Discussion of Fund Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1983
Report to the Boards of Governors of the Bank and the Fund by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee), Ghulam lshaq Khan
It is my privilege to present to you the Annual Report of the Development Committee.
The world economy as is now widely recognized has started emerging from almost pervasive recession, which had remained a source of serious and widespread concern for the past four years. The recovery is however neither universal nor yet assured of durability.
For a large part of the world, difficult conditions continue to prevail, as exemplified by high levels of unemployment, high real interest rates, protectionist pressures inhibiting the growth of world trade, and continued worsening of debt service ratios of developing countries.
The challenge in the period ahead is how the incipient recovery can be sustained, strengthened, and extended in a noninflationary environment. The recovery in the industrial countries is a necessary but not a sufficient condition for restoring growth momentum in the developing world. There are other elements, like expansion in the world trade, a rollback of the tide of increased protectionism, and capital flows—private and official, bilateral and multilateral—which need to be harnessed to enhance the effectiveness of the adjustment process launched by many countries. The steadfast pursuit of adjustment policies by all developing countries, within the limits of political and social tolerance, will continue to be crucial for the attainment of their long-term growth.
It was against this background that the Development Committee in its two meetings held during the year—one in April and the other concluded in Washington this Monday—concentrated its attention on a variety of measures relating to the promotion of development and to the improvement of capital flows and their effective utilization in the developing countries.
The main thrust of our work during the past year has been to identify some essential elements in the efforts to extend the economic recovery to developing countries and focus Ministers’ attention on their pursuit with urgency and a fresh resolve. These included the issues of: financial flows from, and level of lending by, the World Bank and other multilateral development banks and implications of such programs for their capital base; funding of IDA; additional lending for energy; external debt problems of developing countries; and linkages between trade and promotion of development.
The full details of the work on the various topics discussed by the Committee are available in the Annual Report, which does not however cover the meeting held last Monday; for this I have to refer you to the press communiqué. From the communiqué you will see that most members agreed to a selective capital increase for the World Bank of about $8 billion and requested that Executive Directors work out the specifics with the aim of submission to the Board of Governors by the end of this calendar year.
Furthermore, the Committee agreed on the importance of encouraging direct private investment and, in that connection, took note of the intention of the Bank management to propose expanding the investment program of the International Finance Corporation during fiscal years 1984–88 with a capital increase of $750 million.
The needs of the low-income developing countries and particularly those of sub-Saharan Africa have been a continuing concern to the Committee. The urgency of concluding IDA-VII negotiations by the end of this year was unanimously accepted. The Committee recognized that the size of IDA-VII should be agreed at a realistic level which would seek to reconcile the needs of an expanded IDA recipient community faced with an extremely serious economic predicament and the budgetary constraints of donor countries.
In the period under review, the Committee dealt for the first time with two new subjects.
First, the Committee reviewed the growth of developing country debt and expressed its concern about the severity of the debt-servicing problem faced by many of them. It stressed the importance of avoiding an abrupt reduction in the level of international bank lending to developing countries. While noting with satisfaction the prompt response by bilateral and multilateral sources to recent critical debt situations, the Committee emphasized the necessity of maintaining and increasing financial flows to developing countries from official sources. It also noted the importance for borrowing countries of monitoring their external indebtedness carefully and maintaining sound economic and debt management policies. The Committee, while appreciating the efforts by the Bank and the Fund, encouraged both institutions to keep the important matter of the net capital flows to developing countries under constant review.
The second subject which attracted the Committee’s attention related to the linkages between trade and the promotion of development. Recognizing the interdependence of the economies of the industrial nations and the developing countries, the Committee held the view that global economic recovery and progress on trade issues were of critical importance for increasing the foreign exchange earnings of developing countries. The expansion of world trade has made and must continue to make an important contribution to the economic growth and development of both industrial and developing countries. The Committee urged the Bank and the Fund to keep under constant review, in the areas of their competence, the progress made to liberalize trade, including inter alia the dismantling of trade barriers. This subject will again be discussed by the Committee at its spring 1984 meeting, at which the results of further intensive work currently under way in the Bank and the Fund are expected to be available.
The Committee was established by the Boards of Governors as a focal point in the structure of international economic cooperation and to maintain an overview of the development process. This basic objective remains of great importance and validity, and it received a fresh endorsement in the most recent meeting of the Committee. It is relevant to recall in evaluating the work of the Committee that it is not a decision-making body; its role essentially is to facilitate decision making at national and international levels through the mobilization of political consensus on important development issues. The Committee served during the year as a useful forum as it was instrumental in achieving a convergence of views on a number of measures of particular importance to developing countries.
As the last two decades of this eventful century have begun to wind down, we face the tremendous challenge to eradicate hunger and poverty from the face of this earth. A large part of the human family today lives in absolute poverty. This silent and suffering humanity is not decreasing in number. The spectacular progress made by mankind in this century in science and technology has put the means at our disposal to meet this greatest challenge of our times with determination. We have to demonstrate that, now that we have the means, we also have the political will and a willingness to reorder our priorities to meet this challenge.
Statement by the Governor of the Fund for the United Kingdom—Nigel Lawson
It is 22 years since I first had the privilege of attending the Annual Meetings of the Bank and the Fund—although on that occasion, in Vienna, I held the very different responsibility of a financial journalist.
Last year’s Annual Meetings in Toronto, when the United Kingdom was represented by my distinguished predecessor, Sir Geoffrey Howe, coincided with the low point of the recession for the world economy as a whole. Deep concern was then expressed about the prospects of recovery, and there was some hesitation over the right strategies for national economies. And the first major outbreak of the debt problem had just occurred.
Since then, we have experienced an eventful and troublesome year for governments and peoples alike, and for the institutions in which we meet today. Debt problems have multiplied, and we are still far from seeing a clear way through all of them. The course of exchange rates and interest rates has been unsettled, and present levels, particularly interest rate levels, cannot be regarded as satisfactory. The economic and political strains of adjustment have inevitably proved painful. Impatient voices are heard demanding new approaches, new systems, new institutions.
But despite all that there has been undoubted progress, particularly on the all-important struggle against inflation; and recovery is now clearly under way. We are not yet out of the wood, but we are moving forward again. It is a good time to take stock of how best to make further progress and tackle the problems which remain.
That is our common purpose at these meetings. An occasion such as this is one in which the finance ministers who bear many of the political burdens of painful adjustments can share their experiences and perhaps even fortify each other thereby. So it may be helpful if I spend a few minutes describing our recent experience in the United Kingdom, where a clear adjustment strategy was adopted four years ago, has since been steadily pursued, and is showing good results.
In the United Kingdom, we have, during these past four years, followed a three-part strategy. We have exercised steady downward pressure on monetary conditions. Despite the recession, we have reduced our budget deficit significantly as a percentage of gross domestic product. And we have introduced reforms to remove structural rigidities in the economy, abolishing a whole raft of controls on pay, prices, and dividends, on industrial development and consumer credit, and, perhaps most important of all, on foreign exchange transactions.
What results has the strategy brought? First, inflation has been reduced dramatically. It has fallen from a rate of about 15 percent for much of the 1970s to about 5 percent now. The long upward trend of rising inflation rates from one cycle to another has been decisively broken. Second, we have secured renewed economic growth. Despite unfavorable world trade conditions which have a particularly sharp impact on the United Kingdom, our economy has been growing at an average annual rate of about 2½–3 percent since the trough of the recession in the first half of 1981. This compares favorably with our long-run prerecession trend. And unemployment, although still tragically high, is starting to level off.
Some observers in the United Kingdom used to argue that such a recovery was impossible without government stimulus. So far from that being the case, economic recovery in the United Kingdom can now be seen to have started in the immediate wake of my predecessor’s courageously tough budget of 1981.
Now the critics argue that the recovery is not sustainable, that it is unbalanced, and that inflation is bound to rise again. I shall briefly explain why I believe they are wrong on all counts.
It is true that the recovery so far has been primarily based on increased personal spending and the end of destocking. But that is not a cause for concern, for all recoveries have that characteristic in the early stages. That is a well-established cyclical pattern. What is significant is that on this occasion the familiar first stages of an end to destocking, a rise in spending on consumer durables, and an acceleration of housebuilding came about without any government stimulus to demand: they resulted instead from lower interest rates, increased confidence, and above all low inflation, which in turn have been the result of responsible monetary and fiscal policies.
It would now be normal for the emphasis of the recovery to switch from the personal sector to the company sector, in the form of increased capital investment and positive stockbuilding. The pattern—in no way unusual or surprising—that investment follows consumption increases should be encouraged by the very substantial increase in company sector profitability which we have seen over the past year. Certainly, there are no signs, in the forward indicators, that the U.K. recovery is coming to an end. Quite the contrary.
Provided that monetary control is maintained—and it will be—and that inflationary expectations continue to improve, and provided we can continue to hold down our budget deficit and avoid unnecessary pressure on interest rates, which are still too high, we will see the recovery spread more widely throughout the economy.
As for the critics’ concern that U.K. inflation would rise with economic recovery, the fact is that there is no sign so far of re-emerging inflationary pressure even though, as I have explained, the recovery has already been under way for two years. Of course, there will be temporary variations caused by special factors, but there is no sign in the inflation figures, when we strip out the volatile impact of changes in housing costs (themselves the result of changing interest rates) and seasonal food prices, of any change in the underlying trend. The growth of labor costs per unit of output continues to be low, helped by substantial increases in productivity.
The Wider Strategy
I think it worthwhile to set out these facts from this rostrum, for there is an important conclusion to be drawn from all this, and it applies, I believe, not only to the United Kingdom.
It was one of the characteristics of the cycles of the 1960s and 1970s that many observers underestimated the continuing strength of recovery. Indeed, one of the reasons for accelerating world inflation during the 1960s and 1970s was that, at the stage of the cycle which the United Kingdom has now reached, governments worried about the strength of recovery and were persuaded to stimulate the level of demand. Because that stimulus was in addition to the already powerful forces of recovery, the result was excessive inflationary pressure.
The lesson of that experience is one which we should all heed. It is important that we all recognize that powerful forces arising from lower inflation, lower interest rates, and lower labor costs can both start and sustain recovery and that the factors which are most likely to damage recovery would be an excessive expansion of demand by mistaken monetary and fiscal policies, bringing about their own inevitable reverse, and in particular an unsustainable structural budget deficit that puts damaging pressure on interest rates.
Let us also remember that high interest rates bear particularly heavily on developing and debtor countries and that protectionist forces are inevitably strengthened when exchange rates are determined more by capital flows than by trade flows.
So let me now draw some specific conclusions from our U.K. experience.
First, the strategy works. Our experience demonstrates that it is possible for governments to reduce and control inflation through appropriate monetary and fiscal policies and that financial discipline does not stifle growth; on the contrary, it helps to create the conditions for healthy and sustainable growth.
Second, perseverance is necessary, and it is important for the government to convey its determination to persevere; this is not easy, because it takes time before benefits are seen, and it may take additional time to see the benefits convincingly, even after they have begun to take effect. But it is crucial to demonstrate to the markets that there is, and will remain in place, a firm medium-term financial strategy.
Third, although conditions in different countries may vary, I am convinced of the need to have monetary and fiscal policies operating in harmony. Otherwise, there will be risk of severe strain, especially if public sector borrowing so pre-empts flows of savings that monetary restraint can be achieved only at the cost of very high real interest rates.
Fourth, while no country can insulate itself against the rest of the world economy, the more firmly engaged any country is in a sound financial strategy, the better it will be able to withstand external shocks or weaknesses.
Fifth, liberalizing industry, cultivating competition, and giving free rein to market forces help recovery. This applies across, as well as within, national frontiers: liberalization of trade and payments contributes importantly to the development of world trade and economic activity.
Sixth, our general election result earlier this year has demonstrated that, despite all the inescapable pains of adjustment, a government which steadfastly pursues this strategy and which clearly explains to the people the need for the policies it is carrying out has no cause to fear that it is exceeding the bounds of the politically possible. I hope that this will be of comfort to some of my colleagues here today.
I make no apology for having dwelt at some length on the U.K. experience. At repeated international meetings, finance ministers have agreed that the successful pursuit of a firm anti-inflationary strategy is the only sound basis for recovery. The Managing Director of the Fund has consistently and helpfully urged this on us all, not just those who are immediate clients in drawing on Fund resources. He did so again, most eloquently, from this rostrum yesterday. What is happening in my country is, I believe, both relevant and encouraging.
