Discussion of Fund Policy at Sixth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1984
Statement by the Governor of the Bank for Bolivia—Oscar Bonifaz Gutierrez
I am the first to recognize that it is an impertinence for me to speak when I have already been represented, in an outstanding fashion, by another Governor. However, the seriousness of the present time for my country, and the fact that similar circumstances could in the immediate future affect other nations who are nearing a similar situation, obliges me to take some minutes of your time.
The Minister of Economy of Argentina, Mr. Bernardo Grinspun, has fully expressed the thinking that is shared by the Latin American countries. I will not repeat the arguments of his comprehensive statement, with the content and recommendations of which I am in total agreement. What I would like to do, however, and it is for this that I ask your indulgence and understanding, is to refer briefly to the special economic and financial position of Bolivia.
Bolivia is the only country that has been obliged to officially declare itself temporarily unable to pay its debt of $720 million to international private banks. Clearly, this is not a significant figure in comparison with other obligations of various countries, but as everything is relative in the international sphere, it constitutes an unbearable burden for our economy at this time. It is also a matter of respecting a hallowed principle among the international community: that of meeting contractual commitments, regardless of conditions or circumstances or of domestic mismanagement of the resources in question.
In this connection, we are pleased to see that some countries, by dint of exceptional efforts, have concluded agreements with the International Monetary Fund and are meeting the payments due on their external debt. But there are other countries, such as Bolivia, whose situation is different. Bolivia—less well endowed, with an economy destroyed by long years of incompetent dictatorships, plus the added complication of its position as a landlocked country—will remain unable to do so until it is in a position to unlock the wealth in its hydrocarbon deposits, mineral resources, especially gold, and extensive areas well suited to agriculture and the raising of stock.
Deadlines have been set for Bolivia for resuming its payments to the international banks. If our creditors do not have a change of heart, the difficulties we are facing today—which include inflation on a scale that has reduced the purchasing power of wages to derisory levels, together with real hunger in some regions as a result of the ravages caused by the El Niño current that destroyed a third of our agriculture and livestock—will be compounded by the specter of sanctions in the form of attachments and freezing of accounts plus, of course, the impossibility of obtaining any new credit at all.
We cannot ignore the consequences that could follow from such a situation. Just as it is not possible to squeeze blood from a stone, Bolivia, notwithstanding the goodwill of its democratic government, is temporarily unable to meet those obligations since it has to use what little foreign exchange it currently possesses to import food to feed its people and inputs to avert a total shutdown of its productive apparatus. The poorer countries such as mine need the understanding of the institutions sponsoring these meetings. The World Bank, which has done such an outstanding job of supporting the efforts of the under-developed countries to increase their productive resources, and the International Monetary Fund, which is deeply engaged in the task of bringing about a harmonious international financial equilibrium, could also help, in a realistic manner and using not altogether orthodox methods, in seeking formulas for understanding between the poorer countries and their international bank creditors.
These institutions—set up precisely to promote economic development, strengthen the financial systems of their members and prevent collapses or catastrophes in any of their member states that could affect the others—ought to pay particular attention to situations such as the one I have just outlined.
Bolivia has not reneged on its international commitments, but in order to meet them it needs to rehabilitate its economy and put its productive apparatus back on a sound footing. To be able to reopen the dialogue with its creditors, it therefore needs evidence that they are willing to negotiate, without imposing peremptory or unbearable deadlines.
I am convinced that the two institutions under whose auspices we are meeting today can play an invaluable role in the attainment of these two objectives: the development of our economy and an agreement with the international banks which will give us a breathing space in which to create the conditions essential for meeting our obligations.
Statement by the Governor of the Fund and the Bank for Afghanistan—Mehrabuddin Paktiawal
It is indeed a great honor for me to represent the Democratic Republic of Afghanistan for the second time in the Annual Meetings of the Boards of Governors of the Fund and the Bank.
First, let me compliment the management of the Fund and the Bank for the excellent organizational arrangements made for the conduct of these meetings. Let me also record appreciation for the painstaking work put in by the staffs of the Fund and the Bank in preparing the two reports on global economic development and prospects, namely the World Economic Outlook and the World Development Report 1984.
These reports bring into focus the formidable problems that continue to beset the world economy. Prospects of a durable global economic recovery are not yet in sight. The turnaround in economic activity which began early last year remained feeble in most industrial economies, barring a few notable exceptions, while the impulse for transmission of its forces to the countries of the developing world has been, so far, extremely weak and halting. More significantly, unemployment and fiscal deficits in industrial countries continue to remain at historically high levels. So do real interest rates, despite their decline from the record levels of 1980-82. Protectionist pressures, too, remain strong; indications are that they have been further intensified since we met last. While these are posing serious threats to the very sustainability of the recovery, the distinct uptrend in interest rates in the United States since the beginning of 1984, and their firming up in other major industrial countries in the second half of 1983, despite the claim of continuing success in the fight against inflation, are, indeed, disturbing developments that give rise to new uncertainties.
The non-oil developing countries are the worst victims of the prolonged and severe recession of the early 1980s. The rate of growth of real gross domestic product of these countries, which had decelerated from 5 percent in 1980 to less than 3 percent in 1981, slowed down further to 1½ percent in 1982 and 1983. With population growing at a faster pace than output, these countries had a declining per capita output for the second year in succession. Although the deceleration in the rate of growth of their exports was reversed during 1983, export unit values remained depressed. The decline in their imports which began in 1982 continued, with a contraction of 1 percent in volume and 4 percent in value during 1983, on top of the 8 percent fall by volume and 11 percent drop by value in 1982. The squeeze on imports reflects the painful adjustments made by these countries in the face of the sharp deterioration in the external environment. Needless to say, the drastic pruning of imports has seriously undermined their development programs and growth prospects.
Many are the problems that face the developing countries, especially the low-income least developed countries such as Afghanistan—problems of low commodity prices, sluggish demand for export products as a result of intensification of protectionist pressures in industrial countries, high interest rates, crushing external debt burdens, and reduced capital inflows, to name only the most prominent ones. It is crucial to find practical solutions to these problems urgently, for sustaining even their current low rate of growth. The solutions offered by the existing international economic system call for more and more adjustments on the part of these countries, with the developed economies and the international financial institutions playing only a minor role. It is cruel to expect further adjustments from these countries, which have been struggling to overcome the impact of the adverse external economic environment, and which, according to the World Development Report before us, account for only about one fifth of the world’s total output, but have to support three fourths of the world’s people.
Clearly, the need of the hour is a very substantial increase in concessional external financing of these countries, both by way of balance of payments support and development assistance, but, today, notwithstanding pious declarations and resolutions of international conferences, the outlook for credit flows of such magnitude are, unquestionably, dim. The large decline, in real terms, of official development assistance flows in recent years, and the disappointing experience in mobilizing resources for IDA are amply illustrative of the current trends in international cooperation for assisting the developing countries. It is in this background that we find it difficult to share the optimism of the World Economic Outlook for 1984, which has projected a 3½ percent growth rate for the real gross domestic product of the non-oil developing countries during 1984, and a further acceleration in the rate during 1985. Such optimistic projections should not lull us into inaction.
The major reason for the disturbing decline in development assistance flows in recent years is the mad race for building armies and stockpiling military hardware. Only progress toward disarmament will ease international tensions and help release resources, which are now diverted to military expenditures, for economic development.
As you are aware, the Democratic Republic of Afghanistan is a low-income least developed country. For centuries we were exploited by a medieval economic system. The major objective of the April Revolution of 1978, which overthrew the feudal system was, and still is, the raising of the living standards of our people through planned development of the economy. Having set the stage for growth with social justice, by implementing land reforms and other progressive measures such as debt relief and irrigation water rights, we have embarked on the path of diversified development of our predominantly agrarian economy, through annual development plans. The role of the public sector has been strengthened and expanded, especially in industry and transportation. Simultaneously, a policy of actively encouraging private sector investment is followed. This policy was reaffirmed by Babrak Karmal, General Secretary of the People’s Democratic Party of Afghanistan and President of the Revolutionary Council of the Democratic Republic of Afghanistan, in his address to the National Conference of the People’s Democratic Party of Afghanistan, held in February 1982, in the following terms:
…we, from the State side, propose to the national capitalists, small traders, and businessmen, honorable, long-term cooperation, and anticipate that their role will be manifested for the development of the country and the welfare of the people.
