Discussion of Fund Policy at Fourth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1983
Statement by the Governor of the Fund for South Africa—Owen P.F. Horwood
May I begin by congratulating Mr. de Larosière on his reappointment as Managing Director of the Fund and by expressing my appreciation of the distinguished way in which both he and Mr. Clausen have continued to discharge their demanding responsibilities at the helm of the Fund and the World Bank.
The wisdom of the founding fathers of the Fund and the Bank in setting up these twin institutions at Bretton Woods has never been more evident than during the past year. In a remarkable cooperative effort with the Bank for International Settlements, the leading central banks, and the international banking community in general, the Fund and the Bank have been eminently successful in defusing and containing the stresses and strains arising from the debt crisis during this troubled period.
As Governors of the Fund and the Bank, we should not, however, delude ourselves that the international debt problems have now been resolved. They certainly have not. It is one thing to arrange debt rescheduling and bridging finance for debt-ridden countries and to reach agreement with them on “performance criteria” and “adjustment programs.” It is a different matter for these countries to implement these programs, and to keep on implementing them, when they involve harsh restrictive measures, austerity, low growth, high unemployment, and sharp declines in standards of living. At best, the way out of the present debt debacle is going to be long and difficult. And it would be naive to ignore the possibility that domestic sociopolitical resistance in debtor countries or other unfavorable developments might lead to further defaulting and an intensification of the debt crisis. In Toronto last year, we may have been too alarmed at the situation. This year in Washington we are perhaps too complacent about it.
Fortunately, there are encouraging signs that some countries at least are on the way to economic recovery. It is true that the world economy in general is still confronted by serious problems. Developing countries, in particular, are struggling to cope with the adverse effects of the world recession. But this cannot obscure the success achieved by the United States, the United Kingdom, and several other major industrial countries in curbing inflation. In my view, this is the most significant economic development of the past two years.
The market-oriented monetary and fiscal policies employed by these countries have yielded excellent results in the form of greatly reduced price and wage inflation and the restoration of confidence in at least certain currencies. To crown it all, the recovery in the U.S. economy is clearly under way, and the ideal of sustained, noninflationary growth in the period ahead now stands a reasonable chance of being achieved by those countries which have applied appropriate financial discipline.
By contrast, those countries which adopted unduly expansionary policies and tried to spend and borrow themselves out of the recession have only added to their own difficulties. They now find themselves in the worst of all worlds—inflation, balance of payments deficits, debt problems, unemployment, and with little prospect of meaningful real growth for some time to come. Most of the initial fruits of any recovery they might experience will have to go to their creditors.
The conclusion I would draw from this is that the way to economic recovery does not lie in a return to the old inflationary ways of excessive national and international money creation, high government spending, and artificially low interest rates but in persisting with appropriate conservative fiscal and monetary policies. The price which has had to be paid for the gains of enhanced price stability—in the form of low growth and high unemployment in the short run—has been well worth while. A foundation has now been laid for economic recovery in the years immediately ahead.
As I indicated earlier, however, we are not out of the woods yet. I trust, therefore, that the problems and delays being experienced by both the Fund and the Bank in obtaining the increase in resources necessary for them to continue performing their important tasks will soon be overcome. I fully support those who oppose the creation of more unconditional liquidity in the form of, for example, SDRs as a means of alleviating the debt problem. In my view, the best way to approach this problem is to place the main emphasis on national and international financial discipline and on Fund “conditionality.” I also see merit in the Interim Committee’s proposals for limiting the access to Fund resources as the new enlarged quotas come into effect. But then, to be consistent, we should support and ensure the provision of adequate resources to the Fund and the Bank.
From an analysis of the Annual Reports of the Fund and the Bank, two facts about recent economic developments in my own country stand out clearly. The first is that, like all other countries classified by the Fund as “non-oil developing countries,” South Africa has been adversely affected during the past three years by the world recession. In addition, we have had to cope with a sharp decline in the gold price and, more recently, also with the effects of the most severe drought in decades. And the second point is that, by taking early corrective fiscal and monetary action, South Africa has adjusted well and in a timely manner to these adverse developments and has avoided any semblance of overborrowing. Whereas the aggregate current account deficit of the “non-oil developing countries” is projected to amount to $68 billion in 1983, South Africa has succeeded during the past year in transforming a current deficit into a substantial surplus. At the same time, we have reversed the declining tendency shown during the preceding year by both the net foreign reserves and the exchange value of the South African rand. We have also managed to reduce our rate of inflation. Moreover, we have no foreign debt problem. Indeed, our total public and private sector foreign interest payments as a percentage of total exports amounted to only 5.9 percent during 1982.
Part of our short-term financing requirements during this period of adjustment was obtained from the Fund. Despite additional government spending necessitated by the drought and other unforeseen developments, we have continued to meet the “performance criteria” agreed upon with the Fund. Moreover, in view of the improvement in our balance of payments, we have not drawn the full amount to which we were entitled and have, in fact, already made a modest prepayment.
In adjusting to the world recession, South Africa has not lost sight of the need to address the more fundamental, long-term issues of development in our part of the world. To this end, the South African Government has been giving serious attention, in cooperation with other governments in southern Africa, to the development of the less developed parts of the region.
