Chapter

Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
October 1970
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Statement by the Governor of the Fund for China—Kuo-Hwa Yu

On behalf of my delegation, I wish to associate myself with my fellow Governors in congratulating Mr. Schweitzer, Mr. Southard, and the Board of Executive Directors for their continued success in the operation of the International Monetary Fund.

The period that we have just gone through is correctly assessed in the 1970 Annual Report as one of the most eventful both for the Fund and the future of the international monetary system. There was vigorous expansion of world output and trade. There was, moreover, persistent inflation in a number of industrial countries. In world money market centers, interest rates soared to unprecedented levels. Disparity in national commodity prices because of varying degrees of inflation led to shifts in competitive positions. Disparity in interest rates and expectation of devaluation or revaluation led to erratic and speculative movements of short-term capital. As a result, a few of the world key currencies came under undue pressure and had to go through the painful process of devaluation or revaluation.

This was the background under which the Fund worked incessantly and successfully toward the easing of international liquidity, step by step. The substantial increase in Fund quotas will provide a sizable increase in conditional liquidity. The establishment of the special drawing rights assures an orderly growth of international liquidity through collective action. Since only one allocation has been made, the proportion of SDRs in the current composition of reserves is as yet small. But the relative weight of SDRs in respect to other forms of reserves is bound to increase with successive allocations in subsequent base periods. The operation of the SDR scheme is still of limited scope and the full effect of the system remains to be seen. But even the institution of the system helped to take the wind out of rampant gold speculation, thus contributing directly to the maintenance of world financial stability. It is gratifying to know from the Report that the Fund is continuing its efforts in studying other ways and means with a view to attaining stability consistent with growth.

As regards the adequacy of the economic policies pursued by the key industrial countries, the Report maintains that, although economic management has vastly improved during the last 25 years, further improvement could be achieved through a better fiscal and monetary policy mix, so that countries could come to grips with inflation and balance of payments disequilibria at an early stage. This is indeed a matter of universal concern, because abrupt economic decisions of the key industrial countries are liable to reverberate through the fabric of the economy of all nations. The effect, I may add, is particularly serious to the economies of those developing countries whose industries are beginning to develop. While the key industrial countries are those which did their utmost to help the developing countries through bilateral aid and the provision of capital for long-term, low-interest multilateral loans, they are undoing the good work at the same time by the imposition of quotas and other forms of trade restrictions.

With reference to the economic gap between the industrial and the less developed countries, the Report contains some encouraging notes. The rate of increase in real GNP of the less developed countries in 1968 and 1969 matched that of the developed countries on a per capita basis, in contrast to the considerable lag for the 1960s as a whole. Again, by late 1969, the collective terms of trade of the less developed countries were more favorable than at any time since the late 1950s, as metal prices were at record levels and the downward trend in agricultural prices was halted. Consequently, their reserve position improved. On March 31, 1970, less developed countries accounted for 21.3 per cent of world reserves compared with 13.6 per cent at the end of 1962. The improvement was found to be most pronounced in that group of countries that are rapidly achieving a more diversified industrial base.

The Republic of China is one of the countries among that group. In recent years our economic indicators have been generally satisfactory. In 1969 our GNP, in real terms, rose by 8.66 per cent, and this rate will probably be maintained in 1970. In 1969 our total foreign trade rose by 24 per cent. At least the same rate of growth is expected in 1970 and, during 1970, the combined value of our exports and imports will probably reach the $3 billion mark. Again, in 1969 and 1970, there are surpluses in our balance of payments, and there is a substantial increase in our external reserve position. This enabled us to complete our subscription payment of our Fund quota last month, after many years’ delay because of the tremendous damage that the Republic of China suffered during and since World War II. With the approval by the Executive Board of a par value for the Chinese currency on September 4 and the completion of local currency payments, the way is now open for regular transactions with the Fund and the maintenance, I trust, of even closer relations.

Besides the regular consultation in 1970, my country is much indebted to the Fund for giving us valuable technical assistance. In the fields of tax reform, banking legislation, and central bank operations, the Fund has, upon our request, dispatched teams of high-caliber experts to work with us and to advise us. The full implementation of their suggestions will take time, but I am happy to report that the impact of their expert advice is already felt in a number of policy directives, particularly in central banking.

We have been informed of the adoption of the Resolution on the 1970 Election of Executive Directors. With your indulgence, I still hold the view that this Resolution will accentuate the trend of underrepresentation on the Executive Board of the less developed countries. Indeed, the Board of Executive Directors recognizes the need for consideration of the problems of its size and structure. While I share the feeling that the size of the Executive Board must remain within manageable proportions, I fail to see why, if the IBRD can manage with a Board of 21 for the next two years, the Fund cannot do with the same number.

Before I conclude, I must, on behalf of my delegation, express our warm thanks to the host country for its hospitality and many kindnesses shown to the visiting delegates. This is my first visit to the beautiful and historical city of Copenhagen, and I am overwhelmed by its charm and the friendliness of the great Danish people. Historically, the Danes were among the first European traders to come to my country, the Republic of China. May I hope that this economic relationship will revive and flourish, for the mutual benefit of our two peoples.

Statement by the Governor of the Fund and Bank for Kenya—Mwai Kibaki

I would like first to thank the Danish Government for the warmth of the welcome we have received since arriving in Copenhagen and for the excellence of the facilities that have been made available for this meeting. The efficiency with which this Annual Meeting and all the concurrent subsidiary meetings are organized owes much to the high quality of these facilities.

I must also compliment the Managing Director of the Fund and the President of the Bank on the usual high standard of excellence of their Annual Reports. These have become most valuable sources of information concerning the world economy, as well as stimulating commentaries on the development of world economic affairs. The willingness of these Reports to comment critically on some of the more important issues facing this Annual Meeting is to be welcomed and I hope that in future years they will continue to examine critically and offer solutions courageously.

The frankness of Mr. Schweitzer and Mr. McNamara in their keynote statements was most stimulating. In particular the emphasis in those statements on the fact that the present policies of the governments of the more important trading economies are harming the rest of the world is timely. I have noted with satisfaction the reassurance that the developing world can look to the Bank and the Fund for support in what they regard as the fundamental issues facing them at the present time.

I, too, welcome the relative calm now prevailing in the international exchange markets. I believe the problems of the exchange rate mechanism require further study before changes in the existing system can be made. But the problems of rising prices and the policies adopted by a number of major industrial countries to control the rate of inflation are of far greater urgency. The remarks of Mr. Schweitzer on this subject are apposite. The “stop-go” policies of the industrial countries are having a “stop-go” effect in the developing world. Control of inflation in the industrial countries must be undertaken without imposing the burden on the developing world of excessive rates of interest on international borrowing. The expanding needs of the developing world for development aid can only be met by a reallocation of resources within the major industrial economies themselves. Provision for these resources must be found in such a way that the industrial countries do not provide financial aid to the developing world with one hand and take away economic resources from the developing world with the other in the form of excessive interest rates, lower commodity prices, hindered access to markets, and other restraints on economic growth. The efforts of donor countries in providing increasing quantities of development aid are now being nullified by their policies with regard to the control of inflation with too much emphasis on monetary policy combined with illiberal and protectionist trade policies.

The problems created by ever-increasing international borrowing rates are now affecting all developing countries. My own country has up till now been able to manage its economic affairs without incurring serious debt problems, but in order to implement our new and enlarged Development Plan it is necessary for us to borrow more substantial amounts from outside the country in order to cover the inevitable foreign exchange gap. With interest rates rising, the cost of debt servicing is bound to rise at a faster rate than our current account receipts of foreign exchange. In terms of the usual concept of the debt service ratio, my country’s position will, therefore, deteriorate in the next few years unless we are to cut back the rate of development spending as a whole. Economically, this would mean cutting back our rate of growth. Politically, taking into account the rising economic and social aspirations of the people of my country, it would be impossible. We are, therefore, faced with a dilemma beyond solution and unless some answer can be found to the present problem of high international interest rates, my country will have no alternative but to accept a deterioration in its debt service ratio with all that it implies for the longer term. In my view, it should not be necessary for the developing countries to be faced with such a dilemma. The industrial countries should be prepared to tackle their economic problems with policies that do not harm the rest of the world so violently. . . .

The more immediate problems relating to international liquidity have now been overcome with the creation of the Special Drawing Account. I would remind Governors that their colleagues from the developing world were strong supporters of the creation of the new form of international liquidity. They recognized that the interest of the world community as a whole was best served by maintaining a buoyant level of world trade. Although they had, and continue to have, strong views regarding the implementation of the SDR scheme, their views were at variance with those of the more influential voting members of the Fund. But they did not let this disagreement cause them to withhold their support for the scheme as a whole. I would, therefore, plead that the same feeling of common interest should inspire all Governors to consider the problems of aid and economic development which are now the most serious problems facing the world economic community.

The allocation of SDRs in accordance with Fund quotas does not necessarily mean that SDRs have been allocated according to liquidity need. It was a convenient means of carrying out the initial allocation to allow the scheme to go forward. This was the first priority. But now that this primary objective has been achieved, it should be possible, and indeed it is necessary, to examine in a fundamental way where liquidity need is greatest. I am aware of the arguments that have been put forward in the past against such proposals, rhetorically described as confusing liquidity with aid. There are, however, in my view strong arguments for using this new form of international liquidity as a form of development finance, either directly through the allocation of SDRs to developing countries or indirectly by channeling them through lending institutions such as IDA. I accept, however, that many Governors have strong suspicions, if not deep-rooted objections, to such an idea, and, faced with such a strong difference of opinion among the Governors, it seems only reasonable that the Bank and Fund should jointly be asked to examine the economic implications of this idea with the same skill and freedom from prejudice that they have brought to other studies in the past. If such a study were completed well before we next meet, it is possible that all of us will have been able to arrive at a more informed view before the next allocation of SDRs is due to take place. . . .

