Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1984
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System—Willy De Clercq
It gives me great pleasure to be here to report to you in my capacity as Chairman of the Interim Committee, and even more so because we are marking this year the tenth anniversary of the establishment of the Committee. As you know, it has been a decade of solid accomplishment. The world economy and the international monetary system have gone through many vicissitudes and rapid change during this period that could hardly have been foreseen at the time when the Committee was created. That we have managed to cope with them so far, and more or less successfully, is in no small measure due to the effective way in which the Interim Committee has carried out the mandate given to it by the Board of Governors of the International Monetary Fund. For me, it has been a special privilege and a pleasure to have been associated with the Committee since its inception and an honor to have been twice selected to be its Chairman.
The Committee has held two meetings, both here in Washington, since I presented a similar report to you last year—the Twenty-Second Meeting was held on April 12 and the Twenty-Third Meeting was held last Saturday, September 22. The world economic outlook and the question of the allocation of SDRs in the current basic period were discussed on both occasions; in addition, the Twenty-Third Meeting also had on its agenda the review of the enlarged access policy and of access limits for the use of Fund resources. The main conclusions of each meeting are contained in the press communiqués issued at the end. Therefore I shall briefly summarize here only some of the highlights from the discussions.
World Economic Outlook
In many respects, the evolution of the world economy during the last 12 months has been more favorable than we had anticipated. The growth of output in the industrial world is proceeding at a rate of 5 percent, and inflation has continued to abate. The pickup in fixed capital investment in the major industrial countries during the last year has been a particularly reassuring development. The aggregate current account deficit in 1984 of the non-oil developing countries is projected to decline to a level that, as a proportion of current earnings, is the lowest in at least the last 20 years. The Committee found it particularly encouraging that their adjustment is now stemming increasingly from an expansion of exports and being accompanied by a return to positive growth in per capita terms.
There remain, however, several areas of concern in the present, and of uncertainties with respect to the future. The encouraging overall picture masks a great deal of unevenness in the performance of countries and regions. In Europe, the recovery has not yet become robust and the high level of unemployment remains a serious concern. The already high and still growing current account imbalances in some major industrial countries, and the accompanying pattern and volume of capital flows, cannot be regarded as sustainable for an indefinite period. The high level of international interest rates remains trouble-some and complicates the adjustment process in the heavily indebted countries. Protectionism continues to be a danger to the sustainability of the recovery. In several developing countries, firm adjustment policies are not yet in place, and in some of them, inflation has not yet been brought under control. In a significant part of the developing world, especially the low-income countries relying on commodity exports whose prices remain weak, the financial position remains difficult and real income growth disappointing.
In response to these concerns and uncertainties, the Committee emphasized that continued pursuit of a medium-term strategy should remain the basis of economic policy. Such á strategy required that monetary policy remained committed to the elimination of inflationary expectations. In fiscal policy, elimination of structural budget deficits had to be given priority and achieved primarily through reduced expenditures. Most members of the Committee believed that, in addition to being essential to the medium-term strategy, implementation of such a fiscal policy would contribute significantly to lowering the level of international interest rates. In Europe, structural measures to eliminate rigidities would help strengthen growth and ease unemployment. The Committee reiterated its concern that resort to protectionist measures might undermine the prospects for world recovery. While welcoming some recent actions in some countries to resist protectionist pressures, it called upon all members for concrete actions to reverse the drift toward protectionism.
While noting that the external debt problems of many developing countries remain serious, the Committee felt that the coordinated strategy by debtors and creditors of tackling these problems within the framework of adjustment programs had been working well, thanks partly to the more favorable economic environment created by the recovery in world trade. Such a cooperative approach remained essential to the successful resolution of debt problems. In this connection, the Committee stressed the importance of a continuing Fund role in the implementation of the coordinated strategy and it welcomed initiatives toward multiyear debt rescheduling arrangements in cases of effective adjustment.
In the recent meeting of the Committee, Treasury Secretary Donald Regan of the United States proposed that the next meeting of the Committee give special attention to the issues surrounding the management of debt problems in a medium-term context. The suggestion received wide support from other members, and the Committee has requested the Managing Director to prepare, in the framework of the Fund’s mandate and competence, background papers for consideration by the Fund’s Executive Board. The Managing Director’s report on this subject to the next meeting of the Committee will provide a basis for its discussion of these issues. There will be a parallel discussion, with a complementary focus, in the Development Committee.
In many indebted countries, adjustment is now entering a phase in which their key task becomes the achievement of acceptable growth rates while continuing to strengthen the viability of their external positions. In order to facilitate this task, it is important that economic growth in the industrial world should continue at a reasonable rate; that international interest rates recede from the current high levels; that adequate financing should be available in an appropriate volume and on appropriate terms; and that the indebted countries themselves should persevere in their adjustment policies.
Enlarged Access Policy and Access Limits
Turning now to the enlarged access policy and access limits for the use of Fund resources, Governors will recall the agreement in the Committee last year that these subjects would be reviewed annually in the light of all relevant factors, including the magnitude of members’ payments problems and developments in the Fund’s liquidity position.
A year ago, the Fund’s liquidity position was under considerable strain. Since then, the implementation of the Eighth General Review of Quotas, implementation of the enlargement and modification of the General Arrangements to Borrow, together with the associated agreement with Saudi Arabia, and the conclusion of a short-term borrowing arrangement for SDR 6 billion have greatly strengthened Fund liquidity. Thus the Committee’s consideration last Saturday of the policy on access took place against the background of an improved world economic outlook and a comfortable liquidity position of the Fund.
In view of difficult payments problems faced by many members and the serious uncertainties with respect to the medium-term outlook, there was unanimous agreement in the Committee on the need for a continuation of the enlarged access policy but there were some differences regarding whether there should be a phasing down in access limits from 1984 to 1985, and by how much. Following discussion and some intensive negotiations, the Committee reached the following conclusions regarding the access limits for 1985:
1. Access under the enlarged access policy in 1985 should be subject to annual limits of 95 or 115 percent of quota, three-year limits of 280 or 345 percent of quota, and cumulative limits of 408 or 450 percent of quota, depending on the seriousness of the balance of payments need and the strength of the adjustment effort. As at present, the Executive Board should retain the flexibility to approve stand-by or extended arrangements for amounts above these access limits in exceptional circumstances.
2. The present access limits under the special facilities should be retained.
3. As at present, access limits should not be regarded as targets. These limits, and the enlarged access policy itself, should be reviewed before the end of 1985, and yearly thereafter, in light of all relevant factors, including the magnitude of members’ payments problems and developments in the Fund’s liquidity position.
The Committee called on the Executive Board to complete, before the end of this year, the necessary action in order to implement the conclusions reached by the Committee.
The modest reduction in the access limits implied by the above conclusions underscores the temporary character of the enlarged access policy but is not in practice expected to affect materially the Fund’s ability to provide appropriate amounts of balance of payments support to member countries. The Managing Director had noted in his statement to the Committee that the Fund has been cautious in implementing the enlarged access policy in 1984. Therefore, the significance of the proposed modest reduction in the annual and triennial limits is primarily as a signal rather than as a substantive reduction in actual use of resources in the near future.
The retention of the second tier of limits leaves in place the capability of providing augmented access in specific cases if justified by balance of payments need and the strength of the adjustment effort. The cumulative limit of 408 percent has been left unchanged and the second-tier cumulative limit set at 450 percent in order to give the Fund a certain amount of flexibility, and also in particular to avoid situations in which a cumulative limit might cut off Fund financing from countries that, on the basis of their adjustment efforts and needs, it would be in the interest of the international financial community to provide. I should add that as at present the Executive Board retains the flexibility to approve amounts in excess of the access limits in case of exceptional circumstances.
By leaving the present access limits under the special facilities unchanged, the Committee was recognizing the importance of the special facilities at the present time in view of the weakness of commodity prices that is unusual for the current phase of the world economic recovery.
