Opening Address by the Chairman of the Boards of Governors, The Governor of the Fund and the Bank for Spain1, Miguel Boyer

International Monetary Fund. Secretary's Department
Published Date:
November 1983
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It is a great honor for me to be chairing these Thirty-Eighth Annual Meetings of the Boards of Governors of the World Bank, the International Finance Corporation, and the International Development Association and of the International Monetary Fund.

We are meeting once again in this beautiful city of Washington, and I am sure that you share with me the desire to express our gratitude to the President and people of the United States for the courtesy and hospitality with which they traditionally welcome these meetings.

Permit me now, on behalf of us all, to extend our most cordial welcome to the representatives of Malta and of Antigua and Barbuda, which became members of the World Bank during the past year.

World Economic Situation

For almost a decade now the Annual Meetings of the Bank and the Fund have been noting the persistence of a climate of maladjustments and stagnation in the world economy. The opinions stated and the analyses made during these meetings reveal the persistence of one of the most prolonged crises in the history of the world economy—a crisis that has affected virtually all countries regardless of their nature and level of development and regardless of their economic and political system.

The economic recession has directly and indirectly affected all nations and, in the process, has generated effects of unequal intensity and has obliged the various countries of the international community to adopt a variety of approaches, depending on their different adjustment capabilities and the extent of their relative dependence. For this reason, we can detect today, along with clear signs of incipient economic recovery in certain of the major industrial countries, the persistence and even aggravation of the economic difficulties facing many countries, in particular a large number of developing countries. Nobody is unaware that this divergence in the economic development of different zones of the world economy cannot continue for long in a world that has become increasingly interdependent over recent years and that will foreseeably become even more so in the years ahead. Sooner or later, growth or depression will be generalized among the economies of the world. The direction that the world economy ultimately takes will result from the balance between the forces that foster sustained and stable economic growth and greater international cooperation and those that tend to perpetuate the inefficient allocation of productive resources and the present economic disequilibria and to encourage the disintegration of the international economy.

For all of these reasons, this is a particularly delicate moment for the world economy, one that carries with it a special responsibility for all of us who are directly involved in the shaping of economic policy in our respective countries. As I see it, two general principles should guide economic policy formulation in the present circumstances of the international economy:

  • (a) On the one hand, economic growth must be furthered by means which do not simultaneously re-initiate inflationary pressures or external disequilibria that could bring it to a halt at any moment.

  • (b) On the other, and in accordance with the different influence that each country can exercise in determining prices and quantities on international markets, national economic policies and international cooperation must encourage orderly behavior of the exchange markets, create confidence, cooperate toward bringing about greater transparency and promote stability in capital movements, and eradicate the spirit of protectionism now permeating the international scene.

I would now like to analyze recent developments and prospects of the international economy in the light of these two principles.

The adjustment process in the industrial countries

We have to distinguish between those countries which have managed to control inflation and whose balance of payments situation allows greater growth of their economies and the others, which will have to direct their economic policies toward attainment of balance of payments structures that are sustainable in the medium and long term and rates of inflation that are similar to those of their major competitors on international markets.

The first group includes the economies of the major industrial countries, whose economic results determine the main parameters of the world economy. It is heartening to note that economic activity is picking up in some of these countries without, at the moment, endangering what has been achieved in bringing inflation under control. It is, however, obvious that, if the current rate of economic growth in these countries is to be maintained in a lasting manner, real interest rates must be brought down significantly. These countries must therefore pursue an economic policy that is geared toward the difficult task of reducing interest rates without at the same time raising expectations of inflation. To achieve this, more balanced use must be made of monetary and fiscal instruments. Sustained growth in these economies will also require sustained growth in investment. It will not be easy to secure adequate resources for capital formation if, at the same time, the countries are running substantial budgetary deficits that absorb a large proportion of national savings and induce, beyond any doubt, real interest rates that are higher than those needed for a recovery of investment in order to bring us close to full employment. No one can be oblivious of the great responsibility that currently rests on the shoulders of those who determine economic policy in the major industrial countries. Given the current situation, there is a very small margin for drastic downward adjustment in countries suffering from high rates of inflation and balance of payments deficits. These countries, which are bearing the costs of reducing inflation and curbing external deficits in a context of economic crisis and considerable uncertainty, are entitled to expect a positive and lasting contribution from those other countries that have succeeded in reining in the constant rise in prices, that have the resources available, and that are thus in a position to reinvigorate their currently low growth rates through appropriate use of economic policy instruments.