A major step in this connection was taken in June this year with the formal signing of the Articles of Agreement of the Development Bank of Southern Africa. This new institution started its operations on September 1, 1983. It is bound to have a significant impact on economic cooperation and development in southern Africa. South Africa has pledged an amount of R 1,500 million to the Bank in concessionary funds over the first five years of its operation, which will enable the Bank to raise and utilize substantial amounts of capital market funds for development purposes. It is overseen by the Council of Governors in which all member governments are represented and managed by a professional staff under the direction of its Board of Directors selected by the Council from the top echelons of the southern African business community.
While due recognition will be given to the role that industry can play in the development process, the Bank’s development philosophy will reflect the insight gained in so many parts of the world, and recently confirmed so clearly in the report of the World Bank on development in sub-Saharan Africa, that rural development and the strengthening of the food-producing capacity of developing countries must form a cornerstone of development policy.
Although its original membership is limited to South Africa and those countries which have recently gained their independence from South Africa, the door has been left open for other countries in the region to join the Bank as members, or to participate in other ways in its operations. I believe that the Development Bank of Southern Africa will prove to be an effective instrument in realizing in southern Africa some of the priorities set for the developing countries in the 1982–83 Report of the Development Committee, namely, “increasing levels of domestic savings and investments, greater efficiency in the use of capital, strengthening of general economic management, [and] greater emphasis on agriculture….”
To conclude, I am encouraged by the increased sense of realism that has emerged from this year’s meetings. The serious debt problems and other economic difficulties of recent years have had a sobering effect on economic thought and policy. They have underlined the folly of financial permissiveness and the virtues of financial discipline. And under the leadership of some of the main industrial countries, progress is now being made in the quest for noninflationary economic growth. But there is many a slip twixt cup and lip, and a new debt crisis could easily flare up again. Each individual country would therefore be wise to take whatever further steps might be necessary to put its own house in order and not to view the current provision of additional financing facilities as a substitute for appropriate fiscal and monetary restraint.
Statement by the Governor of the Bank for Belgium—Willy De Clercq
Each year, we draw up here the balance sheet of our individual and joint efforts to promote balanced and noninflationary growth. And we promise ourselves that we’ll do better next year.
Considering the slowing of inflation in the major industrial countries, the recovery that is beginning in the United States, and the reduction in current disequilibria in the world, this year we can, to a certain extent, feel satisfaction over progress accomplished.
But at what cost? At the cost of a further rise in unemployment, which has reached unbearable levels; at the cost of a cessation of growth in many developing countries; at the cost of a worsening of already disquieting indebtedness situations.
It behooves us to demonstrate swiftly that these costs are but temporary and that the outlook for employment, for growth, and for the soundness of the financial system can therefore improve, since otherwise our struggle against inflation will have been in vain. What is at stake is the consistency between pursuit of our individual efforts and the strengthening of our cooperation disciplines.
First, let us consider pursuit of our individual efforts. The requirements in this respect differ from country to country.
In certain industrial countries, the results achieved in the struggle against inflation are still deceptive. Those countries need to strengthen the mechanisms for the free determination of prices and to remove the rigidities that paralyze the labor market.
In the countries where inflation has been brought under control better, it is the persistence of high real interest rates that is surprising and disturbing. These high rates are holding back the recovery of investment and obstructing the structural adjustments that are acknowledged to be necessary. In addition, they are adding to the debt service burden of the developing countries.
In a large number of countries, it is unquestionably the magnitude of budgetary deficits—generated by mechanisms that are insensitive to interest levels—which is at the root of this phenomenon and aggravates it by diverting a part of domestic savings into consumer spending. As regards Belgium, reduction of the budget deficit remains, together with restructuring of the major industrial sectors, one of the Government’s primary goals. The steps already taken have called for significant sacrifices on the part of the population; they are beginning to bear fruit in the recovery of the external accounts and the profitability of enterprises.
In many developing countries, a similar adjustment, but often more painful, has to be pursued. Even if the disequilibria to be corrected derive partly from a world environment shaped mainly by others, these countries cannot manage without the efforts necessary to control inflation, public finances, monetary expansion, and the balance of payments. It would seem to me that these efforts should be sustained—and in no way relaxed—through the complementary contribution of adequate external financing, both public and private.
The efforts of some can be frustrated by others if they are not undertaken in the context of the cooperation disciplines that we have all accepted, within the framework of institutions such as this.
The opening of markets remains today one of the fundamental conditions for the worldwide propagation of economic recovery, as well as a vital prerequisite for enabling the indebted countries to obtain the means to put their situation to rights. We must refrain from scrambling to erect various forms of protection, visible or invisible, and must even make a combined effort to remove the barriers to trade that have already been set up. We invite GATT and the IMF to cooperate more closely in order to spotlight the problems to be resolved and take appropriate action in their respective spheres.
The opening of markets is certainly not favored—quite the contrary, in fact—by the instability of exchange rates and the disorderly fluctuations of certain currencies. Moreover, this instability of exchange rates is deterring investment, which ought to play the motor role in economic recovery. We think that it is time for greater priority to be assigned to the righting of international relations in this field, and we are gratified to note the process of reflection and concertation embarked on in this area since the Williamsburg summit.
