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Discussion of Fund Policy at Fifth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1985
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Statement by the Governor of the Bank for St. Christopher and Nevis—Kennedy A. Simmonds

It is indeed a great pleasure for me to address you on behalf of the Governments of the Commonwealth Caribbean, namely, Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Christopher and Nevis, St. Lucia, and St. Vincent and the Grenadines. I wish to join previous speakers in extending a warm welcome to the Kingdom of Tonga which is represented here today as the 149th member of the World Bank. I wish also to join my fellow Governors in expressing our sincere appreciation to the Government and people of the Republic of Korea for the excellent arrangements which have been made for these Meetings and the very warm hospitality extended.

Let me also take this opportunity to express my condolences to the Government and people of Mexico for the great suffering they have incurred as a result of the recent earthquake.

One year ago, the prospects of global economic recovery, led by the U.S. economy, were tentative but, nonetheless, encouraging. Since then we have witnessed only marginal increases in world output and world trade. We have also experienced the successful reduction in the rate of inflation in most industrial countries, but at the same time unemployment has been at its highest postwar level in most OECD countries. The recovery of the U.S. economy has not been without its attendant problems caused by the appreciation of the U.S. dollar, historically high real rates of interest, and the unprecedented U.S. external account and fiscal deficits, which threaten future growth. We note, also, that despite increased demand from North America, only modest improvement in growth performance in the European economies has been recorded. Most important, there appears to be a faster march toward increased protectionism in world trade, which reduces the capacity of developing economies to benefit from world economic recovery by barring free entry of their exports and cutting off vital foreign exchange earnings. Consequently, the Third World debt problem continues unresolved and, in some cases, has been aggravated by the unfavorable developments in the world economy.

The mixed global economic picture confirms the uncertainties of last year’s outlook. Within the OECD countries, for example, there has been markedly uneven growth. Considerable effort must still be applied to ensure that the potential benefits of the modest economic upturn are distributed more equitably among the economies of the world.

While the uneven but generally favorable performance of the industrial economies suggests a somewhat hesitant recovery for that group as a whole, the contradictory policies on which recovery has been based raise doubts about its sustainability. It has also limited the spread of recovery from developed to developing countries.

In our own region there are indications that during the last year only a few of the countries of Latin America and the Caribbean were able to emerge from the deep recession of 1981. However, the reality is that the limited advances that have been made have been achieved through the adoption of stringent and often painful structural adjustment policies. These strict austerity measures, required for the achievement of adjustment objectives, have not reversed the financial disarray that still afflicts these economies. Nor have these policies achieved the restoration of sociopolitical balance so essential for sustained recovery. Indeed, such measures have often created worsening conditions for the poorest sections of society. Whatever marginal improvements in aggregate growth rates have accrued have been outpaced by population increases. Economic activity has been insufficient to keep pace with the expansion of the region’s labor force, and rising open unemployment continues to challenge and erode the economic well-being of these nations. . . .

The majority of the region’s economies recorded a decline in per capita output and a worsening of the external terms of trade accompanied by a fall in the standard of living. Debt-servicing obligations continue to absorb a large share of revenue and, in all cases, divert resources that would otherwise be available for investment in growth. Consequently, the region, like the rest of the developing world, experiences an unacceptable outward net transfer of resources to the developed world. The disparate distribution of the benefits of global recovery is therefore very much in evidence and most critical in the case of the small open dependent economies of the Caribbean subregion.

In this regard, I must point out that for the smaller developing countries whose resource base is more limited, the choices of implementable policy options are commensurately more constrained. Consequently, while the larger economies have some capacity to withstand and absorb such adverse external factors as the vagaries of commodity markets, the resurgence of protectionist policies, and fluctuations in capital inflows, the microstate economies of the Commonwealth Caribbean are markedly less well equipped to deal with such adverse conditions. . . .

The Bank must be in a position to support the efforts of the Fund in providing effective financing packages to meet short-term requirements of adjustment and stabilization in a manner that does not erode the longer-term development capacity of borrowing countries. It is encouraging that this reality that has so long been obvious to developing countries now enjoys more universal recognition. However, in many cases, this recognition has yet to be translated into effective policy. Consistent with such policy would be not only the approval of the general capital increase but the prudent adoption by the Bank of those new options in lending policy, which would put at the disposal of its most needy members a fair proportion of its increased resources.

It is clear that there is still greater scope for policy flexibility and improved sensitivity on the part of international financial institutions and both multilateral and bilateral donor agencies in recognition of the special circumstances of less resilient economies. . . .

Statement by the Governor of the Bank for Thailand—Sommai Hoontrakool

I would first like to join my fellow Governors in congratulating you, Mr. Chairman, on your election as Chairman of the Board of Governors for the current Annual Meetings. I would also like to express our appreciation for the able management by Mr. Clausen, President of the World Bank, and Mr. de Larosière, Managing Director of the International Monetary Fund, as well as for the performance of the staff of the Bank and of the Fund during the course of the past year. However, we regret to learn of Mr. Clausen’s decision not to continue as President of the Bank for another term. We are grateful for his contribution to international development, and wholeheartedly wish him every success in all his future endeavors.

As regards the recent addition to our member countries, it gives us great pleasure to welcome the Kingdom of Tonga to our institutions. As a member of the Southeast Asian voting group, Thailand takes added pleasure in having Tonga join our constituency. We are anxious to work closely and actively in cooperation with Tonga in achieving the common objectives established by the Bank and the Fund.

Turning to problems of the global economy, the uncertain outlook makes it imperative that a multipronged approach be pursued if a recurrence of the debt crisis is to be avoided. Industrial countries must pursue consistent and more coordinated economic policies that support a healthy growth in world demand and resist the pressure to intensify restrictive trade practices, especially in connection with exports of developing countries. Developing countries on their part must adjust their own economies to the realities. In the interim, they need external assistance.

Let me now elaborate on some of the measures that are required.

The rapid proliferation of trade protectionist practices, both in terms of tariff and nontariff barriers, particularly by many industrial countries, is shutting the one last window once thought open to developing countries in their efforts to generate economic growth and pursue needed adjustment policies by relying on outward-looking policies. The decline in these countries’ export earnings and the attendant deterioration in their balance of payments positions have inevitably led to a widening of the foreign exchange gap of such countries, compounding the already serious debt-servicing problem. Consequently, their development prospects have become increasingly unfavorable. The growing pessimism has also led to increased caution in the disbursement of loans already committed.

In view of the current unfavorable international economic situation, which further obstructs the chance of sustained development in countries receiving official development assistance, we wish to call upon donor governments to exert greater efforts to increase the supply of ODA funds. The Japanese example in this field of activity is noteworthy, in that Japan is fulfilling its international responsibilities through continued expansion of ODA commensurate with that of the size of its economy as well as through continuing to improve the ratio of ODA to gross national product. The Government of Japan will make efforts to double the amount of ODA being given by 1992. We therefore urge that the other ODA donor countries be courageous enough to do the same. We would, in this connection, also like to support and urge an early outcome in the preparatory work for successful negotiations of IDA-VIII. Moreover, I welcome the “Program for Sustained Growth” as initiated by the United States as one possible approach to relieving the international debt problem. . . .

The world economic outlook indicates a strong need for vigorous adjustment efforts to be continued in the near future. In this connection, the International Monetary Fund has a central role to play, through the surveillance of members’ policies and provision of temporary balance of payments assistance, and as a catalyst for other lending by providing confidence that the borrower is pursuing sound policies.

The Fund will have to play a greater role in its surveillance and advisory activities and adhere strictly to the uniformity of treatment of all members, developing and industrial countries alike. However, the policies of major industrial countries have global implications, particularly for the functioning of the international monetary system. Therefore, I would like to call for stronger and more effective surveillance by the Fund over the economic policies of such countries. The prosperity of the world is a matter of shared responsibility among us all, and, to me, the possibility of a return to normalcy in the world economic situation rests substantially on the Fund’s role in multilateral surveillance.

In order to facilitate the members’ adjustment efforts, Fund credit must be available on a sufficient scale to provide meaningful support to members.

One issue that must be seriously considered in this connection relates to the maximum access limits to the Fund’s resources. While financial conditions in private markets and the world economic outlook for 1986 remain substantially subject to uncertainties, and the economic adjustment process among the indebted countries is still incomplete, I do believe that a reduction in access limits of the Fund is not timely; nor is it justifiable. I therefore very much regret the decision to reduce the access limits under the enlarged access policy in 1986. Regarding the implementation of access limits under the enlarged access policy, I would like to note that the actual access a member normally obtains is substantially below the limits. An attempt should be made to make the limits more meaningful. Furthermore, in order for the facilities to be meaningful, further tightening of conditionality on access should be avoided, as conditionality is already sufficiently tightened to such an extent that it may have precluded a number of countries from coming under the Fund’s adjustment umbrella.

I would like to note that both the Bank and the Fund adjustment programs have already placed an overemphasis on austerity to such an extent that they unintentionally, but frequently, have implications on the survival of the democratic system in the countries concerned. In the pursuance of austerity policies, a proper balance must be struck between growth and economic as well as political stability. It is indeed a challenge for the Bank and the Fund to devise measures that would lead to the fulfillment of such an objective.

I welcome the deliberation by the Interim Committee concerning disposal of funds coming in from the Trust Fund. The so-called Trust Fund reflows should be used to provide assistance to low-income member countries on terms similar to the original Trust Fund. The possibility of more lenient terms, even on a grant basis, for a portion of the resources should be explored; so should the possibility of using it as a bridging facility for countries with serious problems or for those in arrears to the Fund, so that they may overcome their difficulties.

For the international monetary system to function smoothly, there must be adequate international liquidity. I should like to reiterate the notion that the SDR must be assigned a useful role in meeting the long-term need for unconditional reserves and in providing a safety net for future contingencies. SDRs have declined in relation to most indicators. Furthermore, there are a large number of countries with acute stringency in reserves or with difficulty in gaining access to capital markets. I therefore strongly support a reasonable SDR allocation by the Fund at the earliest opportunity.

Finally, I would like to praise the admirable efforts made by the Joint Secretariat in the preparation of the Meetings. Last, but not least, must be our sincere acknowledgment of the Government of the Republic of Korea’s invaluable contributions to the Meetings by being such a commendable host. On this note, we would like to express words of appreciation and gratitude for the kind hospitality extended by the host Government and by the people of Korea.

Statement by the Governor of the Fund for Israel—Yitzhak Moday

I would like to express our gratitude to the host country for the warm hospitality and the excellent organization of the Annual Meetings in this beautiful city of Seoul. On this occasion, I would also like to acknowledge, with admiration, the unique progress of the Korean economy in recent years, which may serve as an encouraging example of achievements attained through industriousness and determination accompanied by sound economic policies.

May I join previous speakers in expressing our appreciation to the President of the World Bank, the Managing Director of the International Monetary Fund, and their staffs for their devoted efforts in the service of economic progress and stability. During the past year, the status of the Fund was significantly enhanced as it has successfully fulfilled the role of medium-term lender and financial catalyst, as well as coordinator of adjustment policies.

It is most gratifying to note the economic growth which took place last year, in both industrial and developing countries. Especially encouraging is the fact that growth was not followed by an increase in inflationary pressures. It is indeed reassuring when correct policies, strictly implemented, actually bring about the expected results. Yet, many problems still require urgent attention.

In recent years, the external debt problem has threatened the stability of several borrower countries and of the international banking system. Although the appropriateness of the strategy adopted to deal with this problem has been reaffirmed, the burden of debt service facing several debtor countries remains extremely heavy, and the danger of the crisis reappearing in future years is not yet over. Consistent adjustment efforts must be continued by debtor countries and by the financial community.

The solution to the debt problem is conditioned primarily on the persistent improvement in the current accounts of borrower countries. It should be noted, however, that adjustment policies inevitably have heavy social and political costs. Therefore, one must be wary of introducing measures in excessive doses, even though they might bring about quick solutions. Gradual and persistent recovery without undermining social and political stability is, therefore, imperative.

One major difficulty is that adjustment policies very often involve, in their early stages, restraint of domestic demand and economic growth, accompanied by a temporary rise in unemployment. This is the price which must be paid for creating conditions which will enable renewal of sustained growth and increased employment, free of inflationary pressures.

We, in Israel, have had to learn the hard way that growth accompanied by an improvement in the balance of payments is not sustainable while inflationary conditions prevail. Inflation deters investment, encourages consumption, and affects export profitability adversely. Furthermore, inflation undermines confidence in the currency and leads to capital flight and a drop in savings.

Regretfully, the drift toward protectionism appears to be on the rise, among both industrial and developing countries, especially insofar as non-tariff restrictions are concerned. Far too little progress is being made in removing trade barriers, despite the recognition, in principle, of the distorting effects of protectionism. My country is especially disturbed by barriers to free trade with Israel, which were introduced for political considerations. It seems that in our urge to get immediate, though temporary, results in trade policy formulation, we focus on avoidance of unemployment in declining and uncompetitive industries, rather than on emphasizing new job creation in efficient growth industries.

Israel has consistently taken steps to liberalize trade, as part of its program of restructuring the economy, and in conjunction with the recently introduced adjustment program. Export subsidies were considerably reduced; import licensing was minimized; duties are being gradually reduced within the framework of the free trade agreements with the European Community and with the United States. By signing these agreements, Israel has exposed its young industry to the competition of two very strong industrial economies. This risk was taken in the belief that both import-competing and export-oriented domestic production will benefit from greater exposure to foreign competition. To be sure, the bilateral agreements are not designed to replace the drive for global liberalization but rather to give a partial answer to the challenge of liberalized trade, preceding future rounds of multilateral negotiations.

In July, the Government of Israel introduced a comprehensive policy package designed to stabilize the economy. The adjustment program encompasses a number of “real” measures and is reinforced by some temporary decrees of a legal or administrative nature that are designed to freeze prices and wages.

The major goals of the new policy are to bring about a drastic drop in inflation and to strengthen the prevailing positive trends in the balance of payments. Major importance was attached to regaining the confidence of the Israeli public and of the financial community in their currency.

Measures were introduced to reduce domestic real and financial demand pressures, mainly through cuts in public sector budgetary expenditures and deficits and restrictive monetary and wage policy, while increasing reliance on the price mechanism, insofar as prices controlled by the Government are concerned, such as prices of subsidized goods, interest rates, and exchange rates.

Because of the difficulties in achieving the desired reduction of the budgetary deficit through cuts in expenditures alone, and that is known in many countries that have tried it, revenues had to be raised. A new income tax law was implemented, expected to yield additional revenues from companies and the self-employed. A property tax was introduced. Health insurance funds will have to finance part of their own expenditures by charging fees for services and by raising premiums. One third of the planned reduction of the deficit will result from cuts in government expenditures on wages and procurement, another third from far-reaching cuts in subsidies and other transfer payments, and the remainder from increased revenues.

The Bank of Israel intensified its restrictive monetary policy. The volume of credit in constant prices was reduced in the first three months of the program by more than 10 percent, owing to overly high real interest rates.

