Discussion of Fund Policy at Fourth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1984
Statement by the Governor of the Fund for South Africa—B. J. du Plessis
We continue to live in difficult economic times. As some international financial problems become less serious, others take their place. In these circumstances, the Fund and the Bank, under the distinguished leadership of Mr. de Larosière and Mr. Clausen, deserve to be complimented on the contribution they have once again made during the past year toward defusing, containing, and, to a significant extent, even solving the prevailing problems.
As one of the founding members of the Fund and the World Bank, it is a great honor for South Africa to join in welcoming St. Christopher and Nevis and our neighboring country, Mozambique, as new members.
The success achieved by the United States and some other industrial countries during the past year in combining lower inflation with higher growth is most impressive. The lesson it holds for all of us is clear: the key to rapid and sustainable economic growth lies in first curbing excessive money creation and spending by means of basically market-oriented financial policies. Although this approach entails painful short-term sacrifices, it is fundamentally the only way to curb inflation and to achieve or maintain sound balance of payments and foreign debt positions.
As indicated earlier, however, the difficult economic problems which have confronted the world during recent years have not been fully resolved. Far from it. The international debt crisis is still with us and the problems facing many developing countries remain extremely serious. The belt-tightening adjustment programs prescribed under the present case-by-case approach make good economic sense. But it remains to be seen whether these restrictive policies can be implemented to the required extent without creating unmanageable sociopolitical problems leading inevitably to further rescheduling. And, of course, the need for further growth in these countries cannot be ignored.
In the meantime, the present unusual economic situation in the United States continues to exert both favorable and unfavorable effects on other economies. The favorable consequences flow from the strong domestic upswing and the upsurge in the U.S. dollar, both of which contribute to rising U.S. imports from other countries. The unfavorable effects emanate mainly from the large budget deficit and the accompanying high real interest rates and net capital inflow, which are adding to the burden of debt service for many countries and draining scarce international capital from other countries.
Given these continuing problems, the time is indeed opportune for new thinking on the future roles of the Bank and the Fund, and for more effective forms of development finance. The answer clearly does not lie in a premature relaxation of monetary and fiscal policies in the industrial countries. Nor is it to be found, in the first place, in the creation of more SDRs or in the relaxation of Fund conditionality. Steps of this kind are bound to result in more inflation and instability, and will, in the long run, do more harm than good. The only effective way of assisting the developing countries is through transfers to them of real resources and know-how. It is therefore gratifying that fresh consideration is currently being given to the most appropriate ways and means of effecting such transfers.
South Africa has a particular understanding of the plight of many other African countries since it forms part of a region faced with the onerous task of developing its resources in conditions of considerable diversity and volatility. This keeps us singularly aware of the magnitude and complexity of the economic challenges currently facing sub-Saharan Africa. The debilitating socioeconomic effects of the harsh climatic conditions that have ravaged this region in recent years can hardly be fully appreciated by countries that have not themselves actually suffered the same experience. The unfortunate combination of a number of adverse factors at this juncture presents the whole region with an almost intractable problem, but one that must be solved to ensure the very survival of many inhabitants of the area.
The recent initiatives put forward by the World Bank in its report to the Development Committee provide a new and encouraging approach toward meeting these challenges. In the light of its own experience and objectives as part of developing Africa, South Africa welcomes the recognition of the need for realism and viability reflected in the recommendations of the report. In pursuit of similar guidelines, we have for some time been applying a comparable approach in terms of which, among other things, substantial amounts from our own resources are being devoted to agricultural research, education, health and population development programs, and we can testify to the potential advantages of this approach.
A number of internationally recognized organizations, such as the Council for Scientific and Industrial Research and the National Veterinary Research Institute at Onderstepoort, do valuable work in Southern Africa. We are also a leading member of a Southern African agency for the promotion of interterritorial cooperation in the broad field of agriculture and natural resources.
The Rand Monetary Area Agreement and the Southern Africa Customs Union Agreement provide further evidence of the benefits accruing from the pragmatic approach taken by some Southern African governments in regard to technical, financial, and economic cooperation. Through these arrangements, supplemented by numerous other bilateral agreements, South Africa accepts a role and a responsibility for cooperating with its neighbors in serious efforts to improve the standards of living of all the peoples of Southern Africa. . . .
Since last year’s Annual Meetings, the new Development Bank of Southern Africa has commenced operations as planned. It not only supports the maintenance and expansion of the existing economic infrastructure of its members, where appropriate, but concentrates on rural development and the strengthening of the food-producing capacity of the region.
In recent months, we have been greatly encouraged by the degree of economic cooperation that has been made possible, not only between countries in Southern Africa but also between the private and the public sectors, following the recently concluded Nkomati Accord between South Africa and Mozambique. Such cooperation, of course, already exists in other areas, particularly in the financial, agricultural, and transport fields. Only last week seven Bank member countries in Southern Africa gathered to strengthen cooperation in the field of rail transport, which must of necessity redound to the economic benefit of all concerned.
The economic development of sub-Saharan Africa is certainly a high priority from the point of view of both humanitarian and economic considerations. Equally important is the fundamental requirement that such development be achieved through sound economic and financial policies and practices, and in the shortest possible period of time. . . . The commitment by a government to the principles of private initiative and a free market, while an indispensable prerequisite for success, will end as nothing more than a good beginning unless it is also supported and implemented by the populations in those countries. This will involve the uninterrupted and imaginative dedication of experts to the identification, implementation, management, and control of specific programs.
Also needed will be the education and training of large numbers of people and, ultimately, the reorientation of a sufficient number of individuals and communities to establish the principles and work ethic of a free enterprise society as the generally accepted standard and norm.
Clearly, this process will demand sustained involvement and the investment of a variety of resources by the Bank, the respective governments, and the private sector. But mostly it will require ingenuity, perseverance, and time. We are optimistic that the rewards can be substantial, both materially and in terms of those values and goals which the far-sighted founders of the Fund and the Bank envisaged in the establishment of these institutions.
Statement by the Governor of the Bank for Luxembourg—Jacques Santer
We have noted with great interest the optimism that emerges from the probing analyses of the world economic situation presented to these Annual Meetings by the Managing Director of the Fund and the President of the World Bank, this despite the lingering uncertainties about the scenarios adopted. I would also like to congratulate Mr. de Larosière and Mr. Clausen for their success in carrying out their extremely difficult tasks.
The resurgence of world trade, in large measure attributable to the dynamic growth of the U.S. economy, is an encouraging sign that has contributed to modest growth in the other industrial countries. The factors behind the growth in the United States raise some doubts, however, as to its durability without inflation and as to the budgetary and current account deficits. These deficits are not only responsible for the persistence of historically high interest rates; they also are absorbing an ever larger share of other countries’ savings.
We in Europe are aware of the need to continue the restructuring efforts undertaken some years ago with a view to achieving sound and sustainable growth that will make it possible to reduce the currently intolerable levels of unemployment.
Even so, in those European countries that have advanced the farthest in the adjustment process, it should be possible to promote the resurgence of domestic demand and to reduce the rigidities that all too often are still hampering the development of the European economies.
In my own country, the effort to restructure the economy has been carried out in such a way that employment in the steel industry, which provided jobs to 17 percent of the work force prior to the 1974 crisis, has been reduced by more than half. The development of the tertiary sector and the establishment of a wide range of new industries have nevertheless made it possible to keep the employment level high and to limit unemployment to less than 2 percent of the work force.
Financing this restructuring involved shared and coordinated efforts on the part of all concerned while avoiding any structural indebtedness in government finance.
Our objective is to impart consistency and durability to the still moderate growth our economy is experiencing once again.
In the monetary area, we are striving to strengthen the European Monetary System which has made increased convergence of the European economies possible. We are convinced of the merits of more stable exchange rates and are striving to keep our currency among the strongest within the European Monetary System.
One of the major problems which continues to cast its shadow over the world economic situation is the indebtedness of numerous developing countries. This topic also affects us in our capacity as an international financial center.
Experience in recent years shows that this problem, while far from being definitively resolved, is nonetheless susceptible to being dealt with satisfactorily in the medium term. On debt matters, I am most appreciative of the role of catalyst and orchestrator played by the Fund, a role it must continue to play with all the requisite flexibility and in concert with the World Bank. It will also be necessary for growth in the industrial countries to be maintained, for interest rates to come down, for the debtor countries to persevere in their adjustment efforts, and for financing flows to continue without interruption.
In this regard we wish to express our satisfaction with the agreement reached in the Interim Committee to reduce the enlarged access to the Fund’s resources only moderately and to leave the policy in its present form as regards the special facilities.
