Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1985
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System—H. O. Ruding
I am happy to have this opportunity to report to you in my capacity as Chairman of the Interim Committee. As you know, the Committee has met twice since our Annual Meeting in 1984—on April 17 to 19 in Washington, D.C., and over the last two days, October 6 and 7, here in Seoul. As the principal conclusions of both meetings are contained in the press communiqués issued at their end, I shall here limit myself to a few brief remarks on some of the highlights of the discussions.
Consideration of Key Policy Issues in a Medium-Term Framework
At its meeting in the spring of 1985, the Committee discussed, in a medium-term framework and in the context of a global financial environment, certain key policy issues relating to the adjustment process, including particularly the issues of external indebtedness, international capital flows, trade policies, and the role of Fund surveillance in dealing with these issues. In its discussion of world economic prospects in the medium term, the Committee stressed the special responsibility of the major industrial countries to pursue policies that would result in sustainable noninflationary growth and would permit developing countries growing access to markets. Such an environment would also facilitate the implementation of the necessary adjustment policies by the debtor countries. While noting that many developing countries had made progress in dealing with their debt servicing difficulties, the Committee also recognized that for a number of countries, these problems remained serious and their resolution would require sustained and coordinated efforts by both creditor and debtor countries, taking into account the particular circumstances of each case. In this connection, the Committee welcomed examples of multiyear rescheduling arrangements for commercial debts of some countries, and also the intention of the Paris Club to consider, in particular, cases and, in close cooperation with the Fund, multiyear reschedulings for debtor countries with a proven record and continuing prospects of sound adjustment. The Committee also invited the industrial countries to consider, subject to standard national policies and in appropriate cases, resumption of export credit cover.
World Economic Outlook
In its review of the world economic situation during the meeting earlier this week, the Committee was able to note several favorable developments: inflation has been lowered further, interest rates have continued to decline, efforts have recently been made to ensure a better adjustment of major exchange rates to economic fundamentals, and balance of payments deficits in the developing countries have been considerably reduced. However, the Committee recognized that the pace of economic recovery in the industrial world in the first half of 1985 had been slower than expected. There had been a significant decline in primary commodity prices and a weakening in the developing countries’ export earnings and growth prospects. While economic activity was expected to strengthen in the second half of 1985 and in 1986, a number of uncertainties in the outlook were underlined. These included the persistence of high fiscal deficits in a number of countries; an unsustainable pattern of current account positions; weak commodity prices; the fragility in the external position of a number of indebted countries; structural inflexibilities that inhibit growth in many economies; and the resurgence of protectionist pressures.
In confronting them, the Committee took the view that the medium-term scenario visualized in the spring remains feasible but requires effective action. In this connection, particular stress was placed on the need for a substantial and sustained reduction of budget deficits by those countries where they were excessive. In addition, to broaden the basis of the global recovery, countries with strong external positions and good inflation records were considered well placed to enhance their contribution to strengthening world economic recovery.
For many developing countries, the imperative of continuing to persevere with adjustment policies continues to be valid. The Committee noted that a number of indebted countries have been making commendable progress toward the resumption of access to capital markets. However, recent developments had adversely affected external positions and economic prospects of a number of developing countries. Against this background, the Committee underscored that a higher and sustainable rate of growth in the indebted countries was essential to make debt servicing more manageable and, to this end, certain conditions remained necessary: a satisfactory growth rate in the industrial world; a policy mix that permitted a further decline in interest rates; adequate flows of finance, both official and commercial; and success in resisting protectionist pressures. It could not be overemphasized at this time that free access to expanding world markets and the preservation of an open trading system were indispensable to sustaining the current world economic recovery.
The Committee reaffirmed the Fund’s key role in promoting the process of adjustment, in providing balance of payments financing, and in helping to mobilize financial resources for the debtor countries.
Enlarged Access Policy
As you are aware, the Fund’s policy on enlarged access is a facility of a temporary character, and the policy itself, the access limits under it, as well as the access limits under the special facilities, are to be reviewed annually. Accordingly, the Committee carried out such a review at its recent meeting and concluded that in view of the uncertainties facing the world economy and serious payments difficulties confronting many members, the enlarged access policy should be continued with only modest adjustments in the access limits for 1986 and that there should be no change in the access limits under the special facilities. It was agreed that access under the enlarged access policy in 1986 should be subject to annual limits of 90 or 110 percent of quota, three-year limits of 270 or 330 percent of quota, and cumulative limits of 400 or 440 percent of quota, depending on the seriousness of the balance of payments need of the member country and the strength of its adjustment effort. As at present, the Executive Board should retain the flexibility to approve arrangements for amounts above these access limits in special circumstances. The Executive Board is to complete, before the end of this year, the necessary action to implement the above agreement.
Utilization of Trust Fund Reflows
The Committee arrived at the following conclusions concerning the utilization of resources arising from the repayments of loans made by the Trust Fund:
(a) These resources (about SDR 2.7 billion), which might be supplemented with funds from other sources, are to be used to provide additional balance of payments assistance to the low-income countries eligible for IDA resources that are in need of such assistance and face protracted balance of payments problems. In this connection, the Committee welcomed the statements made by the representatives of China and India that they would not avail themselves of the facility in the period 1985–91.
(b) This assistance should be made available to countries implementing economic programs designed to promote structural adjustment and growth in a medium-term framework. These economic programs should be reviewed periodically. Given the emphasis on structural adjustment, it was important that the Fund should work in close collaboration with the World Bank, while avoiding cross-conditionality.
(c) The terms for the use of the resources, such as the rate of interest and the period of repayment, should be similar to those applied to loans from the Trust Fund.
(d) These arrangements would not adversely affect the availability of concessional development finance for low-income countries not utilizing Trust Fund reflows.
The Executive Board has been requested to complete its work on this matter, in the light of the guidance provided, before the Committee’s next meeting.
The question of an SDR allocation in the current basic period was on the agenda of both meetings of the Committee that I am reporting on, and, to my personal regret, the degree of support required for an allocation continues to be unavailable. The Committee reiterated that the SDR constitutes an integral part of the structure of the Fund and agreed to consider the matter again at its next meeting in the light of developments. The Committee also urged the Executive Board to carry out as a matter of priority its planned review of the role of the SDR, in all its aspects, in the evolving international monetary system and to submit to the Committee a progress report for consideration at the next meeting of the Committee.
Reports on the International Monetary System
Finally, the Committee had a preliminary exchange of views on the reports on the international monetary system presented by the Group of Ten and the Group of Twenty-Four. It was agreed that the Executive Board should study the issues raised with a view to facilitating a substantive consideration by the Committee at its next meeting. In my capacity as Chairman, I have undertaken to communicate with the Chairman of the Development Committee to see to what extent arrangements could be made for cooperation on matters pertaining to development.
In concluding, I would like to express on behalf of members of the Committee, and myself personally, our appreciation to the Government and the people of the Republic of Korea, and to the city of Seoul, for the warm hospitality extended to us and the excellent arrangements that were provided for the meeting.
It has been agreed to hold the next meeting of the Committee on April 9 and 10, 1986 in Washington, D.C.
Statements by the Governors of the Fund for Luxembourg—Jacques F. Poos
Since Luxembourg is at present exercising the presidency of the Council of the European Economic Community, I have the honor to address this meeting on behalf of the countries of the European Economic Community.
Let me first express my warmest gratitude to the Korean authorities and people for their exquisite hospitality and for the perfect organization of this year’s Annual Meetings of the World Bank and the International Monetary Fund. I would also like to convey to the Korean people our congratulations and our admiration for the outstanding economic performance they have achieved during the last decades.
Turning to the world economic outlook, we have to acknowledge that, after almost two years of strong expansion, global economic growth has slowed in 1985, owing to the weakening of the stimulus provided by the expansion of demand in the United States. But at the same time, this growth is geographically more balanced. While inflation has been brought down, the unemployment problem remains very severe in a number of countries. In addition, large imbalances have emerged in international payments, which may not be sustainable in the medium term and may pose a threat to growth and financial stability. Finally, high levels of real interest rates may still hamper investment, although they have come down somewhat.
More recently, the business sector and financial markets have developed a more skeptical appraisal of further growth prospects in the United States along the lines which prevailed during the years 1983–84. Projections for the U.S. economy have been revised downward; however, the exchange rate for the dollar has been coming down in an orderly fashion. A continuation of these trends could improve the competitiveness of the U.S. economy and in time bring about a reduction in its very large trade deficit. As growth in the U.S. economy slows to a more sustainable rate, it is essential that other industrial countries consider how they could best support global economic growth.
Although the restoration of a better external and internal balance in the U.S. economy will take time, the recent stronger efforts to move in that direction may have important consequences for the rest of the world. Given the key role of the dollar, the functioning of the international monetary system—and in particular the prospects for exchange rate stability in the longer term—could be enhanced considerably. Financial flows could revert to more sustainable patterns and interest rates could come down.
The ten member countries of the Community, which will soon be joined by Spain and Portugal, have taken a number of steps to remedy the structural weaknesses of their economies. Although progress may vary, the trend of action is clear. Excessive budget deficits are being brought under better control in most member countries and in some instances have been reduced significantly. Inflation and inflation differentials have come down. There has been a considerable improvement in the current account position of most member states of the Community and some progress in reducing wage and labor market rigidities.
More remains to be done in reducing structural rigidities and restoring or improving the profitability and competitiveness of companies. The implementation of expenditure restraint and increased efficiency in public sector spending and tax collection can further alleviate the burden of taxes and levies and thus increase the scope for private sector activity. The Community firmly takes the view that this fiscal stance, combined with appropriate monetary policies, is a basic condition for sustainable, non-inflationary growth and for bringing down the intolerably high rates of unemployment.
While the growth prospects for the world economy may in our view warrant moderate optimism for the shorter term and greater confidence in the medium term, we have to add, however, two important elements of caution about potential handicaps which may arise in connection with the debt situation, on the one hand, and with the dangers of protectionism, on the other.
With regard to the debt problems, the Community expresses full confidence in the way the international community, together with the Fund, is handling the situation, taking account of the specific nature of each individual case and providing a framework of trust for all parties involved. Strong and valuable adjustment efforts have been achieved by many developing countries, with substantial results. These efforts have been sustained by the creditors who managed to address debt problems with flexibility; but the results, though unquestionable, are fragile. Efforts already undertaken must be pursued and deepened. Continuation of cooperation and dialogue between debtors, creditors, and international organizations is of the utmost importance, for there are not even short-term advantages to be gained through unilateral action. The orderly reabsorption of excessive foreign debt will be facilitated by continued growth and the maintenance of recent trends in exchange rates and interest rates, as well as by the rollback of protectionist tendencies.
Protectionism in its various forms and a lack of willingness to opt for open markets have led to an ever more complicated maze of outright barriers, administrative hurdles, agreed quotas, voluntary restraints, and an increasing portion of world trade taking the form of bilateral or multilateral bartering.
In a world where economies are more and more interdependent in both real and financial terms, governments must make it a priority to resist and reduce protectionist pressures and to convince their public of the shortsightedness of the protectionist approach.
