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Chapter

Concluding Remarks1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1986
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Statement by the Governor of the Fund and the Bank for Bahrain—Ibrahim Abdul Karim

Bahrain is privileged to have been selected for the chairmanship of the Boards of Governors of the World Bank and the International Monetary Fund and views it as an honor for itself and the region.

Bahrain, though small in area, has recently developed as a regional financial market and is therefore not alien to the environment of international cooperation. It is in this spirit that we shall endeavor to carry out the duties of the chairmanship with the same enthusiasm, efficiency, and diligence as that demonstrated by our Chairman for this year’s Annual Meetings, His Excellency, the President of the Republic of Colombia.

I would like to take this opportunity to express our gratitude and admiration for Mr. de Larosière, who will be stepping down from his position as Managing Director of the Fund. He has led the institution through a difficult and challenging period, demonstrating remarkable imagination and skill in addressing the changing circumstances in the world economy and in promoting international monetary cooperation.

I look forward to working closely with President Conable and the Managing Director of the Fund in the coming year and to welcoming all of you to the 1987 Annual Meetings.

Statement by the Chairman of the Executive Board and Managing Director of the International Monetary Fund—J. de Larosière

Mr. Chairman, we have had a week of wide-ranging and productive discussions. We have reviewed thoroughly the problems facing the world economy, and we have identified the policies and actions that must be at the core of their solution.

In reflecting upon the interventions of Governors, I have been struck by two underlying themes. One is that cooperation and co-responsibility are absolutely indispensable for sustaining noninflationary growth, for making further progress on the debt problem, and for improving the functioning of the international monetary system. In today’s highly interdependent global economy, international cooperation cannot be regarded solely as a tool of crisis management. Instead, it has to be an integral element in the design of policy itself. The second theme is that countries can best foster sustained growth by putting in place sound macroeconomic and structural policies and by persevering in their implementation. In a time of sharply changing economic circumstances, some flexibility may be appropriate—but only if that flexibility is consistent with financial stability over the medium term.

In these closing remarks, I shall group my comments under three headings: economic policy in industrial countries; growth and debt in the developing world; and mechanisms of international cooperation.

Economic Policy in Industrial Countries

Governors considered that the progress made over the past few years has been considerable and should not be underestimated: inflation is at its lowest point in two decades; international interest rates have declined conspicuously; exchange rates of major currencies have become better aligned with fundamentals; and the industrial world is now in its fourth consecutive year of expansion.

Still, there is no denying that the current situation is also marked by areas of concern and of uncertainty. The large existing current account imbalances among the largest economies are widely recognized as a source of tension and instability. Unless these external imbalances—and the divergences in financial policies underlying them—are tackled, markets could react in ways that would undermine the strength and sustainability of the expansion. Such imbalances also have the unhealthy side effect of encouraging protectionist pressures. Much attention has also been drawn to the persistence of high unemployment rates and to the slower-than-expected pace of economic activity in industrial countries in the early part of 1986. This weakness of activity was seen as contributing to the sluggish growth in world trade and to further weakening of primary commodity prices. While a number of speakers felt that economic activity would strengthen in late 1986 and 1987 as lower interest rates and terms of trade gains in industrial countries feed through to domestic demand, there was nevertheless wide agreement that the situation contained uncertainties and thus merited close monitoring.

Governors stressed that several actions are needed to place the ongoing expansion on a firmer footing. First, it is essential that the United States carry through with its plan for a major reduction in the federal fiscal deficit. Second, domestic demand outside the United States has to be sustained at an adequate pace. Together, these developments would support the needed correction of external imbalances; foster sustainable growth in the world economy; and prevent too much of the adjustment burden from falling on exchange rates. Third, monetary policy has to steer a careful course. The aim should be to facilitate a needed lowering of interest rates over time without rekindling inflationary expectations. Finally, authorities have to build on their achievements in dismantling structural rigidities. Deregulation, privatization, tax reform, and increased flexibility in labor markets—each has an important role to play. In all this, Governors have been clear that there should be no return to excessive “fine-tuning.” What is required are cooperative actions within the medium-term pursuit of sound financial policies.

Growth and Debt in the Developing World

While acknowledging the significant achievements that have been made in handling the debt problem over the past few years, many speakers noted that the problem has become more pressing since we met in Seoul. The sharp decline in the prices of primary commodities has been the principal factor in the increase in debt-to-export ratios in developing countries and in the downward revision of their growth prospects. The massive transfer of resources from the Third World to the industrial countries caused by recent declines in developing countries’ terms of trade was underlined by a number of Governors. It has created a stringent liquidity situation in many developing countries, resulting in a compression of imports and cutbacks in investment expenditures.