The Committee has continued to give close consideration to the question of SDR allocations during the fourth basic period in the hope of arriving at a sufficiently broad consensus in favor of allocations. However, so far it has not been possible to do so. Most members are convinced that there is now a strong case, in conformity with the Fund’s Articles of Agreement, for at least a modest allocation of SDRs. They suggest that such an allocation would meet a part of the growing long-term need for reserves and would not be an inflationary threat. It would be beneficial to many countries that are now undertaking severe adjustment efforts but have inadequate levels of reserves. In short, an allocation would strengthen the world economy and the international financial system. However, other members remain un-persuaded of the existence of a global reserve shortage. They believe that the problems faced by some countries with reserve inadequacies should more appropriately be met through adjustment in economic policies and use of conditional financing.
Under the circumstances, the Committee has urged the Executive Board to continue its examination of the issues involved.
It was agreed to hold the next meeting of the Committee in Washington, D.C. in April 1985.
Statement by the Governor of the Fund and the Bank for Ireland—Alan M. Dukes
I have the honor to address this meeting on behalf of the countries of the European Economic Community.
Present Economic Situation
Last April the message conveyed on behalf of my predecessor, Mr. Delors, as President of the Council of Economics and Finance Ministers of the European Communities, was of optimism, pragmatism, and hope. Nothing that has happened since then would lead us to abandon that message. The optimism has indeed been reinforced in some respects by developments in the interim. At the same time, a number of uncertainties and problems which pose a serious threat to sustained economic recovery have come more sharply into focus. These emphasize the need for vigilance in order to protect the recovery.
We are entitled to take heart from the progressively widening geographical spread of recovery. This has been helped by the sharp pickup in world trade, attributable largely to the strength of activity in North America. Most industrial countries are now into the recovery phase, although, outside the United States, their recovery is still modest by historical standards. Overall growth in the developing countries is also modest and in many cases is inadequate to reverse a serious decline in real per capita incomes over the past few years: in fact, a large number of those countries are still in the grip of stagnation.
Encouraging elements in the present situation are that recovery has not so far given rise to a resurgence in inflation, and that significant adjustments in fiscal and external imbalances have been brought about in many countries. As a group, the non-oil developing countries have achieved a remarkable turnaround in their balance of payments position.
On the other hand, the high level of unemployment continues in most of our countries. In the industrial countries it is now three times as high as it was in the 1960s and is still rising in many countries. The present year will still see more than 30 million people unemployed in the OECD area alone.
Economic trends in the European Community have mirrored those of the industrial countries generally. Gross domestic product growth in the Community is expected to be about 2¼ percent this year. While benefiting from the increase in world trade, better growth was spurred by the improvement in the underlying conditions and there has also been an encouraging pickup in business investment in recent months. Inflation is expected, on average, to slow down further to 5 percent.
The single most unsatisfactory development since April last, and the one which, in our view, still poses a major threat to a lasting recovery, is the increase in interest rates. Views expressed earlier in the year, that interest rates in the United States would soon fall, proved to be overoptimistic. On the contrary, the significant new upward pressure on U.S. interest rates during recent months, allied to the continuing strength of the dollar, has put pressure in turn on interest rates in other countries. The high level of real interest rates cannot but hold back investment as well as consumption in many countries, both directly and through its distorting effects on exchange rates and capital flows. Even more disquieting, it is placing further burdens on the heavily indebted countries, is adding to the amount of domestic adjustment that they must undertake, and has imposed strains on the international financial and banking systems. The fact that these problems have been contained up to now should not delude us into a sense of complacency.
The basic aim of policy in coming months must be to make the economic recovery a healthy and lasting one so that its benefits can spread further, both within the industrial countries and also to the developing countries.
The most pressing need is to create the conditions for getting interest rates down. This could ease simultaneously a number of problems on the real and financial sides of our economies. The achievement of lower interest rates in all our countries will depend on how successful we are in keeping a lid on inflationary expectations. This requires in many cases further progress in controlling public expenditure and in reducing structural budget deficits. While many countries are confronted with these difficulties, the United States has a particular responsibility to discharge here. The “downpayment” measures which have been taken to reduce the U.S. budget deficit are welcome. We trust that they will soon be followed by the additional measures that are needed to reassure the markets and convince them that interest rates can, and will, come down.
In discussions here and elsewhere a large degree of consensus has already been reached on the prudent monetary, budgetary, and other policies that should be pursued to promote noninflationary growth. However, prudent economic management will require us also to keep further developments under review and to exercise flexibility in the pursuit of policies.
The present level of unemployment, with its vast waste of human and economic resources, will confront us with a major challenge in the months and years ahead to see how we can achieve increased employment opportunities in the rapidly changing technological environment. Success in this task will involve not only sound macroeconomic policies to promote investment and overall growth, but also, and more particularly in Europe, the cutting back of major rigidities in our economies which stifle initiative and enterprise and work against job creation.
International Debt Problem
The interdependence among all our economies is not an abstract concept. It shows up in a very real way when one looks at international debt problems. A return to sustained levels of economic growth in the industrial countries in coming years will be facilitated by continued successful management of the debt problems of the developing countries, with whom we have close trading and financial links. At the same time, lasting growth in the industrial countries is itself required for solving the problems of major debtors in the developing world.
The need to view international debt problems in a medium-term perspective is now more generally accepted. Unremitting effort will be needed over a period of years, first of all by the debtor countries but also by industrial countries as well as the international organizations and, of course, the commercial banks.
The progress that some major debtor countries are achieving, at great but unavoidable economic and social sacrifice, is ample evidence of the soundness of the case-by-case approach that has served us well since 1982. That approach must be maintained and strengthened. In particular, an adjustment program agreed between the debtor country and the International Monetary Fund should continue to be the focal point. While these programs will entail some cutbacks in domestic demand and imports, the Fund should continue to make full use of its operating flexibility, in cooperation with the World Bank, to ensure that the productive potential of the economy will be strengthened and progressively brought into use. Moreover, the banks’ willingness to continue providing new funds for debtor countries which are adjusting their economies is a cornerstone of the strategy to deal with the debt problem. Official financing will also have a part to play. In cases where debtor countries are making successful efforts to improve their position, more extended multiyear rescheduling of commercial and public debts should be considered.
As already indicated, the main contributions that we in the industrial countries can make are to create and maintain conditions conducive to lower interest rates and to endeavor to achieve the highest level possible of noninflationary growth. There are two other things that we must do.
First, we must facilitate the debtor countries in expanding their international trade by resisting pressures in our countries for further protectionist measures and by rolling back measures already in place. Real progress in opening markets, and not mere posturing, is now needed. The European Community is committed to advancing the work program agreed at the ministerial meeting of the Contracting Parties to the General Agreement on Tariffs and Trade in 1982. A new round of multilateral trade negotiations may also make a valuable contribution to freeing world trade, and it is our intention, therefore, to participate constructively in the preparatory discussions with our GATT partners on the possibility of holding such a round.
Second, we must lift our eyes beyond immediate problems and look toward ways to improve the operation of the international monetary system, so as to avoid the emergence of unwarranted and volatile exchange rate movements. The European Community looks forward to the completion, in the first half of 1985, of the present phase of the Group of Ten’s work and to subsequent discussion in the Interim Committee.
Clearly, in the light of the upheavals of recent years, all countries represented here have a vital interest in such major issues as exchange rate stability, better multilateral surveillance, management of international liquidity, the role of the Fund, and the cooperation between the World Bank and the Fund. In the meantime, we in the Community take satisfaction in the smooth functioning of the European Monetary System in the recent past despite the unstable international environment. We are determined to maintain and strengthen the European Monetary System, both to bring our own economies closer together and as a contribution to the wider objective of stabilizing the international monetary system. The further development of the international role of the Japanese yen will be followed with interest by the Community.
IMF and World Bank Matters
Our dependence on the stabilizing influence of the Fund was never more apparent than during the recent past. The Managing Director deserves our special gratitude for his leadership and clarity of purpose. The countries of the European Community stand fully behind the Fund in its work. During the year Community member countries demonstrated our support in a concrete way by participating, with the Bank for International Settlements and certain other countries, in the operation to provide credit lines of SDR 6 billion to the Fund.
