Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1986
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System—H.O. Ruding
It gives me pleasure to report to you in my capacity as Chairman of the Interim Committee. Since my report to you a year ago in Seoul, the Committee has had two meetings, first on April 9-10, 1986, and then over the last two days on September 28-29, both here in Washington, D.C. The agenda for both meetings had certain common subjects, including the world economic outlook, the debt situation, issues from the Group of Ten and Group of Twenty-Four reports on the international monetary system among which the exchange of views last Sunday on indicators was particularly interesting and promising, and the question of SDR allocations. In addition, in its more recent meeting the Committee also gave consideration to access limits for the use of Fund resources in 1987. As the main conclusions from the Committee’s deliberations are summarized in the press communiqués issued at the end of each meeting, I intend to limit myself in this report to a few brief remarks on some of the salient points.
World Economic Outlook
In reviewing the world economic outlook at its meeting last Sunday, the Committee noted that the economic developments in recent months have been somewhat mixed. The pace of growth in the industrial countries has been slower than expectations earlier this year, contributing to sluggish world trade and a further decline in already low commodity prices. The international payments imbalances among the major countries remain disturbingly large. The developing countries, following vigorous expansion in 1984, experienced a slowdown in 1985, and are now expected to have a further decline in growth in 1986. However, on the positive side, the most recent indications are that economic activity in the industrial countries has begun to pick up, and they will have a stronger economic performance in the second half of 1986 and in 1987. Moreover, their price performance has shown a further improvement though unemployment continues to be a cause of great concern.
During the last year, the world economy has been subjected to a number of important shifts, including a very substantial realignment of exchange rates for principal currencies, declining interest rates, and a sharp drop in the price of oil. The Committee noted that the lagged expansionary impulse originating from lower interest rates and from terms of trade gains translating into higher private expenditure in real terms should become increasingly evident in 1987. Moreover, the corrective effect of the past year’s exchange rate realignments on the current account imbalances among major countries should help place the international economy on a firmer footing.
Nevertheless, the Committee considered that the following further actions were needed by industrial countries if the basis for durable growth is to be strengthened: the reduction in the federal fiscal deficit sought by the United States authorities has to be translated into fact; domestic demand growth outside the United States has to be sustained at an adequate pace, especially in those countries whose relatively strong domestic and external positions provide them with room to maneuver; structural impediments to output growth must be dismantled and, in particular, protectionism must not only be resisted but reversed. In this respect, the Committee warmly welcomed the recent Ministerial declaration on the Uruguay Round of multilateral trade negotiations, and urged governments to make every effort to ensure an early and successful conclusion to the new round.
Slower growth in world trade and the sharp price declines for oil and other primary commodities have been the dominating influences on developments and prospects in the developing countries; however, there are significant differences to be noted also. The exceptionally difficult economic conditions in low-income countries, especially in Africa, are a matter of particular concern to the Committee. In that connection, the Committee welcomed the establishment of the Structural Adjustment Facility (SAF) last spring and expressed satisfaction with the progress made thus far in operations under it, including strengthened Fund-Bank collaboration in these operations. Committee members urged eligible countries to adopt policies that would qualify for assistance under the SAF; they also urged donor countries to enhance the catalytic role of the SAF and to increase the supply of official development assistance.
Though much remains to be done to overcome the serious problems facing many developing countries, the Committee could also discern signs of progress. The pickup of activity in the industrial countries and the decline in interest rates would ease the constraints for many of them. The nonfuel exporting developing countries are projected to achieve real growth of 4.5 percent in 1986, and the exporters of manufactures among them will do even better. A number of countries have adopted anti-inflationary adjustment policies, and overall, the inflation picture is showing signs of improvement. However, fuel exporting countries are confronted by the need to make major adjustments and their weakened financial position has also had consequences for other developing countries.
The predicament of indebted countries continues to be difficult as reflected in a likely further rise in the debt-export ratio in 1986. The Committee recognized that substantial progress has been made by a number of debtor countries despite difficult circumstances and emphasized that a satisfactory resolution of debt difficulties was dependent upon three basic requirements: first, effective growth-oriented policies in the indebted countries themselves, aimed at mobilization of domestic savings, including a halt and reversal of capital flight, improved allocation of resources, and the maintenance of external competitiveness; second, satisfactory growth in, and access to, export markets; and third, adequate supply of external financing to make adjustment-with-growth feasible.
Committee members stressed the importance of a determined implementation of the strengthened debt strategy introduced a year ago in Seoul. The case-by-case approach and the central role of the Fund in promoting growth-oriented adjustment were emphasized, including the provision of assistance to members in the design and financing of appropriate programs for that purpose. It was noted that close collaboration between the Fund and the World Bank has helped to encourage growth-oriented policy reforms in indebted countries, and the stepped-up program of policy-based lending by the Bank has made an important contribution to the debt strategy. Committee members welcomed the package for Mexico as an example of the strengthened debt strategy and hoped that the package can be finalized promptly.
Committee members recorded satisfaction at the important contribution to the debt strategy from official reschedulings under the auspices of the Paris Club and flexibility by official export credit agencies in the implementation of their cover policies. It was noted, however, that other sources of finance, particularly commercial bank lending, have declined and need to play a greater role.
Issues in the Group of Ten and Group of Twenty-Four Reports on the International Monetary System
As agreed in Seoul, the Committee began at its April meeting substantive consideration of issues raised in the reports on the international monetary system presented to it in October 1985 by the Group of Ten and the Group of Twenty-Four. Discussion at the April meeting of the Committee focused on three subjects: functioning of the exchange rate system, the Fund’s surveillance and management of international liquidity, and the role of the SDR. Concerning the exchange rate system, the Committee agreed that it was the flexibility in the system that had enabled the world economy to adapt to a number of major disturbances. Nevertheless, both the variability in exchange rates and the longer-term misalignments that had emerged were recognized to be weaknesses; the remedy, it was agreed, was largely to be found in conducting national economic policies in a sound and mutually consistent way while according all due weight to exchange rate considerations.
a. Surveillance and indicators
The Committee’s discussion on strengthening Fund surveillance led to broadly parallel conclusions. The focus here was on improving the multilateral setting for surveillance, in particular for assessing the international implications of the policies and objectives of the major industrial countries and also for enhancing policy coordination among them. In that connection, the Committee saw merit in exploring the scope for the formulation of a set of quantitative indicators of policy actions and economic performance, to be considered in a medium-term framework. The use of indicators in conducting surveillance was also endorsed at the Tokyo summit in May. Following up on this mandate, the Fund staff in its latest world economic analysis experimented with the explicit use of indicators of economic policies and performance as a means of focusing attention on potential incompatibilities in national economic policies and projections, particularly among the larger countries. The Committee believes that further development of the application of indicators along these lines offers a promising approach to strengthening the Fund’s surveillance and has therefore asked the Executive Board to pursue it further.
b. Role of the SDR
At its April meeting, the Committee noted that the Executive Board had begun consideration of the role of the SDR in an international reserve system in which borrowed reserves have come to play a prominent part, but are not readily available to many countries. Committee members agreed that the SDR, as an owned-reserve asset, can play a useful role as a component of international reserves and as a unit of account. They recognized the potential use of the SDR as a “safety net” against unexpected contingencies but stressed that in view of its monetary character, the SDR should not be a means of transferring resources. Subsequently, the Executive Board has continued to review various aspects of the SDR system, including proposals relating to post-allocation adjustments of the distribution of SDRs among members and techniques for improving the pattern of SDR holdings in relation to other reserve assets. The Committee has requested the Executive Board to continue its examination of ways to enhance the contribution of the SDR to the creation and allocation of international liquidity.
c. Role of the Fund
The Committee urged the Executive Board to examine expeditiously the role of the Fund as referred to in the reports of the Group of Ten and the Group of Twenty-Four.
The Managing Director reported to the Committee at both its meetings on consideration by the Executive Board of the question of SDR allocations. The position has remained essentially unchanged. Although a majority of Executive Directors favor an allocation in the next basic period, 1987–91, the broad support required under the Articles continues to be lacking. In this regard, the Committee welcomed the intention of the Executive Board to study further the long-term global need for reserve supplementation in the context of the currently prevailing international monetary arrangements.
Access Limits to Fund Resources
At its recent meeting, the Committee discussed the Fund’s policy on enlarged access and the limits on access to the Fund’s resources to be applicable in 1987. As Governors are aware, these matters need to be reviewed before the end of 1986.
The Committee noted that, in view of the uncertainties that continued to surround the world economy and of the worsening payments difficulties of a number of member countries, there was a need to continue the enlarged access policy. In the circumstances, it was judged that the present access limits, both under the enlarged access policy and under the special facilities, should be retained and that in that connection, the Fund’s liquidity position continues to be broadly satisfactory.
The Committee welcomed the offer made by Japan to provide the Fund with SDR 3 billion to enhance its ability to support members’ adjustment efforts.
Before concluding, I would like to place on record the special tribute paid by the Committee to Mr. de Larosière. He has presided over the International Monetary Fund during a particularly demanding period of its history, and has met the many challenges with wise, imaginative, and courageous leadership. Committee members were unanimous in expressing warm and deep appreciation for his many outstanding accomplishments as Managing Director, and for his invaluable contributions to the work of the Interim Committee. We are deeply grateful for his inspiring service to the cause of international monetary cooperation and wish him well in his future endeavors.
The next meeting of the Committee will take place on April 9, 1987, in Washington, D.C.
Statement by the Governor of the Fund and the Bank for Japan—Kiichi Miyazawa
Mr. Chairman, my fellow Governors, distinguished guests, ladies and gentlemen:
It is a pleasure to be with you here today and to be able to give my maiden speech as Governor for Japan. Actually, this is not the first session of the IMF-World Bank Meetings that I have attended. Thirty-odd years ago I came to Mexico as personal secretary to the Governor for Japan when Japan was admitted to membership. That was, incidentally, the same year that I left my job with the Ministry of Finance to go into politics. Now I am back—once more with the Ministry of Finance.
Before turning to the issues before us, I would like to thank the United States for the excellent arrangements that have been made for these Meetings and to extend a very warm welcome to the two new members who are here with us today: Kiribati and Poland.
At the same time, I would also like to express my appreciation to Fund Managing Director de Larosière, to the Executive Directors, and to their staffs for the efforts that they have made over the past year in keeping the global economy on track. I had been very much looking forward to working with Mr. de Larosière, and I am sure his wise counsel will be sorely missed in the months and years ahead.
While we are all sorry to see Mr. Clausen leave the World Bank, he has a worthy successor in incoming President Barber Conable. Mr. Conable’s reputation precedes him, and I am confident that his presidency will be good for the World Bank.
1. The World Economy
In formulating our policies for the future, it is important first to have a clear understanding of where we stand today. Many people have expressed concern about the slower rate of growth in production and world trade early this year. But we should not forget the bright spots.
After seeming to stagnate in the first half of this year, the world economy is set, according to Fund forecasts, to achieve approximately 3 percent growth in both 1986 and 1987. The outlook is thus for sustained growth, albeit at a slower rate than we might like.
Inflation is down, especially in the industrial countries. With sharply lower prices for oil and other primary commodities, the Fund is forecasting inflation in the 3–4 percent range for the industrial countries in 1986.
Interest rates are conspicuously lower than they were last year or the year before.
Exchange rates for the leading currencies are now sharply different from what they were at this time last year. Although these exchange rate adjustments have not had much visible impact yet on the global balance of payments disequilibria, I am hopeful that they will have a tangible effect soon, together with concurrent measures being taken in other areas.
Much of the credit for this promising outlook must go to the efforts being made by our countries individually and in concert.
However, the world economy is not out of the woods yet, and there are still a number of critical issues that need to be addressed.
The first of these issues is the need to roll back protectionism. It is imperative that the protectionist fires be banked and extinguished, and I see the recent declaration of the ministerial conference at Punta del Este and its commitment to a new round of multilateral trade negotiations—the Uruguay Round—as very promising signs here. Determined to work for the preservation and strengthening of the free trade system, Japan will continue to actively promote this new Uruguay Round. Japan will also, it should be noted, continue to take the lead in further opening its markets and facilitating imports.
The second issue that needs to be addressed is that of achieving greater stability in foreign exchange markets. I am thus hopeful that the agreement among the leading industrial countries for multilateral surveillance and policy coordination within the Fund framework will prove fruitful, and I am encouraged at the progress being made in studies on the details of implementation. Japan is cooperating and will continue to cooperate as an active participant in this effort to improve the functioning of the international monetary system.
