Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1983
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—Willy De Clercq
It gives me great pleasure to report to you in my capacity as Chairman of the Interim Committee. Before beginning, let me first address a word of thanks and praise to Sir Geoffrey Howe, who chaired the Interim Committee in a very efficient manner at its February meeting. Sir Geoffrey resigned his post as Chairman to take up other duties in the Government of his country. Second, let me say that I regard it as a special honor to have been selected by the members of the Committee as Chairman for the second time. As you know, the Committee has met twice since the last meeting of the Board of Governors in Toronto—first, on February 10–11 and then, two days ago. The principal conclusions of each meeting are contained in the press communiqués issued at the end, and here I shall only touch briefly on some of the highlights.
In Toronto, the next meeting of the Interim Committee was planned for April of this year. In fact, responding to unfolding financial events, the Committee decided to meet two and a half months in advance of that schedule. The main objective of that meeting in February was to bring to a conclusion the negotiations for the Eighth General Review of the Fund’s quotas. It was considered important to accomplish this not only because of the urgent need to increase the Fund’s financial resources, but also to demonstrate to the international community our ability to act quickly and in concert, thereby strengthening confidence. In fact, the February meeting was successful in resolving the remaining outstanding issues concerning the Eighth General Review of Quotas, and the consensus reached was subsequently implemented by the Executive Board. As you know, the process of ratifying the Eighth General Review is under way, and every possible effort is needed to make it effective by the end of the year, in accordance with the timetable established by this Board. The higher quotas, together with the revised and expanded General Arrangements to Borrow and the associated agreement with Saudi Arabia, would strengthen the Fund substantially in its ability to deal with the needs of its members and of the international monetary system.
Meanwhile, in the course of last year, the world economic outlook has brightened in many respects. The protracted fight against inflation, with its heavy toll in terms of lost output and employment, has finally begun to yield the desired results. The long-awaited economic recovery in the industrial world is finally here and seems to be taking hold. Real income in the industrial countries in 1983 is now estimated to be ½ percent higher than our expectations only six months ago. The task for financial policy now is to strengthen the recovery by making it geographically broad-based and to ensure its sustainability over time. While the economic upturn has so far shown encouraging vigor in North America, it has been less robust in the rest of the industrial world. To keep it on the right track, we must consolidate the progress that has been made in reasserting control over monetary and fiscal policies. Abatement of inflation has contributed directly and indirectly to the revival of private demand. Policies likely to arouse inflationary expectations would sap this revival and must be avoided. In this regard, undue reliance on an accommodating monetary policy is likely to be self-defeating. Fiscal action, aimed at a continuous reduction over the medium term in structural budget deficits would contribute to a stable and sustainable recovery by alleviating the possible competition for private financial savings as the expansion gathers momentum. Measures to ease market rigidities and promote structural change in our technological era remain important, and, in this regard, the Committee laid particular stress on the need to resist and as soon as possible to rescind protectionist measures. An open multilateral trade and payments system is in the interests of all countries, especially heavily indebted developing countries for whom adequate market access is essential in their efforts to overcome their present difficulties.
For the developing countries, the situation remains difficult despite the remarkable adjustment effort that they have made and that has enabled their current account external deficit to be reduced from $108 billion in 1981 to an estimated $67 billion in 1983. The burden of adjustment has fallen on imports and economic growth, in the face of adverse export markets, unfavorable terms of trade, and the contraction of capital flows. While further progress is clearly needed for the restoration of viable external payments positions and management of external debt remains a problem for many, the outlook for the future is now much more encouraging than a year ago. This is due partly to the recovery that is now on the way and partly to our reassuring experience with coordinated financial arrangements involving commercial banks, official lenders, and multilateral organizations.
The Fund has played a vital role in bringing about these crisis-management arrangements and has contributed to the solution of the underlying problem by promoting sound, medium-term adjustment programs. It is crucial for the well-being of the international monetary system that the Fund continues to be effective in this catalytic role of promoting adjustment and financing during the present difficult circumstances. It is from this point of view that it was important for the Interim Committee to reach an agreement at its recent meeting on the subject of access limits for the use of Fund resources. In the absence of an agreement, the whole enlarged access policy introduced in December 1980 would have lapsed at the time that the Eighth General Review of Quotas came into effect. This week’s agreement on access has now avoided that result.
The Committee’s agreement on access was not easy to arrive at, as on the main issues there were substantial divergences in the positions held by the membership. These differences can be traced to differing perceptions regarding the intensity of members’ needs for balance of payments finance, the ideal combination of Fund financing and adjustment, and the prospects for the Fund’s liquidity and borrowing possibilities. Given the diverse economic situations of members and the uncertainties inherent in the current world economic outlook, these differences are hardly surprising. It is gratifying that, in keeping with the tradition of the Interim Committee and in spite of strongly held differing positions, a compromise acceptable to most could in the end be agreed upon. It is inherent in the nature of compromises that they are not the ideal solution, and, regretfully, the consensus of the Committee could not be unanimous. However, it is my sincere belief, and certainly strong hope, that the agreement arrived at will serve all of us and the international financial community well.
Let me now summarize very briefly the main points of the agreement. They are as follows:
(a) The policy on enlarged access should continue for 1984.
(b) The level of access limits and the future of the policy should be reviewed annually in light of all relevant factors.
(c) The access limits under the enlarged access policy during the period of extension specified in (a) would be annual limits of 102 or 125 percent of quota, three-year limits of 306 or 375 per cent of quota, and cumulative limits of 408 or 500 percent of quota, depending upon the seriousness of the balance of payments needs and the strength of the adjustment efforts.
Because of the compromise on double limits, potential access in absolute terms will not be reduced for any member of the Fund. Furthermore, the Executive Board will continue to retain the flexibility to approve, in exceptional circumstances, programs in excess of the above access limits.
(d) As at present, the annual and triennial limits should not be regarded as the norm or targets.
(e) The question of access limits under the special facilities has been referred to the Executive Board for consideration at the earliest possible date. In future, these limits are to be reviewed at the time of each review of the enlarged access policy.
(f) The Fund would be particularly mindful in implementing its policies on access of the very difficult circumstances of the small-quota, low-income member countries.
These then are the essentials of the agreement that was reached, and the Committee has requested the Executive Board to take action to implement it as soon as possible.
The agreement was a very positive one. The banking community has now the certainty that the Fund can live up to expectations. As a result, the banks can continue their contribution to the financing of payment imbalances in a constructive way.
The agreement permits the provision of more resources to deficit countries that implement serious adjustment programs. It is, therefore, a compromise where there are no losers but where the international community is the winner and the IMF is given a stronger role in the balance of payments adjustment process.
Let me now turn from the future of access limits after the coming into effect of the Eighth General Review of Quotas to the implementation of enlarged access policy at the present time.
In his report to the Interim Committee on the liquidity position of the Fund, the Managing Director indicated that the Fund is facing a drain on its usable resources and that, in the absence of steps to replenish the Fund’s liquidity, it may become necessary to reduce, at least temporarily, the amounts of financing available to member countries. In the light of these developments, the Committee strongly endorsed the Managing Director’s efforts to arrange additional borrowing from official sources to cover the Fund’s commitment gap and expressed the hope that this borrowing could be successfully concluded without delay.
The Committee also had on its agenda the question of SDR allocation in the current basic period. While most members believed that a resumption of allocations would be appropriate in the present international monetary environment, others were of the view that the case had not yet been made. On balance, the support was not sufficiently broad to permit a favorable decision on allocations. It was agreed that discussions, which could lead to a proposal from the Managing Director for allocations, should be pursued as a matter of priority. I personally very much hope that the necessary broad support for such a proposal can emerge soon.
In concluding, it was agreed to hold the next meeting of the Committee here in Washington, D.C., in the spring of 1984.
Statement by the Governor of the Fund and the Bank for Greece—Gerasimos Arsenis
I have the honor of addressing these meetings on behalf of the member states of the European Communities.
Since last September, the world economic environment has become more differentiated. On the one hand, evidence of an economic upturn has grown consistently firmer over the last months in some industrial countries, especially in the United States, where recovery seems to be quite significant, and there are also prospects for a further abatement of inflationary pressures. The emerging recovery should help slow, if not reverse, the rise in unemployment, which has reached exceptionally high levels in many countries. On the other hand, high interest rates are hampering the investment necessary for a sustainable recovery. True, nominal interest rates have declined considerably from their peaks of 1982, but real interest rates remain high by historical standards.
As far as the Community is concerned, recovery is expected to be rather modest, although the prospects are very different from one member state to another.
At the same time, developing countries exhibit an unsatisfactory growth record, which is attributable to adverse external developments as well as to domestic factors. The Community is also concerned with the severe impact of these external developments on the payments situation of many developing countries, in particular, the effects of the past sharp deterioration in their terms of trade.
External indebtedness has continued to grow in a number of countries while debt-servicing problems have been accentuated. This has been accompanied by a substantial slowdown in the growth of commercial bank lending to certain developing countries. Most of these countries have now recognized that adjustment of their own policies and performance is essential. We welcome the initiatives taken by the International Monetary Fund in providing and helping to mobilize support for these countries, conditional on effective measures of adjustment, and the efforts made by all parties concerned in bringing constructive solutions to individual cases of debt problems. We are also conscious that an orderly solution of debt problems will be greatly helped by an improving world economic environment.
This difficult situation, in both industrial and less developed countries, is further complicated by uncertainties over the future course of world interest rates and by uncertainties linked to the volatility of the dollar, the recent rise of which has adversely affected the terms of trade of many countries. These developments are heavily influenced by financial policies in the United States.
All these difficulties may threaten the sustainability of the present recovery as well as its capacity to spread its benefits worldwide. The Community is endeavoring, in this context, to pursue policies designed to consolidate the incipient recovery.
Interdependence and Economic Policies
The various manifestations of the present difficulties have once again brought to our attention the growing interdependence of our economies, and, thus, the international dimension of national policies.
We are all aware of the fact that the restoration of sustained and noninflationary growth in the industrial countries is essential to complement and enhance the adjustment efforts of debtor countries. At the same time, we cannot underrate the fact that debt-servicing problems cause severe strains in the international financial system and that orderly solutions to these problems, and renewed growth in developing countries, will in turn strengthen the recovery in the industrial world.
It has been part of the European Community strategy to bring these issues to the attention of the world community and to underline the responsibility we all share in selecting our policies. In a period of increased uncertainty, the need for a coherent and harmonized approach to international economic policy is greater than ever.
Accordingly, we welcome the declaration by the heads of state at the Williamsburg summit and in particular the recognition that the principal industrial countries must act together to pursue a balanced set of monetary and budgetary policies in order that the recovery may spread throughout the globe. Where the underlying circumstances have improved, a priority aim of policy should be to strengthen recovery in a noninflationary way and to promote employment.