This being said, I was nevertheless impressed with the strong reaffirmation by Governors of two key tenets of the current debt strategy. First, as the President of Colombia emphasized, further progress depends critically on all the major parties pulling their weight. Second, a satisfactory solution is feasible only in the context of sustainable growth in the indebted countries.

A first priority continues to be effective policies in indebted countries themselves. This encompasses sound macroeconomic management on the demand side, and determined structural policies on the supply side. In this connection, I have been encouraged by the strong support for foreign direct investment, trade liberalization, fiscal reform, rationalization of public enterprises, and conversion of existing debt to equity. As I noted in my opening remarks, more than two thirds of the 15 heavily indebted countries mentioned in the U.S. debt initiative have either implemented growth-oriented economic programs or are well on their way to doing so. In this respect, it has been heartening to hear many Governors express the view that the Fund and the World Bank are providing valuable assistance in helping members to design growth-oriented programs, and in mobilizing the finances needed to carry them out. Emphasis was given to the importance of close and effective collaboration between the Fund and the World Bank, although the need to avoid cross-conditionality was also stressed.

This week’s events have brought home in a dramatic way another key ingredient of a successful debt strategy, namely, the active participation of commercial banks. Many Governors regretted the relatively slow response of commercial banks in stepping up their new loan commitments. It is in this light that we can all welcome the agreement reached on the commercial bank financing package in support of Mexico’s adjustment efforts. This is an important example of the parties involved acting together in their common interest. A more adequate pace of new net lending can be fully consistent with prudential considerations when the programs being supported enhance the productive and export bases of the countries concerned.

An improved global economic environment would be of enormous help in managing the debt problem. This was another common thread running through the interventions of Governors. In addition to the policies that I have already mentioned, industrial countries should assist the debt strategy through two other channels. One is by rolling back the array of protectionist measures that have been allowed to proliferate over the past few years. Creditor countries must not ask debtors to adopt outward-looking policy reforms and to honor their heavy debt-service obligations and simultaneously handicap their ability to do so. The second contribution is to facilitate financial flows to the developing countries, including providing adequate official export credits and redoubling efforts to increase official development assistance.

Mechanisms of International Cooperation

As I suggested earlier, an important theme of these meetings has been the importance—I would say the necessity—of strengthening international cooperation. But that theme would have a hollow ring if it were not accompanied by concrete measures to improve the existing mechanisms of cooperation. Three areas merit explicit mention.

The first one is economic policy coordination among the large economies. Coordination of sound policies is vital for promoting growth with stability not just in the countries directly concerned but also in the entire world community. Failure to take account of the international repercussions of policies would lead to overreliance on exchange rate adjustments, which could encourage protectionist pressures and possibly result in recession. In this connection, a more systematic use of economic indicators can play a useful role, although as many Governors emphasized, indicators should not be used as a mechanistic trigger. A constructive start has been made. The guidance we have received this week from Governors will enable us to build on our initial exploratory work on economic indicators, and to enhance the efficacy and symmetry of Fund surveillance. In this respect, I was encouraged to hear that the special chapter on Interactions included in our World Economic Outlook report was considered a good start.

A second major area of international cooperation concerns the role of the Fund in the system. Governors supported the Fund’s central role in the reinforced debt strategy and stressed the importance they attach to the Fund’s advice—-in the context of both Article IV consultations and technical assistance missions. The implementation of the new Structural Adjustment Facility was welcomed, although some Governors felt that its catalytic financing function had to be strengthened. Another welcome development has been the offer by Japan to lend the Fund SDR 3 billion. The agreement in the Interim Committee to leave unchanged for 1987 the enlarged access limits is also encouraging. These developments will help ensure that the Fund is in a position to continue to carry out its mandate. A number of Governors underlined the importance of the upcoming quota exercise. In addition, the role of the SDR as a means of supplementing global liquidity was stressed. Some Governors suggested that strengthening the monetary character of the SDR could facilitate reaching a consensus on an allocation. We shall be continuing our studies on this subject.

The third area of cooperation is in safeguarding the international trading system. As President Reagan reminded us, the Great Depression showed clearly what protectionism brings—nothing is protected, everything is destroyed. The international community must overcome protectionist pressures if it wants to reinstate trade policy as an engine of economic growth and efficiency. It was encouraging to hear speaker after speaker at these meetings reiterate their commitments to the standstill and rollback provisions of the Punta del Éste Declaration. An international framework is now in place to pursue comprehensive trade liberalization. It is time to translate good intentions into action.