I must also urge, as many have done before me, that the concept of tied aid should be eliminated. It is not yet clear to me how the recent agreement in the Development Assistance Committee on this subject will be implemented, but I would plead that implementation should be immediate and that those countries which did not subscribe to the agreement in Tokyo defer to the majority in the cause of common good. . . .

I welcome the recommendations of the Pearson Commission regarding the need for greater coordination between the Bank, the Fund, and the United Nations Development Program. We have in the developing countries too often in the past been faced with economic missions from different agencies arriving at our offices shortly after one another to ask the same questions. I strongly support the idea that the local representatives of the United Nations Development Program should play a more positive role in the coordination of information required by both the Bank and the Fund. . . .

Statement by the Governor of the Fund and Bank for Trinidad and Tobago—F. C. Prevatt

The Trinidad and Tobago delegation is very happy to be in this historic city of Copenhagen to attend the 1970 Annual Meeting of the Fund and the Bank Group. This meeting has had the signal honor of being graced by the presence of Their Majesties. I would like to thank the Government and people of Denmark for inviting us and for making such excellent arrangements for us to do our work.

My country is small and densely populated. We have a high rate of unemployment among our young population who share the same hopes, expectations, and frustrations of other young people all over the world. We are exerting strong efforts on our own to mobilize our domestic resources for development and we are cooperating actively with our neighbors in order to improve our position both individually and collectively. The limitations of scale and the other well-known obstacles to entry into the commercial capital markets make it necessary for us to depend extensively on the international and regional development institutions not only for development finance, but also for technical advice and training. We therefore have a deep interest in the broad policies and in the functioning of these institutions.

The general remarks which I shall make to this meeting must be read in the context of the particular circumstances which I have described. These remarks I believe will have relevance for many other members of the Fund and the Bank.

Our experience over the last decade suggests to us that traditional analysis does not fully recognize the fundamental institutional and other obstacles encountered in the development process by small countries which have had a long history of foreign political and economic domination. We believe that the consequences of these influences on the formulation of an appropriate development strategy and methods of dealing with the problems arising therefrom would be a fruitful area of study for the two principal international financial institutions.

We are grateful for the very clear statement made to the meeting by the Managing Director of the Fund. I would like to congratulate him not only for his valuable statement but also for the very constructive work undertaken in the Fund during the past 12 months.

The objective appraisal which he gave of the operation of the special drawing rights scheme leaves us in no doubt that the scheme has operated satisfactorily. In the light of this practical experience the criteria which were used in making the initial distribution of special drawing rights should now be subjected to re-examination by the International Monetary Fund in the interest of equity.

The Managing Director has quite rightly focused attention on the need to accelerate the provision of employment opportunities and to increase the level of living of the large majority of the countries of the world and on the role of development finance in this regard.

In our view one cannot divorce the issue of international liquidity from that of development finance. At the same time we agree that important changes in policy by responsible financial institutions must be taken only after careful examination of all aspects involved.

With this in mind we would like to make the following two suggestions:

First, we are convinced of the practicability and the usefulness of implementing a link between the special drawing rights and the provision of additional development finance on concessional terms. In our view this matter has been studied sufficiently and the results have been unanimously in favor of a link. We agree with the position taken by some governments that the Fund should be requested to study the problems involved in the establishment of a link between the special drawing rights allocation and development finance before the next basic period of allocating special drawing rights begins; we would urge that this study be done in good time so as to permit a decision by the Board of Governors in 1972.

Second, we are of the opinion that the Fund can itself assist in the direct attack on the problem of development finance. To this end we propose that in this new development decade the Fund should give consideration to the procedures and safeguards which are necessary in order to permit it to invest a part of its reserves and surpluses in World Bank bonds at low rates of interest. Such a step would assist the Bank in lending at rates of interest which would more accurately correspond with the debt-servicing capacity of the developing countries, whose demonstrable need for additional development finance on reasonable terms has been adequately exposed by the Fund’s independent investigation. The rising debt burden being experienced by many developing countries, including my own, makes this step particularly important.

We fully endorse the suggestions contained in a recent report of the Fund’s Executive Directors that any modifications to the structure set up at Bretton Woods should be undertaken with care, but we believe that prompter adjustments of existing parity rates would materially improve the functioning of the system which we have. We congratulate the Directors on their useful report presented to us. We would have liked to see more attention given to the effects of the various proposals being considered on the position of the developing countries. Moreover, we are concerned by the fact that the defects in the existing system of adjustment have resulted in increased restrictions on trade. We therefore look forward to seeing the future study of the problems of exchange rate adjustments cover also the question of a reduction in restrictions on trade and the effects on the position of the developing countries.

We fully agree with the recommendation by the Executive Directors of the Fund that the composition, structure, and size of the Board should be reviewed. In this review, we urge that the procedures providing for representation on the Board should in no way impede the strong movement toward regional cooperation and regional groupings. Any such effect would be counterproductive, as it is through such cooperation and groupings that the developing countries hope to offset some of the disadvantages that hamper economic development, which must remain the principal purpose of the Fund. . . .

Finally, I would like to place on record the appreciation of my country for the very constructive cooperation which the staffs of the Bank and the Fund have given in the past 12 months. We sincerely appreciate their advice and assistance and the technical training which they have given to our officers. We look forward to continuing our productive cooperation with them in the years to come.

Statement by the Governor of the Bank for Tanzania—P. Bomani

It is a great pleasure to be participating in these meetings which mark a quarter century of activity by the Bank and the Fund and especially so in this pleasant and attractive city. I am happy to extend our thanks to the Government and people of Denmark for their warm hospitality. . . .

On the other hand, the combination of inflation in most industrial economies, high interest rates in all, and real economic stagnation in several, so clearly noted by the Chairman in his speech, is seriously damaging to all of us. As a developing country we find industrial import prices soaring, raw material export prices lagging behind, and interest rates on borrowing to fill the gap at almost prohibitive rates. The significance of this combination is all too evident when one recalls that during the 1960s the losses incurred by developing countries due to the adverse terms of trade were of the same order of magnitude as aid they received from the developed world. All that we were given—or more usually lent—on the aid side was taken back on that of trade. If industrial inflation, commodity stagnation, and high interest rates characterize the 1970s as they have the last two years, the outlook for global development is grim indeed, no matter what happens to the level of intergovernmental and multilateral loans and grants. . . .

In respect of the Fund we can only express our deep disquiet that the essential issue of establishing an institutional link between world liquidity creation and international resource transfers continues to be given secondary and not central attention. The precise form of the link is less critical—several alternative proposals of merit exist. What is primary is the achievement of the same degree of commitment to the speedy creation of a link as characterized the discussions leading to the creation of SDRs. In his speech the Managing Director noted the IMF’s readiness to assist development. This surely is the priority area for action on that subject. The SDRs were crucial to creating a frame in which the international liquidity problems of industrial economies could be solved. The link is equally crucial to creating a framework within which the development-related balance of payments problems of developing economies can be resolved. Just as it was the duty of developing economies to cooperate in the creation of the SDR system, so it is the duty of industrial economies to assist in bringing the link into being. The world economy is one. The needs of any significant group of its members are the obligations of all—obligations which can be ignored only at a high cost to the system and to its members.

In a developing economy a balance of payments problem need not be the result of mismanagement. It is also a necessary consequence of seeking rapid development. Rapid development in turn results in a growth of our international trade. It is therefore fully appropriate that a link be created between SDRs—designed to facilitate the orderly expansion of international commerce—and resource transfers in support of development. The combination of high interest rates, industrial inflation, and commodity stagnation to which I referred earlier underlines and reinforces the necessity for such an institutional link.

As members of the Bank and the Fund, we have the power to reorganize the international financial and monetary system to render it a more serviceable tool for development. We also have numerous proposals outlining how such changes could be made. If we fail to act it will not be the means or the way which were lacking but the vision and the will.

I fully share President McNamara’s view that the entire world must act more rapidly, more broadly, and more forcefully if talk of development and higher output are not to remain a bitter illusion and a tantalizing mirage for the majority of mankind who are oppressed by poverty, illiteracy, ill health, and inequality. The alternative is a permanent and widening gap between two worlds: a rich, industrial minority world and an impoverished majority world. That disastrous prospect cannot be averted without greater concentration of effort by the industrial world on the creation of the international monetary, resource transfer, and trade conditions which are essential to the cooperative development of a united and harmonious world.

Statement by the Governor of the Bank for Belgium—Baron Snoy et d’Oppuers

On behalf of the Belgian delegation, it is a pleasure for me to thank the Danish Government for its hospitality and the arrangements it has made to facilitate the work of this meeting.

I must also thank Chairman Nouira for his excellent speech in which he reminded us all of the magnitude of the tasks to be accomplished and the responsibilities incumbent upon us.

Mr. Schweitzer, in his remarkable address, drew our attention to a number of specific problems on whose solution equilibrium in international monetary relations depends. In this connection, I should like to pay tribute to the operations of the IMF during the past year. Not only has it continued, with its usual efficiency, to assist countries with temporary balance of payments difficulties and to give counsel to governments in the formulation and conduct of their economic and financial programs, but it has also carried out a far-reaching study of the functioning of the world’s monetary system and of the proposals for changes that have been worked out in various quarters.

The Executive Directors’ report on this subject is at once full, objective, and wise. It informs us that the basic principles adopted at Bretton Woods have lost none of their validity. Accordingly, it recommends that they be maintained and, in particular, that exchange rates should still be based on parities that are fixed but that may be adjusted to correct fundamental disequilibria, by a procedure guaranteeing observance of the interests of the international community through the intervention of the International Monetary Fund. This is a matter of fundamental importance.

By the same token, it rejects any proposals for reform, which, by upsetting the stability of the system, would endanger the progress of trade and development. I fully support these conclusions of the Executive Directors.

They do not, however, discard out of hand some few adaptations which, without affecting principles, would introduce a certain flexibility—as we have agreed to call it—into the system.