Alongside the question of access to the Fund’s conditional liquidity, there is the unresolved problem of creating new unconditional liquidity in the form of a new SDR allocation. This subject has been studied on many occasions, but consensus is still far off. My Government is in favor of a new allocation of SDRs; in our opinion there is a need for liquidity that can properly be considered as global. This need can no longer be met by borrowing and often compels countries seeking financing to implement excessively deflationary policies and to make drastic reductions in their imports. Moreover, the resurgence of world trade requires a roughly equivalent expansion of reserves, meaning that there is no justification for the fear that such new liquidity might be inflationary.
Finally, we are pleased by the initiative to begin global discussions on the major problems affecting the developing countries as well as the problem of indebtedness at the next meetings of the Interim Committee and the Development Committee.
The uncertainty and the uneven geographical distribution of the economic recovery remain the major stumbling blocks to improvement of living standards in the developing countries. These countries’ export prices and their potential markets are still depressed. Their growth rates are lower than the interest rates on their loans. The indebtedness of the developing countries, estimated to exceed $800 billion, amounts to a mortgage in the form of interest and principal equivalent to a third of these countries’ export proceeds. There has been a pronounced decline in spontaneous commercial lending since 1983, and the developing countries’ interest payments exceed net inflows of capital.
In many countries, in particular in sub-Saharan Africa, the population is growing at a faster rate than the economy. The unequal distribution of income internationally is becoming more pronounced and threatens to stymie the economic development of all countries, since a lasting collapse of the buying power of the developing countries would have a serious impact on the majority of the industrial countries that depend on foreign trade. . . .
In conclusion, I would like to stress that the problems of growth, aid, indebtedness, international trade, and population growth cannot be considered separately. The risks are shared, and so are the responsibilities.
Statement by the Governor of the Bank for China—Wang Bingqian
First of all, let me extend, on behalf of the Chinese delegation, our sincere congratulations to you on your assumption of the chairmanship of the current Annual Meetings. I believe that under your guidance, the current meetings will certainly yield positive results. I would also like to express my appreciation to Mr. de Larosière and Mr. Clausen for the commendable work they have done in the International Monetary Fund and the World Bank in the past year. I would like to extend my congratulations to the new member countries.
The world economy has witnessed considerable changes since we met here a year ago. Economic recovery is well under way in developed countries. We should be aware, however, that such recovery is not stable, and very much unbalanced too. The developing world as a whole is still plagued by serious economic difficulties. Over the past few years, many developing countries have carried out economic adjustment and improved their balance of payments to a certain extent at the cost of slowing down their economic growth. However, intensified trade protectionism practiced by a number of developed countries, their reduction of official development aid, and rising real interest rates have made it hard for the developing countries to overcome their economic difficulties. What is most disturbing is that the situations of many low-income developing countries are still deteriorating. It goes without saying that to change such a state of affairs, developing countries themselves should exert their utmost efforts. But, what is equally important is that their external conditions must be improved, which would require the international community to make concerted efforts to render them effective assistance. The economies of all countries today are closely interrelated. Developed countries cannot expect to consolidate the results of recovery and sustain their economic growth without the economic development and prosperity of the vast number of developing countries. We hope that developed countries, the major ones in particular, will adopt far-sighted economic, trade, and fiscal policies and, while developing their own economies, help to promote the economic development of developing countries.
We are all concerned about the problem of international debts which has gone beyond being a mere economic problem and become one of the prominent issues in international politics. The debtor countries should not be held solely responsible for the debt crisis. The high real interest rates resulting from the fiscal and monetary policies pursued by the major industrial country, coupled with the sharp reduction in both private and official flows by the creditor countries, have not only substantially increased the debt service burden of the debtor countries but have also given rise to the abnormal phenomenon of reverse flow of funds from developing to developed countries. Over the past two years, the International Monetary Fund has done a lot of work to ease the debt crisis. But one should be aware of the fact that the debt crisis is not yet over. We are of the opinion that in efforts to overcome the debt crisis, it is neither fair nor workable to call on the debtor countries alone to shoulder the burden of adjustment; the creditor countries should take up certain obligations to lower tariff and nontariff barriers, open up their markets, bring down real interest rates, and offer new loans to the debtor countries so that the debtor countries can enhance their debt servicing capacity on the basis of economic development and export expansion. To this end, the International Monetary Fund should make new efforts to urge the major industrial countries to change their irrational monetary and fiscal policies.
In our opinion, the mounting trade protectionism being practiced by developed countries has seriously harmed the interests of developing countries and impeded the growth of world trade and economy. Developed countries should act speedily and earnestly to honor the commitments they have made in various international forums to roll back protectionism. . . .
We deeply regret the failure in reaching an agreement so far on the allocation of SDRs during the fourth basic period. In recent years, the foreign exchange reserves of many countries have dropped and the proportion of the issued SDRs to the total volume of world trade is shrinking daily. With the upturn of world trade, the problem of the lack of international liquidity has become increasingly serious. Obviously, a new allocation of SDRs is a prevailing general demand. Some people are worried that the allocation of SDRs for the fourth basic period may reignite inflation and adversely affect the adjustment efforts of the debtor countries. That concern is not well founded. We earnestly hope that agreement will be reached on the allocation of SDRs for the fourth basic period as soon as possible.
The situation in sub-Saharan Africa is especially disquieting. For many years, production there has been sluggish and it has been hit by natural calamities year after year. People in that part of the world are living in dire misery. While it is the governments and people there that should be relied upon to reverse this ever deteriorating situation, the international community obviously should make a special effort to give them effective assistance. To this end, the World Bank has worked out a program of action for sub-Saharan Africa, which contains many positive elements that we would like to fully support. In my opinion, in providing aid to Africa, one should take full account of its actual conditions; respect the wishes of the African peoples and governments and the priority in their economic development; and pay attention to the practical effectiveness of the assistance. Only in this way can one truly help the African countries restructure the old economies and build up their own national economies. China and the African countries all belong to the developing world. The Chinese Government has always supported the African people in all their endeavors for national independence, social progress, and economic development. The Chinese Government is ready to continue to assist the African countries within the bounds of our capabilities.
I will now speak briefly about China’s economic situation. Over the past year, at the level of our national economy, better than expected results were achieved in speeding up economic growth, in restructuring the economy, and in improving economic performance. However, from the overall point of view, we still face many difficulties, particularly the backwardness of our technology and the lack of development funds. These will remain major problems for China for a fairly long time to come.
To accelerate economic development in China, we have devoted our efforts to two aspects in our economic work, that is, structural reform and opening to the outside world. As far as the structural reform is concerned, we have scored great successes in rural areas and are now working to speed up the pace of economic reform in the urban areas. With regard to opening to the outside world, we have adopted some policies and measures that are more favorable than before, we have promulgated certain laws concerning external economic relations, and we have signed agreements with several countries on investment protection and the avoidance of double taxation. All this is aimed at protecting the legitimate rights and interests of foreign investors and creating a favorable environment and conditions for foreign investment. The Chinese Government decided early this year, in addition to expediting the development of the existing special economic zones, to open 14 more coastal port cities including Shanghai, Tianjin, and Dalian, as well as Hainan Island, where foreign investors are to enjoy more preferential treatment according to relevant regulations. Through these policies and measures, we hope to further develop economic and technological cooperation with the outside world. At the same time, we will actively promote South-South cooperation on the principles of “equality and mutual benefit, stress on practical results, diversity in form and attainment of common progress” and together with other developing countries, make a joint effort to overcome the present difficulties and seek common economic growth.
Statement by the Governor of the Fund for Argentina—Bernardo Grinspun
It is an honor for me to address this meeting on behalf of Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Spain, Suriname, Trinidad and Tobago, Uruguay, Venezuela, and my own country, Argentina, in order to speak on the complex problems affecting us.
If we go by the weighted average of the growth indicators, we could conclude that there is some evidence of improvement in the global economic situation. However, this average is influenced by the strong economic recovery in North America and by the progress achieved by certain other industrial countries. The fact is, though, that the rate of transmission of this upturn to the developing countries is slow; where there is improvement, it is not uniform and falls far short of offsetting the external factors still besetting us, such as external debt service, the marked fall in the prices for the commodities we export, and the chronic lack of sufficient investment to spur economic growth in our countries.
In addition, and despite the upturn in economic activity referred to, the industrial countries are continuing to impose protectionist measures that restrict access to their markets for the developing countries’ exports.
The future outlook contains a high degree of uncertainty regarding the possibility of maintaining the recovery of the industrial countries, at least in a fashion that will ultimately also benefit the economies of the developing nations.