The cornerstones of international cooperation are effective policy coordination among industrial countries and adherence to our international commitments.
In designing our policies, we should take a more global point of view by recognizing the greater interdependence among all economies; in particular, due consideration should be given to international repercussions of domestic economic policies. In the monetary field, the European Monetary System (EMS) has already demonstrated the potential benefits of such concerted efforts. It has encouraged more convergence in EC member countries’ economic policies and in the implementation of orderly adjustments. The introduction of the System has thus brought more monetary stability, and we hope that this stabilizing influence will spread to the exchange rates of other currencies that have close ties to EMS participants. The EC member states will, of course, play their full role in any discussions that may take place for the improvement of the international monetary system more generally.
Coordinated policies should strive
—to attain a more appropriate fiscal-monetary policy mix so as to counter inflation and permit a reduction in both nominal and real interest rates;
—to secure orderly conditions in exchange markets through the adoption of compatible economic policies, especially by key currency countries;
—to increase productive investment and to adopt positive adjustment policies that will foster the current recovery;
—to reverse protectionist trends, to relax restrictions, and to create conditions for the enhancement of world trade. In particular, it is necessary for developed countries to improve market access to the exports of developing countries. It is also necessary for the latter group to liberalize their own foreign trade as much as possible;
—to strengthen the ability of multilateral financial institutions to assist member countries; and
—to secure continuing and substantial official aid as well as other financial flows to developing countries, the least developed countries in particular.
The Community remains firmly committed to an open multilateral trading system, and despite the present international difficulties it will continue to pursue a trade policy that ensures the openness of its markets.
International Monetary Fund—Related Issues
The IMF has an important role to play in strengthening our efforts to ensure a world recovery and a return to economic stability through surveillance of exchange rate policies and as a source of temporary financing. This temporary financing should aim at promoting adjustment and serve as a catalyst for complementary financial flows from other official and private sources.
In spite of the increased efforts toward adjustment, the balance of payments deficits of many countries remain substantial while the means of financing them have contracted, essentially owing to the reduction in commercial bank lending, particularly to the developing countries. Thus, many of these countries have been confronted with liquidity strains, and this has been reflected in the decline in world liquidity.
The demand for Fund credits has increased sharply while the liquidity of the Fund has deteriorated. We in the Community recognize the importance of the Fund being adequately provided with resources at this time of unusual strains in the world economy. The forthcoming quota increase and the enlargement of the General Arrangements to Borrow (GAB) will constitute a timely and needed strengthening of the resources available to the Fund. The Community member states are taking all necessary steps to ensure that the revised GAB and the quota increase will come into effect in any event before the end of 1983, and we hope that other countries will do the same. We feel that the Fund should remain primarily quota-based and that its revolving character should be preserved.
We are convinced that the successful implementation of Fund-supported adjustment programs by countries that have been confronted with major disequilibria will progressively lead to a better balance of payments situation and smooth out the demand for Fund lending. Still, over the next years, there will clearly be a need to keep the adequacy of the Fund liquidity and the scale of Fund lending under close review. The Community urges all countries to assume their full responsibility in this context.
The countries of the Community contributed actively to the discussions which led to the conclusions of the Interim Committee regarding the continuation of the policy of enlarged access. Although current account imbalances have declined, the world payments situation still makes it appropriate to continue enlarged access for a further period. The conclusions reached take into account the liquidity position of the Fund. They also take into account the borrowing requirements of members and allow increased access depending on the seriousness of their balance of payments needs and on the strength of their adjustment effort.
Conditionality should continue to place adequate emphasis on the improvement of supply conditions and the strengthening of the productive base. The Fund should continue to take into account the economic and social priorities of the countries concerned. The Community endorses the current practice of the Fund as far as conditionality is concerned.
The Community will formulate its position on the advisability of an SDR allocation in the light of the present circumstances and of all relevant provisions of the Fund’s Articles of Agreement. We are of the opinion that this is a matter of high priority.
The Community welcomes the steps taken by the Fund to strengthen its surveillance over members’ exchange rate policies. It underlines the importance that it attaches to an active exercise of the surveillance function in order to promote sound and internationally compatible policies by member countries….
Statement by the Governor of the Bank for France—Jacques Delors
At our previous Annual Meeting, I pointed out that it was imperative to rise to the challenge of the most serious recession of the postwar period, stressing the need to reinforce international cooperation so that we may preserve—and, above all, improve—the stability of the world monetary and financial system, already shaken to its foundations by successive debt crises.
Today, I should have reason for rejoicing: The coordinated action of international institutions, governments, and the banking community has made it possible for the financial system to overcome the gravest risks to its functioning. Second, unquestionable evidence of recovery is building up, particularly in the countries of North America, leading to renewed optimism with respect to world economic growth.
We welcome these positive signs, but we should not ignore the efforts still needed to find the way back onto the path of lasting growth in all countries, and in the developing countries in particular. To this end, it is not enough, I believe, for us to develop international cooperation within the existing framework; we must also rethink that cooperation in order to adapt it to the new pattern emerging in the 1980s.
I. Consolidating and Broadening the Economic Recovery
A number of disquieting uncertainties persist:
—First, while the overall level of economic activity in the industrial countries has improved, the extent of the recovery varies greatly from one country to another. It will take time for some countries, especially in Europe, to find their way back onto the path of growth. The persistence of high interest rates is both a technical and a psychological obstacle to the resumption of investment and to more stable capital flows.
—Second, world trade has not been sufficiently reactivated by the recovery in industrial countries and still has to enter into a new phase of expansion. Yet only the development of international trade and an opening of markets will make it possible for each country in the South, as in the North, to find the support needed to go beyond the necessary adjustment effort and ensure sound and lasting expansion.
—Finally, the current payments imbalances of the non-oil developing countries have, to be sure, been corrected in part thanks to a severe adjustment effort. Nevertheless, their financing requirements remain substantial, while official assistance is no longer increasing. Banks are more cautious, and, by and large, concessional flows from major international organizations are insufficient.
As for continuing the process of rehabilitation, in order once again to obtain margins of maneuver sufficient to encourage production, reactivate investment, and create new jobs, I trust we all agree on these priorities. There is one condition, however, and it is that adjustment must not be achieved at the expense of the future and must not lead to severe political or social destabilization in certain countries. In other words, while the diagnosis is the same, the therapy must be adapted to the specific circumstances of each country.
These remarks are most relevant to the effort requested of the developing countries. But they apply to the industrial countries as well, in view of the need to preserve the foundations of social solidarity and justice.
It is in this spirit that France, doing all it can, has embarked upon a resolute fight against inflation and external disequilibrium, by means of a comprehensive policy encompassing the objective of social justice and the priority to be given to preparing for the future. Our country is achieving this within the framework of an open economy and is willing to work in closer cooperation with other industrial countries, beginning with its partners in the European Community and with the developing countries, in particular those with which it has the closest ties. As regards domestic policy, the initial results are already in: a good start has been made toward reducing inflation, and foreign trade is on the way to equilibrium, thanks primarily to increased exports; finally, investment, the key to the future, is picking up in selected areas in line with the structural adaptation of the productive system.
We must also look beyond the immediate task of adjustment, at home and also, given today’s fundamental interdependence between all economies, in the international field.
This is why we repeatedly reaffirm the general conditions for a sound and lasting recovery:
—a level of interest rates that permits investment and prevents debt payments from being an unbearable burden;
—financing flows adapted to and sufficient for the world economy;
—a significant improvement in the international monetary system.
These are the topics on which we have been focusing and on which this meeting has to concentrate.
The events of the last few years have demonstrated that nothing solid can be built without vigorous and concerted action in these three directions.
Hence, France’s untiring effort, side by side with other countries, to accelerate the indispensable strengthening of the major international institutions and the improvement of the world monetary and financial system.
II. Strengthening the International Organizations
This is no easy task. It is further complicated by controversy as to the respective roles to be assigned to, on the one hand, concerted rules of the game and government intervention and, on the other, the improvement of market mechanisms. It also involves—which is hardly surprising—clear oppositions of interests.
Nevertheless, thanks to the sense of responsibility demonstrated on all sides, steps have been taken. Today, realism as well as vision command us to increase both the speed and the strength of our progress.
The central role of the IMF
Under the superb direction of Mr. de Larosière, whose active and vigorous leadership has won the respect of all, the IMF has succeeded in strengthening its pivotal role in the international monetary system. The Fund is the very expression of the responsibility of our countries and of international cooperation in the face of the seriousness of the present crises: massive indebtedness on the part of the developing countries, unprecedented instability of exchange rates and capital markets, decline or stagnation of world trade.
France has always argued that the Fund should be in a position to develop its financial activities in support of sound and realistic adjustment programs. We must have the wisdom and the will to provide it with the necessary means. Very significant progress has been made since the beginning of this year with the increase of quotas and the enlargement of the General Arrangements to Borrow. We must live up to the commitments made to ourselves and to the rest of the world: to ratify the increase in quotas so that it becomes effective before November 30 next and promptly to activate the General Arrangements to Borrow. Indeed, these were the foundations of the compromise achieved in Toronto last year. I cannot stress too much that the credibility and the future of the Fund are at stake. It is incumbent upon us not to further shake the international community’s faith in the Fund by delays or diversions which bring about an artificial shortage of medium-term resources and short-term liquidity.
The coming months will be difficult ones for the Fund as it seeks to meet many and justified requests for assistance. We will be able, I trust, to devise solutions that will enable it to fulfill its fundamental purpose.
Some are hesitant and stress the need to reduce access to the Fund or, rather, refuse to increase its loans up to a reasonable level consistent with unquestionable needs.
Need I point out in this regard that the improvement in the financial position of the developing countries will, as everyone agrees, be very slow? Does not the IMF expect the aggregate current payments deficit of this group of countries to amount to nearly SDR 70 billion in both 1983 and 1984? At the same time, however, we are witnessing a contraction of the total credit that the commercial banks are prepared to extend to developing countries, a decline of $30 billion in two years. Where will the necessary capital be found? I am for this reason pleased by the agreement finally reached to leave open financing possibilities at least equal, for 1984, to the present possibilities, in the framework of the enlarged access policy. We shall keep a careful watch, on the occasion of the future annual reviews of this policy, to ensure that the situation of the poorest countries and those least endowed with natural resources receives ample consideration.
It is for this very reason, moreover, that France remains firmly in favor of maintaining the compensatory financing facility, and its cereals import complement, which has the undeniable advantage of providing swift support to countries experiencing difficulties. This facility, which represents an emergency oxygen supply for hard-pressed economies, ought only to be changed with caution and as the international situation improves.