The Spanish economy

Reference to my own country’s experience may serve to illustrate the strategy that should be pursued by countries whose growth is conditioned by control of inflation and correction of external disequilibria.

Our experience parallels in many respects that of other relatively small and open industrial economies. We in Spain found that high rates of inflation are not compatible with stable and lasting economic growth. When the behavior of the economic agents is strongly influenced by pessimistic expectations with regard to the rate of inflation, domestic saving is discouraged and a sizable external deficit is generated. The upshot is that, in economies like ours, as inflation rates outstrip those of our competitors on international markets, economic growth declines rapidly as a result of the deterioration in international competitiveness and, hence, in the external accounts. The economic policy being pursued by the Socialist Government of Spain is accordingly placing great weight on reducing inflation and correcting external disequilibria, as basic prerequisites for increasing the rate of growth of the economy and generating a sufficient volume of employment, which is our fundamental goal.

Given the current situation of the world economy, correction of these disequilibria will necessarily take some time, since it is not enough— contrary to what some simplistic approaches to the economy postulate— merely to slow the rate of growth of the money supply. Attention also has to be paid to the problem of the distribution of resources between consumption and investment and between the public and the private sectors. In any event, the adjustment process will be more difficult and more costly in terms of volumes of production and employment if it has to be implemented in the presence of excessive rigidity in the real returns on the production factors.

Thus, as the difficulties have continued, the conviction has gradually been growing that the present situation can only be overcome through continuous adjustments, resulting from collective efforts and the persistent and credible application of corrective economic policies.

This, very briefly, is the strategy behind the economic policy being pursued by the Spanish Government: to bring about a change in the composition of aggregate demand, moving away from expenditure on consumption to investment and exports while disequilibria persist in the labor market and in the foreign accounts, and to make use of the instruments available to the authorities to ensure that the costs of the production factors are sufficiently flexible to bring about the positive adjustments required and reduce the negative impact of these policies on the labor market.

I would not like to conclude these remarks about my country without telling you that our program is progressing as planned and that—even though it is still too early to draw any final conclusions (the new government has been in office for only ten months)—there is already evidence of a significant decline in inflation, from 15 percent in July 1982 to 10 percent in July 1983, and also of a reduction in the balance of payments deficit. This shows that we are on the right path for implementing the remaining adjustments, so that we shall be in the best possible position to take advantage of the expected revival of the world economy.

The adjustment process in the developing countries

The depressive phase of the international economic cycle has had a particularly sharp and negative impact on the developing countries, many of which have been forced to make sizable and sudden adjustments in their economies. In Latin America, for instance, an area whose development we in Spain follow with particular attention and concern, the volume of national production stagnated in 1981, fell in 1982, and has continued to fall in 1983. As the population of this region is growing by some 2 percent a year and as the labor force is growing even faster, it is obvious that a drop in standards of living of this magnitude cannot be tolerated for very long. These countries have seen a sharp decline in their real terms of trade (this variable has dropped to one of its lowest levels since the Second World War); they have experienced a reduction in the volume of their exports, paralleling the decline in growth rates in the industrial countries; they are feeling the effects of growing protectionist practices of all types that are cutting their market share in precisely those activities which, for these countries, display the greatest dynamism and have the best growth potential; and, last, the rise in international interest rates has increased the burden of servicing their external debt and placed many of these countries in a liquidity crisis to which there is no easy solution.

Correction of the disequilibria affecting these countries will, of course, depend on their national economic policies, but also on the international context in which they have to bring about these adjustments, in other words, on factors beyond the control of the responsible political authorities. The greater the discipline and sense of realism underlying the economic policies pursued by these countries, the smoother and less costly the adjustment process will undoubtedly be. Nevertheless, while the scope for domestic economic policies is not insignificant, it is limited and could almost disappear altogether unless a more pronounced and generalized recovery occurs in the industrial nations than is taking place at the moment. By way of illustration, it has been stated, on the basis of empirical evidence provided by various studies prepared by the International Monetary Fund and the World Bank, that an increase of 1 percentage point in the average economic growth rate in the OECD countries during 1984–86 would bring about an increase of 3.5 percentage points in the average yearly growth rate of exports from the non-oil developing countries. An increase in exports of this magnitude would be equivalent to one third of the cost of servicing the total short-term and long-term external debt of these countries (both interest and amortization) in 1982. These empirical relationships show how important recovery in the industrial countries is for the developing countries and, perhaps even more significantly, how vital it is that the propensity of the industrial nations to import goods from the developing countries should not be reduced further. Growing protectionist pressures are not unrelated to the stagnation and decline in the volumes of international trade over the past two years, and these pressures have had a particularly harmful effect on the developing countries, whose exports are growing at rates far below those recorded in previous years.