The Community therefore reconfirms its view that the preparation of a new round of multilateral trade negotiations within the framework of the General Agreement on Tariffs and Trade (GATT) should be concluded as soon as possible. The prospects for successful negotiations depend primarily on the readiness of governments to effectively hold and roll back protectionist measures. In this context progress is also required in the achievement of more stable monetary and financial conditions, which underpin the functioning of international trade. Parallel results should therefore be sought in the trade and monetary fields.
On this occasion, the member states of the Community welcome the work that has already been done by the Group of Ten on the functioning of the international monetary system and consider that the recommendations of its report should be given priority attention. The contribution recently presented on these matters by the Group of Twenty-Four also calls for careful consideration. The Community member countries emphasize the need to continue to examine thoroughly all the issues relevant to the orderly functioning of the international monetary system.
On the issue of an allocation of SDRs, the member states of the Community welcome the comprehensive review of the future role of the SDR in the international monetary system, which is to be undertaken by the Executive Board of the Fund, and hope that this study will help clarify the issues and thus delineate the scope for any action in this field.
In view of the remaining strains and uncertainties in the international economy and to allow the Fund to fulfill its role in a flexible way as an agent of international adjustment, we welcome the decision to continue the policy of enlarged access for another year.
The difficult prospects that remain for many low-income developing countries prompt the member countries of the Community to view the remainder of Trust Fund loan repayments as a way of providing concessional assistance in a flexible manner through the special disbursement account to eligible countries embarking on Fund adjustment programs.
The member states of the Community also support the strengthening of Bank-Fund collaboration, without jeopardizing the unique purposes of each institution. We encourage the Bank, through policy dialogue with borrowers, to design Bank programs which complement the short-term, more financially oriented, Fund programs. The Bank should in a flexible way play a large and continuous role in financing structural adjustment, using its various instruments while preserving loan quality and prudent financial policies. . . .
The Seoul meetings of the World Bank and the International Monetary Fund have induced significant progress in our common efforts to overcome the economic imbalances and the financial strains that characterize the world economy.
All our nations share important responsibilities and obligations in the organization of free and fair trade and in the management of a stable international monetary and financial system.
In pursuing policies conducive to sustained growth and to higher employment in each of our countries, we can make the best contribution to the overall prosperity of all nations.
Finally, I would like, speaking for Luxembourg, and in the name of the ten member states of the EEC, to express to President Clausen our deepest gratitude and appreciation for the inspired way he has guided the World Bank and its affiliates during the last five years.
Statement by the Governor of the Fund and the Bank for Brazil—Dilson Domingos Funaro
I am greatly honored to address the Annual Meeting of the Board of Governors of the International Bank for Reconstruction and Development and its affiliates, the International Development Association and the International Finance Corporation, speaking on behalf of Argentina, Bolivia, Colombia, Chile, Costa Rica, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Spain, Suriname, Uruguay, Venezuela, and of my own country, Brazil.
I would like first to express our pleasure at the appointment of Mr. Mamoudou Touré, Governor for Senegal, as Chairman of this meeting. May I also convey cordial greetings to Mr. Clausen, President of the World Bank, and to Mr. de Larosière, Managing Director of the International Monetary Fund, and a warm welcome to the Kingdom of Tonga as a new member of the Bank.
We are grateful to the Government of the Republic of Korea and the authorities of the city of Seoul for the excellent arrangements for these meetings. To the Korean people, our thanks for the friendly hospitality extended to us.
The international environment in which we meet this year continues to be negative, especially for the developing countries. This is particularly worrisome for the Latin American countries and the Philippines, which have been confronted, at different levels, with problems related to external indebtedness.
What we have seen in the first half of this year is a deceleration in the pace of economic recovery of the industrial countries, combined with a sharp decline in the price of commodities. According to the IMF, the average price of non-oil commodities is estimated to be 25 percent lower in 1985 than in 1980. These events, combined with increased protectionism, hinder the growth prospects for our export earnings, meaning harsher adjustments for our countries at a moment when we need to resume economic growth.
The situation calls for an equitable distribution of the burden of adjustment between creditors and debtors. Alternative mechanisms and viable solutions should be devised to tackle the problem of foreign indebtedness. In this connection, I would like to raise the following points:
1) Regulatory and other governmental agencies should proceed to review their rules concerning banking practices, with a view to reconciling those rules with the requirements of refinancing and new lending.
2) Governments and agencies of industrialized countries should adopt a more constructive approach in rescheduling the debts of developing countries under the aegis of the Paris Club and in extending new credits to them.
3) International financial organizations should be provided with enough capital resources to enable them to act more effectively in the adjustment process of indebted countries, and at the same time they should adopt flexible mechanisms to help those countries to service their debt with these organizations when adverse exogenous factors arise which affect their repayment capacity. . . .
As this is the first time a member of the recently elected Government of Brazil addresses the Annual Meetings of the Bank and the Fund, allow me to present some considerations on my country’s economy.
We have set a target rate for economic growth of 6 percent a year, from 1986 onward. Lower growth rates would hinder adequate labor absorption and delay the process of recovery of per capita income to the levels prevailing before the recession of the early 1980s.
The accomplishment of such a target for sustained economic growth is contingent not only upon the control of inflation but also on the Government being able to promote a significant reduction of the domestic interest rate in real terms, which, in turn, depends on a satisfactory solution of the financial imbalances of the public sector and of the external debt renegotiation process—problems that have to be tackled together. An adequate refinancing of our external debt appears, then, to be the key to successful management of the economic problems challenging Brazil. Attaining projected levels of economic growth, however, cannot be an objective in itself. We will also pursue an equitable distribution of its benefits.
I would like to avail myself of this opportunity to put on record that one of the commitments my Government has taken upon itself is the reduction of regional disparities within Brazil. This, I think, is a matter that could lead to fruitful dialogue between my country and the World Bank, the positive results of which could be extended to other countries.
I cannot end this statement without expressing our solidarity with the Mexican people for the tragic disaster which befell their country. We call upon the international community to support Mexico’s reconstruction effort.
Statement by the Governor of the Fund and the Bank for Ireland—Alan M. Dukes
I want to begin by joining with the preceding speakers in thanking the Korean authorities for the welcome that they have given all of us here, and for the magnificent facilities which they have put at our disposal.
I would like, then, to thank the Chairman of the Interim Committee, Mr. Ruding, for the report that he has given, and, indeed, for the commitment that he has shown to the work of the Committee, even to the point of being here in spite of some medical difficulties lately. It shows, indeed, the commitment that the work of that Committee can bring about among our colleagues and, indeed, the commitment that the work of the Bank and the Fund deserve from all of us who are serious about what we are doing.
I would also like, on behalf of my own Government, to endorse what our colleague, Mr. Poos, said a few moments ago on behalf of the countries of the European Community.
The IMF staff is to be congratulated on its medium-term assessment as set out in the World Economic Outlook. Some of us may have reservations about the optimism of the projections, especially in light of the downward revisions over recent months. Many of the assumptions on which they are based may be disputed because of the downside risks involved. Nevertheless, I feel that the conclusions drawn are still valid.
Despite the improvements and adjustments in individual economies over recent years, world trade is not expected to increase fast enough to provide the growth in employment which we all wish to see, or to solve the other acute difficulties of the developing countries. While there have been significant improvements, reflected in lower inflation, strengthened profits, and reduced interest rates, there has not been an adequate or sufficiently balanced response in terms of increased investment and domestic demand.
It is clear that the pace of recovery is being threatened by the serious imbalances in the international financial and economic environment. The Group of Five, at its meeting last month, gave due recognition to this threat in its communiqué. Many of us believe that the main reason for the persistence of high real interest rates and the distortion of international capital flows stems from the failure of exchange rates to reflect these external imbalances. The Group of Five rightly points out that the U.S. current account deficit, together with other factors, is now stoking protectionist pressures which could easily lead to mutually destructive retaliation with serious danger to the world economy; growth rates could become negative; unemployment would rise still higher; and debt-burdened developing countries would be unable to secure the export earnings they vitally need.
Policy action is, therefore, required to underpin the prospects for durable, non-inflationary growth. While a key requirement of this strategy must be a correction of the fiscal and external deficits of the U.S. economy, there is also an onus on other countries to consider what scope they may have for compensatory policy action on a credible scale to offset the effects of a deceleration in U.S. import demand.
These global developments have, of course, their impact on the Irish economy. Last year, we recorded growth in GNP of a little over 2 percent, following two years of decline, while further reducing our inflation rate and continuing the improvement in our external accounts. The indications for 1985 are that these favorable trends will be consolidated, with a further modest advance in national output. The inflation rate has fallen to the level of that in our main trading partners and the deficit on the current balance of payments will narrow to about 4 percent of GDP. In common with the wider European experience, however, we have been faced with a deteriorating employment situation, aggravated in our case by the needs of a rapidly growing work force. The unemployment rate in Ireland has, in consequence, grown to over 17 percent this year. In addition—and in some measure because of this—we are faced with a persistent imbalance in our public finances, despite both increases in taxation and restraints on expenditure.
We are thus faced simultaneously with the need to tackle the unemployment problem and to continue the process of improving our budgetary and external accounts. This poses difficult problems of economic management. I am, therefore, acutely conscious of the dilemma confronting policymakers in a great many other member countries.
In the final analysis, the fundamental solution to our problems lies in the maintenance of an export-led expansion. This will make easier the restoration of a better budgetary balance, will loosen the external constraint, and will directly benefit employment prospects. Given time, it will also promote the investment required to restructure and expand capacity. For our own part, we can lay some of the groundwork for this kind of expansion by sharpening our competitiveness and improving the domestic environment. These are key factors in my Government’s strategy and we can point to important gains in this respect. Yet we have to face the fact that, however critical these elements, ultimately we depend on the growth of our overseas markets and on a stable international financial environment to maintain the momentum of our economy.
The sharp increase in real interest rates and the volatility of exchange rates have been major obstacles to our efforts to strengthen the capacity of the Irish economy and to come to grips with the unemployment problem. They have considerably prejudiced the capacity of the economy to grow and sustain jobs. They have also aggravated our budgetary problems, both directly by adding to the cost of servicing outstanding debt and indirectly by impeding the compression of our borrowing needs.
While nominal interest rates are falling, real rates are still at a historically high level; further reductions will be needed before my country, and others with much more onerous burdens of indebtedness, can experience worthwhile relief. Balanced growth cannot be sustained if high real interest rates continue to stifle investment and prevent debtor countries from getting off the treadmill of their indebtedness.
Recent events have, however, given us some encouragement. We welcome, in particular, the greater recognition of a need for mutual consistency in policies among the major economic powers and their commitment to a balanced and sustained expansion and to exchange rates which better reflect macroeconomic fundamentals.
The IMF and the World Bank have played a major and innovative role in recent years in helping developing countries to overcome their difficulties. Much has been achieved by these countries through their often painful adjustment policies. Nevertheless, they are still faced with enormous problems, which will require sustained effort on their part. The industrial countries and the international financial institutions must continue to support these efforts and build on them where necessary.