I am not personally convinced that the facilities envisaged would constitute a real improvement to the international monetary system and international monetary relations. I fear, rather, that they introduce elements of uncertainty and of instability that the world would better be without. In any event, as the Executive Directors’ report rightly emphasizes, it is the policies and their judicious application that are important. There are no techniques, however ingenious, that can replace them. This point cannot be sufficiently stressed. However, I think it would be useful if the Executive Directors were to continue their studies within the framework which they themselves have defined in their report and I, for my part, am of course prepared to examine the conclusions in due course.

I must now direct your attention to the new factor that has arisen in connection with the study of these problems in the form of the decision adopted in principle by the EEC countries to form among themselves, in coming years, an economic and monetary union. Active consideration is now being given to the definition of the various stages in this integration process. Any flexibility in relations between the member countries’ currencies is ruled out for the future. Furthermore, the procedure under study is to lead gradually to the elimination of variations between these currencies so as to assure complete stability based on par values.

The attitude of the EEC countries toward flexibility in the international monetary system will thus be largely influenced by the system they are going to establish among themselves. Any flexibility could only exist outside this system, and, furthermore, their position in response to any external flexibility will necessarily be a common one. At all events, the technical adjustment required for the reinforcement of stability within the EEC must be put into effect before any greater external flexibility can be envisaged.

In addition, I should like to emphasize that the problems we are discussing are not purely monetary. They have economic and social aspects on which the Executive Directors should deliberate.

International monetary relationships are undoubtedly the reflection of economic relationships, but are also likely to influence these profoundly. A shift in monetary relations, and particularly in exchange rates, may bring about important changes in countries’ capacity to compete and, therefore, in the level of their economic activities. Governments incur a grave responsibility in provoking changes through the interplay of exchange rates. Cautious thought should be given in every situation to the time for action and the extent of that action. The psychological consequences of this action, in particular, should be taken into account. The repercussions of any decision in the sphere of foreign exchange may be serious not only for the country making it but also for other countries. This is certainly why, at Bretton Woods, it was decided that these changes could be made only under international control. We must not depart from this rule, which is based on a just appraisal of the need for international solidarity. On January 1, 1970, the Fund made the first allocation of special drawing rights. The experience acquired since that time is too brief to be able to make a full assessment of the results of this new form of international monetary cooperation. But it must be noted that a balance of payments disequilibrium in certain important countries does not constitute a favorable basis for the functioning of the special drawing rights scheme. The action to be taken in this area during future years will need to take full account of the future evolution of payments balances. In any case, special drawing rights were devised as a means of reinforcing monetary reserves. It is, therefore, solely on the basis of the need for reserves that they should be created and distributed, not to serve needs of another kind such as those of economic development. The capital required for development should still be drawn from the financial resources that the industrial countries make available to the Third World. . . .

Statement by the Governor of the Fund and Bank for the Democratic Republic of Congo—Albert Ndele

Mr. Chairman, I would like to join you in thanking the Danish Government for their kind hospitality, and I would also like to congratulate the new members and welcome them here as others have done.

We may congratulate ourselves on the recent progress made in the organization of international payments, progress which is the result of our will to cooperate. The system of special drawing rights and the last increase in quotas certainly provide a rational solution for a specific problem: that of a possible insufficiency in the total volume of international liquidity. Despite this result, a real and important one, we must not forget that today we are faced with problems of another kind: they are basically related to the defective functioning of the process of balance of payments adjustment between industrialized countries and the effects of this state of affairs on the regularity of the foreign exchange contributions that the less developed countries are able to receive. This defective functioning is inevitable in view of the fact that most of the industrial countries, in trying to obtain surpluses from their mutual trading, are pursuing objectives that, in the long run, are incompatible.

It is important, then, to improve the functioning of the international payments system by restoring greater coherence to international economic relations.

The functioning of the international monetary system depends, fundamentally, on the structure of the various countries’ payments balances. This structure is determined by the level of development in each of the countries. An industrial country, as a rule, expects to show a surplus in its current transactions for reasons inherent in the unequal degree of industrialization in different regions of the world. Furthermore, this surplus is materially indispensable in order to obtain the resources that the industrial countries have undertaken to place at the disposal of the developing countries, which resources should represent, by present standards, 1 per cent of the national product.

It is to be expected that this surplus of the industrial countries for current transactions will amount within five years to some $15 billion, if we take into account the anticipated expansion of the national product and the results obtained during the decade now ended. Now, this surplus anticipated by the industrial countries implies an equivalent deficit for the less developed countries. Since, from the point of view of these latter, the deficit represents financing in the form of real resources indispensable for rapid growth, the accumulation of a large surplus by the industrial countries and the interests of the developing countries are, therefore, fundamentally compatible and complementary. But this complementarity implies that the industrial countries cannot obtain the expected surplus unless they are prepared to finance the deficit of the less developed countries without thereby excessively aggravating those countries’ burden of debt, either by transferring existing savings to the developing countries or by creating new instruments of payment for their use.

It is essential that we take into account all the implications of our options in this matter. If the structure of the payments balances in our various countries is a normal and even desirable one—since it enables the savings of the industrial countries to be used for purposes of development—this can be a reality only insofar as the international payments mechanisms effectively ensure an adequate flow of funds toward the developing countries. If, without recognizing this need, the industrial countries nonetheless continue to strive in their activities for surpluses on current transactions, they will inevitably find it necessary to establish exchange restrictions, or even quantitative restrictions. Their policy would result in a contraction of international trade that is incompatible with the aims of the Fund and, very likely, in deflationary pressures by which the less developed countries would not be the only ones affected.

It is urgently necessary, then, to re-examine all our economic policy practices in the light of these eventualities.

We must ensure, in particular, that international capital flows fulfill their essential function, that is, to channel into deficit countries the funds representing the savings of countries capable of achieving a surplus. In this context, the industrial countries ought to be able to have more moderate recourse to monetary policy to regularize their economic situation. In present circumstances, the monetary policy pursued by the industrial countries has substantial unfavorable side effects: it makes the debt burden heavier, discourages direct investment, and even tends to attract the less developed countries’ savings toward the industrial countries, preventing the former from applying a more liberal policy in regard to capital transfers.

The developing countries, for their part, must establish the required conditions for the entry of foreign capital: material security, the existence of a coherent administrative infrastructure, and an absence of ambiguity in the general policy implemented by the government. Congo’s efforts in these areas have brought about encouraging concrete results.

The necessary coherence of relations between the industrialized countries and the others implies that each country must bring its daily economic policy measures into line with its fundamental objectives. Yet these individual efforts are not enough. Their success is limited by the larger problem of the complementary structure of the payments balances of the industrial countries and of the less developed countries. The obvious links between the functioning of the international payments system and the development of the Third-World countries now make it necessary for development aid to be incorporated within the organization of the international monetary and financial system.

Our institution ought to take the first steps in this direction. Could we not, for instance, survey the possibility of supplementing compensatory financing by a sort of structural financing that would allow developing countries to absorb the surplus aimed at by the industrial countries? There would then be no danger that the complementary objectives of our various countries in regard to the expansion of production could not be realized on account of a wrongly directed flow of funds. A satisfactory method for distributing new forms of international liquidity, when these are created, would very likely contribute to the solution of this problem.

Several solutions are technically conceivable. The important thing at this stage is to survey the problem as a whole; it seems to me that we could well begin by examining the applicable formulas without delay, but in so doing we should not refuse to envisage more fundamental solutions that could be entailed by a new amendment of the Articles of Agreement. Experience shows that it would not be pointless to reflect along these lines.

In the near future consideration might be given to allowing the developing countries greater access to credit, and in well-justified cases permitting the purchase of currencies to exceed 200 per cent of the applicant country’s quota. This formula would increase the medium-term conditional credits at the disposal of those countries. . . .

We should not, of course, forget that all newly created international liquidity must be intended to meet increased monetary needs of the world economy, and not the capital needs of the developing countries.

The problem I have outlined to you deserves to be studied and solved with all the imagination and audacity that have characterized our previous reforms, and with the same concern for the establishment of greater coherence between groups of countries that are ineluctably interdependent.

Statement by the Governor of the Fund and Bank for Australia—L. H. E. Bury

May I say how delighted I am to be in the historic city of Copenhagen and how grateful I am to our Danish hosts for their efforts to make our stay here a pleasant one. I cannot imagine a more agreeable setting for the Fund and Bank Annual Meeting.

Looking back at events since the 1969 Annual Meeting, I believe it fair to say that we have had a good year. At least that is what the main indicators would appear to suggest: the output of member countries has been growing at a fast pace; the international trade of member countries has been expanding at a very fast pace; and there has been some evidence of greater balance of payments equilibrium between member countries.

And yet if we look behind the outward appearance of the economic situation there are problems, substantial problems, which are very much with us. And in some ways decisions which will be taken by member countries of the Fund over the next year or two—both unilateral decisions and decisions taken together—could have a quite critical significance for the Bretton Woods system of economic and financial cooperation. This, I believe, is a major concern which we would do well to keep in mind.

Let me suggest the kind of problems which I have in mind.

Inflation

The figures on inflation speak for themselves. Between 1968 and 1969 prices in industrial countries rose by about 5 per cent—this is roughly double the average for the early 1960s and represents the highest rate of increase since the Korean war boom. There were no significant exceptions to this price rise trend in industrial countries in 1969. There were no islands of price stability in the sea of inflation; the 5 per cent price rise was not only an average, it was pretty much the general experience. Nor was there any exception in the case of internationally traded goods. In the past, foreign markets have been more competitive than domestic markets and price increases in internationally traded goods have been minimal, but prices of goods entering world trade rose by 4 per cent in 1969, compared with less than 1 per cent on average in the early 1960s.

I need not enlarge here on the economic and social problems which flow from such widespread inflation. On that, at least, there is agreement among finance ministers the world over. What I would point out is that there are new complications arising from the particular strains of inflation virus with which we are at present infected.

The first is that we are spreading this disease to one another. So long as price rises in internationally traded goods lagged significantly behind price rises on the domestic market, we were all subject to balance of payments pressures to take countermeasures. But now that the inflation is more widespread internationally, the balance of payments constraint has been to some extent diminished.