Increasing official development assistance
As the resources of the Fund are increased, official development assistance should also be increased. In fact, the marked drop in the developing countries’ export receipts and the halving of commercial bank financing only strengthen the central role of official development assistance, especially for the least developed countries. Unfortunately, this assistance has remained at $35 billion since 1980. In 1982, total public and private resources transferred to the developing countries amounted to $102 billion, while these countries’ debt service burden alone was $131 billion, nearly one fourth of the value of their exports. Such are the facts.
Against this background, the commitment made by the developed countries at UNCTAD VI to make renewed efforts to increase their aid appears particularly important. It is quite true that budgetary constraints reduce the room for maneuver of many countries, but we must hold our course. France, for example, devoted 0.74 percent of its GNP to official development assistance in 1982. For the independent states of the Third World alone, and excluding the effort made under our gas agreement with Algeria, the French contribution increased from 0.36 percent of GNP in 1980 to 0.48 percent in 1982. France is determined to intensify its effort despite its current, and temporary, difficulties. It will continue its effort particularly in favor of the least developed countries, for which category its contribution will reach 0.15 percent of GNP by 1985.
In this spirit, the President of the French Republic has made an appeal to mobilize assistance from the international community for Africa, which, more than ever, appears to be the continent passed over by development. This action would combine increasing assistance to the sub-Saharan countries with the implementation of sectoral strategies concerted and coordinated by countries or groups of countries. This could improve resource allocation through cooperation at the regional level….
III. Improving the International Monetary System
Under the cover of realism, overskepticism and overresignation dominate in the world of those responsible for the functioning of the international monetary system. The opportunities the present situation offers certain countries may also contribute.
Still, no one can deny the adverse consequences of erratic capital movements, of persistently excessive interest rates in the principal capital market, and of unforeseeable and unpredictable exchange rates behavior.
In this unstable environment, European countries are striving to maintain and strengthen a monetary system—the EMS—which guarantees a minimum of stability and predictability to their economies, as a counterpart for implementing the necessary disciplines. This system is certainly not perfect, nor is a full convergence of their economies achieved. But it no doubt deserves better than the exceedingly negative comments made about it in the IMF Annual Report. Unless, perhaps, the Fund’s experts reject all gradual solutions, all progressive improvements in exchange arrangements in line with the evolution of the individual economies?
This is not France’s approach.
In proposing an international monetary conference, the President of the French Republic sought to launch a wide effort of studies and proposals on these questions which are crucial to the world economy. His declaration aroused interest in the industrial countries, as demonstrated by the resolution issued at the Williamsburg summit, and also in the countries of the South, as evidenced by the UNCTAD debates.
We must revert to the spirit of Bretton Woods, within a deeply changed context. What really matters is the frame of mind: we must not resign ourselves to the present disorder and injustice; we must assess the beneficial effects that an improved system would have on the psychology of economic agents, on the functioning of exchange and capital markets, and on the financing of the world economy.
Of course, the conference shall not be held tomorrow. But it symbolizes our aspiration for a more just and more efficient economic order. This prospect should, in the meantime, encourage careful thinking and initiate a progressive movement toward solutions acceptable to all.
To move in this direction, I have personally proposed three areas of study which have been accepted by our partners in the European Community. I shall take the liberty of mentioning them again here, if only to invite discussion, criticism, and counterproposals:
What should be our view on the creation and distribution of international liquidity? For example, is there not an interest to be served in diversifying reserve assets, thereby easing the burden on the dollar and dollar-denominated contracts? This would, I believe, result in exchange rates and interest rates which would more accurately reflect the basic data on economies and would be more acceptable to all countries. To return to a more immediate question, I should add that this is the perspective from which France looks with favor on a special allocation of SDRs.
What is the actual impact of erratic exchange rate fluctuations? What is the effect of the unpredictability of capital markets on the investment and exchange behavior of economic units? To what extent does this lack of predictability reinforce recessionary trends in the economy and prevent the spread of economic recovery?
Finally, and without exhausting the subject, what will be the future role of the International Monetary Fund in the years ahead, which I am convinced will be quite different from the year when the Fund and the World Bank were born? We believe that the International Monetary Fund must not confine its role to helping countries experiencing difficulties with adjustment. It must assume a special, even a central, responsibility in the management of the overall system so that a minimum number of rules of the game are adopted and adhered to by all.
Consideration of these three subjects could serve as a useful complement to the thinking that led to this year’s excellent report on the value of exchange market intervention. The broad outlines of this report have been accepted by seven industrial countries and the European Community. I refer to it because the efficiency and discretion with which this study was carried out show that, where there is a political will to do so, it is possible to muster the intellect, imagination, and energy needed to work toward a better world.
This was the spirit of Bretton Woods, with its content of illusion and hope, to be sure, but also haunted by the desire to avoid any repetition of the disasters of the 1930s. May this lesson of lucidity and courage continue to guide us today.
Statement by the Governor of the Fund and the Bank for Ireland—Alan M. Dukes
While the problems with which we are confronted at these meetings are many and varied, the link that joins them all together is the state of the world economy. I welcome the Fund’s assessment, which accords with the consensus among other international forecasting agencies that a recovery is now under way, but it is not yet uniform across countries, nor is its durability assured. The crucial question is whether conscious policy efforts can support and quicken the pace of recovery to a point that will make any real impression on unemployment. At present, the outlook for the labor market in most countries remains grim, even in the medium term; the economic and human implications of this prospect should never be far from our minds.
Many of the factors that contributed to the depth and duration of the recession have yet to be overcome. Uncertainty still prevails. Both nominal and real interest rates remain high. Exchange rates continue to be volatile. The financial problems of many countries remain serious. Protectionism, fed by these and other difficulties, is as threatening as ever. Any one of these factors on its own could form a serious impediment to sustained recovery. Their existence collectively indicates clearly that the conditions are not yet present for bringing recovery to the point where investment and growth will take off and where the numbers of unemployed can be reduced. We must be honest and admit that the gap between aspiration and action in regard to international policy coordination is a major impediment to progress in solving these problems.
I am glad, therefore, that Mr. de Larosière has addressed these difficulties in a frank and open way. And I think that we must all be glad that this indeed was a major part of President Reagan’s address to us during the course of this morning.
My colleague Mr. Arsenis mentioned this also during his intervention when he outlined the views of the European Community, and I think that, in view of those strands running through discussion here today, we can all be gratified that the intentions and the determination set out by the Williamsburg summit are being taken seriously and have become a major part of the consciousness of policymakers throughout the world.
We in Ireland are fully alive to the need for a clear and coherent international approach. The Irish economy is small and extremely open.
We cannot achieve economic recovery and, at the same time, successfully correct the imbalances in our economy unless the external environment is favorable.
My Government is resolutely implementing domestic adjustment policies. Taxation has been increased and public expenditure restrained, so as to cut government borrowing. Considerable progress has been made in moderating the excessive growth of nominal incomes.
Our adjustment policies have already produced a major improvement in the external balance and a sharp reduction in inflation. The growth of our exports continues to be impressive, especially against the background of depressed world trade. Despite the considerable costs of external debt servicing, we expect the current account deficit to fall to less than 3 percent of GDP this year. This compares with 8 percent in 1982 and 13 percent in 1981. Inflation has come down from over 20 percent in 1981 to about half of that this year.
The policies involved are, however, imposing severe costs on the Irish economy, costs which are being aggravated by events in the world economy. Investment, the basis of our past and future growth, is set to fall for the second year running. Business expectations remain subdued. Unemployment is still rising—it now accounts for about 15 percent of the labor force. If this trend is to be reversed, there must be an upturn in economic activity, particularly in investment. But domestic policies aimed at this can succeed only if there is a rapid improvement in the external environment.
While the immediate plight of many countries is far more serious than ours, we are facing much the same set of circumstances as the vast majority of member countries are today. Most of us have no choice but to pursue restrictive policies in order to reduce budgetary or external imbalances. We have to look to outside influences to improve the environment in which we operate. But since, collectively, we all create that environment for each other, it cannot be improved if all of us, including those in better circumstances, pursue unremitting restriction. Investment is not undertaken for its own sake: it needs the stimulus of expected demand. If policy is generally restrictive, against a background of considerable excess capacity and unused labor resources, it is hard to see where the improved demand expectations are likely to come from. Yet without these expectations, where is the self-sustaining base for recovery?
To my mind, we need a differentiated approach to policy, which takes full account of our close interdependence. I take the view that credible action by those countries with excessive structural budget deficits is desirable, both for its own sake and in order to reduce pressures on interest rates. For these countries, there is no alternative to restrictive policies. In countries where satisfactory progress has already been made in reducing both structural budget deficits and external imbalances, however, it is most desirable that the constricting grip of further restriction be avoided, in the light of the persisting sluggishness of international economic activity. In the final analysis, better coordination between the major countries remains the best—if not the only—means of fostering recovery and avoiding an indefinite relapse into recession.
I have mentioned the problems of high interest rates and exchange rate volatility. Their effects have been pervasive and adverse. While a period of high nominal interest rates may have been inevitable at the end of 1970s, the failure of interest rates to decline in line with inflation has created serious problems. Developing countries have been particularly hard hit by the combination of high interest rates, the strong U.S. dollar, and commodity prices which declined for a long period. In Europe, we have been faced with the dilemma of imposing historically high interest rates on depressed economies or accepting further currency depreciation, with the attendant risks of renewed inflation. A sustained fall in interest rates and greater stability of exchange rates are urgently required.
In the short term, while all countries have a part to play in helping to achieve this outcome, considerable responsibility devolves on the United States because of its dominant role in financial and currency markets. Looking to the longer term, we have now had sufficient experience with the international system of floating exchange rates to draw some conclusions and to seek to make improvements for the future. Ireland, in common with its partners in the European Community, attaches considerable importance to the steps now being taken to see how the system can be improved. There can be little doubt that some aspects of its operation are in need of improvement, but the essential character of the Fund, as a central part of the system, has proved its worth. It is not surprising that the true strength of the Fund has emerged in the face of crisis. The initial rumblings of the debt problem were beginning to be heard at the time of last year’s Annual Meetings. The Fund saw clearly what had to be done, and it carried out its task with precision and effectiveness. The foresight and leadership displayed by the Managing Director, supported by the staff and Executive Board, deserve our profound respect and gratitude.
The immediate crisis has been averted, but we all know that the problem is far from being solved. A further decline in international interest rates is an important condition for a relaxation of current strains. But the debtor countries will continue to need adequate external financial support for some time in anticipation of a recovery in the world economy and a revitalization of world trade.
If the Fund is to continue to play an effective role in providing this support, the policy of enlarged access must be continued. An abrupt reduction would send the wrong signals to the financial markets and could merely weaken the Fund’s role in the adjustment process. This applies with particular force at present, when the Fund is actively encouraging banks to continue lending to developing countries. The discussions on this sensitive issue in the Interim Committee were obviously difficult, and it is inevitable that nobody is entirely satisfied with the outcome. While Ireland was one of those favoring a generous assessment of present needs, we would encourage those whose expectations have been disappointed to accept the guidelines which have finally emerged. The guidelines should, however, be implemented in a judicious and flexible manner and be kept under review, both as regards their financial implications for the Fund and the adequacy of the assistance they provide to countries undertaking adjustment programs.