The third issue is the need to solve the debt and development problems. As mentioned, the combined cooperation of international institutions, the industrial countries, and the commercial banks alike is needed to solve the debt problem. While the developing countries’ self-help efforts are obviously indispensable, these countries cannot be expected to cope with their debt and development problems unless they are assured of continued access to export markets and enhanced capital availability.
The prerequisite for solving these three issues is the need for the industrial countries to achieve sustained and noninflationary growth while reducing their international balance of payments disparities.
2. Internationally Responsible Economic Management
Japan has been a major beneficiary of the IMF-World Bank regime. Soon after becoming a member in 1952, Japan exercised its right to draw $125 million from the Fund and took out its first loan from the World Bank in 1953. At the time, Japan’s trade balance was, believe it or not, chronically and massively in the red.
Japanese development in the years since then has benefited from financing from the World Bank and a host of other public and private financial institutions. Weathering a number of harsh trials, including the recent oil crises, Japan has grown to account for approximately 10 percent of total world GNP. Ironically, our trade balance is again in heavy disequilibrium, and we seem to be confronting the same problems as three decades ago, this time from the other side of the problem.
Japan is determined to do everything that it can to preserve and strengthen the free trade system, to resolve the economic friction with its trading partners, to live up to its international responsibilities, and to be a country that can be counted on to do what is right.
Given this situation, I think Japan can take positive action in two areas: The first thing Japan is doing is to pursue internationally responsible policy management to achieve sustained and noninflationary growth while addressing its international imbalances of payments.
The attempt to reduce the balance of payments disequilibrium has been a special focus of Japanese efforts, and we have cooperated strongly with currency realignment. As a result, the yen has appreciated more than 50 percent against the dollar over a ten-month period—an unprecedentedly fast change.
Because this foreign exchange realignment has generated sluggishness in Japanese industry, especially in the manufacturing sector, the Government has moved both to restore business confidence by dispelling uncertainty from the economic outlook and to contribute to the reduction of the balance of payments disequilibrium by strongly stimulating Japanese domestic demand.
Illustrative of our efforts is the package of comprehensive economic measures—totaling some ¥ 3.6 trillion, or $23 billion at current exchange rates—that Japan announced on September 19. First, ¥ 3 trillion of this will go to expanding the scale of public works and other investments, including both additional implementation of projects that are especially important for mobilizing private sector activities and enhancement of home financing schemes to promote housing investment. This is the largest such package in Japanese history, and it is, given the current state of Japanese Government finances, the most we can possibly do here.
Second, we will continue to ease regulatory restrictions and provide incentives to promote greater private sector involvement in urban redevelopment and other public interest projects.
Finally, a determined effort will be made to promote personal consumption by seeing that the benefits of yen appreciation and lower oil prices are passed along, to encourage accelerated implementation of private sector capital investment, and to foster continued employment stability.
Japanese structural adjustment is another element essential to achieving a more harmonious trade balance, and the Government is making every possible effort to transform the Japanese economic structure into one oriented toward international coordination.
3. Debt and Development Problems
The debt and development problems are not simply an issue for the developing countries. They are everybody’s concern. Determined not to let a stalemate develop, Japan supports the thrust of Secretary Baker’s proposal last year. Assuming that the debtor countries themselves persevere with their self-help efforts, Japan is prepared to do what it can to facilitate the support they need from the leading international institutions, the industrial countries, and commercial banks. This is, I think, the second field where Japan can take positive action for global prosperity, and I would like to outline three specific areas of action here.
3.1 Strengthening the IMF
The IMF has contributed importantly to resolving the debt problem, and Japan hopes that it will continue to play a central role in these efforts. IMF stand-by arrangements, for instance, are crucial to promoting economic adjustment and catalyzing the flow of capital from commercial banks. Because it is essential that IMF funding be strengthened to enable it to fill this role, I am proposing that negotiations be started immediately on the ninth quota increase scheduled for 1988. Japan is prepared to contribute to the ninth quota increase to the extent of its abilities.
Considering the uncertain prospects for the world economy, it is not unlikely that some of the developing countries may face increasingly serious balance of payments difficulties and financing requirements in the period ahead. The Fund, in applying its present policies, may deem financial support beyond the usual recourse warranted in especially severe instances. Japan considers it desirable that the Fund’s financial position be strengthened to facilitate a flexible response in such special circumstances. Accordingly, Japan is prepared to offer lending to the Fund in the amount of SDR 3 billion as a temporary measure to support the provision of financing by the Fund in such instances. Japan would welcome the interest of other members in joining such an undertaking. . . .
3.2 Utilization of Japanese Public and Private Financial Resources
As noted in Secretary Baker’s proposal last year, commercial banks have a key role to play in resolving the problems of debt and development. Commercial financial institutions from Japan and the other industrial countries are already playing a critical role in this field, and we recognize that the combined cooperation of multilateral institutions such as the Fund and the World Bank, the industrial countries, and commercial banks alike will be needed to solve these problems.
Japan has, as you know, cooperated positively with efforts to help Mexico improve its debt and development positions. We have indicated a willingness, assuming that a framework of international coordination and other financing climate essentials can be arranged, to provide the Export-Import Bank of Japan financing in the amount of $1 billion for three major projects as requested by Mexico.
Japan also intends to do what it can to facilitate the flow of public and private financial resources to the middle-income countries through the Export-Import Bank of Japan’s untied loan scheme, including cofinancing with the World Bank, within the framework of international financial cooperation.
Japan has a high regard for the role that the Paris Club has been playing, in cooperation with the Fund, to solve the debt problems, and we intend to continue these efforts in cooperation with the other industrial countries.
Private sector direct investment is important to solving debt and development problems. We expect that MIGA (Multilateral Investment Guarantee Agency) will make a major contribution in this area.
Never before has the need for policy coordination been as great as it is in today’s increasingly interdependent international economy. With our interlocking ties born of expanded trade and more active capital flows, it would be disastrous for any of our countries to pursue narrow national policy goals in disregard of their international impact.
The IMF-World Bank organizations now embrace some 151 countries around the globe. Just as this breadth makes the problem of policy coordination all the more difficult, so does it promise all the greater rewards for success. I am encouraged by the fact that the international system has endured and grown for more than four decades despite the many trials that it has been subjected to.
I have today tried to express Japan’s determination to tackle the great issues facing the world economy and to indicate some of the actions that Japan is taking. While Japan is determined to do its part within the IMF-World Bank organizations and in every other way, these problems cannot be resolved by one or two nations acting alone. They need the cooperation of all of us here today in a coordinated policy effort, and I sincerely hope, for all of our sakes, that these Meetings will serve to reaffirm and strengthen this international cooperation.
Statement by the Governor of the Fund for the United Kingdom—Nigel Lawson
I have the honor of addressing this meeting as President of the European Community, which since the start of the year has for the first time comprised 12 nations, with the welcome inclusion of Spain and Portugal. The Bank and Fund have also acquired two new members—Poland and Kiribati—and I welcome them, too.
I shall deposit the full text of my Presidency speech with the Secretariat, but I should like to make some of the main points here, before I turn to my remarks as U.K. Governor.
Economic activity in most industrial countries, particularly industrial production, has been somewhat sluggish since the final quarter of 1985. While this is disappointing, it is likely to prove a transitional phase as the world economy adjusts to the major shifts in relative prices which have occurred over the past year or so.
There is a reasonable expectation that economic activity in industrial countries will pick up as domestic demand responds to lower nominal interest rates and higher real incomes. Indeed, signs of a pickup of activity in a number of European countries are apparent.
But in many countries government deficits need to be reduced further. The United States has a major role to play here because of the size of the federal government deficit and because of the contribution which its correction can make to reducing current account imbalances. It is crucial that Japan—and I listened with great interest to the speech we just heard from Finance Minister Miyazawa—should make its contribution by implementing rapidly the recommendations of the Maekawa Commission designed to reduce the export-oriented nature of the Japanese economy and to increase its openness to imports, thus sustaining a faster rise in domestic demand. The Community countries are also aware of the need to contribute to the correction of existing imbalances and to the maintenance of sustained growth of world demand and trade.
The European Community will enter the forthcoming GATT talks with the objectives of consolidating and further developing the open trading system. The EC welcomes the progress made at the September GATT ministerial meeting in Uruguay.
The Fund continues to have a central role in the adjustment process, and the countries of the Community stand fully behind it in its work. In view of the serious payments difficulties that many Fund members continue to face, the EC member states welcome the decision by the Interim Committee to maintain the policy of enlarged access for another year and to keep the access limits unchanged for 1987. The member states of the Community are prepared to participate constructively in the discussions on the Ninth Quota Review. . . .
Let me now make some additional remarks in my capacity as Governor for the United Kingdom.
At previous Annual Meetings I have had occasion to remark on the encouraging consensus that has grown up through the world on the monetary and fiscal policies necessary to secure sustainable noninflationary economic growth. What is new is that the consensus over macroeconomic policy has been extended into the microeconomic sphere. Governments of all political persuasions throughout the world are increasingly coming to recognize that sound macroeconomic policies need to be accompanied by the liberation of market forces: privatization, deregulation, and tax reduction. All have become part of the new world consensus.
Free Markets, Trade, and Protectionism
Nowhere is the proper functioning of free markets more important than at the international level. We have seen at Punta del Este a real breakthrough. The world is now committed to a genuine attempt to bring down trade barriers right across the board, in industry and agriculture, goods and services. It is vital that we now carry this through to a successful conclusion.
I know that the U.S. Administration is deeply concerned about the strength of bipartisan protectionist pressure in Congress. We all share that concern. But equally, it is right to point out that over the past year alone we have seen three important achievements in the international sphere, each of which will strengthen the open trading system:
—Since the Plaza agreement, there has been a major realignment of exchange rates to much more realistic and sustainable parities.
—At the Tokyo economic summit in June, we resolved to improve the process by which we work toward greater consistency in our economic policies.
—Following the GATT ministerial meeting at Punta del Este earlier this month, we are on the road to a worldwide comprehensive reduction of trade barriers on both goods and services.
Armed with these achievements, it is not unreasonable to expect the U.S. Administration to overcome protectionist pressures from within its own shores.
One area of the world economy where market forces are still conspicuously cribbed, cabined, and confined is agriculture. As a result, we have perverse agricultural policies throughout the world, which may well present the greatest challenge of the next decade. We encourage production in high-cost OECD countries and discourage it in developing countries that have a comparative advantage. We continue to arrange that the taxpayers of the western world finance food aid to the Soviet Union.
Low world prices for agricultural exports, as a result of industrial countries’ subsidies, represent a major loss for developing countries and are particularly serious for many debtors. The sums involved are enormous. This year’s World Development Report shows that worldwide liberalization—after allowing for losses to producers—could produce overall gains in the region of $20 billion for developing countries and up to $50 billion for OECD countries.
Let there be no doubt: the potential gains from better pricing policies and trade liberalization are vast and infinitely larger than any feasible increase in aid. The United Kingdom certainly needs no convincing that major changes in agricultural policies are needed by industrial and developing countries alike.
At this year’s summit in Tokyo, the main industrial countries agreed that international cooperation was needed to bring agricultural production into line with demand and to tackle subsidies. What we need is multilateral disarmament among the subsidizers. Clearly, it cannot be achieved overnight. But equally, a start has to be made without delay. I am pleased that the Development Committee has adopted my proposal that this vital issue should be discussed at its next meeting.
The U.K. Economy
Finally, let me say something about the experience of my own country this year.
In general, developments in the United Kingdom have mirrored the pattern of the industrial world as a whole. Domestic demand has been as buoyant as I suggested at the time of the budget in March. But in line with the sluggishness of world trade generally and as a result of weaknesses in a number of markets (particularly those affected by the sharp fall of the oil price), exports have been flatter than I expected then. As a result, overall output growth this year will be less than I envisaged in March.
This slowdown comes after four years of steady growth of about 3 percent a year, the longest period of growth we have known for a considerable time. The important question is whether it represents the beginning of the end of the cyclical upswing that started in the United Kingdom in 1981, or whether it is merely a short pause in that upswing.
Some months ago I ventured the view that what we were experiencing was merely a short pause before the beneficial effects of lower oil prices on world and U.K. activity came through. I see no reason to change that judgment. Indeed, there are already signs of a pickup of exports, and with continued strength of domestic demand there is every prospect of faster growth next year.
