Opening Address by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Japan1

International Monetary Fund. Secretary's Department
Published Date:
November 1984
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Noboru Takeshita

I expect that in these meetings, which mark the fortieth anniversary of the Bretton Woods Conference, constructive discussions will take place and that the aim of these discussions will be to continue the progress of the world economy.

On this occasion, I should also like to express our sincere gratitude to the President and people of the United States for the warm courtesy and hospitality that have been extended to us in this beautiful capital for two consecutive years of Annual Meetings.

At this time, I want to extend a cordial welcome to the representatives of St. Christopher and Nevis, which became the newest member of the Fund and the World Bank on August 15 of this year. I also wish to welcome the representatives of the People’s Republic of Mozambique, on whose membership application we shall vote later today. This continuing growth in the membership of our institutions from 44 countries at the outset at Bretton Woods to 148, when the People’s Republic of Mozambique joins, testifies to the significant role that the Fund and the World Bank Group have played in the past and the expectations for their future. I wish to highlight that role today.

The Economy of Industrial Countries

In our meetings last year, we were able to discern clear signs of recovery from the worldwide recession. A year has gone by and steady recovery has been established in the industrial countries as a whole. The real rate of growth in 1984 is expected to approximate 5 percent. In particular, the economies of North America, which turned upward early last year, are continuing with their robust expansion. The employment situation is also showing improvement. The Japanese economy is on a satisfactory, full-scale expansionary trend. The recovery of Western Europe is generally picking up, though there are differences in speed and unemployment is high. In general, price increases in the industrial countries have been slowing down. This is due to prudent monetary and budgetary policies and the recent stability of oil prices. Paralleling the economic recovery in the industrial countries has been the recovery in world trade which has moved from stagnation to vigorous growth.

This economic recovery of the industrial countries is more soundly based than previous ones because it is based on the firm and mutual efforts of these countries. For several years, they have worked together to reinvigorate the economy and to curb inflation.

Our biggest challenge is to find the way to sustain and strengthen this recovery throughout the 1980s. This can be achieved through increased productivity, lower interest rates, and free trade.

Let us look at the major driving forces behind the present recovery. These are private economic activities such as consumption and investment in housing and plant and equipment. In order to promote these favorable factors, it is important to establish a positive cycle of self-generating economic expansion which is centered around improvements in productivity. It is crucial to press forward forcefully to establish the groundwork for this increased productivity.

First, the unbridled expansion of the public sector needs attention because it can undermine the vitality of the private sector. Huge fiscal deficits compete with private demands for credit. In doing so, they push up interest rates and can exert adverse influence on private capital formation. In view of these detrimental effects, governments must make their best and persistent efforts to curtail public expenditures and to reduce fiscal deficits.

The next step to increasing productivity is to remove the structural rigidities in various economies. These include such factors as inelastic labor-management relations, rigid interest rates, and excessive government intervention, all of which restrain the creative responses of private economic activities. Fostering this creativity is especially critical at this present juncture in the face of the demands of the twenty-first century.

To achieve the necessary flexibility, we must improve working relationships and wage-settlement mechanisms, liberalize capital markets, and relax governmental restrictions. Through these measures we can draw out the vitality of the private sector in a competitive climate and can better foster technological innovation and transform the industrial structure. The major responsibility for achieving these common goals rests with countries with economic weight because of the influence and impact they have on the global community.

The second critical factor in building sustained growth is coping with high interest rates. Despite the progress against inflation in industrial countries, interest rates remained relatively high and have even increased in some countries since the spring of this year. In addition, substantial interest rate differentials still exist among major countries. These high interest rates suggest that inflationary expectations have not been laid to rest. High interest rates not only threaten to undermine economic recovery, but also are increasing the interest payments burden of the debtor countries.