This is a dangerous state of affairs. We would be foolish to be lulled into concluding as a consequence that the problem does not matter any more. The internal problems and injustices flowing from inflation remain as formidable as ever. And they will be enlarged by the fact that, apart from internal “demand pulls” and internal “cost pushes,” we are now importing inflation from one another.

This has special problems for the developing countries and indeed for the developed primary producing countries, many of whose exports have experienced an over-all declining price trend, but whose import prices for manufactured goods will rise inexorably with world inflation.

In the first instance, no doubt, inflation is a domestic problem. As many of us will be acutely aware, it has increasingly taken on highly intractable forms. The simple macroeconomic prescription of slackening the growth of demand does not invariably produce the desired results of reducing cost and price increases. In any case, there are strict limits to the extent to which demand can be throttled back.

In the present-day world the state of employment is a highly sensitive matter, and, that apart, to reduce the level of industrial activity, employment, and output through restraints on demand is not only wasteful of resources but brings its own form of costs and price increases. For better or for worse, advanced economies are now geared to very high levels of employment and cannot and will not tolerate any significant falling away from the full employment ideal.

It is, however, in the condition of full employment that cost-push inflation most readily and prolifically breeds.

I need not perhaps elaborate on this. Many of us are all too familiar with the dilemma it presents. It is, as I have said, primarily a domestic problem, a problem for national governments. But it also concerns us here, individually and collectively; for there is nothing more certain and well-founded in experience than that widespread domestic inflation will sooner or later disrupt the international order of things. No matter what we may do through the IMF and associated bodies to regulate the level of liquidity, to strengthen support facilities such as the Basle arrangement and swap facilities, and improve adjustment mechanisms, such measures will prove inadequate and be overthrown if inflation in major countries, or a number of lesser countries, is allowed to run unchecked.

But the structure of international financial arrangements, of which the IMF is the centerpiece, can help greatly in the perennial fight against inflation in which we are all engaged. In particular, the provisions of the Bretton Woods Agreement governing adjustment of exchange rates and the availability of financial support from the Fund have a major part to play here. For that reason I have been particularly glad to see the conclusion reached in the Fund study on flexibility of exchange rates. It is my belief that firmly held exchange values are one of the main sheet anchors against the ever-present menace of inflation.

Interest Rates

Inflation has been associated with a rapid rise in interest rates. There have been various influences at work here. Governments have encouraged or allowed interest rates to rise as part of an over-all monetary policy directed toward curbing inflationary pressures. Beyond that, governments have adopted policies involving higher interest rates as a defensive measure to curb the outflow of funds to other countries offering higher rates. And with prices rising rapidly, it is understandable that interest rates also should rise to cover the likely depreciation in the real value of the capital lent.

Whatever the reason, the situation has been reached where bond yields in some of the important financial centers are running at higher levels than have obtained for many years. The competitive exchange rate depreciations of the 1930s have their counterpart in the competitive interest rate increases of the 1960s.

What are the consequences of this? One, of course, is that disparities caused by such rapid movement in interest rates have played a part in encouraging the surges of short-term money between financial centers. This has brought problems of its own. It has very much complicated the manipulation of interest rates to achieve domestic ends. It has had the more obvious disadvantage of making capital more expensive, and probably harder to get, for those countries who are at that stage of their development where they are normally capital importers.

What is the answer? That is not clear. But one thing I am sure of is that we will not get interest rates down and we will not get adequate amounts of capital flowing to the countries which need it for the purpose of development until we have made progress in decelerating the rate of world price inflation.

Protectionism

One of the purposes of the Bretton Woods drafters was to provide the financial framework for the balanced growth of international trade. And it was not just expansion they were after. They wanted a multilateral payments system free of restriction on current payments to provide for a multilateral trading system.

Now although 1969 was a very good year indeed in terms of world exports, rising in value terms as they did by some 14½ per cent—and in volume terms by some 10 per cent—the fact is that this generally good over-all result conceals some points of real tension.

The problems of the United States in the trade field are very real. I have listened very carefully to what Mr. Kennedy had to say yesterday and I am heartened by his opinions. It is to be hoped that there will be sufficient cooperation all round for substantial resort to trade restrictions by the United States to be avoided.

The advantages which the United Kingdom sees in entry into the Common Market may be equally real. But it has to be borne in mind that this could have very important implications for world trade, and particularly trade in agricultural products. The countries now comprising the European Economic Community account for about 30 per cent of world trade. With the addition of the United Kingdom and other applicant states, the enlarged community would account for some 40 per cent of world trade. It is to be hoped that this issue too can be solved without increasing barriers to world trade.

There can be little doubt, I think, that if we are not careful we could be facing some decisive and retrograde actions in the period ahead in terms of a return to protectionism and discrimination and away from the multilaterialism which is the essence of the Bretton Woods system.

Special Drawing Rights

We have now had eight months’ experience of this new reserve asset and I do not think it an overstatement to say that the initial operations of the scheme have fulfilled our expectations. But we must remember that the SDRs are still a very new concept and their strength and acceptability in adverse circumstances has yet to be fully proven.

As to the proposal to link SDRs with development finance, I should say that, on the information available to me, I am not in favor of such a link.

This is not to say, of course, that SDRs do not indirectly affect development finance in the sense that they improve the reserve position of both developing and developed countries and they facilitate an expansion of aid flows from developed to developing countries.

But to allow SDR creation to be influenced by the needs of development finance would run the risk of confusing the purpose for which SDRs were invented, namely, to deal with the problem of maintaining adequate international liquidity.

Nor should it be imagined that there is anything painless about giving aid through SDRs. To the extent that developing countries run down SDR holdings they will be drawing on the resources of developed countries and this will be taken into account in the aid plans of developed countries. . . .

A number of countries have asked for a study to be made of the link question. I would not argue against that. But I do think we should remember that the Fund is in the balance of payments business and the Bank is in the development finance business and we may weaken both if we get their functions confused. And I sincerely trust that the examination of this question will not be carried beyond the point where it may prejudice any future allocations of SDRs. That would be a great price to pay.

Exchange Rates

I should like to conclude by referring to one final area of policy where I think the Bretton Woods system may be in some danger.

I refer to the question of exchange rate stability.

The interest in greater variability in exchange rates has had many causes. One of them, I have no doubt, is that the failure of some countries to curb inflationary processes has led to pressures on their balances of payments. Price disparities between countries has led to pressures for exchange rate adjustments and, in fact, in recent years, a number of changes both by way of devaluation and revaluation have been made.

I have already referred to the impressive report of the Executive Directors on this subject. The precise conclusion of this report, as I see it, is that the basic principles of the Bretton Woods system are sound and should be maintained and that radical departures from this system should be rejected. The report details three aspects which Executive Directors intend to study further in the year ahead. I would agree that further study should be given to these subjects. I would, however, hope that this work can be done relatively speedily. There are, I think, some dangers in letting the study of a sensitive matter such as possible changes in the exchange rate system, even if they are not perhaps major changes, drag on for too long. I would also repeat what I said last year, that I hope Executive Directors will continue to give adequate attention to the position of countries which are members of a reserve currency system, as Australia is, in the further work they propose to do.

I hope it is fully appreciated that greater variability of rates could have rather unfortunate consequences for countries who are part of such a system. And I would guess that a substantial proportion of Fund members are, in greater or lesser degree, in that category.

I have been speaking of the pressures to which the international monetary system will be exposed in the period ahead. As to inflation, I would emphasize two points.

First, it is no longer sufficient that we finance ministers work away at this problem within the confines of our national boundaries. It has become an international as well as a national issue and we must work together in dealing with it. I trust that our Executive Directors will bear this in mind over the year ahead. Second, the process of inflation is a lagged process and it takes a long time for corrective action to work through the system. There is no time to be lost.

As to the Bretton Woods system generally, I have suggested that we should not take it for granted. It took a great deal of effort to establish it. It has worked well over the past 20 years to the benefit of us all. We must regard it as something precious not to be lightly frittered away.

Statement by the Governor of the Bank for Israel—David Horowitz

Mr. Chairman, I would like first of all to express our sincere thanks to the people and the Government of Denmark for their warm hospitality which created the proper background and the framework for the success of this conference and made us all feel at home in this country. . . .

A concomitant of these political and psychological obstacles are the economic constraints which preclude the direct access of underdeveloped nations to the expanding capital markets of the world. These constraints are, on the one hand, the lack of security and collateral at the disposal of the developing nations and, on the other hand, the high interest rates charged on available capital.

Nominal interest rates are now higher than at any time in the last hundred years, even if real interest rates (i.e., adjusted for the erosion of the value of money through inflation) may be very low. It seems that high interest rates are here to stay for several reasons. First, there are no signs that inflation is abating, and as long as it continues nominal interest rates will be adjusted upward to provide for real interest rates. Second, the present income distribution is reducing, as a result of social progress and a rising standard of life, the rate of accumulation, and thus the supply, of capital. Third, technological progress and innovations engender demand for more and highly sophisticated capital assets (the modern jet, to take one example, is several times more expensive than the simpler propeller-driven aircraft of the past). Moreover, the technological obsolescence of capital assets is accelerating. Fourth, large public expenditure on armaments, space programs, social welfare, and, recently, environmental reform must inevitably increase the disparity between the supply and demand for capital.

In these circumstances, only a deep and prolonged depression would reduce interest rates. But this remedy would be worse than the disease, and would be socially disastrous and politically intolerable.

Thus, high interest rates are here to stay for quite a long period of time. . . .

The factor presently restricting the transfer of capital is obviously high interest rates. With marginal sums provided to subsidize interest rates, the World Bank would be able to bid on the market for larger amounts by offering a normal market interest rate, and relend the money on IDA terms. For this purpose the profits of the World Bank—the reallocation of which along similar lines is also being recommended by a U. S. Senate Committee—the surplus income of the IMF and some grants from the developed nations, which would be negligible in relation to the amount to be raised, could be utilized. By thus taking advantage of this multiplier effect, the World Bank could at one and the same time raise adequate amounts of capital and relend them on concessionary terms. . . .