But within this overall economic growth, there have been profound changes in the pattern of the economy, associated with changes in the pattern of world supply and demand, and the need for British industry to restructure itself to meet those changes. In particular, there has been a long-established trend for services and oil to grow faster than manufacturing. But even within manufacturing—which overall accounts for roughly a quarter of GDP—performance has been far from uniform.
In some industries—mostly the metal-using industries, textiles, and clothing—output is still below the prerecession peak of 1979. But in other important manufacturing industries—such as chemicals, food, and engineering—output is well above the prerecession level.
At the same time, inflation has fallen rapidly. The underlying rate may now be around 3¼ percent. I do not expect to see much change in that figure over the coming months.
In common with other countries, we have to accept that the sharp fall in the oil price and most other commodity prices means that the underlying rate of inflation is not quite as low as that recorded in the latest figures. But given the continued pursuit of policies of sound money, inflation can be kept at a low rate and eventually eliminated altogether.
As the fifth largest oil producing nation in the world—even though oil is only some 5 percent of our GDP—the U.K. economy has been affected more than most by the collapse of the oil price. This is reflected most notably in the current account of the balance of payments, where the sizable contribution of North Sea oil to our export earnings has been halved. As a result, non-oil exports, both visible and invisible, will have to rise to make good the drop in oil exports.
The need for this rise in non-oil exports—although not of course its imminence—was always foreseen. As I explained in a speech I made at Cambridge some three years ago, a lower real exchange rate would be part of the mechanism that would lead to the necessary improvement in the non-oil balance. Since the oil price halved, we have duly experienced a substantial but on the whole orderly fall in the exchange rate. Inevitably, it will take time to have its full effect on the current account.
Moreover, we have deliberately followed a prudent policy with regard to North Sea oil, and a high proportion of the revenue has been invested abroad to give a permanent inflow of foreign currency income. The United Kingdom’s net overseas assets have risen from £12 billion, or under 7 percent of GDP, in 1979 to some £80 billion, or 23 percent of GDP, by the end of 1985. Our net overseas assets are now second only to those of Japan. The income from these assets will provide a useful offset to a lower contribution from the North Sea.
In the early stages following the fall in oil prices, the United Kingdom was often encouraged to join in a program to restrict oil output and raise prices. We have always had the freest oil province in the world, in which it is up to companies, not government, to decide how much to produce. I have never believed it would be in the interests of the United Kingdom or the world for us to depart from that policy. And I am glad to say that since the spring Interim Committee meeting, our position has been more widely understood and accepted.
A bigger worry is unemployment, which not only remains far too high but has risen further over the past year—although in recent months there has been a welcome improvement in the trend. And the composition of unemployment in the United Kingdom is changing. Youth unemployment is lower than in most of the European Community, and falling. We have tackled this serious social problem by a substantial expansion of youth training and through policies aimed at pricing youngsters back into jobs.
By contrast, our most difficult problem has been the growth of long-term unemployment. Accordingly, we have now devised a package of measures carefully designed to help the long-term unemployed in their search for work. There is increasing evidence that this will prove successful.
In conclusion, let me pay a brief tribute to the Managing Director of the Fund, Jacques de Larosière, who has sadly announced his impending retirement. During his eight years as Managing Director he has had to tackle tasks tougher and more intractable than those faced by any of his predecessors. He has done so in a manner that has earned the admiration and respect of the entire world. We are fortunate indeed to have been served by so dedicated and sure a guide, and we are inspired by his example as we resolve to tackle the problems that still lie before us.
Statement by the Governor of the Bank for China—Wang Bingqian
Please allow me to extend my warmest congratulations to Poland and Kiribati on their joining the International Monetary Fund and the World Bank, and to Mr. Conable on his assuming the Presidency of the World Bank.
The developments of the world economy since our last Annual Meetings have been disappointing in many aspects; the economic growth of the major industrial countries has undergone continued deceleration, and the developing economies remain in grave difficulties. Despite the many changes during this period—the fall in nominal interest rates and oil prices, the significant correction of the serious exchange rate distortions among the major currencies, and the reduction of inflation to the lowest level in the past 20 years—the major industrial countries continue to have lackluster economic performance, with their trade and fiscal imbalances largely intact. What is particularly disturbing, however, is the fact that the external economic environment facing the developing countries has deteriorated further. The prices of primary commodities and petroleum have plunged while those of manufactured goods have risen, resulting in worsened terms of trade for the developing countries, which, combined with the proliferation of protectionism, especially of a nontariff nature, has caused a sharp reduction in their export earnings. At the same time, there has been little increase in capital flows to developing countries. For some of them, reversed transfers have taken place for several years running. In consequence, quite a number of developing countries have registered a negative rate of economic growth. With the world economy increasingly interdependent today, it is hardly imaginable that global economic prosperity and political stability can be sustained in an environment in which the developing countries are confronted with a deepening development crisis and economic difficulties.
I would now like to turn to some of the major topics on the agenda of this year’s Annual Meetings.
1. International Debt
Over the past nine months, the debt problem has been getting worse, renewing concern over the possibility that the debt crisis may recur. Close to $1 trillion in magnitude, the indebtedness not only imposes a heavy burden on the developing countries in their economic development, but also constitutes a major factor of instability in the world economy. The greatest attention of the international community is warranted by the seriousness of the problem. In striving for a solution to the debt problem, developing countries have made enormous efforts and paid a dear price therein. Similar efforts are now required of the developed countries and the creditor banks which should adopt effective measures to help the indebted countries revitalize their economies, including, for instance, reducing real interest rates, extending loan maturities, and liberalizing repayment terms. In addition, the major industrial countries must effectively curb protectionism to foster conditions that would permit expansion of developing countries’ exports. We urge all parties—debtor countries, creditor countries, commercial banks, and international financial institutions—to join in the concerted efforts to tackle the debt problem.
2. Sub-Saharan Africa
The countries of sub-Saharan Africa are still plagued with grave economic difficulties. We note that the World Bank, in helping to bring about economic recovery in that part of the world, has done much substantive work, such as establishing and implementing the Special Facility for Sub-Saharan Africa and playing an augmented role in aid coordination. The International Monetary Fund, for its part, has set up the Structural Adjustment Facility and commenced providing sub-Saharan Africa with financial support for its structural adjustment. Industrial countries, too, have made a positive contribution in this regard. It is our hope, however, that developed countries will redouble their efforts to expand their assistance, especially concessional assistance, to sub-Saharan Africa, so as to help expedite the recovery and growth of the region’s economies. . . .
3. Allocation of SDRs
The prevailing stagnation of exports by developing countries has resulted in the decline of their reserve holdings. An early and substantial allocation of SDRs would have a positive effect on the replenishment of member countries’ reserve assets, thus promoting the expansion of international trade. This is in conformity not only with the interests of the developing countries, but also with those of the industrial countries. We hope that the preparation necessary for the allocation of SDRs in the fifth basic period will be initiated as early as possible. . . .
4. Enlarged Access Policy of the Fund
At the present time when developing countries are suffering serious imbalances in their balance of payments, it is essential that the International Monetary Fund continue to provide financing support to the developing countries. Therefore, we reiterate that the enlarged access policy be maintained in 1987 and that the annual, triennial, and cumulative access limits under this policy not be lower than those set at the Eighth General Review of Quotas.
5. Multilateral Surveillance
In today’s economically interdependent world, the economic policies and performance of the developed countries have an enormous bearing on the state of the entire global economy and that of the developing economies in particular. A mechanism of effective multilateral surveillance over the economic policies of the industrial countries, if established, would certainly be conducive to the stable development of the world economy. We consider it necessary to formulate specific indicators for the purpose. The focus of this analytical framework should be on assessing the sustainability of the balance of payments of the major industrial countries in the medium term and the appropriateness of the exchange rates among the major currencies. The existence of multilateral surveillance should help to correct in a timely manner the inappropriateness of the economic policies of the major industrial countries, as would be suggested by the indicators, so that damage to the world economy can be minimized.
China is presently engaging in the comprehensive reform of her economic management system as well as large-scale economic construction. We have made considerable headway and are proceeding as envisaged. It is our conviction that the development of China’s economy cannot be achieved without the advancement of the world economy. China is, therefore, committed to full cooperation with other member countries to play a positive role in the World Bank and the International Monetary Fund, with a view to creating a better international environment.
We profoundly regret that Mr. de Larosière will leave the office of the Managing Director of the International Monetary Fund. During a period when the international financial situation was characterized by changes and fluctuations, Mr. de Larosière through his efforts made significant contributions to the stabilization of the global financial situation and to the search for solutions to the debt problem. I wish you all the best in your future endeavors, Mr. de Larosière.
Statement by the Governor of the Fund and the Bank for Canada—Michael H. Wilson
It is a great honor to take part once again in these important Meetings. I join in the welcome to Poland and Kiribati as new members of the International Monetary Fund and the World Bank. I salute Mr. de Larosière for his outstanding leadership of the Fund, and I warmly welcome Mr. Conable as the new President of the World Bank. His appointment will do much to ensure the continuity and reaffirmation of the vision underlying the creation of the Fund and the Bank four decades ago. I believe it is incumbent on all of us to join his commitment to the fight against global poverty.
There are two themes that I want to stress in my remarks today. One is the responsibility industrial countries have to pursue policies which ensure that economic growth strengthens and that healthy growth will be sustained. But I also want to deal realistically with the challenges developing countries must meet in order to ease the adjustment problems they currently face and to lay the groundwork for the eventual attainment of economic prosperity.
I attended the meeting of the Commonwealth finance ministers last week. I was encouraged by the strong statements of some ministers that developing countries can be in charge of their own destiny to a far greater extent if they implement policies that improve their opportunities for growth. This should be done, not simply because the Fund or the Bank prescribes them, but because they are in the self-interest of the country and because they are the best way to ensure higher living standards and greater job opportunities for their people.
The goals we seek together are worthy of our continuing and consistent pursuit. But achieving them requires determined, and often difficult, decisions by both developed and developing countries. None of us should succumb to the illusion that any grand design or quick fix will improve our ability to realize them.
What is required to ensure healthy world growth is a continued commitment to our strategy for reducing government deficits, for holding inflation in check, and for reducing current account imbalances through better international balance in domestic demand growth. To assist and complement this strategy, we also need to implement measures to promote a dynamic private sector and to lower unemployment.
This has proved to be a less robust year than expected at the time of the meetings of the Interim and Development Committees last April. It is not surprising, therefore, that questions have arisen about the present course of our policies. We have reviewed these policies carefully over the past few days. I believe we should not change direction despite the disappointments, for the prospects are encouraging.
Let us consider a number of positive factors.
—World growth is continuing. Growth rates are picking up and are forecast to strengthen in the remainder of 1986 and in 1987.
—Although oil price declines have hit a number of countries very hard—including regions within my own country—we are now starting to see the offsetting benefits to the world economy.
—Major exchange rate realignments have taken place among the industrial countries. Although it may take some time, this will contribute powerfully to better current account balances.
—The outlook for inflation is very encouraging. Most periods of economic expansion have been choked off after a few years by the resurgence of inflation. This time, prudent monetary policies are keeping inflation in check.
—In the industrial countries, progress is being made in reducing fiscal imbalances. Budget deficits as a proportion of GDP are declining in most countries.
—As a result of better inflation prospects and improved fiscal positions, interest rates have fallen sharply.
—The new round of trade negotiations has been well launched.
—There is growing recognition that tax reforms, market liberalization, and the reduction of subsidies increase the growth potential of our economies.
—Finally, there is continued determination among the major industrial countries to pursue more compatible policies in order to sustain non-inflationary world growth.
If there is any single message that needs stressing, it is that temporary setbacks must not deter us from persisting in policies that will serve us well, not just in the next six months, but over the coming years. We must be patient in pursuit of our medium-term goals. Experience has demonstrated the pitfalls of macroeconomic “fine tuning” and of trying to avoid rather than adjust to market shocks.
In persevering with the policies we are pursuing, all of us have important roles to play. Industrial countries must accept the great responsibility of proceeding with policies that will promote a stable and vigorous economic environment in which a dynamic private sector plays a leading role.
This is essential, not only to ensure better conditions for our own people, but also to create an international environment that will permit the adjustment efforts of the developing countries to bear fruit.