The issue of protectionism has grown so serious that I feel it behooves me to stress how much of a real threat it is becoming to recovery and sustained growth of the world economy and, in particular, to the possibilities for progress of the developing countries.

The financial system and international cooperation

As a result of the factors I have just mentioned, the distribution of the burdens involved in the process of adjusting the international economy has been skewed against the developing countries, which are making very considerable efforts to the extent that many of them are becoming exporters of capital. The difficulties these countries are facing have been rendered even more intractable by the sudden shrinking in the supply of capital to them, which has compelled them to make a much quicker and larger adjustment, one that perhaps may not have been as appropriate as it would have been under more favorable circumstances.

It seems to be a constant of history, one which successive developments and reforms of the international monetary system have been unable to modify, that capital flows tend to flood into developing countries in times of prosperity and to recede from them in times of economic crisis. One of the great tasks facing us must be to design stable mechanisms for the creation of liquidity and international reserve assets, even though this is essentially a long-range matter. In the shorter term, stability of the international monetary system requires that sufficient funds be channeled toward the countries that are carrying out rigorous adjustment programs, in order to ensure that these programs can be implemented successfully.

Private markets have been playing an increasing role in international financial intermediation, and their action has helped to lessen the impact of higher oil prices on many of our economies. However, with the benefit of hindsight, we can say that they took on a major responsibility, making up for what ought to have been greater participation by the international institutions and government-to-government transactions. Excessive use was made of short-term borrowing to finance activities that could only produce fruit in the longer term. At the same time, the banks allowed their portfolio of international lending to be excessively concentrated in certain countries and regions, applying less strict criteria in the assumption of risks than they would have in domestic banking operations. All of these factors came together to create a mechanism for the generation and distribution of international liquidity predisposed to erratic fluctuations threatening to the stability of the international monetary system. An orderly transition to viable external debt and balance of payments structures in the capital-importing countries will require, first and foremost, that the private banks be prepared to maintain the minimum flows of financing required and that we should, all of us, endeavor to maintain and increase the flow of concessional funds to those countries.

These financial resources, which are particularly limited under present circumstances, should be channeled to investments that will yield the highest return, and, wherever possible, a balance should be sought between investments that will bear fruit in the short term and those that will require a longer gestation period. The developing countries must assign priority to investment in health and sanitation systems, education, communications, transportation, and other related activities that yield high social returns.

In this process, the international financial institutions have a crucial role to play. Although the President of the World Bank and the Managing Director of the International Monetary Fund will refer to this in greater detail, I would like to remark briefly on the activities carried out by these institutions in regulating the effective use of public and private capital flows channeled from savers to borrowers in the world economy.

The World Bank

I would first like to refer briefly to the special assistance program introduced by the World Bank last February. Drawn up in response to the urgency of the crisis, this program is designed to keep the level of development activities in borrowing countries implementing adjustment policies in their economies as high as possible, so as to reduce to a minimum the impact of the adjustment on their possibilities for future growth. Speedier disbursements and, where appropriate, dialogue on and assistance with suitable adjustment policies are basic elements of the program, which is projected to last for two years.

There is an awareness in the Bank that the gravity of the problems experienced by the developing countries requires an expansion in real terms of its lending program for the years ahead, and it will be preparing suitable proposals to this end. This brings us to the question of the flow of resources. It must be acknowledged that there is a need to strengthen the capital of the institution if we want it to properly carry out its responsibilities as a multilateral development agency. I am confident that, along the lines of the recent Eighth General Review of Quotas of the International Monetary Fund, prompt agreement will be reached on a selective increase in Bank capital in an amount which will be appropriate under the circumstances and which will take into account the current situation of its member countries.

Finally, I would be remiss if I did not mention the efforts the Bank is making to mobilize resources through its cofinancing program and the introduction of new instruments in this area designed to increase the net flow of capital to the developing countries and extend loan maturities.

Next, I should like to stress the special importance for the poorest of the developing countries of the Seventh Replenishment of the International Development Association. It is vital for these countries that negotiations be conducted speedily and lead to an amount of funding appropriate to present circumstances.