The Fund’s main concern over the past year—and that of the World Bank too—has been with countries facing debt problems. The growth of such problems in the last 18 months has been dramatic because a number of factors came together at the same time. A combination of world recession and sharply reduced commodity prices has limited export earnings by debtors. Very high dollar interest rates, applying to borrowing of which an increasing amount had become short term, have magnified their problems.
Both elements in this squeeze have already eased a little and should ease still further as world economic recovery continues and particularly if the relative burden of dollar interest rates can be reduced. Because of this, it is important not to overstate the problem, while remaining mindful of the risks.
On the other hand, it is abundantly plain with hindsight that the scale of reliance on borrowing by some countries had by 1981 become greatly excessive, reflecting the overambitious quest to maintain unsustainable growth rates in a deteriorating world environment.
Balancing these various factors, the Fund has produced, in its latest survey of the world economic outlook, a careful assessment of the risks and possibilities in both directions. I do not dissent from it. My own view is that our joint efforts to sustain world recovery and maintain the attack on inflation will help but that there is an unavoidable, urgent, and continuing need for adjustment by the major debtors.
There can be no escaping the need for adjustment, and the Fund has served us all well in holding firmly to this basic requirement. I should also like to add a word of appreciation, indeed congratulation, to those of our colleagues who have displayed the determination and political will to move quickly and decisively in the right direction.
If adjustment is crucial, so also is the provision of some time for its effects to be achieved. I believe we have developed a sensible emergency strategy, with the Fund playing a central role in working out necessary programs of adjustment, which unlock Fund assistance and in turn some mobilization of new commercial lending. But I suggest we should now begin thinking further into the future.
Three issues might be worth pursuing.
First, many of the arrangements that are being made create the prospect of a very considerable hump of debt maturities a few years ahead. If the course of adjustment is satisfactory—and I emphasize this basic requirement yet again—it seems to me that it would be right for the borrowers and lenders concerned to think in terms of trying to reshape maturities for a further period ahead, on a longer time scale. Much will depend on the degree of confidence in the borrower and on world prospects generally; much may also depend on the evolution of interest rates and international flows of funds generally. In the main, however, we are dealing with countries that have considerable potential resources, if they can be effectively mobilized.
Second, it is very likely that the pattern of international flows of funds in the next decade will differ sharply from what we have seen in the last decade. We are already well past the peak period of accumulation of surplus wealth by the major oil producing countries. We may well be moving into a period in which the current deficits that are the natural condition of most of those countries in the developing stage will have as their counterpart the more traditional surpluses of industrial countries, whose capital formation and distribution are very different. There is food for reflection here for commercial banks, but particularly also for the borrowing countries themselves. I suggest in particular that many of them ought to look again at their attitudes toward private investment and to reflect on the advantages they could draw from encouraging long-term flows in that form, rather than the short-term borrowing of which they have had such uncomfortable recent experience and which may in any case be less freely available….
I have already spoken of the key role of the IMF in helping to encourage and support adjustment policies. Recognizing that the Fund must be equipped with sufficient resources to discharge this task, the Interim Committee, under the chairmanship of my predecessor, reached important decisions in February on the Eighth Review of Quotas. The effect of this, together with that of the decisions reached in advance on the enlargement of the General Arrangements to Borrow, should be to double the usable resources available to the Fund.
It is clearly essential that these decisions be implemented as soon as possible by all Fund members. I am glad to say that the United Kingdom has already passed the necessary legislation. It would be difficult to overstate the importance of the U.S. Congress doing so too, and on time.
Provided that they do, the decisions reached, at the end of the day, at the latest meeting of the Interim Committee, in which the United Kingdom was glad to have been able again to offer some assistance, will provide a firm but flexible basis for carrying forward the Fund’s work.
Given uncertainties about future developments, it would not have been sensible to seek to reach a view on the level of members’ access to the Fund more than a year ahead, nor was that necessary. The Committee, rightly in my view, envisages a gradual phasing out of the enlarged access arrangements. But it is evident that their extension into 1984 was necessary and fully justified.
I believe the Committee was also right not to conclude that a case has yet been established for a further SDR allocation. There clearly is imbalance in the distribution of world liquidity, but I am not convinced that there is an overall world liquidity shortage. At the same time, I welcome the fact that further studies in this field are being put in train and that the issue remains on the table….
International Monetary System
I would like, in conclusion, to add a word on the perennial question of the overall working of the international monetary system. The international financial institutions represented here have served us well over the past years, developing to match changing circumstances and meet new needs. Provided that we continue to equip them with adequate resources, I am convinced that this will remain the case.
They have shown resilience and adaptability in confronting the difficult issues arising in a period of transition from one of high inflation. The past few years have in a very practical sense been a period of evolution in which all our countries have shared, in particular through participation, in the operational decisions of the Fund.
In the wake of the second oil price increases, the international community has reached a general agreement on the stance of policy which can best provide the basis for sustainable noninflationary growth. This strategic consensus provides a framework in which we can consider what further improvements to the operation of the monetary system might be sensible.
It is right that there should be continuing exploration and debate about specific aspects of the system. The recent Commonwealth Study Group report represents a thoughtful contribution to that debate. And I welcome the decision of the Group of Ten to carry out further work to identify areas where progressive improvements might be sought.
But I would just add this. Let us remember that it was inflationary domestic policies that precipitated the breakdown of the original Bretton Woods arrangements, not the other way about. When things go wrong, there is a temptation to blame the system. This is a temptation to assume that all problems that are not cyclical must be systemic and can be solved only by changes to the international system. But none of us can in fact duck responsibility for the way we conduct our domestic economic and financial policies. That in the end is still what this discussion is really all about.
It was for that reason that I began my remarks today with an account of our recent experience in the United Kingdom and suggested some conclusions about the roots of our current recovery which might have wider relevance and applicability. It was for that reason too that, in discussing current debt problems and putting forward some suggestions for their handling in the medium and longer term, I have stressed the cardinal importance of appropriate adjustment programs. And it is precisely because both the Bank and the Fund play a key role in encouraging the adoption of such policies and helping countries see them through that I have today emphasized the importance of ensuring that both institutions continue to have the resources they need to do their job, supporting and sustaining a soundly based recovery in national economies and, hence, in the world economy. If we do not fail them, I am confident that they will not fail us.
Statement by the Governor of the Bank for Bahrain—Ibrahim Abdul Karim
It is a great honor indeed to address these meetings on behalf of the Arab Governors of the World Bank and the International Monetary Fund. Allow me to start by joining the others in welcoming the new members of the Bank and the Fund. I would also like to express our appreciation for the thoughtful statements made at the opening of these meetings by you, Mr. Chairman, and by Mr. Clausen and Mr. de Larosière on the problems facing the world economy and the course of action that could be pursued in coping with them.
World economic prospects appear to have improved somewhat over the course of this year. Unfortunately, however, the recovery in the industrial countries is still rather fragile and lacks a sufficiently broad geographical base. In the developing countries, which have been affected particularly seriously by the recession, the situation remains difficult, marked by low growth, large external imbalances, and—for many of them—severe debt service problems.
A key policy challenge at this time is to consolidate and strengthen the incipient recovery. In this connection, while the progress made against inflation in industrial countries will need to be preserved and extended, additional measures for stimulating recovery could now be considered in those countries which have been more successful in controlling inflation. In many cases, greater efforts need to be directed at correcting continuing imbalances in the mix of monetary and fiscal policies and at reducing structural distortions and rigidities. Furthermore, there is a need for better harmonization of policies among major industrial countries with a view to restoring stability to interest and exchange rates.
In developing countries, the focus of policy has been on adjustment. Programs for adjustment being carried out in many of these countries have made possible a significant reduction in their large payments imbalances. However, this improvement has been achieved at the cost of a sharp compression of imports and a further slowdown of investment and growth. Evidently, a firm pursuit of adjustment policies will need to be maintained. However, the attainment of a viable external position together with a return to satisfactory growth rates will require that measures for domestic adjustment be accompanied by restoration of a more propitious environment for the exports of these countries—through a pickup in world recovery as well as freer market access—and be supported by sufficient financing while they are taking hold. The Fund, in formulating adjustment programs, should take adequate account of the structural and exogenous aspects of the payments difficulties faced by developing countries and should adapt its policies to promote adjustment without undue adverse consequences for growth. Furthermore, to prevent an uneven burden of adjustment on these countries, the implementation of the Fund’s surveillance function needs to be made more symmetric and effective by paying greater and commensurate attention to the policies of major industrial countries, including their trade policies and the international implications of their policy choices.
For the oil exporting countries, the most significant development over the last two years has been the decline in oil revenues. As a consequence, the current account surplus of these countries has all but disappeared and, in many cases, has turned into a deficit. These countries are, therefore, reassessing their financial policies and development programs.
The persistence of large payments imbalances and the greatly increased difficulty of market borrowing by many members underscore the need for maintaining Fund financing in support of adjustment at an adequate level. It is for this reason that we have argued that, in the period ahead, members’ access to Fund resources under the policy of enlarged access needed to be maintained at least at the present absolute levels and that the Fund should explore all feasible ways of adequately augmenting its resources. It should be evident that any consideration of terminating or phasing down the enlarged access policy in the near future would be premature. We are also of the view that access to special facilities should be maintained at the present limits in terms of quotas. Furthermore, it is necessary to preserve the character of the compensatory financing facility and to maintain the promptness with which Fund assistance is made available to members under this facility.
We note with regret that no decision has yet been taken on the question of an SDR allocation in the fourth basic period. Recent trends in international liquidity and conditions in the world economy have strengthened the case for an allocation. A timely and appropriate allocation, while contributing to achieving the longer-term objective of enhancing the role of the SDR as a major reserve asset, will be helpful in alleviating some of the current problems of deficit countries. Given the abatement of inflation, the existence of substantial excess capacity, and the present small share of SDRs in global reserves, a resumption of SDR allocations at this time would not be inflationary. Furthermore, a case can be made for moving toward a steady growth in world SDR supply as opposed to the present sporadic one.
In the area of external development assistance, the Arab donor countries are making every effort to insulate their development assistance programs from the unfavorable situation facing them. The Arab development institutions have largely maintained their level of commitments during the past two years. The overall aid performance for Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates continued to be over 4 percent of their gross national product. Aid by these countries is untied and covers a wide range of countries….
Finally, the experience of the last few years has shown that the present international monetary and financial system suffers from a number of shortcomings and inequities. This points to the need for considering ways and means of placing the system on a more solid and equitable basis. The Arab countries are prepared to participate positively in such efforts.
Statement by the Alternate Governor of the Fund for the Federal Republic of Germany—Gerhard Stoltenberg
The two institutions whose work we are reviewing today can look back on another year of challenge and achievement, a year that has tested and demonstrated their strength. The Fund has assumed a central role in our efforts to reach the twin goals of consolidating the incipient recovery into sustainable growth and of strengthening the stability of the international financial system. Its effective, innovative response to the strains of the past 12 months represents a landmark in its history.
I congratulate Mr. de Larosière on his reappointment as Managing Director of the Fund. We all owe a great deal to the dedication and skill with which he and Mr. Clausen have guided the Fund and the Bank through these difficult times.
For several years, stagnation has fed on itself. By now, however, there is growing evidence that the downward spiral has been reversed. Growth performance and prospects have clearly improved in major industrial economies, though with differentiation among countries. Developing countries, too, should experience a gradual resumption of growth. The external environment which, for years, has made their adjustment task much more difficult should become more hospitable. Faster world economic growth and renewed opportunities for trade will improve the prospects for adjusting through, rather than at the expense of, development.
However, we still face the challenge to complete the transition to lasting growth. In many economies, the immediate prospects remain clouded by internal and external constraints. The feeling of uncertainty is a considerable burden for economic decisions.
To ensure that growth will last, it is crucial that investment should pick up as soon as possible. This underlines the need for stable, credible policies fostering private initiative and enterprise. There are already encouraging signs:
—In major economies, underlying inflation rates have been brought down substantially.
—Increased energy efficiency has brought about a more comfortable balance of energy supply and demand.
—Last but not least, growth in the 1970s, for many countries, was built on ever-mounting external debt. The present recovery, however, emphasizes adjustment.
We should resist excessive pessimism.
In explaining the causes of slow growth and high unemployment, one is easily inclined to look abroad.
No doubt, the severity of the recession has taken us all by surprise. It has thwarted adjustment strategies that would have been appropriate in a more benign external environment, and it has overwhelmed the adjustment efforts of many developing countries.
In the final analysis, however, today’s difficulties for most countries are the legacy of domestic policies that would have created friction under any kind of monetary system.