In July, the shekel was devalued by 35 percent against a basket of currencies. It is intended to maintain a stable rate of exchange and to prevent any substantial rise in wages. The profitability of exports is being assured, mainly through the exchange rate policy, while support for exports through subsidized credit has been considerably reduced or eliminated.

The automatic indexation of wages was reduced and has already resulted in a considerable erosion of wages. Average wages in fiscal year 1985 are estimated to decline by 17 percent below their level in the previous year, reverting to their 1978 level. Disposable wages will decline to a lesser extent, owing to the updating of income tax brackets.

Prices of goods and services were frozen for a period of four months, with a possible extension up to the end of this fiscal year. The intention is to defreeze controls gradually, as clear evidence of reduced demand pressure appears. After initial protests following the painful decisions, public reaction to the policies is overwhelmingly one of understanding and acceptance; about 80 percent of the population is consistently supporting the policy and showing confidence in its success.

Partial indicators of developments in recent months are encouraging. It seems clear by now that domestic demand has indeed been substantially restrained and is forecast to decline by about 4 percent in 1985, after declining by 5 percent in 1984. Unfortunately, the slowdown in economic activity was accompanied by a rise in unemployment, which has exceeded 7 percent. Per capita private consumption is forecast to decline by about 3 percent in 1985, following a sharp drop of 8 percent in the previous year. Per capita public domestic consumption is forecast to decline by 2 percent, while the budget deficit is expected to decline from a level of 8 percent of GNP in 1984 to 6 percent of GNP in 1985. GNP is forecast to grow by 2 percent in 1985, after a slight decline of 0.5 percent in 1984. In 1984, the level of savings was re-established at its historically high level of 33 percent of disposable income.

Exports of goods increased in the period January-August by 6 percent as compared with the corresponding period in 1984. Imports of goods declined by 6 percent and, as a result, the trade deficit declined in this period by $540 million and is estimated to decline in 1985 by about $1 billion, after decreasing by $1.1 billion in 1984.

In 1984, the increase in the external debt slowed down considerably, and in the first fiscal quarter of 1985 it declined by $220 million. In recent months, foreign exchange reserves again began to rise. Inflation rates in August and September declined to 4 percent, as compared with a monthly average of 14 percent in the previous months. Price controls proved to be effective when supported by a decline in demand. Fortunately, the new economic policy was well received in capital markets and Israel’s creditworthiness was strengthened by the positive developments in the first months of the program.

We are now in the very early stages of a very comprehensive plan which our country has introduced, probably more out of necessity than any other considerations. I would like to express my hope that the initial signs of success of the program will proceed at least according to the plan that we have introduced. And I would like to express my hope that, when again addressing this plenum, I will be able to report to you that we have made progress in the recovery of the Israeli economy, and that we have embarked again on the growth path of this small but very thriving economy.

Statement by the Governor of the Bank for Nepal—Prakash Chandra Lohani

It is indeed a great honor and pleasure to address this distinguished gathering. On behalf of the Nepalese delegation and on my own behalf, I would like to express sincere thanks to the people and the Government of the Republic of Korea for the warm and generous hospitality extended to me and members of my delegation. During our sojourn, we have witnessed the economic development that Korea has achieved in a relatively short period of time. We are indeed impressed with it. May I also extend our sincere appreciation to His Excellency, the President of the Republic of Korea, for addressing this joint meeting and calling for better understanding and fruitful cooperation among nations for the benefit of both developed and developing countries. I would also like to take this opportunity, Mr. Chairman, to welcome Tonga as a member of the Bank and Fund.

It is heartening to note that the performance of the world economy in 1984 was considerably better than had been expected. While the industrial countries recorded a growth in real GNP of nearly 5 percent, economic growth in non-oil developing countries accelerated from 2.5 percent in 1982–83 to 4.5 percent in 1984. However, persistent high unemployment in Europe; intensification of current account imbalances of a number of industrial countries, especially the United States; high real interest rates; misalignment and volatility of exchange rates; and increased recourse to protectionism resulting in a deceleration in the growth of trade have made the sustainability of the recovery highly uncertain in the industrial countries. In fact, the rate of economic expansion in these countries has slowed from 5 percent in 1984 to 3 percent in 1985. Such deceleration in growth and the uncertainties surrounding future expansion in the industrial countries could have an adverse impact on continuous world economic recovery.

The economic and financial conditions in many developing countries remain severely constrained. Despite improved performance in 1984, per capita real income of many developing countries continues to be lower than in the 1970s. Unfavorable terms of trade, growing protectionism by the developed countries toward the developing countries’ exports, a decline in the net transfer of both official and nonofficial resources, a heavy debt service burden, and acute compression of imports have exacerbated the problems faced by the less developed countries.

A major area of concern to the developing countries has been the deceleration in the growth of world trade and the decline in commodity export prices so far in 1985. These, together with increased trade barriers, have made it extremely difficult for the developing countries to increase their export earnings. Although the current account deficit of non-oil exporting countries has been reduced to $38 billion in 1984 from $113 billion in 1981, this has been mainly possible because of drastic curtailment in imports by these countries, thereby reducing investment and slowing down economic growth and development.

Another area of concern is the decline in net financial transfers to developing countries. While official assistance and institutional financial support have both declined, there has been a virtual stagnation in commercial bank lending to these countries since the onset of the debt crisis in mid-1982. In view of the discouraging outlook for enlarged export earnings, these countries may have to depend largely on international financing to meet their urgent need for resources not only for productive investment activities but also for balance of payments adjustment. Maintenance of both official and private capital flows is thus of paramount importance. In this context the roles played by the World Bank and the IMF assume vital importance. . . .

During the past forty years the Fund has certainly played an important role in promoting a stable international system of trade and payments. However, it has not been as successful in fulfilling the aspirations of a large number of developing countries as was expected. Adherence to excessively rigid performance criteria with insufficient regard to unforeseen developments in borrowing countries and tightening of conditionalities have discouraged countries, especially the low-income developing countries, from benefiting from the Fund. We would, therefore, like to see some easing of the conditionality rules adopted by the Fund.

In view of the extremely difficult external positions of many developing countries, we believe that the Trust Fund should be revived to make concessional loans to eligible countries. Trust Fund reflows could play a catalytic role in attracting additional concessional aid from other lenders. This would be of immense help in bridging the resources gap faced especially by those developing countries that cannot afford to borrow from commercial lenders. With regard to access limits, despite improvement in the world economic conditions since the adoption of the enlarged access policy, the process of international adjustment is not yet complete, and the outlook remains uncertain. In such a situation, favorable consideration should be given with regard to the access limits to Fund resources.

With regard to SDR allocation, we believe that a substantial allocation of SDRs in the fourth basic period would promote economic recovery and would not be inflationary. An allocation of SDRs would help meet the long-term global need of reserves, thereby supplementing international liquidity. We also share the views put forward by other developing countries that the unconditional character of SDR allocation be maintained and that a link be established between SDR allocation and development finance.

Now I would like to dwell briefly on Nepal’s economic performance during 1984/85. Despite appropriate policy measures undertaken by the Government, adverse weather conditions were mainly responsible for moderating the growth in GDP to 2.8 percent, as compared to an impressive growth of 7.4 percent in the previous year. However, viewed in the context of the higher base in 1983/84, the growth rate of 2.8 percent this year is not that discouraging. Inflation was reduced to 4.1 percent from 6.1 percent last year. Improvement in supply management through stock mobilization and timely imports helped improve the price situation. On the external front, significant improvement in the export performance was not enough to prevent deterioration in the balance of payments position. The Government’s policy of encouraging the private sector has been strengthened.

Nepal has embarked upon its Seventh Five-Year Plan from the current year. The main objectives of this Plan are to accelerate production, increase opportunities for productive employment, and to fulfill the minimum basic needs of the people. The Plan aims at securing an average annual growth rate of 4.5 percent. The major thrust of the investment strategy, as outlined in the Plan, is to give priority to the completion of projects carried over from previous years and to maximize benefits from past investments. Despite the Government’s firm commitments and efforts to mobilize additional resources, about 70 percent of the Seventh Five-Year Plan outlay has to be met from foreign assistance.

In spite of the Government’s active involvement in development activities for the last three decades, the achievements so far have been less than expected. Experience shows that the increasing demands of the growing population cannot be met by the Government only. The initiation of the policy to seek meaningful cooperation from the private sector has been further consolidated in the current year. With the flexible interest rate structure, the banking sector has succeeded in mobilizing resources and channeling such resources to the private sector. The Government has also sought to remove constraints from financial institutions seeking diversification of their investments. Providing adequate rural finance for agriculture and rural development is crucial. With the farmers’ involvement, His Majesty’s Government has proposed to establish the Rural Development Bank this year. Similarly, the policy of private sector participation in public enterprises has been vigorously pursued, and full autonomy regarding price, investment, and internal management decisions has been awarded to enterprises having competitive markets. As the implementation of the “Decentralization Act” in some districts proceeds this year, local participation in the formulation and implementation of local level projects is expected to gather momentum. We are indeed guided by the Royal address, which calls upon the people’s participation in attaining the fundamental objectives of providing basic needs to the people. His Majesty, King Birendra Bir Bikram Shah Dev, in his New Year’s message stated, and I quote:

What has become quite clear is that government and government institutions alone cannot bring about the country’s development on the scale which we desire. Genuine development requires sweat and toil and the application of our mind and energy. We have to extend all possible encouragement to the private sector and encourage production through remunerative pricing in the task of mass mobilization for the purpose of comprehensive development.

For sustained growth of the developing countries, recovery in the industrial countries, although necessary, is not a sufficient condition. For this, an appreciable increase in productive investment in the developing countries is imperative. While we concur with the view that domestic resource mobilization should be enhanced, we also think capital flows, both concessional as well as nonconcessional, public as well as private, must be stepped up along with effective measures to limit the volatility of commodity prices. We feel that there is an urgent need to augment the flow of resources from multilateral institutions like the World Bank and the IMF so that borrowers’ access to these resources would be enhanced. In order to enable these international institutions to play their part, their resource base should be strengthened. Affluent nations can do a lot to help and encourage these institutions to play a more positive role in the international economy.

Finally, we heard Mr. Clausen’s decision not to seek a new term in the Bank. We feel that under his leadership the Bank has tried to find a sense of direction and encourage innovative measures for the benefit of member countries. We appreciate his leadership and his efforts to make the Bank an effective institution in alleviating poverty at a time when the world economy was passing through a difficult period. We wish him well in the future.

Statement by the Governor of the Fund for Pakistan—Mahbub ul Haq

Let me at the outset thank the Korean Government for their legendary hospitality, as well as welcome the Kingdom of Tonga into our ranks.

Let me also say how sorry we are to see the World Bank's President, Mr. Clausen, leave. We admire him not only for what he actually achieved but what he had the courage to try to accomplish under the most trying international environment.

My remarks today are directed toward the same international environment. They may appear harsh but they are not meant to be. They are merely a gift of my honest opinion to the Bretton Woods system for which I have enormous personal affection and respect.

Unfortunately, during the last five years, the world has witnessed the fading twilight of multilateralism. The Bretton Woods institutions have been in deep trouble.

We can choose to look away, as we often have before. But the gathering evidence is too powerful to ignore. For instance: . . .

  • (iii) Drawings from the Fund, which stood at SDR 14.1 billion in 1983, fell sharply to SDR 8.1 billion in 1984 and SDR 2 billion in the first half of 1985. And while the Fund must be complimented on financing the difficult adjustment process in many developing countries (and I would like to pay a personal tribute to the leadership of Jacques de Larosière), particularly in Latin America, I believe neither the Fund nor the world community can draw much comfort from the fact that this adjustment is generally being made at sharply reduced levels of income and employment.

  • (iv) So far as the third part of the Bretton Woods triplets is concerned—GATT—the actual situation is already reaching the point of a well-rehearsed and delightful hypocrisy. Country after country has adroitly learned the uncanny art of practicing protectionism while preaching free trade. I must confess that despite my own deep belief in multilateralism, I was obliged to adopt an aggressive counter-trade strategy recently as I saw all possible doors of multilateral trade closing on my country with the slow thud of sad finality.

  • (v) Commodity prices are at their lowest in the last 27 years, with no effective international mechanism to stabilize them.

This is certainly not the finest hour for multilateralism. But the fault is not that of the Bretton Woods institutions. They would have liked to do more, much more. They have often acted with rare courage under the most adverse circumstances. The fault is really ours—the member governments and we, the Governors—for we have failed these institutions and betrayed our own heritage.

If we are willing to face this bitter truth with raw courage, there is yet hope for a fresh start. We can still manage to reverse the rising tide of bilateralism and turn the next decade into a period of new internationalism. It is in this spirit that I venture to make some modest suggestions.

Most operational initiatives are always preceded by an intellectual breakthrough. But, unfortunately, the world lacks today any powerful central idea as its guiding star.

What we need today is adjustment through growth, not without growth, in developing and developed countries alike. What we ideally need is adjustment upward, not downward; at higher, not lower, levels of output and employment, nationally and internationally. This is often the central controversy between the developing countries and the Fund as well as with the developed world. Is it not possible to settle it on the same lines as was done with the raging controversy between the growth and distribution schools in the early 1970s?

The intellectual breakthrough came via “Redistribution with Growth,” a project financed by the World Bank at Sussex University. The operational breakthrough followed as it was recognized that growth and distribution goals could be combined by increasing the productivity of the poor, particularly the small farmer, and through the expansion of public services of education and health.

Today, we need similar thoughtful work on adjustment through growth, so that from a slogan we can proceed to an operational policy. I hope that the Bank and Fund would jointly sponsor such an intellectual initiative with an open mind.

Once we reach an intellectual breakthrough, the operational implications may be many and far reaching. Without trying to anticipate all of them, let me venture some:

  • (i) If output and employment levels are to be protected, adjustment periods must be suitably lengthened and Bank/Fund resources adequately increased.

  • (ii) The conditionality of lending must emphasize supply expansion even more than demand management, for without this change in emphasis the permanent imbalance simply cannot be removed.

  • (iii) The World Bank must take over the lead in the adjustment process when it is agreed that any viable adjustment in developing countries must be via the development route.

  • (iv) As a consequence, the new SDR allocation should be partially linked with development lending.

If international relations are to reach a new maturity, the developing countries must re-examine their own attitudes as well. It is often tempting for us harassed decision makers to externalize our internal economic problems. But it creates an international credibility gap. And it obscures the reality that over 90 percent of the solution lies in our own hands.

It is, of course, legitimate to ask: “Must we starve our children to pay our debts?” But there are other equally legitimate questions. For instance, must we starve our children to raise our defense expenditures? For the sad fact is that from 1972 to 1982, the health and education expenditures of the low-income developing countries went down from 21 percent to 9 percent of their budgets while, at the same time, the defense spending of the developing world rose from $7 billion to over $100 billion. When our children cry in the middle of the night, shall we give them weapons instead of milk?