I feel I am speaking for all present when I voice the hope that the negotiations under way will be concluded promptly and that their outcome will be an expression of international cooperation and solidarity with the least privileged nations.

In concluding these brief remarks on the World Bank, I should like to state that the International Finance Corporation must persevere in its task of attracting and mobilizing financial and human capital for the private sector in the developing countries. Despite the adverse climate for investment in the current economic recession, we must not lose sight of the fact that the International Finance Corporation’s special features make it an important instrument for mobilizing risk capital and other resources to assist the private sector in the developing countries in these difficult times.

The International Monetary Fund

I should now like to discuss the activities of the International Monetary Fund. The worsening over the past year of the problems of a number of countries with large external debts and the changes that have taken place in exchange markets have required the Fund to step up its activities in general, especially its operations designed to finance appropriate adjustment processes and its supervision of the exchange and financial policies of its major member countries. I shall now discuss actions taken in the first of these two main areas of activity of the institution.

Adjustment and financing

In the course of the financial year ended April 1983, Fund lending in connection with adoption of appropriate adjustment policies by borrowing countries increased greatly over levels prevailing in previous years. As of the end of April of this year, the Fund had entered into commitments to disburse SDR 25 billion in connection with 39 adjustment programs, all in non-oil developing countries. In many of these cases, notably in that of borrowers experiencing liquidity problems in servicing their external obligations over the past year, the financing provided by the Fund had a multiplier effect, forming as it did the base of a sizable pyramid of private financing to those countries. The Fund certainly played a crucial role in tackling the problem of external debt in the past year, and we wish to congratulate the Managing Director, Mr. de Larosière, not only on the way in which he has managed the financial and human resources of the institution but also on his personal involvement in the delicate negotiations on the external debts of the main debtor countries.

We must not, however, fall into complacency, either as a community of nations or as international organizations. The transition toward viable external debt structures has barely begun, and we must monitor the process carefully, anticipating difficulties and developing and applying the preventive medicine needed to minimize the negative effects of probable future disturbances in this area. The efforts undertaken by the Fund during the past year to prevent a crisis of confidence in the international monetary system fall in this category of discretionary measures which, by their very nature, cannot be applied continuously. We fear that the Fund’s resource base may be relatively small for its potential responsibilities in this critical period in world economic history. Thus, ratification of the increase in quotas under the eighth review and the disbursement of funds under the General Arrangements to Borrow ought to be speeded up. The agreement in principle on the limits of countries’ access to Fund resources, reached with such great effort in the Interim Committee, has unfortunately not satisfied all its members. We feel, however, that the agreement may permit a measure of flexibility in its application, such that the developing countries in the worst straits will not find their possibilities of access restricted, thus facilitating their task of adjustment and strengthening the role of the International Monetary Fund. In this connection, very positive note should be taken of the gesture made by the Government of Saudi Arabia, which, by promoting additional financing and offering to provide a substantial proportion of that financing, has demonstrated in a practical way its commitment to the principle of international solidarity.


We are passing through a period of great difficulty which mistakes on our part may aggravate and extend. Nevertheless, in the period that has elapsed since we last met, there is evidence of an upturn in certain economic indicators in some countries which, while still somewhat hesitant, allows us to speak of promising signs of recovery. The return of sustained, noninflationary growth in the industrial countries is the best guarantee for a generalized revival worldwide. The components of effective demand should grow in such a way as to reduce existing disequilibria between countries, and, in particular, the recovery of investment should be encouraged as a means of maintaining noninflationary growth, gradually reducing the unemployment that has built up during the years of crisis, and raising labor productivity and workers’ standards of living.

In any event, many countries still have to complete the needed adjustments to their economies to prepare them for the revival of economic growth. This means that the adjustment process is, by its very nature, a slow process and implies, as the excellent reports prepared by the Fund and the Bank make clear, the need for national policies that endeavor to establish the basic equilibria and speed up the achievement of the targets set in the programs, without yielding to temptations that could illogically distort the international division of labor. On the other hand, the very persistence of the period of crisis, particularly in the low-income countries, is giving rise to limiting situations that must be remedied if we are to achieve a rapid recovery.

The fact of global economic interdependence is being understood more and more each day, and, as a result, true international cooperation and total support for these two institutions with their proven record of utility and effectiveness will be essential if we are to emerge from this protracted crisis, which we all want to leave behind us for good.

Delivered at the Opening Joint Session, September 27, 1983.

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