In many countries, inflation had, for too long, been allowed to run loose, budget deficits are absorbing ever-larger shares of national savings, bloated bureaucracies have stifled private enterprise, and protectionism has retarded the growth of promising industries.
Discussions within the Fund and the World Bank have revealed substantial agreement in the policy strategy appropriate at the present juncture. This convergence of views is in itself an encouraging sign.
Three elements of this strategy stand out:
—First, the need to consolidate the gains on inflation.
—Second, the need to cut back structural budget deficits. In the Federal Republic, the process of medium-term budget consolidation is firmly on track. The German economy has responded with a clear improvement in performance and prospects. Given the weight of the American economy, the deficits of the U.S. federal budget are also an international concern.
—Third, we must restore to our economies a greater flexibility.
This includes the need to restore the effective working of the price mechanism, which has been impaired by innumerable forms of government intervention and protection. Indeed, as the GATT has recently pointed out, distortion of price incentives is the “common denominator” of many of the structural rigidities inhibiting growth. Greater reliance on the price mechanism and on the unrivaled efficiency of market forces implies firm efforts to hold and roll back protectionism.
The program agreed upon by the Fund with its members cannot work unless all countries, in particular the world’s largest traders, accept their responsibility for opening up their markets, especially in the interest of developing countries.
The Fund is directed by its charter to exercise firm surveillance over members’ exchange rate policies. In practice, this is a broad competence, transcending exchange rate policies. It enables the Fund to challenge the soundness and international compatibility of the broad spectrum of underlying policies, including those related to trade.
True, with regard to members not relying on its credits, the Fund has fewer pressures it can bring to bear. The effectiveness of surveillance rests largely on the force of its arguments and on the readiness of members to cooperate with the Fund in good faith. The governments represented at the Williamsburg meeting have reaffirmed that readiness by committing themselves to reinforce their multilateral cooperation with the Fund.
I welcome the steps the Fund has taken to strengthen its surveillance, including the increased attention given to identifying potential debt problems at an earlier stage.
Creditor countries have a vital interest of their own—in economic and political terms—in the ability of debtor countries to solve their difficulties in an orderly way. To open their markets, to work toward sustainable growth, and to pursue policies conducive to a noninflationary decline in interest rates are the most constructive contributions that are possible now.
The most important contribution, however, must come from debtor countries themselves: firm policies to strengthen economic efficiency and to bring their foreign debt in line with the capacity of their economies to generate the foreign exchange needed to service that debt.
The conditionality of the Fund should not be seen as a prescription for austerity. It is a prescription for restoring sustainable, noninflationary growth. Of course, it is a continuing challenge to ensure that conditionality be applied in a flexible way, paying due regard to the particular circumstances of borrowers. There can be no standard set of rigid rules.
The road out of the present debt problems will, no doubt, be a difficult one. It will require prudent and persistent efforts to restore the confidence of lenders in the ability of debtor countries to meet their present and future obligations. Grand designs and sweeping proposals for debt relief cannot do justice to the varied circumstances of individual countries, and they are bound to impair, rather than enhance, the credit of debtor countries.
Orderly adjustment hinges on adequate financing. Official creditors are providing very substantial assistance through a variety of channels, including their financial contributions to the Fund.
Not only has the Fund sharply stepped up its own lending, it has also taken an active role in mobilizing supplementary financing from commercial banks. I welcome the leadership that the Managing Director has exercised in this respect.
Concern over the debt problems of large borrowers, however, should not make us forget the plight of the many less advanced developing countries that remain critically dependent on official assistance. These countries, especially the poorest among them, must be able to rely on continuing and substantial aid flows on concessional terms.
The sharp increase in Fund lending has deeply cut into its own liquidity. The planned increase in quotas and in the General Arrangements to Borrow will represent a timely and also a very substantial strengthening of its resources. It is urgent that this increase should become effective as soon as possible.
As far as the Federal Republic of Germany is concerned, we are prepared to agree to it at any time. We consider it essential, however, that the agreement by other members with large quotas will also be forthcoming. In order to maintain confidence in the ability of the Fund to discharge its important responsibilities, the Fund must have the full support of its members.
Given the persisting strains in international financial relations, my Government is, in principle, prepared to support the continuation of a policy of enlarged access for a limited period. Any such decision, however, can only be taken if there is assurance that the Fund will obtain the necessary refinancing from official lenders.
Accordingly, the lending limits under a future policy of enlarged access should be gradually scaled down to the normal lending limits.
In view of the overriding need for adjustment and in order to maximize the catalytic effect of Fund lending on other sources of finance, the Fund should continue to provide the bulk of its lending under its ordinary, conditional facilities. This should be taken into account in reviewing the drawing limits under the special facilities, in particular under the compensatory financing facility.
We all have a vital interest in a strong and effective Fund. I am confident that we shall find constructive solutions to the twin problems of enabling the Fund, as before, to meet legitimate requests for its financing and of safeguarding its financial equilibrium. Both aspects, the future lending policies and the refinancing of the Fund, can only be dealt with in conjunction….
In concluding, one more brief remark. I do not think that there are many among us who still share the faith that John Maynard Keynes professed in a superior capacity of government to spark off economic growth. However, Keynes has left us another heritage: a vision of cooperation on a truly worldwide basis that would catalyze growth, development, and prosperity throughtout the world. That vision is embodied in the Fund and the World Bank that Keynes helped to create. Both institutions have, in their field, set a standard of achievement that others have yet to match.
Statement by the Governor of the Fund and the Bank for Zambia—Nalumino Mundia
I would like first to indicate that I am presenting a special case on behalf of the 48 countries of Africa, which are mostly underdeveloped.
Let me, on behalf of the African Governors, congratulate Mr. de Larosière on his reappointment for a second term as Managing Director and Chairman of the Executive Board of the International Monetary Fund. We African Governors wish him continued success in the difficult period ahead. I would also like to express my appreciation to Mr. Clausen for his understanding of the problems confronting our countries.
Since our last meetings in Toronto in September 1982, the world economic situation has not shown any marked improvement. The level of economic activity remains depressed in most member countries. In 1982, the combined output of all the industrial countries actually declined following four years of continuous fall in their rate of growth. Despite the much-publicized upturn in economic activity in recent months, the growth rate for 1983 is projected at about 1.9 percent and optimistically put at 3.3 percent in 1984, compared with 5 percent in 1976. Although inflation rates decelerated in many of the industrial countries to about 7 percent in 1982 and were estimated at 5.5 percent and 5 percent in 1983 and 1984, respectively, this has been achieved at a very high cost in terms of output and employment. Available data indicate that unemployment rates in the seven largest industrial countries averaged 8 percent in 1982, compared with 3.2 percent in the decade 1963–72 and 5 percent in 1979. It now appears that the unemployment rate in these countries will average 8.5 percent in 1983 and could even exceed 10 percent in a number of them. We view this situation with concern because of its implications for our economies.
The continued slowdown of economic activity in the industrial countries, with the attendant decline in the volume of world trade and intensification of protectionist pressures, has seriously affected the economic performance of most developing countries. In the non-oil developing countries, total output, after growing by 1.2 percent in 1981, increased by 0.8 percent in 1982 and is expected to grow by 2.3 percent in 1983, a dramatic deceleration from an average annual growth rate of 6 percent achieved between 1968 and 1972 and 5.4 percent in 1978. The seriousness of the economic slowdown becomes more obvious when viewed in the context of these countries’ low income levels, which inhibit their capacity to adapt to a significant deceleration in their growth rate.
Compounding the problems of this group of countries is the deterioration in their terms of trade. After five consecutive years of adverse movements in the terms of trade, the cumulative deterioration in most of these countries was about 20 percent in 1982. Added to this are the sharply increasing debt-servicing costs caused by high real interest rates and the appreciation of the dollar. Despite the slower rate of debt expansion, debt service as a proportion of export earnings reached 23.4 percent in 1982, compared with 20 percent in 1981 and 15 percent for 1976 and 1977. However, despite these adverse developments, the combined deficit on current external payments narrowed from $107.5 billion in 1981 to $84 billion in 1982 and is expected to narrow further to $66.5 billion in 1983. This decline in the deficit was achieved at the cost of a severe compression of imports and the consequent curtailment of development programs.
The plight of the African countries should be of particular concern to the entire international community. Twenty-six of the 36 least developed countries are in our continent. The average growth rate of GDP for the region has plummeted from 4.4 percent in 1980 to 2.9 percent and 0.6 percent in 1981 and 1982, respectively, and is expected to remain at the same level in 1983. This is considerably lower than the average population growth rate, implying that, for Africa as a whole, real per capita income has been in continuous decline over the years and is now below the level of the early 1960s. Furthermore, there has been no amelioration of the external payments problems confronting us. It is likely that our combined current account deficit in 1983 will remain at the 1982 high level of around $12 billion with not much change even in 1984. This situation is very worrisome, particularly as the ratio of reserves to imports of goods and services has declined sharply from 16.5 percent in 1973 to not more than 4.5 percent ten years later, and external debt was $93 billion in 1982, compared with only $14.2 billion in 1973. The average debt service ratio is estimated to climb from 8.8 percent in the latter year to 19.1 percent in 1982. This implies a deterioration of 10.3 percent during the period, compared with an improvement of 0.3 percent for Asia and 3.7 percent for the Middle East. It is, therefore, not surprising that the Fund in its 1983 World Economic Outlook emphasized that, despite the expected economic recovery in the industrial countries, many African countries will continue “to encounter difficulties in servicing external debt, in financing current account deficits, and hence in financing the projected flow of imports.”
While appreciating the economic plight of these African economies, it needs to be stated that the worsening economic situation has parallel consequences for the economies of the developed countries in terms of decreased demand for their exports with adverse impact on employment. It has been estimated that one out of seven workers in the developed countries is employed in the export sector. Hence, the case for increased resources to developing countries in general, and to Africa in particular, is of mutual interest to both Africa and the industrial countries.
Given the situation that I have outlined, the need for immediate action cannot be overemphasized. We recognize that the current and prospective problems require us to tighten our belts further, and already most of our countries have put or are putting into effect painful adjustment measures. However, for the majority of our countries, the problems are externally induced. The needed structural adjustment can only be accomplished over a longer period and with the cooperation and support of the whole international community. Our major trading partners must take full cognizance of the deleterious effects of their policies on our economies. We, therefore, urge the industrial countries to abstain from imposing new restrictions and other protectionist measures against African countries, to roll back existing trade barriers, and to open up their markets to our products. It is through the maintenance of a liberal international trading system that we can all promote economic development of our countries. We also urge them to agree on an immediate action program encompassing urgent measures in areas of critical importance to developing countries, well-planned structural changes in the world economy, and far-reaching reforms in the institutional framework governing international economic relations.
There is need to channel additional financial resources into the poorer countries through increased official development assistance and lending programs of the international financial institutions, including the Fund, the World Bank, and the regional development banks. As regards difficulties faced by multilateral development institutions, we would like to emphasize the need to continue to support the African Development Bank. We hope, in particular, that the international community will be responsive to the fourth general replenishment of the African Development Fund, which represents one of the most concessional resources to African countries. The provision of more debt relief through postponement of debt payments and conversion of official loans into grants will go some way toward ameliorating the plight of many African member countries. Without such immediate assistance, not only are the more severely affected countries in danger of economic collapse, but the economic recovery now under way in the industrial world is sure to be aborted as the developing world, which now takes about 30 percent of their exports, will not have the means to sustain such imports.
The industrial countries should take into account the international ramifications of their economic policies and adopt a more appropriate and well-balanced mix of fiscal and monetary policies than hitherto with the objective of stimulating and sustaining a noninflationary economic recovery, reducing interest rates in the major international financial centers, and minimizing fluctuations in exchange rates. It has been estimated that a 1 percent increase in the U.S. interest rate adds about $2 billion to the debt burden of developing countries.
Turning to the Fund, the African Governors commend the Managing Director and the Executive Directors for accelerating and completing their work on the Eighth General Review of Quotas. We also commend those countries that have communicated the acceptance of increases in their quotas to the Fund and urge others to do so as early as possible to make the new quotas effective later this year.
We have taken the view that the occasion of the Eighth General Review of Quotas would be taken to put adequate resources at the disposal of the Fund. We have stated times without number that the Fund’s own resources should be adequate to meet the adjustment and financing needs of its members without becoming too dependent on borrowed resources. As Governors are aware, the Eighth Quota Review has resulted in a 47.5 percent increase in Fund quotas from SDR 61.03 billion to SDR 90.035 billion, against a minimum of SDR 125 billion that all developing countries had supported. It is regretted that the mode of distributing the increase in quotas has resulted in a decline in the share of Africa in total quotas and votes, and this matter must be rectified.