The new vehicle of the SDRs could also be harnessed to effect this peaceful revolution in the world.

It is not suggested that SDRs should be created deliberately for this purpose. But if they have to be created, as indeed they are being created, in order to increase world liquidity, it is difficult to understand why such a diversion of resources to underdeveloped instead of to developed nations should be anathema.

First of all, the very fact that these SDRs are anyway being created invalidates the argument that this would be inflationary. In all modesty, it seems to me that the opposite is true, that the infusion of new money into countries with underutilized manpower and other factors of production would be less inflationary than its use in already overheated economies suffering from labor shortages.

Moreover, it hardly seems reasonable and realistic to assert that, say, $1 billion per annum for IDA, which amounts to one half per mil of the $2 trillion GNP of the developed world, would have an inflationary effect.

To sum up this argument, it is suggested, first of all, that the SDRs—which are anyway being created for liquidity reasons—should be partly used for development purposes; second, such a diversion to countries with idle factors of production would obviously be less inflationary than their use in overheated economies; third, the amount of capital thus created would be negligible, as it constitutes only 1/20 of 1 per cent of the developed world’s GNP.

In the light of these considerations, the argument that development and the creation of liquidity should be kept forever apart sounds rather hollow. . . .

To sum up, adoption of the following measures would go far to galvanize the tremendous potentialities and dormant factors of production in the developing world: (a) The massive transfer of capital from the developed to the developing nations; (b) access by the developing nations to world capital markets; (c) the use of new liquidity created by the IMF for development purposes; (d) the transfer of skills and know-how to the developing nations; and (e) the opening of markets in the developed world to the manufactures of the developing nations, by eliminating administrative restrictions and customs barriers on such products.

These measures would promote peace and progress and help to create a new society with a human face.

Statement by the Governor of the Bank for Yugoslavia—Janko Smole

I have listened with great interest to the highly informative and thoughtful statements made by our Chairman, the Managing Director of the Fund, Mr. Schweitzer, and the President of the Bank, Mr. McNamara. Under their guidance, and with the cooperation of their highly expert staff, the Bretton Woods organizations have yielded in the past year significant results, filling us with confidence that this will be so in the future as well.

I should also like to welcome all the representatives of those countries that have become members of our organizations in the period under review.

May I now deal with a few problems connected with Fund activities.

The problem of international liquidity has been greatly diminished by the activation of special drawing rights at the beginning of this year, an event deserving to be described as of first-rate importance for the present international monetary system. In the meantime, certain other measures have been undertaken by various countries in support of the solution of problems related to international liquidity which previously posed a threat to the proper development of international trade and especially of international payments. As we look back today on the creation and activation of SDRs, we are ever more convinced that their importance derives not only from technical operations designed to relieve pressure on international liquidity but also, and primarily, from the international monetary cooperation that has been so patently reflected in this instrument. This conclusion gives rise to the conviction that suitable solutions can be found even to the knottiest problems, if the determination and political will is deployed, especially by countries that bear the prime responsibility for the proper functioning of the present international monetary system.

Speaking of SDRs, I should like to revert to a problem which I also raised in my remarks at last year’s Annual Meeting, I refer to the need for and possibility of establishing a link between the creation and activation of SDRs, on the one hand, and the financing of development, on the other. With the creation of SDRs, the first and hardest step was well taken; now another one is expected to be made, which, it appears to me, is easier but also of notable importance against the background of general efforts to finance development.

The question of linking SDRs with development financing is not a new one; it has already acquired international recognition by the Pearson Commission, among others. A number of arguments favor the idea of earmarking at least a part of the allocated resources for the creation of supplementary financial means intended for development purposes. These arguments are common knowledge. Their weight is such that I feel it would be justified to ask the Fund to study and elaborate them with the cooperation of the Bank, and to submit concrete proposals to the Board of Governors along these lines, before the beginning of the next three-year period of SDR allocations. If an adequate approach is found, an important contribution would be made to the search for a new and supplementary source of development financing, without compromising, in the process, the very ideas and objectives for which the SDRs were introduced.

International liquidity is one of the problems of the international monetary system. Another, closely related to it, is the problem of the mechanism of exchange rate adjustments.

This problem has recently been the focus of attention of financial experts and a great deal has been said and written about it. What I should like to say here and now is that most of us feel the need for some improvement in the present mechanism for adjusting exchange rates. The discussions conducted in the Fund, and the studies produced on this subject, have helped to clarify views and indicate possible implications which any new adjustment mechanism could have for world trade and international payments generally. Consequently, the work that the Fund has done in this field so far is useful and should be continued.

The possible introduction of greater flexibility into the present mechanism of exchange rate adjustments would not, most probably, essentially help to remove disequilibrium in the payments balances of most developing countries. This is because disequilibrium in the payments balances of developing countries does not derive so much from the rate adjustment mechanism itself as from different well-known considerations. Nonetheless, it would seem justified to believe that greater flexibility in the rate adjustment mechanism would positively affect international monetary, trade, and payments relations. This warrants the conclusion that efforts are needed to find an adequate solution to this problem at the earliest possible moment. . . .

The terms of assistance are not the sole cause of such a state of affairs, although the primary responsibility for it may be assigned to them. Other causes must be sought also in the financing mechanism itself. Namely, exports from developing to developed countries are still subject to various import restrictions, although export earnings represent the basic source of earnings for debt service payments. On the one hand, firm obligations have been undertaken to repay loans and credits and, on the other hand, those very countries that are to be repaid, place limits in the form of various import restrictions on the earnings which should in fact serve this purpose. Similarly, while on one side tied credits are granted for purchases of equipment in the donor countries, on the other the developing countries are forced to make free, untied, foreign currency available for the purpose of debt repayments. It would, therefore, appear that the financing mechanism needs to be improved. It remains to be seen whether such improvement should be achieved by the rescheduling of repayments, the financing of development programs, greater participation in local expenditures, or by a combination of these methods. It might be useful for the Bank to consider the possibility of undertaking studies designed to examine the functioning of the entire financing mechanism from the standpoint of the problem of indebtedness of developing countries. Such a study could possibly reveal new ways of approaching these problems. . . .

I could hardly terminate my remarks without expressing the satisfaction of my Government at the constructive cooperation with the managements and staffs of the Fund, Bank, and IFC in the past year. Although such cooperation has already become customary, I think it is never superfluous to lay stress on its positive results which are significant for the further economic development of my country. I might add that my Government accords full attention to such cooperation and that it is highly appreciated. I should also like to express my thanks for the hospitality rendered to us by the Danish Government.

Statement by the Governor of the Fund for Upper Volta—Tiémoko Marc Garango

At the end of another year of persistent efforts to achieve the purposes assigned to the Bretton Woods institutions, we meet together again to take stock of the world economic and financial situation. Once more, the honor falls to me to express the views of the seven member countries of the West African Monetary Union (UMOA).

In contrast to the climate of uncertainty that hung over the Annual Meeting of last year, our sessions have opened this year in a calmer atmosphere. The fiscal year which we are now reviewing began with adjustments of the exchange rates of certain currencies, which helped to create propitious conditions for the smooth functioning of the international monetary system. Moreover, at the 1969 Annual Meeting, we were confronted with certain large problems for which solutions had to be found during the months ahead: the first allocation of special drawing rights, the fifth general review of quotas, and the replenishment of the International Development Association’s resources.

We may now go on to review the solutions brought to these various problems during the last 12 months by the IMF and the World Bank Group.

As to the IMF’s activities, attention should be drawn first of all to the first allocation of special drawing rights last January 1, for an amount of $3.5 billion. The UMOA countries are aware of the importance of this first allocation of supplementary reserves, intended to facilitate and promote the expansion of international trade and world economic activity at an optimum rate. On behalf of these countries, I wish to emphasize the spirit of cooperation by which they are guided in their relations with other member countries of the Fund and with the Fund itself, with a view to the most constructive collaboration possible toward a sound collective management of these new international resources. Two of the seven countries on whose behalf I have the honor to speak today have already had the occasion to become active participants in the SDR system, one by utilizing a portion of the SDRs allocated to it, the other by agreeing to be included in the list of countries designated to furnish convertible currencies in exchange for SDRs. This attitude shows that the UMOA countries will not shirk their obligations as participants in the new system; on the contrary, they feel that it is the duty of each and all to work toward broad acceptance of the new instrument of international payments.

These remarks on the SDRs lead me to state once more that our governments attach special importance to the creation of an appropriate link between the annual allocation of SDRs and development aid; proof of this is the resolution unanimously adopted last January by the UMOA Chiefs of State. As to the technical methods that would make the creation of such a link possible, the UMOA member countries consider that the most appropriate instrument would be the annual payment by the rich countries to the International Development Association, an affiliate of the World Bank, of the currency equivalent of a portion of their SDR allocation. In accordance with the Pearson Report’s recommendation, this would considerably increase that organization’s resources by sheltering it from the vicissitudes to which it has still been subject in the recent past. The underdeveloped countries were helpless witnesses and victims of these vicissitudes at the time of the second replenishment of resources. Our Governors call upon all IMF member countries to consider the creation of this link, in a spirit of international cooperation that is in conformity with the fundamental purposes of the Articles of Agreement of both the IMF and the World Bank, i.e., the long-run improvement of the well-being of the populations of all member countries.

As to the problems raised by the quinquennial review of quotas in the IMF, I wish first of all to state that the Governors of the UMOA countries accept the resolution approving the increase in quotas to approximately $28.9 billion. In addition, these countries have decided to raise their respective quotas to the level offered to them in the said resolution in order, to make their contribution—modest, to be sure—to the increase in conditional liquidity, which is still one of the important bases for cooperation among all member countries of the IMF.