International cooperation has up till now made it possible to cope with the acute debt situations that have recurred in the past year. There is a lesson to be learned here. The IMF, which deserves our support because of its dynamism, has been able to stave off the immediate danger and take the necessary steps to encourage in future a more appropriate balance between the financing of disequilibria and their needed adjustment. The complementarity between public and private flows, more particularly between the IMF and the commercial banks, appears more obvious than ever. We must ensure that from now on, with the assistance of all parties concerned, capital intended for development be used productively, under appropriate conditions and in sufficient quantity.
This brings me to the more specific aspects of the decisions that we have to take or implement in order to enable the Fund to carry out its purpose and intensify its action as regards both its surveillance role and its role in the financing of payments disequilibria.
In the short term, absolute priority must be given to bringing into force the increase in quotas and the review of the General Arrangements to Borrow. For its part, Belgium recently notified the IMF of its approval of the resolutions in question.
Furthermore, in accordance with the principles of sound financial management, additional resources will have to be made available to the Fund in order to consolidate its liquidity. I am most pleased to note in this respect the spirit of cooperation displayed by Saudi Arabia. I can also assure you that the Belgian authorities have decided to participate in a broad-based collective effort designed to provide the Fund with the resources it needs.
As regards access to Fund resources, this is not the time, in our opinion, to cut back the potential assistance obtainable from the Fund. Such a reduction would be unjustified in view of the disequilibria that still persist, in view of the contribution that can be expected from bank financing, and in view of the weight we would like to give the Fund in the promotion of appropriate adjustment policies. We want the Fund to continue to play a powerful role in this field, and how could it do so without furnishing itself a significant part of the support needed? The Fund is passing through a growth period that fulfills a wish we have often expressed in the past; once its action has borne fruit, the disequilibria ought to become smaller and render its support less necessary. In this perspective, we wholeheartedly endorse the desirability of a periodic review of the access policy.
To finance this access policy, the Fund will need to rely on its own resources and, no doubt for some time yet, on borrowed resources as well. The latter should preferably be obtained from official sources, in particular through the General Arrangements to Borrow; nevertheless, we believe that the possibility of resorting to the private market in case of need, on a temporary and supplementary basis, should not be discarded.
As regards a possible allocation of SDRs, the trend in the level and distribution of reserves and the contraction in bank lending require a strengthening of existing reserves in the long term. Thus, I believe an allocation would be justified under present circumstances.
The opinions to the contrary heard in this regard would lose their reason for being if we envisaged an allocation conducted at least in part on conditional terms, that is, an allocation linked to the adoption of adjustment programs.
Such an allocation could be approved under the present Articles of Agreement. The suggestions we have put forth at earlier meetings of the Interim Committee and, more recently, in the Executive Board seem to me to merit detailed study, in order to better ascertain their potential and enable the Managing Director of the Fund to formulate concrete proposals with regard to an allocation.
However essential the Fund’s action may appear to be, it cannot be sufficient in itself. Longer-term support is indispensable for those countries that have taken the decision to engage in economic rehabilifation policies. The imbalances facing many developing countries are too deep and too structural for them not to need such support.
A global approach to the problems is indispensable.
We are firmly in favor of closer cooperation between the Fund and the World Bank and of complementarity between their activities. But to make the best use of this approach, the two institutions must have sufficient resources at hand on appropriate terms….
The ultimate result may seem inadequate to some, of course, but the essential feature will have been preserved, and this in circumstances of exceptional gravity and duration: the spirit of international cooperation.
The difficulties afflicting the international community are severe, but they are not insoluble if we have the will to apply the policies required by today’s economic reality.
The Annual Meetings of the Bretton Woods institutions have traditionally offered an opportunity for those in charge of economy and finances to discuss potential solutions.
We must make full use of this opportunity to bring our points of view closer together and to make progress toward the end to which we all aspire: a just, more balanced world based on harmonious economic growth.
Statement by the Governor of the Fund for Egypt—Mahmoud Salah el din Hamed
It is a great honor and pleasure indeed for me to address the Annual Meetings of the Bank and the Fund. Let me begin by extending our hearty welcome to countries which became members of the Bank during the last year.
I would also like to express my appreciation for the excellent statements we had at the beginning of our meetings by the President of the United States and by the Chairman, Mr. Clausen, and Mr. de Larosière. They have given a valuable assessment of the state of the world economy and its prospects in the years ahead. They have also outlined the problems that have to be resolved if world recovery is to be sustained and if the development process is to avoid disruption.
After a relatively long period of recession and high rates of inflation, we meet this year with some encouraging indications of incipient recovery in the industrial countries. The level of economic activities in many sectors is picking up. Inflation rates are slowing down, and rates of interest have significantly declined from the peak of the preceding period. The most striking feature of the present recovery, however, is its uncertainty. The picture emerging from some of the industrial countries lacks coherence. While some indicators are moving in a positive direction, others are still lagging behind. It is unclear to what extent these conditions would give birth to a vigorous recovery. Nor is it clear at the present juncture to what extent recovery will spread to developing countries. These countries continue to be in the grip of the most severe recession they have experienced for a long time. Countries exporting primary products have suffered a particularly sharp deterioration in their terms of trade. Middle-income exporters of manufactured products have been hard hit by stagnant demand and protectionism in their major markets. Growth rates have consequently fallen—in most cases implying stagnant or declining per capita income. At the same time, deteriorating trade performance and high interest rates have together created enormous debt-servicing problems for many developing countries. External debt of the non-OPEC developing countries, according to the most recent estimates, is more than $600 billion. Some countries are facing a crushing debt service burden that is equal to the totality of their foreign exchange earnings. In a large number of developing countries, the burden is in excess of 50 percent. Many debtor countries find themselves in a situation where the only alternative to default is to reduce investment and consumption to a level that disrupts their growth prospects and imposes real hardships on their peoples. Such a situation is unsustainable both politically and economically. Debtor countries should have other alternatives under which the adjustment process would be less onerous and more equitable.