Moreover, movement of capital is induced by interest rate differentials and causes shifts in exchange rates. These conditions magnify the current account imbalance. This situation, in turn, is producing uncertainties in the exchange market. Furthermore, these shifts in exchange rates are constraining the monetary policy of the countries with relatively low interest rates.

Under these circumstances, the need to lower the level of interest rates and to reduce interest rate differentials is becoming more and more critical. These can be achieved by diminishing fiscal deficits and also by suppressing inflationary expectations through an appropriate control of monetary growth.

The third critical factor in sustaining growth is free trade. Here, there is cause for grave concern because protectionist pressures are continuing and even increasing in some cases. Protectionist measures not only prevent the optimal allocation of resources, they hinder sustainable noninflationary economic growth. Protectionism is especially damaging to the economic growth of the developing countries. Accordingly, there is an urgent need for each country to make a concerted effort to prevent or roll back protectionist measures. Toward this end the OECD forum reached an agreement on short-, medium-, and long-term programs of work. It is important to produce fruitful results in line with these programs. Furthermore, we strongly hope that the preparations for a new round of multilateral trade negotiations will be agreed upon at an early stage, within the framework of the GATT. These efforts are for the mutual benefit of all economies, both industrial and developing. Since the world economy is in recovery, this is the opportune time to start a new action for strengthening the free trade system.

The Economy of Developing Countries

In general, the picture in the developing world is substantially brighter than it was a year ago. Major contributing factors include the recent self-efforts of the developing countries to adjust their economic structures and the economic recovery of the industrial nations. In many developing countries, we can see accelerated economic growth, curbs on inflation, and remarkable improvements in balance of payments.

There are still serious problems, however, in a number of countries. For example, many countries have been experiencing a substantial decline in their per capita income for the past several years. Still others are suffering from triple-digit inflation.

Within the framework of interdependence, sound economic performance of developing nations is essential for a healthy global economy. I believe, therefore, that an improvement of developing economies is an issue critical to the whole world.

Addressing this situation will require an extraordinary effort by developing nations and this, in turn, will require concurrent financial and technical assistance from industrial countries on a multilateral and bilateral basis. It will also require acceleration of investments and loans from private sources. Eliciting these private sector involvements will need further efforts of coordination between developed and developing countries.

I firmly believe that mutual dialogue is indispensable to achieve effective coordination. In this context, I fully support the latest initiatives of the Interim Committee and the Development Committee to discuss at the next meeting, within the context of a medium- to long-term framework, financial and development aspects of the problems of developing countries in their efforts to achieve sound economic growth. I earnestly hope that constructive and fruitful dialogue between industrial and developing countries will be further promoted through such efforts.

Basically, there are two types of urgent problems that need to be addressed in a concerted manner: the debt problems and the development needs of sub-Saharan Africa.

Two years ago the debt problem became acute, but since then a disruption in international financial markets has been averted through the appropriate actions of debtor countries, governments and commercial banks of creditor countries, and international organizations. It should be noted that in the process, the Fund and the Bank, from their respective standpoints, have played important roles in dealing with the situation. They provided the financing to support adjustment programs of debtor countries and also served as catalysts in assembling comprehensive financing packages.

However, because of the size and composition of the outstanding debt, there is no cure-all or instant solution to the problem.

Constructive remedies will require the cooperation of all parties concerned and will continue to demand a serious, flexible, and case-by-case approach. Other basic requirements include medium-term efforts to transform the economic structure of debtor countries and to increase their ability to adjust, which will take a considerable amount of time.

We emphasize the following points in dealing with this problem: First, debtor countries, when necessary, should consult with the Fund or other international organizations and carry out adjustment policies that will reduce fiscal deficits, restrain domestic credit, make use of price mechanisms, and adjust exchange rates. Through these measures, they should be able to realize and sustain an appreciable reduction in their current account deficits. By so doing they would restore the confidence of the creditors. The Fund should support these efforts at the macroeconomic management level and the Bank should support these efforts by helping to improve development programs. Both should strengthen their mutual collaboration.