Given the clear inadequacy of the new increase in quotas and its inequitable distribution, we consider it crucially important for the Fund to start considering arrangements to bring forward the Ninth General Review of Quotas by at least two years and that, in the meantime, it should focus attention on means of securing additional resources to meet the current and evolving requirements of member countries. In this connection, we welcome the enlargement of the resources available under the General Arrangements to Borrow (GAB), from SDR 6.4 billion to SDR 17 billion. We also note that members of the Fund who are not participants in the GAB will now be able to make use of GAB resources. We hope that the conditions for its reactivation on behalf of many countries may not, in practice, rule out or minimize their access to the Arrangements and that the GAB will not prove to be dormant.
The rapidly widening gap between the Fund’s commitments and its resources underscores the need for the Fund to enter quickly into new borrowing arrangements with official and private sources. Such Fund borrowing cannot now be avoided, even with the coming into effect of the new quota increases. African Governors would like to express their concern about the recent decision of the Group of Ten not to respond positively to the Managing Director’s proposal for a new borrowing agreement between the Fund and the central banks of the major industrial countries, and the consequent suspension of new Fund commitments to members involving borrowed resources. This concern becomes more serious when considered against the background of the readiness of some nonindustrial countries to conclude similar agreements with the Fund.
Although recent liquidity trends suggest the need for creating additional SDRs, the Managing Director has not been able to make the necessary proposals for the creation of additional SDRs in the fourth basic period because countries with strong voting power have failed to support such creation. In view of the strained liquidity situation, we urge all members to support the Managing Director in order to enable him to propose new SDR allocations. We urge that SDR allocations should be delinked from quotas and the link between SDR allocation and development finance established. A special SDR allocation is also necessary to allow the developing countries to meet the requirements for quota increase under the Eighth General Review of Quotas.
Because of the inadequacy of the new increase in quotas, the Fund is being pressured to reduce access of members to its resources. We regret the decision by the Interim Committee to reduce access limits when the increases in quotas under the Eighth General Review of Quotas come into effect. The African Governors are still of the view that, with the coming into force of the Eighth General Review of Quotas, the access limit should continue to be maintained at 150 percent of quota per annum and at 450 percent over a three-year period. If anything, the present conditions in the international economy point to the need for the Fund to provide larger balance of payments financing than was envisaged at the end of 1980 when the current guidelines on access to Fund resources were determined. At a time when the Fund is asking other lenders to increase their exposure in member countries experiencing liquidity problems, the reduction in members’ access to the Fund’s resources is a wrong signal to these lenders, and its consequences for the adjustment efforts of countries with small quotas will be grave.
We are pleased to note that the Fund is aware of the problems many countries face in servicing their external debts, which have intensified over the last year with the sharp increase in the number of countries approaching official creditors and commercial banks for relief in the form of debt reschedulings. The Fund has been active in many rescheduling exercises as a provider of data and, in some cases, as a catalyst in getting creditors to maintain or even increase their exposure in member countries. The evolution of Fund policies in response to the external debt problems should involve more than just the issue of debt rescheduling exercises because the problem is a manifestation of the larger issue of balance of payments difficulties posed by the slowdown in the growth or even a diminution of their export earnings, the decrease in their import costs, and the high rates of interest in the international capital markets. The relief gained from debt renegotiations will be short-lived if something is not done about the root causes of the problem. In this respect, and in the interest of the parties concerned, it is necessary to go beyond the generally applied rules in order to ensure that our countries are in a position to pay their debts. Such an approach will entail a rescheduling of all our debts and an extension of both the maturity and grace periods. Penalty charges also should not be imposed. The surveillance role of the Fund is also very important and should be strengthened so that meaningful dialogue can be established with members as to the policy mix which would ensure stabler conditions in the world economy and make it easier for developing countries to design economic and financial policies that would be consistent with the primary objective of economic growth within the context of a sustainable balance of payments position. To this end, the Fund should strengthen its surveillance over exchange rate, fiscal, monetary, and trade policies of developed countries to ensure that they are consistent with and mutually supportive of the efficient and smooth functioning of the international adjustment process.
The African Governors agree that the compensatory financing facility should not be subject to upper credit tranche conditions, and we deplore the recent decision to extend upper credit conditions to all purchases under the facility. We feel that the facility should be untied from quota limitations and related solely to shortfalls in export earnings calculated on arithmetic and not geometric averages. We also urge that repurchases should be linked with recovery of export earnings in terms of real import capacity. As provision already exists for accelerated repurchases in cases of rapid export recovery, a comparable set of provisions should be made for deferred repurchases for up to ten years in cases of continued real export shortfalls.
The African Governors consider that, in order to cope with the current situation, a special window should be set up as an emergency facility with, say, $2 billion a year for five years to provide additional resources to the low-income countries facing severe adjustment problems and with difficult access to financial markets. Drawings under this facility should be concessional, not linked to quota, and should be eligible for interest rate subsidies from the subsidy account resources. The facility could be financed from profits from agreed sales of Fund gold holdings.
The African Governors feel concerned at the continued tightening of Fund conditionality as is evident in the more frequent use of preconditions. In its requirements for conditionality, the Fund should be flexible in its approach to members. Its uniformity of treatment is meaningless when circumstances of members are not comparable. It is of cardinal importance that, in designing programs for member countries, the Fund should take cognizance of the basic structural differences between the industrial and developing countries and, in particular, the nature of their deficit. The exogenous factors in the present crisis confronting the low-income developing countries should be recognized, and adjustment programs should put more emphasis on supply-oriented measures. In this respect, we should recognize that forcing adjustment in the external account, before adjustment in the productive capacity has taken place, entails severe costs in terms of output, employment, and sociopolitical stability. Indeed, we would propose that a serious study be undertaken to assess the applicability and relevance of various policy mixes to countries at varying levels of development. This would facilitate quicker negotiations between the staff and the national authorities and avoid the need to cancel programs because of inability to meet performance criteria.
Before I turn to the World Bank, I should reiterate that there is now a clear case for a comprehensive international monetary reform with a view to making the international monetary system far more supportive of global development. The reform should aim, inter alia, at equitable distribution of the burden of adjustment between surplus and deficit countries; provision of official payments financing in amounts and on terms and conditions that are in keeping with the origin of the deficits and the differing capacities of countries to make adjustments and that help to limit the international transmission of inflationary and recessionary pressures; and an exchange rate system that provides stability while retaining flexibility to allow adjustment to take place without putting undue pressure on the level of economic activity….
In conclusion, we would like to reiterate our appeal especially to the major shareholders of the World Bank and the Fund to respond positively, in the spirit of international cooperation, to the funding requirements of these institutions so as to enable them to fulfill their mandates. As you well know, it is to our mutual benefit that these institutions succeed.
Let me end my statement on behalf of the African states by stating that, while African countries are meeting stiff conditions imposed by the International Monetary Fund, the future of the Fund is being threatened by the resistance of industrial countries to meet their increased quotas. The future of the Fund is now being threatened by the industrial countries’ refusal to meet a conditionality which is essential for the survival of the Fund itself. As a spokesman for the African bureau, whose member countries are the least developed countries, I wish and hope that the American people and Congress will take the call by President Reagan for Congress to pass necessary legislation to enable the United States to meet its increased quota contribution to the IMF, as an echo of the voice of the starving people of developing countries. This is not a bare compassionate appeal when one notes that an estimated increase in interest rates by 1 percent will lead to an increase of $2 billion in the debt service payments of developing countries. I would not like to be the one to predict that the IMF will collapse for lack of financial and material backing by the very countries it relied on most for its existence.
I can safely predict that these institutions cannot survive in isolated protectionism, but only under conducive climatic economic conditions born of a free international vision devoid of politicization of decisions, but influenced by sober realism of the independence of nations.
Statement by the Governor of the Fund and the Bank for Mexico—Jesús Silva Herzog
I wish to warmly congratulate Mr. de Larosière upon his recent reappointment as Managing Director of the International Monetary Fund.
It is an honor for me to address you today on behalf of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Nicaragua, Panama, Paraguay, Peru, Spain, Suriname, Trinidad and Tobago, Uruguay, Venezuela, and my own country, Mexico. It is a signal honor and a task that I must approach in an objective and realistic manner.
The size and diversity of the financial problems facing the world economy form the backdrop to these Thirty-Eighth Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund. A heavy responsibility rests on all of us here today.
Recent years have been characterized by a worsening in the economic situation of the developing countries, more particularly in the countries of Latin America. External disequilibria have increased, as have inflation and external debt, while the level of economic activity has dropped significantly. This has widened social inequalities and added to the difficulty of resuming sustained and effective development in most countries. This process has worsened in recent years. On the external trade front, a dangerous and persistent decline in the rate of growth of exports set in, brought about by the recession in the developed countries and their protectionist policies. The terms of trade worsened.
On the financial front, our countries’ need for external resources increased, in large measure as a result of the falling off in trade already referred to and the political decision to accelerate growth. The countries of Latin America and the Caribbean had to replace the foreign exchange earned from exports by recourse to foreign loans. In other words, they replaced commercial flows by capital flows, to which was added the natural growth in existing debt.
At the same time, the major international banks had a high level of liquidity, so that they had excess lendable funds available, which were channeled to the developing countries in an active process of recycling. All of these factors came together to create a situation in which the total external debt of the countries in the region swelled to unprecedented levels of more than $300 billion in 1982. Net payments for interest and amortization absorbed the greater part of the region’s export proceeds.
It must be noted that this produced excellent business for the banks, while for the borrowing countries it provided an alternative complementary source of financing for development. The debt burden on these countries is at the moment considerable. The international financial institutions cannot be too ambitious in seeking to bring about a substantial reduction in the rate of growth of external debt. For most developing countries, it will be extremely difficult to generate over the short term the trade surpluses needed to reduce the size of their outstanding debt.
Thus, under present circumstances, with an external debt that is weighing heavily on them and limiting their opportunities for economic recovery, the Latin American countries could face serious difficulties in meeting their financial obligations.
One year ago, the international financial scene was somber, even threatening. A number of encouraging signs have appeared over the past 12 months, even though this period has also seen the emergence of new problems and mistaken attitudes. People are now aware of the problem of external debt; what was yesterday a factor in promoting development has today become one of the obstacles to development.
It has become obvious that this is not a problem involving only the developing countries, or only the banks. It is a problem affecting everyone. It is a worldwide problem. To deny its existence is to deny interdependence. However, this does not imply uniformity. Conditions differ in every country, and each one has to solve its problems as it sees fit.
In this short period of time, people have come to recognize that the problem did not arise overnight and likewise that one cannot expect an immediate solution. We have to learn to live with the problem and to accept, each of us, our share of the responsibility. The events of recent months have shown to the pessimists who are always with us that the international financial system is capable of reacting strongly. In a number of cases, we have seen effective coordinated action on the part of the governments of creditor countries, their central banks, the banking industry, multilateral institutions, and the governments of the debtor countries. Major achievements can be brought about, it is clear, when the political will is there. The central and decisive role of the International Monetary Fund in these matters has also been evident.
We are still too close to events to weigh the profound changes that have emerged from last year’s financial crisis. We are in a new stage in international financial relations. In the past months, we gained time. We have overcome acute liquidity crises, and the policies adopted by the international financial community have been essentially defensive ones. Now we must start to design a program that will bring us back to normalcy and reactivate the economies of the developing countries.
In this, as in other critical moments in the history of international economic relations, we must break the bonds of inertia, abandon shortsighted attitudes, and disregard traditional formulas. As we stand at the crossroads, we must display vision and political will if we are to implement the changes needed to ensure harmonious and sustained growth of the world economy. Against this backdrop, international cooperative agencies play and must continue to play an essential role. The resistance being shown in some circles in certain industrial countries to providing these agencies with sufficient financial resources is a source of concern.
The dramatic and, on occasion, threatening events of recent months call forth a number of basic comments reflecting the views of the countries of Latin America:
There can be no solution without economic growth. The signs of recovery evident in the main industrial countries are certainly encouraging, but they have to be extended to other countries as well. The problem of debt must be resolved through expansion and not through stagnation.
Bringing inflation under control is a priority issue. However, some industrial countries have been obliged to make excessive use of monetary policy instruments. Budgetary deficits—which the developing countries are always urged to reduce—remain extremely high. The persistence of high real interest rates makes the size and servicing of external debt more difficult and impedes recovery.
It is undeniable that some countries’ growth exceeded their real capabilities and they had greater recourse to external credit than their potential for absorbing it efficiently. In such cases, an adjustment program is necessary, not at the behest of some international organization but as an indispensable reaction to economic reality itself. Many countries are doing this.
