Discussion of Fund Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1984
Statement by the Governor of the Fund for Italy—Giovanni Goria
I would like first of all to welcome the representative of St. Christopher and Nevis, a new member of our institutions, and I also wish to greet the representative of the People’s Republic of Mozambique, whose application for membership has just been accepted.
May I also be allowed to note the reassurance we have derived from the outstanding analyses presented by you, Mr. Chairman, by Mr. de Larosière, the Managing Director of the International Monetary Fund, and by Mr. Clausen, the President of the World Bank, in your opening addresses.
We should show some form of optimism, but this should be a form of intelligent optimism which will allow us to cope with a situation where real interest rates are higher than the increase of the growth in GNP. Intelligent optimism is also called for in order to overcome a number of weaknesses and contradictions which are still the hallmark of the world economic situation. We are in a situation where the currency market is characterized by the concept of disorder rather than that of an orderly market situation. These are the problems which may well cancel the results achieved so far unless we do something about it. The problems we are called to solve today and which we should solve in the future also relate to the fact that no one really looked to the problem of comparability of the projects and policies to be implemented.
1. The International Economy
Unlike what has been the case in the recent past, on the occasion of this meeting we can present our analyses with greater, albeit cautious, confidence.
As is fully and exhaustively documented in the Annual Report of the International Monetary Fund, the upturn which was becoming apparent last year at this time has been gaining strength. Under the stimulus provided by the recovery in the United States, the improvement has spread to both the industrial and the developing countries. Recovery has been reinforced by renewed growth of investment after a long period of stagnation, thereby giving rise, at least in the United States, to a brighter outlook on the employment front which, let us not forget, remains the primary goal.
The present economic recovery is not accompanied, as has traditionally occurred in the past, by a corresponding resurgence of inflation. This positive feature is the new fact that makes us optimistic. Of course, as documented in the Fund’s Report, “more production and less inflation” does not apply uniformly to all countries. Rather, the spread in growth rates is relatively greater than in the past, which goes to show that how a country comes out of the recession is closely connected with the kind of adjustment policy applied during the crisis period. The countries that were the first to implement their adjustment policies and which applied them energetically are today experiencing a more vigorous recovery.
In this connection one cannot fail to note that, in this phase of the world’s economy, the European countries are participating less prominently than in the past. The reasons for this lag are twofold. Some are of an international nature and external to the European countries. Others pertain to the specific structure of the European labor market. It has now become a commonplace to state that Europe is incapable of creating new jobs. The need to intervene in my country in particular, to remove the barriers that built up, frequently in contradictory fashion, in the course of the 1970s and which today hinder the attainment of higher employment levels, is a political duty that cannot be put off. The problem lies in deciding how to intervene. While it may not be possible always to deal with the roots of the problems, it is nevertheless necessary at the same time to find, as support, a sufficient degree of consensus among the various social strata.
In addition to domestic problems, causes for concern persist at the international level. The first regards the duration and stability of the economic recovery under way. The U.S. economy, which alone represents approximately one fourth of world production, is buoying up the recovery. There are predictions of a slowdown in the U.S. economic activity as early as 1985. A modest, and normal, recession could occur in 1986 as a consequence of the present over-rapid expansion. Recovery at world level could thus collapse too early.
Moreover, it is difficult to foresee growth of the international economy of more than 3 percent in the medium term. This does not appear sufficient to offset the upward trend in unemployment and to enable debtor countries to meet their commitments.
The present recovery, based on the large current deficit of the United States, along with maintenance or continuation of the dollar’s appreciation with respect to the other currencies due largely to the continuous rise in real interest rates in that country, contains in itself a fundamental contradiction that casts a shadow of uncertainty over continuation of this recovery and its spread to the rest of the world. This is why we join with those who are calling for a combination of more coordinated and better balanced fiscal and monetary policies among our countries.
Another problem requiring attention is the level reached by the exchange rate for the dollar with respect to other currencies. It is certainly true that the world economy has been able to adjust to changes in relative prices unthinkable up to a few years ago; so much so that many predictions regarding the rate for the dollar based on “fundamental’ factors have been shown to be wrong. We must, however, observe that clear and disturbing signs are now appearing of the growing divergence between international competitive relationships and nominal exchange rates. Neither, in light of recent movements in the exchange markets, should the cost of sudden fluctuations and the risks entailed by the development of disorderly conditions be underestimated.
We cannot overlook, in this connection, the increasing tendency of many countries to adopt protectionist measures. We insist that such measures, short-term panaceas for countries that apply them, are in the longer run unsettling for world trade.
The excessive appreciation of the dollar, accompanied by high interest rates, can have even more worrying effects for developing countries. In its Report, the Fund observes that the encouraging signs are not limited to the resumption of growth but also point to greater international financial stability, and emphasizes that, in the majority of developing countries, a process seems to be occurring in which decisions on economic reorganization at the domestic level are followed by a restructuring of debt on the part of creditors, with as a result a general lessening of the risk of insolvency. This is doubtless what we all want to see. But how can it be considered realistic when, even though many developing countries have achieved improvements, in some cases quite significant ones, in their current account balance, they see these efforts brought to nought as regards their indebtedness by the appreciation of the dollar and the rise in international interest rates?
2. The Italian Economy
In the recent context of increased international trade, the Italian economy has also experienced an upturn. After the long recession of the early 1980s, production began to rise again as of mid-1983, thanks to the initial and consistent support provided by exports.
Growth has continued thus far in 1984, which will clearly close with satisfactory results, especially when compared with those of the preceding year; results which nevertheless need to be consolidated as many pointers indicate how long a way there is yet to go before the economic system is back in balance again.
In fact, the restoration of equilibrium presupposes adoption of longer-term measures designed to change the domestic operating mechanisms, from those which regulate public finance to those that determine variations in labor costs.
The direction to be taken has been outlined by a number of actions already taken: while the results achieved thus far are not outstanding, we need to appreciate their scope and draw fresh courage from them to press ahead.
Advance determination of the wage and salary escalator mechanism was introduced in 1984 with reference to the first two quarters of the year. The objective was not to reduce workers’ real purchasing power, but rather to bring nominal wage growth closer into line with inflation, the decline of which in 1984 had been programmed to 10 percent as compared with 15 percent in 1983.
The results confirm the validity of this step: the rise in production costs has slowed and the inflation rate has fallen, turning out to be a third less last summer than it was a year ago the previous summer. Estimates that can now be made for 1984 point to a rise in consumer prices of slightly over 10 percent, which only a year ago many observers believed unlikely if not impossible for our economy. Wages have not gone down in real terms, primarily because the increase in hours worked led to significant increases at the year’s end.
The foreseeable trends for the coming months indicate continuation of this cooling down, so that 1985 should see a lower rate of inflation than the present year. However, without further containment of wage dynamics, it will be difficult to attain the goal of lowering inflation to 7 percent, a precondition for bringing Italy’s inflation down to a level comparable with those levels prevailing in the other industrial countries.
Such containment is all the more necessary if it is desired to lay the foundation for growth of employment. The international example has already demonstrated that reduction of inflation and growth of employment are complementary today. Such a relationship is even more evident in a country like Italy, for which foreign trade is of vital significance and where only the maintaining of adequate international competitiveness makes it possible to create nonmarginal spaces for production growth and, hence, for broadening of the employment base.
Greater competitiveness of the productive system is not obtained merely by the containment of costs. It presupposes an improved production base in industry and improvement of the entire general context in which the latter operates. It accordingly also presupposes control of public finances, whose imbalance is today affecting all the mechanisms of the domestic market.
We have also achieved a number of non-negligible though still insufficient successes along this road in 1984. The requirements of the state sector have been contained this year close to the limits set for it, which has made it possible to hold its growth to a rate below that of the gross domestic product.
In the near future, more wide-ranging action will have to follow the containment effort of 1984; action that will lead within the span of a few years to curbing of the growth of the public debt and reduction of the current deficit to zero. A number of rules of behavior have been set on the basis of which budgets are to be planned and the necessary intervention measures prepared.
Notwithstanding these partial successes on the public finance front, monetary policy restraints have held firm. The foreign context, where interest rates have remained extremely high and exchange rates have been unstable, has certainly not favored a less onerous administration of monetary variables for public and private finance. Despite these constraints, monetary policy has continued to pursue the objective of taming the inflation rate and controlling domestic demand.
These aims led, a few days ago, to an increase in the discount rate, following much more intensive utilization by banks than had been expected, and a resumption of the growth of the money supply. The stress created by internal demand has aggravated the trade balance deficit; not worrisome in absolute terms, this indicates the influences to which our economy is still subject.
It is the general wish, and my personal conviction, that the downward trend in nominal interest rates will resume shortly.
3. International Liquidity
(a) It has always been difficult to make appropriate judgments regarding international liquidity. The problem became even more complicated after the institution of floating exchange rates because variations in exchange rates have direct repercussions on the demand for reserves, because of the continuous changing of their amounts. Moreover, a judgment as to whether international reserves are sufficient or not must necessarily take both their distribution and their composition into account.
Even though an exact estimate of international reserve requirements proves impossible, it seems to us that the high inflation of recent years, the present considerable increase in world trade, the increased demand for reserves to offset exchange rate fluctuations, the large balance of payments deficits and their distribution, and the sudden turn of real interest rates from negative to positive are amply sufficient to justify a new, albeit limited, creation of official reserves to counterbalance increased demand, without fear of rekindling the flames of worldwide inflation.
The Fund’s staff, which can be considered a privileged observer corps in this field, proposes on the basis of analyses and forecasts prepared for the purpose, a limited resumption of the allocation of SDRs. A fresh allocation of this special form of international reserves also seems justified to us by the aim of expanding international liquidity sources not subject to sudden changes in the monetary policies of the countries that hold the key to the creation of international reserves.
At the same time, a modest allocation of SDRs cannot prejudice the success of the adjustment programs of developing countries, because the additional liquidity generated in this way can only be of a lesser amount, compared with the resources furnished by the Fund in support of such programs, and can only be minimal in relation to the present practice under which indebted developing countries borrow reserves from the international financial markets. Even if the concept of global need—which is at the basis of every formal proposal for allocation of new SDRs—is an extremely difficult one on which to reach agreement, the Fund’s proposal for a fresh allocation appears consistent with the requirements of its Articles of Agreement. My country is therefore still in favor of a new allocation of SDRs.
(b) The recent increase in quotas and the borrowing agreements with the industrial countries and Saudi Arabia have made it possible for the Fund to reconstitute the resources necessary for its tasks of promoting financial stability and implementing adjustment programs, while the General Arrangements to Borrow (GAB) have been expanded and amended to serve as a bulwark for defense of the Fund’s liquidity.