When we met in Toronto last fall, the international financial system was under a severe test, the International Monetary Fund is to be commended for the role it has played in averting a real crisis. This, however, should not be a reason for complacency. The problem of external indebtedness is far from resolved. There is need for a systematic and comprehensive approach which takes care not only of major debtors but other debtors as well. More important is the obvious linkage between world recovery and the solution of the debt problem. An expanding world recovery will enable developing countries to earn sufficient foreign exchange to service their debts and maintain their development at the same time.
The increase in Fund quotas under the eighth review and the enlargement of the General Arrangements to Borrow are, of course, positive and important steps in meeting the needs of developing countries. However, it is becoming increasingly clear that, while these measures will contribute toward the alleviation of the problem, they are far from adequate. The Egyptian delegation welcomes the agreement in the recent meeting of the Interim Committee that the policy on enlarged access should continue for 1984 and that, thereafter, it should be reviewed yearly to consider the future of the policy in the light of all relevant factors. However, we are disappointed about the conclusion to reduce annual limits to 102 percent and 125 percent of quota and three-year limits to 306 percent or 375 percent. Under these limits, potential drawings available to a large number of member countries would suffer a significant decline in real terms. That is unfortunate given the stringency in the reserve position of many member countries, the decline of net lending by commercial banks, and the slowdown in the flow of official development assistance. It should be remembered that the increase in quotas of many developing countries under the Eighth General Review was less than the overall increase of Fund quotas. Moreover, the value of quotas has been significantly eroded by inflation. Under these circumstances, it is of crucial importance that the Fund should be enabled to augment its resources, whenever necessary, through borrowing from official sources and, as a last resort, from capital markets.
The Egyptian delegation is also disappointed that, in the recent meeting of the Interim Committee, no agreement was reached on an SDR allocation in the fourth basic period. Recent developments have greatly strengthened the case for a sizable allocation of SDRs. As a ratio of world trade, monetary reserves have been recently declining. A substantial allocation of SDRs would restore a more appropriate ratio and serve to stimulate economic recovery. It is very difficult indeed to accept the argument that such an allocation would be inflationary. Studies by the Fund do not give substance to this contention. The SDR is still a small fraction of total world reserves and will continue to be so for a long time to come even on the best assumption regarding the size of allocation. We support the continuation of efforts by the Executive Board so as to enable the Managing Director to come forward with a proposal on a sizable allocation in the fourth basic period….
I would like to conclude this statement by referring to the need for a comprehensive reform of the international monetary and financial system. The experience of the last few years clearly shows that the present system suffers from many shortcomings and inequities. The instability of foreign exchange rates has been partly responsible for the stagnation of trade and capital flows, thereby aggravating recession. The lack of symmetry in surveillance by the International Monetary Fund has placed a disproportionately heavy burden on deficit and weaker countries. At the same time, the major countries whose policies determine the health of the world economy were able to pursue policies without effective Fund surveillance. More often than not these policies were at cross-purposes, trying to achieve national goals at the expense of others. The net result has been a loss to all and a gain to none. The recent upsurge of protectionism in the industrial countries is hampering the growth of exports from developing countries and frustrating an optimum division of labor between the two groups of countries. The Egyptian delegation shares the view that time has come to re-examine the goals and instruments of the Bretton Woods system in the light of past experience and present reality. We urge the International Monetary Fund and the World Bank to prepare the ground—both technically and politically—so as to convene as early as possible an international monetary conference.
Statement by the Governor of the Bank for Denmark—Uffe Ellemann-Jensen
On behalf of the five Nordic countries, Finland, Iceland, Norway, Sweden, and Denmark, I wish first of all to welcome the two new members of the Bank.
Compared with last year, the outlook for the international economy is somewhat more encouraging. An improvement, particularly in North America, seems to be established. But the last three years have marked the sharpest recession of the world economy since the depression of the 1930s: international trade stagnated, and international interest rates and exchange rates were marked by great instability.
All countries in the world have been affected by the recession. Among the most seriously hit are the low-income countries in Africa south of the Sahara, which have experienced a negative per capita growth in the decade since 1973.
In this situation, many developing countries are experiencing an undermining of their economic base. Inadequate foreign exchange, falling government revenues, and cutbacks in investment plans have affected the results gained through decades of development efforts. The visible reflection is the disintegration of production facilities and infrastructure due to lack of possibilities for maintenance. A continuation of this trend can make the costs of regaining growth and development potential extremely high.
What is even more serious is that the efforts and strategies of the developing countries to alleviate poverty are threatened. Today, a rising number of developing countries find it difficult or impossible to finance the measures that should ameliorate the social conditions of the poorest segments of the population.
In the immediate situation, it seems necessary to place increased emphasis on the need for economic growth in the developing countries through maintenance and rehabilitation of existing production capacities and increased investments, especially in the agricultural sector, and improvement of infrastructure. The focus of such an intensified effort must be to provide the basis for a lasting solution to the poverty problem…. At the same time, the level of investments in human development must be safeguarded, even in the present difficult economic situation, if long-term growth and development prospects are not to be impaired….