Countries can accept belt tightening for a time, but they must find ways of adjusting which promote greater dynamism in their economies and ensure sustained development in the medium term. Privation is difficult to sustain indefinitely. Nevertheless, it may prove inexorable if no way is found to facilitate export growth and the resumption of normal functioning by the financial markets. The adjustment effort must be shared. The asymmetry which now prevails represents an additional burden on the developing countries.
Solving the external debt problem requires the cooperation of all participants. It also requires fighting for a permanent solution that will avoid recurrent negotiations and uncertainty.
In order to pay for and import essential goods and services, a country must export. The connection between financial and trade questions is becoming clearer all the time. A 3 percentage point decline in interest rates and a 10 percent improvement in export prices would be sufficient to completely eliminate the present current account deficits of 20 of the most heavily indebted countries.
There are ample possibilities for facilitating—selectively—the sale of goods produced by the developing countries on the large industrial markets. This is an enormous area for exploration. The industrial reconversion process must be evaluated more closely, as must the recourse to protectionism stemming from the overvaluation of certain currencies.
Efforts to renegotiate external debts have multiplied. It would appear that several general observations are applicable:
(a) The time frame of a restructuring is just as important as the maturities being renegotiated. It is ill-advised to force too early a return to the market.
(b) It is essential that some new resources be assured so as to prevent the strangulation and paralysis of economic activity. There is an exceedingly disturbing and surprising reaction beginning to appear in certain quarters, which are tending to limit the flow of bank credit abroad. At a time when flexibility and continued support are required, it is contradictory and paradoxical to propose solutions in the opposite direction.
(c) The real cost of credit has climbed considerably. One additional percentage point in the financial cost of Latin America’s debt involves some $3 billion. Margins and commissions must be reduced, if only to reduce risk.
(d) It is important to maintain the distinction between credit to the public sector and credit to the private sector. The insistence of some creditors that governments assume the commercial risk of private borrowing is inappropriate.
(e) Support is waning for the idea of a debtors’ club. However, there are some troubling signs of what might be called a creditors’ club.
It is necessary to use imaginative means to facilitate the gradual return of the developing countries to the money and capital markets.
In the next few years, domestic savings must play a leading and more decisive role in financing the development of our countries. Their economic policies must be more precisely defined. Room for maneuver has shrunk.
Our countries have the political will to adopt domestic measures which are appropriate in light of current economic conditions. What is needed is a favorable international climate. It is essential that interdependency be recognized and that we not think the world ends at our borders. It is necessary to increase the transfer of real resources, which, as noted by Minister Galvêas at last year’s meetings in Toronto, facilitates the adjustment process.
At times of widespread economic crisis, particularly when generated by outside causes, it is necessary that agreement be reached that the same conditionality standards cannot be applied as during normal times.
On behalf of the countries I represent, I would like to reiterate our support for the views expressed in the Group of Twenty-Four communiqué. Latin America is acting responsibly. It has reiterated its political will to adopt the domestic measures that are called for under the circumstances and is taking initiatives, such as the forthcoming economic conference, to strengthen its regional cooperation arrangements. We are living in particularly difficult times. Greater international cooperation is required. This idea, however, is not universally shared.
I would like to add a few words about recent developments in Mexico. More than ten months ago, we implemented a severe economic adjustment program. It was necessary to do so. We had no alternative. We have had some encouraging success with respect to the fiscal deficit, prices, the external sector, confidence, and fulfilling external obligations. Most important, however, is the consistency of our actions. This was essential under the circumstances. We are not satisfied, however. Yet another tough stretch is before us in the next few months. It is now necessary to reinvigorate the economy and provide more jobs. We cannot drop our guard.
The most pressing problems of external debt are being overcome. As I have said, however, we are convinced that the problem is global. Accordingly, solving it requires more than battle on a single front, or in a single country, but in all of them and at all times.
There can be no question that the flow of external credit in the next few years will be smaller than in the recent past. In the absence of other sources of external resources, growth in the developing countries will of necessity decline. But these countries cannot follow this path for too long if they wish to avoid domestic problems which, in turn, will affect the rest of the world.
This task is the responsibility of the international community as a whole. Lending and borrowing countries alike must make efforts to avert collapse. No one should exclude himself or be excluded, because there are no partial solutions. The interdependency of today’s world obliges us to act as one and to restore the foundations for balanced and just development as a prerequisite for world peace and understanding.
Statement by the Governor of the Fund and the Bank for the United States—Donald T. Regan
As President Reagan said to you yesterday, we are very pleased to welcome all of you once again to another Annual Meeting of the World Bank and the International Monetary Fund.
Given the pace of life in our time, we often lose sight of the progress being made. Are there problems? Of course. But in the larger sweep of history, mankind has moved farther and faster than our ancestors could have imagined. And our century has seen a veritable explosion of advancement with the prospects of a better way of life for millions.
‘‘History,” Edmund Burke once wrote, “is a pact between the dead, the living and yet unborn.” Our great challenge is to ensure that our pact with the coming generations is a viable one—that we are providing for the future, not mortgaging the future. That is what makes this time in history so crucial.
The last time we met in Washington—in 1981—the world was in the throes of a deep recession. I think you will agree that the mood of these meetings was one of gloom, if not despair. Few saw the way out of recession. At last year’s meetings in Toronto, we could see glimmerings of a recovery, but a new problem—the international debt crisis—had captured our attention. All of us were deeply concerned about the strains in the international monetary system that had emerged and the threat they could pose to the world economy.
Now, one year later, we find ourselves in a much more positive atmosphere. Problems are still with us, and we should guard against complacency. Additional steps are clearly needed before the debt problem can be resolved, and we must turn the emerging recovery into sustained, noninflationary growth throughout the world.
But we have made a turn for the better, and the prospects for world economic prosperity are greater now than they have been for quite some time.
Let us look in more detail at the reasons why.
The first reason is that the global recession is over. It may take some time for the recovery and its benefits to spread throughout the world, but make no mistake: the long-awaited economic recovery is taking place right now.
Led by the strength of the U.S. recovery, most other industrial economies are also turning up. This year will witness the first solid growth in the industrial world in three years. We believe that next year will see even stronger growth. And this growth will greatly benefit the developing countries, providing growing export markets to the rest of the world. Our imports from the non-oil developing countries rose some 10 percent in the first half of this year, providing an important boost to their foreign exchange earnings.
We are in the midst of a historic transitional phase now, and it is by no means over. We are seeing low inflation and significantly lower interest rates. So rather than another traditional cycle of recession to recovery, I think we are witnessing a more fundamental change—moving us onto a solid, new foundation that can sustain real growth and improve the standard of living throughout the world. We are seeing important signs that the world economy is moving successfully through these new and, in some cases, uncharted waters.
One sign is the fact that we and many other nations are altering our approach to economic policy by being willing to forgo short-term expediency and face up to the difficult choices necessary for long-term stability.
Another key sign is the fundamental difference between this recovery and earlier recoveries regarding inflation. During the 1974—75 recession, the industrial world never saw aggregate inflation rates fall below 8 percent. But at the start of the current recovery, inflation in the industrial world had receded to the 5–5½ percent range. This important difference is reflected dramatically in the fact that, for the first time in years, the U.S. economy came out of a recession with a lower rate of inflation than we had when emerging from the previous recession. For most of the postwar period, the inflation rate rocketed upward. That spiral at last has been broken.
With increasing inflation and interest rates, we in the United States had no choice but to adjust, just as many other nations throughout the world are in the process of adjusting their economies in order to achieve more sustainable balance of payments positions.
This brings me to a third important sign pointing toward a solid and sustained global economic recovery: the noteworthy progress that has been made toward adjustment by many developing countries. We have seen country after country begin to stand up to the challenges posed by the low commodity prices, by the recession in the industrial world, by the large debt burdens, and by the shortcomings of their own earlier policies. Their efforts have begun to show significant results. The progress some countries have made in overcoming their economic problems is, indeed, remarkable. Many of my fellow Governors sitting in this room have played critical roles in the process. They—and their countries—have both my respect and admiration for what they have accomplished in the most difficult of circumstances.
From my discussions over the past few days, it is clear that many of you are worried about the durability of the recovery in the United States. Some believe that the recovery will falter next year. And some have argued that high interest rates will stifle private investment.
Both of these issues are based on concerns about our budget deficit: concerns that I believe can be allayed. There is no question that our deficit is higher than we or anyone else wants it, and we are working to get it down in the only sensible way—by cutting spending. We have just recently revised downward our estimate for the federal deficit as a share of GNP in calendar year 1983 from 6.3 percent to 5.5 percent. As we cut expenditures further and the economy expands, the deficit will decline further.
And what about interest rates? In light of the slight rise in interest rates earlier this summer, there is a tendency to forget that rates are now roughly half of their peak levels in 1981. We have made major progress on this front, although there is obviously a lot more work to be done.
As far as the prospect that interest rates will stifle investment, the supposed negative effects of interest rates have not been evident in investment data. During the past recession, investment held up better than during normal downturns, despite high nominal and real interest rates. And more recent evidence suggests that private investment growth will be coming on earlier in this recovery than is historically normal. If we were to reduce sharply our fiscal deficit by raising taxes—as some have suggested—this would, indeed, stifle the recovery.
Why this strength in investment? The explanation lies in the Administration’s tax reform measures. The ability of corporations to generate internal funding for investment has been significantly strengthened by the tax changes, and incentives to invest have been improved. In addition, the equity boom that began last summer has provided a substantial new source of corporate finance.
There are, however, clouds still remaining on the horizon. We must guard against a number of dangers if our forecasts are to become reality. One of these is more overspending by our Federal Government. We must work with Congress to control excessive outlays. Another danger, as President Reagan pointed out yesterday, is protectionism. The recession, with its painful increase in unemployment, contributed heavily to those voices arguing for trade barriers to protect domestic industries. But there is a strange irony here: as the recession recedes, the calls for protectionism grow stronger. It would be tragic indeed if protectionism, fueled by a desire to safeguard employment, were permitted to destroy the very recovery which is now providing millions of new jobs.
A third danger is the temptation to pursue lax monetary policy in an effort to maximize short-term gains. We have been burned so many times on this one that I hope we can all resist the temptation this time.
And then there is the international debt problem. This brings me to the International Monetary Fund. The IMF is at the heart of our agreed approach to alleviate the current debt and liquidity problems. The progress that has been made during the past year is in large measure due to the Fund’s efforts. I would like to reiterate President Reagan’s statement yesterday that we owe Jacques de Larosière and his staff a significant debt of gratitude for their dedication and their professionalism during this turbulent period.
The Fund’s assistance in analyzing members’ problems, in helping them design appropriate policy responses to correct their payments problems, and in supporting their implementation has been crucial for many countries. The “seal of approval” implied by an IMF arrangement has been a critical catalyst for private and official financing.
Given this key role, the Fund membership is acting to strengthen the IMF’s ability to promote adjustment during the 1980s. It is vitally important that the quota increase and the expansion and revision of the General Arrangements to Borrow be implemented at the earliest possible date.
The U.S. Administration is doing everything possible to obtain the necessary concurrence of the U.S. Congress for participation in this increase in IMF resources. Indeed, we believe the IMF legislation pending before the Congress to be one of the most important economic measures on the legislative calendar. Without this quota increase we could put at risk all of the hard-won gains that we jointly have made. I want to assure you that we will continue to work closely with Congress in order to obtain final passage of this legislation within the agreed deadline.
The current financial strains affecting the Fund underscore the need for the IMF to husband its scarce resources. They also emphasize the importance of reaffirming the IMF’s traditional role as a source of temporary balance of payments financing to be used in support of short-term to medium-term adjustment efforts. Our views on this are clear and are rooted in some of the very first discussions of the Fund at Bretton Woods.
On July 20, 1944, Louis Rasminsky of Canada, who went on to become Canada’s first Executive Director in the Fund, presented the Report of Commission I to the full Conference that had been set up to consider the establishment of the IMF. This report, which had the full support of all 44 countries at the Conference, explained the basic purposes of this institution. I would like to quote a few excerpts from this report:
…I think it right to state that the Fund is not regarded, and should not be regarded, as an institution for the provision of long-term capital requirements. The quota of each country should be regarded as an extra reserve to give it confidence to face the uncertain future and not as the primary source of foreign exchange to meet its international commitments. Long-term financing through the Fund must not be practiced….
The Report goes on to say that “the Fund is not intended to provide facilities for relief or reconstruction.”