In this context, I am disappointed that it has not been possible to reach agreement on a further allocation of SDRs. The longer-term studies of the role of the SDR initiated by the IMF Executive Board are welcome, but meanwhile there is a good case for an allocation in the current basic period. The current and expected expansion of world trade will require an increase in official reserves.
It would be appropriate to satisfy some of that global need through a modest allocation of SDRs, if only to reduce the dependence of member countries on borrowed reserves.
The continuation of the policy of enlarged access for another year, which has now been agreed, is clearly justified in order to sustain confidence in the international monetary system. Enlarged access has allowed the Fund in recent years to provide large-scale financial assistance to countries in acute balance of payments difficulties, assistance which has in turn acted as a catalyst for additional bank lending. Given the uncertainties of the world economic outlook and the fragile position of many developing countries, prudence recommends that the Fund should retain this valuable resource in its policy armory.
I welcome the decision to use repayments of Trust Fund loans for lending to low-income countries. A number of interesting ideas have been put forward on how this should be done, some involving close collaboration between the IMF and the World Bank. I hope that, drawing on these and other ideas, agreement on an effective scheme can be reached at an early date.
The reports on the functioning of the international monetary system prepared by the Group of Ten and the Group of Twenty-Four call for detailed consideration, and I look forward to a full discussion of them at the spring 1986 Interim Committee meeting, following their examination by the IMF Executive Board. . . .
The interdependence of the world’s economies has become more evident in recent times, particularly through the effects of the major shocks and imbalances which we have experienced. Much has been done to cope with these effects, but much remains to be done. It is only through full cooperation by all countries, in conjunction with the efforts of the IMF and the World Bank, that progress can be made. I look forward to participating in this cooperative effort.
Statement by the Governor of the Bank for France—Pierre Bérégovoy
I would like first of all to express my thanks on behalf of France to Mr. de Larosière and Mr. Clausen for the quality of their reports and the activities which they have undertaken throughout this year at the head of the International Monetary Fund and of the World Bank. I would like to thank particularly the President of the World Bank, who announced this morning that he would not ask for a renewal of his mandate.
Since our last Annual Meetings, the world has been hesitating as to what path to take. The improvements foreseen in the middle of last year have given way once again to uncertainty. The economic recovery is marking time, and the hopes placed in it for reducing still very high levels of unemployment and resolving the debt problems of the developing countries have been dashed.
However, some grounds for hope have appeared in recent weeks, because our views have moved closer together on two essential points: the need, after the sharp rise in the dollar earlier in the year, for a readjustment of the parities of the major currencies; and the crucial need for a general and rapid resumption of growth.
We sometimes tend to dwell on what divides us. Let us take a look at the views we share, beyond the concept that each of us has of the future shape of society. What draws us together is, in fact, the conviction that it is increasingly difficult to preserve islands of growth when the world economy is in crisis. Even the countries showing the best economic performance suffer when activity slows down in any given part of the world. The interdependence of national economies is the new and important fact of this latter half of the century. This is not to say that the best will not manage to emerge relatively unscathed. But they, too, are becoming more and more aware of the fact that this situation can last only so long.
We are all in the same ship. The unemployment problem is common to all countries, but is of course more acute in the developing countries where so much remains to be done as regards basic infrastructure; moreover, because of the crisis, these countries are facing the risk that the gap between themselves and the industrial countries may become even wider. A slowdown in the world economy hits the developing countries more rapidly than others; each downward movement is reflected in a reduction in the volume of trade, falling prices of raw materials, and a debt burden made heavier as a consequence of high interest rates.
There is cause for concern here: if worldwide economic growth does not meet expectations in the years ahead, the sacrifices that the people of the debtor countries have been asked to make will be lost. How could we fail to consider the social and economic consequences of such a turn of events? How can we not be concerned by the risks of destabilization of the financial system that are inherent in this situation? How can we not see that political equilibrium in these countries may well be jeopardized, even as several of them have just returned to the path of democracy?
It is not enough to analyze a situation correctly. We must provide the tools needed to improve it. In politics, “how” is at least as important as “why. “
It seems to me that we must set ourselves three objectives: first, to speed up growth; second, to ward off the threat of protectionism; and third, to build up the conditions for optimum financing of development.
1. Growth is today being held back by weak domestic demand in countries with major trade surpluses and by interest rates that are too high. It should therefore be a matter of priority to return to more balanced growth between domestic demand, on the one hand, and exports, on the other. The commitments entered into in New York by a number of industrial countries are extremely important from this point of view. But let us not forget that growth would be short-lived if inflation were to flare up again. This explains why we, for our part, attach such great importance to curbing public outlays. France has embarked on a vigorous policy designed to reduce inflation and modernize its industrial and financial structure. More sustained worldwide growth would strengthen the results we have achieved.
2. Free trade has been a decisive factor in the development of the world economy. Customs barriers still exist, to be sure, and certain countries are past masters at selecting their imports. However, movement in the direction of free trade has been continuous up until recently, when the intensification of trade imbalances revived the threat of protectionism.
As you know, France has always held that there is a link between monetary and trade problems. We pointed out that overvaluation of the U.S. dollar led to relentless speculation on the capital market and lopsided terms of competition between economies. The recognition, in New York, that exchange rates as fixed by the market did not reflect underlying economic realities serves as confirmation of what we had long been thinking, as forcefully expressed by the President of the French Republic, Mr. Francois Mitterrand, at the Versailles and Williamsburg summits. We welcome this development. It is good that realism and pragmatism are winning out over earlier certainties. Dogmatism has never been a good counselor.
The French Government has pointed the way toward a possible reform of the monetary system. As I have already had occasion to observe, this does not mean that France advocates an all-or-nothing approach. Concerted management of floating exchange rates constitutes an important step forward in the search for greater monetary stability. Differences remain on what is desirable in the long term. There is a vast area—which has barely begun to be explored—between a system of floating exchange rates that has demonstrated its inadequacies and a return to a system of fixed exchange rates. Two reports are currently under review, prepared by the Group of Ten and by the Group of Twenty-Four, respectively. France trusts that next spring’s meeting of the Interim Committee, which will be called upon to arrive at preliminary decisions, will be carefully prepared not only through intensive work in the Fund’s Executive Board, but also through regular contacts among all the responsible authorities.
This progress in the monetary sphere has created a favorable climate for the preparation of new multilateral trade negotiations. The meeting of experts in Geneva a few days ago has made a useful contribution. What is important in this area is that all the issues be put on the table and that all the developing countries participate fully in the preparatory negotiations within GATT. These are the main conditions for success of the upcoming new round of trade talks.
3. I now come to the third issue I raised a few minutes ago, namely that of development financing, the focus of discussion at our Annual Meetings. Experience shows that the efforts made by the developing countries to reestablish financial equilibrium have no chance of achieving lasting results unless they are accompanied by a strengthening of their production system and improved living conditions for their people. The path that, in my opinion, the international community should take is therefore self-evident.
How can we secure larger capital flows? To open an academic discussion on the respective merits of official aid, commercial bank lending, and private investment would not serve any useful purpose. All forms of investment and financing need to be mobilized. But it is obvious, as many representatives of developing countries have pointed out within the Development Committee, that it would be mere illusion to believe that private finance can take the place of public finance. In fact, I am convinced that private capital will flow more readily to developing countries as public financing increases.
Public multilateral financing has an essential role to play: this is true both of the Fund and of the development banks. In this context, priority should be given to providing the World Bank with the resources it needs to take the lead in development financing. This would imply a rapid decision on a capital increase. . . .
The forthcoming implementation of the procedure for onlending Trust Fund reflows, which France had proposed last April, is a further argument for a sizable IDA replenishment, which would facilitate increased cooperation between the Bank and the Fund in this area.
While the prospects opened by the Trust Fund are encouraging for the poorest countries—and here I welcome the position taken by China and India in waiving exercise of their rights—the case of certain major debtor countries with higher per capita incomes continues to pose a formidable problem.
In their case, the idea of involving the commercial banks more directly seems attractive to me. This presupposes, as has been pointed out, that cofinancing operations can be arranged with the World Bank’s support. I hope that this will be translated into concrete decisions as rapidly as possible, and France for its part is prepared to encourage its banking system to be forthcoming. . . .
For the same reason, I regret that it has not been possible to reach agreement on a new allocation of SDRs, even though the reserves of the developing countries are shrinking, and I even more deeply regret the decision to reduce, even symbolically, the limits on access to Fund resources. This decision was not justified on technical grounds, as Mr. de Larosiére has demonstrated, as the Fund has adequate resources available. Politically, it was inopportune.
There is nothing inevitable about monetary disarray. There is nothing inevitable about underdevelopment. There is nothing inevitable about poverty. Misery is all too often the result of our weaknesses or our rivalries.
Everything depends on us, on our ability to overcome our national antagonisms, on our willingness to rise above our doctrinal differences.
For years now, we have been discussing the North-South dialogue, the new international economic order, and reform of the international monetary system; progress has been distressingly slow. In this forum too, year after year, these issues have to be tackled again. Let us not lose heart; we should always remember that servitude is not only a consequence of despotism but is frequently also the bitter fruit of poverty. This dictates what we must do. It is our duty to do everything in our power not to shatter the hopes that hundreds of millions of men and women still place in international solidarity.
Statement by the Governor of the Fund and the Bank for the United States—James A. Baker III
It is a pleasure to be here for the Fortieth Annual Meetings of the International Monetary Fund and the World Bank. Strong, effective international financial institutions are as essential to our economic well-being today as they were forty years ago. And these institutions are strong today, thanks to their leadership. And, President Clausen, we owe you a debt of gratitude for a job well done.
Our host country, Korea, is a nation whose economic success is surpassed only by its warm hospitality. Korea’s market-oriented approach and strong emphasis on private initiative are a lesson for us all.
Foundation for Growth
I would like to focus my comments today on policies for growth within the context of the international debt strategy. Sound policies and sustained, low-inflation growth in the industrial countries must provide the essential foundation for a successful debt strategy, and are a prerequisite for stronger growth in the debtor countries.
The major industrial countries have already made considerable progress in this direction. Two weeks ago in New York the finance ministers and central bank governors of the Group of Five industrial nations underscored the progress which had been achieved, particularly with regard to the convergence of economic performance toward sustained, low-inflation growth. They also announced a set of policy intentions that will help to consolidate and extend that progress and to improve and sustain growth for the longer term.
We emphasized, for our own countries, the central importance of reducing structural rigidities, strengthening incentives for the private sector, reducing the size of government, and improving the investment environment. We also rededicated our governments to resisting protectionist pressures that threaten our own prosperity and the opportunities for others. We must jointly accelerate our efforts to launch a new round of trade negotiations within the GATT.
These industrial nations agreed that the significant progress already achieved in promoting a better convergence of their economic performance had not been fully reflected in exchange markets and that some further orderly appreciation of the main non-dollar currencies against the dollar was desirable. We expressed our willingness to cooperate more closely to encourage this when to do so would be helpful.