One aspect of development that so far has received too little attention is the change in the cultural and sociological pattern which determines women’s social conditions. There are many examples that development projects inadvertently lead to an increase in women’s work burdens or reduce their access to income-creating activities. At the stage of project preparation and during implementation, careful consideration must therefore be taken of the need to involve women as equal participants in the development process. It is particularly important that women have equal access to the education system. The education of girls and women may be one of the best investments a developing country can make in future economic growth and welfare. The benefits reach the entire family through improved health and nutrition. Experience shows that improved education also can lead to a reduction in the birth rate.
I have pointed out the serious situation, especially for the low-income countries, partly due to the external factors to which they must adjust. The adjustment process imposes heavy burdens upon the developing countries which face difficult policy decisions. For most developing countries, a shortage of external resources is a major constraint. The effectiveness of the adjustment efforts and the long-term economic prospects depend, to a large degree, on the economic and trade policies of the industrial countries, and an adequate capital flow to the developing countries—official as well as private—is essential. In the present interdependent world, the industrial countries have a responsibility to help create an environment which is responsive to the needs of the developing countries for increased capital and exports.
An international economic recovery will greatly assist many developing countries in their efforts to restore the development momentum. If the recovery can be sustained, industrial countries will increase their imports from the developing countries. And with increased export earnings, the more advanced developing countries would become creditworthy for larger amounts of commercial borrowing on more favorable terms, but economic recovery is not enough to solve the problems, especially those of the poorest countries. These countries will continue to be entirely dependent on concessional assistance.
During the 1970s, ODA represented 75 percent of the low-income countries’ external capital. In the low-income African countries, ODA was equivalent to more than 40 percent of investments. However, total ODA flows have been virtually stagnant between 1980 and 1982. International cooperation is, therefore, urgently needed to reverse the present trends in resource flows, especially to low-income countries….
Statement by the Governor of the Fund and the Bank for Canada—Marc Lalonde
Since last year’s meetings, which Canada had the honor of hosting in Toronto, there is much from which we can take comfort. A strong recovery is now under way in both the United States and Canada, with signs—more tentative than I would like to see—of a move away from recession in the rest of the industrial countries. Inflation in most industrial countries has been sharply reduced. The serious problems of international debt that loomed so threateningly at Toronto have been well managed, thanks to the broad and effective cooperation among governments, private banks, and the multilateral institutions under the inspired leadership of the International Monetary Fund.
However, realism and prudence require that we also recognize the serious problems and risks that remain. Unemployment remains distressingly high; and the reduction of this economic and social burden promises to be painfully slow. The recovery in the world economy is still too narrowly based and overreliant on the North American expansion. Until the forces of economic expansion are stronger, protectionism will continue to pose a major threat to the recovery of world trade, on which depends the success of these adjustment efforts by deficit countries and the heavily indebted.
I believe Canada is meeting its international commitments to foster sustained economic recovery and contribute to an invigorated international economy. We have made remarkable gains in raising the level of output and in the creation of new jobs; since the trough of the recession last fall, industrial production in Canada has expanded by more than 9 percent and employment has increased by over 300,000 jobs. We have adopted a program of public investment in infrastructure that is intended to bridge the period until private investment is reinvigorated. Consumer spending has responded positively to this favorable environment, indicating a broadening and deepening of the recovery. Inflationary forces have receded in Canada—from a rate of almost 12 percent a year ago to less than 6 percent currently. Our determination to bring down the structural component of our budget deficit, supported by responsible monetary policy, should allay concerns about a possible resurgence of inflation in future years and ease potential pressures on our capital markets.
While recovery in North America seems well established, the outlook in most other industrial countries is less certain. Real interest rates remain high globally, and the appreciating U.S. dollar, while enhancing other countries’ competitiveness vis-à-vis the United States, has also created new inflationary pressures. Even in the United States, inflationary expectations remain disquieting. Further relaxation of monetary policies in the major industrial countries would be imprudent under these conditions. Greater confidence that the U.S. budgetary deficit will be reduced in coming years would make an important contribution to lowering interest rates. On the other hand, it is important that the recovery be supported in other countries to ensure its sustainability. I believe that there exists some room on the fiscal side in certain countries to provide additional stimulus to domestic demand and that more can be done to contribute to the recovery of the world economy.
Sustained recovery in the industrial countries is a necessary condition for improvement in the prospects of the developing countries. However, it is also essential to ensure that markets are not closed off by protectionist actions. Canada is a major trading nation and relies on trade for 30 percent of its economic activity. For that reason, Canada has more reason than most countries to work toward the liberalization of world trade and against the spread of protectionism. The Government of Canada has recently released a major discussion paper on trade policy. The paper reaffirms Canada’s support for a more stable and more open international trading environment and gives first priority to efforts to strengthen the multilateral trade and payments system, to broaden both its scope and its discipline. Canada supports a continuation of international efforts to translate the world’s heightened economic interdependence into a more open trading system.