The limits of the enlarged access policy were reduced last year, taking into consideration that the simultaneous increase in quotas also left the absolute value of the financing potential for individual member states practically unchanged.
When the limits for 1984 were set, it was established that they were not to be considered as a right to be automatically exercised every time a loan is set up but rather as limits that may be reached under circumstances of particularly serious imbalance and after the adoption of adjustment measures appropriate to the particular circumstances. The Fund has respected these criteria and, in view of the ample increase in resources made available to it, has sought to increase its margins for maneuver beyond what was asked of it by acting in a most prudent fashion.
The demand for loans, as the Fund sees it, is bound to remain high next year and, presumably, over the medium term.
It is therefore necessary to continue the enlarged access policy for 1985 and beyond, in order to allow the Fund greater freedom of maneuver and flexibility of action, so as not to erode its credibility, in terms of potential financing capacity with regard to member countries and private international capital markets at a time when the outlook is still uncertain.
To stress the temporary nature of this facility, the Interim Committee agreed to a reduction in the maximum access limits for 1985. We accepted this compromise because we are convinced that the Managing Director will continue to administer these resources in a prudent and not unduly restrictive manner.
(c) The IMF and the World Bank, while continuing to perform their fundamental roles in respectively promoting financial stability and improving economic structures, should cooperate more closely with each other, and complement each other in solving the present crisis, which can only be accomplished in the medium term. In this connection I stress with satisfaction the undertaking of both the Interim Committee and the Development Committee to consider certain problems relating to member countries’ adjustment efforts and balance of payments prospects, including external debt and trade policies. . . .
We have all shown optimism in discussing the overall economic situation, an optimism that was practically absent from our discussions of just one year ago. However, we must practice “intelligent optimism” if we are to deal with the situation properly, as 1985 and, even more, 1986 promise to bring a gradual slackening in growth rates. We must also display intelligent optimism if we are to identify weak points and obstacles still impeding the path to sustained and harmonious development.
Real interest rates higher than the rate of increase in GNP and a situation on the foreign exchange markets that is closer to “disorder” than to the notion of a “market” are problems that can rapidly wipe out the results obtained to date if we do not attack them resolutely.
The problems we are faced with today, and which we must resolve in the future, also stem in part from the fact that we have not paid sufficient attention to ensuring that the policies implemented are mutually compatible. The major industrial countries simply must coordinate their economic policies, particularly in maintaining the balance between monetary stimuli and fiscal stimuli. In particular, changes in exchange rates for the major currencies and in real interest rates have consequences that reach far beyond national frontiers and which the international community cannot ignore.
Our ability to govern and to avoid becoming victims of economic events will be measured largely by our adjustment policies.
Many countries have achieved significant results, encouraging them to move ahead. Others, surrounded by countless difficulties, are still seeking the path to follow. Yet other countries have made progress, at the cost of great sacrifice, but their efforts have not always been successful because external conditions, whether financial or commercial, which we had judged to be essential, failed to materialize. Here is a basic issue we must never forget in our discussions: We cannot impose extremely high political and social costs and thereby jeopardize the results agreed to, or even cancel them out, albeit involuntarily.
Within the framework of the Fund and the Bank, it is essential to assist the countries in overcoming objectively unfavorable situations that may arise during the adjustment process. While we must take steps to ensure effective implementation and to secure the efforts that have been made, we must also convince those who still entertain doubts that the adjustment process, inevitable and costly though it is, offers real hope of progress.
All of these questions make it all the more necessary to have an in-depth discussion among countries at different stages of development. The response given by the Interim Committee and the Development Committee seems correct: the debate has been brought back within the most appropriate institutional framework; the idea of “negotiations” has been abandoned; all countries have been invited to participate in a joint analysis; and care has been taken not to give certain countries the unrealistic idea that others will solve their problems for them.
On the specific issues we have studied this year, we have made a step forward through a difficult compromise. As regards the Fund, those of us who felt the time had come to show more courage in a new allocation of SDRs and to show greater caution in reducing the limits of access to the enlarged Fund facility may not be fully satisfied by all the decisions taken. The fact remains, however, that the compromise reached is satisfactory on the whole and, as such, is acceptable to all. . . .
When we return home, we will have to answer to public opinion. We will be asked whether we strengthened international cooperation, whether we did anything for the poor countries, whether we played an active role or were merely onlookers.
In these last few days, we have sought to find valid answers to the questions raised. It has also been brought home to us that we still have a long way to go.
Statement by the Governor of the Fund and the Bank for India—Pranab Kumar Mukherjee
I would like to join my fellow Governors in extending to you our warm congratulations on your election as Chairman of these Annual Meetings. May I also welcome the new members, St. Christopher and Nevis, and the People’s Republic of Mozambique, who have joined our institutions.
I think we would all agree that for the past three years these meetings have taken place against the backdrop of a world economy in serious trouble, with both developed and developing countries experiencing a sharp deceleration in economic growth. There is also general agreement that the developing countries have suffered the most. If it has been a difficult time for the developed countries, it has been a desperate time for the rest of us.
This year things look a little different. Economic growth in the OECD countries in the current year is likely to exceed 4 percent, which is certainly better than the previous year. The developing countries too are likely to see a higher growth rate than in the previous two years. These improvements are indeed welcome. But it would be premature, indeed seriously misleading, to conclude that the world economy is out of the woods, and that all we need to do is to wait and let the economic recovery spread and gather strength. Unfortunately, there are far too many uncertainties and contradictions in the present situation to warrant this conclusion. It is important that we perceive this clearly so that we can chart an appropriate course for our two institutions.
The economic expansion, though stronger than expected, is due almost entirely to strong expansion in North America. It has not spread convincingly to Europe, and it has had very limited effect on the developing world. High interest rates continue to cloud the prospects for a broader spread of recovery in Europe.
There is not much cheer in all this for the developing countries. True, their balance of payments deficits have been reduced, but only because their imports have been savagely squeezed. Per capita incomes today are no higher than they were three years ago. In many of the poorer developing countries they are actually lower. Besides, the past year has seen a steady increase in the restrictions imposed by industrial countries on exports from developing countries, contradicting the view that with the beginning of recovery there would be a decline in protectionism. To make matters worse, there has been a sharp decline in commodity prices in recent months.
High interest rates continue to impose a heavy burden of debt servicing, and persistent currency misalignments have inflated the real burden of their dollar-denominated debt. The debt problem simmers alarmingly. We have only avoided an imminent collapse of the financial system, but a durable solution still eludes us.
In short, the crisis of the world economy is still with us, and prospects for growth in both the North and the South continue to be uncertain. And it will not yield to piecemeal attempts at solving particular problems to the exclusion of others. We need to act on several fronts and we need to act urgently.
We must strengthen the forces that can convert the present unbalanced recovery in the industrial countries into one that is broader based and more sustainable. This calls for policy changes in industrial countries and also policy initiatives in the area of international money and finance.
The present historically high real rates of interest are clearly having a depressive effect on investment, especially in Europe. Their adverse impact has been mitigated by fiscal incentives in North America, but this is not a viable long-term solution. There is no alternative but to bring about a better balance between fiscal and monetary policy which alone will lower interest rates to more normal levels. It will also restore a measure of rationality in exchange rate alignments.
Equally important, there must be a visible political commitment in the industrial countries to stemming and indeed reversing the swell of protectionism. This is particularly important for the efficient functioning of the transmission mechanism whereby OECD growth stimulates growth in the developing countries, and is in turn stimulated by it.
These improvements in the character and coordination of macro-economic policy in the industrial countries must be accompanied by decisive action to improve the international financial and monetary prospects facing the developing countries. The crisis of the world economy has exacted a heavy toll from the developing countries, especially the low-income countries. These countries have fragile and vulnerable economies with per capita income levels that provide little margin above the barest subsistence levels. Most of them have undertaken severe domestic adjustment measures, in many cases stretching the limits of social tolerance. Their growth prospects will not improve significantly unless there is a renewed commitment to provide additional finance for both structural adjustment and development.
The Fund and the Bank have a central role to play in this area. Both Mr. de Larosière and Mr. Clausen have steered these two institutions through extremely difficult times with great skill and dedication. I am confident that under their dynamic leadership these two institutions will live up to the even more difficult challenges ahead, provided the international community gives them the financial support they need.
Unfortunately, our experience in trying to forge a new and expanded role for the multilateral institutions has been far from satisfactory. In the Fund, the increase in quotas under the Eighth General Review was lower than what even a pessimist would have predicted when negotiations began. Last year, despite strong opposition by developing countries and several other countries, the access limits were cut rather drastically. To our further disappointment, in the agreement reached in the Interim Committee last week, there has been a further reduction in these limits for 1985. The Interim Committee was also unable to reach agreement on SDR allocations in the remaining part of the fourth basic period despite a proven need and well-established technical case for such an allocation. Extended arrangements which were expected to meet the problems of medium-term adjustment are also under attack, and, in actual practice, such arrangements are now giving way to one-year stand-by arrangements. The compensatory financing facility has suffered a setback. To add to all this, there are now strong pressures to further stiffen Fund conditionality. . . .
Looking to the future, the choice before us is either to continue the process of attrition or to embark on a new course. We believe that there is sufficient goodwill and an emerging consensus in favor of a more effective and expanded framework for international economic cooperation. Within this framework we also believe that most nations are ready to augment the roles that our two multilateral institutions should play. What is needed now is a program of action to translate this hope into reality.
The specific issues before us have been discussed at length in the meetings of the Group of Twenty-Four, Development Committee, and Interim Committee held last week and I do not wish to take the time of this august assembly to go over the same ground again. I would, however, like to take this opportunity to touch upon some areas of broader Fund-Bank policies. First and foremost, there is the question of resources. There is no way in which these institutions can play a more meaningful role in meeting the challenges that lie ahead without adequate resources. It is necessary to reverse the trend witnessed in the last few years and take positive decisions on issues such as the supplementary funding for IDA, the general capital increase in the World Bank, the establishment of an energy affiliate, resumption of allocation of SDRs, and increase in access limits in the Fund. I am, of course, aware that all this cannot be accomplished immediately and that careful groundwork is needed before decisions can be taken. However, what is required is a broad consensus at the political level that the resource base of these institutions should be strengthened. Such a broad consensus can subsequently facilitate decision making on specific issues that otherwise tend to become contentious and divisive.