This package of measures had an immediate, significant impact on exchange markets which continues to be positive, and reflects the importance of the commitments made.
I am convinced that if each of the major industrial nations fulfills its policy intentions and maintains or improves access to its markets, we will have taken a major step toward more balanced and sustainable growth, while providing a solid framework for improving the debt situation in the developing world.
Strengthening the Debt Strategy
Fellow Governors, it is essential that we begin the process of strengthening our international debt strategy.
Three years ago the international financial community developed a flexible, cooperative, case-by-case strategy to address the debt problem and lay the basis for growth in the debtor nations. In three years:
—Aggregate current account deficits in developing countries have been sharply reduced from $104 billion in 1982 to $44 billion this year.
—Growth in developing countries has been restored to about 4 percent, compared to less than 2 percent in 1982.
—This growth has been fueled by sharp increases in developing nations’ exports, including a 21 percent increase in their exports to the United States last year.
These developments reflect improved growth and sharply lower interest rates in the industrial nations, as well as adoption of improved policies within most debtor countries. These policies have been given important support by reschedulings and rollovers amounting to approximately $210 billion, and by net new commercial bank lending.
The international financial institutions have also played an important role in the progress that has been achieved. The IMF in particular has very capably played a leadership role, providing guidance on policies and temporary balance of payments financing, both of which have catalyzed commercial bank flows.
Despite this progress, some serious problems have developed. A number of principal debtor countries have recently experienced setbacks in their efforts to improve their economic situations, particularly with regard to inflation and fiscal imbalances, undercutting prospects for sustained growth. Bank lending to debtor nations has been declining, with very little net new lending anticipated this year. The sense of increasing reluctance among banks to participate in new money and debt rescheduling packages has introduced serious uncertainties for borrowers, in some cases making it more difficult for them to pursue economic reforms.
These problems need to be addressed, promptly and effectively, by building upon the international debt strategy in order to improve the prospects for growth in the debtor countries. This is an enterprise which will require, above all, that we work together and that we each strengthen our commitment to progress.
If the debt problem is to be solved, there must be a “Program for Sustained Growth,” incorporating three essential and mutually reinforcing elements:
—First and foremost, the adoption by principal debtor countries of comprehensive macroeconomic and structural policies, supported by the international financial institutions, to promote growth and balance of payments adjustment, and to reduce inflation.
—Second, a continued central role for the IMF, in conjunction with increased and more effective structural adjustment lending by the multilateral development banks (MDBs), both in support of the adoption by principal debtors of market-oriented policies for growth.
—Third, increased lending by the private banks in support of comprehensive economic adjustment programs.
I want to emphasize that the United States does not support a departure from the case-by-case debt strategy we adopted three years ago. This approach has served us well; we should continue to follow it. It recognizes the inescapable fact that the particular circumstances of each country are different. Its main components, fundamental adjustment measures within the debtor nations and conditionality in conjunction with lending, remain essential to the restoration of external balance and longer-term growth.
We need to build upon the current approach to strengthen its ability to foster growth. There must be greater emphasis on both market-oriented economic policies to foster growth and adequate financing to support it.
In essence, what I am suggesting is that adequate financing can be made available through a combination of private creditors and multilateral institutions working cooperatively, but only where there are reasonable prospects that growth will occur. This will depend upon the adoption of proper economic policies by the developing countries. Financing can only be prudently made available when and as effective policies to promote economic efficiency, competitiveness, and productivity—the true foundations of growth—are put in place. We cannot afford to repeat the mistakes of the past. Adjustment must continue. Adjustment programs must be agreed before additional funds are made available, and should be implemented as those funds are disbursed.
These efforts should be mutually reinforcing. Sound policies in the principal debtor countries will not only promote growth, but will also stimulate the needed private bank lending. And it will be important that these policies be supported by the IMF, complemented by the MDBs. These institutions can help encourage and catalyze both needed policies and financing.
In today’s highly interdependent world economy, efforts at economic isolationism are doomed to failure. Countries which are not prepared to undertake basic adjustments and work within the framework of the case-by-case debt strategy, cooperating with the international financial institutions, cannot expect to benefit from this three-point program. Additional lending will not occur. Efforts by any country to “go it alone” are likely to seriously damage its prospects for future growth.
I would like to elaborate on the actions that will be required by each participant in this three-point program.
Structural Change in the Principal Debtors
The essence of the need for structural change in the principal debtors is captured in two quotations I would like to share with you.
The only way to overcome our economic crisis is to tackle at their root the structural problems of our economy to make it more efficient and productive.1
Economic growth will have solid foundations only if we re-establish trust and stimulate private enterprise, which must be the flagship of our economic development. . . . We will promote authentic institutional change in the economic sector.1
These are not the words of a U.S. Secretary of the Treasury. They are statements made in July of this year by the Presidents of Mexico and Brazil. I believe they reflect a growing sentiment in Latin America.
It is essential that the heavily indebted, middle-income developing countries do their part to implement and maintain sound policies. Indeed, without such policies, needed financing cannot be expected to materialize. Policy and financing are not substitutes but essential complements.
For those countries which have implemented measures to address the imbalances in their economies, a more comprehensive set of policies can now be put in place, promising longer-term benefits from stronger growth, higher standards of living, lower inflation, and more flexible and productive economies. These must not only include macroeconomic policies, but also other medium- and longer-term supply-side policies to promote growth.
We believe that such institutional and structural policies should include:
—increased reliance on the private sector, and less reliance on government, to help increase employment, production, and efficiency;
—supply-side actions to mobilize domestic savings and facilitate efficient investment, both domestic and foreign, by means of tax reform, labor market reform, and development of financial markets; and
—market-opening measures to encourage foreign direct investment and capital inflows, as well as to liberalize trade, including the reduction of export subsidies.
This broader approach does not mean that policy areas that have been the focus of efforts to date—in particular fiscal, monetary, and exchange rate policies—can receive less attention. Indeed, macroeconomic policies have been central to efforts to date and must be strengthened to achieve greater progress. These policies should consist of:
—market-oriented exchange rate, interest rate, wage, and pricing policies to promote greater economic efficiency and responsiveness to growth and employment opportunities; and
—sound monetary and fiscal policies focused on reducing domestic imbalances and inflation and on freeing up resources for the private sector.
The cornerstone of sustained growth must be greater domestic savings, and investment of those savings at home. Macroeconomic and structural policies which improve economic efficiency, mobilize domestic resources, and provide incentives to work, save, and invest domestically will create the favorable economic environment necessary for this to occur. Such an environment is also critical to attract supplemental foreign savings.
As a practical matter, it is unrealistic to call upon the support of voluntary lending from abroad, whether public or private, when domestic funds are moving in the other direction. Capital flight must be reversed if there is to be any real prospect of additional funding, whether debt or equity. If a country’s own citizens have no confidence in its economic system, how can others?
There are essentially two kinds of capital inflows: loans and equity investments. Foreign borrowings have to be repaid—with interest. Equity investment, on the other hand, has a degree of permanence and is not debt-creating. Moreover, it can have a compounding effect on growth, bring innovation and technology, and help to keep capital at home.
We believe that the debtor nations must be willing to commit themselves to these policies for growth in order that the other elements of a strengthened debt strategy can come into place.
Enhanced Effectiveness of the International Financial Institutions
The international financial institutions must also play an important role in strengthening the debt strategy to promote growth. However, we must recognize that the international financial institutions cannot have sufficient resources to meet the debtor nations’ financing needs all by themselves. An approach which assumes that the IMF and the World Bank are the sole answer to debt problems is simply a nonstarter. For most developing countries other sources must play a more important role. These include private sector borrowing, increased export earnings, foreign equity investment, and repatriation of capital which has fled abroad. All these routes should be pursued.
Among the international financial institutions, the IMF has played a major role in advising member nations on the development of policies necessary to promote adjustment and growth. There has been a particular focus on monetary, fiscal, and exchange rate policies, although increasing attention is being paid to other areas such as trade liberalization, pricing policies, and the efficiency of government-owned enterprises.
Emphasizing growth does not mean de-emphasizing the IMF. Through both its policy advice and balance of payments financing, the Fund has played a critical role in encouraging needed policy changes and catalyzing capital flows. It must continue to do so. But it must also develop new techniques for catalyzing financing in support of further progress. “Enhanced surveillance,” for example, can sometimes provide an effective means of continued IMF involvement.
The Fund should give higher priority to tax reform, market-oriented pricing, the reduction of labor market rigidities, and to opening economies to foreign trade and investment. This will help assure that Fund-supported programs are growth-oriented. It will be particularly important for the Fund to work closely with the World Bank in this effort.
I would now like to turn more directly to the role of the MDBs, which need to be brought into the debt strategy in a stronger way, without diminishing the role still to be played by the IMF. . . .
Increasing Lending by the International Banking Community
The international banking community has played an important role during the past three years. I am, however, concerned about the decline in net bank lending to debtor nations over the past year and a half, particularly to those nations that are making progress. All of us can appreciate the commercial banks’ concerns, but we believe these concerns would dissipate if the banks were confident that new lending is in support of policies for growth in the developing nations.
If creditor governments, in an age of budget austerity, are to be called upon to support increases in multilateral development bank lending to the debtor nations, and if the recipient nations are asked to adopt sound economic policies for growth to avoid wasting that financing, then there must also be a commitment by the banking community—a commitment to help the global community make the necessary transition to stronger growth.
Our assessment of the commitment required by the banks to the entire group of heavily indebted, middle-income developing countries would be net new lending in the range of $20 billion for the next three years. In addition, it would be necessary that countries now receiving adequate financing from banks on a voluntary basis continue to do so, provided they maintain sound policies.
I would like to see the banking community make a pledge to provide these amounts of new lending and make it publicly, provided the debtor countries also make similar growth-oriented policy commitments as their part of the cooperative effort. Such financing could be used to meet both short-term financing and longer-term investment needs in the developing countries, and would be available, provided debtors took action and multilateral institutions also did their part.
We would welcome suggestions from the banking community about arrangements which could be developed in order to ensure that adequate financing to support growth is available.
The Poorest Countries
Before concluding my statement, I would like to focus briefly on the problems of another set of debtor countries, the low-income debtors with protracted balance of payments problems. Special efforts are being made to assist these countries, but more can and should be done to improve their longer-term prospects.
The United States believes that the resources provided by the Trust Fund reflows provide a unique opportunity to help address the economic problems of the poorest countries with protracted balance of payments difficulties. Recent experience demonstrates that successful resolution of the economic problems of these countries requires a comprehensive approach, including fundamental structural policy changes, as well as sound macro-economic policies.
The $2.7 billion in Trust Fund reflows present us with an opportunity to utilize IMF resources, possibly supplemented by funds from other sources, in support of such comprehensive economic programs. The effectiveness of such programs would be enhanced by close cooperation between the Fund and Bank. In some cases, this could best be accomplished by a joint approach by the two institutions in support of comprehensive programs.