Thanks to this SDR 6 billion and the implementation of the last quota increase, the liquidity and financing positions are satisfactory at present, but pressures on resources could arise again at a later stage. This year’s effort to provide new resources to the Fund was, by its nature, an exceptional arrangement. Any new financing efforts that may be required should be spread fairly and should include all the major industrial countries. The enlarged General Arrangements to Borrow, which were an integral part of the agreement on the expansion of the Fund’s resources, provide an important instrument for this purpose.
The Fund’s resource needs will, of course, be influenced by the agreement reached at the Interim Committee on Saturday last on the continuation of the enlarged access policy and on the limits to apply in 1985. In present circumstances it would have been premature to drop the enlarged access. Further review of the facility must take account of IMF members’ payments problems, of the financing available to the Fund, of the temporary nature of the policy, and of the principle that subscriptions under members’ quotas are the primary source of Fund financing.
As regards a new allocation of SDRs, the arguments for and against, including the question of the existence of a global need to supplement existing reserve assets, have been well rehearsed over a long period. In the final analysis a decision on whether or not to have an allocation, and on its specifications, is a matter for judgment. Any decision must be consistent with the IMF Articles of Agreement, taking full account of present economic and financial circumstances. . . .
We must surely redouble our efforts to help the poorest countries if we are to retain credibility. The task is not easy but, in tackling it, we must keep in mind the interdependence among all our countries and try to recapture the spirit and vision of Bretton Woods forty years ago.
Statement by the Governor of the Fund and the Bank for the United States—Donald T. Regan
Forty years ago financial officials from throughout the world gathered at Bretton Woods with a common purpose in mind: to create international institutions which, through mutual cooperation and commitment, would assure that the world would not repeat the economic debacle of the 1930s.
The past forty years serve as testimony to their wisdom and foresight in creating the International Monetary Fund and the World Bank. We have modified—in some cases significantly—the tools they fashioned in order to meet the demands of a rapidly changing global economy. But the institutions themselves and the basic purposes for which they were founded have well stood the test of time.
The Fund and the World Bank are even more central to the global economy of the 1980s than they were when they were first created. As we began this decade our nations faced a number of serious problems. These included persistent inflationary pressures, weak economic growth, low productivity, high and rising unemployment, sharply higher oil import bills, and massive payments imbalances and financing needs.
We have, however, made very substantial progress in the past four years. Thanks to the cooperative efforts of debtors and creditors alike in making difficult, but essential, adjustments in our economic policies, we have once again restored growth to the global economy, sharply reduced inflation in many countries, improved productivity, stimulated investment, increased global trade, and preserved a sound international financial system.
Still, making it this far has not been easy—for any of us. The adjustment burden has not been borne by merely a few countries alone. We have all, in one way or another, been compelled to accommodate a new, evolving environment. And we have all had to bear the cost in order to reduce inflation and to restore growth to our domestic economies.
Significant progress has been made in dealing with problems of international indebtedness, although difficulties still remain. Thanks to global economic growth and firm domestic adjustment measures under market-oriented programs, a number of debtor countries are in the process of restoring growth, balance of payments sustainability, and creditworthiness in international capital markets.
None of this would have been possible if we had remained on the inflationary path of the 1970s, if we had refused to recognize the changing global environment, or if each of us had insisted on “going it alone,” and closing our doors to the rest of the world.
Indeed, one of the most important lessons we have learned since the early 1970s is that the health of the global economy depends fundamentally on economic stability within individual member countries.
This basic principle is clearly reflected in Article IV of the revised IMF Articles of Agreement—and it has been central to efforts among the industrial countries to improve policy compatibility, and to bring about a convergence in economic performance, as well as to deal with the problem of debtor nations.
Each nation must do its share. Only then can we achieve the desirable and necessary objectives of increased trade, increased employment, and increased real income; the development of productive resources; exchange rate stability; and the restoration of payments equilibrium.
And let me reiterate once again my profound belief that these objectives can be achieved. At no time in the past four years has there been more reason for optimism; nor more reason for rededicating ourselves to proven policies and methods.
The United States pledges to do so. The International Monetary Fund, under the capable leadership of Managing Director Jacques de Larosière, has played a central role in the progress that has been achieved. We believe that the following additional steps can strengthen further the Fund’s positive influence on the world economy.
First, we should continue the process of restoring the original monetary character of the IMF. The Fund was never intended to be a source of long-term assistance to economic development. That is the role of the multilateral development banks.
The Fund’s strength derives from its ability to provide sound policy advice in conjunction with temporary balance of payments financing to countries in immediate need.
Since last year’s meeting we have significantly strengthened IMF resources. It is essential, however, to husband the use of Fund resources in order to maintain the financial strength of the IMF through this decade.
Access to IMF resources must be subject to adequate safeguards, and drawings must be scrupulously repaid in order to preserve the revolving character of the Fund’s resources. In this connection, we support the recent discussions by the Interim Committee to continue phasing down enlarged access and to forgo an SDR allocation.
Second, we should broaden the scope and give greater substance to annual Article IV consultations and other forms of IMF surveillance over members’ policies—debtors and creditors alike.
I recognize that some have been looking for an easy solution to the recent debt problems of developing countries. But we have all learned that there is no “quick fix.” The only certain approach to restore growth and stability to the world economy is through improved domestic economic policies.
The United States is prepared to move ahead decisively to strengthen international surveillance. We believe that such measures as increased public awareness of Article IV consultations with member countries, and a greater use of ad hoc consultations between the Managing Director and finance ministers, could be very useful. We hope others will support proposals such as these for a stronger IMF surveillance role.
Third, we should increase the emphasis both within the Fund and in our own countries on market-oriented economic policies. Trade restrictions, impediments to capital flows, and wasteful subsidies impair national and global economic efficiency. We need to begin to liberalize these restrictions and to reduce government subsidies, in developing and industrial countries alike, to improve opportunities for global growth.
Fourth, the debt strategy that we developed in response to the 1982 crisis has been working. Many of the debtor countries have adjusted their economies, and in conjunction with expanded market opportunities in the industrial countries, are increasing their exports.
Growth in export receipts exceeds the higher costs due to the high interest rates of recent months, which are, nevertheless, well below 1980 levels and trending downward. The debt strategy should be maintained on the basis of particular solutions for individual countries, not across-the-board formulas. The case-by-case approach has worked and should be continued, but we should also be alert to ways to strengthen it.
Finally, we join others in supporting concrete practical steps to strengthen coordination between the IMF and the World Bank. While both institutions should maintain their individual roles, it is also important to assure that their policy advice and technical assistance are complementary. They have, in fact, adapted very well to the need to develop a wide range of adjustment programs, often under very difficult circumstances. . . .
The United States has proposed a round of discussions next spring between the developed and developing nations. We have made this proposal for a dialogue—not negotiations but a dialogue—in order that we more fully understand one another’s views and one another’s vantage points. It is only in that way that real progress can be made.
This proposal has been endorsed by the Interim and Development Committees, and we look forward to a constructive exchange of views on a wide range of issues.
Now if you will permit me a moment of reflection, I invite you to stand back and look at the last four years with me.
As the 1970s gave way to the 1980s, the world was suffused with pessimism and despair.
Well, to paraphrase the words of the U.S. author Samuel Clemens—better known as Mark Twain—the reports of our demise were greatly exaggerated.
Yes, individually and collectively we got ourselves into trouble—in some cases—deep trouble. And, yes, individually and collectively we paid a price—some of us a very steep price in the form of severe austerity programs. But all in all, we are back from the brink and poised to move into the next phase—the future.
And, it’s the future I want to talk about. Because our efforts, however successful, will ultimately mean nothing unless each of us, and all of us, recognize and profit from the economic lessons temporarily ignored and reimposed on us at a heavy price.
We all now acknowledge the problems that arise from policies and programs that produce inflation. And all of us have learned not only of the inevitability of the stagnation that follows such inflation, but the high price of corrective action.
We acknowledge the pernicious effects of erecting barriers to trade and investment. Many have paid the price of vastly reduced participation in the growing world economy by such self-defeating actions.
We acknowledge the stifling effects of high tax rates and tax policies that reduce incentives. The cost we pay is very real.
We acknowledge that no nation can forever escape the effects of imprudence in its borrowing. That hardly needs restating here, nor do I want to dwell very much on the painful lessons that we have all learned from the 1970s.