Our monetary and fiscal policies must continue to be guided by the need to maintain financial stability and to ease the burden of public sector indebtedness. Important though they are, however, we need more than sound macroeconomic policies to ensure a bright economic future. Monetary and fiscal policies must be backed up by determined measures to remove the structural rigidities that constrain private sector investment and job creation.
More than lip service must be paid to the dismantling of interventionist and protectionist policies in both developed and developing countries. This year’s World Development Report shows what harm has been done by the pursuit of such policies in the field of agriculture in both developed and developing countries. Canadian farmers know too well the effects of beggar-thy-neighbor trade policies.
I shall say a word here about our recent experience in Canada. I believe it offers a good example of the benefits of sticking to a sound medium-term strategy.
Since our Government took office two years ago, we have followed a determined policy to reduce our deficit, to streamline and lighten regulations, to privatize state-owned commercial enterprises, and to remove other obstacles to private sector vitality and growth. We are reforming our tax system to ensure that it rewards success and promotes investment. We have re-established Canada’s traditional welcoming approach to foreign investment, and we are actively pursuing trade liberalization, both in the new GATT round and in bilateral negotiations with the United States.
These policies are working. The budget deficit has declined from 7.4 percent of GDP when we took office to 6 percent last year. It will decline further this year. Far from hurting our recovery, these policies have contributed to one of the highest growth rates among industrial countries and a robust expansion of employment. Nor have we compromised our social or international responsibilities. We have maintained, and in some areas have strengthened, our social support programs, and we have kept our official development assistance close to 0.5 percent of GNP.
In recent years, Canada went through a period when our attitude toward foreign investment was considered ambivalent at best, and inhospitable by many of our trading partners. This resulted, through the 1970s and early 1980s, in an erosion of our competitive position and some loss of investment capital. When our Government took office, we dismantled the major impediments to foreign investment in Canada. More important, we set about, through our overall economic policies, to create a climate in which investors, Canadian and foreign alike, can feel more comfortable about doing business in Canada.
In the past year we have experienced a welcome increase in the inflow of foreign equity capital. This will help make our economy more productive and competitive and will reduce our reliance on debt financing.
I have spoken about the responsibilities of the industrial countries. Let me now turn to the challenges faced by the developing countries.
Improving economic growth in developing countries demands tough decisions, political courage, realistic expectations, and an unglamorous commitment to the ongoing discipline required to carry out necessary policy changes. I was encouraged last week by the statements of some Commonwealth Finance Ministers that developing countries can be more in charge of their own destiny if they implement policies which improve their opportunities for growth.
There is no simple recipe to meet this challenge. The most productive approach lies in a cooperative and comprehensive effort to deal with structural problems and to create the conditions for resumed growth. That is the basic strategy we adopted last year in Seoul. That initiative was not a master plan. It was a framework within which developed and developing countries could work together with commercial banks, the Fund, and multilateral development banks to lay the foundation for greater economic prosperity in debtor countries. We welcomed it then because it embraced a philosophy that we had been working toward for several years. We continue to believe it is the right strategy.
Developing countries clearly face a difficult situation. External debt loads carried by many of them are too high and are constraining their economies. Economic growth rates are picking up in a number of countries, but overall performance is being affected by weak commodity prices and barriers to their exports. Net financial inflows to the developing countries are barely positive.
In the face of these difficult circumstances, the developing countries must continue to pursue appropriate macroeconomic policies. These policies must be bolstered, if growth is to increase, by structural adjustments designed to strengthen the private sector and to create a better climate for investment. Equity capital is an essential element in achieving this growth, not only to reduce debt burdens but also to increase access to technology, to promote exports, and to expand the capacity to support debt.
How can equity capital be attracted? Measures are needed to reduce or eliminate foreign investment restrictions, to develop freer markets, to reduce price controls and subsidies, and to ensure realistic and flexible exchange rates.
Serious consideration should be given to the role of state-owned enterprises. Privatizing them or making them more market oriented can often result in greater efficiency and can help the creation of a dynamic private sector. These are all ways to increase equity investment in developing countries.
As I noted at the beginning of my address, industrial and developing countries today face important responsibilities and challenges. These responsibilities and challenges come together in our multilateral institutions. It is in these important forums that we pursue measures to encourage greater international cooperation. We must ensure that these institutions continue to be effective and capable of providing even greater support to their members. There are a number of ways in which this can be done.
First, we must persist in our efforts to strengthen multilateral surveillance to ensure a stable international monetary system and a vigorous economic environment.
Second, the Fund must continue its policy of enlarged access. In the face of current external indebtedness problems, now is not the right time to end or to lower the temporary expansion of borrowing limits.
Third, the Fund and Bank must intensify and make more explicit their cooperation in supporting and developing joint stabilization and adjustment programs in both middle-income and poorer countries.
Fourth, the increased cooperation between the Fund and the Bank must be backed up by greater coordination with the regional development banks and bilateral donors. Regional development banks must give greater emphasis in promoting policy reforms. . . .
I have spoken today of the responsibilities and challenges we must meet together. I continue to believe that our strategy is the right one. With a shared commitment to this strategy, we can make progress toward improving the living standards of all our citizens.
Statement by the Governor of the Fund and the Bank for Korea—In Yong Chung
May I begin, on this auspicious occasion, by saying how deeply honored the Korean Government was by the opportunity of hosting the Joint Annual Meetings last year in Seoul. The wholehearted cooperation of member governments and the excellent preparation of the staffs of the Fund and the Bank were indispensable to our own endeavors toward making those Joint Meetings successful.
This year marks the Forty-First Anniversary of the Fund and the Bank. With the addition of Kiribati and Poland, the membership has grown to 151 members. In the name of my Government, I wish to extend to them a warm welcome. These are the first Annual Meetings for Mr. Conable in his capacity as President of the World Bank. We congratulate him and look forward to his resolute and sagacious stewardship in the coming years. And these are the last Annual Meetings for Mr. de Larosière as Managing Director of the Fund. I would like to join my fellow Governors in expressing my heartfelt gratitude for his contribution and dedication to the prosperity of the world economy. We will greatly miss him.
Since our last Meetings in Seoul, the world economy seems to have made only slight progress. In spite of the substantial decline in energy prices and generally lower interest rates, real growth has been less than expected. Economies of industrial countries remained sluggish through the end of 1985, although they have shown some signs of improvement this year. In the developing countries as a whole, growth in output and employment did not pick up, except for a few small economies. Demand management by industrial countries, the downturn in commodity prices, and restricted access to markets abroad for manufactured goods from developing countries significantly dampened their economic activities.
This year, world trade volume is projected to rise by 3.5 percent, with unit value declining by about 9.5 percent. As a consequence, trade is generating little growth momentum in most developing countries. To make things worse, trade-restrictive policies in major markets have not been eased, but, in many cases, have even been strengthened against manufactured products, mostly through unilateral means.
The substantial realignment of major currencies that began last year has not so far had a major impact on the current accounts of the large industrial economies. This is strong evidence of the rigidity of the structure of the world trading system. Nonmarket forces appear to have overwhelmed potential trade flows. In this global economic climate, we believe that there is ample room for noninflationary growth. We therefore urge member countries to seize this opportunity to pursue growth-oriented policies and provide greater trade opportunities for developing countries.
At the same time, we welcome the agreement at the GATT ministerial meeting in Punta del Este to launch the new round of multilateral trade negotiations. We hope this round will be successful.
I am pleased to report that Korea’s real growth in the first half of 1986 was significantly improved. This recovery has been accompanied by continued price stability and by a shift in the external current account from deficit to surplus, reflecting the continued rise in the domestic savings and favorable external factors, particularly the decline in oil prices. The new economic environment has provided an opportunity for Korea to slow down the increase in its external indebtedness and rationalize its debt structure, while still providing for adequate increases in international reserves.
I would now like to turn to issues relating to the International Monetary Fund. Given the key role of the Fund in the international monetary system, my Government supports the improvement of its multilateral surveillance procedures as a means of assessing the international consequences of national economic policies and of enhancing coordination between those policies. In the conduct of such surveillance, the use of indicators related to economic policies and performance has been proposed. To determine the workability and desirability of this approach, it may well be prudent to apply it to developed countries initially. With respect to surveillance of exchange rate policies in particular, we believe that this is a multilateral concern more appropriately addressed under the aegis of the Fund than in bilateral or limited forums. We would therefore support strengthening the Fund’s specific procedures in this regard.
My Government regrets that no SDR allocation was agreed on in the fourth basic period, particularly in the light of the inadequacy of developing countries’ reserves. We hope that member countries will agree on an allocation in the fifth basic period, perhaps as early as 1987, and that its distribution will reflect the needs of developing member countries. Moreover, as a means to enhance the role of the SDR as an international reserve asset, we would urge measures to increase its remunerability and transferability.
The establishment of the Structural Adjustment Facility is a welcome addition to the Fund’s instruments. Though limited to low-income countries, the size of the facility is small relative to the needs being addressed. As more and more countries avail themselves of this facility, we would urge member countries to closely monitor the adequacy of its size and the appropriateness of the conditions of access.
As for other facilities in the Fund, we would support the continuation of the enlarged access policy through 1987 and the maintenance of access limits in present Fund facilities.
The international debt situation requires multifaceted solutions. Robust growth in the developed economies, the abatement of protectionism, lower international interest rates, and the recovery of commodity prices would all have beneficial effects on the debt situation of developing countries generally. For individual developing countries whose debt service obligations are inconsistent with sustainable growth objectives, new capital inflows as well as debt rescheduling within the context of sound medium-term economic programs may be required. In the formulation of such programs in the light of individual circumstances, the national authorities, the international financial institutions, and the banking community all have complementary roles to play. . . .
For 40 long years, we have together changed a large part of the world, changed it for the better. Many sacrificed their resources for others so that the others might become like them some day, at least in the physical sense. Many in the developing world who have not even heard of our organizations were able to cross the bridge arching between misery and dignity in life. We happen to know how one feels on that bridge, because we were there not too long ago.
Statement by the Governor of the Fund for France—Michel Camdessus
The Annual Meetings of the Fund and World Bank are a high point in international cooperation. They provide the opportunity for drawing up a balance of the past year’s monetary and financial developments, identifying both the advances and the failures of our cooperation, and outlining prospects for the future.
I would like to begin our analysis of the world economic outlook with some remarks about the French economy. I will stress three developments which are striking in relation not only to the recent past, but also to a long tradition.
—First, the retreat—if not to say the disappearance—of inflationary expectations and the slowdown of wage increases have placed our country, according to the Fund itself, in a good position as regards disinflation and controlling production costs.
—Second, there is an increasingly widespread perception that the Government cannot do everything and must leave more room for private initiative. The privatization of a large number of public enterprises and the reduction of taxes and of the weight of government expenditures have been undertaken and will be pursued in 1987, showing our determination in this regard.
—Third, the unequivocal acceptance of market discipline in such areas as employment, prices, exchange rates, monetary issues, and the financing of the economy.
I am convinced that this broadening of economic freedoms will in time lead to positive effects in the areas where there are weaknesses we refuse to condone. I would like to stress three of them.
—Unemployment, despite improved job creation.
—Developments in the current account balance. Though favorable as a result of falling oil prices, they mask a persistent weakness in the productive system, caused by too many years of insufficient investment.
—Interest rates. In spite of the marked decline in interest rates over the last year, real rates remain too high. But we cannot act alone in this area.
All in all, growth is still insufficient in France as in other countries, despite the recent recovery that is expected to continue in 1987. However, we are certain that the course we have chosen is the correct one, but more time is needed to reap its beneficial effects; continuity is needed as well to guarantee lasting progress.
It seems to me that many of the points just made concerning France also apply to an analysis of current international problems. We are suffering from a still inadequate growth, given the capacities of the world economy. Our economies also face external imbalances which are clearly unsustainable in the medium term.
To achieve lasting growth, we must rediscover the path of equilibrium. But how? First, let us discard the false remedies. In my view, no true solution will be found in further exchange rate adjustments: a further decline of the dollar would not be a suitable answer to the imbalances that still exist. At this point, that would be trying to correct one imbalance by another.
We are all equally convinced that protectionism is not the way out: by isolating ourselves from each other we would be condemning all of us. I therefore hail the wisdom that prevailed at Punta del Este in strengthening our free trade system under the GATT. Therefore, there is no choice but to seek a more balanced world pattern of growth rates, with deficit countries maintaining in particular the strictest possible control over their public demand, and surplus countries consolidating the current recovery of their domestic demand.