The United States is also prepared to consider a bolder approach, involving more intensive IMF and World Bank collaboration. We believe that this approach would help ensure that the institutions provide sound, mutually consistent advice on the full range of policies to promote growth.
The United States, which supported African countries with $1.7 billion in bilateral aid in 1985, would be prepared to consider seeking resources in support of such a far-reaching approach if other donors were prepared to make equitable contributions.
We recognize that some may have reservations about such an approach, viewing it as complicated and difficult to implement. I can understand some of those concerns, and believe they suggest the need for further reflection on certain aspects of this proposal. But, we cannot let parochial resistance or unfounded suspicions block an idea that can significantly help the poorest countries and strengthen ties between the Fund and the Bank. I urge you to give this approach further consideration during the months ahead.
In conclusion, much has been accomplished in the past few years in addressing the pressing economic problems of the early 1980s and preparing the foundation for future global growth. We must now join together to consolidate our progress in building stronger economies for the future.
Sound policies and growth in the industrial world can provide a solid foundation for strengthening and adapting the current international debt strategy. Let us not lose the present opportunity. I have proposed a three-point “Program for Sustained Growth” to provide renewed impetus for resolving the debt problem. We must not deceive ourselves. There are no easy solutions, and none of us can escape our responsibilities.
The principal debtor nations must make the hard policy decisions to restructure their economies. The commercial banks must provide adequate resources to support these efforts. The MDBs must increase the efficiency and volume of their lending.
Moving from proposal to implementation will be a demanding exercise and cannot be accomplished overnight. As we adapt our strategy, we must continue to look to the IMF as the catalyst for new financial flows. And with these new flows will come new hope.
We will be building on the efforts of the past. The needs are clearly recognized by borrowers and creditors alike. Fundamentally, there is no disparity of interest among our nations. We have a common interest in growth—sustained growth that rests on productivity, innovation, and investment. Let us begin our efforts now.
Statement by the Governor of the Fund and the Bank for Japan—Noboru Takeshita
Mr. Chairman, my fellow Governors, distinguished guests, ladies and gentlemen:
I wish first of all to join you in expressing my sincere gratitude for the favors given by the Government of Korea and for their great efforts devoted to organizing these joint Annual Meetings. The Korean economy has achieved miraculous growth, often called “the Miracle of the Han River.” The largest contributing factor to this growth, I think, has been the wisdom and the relentless endeavors of the Korean people themselves. At the same time, however, we should also observe that the IMF and the World Bank have each provided positive assistance to Korea, in terms of the promotion of appropriate economic management and the furtherance of development, respectively. The Government of Korea, in turn, has been very successful in making the best possible use of such assistance. This cooperation, I believe, has also significantly contributed to the remarkable growth of the Korean economy. It has also helped establish the Korean Government’s high creditworthiness. Consequently, I think it is very suitable and also a matter for the utmost congratulation that these Fortieth Annual Meetings are being held in such gracious surroundings in an exemplary member country where the activities of both institutions are steadily bearing fruit.
Finally, before I proceed, let me at this time extend a cordial welcome to the representatives of the Kingdom of Tonga, which recently became the newest member of the Fund and the World Bank.
The economies of the industrial countries in 1984 achieved a real growth rate of some 5 percent, which is the highest in about two decades. At the same time, the rate of inflation fell to its lowest level in the same period. Both achievements are largely attributable to the implementation of appropriate economic management in these countries. Their robust growth has had a favorable effect on the economies of the developing countries, which, as a whole, realized a growth rate substantially exceeding that of the previous year.
However, during this year, the expansion of the U.S. economy has decelerated. In addition, labor market conditions, especially in Western Europe, remain serious. Furthermore, large current account imbalances persist, mainly due to the strong dollar. Against such a background of increased uncertainties, I consider the following to be the two vital policy challenges for the present world economy. They are: one, the achievement of sustained non-inflationary growth by drawing on the vitality of the private sector; and two, the maintenance and strengthening of the free trade system. I will deal with each of these challenges in turn.
For the achievement of sustained non-inflationary growth, we need balanced progress in demand growth and supply increase. In this connection, short-run expansionary fiscal policies have the following three adverse effects, even if they raise demand temporarily.
First, imprudent expansionary fiscal policies not only do harm to the confidence of the private sector in stable economic management, but also apply upward pressure on interest rates. This exerts a negative influence on private investment in and outside the country concerned and thereby hampers sustained economic growth.
Second, continued expansionary fiscal policies lead to an accumulation of public debt accompanied by large debt service payments. This hurts the ability of the budget to respond flexibly to changing social and economic conditions, including a potential situation in the future when economic stabilization will be truly necessary.
Third, short-run expansionary policies run the risk of merely creating inflation, unless they are implemented to absorb idle human and material resources, such as cyclical and serious unemployment.
In the light of these adverse effects, we should not repeat, under the present circumstances, the mistake of the locomotive theory of the past. We should rather maintain and strengthen prudent fiscal policies in the medium-term framework.
Therefore, in order to promote balanced progress in demand growth and supply increase, we consider it appropriate to try and realize an autonomous rise in private investment. This can be done by drawing on the vitality of the private sector, or, in other words, by unleashing the intrinsic energy of the private sector. For this purpose, to put it more specifically, it is essential to take decisive measures, including the deregulation and privatization of public enterprises. This will foster competition and efforts at creative innovation by private enterprises by means of the market mechanism.
Now let me turn to the second policy challenge. The marked growth of the world economy during the past forty years owes much to the benefits of free trade supported by the IMF-GATT system. Therefore, my country views the present unprecedented rise in protectionist pressures as an emergency situation. And, indeed, as Minister Bérégovoy mentioned, my country considers it the most important policy challenge for the world economy that we resist such protectionist pressures and maintain and strengthen the free trade system. Such actions are also required for the resolution of the debt problem. To preserve and strengthen the regime of free trade, it is necessary that, in addition to dealing with structural rigidities that are the major cause of high unemployment, we should concentrate on the following two areas.
The first involves efforts in the area of trade policies. In other words, in order to maintain and strengthen the free trade system, it is essential that each country not only renew its appreciation for the benefits of such a system and avoid the introduction of new protectionist measures, but also affirmatively take up the task of opening up and liberalizing its market. To promote this, the individual efforts of each country should continue. At the same time, the New Round of Trade Negotiations should be started as a new international undertaking at an early date. In this respect, I am encouraged by the formal decision reached earlier this month at the special session of the GATT Contracting Parties to initiate the preparatory process for such negotiations.
The second involves efforts to correct exchange rates, the reason for which is clear. Exchange rates in recent years, by substantially distorting the relative prices of goods and services of various countries, have become the major cause of large and persistent current account imbalances. These imbalances, in turn, not only are inflicting heavy damage on export and import competing industries in deficit countries, but also are becoming a significant factor in the slowdown of their economic growth. In eonsequence, protectionist pressures have heightened to a dangerous level.
Exchange rates should better reflect fundamental economic conditions. Sharing the recognition that orderly appreciation of the main non-dollar currencies against the dollar is desirable, the SDR countries met earlier. They issued an announcement containing specific policy actions, promoting greater policy cooperation and making exchange rates more fully reflect fundamental economic conditions. Such efforts at policy cooperation, also underlined in the proposals by the Group of Ten, should continue in the future.
The world economy is also facing the major challenge of coping with the debt problem. There has been some improvement in the economic condition of indebted countries compared with a few years ago. This improvement is the result of progress in their adjustment efforts supported by the parties concerned, with the IMF playing the central role; the economic expansion in industrial countries; and the decline to some extent in interest rates. There has also been progress in individual debt relief negotiations. As a result, liquidity crises have been averted in indebted countries. However, we still see a number of sobering factors that do not allow optimism about future prospects. Therefore, the current response to the debt problem based on the spirit of cooperation of the parties concerned, with the IMF playing the central role and financing provided on a case-by-case basis, should be continued.
In addition, in the medium and long term, it is essential for the resolution of the debt problem to increase the productive capacity of the economies of indebted countries. This would provide substitutes for imports and increase exports, and thereby accomplish the needed correction of structural disequilibrium in the balance of payments. Toward this end, furtherance of economic development in indebted countries is becoming an increasingly vital challenge. In this connection, I find the proposal on this subject made by U.S. Treasury Secretary Baker today interesting. I greatly appreciate his initiative in making such a proposal.
The Japanese Economy
Next, let me describe the main features of the present state of Japan’s economy and its policies.
The Japanese economy is at present in a self-sustained expansion phase, mainly supported by domestic demand growth. Investment in plant and equipment has been showing a robust increase, reflecting increases related to high technology. More recently, a steady increase in personal consumption has become evident. For the first half of calendar year 1985, the Japanese economy recorded the following favorable performance: a high real growth rate of 5.4 percent and a consumer price increase of only 2.0 percent, compared with the same period last year; and an unemployment rate of only 2.7 percent. The factors supporting domestic demand growth, including price stability and strong corporate profits, are expected to continue in the period ahead. This makes me confident that stable growth, with a real growth rate of 4.6 percent, can be attained in fiscal year 1985, mainly supported by domestic demand growth.
Japan’s trade and current account surpluses have expanded due mainly to exogenous factors beyond its control, including the strong dollar and falling primary commodity prices. The yen/dollar exchange rate has not fully reflected such current account surpluses primarily because of the interest rate differential. Japan has strongly desired correction of the strong dollar and weak yen, which is indispensable for rectifying the external imbalance. In this light, the latest exchange rate developments are to be welcomed.
Japan’s budgetary situation is extremely severe despite efforts at fiscal consolidation over the past several years. This can be seen from the fact that tax receipts, which are the basic revenue source in Japan, account for only about 70 percent of the total revenue. It can also be seen from the fact that debt servicing payments take up some 20 percent of the total expenditure. Therefore, the Government has set a goal of freeing itself by fiscal year 1990 from its dependence on bonds to finance current expenditures. It also intends to lower the overall dependency on government bonds by fiscal year 1990, and has been doing the utmost toward these goals. To this end, the Government will continue its best efforts to make the revenue and expenditure structures more efficient and appropriate.
There are arguments that Japan should have recourse to expansionary fiscal policy. These arguments claim that, through expanded domestic demand, it can reduce its current account surpluses and lead the growth of the world economy. However, I do not consider such a policy course appropriate in light of the severe budgetary situation and the various adverse effects that I have already elaborated, including a negative influence on private investment.
In order to expand domestic demand, the Government has been making efforts to give full play to private sector activity through such measures as deregulation, privatization of public enterprises, and introduction of private sector activity into public works. To this end, regulations have been reviewed to facilitate redevelopment of cities; both the Japan Tobacco and Salt Public Corporation and the Nippon Telegraph and Telephone Public Corporation have been privatized; a stock corporation has been set up to construct the New Kansai Airport; the Japanese National Railways Corporation is also scheduled to be privatized. In order to take such steps further and contribute to the dissipation of economic friction through a balanced expansion of economies, the Government has organized a special working group to conduct an examination. Its conclusion is scheduled to be announced soon.