But I wonder if we have all understood the corollaries to these timeless economic lessons. Because, from what we have all learned in the last generation, everyone of us can take hope for the future.
By putting incentives into the system—lower taxes, less regulation, free markets—by allowing the creative spirit and energies that exist in all of our countries to flourish, I believe every economy on earth can enjoy the growth that some of us have experienced and all of us want.
By being prudent in our fiscal and monetary affairs, I believe every one of us can experience that growth without devastating inflation.
By allowing the free flow of goods, services, and capital, both within and without our borders, I believe that every nation in the world can enjoy the benefits of the individual genius that lies within every land.
By removing the rigidities within each of our economies, I believe every nation can more quickly improve its efficiency and investment potential.
In short, let me impart to you today my firm conviction that by living the lessons, those universal economic lessons that we have all been called to relearn in the last decade, the next decades can generate a prosperity undreamed of.
I urge you: As much as you may want to erase the memory, do not forget the pain of the past, nor allow yourselves to lose sight of the better times on the horizon.
Being mindful of that past and optimistic for that future gives the best assurance of reaching our mutual goals.
With a little courage, a little determination, and a little patience we can do it. But we must do it together. We must rededicate ourselves to the spirit of cooperation and shared destiny that brought our predecessors together 40 years ago.
The opportunity is here today. We cannot afford to let it pass us by.
Statement by the Governor of the Bank for France—Pierre Beregovoy
The Bretton Woods Conference, which gave birth to the institution under whose auspices we are now gathered, was held forty years ago.
Such longevity bears witness to the soundness of the system established at the end of the Second World War. Adjustments have been necessary; others remain to be made. We are here to devise solutions adapted to our times.
The world has changed a great deal in forty years. In all likelihood there will be additional upheavals by the end of the century under the combined impact of the demographic, technological, and social changes that set the course of international economic developments.
The basic question before us now is, in fact, broadly the same as the one facing the participants at the Bretton Woods Conference, namely, our ability to pull our countries out of the economic crisis and to establish the conditions for lasting growth.
No one can be content with the present situation: the rise in unemployment, which is still very high in Europe, the impoverishment of many developing countries, and the recurrence and spread of famine in certain areas such as sub-Saharan Africa not only generate sizable social and human problems, they also threaten to jeopardize international relations.
To correct this situation a balanced growth of production is required. All our efforts must be focused on the need to achieve and subsequently consolidate world economic recovery.
The improvements over the past two years indicate that we are on the right track. In 1984, prospective growth in the OECD countries is about 4 percent, and international trade is again on the rise after having stagnated and then declined. Encouraging as these results may be, they remain tenuous. Even where growth is the most pronounced, disequilibria and financial pressures show that the adjustment process is far from being completed.
This rehabilitation of our economies is based primarily on the efforts, and, in many cases, the sacrifices, that each of our countries has agreed to make in order to emerge from the crisis. As you know, France is modernizing its economy while simultaneously reducing public deficits, being conscious that higher productivity is the prerequisite for noninflationary expansion.
Our policies will remain firmly based on the principle of the openness of our economy to international trade as we believe that the growth of international trade is essential for the growth of the world economy.
In this connection, monetary stability is one of the conditions for maintaining sustained growth. This requires eliminating current payments imbalances through adjustment measures adapted to the circumstances of each country. Fund assistance is decisive in this regard. Under the leadership of its Managing Director, Jacques de Larosière, the Fund has played a role of paramount importance in the drawing up and financing of the programs required for the countries suffering from the most serious imbalances.
On behalf of my Government, I express the wish that international monetary cooperation be strengthened. It is clear for us that the debt burden of the developing countries, aggravated by the rise of the dollar, is seriously endangering the world economic recovery.
Let us be specific: According to Fund data, one additional percentage point of growth in the industrial countries between 1984 and 1986 would yield a 3.5 percent expansion in the exports of the non-oil developing countries and improve their balance of payments by a corresponding amount. In contrast, however, the monetary developments of the first six months of this year will increase the developing countries’ interest burden by $6 billion. This gives the measure of the harmful effect of high interest rates, which are also impeding economic recovery in Europe.
Despite the commitments made at former summit meetings of industrial countries, the situation has scarcely changed at all. I hope that our discussions on this topic here in Washington these past few days will not be without result. France believes that industrial countries have a responsibility to bear in this matter. No country in the world, not even the largest one, can shirk this responsibility. I would even go so far as to say that the responsibility increases with the economic size of countries and the role they play on the world scene.
France is deeply attached to the community of democratic nations; that is why I am expressing myself in such a forthright manner, political and economic responsibilities in this area being closely interrelated.
An easing of interest rates would therefore be most welcome. This would not in itself compensate for the slow growth of international liquidity, which in our view jeopardizes the medium-term growth of output and trade. For this reason, we have supported a new allocation of SDRs. Although a majority of member countries declared themselves in favor of such an allocation, this proposal was not accepted by the Interim Committee.
I regret this fact, for a new allocation would have confirmed the Fund’s monetary function and strengthened the role of the SDR as a reserve asset. It is my firm wish that this question be reexamined, and that France’s suggestion that industrial countries lend all or part of their new allocations to the countries that are carrying out economic adjustment efforts be taken into account.
In the same spirit, France spoke out clearly in favor of continuing the policy on enlarged access to the Fund’s resources. This instrument has proved to be useful and I am glad that it has been continued. Arduous discussion took place within the Interim Committee, but eventually all member countries were able to agree.
This agreement means that the loans extended under the enlarged access policy will be reduced significantly less than might have been feared. In addition, overall access limits for individual countries will be maintained at the same level in the vast majority of cases; this constitutes the most positive outcome of our discussions.
Finally, should the Fund need to replenish its liquidity, it could make use of the General Arrangements to Borrow, revised last year, in which France would participate.
To be effective, adjustment programs must be part of an overall approach to economic development. The countries concerned are required to make a threefold effort: balance their accounts, produce more, and sell more abroad. This means that their productive capacities must be considerably strengthened, which will call for a sizable investment effort over a long period.
The financial assistance provided to them must therefore be considered within a long-term framework. In this connection, it is essential that the Fund cooperate closely with other institutions involved in medium-term project financing. It is therefore necessary to ensure that the multilateral financial institutions have sufficient resources to carry out their missions. . . .
I wish now to raise an issue about which my country is particularly concerned, namely, sub-Saharan Africa. The region has serious, often dramatic, problems; it is ravaged by drought, and there are now more than 100 million Africans suffering from malnutrition. It is urgent that the international community should make an exceptional effort for these countries and their peoples.
The World Bank has presented us with a forthright analysis of the difficulties. It has still to draw appropriate financial conclusions from its lucid analysis. Once again, I call upon the World Bank to convene a donors’ meeting so as to set up as early as feasible a “Special Africa Facility. …”
France is prepared to contribute to this effort with the resources it had set aside for the IDA-VII Supplementary Fund. Bilateral aid programs are useful; France for its part is earmarking 50 percent of its bilateral aid for sub-Saharan Africa. Multilateral assistance is no less necessary, and I invite the major industrial countries to hear the call of the African continent.
The international community must also agree to take a more prospective view. “The time has come to consider a new Bretton Woods,” stated the President of the French Republic, François Mitterand, to the OECD last year. We all sense that the international monetary system needs to be adapted to the vast social changes that are taking place.
Moreover, France proposes that a new instrument, country loans, be created. These loans would be committed over a period of five to seven years. Their basic aim would be to contribute to external adjustment through a range of coordinated policies to enhance the productive capacity of the countries concerned. They would be extended by the World Bank in close cooperation and consultation with the International Monetary Fund.
We cannot remain indifferent to the disorder and injustice imposed upon the weakest countries. I realize that it is a delicate matter and that monetary reform is not easy. I am a pragmatist and would like to see steady progress made, neither too quickly nor too slowly.
Under my predecessor, Jacques Delors, the Group of Ten gave serious and detailed consideration to four topics: the stabilization of exchange rates, international liquidity, multilateral surveillance, and the role of the Fund. The report will be completed early next year. It is the wish of France that a special meeting of the Interim Committee be held in 1985 to discuss it. In this way, we would be moving one step closer to a more stable and mutually supportive system.