The international community cannot expect to benefit from the active role taken by the Fund in the debt problem and, at the same time, refuse to provide it with the resources needed for the job. I would stress that we all benefit from the role played in this regard by the Fund. Ireland has already consented to its quota increase under the Eighth General Review of Quotas, and we hope that all other countries will speedily honor the commitments undertaken in February last, so that the Fund can quickly acquire the agreed and essential increase in its resources.
While it is probably difficult to demonstrate conclusively that there is a long-term global need for an increase in liquidity, there has certainly been a break over the past couple of years in the historical trend of liquidity, especially for a considerable number of developing countries. This is due in part to the reduced availability of commercial lending to these countries. This changed pattern of liquidity, the low level of activity in the world economy, and the reduction in inflation in the past couple of years all suggest that a new allocation of SDRs would now be desirable. At present, international liquidity creation depends excessively on developments in the balance of payments of reserve currency countries. It would further rationalize the system if we lived up to our commitment to promote the SDR as the principal reserve asset. An allocation of SDRs during the fourth basic period would be a positive step in this direction….
Whether we are talking about the management of the world economy, the financing of the Fund or the Bank, or the problems of IDA, the basic issue comes back to interdependence. We need to recapture the spirit that inspired these institutions during the early postwar period of renewal. The year ahead will provide a further test of our resolve to do so.
Statement by the Governor of the Fund for New Zealand—R.D. Muldoon
It is usual at meetings such as these for Governors to address the immediate issues of the world economic situation, to discuss the matters affecting the current operations of the Bank and the Fund, and to touch on the relevance of these questions to their own individual countries. I intend to depart from this traditional practice. I do so because I believe there are broader, more fundamental issues which face us today, issues which go to the very roots of the long-term preservation of the world trade and payments system and which also bear importantly on the structure of our international economic institutions.
The present international economic arrangements had their origins in an immediate postwar world which was far different from that which we face today. There were fewer sovereign states, even fewer dominated world affairs, and the largest of these, the United States, generated only a small proportion of its national income by trade with the rest of the world. It was thus not surprising that much of the economic analysis of the 1950s and 1960s was conducted on the basis of models derived from the case of the so-called closed economies. It was perhaps also not surprising that we thought we could compartmentalize the international economy into three separate components: general balance of payments adjustment under the oversight of the Fund, project loans and other aid through the World Bank and its affiliates, and trade issues within the preserve of the GATT.
Times have changed. The domestic management of individual economies is now acknowledged to be much more complicated than was thought in the relatively stable days of Keynesianism or simplistically supposed in the early days of monetarism. Domestic economic policy dilemmas have become more complex, and, for many countries, tradeoffs between various economic objectives have deteriorated. Slow growth, high unemployment, persistent inflation, and external deficits seem too often to be incurred simultaneously. Associated with these difficulties have been the particular shocks of the 1970s and early 1980s: the oil price changes, the deep and lengthy worldwide recession, and the terms of trade decline experienced by most developing countries. Since most economies, including even the United States, have become much more open in recent decades, these shocks have reverberated around the world to an extent never envisaged at Bretton Woods.
As a consequence of this mix of problems, international debt has expanded greatly, to such an extent indeed that many debtor nations and most major commercial banks have overextended themselves. International liquidity is now contracting, despite the urgent and pressing economic problems faced by many countries. To put the matter simply, what all this amounts to is that there has been an enormous upsurge in economic and financial interdependence among a now much larger number of nation states than existed in the 1940s and 1950s.
What should we do about this extraordinary and fundamental change in the international structural situation? First, let me make it abundantly clear that I believe the international institutions, especially the Bank and the Fund, have done a remarkable job in avoiding a collapse of the international trade and payments system. With the help of the BIS, they have conducted a first-class holding operation. Unfortunately, it cannot be said to be any more than this, given the fact that problems are still responded to in an ad hoc manner and given the uncertainties with respect to confirmation of the Fund quota increase, the role of the General Arrangements to Borrow, and the availability of large-scale borrowed resources for the Fund. We are still responding to problems on a case-by-case basis, moving from crisis to crisis. What is clearly needed is a more comprehensive, integrated approach. We must acknowledge that we have on our hands some fundamental structural problems which will not be solved either in the short run or by a series of ad hoc and necessarily partial solutions. I am sure our inability to focus adequately on the present scale of our interdependence and the interrelated nature of the international economic difficulties is partly the result of the separation of the finance, aid, and trade issues into different forums. We have a diverse range of discussion groups and a variety of unlinked international institutional arrangements, but the problems of inadequate international liquidity, enormous debt burdens, exchange rate and interest rate instability, extensive protectionism, a slowdown in aid flows, and uncertainties about the appropriate macroeconomic policy responses to external shocks are not unrelated issues. Indeed, they are inextricably interwoven, one with the other, and they demand a wide-ranging reappraisal. What I am calling for is thus nothing short of a fundamental review of the world’s trade and payments systems. This is not just a question of domestic and international economic policy, it is also a political issue, and it demands a political response in an appropriate political forum. I have been greatly heartened by the extent to which this view has spread internationally since I first raised it more than a year ago. The Williamsburg summit revealed the first glimmerings of hope that the major nations of the world may work toward a new international conference on these issues, and the Commonwealth Finance Ministers’ meeting held last week in Trinidad endorsed the concept with enthusiasm.
The present economic recovery, far from providing an excuse for delaying progress, amply confirms the points I am making. On the one hand, it provides a more suitable backdrop than prevailed a year ago because, first, adaptability is better facilitated in an environment of some growth and, second, the sort of process I am talking about will take quite some time. On the other hand, the slowness with which the recovery is seeping through from the United States to the rest of the world illustrates the urgent need to open up the financial and trade bottlenecks that are now being encountered. This would be as much in the interest of the United States, itself now a more open economy, as it would be in the interest of the world in general and the developing countries in particular. The only way I see of promoting conditions conducive to a long-term, sustainable, and genuinely internationally based recovery is to acknowledge the existence of the structural problems to which I have referred, to formulate an integrated agenda of them, and to set in train the necessary political processes to enable us to carry out a fundamental review of the world’s trade and payments system. The basic fear that the major industrial countries have, and which they are even afraid to express publicly, is that a major conference—a new Bretton Woods, as it has been labeled— would, on a one-country one-vote basis, produce decisions that would be politically impossible for them to accept.
The solution to that problem is simple. The detailed work should be done by working parties based on the grouping system of the Bank and the Fund. We accept that, in our deliberations here; we would accept it as we seek a new mandate to bring these institutions of the 1940s into the 1980s and the twenty-first century. If we fail to do this, we run a high risk of the recovery being aborted or, in any case, of its not being shared by those who need it most desperately. The view that we need a new international conference on these matters is widespread. I hope that it will be expressed by those Governors who agree with the proposal. I believe we can capitalize on this concept and work steadily toward a constructive and unified repair and rebuilding of the world trade and payments system. For every country represented here, rich and poor alike, this proposal is simply enlightened self-interest. We will do this, or something like it, eventually. Let us do it now, while there is still time and before we are forced to do it, as was the case at Bretton Woods, after a disastrous worldwide depression that spared no one.
Statement by the Governor of the Fund and the Bank for Korea—Kyong-Shik Kang
First of all, I would like to join my fellow Governors in welcoming Malta and Antigua and Barbuda as new members of the World Bank.
Last year, the Annual Meetings were held in the midst of a deep worldwide recession and an international financial crisis. There was then widespread concern about a potential world depression. Fortunately, however, the world was able to meet the challenge, and it now seems to have entered a definite recovery phase. The strength of the recovery, nevertheless, remains weak in many parts of the world, and several problems continue to pose serious threats to a sustainable expansion of the world economy.
First and foremost, although many industrial countries profess liberal trade regimes and promise to lower their trade barriers in international gatherings, they are in reality increasingly resorting to protectionist measures, as their industrial activities continue to stagnate and their unemployment levels remain high. Many developing countries are also adopting new protectionist measures in order to cope with their worsening external positions.
Second, continuing high levels of real interest rates and wide fluctuations in the exchange rates of industrial countries are hindering the growth of world trade and the recovery in many countries. At the same time, large fiscal deficits in many industrial countries are rendering policy coordination among them difficult.
Third, the world financial market is continuing its contracting trend, further aggravating the situation. Although the financial crisis that emerged in the summer of last year has been resolved for the moment, its shadow is still hanging over many countries, as their foreign exchange earning capacity is severely limited by the weak pace of the world economic recovery and rising protectionism in industrial countries.
If these problems are not solved in the near future, there is a chance that the economic recovery that has just begun may stall again. Particularly, many developing countries, which depend heavily on the world economy for their growth, will face serious problems.
In this respect, the leading role that the International Monetary Fund has played during the past year in providing speedy and appropriate assistance to some countries suffering from debt problems deserves our high commendation. I sincerely hope that this role of the Fund will be further enhanced in the future in such a way as to ensure appropriate financial flows to countries that seek proper adjustments.
In fact, Korea is a country that has weathered the world recession relatively unscathed, through close cooperation with the Fund and the World Bank. Since 1979, the Korean Government has carried out structural reforms in various sectors of the economy and consistently pursued an economic stabilization policy. As a result, Korea was able to attain remarkable price stability and a significant improvement in the balance of payments, while maintaining a relatively strong momentum of growth in 1982.
The inflation rate dropped from 21 percent in 1981 to 7 percent in 1982 and is currently running at the low level of 3 percent. The current account deficit was reduced to $2.6 billion in 1982, from $4.7 billion in 1981, and the Government expects that it will be further reduced to about $2 billion this year. The country’s GNP also grew by 5.2 percent in 1982, and this year the growth rate is expected to reach 8 percent.
Sustained growth of the Korean economy and improvement in its balance of payments, however, are highly dependent on the continuous and orderly expansion of the world economy, and this is why the Korean Government is particularly concerned about the current international environment. We believe that policy coordination, particularly among industrial countries, should increase and that cooperation between the Fund and commercial banks should be reinforced in the future, in order to improve the world trade environment and financial order.
To enhance the effectiveness of the Fund in such a role, its resources must be increased. In this respect, we welcome the decision made by the Board of Governors early this year to increase the Fund quotas and to both enlarge the size and expand the role of the General Arrangements to Borrow. I am happy to note that my Government has already agreed to the increase in its quota under the Board’s Resolution, and I urge all my fellow Governors to complete the necessary domestic procedures in time for the new quotas to become effective on schedule.