And let us also ask: Must we spend a good part of our development budgets to provide facilities for the rich and the privileged? For I discovered from my own experience that it took only the postponement of one expensive urban hospital to finance the entire cost of an accelerated immunization and health care program for all our children. Is it not our own responsibility to correct our distorted priorities and prices before making fervent appeals for the correction of international irrationalities?

I can only hope that the birth of such a new realism in the developing nations will evoke an equally mature response from the developed countries and the international institutions. But even if that does not happen, our people would have gained enormously from our honest effort to internalize our internal problems.

The implication of what I have said so far should be clear: In launching developing countries into the phase of sustained economic growth, the international community must spend much more intellectual capital than it did when it mechanically applied the medicine of demand compression and growth retrenchment all across the board. The lessons taught by recent history have been painful. We must not forget them too easily.

We need at least four elements for any sensible solution: An intellectual framework; a firm commitment by developing countries to tackle their own problems; some crucial Bretton Woods initiatives; and a process of constructive dialogue. I have already talked about the first two. Let me now turn to the last two and offer a five-point agenda for action.

First, we must at least double Bank lending by 1990 over the 1984 level and take it to a minimum of $24 billion. . . .

Second, we must candidly recognize that IDA's liberal terms which found such ready acceptance in 1960 are, after 25 years, no longer acceptable to most legislatures. . . .

Third, any viable solution to the $900 billion debt problem of developing countries must recognize that debt by itself is not a problem, but is the manifestation of a problem. Why the burden of debt appears so heavy today is that those who carry it have not carried out their domestic structural changes and they have been weakened by the way we have treated them from the external environment. It is vital that sustained growth be maintained in the debtor nations. The debt reschedulings must lower future costs, not raise them; they must change the debt profiles from short term to long term; they must allow a healthy expansion of productive capacities rather than only a painful squeeze of already low consumption levels; and they must provide for a continued increase in the lending of commercial banks. This requires a new international debt refinancing facility. Last year, I had proposed that this should be a Fund subsidiary. I have now come to the conclusion that we may have to be even more enterprising—to have the Bank and the Fund work together, raising their expanded resources through significant expansion in Bank capital, increase in Fund quotas, Trust Fund reflows, and new SDR allocation—and this facility should work primarily under the Bank's leadership because of its new development conditionality.

Fourth, the third Bretton Woods institution, not fully represented here—GATT—must organize new trade talks within the next year. For this to succeed, both sides must give a little. Let the industrial nations consider discussing all forms of protectionism including restrictive quotas on textiles, footwear, and agricultural subsidies, and let the developing countries be willing to re-examine their stated stand on reciprocity and on inclusion of services in trade talks. The bargaining table must be full: Actual agreements can be graduated, according to the willingness and ability of the nations to adjust to a new trading order.

Fifth, is it possible at all to give our own annual deliberations a certain focus and a theme? Must we condemn ourselves, as Governors, in these Meetings to remain mute spectators of an international situation we can neither influence nor change? Must we each ritually say our own set piece, which is seldom heard and often ignored, and then take our formal bows from an empty world stage? Or do we dare be different? Can we, for instance, select for 1986 the theme of a fundamental restructuring of the Bretton Woods institutions and guide our statements accordingly? Instead of slogans of a second Bretton Woods, can we analyze the past forty years’ experience dispassionately, each from his own vantage point, and offer some constructive solutions in this forum? Can we convert the next Annual Meetings into a collective think session, with relevant documents from the two institutions? It may not work. It may not work, at all. But can we really lose by trying?

The eternal question is the same as was posed by T. S. Eliot:

“Do [we] dare disturb the universe?”

Statement by the Governor of the Fund and Alternate Governor of the Bank for Belgium—Jean Godeaux

Since the early 1970s, far-reaching and sometimes abrupt changes in commodity prices, exchange rates, and interest rates have disrupted international trade and capital movements. This instability in such basic variables of the international economy is a source of concern, anxiety, and, sometimes, paralysis.

The recent history of international economic relations compels us to recognize that one of the basic causes of this instability lies in the fact that we can rarely manage to eliminate disequilibria without recourse to measures which call forth new disequilibria, of a different nature perhaps, but no less sizable. Thus the oil shocks of the 1970s caused major disequilibria in the current accounts of the balance of payments, which were particularly marked in the case of the non-oil developing countries. Many people welcomed the fact that recycling of these surpluses by the international capital market enabled these deficits to be financed. But the seeds were being sown for the debt crisis which erupted in September 1982. The adjustment process in the debtor countries, made both inevitable and urgent by the debt crisis, was facilitated by the recovery brought about by rapid expansion of the U.S. economy. Over a period of barely three years, the developing countries’ deficit was cut by more than half. During this period, the U.S. current deficit reached a level that everyone agrees is unsustainable. This disequilibrium, too, must be corrected sooner or later. Unless this correction is carefully managed, there are grounds for fearing that it will in turn produce an unstable situation that will generate new disequilibria.

If this reading of the recent past is correct, it would seem that our actions, and sometimes our inaction, have resulted in one disequilibrium being replaced by another. The lesson is that, regardless of its merits, the market is unable to resolve every problem. The “invisible hand” sometimes trembles. It may err from time to time and, instead of correcting a situation, bring about destabilization. The basic question is thus what we should do to ensure that the second half of the 1980s will be marked by conditions that will generate less instability, less tension, and less uncertainty, so that we can develop an acceptable solution to the two major problems facing us here today: the risk of dislocation of trade and international payments by a revival of protectionism, and the debt burden. We must obviously take action to guide the invisible hand. This can be done only through closer, more enlightened, and more decisive international cooperation. It is incumbent on the major industrial countries in particular to unify their views and coordinate their policies.

Thus it was with relief and hope that we greeted the decision by the five major industrial countries on September 22 to cooperate, with a view to ensuring, in particular, that exchange rates would better reflect the fundamentals of the world economy. Need I say how satisfied we are that exchange rate levels have again become one of the major objectives of economic policy. But we cannot act only on exchange rates. If we are to succeed, we must take action against the underlying causes. This is the area where international cooperation comes into its own and can prove truly effective.

We consider international organizations—and in particular the Bretton Woods organizations—to be the chosen vehicles for such cooperation.

With hindsight, we can now see that we have not always provided these institutions with all the resources they required. The International Monetary Fund was enabled to play its role in the crucial period following September 1982 by the increase under the Eighth General Review of Quotas—which we feel came too late and was not large enough—only because the Fund has since that time become the catalyst for indispensable flows of financing.

It is imperative—of this we are all convinced—that the Fund be able to continue to “guide” adjustment on terms that are politically and socially tolerable. To do this, however, “surveillance” is not enough. Admonishments will not suffice. The necessary financial support must be forthcoming during the crucial phase up to the time when adjustment bears fruit.

We therefore welcome the decision to extend the policy on enlarged access. It is regrettable, however, that this decision had to be reached at the cost of a concession, albeit a rather symbolic one, to the doctrine of this policy's temporary nature. We also regret that it was not possible to reach agreement on a further allocation of SDRs. We therefore attach the greatest importance to the study of this issue which the Interim Committee has charged the Executive Board to undertake. This study will not meet the needs of the hour unless it takes account of the role that the SDR can play in a system encompassing several reserve currencies and characterized by sizable financial movements. This role is related not only to the contribution that the SDR makes to the volume of international liquidity, which has declined recently, but also to the element of security that it could contribute to the system. From an operational point of view, the role of the SDR can most easily be revitalized if it is further integrated into the Fund's operations. The next allocations could thus give rise to a reflow to the Fund of the newly created SDRs allocated to the industrial countries, while the developing countries would retain theirs. This very process would strengthen the means of action the Fund needs to have at its disposal to support its members’ stabilization policies. Along the same lines, an allocation could coincide with the next quota increase and be as large as the amounts to be paid in reserve assets. In other words, a system must be built up again. Targets must be set. As Flemish mariners in my country are wont to say: “There's no such thing as a good wind if you don’t know where you’re going.”

As regards debt, we all know, even though we sometimes experience it differently, that the solution does not lie in a return to permissiveness and inflation or by gambling on organized insolvency. We also know that a case-by-case approach continues to be indispensable. We must beware of composite solutions and gross oversimplifications that fail to respect differences in individual situations. Correction of an excessively high debt level in relation to export earnings must come primarily from observance of the conditions spelled out in the Fund's basic scenario and, within this scenario, from the implementation within each country of development policies affecting the supply of goods and focusing on the infrastructure, both human and physical. . . .

This is the opportunity to say that the proposal outlined by the Secretary of the U.S. Treasury the day before yesterday deserves at an early date an in-depth study in order to determine how the proposal can be translated into concrete actions.

Our institutions are forty years of age. At this time of mature strength the lessons of experience should guide our choices for the future. In sum, this lesson is encouraging: economic policies succeed when they are applied resolutely and speedily. Reality responds to the stimuli of international cooperation and government decisions. Unfortunately, it also responds to inaction. It is therefore incumbent upon us, during the ten years that still separate us from our fiftieth anniversary, to seek to achieve what are now our two priority objectives, namely, stabilization of the payments system and establishment of the conditions for lasting development of the nonindustrial countries. The deliberate approach that secured the successes of the past guarantees those of the future. We must continue to refute the skeptics. This will be made all the more difficult by the fact that we can achieve our current priorities only slowly. We thus need not only courage but patience as well.

Statement by the Governor of the Bank for Bangladesh—M. Syeduzzaman

Allow me to join my colleagues in extending a warm welcome to the Kingdom of Tonga, which has joined our twin institutions very recently, and to the Hungarian People's Republic, which has extended her membership since our last meeting to include the International Development Association (IDA) and the International Finance Corporation (IFC). Allow me also to join others in complimenting our hosts, in this beautiful capital of their lovely country, on the grace and ease of their famous hospitality, which provides a good cushion for the severity of the problems we have to discuss.

The year that has passed since we last met in Washington has been one of constantly shifting movements in the world economy. These have culminated in an air of ominous uncertainty, which should give us pause and induce us to re-examine the dominant doctrines of recent years. As a precondition for providing a range of badly needed facilities, such as debt rescheduling, new lending and development finance for growth, and structural changes, one of these hitherto invincible doctrines demands the adoption—regardless of the specific capacities of the economies concerned—of stabilization programs that are hard-hitting, short-term, and have rigid tranche conditions. In the eyes of the faithful, the doctrine still remains invincible. There are recent indications, however, that with its supposed beneficiaries, including many least-developed countries, ominously bending under the weight of their stabilization programs and debt burdens, the chinks in the armor of this doctrine are becoming visible even to the true believers. This appears to be stimulating a desire to provide, by using the direct as well as the catalytic role of our institutions, some forms of relatively long-term fast-disbursing finance to make possible the continued servicing of existing commercial debt and also the return of other funds provided earlier in support of stabilization programs. Though one must weigh such ideas very carefully before accepting or rejecting them, one must also welcome the new spirit of realism and enlightened self-interest underlying them.

The Fund's updated survey of the world economic outlook underlines the air of uncertainty I have referred to and links its policy advice to this central reality. This document, like its predecessors, bears the hallmark of professionalism that we have come to expect and find in the work of our institutions. I would say that this year it has also been somewhat more direct and even-handed than in the past in its diagnosis of the adverse influences on the world economy. Its prescriptive parts, however, call for some further thoughts I want to share with you.

Briefly, the policy prescriptions offered in this excellent document are, for the United States, a reduction of the federal deficit; for Japan, a promotion of domestic rather than external demand to stimulate growth; for most other industrial countries, a relaxation of structural rigidities; and, finally, for the developing countries, a continuation of adjustment policies aimed primarily at better allocation of domestic resources, a further improvement in the external balance, and counterinflationary stabilization. The policy prescriptions for developing countries are marked by a greater degree of generalization than those for the developed countries. This results in part from the compression of language and contents natural in a document of this kind. But more important, it reflects a tradition of standardizing the problems of developing countries and prescribing unidirectional solutions for them. One result of this tradition is that over the years, through repetition, macroeconomic policy advice to developing countries has become uniform and unvarying. It is also becoming increasingly separated from the realities of the social and political context which sets the limits of policy actions. In contrast, the more diversified and intensive approach to the developed economies results in a greater awareness and accommodation of social and political sensitivities.

The inevitable consequence of this contrast is that the burden of restoring the health of the world economy comes to rest disproportionately on the shoulders of its weakest members. But no matter how brave their efforts, it inevitably becomes counterproductive, much like the labors of the hapless Sisyphus. Despite severe and continued adjustments by developing countries, policies in the developed economies, or their absence, have made the efforts of the developing countries ineffective through their adverse effect on many crucial commodity prices, on the volume and direction of resource flows of all kinds. They have, in most cases, suffered a decline in growth rates and living standards as well as other traumas, which are perceived by the vast masses of their people as the result of adjustment measures and policy reforms. This does not make the work of domestic economic management any easier, nor does it promote fruitful relations between our institutions and its member countries.

It is our perception that the Bank, the Fund, and almost all other multilateral institutions, in their pursuit of quiet diplomacy and the search for consensus through courtesy, do not articulate strongly enough the international responsibilities of the developed economies. In contrast, they are somewhat demanding and perfectionist in their prescriptions for the developing countries. This asymmetry has the unintended effect of weakening incentives for corrective actions on the part of the developed countries. It also has the equally unintended effect of weakening the will and ability of the developing countries to sustain their lonely endeavors. We believe that our institutions could profitably pursue their search for consensus with greater frankness toward the stronger economies and a higher degree of sensitivity to the social and political limits of adjustment and policy reform in developing countries. This year there have been some hints of progress in both these areas, but much remains unsaid and undone.

Obviously, the willing consensus of the stronger members of the international community is absolutely indispensable for any success in dealing with our common crisis. The strategic, as well as tactical, decisions in this campaign for universal recovery and resumption of sustained growth can emerge only from detailed multilateral exchanges on specific issues. But these exchanges themselves can have a meaningful start only with a recognition of the mutuality of interests between the developing and developed countries. The experience of the last four decades, as well as sheer common sense, suggests that the revival of the stalled, or nearly stalled, recovery in industrial countries in a sustainable manner requires the revival of demand and economic activity in the developing countries.

The domestic measures needed for resumption of growth in developing countries have been the overwhelming theme at many forums during the last several years and constitute a principal theme of program-by-program and project-by-project negotiations with donor countries and agencies, particularly the Bank and the Fund. Despite the difficulties inherent in achieving any viable consensus on such issues in an environment of shrinking resources, both internal and external, the developing countries have been doing their best to hammer out and implement workable programs. Their efforts, as I have said, have been largely negated by an inhospitable world economic environment radiating from policies seemingly incurred in the developed countries, and by a certain amount of perfectionism inconsistent with social and political realities in some of the adjustment and reform programs proposed.