We must hence seek to improve the way the adjustment burden is shared. The United States must deal resolutely with the primary source of its external imbalance, the budget deficit. On the other hand, in countries where domestic saving exceeds financing needs, it may become necessary to adopt more flexible monetary policies or to stimulate domestic demand through tax measures. The monetary components of this improved adjustment deserve particular attention. Allow me a few words on this matter.
The high level of real interest rates remains harmful to the developing countries and to investment, a decisive component of growth-based strategy.
Instability of exchange rates can also be harmful to growth.
A year ago, signature of the Plaza agreement marked a significant step forward toward creating the conditions for improved exchange rate equilibrium in our trade.
The events of this summer have given us cause for concern. We welcome the joint effort of analysis and cooperation that is now developing. The initial results of this effort have been truly encouraging. We must ensure that they continue to be borne out and that the parities of the major currencies are stablilized at their present level, which, all things considered, is satisfactory. France is ready to play its part in this effort.
Our country, as you know, has contributed without reservation to strengthening international cooperation, has actively sought and implemented concerted moves to lower interest rates, and has given its support to the introduction of a set of indicators. But we must not lose sight of the fact that beyond this exercise, we obviously also need to rebuild an international monetary system. Mere clever conjecture, even if based on the sound work of experts, cannot satisfy this need. In my view, what is at stake is quite simple: on the one hand, genuine financial freedom and freedom of trade; on the other, the legitimate desire of governments to retain autonomy in their economic choices. We must reconcile the two. This means that we must define actual procedures including automatic mechanisms, constraints, and a referee. We should focus our attention on the variables through which international influences are directly transmitted, namely balance of payments, interest rates, and above all exchange rates. France has for several years been making serious proposals to its partners with a view to the adoption of a system of reference zones for exchange rates. It seems to me that the time has come to think seriously about this.
Regarding the situation of developing countries and the international debt, the experience of recent months has confirmed that the path chosen by the international community for dealing with the debt problem is a sound one: a case-by-case, concerted, and pragmatic approach. This approach stems from the shared understanding that debt is not solely a financial phenomenon but reveals deeper imbalances related to the very nature and direction of the development process. No lasting solution can be found by treating the effects without attacking the causes, or by dealing with it as if it were the problem of the debtor countries alone.
This is why the search for a more sustained and lasting world growth must be the central objective of our cooperation. It is this search which must guide the actions of each partner, whether public or private, and each must be ready to play its part fully these days.
Indeed, the outlook for such world growth, however desirable, remains uncertain. The continuing deterioration of the debt ratios shows that the interest rate decline has not offset the impact of the continued worsening in the developing countries’ terms of trade. The latest statistics reflect the growing reluctance of commercial banks to increase their exposure in developing countries. This conjunction of negative developments entails a risk of deflationary slippage that must not be underestimated.
In this context, it is incumbent upon the World Bank and the Fund to take leading roles in the strategy defined in Seoul. These institutions have demonstrated over the last few months that they are capable of responding to the mandate given to them at that time by their shareholders. The World Bank has done so notably by increasing its commitments to indebted countries in the form of nonproject financing in cooperation with the Fund. Recovery programs have been designed that take into account both the constraints of adjustment and the needs of development, as in the case of Mexico. My sincere hope is that these recovery programs be implemented promptly, supported by one and all, and fully successful.
Thus, it is necessary to provide these two institutions with the means they need to carry out their actions. It is essential to maintain the enlarged limits on access to the Fund’s resources in the difficult period which developing countries are presently going through; renewed SDR allocations would also be one way—and one which I believe involves no real danger—to attenuate the difficulties experienced by nearly all these countries in rebuilding their reserves to a minimum level. . . .
At the same time, we must bolster the support given to the poorest developing countries, and especially to the countries of sub-Saharan Africa. The report submitted by the World Bank to the spring meeting of the Development Committee on the financing needs of sub-Saharan Africa was highly enlightening. It demonstrated in particular the priority of mobilizing additional financial resources to support the structural policies upon which lasting development is based. Despite its strict policy of cutting back public expenditure, France is striving to contribute actively to this end: its contribution to development assistance, in addition to its efforts in favor of its overseas departments and territories, is expected to amount to 0.54 percent of gross domestic product in 1987, of which nearly two thirds is intended for sub-Saharan Africa. This ratio was 0.36 percent in 1980. The Special Session of the United Nations made clear the full magnitude of this challenge. The French Government has noted with satisfaction that the conclusions of that meeting are largely in agreement with our own views of a year ago, as regards the objectives and means of development in Africa, the role of the various international institutions, and the nature of the pressing actions required of us. The creation of the special facility for sub-Saharan Africa and, later, of the Structural Adjustment Facility, have charted the proper course of action. . . .
You have here then my country’s principal thoughts on the matters which concern us. Having shared them with you, I cannot fail to add that it is with great regret, though fully understanding the reasons why, that France has learned of Mr. de Larosière’s intention to resign as Managing Director of the IMF. He has served the international community admirably in that position, and we wish at this time to thank him most heartily.
Statement by the Governor of the Fund and the Bank for Malaysia—Daim Zainuddin
I would like to begin by extending my warmest congratulations to Mr. Conable on his appointment as President of the World Bank. I am confident that Mr. Conable will bring with him new perspectives and fresh ideas which will invigorate the Bank in the years ahead. At the same time, let me also say how sorry we are that Mr. de Larosière will soon be leaving the Fund. He has steered the Fund through a difficult period with vision and incisive leadership, and we would like to thank him sincerely for his contributions and wish him well in his future undertakings.
When the Interim and Development Committees met in the spring, expectations were high for a strong global economic revival following the decline in world oil prices and interest rates. We were also encouraged by the progress made on several fronts—namely, historically low inflation rates, a better alignment of exchange rates, and an apparent convergence of economic policies in the major industrial countries. However, this optimism proved short lived, as the world economy continues to be plagued by mounting problems. Trade imbalances remain large; protectionist pressures have intensified; fiscal consolidation in industrial countries has not had much impact; and the terms of trade and real incomes in developing countries continue to deteriorate.
With these uncertainties, the medium-term growth of 3 percent a year projected in the World Economic Outlook looks unlikely to be achieved, so that a world recession cannot be ruled out. Of equal concern, a sustained recovery in commodity prices and exports by developing countries remains doubtful. The situation calls for stronger efforts at reflation, especially by countries which can afford to do so, and greater commitment toward policy coordination among the industrial countries to strengthen world growth and trade.
Without such concerted measures, the developing countries will face an even more inhospitable international environment and dimmer prospects for resolving their debt problems. Falling commodity prices, deteriorating terms of trade, and declining real incomes underscore the importance of strengthening the global economic recovery and reviving the expansion of world trade. The new GATT round must aim for this. Debtor countries cannot be expected to resolve their current problems of indebtedness if the markets of industrial countries continue to be protected. Resolution of the global debt problem will hinge critically on freer trade and a revival in world economic growth.
We have seen over the last few years a marked contraction in financial flows to developing countries. This is most disheartening. In strengthening the global debt strategy, a critical element is the availability of sufficient external financing to support the adjustment efforts. The Fund and the World Bank must play a more important role by strengthening their financial support, while also acting as a catalyst for increased lending from commercial sources. It is in this context that I urge for early implementation of the near universal agreement on an allocation of SDRs, an adequate replenishment for IDA-8, and a substantial general capital increase for the Bank. These are not new issues. I will not therefore elaborate on them further beyond expressing my hope that the obstacle which has stood in the way of their implementation will soon be removed. The case is clear and well established. It is only the political will that is lacking.
Given the uncertain international economic environment, the Fund and Bank must work closely together in ensuring progress and development in the world, especially in the developing countries. . . . As regards the Fund, an important role which it must play is to ensure an effective coordination of policies in the industrial countries that have a major impact on the world economy and global trade. For too long, the developing countries have been left out in the cold, while the fate of their economies is decided in the major countries without sufficient consideration of the adverse impact of these decisions on the rest of the world. I refer, in particular, to the Group of Five accord, which in the span of one year caused volatile exchange rate changes, leading to a substantial increase in the external debt of developing countries denominated in yen and deutsche mark. Policy coordination to promote such exchange rate adjustment over a longer time span would have avoided much of its disruptive effects. Such coordination would also have prevented the prolonged appreciation of the U.S. dollar until early 1985, thereby stemming the significant increase in protectionism that had occurred. In this regard, the study by the Fund on the use of economic indicators will prove useful, but the consultation must be on a wider scale than has been the case. Surely, the developing countries have a right to contribute ideas on how policy coordination for adjustment should be undertaken with minimal adverse effects on them.
In conclusion, I urge a greater sense of urgency to tackle the problems of slow growth, decline in commodity prices, stagnant world trade, and the inequity in the process of decision making. These problems are interconnected and they need to be tackled in a concerted and coordinated manner. For the developing countries, in particular, the outlook is increasingly more serious and grim. No one owes us a living; but by any standard, most of us have made and are making politically difficult decisions to bring about the necessary adjustments. A supportive external environment can make the difference between success and failure. It is my hope that the decisions taken during these Annual Meetings will consolidate and strengthen such an environment, which is after all in the interest of all of us in an interdependent world.
Statement by the Governor of the Fund for Italy—Giovanni Goria
We should like first of all to extend our warmest greetings to Poland on its reaccession to membership and also to the youngest of the newly formed nations, Kiribati.
The World Bank has a new President, in the person of a distinguished official who possesses great political experience and remarkable negotiating ability. We wish to assure him of our firm support in the performance of his demanding task and to offer him our very best wishes for success in his new work.
These arrivals coincide with the departures of the Chairman of the Development Committee, Mr. Ishaq Khan, from whose wisdom we have all benefited, and in particular, of the Managing Director of the International Monetary Fund.
The contribution made by Mr. de Larosière in an international monetary situation over which debt problems have cast sometimes threatening clouds has earned him a permanent place in the history of the International Monetary Fund, which he has directed with so much competence and wisdom and with such a sure touch. We extend to him our sincere thanks, together with our heartfelt good wishes for his future success.
The International Economy
Despite the decline in the prices of oil and raw materials and the successes achieved in the fight against inflation, economic developments in the first few months of the current year have been disappointing in relation to the general improvement of the world economy that was expected.
Nevertheless, we share the more optimistic view of recent studies, which hold out hopes of more sustained growth in the end of the current year and in 1987.
Still, the general climate is worrisome in several respects. First, external account disequilibria are still pushing both the external debt of the United States and that of the developing countries toward an intolerable position. In this connection there do not appear to be sufficient grounds to expect substantial changes in the short term: the underlying deficit of the United States’ current account still exceeds $100 billion, and the terms of trade for the developing countries have deteriorated considerably.
Moreover, we must bear in mind the way in which the world economy has reacted to the fall in international prices. The contraction of domestic demand in countries that show a deficit or for which the terms of trade have deteriorated has been much more rapid than the expansion of domestic demand in countries that are in the opposite situation.
In view of the present phase of the economic cycles and the medium-term prospects, it seems unrealistic to us to believe that a fundamental improvement in the international economic situation will be sufficient to expand world demand. Rather, the best possible use should be made of the interaction of major countries’ economic policies so as to bring about a more rapid reaction to the stimuli already given.
In particular, we feel that the United States should take full advantage of the leeway it has available to restore equilibrium in the federal budget, so as to facilitate the adjustment of its external accounts.
It would be desirable, however, for the restoration of U.S. budgetary equilibrium to be counterbalanced by more dynamic policies in other countries. I am thinking not only of the possible contribution of countries that have already largely balanced their budgets, but also of a substantial effort by all industrial countries.
The offsetting action, which is essential to reduce the still high unemployment rates, should also involve monetary policy. To be sure, it is illusory and dangerous to believe that interest rates can be lowered much further, but we do feel that care should be taken not to apply an overly stringent monetary policy that could hinder the reduction of real rates.
Inability to resolve these problems might well translate into abrupt adjustment measures; I am thinking in particular of the exchange policy conducted thus far by the United States, which, if it were to persist, would have considerable and hardly tolerable consequences for the relationships among major currencies.
Moreover, if no solution is found for the problems of the international trade and payments system, trade difficulties and the dangers of protectionist pressures, in the United States in particular, might well intensify.
While at the recent GATT meeting in Punta del Este the participants arrived—with difficulty—at an understanding on certain points, basically in the areas of policy and procedure, one should not conclude that the differences in views on the major topics of the negotiations have been overcome. Should the negotiations bog down, the resulting impasse would leave a clear field to the champions of protectionism, and consequently to an increase in recessionary forces.