Japan has been taking the initiative in opening up its market. This initiative has been based on the belief that it should assume roles and discharge responsibilities commensurate with its economic strength in order to maintain and strengthen the free trade system, the most important policy challenge facing the world economy. As a result, Japan’s average tariff rate is already among the lowest in the world. Japan does not impose tariffs on semi-conductors, color TVs, or automobiles.
Moreover, Japan decided on “the Outline of the Action Program for Improved Market Access” this July, with the determination to make the Japanese market one of the most open markets in the world. This Outline sets out bold measures in several areas, including tariffs, standards and certification, and government procurement. Japan also announced its decision this August to abolish the tariffs on computers. It intends to continue to take voluntary measures to open up its market and to promote imports.
At the same time, it will actively promote the New Round of Trade Negotiations, with a view to expanding world trade through the maintenance and strengthening of the free trade system.
Japan believes that financial liberalization and internationalization of the yen not only helps the progress of its own economy and improvement of the life of its own citizens, but also offers a meaningful way of contributing to the growth of the world economy as a whole. Based on such conviction, Japan has taken successive measures for liberalization of interest rates, improvement of the short-term money market, improvement of access of foreign financial institutions, and internationalization of the yen. It will continue to steadily carry forward such efforts.
As to monetary policy, Japan intends to seek flexible management, with careful attention to the developments in exchange rate and interest rate differentials.
Improvement of the International Monetary System
Next, let me address the issue of the improvement of the international monetary system. I welcome the preliminary consideration of this issue conducted at the Interim Committee meeting on October 6, and look forward to a fruitful and substantive consideration at its next meeting. In respect of these considerations, the Group of Ten Ministers and Governors, of which I have been serving as Chairman, issued a statement in June and released a report that is the product of a thorough review carried out by our Deputies. The general conclusion of the Group of Ten is that the basic structure of the present international monetary system requires no major institutional change. However, since the system has also shown weaknesses, the Group of Ten is formulating realistic and progressive proposals to make its functioning more stable and more effective. I will introduce in the following their main features. Let me add that they are highly valued and supported by Japan:
As regards the exchange rate system, a return to a generalized system of fixed parities is unrealistic at the present time. However, in order to achieve greater stability of exchange rates, which have important implications for our economies and free trade, improvements are needed in the functioning of the present system. Exchange market intervention can be useful to counter disorderly market conditions and reduce short-term volatility. Intervention may also on occasion express an attitude toward exchange markets. Countries should be willing to undertake coordinated intervention on occasions when it is agreed that it would be helpful.
For the achievement of greater exchange rate stability, the following should be emphasized: First, an essential condition of exchange rate stability is convergence of economic performance in the direction of sustainable non-inflationary growth. Second, this, in turn, requires not only sound, consistent policies, but also the removal of artificial barriers and structural rigidities. Third, the international implications and interactions of domestic economic policies should be given close attention to improve the compatibility of sound policies.
According to the majority opinion, a move to target zones would not be practical in the present circumstances.
A strengthening of international surveillance is required to improve the compatibility of policies among countries and the convergence of economic performance around sustainable, non-inflationary growth. It should be done through measures to improve the effectiveness of IMF surveillance, including the following: a confidential exchange of views between the Managing Director of the Fund and the concerned Finance Minister at the end of the consultation process in certain cases; follow-up reports to the Executive Board when necessary; increased use of special or supplemental consultations; continued development of “enhanced” surveillance procedures; and introduction of strengthened arrangements for multilateral surveillance.
In order to avoid excessive swings in the availability of international liquidity, measures including the following are needed: improvement of the creditworthiness of debtor countries; improvement of IMF surveillance; liberalization of capital movements; and provision of official finance on appropriate terms. As to the SDR, changes in the international monetary system have affected its rationale. However, the SDR may have a useful role in meeting a long-term global need for reserves and in this context in providing a safety net for future contingencies.
In order to strengthen the role of the IMF, the following conditions need to be met: First, as more normal creditworthiness situations in debtor countries return, the IMF should revert to its traditional role, of a monetary character, of providing temporary balance of payments assistance. Second, the IMF should be able to command adequate resources, as it does at present. Third, the IMF should normally finance its lending from quota resources and keep it generally in line with these resources. Fourth, implementation of effective adjustment programs should be continued.
Cooperation between the IMF and the IBRD should be strengthened to address individual country problems in a coordinated manner, without jeopardizing the unique purposes of each institution. To this end, the two institutions should continue their efforts to ensure that policy advice and the provision of financial resources are more coordinated than in the past, particularly where a reduction in access to IMF credit might be accompanied by appropriate forms of increased IBRD lending.
Economic Development Assistance
Now, let me turn to the issue of economic development assistance. The economies of developing countries as a whole grew by 3.7 percent in real terms in 1984, much higher than the 1.5 percent in the previous year, due to the favorable effects of the strong expansion of industrial economies. There was also an improvement in the balance of payments adjustment. The combined current account deficit of developing nations declined to 44 billion dollars in 1984 from 71 billion dollars in the previous year.
We can see, however, a wide discrepancy in economic performance among regions. The Asian economy, including in particular Far East and South East Asian economies, continued to expand by 6.4 percent in real terms following an impressive 7.1 percent in the previous year. Some signs of uncertainty can be detected, however, for future development. National income per capita in low-income countries continued to decline. As for Latin American countries, they, as a whole, still remain under the yoke of triple digit inflation in spite of a remarkable progress in balance of payments adjustment.
In order to attain sustainable growth and development in developing countries, it is necessary to address issues concerning those countries on an individual basis, because each developing nation faces its own specific problems. Low-income countries, for example, need to improve such sectors as agriculture, health, and education, which have constrained their development over the years. Middle-income nations facing heavy debt service problems need to promote a balance of payments adjustment process through demand management and to prepare for hosting more direct investment. Other middle-income countries with satisfactory progress in economic adjustment need to ensure sustainable growth.
Within the framework of interdependence, the sound economic performance of developing nations is essential for the prosperity of the world. The basic approach requires a serious effort by developing countries and this, in turn, requires concurrent assistance from developed countries. In order to provide development assistance effectively and efficiently, coordination of multilateral and bilateral aid resources and exchange of aid information should be encouraged. In this context, I appreciate the efforts of the task force under the Development Committee. I firmly believe that mutual understanding between developed and developing countries is indispensable for enhancing the effectiveness of aid. I, therefore, would like to emphasize the importance of continued dialogue in a frank manner.
At the Development Committee in April, we agreed on the significance of increasing aggregate financial flows to developing countries. Japan’s financial flows to the developing world increased from 10.5 billion dollars in 1983 to 16.0 billion dollars in 1984. As a result, the amount of financial flows to the developing world reached 1.3 percent of our GNP.
Japan has been making utmost efforts to enhance the amount of Official Development Assistance, in spite of its serious budgetary situation. In 1984, our ODA reached 4.3 billion dollars, which was the second largest amount in the world. Furthermore, our ODA budget in the general account, which is an important instrument for the attainment of our second medium-term target, grew 10 percent in the Japanese fiscal year 1985, the largest growth rate among the spending programs for major policy areas, while other expenditures were reduced. Thus, the cumulative ODA budget in the general account for the last five years doubled from the previous five years as targeted.
Last month, Japan announced the third medium-term target for 1986 through 1992. During this seven-year period, we aim to bring the total ODA disbursement to not less than 40 billion dollars. To this end, we will make efforts to double the ODA amount in 1992 compared to that in 1985 through expanding bilateral grants, multilateral assistance, and yen loans. We will continue to take our international responsibilities commensurate with our economic strength through extending larger ODA.
Since we recognize the important role of multilateral development banks for the economic and social development of developing countries, we generally support the strengthening and broadening of their roles. We especially value the MDBs’ ability to allocate their resources in an equitable and efficient manner, and provide effective policy advice in accordance with their extensive information resources made possible by these organizations’ neutral and professional privileges.
I firmly believe that each donor country should be encouraged to cooperate with MDBs under the fair burden-sharing principle, not only at the time of its contribution commitment but also at the time of its payment of subscription. . . .
In the meantime, President Clausen of the World Bank expressed his intention not to serve a second term. I would like to express our great admiration for his achievement of exercising outstanding leadership over such matters as the special capital increase of the World Bank, the Seventh Replenishment of IDA, the Special Facility for Sub-Saharan Africa, and the Multilateral Investment Guarantee Agency.
Confucius, an ancient oriental philosopher, said in his famous Analects as he looked back at his life: “At thirty I had a foundation. At forty, a certitude.” The latter means that at forty, he established his character and insight, and no longer suffered from perplexities or uncertainties in the face of turbulent social changes.
Both the IMF and the World Bank Group are now celebrating their Fortieth Annual Meetings. Let us on this occasion further solidify our support for these institutions, so that they can rest on an even more stable and firm foundation, and so that they can fulfill their lofty missions in this world economy that embraces a number of vital challenges.
Statement by the Governor of the Fund and the Bank for Canada—Michael H. Wilson
Let me associate myself with the previous comments of thanks to our hosts, the Government of the Republic of Korea and the city of Seoul, for the excellent arrangements and facilities they have provided to make our Meetings here both productive and agreeable.
Since the Annual Meetings of the World Bank and the International Monetary Fund held in Toronto in 1982, we have concentrated on drawing up and refining a road map to steady noninflationary growth in the economies of the industrial countries and to adjustment and renewed growth in the developing countries. We can note with satisfaction today that we have made much progress along this path. However, we still are walking along a bumpy road and there are some troubling signs ahead.
These worrisome signs include the risk of an excessive slowdown in the U.S. economy and of an insufficient pickup in growth in other major economies; they are reflected in continued high real interest rates and difficulties in coming to grips with high structural budget deficits. They also encompass large external imbalances between major economic powers and the menace of growing protectionist forces.
For the developing countries, the burdens of high debt-servicing costs and domestic financial imbalances are creating serious social and political strains in their societies. Debt service difficulties are being compounded by weak and declining commodity prices, difficulties in securing new financial flows, and the prospects of slower export growth.
With that as a backdrop, let me concentrate today on three general topics, namely, macroeconomic policy management, international trade, and the international debt situation.
First, it is clear that the U.S. economy has played a key role over the past three years in moving the global economic system out of the depth of the 1981–82 recession; however, the United States on its own could not sustain this impetus indefinitely. The slowing in the U.S. economy was to be expected and should not be seen in itself as a cause for concern. It is clear that the United States’ main responsibility to the system now is to continue its efforts to reduce its structural budget deficit. At the same time, the other large and powerful economies must continue to preserve the growth momentum that has been established so far.
In their latest statement, the Group of Five have explicitly recognized that there exist serious financial imbalances and currency misalignments among them. They have also rightly concluded that the only lasting corrective solution is the redirection and adaptation of underlying economic policies to improve policy coordination and secure a greater convergence of economic performance. The essential questions that remain to be answered by all of us are whether, and how effectively, our good intentions will be put into practice. That is, will those countries that need to provide more stimulus to global demand put in place policies that will achieve that objective? Will countries that need to exercise restraint have the political will and stamina to carry through with their program?