Although the problem of perfectionism is one that can be, and usually is, addressed on a case-by-case basis, the other more fundamental problem of the hostile world economic environment can be addressed only through an international effort of the will and the intellect. In organizing such a collective effort, the Bank and the Fund can, we believe, play the leading role. May I suggest that as a first step toward a renewed effort in this area, they flag once more the contemporary linkages between the economies of the developing and developed countries and the mutuality of their interests? I am aware that the current style and temper of our two institutions, as well as that of most governments in industrial countries, may not be quite sensitive to these issues. Wide sections of the business community in the industrial countries, however, have an intuitive grasp of the realities I have alluded to and in many academic circles there is an intellectual awareness of these realities. As many forward movements in collective endeavors originate in such open fields exposed to the winds of experience and ideas in real life, it would be worthwhile for our institutions to engage in a professional study of the theme I have mentioned in collaboration with the business community and academic thinkers.

For the least-developed countries, of which my country is one, the single most important element in the hostile world economic environment is the steady decay of concessional finance for economic development, which the world has been witnessing during the last several years. I cannot resist referring to our own experience of a sharp decline in fast-disbursing resources in the past year when the deterioration in our balance of payments was one of the worst because of exogenous factors. Not surprisingly, one conclusion of the balanced and sensible report of the Task Force on Concessional Flows is: “Aid's present supply crisis is only a crisis of commitment,” and that “objectively, there are no major obstacles to doing what is needed.”

The incipient discussions on the use of the Trust Fund reflows are of considerable interest to us, as they are to other member countries. The potential benefit of these resources for eligible low-income countries has been significantly enhanced by the voluntary and generous decision of China and India not to avail themselves of this facility. We deeply appreciate this. It is too early to make definitive pronouncements on the modalities of the use of these resources, beyond saying that in terms of concessionality and conditionality, the eventual decision should be consonant with the existing decisions on the subject, that the funds should be made available to the very low-income countries, and that they should not be put under a common umbrella with other concessional flows. The need for this last criterion arises from the importance of preserving the essential character of these resources as balance of payments support.

The subject of the allocation of SDRs in the fourth basic period has been with us for a long time now. It is unfortunate that a consensus still eludes us, despite the steady personal endeavors of the Managing Director. We are convinced, as are indeed most of the Fund's member countries, that all the quantitative and qualitative criteria for an allocation of a significant amount of SDRs have been satisfied for quite some time. Such an allocation has now become an imperative for the attainment of an adequate level of global reserves, the absence of which hurts us all. . . .

Statement by the Governor of the Bank for Solomon Islands—George Kejoa

I have the honor to speak not just for Solomon Islands but also for our Pacific neighbors, Western Samoa and Vanuatu, who have agreed to my speaking on their behalf. My purpose is to highlight a few key aspects of these discussions as they affect smaller member countries.

The overriding concern of a developing country is to develop. Standing still, for us, means going backward. Our goal is always to strengthen and raise the fragile and inadequate standard of living of our people.

Our concern in economic management therefore is to bring about growth. As we have said to each other so often, and I agree, we must aim at “sustained, noninflationary growth.” Above all, it must be growth, real economic growth, in terms that benefit the mass of our people. Our objectives in relation to balance of payments, the fiscal balance, money, and inflation all derive from and are secondary to that need.

To do this, we need (1) stability in exchange rates of the major trading currencies; (2) commodity prices that at least cover the production costs of an efficient producer; (3) fair access to markets both in industrial and in other developing countries, on terms unhindered by protectionist measures that eventually hurt everyone; (4) a steady inward flow of investable resources transferred to us, by successful competitive trade, by access to financial markets, by direct private investment, and by official aid; and (5) we must have domestic policies that enable those incoming resources to be put efficiently to work alongside our domestic factors of production, to generate economic growth. These policies must embrace taxation, exchange rate, prices, employment, public/private sector balance, and a sound government budget.

The Bank and the Fund, whose governing body we here constitute, have assisted us all in different ways, first to identify and then to deal with constraints and needs on our path to growth. But the Bank and the Fund are only parts, though important parts, of a wider network of governments, banks, transnational trade, and investment flows—part of a world where economic linkages are becoming steadily closer and more complex. The Fund and the Bank can only function effectively in the context of a concerted global effort.

Today, meeting in this hardworking, hospitable, and courageous country of Korea, I see some encouraging signs:

  • —an increased awareness now of the holistic interrelationship of all our development efforts;

  • —growing acceptance of the need not only for convergence of policy aims, but coherence of policy implementation;

  • —widespread appreciation for the efforts by the Group of Five to smoothly bring down the U.S. dollar from its absurd heights;

  • —increased readiness to review the working of the international monetary system in a broad-based forum, in parallel with a review of world trade;

  • —less sweeping rhetoric from our big brothers about the “magic of the market place;” and

  • —more recognition that for many of us the markets are cruel, fair deals do not come readily, and the weaker participants need continued and unstinting assistance.

We want to see this Korean sunshine lead on to solid achievement. Real improvements come step by step. . . .

Meanwhile in the Fund, we have seen flashed across the screen a preview of some interesting ideas from the United States on how to use the money that is expected to flow back to the Fund in the next few years, as countries repay the Trust Fund monies distributed to them in the 1970s.

While it is certainly a welcome change to see the United States putting forward a positive proposal—and we are pleased with the greater understanding of economic realities this seems to show—it is important to remember the origin and nature of the Trust Fund reflows.

It will be a matter for all of us to consider how they should be used. The first idea tabled may not necessarily be the best. We would, for example, be opposed to any suggestion that the Trust Fund reflows could in any way reduce the need for early action to replenish the International Development Association (IDA), and organize a substantial general capital increase for the Bank. Similarly we are anxious that the Trust Fund reflows, or any related ideas, should not be seen to weaken the case for a new distribution of SDRs, and the need to start work on a further quota review in the Fund. And we shall obviously be looking for only such conditionality as to ensure that such monies are used efficiently to alleviate serious economic needs.

I sense that great progress is possible during the next few years if we can somehow learn to coordinate our effort. I hope my feelings of cautious optimism are not too much influenced by the warm welcome we have received here.

We add our warm welcome to our Pacific island neighbor, the Kingdom of Tonga, now joining the Fund and Bank family of nations.

We join with everyone in thanking my colleagues, Minister Kim, Governor Choi, all their assistants, and the Korean people for making these Meetings successful.

On a sadder note, we must all regret the decision of Mr. Clausen to leave the Bank when his term of office expires. His leadership will be greatly missed, but I am sure that his influence will remain with us for many years to come.

Statement by the Governor of the Fund for Tonga—James Cecil Cocker

I would like to thank all Governors and the Fund and Bank staff for the assistance given to us. And I would also like to thank the Government of Korea for its kind hospitality.

We all have problems, and we look forward to our membership providing a forum for continuing an effective dialogue and cooperation to enable us to build the foundation for a stable and prosperous future.

First, may I congratulate you, Mr. Chairman, on your election. May I also thank the President of the World Bank and the Managing Director of the International Monetary Fund for their incisive statements. I would like to express, on behalf of my delegation, our sincere appreciation to the people and the Government of the Republic of Korea for their gracious hospitality and the excellent arrangements for these Meetings.

I am indeed grateful for this opportunity to thank delegates for the many words of welcome which have been extended to Tonga since the opening of the joint Annual Meetings of the Bank and the Fund. I would also like to express our appreciation to the staffs of the Bank and the Fund for their excellent preparations, in particular the efficient manner in which our membership application was processed, culminating in our becoming the 149th member of the Fund on September 13, 1985. On behalf of the people and the Government of Tonga, I would like to express our gratitude at the warm and hospitable reception we are accorded here on our first attendance at these Annual Meetings.

We in Tonga, like other developing small nations throughout the world, face various social and economic issues which need resolving. We trust that our joining the World Bank and the International Monetary Fund will afford us the opportunity to explore various alternatives to resolving our problems. We are aware that each individual member country faces many issues and that, because of our global interdependencies, it will be necessary for continuous cooperation and concerted action by members, if these issues are to be successfully resolved. The Government of Tonga looks forward with anticipation to the opportunity for greater and more effective dialogue and cooperation, which will enable us to build the foundation for a stable and prosperous future.

Statement by the Governor of the Bank for Peru—Luis Alva Castro

In attending these Annual Meetings of the World Bank and the International Monetary Fund, we are not merely participating in a ritual to which all member countries have committed themselves for the last forty years. We have come here for the purpose of making our own statement at these Annual Meetings, which through the action of all of us should be a milestone in the progress of these institutions.

We are not driven by arrogance when we express our desire that these Meetings mark a decisive moment in our history. We are driven by the urgency of a people hit hard by the world crisis.

We believe the gravity of this crisis has made evident to the leaders of all countries the need to undertake without delay a profound change in the international economic order. In our view, this necessarily entails a fundamental change in the operations of such institutions as the International Monetary Fund, as proposed by the Group of Twenty-Four and the non-aligned group.

Therefore, and as was recently stated by the President of Peru in the General Assembly of the United Nations, we have come to Seoul to urge you to take decisive steps along the road to reform of the international monetary system. We have come to tell you that the Government of Peru wants to take an active part in the task of building a new international economic order and that it commits itself, here and now, to become a member of any task forces these Meetings may deem necessary to set up for this purpose.

The Crisis of the Seventies

The declaration of the inconvertibility of the dollar in August 1971 marked the end of the international monetary system sanctioned in the Bretton Woods Conference of 1944.

Successive U.S. balance of payments deficits had weakened the dollar ever since the late 1950s. However, it was not until 1968, with President Johnson's declaration of the partial inconvertibility of the dollar, that we were warned of the impending deadline. And the U.S. economy was financed, indeed its importance as a world power was made possible, by the balance of payments deficits Jacques Rueff described as “tearless deficits.”

When the dollar was made no longer convertible into gold in 1971, all currencies were theoretically put on an equal footing. However, the strength of its economy enabled the United States to continue incurring “tearless deficits.” But unlike the situation of previous years, these deficits were no longer associated in any way with declining gold reserves.

The lack of a convertible currency stripped the Bretton Woods agreements of their substance and thereby required a reconstruction of the international monetary system. But the United States, which should have led the reform of the system and the creation of a true international monetary asset, did nothing in this regard. The SDR, whose creation was linked to the initial stages of the dollar crisis, did not become a new currency; rather, it became a pretext for indefinite postponement of any true reform of the system.

The float that resulted from the declaration of inconvertibility of the dollar led to continuing instability of the international monetary system. The United States made use of the float to devalue its currency and launch a trade offensive against its competitors in Europe and Japan. The idea was that in this way the United States would recover the trade hegemony it had lost; the idea was that hegemony in trade was synonymous with hegemony in production.

But the oil price increase of late 1973 brought about even further changes in the standards of operation of the international economy. The existing imbalances were compounded by the imbalance resulting from the surpluses of the oil producing countries of the Middle East. The Europeans and the Japanese launched a hard fight to prevent possibly uncontrollable trade deficits.

As a result, during the 1970s the non-oil exporting countries of the Third World had to withstand a joint trade offensive by the industrial countries. The United States pressured Europe and Japan, who defended themselves not only from this pressure but also from the oil bill. The Third World countries, thus, had to bear extraordinary trade pressures.

As the recession of 1974–76 limited the international purchasing power of the Third World countries, the only way to have them continue buying was by giving them the money needed to maintain or even increase their imports. These purchases were financed by the oil surpluses, which amounted to $180 billion from 1974 to 1978. Commercial banks then carried out, with apparent success, an enormous recycling of financial resources between oil producing and non-oil producing countries of the Third World.

Of course, the debt of the Third World countries increased by a similar proportion, from $180 billion to $380 billion between 1973 and 1978.

Faced with this situation—which carried the seeds of an even greater crisis in that the Third World countries were not in a position to generate trade surpluses—the International Monetary Fund shirked its responsibilities and became an accomplice in the overindebtedness of the Third World countries.

The Crisis of the Eighties

In the late 1970s the United States decided to make a radical shift in its economic policy. It had apparently run its course, and the interests of the United States called for a different approach.

Thus, the United States committed itself to a restrictive monetary policy, ostensibly with the goal of fighting inflation—a policy that caused an immediate massive inflow of capital into the United States and the resulting international recession.

In any event, the essential point is that the new U.S. monetary policy induced a worldwide recession which, as the 1974–76 recession had not yet been fully absorbed, became more acute from the beginning of the 1980s.

The massive inflow of capital into the United States enabled the country to keep its recession from becoming as severe as that of other countries. It also enabled it to pursue a policy of expanding government spending while reducing the taxes of the rich. The rest of the world financed the fiscal deficits and the trade deficits of the United States.

The policy of industrial restructuring pursued by the United States over many years was carried out in the framework of a new international division of labor. Older industries—steel, for instance—were hard hit and forced to change by imports from countries that had more competitive plants. Leading industries, largely linked to the defense industry, were not affected by the competition but instead were favored by government demand, that is, by external financing.

It is important to note that the U.S. fiscal deficit cannot be reduced unless U.S. economic policy undergoes a dramatic change. Even so, the volume of the public debt is so large that just keeping up with its service will make it difficult to reduce the deficit even if extreme cuts should be made in defense spending, which is so important to the U.S. Administration and so significant for industry.

Faced with this development, which significantly limits the possibilities of recovery in Europe and which has put the Third World in dire straits, the International Monetary Fund has done nothing other than contribute to concentrating all capital in a single country, especially by imposing adjustment policies whose only objective—in the case of the Third World countries—is to generate trade surpluses to make it possible for the external debt to be paid.

The crisis of the 1980s has had an extraordinarily violent impact on the Third World countries. In the first place, it affected the prices of our countries’ export products. Copper prices, for example, fell by 25 percent from 1971 until now, while silver prices declined by 29 percent in the same period.

Second, prices of industrial products have continued to rise, despite the slackening of inflation, with the result that from 1981 to 1984 Latin America's terms of trade deteriorated by some 25 percent.

Third, increased interest rates have meant a substantial increase in interest payments by the Third World. Latin America alone paid $40 billion in interest in 1984, an amount representing 42 percent of its exports during the year.

Fourth, protectionism in the industrial countries—and particularly that of the United States in the 1980s—has seriously affected the countries of the Third World. The European countries and Japan, in addition to the Southeast Asian countries, are the only beneficiaries of the U.S. trade deficit. This is not the case for the countries of the Third World, including those of Latin America other than Brazil and Mexico. Protectionist practices have driven these countries away from the only market that expanded during the 1980s. Implementation of the Trade and Tariffs Act of 1984 has made things even more difficult.

In addition, net external financing to the Third World was negative in 1983, 1984, and, so far, in 1985. To this is added the fact that the Fund, instead of automatically making resources available to the affected countries, has been interested solely in imposing adjustment policies aimed at deepening the recession and thus releasing resources for debt payment. In this manner, the strict conditionality of Fund lending has been joined by a hidden conditionality as the Fund plays the role of international banking policeman.

In view of all this, we declare that the conceptual foundations on which the Bretton Woods system was built are bankrupt and, therefore, that the International Monetary Fund has lost its legitimacy.