To maintain or further reinforce the Fund’s role in helping the adjustment programs of many member countries, the Korean Government also believes that member countries’ access to the Fund’s resources should not be severely affected by the review of the policy on enlarged access to the Fund’s resources that is taking place. At the very least, we believe that the access limit of individual member countries should not be decreased in absolute terms. In this regard, the Korean Government welcomes the decision made by the Interim Committee yesterday.
As another method of increasing the Fund’s resources, we should seriously reconsider the possibility of allocating additional SDRs to member countries in the fourth basic period. The reserve positions of many developing member countries have recently worsened considerably, while inflationary pressure has considerably subsided in most parts of the world….
Almost every country in the world today is in the process of structural adjustment. Therefore, one is apt to forget the problems of another.
However, the more each country becomes selfish, with its policies based more on narrow self-interest than on a global perspective, the more it will become impossible for all of us to successfully overcome the present challenge.
Let us all remember this simple truth and endeavor jointly to resolve the difficult international conditions that beset the world today.
Statement by the Governor of the Fund and Alternate Governor of the Bank for Japan—Haruo Mayekawa
1. The World Economy
Ten years have passed since major currencies departed from the system of fixed exchange rates and oil prices began their huge increase in 1973. We have managed to weather this stormy decade and now seem, at last, to have reached a position where we can draw on our experiences to chart the way ahead.
Through our experiences during the past ten years, we have learned that no trade-off exists between suppressing inflation and promoting economic growth. Sustainable growth cannot be attained through the continuation of stimulative fiscal and monetary policies. Rather, we need to enhance private sector confidence in economic prospects by pursuing disciplined policies firmly committed to medium-term and long-term goals. We have also learned that an oversized public sector, or excessive intervention in private activity by the government, weakens the vitality of the private sector and thereby deprives the economy of its growth potential. Furthermore, with the growing interdependence of the world economy, we have recognized, more than ever, the importance of maintaining a free and multilateral system of trade and finance through international cooperation.
These lessons have guided us in our current efforts to realize sustainable economic growth. We have undertaken to reduce budget deficits and maintain appropriate control over money supply, so that inflation and inflationary expectations may be suppressed and interest rates brought down. Concurrently, we are seeking to invigorate the private sector by reviewing the regulatory role of the government, so that private economic activity may prosper through a more efficient use of market mechanisms. Also, we are resolved to promote international cooperation to enhance stability in the international monetary and financial systems, as well as to resist the tide of protectionism and promote free trade.
The world economy today tells us that these efforts are finally beginning to bear fruit. On the inflation front, substantial gains have been made since last year, especially in the industrial countries. Even though unemployment remains high in many countries, a trend toward worldwide recovery can be observed, the United States being a forerunner in this respect. Moreover, under current conditions, both the recent fall in oil prices and the upturn in primary commodities markets are expected to contribute to a smooth recovery of the world economy.
Certain progress has also been made on the problem of external indebtedness of the developing countries. The debt problems of certain countries cast dark shadows over last year’s Annual Meetings: if mismanaged, they could have posed a serious threat to the stability of the international financial and monetary systems. However, by determined and concerted efforts by debtor and creditor nations, private banks, and the International Monetary Fund, the crisis was somehow avoided. This proved both the flexibility and the resilience of our international financial system.
Brighter as the outlook may be, we are still in the early stages of securing sustainable growth. What is most demanded of us now is determined adherence to the basic policies that we have been pursuing, and it is only through such action that we can enhance confidence in prospects for the global economy. Above all, it is important that we conduct our fiscal and monetary policies in a coordinated fashion, so that high interest rates and inflationary expectations do not abort a sustained recovery nor crush the seeds of a constructive approach to the debt problem. In this respect, the responsibilities are great for any country that has a significant influence on the world economy.
2. The Japanese Economy
Regarding Japan’s economy, high growth in productivity, flexible adjustment in industry, and a balanced relationship between productivity and wages have together provided the basis for a favorable performance. Every year since fiscal year 1975, Japan has achieved growth rates of from 3 percent to over 5 percent, while annual increases in consumer prices on a monthly basis since 1982 have settled down to about 2 to 3 percent.
On the other hand, extremely large amounts of public debt had to be issued to cope with the economic downturn that followed the oil shocks and to ensure a smooth transition to a moderate growth path. Thus, every year since fiscal year 1975, the general account budget has had to rely on bond issues for over a quarter of its total revenues. It is expected that, by the end of fiscal year 1983, outstanding long-term government debt per capita will reach approximately $4,500, or 12 times the corresponding figure of a decade ago. This is exceptionally high by international standards.
Japan will face growing demands on public finances, reflecting an aging population. Given such projections, it is now paramount that we strengthen our efforts to reduce budget deficits by reconsidering the role of the government and public finance and by conducting a thorough review of expenditures. It is through efforts such as these that we should be able to invigorate the private sector and enhance confidence in economic prospects, the basis for securing sustainable growth. By these actions, Japan hopes to be able to contribute to the development of the world economy.
In accordance with these principles, we have been conducting an overall review of the role of the government in order to realize a streamlined and efficient government and have been continuing in-depth reviews and retrenchment of expenditures.
Japan’s economy, after growing by 3.3 percent in real terms in fiscal year 1982, mainly on the strength of domestic demand, is currently maintaining a moderate pace of recovery. Fostered by medium-term and long-term efforts for administrative and fiscal reform, together with continuing price stability, lower oil prices, and a world economic recovery, a further improvement in the economic environment is expected to result in the Japanese economy’s consolidating its sustainable, domestic-demand-oriented growth. This year’s real growth is expected to be about 3.4 percent.
Turning to the balance of payments, Japan’s current account swung back into surplus in 1981 after the elimination of its previous large deficit. With the fall in oil prices and the weak yen-dollar rate since last year, the surplus has continued to grow rapidly in recent months. Meanwhile, Japan has been contributing to the smooth development of the world economy by continuing stable exports of long-term capital.
Needless to say, we do not intend to accumulate excessive current account surpluses; the Japanese Government will continue its current efforts to maintain a harmonious economic relationship with the rest of the world. Meanwhile, we expect that sustained growth led by domestic demand, as well as the series of measures already taken to further open up our markets, will gradually have a visible effect on our imports. In addition, the Government is now considering what further measures can be taken to augment our policy effort along these lines.
I should like to point out that the recent increase in our current account surplus is due mainly to factors beyond our control, such as the fall in oil prices and a strong dollar caused by, inter alia, high interest rates. It is, in this sense, impractical to expect a dramatic reduction of this surplus solely through unilateral efforts by Japan.
The yen’s exchange rate vis-à-vis the U.S. dollar is being strongly influenced by such factors as widening interest rate differentials, to the extent that its recent movements do not seem to justly reflect the favorable state of Japan’s “fundamentals.” This has reduced maneuvering room for monetary policy, in that we must pay due attention to interest rate differentials while conducting policy in a manner consistent with the aim of securing sustainable growth. Japan wishes that the yen appreciates on the strength of its favorable economic performance, not only for reasons of balance of payments adjustment, but also in view of stable prices, higher real income, and greater freedom in economic policy that would accompany a stronger yen.
3. International Cooperation
An open and multilateral system of trade and a free and stable flow of capital are the two elements in international transactions that are essential to ensuring a sustainable, noninflationary growth of the world economy. The multilateral system of world trade has been basically preserved intact, despite the extremely high levels of unemployment and the stagnation in world trade in recent years.
Nonetheless, the trend toward increased adoption of protectionist trade measures and domestic barriers to trade is ground for serious concern. Now that the outlook for the world economy is brightening, we should all abide by international agreements which call for efforts to avoid the establishment of new protectionist measures, as well as for efforts to ease or dismantle altogether restrictive trade measures—and those domestic measures with comparable protectionist effects—that have been adopted in recent years.
Despite the worldwide trend toward protectionism, Japan has been taking a series of measures to open her markets by unilaterally lowering her tariffs, simplifying import-testing procedures, and relaxing standards and certification requirements. Through such measures, we have increased export opportunities for foreign countries selling to Japan.
The promotion of free and stable capital flows contributes to the healthy growth of the world economy by ensuring more efficient international use of resources. Japan’s capital transactions vis-à-vis the rest of the world have increased enormously since the full revision of the Foreign Exchange and Foreign Trade Control Law in 1980. We expect that Japanese capital will be utilized even more actively in the future, through both a steady flow of direct investment and fund raising on the Japanese capital and financial markets.
Experiences during the past year have taught us that the only realistic approach to the debt problem is for all concerned to resolve their divergent interests and cooperate in concerted action. Japan recognizes the importance of international cooperation and has joined in equitable burden sharing, be it for official credit or commercial loans.
Recently, there have been improvements in those factors which have aggravated the debt problem: world trade is recovering, debtor nations’ terms of trade are improving, and interest rates are lower. Nevertheless, the huge indebtedness of certain countries still remains as a potential source of disruption in the international financial and monetary systems. A serious and careful approach is still needed in which international cooperation plays a central role. It will still take considerable time before the situation returns to normal.
In this connection, first, debtor nations should make appropriate economic adjustments to realize an appreciable reduction in their current account deficits. This could be done in consultation with the International Monetary Fund or other international organizations where necessary. Such efforts are essential to restore confidence in the future resolution of the debt problem.
Second, the industrial countries, for their part, must work to expand export opportunities for debtor countries’ products by ensuring sustained growth of their economies and improving access to their domestic markets. The policy efforts to lower interest rates in the industrial countries are also most important in view of the effect this would have in lightening the burden of debtor countries.
Third, private banks are expected to continue extending credit to debtor countries. They should take a longer perspective in their lending policies, at the same time not neglecting the need for prudent management. It is of utmost importance that we persevere in our comprehensive efforts to realize a step-by-step solution to the debt problem. Japan intends to continue to participate fully in coordinated international actions.
In recent years, the International Monetary Fund has played a pivotal role in promoting international cooperation toward realizing noninflationary sustainable growth, as well as toward formulating an appropriate response to the debt problem. It has done so by its functions, including surveillance, and by its effective use of funds bearing conditionality. These accomplishments are greatly appreciated. We hope that the Fund continues to perform such a role effectively through close dialogue with member countries.
In this respect, we welcome the recent decisions with regard to the Eighth General Review of Quotas and also the revision and expansion of the General Arrangements to Borrow, which together strengthen the financial base of the Fund. We hope that these decisions will soon be put into effect. The Japanese Government has submitted a bill containing the necessary legal amendments to the Diet session convened earlier this month and hopes to obtain early passage.