Turning to international trade, we are all preoccupied with the serious imbalances which have developed and are persisting. These imbalances are not an accident of history; they are caused in part by the interaction of economic policies geared to domestic objectives but which failed to take account of their broader international repercussions. Even more threatening is the potential political response to this situation; instead of addressing the root causes of the problem, many interest groups are pressing for a quick-fix solution through broadly based protectionist measures. Not only would such shortsighted solutions fail to solve the problem at hand, but they would also surely bring on the gravest consequences for the international trading system, the level and strength of global output, and the generation of world income.
In both these areas—economic policy management and trade policy—Canada is making every effort to adapt to existing difficult circumstances. Without question, we have made significant progress. Our GNP rose by 4.5 percent over the past year, one of the highest growth rates among the industrial countries over that period. Nearly 340,000 jobs have been created. Unemployment, while still unacceptably high, has begun to move in the right direction. It declined to 10.4 percent in the most recent three months, from 11.0 percent in the corresponding period last year. Inflation is now running at less than 4 percent.
The major challenge still facing us is to reduce our structural public sector deficit and thus permit the more efficient operation of market forces in our economy. These objectives are fundamental to the medium-term adjustment strategy which I outlined in the Government’s first budget last May.
Canada is also committed to a strong multilateral trading system buttressed by the rule of law. We believe, therefore, in the overriding importance of continued trade liberalization, and we strongly support the early launching of a new round of multilateral trade negotiations. Hand in hand with multilateral trade solutions, we are also pursuing trade liberalization bilaterally with the United States, our largest trading partner. These bilateral and multilateral actions are complementary and mutually reinforcing.
The third area in which all of us who are meeting here are facing major challenges is the international debt situation. While many debtor countries have achieved a remarkable turnaround in their external positions over the past few years, a number still face a heavy debt service burden. Some of them are becoming discouraged with this situation and with the economic, social, and political problems that it entails.
The international debt problem appears to have entered a new phase. Today we are less concerned about temporary liquidity crises. Instead, we are now looking at a long-term debt service burden in many countries, which drains a large proportion of export earnings, depresses standards of living, and impedes development programs and strategies. The challenge before us is to review our strategy and take account of these longer-term problems.
An essential element in improving the growth and development prospects for the stronger and more diversified debtor countries is a restoration of creditworthiness leading to increased voluntary commercial lending in support of worthwhile investments. This will require policies that not merely deter capital flight but that are successful in mobilizing domestic savings for internal investment. More attention must be paid to the effective functioning of the private sector in the heavily indebted countries. We have already made a good start in this direction and gained much experience over the past several years; we must now persevere in these efforts.
If we wish to encourage new private lending, it must be accompanied by adequate levels of official lending. If the national authorities of creditor countries give a signal—either individually through their own agencies or collectively through their multilateral institutions—that financing activities need to be or are being trimmed, the private sector will surely follow suit. It is possible, however, that we can turn this around by providing new export credits, new fast-disbursing program and structural adjustment lending, and additional concessional loans in support of major restructuring efforts. Clearly the actions of both governments and multilateral lending institutions together with the commercial banks are interdependent.
For those countries that do not have access to commercial credit and are facing severe economic hardships it is particularly important that adequate aid and concessional financing be provided. This must be done to support ambitious and courageous structural adjustment programs if these economies are to be set on a sounder and more self-reliant footing.
I have already touched on the question of protectionism in relation to the imbalances among the industrial countries; yet this issue is equally relevant and crucial in relation to the exports of the developing countries. The point has frequently been made that to maintain their debt service capacity, the developing countries must have continued access to the markets of industrial countries to ensure the adequacy of their export earnings.
We, as Governors of the Bank and the Fund, have particular responsibilities in ensuring that our institutions can respond adequately to the challenges I have outlined above. The Bank and the Fund must work in even closer cooperation, not only to address short-term problems but also to adopt measures and policies that will assure greater economic stability and growth in the future. Let me first deal with Fund-related matters.
Canada supports the continuation of the Fund’s enlarged access policy for 1986, and I am pleased that there is acceptance that the limits set on borrowing from the Fund should not be greatly changed.
I also welcome the proposals that have been made to use the reflow of resources to the former Trust Fund to extend concessional financing to the low-income countries which are willing to undertake serious structural adjustment programs. These programs will have a much greater chance of success if they are arranged in close cooperation with the Bank.
On the question of SDRs, Canada endorses the commitment of the Fund to re-examine the role of the SDR.
Beyond these more immediate considerations, we must also reflect on the future evolution of the international monetary system. The reports on international monetary issues prepared by the Group of Ten and the Group of Twenty-Four are a good starting point.
Many of the concerns expressed in the Group of Ten and Group of Twenty-Four reports are parallel. There is, however, considerable divergence in the proposed solutions. I believe that the Executive Board of the Fund should review the reports in detail. This analysis could then be discussed at the spring meeting of the Interim Committee. . . .
The problems faced by the world economic community are numerous and their complexity and difficulty constitute major challenges. Irrespective of our individual situations, we each have our own responsibilities to adopt domestic policies that are conducive to a lasting improvement in our own national economies and also, by extension, in the world economy. We cannot escape our individual responsibilities. At the same time, the stronger countries must help the weaker countries to benefit from our actions in a way that not only provides them with the necessary financial flows, but also improves their growth prospects in the most efficient manner possible. We have two powerful institutions to help us in meeting these challenges: the Bank and the Fund. Let us support them and strengthen their role further. Let us also bear in mind that private investors and lenders have a critical role to play. It is essential that all of our efforts are closely and carefully coordinated so that our actions are mutually reinforcing. But, in the last analysis, the private sector, governments, and multilateral institutions are looking to us for leadership. Let us not fail in these tasks.
Statement by the Governor of the Fund for Spain—Mariano Rubio Jiménez
When we last met a year ago in Washington, optimism tended to win out over feelings of uncertainty. The vigorous recovery of the U.S. economy had stimulated growth in world trade, and in turn this had spurred economic activity in the other industrial economies without interrupting their efforts to curb inflation; the U.S. recovery had also alleviated the problems of many developing countries. It was felt that the prevailing imbalances and difficulties would not stand in the way of the world economy’s moving along a path of sustained growth.
Today, meeting in this hospitable country, we must acknowledge that the factors of uncertainty have not given way and have even become more serious in certain important respects. We still face major financial imbalances and structural rigidities which pose obstacles to progress in the industrial countries; the heavily indebted developing countries are still grappling with problems; and we are living under the growing threat of protectionism. All these factors cast new doubts on the world economic situation.
The International Monetary Fund’s analysis of the global economic situation and world economic outlook concludes that, in these times of uncertainty, the industrial countries must stick with their disciplined financial policies aimed at medium-term objectives and with supply-oriented policies aimed at overcoming the structural rigidities of their economies. It is difficult to disagree with this recommendation. Spain, which is following this basic strategy, is well aware of the need for such policies to be adhered to, of the difficulty of consolidating the successes which have been achieved, and of the slow and uncertain pace at which rigidities can be overcome and the required adjustments made. Few industrial countries are as yet in a position to follow more relaxed financial policies; even fewer of them can be satisfied with what has been achieved so far by their supply-oriented policies.
But the Fund goes on to point to the crucial role being played in these uncertain times by the budget deficit of the United States; the Fund believes that a significant reduction in this deficit is a basic requirement for any expansion of the world economy on a firmer basis and for easing the task faced by the debtor countries of combining growth with financial stability. Indeed, the U.S. budget deficit has extremely important implications both for the economy of the United States and internationally. Its persistence calls into question the capability of the U.S. economy to move forward on a path of sustained expansion; its effects on interest rates, the exchange rate, and the balance of payments of the United States generate policy problems in all the other industrial countries, increase the external debt burden, give rise to elements of uncertainty which impede the international transmission of expansionary impulses, and increase the pressures in favor of protectionism. We must therefore encourage the U.S. authorities to act on their repeatedly announced intention of reducing the federal budget deficit, which, according to the analyses provided by the International Monetary Fund and the World Bank, has enormously aggravated the problems of the debtor countries and weakened the recovery potential of the industrial countries themselves. The U.S. authorities have quite rightly pointed out to us in the past the need to make financial adjustments and deregulate markets in order to resolve the problems facing us; we must be equally frank in requesting that this task not be made more difficult for us by their maintaining a budgetary policy which enormously aggravates the problems of developing countries and industrial countries alike.
Generally speaking, the major industrial countries must formulate their economic policies in full awareness of the impact they have on the international community as a whole. The report drawn up by the Group of Ten has stressed the importance of coordination and convergence in the financial sphere among the economic policies of the countries in the group, so that the international monetary system may function reasonably and promote expansion of the world economy. To be sure, in a period like the present one, characterized by sizable variations in relative costs and prices and technological advances which alter the international pattern of comparative advantages and lead to considerable adjustments in the structure of production, the convergence of economic policies in the industrial countries must go well beyond the strictly financial area. An effort must be made to restore worldwide equilibrium on the basis of criteria that are consistent with the maintenance of an international economic order based on the principles of economic freedom, nondiscrimination, multilateralism, and cooperation. Failing this, there will be even greater uncertainties about the future, and the world economy will continue on its vacillating course, protection will continue to grow apace, and the problems of the developing countries will become even more severe.
The position of the developing countries remains extremely difficult, and even dramatic on occasion. This is one of the basic points on which our relative optimism of last year has not been borne out. It cannot be denied that, in the case of many countries overwhelmed by external debt, their current burdens are at least partially the result of past economic policies that were misguided and unsustainable. There is likewise no doubt that these countries must implement harsh and difficult policies to rehabilitate and reform their economies in order to overcome their problems. This is required both by the future of their economies and by the need to develop a favorable attitude on the part of the international financial community. There must be an awareness, however, of the effort being asked of them, of the limits of this effort, and of the external circumstances with which they must deal in order to achieve positive results from this effort. However, as noted in the World Bank’s excellent World Development Report 1985, there is some question whether in many developing countries the socioeconomic fabric is sufficiently sound to resist such tensions indefinitely.
The scenarios prepared by the Fund and the Bank for the next five and ten years constitute the best guidelines on external economic development available to the heavily indebted countries. Both of the best-case scenarios project an improvement in the situation of these countries; however, the results are extremely sensitive to the assumptions on which they are based. In point of fact, the scenarios prepared by the Fund and the Bank demonstrate clearly that the situation of the debtor countries cannot improve unless real interest rates decline, which is strictly contingent on the budgetary policy of the United States, a reasonable rate of growth in the industrial countries, and a reduction in protectionism. Should these favorable assumptions not prove correct—and in times like these there are no grounds for optimism—the ability of the debtor countries to meet their external commitments will be seriously jeopardized; even though the debtor countries will be prepared to follow adjustment policies, it will be difficult to continue these indefinitely and the creditor countries will lack technical and moral arguments to maintain their recommendations of economic austerity and reform.
It is Spain’s view that the international community is faced here with a combination of difficult and dangerous problems to which a genuine response must be worked out in a cooperative manner, and that the studies and discussions on this response should be put off no longer.