Forty years ago, the Bretton Woods Conference opened the doors of prosperity to the world by organizing a stable monetary system. Present times are not so dramatic. The world has changed, often for the better. However, monetary stability and development are still to be addressed. It is my earnest wish that we should demonstrate, for the cause of our peoples and of peace, the same boldness and realism as our predecessors.
Statement by the Governor of the Bank for the Dominican Republic—José Santos Taveras
It is my honor and privilege to address you at these Meetings of the Boards of Governors of the International Monetary Fund and the World Bank on behalf of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Spain, Suriname, Uruguay, Venezuela, and my own country, the Dominican Republic. The Dominican Republic and the other countries I represent are pleased to take part in the discussions on this transcendentally important occasion.
Most of our countries, like the industrial countries, are in the midst of a critical stage in the development process, and we believe this is the proper time and place to give voice to our profound concerns.
Our destinies are so intertwined that to strengthen one is to strengthen all. We are concerned today, therefore, with the importance of adopting a comprehensive approach to the economic and financial problems that threaten both the strength of the recovery and the re-emergence of the forces of development. We are fully aware that the conditions in which our nations find themselves today impose a clear choice: either we progress jointly, or we will be forced to face social, economic, and political disturbances of unforeseeable magnitude.
Although it is repetitive to state it time after time, the situation of the great majority of our countries is deeply worrisome. The major economic indicators all yield the same somber picture, and I have no hesitation in stating it in these terms, on behalf of all the countries I represent and of my own.
For instance, data from the Economic Commission for Latin America (ECLA) show us that Latin America’s gross domestic product (GDP) declined for the second year running in 1983, falling by about 3 percent, and that per capita GDP decreased by 5 percent last year, continuing a “trend” started in 1980.
On the other hand, urban unemployment in the region rose alarmingly in 1983 and can be clearly felt throughout our countries’ economies. And inflation, as measured by consumer prices, also showed a similar trend, as domestic prices rose more quickly in 1983 even in those countries that have traditionally moderate inflation rates.
Turning to indicators for the external sector—which is so important in our countries, given the considerable degree of openness of our economies—we see that the trade surplus of approximately $33 billion obtained in 1983 was generated exclusively by drastic cuts in the region’s imports, which declined by 30 percent after having already fallen by 20 percent in 1982.
This fact and its exceptionally adverse implications for regional and world development, together with the shocking reality of progressively worsening terms of trade, brutally reveals the crisis in which we are mired. In this regard, the data show that in 1983 the terms of trade index was 28 percent lower than in 1978 and reached its lowest level in the last half century; in 1980-83 its average was much lower than in 1931-33, the most critical stage of the Great Depression. Furthermore, as a result of this new decline in the terms of trade, and despite the 7 percent increase in the region’s export volume, purchasing power actually fell.
We should also note that declining financial remittances helped strengthen the impact of the trade surplus on the current account of the balance of payments. Nevertheless, we know that this resulted largely from a contraction in the region’s economic activity. Another equally significant fact affecting the reduction in the current deficit was the sharp decline in net capital inflows, which in 1983 were no more than 10 percent of their 1981 value.
On the other hand, the external debt grew by 7 percent in 1983, as a basic consequence of the virtual cessation of new international bank lending to Latin America. In addition to these facts, developments in 1984 add even more unsettling factors, including above all the rise of the basic interest rate in the United States.
Our countries do acknowledge, however, that some positive signs can be seen in several developed economies. The U.S. economic growth rate has remained at levels that suggest the emergence of economic recovery. Other developed economies have also shown progress in this regard. Industrial country growth rates are expected to exceed 3.5 percent in 1984 and may possibly be even higher in 1985.
But these signs of recovery have not produced the stimulus our countries looked forward to in order to escape from their three-year-long economic recession, during which we saw our per capita income decline in real terms. More serious yet is the fact that we continue to be strangled by service payments on an external debt for which creditors as well as debtors are responsible. We must honor this debt to the extent possible, in order not to affect the normal development of the international financial community—an objective we deem essential and because of which we are immersed in a painful economic adjustment process which in many cases is taking us to the limits of our social and political tolerance.
Let us recall that some years ago, in meetings similar to this one, we were told that our countries should resort to international private bank financing to cope with their desperate economic problems. However, events have shown that, instead of resolving those problems, what recycling through the commercial banks has brought us is a problem even greater than the one we were trying to solve. Consequently, the problem of development cannot be stated in purely commercial terms.
Our countries reiterate their view that the topics of the uncertainty of this recovery and the declining thrust of development in many developing regions have not been given the importance they merit. These factors place the world financial and monetary systems in danger of collapse.
The industrial countries continue to fight to prevent the resurgence of inflationary pressures, but they do so only through monetary policy, allowing their fiscal deficits to persist. As a result, real interest rates remain high and nominal rates have become extremely sensitive to the slightest movement of economic indicators. Exchange rates, particularly those of the stronger currencies and especially that of the U.S. dollar, have become unbalanced and are causing unsustainable trade dislocations. Protectionism is gaining strength day by day, preventing the developing countries from increasing their penetration of the developed world’s markets, especially as regards their agricultural products, and constituting a threat to their small achievements in, say, the textile and steel sectors. Above all, however, what we call the international problem of the debt continues to weigh heavily on the development of our economies.
The irony of the situation is that what has always been referred to as the international debt problem has not been approached as what it is—an international problem. By dealing with it case by case, the tendency has been to approach the problem as belonging to this or that debtor country and to consider that it should be solved through sacrifice on the part of the debtor country. The international conditions that created the problem have been altogether overlooked. For example, there has never been a willingness to accept joint responsibility for the unevenness of the adjustment effort. Because of the inequality in the adjustment process during the 1970s, the requirement of adjustment was imposed only on the developing countries, as if it were merely a matter of mismanagement of resources in those countries. At no time was there a mention of the lack of action by the developed countries—five or six of which dominate multilateral organizations such as the International Monetary Fund and the World Bank—in not applying the political will to change the position of these institutions and thereby obtain an appropriate reaction to the changes that were occurring in the international financial environment in the late 1970s.
It cannot be denied that the problem of the debt is everyone’s problem and that, consequently, it merits a highly urgent international political solution that must not be delayed. The leaders of the countries on whose behalf I am addressing you today have repeatedly emphasized this fact in the last two years, both in Quito early this year and in Cartagena in June, then in a communiqué addressed to the London Summit Meeting and, more recently, in the Mar del Plata communiqué.
These initiatives unambiguously state that the negotiations to restructure our countries’ external debt must envisage the elimination of a series of obstacles that hinder our compliance with our payment commitments and make it more burdensome to do so. To this end, it was mentioned that there is a need to establish multiannual rescheduling periods, eliminate administered rates, reduce spreads, abolish rescheduling fees, and consider designing debt profiles more consistent with the debtor countries’ payment and refinancing capacity.
In addition, in view of the burden represented by the high real and nominal rates of interest—which clearly have become obstacles to economic recovery in our countries and even in the creditor countries, as many of these hindrances result from the fiscal and monetary policies pursued by the industrial countries—we reiterate that the adjustment process must not be recessive and must have a symmetrical nature in order to prevent its costs from falling solely upon the developing countries. Moreover, our countries would hope that the rescheduling of their debts to international banks will not be linked to international organizations’ conditional programs but rather will be based on criteria consistent with our payment capacity.
Any lasting and equitable solution must be the result of a joint consensual position reached by all sectors involved in the international community, as the signatory countries of the Cartagena Consensus stated clearly in the Mar del Plata communiqué. To this end, the countries we represent are determined to continue to seek such a consensus through a permanent and sustained dialogue going beyond the unavoidable purely economic facets to encompass the political aspects of our societies.