We have two conclusions:

1. We hold that the Fund does not fit its proposals to scientific criteria, because it ignores the structural nature of balance of payments disequilibria; because it is not consistent in applying its own criteria, as it uses different prescriptions for similar situations, depending on whether a Third World country or a more industrial country is involved; and because it is a political institution that replicates the old colonialism in its attempt to constrain national efforts toward structural change.

2. We believe that, for all practical purposes, the monetary system agreed upon in Bretton Woods has already collapsed, and that it has been proved unacceptable to the South, inefficient to the North, and anachronistic to all.

The Case of Peru

The decline in Peru's purchasing power in the world market in the 1980s has been truly dramatic. Our export proceeds fell by more than 25 percent between 1980 and 1984. This result is explained in part by falling commodity prices, but also by protectionism in the industrial countries. During this period, the prices of our raw materials dropped by some 40 percent, and our exports of manufactures fell by approximately 20 percent.

Our terms of trade, which measure the real purchasing power of each dollar generated by our economy, also changed unfavorably. We lost approximately one third of our dollar purchasing power during the same period.

What is more, our imports fell by approximately one third between 1980 and 1984 and by about 50 percent between 1981 and 1984. Despite this, and reflecting both the increase in interest rates and a massive capital flight, our total external debt rose by approximately 50 percent.

In a word, an economic absurdity was transformed into a disaster, in which the International Monetary Fund is not uninvolved, as may be concluded from an evaluation of the economic policies adopted in our country during the last few years and the poor results obtained.

For this reason, we would not want to neglect to mention the Fund's letters of intent, which the President of Peru, in his statement to the U.N. General Assembly, referred to as “letters of colonial submission to injustice.” The fact is that when an institution responds exclusively to the interests of the largest of its members, we are obviously faced with a policy like that of an imperial court.

The letters of intent imposed on various Peruvian governments have borne features of true instruments of submission. Through them we were forced to devalue our currency, contract the money supply, and reduce government expenditure, as if the imbalances of the Peruvian economy originated in excess domestic demand.

But the Fund has gone much farther than this. In an assault on our own sovereignty, it has made signing the letters of intent conditional upon the implementation of economic policies not directly related to the re-establishment of balance of payments equilibrium. On the contrary, the Fund compelled Peru to open its economy even in circumstances in which such an opening—as in 1983—worked directly against balance of payments equilibrium.

We must also recall that the Fund went so far as to make a loan of approximately $100 million contingent on keeping in effect an allowance of $8,000 a year for Peruvian tourists, despite the fact that abolition of this allowance would have meant a saving of approximately $100 million in one year.

Furthermore, we must remember that the stand-by arrangement of April 1984 stated that Peru had to introduce “changes in the land tenure structure”—that is, that it had to completely alter the spirit of the Agrarian Reform Law. That letter of intent also noted that Peru had to make its labor legislation more flexible, which, in other words, meant that it had to put an end to the labor stability hallowed in the very Constitution of Peru.

We cannot fail to mention the establishment of untouchable blocked accounts at the Central Reserve Bank under successive agreements with the Fund. Thanks to these accounts, the Central Government and public enterprises continued to service the external debt that had been rescheduled with the creditors. Thanks to them, resources were sterilized at the Central Reserve Bank, contributing to the economic depression. Also, along the same lines (tying the hands of the public sector) is the thesis that net domestic credit must be directed solely to the private sector.

Application of these policies—which, moreover, violate Peru's Political Constitution—could only lead to further depressing our economy and further impoverishing our people.

As a result, Peru's per capita output is now equivalent to that of 20 years ago and some 17 percent less than that of 10 years ago.

Per capita agricultural output has fallen even more dramatically. Production of potatoes, a tuber that originated in Peru and is the basic staple of millions of Peruvians, was cut by half in the last 20 years. In the 1980s alone the drop was one third, or 66 percent of the 20-year decline.

A similar though less dramatic situation has occurred with the production of maize, also a staple food of the old Inca civilization. We now produce about one third less per inhabitant than we did 20 years ago.

Within the general context of deterioration, the wages and salaries of the small portion of our labor force that has pepmanent employment have of course been affected. From 1980 to 1985, the average worker's wage has been cut by 40 percent, and government employees have borne the brunt of the reduction.

External Debt

Regarding the external debt, the increase in which is associated both with the disequilibria of the 1970s and how they were handled and with the crisis of the 1980s, Peru stands by the positions it has been taking since July 28 of this year.

First, Peru considers that in view of the origin of the external debt, it is essential that debtors and creditors accept the principle of co-responsibility. It is not possible for the creditors to view the debt question as primarily a problem for the debtor countries. It is a problem of creditors and debtors alike, and possibly more for the former, who continued increasing their lending while knowing that repayment was out of the question. In any event, we are shouldering our responsibility and informing our creditors that, just as we acknowledge the existence of the debt, we also maintain that we are not in a position to pay it, at least not until there is a radical change in the world economic situation.

Meanwhile, and since we are neither maximalists nor do we think we can do everything by ourselves alone, we reaffirm our decision to pay not more than 10 percent of the value of our exports by way of debt service.

Of course, we do not expect other countries to take the same decision. Ten percent is not a magic figure; it is simply one that is compatible with our present capabilities. However, it is important inasmuch as it is linked to the value of our exports, that is, to our purchasing power in the world market; and especially because it expresses the sovereign decision of a poor country to regain by itself the right to decide its own destiny.

We said at the United Nations that we are not afraid of any reprisals that may be directed at us for having taken this decision. We know that the Third World's creditors and, in particular, the United States, have yet to show any flexibility in their position. We are also aware that they customarily respond with a wide variety of sanctions to those who have the temerity to take a sovereign decision.

At the same time, however, we are convinced that the time has come for reason. Our decision expresses above all a vital need of our economy. We will not pay more because we cannot pay more; and if we were to pay more we would be jeopardizing the very existence of our society, not to speak of the continued existence of a democratic regime, that is, one based on universal suffrage and the balance of powers that characterizes our civilization.

We would also like to inform our creditors that we are ready to talk directly with them; that we are not prepared to accept the International Monetary Fund as intermediary. This is purely and simply because the policies recommended by that organization have served the interests of a single country. They have served to enable the countries of the Third World to generate surpluses needed to pay off their debt, regardless of what happens to their peoples.

We accordingly demand direct negotiations, but also an early meeting of the United Nations to deal with the debt problem.

Peru is applying an emergency medium-term economic program designed to overcome the structural shortcomings from which our country has been suffering. The key components of this program are as follows:

a. Combating the inflation coupled with recession that has been seriously afflicting the neediest among our people.

b. Reactivating the national production apparatus, generating more employment, increasing productivity, and channeling financial resources and domestic savings into production.

c. Reducing the fiscal deficit by means of higher revenues, real austerity in public spending, and a voluntary and responsible reduction in defense expenditures.

d. Taking decisive action against terrorism and drug trafficking, two evils that have combined to undermine our society. Terrorism has taken advantage of the poverty of our people, aggravated as it has been by the application of recession-spawning adjustments (which we have criticized), and has sought to destabilize our democratic system, while the drug traffic is an illegal and immoral activity conducted to meet the growing demand from the large country to our north.

Clearly, we have a structural adjustment program that is consistent with our true situation, is based on our own internal efforts, and has gained the support of all Peruvians notwithstanding the sacrifices it requires.

We are convinced that an effort of this nature, which is already yielding its first fruits, should be firmly supported by the entire world community and should not be hurriedly and mistakenly dismissed as a “vain isolated effort” that might work against the projections of future growth.

International Monetary Reform

Clearly, solution of the debt problem will ease the way toward reform of the international monetary system. However, it is not a prerequisite for embarking on this reform. Rather, reform of the international monetary system may well make it possible to control and perhaps find a more rational solution to the debt problem. In any event, far-reaching changes in the international monetary system are essential. They are essential because the commercial and financial relations among nations can no longer be maintained under the old system. The old system has in fact ceased to exist, and it is the United States that governs financial relations and the world economy.

We therefore demand that reform of the system be begun without delay.

We affirm that the International Monetary Fund has not performed the role assigned to it under its Articles of Agreement. To begin with, the Fund was to foster the balanced expansion of international trade in a context of exchange rate stability. However, at no time since its establishment has the expansion of trade been balanced. On the contrary, the existence of disequilibria has been the essential feature of the development of world trade since 1945. And it is this unbalanced development of trade and international finance that made possible a large-scale expansion of trade and finally led to the nonconvertibility of the dollar.

In our view, for the Fund to be of any use it should adopt clear and symmetrical rules regarding adjustment. Both the deficit and surplus countries should be subject to international discipline of a general nature. There is no point in applying discipline to some but not to others. We accordingly support the Group of Twenty-Four's proposal that multilateral surveillance be developed together with bilateral consultations in order to ensure symmetrical adjustment.

This brings us to a matter of great importance: we refer to the democratization of the Fund. In our opinion, the right of veto that the United States has retained to the present day should be eliminated. If this is not done, the Fund will continue to serve that country's imperial policies. In this connection, we propose that the Third World countries’ participation be raised to at least 50 percent of the quotas. We look upon this recommendation by the Group of Twenty-Four as a positive step toward democratization.

Of no less significance is the aim under the amended Articles of Agreement to make the SDR the principal reserve asset of the system. To this end, we believe that SDRs should be issued annually as advocated by the Group of Twenty-Four. Such issues should give rise to unconditional allocations, that is, automatic allocations subject to no restrictions whatsoever. As further advocated by the Group of Twenty-Four, we recommend an annual issue of SDR 15 billion.

In addition, or, if preferred, as part of this annual issue, the Third World countries ought to receive an allocation as development assistance.

In this latter case, consideration could also be given to the unconditional allocation of certain amounts for the poorest countries.

We demand a far-reaching change with regard to conditionality also, since we have been victims of the unusual conditions set for access to Fund resources.

We must point out that it was in the period when the backward countries needed assistance most, that is, the 1980s, that their economies were wrenchingly adjusted by Fund representatives. It is obvious that the drop in export earnings, the deterioration in terms of trade, and the rise in interest rates render the automatic granting of compensatory financing necessary. However, not only has the Fund not made any effort to provide this type of financing, it has actually tightened the terms for allocating the limited resources available. Even the compensatory financing facility has been reduced to the equivalent of 83 percent of member countries’ quotas.

We must also point out the lack of compensatory funds to soften the impact of higher interest rates. Similarly, there have been no funds to cover the abrupt reduction in the flow of capital since 1982, following the Mexican debt crisis. The funds now available finance export shortfalls only.

All of the foregoing points up one and the same conclusion: the Fund is doing precisely the reverse of what it ought to be doing in circumstances of this nature.

Thus, besides making the allocation of a certain volume of SDRs unconditional, there should also be a reduction in conditionality, especially in the event of disequilibria that would have occurred whatever the policy adopted by a country.

One point regarding the available resources. The Eighth General Review of Quotas did very little in the way of increasing quotas, while use of existing quotas was reduced from 600 percent to 400 percent and conditionality was augmented at the same time. Under the Ninth Review, we would like quotas to be increased significantly and for the increase in available resources to go hand in hand with a reduction in conditionality.

In sum, we concur with the Group of Twenty-Four since we consider that its recommendations are headed in the right direction.

However, we feel they do not go far enough. In our view, more ambitious goals are needed—a sort of target or optimum monetary program.

We accordingly insist on the need to convene a United Nations conference on currency and international finance.

Obviously, some preparatory work will have to be done for this conference; in particular, a working group will have to be formed to start right away preparing documents for discussion on the basis of guidelines imparted to the group at these Meetings.

First of all, we must tell you that we want to create a new international monetary order and, if enough headway has not been made with reform of the Fund, an agency that will supersede the Fund. This agency, unlike the Fund, would include all nations; its more balanced membership would therefore allow it to operate more democratically. No single country would be in a position to exercise a veto.

The monetary agency in question would establish an international currency that, unlike SDRs, would truly have the characteristics of a currency. It would therefore be not only a medium of value, but also a medium of exchange and a payment medium. All currencies, subject to certain rules to be set, would be convertible into this universal currency.

As will be readily apparent, allocation of this currency would be much more of an automatic matter than that of SDRs. In addition, allocation would be closely bound up with the global requirements of the development of trade, hence guaranteeing lasting monetary stability.

We believe that the working group we are suggesting here should be made up of ten prominent individuals from the academic and political spheres of the different regions of the world who have a clear grasp of the change that is required.

We also think that this working group should be given no longer than six months to prepare a proposal for comprehensive reform of the international monetary system.

In accordance with the foregoing, we believe the working group would be able to address the following topics:

  • the characteristics of the international currency to be created;

  • the guidelines for the distribution of international liquidity;

  • the allocation of international liquidity to the Third World countries;

  • the functions of the new international monetary agency;

  • the operating conditions of the international monetary agency;

  • the possibilities for absorption of the Third World countries’ debt in the context of the new international agency.

Upon completing its report, the working group would submit it to the Secretary General of the United Nations, who would, within four months, convene the international conference we have proposed.

We have come to these Annual Meetings to have our say; to communicate to you the urgent needs of a country that is fighting for its survival and believes that the affirmation of its sovereignty is a necessary condition for its development.

We have come to the inescapable conclusion that we must demand an end to the era in which a single country imposes the conditions for its existence on the rest. We do not accept there being a single country that is subject to no control whatsoever, while the countries of the Third World are condemned to hunger for the sake of re-establishment of economic equilibrium.

We affirm that the international disequilibria and, accordingly, our own imbalances, will only be remedied when certain countries accept that they must pay the bill for their excesses in all spheres.

However, we are not prepared to wait till this comes about. We have decided to take our destiny in our own hands. We have decided to remove, to the extent that we are able, the obstacles to our progress.

In this connection, we reaffirm our readiness to pay a maximum of 10 percent of the value of our exports by way of service on our external debt.

But we have also come to demand a far-reaching reform of the international monetary system, a reform based on the principle of equity in resource distribution and the safeguarding of the sovereignty of states.

In closing, we consider it relevant to repeat here what the President of Peru said to the United Nations:

The representatives of the nations gathered here should understand that it is not of interest to us, nor is it worth our while, to remain as members of an organization that serves the interest of a single country. We accordingly reiterate that the International Monetary Fund will not be an intermediary between us and our creditors; in the dialogue with our creditors we do not accept either condition that we mortgage our economic sovereignty or the imposition of policy conditions through the signing of letters of intent as negative instruments for our people.

Statement by the Bolivian Delegation

It is disheartening to note the fragility of the world's economic recovery, because of its negative repercussions for the less developed countries, especially as the prices of our exports remain depressed. Economic activity in Latin America is today at levels far below those recorded during the two previous decades, on the order of 6 percent on average. Even under the most optimistic scenario, there are no prospects for an adequate economic revitalization of the region, one that would ensure social and economic well-being for its inhabitants. On the contrary, per capita income levels and unemployment and underemployment rates have deteriorated substantially.