In recent months, both in the Bank and the Fund, there has been some discussion of conditionality, and the role that these institutions should play in rendering policy advice to borrowing countries. There can be no doubt that it is the responsibility of governments to formulate appropriate policies, and that corrections and adjustments in these policies are needed in response to the emerging situation and problems. However, what is equally true is that, given the state of the art, there can be an honest difference of opinion regarding what constitutes the right policy mix as well as the pace of transition. Needless to add that these differences of views exist in the developed world just as they do in the developing world. In this situation, it is only proper that the responsibility for taking policy decisions and for deciding on the right course of action rests squarely on those who have to face the consequences of such decisions. Those of us who have to formulate policies and to work out programs for development in the face of many uncertainties have learned to be modest. Our ability to forecast economic events or even to correctly diagnose the causes of deep-seated problems is not beyond doubt. We would urge that this perspective is kept firmly in view by those who advocate a greater or a more wide-ranging role for multilateral financial institutions in bringing about economic and social change in developing countries.
It is only natural that during a period of extreme strain and stress through which the world economy has been passing, our attention has concentrated on fire-fighting operations or in trying to find solutions to the immediate crisis in particular countries and regions. These problems often require a special thrust, diversion of resources from other areas, or the launching of a new program with a specific focus. While this is necessary, we believe that our concern with short-term problems must not deflect us from the primary task of promoting investment, growth, and development. . . .
In recent years, there has also been some discussion of the role of concessional assistance in development financing, and this issue is being considered in depth by a task force of the Development Committee. It seems to us that the developments of the 1970s and early 1980s have convincingly demonstrated the vital role that such assistance can play in promoting investments in developing countries, particularly in sectors such as infrastructure, irrigation, rural development, and development of human resources. Investments in these areas strengthen the long-term productive capacity of the developing world without, however, providing immediate and adequate financial returns in foreign exchange. In many cases, excessive reliance on high-cost financing for long-term development has led to both a liquidity squeeze and an erosion in the capacity to finance new investments.
Finally, in our view the crisis that has been confronting the world economy for some time now is “systemic” and not merely due to erratic shocks or some temporary phenomena. However hard we try to overcome these problems through ad hoc and special solutions, we are unlikely to make sustained progress unless there is a more basic review of international monetary and financial issues. It was for this reason that the Nonaligned Summit, held in New Delhi last year, had given a call for an international conference on money and finance. Several other countries have since joined in this call, and considerable work has been done in various forms to identify the issues, and to determine the modalities for holding such a conference.
This is an idea whose time has come.
Statement by the Governor of the Fund for the United Kingdom—Nigel Lawson
I should like at the outset to join my colleagues in extending a very warm welcome to our two new members—St. Christopher and Nevis, and Mozambique.
A year ago most of us saw three main external threats to our national economies: uncertainty over the prospective world economic recovery, high interest rates, and international debt difficulties. I would like today to look at each in turn.
Before doing so I will, as last year, say something about the experience of my own country.
The U.K. Economy
Developments in the United Kingdom over the past year have been much as I foresaw when I spoke at this meeting last year. We are now in the fourth successive year of steady recovery. As expected, the pattern of the recovery has changed. Fixed investment and exports have both grown rapidly over the past year while consumer spending has grown more slowly. In particular, manufacturing investment in the first half of 1984 was about 15 percent up in real terms from a year ago. At the same time the inflation rate has remained broadly flat at 5 percent, a pattern which has persisted now for some 18 months.
Fiscal and monetary policies have developed as intended. Both broad and narrow measures of money are growing at a rate well within their target ranges. And we are continuing to reduce the budget deficit. Last year, it was over 3 percent of GDP. This year we budgeted for 2¼ percent of GDP and present indications suggest that we remain broadly on target.
Growth last year was 3¼ percent. This year, the fall in coal output as a result of the continuing miners’ strike is equivalent to almost 1 percent of GDP in 1984, and growth this year may therefore be closer to 2 percent than the 3 percent previously expected. By the same token, growth next year should benefit by about 1 percent as coal output returns to its normal level. As a result, I would expect recorded growth next year to be higher than this year.
While none of us can claim actually to have abolished the business cycle, the policies which the United Kingdom, in common with many other industrial countries, has been following, form a sounder basis for sustainable growth than we have known in the past.
So far as my own country is concerned, that is borne out by the important differences between this recovery and previous recoveries.
There has been no significant stock building. This means there is much less chance of a sharp stock building cycle. There is little threat from higher inflation, which so often has been an important factor in cyclical slowdown. In addition, the different phasing of output growth in the United States and Europe means that the growth of world trade should be more even. And commodity prices, including oil, are showing weakness rather than the rapid growth of the last two cyclical upswings.
In previous cycles, inflation has tended to rise as soon as recovery has become well established. As a result, many commentators have argued that an inflation upturn in the United Kingdom is imminent. We take a different view. Our analysis suggests that the pressures making for higher inflation are not strong. Monetary growth continues to decline, and competitive pressures are likely to continue to restrain price increases. The underlying trend of inflation is still downward. This performance of inflation during the current recovery has convincingly reversed the secular upward trend of the last two decades.
The one outstanding worry is unemployment, which is not only far too high but continues to rise. Not that new jobs are not being created. Over the year to last March, the number of people in work in the United Kingdom has risen by around a quarter of a million—about double the rise in unemployment over the same period. But we ought to be doing better than this. To some extent, of course, the rise in unemployment is the temporary consequence of the long overdue success of British industry in making itself more competitive by cutting costs and improving productivity.
The heart of the problem—and here the contrast with the United States is particularly striking—has been the steady growth in real wages.
We must not be seduced by the wonders of high-tech into overlooking the fact that many of the jobs of the future will be in labor-intensive service industries that are not so much low-tech as no-tech.
I see little prospect of reversing the trend of unemployment unless we can decisively moderate the growth of real wages. As the Managing Director of the Fund put it in a speech to the Economic and Social Council of the United Nations last July:
There are now clear indications that in some of the major industrial countries, especially in Europe, the present cost of labor may be incompatible with attainment of high employment goals.
This means that it has become more important than ever to remove rigidities in the labor market and the product markets alike.
In recent years the emphasis of policy in many countries, including the United Kingdom, has been on financial stabilization. And we have seen the benefits of that stabilization. But while maintaining this policy intact we need to place more emphasis on supply-side policy in the true sense of that much-abused term, that is, in dealing with the structural problems that are the cause of the continuing high level of unemployment which so many of us face today.
The World Economy
In the industrial world as a whole, recovery has in general been stronger even than the hopes, let alone the fears, of a year ago. The Fund staffs latest forecast for growth this year shows a further upward revision. And almost all major forecasters expect reasonable rates of growth to continue next year, and with a less uneven distribution.
The position of many developing countries, and I will come back to this, has also been strengthened. The current account deficit of the non-oil developing countries this year is expected to be only $45 billion, less than half its level in 1981. This improvement has reflected, in many cases, cutbacks in imports and national income. We recognized at the London Summit the social and political hardships this involves. But such adjustment is paying the way for renewed and sustainable future growth. The process must continue, but we should be looking now for emphasis on the positive aspects of maintaining and financing healthy growth.
Trade and Capital Flows
In the trade field there is agreement to begin preliminary consultations on a new round of multilateral trade negotiations. With recovery being sustained I hope we need not wait for those negotiations before taking action to roll back protectionist barriers—not just tariffs but subsidies and other distortions.
With an overvalued dollar causing imports to flood into the United States, with high and rising unemployment in Europe, and with the continuing hardship faced by much of the developing world, the pressures for protectionism are very strong indeed. It is essential that we resolve all the more strongly to resist them.
Nothing could be more self-defeating than a worldwide drift to protectionism. And few things would be more damaging to our burgeoning recovery.
The past year has also seen progress in promoting the free flow of capital between countries. I have particularly in mind the steps announced by the Japanese Government to promote the international use of the yen. This involves a continuing program of specific measures, and we will follow developments here with close interest.
In short, in the first of our three main areas of concern, the future course of world economic activity, we have a distinctly improved climate, and the medium-term prospects for widely shared recovery are better than for many years past.
Interest rates, on the other hand, remain a dominant concern for most of us, and I must link this with the situation in the United States. The United States accounts for one fifth of world GNP and some 15 percent of world trade. So U.S. policies cannot simply be judged by domestic criteria, even in economic terms, quite apart from the responsibilities that accrue to the United States as the leader of the free world.
On the domestic side, the U.S. achievement has been remarkable by any postwar standards. In particular, the creation of over 6 million new jobs since the end of 1982 owes a great deal to the flexibility of the U.S. labor market and the moderate increases in real labor costs compared with most other leading industrial countries in recent years.
Success in the creation of new jobs and the vigorous growth of output in the last two years reflect the admirable strength and resilience of the U.S. economy. But there are other features that represent a cause for real concern.
Although the U.S. budget deficit may be lower as a proportion of GDP than that of some other major industrial countries, it has grown very large in relation to the level of net domestic savings. Its sheer size weighs heavily in the demand for savings worldwide. As the recovery stimulates a growing parallel demand for private investment, without any matching growth of domestic savings, we see two effects. Interest rates are held at unprecedented levels in real terms, and the needs of the U.S. economy pre-empt a large share of the savings of the rest of the world.
The need to attract increasing capital inflows from the rest of the world to finance the budget deficit has as its inevitable counterpart—for the external accounts have to balance—a current account trade and payments deficit of nearly $100 billion a year, and still rising; while the unprecedented rate of interest on the world’s leading reserve currency has inevitably led to a sharp rise in the value of the dollar in terms of other currencies.
I come from a country that has experience from the past of the advantages—and also of the risks and the responsibilities—of operating a reserve currency. The availability to borrow abroad in one’s own currency gives opportunity and time which would not otherwise be available, to some extent at the expense of the rest of the world. But we also have experience of the consequences that occur when this special privilege is abused.
Imbalances, in the budget and in the trade and current accounts, of the size we are now seeing in the United States can continue for much longer than they could in any other country. But they cannot be sustainable forever. Meanwhile, the problem of international debt, to which I will turn in a moment, is greatly exacerbated. The U.S. authorities have themselves pointed the way ahead with their important “down payment” decision. Timely reinforcement of that approach will be crucial if the process of adjustment is not to end in tears.
Perhaps, here in Washington, it would be appropriate for me to conclude this section of my speech with some words of Thomas Jefferson:
I place economy among the first and most important of republican virtues, and public debt as the greatest of the danger to be feared. To preserve our independence, we must not let our leaders load us with perpetual debt. (Letter written in 1816 by Jefferson to William Plumer, quoted in the 1984 Shann Memorial lecture given by John Stone, Secretary of the Australian Treasury.)
I turn now to the question of international debt. Last year, I suggested some ideas going beyond the immediate strategy adopted by the international community built around programs of adjustment. Some of those ideas were carried a stage further at the recent London Summit. I should like to say a little more about them now.
Borrowing of the Wrong Kind
I will not today go over all the origins of the debt problem. But important elements were too much borrowing and borrowing of the wrong kind. By borrowing of the wrong kind I mean undue reliance on bank finance.