4. Improving the International Monetary System
Looking back on a decade of experience with floating exchange rates, we believe they have played a positive role in absorbing external shocks and restoring equilibrium to the economy, although not to the extent that was expected in certain circles. Exchange rates have moved to adjust current account imbalances, even though the adjustments have tended to be protracted. Moreover, it would have been impossible to maintain the functions of the foreign exchange market in the face of such large external disturbances as the oil shock under a system of fixed exchange rates.
However, it is also true that the shortcomings of floating rates have become apparent with the marked increase in international capital transactions. These include the disturbing effects of exchange rate volatility on international transactions and the determination of exchange rates at levels inconsistent with balance of payments adjustments. In particular, the continued prospects of high interest rates in a key currency country have brought these faults into closer focus.
A further convergence of economic policies aimed at noninflationary, sustainable growth is a fundamental prerequisite for achieving stable exchange rates. In this respect, closer cooperation among major countries following internationally agreed upon arrangements is essential.
We do not believe that a solution capable of supplanting the floating rates system or eliminating its shortcomings can be found given the current international economic environment. A more realistic approach would be to maintain the present system of floating rates and to seek to improve management of the system in response to changing economic conditions. It is hoped that an empirical rule for stabilizing exchange rates will evolve gradually through such a process. Japan welcomes the recent series of international agreements along these lines. We believe that the recent multilateral intervention by Japan, the United States, the Federal Republic of Germany, and others has been a valuable step in that it implements coordinated action in the area of intervention.
5. Development Finance
Japan has been making strenuous efforts to steadily expand economic cooperation, with a view to assisting the self-help efforts of developing countries, and thereby contribute to the development and stability of the world economy. Our national budget is, on the other hand, in strained circumstances. Consequently, it has become increasingly important for us to identify truly needful projects for the economic development of recipient countries and to extend our aid in the most efficient way. With these considerations in mind, we will continue our best efforts to strengthen our economic cooperation….
6. Concluding Remarks
Japan recently formulated the ‘Outlook and Guideline for the Economy in the 1980s,” which lays down fundamental guidelines for Japan’s economic policy during this decade. The Guideline sets the “construction of a creative yet stable society” as a goal for the Japanese economy and society in the 1980s. To this end, the Guideline stipulates that Japan pursue her critical task of administrative and fiscal reform, proceed in the direction of a new pattern of growth aided by an increasingly sophisticated industrial structure, utilize and support the role of private sector vitality, and promote international cooperation.
As I have suggested in my statement today, our most important task is to learn from our experience in the turbulent 1970s and establish a robust framework for international cooperation. The Guideline, in this spirit, maintains that the 1980s should be a “period for the quest of a stable order” for the world economy.
Compared with last year’s Annual Meetings, we are in a better position today as regards inflation, economic recovery, and the debt problem. We are gaining ground in our quest for the reconstitution of a stable world economy. On the other hand, problems still remain in quenching inflationary expectations, stabilizing exchange rates, containing protectionism, and achieving adjustments in developing economies, to name but a few. Even though the prospects for the world economy are becoming brighter, it is essential in view of current conditions that we persevere in our efforts for gradual improvement. This requires a steadfast commitment to policies that may at times prove unpopular.
I am convinced that, through our efforts in many fields over the coming year, we will be in a position at next year’s meetings to perceive more clearly the outline of a stable world economic order.
Statement by the Governor of the Fund for Italy—Giovanni Goria
The International Economy
The Annual Report of the IMF, while noting the signs of improvement of the international economic situation, also clearly describes the elements of weakness in the ongoing recovery. In the United States and in Canada, output growth is stemming mainly from consumption and inventory demand, while the recovery in investment activity is lagging; in Japan and in Europe, growth prospects remain modest. In many countries, the recent improvement in external balances stems mainly from the decline in domestic and import demand, thus reflecting only in part an easing of the external constraint. Unemployment everywhere is almost dramatically high; the possibility of significant improvement in the near future is scanty and, in fact, in many instances nonexistent.
Within the context of these elements of weakness in the economic recovery, I wish to discuss a central aspect for the assessment of international monetary conditions in 1983, an aspect that can determine economic effects of varying size and intensity in the United States, in the other industrial countries, and in the developing countries: the high level of real interest rates.
There is no doubt that real interest rates are well above the return on investment and, hence, are creating a strong deflationary impact together with a massive redistribution of resources from productive to financial investment. How many entrepreneurs, even the best among them, are willing to risk their money to buy capital goods when they are convinced that they can make more money by placing their wealth in treasury securities and bank deposits?
I do not want to examine in detail the causes of the present level of interest rates: we know most of them. However, it is certain that the overvaluation of the dollar, which has de facto accompanied high interest rates, has transmitted important, though diversified, effects on all countries. The benefit of a more rapid disinflation in the United States, which is also felt internationally, was achieved at the cost of larger imbalances and in many instances higher inflation in the other countries, which were then forced to adopt more restrictive economic policies than would have otherwise been necessary. Furthermore, an overvalued exchange rate, by increasing import penetration on U.S. markets, generates the risk of protectionism, which can only delay recovery. On another front, the overvaluation of the dollar has also induced a decline in primary product prices relative to those of finished goods, thus worsening the situation of less developed countries. In each of these cases, there is the potential risk of a conflict of interest between the United States on one side and the other industrial countries and developing countries on the other.
The costs of an overvalued dollar are, therefore, not only reflected in the distortions of international trade flows but also and above all in the effects of exchange rate oscillations on other countries’ prices and costs.
The success of U.S. economic policy in reducing inflation can, in a sense, be considered the outcome of an implicit loan extended to the United States by the primary goods producing countries and by those countries whose currencies have depreciated vis-à-vis the dollar. Should the dollar return to more realistic levels, this implicit loan would have to be paid back and the depreciation of the dollar would then rekindle inflationary pressures.
These considerations are not intended to express, in a sterile way, a concern that is strongly felt. Indeed, my own country would not even be the most qualified to do so! I know all too well that the same problems affect, in a very different way, industrial countries and the developing nations. For us, or at least for some of us, the problem is one of maintaining the expectations of growth. For the weaker countries, or at least for many of them, the problem is one of a further, progressive deterioration of standards of living. The recollection of the grave problems confronting us leads me to emphasize the need for a commitment on the part of the stronger countries to adopt policies that continue to aim at the reduction of inflation but that, at the same time, lay the ground for a sustainable recovery and avoid further pressures on exchanges rates. A first fundamental course of action, where we will all have to test the consistency of our intentions and behavior, is that of international cooperation, which will have to be pursued with greater determination and resolve than in the past. Furthermore, it is important that the countries where inflation has been brought under control do everything in their power, and I mean everything, to stimulate economic activity, in particular investment. In some of these countries, for example, the uncertain prospects of domestic demand growth and the emergence of large surpluses in current balance of payments point to the opportunity of avoiding too rapid a reduction of public sector deficits.
Finally, it is essential that the United States succeed in adopting a mix of fiscal and monetary policies which, by easing tensions on financial markets, will lead to a strengthening of recovery and reduce the external debt burden of developing countries.
However, beyond the strong commitment to international cooperation, it is essential that each of us plays his own role in terms of domestic economic policies before embarking on the search for an external cause of internal problems. If it is true that the present regime of flexible exchange rates, contrary to widespread expectations, has not dampened the transmission of cyclical fluctuations, it is necessary that countries that have a high degree of openness to foreign transactions adopt economic policies that will enable them to shield their economies from the effects of deflationary impulses of an external origin. I refer, in particular, to the adoption of incomes policies which, by reducing the effects of exchange rate movements, make room for an improvement in employment. To those who argue—with some reason—that such policies often result in distortions and inefficiencies in the allocation process, it must be answered that the social and political costs arising from the present unemployment levels are far more severe and dramatic.
Let me say a few more words on the international financial situation. On world markets, the acute tensions of a year ago have somewhat abated, although many countries have had to reschedule their external debt obligations, being unable to meet their commitments. The Fund in this regard has played a central role in restoring stable conditions and confidence in a severely shaken market, on the one hand, by promoting the adoption of severe adjustment programs and, on the other hand, by providing private banks and creditors with a valuable assessment of the economic situation of debtor countries, thus ensuring the maintenance of private financing flows. However, we are still far from a lasting solution to all these problems. Despite the adjustment programs so far introduced, for many developing countries the ability to generate resources through exports is not sufficient to meet the external debt burden, given the present levels of interest rates and the projected growth of world trade. Moreover, the growing perception of sovereign risk by private capital markets will continue for a protracted period to weigh negatively on the ability of LDCs to obtain fresh financing, thereby making the external constraint more stringent. The recovery of economic activity in industrial countries, the decline of interest rates on international markets, and the increased flow of financing to LDCs through official channels, in particular multilateral financial institutions, are the prerequisites for maintaining financial stability in the immediate future and for allowing the recovery to spread to developing countries as well.
The Italian Economy
After two years of stagnation in economic activity, the Italian economy has entered into a phase of recession. Unemployment stands now at over 12 percent of the labor force. At the same time, the progress realized in the adjustment of internal and external imbalances has been far too modest to warrant hopes for a rapid recovery.
If the growth of employment remains our fundamental objective, inflation is the most important impediment: for the current year, the inflation rate is expected to be about 15 percent, only marginally lower than a year ago and well above the levels of other industrial countries. The evolution of domestic costs and the various forms of indexation of nominal incomes are still incompatible with a rapid slowdown of inflation. The improvement recorded in the balance of payments current account is mainly a reflection of the fall in domestic and import demand. The external constraint thus continues to mortgage heavily the chances of a recovery of domestic demand.
The central problem of an anti-inflationary policy is how to regain control of the evolution of government spending and to contain the treasury deficit, which will amount this year to about 16 percent of GDP. The Italian Government is currently preparing a series of measures to reduce public expenditure and to raise additional revenues. It is, however, important to underline that the objective of limiting the public sector deficit, which is mainly a problem of domestic origin, is largely affected by developments in international financial conditions. A relevant share of the public sector deficit originates in interest payments on outstanding debt, and domestic interest rate trends are bound to reflect those prevailing on international markets. The Italian Government is committed to the significant reduction of the structural component of the public sector deficit. In this connection, it is worth recalling the role that an effective incomes policy could also play in the containment of public expenditure.
The conduct of monetary policy remains strictly dependent upon the evolution of the treasury financing requirement and the success in reducing inflation. In such circumstances, the monetary authorities aim, on the one hand, at containing the growth of lending to the private sector and, on the other hand, at maintaining a high propensity to save in financial assets on the part of households, while trying to channel saving toward longer maturity assets. Consistently with such objectives, the decline in interest rates—about 2 percentage points since the beginning of the year—has been kept within the limits of the deceleration of inflation. The possibility of further decline is linked to the evolution of real interest rates on international markets and to the pressure exerted by the treasury financing requirement on the growth of total financial assets.