These concerns, then, underlie the approach my country takes to the various topics now under consideration within the Fund and the Bank.
First, Spain is in favor of a new allocation of SDRs during the current basic period. We believe that if such an allocation is kept within responsible limits, there is no justification for the fears of some who oppose the measure on the grounds of its possible impact on world liquidity and inflation. On the contrary, it would ease tensions in the heavily indebted countries without affording them sufficient margins to relax their adjustment processes. In the final analysis, the decision would contribute to strengthening the role of the SDR, the rapidly declining position of which appears to be prejudicing the outcome of the studies now under way on its future role within the international monetary system.
As regards access limits for 1986, Spain opposes further reductions and seeks to have the current limits maintained as a minimum. The decision taken last September to reduce access limits was based on a prospective improvement in the problems of the debtor countries, which unfortunately has not come to pass.
For similar reasons, we believe that the financial resources now reverting to the Fund from the former Trust Fund should be channeled into the provision of financing on soft terms to the poor countries, using a definition similar to that employed by the International Development Association and also taking into account each country’s relative ease of access to international markets and, above all, to multilateral financial institutions. In our opinion, the resources should be provided subject to an extremely limited degree of conditionality on the basis of multiannual adjustment programs and the achievement of annual targets. . . .
I would like to conclude by noting that, while adjustments and an expansion of the activities of both institutions are important, the success of their work will inevitably continue to be subject to progress in solving the major problems currently facing the international economy: adjustment of the fiscal policies of the major industrial countries, utilization of the available room for expansion in those countries which have achieved a reasonable degree of economic recovery, adoption of positive adjustment policies which will preclude recourse to protectionism and, finally, the issue of the degree of cooperation which it seems necessary to extend to the heavily indebted countries that are prepared to implement practical adjustment and economic recovery policies.
Finally, I would like to express my sincere thanks to our colleagues from Korea and its Government for the hospitality extended to us here.
Statement by the Governor of the Fund for China—Liu Hongru
First of all, on behalf of the Chinese delegation and myself I wish to extend our heartfelt congratulations to you on assuming the chairmanship for the current Annual Meetings. I am convinced that under your chairmanship the present Meeting will be a successful one. We would also like to express our appreciation to Mr. de Larosière and to Mr. Clausen for their commendable work during the last year. In addition, we welcome the Kingdom of Tonga in joining the Fund and the Bank. We would also like to thank our host for the excellent arrangements made by them for these Annual Meetings.
Mr. Chairman, it is clear from the recent developments in the world economy that the difficulties that beset many countries have increased in recent months, and the economic prospects for the world as a whole have become less optimistic than we anticipated at this time last year. Most important, the rate of economic growth in the major industrial countries has shown a significant decline. Fiscal deficits are still very large, and real interest rates remain high. There are sharp fluctuations in the foreign exchange rates, and protectionism has become widespread and is increasing. There has been no improvement in official development assistance, and commodity prices are weakening in world markets. All these problems have inevitably accentuated the economic difficulties that the developing countries have been facing in recent years. Among the developing regions, in sub-Saharan Africa the economic situation is especially alarming, not only because economic growth in these countries has always been extremely slow, but also because successive disasters in recent years have brought hundreds of millions of people to starvation. Therefore, urgent efforts must be made by the international community to increase the transfer of real resources, particularly official development assistance to these areas.
Since all countries are economically interdependent, the improvement of the world economy cannot be sustained unless the economic difficulties of the developing countries are solved. In this context, it is important that industrial countries take into account the impact of their policies on the world economy as a whole, and on the developing countries in particular.
Now I would like to turn to those questions of concern to all of us.
First, the problems of the existing exchange rate system. The most serious weakness of the existing floating exchange rate system is the misalignment and volatility of the exchange rates of the major currencies. Experience shows that these factors tend to have a disproportionate negative effect on the developing countries. It is therefore reasonable and justifiable for developing countries to call for corrective measures to overcome the weaknesses in the floating exchange rate system. Proposals by the Group of Twenty-Four to improve the existing exchange rate system deserve our serious and careful consideration. We accept the Group of Twenty-Four proposal to convene at an early date an international monetary conference, as well as the recommendation that a joint subcommittee of Ministers from both developing and industrial countries be established.
Second, the Fund’s surveillance. Effective Fund surveillance is a crucial element for an orderly international monetary and financial system. At present Fund surveillance is asymmetrical, as it is effective only in the case of those developing countries that have to use Fund resources, while it is not at all effective for the industrial countries. In reality, it is the policies of the major developed countries that cause the instability of the international monetary and financial system that ought to be under strict Fund surveillance. It is important that such a situation not continue. We fully support the proposals by the Group of Twenty-Four that Fund surveillance should focus on the symmetrical adjustment process and specific measures should be adopted, so that effective surveillance of the policies of the major developed countries can be realized.
As for enhanced surveillance, it is important that it should be used only at a member’s request, under exceptional circumstances, and not be applied as a general principle to all member countries.
Third, the SDR allocation. It is regrettable that there has been no progress on the question of SDR allocation in the fourth basic period. A new allocation is particularly needed at this time on account of the following factors. The flow of funds from the commercial banks to the developing countries, particularly to the debtor countries, has been declining. At the same time, official development assistance to the developing countries has reached its lowest level. In addition, the supply of real resources in the developing countries has suffered from a net outflow of capital from these countries. Moreover, as a result of the continuous expansion of international trade output, there is a global need for increasing international reserves. The needs of the developing countries in this regard are particularly urgent.
Fourth, the debt problem. In spite of its alleviation in the past two years, the world debt problem is far from being resolved. The debt burdens of developing countries, particularly those of Latin America and the African countries, remain very heavy. This situation poses a very serious threat to the world economy and to the stability of the international monetary system. It is commendable that during the past several years the Fund has channeled its efforts in an attempt to solve the debt problem. It is our hope that in its future endeavors the Fund will reorient its adjustment programs to emphasize growth rather than demand management, will relax conditionality, and will continue its enlarged access policy without further reducing access limits. It is gratifying to see that the Interim Committee has reached a decision on the principle of using Trust Fund reflows, and it is urgent that this decision be implemented as soon as possible. Moreover, it is important that the adjustment should not be undertaken only by the developing countries. On their part, the creditor countries should resist the pressure to increase protectionism, to roll back trade and non-trade barriers, to increase market accessibility, to further reduce the level of real interest rates, to continue to arrange for multiyear debt restructuring, and to continue official development assistance. . . .
Mr. Chairman, we are still facing many difficult problems, and there are numerous urgent tasks to be accomplished. China will continue to cooperate with these two institutions and member countries in our common endeavor.
Statement by the Governor of the Fund for New Zealand—R. O. Douglas
May I first extend a welcome to our Pacific colleagues from Tonga. It is fitting that we should be meeting this year in this very impressive country. Korea is a developing country and therefore provides a very appropriate venue for the consideration of developmental issues that are fundamental to the future of the Bank and the Fund. It is one of that small group of Asian countries that has already found a path that promises to lead through the forbidding array of economic challenges that beset the developmental process.
Again and again during debate on almost any financial issue within both the Bank and the Fund, distinctions that are drawn between developing and developed countries have been found to be artificial.
Many of the problems that I as a Minister of Finance of a small developed country face day to day have a high degree of commonality with those that confront my colleagues in the developing countries. It could be argued that this statement simply reflects the fact that, as a small and geographically isolated country reliant on commodity exports, New Zealand has more in common with developing countries than other OECD members. I acknowledge that there is some truth in this point of view. It is, however, by no means the full story.
Over the last twenty years, our economic performance has been characterized by
—large and persistent internal and external deficits with a corresponding growth in debt,
—persistently high rates of inflation,
—stagnant and often declining productivity, and
—unprecedented levels of unemployment.
The fact that this poor economic performance has been a feature of a country with substantial natural resources in no way sets us apart from so many other members, both rich and poor, that can tell a similar story.
We attribute our poor economic performance to both external and internal factors. Like others, we have been hurt by the oil price shocks, world recession, and declining terms of trade. I believe, however, that much of the blame for New Zealand’s poor performance can be laid at the door of internal policy failure. My Government has performed radical surgery on those policies. The first element of our approach has been to introduce policies that are medium term in orientation and that are consistent with each other. The second important principle we have followed has been that economic policy should, above all, be concerned with the efficient allocation of resources and therefore facilitate adjustment rather than hinder it. Third, equity objectives and the spreading of the burden of adjustments have been central to our program of economic reform. This has meant removing many ad hoc interventions in particular markets. Fourth, in implementing its program, my Government has quite consciously acted speedily and decisively across a broad range of policy areas. For decades, New Zealand sought to isolate itself from external economic pressures. In the end, we found the cost of shoring up the defenses of Fortress New Zealand just too great. We finally realized that the world economy was not going to change direction to accommodate us. The onus for changing lay squarely with ourselves. For years we protected our producers, in part because we were denied access to the markets of our natural trading partners. We have now come to realize through the hard school of experience that protectionism is self-defeating. Our sheltered industries have not been under international pressures to use our resources efficiently and to rationalize. They have imposed direct costs on our consumers and on our traditional exporters. At the same time, new and potentially profitable lines of activity have been precluded.
We have decided to accelerate removal of our import controls and to rely instead on tariffs, which are also being reduced. Our objective is to expose our domestic producers to the pressures of international competition by means of lower and more uniform levels of assistance. Our trade barriers have simply served to impede realization of the efficiency gains that accompany adjustment. If we were to go on waiting for our trading partners to remove their barriers, we would lose these benefits. If, on the other hand, our trading partners do remove their barriers, not only will they benefit from improved domestic resource allocation, but both parties will have incremental benefits from the increased trade flows. Freer trade is not a zero sum game. Nor is economic development.
A world economy performing at a high pitch would offer the prospect of unparalleled benefits for all. This happy state of affairs must, however, be based on a foundation of solid economic performance in individual economies. If we don’t establish that sound economic base domestically, we will not individually have the capacity to obtain the incremental benefits that come from buoyant world economic conditions.
We cannot promote economic growth and development through IMF and/or World Bank decree. One persistent theme of discussions in the Executive Boards of the two institutions has been that neither institution can help member countries that fail to take the initiative to help themselves. The Bretton Woods institutions, and this applies as much to the GATT as to the Fund and the Bank, can support appropriate development policies, but implementation must remain the responsibility of individual countries.
In New Zealand, we have set in place a strategy that is changing our economic policy in a fundamental way. The adoption of medium-term perspectives in setting policies and in assessing benefits and costs is central to this process. In this context I am confident that we will soon be reaping benefits from the painful adjustments that are now taking place.
I would like to think that before too long we will also reap incremental benefits from the real growth in the international economy that would accompany the more widespread adoption of policies of the kind I have been talking about today. This does mean, of course, that we must all resist the growing tide of protectionism.
October 8, 1985.
President de la Madrid at the Mexican Bankers Association Annual Meeting, July 22, 1985.
President Sarney in a televised address to the nation, July 23, 1985.