In retrospect it is easy to see how this happened. Financing difficulties were substantial and arose relatively suddenly. The private banking sector is generally able to respond more quickly to sudden change. It is therefore perhaps not surprising that the banks took on the major role in the recycling process. Indeed, the substantial recycling of funds that took place during the 1970s and 1980s was initially helpful in avoiding severe deflation in developing countries and providing them with time to adjust. But, with the benefit of hindsight, it is clear that overshooting is a characteristic not merely of the foreign exchange market. The patterns and scales of financing that resulted and the lack of conditionality attaching to most of the flows made the debtor countries and the international financial system highly vulnerable to the changes in the economic environment that have occurred since the end of the 1970s.
The unhappy legacy of that period which we now face is a burden of liabilities of debtor countries which present considerable problems in terms of their relative size, their maturity profiles, and the accompanying vulnerability to interest rate fluctuations; and for banks, potentially destabilizing doubts as to the true value of a part of their assets.
Some debtor countries have achieved conspicuous success in some aspects of adjustment. The turnaround in the balance of trade of both Mexico and Brazil are notable examples of what can be achieved, if inescapably at the cost of considerable pain and sacrifice. But even those countries that have tackled adjustment in the most determined fashion still have some way to go. Some countries are as yet only a little way along the adjustment road; and some countries have not yet made a start.
The need for further adjustment is evident. Many countries still have to contend, in varying degrees, with high rates of inflation and substantial budget deficits beyond the scope of financing by domestic savings. Some are still clinging to overvalued exchange rates, on the mistaken grounds that this will moderate inflation—the real effect is to damage international trade performance and depress and distort domestic production. These are not stable conditions. They do not make for real growth of prosperity.
The essential point, on a longer perspective, is that borrowing countries will need to place more emphasis on changing the structure of their economies to reduce distortions and disincentives. More consideration needs to be given in ways in which this can be achieved. Continuing adjustment is needed for both internal and external reasons, if the future development of these countries is to be put again on a sound basis, and if they are to restore confidence in themselves as well as in world financial markets.
One of the tragedies in many debtor countries—and other developing countries too—is that they not only have difficulty in attracting foreign investors, but they have lost a huge volume of potential investment by the flight of capital from their own residents. Debtor countries need to adopt policies that will restore the confidence not merely of the outside world but also—and equally important—of their own people. Foreign exchange controls are not, and cannot be, a substitute for restoring that confidence. To imagine otherwise is an illusion.
Private Financial Flows
As debt servicing problems emerged among developing countries, banks that had lent to them faced uncertainty about the value and maturity of a proportion of their assets. They have responded to this by establishing a higher level of provisions.
It is of prime importance that this process continues and that banks build up and maintain provisions to allow for the probability of some losses of value, even where they cannot with any uncertainty be identified individually. They must also continue the process of strengthening their balance sheets in other ways, notably by adding to their capital resources.
There are a number of lessons for the longer term. For the international financial system as a whole it can be argued that a balance needs to be maintained between unconditional market lending at commercial rates and concessionary lending which will, for the most part, be conditional. The banking system has undoubtedly a role to play, but it is not appropriate for it to play the major role that it has in recent years in financing debtor countries’ balance of payments deficits. At the level of the individual bank, the events of recent years provide an eloquent case for the need to maintain an appropriately diversified portfolio. Banks and their supervisors are well seized of this although it will not be quickly achieved.
Banks have been prepared to put up substantial sums of new money in “unspontaneous” lending in support of debtors that have agreed programs with the Fund. They are showing a willingness to adapt to the changing needs of debtors at different stages of adjustment, as witness the imaginative and longer-term package recently negotiated for Mexico. This constructive approach was advocated for appropriate cases at the London Summit.
But the fact remains that it is necessary, both in the interests of debtors and of the banks, that nonbank private flows should gradually become more prominent. The London Summit addressed this issue and outlined a strategy to create a sounder financial framework for medium-term development in the present debtor countries. I have mentioned multiyear rescheduling. Let me recall now three other important elements:
—First, a stronger role for the World Bank in fostering development over the medium and long term, not least as a catalyst for private investment.
—Second, the encouragement of private investment. I welcome the emphasis the Managing Director of the Fund has given to the importance of borrowing countries “taking steps to dismantle or relax administrative or other obstacles which often apply to inflows of direct investment.” This is a matter to which I believe the Executive Board should always pay close attention both in its regular surveillance and in its examination of country programs. An important advantage to developing countries, especially debtors, of seeking private direct investment is that it can service itself as, and only as, it contributes to profitable output. In this context, I hope we shall be able to bring to fruition a workable plan for the insurance of private overseas investment.
—Third, the encouragement of other forms of finance that promise to be more appropriate and stable. For the moment, the financial position of many debtor countries remains so precarious that the provision of unspontaneous bank lending will have to continue to play a part in meeting their immediate financial needs. But the recent Mexican agreement shows that a return to spontaneous lending is a prize within reach. Beyond that, debtor countries should be given encouragement to find means of reducing the relative burden of bank debt by offering opportunities for more stable and appropriate investment—the kinds of investment they will surely need to foster in any case in support of their internal development for many years to come.
Better and healthier commercial ways of financing the future needs of developing countries could be found in private investment, direct and portfolio, and in longer-term marketable instruments. I would like to see banks positively encouraging developments of these kinds. Many of them could doubtless find an active role as agents in placing financial instruments that complemented, or in some cases reduced, the banks’ own lending, to this end developing a more direct relationship between some of their present depositors and the ultimate borrowers.
The development of such different forms of financing will take time and is likely to relate to new money rather than the direct marketing of existing debt. But the action already being taken, with adjustment bolstered by rescheduling, has bought time and is helping to create a situation where some debtors at least may begin to contemplate returning to the bond market and where outside investors may be willing to look again at participations in local resources and assets. Banks and other financial institutions should be encouraged to devise new instruments to bring stable capital to countries whose underlying resources in many cases are so abundant.
The Lesson for Governments
The kinds of future financial flows I am advocating are for commercial markets to develop. They are needed to mobilize in up-to-date ways the kind of financing which has been based on private resources in the past. Governments of host countries can do much by creating confidence and a hospitable climate. International institutions can play a valuable encouraging role, which is why I warmly welcome the efforts, for example, of the World Bank to promote joint ventures and cofinancing, and the ideas IFC has been nurturing for the development of unit and investment trust outlets in some developing countries.
Governments of creditor countries can and should offer encouragement. They are also directly involved with debtor countries, largely through their various export credit agencies, and on a large scale. They have shown readiness, through the Paris Club, to negotiate rescheduling arrangements, and will be prepared to extend this approach to multiyear agreements where appropriate, in parallel with negotiations by commercial banks. The United Kingdom has taken the initiative in pushing forward consideration of the technical issues that arise.
In the past the United Kingdom, in common with many others, has normally suspended provision of official export cover to countries which have rescheduled debt. We have reviewed this policy and should shortly be ready in appropriate cases to maintain cover or resume it at an earlier stage to support credit for goods that would contribute to the economic recovery of the debtor country. In this area we see a case for some harmonization of approach among industrial countries generally and I welcome the discussions now taking place to this end.
But by far the most important contribution that governments of the major creditor countries can make lies in their own general economic and financial policies. The biggest single contribution so far toward easing the debt problem has been the recovery of world economic activity and, especially during the past year, the resumption of more vigorous growth of world trade. The biggest single contribution which could be made over the next year or so would be the development of U.S. policies which could lead to lower dollar and world interest rates.
The Case-by-Case Approach
It is tempting, of course, to seek now a radical new approach to international debt. However, I do not believe that that is the way forward. There is no such radical alternative that can satisfactorily resolve what is clearly a highly complex problem. Rather, we have to persevere with the present approach, varying it as necessary to meet the particular circumstances as they arise. I remain firmly opposed to the “global solutions” to the debt problem which are canvased from time to time. These invariably—if not always explicitly—involve new and inflationary methods of financing, or the assumption by the taxpayers of creditor countries of the obligations of the debtor countries or the risks of the banks.
There is no sensible alternative to the case-by-case approach which we have been pursuing. Contrary to what is alleged by its critics, it represents a coherent strategy. It rests on common principles—above all on the central importance of countries taking measures to put their finances in order and restore their creditworthiness. But it recognizes the inescapable fact that every debtor country is individual and different. They all have different resources and abilities, different kinds and scales of debts, and international financial and economic difficulties and opportunities.
The case-by-case approach also recognizes the need to buy time. Borrowing countries need time for the process of adjustment to work. Banks need time to get their balance sheets in order. This is a situation in which time—provided it is put to good use—is an invaluable commodity.
The London Initiative
At our meetings over the past weekend we were able, within the Interim Committee, to reach satisfactory operational decisions which will provide constructive guidance to the work of the Executive Board of the Fund in the coming months. But the most important outcome of our deliberations in the Interim and Development Committees derives from the proposal contained in the Economic Declaration at the end of the London Summit last June. It was then agreed, by the seven nations taking part, that finance ministers should set up an intensive discussion of international financial issues of particular concern to developing countries within the framework of the established international financial institutions.
This initiative recognized the close interdependence of developing and developed countries. It reflected the interest they share in a re-examination, in a medium-term framework, of aspects of the international monetary system, of external indebtedness, the roles of multilateral institutions, international capital flows and investment, and trade policies and protectionism. The concerns expressed in the London declaration have been echoed in other international forums, including the recent meeting of Commonwealth Finance Ministers in Toronto.
As host country at the London Summit, it is therefore of particular satisfaction to the United Kingdom that at the meetings that have just been concluded, the Interim and Development Committees have responded by deciding to set time aside next spring for discussions covering the broad areas I have outlined. I am sure that this is the most constructive way of meeting the very understandable requests of developing countries throughout the world for a dialogue with the industrial nations.
Two years ago saw the start of global economic recovery. This year we can reasonably claim that it is well established. In the coming year the task before us will be to sustain it by making progress in the following areas. We need to:
—put our own houses in order by securing stable monetary conditions and reduced budget deficits;
—press forward with supply-side policies to improve productive potential and employment;
—resist the forces of protectionism and move toward a new round of multilateral trade negotiations;
—maintain the momentum of economic adjustment where it is still needed;
—develop new ways of financing the future needs of developing countries; and
—relax obstacles to flows of private capital.
Let us, in all these endeavors, recognize the responsibilities that flow from the interdependence of our economies, an interdependence of which the Fund and the Bank are so valuable an institutional expression.
Statement by the Governor of the Fund and the Bank for Zambia—L. J. Mwananshiku
I am greatly honored to address this important international gathering on behalf of the African Governors in the International Monetary Fund and the World Bank, and also to welcome the new members of our institutions—St. Christopher and Nevis, and Mozambique.