A feature of recent years has been that many countries have based their growth policy on a high level of public indebtedness. The industrial countries borrowed for the greater part in their domestic markets, but the developing countries—which did not have a similar option in their domestic capital markets—resorted to external credit, a process made easier by the ample supply of funds at the time.
While there are many variables that play a part in determining the level of interest rates, there is no denying that persistent fiscal deficits, mounting public debt, and the growing demand for new funds to finance it form a vicious circle fueled by progressive increases in real interest rates. When this happens in industrial countries, which absorb funds willingly made available by foreign investors, the inflow of outside capital tends to result in an overvalued national currency, which can over time produce significant distortions.
Moreover, the trade balances of countries with overvalued currencies show heavy deficits. The liquidity which is thus passed on to the market is distributed unevenly in the world economy, giving rise to a circuit that is basically confined to the industrial countries.
When we add the impact of international interest rates, running at unprecedented levels in real terms, the result is an enormous burden for the indebted developing countries, a burden that has the additional disadvantage of being of indefinite duration.
Most of the countries on whose behalf I am speaking today have not yet felt the effects of the economic recovery under way in the industrial countries; this impact has been exceeded or wiped out by the lagging prices for exports. In some cases, our products have no market in the industrial countries, because they compete with goods that those countries themselves export or because technological developments have reduced demand for the products in question, or because protectionist barriers have been erected or made harder to overcome.
Worldwide economic adjustment is thus taking place on the backs of the debtor countries, through sharp cuts in their domestic consumption designed to produce greater surpluses for export and through a reduction in their imports and hence in their levels of economic activity, employment, and wages.
This situation is not only unfair; it is also unsustainable over time and thus perilous unless concerted action is taken to correct it. It is simply unjust that one group should bear the entire cost of correcting a situation for which all parties are jointly responsible, and it is likewise impossible that this adjustment can continue indefinitely since, as you all know, two thirds of the total debt of the region has been contracted at floating interest rates.
While the transmission of economic recovery manifests itself basically in the interrelationship among the industrial countries, the developing countries are lagging far behind and there is a risk that the process may come to an end before its benefits reach us.
The speed of transmission of real increases in interest rates, on the other hand, has been phenomenal. In just a few short months, the countries that are highly indebted in dollars at floating rates have seen the real burden of interest payments rise from a historic level of one to two positive points, in the years prior to 1979, to more than 5 percent, in 1980, and to an average of 10 percent over the last four years. Future trends cannot yet be foretold, since the structural reasons for this aberration have not changed.
With an external debt on the order of $350 billion, this implies a considerable extra burden for our economies, which will be deducted from the funds available to finance regional development and will instead be transferred to the industrial countries.
This makes a mockery of the basic idea that the developing countries ought to be natural importers of capital, with balances of payments and of services that are normally negative, as a basis for their necessary growth. This principle has been generally accepted since the end of World War II, but now we find the exact opposite occurring. We are obliged to export capital we do not have, stifling our development process and placing social stability at great risk.
The adjustment this situation has forced on our countries is not proportionate to our resources, nor is it consistent with the historic context in which the debts were assumed, nor is it justified in light of the underlying causes for the high real rates of interest. In the past two years, the developing countries have not been significant borrowers on international financial markets. Any increase in our external debt has been at an annual pace considerably below interest rates. Our payment capacity has not been able to expand as rapidly as the real pace of increase in interest rates, since the rise in the volume of our exports has been more than offset by the drop in commodity prices and limited by protectionism.
And, nevertheless, we continue to reduce our domestic expenditure and our imports, postponing justified aspirations for growth and spending to meet social demands—a policy that has produced outbreaks of violence in some countries—in order to devote increasing trade balances to make interest payments on outstanding debt, but in some cases we are still unable to meet these payments in their entirety.
We are faced with the paradox that the developing countries—or should we say the countries whose development has been put on hold—are currently net exporters of capital. And we are not even being encouraged in our efforts by moves to eliminate the causes that are producing so much hardship and bringing so much danger for social peace in our countries.
Starting in 1982, the external debts of many countries have been rescheduled and in some cases the markups on commercial bank lending have been reduced by approximately one point. But it must be noted that this slight decrease has applied to margins and commissions that had reached levels that were both excessively high and unsustainable, allegedly based on a concept of country risk that we cannot accept, since the legal continuity of national states guarantees final payment of all sovereign debts assumed. Countries constitute sovereign entities, not risks.
It is here, within these institutions that are hosting our discussions, that we must seek ways and means to overcome the circumstances that have brought many countries to a situation of illiquidity that, as we can see, is often due to causes beyond their control.
In addition, and as part of the debt rescheduling operations to which we refer, a certain volume of external trade financing has, in most cases, been maintained and, through the intervention of the International Monetary Fund, other organizations, governments, and banks, it has been possible to obtain some measure of new funds subject to the payment of interest.
But if we nonetheless continue paying real rates of interest that remain consistently above 10 percent per annum, it is clear that the main problem resides in the base for determining the rate in question, on which no progress has been made. In point of fact, we have slipped back in the past year, with average rates rising by close to two points. The problem of the base rate, which must be lowered if a true and lasting solution is to be found, can be dealt with only by attacking its root causes. A temporary palliative, which could be applied while the causes are being corrected and the effects eliminated, would be the expansion of the facility for the compensatory financing of export fluctuations to cover upward fluctuations in interest rates, or, as an alternative, the establishment of a special mechanism to finance interest markups, as part of the arrangements proposed by the Ministers of the Group of Twenty-Four.
All countries must recognize, while there is still time, that we cannot continue accumulating fiscal deficits and public debt. The countries with the largest external debts have come to understand this on their own, as is clearly indicated by the impressive reversal in the flow of international payments.
As the problem of high real interest rates in the dollar area persists, as does protectionism, which in some cases has been intensified, we wish to stress the need to find a lasting solution that would make it possible to reduce the rate of interest, reverse protectionism, and improve the terms of trade of the developing countries.
The industrial countries must understand that we are purely and simply unable to go on bearing the burden of such high real rates of interest, the root causes for which lie in events beyond our control. These countries must correct their fiscal deficits and contribute to a more equitable distribution of burdens, which at present is quite unjust and one-sided.
Only if we recognize that the problem is global and structural in nature, rather than regional or transitory, will we find the proper way to deal with it. Let us not be deceived by the more satisfactory figures now appearing on the foreign trade of the indebted countries. These very figures show that the effort is tremendous and carried out in isolation. It is our responsibility to vindicate those who are making this effort and to make it known that they cannot be required to continue it indefinitely, while the industrial countries are increasing their fiscal deficits and piling up domestic debts which exert a steady upward pressure not only on domestic interest rates, but also on the cost of our external commitments, in which they are immediately reflected.
Recognition of the global nature of the problem does not imply support for the implementation of a single, identical approach to rescheduling for all debtors, since each country has its own characteristics, plans, and decisions. It does mean, however, that there is joint responsibility on the part of everyone concerned, going beyond the relationship between debtor and creditor. Markups and maturities can be discussed with the lenders, but only the governments of the industrial countries are in a position to reduce base rates to their normal real levels. Without such action, it seems impossible to arrive at any lasting solution.
As a representative of one of the signatories of the “Cartagena Consensus” and the “Mar del Plata Communiqué,” which are supported by the countries participating in the preparatory meeting of the Latin American caucus of the International Monetary Fund and World Bank in Puerto Plata, I wish to stress the need for direct political dialogue, as a factor promoting understanding in the search for an agreed solution to the problem. Dialogue between creditors and debtors is essential to achieving full understanding of the situation and represents the most suitable means for establishing the contributions each party must make to the solution sought. In this context, the Foreign Ministers and Finance Ministers signing the Mar del Plata Communiqué deemed it essential to invite the governments of the industrial nations, the international credit institutions, and commercial banks to cooperate in seeking a solution to the problem jointly with the debtors. For us, direct dialogue opens the way to mutual collaboration in the search for a promising and equitable solution.
For this reason, we are pleased by the initiative under which the Interim Committee and Development Committee are to be examining in 1985 various issues pertaining to the external debt. However, we wish to emphasize that this welcome first step in the proper direction should be complemented by direct political dialogue between the governments of the creditor countries and the debtor countries in the first half of 1985, as 11 Latin American countries have requested in the Cartagena Consensus and the Mar del Plata Communiqué with the unanimous endorsement of the countries meeting recently in Puerto Plata.