The satisfaction I have expressed should not, however, cause us to lose sight of the many problems that were raised and foreshadowed by the discussions on quota increases in the IMF, i.e., those concerning the election of Executive Directors, and particularly the doubts they have aroused in regard to African representation on the Executive Board. May I be allowed to point out that Africa cannot accept having the number of its representatives in the IMF decreased just when its relations with that institution are becoming closer and closer. In the clear interest of the IMF and the world community that has opted for cooperation in that institution, it would not be desirable for African representation to be reduced from two Executive Directors to one who would represent one third of the members (as a result of the possible merging of the two existing African groups in the IMF), whereas 19 other Directors would represent the remaining two thirds.

That is why, as we have made known through our representative on the Executive Board, it is imperative that a study be undertaken at the earliest possible date within the Board to determine the different factors and elements that would ensure the most equitable representation of all member countries in the 1972 elections. This representation should not only be based on economic data pertaining to each country or group of countries, but should also, as I said in my statement last year, take into account geographical facts and the most elementary principles of international law. The UMOA member countries, with all of Africa, call upon all member governments to undertake this study in the most cooperative and constructive spirit possible. Since the IMF has demonstrated its capacity for adaptation to changing circumstances, we approve paragraph 7 of the report to the Governors in which the Executive Board of the IMF undertakes to complete its study on the optimum number of Directors and the structure of the Executive Board before the 1972 elections.

As to the question of a possible reform of the international monetary system on the basis of a system of stable par values, the governments of the UMOA countries have noted with great interest the report of the Executive Directors on this problem. As might be expected—in the normal fashion—our countries have studied the conclusions reached by the rapporteurs, in the light of what is clearly in the interest of the developing countries in regard to their role in international trade. This role is mainly—as we know—that of supplier of raw materials, with the hazards of fluctuations in prices to which these underdeveloped countries are all too frequently subject. Under these conditions, the governments of the countries on behalf of which I am speaking today, while recognizing the importance of the studies on increased exchange rate flexibility and its effects on the growth of international trade, and while encouraging the Executive Directors to carry forward their studies on the subject, feel that they cannot endorse at this time any exchange rate system that would have, in actual operation, fewer advantages than the present system, mainly by introducing permanent factors of uncertainty at the monetary and foreign trade levels. . . .

Finally, in an area common to the Bank and the Fund, that of translation, we thank the management for the effort made toward improving conditions. However, taking into account the inadequacies and the many delays noted in document translation, we feel that it is now essential to consider the creation of a real translation department in order to enable those who do not have English as a working language and for whom French and Spanish, in particular, are the main languages to have texts available in time to benefit to the maximum from their cooperation with the IMF and the World Bank Group in the formulation and implementation of their economic and financial policies.

In conclusion, we invite the responsible authorities of the World Bank Group and the IMF to start considering immediately all the problems with which we are concerned and the various recommendations that have already been made in certain international forums, in order to find the solutions most capable of improving the functioning of our institutions.

Besides the creation of a link between SDRs and development aid, we are thinking in particular of the suggestion already made on several occasions for making legally possible the transfer of a part of the IMF’s net income to IDA. It is by means such as these that the two Bretton Woods institutions can work more effectively toward the same purpose, i.e., improvement of the standard of living of the populations of all member countries in a climate of international cooperation and fraternity, to which all of us, and particularly the African countries, are so devoted.

Statement by the Governor of the Bank for Afghanistan—Mohammed Aman

The Afghan delegation is happy to participate once again in the Annual Meeting of the Fund and the Bank and its affiliates. This gives us all an opportunity to review seriously the world’s development and financial problems. We would like to thank the Government of Denmark and officials of the city of Copenhagen for their hospitality.

Fund Activities

During the past year, the special drawing rights provisions were implemented which are necessary for sustained world trade and capital reserves. Activation of the SDR system has reduced pressures on the balance of payments for the key currency countries and has had a stabilizing effect on the gold market. However, as was stated last year, we are especially concerned about the rigidity of the formula for allocating the special drawing rights. It appears to us that the developed countries, rather than the developing countries benefit the most from this rigidity. While it is recognized that the five-year quota increase will be helpful, primary producing countries require proportionately larger increases since their export markets are more sensitive to demand changes. Therefore, recognizing that there is no specific link between the SDR system and developing countries’ needs for economic resources, we request that the Fund’s monetary experts study alternative methods for reallocating the special drawing rights. One possibility would be to continue the present system of computation based on quotas but to provide for double allocations of SDRs to developing countries.

Afghanistan has found particularly helpful the technical assistance provided by the Fund in reforming the statistical and accounting systems of our national bank and trust this will continue and expand in the foreseeable future. In accordance with the Managing Director’s recent statements, the Fund should proceed with providing technical assistance and advice in both monetary and fiscal policy areas.

Afghanistan

In turning to Afghanistan, we should note, that, like most developing countries, we face difficult economic and financial problems. Our foreign debt service and other mandated expenditure requirements continue to rise sharply, while our revenues are not increasing at a comparable rate. This has occurred despite the fact that since 1965 Afghanistan has taken substantive action in a number of revenue areas, particularly in the field of direct taxation. However, as many developing countries have experienced, the implementation of direct taxes requires efficient administrative machinery, and although we are working on this problem, it will require a long-term effort to correct the situation. During the coming years we must proceed with an accelerated development program, and due to our inability to generate a substantial increase in revenues, we may have to continue to rely on deficit financing. This condition has already led to inflationary pressures. Obviously, we are concerned, but what are the choices available to us?

We are now going through the throes of industrialization. Afghanistan has a liberal Foreign Investment Act to attract foreign capital, and while we are pleased with the progress so far, we must look at the program on a long-range basis. Also, the Government has taken steps to encourage our major exports, primarily directed toward quality control, such as improved packing and processing techniques. . . .

Bank Activities

2. The annual grant by the Bank to the International Development Association should be increased. The Bank should also use its good offices to obtain more funds from the developed country members for IDA use. One way this could be accomplished would be for the developed members to devote a portion of their SDR allocation for IDA use.

3. It appears that Fund and Bank policy with regard to economic growth has somewhat different objectives, although both institutions are concerned with the economic development of their members. Therefore, it is recommended that future economic missions be composed of both Fund and Bank experts. We believe that such a joint approach will facilitate a better understanding of the political, economic, and financial problems of the developing members. . . .

We urge serious consideration and study of these points.

Statement by the Governor of the Fund for the Sudan—Mohammed Ali El Mahasi

It is a great privilege for me, on behalf of the delegation of the Democratic Republic of the Sudan, to address this meeting. I wish first to express our appreciation to the staff of the Bank and Fund for the excellent work they have undertaken to produce their comprehensive accounts of the world’s economic conditions and the activities of their respective organizations.

It is our belief that the Bank Group and Fund have a major role to play in resolving the vital problem of development which faces the world as a whole and which is tragically manifested at the present time by extreme poverty and misery in developing countries and an ever-widening gap in incomes between developed and developing countries as well as maldistribution of incomes within the developing countries themselves.

Our delegation is of the opinion that, in spite of the commendable efforts being made or envisaged to solve this problem, there is still lack of a fuller and deeper positive understanding and awareness of the pains and problems of development and its processes. The present trend cannot go on indefinitely without catastrophic results for the whole world, developing and developed alike. We therefore urge the Fund and Bank Group to study ways and means for reorientation of their activities to meet this greatest challenge of the age in which we live. . . .

Since last year’s Annual Meeting, we in the Sudan have undertaken a number of major reforms aimed at creating the suitable economic structure which is necessary for the success of the development effort. All commercial banks and some strategic foreign trade concerns were nationalized allowing, of course, for fair and just compensation to shareholders. These internal reforms were not directed against any country or group of countries and have been dictated merely by economic necessity. The nationalized banks, for example, included Sudanese, African, and Arab, as well as European banks. These reforms were intended to strengthen the public sector’s hold on the economy as a necessary prerequisite for the determined effort of central economic and social planning on which the country is embarking. It is worthwhile noting here that the previous free economic system in operation before the May 1969 Revolution has only led to severe economic difficulties, low levels of economic activity, and stagnation. . . .

In spite of the fact that the Fund has succeeded over the years since Bretton Woods in improving the stability of the international monetary system, this should not deter us from stating that the conditions laid down for correction in cases of balance of payments difficulties result in great hardship reflected in increased unemployment, slower economic growth, and social and labor unrest. This has been the case in many countries, both developed and developing, when applying the prescribed stabilization program as a means of eliminating chronic balance of payments deficits. If, therefore, we bear in mind that most developing countries are in varying degrees of balance of payments difficulties, one can appreciate the significance of this policy. We therefore urge the Fund to study this problem and establish procedures for stabilization and correction of balance of payments difficulties which will not result in such hardship for the countries concerned.

Concerning special drawing rights I wish to restate, as my predecessor did last year, our disappointment at the share of this facility accruing to developing countries. Furthermore, the facility itself is limited by the fact that some of the rich oil-producing countries have, for one reason or another, not participated in the scheme.

Therefore, although very useful, SDRs in their present form do not provide an adequate solution, at least for the developing countries.

In order to improve the operation of the SDRs for the benefit of development it will be necessary first to reconsider the distribution system and second to devise suitable means of linking SDRs to development finance for the developing countries.

As far as the controversy on flexible exchange rates is concerned, we hold the view that although the present system of a fixed parity and stable rates has made it necessary for many developing countries to suffer hardships at times of stabilization, it has nevertheless contributed greatly toward relative world monetary stability. If, however, some system of flexibility is found necessary and approved we urge very strongly that it should have a built-in component which will safeguard the interests of the developing countries.

In concluding, I wish to express our gratitude to the people and Government of the Kingdom of Denmark on their admirable hospitality.

Statement by the Governor of the Fund and Bank for Ceylon—N. M. Pevera

I should like at the outset to say how grateful we are to the managements of the International Monetary Fund and the World Bank for the assistance they have given us and for the very excellent analyses of developments in the international economy with which they have provided us. I should also like to say how appropriate it is that we should be meeting in Denmark at this time when several issues involving commitments for the Second Development Decade in the fields especially of development assistance and supplementary financial measures remain to be resolved. Denmark and the Nordic group of countries in general have played an especially positive role in the discussion of these questions within the United Nations and elsewhere and we look forward to their continuing cooperation in the tasks that lie ahead.

