Presentation of the Twenty-Fifth Annual Report1 by the Chairman of the Executive Board and Managing Director of the International Monetary Fund Pierre-Paul Schweitzer
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1970
Mr. Chairman, we have indeed been honored by the presence of Their Majesties at the opening of our sessions. I should like to associate myself with your thanks to the Prime Minister for his cordial welcome and to the Government of Denmark for the invitation to come here and for the efforts that have been made on our behalf. It is for me a particular pleasure to visit this beautiful city again. In greeting those present, I am also especially happy to include the Governors for Cambodia, Equatorial Guinea, and the Yemen Arab Republic, representing countries that have become members of the Fund since the close of our last Annual Meeting.
The past year was another busy and eventful one for the Fund. The Fund’s activities during the year have been fully described in the Executive Directors’ Annual Report, which I have the privilege of presenting to you. I shall therefore address myself only briefly to the important issues that occupied the Fund’s attention, before turning to major problems that are presently facing the world economy.
Substantial progress was made toward a general increase in Fund quotas—the third such increase in the Fund’s history. The Executive Directors prepared a detailed proposal that the Governors adopted on February 9, 1970. Under this proposal the size of the Fund can increase by the equivalent of $7.6 billion, to a total of nearly $29 billion. The new quotas are expected to be generally in effect by the end of the year. Enlargement of the Fund by about 35 per cent will, I am sure, enable it to be even more effective for the benefit of its members through its administration of conditional liquidity.
In the past year the Fund has undertaken a major operational task: the allocation of special drawing rights and the performance of the functions assigned to it in connection with transactions and operations in this new reserve asset. As a consequence of the decision of the Governors a year ago to activate the SDR facility on January 1, 1970, the new provisions relating to the Special Drawing Account in the Articles and in the Rules and Regulations were submitted to their first test of practical application. The Executive Directors, who took a number of decisions with respect to the operation of the system in late 1969, have kept this operation under close watch during its initial period. Supervision of the new facility is a permanent addition to the responsibilities of the Executive Directors.
In my judgment, the experience up to now with the operation of the special drawing rights facility has been highly successful, and it can be stated that the SDR has become established as a reserve asset. The broad scope of the designation plan has made it possible for a wide group of participants, each with sufficient strength in its balance of payments and reserve position, to accept special drawing rights in designation—including both large and small member countries, with advanced or less advanced economies. Participants have thus encountered no difficulty in using SDRs to acquire convertible currencies, and have also used them in payment of charges and repurchases to the General Account, which now holds approximately 275 million units of SDRs. The General Account has already made some use of its SDR holdings for certain payments to participants, in agreement with them. And it will be able, when appropriate, to acquire with SDRs, as it can with gold, the currencies needed for use in its transactions and operations.
The allocation of SDRs is designed to meet the long-term global need for reserves, taking into account prospective developments in other reserve assets. In the first half of 1970, there was a sizable expansion of other reserves, chiefly in the form of U. S. dollars, reflecting the re-emergence of a large U. S. balance of payments deficit in official settlements. In view of the sharp fluctuations that have characterized the U. S. balance of payments in recent years, to which I shall refer later, it is too early to come to a judgment about the significance of the recent increase of dollars in international reserves. But at this juncture I would make two comments. First, these developments emphasize the importance to the international monetary system of a sustained improvement in the U. S. balance of payments. Second, until the payments position of the United States is brought into balance, it is important that the deficit should be financed by the use of U. S. reserve assets to the extent necessary to avoid an excessive expansion of official holdings of dollars by other countries. A policy of this kind is indeed necessary if control over the issuance of special drawing rights is also to provide the means of regulating the aggregate volume of world reserves.
Throughout the past year the Executive Directors have given close consideration to the role of exchange rates in the adjustment of international payments. In last year’s Annual Report the Executive Directors had already referred to their study of this subject. This year they have submitted a separate report on it incorporating the results of their further study.
I would draw the attention of Governors particularly to Part II of the report, which contains the policy views of the Executive Directors. These views reflect broad agreement on certain major issues related to the exchange rate system. The Executive Directors express their conviction that the basic principles of the Bretton Woods system are sound and should be maintained and strengthened. They note the fact that, in the past, exchange rate adjustments have sometimes been unduly delayed and that in certain cases prompter and smaller adjustment in members’ parities would help avoid the building up of large fundamental disequilibria and the eventual recourse to sharp adjustments. The Articles are no bar to such prompter and smaller changes in parities, whenever these are necessary to correct fundamental disequilibria.
In their report, the Executive Directors discuss three areas in which certain proposals have been made for amendment of the Articles of Agreement in order to enhance somewhat the flexibility of exchange rates. The proposals cover small and gradual changes in exchange rates, slightly wider margins around par, and temporary deviations from par value obligations. The Directors have not come to a final view with respect to these proposals. They have indicated in the concluding section of their report that, in the period ahead, they intend to give particular attention to the issues that remain open, including their legal aspects. In their further consideration of this subject, the Executive Directors would be greatly assisted by expressions of views by Governors in the course of this Annual Meeting.