It must be recognized that recent rescheduling agreements and new flows of funds have embodied some of the principles in regard to costs and conditions set forth in the Cartagena Consensus. This represents an encouraging step in the right direction. It marks the beginning of a reordering of conditions with a view to correcting the underlying economic disequilibria. We must continue along this course, but nothing can replace the powerful stimulus that would ensue from elimination of the fiscal deficit of the industrial countries, with their impact on base interest rates.
Until this happens, the risk of a further and even greater decline in the world economy remains very high and the balance remains a tenuous one.
For the situation to become sustainable, the developing countries must soon return to adequate rates of growth needed to meet national priorities.
The countries I represent support the “Revised Program of Action for the Reform of the International Monetary and Financial System” approved by the Ministers of the Group of Twenty-Four.
The following points were borne in mind in drafting that document: the call by the developing countries for sustained growth; stability in money and exchange markets; the need for flows of external resources to fund investment programs, and more particularly, the specific needs of the developing countries. The document is intended to provide technical information that justifies the needs discussed and the procedures for meeting these objectives.
We trust that the response from the industrial countries will be positive, starting with recognition of the desirability of convening an international conference that will enable the world community to examine these important matters, and going on to define the means for applying a program of immediate action, as the proposed reform takes shape.
In this context, it is also vitally important for the international organizations to take into account the special situation of the smallest countries which, while individually presenting no threat to the stability of the international financial system, are presently coping with acute financial and economic problems that do place their own political and social stability in jeopardy.
We expect these Thirty-Ninth Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank to constitute a milestone in the growth of understanding of the obligations resulting from joint responsibility and interdependence. We hope to return next year to discuss new advances and not to reiterate our pressing present problems, having particular regard to the injustices-underlying the financial structure, the effects of which are weighing so heavily on many of the countries on whose behalf I am speaking.
For and on behalf of these countries, I reiterate our support for the recommendations put forward by the Group of Twenty-Four, which more precisely express our ideas and needs.
I should now like to refer briefly to the situation in my own country, the Argentine Republic. Last December 10 we began a fundamental period in our history, when we regained all our freedoms and set off on the difficult road toward ultimate democracy.
This new stage is not an easy one, however, because of the inheritance we received. The previous government brought disorganization and destruction to the system for producing goods and services and to the country’s basic infrastructure and laid waste entire industrial sectors.
Per capita gross domestic product was more than 15 percent lower than in 1970. Real wages fell markedly, and the level of unemployment and underemployment rose. The external debt rose from $8 billion in 1975 to nearly $45 billion by late 1983. This increased indebtedness was not used to add to the nation’s capital base.
Another negative aspect of our inheritance was uncontrolled fiscal expenditures and foregone tax collections, which led to a substantially increased public deficit. Central bank financing of this fiscal deficit, in conjunction with the high interest rate subsidies granted through the monetary regulation account, were key factors behind the expansion of the monetary base.
In spite of all the difficulties, we have reoriented public expenditure in our first nine months of democratic management and managed to raise allocations for health and education—which had fallen to alarmingly low levels—while curtailing overall spending.
As a result of the enormous effort made in the external sector during this period, the trade balance posted the best results ever achieved in all of Argentine history, even though our export prices fell 20 percent below their level of three years ago.
Satisfactory results have also been obtained in the fiscal area, as the deficit was cut by more than half in terms of the gross domestic product.
We are achieving moderate growth in the productive sectors, particularly in manufacturing. The Argentine Government acknowledges that much remains to be solved. We must expand the construction industry in order to alleviate the housing shortage; we want to improve agricultural and livestock production; we wish to impart stimulus to the country’s reindustrialization by expanding manufacturing activity so as to place the entire productive system at the service of Argentine society.
We are also aware, however, that one of the most complex problems faced by Argentina is its high domestic inflation. With a view to containing it, we have begun a process of concertation between labor and capital under guidelines clearly defined by the Government, which we expect to bear fruit during the next few months. In order to achieve this, our efforts to constrain the growth of the monetary base are being matched by our attempts to improve the overall productivity of the economy, to make supply more responsive by modernizing the production and distribution system for goods and services, and to dismantle those institutional mechanisms set up in the past that have promoted inflation feedback.
The Government’s price policy fits within the broader framework of its incomes policy. Once we have overcome the current problems arising from high inflation, we will enter the stage in which a central role is played by entrepreneurial responsibility, sectoral concertation, and social harmony.
In the tax area, we aim to curtail the high level of evasion and are engaged in broadening and deepening agreements on double taxation so as to eliminate obstacles to foreign investment.
As regards fiscal policy, and in addition to the achievements I have already mentioned, we anticipate a better balance between expenditure and resources, and we will make an additional effort to reduce the fiscal deficit in 1985.
Lastly, a profound revision of the financial system, a fundamental mainstay of our policy of revitalization and growth, will enable it to serve the productive sectors.
These general aspects comprise the constitutional Government’s response in the economic area with a view to consolidating democracy in Argentina.
Austerity without recession is the slogan we have used repeatedly to define our economic adjustment policy.
We took office with a firm commitment to reorganize the production and distribution system of goods and services, raise the employment and wage levels of workers, restore the entrepreneurial rate of return, control the excesses of the financial system, capitalize public sector enterprises, transfer to the private sector those public enterprises that do not fulfill essential government purposes, refinance the external debt, reshape the public sector, reorient allocations, and reduce the fiscal deficit. All of this, so as to bring balance to the domestic sector and order to the external sector.
We favor foreign investment. We do so not only because Argentina became increasingly decapitalized during the last decade as investment in productive activities was cut back, the economic infrastructure was partially destroyed, and the mechanical and technical obsolescence of our industrial plants accelerated. We favor foreign investment not only because a large share of the saving our economy can generate each year has to be transferred abroad to cover debt service equivalent to 8 percent of the gross domestic product.
We favor foreign investment because we want an economy with open borders, an economy that is strongly integrated domestically but closely linked with the rest of the world, and because when foreign investment was respected and respectful in Argentina it contributed markedly to modernizing the country, spurring its economic growth, and enhancing the welfare of the people.
The incredible growth of the Argentine foreign debt since 1976, together with the arrears situation and the almost total lack of reserves, led us to give priority to the normalization of our external sector, beginning with foreign trade. In October 1983 the former authorities had suspended payments for imports effected through the end of that month; in view of the minimum financing terms to which imports were then subject, we were left to cope with six months’ imports in arrears and no reserves.
We thus made it a priority to regularize all private sector arrears while punctually fulfilling obligations with respect to new imports under the automatic payment system that was still in effect for both the public and the private sectors.
The characteristics of our inherited debt made it necessary to conduct a formal inventory—completed and published this month—which will be used to speed up the tasks of conciliation and rescheduling with commercial banks and other creditors within the framework of the current negotiations.
With no material assistance other than the bridge loan extended to us by four Latin American countries, which we repaid in July of this year, we have fully settled all private sector commercial arrears; from December 1983 to August 1984, we made total payments of nearly $7 billion including two quarterly financial payments to banks and the payment of current interest on the syndicated loans linked with the last refinancing. This was feasible primarily because of our foreign trade performance, which brought in receipts of $6.8 billion during the period and generated a record surplus.
The negotiations under way with the International Monetary Fund, the commercial banks, and the Paris Club should enable us gradually to settle our arrears and to arrange a more appropriate external maturity profile. In connection with our discussions with the International Monetary Fund, I am pleased to announce that the Managing Director of the Fund, Mr. de Larosière, has officially informed me that he has decided to recommend for approval by the Executive Board the documentation submitted by Argentina. This is a decisive step toward putting our external sector back in order.
I have earlier spoken at length regarding the costs involved in fulfilling debt obligations. Therefore, I will say only that our principle is to sign contracts we will be able to fulfill.
We are prepared to increase the volume of our exports, which will gradually give us greater flexibility to manage a growing economy. We wish to avoid further increases in the size of the debt in the future, except for specific projects that are linked to the effective development of the country’s productive capacity and have clear potential for yielding adequate returns.
These goals have been approved by Argentina’s society and today determine the actions of our Government.
On behalf of the countries in whose name I am speaking, I would now like to return to certain other specific concerns which we have already addressed in the Interim Committee but which also warrant being summarized here. In particular, we deem the role that should be played by official organizations such as the International Monetary Fund as regards the liquidity of the system to be a most important one. Last year we reached a compromise on reducing the limits on access to the Fund’s resources, taking into account the necessity of preserving the institution’s liquidity position. In this regard, we have noted that those prospects have notably improved and that there are more than sufficient resources to meet potential commitments within the present access limits.