* * * * *

In closing, I want to thank Governors for their generous remarks and warm good wishes to me personally. As I take my leave of you, may I offer you and the institution we all serve my best wishes for success in meeting the challenges that lie ahead. I know that the spirit of cooperation, from which I have benefited so much, will be a source of strength to you all.

Statement by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Colombia—Cesar Gaviria Trujillo1

Three days ago President Barco of Colombia opened these Annual Meetings; it is now my privilege to bring these Meetings to a close. I think we can all agree that, at this critical juncture for the world economy, our discussions have been purposeful and productive. I would like to take this opportunity to thank my fellow Governors, the Managing Director of the Fund, and the President of the World Bank for their thoughtful contributions and, personally, for their assistance to me in carrying out my duties as Chairman. I am also grateful to my colleagues from India and Norway who, in their capacity as Vice-Chairmen of the Boards of Governors, assisted me particularly with the process and procedures pertaining to the election of the Executive Directors of the Fund and the Bank.

The heads of our institutions have already reviewed the broad economic issues of concern expressed by Governors in these and other meetings during this past week. I do not wish to repeat these points at this stage. Let me just add that we are all now aware of the major areas where further immediate action is necessary: to develop policies aimed at achieving growth with stability and to promote strong world trade so as to tackle the fundamental causes of the debt problem; to push for increased financial flows—from both public and private sources—to the developing countries; to increase the resources of our multilateral institutions; to resist and roll back protectionism; and, more generally, to create an international environment conducive to the pursuit by individual countries of their economic goals without adversely affecting the performance of others. The basic formulas for success are simple; the challenge is to implement them. Many speakers have focused on the respective roles to be played by our institutions in achieving the goals we have set for ourselves. On the Fund side, mention has been made in particular of the importance for the Fund to continue to play a strong role in carrying out the debt strategy by promoting growth-oriented programs and acting as a catalyst in their financing. Of equal importance is the development in the Fund of work on indicators that can provide a basis for ensuring that the policies and economic performance of countries are consistent and mutually beneficial.

But I have also heard it stressed that the institution must itself provide more resources and must be sufficiently flexible in its application of conditionality to meet the individual needs of its members. For the most part, additional resources will have to come from quotas, and it is fitting that discussions will soon begin on the Ninth General Review of Quotas. Further, I join those who have welcomed the offer by Japan to provide the Fund with SDR 3 billion in resources to enhance its ability to support members’ domestic policies.

The Fund also has the power to create additional resources in the form of SDRs and to allocate them to members. I regret that despite strong arguments in favor of an allocation, and the majority of members pressing for it, the broad support needed under the Articles of Agreement is still lacking.

Regarding the World Bank, Governors have made several points very clear. First, the Bank must continue to pursue its fundamental mission: to accelerate economic growth and alleviate poverty in its borrowing member countries. Second, it must assist member governments in formulating programs aimed at structural changes. In implementing such programs, the Bank ought to take a leading role, particularly in helping to resolve the debt problems. At the same time, it must maintain its role as the world’s premier development institution. It was gratifying that, in his first annual address, Mr. Conable emphasized this historic commitment of the Bank and expressed the intention to build upon its past achievements and reservoir of expertise.

To achieve these objectives, the Bank must be ready to expand the scale and range of its activities and be able to respond quickly to changing circumstances; but it must also be assured of a sufficient resource base. On this point, Governors gave a strong and clear message that the Bank’s ability to play its vital role must not be constrained by a lack of capital.

Concerning IDA, Governors believed it imperative that negotiations on the Eighth Replenishment be completed very quickly now, and at a minimum level of $12 billion.

Another major point underscored by Governors was that the Bank’s capabilities to act as a catalyst for both financial and nonfinancial assistance must be maximized. The importance of private flows to the developing countries was emphasized, as were the important catalytic contributions to be made by the Multilateral Investment Guarantee Agency and the International Finance Corporation.

I would like to take this occasion to express my appreciation to Mr. de Larosière, who has formally announced at our Meetings his intention to resign from his post as Managing Director of the International Monetary Fund. We have been fortunate to have benefited from his guidance during a challenging period for the global economy. I thank him and wish him well in his future endeavors. I should also like to pay my respects to Mr. Conable and wish him good luck in his new undertaking.

Before concluding, I would like again to extend my congratulations and best wishes to the Governor for Bahrain who succeeds me as Chairman of the Boards of Governors. Finally, I wish you all a safe journey home. The 1986 Annual Meetings of the Fund and World Bank and its Affiliates are hereby adjourned.

Delivered at the Closing Joint Session, October 3, 1986.

Mr. Trujillo assumed the chairmanship on the second day of the Meetings and presided thereafter.

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