Second, to improve the economic environment of debtor countries, the industrial countries should implement policies that ensure sustained growth and lower interest rates.

Third, the industrial countries should avoid protectionist measures that affect the products from debtor countries, and they should strive to improve the export opportunities of debtor countries’ products by expanding market access. At the same time, the promotion of further liberalization of capital markets is expected to provide debtor countries with smoother access to funds.

Fourth, to lessen the immediate debt burden, parties concerned should explore through consultation feasible measures such as rescheduling of existing debts. It is important, in cases where debtor countries are making progress in economic adjustments, to encourage a more extended, multiyear rescheduling of their commercial bank debts.

As we have already indicated, the problems of the sub-Saharan countries are extreme in comparison with those of other developing countries. The per capita income has fallen to the level of the 1960s. This depression has been aggravated by a serious food crisis. A drought has beset the region for the past decade and has taken a dramatic toll.

Obviously, we have to give special attention to countries living in absolute poverty. Suffice it to say that immediate and effective actions including food aid are required. It also goes without question that a long-term, multifaceted strategy is essential to restructure the economic framework of these countries.

In order to serve the region’s developmental requirements, we should be prepared to provide a more concessional flow of development assistance. We should also assure that the region receives appropriate technical support to match its needs.

The Japanese Economy

Despite the fact that the Japanese economy has undergone two oil shocks and encountered various difficulties, its industries have responded positively. On the whole, Japanese industries have been flexible and adaptable. In particular, they have promoted resource-saving and energy-conserving efforts and streamlined management, and, as a result, attained high productivity growth. In addition, the nation’s flexible wage-settlement mechanism has kept wage increases to a modest level.

The Government also has played a constructive role. It placed administrative and fiscal reform as one of its most important objectives. It has tried to invigorate the private sector by simplifying and rationalizing its administration and reviewing its public regulations. The Government also has been prudent in its monetary and budgetary policies; especially, it has held down government expenditures and curtailed budget deficits.

Because of these public and private efforts, the Japanese economy has been achieving real growth rates of over 3 percent a year since the second oil shock. For fiscal year 1984, Japan’s real growth rate is expected to surpass substantially the 3.7 percent attained in fiscal year 1983.

In the first half of 1984, the unemployment rate was 2.8 percent. Consumer prices were 2.2 percent above those for the same period last year. Both figures are the lowest among the industrial countries. The interest rates are also at a relatively low level. In addition, administrative reforms continue to move forward dynamically. In the near future, the Nippon Telegraph and Telephone Public Corporation and the Japan Tobacco and Salt Public Corporation are scheduled to become stock corporations.

However, Japan’s budgetary situation is exceptionally severe; we see it from the fact that in fiscal year 1984 the general account budget had to rely on bond issues in the amount of 25 percent of its total expenditure. Therefore, the Government has set the goal to free itself by fiscal year 1990 from the characteristics of being dependent on bonds to finance current expenditures. It also intends to lower the overall dependency on government bonds by fiscal year 1990, and has been doing the utmost toward these goals. To this end, on the expenditure side, the Government will actively continue reviews and retrenchment, such as continuous fundamental reforms of existing systems and policies. It will do this from the perspective of clarifying the roles and responsibilities of the government and the private sector. It will clarify the roles and responsibilities also of the central and the local governments.

On the revenue side, the Government needs to study what the fair and appropriate tax burden ought to be, taking into account changes in social and economic conditions.

Since last year, Japan’s balance of payments current account has continued to show a considerable surplus, but I should like to point out that this is due mainly to factors beyond its control, such as the fall in oil prices, recovery of the world economy centered on the United States, and a strong dollar. On the other hand, Japan’s long-term capital account shows a net outflow exceeding the current account surplus. This means that Japan, by providing capital abroad, is contributing to the vigor of worldwide investment activities and to the lessening of upward pressure on interest rates. In particular, out of Japanese commercial banks’ medium- and long-term external lending and yen-denominated bonds issued in the Japanese capital market, those related to the developing countries and international organizations amounted to about $14 billion in 1983.