One of the factors that will determine the future of the region is financial flows. It is a widely known fact that the flows of official financing from multilateral agencies as well as concessional and commercial flows have been reduced, which has had a serious impact on our countries’ capacity to import and to maintain output. An increased flow of resources to the region is essential in order to help its adjustment process. To this end, we believe that the multilateral institutions will continue to play a predominant role, but at the same time, increased resources, particularly from the World Bank, will be required to meet financing needs. In addition, direct private investment and concessional flows will make an enormously significant contribution toward a long-awaited economic recovery. We believe that a concerted international effort will be able to lay the foundations for improvement in the current world economic outlook. In this regard, it is crucial that the industrial countries avoid protectionist measures, and that steps be taken toward a new allocation of SDRs.

As regards the problem of the external debt, we believe that efforts must be continued in the search for lasting solutions, within the framework of responsible negotiations that take into account the real needs and possibilities of the debtor countries.

There is a pressing need, given the financing requirements of the developing countries, to expand the World Bank's lending program for the next five years. . . .

It will be impossible to restore confidence in the capital markets unless there are increases not only in concessional or official flows of financing, but also in commercial flows, to countries such as Bolivia which have embarked upon serious economic adjustment programs but necessarily require effective international cooperation. This effort is not limited to the short term; it has a medium- and long-term horizon, and specifically concerns the financing of projects aimed at increasing exports or mitigating the negative impact of adjustment, especially the social cost stemming from the adoption of measures intended to correct real and financial imbalances.

The problems faced by Bolivia's economy in recent years include recession, high inflation rates, and large balance of payments deficits; these problems, in turn, are related to that of the external debt.

The problem of recession is reflected in large negative rates of growth of real GDP: 6.6 percent in 1982; 8.6 percent in 1983; and 3.7 percent in 1984. The decline in investment was the main factor behind the recession, as negative rates of 16.9 percent, 2.5 percent, and 11.8 percent were recorded in 1982, 1983, and 1984, respectively.

The average rate of inflation, as measured by the consumer price index, was 123.54 percent in 1982; 275.56 percent in 1983; and 1,281.34 percent in 1984. In the first seven months of 1985, inflation reached 4,000 percent. Had this trend continued in later months, the anticipated inflation rate for 1985 would be 44,000 percent.

Among the most important factors causing these economic problems are the large fiscal deficits, distortions in the overall price system, and inadequate monetary and exchange policies. As for the problem of investment, poor resource allocation was the main factor behind the inability to pay the high level of debt.

The level of general government expenditure relative to revenue gave rise to substantial deficits, which amounted to 8.8 percent of GDP in 1982; 18.2 percent in 1983; and 17.0 percent in 1984. Also, in terms of GDP, the Central Government's current expenditure represented 12.7 percent, 19.7 percent, and 15.0 percent in the same years. The rising level of expenditure is explained by an irrational subsidy policy and excessive spending on wages and salaries. On the other hand, revenue was kept down because the administered prices of public enterprises were held below their real level and because the exchange rate was set at considerably overvalued levels. As a result, the Central Government is unable to collect larger resources in the form of taxes and royalties that ought to have been paid by the public enterprises.

The price and tariff control policy whereby their levels were kept below their real values meant lower revenue and large deficits for the public sector, besides giving rise to supply shortages, hoarding, and smuggling of essential goods to neighboring countries.

The policy of keeping the Bolivian peso overvalued caused the demand for international reserves to significantly outstrip the supply, causing deterioration of the balance of payments and virtually exhausting the Central Bank's international reserves. This gave rise to a parallel market in which the dollar was quoted progressively higher than the official market rate. At times, the official market rate for the dollar was only 5 percent of its price on the parallel market. This policy constitutes a disincentive for exports and provides a sizable subsidy for importers, and has a negative impact on public sector revenues.

Furthermore, the supply of foreign exchange available from the Central Bank became extremely limited in view of the reduced inflows of foreign exchange from sales abroad, compounded by smuggling and the underinvoicing of export goods.

In addition, beginning in 1979, the rate of inflation began to rise more rapidly than interest rates, making real interest rates progressively more negative. The implicit public subsidization of monetary assets to the benefit of users of credit contributed to reducing the money supply in recent years in real terms, thereby reducing the degree of monetarization.

Finally, the investments of the public enterprises failed to produce a return. The national oil corporation increased its recourse to foreign borrowings twofold between 1975 and 1979 while oil production fell drastically. Massive investments were made in refineries on the strength of projections of large exports of oil and petroleum derivatives. Indeed, while it was estimated that Bolivia's oil exports between 1976 and 1979 would amount to US$1,105 million, this figure was not reached because production slumped sharply as of 1977; as a result, exports totaled only US$226.5 million over the period and were halted altogether in 1980.

Other projects with low returns that received considerable volumes of external resources were the Karachipampa Metallurgical Complex and the Villamoentes Oils Plant, and others, entailing a significant increase in the Government's external obligations. Moreover, since these investments do not generate the surpluses necessary for repaying their debts, the Government is currently severely constrained in its ability to cover the corresponding debt service.

The New Economic Policy put into effect as of August 29, 1985, is designed to eliminate the distortions that gave rise to these problems. In other words, by applying this policy, the Government is seeking to reduce inflation drastically, deal with the external debt problem, and lay the groundwork for reactivating the economy.

To achieve these aims, an exchange rate policy based on a real parity has been established. To this end, a free exchange system has been instituted, with a single, real, and flexible exchange rate, the level of which is determined by means of public foreign exchange auctions conducted periodically by the Central Bank. Successful bidders may freely dispose of foreign exchange acquired in this way.

In addition, all financial agents and, in general, all individuals or legal entities, are now authorized to be party to all kinds of legal acts, transactions, and contracts in Bolivian currency and foreign exchange with a value-maintenance guarantee with respect to the U.S. dollar. This will create greater confidence in the Bolivian peso, backed in turn by the measure deregulating the setting of interest rates.

Goods may now be imported and exported freely, with the exception of those affecting public health and national security. Customs duties have been fixed at 10 percent, above and beyond the 10 percent levy previously in effect.

Labor may now be contracted freely, which means that public and private bodies and enterprises can rationalize staffing more efficiently. It has been determined that the prices of goods and services throughout Bolivia may be fixed, except for those produced by public service monopolies or oligopolies.

The public enterprises COMIBOL (Corporación Minera de Bolivia), YPFB (Yacimientos Petroliferos Fiscales Bolivianos) and CBF (Corporación Boliviana de Fomento) have been decentralized with a view to converting them into undertakings that will generate surpluses.

Even in the short time since its inception, the New Economic Policy is already showing positive results: negative inflation rates have been posted, the exchange rate is stable, international reserves have grown, and the real demand for money has increased.

With these measures we are sure that Bolivia will regain its financial solvency in the international capital markets, since it is making a resolute, responsible, and consistent effort that warrants the support not only of the multilateral financing institutions but of the entire financial community.

Bolivia fully intends to meet its external obligations; to do so it will seek to ascertain whether a possible renegotiation might be appropriate in light of its serious economic situation and its financial possibilities.

Statement by the Governor of the Bank for Fiji—Jone Kubuabola

May I first extend a warm welcome to our neighbor and friend in the South Pacific, Tonga, which has become the newest member of the World Bank and the International Monetary Fund. May I also express my appreciation and gratitude to the President of the World Bank, Mr. Clausen, who has done an outstanding job during one of the most difficult periods in recent economic history. I wish him well. On this occasion, I would like to express my deep appreciation to the Government and the people of the Republic of Korea for the warm welcome and cordial hospitality extended to us and for the excellent meeting arrangements.

When we met this time last year, there was a widely shared optimism about the prospects for the world economy in 1985. Developments in the world economy so far suggest that the growth in global output in 1985 will be significantly below what was achieved in 1984 and somewhat less than what was expected in the spring of this year. Nonetheless, the growth in world output is expected to be at a respectable level of 3.1 percent, which is far in excess of the average growth rate for the recession years, 1980–83.

There is no doubt that the medium-term financial strategy of industrial countries has been successful in reducing inflation and inflationary expectations and in increasing investment, employment, and output. Some recent developments, however, tend to suggest that the prospects for a strong and durable recovery are clouded by a number of uncertainties. There is a risk of a slowdown in the growth of industrial countries, since fiscal policies in these countries are not likely to provide much stimulus to future growth; there are uncertainties regarding the prospects for the reduction in the U.S. fiscal deficit; there are uncertainties regarding interest and exchange rate developments, the manageability of the external debt situation, and the easing of protectionism; and there are uncertainties regarding commodity prices. Given these uncertainties, there are at least three areas in which action on the part of industrial countries could reduce uncertainties and improve prospects for a strong and sustainable economic growth.

First, any slowdown in economic activity may justify acceptance of a somewhat larger fiscal deficit and a somewhat more expansionary monetary policy. This change will have to be introduced cautiously and selectively: cautiously, because it is important to avoid wrong signals to market participants; and selectively, because some industrial countries are in a better position to provide fiscal and monetary stimulus than others.

Second, a lower level of interest rates would improve the prospects for a durable recovery. Therefore, meaningful progress in reducing the U.S. fiscal deficit could contribute toward a significant easing of interest rates.

Third, much greater progress needs to be achieved in tackling structural rigidities in a number of industrial countries. Measures aimed at a reduction in labor market rigidities, reduction in distortions created by government regulations, reforms in wage setting mechanisms, elimination of subsidies and protection granted to uneconomic industries, and manpower training in new skills need to be adopted if a sustainable noninflationary growth is to be achieved in many countries. With the risk of a slowdown in economic recovery in industrial countries, the task of addressing the structural problems has become even more urgent.

The growth and balance of payments prospects of developing countries are closely tied up with economic prospects in industrial countries. Therefore, a sustained strong economic growth in industrial countries will be crucial for the achievement of higher growth rates and improved external balance in developing countries. Recovery in industrial countries alone, however, will not improve the prospects for developing countries. Progress in a number of other areas will be necessary before developing countries can achieve a higher level of growth together with a sustainable external balance. A lower level of interest rates in capital-exporting countries, a rollback in protectionism in industrial countries, an increase in the flow of non-debt-creating capital, and a multiyear debt rescheduling for heavily indebted countries will be crucial for achieving higher growth and an improved balance of payments position. Unfortunately, progress in all these areas has been either absent or inadequate. Without significant progress in these areas, the prospects for developing countries will remain bleak.

The Bank and Fund have a vital role to play in the transfer of resources and in the adjustment process. I believe that if these institutions are to continue to play an effective role in these changing and difficult times, changes may have to be introduced in at least four areas: first, these institutions will have to be adequately funded; second, the policy on access to the resources of these institutions must provide for access on a scale sufficient to meet the development and adjustment needs of member countries; third, the conditionality associated with the provision of assistance must be reasonable and realistic in the context of the economic, social, and political circumstances of member countries; and finally, new policy initiatives will be required to enhance the flow of resources from capital surplus countries to capital deficit countries. . . .

Meanwhile, liquidity is not likely to be a constraint to the Fund's operations in the next few years; but, beyond that period, a substantial increase in Fund quotas under the Ninth General Review will become crucial if the Fund is to continue as an effective institution. In the meantime, the multilateral institutions must continue to provide greater access to their resources. It is a matter of regret that the level of Bank lending in fiscal year 1985 has been lower than what had been envisaged earlier. Similarly, the average annual access to the Fund's resources has been curtailed substantially from 77 percent of quota in 1982/83 to 52 percent in 1985. It is indeed revealing that the present access limit is only 10 percentage points above that which was granted to members in the three-year period preceding the introduction of the supplementary financing facility. While I welcome the decision of the Interim Committee to make only a modest adjustment in 1986 to the present access limits under the enlarged access policy, I believe that a more liberal interpretation of the guidelines on access could contribute toward a more effective role of the Fund in the international adjustment process and in providing stability to the international monetary system. I also believe that the usefulness of the compensatory financing facility has been eroded considerably by its being changed from an unconditional facility into a conditional facility. I believe it would be appropriate to restore the unconditional character of the compensatory financing facility to provide timely assistance to members facing balance of payments difficulties arising from a temporary shortfall in exports.

I appreciate that part of the reduction in the use of resources from multilateral institutions has been associated with the slow recovery in industrial countries. At the same time, I believe that a good part of the reduction can be attributed to the tightening of conditionality. Adjustment measures in developing countries which entail drastic cuts in the standard of living over a short period of time can be very difficult both socially and politically, and it could lead to undue postponement of adjustment in many countries. Therefore, it is important that the design of programs take into account the social and political circumstances of member countries. In many cases, the pace of adjustment will have to be more gradual so as to avoid severe hardship to the general population. In this context, I believe that a greater use of the extended Fund facility would be both appropriate and desirable.

I warmly welcome the initiatives taken by the Fund and the Bank to enhance the flow of resources. The catalytic role of the Fund in putting together financing packages for indebted countries and its role in providing enhanced surveillance intended to preserve and strengthen the confidence of private creditors have contributed much toward the management of the debt problem and toward the stability of the international monetary system. . . .

The absence of an allocation of SDRs in the fourth basic period and the failure of the membership to reach a consensus on the subject is a matter of concern. I believe that an allocation at this juncture will provide three distinct advantages. First, it will help promote growth and adjustment at a time when the existing mechanisms for the international transfer of resources are not functioning properly, and at a time when many countries are undertaking painful adjustments by restraining their imports. Second, at present there is a heavy dependence of the supply of international reserves on the lending policies of the major international banks and on the national policies of reserve currency countries. Hence, it would be desirable to have a system in which the SDR had a greater role and in which it could contribute to greater stability in reserves. Third, one of the objectives of the Fund's Articles of Agreement is to make the SDR the principal reserve asset, and an allocation at this time will contribute toward that objective. I believe that the criteria for an allocation have been adequately met and that the decision by the Executive Board to conduct a review of the future role of the SDR should not be a reason for not making an allocation at this time.

We all recognize that there is scope for improving the international monetary system. The Group of Ten and the Group of Twenty-Four studies recognize the basic problems facing the system, but they differ in some respect in their prescriptions on how to deal with these problems. I hope the Fund staff will make an assessment of these studies and the Fund's Executive Board will have an opportunity to discuss these studies and report its conclusions to the Governors. I would be particularly interested in the Executive Board's views on how the Fund's surveillance process could be used more effectively in coordinating economic policies of major industrial countries in a way that will bring about greater stability of exchange rates.

Statement by the Governor of the Fund and the Bank for the Lao People's Democratic Republic—Kikham Vongsay

It is a great joy and privilege for me to be able to represent the Government of the Lao People's Democratic Republic at the Fortieth Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund.

On behalf of my delegation, I would like to use this opportunity to express my thanks to the President of the World Bank and to the Managing Director of the International Monetary Fund and to their staffs for the excellent arrangements and facilities provided for the smooth running of these meetings. My delegation would also like to extend greetings to the delegations of the friendly countries that have become full members of our two institutions.