We must resist the temptation to use unilateral shortcuts; they procure a brief respite, but also provoke a chain reaction of retaliatory measures.
Low growth rates and protectionism would have particularly tragic effects on the economies of the indebted developing countries. Although interest rates are declining and some developing countries have benefited from the decrease in oil prices, developments in the current year and the prospects for 1987 add up to a very critical situation.
Only a high level of growth in the OECD countries, accompanied by a greater openness to exports from the developing countries and by continuation of the present adjustment/financing process, will make it possible to change this reality to any substantial extent. Moreover, the debt situation has taken a different turn for different groups of countries, and this phenomenon calls for action adapted to the specific requirements of those countries. There is no valid alternative to a strategy that bases economic rehabilitation on both financial efforts and structural reforms.
The recent financial negotiations between Mexico and the International Monetary Fund have demonstrated, however, the need also to take account of the difficulties caused by the fall in oil prices. It appears necessary, therefore, to update the framework for action presented at last year’s Meetings, so as to take account of this new reality and of the additional difficulties of countries to which the Baker Plan did not originally refer. We are obliged to note in particular that one year later, the financial commitment of the international banking system has proved to be insufficient and below the initial forecasts.
Failing closer coordination of the major countries’ economic policies, it would appear, unfortunately, that the concerns we expressed at the Interim Committee meeting last spring, regarding the possibility of an economic downturn and the risks posed to the world economy by a reduction of the United States’ fiscal and external deficits, are being confirmed.
The progress of coordination of national economic policies is laborious; more in-depth discussion is needed to bring about agreements on policy, technical, and procedural matters. Clearly, the IMF’s studies on economic indicators are an important contribution to the work on multilateral surveillance of the economic policies of key countries. In this connection, the choice of indicators is important, as is the value that the major countries would be willing to assign to changes in these indicators.
We feel that the exercise of surveillance in all its aspects should be given a more operational and more constraining character; we think it necessary, therefore, to concentrate on economic policy. To complete the analytical framework, it would be well to take into account the experience gained with economic policy coordination in the EMS.
We think that effective coordination of economic policies can find a preferred, but not exclusive, forum in the IMF; we wish to say sincerely, however, that we greatly appreciate the contribution the IMF has made, both through the improvement of instruments for providing data and through the preparation of a special chapter on the interaction of economic policies, as was done in the recent World Economic Outlook analysis.
The Italian Economy
The process of combating inflation, in which we have been engaged for some time, is being assisted today by the fall in energy costs and by continued low raw materials prices—two factors that have helped to bring inflation down to levels close to the European average (the average rate will be less than 6 percent in 1986 and 4 percent in 1987), and to restore equilibrium in the external accounts. For this year, a significant current account surplus is forecast for the first time since 1979.
The improvement in the terms of trade is due to a marked drop in import prices, which is itself linked to the dollar decline. Export price developments have been characterized by a moderate increase. The growth of import volume, which has certainly been stronger than that of export volume, will nevertheless not be large enough to cancel out the gains in terms of prices.
In the medium term, however, there is no lack of causes for concern. In particular, unemployment, though it has stabilized, is still at a level that is hardly tolerable from the political and social points of view. Our aim is to speed up, through demand expansion, the decline in the unemployment rate—still about 11 percent today—which will result from demographic factors. In 1987, assuming the international environment is favorable, the growth of GDP should be about 3 percent and the growth of demand around 4 percent, which would make it possible to increase employment while still maintaining a surplus on the balance of current transactions.
Beyond world economic growth prospects, the possibility of consolidating the improvement in Italy’s economic situation depends primarily on our ability to increase the efficiency of our productive apparatus. Production facilities have already been improved to some extent by massive investments. Moreover, the effort made in recent years to contain the increase in labor costs through a balanced incomes policy has been substantial. These two actions have been of appreciable help in improving the profitability of enterprises and their competitiveness. In this connection, the agreement concluded with the trade unions, involving a reform of the wage-indexing system, is particularly significant. Thus, the conditions have been created for expansion of the productive base and, consequently, the creation of skilled jobs, particularly in sectors where Italy has a greater comparative advantage, has been encouraged.
The rehabilitation of the public finances is proceeding today along the same lines. In addition to the possible medium-term limitation of the public sector deficit, which will decline from 16.1 percent of GDP in 1985 to 14.3 percent this year and 12 percent next year, a number of structural reforms are being implemented to ward off the dangers of an automatic increase in public expenditure. In particular, the reform of the social security system and that of the local finances, both intended to establish a closer link between contributions and benefits, are under way.
The reduction of public sector financing requirements should produce positive results not only as regards inflation, but likewise as regards the formation of savings, which should also be better utilized.
It should be borne in mind, however, that these prospects are closely linked to developments in the world economy, and the state of the world economy, while improving, presents considerable uncertainties, as we have seen.
One year after the Governors last reviewed Fund policies, the IMF still has a central role in the surveillance of the functioning of the international monetary system and in supporting adjustment programs. The problem of international liquidity, however, is still a subject of concern to us. A more balanced and more stable composition of members’ reserves might help relieve existing tensions.
The SDR is certainly one of the instruments best suited to appropriate international reserves management and should be called upon to play a bigger role in meeting the needs of countries that have limited access to the international capital market.
Indeed, unless there is a new allocation, these countries will be obliged to enlarge their reserves by continually achieving a surplus on current account or by bearing the particularly high costs of borrowing in the financial markets.
The technical characteristics of the SDR should be improved also, in order to strengthen its role. In this connection it would be particularly desirable to revise the mechanisms for transferring SDRs.
In our view, the International Monetary Fund performs an essential task in providing adequate financial support to members which undertake economic adjustment programs to resolve their internal difficulties and their external payments problems.
In these circumstances, the enlarged access policy is still a useful instrument in that it helps countries to progress toward external adjustment in the framework of economic programs approved by the Fund. This is why this policy should be continued during the year to come, and, in view of the present phase of the economic cycle, the access limits should not be modified.
Thus, while reaffirming our support for the action taken thus far, it seems to us appropriate to stress the new factors that have characterized it and have made it possible to better adapt Fund assistance to a country’s particular situation. This, clearly, is what the Structural Adjustment Facility, recently created to deal with the protracted balance of payments difficulties encountered by the poorest countries, makes possible.
The Fund’s liquidity position is satisfactory at present, but the fact remains that the possibilities of extending assistance are still determined by the amount of financial resources available. It is basically through a quota increase that the resource level will have to be adapted to the financing needs. However, we welcome the recent initiative of Japan, aimed at providing supplementary bilateral resources.
The monetary character of the Fund should be preserved. We are therefore in full agreement with the procedures adopted to deal with the phenomenon of delays in loan repayments. . . .
In an extremely delicate international situation, a situation that could usher in a new cycle of durable and sustained development or could degenerate into a new recession, many of us have come to these Meetings with a definite conviction and a clear purpose.
Our conviction concerns concepts that are wrongly regarded as self-evident, i.e., that the problems of some countries are also the problems of others and that the success of some is also the success of others.
Our purpose is just as clear: to reaffirm that discussion and collaboration make more sense than conflict and discord.
In the case of those questions that concern the functioning of our institutions, our success in the area of discussion and collaboration has been total. Never have our discussions been so convergent and our conclusions so unanimous as they have been this year. We have succeeded, in particular, in reaching agreement on:
—maintenance of the limits on enlarged access to the resources of the Fund at their present level instead of lowering them, as was in principle expected;
—replenishment of the resources of the International Development Association which, taking voluntary contributions into account, will come close to $12 billion. This will enable the Eighth Replenishment of resources of IDA to enter into effect in July 1987;
—the necessity to pursue without delay the work already begun with a view to obtaining a general increase in the capital of the World Bank to enable it to continue and step up its lending programs.
On the other hand, less progress appears to have been achieved than was expected on questions relating to the international monetary system. In my view the disappointment with the amount of agreement on these topics is only partially justified. The fact is that there are no substantial differences of opinion among us concerning the necessity to pursue a medium-term economic policy geared to stable and balanced growth.
The basic objective that we have set for ourselves is to strengthen international cooperation. While this undoubtedly presupposes the existence of instruments such as indicators, it is not limited to that. Such cooperation is necessary both to create a more stable economic and, in particular, financial environment and to help the affected countries to escape from the scourges of underdevelopment and excessive indebtedness.
Similarly, the short-term problems are by no means being neglected, as is shown very clearly by the exchange market developments of the last few days. It is indeed essential that the short-term component be restored to economic policy, if only because the financial and exchange markets react more quickly than the commodities markets. The phenomena of “overshooting” and “undershooting” can affect not only monetary equilibria and output levels but also the utilization of savings and resources in general and therefore, in the last analysis, development.
But it is true that the impression we risk giving to markets and observers is that our agreements are relatively fragile, an impression that does not favor stability and progress.
Moreover, the threat of protectionism is stirring in the most highly developed country. If the free trade system succumbs to this threat, the last pillar of the Bretton Woods system will collapse, in spite of the conferences and of the effort to extend to other fields the discipline that has until now governed trade relations in the Western world.
It is up to us, or rather to those among us who have greater responsibilities, to do everything we can to avert this risk and all the uncertainties to which it gives rise. To that end it appears essential to reaffirm a number of specific points on which we could take a common position.
First of all, no one can regard the problem of the U.S. external deficit as one that concerns only that country, just as the enormous surpluses posted by some countries must be a matter for concern to all.
Second, no one can regard the economic adjustment problems of the developing countries and, for some of them, their external debt as anything but problems that we all share.
Third, no one can in good conscience agree to tackle these problems through the instrument of deflation, thereby rendering all the solutions socially more difficult and less tolerable.
Fourth, no one should imagine that market freedom, the expression and foundation of so many other freedoms, can be limited with impunity.
While the above factors are not open to dispute, we nevertheless need to show consistency. Maximizing growth cannot fail to become the goal of the countries that post enormous or even only significant surpluses, the sole absolute obligation being to preserve a noninflationary environment. This is the objective of the policies carried out by Italy; an objective that is all the more significant in that it is geared also to a fundamental necessity for most of us: the combating of unemployment, especially among the young. That having been said, we all know that this maximized growth will be achieved only if the enhanced capacity of markets to react is accompanied by a firm and at the same time prudent package of economic policy measures that accords priority attention to the goals of unemployment reduction and price stability.
By showing that we understand the problems and are capable of devising the most suitable courses of action to resolve them, we shall greatly enhance our sense of responsibility to make the choices that these solutions entail.
By resolutely confirming, all of us, that we feel this sense of responsibility, we shall be able, I am convinced, to effectively allay the deep-seated anxieties of our peoples.
That is what Italy, for its part, proposes to do, and we earnestly look forward to playing a not inconsiderable role in a common program of action.
Statement by the Governor of the Bank for the Philippines—Jaime V. Ongpin
Mr. Chairman, please accept my personal congratulations and those of the Government of the Philippines on your election as Chairman of this assembly. The long association of the Philippines and Colombia in the World Bank gives us full confidence that your stewardship of these Meetings augurs well for their successful outcome.
I would also like to take this opportunity to welcome Mr. Conable formally on his assumption of the World Bank presidency. Already we have come to appreciate the exceptional qualities of his leadership, combining, as he does, pragmatism and human understanding. These are qualities which can only have a positive influence on the Bank’s operations and its relations with member countries.
This has to be the occasion too for bidding Mr. de Larosière farewell. His initiative, which has often led to the creation of Fund mechanisms responsive to member country needs, has always reflected a management stance deeply sensitive to the moods and impulses of the global economic environment. We are deeply grateful to him and would assure him that our best wishes go with him for continued success.
Allow me, finally, to extend a warm welcome to the two new member countries of these institutions, Kiribati and Poland, whose points of view, I know, will enrich Bank/Fund deliberations.
Such small island economies of the Pacific as Kiribati have their own specific development needs which, we believe, ought to receive meaningful World Bank attention.
If today we were to take a poll among those who have journeyed here on the occasion of these Meetings, I daresay that everyone would readily state that the mood of the moment is one of urgency; urgency over the world economic outlook; urgency over developments in the implementation of the debt strategy; urgency over the lags that have emerged in international capital markets; and, indeed, urgency over the roles that the World Bank and the Fund must play. These are crucial roles which, as Governors of both institutions, we have the power—but so far, I must remark in all candor, have not had the political will—to perform.