This is the second occasion on which I am privileged to address this distinguished assembly. Since I last spoke in this forum in 1964, the Government I then represented has experienced the vicissitudes of political change that are usual in parliamentary democracies. After five years in opposition, we have recently been returned to power with a mandate for improving radically the economic and social performance of the government we have replaced. This is perhaps an appropriate occasion for taking stock of developments in Ceylon in the past five years. Although these developments have been publicized internationally as containing at least the beginnings of a success story, they have culminated in a disastrous political failure. . . .

Ceylon in these last five years sought to develop within a framework of international cooperation in association with the IMF and the World Bank, which sponsored a group of countries interested in aiding Ceylon’s development effort. The principal effect of this aid program was to maintain Ceylon’s import levels despite a fall in export earnings. During this period Ceylon enjoyed increasing rates of economic growth, rising to a figure of nearly 8 per cent in 1968 and propelled by the Green Revolution. However, the growth that took place was inadequate to absorb the annual increment to the labor force into productive employment. Ceylon also moved toward a more realistic exchange rate, and in line with conventional wisdom looked to the operation of market forces to bring about a better allocation of resources under a regime of limited import liberalization. In the interests of better fiscal balance she moved away from a previous emphasis on welfare measures and reduced a subsidy on rice, the staple food of our people.

Yet however sound in conventional terms these policies may appear to have been, their political impact turned out to be disastrous for the government which pursued them. What lessons are there for development policy within an open society to be culled from this experience? Perhaps the first major lesson to be drawn from Ceylon’s experience concerns the harshness of the international climate within which small “open” economies are today compelled to develop. All that the total aid effort of the last five years accomplished in Ceylon was to offset the fall in tea prices alone which occurred between 1965 and 1969 from 1963/64 levels, resulting in a total loss to the country of something like $170 million. The fall in tea prices over this period has been consistently below any reasonable expectations that might have been formed of their behavior at its commencement, so that much of the aid received by Ceylon has been more in the nature of supplementary financing than aid proper. . . .

The moral to be drawn here is that in countries such as ours, outward looking development has to be combined with the right mixture of internal policies and approaches to domestic resource mobilization which prove to be socially acceptable. This calls above all for self-reliance, an equitable sharing of the burden of development among the various sections of the community, and the active involvement of the mass of the rural population in the growth process so that development would proceed in a more decentralized fashion. I would plead therefore with those international organizations under whose aegis much of the development effort in the Third World takes place today to display a sympathetic understanding of the totality of the circumstances in which economic development has to occur. I say this in the knowledge that authoritative international thinking is gradually becoming more receptive to pleas such as mine. The United Nations Committee for Development Planning has, for some time now, been emphasizing that we must look in the future beyond aggregate measures of economic growth to partial development indicators reflecting the social and moral aspects of the development process, in the course of evaluating the success of any particular development strategy. There are several indications that these sentiments have found a sympathetic echo in Fund and Bank thinking as well. Such development indicators appropriately formulated and covering areas such as income distribution, education, and health and other welfare facilities could well become targets toward whose achievement international effort ought to be directed in particular cases, and which could be internationally underwritten in much the same way as target rates of GDP growth are today. . . .

I should now like to pass on to a matter which is within the purview of the IMF and in which we in Ceylon have taken a very special interest, namely, the possibility of linking SDRs with development finance. This matter has been discussed on previous occasions within this body and I do not propose at this stage to go into the technicalities of the question, let alone place before you the very powerful case which the developing countries have to present on this matter. This has been done in ample measure on many previous occasions and most recently in a memorandum prepared by the developing countries represented in UNCTAD’s Committee on Invisibles and Financing, which has been made available to member governments. What I propose to suggest is a course of action which seems to me to be constructive at the present time, which was discussed last week at Ceylon’s initiative in Cyprus by the Commonwealth Finance Ministers and on which agreement was reached. This agreement is reflected in the communiqué issued by the Ministers at the end of the meeting and we view it as being of considerable significance in indicating the potential for cooperative action within the Commonwealth.

It is clear that the next occasion when the international community would be ready to consider the question of the link at all seriously would be in 1972 when the second round of allocation of SDRs falls due. What the developing countries have asked for in their memorandum is that “due consideration should be given to the establishment of a ‘direct’ link” at that time. All I want to suggest for the present is that this consideration ought to be an adequately informed consideration. To this end—and without in any way prejudging the question of an acceptance of the principle of link at this stage—it has seemed appropriate to the Commonwealth Finance Ministers, and I quote from the Cyprus communiqué, “that the Executive Board of the Fund should be requested to undertake a study of the question in good time so that the results are available well before the time when decisions must be taken in 1972.” It would in our own view materially assist the process of consideration if the results of this study are available sufficiently early, consistent, of course, with a reasonable experience of the working of the SDR system. For I am deeply conscious that the SDR system, being the major innovation it is in international monetary management, ought to become firmly established before there could be any link with development finance.

In particular we fully accept with all its implications the proposition that the creation of SDRs should be determined solely by the monetary needs of the world economy and not by those of development finance. We in Ceylon feel, however, that in the light of “the satisfactory progress toward the establishment of SDRs as a reserve asset on an equal basis with other assets,” noted by the Commonwealth Finance Ministers in their assessment of the working of the SDR system so far, it would not be too soon for us to expect a report from the Executive Board to the 1971 meeting of the Governors of the Bank and Fund. Whatever its timing, a comprehensive report by the Executive Board of the kind the Commonwealth Finance Ministers have suggested will naturally be based upon the continuing studies being made of this question at the staff level and would carry with it the most authoritative assessment of the matter that the IMF membership can possibly have at its disposal.

I should also like to take this opportunity of indicating our thinking on the limited degree of exchange rate flexibility which has been studied within the Fund and on which a separate report has been made available to us.

We welcome its reaffirmation of the basic features of the Bretton Woods system. The principal question with which I shall be concerned, however, is the bearing of the kind of flexibility now being considered on the circumstances of the developing countries. It appears to us that limited flexibility insofar as it applies to the major industrial countries of the world can carry with it positive advantages for developing countries. The reason for this is simply that the present system tends to peg exchange rates at unrealistic levels for substantial periods of time before changes are made. This, in our view, must weaken the thrust toward trade liberalization in the industrialized countries. It is also bound to affect adversely the quantity and quality of aid to developing countries. For while deficit countries with unrealistic exchange rates may be compelled to cut back aid, there is no guarantee under the present system that surplus countries will make good this loss. Limited flexibility, we think, would provide a way of getting around the “stickiness” of unrealistic exchange rates and would establish a basis for a more satisfactory expansion in international trade and aid, especially when combined with the facility for adding to liquidity in an orderly fashion offered by the SDR mechanism.

It has to be recognized, on the other hand, that these advantages will have to be weighed against those of greater exchange rate stability from the standpoint of developing countries, so long as they are obliged to maintain substantial reserves in the form of key currencies.

So far as the most appropriate regime for adoption in the developing countries is concerned, it is our view that the choice is not so much between flexibility and stability in their exchange rate systems as between unitary and multiple rates. We feel there is much to be said for a regime of dual or multiple exchange rates—not of course involving a plethora of rates. I do not wish to elaborate our thinking on this matter in any detail but would like only to emphasize the point that the rules of the game applicable to industrial countries ought to be different from those which are likely to provide satisfactory solutions to the problems of developing countries.

Other less momentous changes not involving an alteration of the Articles of the IMF would also have to be considered. Countries such as mine are in the situation of having to repurchase compensatory drawings at a time when export earnings, far from having recovered, are continuing to decline, while we are simultaneously committed to discharging repurchase obligations under existing stand-by arrangements. We feel that there is no reason why the normal logic of debt rescheduling applicable to countries placed in situations of foreign exchange stringency ought not to be extended to dealings with the IMF. In this way, greater flexibility could be introduced into the relationship between the IMF and a member country by a spreading out of repayment over longer periods for both normal stand-bys and compensatory drawings in circumstances where a country’s foreign exchange situation continues to deteriorate. One of the uses to which a supplementary financing facility could be put would be to provide relief in situations such as this.

The Second Development Decade poses new challenges for both the Bank and the Fund, especially with the increasing recognition that is nowadays being given to the many-sidedness of the development process. As institutions, they have sometimes been controversial. Yet controversy usually helps to force the pace of adaptation to changing circumstances and to throw up new and sometimes unorthodox solutions to perennial problems. The principal problem that has somehow to be surmounted in the period ahead, and in fairly short order, is that of unemployment, especially among educated and restless youth. We in Ceylon have chosen to emphasize this urgency by entrusting the Prime Minister herself with a Ministry of Planning and Employment. We ought at the international level to begin to look dispassionately at the various approaches to the problem of rapid employment creation that have been made and seek to glean what we can from them. I should like to think that the controversies of the past would stimulate the international development institutions charged with the task of helping plan for employment on a global scale into doing the kind of imaginative thinking that today’s situation demands.

Statement by the Governor of the Fund and Bank for Uganda—L. Kalule-Settala

I join fellow Governors who have already made their statements in expressing the appreciation of the Ugandan delegation for the warm reception and hospitality extended to us by the Royal Danish Government and the citizens of Copenhagen during our stay.

I would like to thank you, Mr. Chairman, for your very clear statement in which you touched on the major problems facing member countries of the Fund and Bank in the joint endeavor of promoting cooperation in the monetary and financial spheres as well as the development process of the Third World. I would also like to express my thanks to Mr. Schweitzer and Mr. McNamara for their very able addresses to the Governors.

I would like to convey my congratulations to the Executive Directors and the managements of the Bank and Fund upon yet another successful year of operations and also for the efforts to adjust these institutions to new functions.

For the first time since the Bretton Woods Agreement was signed, the Articles of Agreement were amended to bring the special drawing rights scheme into operation. While the SDR facility will undoubtedly be beneficial to members of both developed and developing countries, the international community should, however, recognize that on the basis of the present criteria of allocations the benefits accruing to developing countries are limited.