Nevertheless, these limits were reduced at the recent meeting of the Interim Committee. Many countries continue to experience payments difficulties; external accounts are subject to great uncertainty for 1985 as regards the world economic outlook, interest rates, potential financing, and the resurgence of protectionism. The debtor countries are engaging in severe adjustment efforts. In view of these circumstances, we had anticipated an adequate response, with access levels at least being maintained; this would have sent positive signals to the international financial community, demonstrating the political will to support such adjustment efforts. We therefore believe that, as soon as possible, the Fund’s access limits should be restored to at least the levels applied heretofore.
In this regard, we wish to stress our concern with the trend toward greater conditionality that can be perceived in several areas of Fund activity. In this connection, we repeat our firm conviction that any new allocation of SDRs must be without conditions on their use, for which reason we support the basic views on this subject set forth clearly in the Ministerial Communiqué of the Group of Twenty-Four.
We wish to express our great concern with the fact that, even though a great majority of Fund member countries favor an SDR allocation, sufficient agreement was not reached for the fourth basic period. An allocation of SDRs has been unjustifiably delayed. Our countries believe that the conditions exist for an SDR allocation in accordance with the terms of the Articles of Agreement, that such an allocation should be no less than SDR 15 billion in 1985 and 1986, and that the possibility of allocations beyond that year should be studied, all in accordance with the request of the Group of Twenty-Four.
Until the limitations on the developing countries’ access to markets have been reversed, the various measures proposed can contribute to a more positive transition. We therefore recommend that they be studied and decided on without delay. In this context, the supervisory function of the Fund must effectively influence policies in the industrial countries, not merely in the countries that make use of the Fund’s resources.
I would like to close by reaffirming that the nations on whose behalf it has been my privilege to address these meetings are firmly resolved to persevere in the task on which we have all embarked—that of finding approaches that ensure progress in the effort to achieve understanding and cooperation among all countries.
Statement by the Governor of the Bank for Belgium—Willy De Clercq
Forty years after their foundation, the institutions under whose auspices we are meeting today continue to play a vital role in the world economy. I personally see this as eloquent homage not only to those who had the vision to lay the foundation stones but also to those who today guide the destinies of these institutions. The legacy of cooperation and solidarity from which we benefit and which it is our duty to uphold must be continually defended and consolidated: it is our responsibility to do this with the vision and clarity of purpose required for the conduct of any financial transaction and, in addition, with the courage and steadfastness required of us in our capacity as Governors of these institutions.
Our collective decisions can make a major contribution to the economic climate worldwide, not only by their direct technical impact and resultant linkages, but also through the message they send to the nations of the world, to their governments, to their businessmen, and to their people. I appeal to all, particularly the most powerful among us, not to lessen our support for the growing activities of the Fund and the Bank. Forty years of experience have shown us that the capital in the form of money and effort invested in these institutions serves to promote progress and harmony in the world. We, for our part, will continue to contribute in this spirit.
As always, the decisions we are called upon to make are governed by the world economic situation and prospects. As the current President of the Council of European Communities has already discussed this matter at length, I shall confine myself here to stressing two points, both closely interrelated, which I feel to be of vital importance and which indicate the direction in which we must move rapidly, particularly in the industrial countries.
The first point is that economic recovery can be consolidated only if there is a speedy prospect of a lowering of interest rates. In the major countries, these rates are no longer simply the consequence of persistent and stubborn inflation, but also reflect a real and marked disequilibrium in the financial markets calling for resourceful action.
And this leads to the other point I wish to stress: the need to reduce budget deficits, where these are of a size that requires the economy to draw consistently on foreign savings. We in Belgium have implemented a medium-term program designed to reduce the budget deficit for this precise purpose. For the past two years, the Belgian Government has been applying this program in full awareness of the necessary sacrifices it will entail for the population as a whole and the difficulties that will have to be overcome. Why should we not ask the same of our U.S. friends, since they cannot balance their accounts without massive recourse to the savings of less prosperous countries, at interest rates that place the world economy in jeopardy.
I wish to focus my remarks on what we expect from the International Monetary Fund. To my mind, three lines of action need to be pursued simultaneously.
First, the Fund’s catalytic role, which has been recognized by all, cannot be maintained without credible recovery programs; we must not weaken the Fund by forcing it to play a role that more properly belongs to the development institutions. Moreover, in many cases, it is vital that the Fund’s activities continue to be supported and supplemented by other sources of financing on more concessional terms and that collaboration with the World Bank be maintained and strengthened.
We fully approve the decision to extend the policy on enlarged access for 1985. While recognizing the temporary nature of this policy, the Fund will in this way have sufficient flexibility to use these resources to benefit member countries engaged in appropriate adjustment programs.
In view of persistent difficulties in finding supplementary sources of financing, and the recovery policies that need to be pursued, action by the Fund can only be fully effective if the countries can have full access to the potential assistance currently available from the Fund. Moreover, a reduction in the Fund’s financing capacities might be wrongly interpreted by the financial community, which has been strongly urged to maintain and even to increase its commitments to the heavily indebted countries.
In short, I feel it highly desirable that the recommendations made by the Fund in the exercise of its surveillance functions be followed with increased attention by the various member countries, particularly when the external effects of policies under discussion are sizable.
I also feel it appropriate to say a few words on the question of SDR allocation. Belgium remains favorably disposed to a reasonable allocation. This view is backed by two considerations:
—To be able to develop and take root, the revival of international trade must be accompanied by an appropriate increase in international reserves;
—While they are engaged in considerable adjustment efforts with inadequate reserves, a certain number of countries have difficulty in gaining access to capital markets.
We should also recognize that the inflationary risks attaching to a reasonable allocation seem minimal.
Our recent experience with this interminable debate on the timeliness of an SDR allocation prompts me to a more basic thought.
The objections raised as a matter of principle against the “long-term global needs” criterion bear witness to the difficulties we face in correctly interpreting this criterion, delay the allocation process, and jeopardize the role we want the SDR to play.
Belgium consequently felt it would be useful to put forward proposals for the conditional use of SDRs, while respecting the provisions of the Articles of Agreement, so as to make a new allocation compatible with the totality of the Fund’s objectives, while allowing the SDR to retain a measure of importance within overall reserve assets.
I should not like to conclude this part of my remarks without sharing some thoughts on the debt problem facing many countries. If we are to overcome and solve this problem we must, I feel, step up our efforts to promote sustained growth, reduce interest rates, and put up greater resistance to protectionist pressures. The consultation and cooperation that have hitherto characterized relationships among the indebted countries, the Fund, the commercial banks, and certain governments remain necessary. The introduction of measures of a general nature should be clearly rejected: it is essential that the special circumstances of each country be fully taken into account at the time of each renegotiation. Furthermore, in some instances of rescheduling, it could be desirable to take a longer-range approach, and a more extensive exchange of information among the Fund, the debtor country, and the commercial banks could prove beneficial to all concerned.
Over the past two years, the Fund has played a key role in the strategic measures drawn up to counter the threats to the stability of the international financial system.
A longer-range view must now be taken if we are to avoid a resurgence of past difficulties that could wipe out all that has been accomplished by adjustment efforts to date. This approach, which seems to be widely accepted, should provide support for adjustment programs and also permit growth to resume. . . .
In conclusion, I wish to stress the need for increased international cooperation within existing multilateral institutions. Definite progress has been made since the low point in the world recession two years ago, but at the cost of adjustments that were sometimes painful, but invariably essential.
This is not the time for us to slacken our efforts. We only need to ask what the situation would be like today if the Bretton Woods organizations did not exist in order to realize that we live in a better world because of them. This alone is reason enough to hope that their activities will be strengthened in years to come. The wisdom of our founders lay not in seeking to foresee all too precisely the difficulties that the future would hold, but in providing our institutions with sufficient flexibility to enable them to meet the needs of the moment. The cooperation that has grown up among us has kept our institutions on a path of cautious but continuous development. The many years that I have spent as minister in charge of my country’s finances, and as Chairman of the Interim Committee, have made me neither a skeptic nor a pessimist. The opposite has in fact occurred: after overcoming a number of serious crises, and most recently the gravest crisis of the postwar years, we have earned the right to speak hopefully of the future.
Statement by the Governor of the Bank for Pakistan—Ghulam Ishaq Khan
I join my colleagues in extending a warm welcome to the new members of the Fund and the Bank.
It is indeed gratifying to note the general air of cautious optimism at these Thirty-Ninth Annual Meetings of the Fund and the Bank which is stronger than I can remember at any time since the mid-1970s. President Reagan’s address has certainly contributed to this mood by pledging U.S. support for efforts to maintain growth and stability in the world economy in an environment of freedom and peace. Your opening statement, Mr. Chairman, and those of the Managing Director of the Fund and the President of the World Bank present a lucid analysis of recent developments in the world economy, setting out the agenda for global policy action for the latter part of the 1980s.