The world has seen many changes since our last Annual Meeting. Our expectations had been buoyed then by Mr. Baker’s initiative on a growth-oriented debt strategy. Needless to say, we regret that developments since then have generally turned for the worse. Prognoses for the world economy give no further grounds for optimism. Growth projections for industrial countries in 1986 have been revised downward to 2 ¾ percent, and growth in world trade is forecast to decline in value terms by 9 ½ percent.
Financial prospects for developing countries, particularly those which are heavily indebted, have become bleak. A renewed buildup in arrears is now forecast, and a steep rise in amounts of debt to be rescheduled is anticipated. The pace of official lending is seen as somewhat subdued and that of private lending as continuing its sharp downward trend. We are concerned, moreover, that the level of cohesiveness among various sectors engaged in international lending seems to be declining and, consequently, concerted lending, which has played a major role in the debt strategy, is becoming more and more difficult to arrange—this, at a time when financing needs are rising substantially among countries with no normal access to the credit markets.
When the Baker initiative was launched from this very forum last year, all who remarked on its promise stressed that its success depended on the exercise of co-responsibility by creditors, debtors, and trading partners. The trends in the world economy in general and in the capital markets in particular have to date not been auspicious for this initiative. To be sure, developing countries have subjected themselves, and continue to subject themselves, to severe adjustment. To date, since the beginning of the 1980s, the Fund has arranged stand-by and extended arrangements for over 40 percent of its membership, including 12 from among the 15 most heavily indebted countries. That, lately, adjustment has at last been recognized as necessitating accompanying growth packages is a welcome development. It should mitigate the severity of reforms in demand management with the expectations of growth that supply measures evoke.
Speaking on behalf of the Philippines’ new Government, I am pleased to report that we have recently come to full agreement with the Fund on a new stand-by arrangement which significantly improves on the adjustment program the country has had since 1984 by following a design that is as growth oriented as it is consistent with prudent demand management. We have broadened our tax base even as we have improved the system’s progressive character and elasticity. We have adopted measures that would improve the efficiency of our financial institutions and have rendered our agricultural sector more responsive to market influences. We have continued to maintain a market-determined exchange rate, halted the flow of capital flight, and nearly doubled our foreign exchange reserves. We have virtually eliminated inflation and have substantially liberalized our trade system. We have, in sum, sought to foster an economic recovery grounded in a revived private sector within an environment of price and balance of payments stability.
I should quickly add that our efforts to adjust have received some support from the international community, both official and commercial. Indeed, it has been recognized, after all, that international support is necessary if any debt strategy is to succeed. For this reason, we commend the Japanese Government for having committed a loan of $3.5 billion toward buttressing the Fund’s resource base.
It is clear that the developing countries are doing their part, not without sacrifice and pain. They are doing so, moreover, not without expectations of some matching manifestation of co-responsibility on the part of creditors, commercial as well as official, and meaningful support from the international financial institutions. If, at this point, however, many begin to exhibit symptoms of adjustment fatigue, it cannot be for lack of perseverance or determination. It is rather because their perception of international response—from the commercial banking community and from the leadership of those countries who dominate the economic and financial systems of the world as well as the decision centers of multilateral institutions—is that the response has been, at best minimal, and at worst, insensitive to the exigencies of the debt strategy. For how else are they to interpret the continuing substantial decline in commercial bank lending to developing countries and the refusal to open doors to compromises on debt service and interest payment levels? How else to fathom the phenomenon of negative transfers from many indebted countries to the multilateral financial institutions? How else to explain the suspension of SDR allocations during the fourth basic period, and now again at the beginning of the fifth—in spite of strong positive recommendations from the Fund staff and a significant majority of Executive Directors from countries at all levels of development? How else to grasp the significance of the reluctance to initiate the reviews that would lead to the increase of quotas in the Fund and of capital in the World Bank? How else to justify the rise of protectionism, the heavy subsidies for agriculture on the European and American continents, and the renewal of a more broadly restrictive Multifiber Arrangement? Indeed, how else are they to understand the half-hearted commitments to policy coordination for global growth?
It is fitting and, indeed, proper that the urgency we all feel should find full expression in this forum. The special role, after all, for which the Bank and Fund have been designed, is that of catalyst, that of evoking fully and effectively the potential of every major agent in the debt workout process. Though the recent intensification of Bank/Fund cooperation and coordination is not without its pitfalls—the danger, for example, of succumbing to the temptation of cross-conditionality in all its forms—we believe that, with appropriate safeguards and vigilance on the part of Executive Directors, both institutions are now better able to complement each other’s operations in the catalytic process. It may be useful, nevertheless, to clarify their relative roles on a case-by-case basis, of course, according to their specific competences and expertise. It remains for us, as Governors, to ensure the adequacy of Fund/Bank resources to the level required if both institutions are to become truly effective catalysts in country financial programs.
We must, therefore, resolve to accelerate the completion of increases in Bank capital and Fund quotas. We must resolve to support approval of SDR allocations through the fifth basic period that would at least restore the ratio of SDRs to non-gold reserves to its 1972 level. This, we are convinced, accompanied by continued adjustment on the part of developing countries, is the necessary condition for relieving pressures on the international reserve system and for providing room for maneuvering in developing country-commercial bank relations. We must, moreover, resolve to maintain extraordinary access to the use of Fund resources as long as quotas remain inadequate for the needs of the present crisis. By so strengthening both institutions and filling the managerial void the Baker initiative has to date suffered from, we should be able to rescue it from its faltering first stages and move it forward to the benefit of all.
We do recognize at the same time that we must take positive measures that would encourage the flow of direct investment into developing countries. In this connection, beyond the reforms I have described above which have liberalized our investment and trade systems, we have made our commitments to support international initiatives that would create an international climate conducive to equity capital flows, particularly into the highly indebted developing countries. We know that, in the last analysis, we must depend largely on our own initiatives if we are to brighten our growth prospects. It is also a truism, however, that this is possible only so long as exports from developing countries are allowed to flow freely into their proper markets. We therefore look with hope to the efforts begun in Punta del Este to seek liberalization of the international trade system under the GATT.
The figure of Sisyphus is a tragic one in ancient classical myth. It reflects a vision of human life which is at once as full of anguish as it is absurd. Winging my way across the skies between Manila and Washington, D.C., and pondering the present predicament of the developing world, I could not help but note the analogy emerging between the fate of Sisyphus and that of the most heavily indebted countries. The same laborious struggle is there, and the same absurd odds; so too the same irrational law of adhering to pre-ordained terms in spite of new circumstances and more practical exigencies; the same frustration, therefore, and the same sense of always arriving no place in the end. I submit that the story of development in our time cannot be that of Sisyphus—not, indeed, when only a few decades ago human wisdom saw fit to create these twin institutions in Bretton Woods which, to this moment, have served international commerce so well. The urgency of the moment lies, indeed, in this: that developing countries remain convinced that economic well-being is not a pipe dream but a credible option for all.
Statement by the Governor of the Bank for Papua New Guinea—Julius Chan
Ten years ago, I spoke for the first time as Governor, representing a newly independent Papua New Guinea, at the Annual Meetings of the World Bank and the International Monetary Fund in Manila.
I fondly remember the warm reception we received. Now it is our turn to welcome new members, and I join others before me in welcoming Poland and a neighbor and Pacific friend, Kiribati, as the newest members of the World Bank and the International Monetary Fund.
I would also like to express my cordial greetings to the new President of the World Bank, Mr. Conable, and to thank the host country for the excellent arrangements they have made for our meeting.
Much has happened in Papua New Guinea over the past decade, but essentially it has been a period of construction and consolidation since our attainment of independence in 1975.
As is the case for all members of the international trading community, our economic progress has been determined in large part by external forces. Because we are a very small and open economy, this outside influence is particularly important to us.
A healthy world economy injects vigor and life into all its members. The reverse is also true. It is crucial that recent efforts at international dialogue on the world economy be sustained. Better policy coordination of the wealthy countries is crucial.
The world enjoyed a long period of rapid and sustained growth after the Second World War. But then, the period of the 1970s saw the average GDP growth rate for the industrial countries fall to 2.8 percent a year. This industrial world slowdown was due in part to rising world oil prices.
The industrial economies have themselves only recently clambered out of the 1980–82 recession. This recovery shows signs of faltering. It is vital for all of us that this faltering be forestalled. The industrial countries must continue to intensify their current efforts to invigorate their own economies. This is especially so of the large surplus countries such as Japan and the Federal Republic of Germany.
The developing countries have also felt the pain as world aggregate demand dropped and world commodity and metals prices plummeted. Most developing countries have experienced very poor growth performances in recent years.
In many areas we are still feeling the pinch. For example, the price of copper, a very important export for Papua New Guinea and for many other developing countries, has never recovered to the peak levels of the late 1960s. Nor does it seem likely to do so in the immediate future.
“Times are tough now” is a sentiment echoed in many of the speeches I have been listening to. Papua New Guinea is no exception to that generalization. We too have fallen prey to volatile commodity and metals prices.
If there is one message that I wish to share with the other developing countries, it is simply that we should not expect a recovery by the industrial countries to bring demand for all traditional products back to those levels previously experienced. The demand functions of the industrial countries are continually changing as new goods and substitute products enter the marketplace. Developing countries need to be able to quickly adapt to changing technology and world circumstances, if they are to progress.
Optical fibers and other innovations have cut the industrial demand for copper, and growing supplies of vegetable oils—particularly soya bean and palm oils—have limited the recovery of coconut product prices. Many other products have suffered a similar fate for similar reasons. This “substitution factor” is important because its impact is permanent. Cyclical upswings are unlikely to compensate entirely for these permanent falls in world demand for particular products. This is a reality that many developing nations must come quickly to grips with.
The only viable long-term response to the substitution problem is to develop new products and markets. The new activities will help to compensate for reduced demand for traditional products—the diversification inherent in developing new products will reduce the risks in future. In Papua New Guinea we have been diversifying our export base and exploring avenues for the introduction of new industries.
During the late 1970s and early 1980s some developing countries responded to declining demand for their products by adopting the easy option—borrowing to fill the growing income gap rather than cutting back on imports and generally restraining expenditure.
A large pool of readily accessible funds, largely the product of OPEC oil revenues, and contemporary economic thinking facilitated these countries’ rush toward growing indebtedness. It was believed that, if enough money and capital were pumped in, then these economies would magically “take off” on a path of self-sustaining growth. Now, the repercussions of those overly optimistic days are clearly evident in the debt service ratios of various member developing countries.
The world as a whole must live with the consequences as developing countries face the unenviable task of lifting themselves out of their trough of indebtedness and, in many cases, of persistently low growth rates. Responsibility for the success of these efforts lies with all members of the world economy.
The benefits of any industrial growth continue to be diminished by the onset of the “new protectionism” since the early 1970s. The record of the 1980s continues to be poor, with growing levels of protection evident, especially through nontariff barriers and increased recourse to bilateral sector-specific arrangements.
There are many areas of ongoing controversy. Agricultural assistance schemes applying in the EC, Japan, and the United States are prominent, as are the Multifiber Arrangement and a host of other restrictions in critical areas such as clothing, footwear, automobiles, and other manufactured goods.
Our own position is to support the general liberalization of trade. While it is true that a range of preferential trade schemes exist for many developing countries, we see these as being very much second-best options, often leading only to changes in the direction of trade rather than to increased volumes—and certainly not to increasing competition. We would prefer to compete in a freer system rather than rely on preferential schemes—provided meaningful trade reform can be achieved. Of course, until real changes occur in world trading patterns the question of market access remains important, especially for newly independent states.
In this regard, the recent GATT talks and the role of the international organizations are very important. The proposed new GATT round is crucial for several reasons. First, the talks must call to answer those industrial countries that have failed to honor their obligations under the Tokyo Round with regard to freeing up trade in manufactured goods. Second, the talks must continue the process of reducing the restrictions on agricultural trade. Finally, the talks must make some progress on freeing up trade in services.
We are heartened by the apparent progress made in Punta del Este. However, our optimism is tempered by a realization that much of the developed world has yet failed to implement promises made in the Tokyo Round. We are also frustrated that a four-year time period has been allowed for the proposed talks to drag on.
Let me now turn to questions of aid and resource flows. I would like to take this opportunity to observe that there appears to be a growing reluctance on the part of many donors to fulfill the old goal of contributing 0.7 percent of their GNP to the developing world. This goal seems to have been foresaken, even though it is still written into the political manifestos of many of the political parties currently in government around the world.