Let me now deal with the immediate questions on our agenda and then address our longer-term concerns. The increase in IMF quotas that we have agreed upon is relatively modest given the prospect of continuing external imbalances and general uncertainties about future global economic performance. It is essential that this increase be put into effect quickly, together with the expanded General Arrangements to Borrow. Given the limitations on Fund resources and the serious financial problems confronting some of our members, we must retain the flexibility that has been exhibited in the past to provide temporary assistance or bridge financing to countries in need. As an element of that flexibility, the enlarged access to IMF resources agreed to in the exceptional circumstances of the past few years needs to be continued in present circumstances and reviewed in the light of changing conditions. Recognizing that there may also need to be further provision of government-to-government assistance in exceptional cases, I would like to see it structured more rationally, with a clear indication and articulation of the amount of financing required, a fair distribution of commitments among the countries providing such assistance, a proper and efficient means of supplying the funds, and an adequate monitoring of the assistance and credit package to ensure that it is properly focused.
Concerning the commitment gap that has been building up with respect to Fund borrowing under existing programs, I feel we can find the necessary consensus for an arrangement to accommodate these financial requirements. Canada is prepared to do its share.
Finally, with regard to an SDR allocation, the problem in this area is not only one of magnitude but also of timing. To increase international liquidity substantially at a time when recovery is beginning to proceed at a satisfactory pace and concerns about inflation and inflationary expectations have by no means been eradicated seems imprudent. A modest increase to maintain and strengthen the role of the SDR in the international monetary system would be more appropriate….
Apart from these immediate and pressing issues, calls for a broader review of the international system have lately been emerging with growing insistence. Commonwealth Finance Ministers considered a useful analysis of the problems the global economy faces and how we might proceed to correct them.
Reform of the exchange rate system has been called for. To date we have discovered that floating has not brought exchange rate stability. Given the disruptions the world has faced over the past decade and the need for major structural changes, however, a continuation of the old regime would only have added to our problems. There is a need for the strengthening of the surveillance system but not a return to pegged rates. More emphasis, particularly by the major countries, on gearing domestic financial policies explicitly to the objective of promoting exchange rate stability is required, and I welcome the commitments made at the Williamsburg summit to this end.
The issue of some form of debt relief has also been raised in the context of proposed longer-term reforms of the international monetary system. Such proposals raise matters with which we have only limited experience. We have not traditionally based our aid policies on the expenditure commitments of individual countries to a particular group in the international economy, namely, the commercial banking system. Nor is it clear, when considered in this light, that diverting some of the limited aid resources—and we should not deceive ourselves that special programs would not involve cutbacks elsewhere—in this way would meet with general acceptance.
Even in our domestic economies we have strongly resisted debt-relief proposals. When interest rates soared in Canada in 1980 and again in 1982, highly visible and diverse income groups were directly and severely affected. Debt or interest-related subsidies in such an environment quickly become very expensive, are almost inevitably inequitable, and in the long run are self-defeating in terms of distorting the basic signal to borrowers that the cost of credit has gone up.
The international debt situation has many parallels. The problem of maintaining equity in the treatment of individual debtors in any assistance package would be enormous. The extent of burden sharing between borrowers, lenders, and the governments/taxpayers of the industrial countries would also be an extremely contentious issue. In sum, the degree of indebtedness is a poor basis for providing international aid. As I noted earlier, the ad hoc approach to resolving debt problems has worked well, and I believe we should continue with this pragmatic case-by-case method. I would stress, however, the importance of the support of the commercial banking systems and governments through their aid agencies and export credit institutions, as well as the adjustment efforts of debtor countries themselves, in ensuring a stable overall lending environment in which individual cases of payments difficulties can be resolved.
This brings me to actions that can be undertaken immediately in the context of the existing institutional framework. We must adapt the mix of credit flows to the developing countries by funneling more of it through official channels, notably through the IMF in support of adjustment programs and through the World Bank and other multilateral development agencies. This would both improve the targeting of credit flows and ensure tighter control over the expenditure of these funds. The increase in the scale of operations of our international financial institutions implies increased subscriptions, higher capitalizations and replenishments, and increased market borrowing by these institutions. Resolution of these issues remains an unmet challenge.
We could also consider in this context strengthening the role of the main advisory bodies of the IMF and the World Bank. The Interim Committee can play a useful role in encouraging its members to play a more effective role in addressing the issue of improved mechanisms for surveillance and policy coordination. Similarly, we could expand the mandate and authority of the Development Committee. The Committee might consider ways in which the World Bank and the IMF can help improve coordination between public and private lenders in response to debt problems and encourage more private and commercial bank lending to developing countries. As well, it might re-examine the critical links between the development process and maintenance of an open multilateral trading system.
While “political will” in the form of a special high-level conference may be appropriate at some point in the future, we should first devote our energies to strengthening existing institutional arrangements. This is likely to produce faster and more effective results in dealing with the pressing problems facing us.
Statement by the Alternate Governor of the Fund for India—Manmohan Singh
May I join my fellow Governors in offering you my heartiest congratulations on your election as Chairman of our Annual Meetings this year. We also welcome the new members that have joined the World Bank.
The world economy is passing through exceptionally hard and difficult times. Countries of the Third World are the worst victims of the global economic crisis, the making of which they have had no responsibility. The sharp deterioration in the external environment has imposed on these countries most painful adjustments, which have adversely affected their longer-term growth prospects as well as current levels of consumption.
