotas is the increasing influence of debt service, including retirement, on the balance of payments of developing countries, in the light of those countries’ need to maintain adequate reserves.
The developing countries have to devote an increasing share of their export earnings and capital imports to foreign debt service, thus further limiting that part of the reserves which can be used for financing their international trade. Any cyclical or temporary contractions in their export earnings will aggravate their situation far more than that of countries with fewer expenditures for debt service, including retirement.
We realize that special increases in the quotas of the developing countries cannot and should not serve as a possible substitute for long-term capital imports. They should, however, serve as a necessary supplementary measure to enable those countries to overcome temporary setbacks.
I would now like to add a few words concerning recent economic development in Israel. During the past two years, 1968 and 1969, Israel has enjoyed a high rate of economic growth. The GNP has, during those years, grown at an average annual rate of 12 per cent. Gross investment has grown at an average annual rate of 17 per cent, and industrial exports, which must be the basis for export expansion in the future, at a rate of 20 per cent.
However, the further development of our economy and special needs due to our international situation have jointly caused a rate of increase in imports that has exceeded an otherwise satisfactory growth in our exports. These factors have resulted in a temporary increase in the balance of payments deficit, and in a drop in the level of our foreign exchange reserves.
In order to deal with this problem, we have taken certain monetary and fiscal measures designed to reduce that part of our imports that is not essential to further economic development. We hope to see the effects of those measures during the coming year and are, of course, keeping the situation under close review.
I would like to thank the Managing Director and the Executive Directors of the Fund for their cooperation and for the understanding they have shown of the difficulties we have encountered during the past year. I particularly would like to add an additional word of gratitude for their response in connection with our recent drawing. In conclusion, I would like to repeat the expression of hope with which I began—that the coming year will see further, and even more meaningful, developments in our international monetary cooperation, which will accrue to the benefit of all our members and of all mankind.
Statement by the Governor of the Fund and Bank for Ceylon—U. B. Wanninayake
Mr. Chairman, let me at the outset congratulate you on your being appointed the Chairman of this meeting. I would like also to say how pleased I am to be in Washington once more. As usual, the President of the Bank, Mr. McNamara, and the Managing Director of the Fund, Mr. Schweitzer, have given us the best in leadership and service. The Annual Reports of the two institutions are documents which are of immense value.
Both the Bank and the Fund have continued to play a very helpful role in my country’s efforts toward economic progress. I would like here to record our appreciation of the work done by their staffs to help us in our endeavor to solve our problems. . . .
Let me now turn to matters concerning the Fund. The maturing of the SDR scheme is naturally a matter for great satisfaction. It is a notable step forward in international monetary cooperation. But I would like now to express some of my thoughts about future steps that could be taken. I have, at each of these Annual Meetings, which I have attended since 1965, persisted in referring to the desirability of establishing a link between the creation of new reserve assets and the flow of resources for development. I am glad, indeed, that there now appears to be growing support for this proposal. It was clear to me that the volume and timing of new reserve creations should be determined strictly by global liquidity needs. The SDR scheme ensures that this is so, but, once additional liquidity has been created, it is appropriate to ask whether the relief this would provide to the advanced countries should not be made an occasion for augmenting the much-needed flow of resources for development. The arguments in favor of this have been made elsewhere and I will not go over them again. I am aware that the present SDR scheme rules out the possibility of an “organic” link between liquidity creation and resources for development, but numerous methods could be devised by which the recipients of SDR’s among the advanced countries could make a fair proportion of the additional resources accruing to them available for development financing. I am aware that this question has recently been studied in detail in other forums, notably by UNCTAD. I would wish to commend these ideas for further consideration and make the specific proposal that the Fund, possibly in collaboration with the Bank, make a complete study of this issue, and I do hope that concrete and practicable proposals would emerge out of this.
I welcome the statement of the Managing Director on the first day concerning the need to supplement the SDR scheme by providing to member countries further access to liquid resources through an increase in Fund quotas. The developing countries are greatly in need of bigger quotas in the Fund. While they normally share in the general increases in quotas that take place periodically, I would like to suggest that a review be made as to the basis on which their quotas have been established with a view to adopting more appropriate yardsticks than those applied in the past. In this connection, some special weight needs to be given to the consideration that the Fund is a more important source of short-term resources for developing countries than is the case with advanced countries. The developing countries have very small reserves and limited access to other sources of short-term resources. In connection with quotas, I wish also to express my concern about another possible development. This is about the need not merely to maintain the relative share of developing countries in the Fund quotas, but also to increase their share. The relative share in quotas is important not only in the context of the scheme for SDR’s, but also in the context of the role which developing countries play in the decision-making process of the Fund. Unless such action is taken to reverse this trend, particularly through a selective increase in the quotas of developing countries, there is a danger that their relative share in quotas will tend to fall. This is because developing countries are experiencing a progressive decline in their share in world trade, which has been an important yardstick in the determination of quotas.