Increasing resource flows to the developing world, including aid flows, remains of crucial importance. Disappointment at the lack of progress has produced a general malaise in the developing countries, and aid fatigue in the developed ones.
Some of those who do not want to provide aid for their own domestic reasons are now trying to justify this by inappropriate reference to theoretical concepts, along the lines of the “Dutch aid syndrome.” This argument claims that it is possible to have too much capital clustered in an oversized public sector, leading to excessive wages and overvalued exchange rates among other distortions, thus crowding out the private sector.
Independence from the need for aid is to be preferred. In any case, we certainly favor providing the private sector as much scope as possible to operate. In our view, it is the private sector that ultimately will provide the growth that will alleviate our difficulties. We therefore must avoid any possible adverse effects of aid, implausible though that might seem to developing countries. Those of us who deal daily with massive problems of illiteracy, poor health, inadequate transport systems, and so on, have considerable reservations about the bland application of such all-encompassing theory to our economies.
There are real constraints on our ability to pursue an effective restructuring and growth program.
Even our traditional and generous neighbor Australia is going through difficult economic times. As a result, the Australians have recently decided to cut back substantially on a signed international aid agreement between our two countries. The creation of such uncertainty by wealthy nations has been attacked for years in forums such as this, because of the difficulties implied for good planning in the developing world.
We live in a turbulent world in which we are frequently buffeted by the ebbs and flows of world trade, capital markets, and the policies of industrial countries. This volatility feeds instability and uncertainty into the system. Investors are hesitant and afraid to take risks. Government budgets and business plans are formulated on tentative forecasts of expected export receipts and domestic demand.
Amid this muddle of uncertainties, it is important that other sources of income assistance, such as aid flows, be kept as stable and predictable as possible. There is no argument for tying aid flows to the vagaries of trade cycles in the developed countries.
Direct aid is not the only concern. The institutions also have an obligation and an important role to play. We are concerned at the trend toward decreased resource flows between the developed and developing worlds. We view with alarm forecasts that suggest major institutions such as the Bank and the Fund may shortly reach the stage where they drain more resources from the developing world than they send to it. We face a very dangerous and conflicting future if this trend is not reversed.
The institutions must be provided with adequate resources and their policies must be realigned to allow speedy and productive use of these resources in order to cushion the huge impact of economic and human catastrophe. . . .
We support the Baker proposals put forward last year to increase resource flows to indebted developing countries, in a growth-oriented framework. However, we are dismayed at the slowness in implementing the proposals. We would also like to see more general application to the developing world.
The problems I have outlined in relation to growth, trade, commodity prices, aid, and resource flows are of significant concern to the developing world. However, as the 1986 World Development Report noted, the next five years provide hope for a period of “hesitant recovery” in the world economy, the speed of which will depend on the policies we all pursue.
Lower oil prices, lower inflation, declining interest rates, and currency realignments still provide a potential base for sustainable growth, the prospects for which would be helped by some modest reflation in surplus countries such as Japan and the Federal Republic of Germany. Good budget management and sensible economic policies, combined with the continued generous support and assistance from the Bank and others, will see us through the present period of austerity, to reap fully the benefits of the hoped-for “hesitant recovery.”
We have all experienced the many lessons of history not to make ourselves overly dependent on the whims of the industrial economies—they have their own interests to look after and will often adopt narrow policies to promote these interests. The resurgence of protectionist tendencies throughout the world is a case in point.
International financial relationships constitute something of a partnership in growth between countries. The economically powerful industrial economies are inevitably the leaders in these partnerships. But that is no excuse for timidity or passivity on the part of the developing economies. Good policies, strong economic management, and innovative investments on the part of the developing countries can play a significant role in invigorating the world economy and in turning a hesitant recovery into a dynamic one. We have very little choice and cannot continue to pray for money or hope for generosity from the giants.
Let me now turn briefly to discuss the role of the Bank and the Fund, in the current world climate, and especially their role in my own region of the world.
While we have valued the services of the Bank and the Fund in our establishment phase, the policies of both organizations have not always been conducive to our needs as a small Pacific state. The international organizations and those highly privileged and paid individuals who work for them must develop greater conviction and vision in formulating and implementing development strategies. The capacity for complex theorizing on global, regional, and sectoral issues must be converted into greater understanding of the realities of underdevelopment at the level of nations and individuals.
Specifically with regard to the Fund, many in our region are disappointed that technical assistance previously being provided to central banks seems to be being phased back, apparently because of short-sighted budgetary approaches within the Fund. For many countries which take a prudent approach to managing their balance of payments, the provision of technical personnel has been one of the few contributions the Fund has been able to make to our development. Now that contribution seems to be in doubt. In Papua New Guinea we have been waiting in vain for some years to fill several key positions in our Central Bank.
There are many more Fund issues of general concern to the developing world. These include better surveillance and coordination of the rich, more positive approaches to conditionality and cross-conditionality, and increased resource flows to the developing world, combined with better access to concessional facilities for the smaller states. . . .
Let me conclude with a philosophical but factual testimony of the world all of us aspire to mold. It seems a regrettable fact of life that, in spite of all good intentions, we cannot ever achieve total equality. It appears there will always be rich and poor, at the level of both individuals and countries. Our vision must be set at considerably improving the living standards of the poorest groups, moving them to a higher plane of existence. The fortunes of the rich and the poor are heavily interrelated. If the poor are not kept too poor to prevent them from wanting and consuming the products of the rich, we have the potential to coexist happily together on this planet, despite our natural and obvious differences. It is time to strive toward improved equity and recognition that the abundance of the earth’s resources must be shared. The alternative is bleak.
Statement by the Governor of the Bank for Spain—Carlos Solchaga
As has become the pattern in recent years, we come to these Annual Meetings disappointed by economic developments since our last Meetings.
The optimism that prevailed a few months ago has tended to diminish considerably. It was thought that the fall in oil prices, the downturn in prices of foodstuffs and raw materials, and the depreciation of the dollar would lead, outside the United States, to a rapid strengthening of domestic demand; we were hoping for a fall in inflation rates, more rapid growth of output and employment, and a reduction in the serious external accounts imbalance in the industrial countries; and we were confident that the stronger expansion in the industrial countries would, through increased trade, give the developing countries the relief that many of them so badly and urgently need in the difficult situation they find themselves in.
Yet the summer is over and most of these favorable expectations remain unfulfilled. The Fund, in its excellent World Economic Outlook report, has found itself obliged to revise downward the moderately optimistic forecasts it made in April on real growth over the year in the industrial and the developing countries, and to draw attention to the extreme slowness of the adjustment taking place in international payments.
The report points to a combination of special factors that had an adverse impact on the various industrial countries in the early months of the year. It emphasizes that, in a complex situation in which economies have been reacting to major changes in important variables, the factors with negative effects have tended to make themselves felt before those other factors which, it is hoped, will have positive effects. This is certainly true, and it is thus also true that recent trends in economic indicators cannot be taken as reliable guides to future prospects. It is certainly to be hoped that the effects of the favorable elements will start to become more noticeable in the coming months and that the industrial countries will improve their performance during the second part of this year and throughout 1987.
Nevertheless, only a modest improvement is expected, and it will not be enough to bring about a rapid correction of balance of payments disequilibria in the industrial countries or to provide sufficient external stimulus to growth in the developing countries. Moreover, as the Fund report itself points out, the prospects for improvement are threatened by a number of significant uncertainties and stresses.
The major industrial countries that have completed their basic adjustments are not taking advantage of the opportunity offered by favorable world economic developments to stimulate their recovery and growth. Their positive experiences are the best proof of the desirability of maintaining policies to strengthen their economies, reduce inflation, and increase the flexibility of their economies. Nevertheless, the ground they themselves have gained appears to offer those countries sufficient leeway to adopt stimulative measures without deviating from the basic line of those policies or jeopardizing what the policies have achieved. What is needed is a correction of the United States budget deficit and a strengthening of domestic demand in countries with stable prices, swollen current account surpluses, and currencies under pressure to revalue, so as to speed up a reduction in international payments disequilibria, allay the uncertainties that are discouraging investment and growth, and increase the pace of world economic progress.
We are faced with a problem of coordinating national economic policies so as to take into account their interaction and their international consequences. We can agree on the need for surveillance to facilitate this coordination; we can select a group of indicators to help detect and analyze the problems; and we can design a framework and rules for discussing them. But ultimately, coordination will be possible only if we have the political will to achieve it.
My country’s view is that the desire for coordination is particularly important today and that its expression in a concrete strategy would be beneficial, primarily to the countries implementing it, but also to the industrial world as a whole and to the developing countries, whose growth crisis constitutes, as the Fund has rightly pointed out, the real crisis of the middle of this decade.
We can and we must insist that the developing countries strive to overcome their grave problems by means of policies to rehabilitate and increase the flexibility of their economies, so as to eliminate disruptive distortions, and by means of strategies to encourage export-oriented growth based on the criterion of comparative advantage. But these recommendations will lose much of their purpose if, at the same time, the industrial countries do not facilitate more vigorous growth of world trade by making use of their own leeway for expansion, or if they allow their protectionist policies to hinder the export strategies they are urging on the countries that are being stifled by external accounts difficulties. This year’s magnificent World Development Report prepared by the World Bank, examining the situation and outlook for economic growth in the world, presents a discouraging picture of the advance of protectionism, especially in the sphere of agricultural commodities, and offers an assessment—which we would be well advised to heed—of the major benefits of reducing protectionism in this field, not only for the developing countries but also, and especially, for the industrial countries. It is to be hoped that the new round of the GATT negotiations will be inspired by the desire of the participating countries to check the spread of this grave evil, which is increasingly burdening the world economy.
The fact of the matter is, however, that the adoption of a coordinated short- and medium-term economic policy strategy by the major industrial countries is a somewhat unlikely prospect for the immediate future, and that at best it will be some time before the drive toward greater liberalization of trade bears fruit. In these circumstances, we should use the instruments that are available to us to prevent the world economy from sinking into a deflationary course and to spare the developing countries, burdened by their lack of financial resources, from having to impose drastic reductions in their imports, consumption, and standards of living even when they are willing to implement correct adjustment and growth policies.
Spain thus favors, in the first place, a resumption of SDR allocations in the fifth basic period. At present the world is not experiencing an excess of international reserves and is not threatened by a rise in inflation; on the contrary, the dangers are contraction and deflation, inadequate reserves, and the instability of a system of borrowed reserves. Consequently, we do not share other countries’ resistance to the creation of SDRs. On the contrary, we would support a resumption of allocations during the fifth basic period leading to a modestly higher ratio of SDRs to nonmetal reserves and bringing the ratio in 1991 to a level slightly above that of 1972. We would thereby be fulfilling the mandate of our Articles of Agreement that SDRs be made the principal reserve asset of the system.
For the same reasons, my country feels that in 1987 the present limitations on access to Fund resources should at least be maintained, both under the policy on enlarged access and under the special facilities. The Fund’s present liquidity position is comfortable, and current projections indicate that it will continue to be so in 1987. This confirms us in our opposition to any reduction in the current access limits, which would hamper the Fund’s capacity to play its proper role in the difficult conditions now besetting the world economy. . . .
We take a positive view of the cooperation that has been initiated between the International Monetary Fund and the International Development Association for purposes of carrying out structural and sectoral adjustment programs in the sub-Saharan countries. We are thus pleased that the Structural Adjustment Facility has begun operations with funds from the IMF Special Disbursement Account. We hope that, after the Eighth Replenishment, the Association will rapidly be able to play its proper role in this joint task.
To sum up, Spain wants our two institutions—by virtue of their approaches, their resources, and the criteria and rules for use of those resources—to be in a position to play the important role that is incumbent on them in today’s difficult conditions. It is conceivable that some of the problems we are encountering today would be less serious if an attempt had not been made to reduce this role in the past. But, in the final analysis—and this brings me back to the first part of my statement—action by our institutions can never substitute for the impulse toward growth stemming from a concerted strategy of the major industrial countries that makes for an external environment conducive to healthy economic policies in the developing countries.
Mr. Chairman, allow me to conclude by conveying to Mr. de Larosière our deep gratitude to him for the excellent work he has carried out over the last eight years and for his fine leadership at a time of very serious threat to the international monetary system. Thank you very much.
September 30, 1986.