It is a matter of gratification that the private sector has since extended active cooperation to the State. Currently, that sector accounts for about one fourth of the total output of our manufacturing industry. Our government has also initiated a review of the entire gamut of legislation bearing on commercial, banking, and industrial activity, with a view to further improving the climate for economic development with the full cooperation of the private sector.
Afghanistan also welcomes foreign capital participation for development of the economy through joint ventures. There are already tax concessions and customs duty exemptions for such investment, and statutory provisions for full repatriation of capital and profits thereon.
We are, however, facing numerous difficulties in our endeavor because of the depredations of counterrevolutionaries, actively assisted by international reaction and imperialism. Besides disrupting current economic activities, they damage productive assets and infrastructure facilities and also indulge in wanton destruction of places of worship, medical and clinical centers, and educational institutions. The rebuilding of assets destroyed by this undeclared war of imperialism and reactionary forces absorbs a large part of whatever modest resources we are able to mobilize within the constraints set by our low per capita income, leaving practically very little for creating additional productive capacity and infrastructure facilities.
Our external finances also have come under severe pressure due to a number of factors. The recession-induced crash in prices and depressed demand for our export products have drastically reduced our export earnings. The debt service obligations have increased in the meantime, making severe dents in our current foreign exchange receipts and curtailing our import capacity for undertaking development programs. With the unilateral suspension of development assistance by the industrial countries and some of the international financial institutions in 1980 and 1981, our external financing problems have assumed serious proportions. Today, our foreign exchange reserves are at a distressingly low level and we are facing acute balance of payments problems, which are anticipated to further intensify.
Despite the many problems, in 1983 we could achieve a 4½ percent increase in the real material product, thanks to the devoted work of our people and liberal assistance of friendly countries, especially the Union of Soviet Socialist Republics. This welcome trend came after several years of poor growth, but the prospects for sustaining the growth momentum are extremely bleak, unless we get substantial balance of payments support and concessional development assistance. We have approached the Fund for assistance, and we hope that objectivity will be the Fund’s guideline in processing our request. . . .
I now conclude, looking forward to a constructive policy toward developing countries, a policy that will fully appreciate their problems and find practical solutions within the framework of the socioeconomic and political realities in each country.
Statement by the Governor of the Bank for Yugoslavia—Vlado Klemencic
The preceding Annual Meetings of our institutions were held at a time of great uncertainties with regard to the initiation, transmission, and intensity of the recovery process in the world economy. This process has now started, although it has been uneven and hampered by numerous obstacles and difficulties. The stability of the process, its strength, and duration are of great concern to us. It is also evident that the debt problem will dominate the world economic stage for many years to come. With its numerous political and social aspects, it will be the focus of our concerns, and will require joint efforts of debtor and creditor countries and a severe adjustment process in the developing countries.
Yugoslavia acknowledges the fact that it should settle all its debts. We have adopted our own program of economic stabilization, which contains short- and long-term objectives of the adjustment process in the changed environment. After three years of economic stagnation, we are now in a period of recovery and growth. We estimate that the real GNP will increase by 2.5 percent in 1984, in comparison with the preceding year. Total exports are registering an even faster rise. Over the first eight and one-half months of the year, convertible exports rose by 10 percent over those of the same period in 1983. A surplus in the current balance of payments in the exchange with the convertible area is expected to be much higher this year than in 1983. In addition, we can report much better results in convertible cash flows than in the preceding year, when we were faced with considerable increases in exports and long delays in foreign exchange inflows. Also the relation between supply and demand in the market is more balanced in comparison to the late 1970s. Such results in the recovery of production, increased exports, and a more balanced global supply and demand are the outcome of efforts and policies over the last three years. The circumstances prevailing in the early 1980s called for many unpopular measures. Real personal wages have been in a constant decline for the last four years, investment expenditures have decreased in real terms, and to some extent, other forms of consumption.
The Fund reported in midyear that the implementation of the 1984 stand-by arrangement was going according to plan, and, in some aspects, the goals achieved were higher than envisaged.
This year we have prepared a strategy of gradual decrease in the country’s overall indebtedness, both in absolute and real terms, with the intention of reaching a normal stage of the external liquidity of the country by 1990. This program is in its final stage of preparation. Yugoslavia is advocating a multiyear rescheduling. It will still need to refinance the payments on principal falling due over the next four years, but the percentage of such payments to be refinanced would decline from year to year. We count on financial support to be given by the international financial institutions, particularly the World Bank. We will continue to take commodity credits, while, at the same time, we have no intention of seeking fresh money this year or in the future.
The decrease of indebtedness, however, must not result in a slowdown of our development, which is indispensable for the country and its further technological advancement. The same applies to the gradual improvement of the standard of living of our population.
In the struggle aimed at overcoming the economic crisis and decreasing indebtedness there are still a number of uncertain assumptions and conditions which do not depend on us. An increasing interdependence of economies of all countries whose representatives are gathered here, and of all the countries in the world, is quite evident. We accept our share of responsibility for development in the world economy and in the international financial system.
We should not underestimate the burden of austerity measures borne by the population of developing countries which have started implementing their adjustment processes. At the same time, we expect other countries, particularly those whose impact on the world economic movements is stronger, to take their own share of responsibility. It is only if we are aware of the joint responsibility of all countries that confrontations can be avoided and progress made to the benefit of developed and developing countries alike.
I wish to emphasize all these points because it might be very dangerous to conclude that the world is now managing the debt problem, and that if we proceed in that way no serious difficulties can emerge if we continue to manage this issue. The amount of unsettled debts in the world is enormous, and the consequences of their repayments have neither been approximately perceived nor realized. In that connection, increasing interest rates, whose levels cannot be compared with any of those in earlier periods, have become a very serious problem. Their increases, together with the rising value of the U.S. dollar particularly, deteriorate the position of developing countries. Industrial countries should introduce changes into their economic policies to contribute to declines in interest rate levels. Changes are also necessary in budget deficit financing and taxation policies. Discussions on protectionism have been initiated on many occasions over the last few years, but not a single determined step has been taken so far toward its alleviation. This would be a precondition to increase exports and to generate funds necessary for debt repayment. On the contrary, further steps toward protectionism are under way.
The existing monetary and financial arrangements have proved inadequate to ensure the international financial stability in the long run. A characteristic feature of the existing arrangements was to seek short-term solutions. We must also be aware that medium- and long-term borrowings were lower than the repayments of obligations against that debt. This resulted in net transfer of funds from the developing countries in their transactions with commercial banks of about $7 billion in 1982 and $21 billion in 1983.
We consider it unavoidable to have the basic principles of the international financial and monetary systems re-examined. This should, in turn, reflect the realities of the time we live in, and the need to create such mechanisms which will provide appropriate development opportunities for all members of the system.
These are major issues whose solutions cannot be achieved by short-term activities. They call for long-term strategy and concrete obligations for their implementation. Economic policies pursued by industrial countries have far-reaching consequences for the adjustment processes in the developing world. Therefore, the supervisory role of the International Monetary Fund over these policies could exert a proportionally major impact on the decrease of total cost of adjustments, in particular, on the sector of foreign exchange policy, interest rates, and alleviation of protectionism.
Yugoslavia supports the requests of debtor countries for better conditions for their debt repayment. We also call for a major involvement by the Development and Interim Committees in this matter. A task force under the aegis of the Development Committee, whose establishment was suggested by the Group of Twenty-Four last April, would also contribute to further elaboration on this issue. We will continue to make efforts within the Group of Twenty-Four, the Group of 77, and the Movement of Nonaligned Countries, to help find mutually acceptable solutions for both the debt problem and international indebtedness.
A specifically important element in the present environment is the support given by international financial institutions whose funds should increase more rapidly, if it is the wish of all countries to have them play a more active role in adjustment processes during abrupt declines in commercial financing. However, a weakening spirit of international cooperation has made the international financial organizations instruments for the transmission of disproportionate burdens of adjustment to the countries that seek their assistance. Thus, certain adjustment processes are acquiring asymmetrical features. . . .