Japan is taking the initiative in making active efforts to maintain and strengthen the free trade system and to form harmonious external economic relations. This April, Japan arranged external economic measures to carry forward more vigorously the policies to open up its domestic market and to promote imports and investment flows. When the various measures that were announced in May to liberalize the Japanese capital market, to internationalize the yen, and to improve access by foreign financial firms to the Japanese capital market are implemented, they are expected to yield many results. Specifically, they are expected to help enable the yen to reflect more fully Japan’s importance in trading and financial transactions, to result in an increase in the yen’s international usage and holding, and to improve the efficiency of the Japanese and world capital markets. Japan will make continued efforts toward these ends.

With respect to the debt problem, Japan has been sharing an equitable burden, whether for official credit or commercial bank loans. The parties concerned are acting in concert from the standpoint of international cooperation. In order to further mitigate the interest burdens of debtor countries, Japan will support conversion by its commercial banks of dollar-denominated credits into yen-denominated credits.

The International Monetary Fund

We welcome the several developments that have been made in this past year to strengthen the Fund’s resources and enable it to meet increased demands on the Fund caused by the debt problem. First, the Eighth General Review of Quotas has come into effect, providing the Fund with an approximately 50 percent increase in its ordinary resources. Agreement on a threefold increase in the resources available to the Fund under the General Arrangements to Borrow and also on its amendment and under an associated arrangement with Saudi Arabia have also come into effect. More recently, new credit arrangements have been concluded between the Fund and industrial member countries and Saudi Arabia. We need to continuously re-examine what the access to the Fund’s resources should be in response to existing circumstances. We should concentrate on assuring effective use of Fund resources and preserving the original function of Fund lending as mutually supportive short-term financing.

The agreement on the enlarged access to the Fund’s resources of 1985 concluded at the Interim Committee as part of this on September 22, 1984 is welcomed.

The adjustment programs of major debtor countries are moving on the right track with the Fund’s support; we look to their continued smooth implementation. At the same time, appropriate economic management is needed in the medium term which goes beyond the adjustment period to reconstruct the economies of debtor countries. In this regard, the Fund’s surveillance is expected to play a particularly important role.

In order to prevent the occurrence of a new debt problem, the Fund is playing a significant role in monitoring the medium-term prospects for the balance of payments of member countries, monitoring international banking activities, and monitoring the state of bond issuance.

At the present time, a return by major currencies to a generalized system of fixed parities is unrealistic. More appropriate is an improvement in the management of the existing floating exchange rate system. Under these circumstances, greater convergence of economic performances and better compatibility of sound noninflationary policies are indispensable to realize stable exchange rates. As a way to promote this, strengthening of surveillance of the Fund is hoped for.

At present, finance ministers are conducting an examination among industrial countries on ways to improve the operation of the international monetary system. The present phase of this work is scheduled to be completed in the first half of 1985, and subsequent discussion at an early meeting of the Interim Committee is anticipated.

World Bank Group

The problem of developing countries has served to emphasize the important role of the World Bank Group and other international development financial institutions. The present difficulties of developing countries include structural characteristics that cannot be properly addressed through simple short-term demand management policies alone. We should, therefore, be prepared to provide medium-term and long-term comprehensive support which we have designated country assistance.

Since each developing country has its own particular needs, the World Bank Group must provide this country assistance on an individual basis. Sub-Saharan countries, for example, need basic development assistance, while heavily indebted middle-income countries need assistance that focuses on adjusting their balance of payments. In addition, we anticipate greater demands on the policy advice function of the World Bank Group, especially from countries with satisfactory progress in economic adjustments.

I believe that the World Bank Group and the International Monetary Fund should strengthen their cooperative relations and constructively share roles in various phases of development.