The mechanisms for the management of international liquidity also show weaknesses and imbalances; after a period of excessive creation, we seem to be headed now for a crunch. In both instances, the evolution of international liquidity was determined much more by the stance of monetary policy in major countries, reflecting purely domestic considerations, than by the needs of trade and of the international adjustment process. The issue of improving international liquidity management and control remains unresolved.
For the immediate future, it is our opinion that recent developments in international liquidity and credit flows from international markets could justify a resumption of SDR allocations. In the medium term, ways should be studied to expand the role of the Fund in the creation and control of international liquidity. The SDR, as a monetary standard largely independent of monetary developments in individual countries, can become the vehicle of these functions. Exclusive use of the SDR in the Fund’s lending and borrowing operations could represent a first step in this direction.
The Fund and the World Bank should be enabled to perform their fundamental role in preserving world financial stability and promoting structural adjustment. To this end, it is crucial that these institutions command adequate resources.
After the agreement earlier this year on the Eighth Review of Quotas and the revision and enlargement of the General Arrangements to Borrow, it is essential that the national ratification procedures be completed as soon as possible. In Italy, the draft bills for these decisions have already been approved by the Government and are now before Parliament. We hope that they can be approved before long.
The balance of payments situations of many Fund members justify, in our opinion, a continuation of the enlarged access policy after the Eighth Review of Quotas. This judgment is strengthened by the good results the Fund-supported adjustment programs are producing in many countries. Furthermore, at a time when private credit flows for balance of payments financing are shrinking, the availability of larger financing from official channels becomes an essential condition for the very viability of those adjustment programs. Therefore, a concerted action by industrial countries to strengthen, over the next years, official assistance to developing countries through both bilateral and multilateral channels of financing, is urgently required. In particular, the capital base of the World Bank and IDA should be rapidly and substantially increased if we want to avoid the curtailment of the real flow of resources through these channels. While keeping in mind financial constraints of donor countries, an acceptable compromise can and must be found to allow international institutions, more specifically those focusing on development issues, to perform their fundamental functions.
Compared with only a few months ago, world economic and financial prospects have improved, lending support to our conviction that we will be able to move the world community toward a new phase of sustained growth. This is the answer we owe to our youth, who more than any others have suffered the consequences of protracted stagnation.
All this, however, will not happen by chance, but only if we are able to bring it about with our decisions, our intelligence, and our awareness of the interdependence of the world economy, in a world such as ours which, in the long run, cannot tolerate the building up of someone’s fortune upon someone else’s adversity.
Statement by the Governor of the Bank for Israel—Moshe Y. Mandelbaum
As has already been noted in our deliberations, following a protracted recession which may yet cast its shadow on economic development for years to come, some signs of economic recovery are now apparent. These signs, however, are confined to a limited number of developed countries, while the economic outlook for the overwhelming majority of developing countries continues to be bleak.
Under these circumstances, we believe that the Bank and the Fund can, and should, play an important role in turning the existing momentum into sustained growth to be shared by all, developed and developing countries alike. Revitalization of the world’s economy is a huge task; the Bank and the Fund can contribute to it by expanding international liquidity, combating trade barriers, mobilizing financial resources essential to development programs, and stimulating investment in both the public and the private sectors.
Faced with severe inflationary pressures, Israel has sought to mitigate their ill effects upon the economy through a system based upon indexation of both wages and financial markets. For its exchange rate, as noted in the Fund’s Annual Report, 1983, it has adopted a “crawling peg” system. While this is preferable to the fixed exchange rate approach, it cannot replace the use of appropriate monetary and fiscal measures required to curb inflationary pressures themselves.
In order to reduce inflationary pressures and the current account deficit, in the last two years Israel has undertaken fiscal measures which have led to a decline in excess public domestic demand, from 16 percent to 9 percent of gross domestic product. Recent government decisions on budget cuts should decrease it still further. The reduction in fiscal deficits has been complemented by restrictive monetary measures so that credit to the public has been reduced by 13 percent in real terms since the beginning of the year.
While facing three-digit inflation, Israel continues to maintain a 4 percent level of unemployment, far less than half the world average. Our deep concern for the socioeconomic implications of high unemployment has been and will continue to be the linchpin of our policies. Furthermore, while fixed investments in developed countries declined by some 3 percent last year, they increased in Israel by 5 percent, particularly in the infrastructure of science-based industries, which are playing an increasing role in our exports.
In terms of the world economy, the past decade has been, to say the least, an eventful one. Within a relatively brief time span, major changes have taken place in basic economic interrelationships once regarded as immutable.
In these difficult circumstances, the Fund has shown commendable ability in aiding its members to cope with structural balance of payments problems. Equally, we believe that it is important that the Fund not retreat from one of its additional roles, namely, maintaining facilities which aid members faced with shorter-term, unpredictable balance of payments difficulties owing, at least in part, to factors beyond their control.
The progress which marked the 1960s and the 1970s will, regrettably, be a thing of the past in the developing world as long as the current world economic situation remains basically unchanged. As a consequence, numerous socioeconomic programs that are vital to development and the alleviation of absolute poverty have ground to a halt….
The bleakness of the economic outlook for most of the developing world is increasing the demands being placed upon the resources of both the Bank and the Fund. It is therefore to be hoped that the implementation of the Eighth General Review of Quotas will proceed on schedule and that it will be followed without untoward delay by a replenishment of the Bank’s resources as well.
In closing, I would like to say that we see it as the duty of the developed countries, and very much in their own best interests, that the Bank and the Fund, so ably led by Mr. Clausen and Mr. de Larosière, be provided with the means necessary to foster sustained growth and financial stability in the world economy.
Statement by the Governor of the Bank for Thailand—Sommai Hoontrakool
It gives me great pleasure to address the joint Annual Meetings of the Boards of Governors of the Bank and the Fund. At the outset, may I congratulate you, Mr. Chairman, on your most prestigious assignment. I sincerely hope that your profound experience and personal influence will guide the deliberations of this assembly to a constructive and fruitful dialogue.
It is encouraging to see that the world economic recovery which was previously anticipated to materialize in 1982 has now begun to emerge. This is attributable mainly to the success of major industrial countries in keeping inflation under control. Nevertheless, the growth of private investment remains on a modest scale and the serious problem of unemployment still prevails. For economic growth to be sustained, it is important that the adoption of a policy stance in leading industrial countries be well coordinated and that further efforts be directed toward structural adjustments, particularly in the areas of the labor market and budget deficits.
There are worrying signs, however, that the protracted fiscal imbalances of the United States, the strengthening of the U.S. dollar, and rising interest rates could impede the long-awaited recovery. Should this recovery turn out to be short-lived, the plight of developing countries will be intensified further. Even if this pessimism were to be set aside, the current outlook facing these countries is still not much more encouraging. The protectionist attitudes and policies of industrial countries, together with the commodity price slump, have sharply reduced export earnings and have exerted further strains on the current account deficits and the deteriorating external debt burden situation of developing countries, particularly the non-oil exporters.
In the period ahead, credits from the international banking circle will be scarcer, as sovereign debts have become much less attractive with sporadic debt reschedulings. This alarming development is most harmful to the already fragile international financial system.
At such a difficult juncture, the Fund has to play an active role to ensure the viability of the global financial setup. The inadequate increase of the Fund’s ordinary resources under the Eighth General Review of Quotas has forced the Fund to consider reducing the present maximum limits on the enlarged access to Fund resources so that most member countries will be able to draw significantly smaller absolute amounts under the new quotas. This bleak prospect should demonstrate that the Fund needs more liquidity through a fresh allocation of SDRs in this fourth basic period and the accelerated ninth quota review. Another regrettable development is the move to tighten the conditionality and reduce the access to special facilities, namely, the compensatory financing facility and the buffer stock financing facility. This development is most alarming when financing from private sources is being curtailed.
We need not be reminded that the severity of the debt problems requires consolidated efforts from all concerned to urgently restore a healthy international financial system. Lender countries must bear a bigger share of responsibility by making available to the Fund additional lending from official sources, and at the same time, as a safety net, the Fund should also explore its entry into private capital markets…
The Bank and the Fund play a critical role in financing trade and development. I believe that the true spirit of international cooperation of Bretton Woods is still alive among our members. We should not let frustrations caused by domestic misgivings and misconceptions of the role of these institutions deter us from the appropriate course in pursuit of our common goals for the economic and social development of our member countries. Trade and development can only grow together under an appropriate mix of domestic and external policies which are conducive to the flow of trade and the transfer of real resources.
Statement by the Governor of the Bank for China—Wang Bingqian
First of all, please allow me, on behalf of the Chinese delegation and in my own name, to extend our warm congratulations to Mr. Boyer, Chairman of the current Annual Meetings. I would also like to take this opportunity to express our sincere congratulations to Mr. de Larosière on his re-election as Managing Director of the International Monetary Fund and on his contribution to the amelioration of the international debt problems. I would also like to express our appreciation to Mr. Clausen, President of the World Bank, for his efforts in promoting the economic development of the developing countries over the past two years. In their reports to the Annual Meetings, Mr. de Larosière and Mr. Clausen made very good analyses of the current world economic situation and its problems. This is very helpful to our discussions and exchanges of views.
I would like to make some observations on behalf of myself and my colleague Governor Lu Peijian with respect to the current world economic situation and to some important questions before the World Bank and the International Monetary Fund.
The current world economic situation remains less than optimistic. Despite the signs of recovery in some industrial countries, it is still hard to predict whether this initial trend of recovery will be sustained or short-lived under the dark shadows of huge financial deficits, high interest rates, and abnormal exchange rates. At present, unemployment in many developed countries is still serious; world trade is stagnating; interest rates in real terms remain high; and the international monetary situation is unstable. A vast number of developing countries are still faced with grave economic difficulties, and the threat of a debt crisis is far from being removed. As we can see, the current economic crisis, the gravest ever since World War II, has brought most serious and damaging consequences to the world economy. In particular, the trade protectionism and high interest rate policies adopted by some developed countries and their reduction of official development aid have dealt a severe blow to the developing countries, where economic conditions have worsened drastically, economic growth has been seriously impeded, standards of living cannot be improved, and some have even dropped. This leads to social unrest and political instability. What causes particular disquiet and deep concern is that the economic growth of some developing countries has in fact been outstripped by their population growth and that, by the end of the 1980s, the per capita national income in some low-income African countries might drop below the level of the 1960s.
Many important proposals were put forward at the seventh summit conference of the nonaligned countries and the fifth ministerial meeting of the Group of 77 for a settlement of the immediate problems and for the restructuring of outdated international economic relations. In the financial and monetary fields, they have proposed the increase of official development assistance, alleviation of the debt burdens of the developing countries, expansion of the source of funds for international monetary institutions, and convening a conference on international monetary and financial problems to explore the restructuring of the international monetary and financial system. All these proposals reflect the actual immediate needs and just demands of the developing countries. The Sixth United Nations Conference on Trade and Development held in Belgrade three months ago offered a good opportunity for promoting the North-South dialogue, improving North-South relations, and facilitating the solution of world economic problems. Regrettably, however, the rigid attitude of some major developed countries prevented this conference from achieving its anticipated substantive progress.