Turning now to the world economy, I shall focus on two major features of the current scene. One of these is the prevalence of inflationary pressures among the industrial countries; the other is the improved—though still far from satisfactory—structure of international payments. I shall end with some observations on the impact which this situation has on the developing countries.
Inflationary pressures grew progressively more acute in the industrial countries during the course of 1968 and 1969, and are now rooted in strong cost-push forces that render the control of inflation particularly difficult. The price increases that industrial countries experienced in the first half of 1970 were, generally speaking, the largest since the Korean war period nearly two decades ago.
Although inflation has become widespread throughout the industrial world, the current situation in North America differs significantly from that prevailing elsewhere. Inflation has been a problem almost continuously in the United States and Canada since late 1965. In most other industrial countries, strong upward pressures on prices and costs did not become apparent until early 1969, after the respite from inflation that was produced by the 1966–67 economic slowdown. Consequently, efforts of the industrial countries to bring inflation under control and to eradicate inflationary expectations have been under way longest in the United States and Canada; in these two countries conditions of excess demand have been eliminated and, indeed, relatively high unemployment has emerged. On the other hand, in most European industrial countries and in Japan the pressure on resources remains strong.
The stabilization efforts of the U. S. and Canadian authorities in the past few years have been attended by some disappointment as the inflationary momentum and psychology proved unexpectedly stubborn. In recent months, however, some price developments have been encouraging. I refer mainly to the slowing in the rise of consumer prices in Canada and of wholesale prices in the United States. In both countries wage settlements are still running substantially in excess of normal productivity growth and the task of economic management is clearly difficult—to restore a reasonable degree of price and cost stability while avoiding prolonged and unacceptably high unemployment.
Arrest of the generalized inflationary trend in the industrial countries is imperative for the longer-run health of the world economy. Basically, such an achievement will require that the national authorities attach a very high priority, among their objectives of economic policy, to the restoration of price stability. The United States and Canada will need to persevere in their protracted stabilization efforts—with particular care, in the current situation of economic slack, to avoid excessively expansionary policies that might nullify the progress already made against inflation. Many industrial countries outside North America will have to reduce demand pressures considerably if inflation is to be restrained. Without determined and mutually reinforcing counterefforts on the part of all the larger industrial countries, the further international spreading of inflationary tendencies would inevitably handicap or frustrate domestic stabilization programs among developed and developing countries alike.
In their efforts to eliminate inflation, industrial countries must rely primarily upon fiscal and monetary policies. However, it should be recognized that these policies, used by themselves, may prove incapable of stopping a strong wage-price spiral without entailing excessive economic and social costs. It is logical that national authorities should give consideration to the supplementation of fiscal and monetary policies with what has come to be called incomes policy, comprising a wide range of measures that might be used to influence the movement of prices and incomes in the public interest. Such measures may be particularly useful in dealing with continuing cost-push forces at a time when fiscal and monetary policies have stamped out excess demand and the economy is operating below capacity. Whether an incomes policy should be adopted, and what form it should take, must be judged by each country in the light of its political and other circumstances. But an incomes policy should always be viewed—and I emphasize this—as an adjunct to effective fiscal and monetary policies and not as a substitute for them.
Despite the problem of inflation, the recent period witnessed a number of achievements in the international payments field. Of major importance was the progress that became apparent in the area of balance of payments adjustment as the external positions and prospects of several European countries improved markedly. Shift of the United Kingdom’s payments balance into substantial surplus, rapid improvement of the external position in France, and movement toward a more sustainable structure of the German balance of payments—these developments had by early 1970 signaled the successful realignment of European currencies. They had also helped to restore confidence in the international monetary system and to calm the financial markets.
Likewise contributing to this change in the financial situation were three international actions which, it was widely recognized, would improve the functioning of the international monetary system. One was the launching of special drawing rights within the Fund, representing as it did a historic move aimed at assuring appropriate growth of world reserves through a rational process of international consultation and decision. The two other international actions were the provision for a substantial increase in Fund quotas and the adoption of a policy on purchases of South African gold.
Notwithstanding this very welcome progress, there are still some problems in the international payments field. Several major countries have not yet achieved a durable balance in their external payments. In the case of Canada, upward pressure on the reserve position led to a decision last May not to maintain the exchange rate for the Canadian dollar in accordance with the Articles of Agreement; I trust, however, that an effective par value will be resumed at the earliest possible date. From the standpoint of the functioning of the international system, by far the most important problem is posed by the deficit in the balance of payments of the United States. The need to rectify the U. S. payments position is termed by the Annual Report “the most urgent remaining task in the field of international payments.