Our countries have not shied away from their responsibilities. They are directly confronting the adjustments required by their economies, and, furthermore, they are also prepared to assume their international financial obligations. No more should or can be expected of us. The rest of the world also must face up to this challenge. The industrial countries must soften their monetary policies with a significant fiscal moderation and adopt more liberal policies in the areas of trade and development aid. Commercial banks and other sectors of the international financial community must provide a stronger and surer support adapted to the external situation of the countries in question and leading to their development. And, from our own point of view, it is essential that the multilateral institutions provide guidance and assistance based on realistic data regarding capacity and limits of tolerance in view of the political and social costs and of the needs of developing countries. . . .
We would like to conclude our remarks by stressing that it is only through direct, permanent, and constructive dialogue among all nations, backed by a firm political will, that we will be able to arrive at satisfactory solutions to the international economic crisis now weighing down upon us.
Statement by the Governor of the Fund and the Bank for Korea—Mahn-Je Kim
I would like to begin by joining fellow Governors in extending a wholehearted welcome to St. Christopher and Nevis as the newest member of the International Monetary Fund and the World Bank.
As we all know, 1984 marks the fortieth anniversary of a landmark in international cooperation—the Bretton Woods Agreement, which created the Fund and the Bank. This successful experiment in world cooperation has guided us into almost four decades of postwar prosperity.
I would like to take this opportunity to review the current state of the world economy and the role of the two Bretton Woods institutions. By a renewal of this spirit of global cooperation, I am confident that we can find solutions to the major problems facing the world economy today.
Fortunately, the world economic situation is much better now than it was a few years ago. The marked economic recovery in North America and moderate recovery in the other areas of the industrial world, combined with significant progress in price stabilization, have brightened the world economic picture.
Also, some progress in correcting unsustainable external positions of some developing countries through implementation of structural adjustment programs has also improved prospects for a resolution of their debt servicing difficulties and a resumption of more satisfactory growth rates.
Some important issues, however, remain:
First, many developing countries have yet to share in the fruits of recovery.
Second, the recovery itself may lose momentum in the latter half of 1984 and on into 1985 partly as a result of high real interest rates.
Third, as noted by the Fund’s 1984 Annual Report on Exchange Arrangements and Exchange Restrictions, trade protectionism has expanded in the industrial countries.
Fourth, and last, the debt burden of many developing countries continues to be heavy.
Thus, the medium-term prospects for a durable world economic recovery are still uncertain. Among others, protectionist pressures have produced anxiety among developing countries that are dependent on continued access to export markets in industrial countries. Indeed, it cannot be emphasized strongly enough that the developing countries must have fair access to export markets in order to earn the hard currency needed to service their foreign debts.
In addition to protectionism, excessively high real interest rates pose a serious threat to the stability of the world financial system. Not only do they discourage investment spending in the industrial nations over the long run, but in the short run they exacerbate the debt servicing burdens of the developing countries as well as increase the costs of needed structural adjustments for developed and developing countries alike.
These problems highlight the interdependence of the world economy. Therefore, their solutions can only be found through the joint efforts of both developed and developing nations working in collaboration with international organizations such as the Fund and the Bank.
On our part, the Korean Government has been consistently pursuing strong adjustment policies despite severe hardship that they sometimes entailed. These include strict fiscal discipline, monetary restraint, and flexible management of the exchange rate, complemented by structural policies.
To improve the efficiency of domestic industry through increased competition and greater technology transfer, we have been adopting measures to liberalize imports, reduce tariffs, and remove barriers to foreign investment. To mobilize more domestic resources and enhance the role of the market mechanism in resource allocation, we have been implementing policies to deregulate prices and interest rates and to reform the financial sector.
The result of our adjustment program is clear from our recent economic performance, which in 1983 far exceeded program targets. Output growth nearly doubled to over 9 percent, inflation was virtually eliminated, and the current account deficit halved to about 2 percent of GNP. At the same time, the growth of external debt slowed and its maturity improved.
Judging from our economic performance in the first half of this year, we expect in 1984 a growth rate of over 8 percent, continued low inflation, and further reduction in the current account deficit. To ensure the ongoing success of our structural adjustment efforts, Korea will continue to work closely with the Fund and the Bank.
As Korea becomes more integrated with the world economy, its vulnerability to external disruptions is heightened. Therefore, more coordinated international economic policies and stronger international cooperation become necessary. That is why Korea strongly supports a strengthened role for the Fund and the Bank.
The Korean Government is pleased with the achievements of the Fund during the last year. The Fund has played a catalytic role in facilitating cooperation among debtor nations and lenders to effectively address the developing countries’ balance of payments and debt servicing problems. Also, the Fund has recently expanded its surveillance activities in the context of annual consultations with member countries. In view of the important link between developing countries’ export earnings and their debt servicing capacity, Korea supports a strengthened role of the Fund’s symmetrical surveillance function, particularly aimed at the reduction of protectionism. A more open trading environment will benefit all countries. First, it would accelerate structural adjustment in the industrial countries, which leads to higher economic growth through international trade specialization. Second, it would increase developing countries’ access to export markets and, thus, improve debt servicing and import capabilities.
As I mentioned earlier, substantial progress in price stability has been achieved. However, the international reserve assets of the developing countries relative to their financing needs are not adequate. Therefore, now is the time to reach an agreement on the additional allocation of SDRs to smooth the functioning of the international monetary system and to facilitate the expansion of world trade. In order to enlarge Fund resources to meet an expanded role, Korea hopes that meaningful discussions on the Ninth General Quota Review will begin shortly. . . .
Let me conclude by mentioning the major challenges facing developed and developing countries in their common endeavor to achieve a durable expansion of the world economy. First of all, developed countries should open up their markets to developing countries’ exports by reducing protectionist barriers. Furthermore, greater efforts should be made to reduce the present high levels of real interest rates in order to ease the debt burden and to ensure a stable international financial system. On their part, the developing countries should manage their balance of payments and external debt problems more effectively by pursuing strong adjustment policies.
As for international organizations, such as the Fund and the Bank, they should strengthen their role as capital suppliers to the developing countries, and particularly the Fund’s surveillance function aimed at balanced structural adjustment efforts.
And, finally, commerical banks should play a larger financing role in the current world economic environment. In so doing, they should respond favorably to countries undertaking adjustment programs and posting good economic performance.
We cannot afford to delay these actions, because such delay would bring greater unnecessary hardship to all nations. Rather, the time to deal with the problems I have discussed is now, during a period of global economic recovery, when the task of structural adjustment of the world economy can be undertaken with lesser sacrifice and greater chance for success. If we act promptly and decisively, I believe that we can break the vicious circle of protectionism, recession, and debt crisis that has plagued the global economy in recent years.
On behalf of the Government of the Republic of Korea, I look forward to welcoming you all in Seoul at the next Joint Annual Meetings, and I can assure you that we will do our best to assist in making the meetings a success and to make your stay a very pleasant and comfortable one.
Statement by the Governor of the Fund for Indonesia—Radius Prawiro
I am very pleased to meet you all today in the course of these extremely important and constructive meetings.
With the experiences of Sarajevo and Los Angeles fresh in our minds, I suspect some might regard these meetings as the Olympics of the international financial community.
I trust, however, that our gracious hosts do not attempt to continue their success in those Olympics. With all the first place medals won by U.S. athletes, some may be inspired to return to the gold standard as suddenly as it was dropped a decade ago. There are sufficient indicators in the world economy today which would make such a sudden policy change all the more unsettling. In a sense, that sums up the point of view that I would like to share with you today. To take a page from the game theory and to continue the Olympics metaphor, let me suggest that we give equal attention to the rules of the game as well as the policy content.
It should be acknowledged at the outset that certain conditions have improved significantly since we last met in September 1983. The economic recovery, however, has been heavily concentrated in North America and Japan. It is true that in spite of the prevailing high interest rates in the United States, business fixed investment has revived quite strongly, but some slowdown in the economic performance of the United States is expected in the year ahead. On the other hand, growth has been relatively weak in the European countries, where very high unemployment still prevails. The inflation rates, however, have generally been brought down to sustainable levels.
The developing countries in general have likewise experienced some acceleration in the improvement of their economies. Their debt servicing problems have eased considerably since 1982 when the prolonged world economic recession and the emerging debt problems caused fears of an imminent financial crisis. Relatively austere monetary and fiscal policies, good agricultural harvests, and generally stable import prices have allowed most countries in Southeast Asia to maintain remarkably low rates of domestic price increases. Austere domestic policies to contain import demand, combined with generally improving export markets, have been the main reasons for improvement in the current account deficits of these countries.