After three years of, in effect, uninterrupted decline in world economic growth and trade, the outlook for the world economy is still far from encouraging today. While the economic recovery in the industrial countries continued and gained momentum throughout 1984, their economic growth rate averaged no more than 4½ percent and remains uneven. As to the developing countries, although there are signs of a certain upturn in domestic economic growth, their average growth rate, now 3¾ percent, is still low. Many of these countries are still caught in a rising tide of protectionism, the high interest rates prevailing in the international capital markets, and the shrinkage of official development assistance. All these problems are major causes of great concern for the developing countries.

The Lao People's Democratic Republic, a developing country, has endeavored to carry out its development strategy and development plans, and we are happy to report that some successes were achieved in the past year, notwithstanding enormous difficulties resulting from natural disasters and, especially, the pressures, subversion, acts of aggression, and sabotage perpetrated against our country by the enemies of the Lao revolution. In the course of 1984 we completed the fourth year of our first five-year plan, the initial results of which have been encouraging. Production of paddy, in particular, was 18 percent higher in 1984 than in 1983. Export earnings also increased appreciably. These successes are the results of the resolute efforts of our people, domestic reorganization, and fruitful cooperation with the fraternal socialist countries, friendly countries, and international organizations such as the World Bank and the International Monetary Fund. I would like to take this opportunity to express, on behalf of the Lao people and Government, my sincere thanks and deep gratitude for their valued and helpful assistance.

This year, the Government of the Lao People's Democratic Republic is on the point of evaluating the results of the first five-year plan, covering the period 1981–85. As of now, we can state that the results are quite satisfactory. The physical and technical foundations for the country's development have been laid, making it possible for our country to move ahead to the second five-year plan—for 1986–90—under relatively favorable conditions. Despite these accomplishments, the country is still faced with innumerable problems arising from its landlocked situation, extreme underdevelopment, and several other constraints. Our delegation would like to emphasize the fact that this meeting is taking place at the same time as the one in Geneva for the mid-term review of the new Special Action Program for the 1980s in favor of the least developed countries. The Lao People's Democratic Republic, ranked among those countries, attaches very special importance to that meeting since it is vitally concerned with the transfer of resources for the economic and social development of the least developed countries. It is the view of our delegation that the development financing institutions should participate actively in the attainment of the objectives of the new Special Action Program and subscribe to the conclusions reached by this important meeting.

As regards our own nation, we need considerable volumes of capital to repair and rebuild our roads, promote agriculture, intensify the production of forestry resources for export, and develop hydroelectric potential in the interests of industrialization. In this respect, the Lao Government is counting on close and heightened cooperation from its bilateral partners and from all development financing institutions, including the Bank and the Fund. . . .

As regards the policy pursued by our two institutions, my delegation shares the concern and the views expressed by many delegations from developing countries. It supports the policy of cofinancing with the appropriate bodies, with a view to creating additional financial resources and genuinely promoting economic growth and development in the developing countries. It likewise supports the policy intended to increase resource transfers to the developing countries in this and the next decade, either as grants or in the form of loans on highly concessional terms, in particular for the least developed of the developing countries. . . .

The International Monetary Fund should play an important role in helping its member countries to restore the conditions required for economic growth and prosperity in the longer term, encouraging adjustment efforts by providing increased assistance to member countries, and continuing to support adjustment by using its resources on a scale commensurate with the adjustment effort, the balance of payments requirements, and the particular features of each country's situation.

It is my delegation's view that the items I have mentioned will contribute to strengthening the global roles and effectiveness of our two institutions.

Statement by the Governor of the Bank for Lesotho—Peete Nkuebe Peete

May I first congratulate the Chairman on his election to his present office, and express my appreciation of the distinction which he brings to it.

When we met last year, there appeared to be promise of a significant recovery in the world economy. Twelve months later that promise remains unfulfilled. The recovery in the industrial countries looks fragile, while the outlook for the developing world is extremely depressing.

I refer in particular to:

  • —the continuing debt crisis, of which the ultimate outcome cannot be foreseen;

  • —the volatility of exchange rates;

  • —the reduction in capital flows from industrial to developing countries (estimated at a negative net volume of some US$7 billion for 1984);

  • —a reduction in world trade and intensified protectionist tendencies;

  • —continuing high levels of unemployment in industrial and developing countries alike; and

  • —natural calamities such as the sub-Saharan drought, which bring famine and disease in their wake.

I believe, however, that there are possible remedies for the fluctuations which have been so damaging to the world economy in general, and to the developing countries in particular; that these remedies could be less painful than those so far prescribed as orthodox; and that these remedies have not so far received proper consideration. I have in mind specifically the principle of free trade on the basis of comparative advantage.

With the invaluable assistance of the industrial countries, even the least developed countries, such as my own, have built up a capacity to produce a range of low-technology consumer goods far more economically than the industrial countries. These include textiles, mineral products and some agro-industrial products for which developing countries produce the primary raw material, and currently export that material with little or no value added. But when they develop the capacity for down stream processing, they are denied access for their finished products to lucrative markets in the developed countries. This situation distorts international trade patterns, denies developing countries the purpose of economic advancement, and leaves them no alternative but to rely on external concessionary aid. Surely it should be possible to persuade the industrial countries to concentrate on high-technology products, redeploying and retraining their labor forces for more rewarding employment, and leaving the initial processing of primary products to the producers. I am convinced that the larger volume of high-technology capital goods so produced by the industrial countries would find ready markets in developing countries, as the ability of the latter to pay for imports would increase with their improved export earnings.

I turn now to some of the pressing issues that confront my Government in its persistent efforts to obtain economic security and improved standards of living for the Basotho nation. In this connection, my Government deeply appreciates the invaluable assistance that it has received from the management of the Bank and Fund over the past two decades.

Lesotho is one of the smallest and most disadvantaged of the least developed countries. It is landlocked and totally enclosed within the boundaries of a much larger, more powerful neighbor with a highly developed economy. The main body of our work force depends on that neighbor for employment. Our natural resources are minimal. Our primarily agricultural economy has been devastated by the sub-Saharan drought, which has not yet broken. We have tried to manage our finances with maximum prudence, but 25 percent of our annual revenue is preempted for amortization and interest on the public debt. The strength of the U.S. dollar (in which most of our debt is denominated) and high interest rates compound our problems and impose a crippling burden. Our currency, which is inescapably linked to that of our neighbor and principal trading partner, shows no sign of appreciating against the recent easing of the dollar. The weakness is attributable to noneconomic factors prevalent in the region, which are outside our control. A major consequence is that the cost of our fuel oil imports has increased by 100 percent over the past ten months, with a resulting continuous erosion of our foreign exchange reserves.

We are most anxious to attract investment to Lesotho either directly or in concert with our National Development Corporation, and we can offer the foreign investor a location in a country of proven political stability with a highly intelligent and adaptable labor force and access to a wide variety of markets.

In our present situation we are dependent not merely for development, but perhaps for survival, on such international institutions as the Bank and the Fund.

You will therefore understand our appreciation of their continued support and our concern (shared with other developing nations) for the future of these institutions. It is vital to us—and, I suggest, to the ultimate good of the world economy—that they be assured of the resources and authority to carry out their respective mandates. In that connection, I suggest that history gives us no cause for confidence in the wisdom that is often claimed to inspire the completely free operation of market forces. A distinguished observer commenting on the current problems of both the Third World and the industrial democracies has remarked,

The solution of these problems requires international cooperation of a high order, sometimes amounting to a limited or partial pooling of sovereignty. The solution of these problems will require a strong and effective multilateral institutional framework persistently adapted to the new situation precipitated.

I commend the high degree of technical skill with which the Bank and the Fund have consistently conducted their operations and the success that has attended their efforts. . . .

With regard to the Fund, I would state most earnestly that the case for a new allocation of SDRs sufficient to ensure adequate global liquidity has been fully argued; that such an allocation is now long overdue; and that it should be unconditional. An increase in the liquidity of less-developed countries is not without advantage to the major industrial countries who have opposed and continue to oppose it so strenuously and rigidly.

It is unacceptable and illogical that access to Fund resources should be reduced at a time when many of its poorest members stand in greatest need.

Finally, I suggest that in its surveillance of the financial policies of its members, the Fund's monitoring role should be no less critical and significant in the case of the major industrial countries than it is in the case of the less-developed countries. It is the major industrial nations that determine the course of the world economy, and thereby incur responsibilities that extend far beyond their short-term national interests. It would be to the advantage of all if their policies could be regularly and critically assessed in the light of their probable global consequences.

My Government regrets the irrevocable decision of Mr. Clausen not to serve another term as Bank President. He was a great asset to this institution, and his experience will be missed by all of us.

My delegation extends a warm fraternal welcome to our newest member of the Bank and Fund, the Kingdom of Tonga.

In conclusion, I would like to thank the President, Government, and people of Korea for their most generous hospitality, and for the warm welcome they have extended to us who are visiting this most beautiful country.

Statement by the Governor of the Fund and the Bank for Malaysia—Daim Zainuddin

It gives me great pleasure to address fellow Governors at these Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund. I would like to take this opportunity to express on behalf of my delegation our thanks to the Government and people of the Republic of Korea for their gracious hospitality and the excellent arrangements made for these Meetings. I would also like to welcome the Kingdom of Tonga as the latest member of the Bank and the Fund.

We are now meeting at a time of great uncertainty in the international economic environment. Volatile exchange rates, unstable capital flows, and large payments imbalances among the major countries clearly pose threats to a sustained recovery and the continued viability of the international monetary system. At the same time, viable solutions to the world debt crisis are not in sight. The political will to alleviate problems facing the world economy is clearly lacking.

A number of fellow Governors have spoken about the evils of protectionism and the urgent need to roll back trade barriers. There appears to be a consensus that protectionism hurts everyone. It is time we translate all these concerns into concrete programs of action to pave the way for a revival in economic growth and world trade.

The Bank and Fund must play a stronger role in reviving world economic growth. The Fund will need to enhance surveillance and make it more evenhanded. Besides promoting adjustment in developing countries, it must also promote policies to achieve convergence in the economic performances of major industrial countries. This will minimize serious misalignments of exchange rates, high interest rates, and perverse capital flows. . . .

Although a favorable international economic environment and an enhanced role for the Bank and Fund are important for sustained growth and development, domestic economic and financial policies need to emphasize fiscal consolidation in the medium term.

In Malaysia, a key element in promoting economic development is a more dynamic and effective private sector. Recognizing this role, the Government has taken positive steps in the past year to promote private investment.

The Government, for example, has recently liberalized the guidelines for foreign equity participation. The new guidelines aim at promoting exports, especially of manufactured goods. We are convinced that this policy will further improve the investment climate in Malaysia. Policies are also in train to increase domestic private investment. At the same time, a more efficient and competitive industrial sector will also be achieved through privatization of public enterprises. The national airlines, telecommunications, and port facilities are at various stages of being privatized. . . .

Solutions to the debt problem remain as elusive as ever. Expectations of a major initiative at these Meetings have fizzled out. Consequently, high debt servicing has caused serious hardship in the indebted countries. We need to introduce new initiatives to address this problem. I propose that the Bank seriously consider, among others, a scheme to reinvest a proportion of the repayments in debtor countries. This would encourage higher levels of investment and economic growth, thus enhancing their capacity to service the debt. Such schemes can be readily incorporated in the framework of the Bank's cofinancing loans. Some of these ideas could as well be translated into workable plans of action by multilateral institutions and private and official creditors.

The developing countries have borne the brunt of the failure by industrial countries to sustain noninflationary growth in the world economy. We in Malaysia have taken strong and effective adjustment measures to reduce our external and fiscal imbalances. The measures have been successful, but success was achieved at a cost of lower economic growth and development. We believe such measures are necessary to ensure sustainable long-term growth of the economy.

Finally, we join other members in wishing Mr. Clausen all the best in his future endeavors. Needless to say, Mr. Clausen has done a tremendous job for the World Bank in his capacity as President during his tenure in office.

Statement by the Governor of the Fund and the Bank for Malta—Wistin Abela

First of all, I should like to express the Maltese delegation's appreciation to the Government of Korea and the people of Seoul for their warm hospitality and the excellent arrangements made for our meetings.

After our meeting in Washington last year, the recovery in world output and trade strengthened further—without any resurgence of inflation in the major industrial economies. During the first half of 1985, however, the upturn appeared to lose its momentum, and this before many developing countries had begun to benefit significantly from the recovery. Indeed, much of Africa continues to suffer from economic deprivation, famine, and other crises, while the development process in Latin America has been set back many years. Moreover, more than half of the developing countries now have lower per capita incomes than before the recession.

In spite of the recovery, therefore, I feel that the Ministers of the Group of Twenty-Four were fully justified last April when they described the international economic situation as “unstable and unsustainable” and “a cause for serious concern.” Dangerous elements of instability, in fact, threaten the world economy, and since our last meeting some have even worsened. These include the large trade imbalances between the world's major economies, growing protectionist pressures, fiscal imbalances, high interest rates, and a debt situation which, despite occasional optimistic pronouncements to the contrary, still give cause for concern. For the developing countries, in addition, a number of factors have combined to bring about an anomalous situation where net flows of finance are actually negative—and this at a time when the world's largest and strongest economy has become a net absorber of the world's savings.

Perhaps the most disturbing factor in the present situation is that there is as yet no evidence of an alternative stimulus to global economic activity, now that growth in the United States is slowing down. In the meantime, while prospects for the developing countries depend mostly on the level of economic activity in the industrial countries, direct international and domestic actions are necessary to ensure adequate support for these countries, which, because of the asymmetries inherent in the present international financial and trading system, continue to bear most of the burden of adjustment.

In short, there is much hard work to be done.

Although the problems besetting the world seem, at first glance, to be many and complex, in reality they are all interrelated. The trade deficit of the United States has now reached a level, in relation to its GNP, which is so high by historical standards that it threatens to undermine confidence in the dollar, and, thus, also in the whole international financial system. The abnormally high interest rates that have given rise to this development are, in turn, the result of the U.S. budget deficit combined with the strict adherence to tight monetary policies. These facts and the consequent strength of the dollar have, at the same time, contributed in no small manner to the difficulties of debtors in the developing countries, and also contribute to the further dangers these facts, in turn, pose to confidence in the international financial system.

We sincerely hope that the measures recently taken to bring the dollar's value down to more realistic levels will help to remove at least one source of instability, and that these arrangements will be lasting. If, as a result, the mounting protectionist stance in the United States can be successfully resisted, another grave danger which has been looming before us—that of an all-out trade war between the world's major economies—can be averted, and hopefully, the protectionist tide can be rolled back.

There is, of course, that other strange phenomenon of our times—the high and rising unemployment in the European economies at a time of supposed economic recovery. A new word—“Eurosclerosis”—has been coined by the popular press to describe the illness afflicting Europe. Within our more esoteric circle, we refer to it as “structural rigidity,” especially in the labor markets. However, although it might be argued that the dollar's strength should have contributed to economic revival in Europe, the high interest rates on which that strength rests did not. Neither did the perilous debt situation of the developing countries—which are a potentially (but, in the circumstances, not actual) large market for Europe's exports.