Some forty years ago, the founding members of our two Bretton Woods institutions had a vision. Their vision was of an international economic system characterized by mutual cooperation for the benefit of all. Today, paradoxically, despite the greater interdependence of the economic system, the vision and the will to work cooperatively have waned. Today, we face difficult economic conditions that call for a concerted effort by all countries and a willingness to join in a common endeavor to overcome them.
The policies currently pursued by some industrial countries offer little encouragement to the developing countries which continue to experience serious deterioration in their economic performance. The economic recovery which is being talked about has not exerted any significant positive influence on the developing countries. International interest rates are still very high. The prices of our major export commodities remain depressed, while the prospects for increased concessional assistance are grim. Furthermore, industrial countries have continued to erect trade barriers everywhere.
The terms of trade of the developing countries have suffered serious deterioration and their balance of payments deficits are still very high. The debt problems are still with us and are becoming more severe. At the same time, available financing has diminished to a point where net transfers of resources to developing countries are now negative. The increasing number of debt rescheduling exercises testifies to the severity of the problems facing the developing countries. The adjustment that these countries are undergoing involves a severe reduction in imports resulting in a depressed rate of growth. Although current account deficits have fallen significantly, this reflects the sharp cutback in imports rather than an increase in exports.
Exchange rate volatility has become more pronounced in the last few years to the detriment of our economies. The situation has been aggravated by the continuing appreciation of the U.S. dollar and, in particular, its impact on debt servicing costs and the uncertainties it generates with regard to trade, foreign exchange earnings, and debt management. We therefore call on the industrial countries to take due account of the implications of their exchange and interest rate policies on other countries.
Most African countries have been forced to reduce their imports of capital goods, thereby slowing down their rates of growth at a time when the problems of poverty, disease, illiteracy, hunger, and malnutrition demand increasing attention. The recurring severe drought and the disastrous desertification have aggravated Africa’s problems. These are the problems that constitute Africa’s crisis today. Despite the weak economic conditions, our Governments have taken measures to address the emergency situation. Among other things, we have had to redirect resources allocated to development projects in order to finance urgently needed foodstuffs. In spite of all these efforts, we believe that urgent international action is needed to assist us in alleviating the adverse impact of the drought, and reversing the declining trend in economic growth.
Much has been written and said about the plight of sub-Saharan Africa. Two of the most recent documents on sub-Saharan Africa entitled, Toward Sustained Development: A Joint Program of Action for Sub-Saharan Africa, by the World Bank, and the Special Memorandum by the UN Economic Commission for Africa Conference of Ministers on Africa’s Economic and Social Crisis reiterate the difficult economic circumstances that continue to face Africa and present a realistic assessment of the alarming prospects for the coming decade. The crisis now confronting Africa needs to be addressed urgently if the political, social, and economic “nightmare” that many African countries might experience by the turn of the century is to be avoided. A clear, coherent action by the international community has not yet emerged to address the problems facing Africa. Clearly, African countries have never abdicated their primary responsibility for dealing with the problems they face. But it has to be acknowledged that, given the magnitude of the problems, it is virtually impossible for Africa to cope with them on its own. We believe that the Joint Program of Action prepared by the World Bank provides a reasonable basis for joint action by the international community. It is both timely and feasible and must be implemented as a matter of urgency. . . .
Indeed, while the drought in Africa is most disturbing, we should also not lose sight of the seriousness of the continent’s debt problem. We are aware that because of its magnitude in relation to those in other parts of the world, the debt problem facing Africa is not given due attention. For Africa, however, the problems are of staggering proportion. The number of African countries that have gone to the Paris Club is but one indication of the severity of the problem. In view of the seriousness of the situation, which is aggravated by the effect of the adjustment programs now underway, the rescheduling exercises on a case-by-case basis no longer suffice. New and comprehensive arrangements for debt relief including the conversion of ODA loans into grants are called for particularly in favor of the least developed sub-Saharan African countries, if there are to be reasonable prospects for the resumption of growth and development in these countries. . . .
We should like to draw the attention of the international community to the funding problems facing the International Fund for Agricultural Development. To enable the institution to continue to foster rural development, it is essential that the second replenishment of the Fund provides substantial additional resources. This is all the more important given the decline in food production in most developing countries.
Turning now to Fund matters, I should like to express serious concern at the new development which has cast the Fund on the center stage of debtor/creditor relationship. This development is evidenced by the fact that before rescheduling negotiation with a debtor member, the latter is required to conclude an arrangement with the Fund. The “seal of approval” by the Fund brings with it increased responsibility for the Fund. The Fund must be warned of the consequences of shouldering this undue responsibility. It will no longer be enough for the Fund to preach the familiar tune that it was established to deal with short-term balance of payments problems. It is clear that the Fund will need to adjust to the new reality which will call for bold and innovative approaches and longer-term perspectives in dealing with problems facing member countries.
One of the measures the Fund would be required to take in meeting this new responsibility is increasing its financial support for the countries undertaking adjustment programs as adjustment without adequate financing is highly disruptive. The Eighth General Review of Quotas was to have been a step in this direction, but as we had feared from the start of the review exercise, the increase in quotas has proved to be grossly inadequate and inequitable in distribution. As a result, the new quota increase has had very little meaning for us in Africa relative to our access to Fund resources. In fact, the Fund has been and continues to be under pressure to reduce access under the enlarged access policy and under the special facilities, a step that defeats the basic purpose of the quota review. There is even talk of limiting access further to members which are being described as prolonged users of Fund resources, something which we find objectionable since the incidence of repeated use of Fund resources in recent years does not show any marked change compared with the past. For the Fund to be able to play a significant role in the financing of payments imbalances, it will have to increase its lending capacity to a level compatible with the magnitude of expected imbalances; which means that resources at its disposal must be increased. In this regard, the African Governors are agreed that Fund borrowing at that time was unavoidable and we would commend the management of the Fund for concluding borrowing arrangements totaling SDR 6 billion to augment the lending resources of the Fund. However, since it is our view that borrowing should not replace quotas as the primary source of Fund financing, we will re-emphasize the need for the Fund to advance the time for the Ninth General Review of Quotas by at least two years. That Review should fully reflect the financing needs of members.
In calling for a new outlook for the Fund, we would like to stress that because of many structural problems and rigidities in many of our economies which make it difficult to adjust to external shocks and respond promptly to policy measures, we see a need to reduce undue reliance on very restrictive demand management policies and prescription for exchange rate devaluations. The lesson of experience shows that under such conditions progress tends to be illusory and is quickly reversed in the face of new external shocks. This is not to deny the relevance of austerity to the adjustment process. In fact, African countries have themselves undertaken rigorous adjustment measures that have all but brought their economies to a standstill. The social and economic costs of these measures threaten the real fabric of their society. The scope for further actions on their part is extremely limited. It is high time that the Fund begins to see adjustment in a medium-term context that gives adequate attention to growth and structural reform, as well as to factors that are known to be beyond the control of the country concerned, including in the African context, the devastating effects of drought. This would require fundamental improvements in program design and more support based on extended arrangements than as of now. In this connection, we would also reiterate our proposal that the management should initiate a serious study to assess the applicability and relevance of various policy mixes to countries at varying levels of development.
We would like to re-emphasize that adjustment should not be seen as limited to the deficit countries only. From the standpoint of a smooth functioning of the international adjustment process, surpluses and deficits can be equally destabilizing. Adjustment to be successful must therefore be symmetrical between the surplus and the deficit countries. The asymmetry in the international adjustment process as we now have it implies that the brunt of adjustment in terms of output, unemployment, and consumption is borne by deficit countries. The fact that these are, by and large, the developing countries with fragile socioeconomic and political institutions makes the inequities in the system more absurd.
Closely linked to the inequity in the international adjustment process is the asymmetry now inherent in the Fund’s surveillance activities. It is clear that Fund surveillance has been pursued seriously only in respect of developing countries, particularly those making use of Fund resources. By and large, the Fund has not so far devised a mechanism to make its surveillance over the exchange rate and other policies of the large industrial countries effective even though what happens in these countries determines the smooth running or otherwise of the international monetary system. There is no gainsaying the fact that the domestic policy stance in major industrial countries has contributed greatly to the severity of the adjustment problems of developing countries. The Fund should therefore find means of making its surveillance over the economic and financial policies of the large industrial countries meaningful, consistent with, and mutually supportive of the efficient and smooth functioning of the international adjustment process. To this end, we urge the large industrial countries to cooperate with the Fund in order to make the surveillance effective.
The African Governors regret that until now agreement has not been reached on SDR allocation under the fourth basic period which began in January 1982. All technical studies on the subject to date have established the case for further SDR allocations. The African Governors strongly support annual allocations of the order of SDR 15 billion as called for by the Group of Twenty-Four Ministers. In lending our support for this modest annual allocation we take into account the efforts which have been made to improve the quality of the SDR and enhance its attractiveness as a reserve asset. But, unless the declining trend in the share of SDRs in total non-gold reserves is stemmed through SDR creation, we might be giving the wrong signal that the objective of making the SDR the principal reserve asset is being abandoned. We therefore call on the few industrial countries which have delayed agreement to respond positively in order to enable the Managing Director of the Fund to make the necessary proposals to the Board of Governors without further delay. Future SDR allocations should be delinked from quotas. While we continue to call for the establishment of the link between SDR allocation and development finance, we are totally opposed to the establishment of a link between SDR allocations and Fund conditionality. We believe that it will be wrong for the Fund to move in that direction as it would only confuse the issue and lead us down a road that offers little chance of resolution of the real problem. It would be tantamount to an attempt to change the basic character of the SDR outside the framework of the Articles of Agreement, and could open up a Pandora’s box on the Articles themselves, and this against the background that not only has Fund financing become generally highly conditional, but also that financing by banks is now more often than not tied to the adoption of Fund-assisted adjustment programs and increasingly official flows are not now exempt from this consideration.
The African Governors are agreed that the compensatory financing facility should be untied from quota limitations. We also feel that repurchases should be linked with recovery of export earnings. As provision already exists for accelerated repurchases in cases of rapid export recovery, a comparable set of provisions should be made for deferred repurchases for up to ten years in cases of real export shortfalls. The compensatory financing facility should be a nonconditional facility in all respects and should not be linked with upper credit tranche and extended Fund facility drawings and therefore subjected to their conditions.
The African Governors would like to repeat the call they made at last year’s Annual Meetings for the establishment of a special window as an emergency facility in the Fund along the lines of the former Trust Fund to provide additional resources to the low-income countries facing severe adjustment problems and with inadequate access to financial markets. Drawings under the facility should be eligible for interest rate subsidy.