In general, the performances so far are encouraging, but the outlook remains uncertain because growth recorded so far has been uneven, and the ability to sustain the recovery remains unproven. A number of factors suggest that the present recovery is fragile and could easily be aborted. High interest rates, protectionist trade policies, and exchange rate fluctuations still darken the horizon. The uncertainty surrounding these factors would no doubt complicate the formulation of economic plans and could easily undermine the effectiveness of the policies pursued by the developing countries to achieve sustained economic growth.
For a country seeking to improve the inflow of capital and stimulate investment, the upward pressures on interest rates are causes for concern. Excessive fluctuation in exchange rates will also take its toll in exports. At the same time, protectionist trade policies persist, thus further distorting the efficiency of international trade.
What accounts for these problems? I hesitate to say whose responsibility it is because I believe it is the responsibility of us all. It is, therefore, fair to say that we must renew our commitment to ensure that national economic policies are harmonized with global economic interest, particularly with that of the developing countries. Developed countries are equally affected, but the strength and diversity of their economies could cushion or even disguise the impact.
In the United States, a combination of strong private demand for credit, together with a large fiscal deficit, has pushed real interest rates up to levels that could adversely affect investments. High real interest rates have also contributed to the sharp appreciation in the value of the dollar which will adversely affect U.S. exports. This, in turn, leads to increased protectionist pressures within the United States.
High real interest rates in the United States also have international implications since they attract foreign savings into the United States and influence exchange relationships in a direction that may not be justified from the point of view of balance of payments, particularly the current account balances. At the same time, the debtor countries’ debt servicing capacity will be adversely affected by high interest rates in the capital markets. The rise in debt service cost due to interest rate increases has, to a large extent, offset the benefits of the recovery in the exports of the debtor countries.
We also observe that recovery in the European economies has not been sufficient to reduce the prevailing high unemployment. Policies to stimulate growth in these economies are constrained by structural rigidities. The social welfare schemes in some of these countries, together with wage rigidities, have resulted in distortions in the labor market and a decline in business profitability. Consequently, investment performance and job creation have lagged behind those experienced in North America.
Among the developing countries, the newly industrialized countries have indeed benefited the most from the world economic recovery. This is mainly due to their more diverse economic bases and their ability to respond quickly to foreign demand for manufactured and semiprocessed products. However, the apparent increase in protectionist sentiments in industrial countries might severely limit the ability of these newly industrialized countries to experience sustained growth in exports of manufactured goods. At the same time, international prices of commodities, upon which most developing countries are heavily dependent, have declined in recent months. The outlook for a pickup in these prices, especially for coconut and copra products, sugar, timber, copper, tin, oil, and rubber, is very uncertain. Prospects for substantial improvements in the economic performance of these countries during the coming year could, therefore, be undermined.
To put this in a different perspective, the Economist recently noted in its columns that after this November, industrial Western nations will go two years without national elections. This provides them with the chance to make tough economic decisions without the pressure of voter reactions. The publication added, and I quote,
While the (major) shareholders in the IMF are right to say debtors can boost their supply of exports by changing their domestic policy … (it is) equally right that the demand for exports must be there. … If governments of the rich world want to turn debtors into defaulters and shake the banking system, they only need to follow the advice of their own protectionists.
In order to sustain the present recovery in the West, important measures must be taken to reduce budget deficits to achieve lower interest rates, to establish a more consistent pattern of exchange rates, and to reduce current account deficits. It is not difficult to envision the domestic political value of a strong dollar and the probability that these conditions would change after the election. But there is also a practical and psychological impact on the world economy which must respond to the pressures.
For other industrial countries, especially those in Europe, I believe that a cautiously expansionary financial policy, combined with measures to ease the structural problems, could contribute toward a better economic performance. This seems especially appropriate in countries where inflation is under control and where the balance of payments is strong.
For the developing countries, further progress in economic development and the ability to service debt will depend, to a large extent, on the willingness of industrial countries to match the adjustment efforts of the developing countries with policy improvement of their own. Recovery in the developed countries should provide them with a good opportunity to adopt trade liberalization measures. In addition, some thought should be given to the idea of introducing more effective surveillance procedures in the Fund to bring about a better mix of policies in the industrial countries.
In addition to those measures, there is the urgent need to preserve and increase the financing flows to developing countries as an integral part of the strategy to ensure a sustainable and broad-based global economic expansion. This brings me first to the question of adequate access to Fund resources. Since the global situation is still uncertain and the liquidity position of the Fund is sufficiently comfortable, I do not see any reason why the present access limits could not be at least maintained, along with higher rate of utilization, so that a larger proportion of members’ deficits could be financed with Fund resources.
An allocation of SDRs in the remaining fourth basic period could certainly play an important role in ensuring appropriate financing flows to the developing countries. The most recent paper by the Fund staff on this subject provides a clear and convincing case for the resumption of the allocation of SDRs. I cannot help but express again my disappointment at the fact that the allocations have not materialized. What we need is not another case with more convincing technical arguments, but a strong political will to agree on an allocation.
Let me now turn to the economic difficulties confronted by our developing member countries. The plight of these countries, particularly those in sub-Saharan Africa, is a matter of serious concern for the world community. These countries require massive development assistance from both bilateral as well as multilateral sources, including increased flows of foreign grants. . . .
I have attempted to show that the elements which would contribute to a sustained and healthy global recovery are based on some traditional “rules of the game,” such as the free flow of capital resources and free trade. To bring this about requires not only harmonization of national economic policies, but also close cooperation through multilateral institutions such as the Fund, the World Bank, GATT, and others. With that kind of cooperation, the future of the world economy can be much brighter.
In concluding, I would like to express my gratitude to the Government and the people of the United States for the warm hospitality that they have extended to us.
Statement by the Governor of the Fund and the Bank for Canada—Michael H. Wilson
It is an honor for me to address this distinguished assembly. The institutions gathered here have been pillars of strength for the international financial system. The fact that these institutions have always met jointly is a tribute to the foresight of their founders and continuing testimony to the need for, and benefits of, international cooperation.
I have been Minister of Finance for Canada for only one week. In that brief period I have had the pleasure to chair the Commonwealth Finance Ministers meeting in Toronto and to meet with many of you personally to begin discussions of issues of common concern. This has been an exciting and stimulating beginning to my new job. I am impressed by the determination with which our problems are being tackled and the firm commitment of policymakers in all countries to overcome them. This determination and commitment will allow us to improve our prospects for the remainder of the 1980s. I look forward, during my time as Minister of Finance, to working closely with each of you and I pledge to do so in the same spirit of constructive purpose that I have encountered so far.
As we meet today, we are justified in taking some satisfaction in the strength of the global economic recovery and the success of efforts to enhance the stability of the international financial system. Led by a remarkable performance in the United States, the industrial countries are experiencing less inflation and more buoyant growth than has been the case for a number of years. International cooperative efforts over the past two years, along with the recovery in the industrial countries, are easing the financial difficulties of the developing countries. Over the medium term there is every reason to be confident that the international debt situation can be successfully managed, within an environment of sustained growth, provided both debtor and creditor countries continue in their determination and commitment to follow appropriate policies, and provided the commercial banks remain flexible and pragmatic.
Developments over the past year justify increased optimism on our part but this must be tempered by the realization that the global economy continues to face major difficulties. Unemployment remains unacceptably high, with little indication of immediate relief. The economic loss and associated social burdens resulting from unemployment are a matter of great concern to governments. Many developing countries have yet to share in the recovery and the outlook for the poorest remains bleak. Although world trade is now expanding strongly once again, protectionist pressures remain strong everywhere. The durability of the recovery demands that we pursue policies that will avoid both a new recession and a resurgence of inflation. During most of this year nominal and real interest rates have been rising, reflecting continued concern over the future course of inflation and the conflict between private and public demand for credit. Their rise has resulted from the extraordinarily rapid growth of the U.S. economy and the impact of interest rates set in U.S. financial markets on interest rates around the world. Although world output is now growing again at a healthy rate, the benefits of the recovery remain unevenly distributed. Current high real rates of interest threaten its continuation and the economic and social well-being of industrial and developing countries alike.