Two days after this report was presented, these concepts were formally embodied in the IMF Articles of Agreement. We believe it is critically important that this unique role for the Fund be preserved.
We recognize, of course, that the world economy has changed greatly since 1944, and an institution must be able to adapt to the changing needs and circumstances of its members. There comes a point, however, where adaptation becomes transformation. We must steadfastly guard against going beyond that point.
We are pleased with the accord reached in the Interim Committee to continue the enlarged access in 1984. We believe the outcome takes into account the financing needs of Fund members during these difficult times, the need to husband Fund resources, and the need to preserve the temporary revolving character of IMF financing. I regret that a compromise could not be reached on the compensatory financing facility, but I am confident that the Fund’s Executive Board will be able to resolve that issue.
Before turning to World Bank issues, I would like to touch on one other aspect of the Fund’s responsibilities.
I am referring to the obligation that all members in the IMF have under Article IV of the amended Articles of Agreement. This Article embodies the concept that international stability can only be derived from domestic economic stability. In my view, this places the emphasis where it should be. The Article specifically directs all IMF members to (and I quote)
(i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;…
Article IV not only gave IMF members greater responsibilities to maintain domestic economic stability, it also gave the Fund the mandate to exercise firm surveillance over members’ exchange rate policies. The Fund agreed to principles and procedures to implement its surveillance mandate, and these contained many useful and relevant provisions. We sometimes are tempted to look past Article IV and surveillance for more broad-ranging solutions to our international economic problems. But the real challenge is to develop the system we already have. I suggest that we all should take a serious look at this area and consider ways the Fund’s surveillance activities could be strengthened….
One of our American public figures of the early part of this century was William Jennings Bryan. He wrote: “Destiny is not a matter of chance. It is a matter of choice. It is not a thing to be waited for. It is a thing to be achieved.” That statement was true then. It was true when the IMF and the World Bank were created. And it is true today.
Some believe that the U.S. position on IMF and World Bank issues at this meeting reflects a lack of support for these institutions. Nothing could be further from the truth.
I believe we all share the same vision of our destiny—a destiny of economic prosperity throughout the world. We may differ on the most appropriate way to achieve that goal, but that should not obscure the fact that we do have a common goal.
Four decades ago, former U.S. Secretary of the Treasury, Henry Morgenthau, made the closing address to the Conference at Bretton Woods that created these institutions. He said then:
There is a curious notion that the protection of national interests and the development of international cooperation are conflicting philosophies—that somehow or other men of different nations cannot work together without sacrificing the interests of their particular nations…. [But] we have come to recognize that the wisest and most effective way to protect our national interests is through international cooperation—that is to say, through united effort for the attainment of common goals. This has been the great lesson taught by the war and is, I think, the great lesson of contemporary life….
Many centuries before Mr. Morgenthau, a Greek mathematician discerned the vast power of the fulcrum. That man, Archimedes, said, “Give me a standing place and I will move the world.” In a sense these two great institutions are here to provide nations a “standing place” and a fulcrum to be used to strengthen their own economies. But like the “standing place” and the fulcrum of Archimedes, they are only tools. In the long run, the true power will come from our own efforts and from the dynamism of the marketplace.
Statement by the Governor of the Bank for the Netherlands—H.O. Ruding
In the past half year, more and more evidence has become available of an incipient recovery of the world economy. The resumption of economic growth is particularly strong in the United States, but signs of it are also visible elsewhere, although in some countries it is in a very early stage. The cause of this recovery, which comes after many years of recession, can be discerned clearly. The reduction of inflation to very low levels in several major industrial nations in combination with recent monetary expansion has given rise to a new growth of real demand. The recovery can therefore be said to be founded upon the achievement of low inflation rates.
The question arises whether this incipient economic growth will be sustainable. Although several economies with near price stability are well placed to embark on further expansion of activity, such a sustained growth cannot as yet be taken for granted. For there are several risks that threaten to slow the recovery down.
The first of these risks is the danger of a rekindling of inflation. New inflation would erode expenditure, disturb the general equilibrium of markets, and thereby eventually cause a new contraction of economic activity. At the same time, however, inflation rates are still too high in many countries, especially in the developing world. Moreover, inflationary expectations, although diminished, are still present nearly everywhere. Furthermore, the considerable expansion of the money supply in low-inflation countries during the past 12 months might, unless it is curbed in due time, eventually rekindle inflation and inflationary expectations. For all these reasons, it seems to be a matter of great importance that monetary expansion be kept moderate.
A second risk is that investment growth will be crowded out, or rather kept out, by high budget deficits. At present, these deficits absorb a very large part of available savings and push up long-term real interest rates to very high levels. In this way, they tend to depress private investment, much to the harm of future economic growth. An additional disadvantage of large budget deficits is that interest payments on the public debt are rising and will take an ever larger share of public expenditure. It must be feared that public investment will suffer from such an unfortunate development, not only at the present time but also in the years to come, and that this will tend to lower the rate of economic growth in the long term. It is in the interest of durable economic recovery that the efforts to bring these deficits down be continued and intensified.
A third threat to sustained economic growth is formed by exchange rate instability. Whereas in the 1970s we faced a continued depreciation of the U.S. dollar, this situation has now been reversed. Since the end of 1980 we have been experiencing a major appreciation of the U.S. dollar. In both periods the fluctuations attending these exchange rate developments have produced reactions in the other industrial countries of the OECD area. For, as we all know, this instability might hamper international trade and foreign investment and may give rise to calls for more protectionist trade policies.
One of the reactions to exchange rate instability was the request, which was particularly addressed to the United States, for a more active intervention policy, in order to dampen the fluctuations and curb the persistent rise of the U.S. dollar exchange rate. In this connection, a study was undertaken by a group of experts last year regarding the effects of official interventions. As some of us may have expected, this study showed that, although market interventions may not be without effect in the short run, for the achievement of exchange rate stability in the long run they are not of much help if they are not supported by appropriate changes in monetary and budgetary policies.
Long-term exchange rate stability can only be achieved by coordinating our national monetary and budgetary policies on a sound basis. It is to be expected that, as long as countries keep pursuing their domestic economic policies as though the effects of these policies were of no consequence internationally, exchange rate stability may remain a nearly unattainable goal. Of course, this is especially true for the major industrial countries. On the other hand, however, it will be necessary for the smaller countries to adjust their domestic policies toward achieving both internal and external equilibrium. Thus, the responsibilities for the appropriate policies lie with all actors in the international economic scene.
It is my opinion that in this field the Fund could play a more important role in the future. Up to now, surveillance of exchange rate policies by the Fund has mainly taken place in the Article IV consultations on a country-by-country basis. In order to attain more policy coordination, it might be advisable to extend the task of the Fund in this particular direction, for instance, by encouraging the Fund to make more extensive use of its authority under Article IV or by having the Fund organize consultations, or discussion rounds, on a multilateral basis. In the latter instance, the Fund would set the stage for an exchange of views on both the intentions and the implementation of monetary and budgetary policies by the different participating countries.
In order to attain exchange rate stability, however, it may be useful to discuss the major policy issues in other forums as well, in particular in the meetings of the ministers of the Group of Ten and their deputies. These meetings could be intensified, and some could be reserved solely for discussions on the subject of policy coordination with the aim of achieving exchange rate stability. An interesting thought in this connection could be the idea, which is being developed in the latest Annual Report, to examine whether exchange rate stability and the results of the monetary policy could be improved by using the exchange rate as an indicator. Although I consider the context of the meetings of the Group of Ten particularly suited for this purpose, I feel that we should be open to other constructive suggestions or proposals. As a last remark on this particular subject, I would like to stress that no amount of discussions and consultations on a multilateral level will lessen the importance of the requirement that governments take the international consequences of their domestic policies into consideration in formulating their economic policies. Should this willingness not exist, all discussions and consultations will prove to be of little avail.
A further area of concern on which I would like to make some remarks is the debt problems of several major developing countries. I would like to stress that the Fund has done an excellent job in preventing the illiquidity problem of individual countries from creating serious trouble in the world financial system. Moreover, the rescue operations for the debtor countries, speedily and efficiently put together by the Fund in close cooperation with central and commercial banks, have until now warded off a breakdown of the economies of the debtor countries. I have noticed with satisfaction that this has brought about a greater understanding of the role of the Fund and especially of the conditionality attached to its lending operations.
Looking forward, however, we should realize that the debt problem will still be with us in the years to come.
One of the great challenges we are facing now is to keep the international monetary system functioning. The International Monetary Fund is an important factor in this process, and, without going into details, I would like to point out some of the areas in which I think the Fund could play a major part.
First of all, it is of great importance that the debtor countries, supported by the Fund, adopt programs of adjustment so as to recapture their creditworthiness. It is crucial that these programs be successfully implemented and aimed at a decreasing dependence on external finance.
Second, the Fund should be able to continue its lending to deficit countries. The recent decision on the quota increase and the modification of the General Arrangements to Borrow—which we hope will be quickly effectuated—are the first steps to strengthen the liquidity position of the Fund. Moreover, in order to strengthen the liquidity position of the Fund so that it can continue its lending in the future, I feel that it is equally important that the policy of enlarged access be eventually terminated. We should bear in mind that from the outset that policy was meant to be a temporary instrument. At the same time I am aware that, due to the large problems that many member countries are still facing, this termination should take place gradually. Although I would have preferred a solution of a uniform access limit of 110 percent, I consider the compromise solution on enlarged access reached by the Interim Committee for 1984 as acceptable under the present circumstances, though not ideal.
The third condition for an adequate flow of finance to the developing world concerns commercial banks. As in the past, they will be called upon to finance part of the current account deficits of the developing countries, although at a much more modest pace. Given most current account projections for the non-oil developing countries, net exposure of the commercial banks would have to grow on average by approximately 5 percent annually, against 20 percent or more in the years before 1982. Although this 5 percent seems well within reach, recent developments cast doubt on whether the ability or the willingness of banks will be sufficient to actually meet this target. It is my opinion, however, that the Fund is in an ideal position to help ensure at the appropriate times and amounts the future lending of commercial banks to debtor countries. Measures to improve the flow of information are very important in this respect. The main contribution of the Fund, however, is to ensure that its lending is accompanied by the appropriate adjustment programs.
Finally, as for the question of an SDR allocation, I am of the opinion that a moderate SDR allocation is warranted. We should, however, be careful and clearly distinguish between, on the one hand, the present demand for balance of payments financing in many countries and, on the other hand, the long-term global need to supplement reserves. We should bear in mind that the Articles of Agreement clearly stipulate that allocations should meet the need to supplement existing reserve assets. Some of the arguments that were used against an SDR allocation two years ago no longer prevail. There is no longer an ample supply of reserves through international bank lending, and inflation rates worldwide in the main industrial countries have come down dramatically. Also, in 1982 global reserves have, for the first time in many years, declined. For these reasons I see a good case for the resumption of SDR allocation on a modest scale for the remainder of the current basic period.
The economic recovery in the industrial world, if it takes hold, will no doubt have positive effects on economic growth in developing countries. Even so, the economic situation of many developing countries will remain highly worrisome. Much depends on the successful outcome of the adjustment programs currently being undertaken by many developing countries. Indeed, the recession has laid bare the distortions in economic and financial policies in many countries. Developing and industrial countries alike will first have to pursue policies that create the conditions for a recovery of growth before they can fully profit from external impulses. Of course, we should not forget that there are many differences among developing countries and that the problems of the poorer developing countries are so deep-seated that a solution of their problems will require specific measures and additional support….
Statement by the Governor of the Fund and the Bank for Australia—Paul J. Keating
After a decade of disappointingly slow growth and three years of severe recession, the recovery in a number of major industrial countries is a very welcome development. However, the major problems of the world economy will not be overcome by a short-lived cyclical turnaround in activity, and we must not relax our efforts to implement policies that will enable the recovery to be broadened and sustained. We should not be lulled into thinking that global inflation has been contained just because a few major countries have had some recent success on this front. In most countries inflation has yet to be convincingly dealt with, and in almost all countries inflationary expectations remain stubbornly entrenched. All of us will need to be on our guard against a rekindling of inflation as recovery gathers momentum.
As many speakers have acknowledged, the task of financing large budget deficits can have adverse expectational effects and exacerbate problems of monetary management. Nominal interest rates are holding well above the current rate of inflation. In turn, consumption and investment expenditure by the private sector are being discouraged. Financial markets are rightly looking for convincing evidence that governments will wind back budget deficits as the recovery strengthens so as not to put undue pressure on interest rates and exchange rates. Monetary growth must also be supportive of noninflationary growth objectives.