Let me reiterate that the African Governors strongly believe that there is now a clear case for a fundamental and far-reaching reform aimed at making the international financial system fully supportive of global development. The ingredients of such a reform should include, inter alia, equitable distribution of the burden of adjustment between surplus and deficit countries and an exchange rate system that provides stability while retaining flexibility to allow adjustment to take place without putting undue pressures on the level of economic activity; a new look at the principles governing international liquidity and reserve creation taking due cognizance of the interests of all groups of countries. The reform should also focus on a better functioning of the market mechanism to facilitate equitable return to primary producers; enhanced and efficient flow of resources, particularly ODA, to developing countries; finding means of helping international banks to facilitate capital flows to developing countries on appropriate terms; reducing the role of national currencies and strengthening that of the SDR in the international financial system; and making developing countries’ participation in decisions affecting the system meaningful. In this regard, we would like to affirm our support for the position taken by the Group of Twenty-Four calling for an international monetary and financial conference.
It has been suggested that the vision of the founders of our institutions 40 years ago has been dimmed by excessive preoccupation with parochial concerns. It has also been suggested by some that there is nothing that can be done about it. It is something that we just have to live with, we are told. We refuse to accept the counsel of despair on this issue. The people on whose behalf we make these pleas deserve better. We cannot let them down. The challenge before us is to renew that vision. Together we will not fail.
Statement by the Alternate Governor of the Fund for the Federal Republic of Germany—Gerhard Stoltenberg
Spreading recovery; reviving world trade; ongoing adjustment; responsible financial cooperation: these are important elements of the world economic setting in which this meeting takes place. The two organizations whose work we are reviewing today have made a critical contribution to this improving trend. I pay a special tribute to the dynamic and innovative leadership of Mr. de Larosière, Managing Director of the Fund and Mr. Clausen, President of the World Bank.
Developments last year have again demonstrated the indispensable role of the Fund as a catalyst for adjustment and cooperation as well as for economic and social progress. In cooperation with the Fund, many developing countries have made bold efforts to restore their economic and financial equilibrium. In the initial phase, this process almost inevitably developed in a context of economic retrenchment. We are now in the second stage. The adjustment that remains to be accomplished is likely to take place in a more forward-looking manner with developing countries gradually regaining the growth momentum.
Many industrial countries, too, have significantly strengthened their policies; they have restored monetary credibility, improved fiscal performance, and are now tackling structural rigidities. The progress achieved has belied the pessimists. However we remain vulnerable. Confidence is still fragile. Many developing countries remain burdened with severe social problems and large external debts.
At this meeting we are called on to reaffirm our commitment to a credible strategy for sustained and broadly shared growth; to emphasize the common interest of all parties involved in resolving debt problems in an orderly way; and to demonstrate our undiminished support for the Fund and the Bank. Monetary and fiscal discipline; structural flexibility; international cooperation: Countries that have followed this course have, in the longer run, performed better; they have grown faster, have been more successful in creating employment, and have more quickly adapted to external shocks.
Cautious monetary policies have been essential to get the recovery started. They remain essential to ensure that it will last. Inflation should not be allowed to come back as it did in previous cyclical upswings. A credible anti-inflationary commitment is the best way to help bring down interest rates from their very high levels.
The improved performance of monetary policy has yet to be matched in the fiscal and budgetary areas. The Fund has become a sharp critic of large budget deficits—and with good reason. Expansionary budget policies may help to underpin demand in the short run. This has to be weighed, however, against the distinctly adverse effects on interest rates and exchange rates, on trade flows and current accounts, on the debt burden of developing countries, and on the long-term potential for growth.
Government itself cannot secure lasting growth. Its most effective contribution is to provide a framework of stability within which individual initiative can develop. Realistic price and incentive structures are an essential part of that framework. Their restoration has been, and must continue to be, a focus of the economic policy surveillance maintained by the Fund.
Another element of that framework has to be a liberal trading system. The continuing pressures for protectionism remain a hazard to recovery. As the Managing Director once said: “Attacking trade strikes at the roots of … prosperity.” The debt difficulties of the developing world have increased the urgency of new and concrete steps to dismantle barriers to trade. My Government fully supports the launching of a new round of trade negotiations in the GATT. One focus of such negotiations should be extension of disciplines of the liberal trading system to new and subtler forms of protectionism which, so far, escape multilateral surveillance in the GATT. The success of a new trade round hinges on thorough preparation. In the interim, every effort should be made to implement the commitments to trade liberalization already existing.
Open markets; sustained growth; policies conducive to lower inflation and lower interest rates: these are preconditions for coping with world debt. It is the primary responsibility of industrial countries to ensure that these conditions are met.
There is another contribution that essentially can only come from debtor countries themselves: policies designed to strengthen the domestic framework for growth and financial equilibrium. Such policies are essential to reverse capital flight, to encourage the external financing without which adjustment cannot proceed in an orderly way, and to increase nondebt-creating financial flows, particularly direct investment.
The linkage of financing to corrective policy action—a key feature of the Fund—is the very basis of the Fund’s strength and of its catalytic effect on other sources of finance. The frequent controversy over Fund conditionality tends to miss a basic fact. Adjustment is not dictated by the Fund. It is imposed by a member’s objective economic situation. The longer adjustment is postponed, the harsher it will eventually be. Effective conditionality, of course, has to be flexible. It must take into account the hardship that the adjustment process can entail. And it must be sensitive to the limits of what is socially and politically tolerable.
Adjustment must go hand in hand with continued financing from official and private sources, including the commercial banks. Creditors are aware of the stake they have in restoring the financial viability of their debtors. This awareness is reflected in the cooperative way in which financial support packages have been arranged. The spirit of cooperation is also reflected in the substantial replenishment of the Fund’s resources that became effective late last year. Moreover, commercial banks are now envisaging a restructuring of debts in a longer-term perspective for countries with demonstrable adjustment progress. This is a welcome and constructive innovation.
Within the broad framework of the strategy I have just outlined, effective solutions to the debt problems must be worked out on a case-by-case basis, taking into account the widely varying circumstances of individual countries. Grand designs and sweeping proposals for debt relief would only postpone the return to financial normality.
A minute ago I discussed the role of conditionality as a necessary adjunct to financial support from the Fund. However, the Fund also has to oversee the policies of those members that do not have recourse to its conditional lending. This underlines the need for a firm implementation of the surveillance function conferred on the Fund.
I am pleased to note that the stance of German policies is in close harmony with the Fund’s views. Since the fall of 1982 when my Government came to office, we have significantly strengthened our fiscal performance and prospects. In particular, we are firmly committed to achieving a very marked reduction in our budget deficit in a medium-term framework. We are keeping a tight rein on expenditure growth, holding it well below the growth of GNP. Tax policy is geared to encourage private initiative, investment, and risk taking.
Budget consolidation in Germany is part of a broader strategy. It is designed to cut back the role of government in the economy, to strengthen market forces, and to re-emphasize the qualities upon which economic vitality depends—the effort and dedication of individual citizens.
We will reduce bracket creep. We are removing unnecessarily burdensome regulation of private sector activity. The share of public sector spending as a percentage of GNP is again declining; we will bring it down to about 45 percent over the next few years, five percentage points below the level reached when my Government took office. We remain committed to turning over public sector enterprises and activities to private ownership and management where this can be achieved without prejudice to the public interest.
The German economy has responded well. It is again set on a path of sustainable growth. Our biggest concern remains the persistence of high unemployment. A significant reduction in unemployment will require sustained and satisfactory growth over the medium term.
The conditions for a continuation of economic expansion in Germany are now generally favorable, and not solely in the fiscal field. Investment has strengthened. Inflation has dropped below 2 percent. Lower inflation is bolstering the income of private households. International competitiveness, in price and nonprice terms, is satisfactory. The external payments position is balanced. Interest rates are low by international standards. Long-term interest rates have fallen about 5 percent below dollar rates. A fall in interest rates abroad would provide room for a further decrease in our domestic rates.
Given its close integration in world trade and finance, the German economy, of course, cannot isolate itself from developments abroad. We have an important stake in the economic and financial stability of our partners. We recognize the critical role of the Fund and the Bank in that respect.
I welcome the constructive agreement reached in the Interim Committee on the future enlarged access policy. The continuation of enlarged access in 1985 will ensure the continued ability of the Fund to meet members’ legitimate liquidity and financing needs. As was recalled by the Interim Committee, enlarged access is a facility of a temporary nature. It was introduced in 1981 as an exceptional response to an exceptional situation. Since that time, the world economy has distinctly improved. It is, therefore, appropriate that the Interim Committee has agreed on a moderate scaling down of the lending limits in 1985.
An important indirect contribution that the Fund can make in order to ensure a sustainable balance of global liquidity demand and supply is through effective exercise of its surveillance function. The Fund can encourage members to pursue policies that will keep their liquidity needs within realistic limits and that will provide a more favorable climate in international financial markets by fostering the conditions for lower interest rates. . . .
I welcome the increased attention being given in the Fund and the Bank to ways of strengthening cooperation. While their roles and responsibilities are different, their ultimate goals are identical: to catalyze balanced growth and prosperity. Maximum efficiency in the cooperation between the Fund and the Bank will benefit all members, and particularly the developing countries. . . .
I would like to conclude with a point that gives me particular pleasure: the resolution earlier this month of the two Boards of Governors to accept the invitation to hold the 1988 Annual Meetings in Berlin (West). I would like to express, on behalf of all concerned in my country, our sincere appreciation for this decision.
The crucial importance of a strengthening of international cooperation for the well-being of our nations is becoming increasingly well understood by the citizens of our countries. The differences in our political systems and economic structures are real. But it is only by acting together that we can meet the enormous challenges facing mankind in a peaceful manner and in a spirit of solidarity. To achieve these goals, we must enable the Fund and the Bank to continue playing their important roles while coordinating their activities even more effectively. As before, my Government will work to ensure that both institutions continue to be provided with the necessary resources and instruments.
Statement by the Governor of the Bank for Tunisia—Ismail Khelil
It is a great honor for me to address this distinguished gathering on behalf of the Arab Governors of the International Monetary Fund and the World Bank. I would like to start by joining other speakers in welcoming the new members of these institutions. I would also like to take this opportunity to express our appreciation for the very useful opening statements made by you, Mr. Chairman, and by Mr. de Larosière, and Mr. Clausen on the issues that must engage our attention at these meetings.
As a result of recent developments, the world economic outlook is much better today than it was when we met last year. The recovery in the industrial countries has strengthened; output has increased, inflation is slowing down, world trade is growing, and unemployment, although still high by historical standards, is on the decline. However, the spread of recovery to the developing countries has been both slow and uneven. While certain countries have recorded some improvements in their growth and export performance, many aspects of the global economic situation remain a source of concern and pose a continuing challenge to policymakers. Protectionism in the industrial countries is still on the rise. This is particularly so with respect to nontariff barriers. Many of the new barriers are of a covert nature and introduce greater rigidities into the international trading system, such as voluntary export restraints and the so-called orderly marketing arrangements. The tightening of trade barriers is hampering the adjustment efforts of developing countries. It is also hurting their development potential along the lines of comparative advantage.