I also believe we need to strengthen the effectiveness of structural adjustment loans as an instrument for country assistance and subsequently raise the limit of lending.

Keeping these points in mind, it is important for us to be flexible in developing future functions for the World Bank. I hope many member countries will express their views on this subject.

In this context, I welcome the fact that the future role of the Bank was discussed at the Development Committee yesterday.

It is, of course, essential for the World Bank Group to strengthen its financial base in order to continue functioning as an effective development finance institution. Accordingly, all the major donor countries will be expected to cooperate as much as possible.

Toward this end, the Seventh Replenishment of IDA and the selective capital increase for the World Bank that were authorized earlier should be mobilized as soon as possible through the various internal procedures of the contributing countries.

It is also important to authorize the scheduled general capital increase for IFC and to start preparations for a general capital increase for the World Bank.

We should emphasize, however, that strengthening the financial base of international development finance institutions cannot be achieved by a capital increase alone. Donor countries are facing difficult fiscal situations of their own. Therefore, to meet the enormous assistance demands of developing nations, the limited resources of the World Bank Group must be used as efficiently and effectively as possible. For this purpose, we must emphasize the World Bank’s role as a catalyst for mobilizing private funds.

Along these lines, I place particularly high regard on the new methods of cofinancing initiated by the World Bank which have been successfully implemented in the pilot stages. It is my earnest hope that these programs will spur future growth of cofinancing.

I also expect IFC to play a more active role in promoting private investment. At the same time, we should acknowledge the critical importance of transferring the technical and intellectual know-how of the World Bank Group to developing countries.

Concluding Remarks

Since the 1970s, which was known as the decade of “shaking of the world economic order,” the world economy has faced various economic difficulties. We have had to cope with simultaneous maladies of high inflation and serious recession, large fluctuations in exchange rates, the debt problem, and aggravated trade friction. We have continued to explore our future courses. Through our combined wisdom and relentless efforts we have somehow managed to overcome these difficulties. We did it by promoting international cooperation, working to remove the rigidities in the economy, and executing prudent monetary and budgetary policies. These efforts are now bearing fruit. Notwithstanding the existence of regional disparity, the world economy is expanding. Our goal now is to try to sustain and spread this economic growth. We must also make further efforts to resolve the debt problems and strengthen the free trade system.

When we look ahead at the world economy from the 1980s through to the twenty-first century, we see dramatic changes. The development of new means of transportation and communication and the internationalization of capital markets will, whether we like it or not, lead to homogenization in international economic transactions. At the same time, however, there is a danger that innovative advances in technology, along with population changes and inherent differences in historical and natural conditions, will widen the gap in living standards among countries.

Our supreme task, therefore, is to build on the past to work toward a balanced growth of the world economy. For this purpose, we expect each country to press forward with a structural adjustment of its economy, draw upon the inherent strength of that economy, and make efforts to respond to the new age. These efforts include preparing a competitive environment according to each country’s situation; maintaining appropriate balance between savings and investment; reviewing the role of the public sector; and consolidating its fiscal position. On the basis of these efforts, each country needs to heighten its awareness of interdependence of the world economy and expand its international cooperation to meet the needs of the times.

Not only must we promote wider and more vigorous collaboration in the area of goods and capital, which have been the primary thrust of cooperation so far, but we must also improve cooperation in other areas as well.

Specifically, we must cooperate in improving the planning and implementation of economic policies; cooperate in improving administration in public and private institutions; cooperate in transferring science and technology; and cooperate in promoting an active exchange of information.

The tasks are immense, and their attainment is not easy. We should be ambitious in our goals, but pragmatic in their implementation. We must make steadfast but step-by-step efforts. These are tall marching orders. But considering our 40 years past experience, I am convinced that through our cooperative efforts within the framework of the Fund and the World Bank Group these goals are within our collective grasp and our future will be bright.

Delivered at the Opening Joint Session, September 24, 1984.

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