One of the measures that should be taken would be a new allocation of SDRs. This would directly contribute to improve adjustment processes and to a faster recovery of the world economy, characterized by insufficient utilization of capacities.
The latest trends in international liquidity and reduced levels of private capital flows to the developing countries, accompanied by negative transfers of funds, indicate that the new allocation of SDRs would contribute to stability in the international financial system. . . .
These institutions are today playing not only an important but also a very delicate role. They are points of cooperation among the countries at different levels of development and with different economic systems. Never in the past have we expected so much from these institutions—encouragement of processes in the world economic recovery, solutions of debt problems, and assistance to the least developed countries at the times of their most severe crises. Creativity and flexibility in solving the problems that are placed before them are imperative in the present situation. Having this in mind, I would like to take this occasion to extend our support to the persons heading the World Bank and the International Monetary Fund in their future efforts and activities.
It is my pleasure to welcome the representatives of St. Christopher and Nevis, and the People’s Republic of Mozambique.
Statement by the Governor of the Fund and the Bank for St. Christopher and Nevis—Kennedy Simmonds
I am grateful for this opportunity to respond to the many words of welcome which have been extended to St. Christopher and Nevis since the opening ceremony of the Joint Annual Meetings of the International Monetary Fund and the World Bank.
Indeed, this is the first meeting of these organizations which affords my country the honor of participating in the proceedings of these institutions since we signed the Articles of Agreement on August 15 of this year.
I would like to take this opportunity, on behalf of the Government and people of St. Christopher and Nevis, to emphasize my sincere appreciation for your warm and hospitable introduction into this most important and resourceful forum for regulation and collaboration on international monetary affairs.
St. Christopher and Nevis brings into this forum a very vivid awareness of the reality of the trading and financial interdependence of all of the member nations which are gathered here today.
It is an inescapable fact of life that the degree of strength of the economies of both the rich and poor nations alike is tied to the flow of goods, services, and money between their trading partners and themselves.
While this phenomenon is perhaps more easily visible from the perspective of developing nations, it will be recognized that the deteriorating circumstances of overseas markets must, of necessity, adversely affect the prospects of sustained economic growth in even the most flourishing of developed countries as well. Therefore, the developed countries must have a vested interest in the economic growth of the developing countries.
I listened with great attentiveness to the informative and comprehensive reports delivered to the Board of Governors on the subject of the most recent global economic trends and, in particular, I noticed the apparent uneasiness that is inspired by the seemingly intractable debt problems of developing countries.
It is all too easy for us to categorize the problems of the developing world as being merely the product of poor financial management and to propose greater austerity as a possible solution. I strongly urge my fellow Governors to guard against any appeal of so facile a view. It is a gross oversimplification of our desperate economic situation. We must compete in the international arena against the background of a legacy of underdevelopment and stunted growth. This situation is compounded by fluctuations in trade conditions over which, in many cases, we have no control.
I have a mind to repeat a point which I made in another forum recently: That ministates such as St. Christopher and Nevis are required to perform impossible feats of economic gymnastics—such is the skill, the ingenuity, the coordination, and the daring necessary to walk the tightrope between the growing expectations of our people and a legacy of monoculture which has, itself, a stranglehold on the aspirations of our population.
I appeal to this gathering to consider that what is needed is an urgent re-evaluation of the criteria for concessionary assistance to ministates. We need to face the reality that special measures must be evolved for dealing with the new phenomenon of sovereign island states.
Sometimes we get the feeling that we are under siege from all sides. On the one hand, our small population and scarce resources severely limit our gross national product, whereas on the other hand, the presence of a tiny nucleus of wealthy citizens can distort our per capita income out of all proportion and place us in a category which then denies the bulk of our poorer citizens the assistance which we so sorely need.
While on this occasion I speak with the voice of inexperience in the workings of this forum, yet I speak with experience of the realities of poverty and underdevelopment. I urge that all of us give thought to questioning and challenging the established processes of both the International Monetary Fund and the World Bank with a view toward making them more responsive to the needs of all developing countries.
To this end, I pledge the energies and cooperation of my delegation, and I look forward to a fruitful and productive relationship as a member of these institutions.
Once again, I express the deep appreciation of the Government and people of St. Christopher and Nevis to you and to all members of the International Monetary Fund and the World Bank for the warm welcome accorded to me and my delegation and as the senior member, I extend a word of warm welcome to the People’s Republic of Mozambique.
Statement by the Governor of the Fund for the People’s Republic of Mozambique—Rui Baltazar dos Santos Alves
In taking the floor to address this gathering we first wish to thank you for the kind references to the People’s Republic of Mozambique on the occasion of our joining the International Monetary Fund and the World Bank.
We take this opportunity, through the various delegations here present, to send our greetings and our message of peace, friendship, and cooperation to the governments of the Fund member countries.
The People’s Republic of Mozambique, which gained its independence nine years ago, is continuing the struggle to secure the physical and spiritual well-being of its people, in full awareness of its role in the establishment of peace and the development of international cooperation.
In addition to the backwardness and underdevelopment resulting from a distorted economy highly dependent on the outside world that they inherited from the era of colonialism, a series of natural disasters, and the negative consequences of the world economic crisis, the Mozambican people have also suffered aggression and attempts at destabilization in the process of building their nation, in affirming their personality, and reaffirming the right to freely determine their own destiny.
The climate of peace and understanding that can be foreseen for the independent states of Southern Africa will enable the Mozambican people to focus all their efforts on rebuilding and restoring their economy.
The People’s Republic of Mozambique has increased bilateral cooperation, thereby gaining positive experience in the development of mutually beneficial multilateral cooperation with all countries, regardless of their economic and social system.
Development of Mozambique’s vast agricultural, energy, mineral, and other resources and exploitation of its strategic location will require an appropriate mix of locally available means and capacities with physical, technical, and financial resources from overseas.
Mozambique’s participation in the various international organizations will not only enable it to mobilize resources for its own development but also create favorable conditions for expanding regional cooperation among the various members of the Southern African Development Coordination Conference to the ultimate benefit of the entire international community.
As we face the same type of problems and difficulties as all the sub-Saharan African countries, the People’s Republic of Mozambique hopes that it too can benefit from the priority attention that these meetings have rightly endorsed.
We are certain that with courage and a greater sense of justice, we will together be able to carry out actions that will promote real growth in the currently underdeveloped countries and provide the basis for stable growth of international economic and financial relations.
In conclusion, we wish to thank the Government and people of the United States for the hospitality they have extended to us and for the excellent atmosphere that facilitated the accomplishment of our work.
Statement by the Governor of the Bank for Fiji—Mosese Qionibaravi
I would like first to extend a warm welcome to St. Christopher and Nevis as the newest member of the Fund and the Bank. I also wish to welcome the representatives of the People’s Republic of Mozambique whose membership has just been accepted. On this occasion, I would also like to express my deep appreciation to the President and the people of the United States for the warm welcome and hospitality extended to us.
We meet at a time when the world economic situation looks promising. After a long recession, the international economy led by North America and Japan showed strong recovery in 1983 and 1984. Substantial gains have been made in controlling inflation in major countries, thus creating a suitable climate for recovery. The debt problem that loomed large in 1982 and 1983 now appears to be more manageable. However, there are certain elements that raise doubts as to whether, in the absence of positive action, the recovery will be sustained.
In many countries, appropriate policy measures need to be put in place to address problems and reduce rigidities which have led to inflation, recession, mounting debt, unemployment, and reduction in the international flow of goods, services, and capital in the last three or four years. Unemployment is still high in industrial countries outside the United States and Japan. High real interest rates in the United States continue as a result of large fiscal deficits and increasing demand for capital and credit from the private sector, posing a policy dilemma for other industrial countries where the recovery is still weak. Exchange rates are being largely influenced by developments in the financial markets leading to extreme volatility. The combination of high interest rates and a strong U.S. dollar is draining savings from other countries and diverting them to the United States. Less developed countries, in particular, are under strain with their debt servicing burden which in turn creates an unstable situation for commercial banks and other lending institutions.