As the Annual Reports of the Fund and the World Bank clearly state, the world economy was in a more healthy state in 1983 and the early part of 1984 than at any time since the beginning of the 1980s. Not only did the economic recovery gain further strength in the United States, its impact was also observed in the better growth performance of a number of other industrial nations. The rate of inflation in the seven major industrial countries fell below 5 percent in 1983 and is expected to decline even further in 1984—the lowest in 15 years. The external payments position of various country groups also presented a more manageable outlook. Thus, real prospects now exist for the world economy to resume steady growth once again, with stability in prices and external payments.
This generally encouraging outlook is, however, threatened by persistent high fiscal deficits and an unprecedented steep rise in real interest rates. The accentuation of the debt problem of those countries that relied on market borrowings for financing their development efforts is only one of the many consequences of this phenomenal increase in real interest rates. Another manifestation of the same basic problem is the instability of exchange rates giving rise to serious strains in trade relations and revival of strong protectionism in industrial countries. The financial and trading system of the world cannot sustain the distortions created by high real interest rates for long.
The impact of these adverse elements on the global situation has fallen disproportionately upon the developing countries. The average rate of growth in the non-oil developing countries, at 1.5 percent in 1983, showed no improvement over the preceding year. In fact, 1983 was the second successive year of negative per capita income growth for the non-oil developing countries. For 1984, there is hope that per capita income growth may be positive although it will still be significantly below the 3 percent growth recorded in the 1960s and 1970s.
A number of factors have impeded the spread of the recovery to the developing countries. Apart from the high interest rates, growing protectionism in the industrial nations, declining net availability of concessional capital flows, sharply reduced access to commercial sources of finance, and the fall in commodity prices continued to restrict their growth.
It is indeed remarkable that, even in this inhospitable world climate, the developing countries have pressed ahead and managed to attain some success with their adjustment programs. A major improvement has been brought about in the balance of payments position of the non-oil developing countries. The balance of payments deficit in the current accounts of these countries has been reduced to virtually half between 1981 and 1983 and, at 12.5 percent of the value of exports in 1983, was the lowest on record in ten years.
The foreign exchange reserves of these countries also increased by SDR 13 billion in 1983. The median rate of inflation which the Fund report regards as more representative of price increases in a typical developing country declined from 15 percent in 1980 to 11 percent in 1982 and remained at that level in 1983.
This difficult adjustment was carried out at a heavy economic and social cost. The volume of imports of the non-oil developing countries in 1983 was not higher than it had been in 1979. Major debtor nations faced a considerable increase in unemployment, and real wages in these countries registered a decline of 20 to 30 percent. The limits of sociopolitical tolerance were severely tested in some of these countries. Millions were pushed below the poverty line, frustrating their hopes for a minimum level of human existence. This is particularly true of Africa, which comes to us as the biggest challenge for development in the 1980s. Let it not be said that the developing countries have not contributed in full measure to the process of adjustment. The human cost of this adjustment could have been less and the pace of progress higher, if those with the capacity to influence the environment of world economy had intervened in time to arrest the deteriorating situation.
We talk of an interdependent world. However, the dependence pattern is extremely slanted and asymmetrical. The developing countries are among the first to feel the impact of recession and decline in economic activity in the dominant industrial nations. They do not, however, automatically benefit from the recovery. There is a serious danger that the recovery phase may fade into a slowdown without a large number of developing countries moving to a strong resumption of growth. A careful “engineering,” and not a total reliance on a “trickle-down effect,” is needed to strengthen the positive linkages between trade, debt, and capital flows.
I am happy to note that the documentation for this meeting prepared by both the Fund and the World Bank has focused on the joint responsibility of the industrial and the developing nations to influence the scenarios for the second half of the 1980s and the 1990s. A lack of symmetry continues to persist in distributing the burden of responsibility for correct and rational behavior among nations. To give a few examples:
(1) The disturbances in the international payments and exchange system arising from the actions of major industrial nations, acting either alone or in concert, have to be accepted as a reality. The rest of the world is expected to adjust meekly as part of the required good conduct.
(2) While tying of foreign assistance by donors is not regarded as a deviation from market behavior, the efforts of the developing countries to regulate their imports for the purpose of absorbing this very tied assistance become heresy.
(3) The developing countries are urged to accept import liberalization as an article of faith, while nontariff barriers and other impediments against their exports continue to intensify.
(4) Fiscal deficits in the industrial nations are beyond the scope of advice from the international community and surveillance by international financial institutions, regardless of the severity of their impact on the global economy.
(5) Agriculture must continue to be heavily subsidized in the industrial nations even when such subsidies result in piling up unmanageable surpluses of agricultural produce which cloud the prospects of agricultural growth in the developing countries. Subsidy programs, even for smoothing out the adjustment to high food prices for poverty-stricken masses in the developing countries, remains anathema.
The standards expected of borrowers have, of course, always been different from those of the lenders. Such conventional wisdom apart, the developing countries must accept that the efficient management and healthy development of their economies is primarily their own responsibility. Sound policies are in their own best interest. Nevertheless, in the context of a truly interdependent world, we must all move in a cooperative framework, with mutually supporting policies. Certain obligations must be accepted as part of rational international behavior by all.
With the recovery now well established, though at differing rates, in the industrial nations, it is essential that steps be taken early to ensure the sustainability of growth. This is not only in the interest of the concerned nations themselves but of the entire global community. The World Development Report presents this as the necessary condition for reasonable growth prospects for the developing world. The rates of growth are not high enough in any of the scenarios presented in the report. For Africa, the best hope, even under the most favorable circumstances, is an absence of decline in per capita income during 1985-95. While this may be the high-case scenario, it is also the minimum case worth the effort.
Recognition of the dominant role of industrial economies in determining the economic climate for growth in developing countries does not preclude the possibility of certain countries moving at a rapid pace despite an unfavorable international climate. In my own country, we have succeeded, with Allah’s blessing, in maintaining a growth rate close to 7 percent per annum for the past seven years, almost in defiance of the international economic factors. We began implementing our own adjustment program with positive results prior to an agreement with the Fund on the extended Fund facility and have persisted with the objectives of our adjustment strategy even after the successful completion of the extended facility. It is, however, not easy for any country to swim against the tide all the time.
Our common concern is with the growth prospects for the majority of the developing countries and the climate affecting the results of their endeavors in this direction. For this purpose, it is essential that apart from steady growth in the industrial nations, the access of these countries to the markets of industrial nations is improved. All the advice to the developing countries to adopt an open, outward-looking development approach is meaningless, so long as their access to markets is limited precisely at the time and in relation to the items in which they show signs of successful market penetration. Once hurt by such an experience, entrepreneurs refuse to invest in export-oriented ventures and prefer the security of domestic markets.
In the Development Committee, we have been examining this issue for the last two years. There is a consensus on the objectives and the positive correlation between trade and development. Commitment to the ideal of maintaining and enlarging an open-trading system has been restated at the highest level in the OECD and at the summit meetings of major industrial nations. At its recent meeting a few days ago, the Development Committee again reiterated that progress in maintaining open access to markets for the exports of developing countries was an essential support to their current adjustment efforts and to the long-term solution of the debt problem. The actual progress so far has, however, been disappointing.
Trade practices form the core of impediments in finding a long-term solution to the debt problems of developing countries. It is axiomatic that international debt is serviced in the final analysis in the form of exports of goods and services. Behind the cover of financial flows lies the real world of trade and movement of goods. Insistence on uninterrupted debt servicing from the developing countries, while refusing to accept the goods and services which represent the concrete form of the same debt servicing, is a major contradiction.
Another important lesson that we must learn from our recent debt crisis is to avoid excessive reliance on the commercial banks for meeting the financing requirements of development. Commercial banks primarily hold short-term liabilities and cannot commit funds for long periods. Their short- and medium-term lending must be combined in suitable proportions with long-term capital. In retrospect, it was probably a mistake to rely on the market alone to recycle the surpluses generated as a result of the second oil price increase after 1978. Much greater vision was shown by the world leaders at the time of the initial oil price increase in 1974 by creating an oil facility which, together with the Trust Fund, played a major role in smoothing the transition. Institutional support continues to be essential for handling major changes in the world economy. The flexibility of response by the Bretton Woods institutions holds the key to the economic future of the world.