In a number of countries, including my own, poor economic performance can be linked to past failings in the reconciliation of conflicting income claims. Although the process of income determination differs among countries, we consider it desirable for governments to achieve a greater social consensus about that process and its requirements for economic recovery.
The vitality of recovery can be enhanced by measures designed to increase the responsiveness of economies. Many of the factors which have stifled productivity and economic growth over the last decade lie within the power of individual countries to correct. Domestic pricing distortions, rigidities in markets both for labor and goods and services, disincentives to saving and investment, and unnecessary regulations are but some examples.
The growth in protection, particularly over recent years, has been most disturbing. That issue is of course one on which few, if any, of us can legitimately avoid criticism. However, there is a need to find a way forward. We must look to leadership from the major developed countries, but it is important that the framework used should be global in nature and embrace all product groups and trading nations.
The single most important longer-run contribution that the industrial countries can make to resolving the problems of high-debt countries is to foster a sustained and gradually strengthening recovery in the industrial world. If this recovery can be achieved in a noninflationary manner and interest rates can be brought down, the difficulties will be further lessened. The obligation to adopt appropriate domestic policies weighs on us all, not just on the heavily debt-burdened countries or, more generally, those in balance of payments difficulty.
The world economic environment has been a testing one for the Fund. Its role in relation to the international debt situation is to be applauded. While increased lending has been an essential part of this role, policies for adjustment in the context of short-term balance of payments financial support must continue to receive priority. Under the Fund’s guidance, many developing countries have already made admirable progress in difficult conditions in their adjustment policies.
The depletion of the Fund’s financial resources resulting from its close involvement in the debt situation gives cause for concern. It is important that the eighth quota review increase should come into effect by the end of 1983. As far as Australia is concerned, legislation has already cleared one House of the Parliament, and I expect its passage to be completed in time for us to consent to our proposed quota increase by November 30. The level of quotas is, of course, a key factor in the Fund’s operations. Governors have agreed in the past that quotas should remain the principal source of finance for the Fund. Given that, the new quota levels will set certain limits to the Fund’s balance of payments support activity for the next few years. There has already been mention of an accelerated ninth quota review, but to be realistic our calculations must assume that the quota levels of the Eighth General Review will hold for at least a few years.
As in the past, there will, of course, be opportunities to supplement quota-based resources through borrowing by the Fund, but here also it would be easy to anticipate too much. While the Fund is still well short of the ceilings under its borrowing guidelines, there are other constraints on the scale of borrowings, including the vexed question of the Fund borrowing on capital markets. Consideration of the supply of resources to the Fund is an integral part of the review of limits on access to Fund resources. The need of countries for balance of payments support is the other important element. The balancing of these two competing considerations has not been an easy task. But the proposals to be considered by the Executive Board should, I believe, form a sound basis for the Fund to undertake financing and adjustment policies for countries requiring its support.
Within the past year, the Fund has been called upon by the summit countries to participate in considering the part that a high-level international conference about changes to the international monetary system might play in improving the performance of that system. Discussion in these areas should be encouraged. However, before we consider a wholesale redesign of the international monetary arrangements, we would be wise to explore more fully the opportunities that our own economic policies provide for stabilizing the international monetary system as it currently operates….
Finally, may I assure you of the Australian Government’s continued strong support of the operations of the World Bank and the Fund.
Statement by the Governor of the Fund for Hungary—János Fekete
It is a great honor for me to address for the first time the Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund in the name of the Hungarian People’s Republic.
Allow me first to extend on behalf of my Government a warm welcome to the new members that have joined the World Bank since our last Annual Meetings. I listened with great interest to President Ronald Reagan, to the opening address of our Chairman, to the speeches of Mr. de Larosière and Mr. Clausen, and to the previous speakers. I wish at this time to report on our situation and our cooperation with the two institutions. I would also like to make some comments on the present world economic situation.
For a small country like ours, an active participation in the international division of labor and in the work of international institutions is a vital condition for furthering our economic development. This has been duly reflected in the economic policy of our Government, and our application for membership in these institutions is a logical extension of that policy.
Hungary signed the Articles of Agreement for the Fund and the Bank in May and July of 1982, respectively. I would like to use this occasion to express my sincere thanks that all the Governors participating in the voting procedure voted to approve our application for membership. I would also like to thank the Executive Boards, the managements, and the staffs of the Bank and the Fund for the cooperation they have shown us, not only during the preparatory talks before our application for membership but ever since as well.
In 1978–79, the Hungarian Government introduced significant adjustment measures aimed at eliminating the external and internal imbalances which developed after the two energy price explosions, which ended a period of balanced growth in Hungary. These efforts brought favorable results for our external trade balance. Although in 1978 our external trade, settled in convertible currencies, had shown a deficit of $1.2 billion, the year 1979 brought a sharp reversal of this trend, and in 1980–82 we had a further improvement, which gave us a growing surplus in our trade balance. The deficit of the budget has been reduced to about 1 percent of our GDP.
At the same period that we in Hungary were fortunately returning to a situation of balance, the payments difficulties of some of our neighbor countries caused a massive withdrawal from Hungary of short-term deposits on the part of numerous banks. We were also unable during this period to get any new medium-term credits. This is the phenomenon called the “regionalization syndrome” by the Annual Report of the Bank for International Settlements (BIS).
By 1982–83 further regionalization syndromes had occurred in other parts of the world as well, and it soon became quite evident to the international financial community how dangerously this erroneous theory could develop.
Our initial favorable liquidity position enabled us to resist this pressure, and we were able to fulfill our obligations, but we found ourselves confronted by growing liquidity problems. Through the BIS, the National Bank of Hungary requested and was granted short-term bridging facilities from other central banks, amounting to $610 million in several tranches. At about the same time, we concluded our membership negotiations with the Fund, and by December 1982 we had reached an agreement on a first stand-by credit and a compensatory financing facility totaling about $600 million. When the commercial banks saw that a large international cooperative effort had been set in motion in our interest, they also regained their confidence in us, and we were able to establish a number of major credit agreements with them. These agreements also contributed to the improvement of Hungary’s liquidity position. We repaid, on time, all the short-term bridging facilities received through the BIS….
To overcome our difficult situation, which was mainly caused by events beyond Hungary’s control, two major preconditions had to be met. The first element required to solve the liquidity crisis was implementation of necessary internal measures. The Hungarian Government took severe measures aimed at cutting back domestic purchasing power and reducing the budgetary deficit. It is expected that these measures will provide us with considerable convertible currency trade and a current account surplus for this year. To increase this surplus still further will remain a top priority goal of Hungarian economic policy in the coming years.
The second necessary element was the moral and material support of the international financial institutions, other governments, and central and commercial banks.
We are firmly convinced that these collective efforts were crowned with success only because this essential external help was paralleled on our side by the necessary political will, social consensus, and economic policy measures. Our adjustment efforts were aided by valuable advice from the Fund missions, given to us in frank and open consultations and discussions. The same can be said of our relations with the World Bank. Although our discussions concerning methods, approaches, and timing were sometimes heated, we were able in the course of these negotiations to find the elements of cooperation between Hungary and the Bank and the Fund. I think this was made possible because all our negotiations, from the highest-level consultations to the discussions with the experts, were characterized by nondiscriminatory, objective points of view.
Before I conclude this part of my remarks devoted to our experience of cooperation with these two institutions, I would like to emphasize that an economic adjustment program supported by the Fund can be considered well-founded and feasible only if the conditionality requirements are tailored individually to the aims and specific sociopolitical conditions of the country concerned. This was the case with Hungary, and the Fund’s recommendations fortunately coincided with the Government’s adjustment programs, which had been introduced already in 1978. Special importance has to be attached to the fact that, under the conditions of the present time, in some cases there is a tendency to prefer excessively short-term measures, which endanger long-term development. The support we gained from the Fund’s cooperation will help us not only to pursue our adjustment efforts but also to make further progress in the economic reforms already initiated in 1968. The aim of those reforms was and is to establish a socialist planned economy in which market forces are increasingly taken into account.
Naturally, our progress depends largely on external factors arising from the world economic situation.
During recent years, the world economy has been struggling to overcome serious and ever-growing problems. Some very large and important industrial countries have succeeded in overcoming inflation by the pursuit of tough anti-inflationary policies. However, because these policies have been implemented mainly with monetary tools and without the necessary accompanying support of fiscal measures, they have required heavy sacrifices in terms of economic growth and labor management. Monetary restrictions have not only reduced the domestic demand of the industrial countries but have simultaneously narrowed their export markets as well. The high levels attained first by nominal and then by real interest rates, together with high energy prices, have imposed heavy burdens on all oil importing and debtor countries, burdens which are reflected in growing balance of payments disequilibria. Both the developing and the middle-income countries are hard hit by the narrowing of their export possibilities, which is due partly to increasing protectionism and partly to the increased cost of external resources.
It seems safe to predict that, if present monetary policies are continued, they will lead a number of countries into serious financial difficulties, which will then directly threaten the entire world monetary system.
In my view, in order to avoid this general economic depression, the recessionist policies so far pursued with the primary goal of combating inflation must now be changed. On the occasion of these Annual Meetings of the Boards of Governors, it would be right to recognize and to declare that today’s “public enemy number one” for the world economy is depression. The major industrial countries with low inflation rates, high unemployment, and low capacity utilization, the same countries which are responsible for more than half of total world production, could encourage the economic revival by expanding domestic demand. At the same time, however, the fight against inflation cannot be abandoned, either generally or in certain specific countries. The world has paid too high a price for the results achieved so far for those results to be endangered now. What we must do, then, is to find new weapons capable of fostering conditions for economic growth consistent with maintaining the struggle with inflation.
In today’s world economic environment, one appropriate measure would be to increase the roles of the Bank and the Fund.
The Fund’s important and ever-increasing responsibilities require that it be given the opportunity to support the readjustment of the economic processes of various countries. To enable it to perform this task, the Fund must be provided with adequate resources. Its members are approaching the Fund to help them to meet their increasing financial needs, which stem mainly from the recession in world markets and from their high debt service burdens. The Fund’s task is to ensure that stand-by credits are granted on appropriate terms to those countries which undertake economic programs aimed at re-establishing their external and internal equilibria. When the Fund supports them, it is not only with its own resources, since this support also gives them access to other sources of capital. In consequence, the impact of the Fund’s financial support considerably exceeds its own institutional limits and goes beyond the financial means it allocates itself. We therefore fully support the extension and strengthening of the conditional lending activities of the Fund, since these are to be considered one of the main pillars of the worldwide adjustment effort.
We believe that the resolution on quota increases under the Eighth General Review of Quotas and the enlarged General Arrangements to Borrow must receive urgent ratification by the legislations of all member countries without amendments which would impede the flexibility and freedom of the Fund’s activity.
For the same reasons we support those suggestions which would not reduce the scope of the extended Fund facility arrangements. These credit facilities, together with the compensatory financing scheme, should be maintained.
Taking into account the great financial needs of many indebted countries, there is the impending danger that the Fund might face a liquidity problem due to unexpected delays in the constitutional approval of the above-mentioned quota increases. To avoid any interruption in fulfilling its main tasks, we support eventual borrowing by the Fund— even on a stand-by basis—first of all, from official sources and, if necessary, from the private markets as well.
We support new SDR allocations. Arguments that such allocations might rekindle inflation are not justifiable in the present situation, which is characterized by high unemployment, underutilized capacities, low raw material prices, and serious liquidity problems. I would even add that there now exists the possibility of increasing the role of the SDR, a matter which has already been decided in principle but not yet realized in practice.
A further important task would be to find some new monetary arrangements capable of moderating the extreme exchange rate fluctuations which have led to serious misallocations of resources and disastrous effects on world trade.
Recent reports inform us of the economic recovery under way in the United States and to a lesser extent in the other major industrial countries. I surely hope that the optimistic forecasts concerning the beginning recovery will be fulfilled and that the coming years will see sustained, noninflationary growth. I feel that I speak in the name of all present at these meetings when I say that all of us are interested in and waiting for this recovery.
However, I must admit that I do not yet see the economic basis of these optimistic forecasts. I am convinced that, without a change in the priorities of economic policy in countries with low rates of inflation, without new efforts to control inflation in the others, and without some new steps in international monetary cooperation, this recovery will be short-lived and may be followed by an even deeper depression. To avoid this should be the primary task of the Governors of the Bank and the Fund and of all of us who are taking part in these meetings. Today, all over the world, eyes filled with hope and expectations are directed toward this conference. They are waiting for an encouraging signal, indicating that we can surmount the difficulties that we have to face. I am sure that the governments, the governors representing them, and the managers of the Fund and the World Bank are well aware of their responsibilities and will act accordingly.