I would like to welcome the constructive role which the Fund has played in respect to the problems caused by the instability of primary products. The new facility relating to buffer stock financing is one of the elements in this constructive role. It should be appreciated, however, that not all primary producing countries are in a position to benefit from this facility. In the case of my own country, for example, exporting mainly tea, I see little prospect for the application of this instrument. Nevertheless, for us the problem of declining primary product prices is as acute as ever. A persistent long-term trend of falling tea prices has further aggravated our balance of payments this year. In recent years, my country has witnessed a very successful upturn in economic activity based on the expansion of domestic agriculture and domestic industry. This process of economic recovery was assisted by external resources from donor countries, the Bank and the Fund, but our successes on the domestic front have not provided the relief they should have provided for our balance of payments because our export earnings have been undermined by declining prices for our commodities, particularly tea. We are endeavoring, in cooperation with producer and consumer countries, to bring about an international arrangement that would stabilize and strengthen the price of tea, but, in the meantime, we continue to suffer from these adverse developments. What is more, our current difficulties have been intensified by the need to repurchase drawings made earlier under the compensatory financing facility despite the fact that our export earnings have not recovered and did in fact fall below the level reached at the time the drawing was made. I would like very earnestly to suggest that the Fund give some further thought to this problem with a view to easing the burden of repurchase in situations such as this. I would like, in particular, to suggest that attention be given to the possibility of either extending the repurchase period over a much longer interval or of making repurchases conditional on the recovery of exports.
Finally, I would like to refer briefly to the question of the adjustment mechanism. I have been much interested by the ideas currently being canvassed about reforms which would permit a great measure of exchange rate flexibility. I do not wish to comment on the effectiveness of these changes for the advanced countries, although I should say that they are to be welcomed to the extent that they enable these countries to pursue more liberal policies in the fields of aid and trade. I would like to urge that an extensive study be made on the implications of these proposals for the developing countries, particularly in terms of their possible impact on their reserves, their terms of trade, and the domestic prices of their primary commodities. I can see some awkward problems that may arise, and I would like to say at this stage that these need to be studied. The developing countries, however, face another question concerning the exchange rate system most appropriate to their needs and I do not think that the move from a fixed exchange rate to a system of very limited flexibility would provide the answer for developing countries. Their requirements may be of a different kind, perhaps in the direction of a greater degree of flexibility, and the adoption, where appropriate, of dual or even multiple exchange rates. I would like also to say that when exchange rate adjustments are considered for developing countries, special attention needs to be given to the possible impact of these adjustments on their terms of trade and on the domestic price cost structure.
Statement by the Governor of the Fund and Bank for Lesotho—P. N. Peete
Allow me to join in the welcome already extended to the new members of our institutions, and in particular to our neighbor, Swaziland, and Southern Yemen, both of whom are taking part in these meetings for the first time. . . .
With regard to some of the important issues that have been raised and discussed here, I would like to make the following brief comments. First, that to my country, which is heavily dependent on other countries for budgetary and development aid, the year under review has been one of encouragement, hope, and despair. . . . The year was also full of hope because of the agreement to activate the special drawing rights scheme. The Managing Director of the Fund, Mr. Schweitzer, and those who work so untiringly on this scheme deserve a special word of appreciation from us all. Lesotho will formally participate in this scheme. The activation of special drawing rights has proved once again that with determination and good will we are still capable of solving some of the most difficult economic and monetary problems that confront our world. The year is also full of despair at the rising interest rates in major capital markets as a result of excessive use of monetary policies to restrict inflation. This general increase in interest rates which led to an increase in the Bank’s lending rate, can only compound the debt-servicing problems of many developing countries, especially when they embark on social and educational programs that yield returns in the long run. This prospect is disturbing to us and we appeal to developed countries not to overlook the interests of developing countries, especially small ones, in their efforts to contain inflation and achieve balance of payments equilibrium.
Secondly, the flow of official resources from developed to developing countries is already leveling off before reaching a magnitude sufficient to meet identified development needs. The resulting gap can only be filled by private capital investment and know-how. Through various tax concessions and inducements and through the establishment of a Development Bank, we in Lesotho are already taking steps to maximize this flow. But all these will not avail unless close cooperation between donor and recipient countries is achieved in order to stimulate this flow and unless there is further cooperation among contiguous developing countries in order to avoid the risk of cut-throat competition to attract such investment. . . .
Finally, I would like to offer one very general comment. Despite all that has been said and written, especially in this very forum over the past few days, I am left with the impression of two worlds each of which is imperfectly aware of the other’s existence and needs. Each sees the other “as through a glass darkly” and only dimly comprehends the other’s needs and motives. This is a sad commentary on an age remarkable for its technological achievements in the field of communication. I have no doubt that we have both the will and the means to do much more than we are doing. All that is missing is determination.
October 3, 1969.