In these times of serious difficulties, the international community is indeed very fortunate that in Mr. de Larosière and Mr. Clausen our two institutions have at the helm of their affairs men of exceptional ability, wisdom, courage, and dedication to the cause of international cooperation. We rejoice at the re-election of Mr. de Larosière for a second term as the Managing Director of the International Monetary Fund. We in India have always regarded him as a sincere friend and well-wisher of the developing world. In Mr. Clausen the World Bank has an eloquent and able spokesman for the cause of development cooperation. We wish both of them good luck in discharging their onerous responsibilities.
Since our last meeting, a few hopeful signs have emerged on the current world economic scene. Many of the developed countries have been able to bring inflation under control, which is indeed a solid achievement. A sort of recovery is also now under way in some developed countries. However, one should not be lulled into any false sense of complacency to believe that the global economic crisis is over. Indeed, there are a large number of factors in the current situation which are cause for deep anxiety and concern. Thus, although the present expectations are that the industrial countries may achieve a growth rate of about 2 percent in 1983, this will still be well below the normal average for the period following a recession.
It is particularly distressing to note that there is unlikely to be any significant reduction in unemployment rates in the major industrial countries. Unemployment is especially severe among the young new entrants to the labor force. If uncontrolled, current levels of unemployment can erode self-confidence and hope for the future among young people at the very beginning of their productive careers. This is a most dangerous development, particularly if we take note of the devastating social, economic, and political consequences of high unemployment in some of the continental countries of Europe in the wake of the Great Depression of the 1930s. Present levels of unemployment can provide a formidable inducement to the growth of protectionism and pursuit of “beggar-my-neighbor” policies which will be destructive to both national and international prosperity. We honestly believe that, while as much as possible should be done to curb inflationary expectations, we must find a more humane and rational mechanism other than mass unemployment to “discipline” the working classes. In this year of the Keynes centennial, all of us—the academic community, national governments, and international agencies—must, therefore, take this up as a new challenging task.
As I have already mentioned, countries of the Third World have been the major victims of the deepest and most severe recession to overtake the world economy since World War II. The sharp deterioration in the external environment has imposed most painful adjustments on developing countries and has adversely affected both their longer-term growth prospects and their current levels of consumption. The squeeze felt by the financially starved developing countries has been in many ways unprecedented. More recently, there has been some improvement in the external environment implied by lower interest rates and some recovery in primary prices. Even then, on the best estimate, the economic growth of the developing countries in 1983 will still be considerably lower than the average for the 1970s and perhaps smaller than the increase in population.
In addition to the feeble nature of the cyclical recovery, there is the equally serious problem of the sharp deterioration in the medium-term outlook for economic growth in the world economy. The International Monetary Fund has lowered its sights and now envisages, according to its latest central scenario, an average growth rate for all industrial countries during 1984–86 of less than 3 percent per annum. Even if this rate of growth materializes, which itself is problematical, it would not lead to much decline in unemployment. The 1980s thus promise to be a decade of slow growth. Protectionist pressures in developed countries will probably remain strong, notwithstanding pious declarations to the contrary. The developing countries cannot, therefore, rely on the trickle-down effects of growth in the developed countries to sustain the momentum of their own growth.
It is against this somber background that we must mark out the course of action to be pursued by our two institutions. We need simultaneous action to speed up the pace of recovery in developed countries, to ensure that it is deep and wide enough to materially influence the rate of growth of world trade and, in the meantime, also to provide the developing countries enough liquidity and development assistance so that they can sustain a minimum acceptable level of growth even in the face of current uncertainties.
In these matters, the Bank and the Fund have a vital role to play. I venture to think that cooperative international action to sustain and enhance the import capacity of the developing countries during the current difficult situation would, in itself, make a substantial contribution to sustain recovery in the industrial countries, to promote noninflationary growth, and to strengthen confidence in the international financial system. As I said earlier, we are opposed to undue stimulus which could give rise to revival of inflationary expectations. Clearly, development assistance, which seeks to develop the agricultural resources of the developing countries and reduce their dependence on imported sources of energy, can make a material contribution to the stability of the world economy as a whole.
In the time I have at my disposal, I shall therefore briefly outline elements of a concerted global strategy which alone, in our view, can reverse the present unfavorable tide.
First and foremost is the task of greater macroeconomic coordination among the major industrial countries so that both interest rates and exchange rates cease to be as volatile as they have been in recent years. The current level of real interest rates is probably the largest single factor in the weakness of investment throughout the world. In the same manner, although flexible exchange rates may have reduced the need for trade controls, the extreme volatility of exchange rates has given rise to new uncertainties which hamper both investment and trade flows.
No less urgent is the task of providing more effective mechanisms for meeting the pressing liquidity needs of the developing countries. Despite painful and massive adjustments undertaken by these countries, their financing gaps still remain very large. By now, it is obvious that these gaps cannot be filled by the commercial banks or the private capital market. In the course of the last year, several developing countries have had to draw down their reserves. They have, therefore, very little room for maneuverability now. If adequate financing is not forthcoming, the developing countries will be faced with an acute crisis which could lead to a situation of widespread default on private debts. This is a course of action which must be avoided at all costs. The logical corollary of this is that the needed finance must be forthcoming to enable developing countries to pursue orderly patterns of adjustments which do not strain their political, social, and economic stability beyond limits.