Statement by the Governor of the Bank for the Islamic Republic of Iran—Iraj Toutounchian
First, I would like to express, on behalf of the delegation of the Islamic Republic of Iran, my gratitude and appreciation to the organizers, Board members, and others responsible for arranging this international gathering to consider the problems of member countries. I take this opportunity to welcome those countries which have been admitted recently as members of the World Bank. I hope that someday members of our two internationally important financial and monetary organizations, which are constituted mainly of developing countries, will find long-term solutions to the existing world economic problems. We also expect that such a magnificent meeting will at least contribute toward exposing to the world the problems of the underdeveloped countries. From such an initiative, a comprehensive and correct judgment can be ascertained as to the root causes of the exploitive and oppressive policies faced by the underdeveloped countries.
The current global economic disorder has fundamental underpinnings which are the reflection of many years of hegemonistic economic and political policies of certain countries. As a result, poor countries have become poorer and the rich have acquired more than they deserve. We can observe this reality in the statistics of the gross national products of the rich and poor countries of the world during recent years. According to international economic statistics, the developed countries have enjoyed a positive rate of growth in their gross national product, while simultaneously this rate has shown a negative growth in numerous underdeveloped countries.
The present economic crisis has manifested itself in an inflation rate that is much too high, balance of payments problems, low rates of economic growth, and increased unemployment. Coupled with this is the undeniable fact that the industrial countries are unable to bring about economic stability, arrest the spiraling tendency toward recession, or eliminate the crisis itself. To counteract this inflationary trend, restrictive monetary and fiscal policies have been implemented. The so-called remedy has led to a marked increase in unemployment, deeper recession, as well as an adverse effect on investment and on the level of production. The result of the current crisis in the developing countries has been even more pronounced and has manifested itself in the appearance and formation of particular economies characterized by stagnation, high unemployment, extreme poverty, and a high infant mortality rate. Thus, the economic structure of the developing countries is marked by total dependence on the rich countries; and, as a result of limitations brought about by such dependence, a special industrial and economic structure, with all its ramifications, has taken shape in the developing nations.
Such ramifications show their effects in the industrial structure imposed on the majority of underdeveloped countries, characterized by the lack of an appropriate interindustrial relationship which appears as a primary obstacle to their growth and development. In other words, the forward and backward linkages between the industries are almost nonexistent. Those industries which have been accorded greater priorities have little linkage to other related industries. Therefore, the industrial structure of these countries lacks the necessary foundation, and most of the value added is obtained in a single production unit. This is one of the basic factors causing dependence, that is to say, the provision of semifinished goods by the industrial countries to the domestic industries of the developing countries. Even the choice of an appropriate technology based on the domestic abilities of the developing countries becomes by itself a great problem for most of these countries.
Adding to this problem is the fact that there is only a limited number of developing countries that have sufficient foreign exchange reserves, and these feel compelled, under the technological know-how and might of the superpowers, to obtain the most sophisticated industrial processes available, although having no bearing on their domestic industries or their current know-how.
On the other hand, the majority of countries are poor and lack the necessary foreign currency for internal development, design, and planning of appropriate technology. Furthermore, these countries are faced with an acute shortage of skilled and semiskilled manpower during the course of effective utilization by their productive sectors. The consequence is that the industrial and technological development of this group of countries has been stifled, and they are caught in the vicious cycle of borrowing in order to support the importation of intermediate products. This, of course, leads to a steady increase in the deficit in the balance of payments. According to World Bank statistics, there have been frequent reductions in the real prices of raw materials, which are the main export items of the developing countries, while at the same time industrial goods, which are the main import items of these countries, are consistently increasing in real values. Added to this is the low level of capital formation in the developing countries. The overall consequence is their urgent need for foreign exchange and thus their dependence on foreign loans and credits. In the face of such needs, the mechanism for acquiring foreign currency is itself an added burden. This mechanism imposes an additional burden on these borrowers in the form of foreign debt, including principal and interest. For example, there are some countries whose total foreign debts are more than their gross national product.
In addition to this difficulty, there are some countries whose needs for financial resources have never been seriously considered by the international financial community. At the same time, it is observed that the major part of the available financial resources go to only a select few of the developing nations. The inability of these few countries to service their foreign debt is perceived as the current financial crisis of all developing countries. Considering the increasing trend in the accumulation of foreign debts by all countries, it is plain that their economic situation has become increasingly vulnerable. Therefore, it is desirable to evaluate the conditions upon which they enter into foreign debt, either through international organizations or through the world capital and money markets. Due attention to the mechanism by which debts are accumulated and to the role of one of the main culprits in this crisis, that of floating interest rates, is of utmost importance.
Floating interest rates make the borrowing countries susceptible to the economic fluctuations of the industrial countries, thereby increasing their financial burden. This is one of the most important factors in the disruption of the process of economic and fiscal planning in the borrowing countries and is a serious impediment in the path of the development of all developing countries.
One of the most important economic changes of the Islamic Republic of Iran in its monetary and banking policies is the ultimate elimination of interest (not profit). Thus, interest rates will be replaced by the internal rate of return on investment, which is the effective factor in the allocation of financial resources. The cost of interest is not only an obstacle to development and economic growth but, more important, it is an instrument of exploitation and is therefore strongly condemned in the Holy Quran. Furthermore, the intermediary role of interest, which has no relationship whatsoever to the profitability of capital, is unnecessary. Therefore, we should duly depend on the rate of return of capital, which is at the forefront of the economic programs of the Islamic Republic of Iran.
In spite of the mammoth problems and difficulties which have appeared in the path of Iranian economic development during the postrevolutionary period, including economic boycott and an imposed war, the Islamic Republic of Iran has been able to overcome these difficulties by the help of God the Almighty and under the Imam Khomeini’s leadership and by the sacrifice and sincere devotion of the Muslim people of Iran. The obvious result of this success can be observed in our present political and economic stability. Contrary to what the world has expected, it can be observed that, under the political and economic security of our country, valuable steps have been taken toward economic and industrial independence and self-sufficiency.
The achievements of the Islamic Revolution of Iran can be seen and felt in all the economic, social, and political aspects of life. These achievements include, but are not limited to, the unprecedented expansion of the highway and road system, in particular the rural roads which have been constructed by efforts of the Reconstruction Crusade; the extension of the electricity network; and the establishment of numerous new schools in rural areas. These are but a few of the many steps taken to ensure a lasting infrastructure.
The Islamic Republic has brought about the possibility of realizing the establishment of complete Islamic justice by eliminating economic inequality and devising a better system of distribution of income and health care in the society, measures which will be seriously followed in the future. In the midst of the economic and social stability within our country, it can be witnessed that the first five-year development plan of the Islamic Republic of Iran has been devised and is in the process of implementation. The accomplishment of such infrastructural programs will smooth out the path of continuous growth and development in the future. It is clear that the performance of the economic policies of the Islamic Republic of Iran is based on the general policy of “Neither East Nor West”; it is based, and will continue to be based, on its own resources and capabilities, aimed at self-reliance.
On the international scene, again in spite of all the difficulties and shortcomings which our nation has encountered during the postrevolutionary period, the Islamic Republic of Iran has honored all its foreign obligations, as is evident by the prompt and timely repayment of all international and financial commitments. Indeed, according to statements by international economic observers, the overall situation is far better today than at the beginning of the imposed war. In addition, in order to help those countries which are in need of financial assistance, Iran has committed itself to reschedule the repayment of those countries’ debts to Iran. The efficient use of Iran’s foreign exchange has resulted in the considerable increase in its foreign reserves. We are thankful to God Almighty that in this respect no problem exists at present.
As a country of the developing world and as a member of the world community, Iran is bound to think not only about its own problems but to help solve the problems and difficulties of the poorer countries of the world. For the past several years, the root causes of underdevelopment have been a prime subject of debate at most international gatherings. In this respect, hundreds of resolutions have been put forward, but the tangible realities of the world indicate that much less success has been achieved in alleviating these difficulties. Regrettably, in many cases the economic situation of the deprived nations has become considerably worse. What we are saying here is not new, but the purpose of reiterating it here is to at least bring up the question of when will the time come for paying due attention to these critical matters. Isn’t now the time to confront, constructively, these deep-rooted problems and at last liberate ourselves from the vicious circle of underdevelopment caused by exploitation? While the urgent need for structural changes is emphatically felt, ignoring the realities of the immediate requirements of poor nations is neither desirable nor realistic. Facing these harsh realities calls for decisive and drastic measures by the represented member countries and the international agencies concerned.
One of the most important demands of the countries which are in need of loans from the World Bank and the IMF is a fundamental review of the system for granting loans to these countries. The existing system, which is dogmatically adhered to by the authorities of these two international organizations, does not even approach the minimum requirement necessary to satisfy the basic prerequisite needs of the poor nations. Thus, the conditions for granting loans required by these two international bodies practically become a guarantee for due repayment of other loans extended to developing nations by the financial and capital markets of the world, which are mostly owned by industrial countries. Reciprocally, most financial sources in the developed world make any lendings to the poor countries contingent upon receiving loans and entering into the adjustment programs. Such a mutual relationship, which imposes such an irrational constraint on the shoulders of needy countries, results in an unfair and unbalanced distribution of these resources.
Regretfully, we observe many countries burdened by heavy debt, and perhaps, according to the expert views of the world monetary and banking authorities, they may never have the ability to repay their debts, while a substantial number of the needy countries do not even have the hope of ever obtaining sufficient financial resources for their needs. Another undesirable consequence of this parallel relationship is that the World Bank and the IMF have become a kind of guarantor for repayment of these loans, or at the very least a monitoring agency for maintaining superficially favorable economic conditions in the loan-seeking countries. With respect to this obvious reality—that the interests of the developing countries do not necessarily correspond to the ultimate aims of the capital and financial markets—unfortunately the constructive and creative role that the World Bank and the IMF could play in the economies of the developing and poor countries has been ignored.
The Islamic Republic of Iran calls upon the distinguished representatives present in this world convention to seriously endeavor for a better and more constructive role within the World Bank and the IMF, in order to create the necessary means to help and assist the poor countries. One of the ways to achieve this noble aim is to provide more accessible credit for those countries in need. This aim can be achieved by reducing interest rates and establishing easier conditions for obtaining loans. In this connection, the World Bank and the IMF can supervise and guide the disruptive elements prevailing in private international markets in a way that will facilitate an easier approach to them by the needy countries. In fact, the principal aim of the adjustment programs must not be limited merely to enabling the poor countries to make prompt and timely repayments of their debts; but their ultimate objectives must be based upon putting forward long-term reconstruction and development programs, paving the way for their economic independence.
With regard to the low level of economic development and growth, and the fact that most poor countries of the world have an urgent need to acquire outside resources for long-term infrastructural investments, reduction of the interest rates appears imperative. Regretfully, the prevailing conditions for offering loans are such that the developing countries are not capable of allocating them to infrastructural projects but rather are forced to direct them toward short-term, quick-yielding, and nonbasic purposes. Under such conditions the gap between the rate of return on investments and that on the imposed high interest rates widens. Once again, as experience has proved, the result is the ever-increasing indebtedness of these countries….
Another valuable step toward helping many poor countries is to increase the amount of SDRs allocated to each member country. Even with the increased subscriptions of the IMF, in its eighth quota review, the available funds, and in particular the allocated SDRs to some countries, will have no parallel with their actual needs. Hence, it is necessary to allocate more SDRs to these countries by giving them a greater share in comparison to richer countries. This will not only be an expansion of available sources of financing but is indeed an effective step toward relaxing the harsh existing prerequisite for obtaining financial resources.
Further, the voting system based on the shares and quotas of the member countries gives a controlling role to those countries with the highest weighted shares, and for this very reason the majority of the deprived nations do not have an effective voice in the decisions made in these two international organizations. An urgent reform is called for to remedy this unjust mechanism. In order to prevent any unjust influence in the process of policy formulation and decision making in these organizations, it is essential to promote the degree of collaboration and unity among all developing countries.
In order to reach the target of long-term economic growth and development in developing countries, it is essential that the basis of international cooperation and collaboration among these nations be extended as far as possible. There are numerous grounds for multilateral cooperation in financial and investment undertakings. The exchange of technological knowledge and expansion of trade between these countries can ultimately lead to the creation of a collective self-relying system.
We can also embark on a constructive relationship with the advanced and industrial world based upon mutual respect for each other’s sovereignty and noninterference in one another’s internal affairs. This can materialize if there is an adherence to the fact that all concerned have an equal status within the framework of humanistic relationships.
September 28, 1983.