The debt problem continues to be disturbing. In the past two years, a large number of developing countries have experienced serious difficulties in servicing their outstanding debt. At the end of 1983 the total debt of all developing countries stood at an estimated $810 billion. Service payments due in 1983 on all debts, including short-term, amounted to approximately $165 billion or 34 percent of total developing country exports of goods and services. However, due to rescheduling, actual payments in 1983 were about $125 billion or 25 percent of exports; still a heavy burden on their foreign exchange earnings. Related to the debt problem is the high level of interest rates, both nominal and real. For developing countries the rise in interest rates has made new borrowing more costly and difficult; it has also considerably raised service payments on debts contracted at variable interest rates. The problem has been compounded by the instability and misalignment of exchange rates.
In addition, developing countries have had to contend with a precipitous decline in commercial bank lending. Voluntary commercial lending to some of the major debtor countries has all but ceased. As a result, developing countries in 1983, for the first time, received less from medium- and long-term loans than they paid to service outstanding ones.
At the same time, official development assistance, which constitutes 75 percent of the external capital flows to low-income countries, has not increased in real terms since 1980. ODA has traditionally played a unique role in supporting the efforts of developing countries toward structural transformation of their economies. Unfortunately, the performance of most DAC countries in the field of ODA continues to fall short of the 0.7 percent target. The aid performance of OPEC donors as a group, relative to their GNP, substantially exceeds DAC average and stands well above 0.7 percent. Despite the large decline in oil revenues in recent years, the major Arab donors have continued to extend high levels of external aid. These aid flows, which have been widely distributed among developing countries, still exceed 3 percent of their GNP.
Faced with these difficulties, many developing countries have embarked on the implementation of severe adjustment measures. Non-oil developing countries have sharply reduced their current account deficit from $109 billion in 1981 to $56 billion in 1983. Some major debtor countries have in fact moved from large deficits to large surpluses in their trade accounts. But these gains have been due mainly to substantial compression of their imports rather than expansion of exports. In the face of sluggish export earnings, decline of commercial bank lending, stagnation in official development assistance, and mounting debt service burden, the full brunt of adjustment fell upon imports. This has had profoundly adverse effects on investment programs and consumption levels. Available evidence goes to show that this kind of adjustment has been bought at the cost of economic setback, injury to world trade, not to speak of grave risk to political stability.
The policy questions that Arab countries have had to deal with in recent years have in many respects been similar to those faced by other developing countries. In response to the global recession, the non-oil Arab countries have followed a policy of adjustment that has been reflected in reduced public expenditures and imports. As a result, growth rates have generally been much below those attained in previous years. Moreover, some of the Arab countries have experienced difficult debt servicing problems. The recession has also had a large impact on those Arab countries that are oil exporters. The drop in the demand for oil, coupled with increased production outside OPEC, resulted in a sharp decline in export receipts, necessitating a general policy of adjustment and restraint, which had the inevitable effect of considerably slowing down economic expansion. Most of these countries have over this period undertaken a reassessment of their development plans with a view to economizing on expenditures and improving the allocation of resources. An increase in output and exports is forecast for the period ahead, though the extent of the recovery remains sensitive to assumptions made with respect to developments in the international oil market. For their part, the Arab oil exporting countries, together with other OPEC members, have sought to preserve stability in the oil market, which they regard as being in the interest of both producers and consumers.
Turning to some specific Fund issues, while an agreement has been reached at the Interim Committee to continue the policy on enlarged access in 1985, we would have preferred an agreement that also maintained access limits under the policy at the present level. As we know, the enlarged access policy has played a very useful role in the past in enabling the Fund to meet members’ increased requirements for financing in support of adjustment. Care should be taken in future reviews to avoid a premature phasedown of the policy.
We note the concern that has been expressed by other developing countries at the general shift toward lower access ranges in the implementation of the policy on access over the past year, and at the tightening of the conditionality of the compensatory financing facility. The amount of access within the limits should be duly related to the particular attributes of individual cases, and the compensatory financing facility should retain its distinctive identity as a source of quick-disbursing bridging finance. While the Interim Committee has agreed to maintain access limits for the compensatory financing facility at the present level, we would like to state that, since the compensatory financing facility is not a temporary facility, access under it should not be tied to the annual reviews of the enlarged access policy.
It is regrettable, that, despite widespread support, no allocation of SDRs has so far been made in the current basic period. The substantial weakening of the reserve positions of a large number of countries despite severe import compression clearly points to the existence of a long-term global need for reserve supplementation. This need could be further accentuated in the coming period if world trade expands as projected and access to financial markets remains limited. Moreover, it appears highly unlikely at this juncture that an allocation of an appropriate size would be inflationary or would adversely affect the ongoing adjustment efforts. A strong case, therefore, exists for an early and meaningful allocation of SDRs, which would also contribute to the objective of promoting the role of the SDR as a reserve asset. . . .
Statement by the Governor of the Bank for the Netherlands—H. O. Ruding
The international economic environment has undergone radical changes during the last decade.
First of all, the end of the Bretton Woods exchange rate arrangement heralded a new era of managed floating. Second, oil price shocks led to macroeconomic disturbances throughout the world. These shocks, together with economic mismanagement and institutional rigidities in both industrial and developing countries, amplified internal and external imbalances. In my opinion, and with the benefit of hindsight, the economic policy responses to the effects of the increasing oil price were generally inadequate. Although the new system of flexible exchange rates mitigated some of the macroeconomic disturbances, inflation surged while output stagnated. The current accounts of most oil importing countries deteriorated sharply. Nevertheless, necessary policy adjustments were delayed or not implemented at all. In the meantime, international financial markets played an increasing and much acclaimed role in providing funds for balance of payments support. The recycling of funds through these markets led to a sharp increase of external debt in a number of countries, and weakened the role of the Fund during this period. Indeed, in the second half of the 1970s, only a small part of the need for balance of payments assistance was accounted for by IMF financing, although Fund resources had increased as a result of quota increases. Only after 1980 did the demand for Fund credit rise sharply. The Fund became more involved in the financing process, and applied an appropriate, strict degree of conditionally to ensure the implementation of policy adjustments. Thus the Fund became a catalyst and coordinator of balance of payments adjustment and assistance.
During the last few years, the international economic situation has improved. Industrial countries have pursued anti-inflationary policies and many countries have implemented adjustment policies in cooperation with the Fund. The result was lower inflation in the industrial countries, a recovery of world output, and a sharply reduced external deficit of the developing countries as a group. It is encouraging that the improvement in the current account of developing countries is by now increasingly due to growth of exports and no longer to further compression of imports. However, a number of developing countries will be confronted with serious domestic and external economic and financial problems for many years to come. In general, those countries, both developed and developing, that have adjusted in time to the changed international economic environment have fared better in their economic performance than those that have been slower to adjust.
Threats to the current economic recovery remain. Too high nominal and real interest rates, influenced by high fiscal deficits, could weaken the economic recovery, particularly in those countries with high external debts. Inflexibilities on the supply side still exist in many countries, owing to market imperfections, capital controls, and institutional rigidities. And unemployment levels in many European countries, particularly in my own country, are still unacceptably high.
Therefore, in order to sustain, deepen, and spread the improvement of the international economic situation in the years ahead, monetary discipline should be maintained and fiscal deficits further reduced. Such macroeconomic policy measures that would keep inflation and real interest rates low, should in most countries be combined with microeconomic measures, aimed at reducing capital and labor market rigidities. In this way, opportunities for domestic and foreign private investment can be improved. At the same time, we must intensify our efforts to roll back protectionism. Refraining from protectionism is crucial to the efforts of the developing countries to increase their exports. Although protectionism is not a sin exclusively committed by industrial countries, they, because of their economic predominance, bear a special responsibility for maintaining an open trading system. Developing countries, on their part, need to pursue sound macroeconomic policies, if their exports are to compete in the international markets.
The International Monetary System
If we all accept these responsibilities, I am confident that we will be able to attain durable noninflationary economic growth. The present system of exchange rates, for which I see no viable alternative in current circumstances, can be effectively used to help prevent longer-term balance of payments disequilibria.
Of course, the recent change in the international economic situation has implications for the functioning of the Bretton Woods institutions. Although developments appear to have taken a turn for the better, it will be necessary to prevent a recurrence of the severe liquidity and debt problems that many countries have been facing these last few years. Future financial flows to developing countries will depend highly on the successful solution of present major debt problem cases. Already, many countries have accepted arrangements for the restructuring of their debts together with a coherent set of policy measures aimed at economic adjustment. But even when the creditworthiness of a country has been restored, a more cautious approach to commercial borrowing than in the past is called for—both on the part of the commercial banks and of the deficit countries. The Fund can and should play an important role in preventing the recurrence of liquidity problems. Let me indicate how I think this could be realized.
The Role of the Fund
The policy of enlarged access, a temporary facility from the outset, enabled the Fund to cope with the financial needs of its member countries. At the same time, however, it also severely strained its liquidity position. The Eighth General Review of Quotas had to be precipitated and additional borrowing had to be arranged. The serious strains that emerged in the international monetary system and the threats they posed to the world economy have been dealt with swiftly and satisfactorily. Owing to their impressive adjustment efforts, many of the debtor countries have been able to bring down their current account deficits drastically since 1981. Most of these countries are now implementing adjustment programs geared toward reducing their dependence on external financing. Considering these positive results so far, I think there is sufficient room to proceed with the gradual reduction of the enlarged access to Fund credit, as agreed in the Interim Committee, beginning next year, in order to bring access limits over time to a level that can be supplied from the Fund’s quota resources.
By such action the direct financial role of the Fund would be somewhat de-emphasized, but its role as a catalyst in unlocking additional finance would, in combination with a strengthening of surveillance, not be affected. The advantage would be that the liquidity position of the IMF would remain strong enough to cope with all requests for Fund credit until the time of the next quota increase. Moreover, subscriptions under members’ quotas would again become the primary source of Fund financing. The liquidity of the financial claims on the Fund would be improved and the role of the Fund as a monetary institution would be strengthened. In order to ensure that the recent problems of the heavily indebted countries are less likely to recur, it is also advisable to enhance further the Fund’s role in the international monetary system by strengthening its surveillance task. What is needed is a shift in its role from cure toward prevention. External adjustment and economic recovery are encouraging. This is the time to consolidate and extend what has been achieved so far. The heavily indebted countries should continue to implement adjustment programs, whereas the industrial countries should set themselves to the task of consolidating their present recovery. Higher growth in the industrial countries will allow higher exports from the debtor countries and thereby ease their adjustment efforts. It is the smoothest way out of the debt crisis.