There is a further threat to the continuation of world economic recovery and its sustainability over a long period. Protectionist tendencies are increasing. This is partly the result of high unemployment. It also reflects a combination of rigidities in the labor markets, exchange rates not aligned with basic economic conditions, and a misconceived belief that incomes and jobs can be protected by keeping out cheaper imports. These tendencies pose a threat not only to the prosperity of countries dependent on world trade, but adversely affect the growth even of the countries that embrace such policies because of the attendant misallocation of resources and consequent loss of efficiency.
I have taken a little time in underlining these problems because they point out the basic issues which the International Monetary Fund and the World Bank should address in the interest of advancing the role for which they were constituted. The lessons of the postwar period of prosperity, depression, fluctuations in world trade, and financial strains clearly demonstrate the increasing economic interdependence among nations. No country or group of countries should pursue independent policies without considering their impact upon other countries. We must embrace international coordinated actions if growth with stability is once more to be achieved by the membership of the Fund and Bank. It is in this context that we should pause to consider what policies the two institutions should follow in light of the basic problems confronting us and the lessons that we have learned from the recent past.
At our September 1983 Annual Meetings, it was decided to reduce access limits in terms of multiples of quota but to maintain approximate absolute access limits in 1984. I am most concerned that, in the implementation of this decision of the Interim Committee, there seems to be a marked trend toward granting a level of assistance which falls substantially below the approved access limits. I note that, in the implementation of the enlarged access policy, the average size of commitment under stand-by arrangements has declined substantially, and purchases under special facilities in 1984 are expected to be only one half that in 1983. The shift toward lower access cannot be explained solely by improvements in the external position of developing countries. The factors I mentioned earlier, such as protectionism and high real interest rates, and the sharp curtailment in the access of many developing countries to private sources of capital tend to suggest that the utilization of the access limits should be increased, so that a larger proportion of members’ deficits could be financed with Fund resources. This would also assist in giving confidence to the banking community to assume a more active role in resolving the current debt problems. Thus, it is important for the Fund to send positive signals by providing a more realistic access to its resources than has been the practice in the recent past. I would also encourage the Fund management to help debtor countries to secure multiyear debt rescheduling on more favorable terms.
I attach great importance to the special facilities of the Fund. They constitute a useful and important instrument for short-term balance of payments assistance. For a country like Fiji, whose resource base is narrow, and who has been faced with historically low prices for its major export, sugar, a facility such as the compensatory financing facility is extremely useful. In fact, we have been making use of that facility. The shortfall in our exports flowed from factors beyond our control. But I note with disappointment that conditions for access to this facility have been made stringent. Once the shortfall in exports has been proven to be outside the control of a country and to be of a temporary and reversible character, it is clearly inappropriate to make access to the compensatory financing facility conditional upon pursuit of restrictive macroeconomic policies. I would therefore urge that the Fund revert to a more traditional approach to the compensatory financing facility under which the test of cooperation is given a more liberal interpretation.
Let me now turn briefly to the equity aspects of adjustment, the question of conditionality, and the need for an appropriate balance between growth and stabilization objectives in Fund programs. I accept that orderly adjustment on the part of the member countries is both desirable and necessary. In recent years, however, the burden of adjustment has fallen rather too heavily on the developing countries, particularly those countries which entered into Fund programs. It is my view that the international community should give some thought to the idea of introducing more effective surveillance procedures in the Fund, so that the burden of adjustment could be shared more equitably.
I accept that conditionality associated with Fund credit is an important and a useful tool of adjustment. However, there is evidence that suggests that conditionality in recent times has become so stringent that it discourages members to come to the Fund at an early stage of their problems. Perhaps the Fund could approach the application of conditionality with more sensitivity to the social costs and political realities inherent in adjustment.
I shall now address the issue of SDR allocations in the fourth basic period. The Fund staff paper on this subject clearly establishes that there exists a long-term global need for reserve supplementation. The projected recovery in world trade will result in a substantial increase in the demand for reserves. Already, a large number of countries undertaking serious adjustment efforts are faced with inadequate levels of reserves. In the process of their adjustment efforts, many of these countries have already compressed their imports to a level where it is seriously undermining investment and growth. All these factors, together with the fact that inflation has been brought under control in many countries, suggest that this may be a propitious time for a significant allocation of SDRs. . . .
Statement by the Governor of the Fund and the Bank for the Lao People’s Democratic Republic—Kikham Vongsay
Permit me to express at the outset, on behalf of the delegation of the Lao People’s Democratic Republic, my heartiest congratulations to Noboru Takeshita of Japan for his unanimous election to the important position of Chairman of these Thirty-Ninth Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank. My delegation is certain that his broad range of experience and skills guarantees that our meetings will yield the anticipated results.
My delegation would also like to take this opportunity to extend its sincere greetings to the delegations of the friendly countries which have become full members of our two institutions.
Finally, I would like to express my sincere thanks for the warm welcome and hospitality extended to us by the Government and people of the host country during our stay in their beautiful country.
Our thanks also go out to the Managing Director of the International Monetary Fund, to the President of the World Bank, and to their respective associates, for the excellent arrangements and facilities provided for a successful conference.
After three years of what could be termed uninterrupted declines in growth and trade, the international economic situation has improved somewhat in the last 12 months. This should facilitate the adjustment process under way in many developed and developing countries.
Economic growth slowed in the industrial countries during the 1970s, and at the end of that decade inflation appeared impossible to control. Vigorous anti-inflationary policies based largely on monetary policy and continuous budget deficits have prolonged the recession of the early 1980s. The high level and volatility of interest rates as well as the instability of exchange rates in the industrial countries over the past two years have posed serious problems for these countries and the rest of the world, in particular the developing countries.
An unprecedented number of developing countries have had difficulty servicing their debts. Commercial bank lending to the developing countries has slackened off somewhat, further aggravating the liquidity problems of the borrowing countries. Debt reschedulings have afforded some respite to many developing countries allowing them to benefit from a regular flow of long-term capital to use for their development and to increase their exports so as later to be able to repay their debts.
Development assistance contributions have been irregular and uncertain, and protectionist pressures are jeopardizing the liberal system of multilateral trade. To meet the urgent problems that have arisen, many developing countries are obliged to take steps that hamper their future growth. For budgetary reasons, some of them are cutting back or eliminating sound and promising programs aimed at increasing the production of small farmers, improving education and sanitary conditions, and extending services to the urban poor.
Because of the stagnation of their economies, the developing countries are compelled to reduce imports, which in turn slows recovery in the industrial countries. About 30 percent of the 1982 decline in imports worldwide can be attributed to the import cuts by the non-oil developing countries. There can be no strong and lasting recovery in the industrial countries unless it is matched by recovery in the developing countries.
With your permission, I would like briefly to inform you of some of the results of implementing the development strategy and plan in the Lao People’s Democratic Republic in 1983. We are pleased to report that the achievements in the sacred effort to defend and build socialism in our homeland in the past year have been significant, this despite the enormous difficulties caused by natural disasters and especially by the manifold incidents of subversion and sabotage perpetrated by the enemies of the new Government.
The diverse Lao people, under the firm leadership of our Party, mobilizing all their physical and intellectual energies and benefiting from the assistance of fraternal socialist countries, friendly countries, and various international organizations including the International Monetary Fund and the World Bank, have accomplished the following: The gross domestic product increased by 9 percent over 1982 and national income rose by 6 percent; agricultural production was up 3.5 percent and industrial output 18.9 percent; the domestic revolving fund used for development purposes was increased by 26 percent, while export proceeds rose 10 percent; the volume of transportation and communications services increased 38 percent. It is obvious that these significant achievements were largely due to the transformation and reorganization of the agricultural cooperatives and of the industrial and commercial firms, in other words to the rationalization of their management. As regards agricultural production, despite poor weather total rice tonnage is at roughly the same level as in 1982. This does not mean that our people are without problems. Indeed, this is far from the case. Our Party and our Government are deeply devoted to improving the living standards of our diverse people to the greatest possible extent.
As regards the policies followed by our two institutions, I fully share the views expressed by many delegations from developing countries. Accordingly, we would like to make the proposals which follow.