I am happy to note that the Fund demonstrated a great deal of boldness combined with its traditional realism in handling the short term aspects of the debt crisis which loomed large as a major threat to the global financial system at our Annual Meetings last year. The increase in the quota resources and the larger agreement to borrow enabled the Fund to approach the adjustment problem with adequate resources at its command. In the immediate perspective, the problem has been reduced to manageable dimensions. The world can now focus with greater calm on the longer-term solution of this serious issue. I was particularly happy that the latest agreement on Mexican debt has adopted a longer-term approach for the debt problem.
For the low-income developing countries, the only significant source of financing is concessional assistance. Their debt problem is mainly related to the net transfer of resources under various assistance programs. Growing debt service payments on earlier contracted loans, in the absence of a similar increase in fresh transfers, drastically squeezed net resource inflows. . . .
In this connection, the Development Committee has urged the World Bank to play a leadership role in mobilizing financial support from donors for implementing the joint action program for Africa. My impression is that the response is favorable and with the strong support extended to this program by the President of the United States in his address, a constructive effort can be launched in Africa without further loss of time.
I find it encouraging that, at our meetings this year, we have decided to make a modest beginning toward establishing a constructive dialogue between the industrial market economies of the North and the developing countries, mostly from the South, on global economic issues of common concern. The Interim Committee and the Development Committee in their meetings last week agreed on the broad modalities of the work programs preparatory to their extended meetings in the spring of 1985, for discussing a series of interrelated issues in the field of money, finance and debt, trade, and development. The selection of existing proven institutions for this purpose is a positive factor.
The aim of this dialogue would be the development of a framework for medium- and long-term adjustment, both for the developed and the developing countries, including the financing of such adjustment. The structural and development aspects of the problems of developing countries cover a wide range of issues, including indebtedness, protectionism, commodity prices, interest rates, structure of capital flows, obstacles to direct investment, and equity capital flows. The Fund and the World Bank would need to work in close cooperation to blend the application of the unique expertise of their respective staffs and differing institutional perspectives to evolve a well-coordinated approach. . . .
In the end, let me express my strong feeling that we have arrived at a new moment of decision. We can move forward from here toward achievement of the interests of both the developing and the industrial nations—if, by adopting the right course, we move in concert in a spirit of understanding and accommodation as urged by President Reagan.
The real test will be whether we can mobilize the necessary political will for such an effort.
Statement by the Governor of the Fund for Norway—Knut Getz Wold
I have the honor to speak on behalf of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden. I join my fellow Governors in welcoming our new members, St. Christopher and Nevis, and the People’s Republic of Mozambique.
Since our meeting a year ago, the recovery of world economic activity has continued at an uneven pace. It has been particularly strong in the United States and moderate at best in Europe. It is beginning to reach the developing countries. Many of them, however, find themselves saddled with an extraordinarily high debt service burden which, barring any fundamental changes, will seriously weaken their ability to pursue appropriate development policies.
Despite wide differences between our member countries, both in terms of their levels of development and current cyclical status, the high degree of interdependence in the world economy forces us to look beyond our borders and focus on the solutions to our current problems in a global context. Otherwise, we may not be able to prevent a relapse into another recession.
Although the industrial countries have emerged from the recession, they continue to face important problems. I would like to mention three areas which in particular deserve our attention.
First, in spite of the recovery, unemployment in Europe remains at about 11 to 12 percent on average, and no reduction is in sight. By the end of 1983, youth unemployment in the four major countries reached an average of more than 20 percent and is still increasing. We cannot allow ourselves to become accustomed to such figures. In the United States, on the other hand, developments in the labor markets have been encouraging, but at the present rate of growth, capacity constraints will soon be encountered. Hence, it becomes essential that growth in Europe and Japan takes up the important and useful role which the U.S. economy has played internationally, as the latter’s growth makes a hopefully “soft landing” onto a more sustainable path. Some countries in a strong balance of payments position and with low inflation already appear to be at a point where stimulative measures are advisable for international as well as for domestic reasons.
Second, the European economies might do well in drawing upon the U.S. experience with respect to flexibility in labor markets as well as in industrial structure. It is essential that market imperfections and failing profitability be corrected if significant inroads into unemployment are to be achieved in Europe. This might also open the way for some stimulative measures to be taken with less fear of reigniting inflation.
Third, a very deplorable aspect of the problems facing the industrial countries is the impetus given to protectionist tendencies and measures. We have already on earlier occasions given our support for a fresh multilateral approach aimed at rolling back restrictive measures imposed in recent years. In this connection, I welcome the declarations of the OECD Ministerial Meeting in May and the London Summit in June regarding a new round of trade negotiations. But we should also keep in mind that the process of completing a new round of negotiations will take a long time, and the present situation is of immediate concern. We must, therefore, as a high priority, implement the work program set up at the GATT Ministerial Meeting in 1982 and rely on the GATT and the International Monetary Fund to emphasize the economic inefficiency of restrictive measures, their detrimental effects on the recovery, and consequently the importance of a swift rollback.
Troubled by severe balance of payments problems, developing countries have experienced only a limited recovery so far, and some have hardly been affected by the recent upswing at all. Although exports to the industrial countries have expanded vigorously since the end of 1982, this positive factor has to a large extent been offset by high and increasing interest rates and reduced net inflows of capital from abroad. Terms of trade have improved only marginally. Their sharp deterioration in recent years was brought about by the depth and the length of the recession which illustrates how important an extended period of satisfactory growth in the industrial countries is for an alleviation of the problems of the developing countries.
In many cases, the externally generated problems have been compounded by inadequate domestic policies with rapidly increasing reliance on foreign borrowing. The foreign debt which was thus incurred has, however, become much more burdensome than could have been anticipated because of the prevailing high level of real interest rates in international capital markets and the strong dollar. This twin problem is partly a result of governments’ high reliance on savings in the private sector to pay for their expenses. The fiscal deficit of the United States is of particular concern in this connection, due to the importance of the U.S. dollar in the international monetary system. In these troubled waters, the Fund has navigated skillfully in preventing major payments crises and in helping to bring about a manageable balance of payments situation in a number of countries. However, we must also acknowledge that dealing with many of the problems of the present day is beyond the scope and capacity of the Fund. In the absence of other arrangements, however, the Fund has been called upon to deal with situations that require much more than short-term balance of payments financing and, in the view of my authorities, it has handled these well within its financial and institutional constraints.
In a number of developing countries, the circumstances are now such that they will, in effect, have to contain their imports over the next few years to levels which must be considered highly inappropriate given their stage of development. Consequently, it is of great importance that the industrial countries pursue policies that will enable the developing countries to expand their exports. Second, appropriate fiscal and monetary policies would also tend to reduce over the medium term the burden imposed by high real interest rates. Third, as many of the poorest countries will continue to depend on direct transfers, it is essential that the industrial countries maintain and increase the transfer of resources to the developing world. Fourth, we should encourage cooperation between the World Bank and the International Monetary Fund, particularly in the restoration of sound economic developments in severely imbalanced countries. We would also underline the importance of granting multiyear rescheduling of debts. Finally, we welcome the agreement reached to discuss issues related to the adjustment efforts at the next meetings of the Interim Committee and the Development Committee.
But what role can the Fund most usefully play in the present situation? It has few alternatives but to try to continue on the present course—to aid in bringing about manageable payments situations in the countries concerned, including the encouragement of appropriate adjustment policies. It is equally essential that the Fund be enabled to carry out more effectively its surveillance function. This is becoming all the more important now that the future path of the recovery may be very much affected by policy choices in the industrial countries. In this connection, we welcome the commitment to effective surveillance given at the London Summit in June.
With some justification, it has been pointed out that there is considerable asymmetry in the implementation of the Fund’s surveillance policy. It is, of course, difficult for the Fund to treat uniformly, on the one hand, members with pegged currencies and, on the other, members with floating currencies. The Fund’s power of persuasion is, by the nature of things, significantly stronger in its relations with countries implementing Fund-supported programs than vis-à-vis other member countries.
We must consider how the Fund can most effectively bring to the attention of authorities in countries which do not have Fund programs, and to the authorities in the major industrial countries in particular, the possible international implications of their policies. In our view, the Fund must, in its consultation reports, give frank and explicit views on member countries’ exchange rate policies as well as policies influencing the exchange rate. When the exchange rate development causes particular concern, the Fund must stand ready to undertake special consultations.
In looking beyond the area of exchange rates, that is, at the international implications of domestic policies, the Fund enters another sensitive area of equal importance. I have already referred to the interrelationship between fiscal deficits and high real interest rates, and to the impact of the latter on the ability of many developing countries to service their debts. In our view, the Fund should take a very explicit stand on these matters in its publications, such as the World Economic Outlook, supported of course by careful analyses. In this area, the Fund should emphasize its assessments of policies in countries which strongly influence world economic developments. The commitment of the membership should be such that members would be prepared in a spirit of cooperation to seriously consider the opinions expressed by the Fund.