The United States has provided a remarkable boost to the worldwide recovery through increasing export opportunities for other countries. There are, however, two worrying aspects of its performance, particularly for those developing countries that are struggling to pull themselves out of an extraordinarily difficult debt situation with minimum social and political disruption.
The first is the threat of protectionism. The U.S. Administration, to its great credit, had not yielded to easy short-term solutions at the expense of the multilateral trading system that has served us well. But pressures continue to build and will remain relentless.
The second is the high level of real interest rates which continues to have an adverse impact on other countries, adding to the difficulty of debtor nations, and increasingly threatens the sustainability of the expansion in the United States itself.
Government debt and deficits are very much on my mind as I begin to assess Canada’s economic situation. Clearly, Canada is not unique in the nature of its problems nor in the policy directions that must be pursued. Real growth in 1984 in Canada is generally expected to be about 4½ percent, and the outlook is for a significant slowing next year. I am concerned about the adverse implications of such a slowdown for employment. And, as worrisome as this prospect may be, it could become worse if we continue on our present policy course.
The Government I represent was elected to bring about change and we are committed to do so. Our top priority will be to introduce new policies that generate investment and provide sustained growth. But, while policy change is needed, it is crucial to bear in mind that the process of restoring the vitality of the Canadian economy will be lengthy and difficult.
Lower real interest rates are essential to support sustained expansion and to provide us with the ability to reduce fiscal imbalances. The United States is critical in this regard. But we cannot use this as an excuse for inaction. The situation requires a demonstration on our part that we are prepared to put our own fiscal house in order.
As the Managing Director of the International Monetary Fund has so aptly noted, deficits around the world exploded because traditional fiscal probity yielded to the political pressures that rising expectations generated. The consequent buildup of public debt, however, has increased our vulnerability to high real interest rates and threatens our ability to achieve sustained growth and high employment. As the Annual Report of the Fund points out, deficits in Canada are destined to absorb historically high proportions of people’s savings if we continue along the same path as the previous administration.
The expectation that large deficits are likely to persist indefinitely is, itself, becoming a serious obstacle to growth. While a deficit in any given year generally supports economic activity, the path of deficits over time can worsen prospects for sustained growth. The accumulation of debt that such deficits imply will hinder our ability to grow in many ways. It encourages inflationary expectations that can put upward pressure on current interest rates. It increases real interest rates that can shift income away from risk capital and labor to debit holders. Moreover, because deficits bias output away from productive private sector investment and toward public expenditure, they can lower the long-term potential growth rate of the economy.
The growing debt burden places a serious constraint on economic policy and leaves us increasingly vulnerable to economic events beyond our control. In order to achieve maximum feasible growth it will be necessary to tackle the deficit successfully. Moreover, a credible plan of action to constrain the growth of debt is necessary to build business and consumer confidence, on which our economic objectives are so dependent.
In taking the difficult decisions necessary to get our deficit under control, I want to emphasize that this will not be done at the expense of the underprivileged in our society. Indeed, the social safety nets are an important element in maintaining consumer confidence. Ours is a government of compassion and it will not inflict hardships on the poor in its efforts to restore our economy to health.
In addition to a responsible fiscal stance, monetary policy must continue to be carried out in a prudent manner. In many countries, including Canada, inflation is currently lower than it has been for over a decade and there is no sign of a significant upturn. However, it should not be forgotten that inflation rates remain significantly above the levels experienced in the 1950s and 1960s, and even current rates pose longer-term threats to efficient performance.
Governments can and must provide a sound economic framework. But it is the private sector which generates the investment essential for growth and the productive jobs which yield rising real incomes. Sound fiscal and monetary policies thus must be supported by measures to increase competition and remove structural rigidities. Such measures will play a central role in our economic program.
Economic growth and job creation depend critically upon investment. Our policy framework will be designed to encourage business expansion in Canada by domestic and by foreign investors. Let me state clearly that the welcome mat is out once more: Canada is a good place to do business; we are opening our doors to those who want to share in the tremendous opportunities with which we have been endowed.
The new Canadian Government faces a formidable challenge in renewing the economy. It cannot do the job alone. We intend to provide the leadership and direction; our goal will be to forge a consensus among governments, business, and labor. The success of our program will ultimately depend upon their response. This Government has the political will to adopt the necessary economic policies; it is the private sector that will have to work and invest for a more productive future.
The situation we face in Canada, with large deficits and a rapidly accumulating debt, has parallels in many developing countries. And the remedies for these problems are broadly similar. Sooner or later realities must be faced and economic equilibrium must be restored.
I am happy to note that the courageous adjustment programs of many developing countries, supported by multilateral cooperative efforts, are beginning to show results. Their external imbalances have narrowed. Exports are higher, permitting increased imports and accelerating growth. Over the next few years, however, major debtors will have to cope with a heavy schedule of maturing debts. To service these debts and maintain an acceptable rate of economic development will require perseverance with adjustment efforts.
Sound adjustment means that an economy becomes dynamic, productive, and stable and that it produces rising standards of living for its citizens. Governments of debtor nations have an additional incentive to persist with policies in this direction. If they are successful they will attract investment that will reinforce their efforts. Domestic entrepreneurs as well as foreign investors shirk economies burdened with debt and lacking fiscal discipline. Investors will elect to invest in countries offering the greatest economic opportunities, and sound and stable economic policies. My Government intends to practice what we preach. We intend to produce that sort of environment in Canada.
Debtor nations that do pursue appropriate policies deserve support and encouragement. Private creditors must continue to demonstrate flexibility in dealing with those countries which respond to their debt problems with realistic and effective policies. For our part, governments in the industrial countries must provide adequate financial support through the multilateral institutions and through bilateral development assistance, particularly to the poorest. In addition, greater private investment in developing countries will allow a greater share of official development assistance to go to those most in need.
On the decision we reached on operational matters, I welcome the Interim Committee’s agreement to extend the enlarged access policy into 1985. The new, marginally lower limits continue to provide the IMF with the flexibility it needs, while still recognizing that the policy is temporary and should be gradually phased down.
The other major item on the Fund side is the question of an allocation of SDRs. Relevant to our consideration of this issue is the rebound in world trade and the consequent prospect of an expansion in the overall demand for official reserves. The global need for reserves can likely be met in forms other than the SDR. However, in support of the objective of strengthening the role of the SDR in the international monetary system, it would be appropriate if we were to satisfy some of that need through modest allocations. I regret that we have not been able to find a consensus on this matter. . . .
The situation in most of sub-Saharan Africa has become increasingly desperate. We commend the World Bank and the countries in the region for the efforts they have made so far in dealing with this pressing problem. Nonetheless, as noted in the Bank’s report, the crisis facing this region can only be resolved through major structural changes, some of which may be painful and require several years to implement. Canada is already making a concerted effort to direct a major portion of its aid program to the African region in helping those countries attempting to implement needed changes. We stand ready, however, to join with the other major countries, the World Bank, and the Fund to do whatever is possible to increase not only the volume, but more particularly, the effectiveness of the assistance we are providing. . . .
Finally, I welcome the decision that we will examine current problems in a medium-term context in meetings of the Interim and Development Committees next spring. This idea was introduced by Canada at the London Summit. It found widespread support at the meeting of Commonwealth Finance Ministers last week in Toronto and I was pleased to pursue this initiative here over the past few days. I think it is indeed appropriate that we look at the challenges to development and related balance of payments and adjustment issues over a broader horizon. In that framework we can also see whether the efforts of the Fund and the World Bank can be strengthened to the benefit of all of us.
I began by expressing my admiration for the Fund and the Bank and the commitment of their members to international cooperation. I am confident that if we follow through in that spirit, pursuing policies both at home and internationally that promote better economic performance in a realistic and disciplined framework, we will achieve a better world. I will return to Canada to take on the heavy agenda that our own economic problems have created for me, more secure in the knowledge that a community of interest provides a close bond with my colleagues from around the world. This is a reassuring thought as I begin my challenging tenure.
September 24, 1984.