We believe it will be necessary to increase the resources of the International Monetary Fund and the World Bank in an accelerated manner in order to be able to meet international requirements. . . .
My delegation remains concerned by the fact that our two institutions have not yet been able to examine certain credit requests from a particular member country which has been provisionally suspended for political reasons. We believe that once a country fufills all its obligations as a member, it must be treated normally in a nondiscriminatory manner just as all other members. We would like both our institutions to re-examine the decisions that are prejudicial to such countries.
As regards the future role of the International Monetary Fund, we believe the Fund should play a vital role by supporting the adoption of measures aimed at managing the crisis and should contribute to resolving the fundamental problem by promoting well-crafted medium-term adjustment programs.
We ask that access limits and the future of the policy on enlarged access be reviewed annually in the light of all pertinent factors.
We strongly support the Fund’s efforts to arrange for additional lending from public sources to cover the gap between available credit lines and the Fund’s commitments.
The institution should cooperate with private banks in lining up the resources to finance economic development.
In conclusion, my delegation believes that the views expressed above will help strengthen the role and effectiveness of our two institutions throughout the world. We heartily congratulate the Managing Director of the International Monetary Fund and the President of the World Bank for the remarkable manner in which they have performed their duties in such a serious world economic climate. We wish these Thirty-Ninth Annual Meetings outstanding success.
Statement by the Governor of the Fund and the Bank for Malaysia—Abdul Daim bin Haji Zainuddin
It is my privilege and honor to address, for the first time, the Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank on behalf of the Government of Malaysia.
Allow me first to extend my congratulations to Mr. Noboru Takeshita, Chairman of the Annual Meetings, and my appreciation to Mr. de Larosière and Mr. Clausen and their respective staffs for the excellent arrangements made for these meetings.
The world economic outlook is now showing some positive signs of improvement compared with the situation in the last two or three years. There are some indications that the major industrial countries will show significant growth in their economies. However, considerable anxiety still exists at the thought that the recovery may not be as strong as is hoped, and that its effects will not permeate to all countries in the world, especially the developing countries. Any renewed recession would be a heavy blow to developing nations, especially the low-income and heavily indebted countries that are still trying to pull themselves out of the last recession. Economic conditions in the developing countries are still fragile, and any new round of increase in interest rates, protectionism, or weakness in the economic growth rates of the major developed nations would only spark another recession that would set back whatever little gains have been made over the last few months. Indications are that growth in the United States, which has provided grounds for optimism in the early part of the year, is expected to slow down in late 1984 and in 1985. For 1985, the growth rate of real GNP in the United States is expected to decline to 4 percent from about 7.3 percent in 1984. This, coupled with an expected decline in the growth rates of other OECD countries, would reduce the OECD growth rate to 3.4 percent in 1985.
It is important, therefore, not just for the economies of the developed countries to strengthen the momentum of growth so far achieved, but to also have the will to lay the foundation for even stronger growth in their countries. This would not only assist the developing nations to extricate themselves from the current economic difficulties but also enable them to grow at rates that would allow for the achievement of their economic and social development targets.
While we agree that it is difficult to project economic growth with any certainty, one thing is still clear: the greatest threat to economic growth lies in the disparate performance of monetary and fiscal policies of the major industrial countries, especially in the United States. If their performance turns out to be below that projected, the consequences for developing countries will be exceedingly damaging. While the developing nations are attempting to improve upon their performances, it is important that their efforts are not hampered by the policies of developed nations. Many developing nations have reviewed and revised many of their economic and fiscal policies and embarked upon austerity measures in order to meet and overcome their current economic difficulties. However, there is a limit to what they can do and the measures they can take without causing serious disruptions to their development plans. The situation is so fraught with dangers that any excessive measures run the risk of backfiring and would take years and even greater hardship to recover from. It is thus important for industrial nations to play their role, to contribute toward the establishment of sound economic and fiscal policies for the betterment of the international community.
It cannot be stressed too much that the International Monetary Fund must continue its efforts to aid the adjustment efforts of member countries by providing adequate financing. This must be on a scale commensurate with the needs of member countries now that the access to international capital markets has become more difficult for developing countries. We are disappointed that the access to Fund facilities has become increasingly subject to greater conditionality due to the desire of the Fund to conserve resources. The issue here is surely how best the Fund can help the member countries facing problems of balance of payments difficulties to adjust over time without being too destructive to economic growth, domestic political stability, and national development. The liquidity and financial viability of the developing countries are just as vital to the developed countries in an interdependent world. Shortsighted pressures to curtail the role and effectiveness of the Fund, at a time when its assistance is most needed, could only rebound on the developed countries. While the major burden of adjustment is being borne by the developing countries themselves, they must be assured of at least a certain minimum support from the Fund.
Moreover, we are disappointed by news that some industrial countries have suggested reducing or even eliminating the policy of enlarged access. It must be noted that although the current account imbalances of the non-oil developing countries have declined, the fragile state of the world payments situation still makes it appropriate to continue the limits of enlarged access for a further period. In implementing the access limits, the Fund has to consider seriously the borrowing requirements of members and allow increased access, depending on the seriousness of their balance of payments needs and the strength of their adjustment efforts.
On the question of an allocation of SDRs in the fourth basic period, we are concerned that the major industrial countries continue to refute the clear evidence that all requirements for an allocation of SDRs have been met. The need for additional unconditional liquidity in the face of declining reserves has been established by almost all technical analyses. The arguments that an allocation of SDRs will lead to higher world inflation are not valid in an environment of declining inflation, especially when the reserve-creating capability of the private capital markets is not forthcoming to assist the orderly progress of adjustment being undertaken by the developing countries.
I consider, therefore, that there should be an allocation of SDR 4 billion to SDR 5 billion a year for the next two years in order to alleviate the strained international liquidity situation. An allocation in the present circumstances will be critical in the much-needed bolstering of reserves at a lower cost, thus helping to alleviate the international debt problem. It will also improve over time the effective functioning of the international monetary system. . . .
The actions that are needed to tackle the difficult conditions of the world economy are both urgent and obvious. They have been discussed at various international forums. Pledges and commitments have been made by all parties to improve the situation. However, we are disappointed that many of these promises have remained just that: promises. The experiences of the last decade showed that there is still no strong commitment to look beyond narrow national interests to the wider needs of the international community. We hope that this forum will be different, and that the hopes and wishes of the majority in this hall will not be drowned in the flood of good intentions and empty pledges. It is our hope that we will exercise the proper judgment and leadership that will make these meetings remembered long after we have all returned to our countries.
Statement by the Governor of the Fund and the Bank for Malta—Wistin Abela
During the past year, we have seen economic recovery get under way in the industrial countries after the most severe and prolonged recession since the Great Depression. We have also seen concerted efforts set in motion to deal with the severe debt problems that had beset and continue to beset a number of countries in the developing world. These are doubtlessly positive developments. But we cannot afford to be complacent about them. Without wanting to sound unduly pessimistic, we must point out that neither the world economy nor the international financial system is yet in a particularly healthy condition. Steering the global economy back toward a sustainable growth path and restoring stability to the financial system are indeed a challenge that will require further efforts, both at the national and at the international levels.
For one thing, the recovery in the industrial countries is still very uneven. Although most of these countries have been quite successful in bringing down inflation, there are some notable exceptions. Moreover, unemployment levels remain stubbornly high almost everywhere. Worse still, there is a real danger that the continuing high level of interest rates will choke off the recovery before it has time to become more broadly established, and before its effects filter down significantly to the developing world. Above all, we must not forget that the systemic factors at work in the world economy—the structural imbalances, about which there has been almost universal consensus—still have to be tackled if the present recovery is not to be more short-lived than the previous cyclical upswing, and the subsequent down-swing more severe and prolonged than the one we have just been through. In these circumstances, the least we can do is to revive and strengthen the spirit of international cooperation which had inspired the founding fathers of the two Bretton Woods institutions, and which, sadly, has been so badly weakened by years of stagflation.