In conclusion, the sustainability of the present recovery is still uncertain. It is threatened by protectionist policies in the industrial countries, debt problems in many developing countries, and high real interest rates, which are impediments to growth in the industrial as well as in the developing world. These areas need to be dealt with through a multilateral approach where the Fund has a crucial role to play.
Statement by the Governor of the Fund and the Bank for Sri Lanka—Ronnie de Mel
At the outset, let me extend a warm welcome to St. Christopher and Nevis, and the People’s Republic of Mozambique, who have come into our fold since the last Annual Meeting.
Although I consider it a great privilege and honor to speak at these Annual Meetings for the eighth consecutive year, I am rather concerned at the little progress we have made during this time toward a more orderly and equitable international financial system. There has been such a wide divergence between theory and practice, between intention and action. Our discussions and deliberations in recent years have been clouded by severe problems arising from the worst global recession during the last half century. There are some signs of modest economic recovery in North America and Japan; but there is a great deal of uncertainty about whether the recovery will be widespread and long lasting. Despite the improvements in the United States and Japan, conditions in the developing countries are still very serious. External debt still continues to be a major constraint to growth in developing countries and, consequently, to global economic recovery. The super-imposition of the debt burden on the recent recession has destabilized the international financial system. The realization of a lasting world economic recovery can prove to be rather elusive if we do not remove the obstacles to growth and development in the majority of the nations—the developing countries. Growth and development in these countries have been truncated in recent years by worldwide recession, large oil bills, slumping commodity prices, prohibitive interest rates, volatile exchange rates, increasing protectionism, and high debt service payments. Many developing countries responded to these adverse forces by undertaking courageous adjustment programs, which, in sum, resulted in the severe curtailment of imports and investments and a drastic fall in living standards for three years. The pursuit of such contractionary policies in developing countries could not only be socially and politically unsustainable but could also be counterproductive in promoting global economic recovery. How can poor countries be expected to carry the burden of asymmetrical adjustment in the world economy any longer?
The time has come, therefore, to create an environment that is conducive to growth and development, in both industrial and developing countries. In my opinion, a world economic recovery program should include, inter alia, the following four elements:
First, greater convergence and complementarity of economic policies adopted by industrial countries, so that the volatility of interest rates and exchange rates could be contained. Policies should be adopted to bring down real interest rates on the one hand, and to expand economic activity, on the other.
Second, economic efficiency of industrial countries must be improved by elimination of structural rigidities. The intensification of protectionism has been due largely to the lack of restructuring, based on comparative advantage, in the industrial countries. Protectionism, therefore, acts as a major obstacle to efficient utilization of global resources and promotion of trade. Removal of protectionist barriers is also an essential component of a long-term solution to the debt problem of developing countries.
Third, an integrated approach to the debt problem: The origin of the debt problem may be traced primarily to the recession, collapse of commodity prices, protectionism, and, most of all, too high real interest rates. The solution lies in an adequate response from the entire international community. I commend for your consideration the report entitled ‘The Debt Crisis and the World Economy” prepared by a team of Commonwealth experts. The current “case-by-case” short-term approach is fraught with danger. An integrated medium-term program must be evolved to contain the debt problem. Special attention must be paid to the needs of the poorest countries. It is important that the preoccupation with the problem of the large debtor countries does not lead to the “crowding out” of the low-income countries from official financial sources.
Fourth, transfer of an adequate amount of resources to developing countries so that recovery can be accelerated and made more sustainable. It is possible for the anti-inflationary policies currently being pursued by the industrial countries to be married to a form of international Keynesianism that transfers resources to develop the vast unutilized capacities in the developing countries. I think an adequate transfer of resources through aid, trade, and direct investment can bring about a “positive-sum” situation, whereby the whole community of nations can benefit. Capital markets of industrial countries should be broadened and diversified to facilitate the flow of resources to developing countries. The multilateral institutions, such as the Fund and the Bank, have a crucial role to play in the process of resource transfers.
International Monetary Fund Issues
Let me now deal with some of the issues concerning the International Monetary Fund. The relative size of Fund resources vis-à-vis both current accounts imbalances and the volume of world trade has declined significantly. In this connection, it is of paramount importance that the enlarged access policy is maintained until such time as the size of quotas bears an appropriate relationship to world trade and current account deficits.
Furthermore, the improvement in the world economic situation has been very uneven. The Fund must be in a position to support, on a substantial scale, members’ adjustment efforts. Many countries that require balance of payments support are being discouraged from coming to the Fund because of the tightening of conditionality. Any further reduction of access limits or increase in conditionality would not be in the interests of promoting orderly adjustment in the developing countries.
It is also important to maintain the special facilities at the present limits. It is extremely disconcerting that greater conditionality is being attached even to lower tranche drawings under the compensatory financing facility (CFF). These trends should be reversed. There must be automaticity in the operation of the CFF. It is also important to continue with the access limit for the buffer stock financing facility to avoid giving the signal of declining Fund support for international commodity stabilization.
Conditions in the world economy warrant a substantial fresh allocation of SDRs. There is an urgent need to provide sufficient liquidity to enable imports of non-oil developing countries to recover from the very depressed levels to which they have sunk. The case for an infusion of liquidity is strengthened by the reduced access of many countries to international capital markets. Furthermore, lack of reserves is forcing countries to adopt excessively restrictive policies which are having negative effects on growth and employment. A resumption of SDR allocations would help world economic recovery, reserve diversification, reduce excessive dependence on borrowed reserves, and promote the SDR as a principal reserve asset. The effort to obtain a consensus for an SDR allocation must be relentlessly pursued.
It would be wholly inappropriate to attach conditionality to SDR allocations. This would constitute yet another mechanism to promote asymmetrical adjustment. There is also a very strong case for establishing a link between the allocation of SDRs and development assistance when considering the distribution of SDRs. . . .
Let me conclude by urging my fellow Governors to set in motion the process toward a conference for the reform of the international monetary and financial system. Over the last decade or more, there has been an intensification of cyclical instability and the risk of shocks in the system has risen sharply. There has also been increasing asymmetry in adjustment between surplus and deficit countries and between reserve centers and other countries. This has been due largely to the lack of surveillance over the economies of the major industrial countries. Furthermore, little progress has been made toward stabilizing commodity prices and establishing regular and adequate levels of official development assistance. Above all, there is a need to develop a stronger framework for world production, trade, and finance. In this connection, we welcome the present initiative calling for extensive discussions on reform of the international monetary system. I trust that we will not attempt to institutionalize the current economic relationships, which have proved to be highly inequitable from our viewpoint. If we do so, we might have a highly protracted dialogue of the deaf. What we need for the next generation is an international financial system based on the spirit of dignity and the equality of all men and women the world over.
It is now 40 years since the Bretton Woods system was inaugurated by its founding fathers. The system served its purpose and achieved much in the first two decades since its inception. The system, however, de facto ceased to exist in the early 1970s, but nothing coherent has replaced it yet. The entire structure of the world economy has changed during the last 40 years and is still changing. Only 44 states were members of the International Monetary Fund and the World Bank at their inception. Now there are 148, at varying stages of economic development. There is, therefore, a paramount need for a new and coherent system to fashion an equitable new international economic order. We have talked about it for more than ten years, but nothing has happened. When will this new system evolve? Without such a system the world economy will be condemned to blunder from crisis to crisis in which the developing countries will suffer most. In the process, the entire political and social fabric of these countries will be greatly damaged.
The fact that developing countries seek international action to reduce, if not actually eliminate, international inequities does not imply that we are unwilling to shoulder our own responsibilities. We all know—finance ministers in particular know—that every developing country has to make very hard choices on the road to progress. The will to develop and the effort to develop can only come from within our societies. Developing countries do not shirk those obligations.
Sri Lanka, for instance, has followed a sustained program of development and adjustment over the past eight years. Our people have maintained a willingness to shoulder even those burdens imposed on them by external economic circumstances. Creative policies and popular response have combined well. Agriculture has flourished, incomes have risen, housing starts have moved briskly, and industry has shown a new vitality.
Other developing countries have also shown their commitment to fulfilling their domestic responsibilities. We will continue to do so. But in an interdependent world, external inequities can wipe out the benefits of domestic effort. If that is to be the continuing pattern of international economic arrangements, developing countries will ultimately be wracked by social and political explosions whose reverberations will be felt worldwide. Collectively we must nurture the will and the wisdom to prevent such a catastrophe.
September 25, 1984.