As we know from experience, economic recovery requires a climate of stable economic and financial conditions. Unfortunately, instability continues to exist in the field of both exchange rates and international liquidity. Instability creates uncertainty and uncertainty leads to extra costs. Reduction of instability would therefore be beneficial to the economies of all our countries.
An essential step toward long-term stability is the coordination of our national monetary and budgetary policies. I am convinced that the Fund’s surveillance could play an important role in achieving this. Of course, I realize that surveillance by the IMF can only be effective if member countries are willing to work together to ensure that their domestic economic policies are formulated and conducted in such a way as to take the international consequences into account.
A stable system requires a stable development of key variables such as price level, monetary growth, domestic demand, and the current account position, as well as a reduction of external debts and public sector deficits. Apart from a more intensive country-by-country approach under Article IV, multilateral surveillance should be intensified. Particular attention could be paid to the international implications of the economic policies of the major industrial countries. In this spirit, discussions are being held in the Group of Ten to examine how Fund surveillance can be strengthened and be made more effective, for debtor and creditor countries alike. I realize that much remains to be done to achieve a more effective surveillance, but I am convinced that agreement on strengthening surveillance would be considered a signal of greater international willingness to work toward a stable future.
The Developing Countries
In the first part of my speech, I presented my views on the international economic recovery and the effects that it is having on the economies of developing countries. I indicated that, provided sound economic and financial policies are pursued by all parties and protectionism is contained, the recovery will undoubtedly spread to developing countries. Indeed, it has already done so. Nevertheless, this assessment must be qualified for the poorest countries that have no access to financial markets. Even if those countries do profit from the economic upturn, they still face harsh long-term constraints on their development. The problems of sub-Saharan Africa were the main item on the agenda of the Development Committee.
Statement by the Governor of the Fund and the Bank for Australia—Paul J. Keating
After a prolonged period of economic recession, with each year seeming to offer less hope than the previous one, the world economic situation at last shows some encouraging signs:
Total output in 1984 should show its best performance for some years, both in developed and developing countries;
The rate of inflation has slowed in most countries;
World trade is beginning to pick up, to the benefit of all; and
Disequilibrium in external payments shows signs of diminishing.
I am pleased to say that in my own country inflation has been cut to less than half its previous rate, while declining output has been replaced by record economic growth. But the world is still confronted by some difficult problems. For instance, real interest rates remain high, adding to debt burdens; and the appreciation of the U.S. dollar continues, thus heightening tension and uncertainty.
Hanging over us all are three major questions:
Whether we can find a satisfactory solution to the debt problem;
Whether we can roll back protection; and
Whether we can reduce unemployment from its tragically high levels.
For my part, I err on the optimistic side. We now have opportunities that we have not had for some years, but it would be so easy to let those pass us by. In what ways can the institutions we Governors represent—the International Monetary Fund and the World Bank—help us to transform those opportunities into success?
Let me speak first of the Fund.
It seems to me that we often expect the impossible from that organization. It is an institution that was never designed to solve the development problems of the world. Within the limits of its capacity, this is the responsibility of the World Bank.
The Fund was originally designed to provide temporary balance of payments assistance. In recent years, we have experienced a severe period of international payments imbalance. Without going into the reasons for that, let me say that we all, individually and collectively, bear the responsibility. The Fund has done a great deal about this—a great deal for which it has not received the credit it deserves.
There is not time for me to go into the changes the Fund has made to its normal working procedures to cope with the problems we laid at its doorstep. But let me just mention its major policy adjustments.
It pressed those of us who could afford it to provide loans which it could on-lend to countries who had fared less well;
It strained at its Articles of Agreement to lend money in larger amounts and over longer periods than had previously been entertained;
It involved itself directly in encouraging private banks to maintain their lending to countries hard pressed by debt; and
Most of all it endured the criticism which came its way when it insisted that countries drawing on its resources took all the steps necessary to adjust to changed economic circumstances.
By 1983, the Fund was making finance available at ten times the rate of the mid-1970s. In the light of this alone, who can honestly say that the Fund has not proved itself to be flexible and sensitive to the financial needs of the times?
The other side of this debate concerns the conditions under which finance is lent. I believe that criticism of the Fund’s approach to conditionality is misplaced. It is the role of the Fund not just to help countries through temporary balance of payments difficulties, but to provide finance in such a way that they can avoid self-defeating economic policies and need not try to pass their problems on to others. Economic adjustment by such countries is inevitable. The question is not whether to adjust but whether adjustment should come about with or without Fund support. And it is wrong to imply that Fund conditionality is in some way inimical to growth. The aim of the Fund is to help establish the basis for sustainable growth.
I seriously put it to Fund members that we should take care not to place too great a burden on this institution lest we inadvertently undermine its basic character and its financial support.
The outcome of the Interim Committee’s deliberations is clearly in line with the views I have just expressed. The conclusion that an SDR allocation is not warranted at this time is, I suggest, soundly based given the lack of evidence of a global need for additional liquidity. An allocation large enough to add significantly to liquidity would have run an unwarranted risk of adding to inflationary pressures. We should remember that, while we have fought a long and hard battle against inflation—and have made remarkable progress—it is not yet total victory.
I support also the reasonable compromise reached on access limits. The policy of enlarged access was adopted as a temporary measure to respond to members’ needs during a time of massive and widespread payments imbalances and of constrained quotas. Though many problems remain, the overall payments imbalance has improved and quotas have been increased. It seems to me fitting, therefore, that we should begin the task of reducing access limits. . . .
Statement by the Governor of the Bank for Israel—Moshe Y. Mandelbaum
I would like to join the preceding speakers in welcoming St. Christopher and Nevis and Mozambique, the newest members of the International Monetary Fund and the World Bank. I would also like to congratulate Mr. Richard Erb on his recent appointment as Deputy Managing Director of the Fund and extend to him my warmest wishes. May I also thank our host nation, the United States, and say what a pleasure it is to be here in Washington.
Following a protracted period of stagnation, economic recovery in most industrial countries, and especially so in the United States and in Canada, is now well under way. Furthermore, in the developing countries, exports are already responding to this recovery, thereby generating renewed economic growth. However, these encouraging developments must not deflect from the persistence of three fundamental problems which threaten global economic recovery: unemployment, external debt, and inflation. Moreover, most of the developing economies are still suffering from a serious setback as a result of the prolonged world recession. In some areas of the world, notably in sub-Saharan Africa, the standard of living has been reduced to poverty if not outright hunger.
Interest rates, contrary to the hopeful signs last year, have not fallen; instead they have settled at a level which imposes crippling debt servicing on the developing economies. Indeed, during the last 12 months we have witnessed an alarming increase in the number of countries which have had to negotiate debt rescheduling agreements and to seek emergency balance of payments support from the Fund. The Fund’s role in administering first aid to economies that cannot meet their external obligations has become quite formidable as has the task of governments that are receiving such aid and are required to implement harsh and unpopular adjustment policies. As the Annual Report of the Fund points out, the measures that are implemented in order to bring about an improvement of the balance of payments are often at the cost of suppressing economic growth. Furthermore, the high level of interest rates is preventing a renewal of private investments, and with inadequate capital formation, the prospects for sustained growth in the future are jeopardized. . . .
But the developing countries’ debt burden has more immediate repercussions too. The pressing need to improve their current account often made countries take recourse to administrative import controls. For their part, the industrial countries seek to further their own recovery by protective measures. Such practices put further obstacles in the way of global economic recovery. We share the view that free world trade is essential if optimal economic growth is to be achieved. In spite of the reservations expressed at the Interim Committee, I believe that an allocation of SDRs will stimulate world trade and strengthen the global recovery and thus obviate the need for protective measures. Bearing in mind the unutilized capacity in both developed and developing economies, there is, I believe, no danger that such an allocation will rekindle inflation. As for enlarged access, this Fund facility has been of great help to many countries but it is an emergency measure that should not be perpetuated. The Fund’s support should be granted according to well-defined criteria. The Fund should have adequate resources at its disposal, so as to be able to make its support available in full measure to the eligible members.
I would now like to address myself briefly to Israel’s economy. Israel’s exports are responding well to the recovery of the industrial economies. Following two meager years, export performance in 1984—a 16 percent increase in dollar terms—suggests a return to the rapid expansion that characterized Israel’s exports until 1981. It is significant that such rapid expansion of exports is taking place in spite of a three-digit inflation which is plaguing Israel’s economy and it is perhaps indicative of the economy’s growth potential. This potential could be fully expressed once inflation has been stopped.
In order to alleviate the effects of inflation, Israel has introduced an indexation of both wages and financial assets. Such an arrangement has worked tolerably well at moderate rates of inflation and has in fact ensured high levels of private savings. However, as inflation accelerated, indexation also perpetuated it. The real forces in the economy have to struggle with a severe and unnecessary handicap which inflation imposes. The cost of inflation is reflected in a financial sector that has expanded beyond the real needs of the economy; it is estimated that 4 percent of total employment accounts for this expansion of the financial sector. Furthermore, the private sector has to function in a situation of growing uncertainty expressed in the ever-widening variance of the relevant economic variables.
The new government, which came into office ten days ago, has put on top of its list of priorities the implementation of an economic plan to reduce simultaneously the rate of inflation and the deficit in the current account. This plan calls for a substantial reduction of the budget deficit and for the encouragement of private savings in order to reduce inflationary pressures and bring about some improvement of the current account at the same time. The plan also calls for a “social contract” which will provide the ground for a policy of price stabilization. The success of the plan is underpinned by the growth potential of Israel’s export sector. Growth in Israel has concentrated on technologically intensive industries. Investment in these industries has been increasing at fast rates (last year alone, there was a 20 percent increase). However, because of the high level of domestic demand, the export potential could not be utilized. A reduction of domestic demand will therefore enable a fast transfer of resources into exports.
As I have mentioned, Israel’s economic growth is based on technologically intensive production sectors in both industry and agriculture. The emphasis has always been on a close link between research and development and investments. Since Israel’s industries are technologically intensive rather than capital intensive, they would also be suitable for many other developing countries who suffer from scarcity of capital and energy. I would like to take this opportunity to reiterate Israel’s readiness to put its developing experience at the disposal of all other developing countries. Israel’s expertise in agromechanical farming methods, creation of alternative energy, industrial training, public health, and civil engineering could be made available to many other countries.
In closing, I would like to say that we see it as the duty of the developed countries, and very much in their own best interests, that the Fund and the Bank, so ably led by Mr. de Larosière and Mr. Clausen, be provided with the means necessary to foster sustained growth and financial stability in the world economy.
September 25, 1984.