Strengthening cooperation implies two things, even though the two may not be unrelated. First, it means that governments—especially in the larger, more economically powerful countries—should take more account of the international consequences of their domestic economic and financial policies. Second, it means that the international institutions—like the Fund and the Bank, among others, should be strengthened further. These institutions, after all, are the visible embodiment of the spirit of international cooperation. Whatever their defects, it would be hard to imagine how the world could be better off if their influence were diminished and their role curtailed.
With respect to the international consequences of domestic economic policies, there can be no doubt that the fiscal deficits of some of the major economies, when combined with the strict adherence to policies of tight monetary control, are contributing to the present high level of interest rates. These, in turn, not only aggravate the debt burden of several developing countries but also threaten to cut short the recovery in the industrial countries. Moreover, when coupled with large current account deficits, financed by potentially volatile capital flows, they pose another different threat to international financial stability.
Protectionist measures, on the other hand, are even more obviously inimical to the spirit of international cooperation. Such measures should be resisted at all costs. Economic theory itself can only suggest one argument to justify protection, namely, the “infant industry” argument. And surely there are no infant industries in the industrial countries—especially none that is threatened by competition from the developing countries. More likely, there are declining “old industries,” which the theory of comparative advantage suggests should now be left to the developing countries if there is to be a proper international division of labor that would lead to increased world output for the benefit of all.
We are pleased to note, however, that there seems to be a growing interest in multilateral trade negotiations under the auspices of the GATT, and we would like to join our voices with those of the Development Committee which, at its April meeting here, expressed the hope that the GATT should continue to play the central role in its efforts to bring about a more open trading system. These negotiations should, in particular, consider ways of dismantling nontariff barriers and other measures adversely affecting the trade of developing countries, which seem to have increased alarmingly during the past years.
With regard to the international institutions, in particular the Fund and the Bank, strengthening them means not only providing them with adequate resources but also enabling them to play a wider role, through greater flexibility and the development of procedures more suited to the conditions of the present times. Regrettably, however, we note that when it comes to providing them with resources, the Fund and the Bank are being increasingly used as bargaining counters by the more powerful member countries in disputes over matters extraneous to these institutions. We have in mind, in particular, the recent unedifying wrangles over the selective capital increase for the Bank, and previous attempts to subject the Fund to conditions that would have undermined its autonomy, such as putting pressure on the Fund to introduce political considerations into its lending policies. It is the Fund that should influence the policies of members, and not vice versa. Through exercising “firm surveillance,” in accordance with Article IV of its Articles of Agreement, we feel the Fund should ensure better coordination and compatibility of policies among the major industrial countries, so that the burden of global adjustment does not always fall on the poorest and weakest of its members as has happened hitherto.
We regret, also, that despite the stagnation of global reserves during the last three years, no allocation of SDRs has been made for the fourth basic period. Yet such allocations would have helped economic recovery without being inflationary, particularly if linked with development finance. Moreover, they would have eased the serious constraints in the payments position of many countries and, besides promoting world trade, they would also have helped reserve diversification and generally supported orderly adjustment. Therefore, we strongly urge those member countries that have so far not found it possible to agree to an SDR allocation to reconsider their position. . . .
The provision of adequate financial resources, though necessary, is not in itself sufficient to ensure that the Fund and the Bank respond sensitively to the aspirations of the developing world. Thus, while my country has always supported moves to increase the resource base of these institutions, we have consistently deplored the fact that, given the criteria generally applied by the Fund and the Bank, the middle-income countries stand to gain very little from membership in the two institutions. In the case of the World Bank, for instance, the only type of aid to which such countries are entitled, under present policies, is in the sphere of technical assistance. Neither do current proposals for graduation from the World Bank and other multilateral development banks augur well for middle-income countries such as Malta in this respect. Yet, we must submit that the criteria of income and GNP per capita do not in themselves constitute an adequate yardstick of development. We feel, as we have repeatedly stated in this and similar forums, that account should also be taken of such factors as resource endowment, levels of technological know-how, size and openness of economy, and vulnerability to external shocks. Thus, rather than the graduation principle, we would like to see alternative approaches developed, within the Fund and the Bank as well as elsewhere, to the problems at present besetting many developing countries.
The plight of those countries overburdened with foreign debt also deserves special and urgent attention. It is not enough to point out that the combined deficit of such countries has declined from $82 billion to $56 billion over the past year. These gains have been made at the price of a severe setback to the development process and a fall in living standards in these countries. The result has been, as the Commonwealth Group of Experts chaired by Lord Lever points out in its excellent Report, “The Debt Crisis and the World Economy,” that people in these countries have been driven to the margin of tolerance, and that some countries may even be contemplating reneging altogether on their debts. Should that happen—should we be faced with nonperforming debts on a large scale—the international financial system could be dealt a mortal blow. Therefore, apart from all moral considerations, it would clearly be in everybody’s interest to give serious consideration to all schemes aimed at resolving or alleviating these problems. Besides other suggestions, these Experts call on the governments of all creditor countries, in cooperation with the Fund, to insure loans from private banks to debtor countries on a scale large enough to eliminate the need for debtor countries to service their debt by premature exports, or to postpone the day of reckoning by refinancing past loans. We believe that this approach, which attempts to deal with the root causes of developing country debt problems, deserves serious and sympathetic consideration.
Another proposal that has recently been made, and which, in our opinion, should be put into effect expeditiously, is the setting up of a special facility within the Fund, similar in concept to the compensatory financing facility, to assist debtor countries adversely affected by increases in international interest rates which are completely beyond their control. Indeed, we have often urged that even large increases in import costs, like shortfalls in import earnings, should qualify for compensatory financing, particularly for those developing countries whose openness makes them exceptionally vulnerable to such shocks.
In conclusion, if the Fund and the Bank are to continue to play a meaningful role, so as to ensure increased economic well-being for all our peoples, they must adapt—and be allowed to adapt—to the constantly changing environment. In short, we need to recapture some of the spirit that inspired the founding fathers of these institutions. I sincerely hope that our discussions at these meetings will make a valid contribution to this end.
Statement by the Governor of the Fund for New Zealand—R. O. Douglas
World Economic Situation
A striking feature of the present international situation is the firming-up that has taken place during the course of this year in the outlook for the world economy. We have been through a stage when estimates and projections of such key variables as the growth in the volume of world trade, or of the growth in demand in the industrial economies, have moved up with each fresh set of forecasts. This pattern is in marked contrast to the pattern of recent years. It is generating a new set of expectations—if not of optimism then at any rate no longer of unbridled pessimism. The outlook is, by the dismal standards of recent years, relatively encouraging.
Global economic expansion is being driven by broadly based and vigorous growth in the United States. By the end of this year output in the United States should be over 13 percent up, in real terms, from the trough of the recession in late 1982. A strong recovery is under way in world trade, with trade volumes likely to rise this year by over 8 percent. Inflationary pressures have subsided in many industrial countries and have not been revived by economic recovery. This is all having widespread and positive effects. Developing country imports are now rising after two years of decline—and their output is now rising significantly faster than population growth. These broad indicators do, however, include continuing bleak prospects for some regions of the world, even under the most optimistic scenarios for the international economy as a whole. And they do not remove the need for difficult economic adjustments by many countries.
A key question is whether the present rapid economic expansion will settle down to a more modest, but enduring period of rising levels, of output—with all that implies in the way of a favorable international environment for the changes some of us need to make, in any event, to restore growth and development. Or whether such elements as the uneven pattern of economic growth—rapid in the United States, and sluggish in Europe—and the very high level of international interest rates, will set in motion forces that will return us to the economic stagnation of earlier years.
I will comment on three aspects of this: in the first place, barriers to international trade; in the second place, the responsibilities that all countries have to tackle their own problems; and lastly, the financial cooperation at the international level which has to support their efforts.
Trade and Protection
Whether or not it proves possible to avoid the imposition of further restrictions on international trade, and to roll back existing barriers to trade, will have a major influence on the economic prospects of all of us. The recent record is not encouraging. In one area of special interest to us—agricultural trade—markets are deteriorating under the impact of tightening restrictions and increasing subsidies.