The over-all U. S. payments position, as I have already mentioned, has exhibited marked fluctuations in recent years. In terms of the balance on official settlements, the United States was in substantial surplus in 1968 and 1969. Although the 1968–69 surpluses imparted an element of temporary strength to the international monetary system during an interval of currency instability in Europe, they were not indicative of the underlying U. S. payments position. Neither, however, were the heavy official settlements deficits experienced by the United States in the first two quarters of 1970 a valid gauge of the underlying position. Both the surpluses and the deficits were due primarily to volatile short-term capital flows. Excluding such flows, the U. S. “basic balance” in the 1969–70 period was in deficit by some $3–4 billion at an annual rate. This signifies a continuing problem, but not on the scale suggested by the official settlements deficits so far this year.
The balance of payments problem of the United States may be viewed as centering in a current account surplus that is too small to cover the outflows of U. S. private long-term capital and government expenditures abroad. This surplus shrank severely under the impact of several years of excess demand and inflation, but it has improved quite markedly since about the middle of last year. The partial recovery of the current account surplus has stemmed from the conjuncture of economic forces that I just described—the cooling off of the U. S. economy, which has moderated demand in the United States for imported goods, and the continuation of rapid economic expansion abroad, providing a strong demand for U. S. exports. This same conjuncture of forces, which have yet to run their course, is favorable to a further improvement of the U. S. current account surplus in the period ahead. How big this improvement will be, and how well it will be sustained once the other industrial economies have stabilized, will depend on policies, especially those in the United States. With pursuit of policies giving emphasis to the elimination of inflation and the regaining of price and cost stability, the United States will have an excellent opportunity, in my judgment, to recoup losses of recent years in its external trade account and thus to effect a fundamental strengthening of its balance of payments position. I would stress that improvement in the U. S. balance of payments—and, hence, the sound functioning of the international monetary system—depends greatly on the current program to stabilize the domestic economy.
This brief survey of the international situation points up my conviction as to the central need for restoration and maintenance of financial stability in the major industrial countries. I see this need not least because of the heavy impact which the policies of those countries have on the developing nations. Of course, it is essential for the developing nations to continue and intensify their own efforts to achieve greater stability. But the record of the past half-dozen years or so indicates a number of ways in which they would stand to gain from an improvement in the economic policies of the main industrial countries.
These policies have shown a tendency to alternate between overexpansion and contraction. When excessive rates of resource utilization in the industrial countries are followed by periods of slack, the less developed countries tend to lose earlier gains in the volume and prices of their exports while they may sometimes feel a more lasting impact of cost escalation on prices of the manufactured products that predominate among their imports. When industrial countries fail to apply fiscal policy and resort to heavy use of monetary policy in a setting of high demand pressures and rapid price increases, many developing nations are affected by the resultant higher cost and restricted availability of credit in international financial markets. Furthermore, the unevenness of policies in the industrial world complicates the already difficult task faced by the developing nations in the area of economic planning. And it is especially unfortunate that the industrial countries—in their evident preoccupation with inflation, balance of payments difficulties, and budgetary pressures—have not accorded the flow of development assistance the high priority it deserves.
For the great majority of our members one of the main aims of government is to speed up the rate of development. The Fund’s Articles and the Fund’s policies support this aim. Of course, development cannot be gauged simply in terms of statistical growth rates, and must embrace social as well as economic progress. Development is the road—the only road—toward raising the standard of living and toward solving the grievous problems of unemployment and underemployment in many countries. The Fund collaborates closely with the World Bank and with other international organizations engaged in this great task.
An assured flow of development assistance that is adequate in amount and quality is a necessary condition—albeit far from a sufficient condition—for a satisfactory rate of development. The President of the Bank will, I am sure, have a good deal to say on this subject. For my part I want to stress two aspects of it that touch directly on the activities of the Fund. First, as I already indicated last year, the acceptance of the principle of an adequate controlled growth of international reserves should be an important contribution to a world economic climate in which development aid can assume its proper role. And, second, we in the Fund attach particular importance to elimination of the practice of tying development loans—a practice that leads not only to reduced real aid, but also to distortions in trade and exchange arrangements of recipient countries as they endeavor to facilitate the absorption of tied aid imports. I was glad to learn, therefore, that at the DAC High-Level Meeting in Tokyo last week a large majority of donor governments declared themselves to be in agreement, for the first time, with the principle of untying development loans.
The developing nations would gain greatly from a trade policy in the industrial countries giving them the maximum possible access to the markets of those countries. It is the developing nations, too, that suffer most when trade policy becomes less liberal. I am particularly concerned that the drive toward freer trade, which was one of the most encouraging aspects of international economic policy in the postwar period, seems now to have lost its forward momentum—indeed, there are signs of retrogression. This is the more regrettable since the establishment of the SDR facility should now enable countries to view their long-run external positions with greater confidence. I urge all members, in particular the industrial countries, to maintain and indeed to intensify a long-run liberal approach in trade policy, giving due recognition to the benefits of this approach to countries individually and to the world as a whole.
The Fund stands ready, with all the means at its disposal, to assist the developing countries in their struggles. In this endeavor, the Fund will, I am sure, be able to count on the spirit of cooperation that has been so outstandingly demonstrated by all its members.
September 21, 1970.