This is a problem to which the Fund should give urgent and serious attention. Uganda supports the proposal that before 1972, when consideration will be given by the Fund to the next round of SDR allocations, the Executive Board of the Fund should undertake a study of a link between SDR and development finance. I have in mind the possibility of allocating the next tranche of SDRs to member countries partly on the basis of their quotas as at present and partly to international development organizations.

I would like to congratulate the Executive Directors of the Fund for their interesting report on The Role of Exchange Rates in the Adjustment of International Payments. The Bretton Woods system, though not perfect, has worked well for the past 25 years and has been particularly beneficial to small and open economies such as Uganda’s. Unpredictable exchange adjustments by countries with which we have close economic and financial ties would make it extremely difficult for us, indeed for most developing countries, to plan an orderly economic development. We recognize, however, that there is scope for some improvement in the present system. In considering any changes in it, extreme care should be taken to ensure that the new arrangements do not work against the interests of both the developed and developing member countries. We therefore recommend that further study of the exchange rate mechanism be made. . . .

As regards the terms of aid and the problems relating to aid tying, debt servicing, and local cost financing, all of which have on several occasions been discussed in this forum, I would like to support what other distinguished delegates have stated, namely, that the time has come for governments and international organizations making loans to developing countries to review their aid policies with a view to arriving at an early agreement for the untying of such assistance. Since most donors have indicated that they are not opposed in principle to the untying of aid, on condition that other donors follow the same policy, I urge the World Bank to take fresh initiatives in this matter. In this connection it was encouraging to hear from statements made by distinguished Governors of some donor countries during these meetings that they were willing to take steps toward untying aid.

Mr. Chairman, before concluding my remarks, permit me to mention briefly two developments concerning Uganda’s economy which have taken place since the last Annual Meetings. First, Uganda’s economy performed well in 1969. Gross domestic production in real terms grew by 11 per cent, a rate well beyond the annual growth rate of 6.2 per cent envisaged in our Second Five-Year Development Plan. This exceptional performance of the economy was due to the more than average yields of our two export crops—coffee and cotton. The second development was the adoption of a socialistic strategy for Uganda’s economic development embodied in the Common Man’s Charter—our blueprint for political, social, and economic progress. Perhaps the most important aspect of the new economic measures in the Common Man’s Charter is the principle of participation by the Government of Uganda in any major privately owned enterprise, either directly or indirectly, to the extent deemed desirable by the Government for the benefit of the common man.

The new economic measures in the Common Man’s Charter, including their implementation, were freely and widely discussed in Uganda before the formal announcement of the areas of the economy in which the Government or other publicly owned enterprises, plus trade unions and the cooperative movement, would participate alongside private enterprise, specifying at the same time the degree of that participation. In most cases the Government’s or other publicly owned bodies’ share in 60 per cent and the private enterprise share is 40 per cent. I am pleased to state that although these new economic measures introduced by the Government of Uganda have attracted a certain amount of criticism from overseas, their implementation through negotiations with the companies affected have proceeded smoothly. . . .

Statement by the Governor of the Bank for Burundi—Joseph Hicuburundi

The Annual Meeting of the Bank and of the International Monetary Fund once more gives us the opportunity of consolidating and intensifying monetary and financial cooperation among the member countries of our institutions.

The first allocation of special drawing rights constituted a certain advancement. But it is still to be directed toward an increase in financial aid to the developing countries.

We also welcome the adoption of the resolution on the increase in quotas. We, for our part, have already notified the Fund of our consent.

However, although the problem of a rational increase in international liquidity is being gradually solved, we have still a long way to go before we can restore monetary stability, which is as essential for the progress of commercial trade as it is for the increase of bilateral or multilateral aid.

The developing countries are not mere spectators of the disorders perturbing the exchange markets; they also experience the adverse effects on their economy of the excessive cost and limited amount of available capital.

To all appearances, the magnitude of the balance of payments disequilibria calls for a more efficient adjustment of internal policies. That is why we do not believe in the virtues of greater flexibility in the exchange rates. In particular, it does not seem sensible to assume that the most realistic exchange rates would be those arbitrarily imposed by uncontrolled movements of speculative capital. Recourse to a simple widening of the margins around fixed parities is not convincing either, because it has certainly not been proved that speculative flows would thereby be weakened to any permanent extent.

Even more worrying for us is the problem of the stabilization of prices for primary products. Indeed, how can we work out a development policy when we know that upward or downward fluctuations in the prices of our products may be as great as 50 per cent in less than one year? We therefore attach the greatest importance to studies and resolutions that would not only offset export deficits—in the form of loans—but prevent them by agreements in which the Fund and Bank would contribute to the institution of long-term cooperation between consumer countries and producing countries. . . .

We are sure that the authorities of the Bank and the Fund, whose initiative in the past has often proved successful, will be able to surmount the many problems of this decade.

Burundi has barely begun to deal with the difficult stages of its development. Its needs are great even if its aims are modest. We think, in spite of everything, that the framework has now been set up to ensure that external aid finds an appropriate receptive structure in our country.

In concluding, I take pleasure in welcoming the Governors for Cambodia, Equatorial Guinea, and the Yemen Arab Republic, and in thanking the host country for its unstinting efforts to compensate for our somber concerns by its captivating hospitality.

Statement by the Governor of the Bank for Somalia—Ibrahim Megag Samater

I would like first of all to associate myself with those Governors who have expressed their appreciation of the warm welcome which we have received in this beautiful city of Copenhagen and of the excellent arrangements made for our meetings here.

I would also like to associate myself with those who have congratulated the Managing Director of the Fund, the President of the Bank, the Executive Directors, and their staffs on the excellent work which they have done during the past year.

One of the major issues facing the world today is the rate of inflation in many of the developed countries. I would like to stress that this is a matter which is of great concern to the developing countries as well as to the developed countries themselves. Indeed, in some respects it is a more serious problem for us. As the inflation goes on, the price of manufactured goods and capital equipment mounts up. There is some measure of protection for the developed countries in their trade with each other in that their own increases in prices are to some extent offset by increases in the prices of the products of their trading partners, insofar as they, too, are affected by inflation. For the developing countries, however, the price increases tend to be all on one side. Their imports cost more, but their exports, mostly raw materials, do not earn any more. Indeed, as more and more synthetic substitutes become available, they are likely to earn even less than they do at present. In the past, emphasis has been put, and very rightly, on devising measures to safeguard the export earnings of the developing countries. I would like to suggest that more attention should now be given to the other side of the equation, namely, the increases in the cost of their imports resulting from inflation in the developed countries. I appreciate that this is an intractable problem, and that the social and political aspects of it are closely bound up with the financial and economic aspects of it. I do not consider that it would be appropriate for me to go into any greater detail here, but I would like to stress that if the Fund were able to come up with some practical suggestions for tackling this problem after a study in depth it would earn the gratitude of the developing countries no less than the developed ones.

A separate, but by no means unrelated issue, is the high rate of interest now charged on capital raised in the world’s financial markets. This is reflected in the charges which the Bank has to make for its loans to member countries. I observe that the average cost of the Bank’s borrowings in 1969–70 was 7.69 per cent, and that it has been necessary to increase the Bank’s own lending rate to 7.25 per cent with effect from August 1, 1970. I know that these rates are a matter of concern to Mr. McNamara and his staff and to the Executive Directors, but so long as they remain in operation it is difficult to foresee that Somalia will be able to make any use of Bank loans. I would urge, therefore, that the Fund continue its research into ways and means of reducing the pressure on interest rates throughout the world. . . .

As a result of the wise policies pursued by the Somali National Bank, and with the assistance of the Fund, Somalia has achieved a very creditable measure of monetary stability in recent years. This stability has, however, been achieved at a certain cost. The economy has not developed as the people had hoped that it would, and the mass of the people have not benefited from independence as they should have done.

A new Development Plan covering the years 1971–73 is now being drawn up, and this will place more emphasis on productive enterprise, with special reference to livestock and agriculture, but with the intention of stepping up industrial development as soon as the internal market begins to build up and the existing factories for the processing of locally produced meat, fish, and milk have been put in sound working order.

The present Government of Somalia has inherited a situation in which there is a disproportionate amount of nonproductive expenditure in the government budget, much of it for salaries of office workers. We fully recognize that this is unsatisfactory, but it is not something which we can rectify overnight. We are making every effort to shift the emphasis in the budget, but it will inevitably be some years before we can achieve a position which we can regard as satisfactory. In the meantime, we consider that a move to some modest increase in credit will be necessary in order to get the economy moving forward, but we shall watch the situation very carefully to ensure that the additional credit is used for the right sort of purpose.

Two subjects which have occupied much of the attention of the Fund in recent years are special drawing rights and the mechanism of exchange rate adjustment. I am happy to observe that the SDRs have now been safely launched, and I think that there will be general agreement that the approach of the African countries as a whole to their use has been a very mature one.

Another important issue which faces this assembly is the problem of exchange rates. It is generally agreed that the present par value system has certain rigidities which, on reflection, would hinder timely and adequate payments adjustments among trading countries, and, accordingly, general proposals for more flexible exchange rates have been put forward with some elaborations. While appreciating such proposals as useful starting points, we should not lose sight of the fact that we have not as yet gone beyond theoretical models on the matter. Indeed we should be doing a disservice to an orderly international payments and trade system if we view the problem of reforming the par value system in terms of this or that theoretical model as being the best. Recognizing therefore that the present par value system is too rigid for timely and sufficient payments adjustments, we should equally appreciate the practical difficulties of moving immediately to freely fluctuating rates—a step which, on our part, would be experimental, with all its attendant risks for world trade and payments.

What we can do more realistically is to explore the possibilities of a happy medium or, rather, a compromise between stability and flexibility in exchange rates. This would not be an easy compromise, but given good will, patience, and some hard thinking on our part, it should not be beyond our possibilities to evolve a system, within or without the present Articles of the Fund, which offers a practical solution to our exchange problems.

September 23, 1970.

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