New Zealand has itself long maintained very high levels of protection for manufacturing industries. We have recently decided to phase out import controls and rely instead on tariffs. We will end up with a lower and more uniform rate of protection. We are doing so primarily because we think that we ourselves will benefit from this step. Excessive levels of protection are costly to the economy. The direct impact falls on consumers and unprotected industries—especially in the export sector—in the form of higher costs for goods and services. They also subsidize industries that compete with imports: industries that need to rationalize, improve productivity, and stand on their own feet. And finally they fail over the long run to increase employment or economic growth.
A feature of a meeting like this is the similarity of the economic problems that many of us face; the similarity of what we need to do about them; and finally the similarity of the difficulties in the way of bringing those changes about. There are some impressive examples of countries—both developed and developing—who have in the very difficult circumstances of recent years made the economic changes necessary to lay the basis for a return to sustainable growth and development. Their resolution is already paying off in the form of rising levels of production and employment, an easing of external financial pressures, and returning confidence. Some of the rest of us—New Zealand included—have delayed for a long time before setting out down that path.
Economic adaptation and adjustment is not just a matter of identifying what needs to be done. I see little room for argument on the lessons to be drawn from the experiences of so many countries. These lessons include the importance of a realistic exchange rate; the importance of letting interest rates encourage savings and promote the best use of funds for investment; the importance of reducing excessive levels of protection, which deny the consumer the benefits of international trade; the importance of getting labor markets to work better and increase employment; and the importance of reducing budget deficits to sustainable levels and reducing dependence on external borrowing.
The real challenge is rather different. It is to develop public understanding of why changes have to be made, and to arrive at a broad-based consensus on what has to be accomplished. That is, naturally, easier said than done. We have in the last couple of months been trying to do just that in New Zealand. We have been doing so because earlier very cautious attitudes to economic change, and a preference for tackling symptoms rather than causes, had been based on a profoundly pessimistic view of what the public could understand or support. We now take a different and more optimistic view.
We realize that we cannot protect everyone from the adverse short-run impact of what has to be done. We can and we will protect the position of low-income families. That is central to our economic program, and is an important reason for confidence that it will be supported by the community as a whole.
A final point on economic change. A country such as New Zealand has the resources and the social infrastructure to support the most vulnerable section of the community. The adjustment problems of low-income developing countries are of a different order of severity, not only because of low overall levels of income but also because of the scarcity of social welfare mechanisms to meet basic human needs. It is those countries in particular whose efforts to develop and adapt deserve the full support of the international community.
International Financial Cooperation
The International Monetary Fund and the World Bank are the major mechanisms through which the international community can support the adjustment and development efforts of individual countries. The enlarged access policy of the International Monetary Fund, and the Special Action Program of the World Bank, have each made vital contributions in a period of acute difficulties. It is now time for both institutions to consider directions for the future. They will face further challenges, and will need to respond to them. International trade and finance issues need to be reviewed in a comprehensive manner. I welcome the recent agreement to schedule special discussions of these matters at the next meetings of the Interim and Development Committees. I will also comment on four issues of immediate concern.
IMF: Enlarged Access Policy
The IMF’s Interim Committee has very recently decided to reduce the limits on countries’ access to the Fund’s financial resources. The present enlarged access policy has enabled the IMF to provide large-scale financial assistance to countries in acute balance of payments difficulties, assistance which in turn has acted as a catalyst for additional bank lending. Over time, if payments imbalances decline and if quotas are increased, then the IMF should revert to limits on access that can be financed by quota subscriptions alone. But I regret that it has been thought necessary to reduce the limits at this point. I hope this action will not be seen as signaling a lack of support for the adjustment efforts of individual countries—efforts that will be every bit as arduous next year as this.
IMF: Allocation of SDRs
New Zealand will continue to support the resumption of SDR allocations. Provided the size of the allocation is carefully set, and timed, we do not think it would risk reviving inflationary expectations. An allocation will permit the rebuilding of reserves to proceed at a faster rate than would otherwise be the case. This is particularly important given the very low level of access that many countries now have to the international capital markets. . . .
Statement by the Governor of the Bank for Papua New Guinea—Phillip Bouraga
As we review the world economic situation in 1984, we see signs of economic recovery in the United States, and to a lesser extent, in Western European countries. However, we all acknowledge that several major concerns still confront the world community. Interest rates in the financial markets remain high, making the cost of much needed development funds burdensome for all borrowers. The rate of inflation continues to remain at high levels in many countries, thereby adversely affecting their growth objectives. These depressing conditions, which have continued from the period of the recession, continue to give rise to high levels of unemployment, low export earnings, high debt service burdens, and low levels of economic growth.
Papua New Guinea, as a small island developing country, is concerned, along with many other countries, about the problems of sustaining the present economic recovery, because it also affects our development objectives and prospects just as intimately.
During the last three years of the recession, Papua New Guinea, and my Government in particular, had to come through a very painful adjustment period. During the three-year period of the recession, we cut government expenditure at an average rate of 3 percent in real terms a year. This meant trimming our public service by 6 percent and generally rationalizing the functional activities of the Government so that we can continue to provide essential services required by the population within our existing resources.
Because of the openness of our small economy, my Government also tightened monetary policy to ensure that the balance of payments did not deteriorate to any significant extent. These fiscal and monetary initiatives, together with the existing stabilization schemes we have for our major export commodities, such as copper, coffee, cocoa, copra, and palm oil, as well as the appropriate wage and exchange rate policies, have lessened the adverse domestic impact of the global recession.
With these domestic developments, my Government continues to formulate its fiscal and monetary policies to ensure continuous sustenance of the current favorable domestic economic conditions as were implemented by the Government in response to the global recession. The most noted initiative is the current Government’s objective to develop a medium-term development planning program.
The new initiative has been to change the Government’s pattern of expenditure and revenue generation to a five-year cycle because of the current medium-term forecast of weak metal and agricultural export prices and the growing burden of recurrent expenditure. This initiative has been considered necessary because we have come to realize that management of our resources should be given special attention, so that we can better withstand future prolonged adverse economic conditions like the recent recession we have just come through.
As part of the new initiative to shift to, and, at the same time, to strengthen our medium-term planning capacity, Papua New Guinea has committed itself to a more growth-oriented approach to development. This involves major reforms in our economic planning, financial regulation, and personnel management policies. An important aim in this exercise is to strengthen the functional capacity of line departments to more efficiently perform their respective development functions.
Papua New Guinea recognizes that these new initiatives being undertaken by my Government will not produce immediate tangible results. In consultation with the World Bank, we have decided to concentrate our efforts in the most important economic sectors such as agriculture, forestry, fisheries, education, minerals, energy, communications, road, and particularly, air transport to achieve some economic growth in the short term to medium term. . . .
I have taken the trouble to briefly and generally outline the new development plans for Papua New Guinea because the sustainability of the present recovery, and indeed, the world economic and financial developments in the 1980s and 1990s are going to be of utmost importance to the success of these plans. To illustrate this point, our new plans and initiatives for development will require additional financial flows in the form of new commercial and concessionary borrowings. At the same time, we will require external markets for all our products. It is most important for us, as I am sure it is for most other countries, that world trade continues to expand and that interest rates and world inflation decline to levels that would promote national as well as international economic growth.
Statement by the Governor of the Fund for Paraguay—Oscar Jacinto Obelar
I have the honor, on behalf of the Government of the Republic of Paraguay, to present friendly and cordial greetings to the Chairman of the Joint Meeting; to the authorities and people of the United States of America; to the Managing Director and Executive Directors of the International Monetary Fund; to the President and Executive Directors of the World Bank; to the Governors and delegates of the participating countries; and to all the staff of the two institutions who are performing such valuable services.
This Annual Meeting finds the world economy on the way to gradual recovery, with the degree of recovery differing among countries depending on their level of industrialization. Within this context, the developing nations harbor rising expectations that they too will soon be able to share in the benefits of recovery. Despite the considerable domestic efforts they have made, often at high social costs, the developing countries are experiencing a growing need for timely and effective international cooperation rooted in a true understanding of the crisis that is still affecting them.
Analysis of the causes and consideration of the corrective courses of action adopted reveal significant differences in the ways and the intensity with which the economic crisis has tested each country’s capacity and options for overcoming the recent difficulties.