We have always held the view that the economies of all countries are closely interrelated. The economic recovery of industrial countries cannot be achieved without the economic growth and prosperity of the developing countries. If one ignores the developing countries’ urgent need for economic growth and fails to actively help them overcome their economic difficulties, it will be difficult for the developed countries to achieve real economic recovery. The argument that the economic recovery of the industrial countries will automatically bring about the economic re-vitalization of the developing countries is hardly credible. We hope that the industrial countries, the major ones in particular, will conform to the trend of our time by adopting a wise and farsighted policy to promote the economic growth of the developing countries in the commodity, trade, financial, and monetary fields. This will not only benefit the developing countries but will also contribute to the recovery of developed countries and the revitalization of the world economy.
The World Bank and the International Monetary Fund should and can play an important and positive role in facilitating the economic growth of the developing countries and promoting the revitalization of the world economy. Since the beginning of this year, loans available on the international capital markets have remained tight, the rescheduling of debt servicing is still on the increase, and harsher terms have been imposed by commercial banks. Consequently, the developing countries have to rely more heavily on multilateral financial institutions, whose loans have increasingly become a major resource for solving their financial difficulties. In these circumstances, the World Bank and the International Monetary Fund are facing a severe test as to whether they can meet the pressing needs of the present situation and vigorously support the developing countries in overcoming their difficulties by expanding their lending capacity and playing a more active role especially in providing concessionary funds.
We have all along supported the two organizations in expanding their resources so as to meet the growing demand for funds. The Chinese Government has already completed the procedures for the ratification of the capital increase under the Eighth General Review of Quotas of the Fund. We hope all those member states which have yet to complete their legislative procedures will hasten the process of ratification so as to ensure that the quota increase will become effective as scheduled. We are not in favor of the idea that limitations should be imposed on access to Fund resources along with the entering into force of the quota increase, because, by so doing, the quota increase will become meaningless. Moreover, the objective reality has made more and more countries realize the urgency of the immediate reallocation of SDRs. We hope that the question of the fourth basic period of allocation of SDRs can be settled as soon as possible….
Now, let me speak briefly on China’s economic situation. In a nutshell, our national economy has reversed the state of instability that was caused by a serious disproportion between various sectors of the national economy and has embarked on a path of steady growth. In recent years, our industrial and agricultural production have increased annually, and a basic balance has been maintained between state revenues and expenditure. Our urban and rural markets are brisk, prices remain basically stable, and the real income of our people has shown a steady rise. Our economic and technical exchanges with other countries have continued to expand. Needless to say, in our progress, we still face many difficulties and problems in our national economy that call for a solution. China is a developing socialist country, relatively backward, with a huge population and a weak material and technical foundation. The level of our gross national product per capita is still very low. This predetermines the protracted, arduous, and complex nature of China’s endeavor for modernization. At present, we are still in the process of economic readjustment and consolidation, and we are redoubling our efforts on key projects in such weak areas as energy and transportation and are vigorously promoting the technical transformation of the existing enterprises. At the same time, we are carrying on programs of family planning to control population growth.
A salient problem in gradually achieving the modernization of our national economy is the shortage of funds. We must adhere to the policy of self-reliance and take effective measures to improve economic results, bring in more income, and use the available funds with priority. We should also, on the basis of equality and mutual benefit, accelerate our economic legislation and adopt more flexible economic policies, so as to make good use of foreign investments and carry out economic and technical cooperation with other countries. The present surplus in our balance of payments and the increase in our foreign exchange reserve are mainly due to our failure to fulfill the planned target of import in the course of our economic readjustment and are, therefore, temporary phenomena. Either in the long term or in the immediate future, our development funds are far from adequate. As before, we will continue to implement a policy of openness with the outside world and further strengthen our economic and technical cooperation with international financial institutions and friendly countries.
Finally, we wish to join with all of you in making efforts to enable the World Bank and the International Monetary Fund to play their due positive role in helping to solve the existing world economic problems, promoting economic growth of the developing countries, and establishing the new international economic order.
Statement by the Governor of the Fund for Indonesia—Radius Prawiro
It is my great pleasure and honor to participate in these Thirty-Eighth Annual Meetings of the World Bank and the International Monetary Fund and to have the opportunity to address you for the first time in my capacity as Governor of the Fund for Indonesia. First of all, I would like to extend my congratulations to the Managing Director of the Fund and the President of the World Bank and their staffs for the excellent arrangements for these meetings and for the comprehensive and high-quality reports produced. The quality of these reports clearly reflects the concerted efforts undertaken by the Bank and the Fund as manifestation of the important role that they play in the world economy today.
Over the past few years, the world economy has been in the throes of the most pervasive crisis since the Great Depression. Many countries have been caught in a spiral of declining output, employment, and trade accompanied by heightened inflation. The growth of output reached its lowest level in decades, the world trade was stagnant, and the unemployment rate rose to the highest level since World War II. At the same time, the inflation rate soared to an unprecedented level. The brunt of the crisis has fallen most heavily on the developing countries. Their export markets have shrunk and their export prices have slumped, creating difficult external positions which have been further aggravated by high real interest rates, the reluctance of commercial banks to lend, protectionist measures adopted by many developed countries, and increasing debt service payments. Consequently, imports have been drastically cut, investment expenditures—including expenditures for human resources—have been curtailed, and development programs have been suspended with all their consequences.
Against this background, it is gratifying to learn, as is also stated in the Reports of the Bank and the Fund, that there are encouraging signs of economic recovery in some developed countries, particularly in the United States as evidenced by significant increases in their output accompanied by declining inflation rates. If these developments continue, they would further improve business incentives and confidence, which will eventually set the stage for a general and sustained upswing in production, trade, and employment. The levels of interest and unemployment rates are, however, still high, and they have, therefore, not led to a significant contribution to the improvement of the world economy. In certain leading industrial countries, budget deficits are also still very high. If these levels persist, the strength of the recovery could be seriously impaired. Large budget deficits will continue to absorb substantial private savings, thereby crowding out private investment and hampering a significant decline in the interest rates. Persistently high levels of interest rates will also continue to bring about further undesirable exchange rate volatility. The world economy therefore remains fragile. The situation is still uncertain and its favorable impact has not been widely felt, particularly in the developing countries.
Comprehensive adjustment programs have been undertaken in many developing countries in response to the severe problems they have been facing. As a result, the current account deficits have declined; however, a large part of the component has been achieved by curtailing imports, which has been painful and growth inhibiting. Efforts to improve external positions through export promotion have been hampered by recession and growing protectionism in industrial countries.
The task before us now is how to maintain the momentum for a general and sustainable recovery. Economic recovery in the developed countries is a necessary but not sufficient condition for a worldwide sustainable economic recovery. In our present world of increasing interdependence, recovery in the developed as well as the developing countries constitutes the twin engines of growth of the world economy. It is of utmost importance for us to see, therefore, that policies exercised at the national level should not only be conducive to the recovery of the national economy but should also have favorable international implications, particularly for the developing countries.
In this regard, it is imperative for the industrial countries, in their efforts to foster economic recovery, to adopt a better mix of fiscal and monetary policies that could bring down the interest rates, thus helping to ease the debt service burden of the developing countries. In addition, it is also important for the developed countries to tackle distortions and structural rigidities in their economies, so as to enable them to remove protectionist measures which have hampered exports of the developing countries.
At the international level, there is a need for closer cooperation— bilateral as well as multilateral—among countries, including closer cooperation between the developed countries of the North and the developing world of the South. It is in this regard that international institutions such as the World Bank and the IMF play an important and decisive role in bringing about a prosperous and equitable world economy.
Developing countries are buoyant markets and have constituted a dynamic outlet for exports of the developed countries in the recent past. This feature will only continue if the developed countries are willing to open up their markets for exports from the developing countries. This will not only promote development of the developing countries but will also help expand output and employment in the developed countries, hence strengthening the fledgling recovery. In this regard, intensified collaboration between the Fund and GATT for early removal of protectionist measures should be welcomed and endorsed.
Uncertainty about the recovery in the world economy, reluctance of commercial banks to lend to some developing countries, and the high level of interest rates in the world capital markets have placed the Bank and the Fund in a very central role in assisting member countries, particularly the developing ones, to meet their requirements for adjustment and development of their economies.
This can only be done through significant increases in the resources of the Fund, the Bank, and its affiliates. In my view, the increase in quotas of the Fund, including the Eighth Review of Quotas as proposed by the Interim Committee in February 1983, is insufficient for the Fund to adequately carry out its duties. In this regard, I would propose that preparations for the ninth quota review of the Fund be undertaken as soon as possible and would strongly urge the Managing Director to expedite arrangements for additional borrowings from official sources.
With regard to access to Fund resources, it is important that the access limit to these resources be sufficiently high, the terms of the program be adequately long, and the conditions of use of these resources be relatively flexible. This is because the needs of many members, particularly the developing countries, for temporary balance of payments financing are and will continue to be large in relation to their quotas. On the other hand, access of many developing countries to the world capital market and private investment is extremely difficult and the prospects of ODA are bleak. In this regard, I would be willing to go along with the consensus that emerged at the twenty-first meeting of the Interim Committee. At the same time, I should emphasize, however, that in implementing this consensus due regard has to be given to the actual and growing need of member countries in line with the availability of resources.
With regard to SDRs, I cannot help expressing my disappointment at the fact that SDR allocations in the fourth basic period have not materialized. The decline in the growth of global non-gold reserves, the worsening distribution of reserves among countries, and the containment of inflation, in my view, clearly justify a further allocation of SDRs. Moreover, it is difficult to imagine that the enhancement of the role of the SDR as a principal reserve asset could be done merely by improving the features of the SDR without creating more SDRs in the system.
This is certainly not consistent with the idea of creating SDRs as mentioned in the Articles of the Fund. I, therefore, would like to make an appeal to members that are still in doubt about the merits of a further allocation to reconsider their position in favor of it, particularly in this very difficult time for the world economy.
The recovery in the industrial countries will no doubt favorably affect the growth of the developing countries, but it is not sufficient to restore growth to a level high enough to bring them to a respectable position in the world community. It is in this context that, while domestic resource mobilization should be enhanced, capital flows to the developing countries, both concessional and nonconcessional and both public and private, must be stepped up….
In concluding, I would like to take this opportunity to thank the President of the United States for his kind words of welcome and for the support of the United States to the Bank and the Fund and to express my gratitude to the Government and people of the United States for the warm hospitality that they have extended to us.
September 27, 1983.