Thus, one could go on endlessly establishing links between the various ills that plague the global economy. However, the underlying cause can be found in the weakening, over the years, of the spirit of international cooperation that had inspired the founding fathers of the Bank and the Fund and which had brought so much stability and prosperity, and such promise, to the world in the two decades immediately following World War II.

In this context, I feel that the calls being made by the Group of Ten and the Group of Twenty-Four for improving the effectiveness of the Fund's surveillance role in relation to the major industrial countries are of great significance and should be heeded. It is essential not only to strengthen the procedures relating to surveillance, but also to provide an element of constraint, even for countries with large surpluses, to bring about greater compatibility of national policies and exchange rate stability, as well as greater symmetry in the international adjustment process. Otherwise, the burden of adjustment will continue to fall almost entirely on the weak debtor countries, which are least able to bear it.

We feel, however, that the Report of the Deputies of the Group of Ten on the Functioning of the International Monetary System, while acknowledging the inherent weakness of a floating exchange rate regime—which, as we all know, has in recent years been highlighted by such disruptive volatility and destabilizing characteristics—does not really offer practical solutions for tackling such weaknesses. It dismisses too easily the idea of target zones for the major traded currencies, which is supported by the Group of Twenty-Four. We feel that, in view of the severe negative effects of exchange rate instability on the developing countries, this proposal merits more careful consideration. But perhaps, in the meantime, one way of mitigating the impact of erratic—and sometimes ephemeral—movements in exchange rates between the major currencies would be to diminish the heavy reliance on one or two currencies—namely the U.S. dollar and the pound sterling—in the pricing of major commodities and replacing them by a composite unit, such as the SDR. Such a measure would, we believe, lead to a much more stable price structure for the major internationally traded goods and would therefore enable better planning and greater stability for the benefit of both the developing producer countries and the industrial end-users and for a less disruptive international monetary system.

And that brings me to a closely related topic: the future role of the SDR, which, according to the Second Amendment of the Fund's Articles of Agreement, should one day become the principal reserve asset of the international monetary system. The Group of Ten Deputies now seem to be having second thoughts about this objective. Thus, in their report, they argue that the expansion of international financial markets and the emergence of a multicurrency reserve system have reduced dependence on a single currency in international settlements and reserve holdings, and this has affected the rationale for the SDR. However, experience has shown that a market-based system of reserve creation is not able to provide for all the liquidity needs of all countries. In fact, in view of the asymmetrical effect of poverty on needs and creditworthiness, it is difficult to see how the existing maldistribution of liquidity can be corrected by market forces. It is essential, therefore, that, in carrying out the current review of the future role of the SDR, the Fund's Executive Board should consider not only the global need for liquidity, but also particular needs, especially those of the developing countries.

Much can be done to alleviate the burden on these countries through the provision of more financial resources by and through the Fund and the World Bank. These resources need to be provided on easy terms, and for longer periods of time. Circumstances certainly do not warrant the accent recently being placed on the “monetary” character of the Fund and the “temporary” nature of its support for balance of payments adjustment. What is necessary is an urgent reappraisal of the Fund's policies with regard to the use of its resources and its general approach to adjustment where developing countries are concerned. In addition, more positive thinking should be given to the question of an SDR allocation, which would help not only to ease the liquidity strain currently facing many countries, but also to promote a more even growth spread in world trade. Similarly, the Fund's policy of enlarged access should be continued at current levels at least up to the Ninth Quota Review, and use of the extended Fund facility should be expanded so that the Fund will be able to respond more effectively to the medium-term balance of payments needs of many member countries. Besides, it should not be too difficult to reach agreement on utilizing Trust Fund repayments for concessional assistance to the poorer countries, and active consideration should be given to establishing the Trust Fund on a more permanent basis. Furthermore, it is important to ensure that both the Fund's assistance and the World Bank's structural adjustment loans continue to deal with the particular financial needs of individual countries in a mutually supportive manner. . . .

Finally, I cannot close without expressing my country's deep sympathy to the Government and people of Mexico for the widespread destruction and devastation of their country as a result of the recent earthquake. I feel, however, that these Meetings should go further and demonstrate the solidarity of the whole international community in a practical and tangible manner. In particular, I am sure I would be expressing the feelings of all our members were I to call on the Fund and the Bank to take whatever measures they deem possible to alleviate the hardship and suffering at present being borne with such fortitude by the people of Mexico.

Statement by the Governor of the Bank for Papua New Guinea—Philip Bouraga

On behalf of the Government of Papua New Guinea, I wish to extend to you, Mr. Chairman, President of the World Bank, Managing Director of the International Monetary Fund, and fellow Governors, our warmest greetings. I would also like to thank the authorities and the people of Korea for the warm welcome and for hosting these Annual Meetings. I also wish to extend a warm welcome to Tonga as our newest member of the Bank and the Fund.

The last few years—1980–83—have witnessed the longest recession in fifty years, with many countries struggling to maintain output and employment in the face of increasing fiscal problems and rapidly rising debt. The recession brought many problems, many challenges, and, more important, I hope, many valuable lessons for policymakers throughout the world.

The recession also brought out the weaknesses that are inherent throughout the world's economic and financial system. Increased unemployment and inflation clearly highlighted the rigidities inherent in our economies.

An improvement in the world economy came in 1984. Many experts saw it as the start of a new period of sustained growth and prosperity. Certainly, this growth was expected to continue into 1985 and 1986.

This picture has now changed somewhat and there have been increasing signs of hesitancy in the face of world economic expansion in the first half of 1985. Growth in 1985 and 1986 is now expected to be somewhat less than was foreseen six months ago because of the sharper than expected deceleration of growth in the United States and weaker than expected demand for primary goods.

Economic growth in industrial countries is now expected to average around 3 percent a year over the next five years. I would emphasize, however, that this is dependent on policymakers learning from, and improving on, past performance.

Nevertheless, it is encouraging to note that the world economy remains fundamentally unchanged, and it should be possible to sustain the current modest pace of recovery. Inflation in industrial countries has been reduced considerably and is expected to average around 4 percent for the next five years or so.

I am pleased to see that developing countries have performed relatively well, recording growth rates of 4.4 percent in 1984 and 3.6 percent in 1985. Projections for 1986 indicate that developing economies will improve their performance and could improve their growth rate to around 4 percent. The downward revision in the growth rates of developing countries reflects the weak oil and commodity markets. In primary product-exporting countries like Papua New Guinea, the medium-term outlook appears gloomy. Commodity prices are not expected to improve, resulting in lower export receipts, which directly affect domestic incomes and retard the growth of domestic demand and output. Forecasters see little prospect of a change in this trend.

For Papua New Guinea, the weakness apparent in gold and other mineral prices is having a significant impact on our mineral resources stabilization fund and will further compound the fiscal problem caused by falling real levels of Australian aid and unfavorable exchange rate movements. Export taxes will also be affected by declining commodity prices.

Because of these developments in the world economy, my Government has taken steps to ensure that Papua New Guinea alleviates the impact of falling commodity prices. Given the limited amount of resources available to the Government, it is important that these resources are put to good use. In Papua New Guinea, we believe that this means government doing the things it is good at and required to do and encouraging the private sector to contribute in other areas in which it has more expertise than the government. As part of our adjustment moves for this year, we have tightened our monetary policy to be consistent with and to supplement our expenditure cuts.

This year, in which we celebrated ten years of independence, has been a special one for us. We have seen growth by way of increasing involvement of our people in the cash economy all around the country.

Our macroeconomic strategy has been commended by independent reviews, and my Government has an established record of making hard decisions when the need arises. Often, many countries have devised sound economic policies but lack the political will and determination to implement those policies.

At present, my Government is preparing our 1986 budget and the medium-term development plan, which together will be the major policy statements marking the beginning of our second decade of independence.

Our medium-term development plan is part of a broad program of administrative reform over the next five years and sets out our sectoral development strategies and sectoral targets. Its formulation involved provincial departments, the private sector, universities, and relevant national government departments.

My Government will allow the private sector a more active role in commercial investments. We will promote commercial investment but will refrain from being investors ourselves. It is encouraging to note that overseas investors continue to show considerable interest in large-scale agricultural and minerals projects upon which the health of the balance of payments would seem to depend over the next five years, and we will continue to encourage foreign investment.

Like other developing countries, there are constraints in achieving our goals of faster economic growth and increasing employment. We have identified a program of economic reform. In this program, we will continue to implement our macroeconomic strategy, which has to date brought us considerable advantages. We have set our sights on reducing real wages, improving land allocation, streamlining investment regulation and procedures, assisting national investors, and encouraging foreign investment.

We want to encourage economic growth and create more employment opportunities throughout the economy. During the next decade, it is going to be necessary for Papua New Guinea to become more outward looking and aggressive in pursuing growth.

We hope our internal efforts will be aided by favorable developments in the world economy. To this end, we would appreciate responsible policy actions by industrial countries—namely, trade policy. Protection has been discussed for many years now, and time and time again protectionist tendencies have been unanimously condemned. We can only appeal to our consciences and hope that industrial countries will improve this aspect of their macroeconomic policies, so that economic growth is encouraged and sustained.

In conclusion, I would like to stress the importance of economic cooperation. The problems of growth, debt, international trade, and population growth are common, and we ought to work together to find solutions. Recent developments in the world economy call for increased international cooperation within existing multilateral institutions.

I firmly believe that, as a first step to reform, we need to develop the right kinds of attitudes. We need to see the need for change and be prepared to cooperate in bringing about the desired changes to our economic and financial system.

Statement by the Governor of the Bank for Paraguay—Cesar Romeo Acosta

On behalf of the Government of the Republic of Paraguay, we are honored to present our most amicable and cordial greetings to the Chairman of these Annual Meetings; to the illustrious Government and the noble and progressive people of the Republic of Korea, joining them in commemorating the anniversary of its founding; to the President and Executive Board of the World Bank; to the Managing Director and Executive Board of the International Monetary Fund; and to the Governors and Delegates of member countries of participating institutions. On this occasion, we make special mention of our profound solidarity with the people of Mexico, in view of the painful events through which they have lived recently.

We come to this forum of international cooperation and solidarity with ever renewed confidence in the noble purposes and effective functioning of our two institutions.

Consistent with the demands of our time, the developing countries have continued their efforts toward recovery and reactivation of their economies. In most cases, their success is yet modest and declining relative to their expectations and to the considerable social costs that the policies of economic adjustment, fiscal discipline, and resource allocation constraints demand in order to overcome stagnation and recession.

When at last year's Annual Meetings, the spokesmen of the industrial world predicted the beginning of a clear recovery in their economies and the potential positive implications of that recovery for the world economy, it was difficult to imagine that we would meet again to deal with problems that differ little from those that characterized the worst moments of the recent crisis in the Western Hemisphere.

The theory that the benefits of recovery would spread to developing countries sounded promising. But the fruits of the expected recovery in the industrial countries failed to trickle down to the level of our economies, and we have become even more tightly constrained by rising protectionism and the high financial cost of such capital as is available.

We are aware of the need for consistent actions to assure an equitable absorption of the effects of international maladjustments. Accordingly, those industrial countries capable of affecting the behavior of the fundamental variables of the world economy must urgently adopt the measures needed to restore their domestic and external equilibria and thereby effectively resume their role as providers of economic stimulus and financial resources to the developing community.

In these circumstances, we view as auspicious the attempts by certain industrial countries to reduce existing protectionist barriers, as well as the developing countries’ proposals to examine carefully the factors that constrain recovery, which include the furnishing of additional resources to meet specific problems of low-income economies, the timely provision of foreign exchange, and real financial assistance, as prerequisites for the liberalization of international trade.

In view of the unsuitability and insufficiency of the original official development assistance targets, special significance attaches to the responsibility of international financial institutions to provide borrowers with the greatest possible assistance, with no condition other than reciprocal flexibility and understanding, so as to facilitate the balanced participation of their economies in the overall context.

During the last twelve months, our countries’ will and ability to avoid or reduce their considerable vulnerability to external recessionary factors by implementing preventive and corrective measures appropriate to a recovering economy have again been put to the test.

After a difficult short-term stage for the Paraguayan economy, caused largely by external factors, a process of recovery commenced in 1984, with positive signs for the short and medium term. While negative growth rates of 2 percent and 3 percent were posted in 1982 and 1983, respectively, the economy grew by 3 percent in 1984, and the behavior of the principal indicators led to a growth estimate and some 4½ percent for the current year, which would provide the push required for more balanced development.

The present situation and the prospects for coming years require the use of all available elements to develop the national potential and to overcome the problems stemming from the world crisis and the recessionary trends of the recent past. In line with this, and as a way of guiding the national economy toward the objectives of greater stability and growth, the Government is pursuing a policy of public austerity accompanied by continuing review and improvement of fiscal policy, especially as regards the amount and composition of public expenditure and enhancement of revenue.

As regards improving utilization of our resources, we would mention in particular their joint use with our neighboring countries in major projects such as Itaipú and Yacyretá and in other potential large-scale undertakings that turn the desire for integration of our peoples into fact.

The already low level of unemployment has been appreciably reduced, and wages have been adjusted at levels designed to maintain the real purchasing power of the workers.

Development with political stability and social peace, viewed by the Government as the cornerstone of its economic policy, seeks to hold at controllable levels not only the money supply but also those factors that might prompt excessive rises in domestic costs and prices.

The Government's monetary and financial management efforts are aimed at counteracting the short-term problems by creating suitable conditions for reattaining the growth levels of prior years.

The credit policy has aimed basically at channeling the greater part of the banking system's financial resources into priority production sectors. Given the great importance of agriculture in the national economic system, special emphasis continues to be placed on investment intended to substantially increase the production and yields of export crops.

As regards the balance of payments, the Government is engaged in rationalizing the behavior of aggregate demand, so that imports of goods and services will not exceed the advisable levels imposed by the import capacity and the maintenance of a level of international reserves consistent with the country's needs.

Having regularly fulfilled its financial obligations, Paraguay has benefited from the support of friendly countries and of international financial institutions to complement its domestic development effort. In this regard, we wish to stress Paraguay's recognition of the significant role of international financial cooperation, reflected in adequate and timely flows of resources in conjunction with its efforts and political determination for the welfare and full development of its people.

As a result of the gradual rehabilitation of the fiscal situation, in terms of a balanced national budget and progressive reduction of the deficit, the Government ensures the continuity of public investment programs by means of timely counterpart allocations and repayment service on financing contracted with cooperating agencies. Therefore, we reaffirm our confidence that we will continue to be able to rely on the valuable assistance and cooperation of the Bank and the Fund.

In conclusion, we express our recognition and gratitude for the manifold attentions we have received from the people and Government of Korea and from the organizers of this global event. We heartily wish that the efforts of our two institutions will result in effective benefits leading to enhanced well-being in all their member countries.

October 10, 1985.

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