Thus, despite its exemplary growth over the past decade, Paraguay has been unable to escape the impact of external recessionary factors coupled with difficulties brought about by adverse natural conditions. May I be allowed to present a brief outline of the exceptional development of the Paraguayan economy and give a brief description of the current situation and prospects for the future.
Between 1976 and 1981, Paraguay’s gross domestic product grew by an exemplary 67 percent in real terms, representing an average yearly growth rate of 10.5 percent which was achieved through prudent management and the joint efforts of the people and Government of my country.
The factors whose combined effect brought about this expansion in economic activity included: the rapid capitalization of the economic system; the social and political stability prevailing in the country; the effective tax incentives granted for production activities; and the increase in external demand resulting mainly from diversification and improved quality of our major agricultural and livestock exports.
This period of rapid expansion was, however, affected starting early in the present decade, as was the case in many countries, by a number of outside factors that caused demand for our exports to slacken, making it necessary to introduce additional adjustment mechanisms and austerity measures.
The concerted efforts undertaken by the Government in conjunction with the productive forces have sought mainly to secure economic recovery in the short term; to reduce current levels of inflation; to bring about a general improvement in central government finances; and, lastly, to bring about a substantial improvement in our external position.
The Government is devoting constant and attentive efforts to the strengthening of the agriculture and livestock sector, acknowledging its role as Paraguay’s main source of future development. Special attention has been paid to investment designed to substantially boost production of export crops.
With the increased capacity to provide direct technical assistance to farmers in the field and the valuable help received from international financial agencies, it has been possible to increase the potential of the country’s farms through intensive use of labor on the smaller holdings and mechanization on the larger ones, together with the adoption of appropriate technologies in accordance with local conditions.
Support measures in the form of credit for farmers have also had a considerable impact, in terms of number of beneficiaries, area under crops, and returns at farm level.
We must, however, recognize a number of factors that limit the actions that can be taken to develop and support crop and livestock production. The ratio between the domestic cost of inputs and mechanized equipment in relation to prices obtained for products is growing increasingly distorted.
Notable work is also being done by the relevant agencies in constructing, improving, and maintaining Paraguay’s road network. While there has been considerable expansion of the areas served by some 15,000 kilometers of major and secondary highways, large sums and considerable institutional efforts are still needed to provide adequate roads serving population and production centers.
The gradual implementation of timely and effective tariff measures has permitted a significant advance in the area of foreign trade. Nevertheless, the volumes available for export are still small, and are sensitive to a continuing lack of diversification, while international prices are low in relation to production cost.
After a period of constant growth, the other sectors of the economy, namely, industry, construction, and basic services, declined in 1983 as a result of the economic downturn.
The Government is aware of the major impact of fiscal policy and public finances in determining general economic growth and particularly in attaining development goals.
Throughout the 1970s, and up until 1982, revenue and expenditure were in balance and the national budget was in surplus.
Despite this, we must recognize that the picture with regard to the national government public finances was not entirely satisfactory in 1983. As regards current trends and prospects for the public sector, as measured by data for the first half of 1984, the assumptions and strategies adopted for budget execution have been borne out in the current fiscal year. Among the preliminary results, we note there was a gradual improvement in the level and composition of revenue, up approximately 5 percent compared with the original estimates, together with no need to draw on additional financing from public credit during the period.
It is expected that, by the end of 1984, current revenue receipts will be up approximately 16 percent over 1983.
The draft National Budget for 1985 to be submitted to Parliament for approval calls for the rationalization and restructuring of public expenditure, with the accent on investment in productive projects while making full allowance for counterpart contributions for projects benefiting from external financing.
I should also like to note the special emphasis that has been placed on strengthening administrative and control systems, together with the introduction of fiscal instruments intended to increase tax revenues. These measures include a simplification and unification of the domestic tax rates, at appropriate levels, with a view to their gradually replacing import taxes as a major source of income. Export transactions, for their part, have been stimulated by a total elimination of taxes.
In short, this has been Paraguay’s experience and response as it moves ahead in the current situation with renewed confidence and optimism.
My country is thus laying the foundations for effective, timely, and ongoing international cooperation among both member countries and the agencies that bring us together.
In conclusion, I wish to congratulate the Fund and the World Bank on their work and at the same time express my sincere thanks for the hospitality extended by our great host country. To the delegates representing the international community, we again express our hopes that our current deliberations will be crowned with success.
Statement by the Governor of the Bank for Viet Nam—Nguyen Duy Gia
On behalf of the delegation of the Socialist Republic of Viet Nam, I wish to extend to you, Mr. Chairman, the Managing Director of the Fund, and the President of the Bank my warm greetings. I also wish to extend my thanks to the staff of the Fund and the Bank for their excellent arrangements for these meetings.
As we meet here this year, the world economic situation is not as gloomy as in previous years, although dark clouds are still hanging on the horizon and blur our vision, and many countries are still facing difficulties. Although there was some improvement in the world economy in 1983, the foundation for a forceful recovery and development was not well established. Financial stability—an important prerequisite for satisfactory economic growth—has not emerged. Increased trade protectionism in various forms has placed severe obstacles to a free trade system, to economic development, and to the external debt servicing of many countries, especially developing countries. These also slow down the adjustment process of developed as well as developing countries. The obstacles to recovery and development emanate from the selfish policies, of major member countries which disregard the interest of others.
Our delegation shares the concern of other Governors about the heavy fiscal deficits of the United States which affect the monetary and financial situation and investments in the world. The high interest rate in the United States has attracted investment capital from other countries and pushed the dollar to an overvalued level, thus causing disturbances in exchange markets and adding additional cost to the debt servicing of a number of countries.
External debts of developing countries have become increasingly serious. Principal payments alone by the 25 biggest debtors will rise from $35 billion to $85 billion between 1984 and 1987. The hardship that many developing countries are encountering, especially external debts, is attributed to the financial and monetary policies of industrial member countries. It is the right time for both our institutions to fully play their role in awakening the industrial community to the formidable danger of a default crisis of $800 billion of debt and provide necessary assistance to countries in difficulty. This crisis may blow out the light of recovery at the end of the tunnel.
One question is now raised: which policies and measures should the Fund and the Bank adopt to cope with these problems?
The Fund’s resources are not so constrained at present as in previous years, while its assistance is piecemeal with tighter conditionality. We cannot agree with the imposition by the Fund of unduly rapid adjustment in member countries, because it disregards the social constraints involved. The Fund always requests members to be flexible in their policies under an assisted program, whereas the Fund is always rigid in its application of the rules for its assistance as permitted by the Articles of Agreement. . . .
Now I wish to elaborate on Viet Nam’s economic situation and its financial relations with the two institutions. There were positive and favorable improvements in our economy in 1983. We wish to draw your attention to the fact that these improvements emerged from serious imbalances caused by a long war of 30 years and successive natural calamities and from a very low base. And it is because of these factors that the economy, including the monetary and public finance positions, is still in an extremely difficult position. Viet Nam, as other poor developing countries, has been affected by the recent prolonged recession. We have no choice other than to adopt the necessary policies and measures for economic adjustment. We have so far received some assistance from the Fund and the Bank, but the conditions are harsh and the amount is too little in proportion to our economic needs and too low on a per capita basis—$2 from the Fund and $1 from the Bank. We have in recent years continued to introduce new economic adjustment policies and measures to cope with the changing situation and our economic needs.
It is unfortunate that in the course of the years our two institutions, on the basis of some unpersuasive excuses, have not extended due financial assistance to Viet Nam to enable us to overcome our difficulties. Despite this fact, Viet Nam has done its utmost to fulfill its financial obligations to the Fund even under severe circumstances of exceptional hardship. In response to our willingness to promote cooperative relations with international financial and monetary institutions, the Fund is reluctant to resort to possible provisions and regulations in its Articles of Agreement to help Viet Nam relieve extremely acute hardship. We have been patient with the Bank’s inflexible policies regarding Viet Nam, and it is regrettable that the Fund has adopted rigid policies regarding the settlement of Viet Nam’s overdue payments to the Fund. In light of our extreme economic difficulties and exceptional hardships, the Fund should find appropriate policies and a satisfactory solution to the case of Viet Nam that would not run counter to the Articles of Agreement.
September 27, 1984.