In this context, we are disappointed at the meager increase in Fund quotas which was agreed to earlier this year. We sincerely hope that this quota increase, inadequate though it is, will become effective very soon. We also believe that, given the importance of quotas in providing adequate resources to the International Monetary Fund, work on the Ninth General Review of Quotas must be speeded up. It is also necessary to take a fresh look at the present cumbersome mechanisms for agreeing on the revised quotas. We feel that, given the growing responsibilities of the Fund, quotas must, as a minimum, increase at a rate equal to growth of world trade in value terms. It is only for quota increases beyond this level that there is need for consultative mechanisms of the type currently in vogue. We also feel that the Fund should be able to activate the General Arrangements to Borrow and to make use of the resources of the capital markets, if necessary, in order to meet all reasonable claims on its resources. The knowledge that the Fund is backed by adequate resources will in itself have a major psychologically favorable effect in boosting confidence in the international financial system.
At a time when recovery appears to be so feeble, when the prospects for world trade remain highly uncertain, when official aid flows show no sign of growth, when commercial banks have become increasingly reluctant to expand their commitments in developing countries, and when the reserves of developing countries can afford no further blows, it is imperative that the Fund should not take any action which would deny developing countries much-needed liquidity given the present dismal situation with which they are faced. Against this background, the efforts made in the Interim Committee last week to scale down the present access limits under the enlarged access policy are in our view fraught with danger and are likely to strengthen the contractionary impulses in the world economy. It was for this reason that we could not endorse the proposals in the Interim Committee for the sharp scaling-down of present access limits.
Moreover, given the highly uncertain prospects for the international economy, it would be most regrettable if the Fund were to think in terms of tightening or reducing the scale of assistance provided through its special facilities such as the compensatory financing facility and the buffer stock financing facility. By now, there is impressive evidence to suggest that developing countries are faced with massive payments imbalances for reasons beyond their control. These imbalances will persist for quite some time, given the weakness of current recovery. We therefore do not see any basis for departing from past practice. Thus, the Eighth General Review of Quotas should not become an occasion to scale down access limits under these special facilities. We also fail to see justification for a recent decision to stiffen conditionality of the compensatory financing facility through a new definition of the test of cooperation which will make it difficult for members to obtain prompt assistance from the Fund.
There are clear indications that the prospects for primary prices are far from assured, and international commodity agreements that rely on buffer stock financing activities to stabilize prices (cocoa, rubber, and tin) have experienced difficulties in gaining access to funds to finance buffer stocks in the face of downward pressures on prices. For all these reasons, we ought to think in terms of even more liberal access to special facilities like the compensatory financing facility and the buffer stock financing facility. In particular, in the calculation of export shortfalls, we must take note of new developments in the world economy which make for a longer period of adjustment than is assumed in the traditional view of the business cycle. It is also necessary to calculate export shortfalls in real terms, that is, after taking into account the effects of changes in import prices. Moreover, we strongly feel that nationally held buffer stocks should also be eligible for financing from the buffer stock facility.
If the Fund is to be an effective instrument for promoting sound adjustment, it is essential that adjustment measures take into account the specific needs and circumstances of member countries. The varied experience of the developed countries themselves in controlling inflation and in dealing with payments imbalances clearly demonstrates that there is no single unique path of adjustment applicable to all countries. We would strongly urge that targets and performance norms used in Fund programs should have built-in flexibility. In particular, there must be greater recognition of the fact that structural changes implying reallocation of resources require many years to be completed. It is important that the Fund continue to lend for structural adjustment if its programs are to have a beneficial impact on the medium-term adjustment prospects of developing countries.
There is an urgent need for a fresh allocation of the SDR. Even as a series of steps has been taken to improve the characteristics of the SDR— the latest being to pay the interest on SDR holdings every quarter—to bring it as close as possible in alignment with currency assets, the proportion of SDRs in non-gold reserves has slipped further. This was the result of the absence of allocations during the last two years. It would not be incorrect to say that, by permitting this, we have moved a step away from the objective of the Articles of Agreement of the Fund to make the SDR the principal reserve asset. The international liquidity needs have grown and will continue to rise as the international economic and financial activities expand. Keeping in mind the objective of making the SDR the principal reserve asset, a reasonable proportion of the expected requirements of international liquidity must be met by a new issue of SDRs. Such an issue will have a favorable impact on the distribution of liquidity among groups of countries, help several developing countries currently under severe economic pressure, and strengthen the global recovery. Considering the very small addition to world demand that a reasonable allocation of SDRs as being advocated would make and the unutilized capacities prevailing around the world, there should be no fear of rekindling inflation. We therefore urge that an early decision be taken for an appropriate allocation of SDRs during the remaining three years of this basic period….
By all accounts, medium-term prospects for growth of developed countries and for the growth of world trade in the 1980s appear to be highly unfavorable, compared with the period 1950–73. To that extent, developed countries can no longer perform the function of the engine of growth for the developing world. We need new mechanisms to stimulate and sustain growth impulses originating from the internal dynamics of the situation in countries of the Third World. South-South cooperation in trade, in technological developments, and in the setting up of multinational enterprises characterized by substantial economies of large scale assumes, therefore, a new urgency. It is highly important that lending policies of the Fund and the Bank should be adapted to facilitate the fullest possible utilization of the potential offered by South-South cooperation and collective self-reliance.
I have tried to deal with some pressing urgent issues which require a constructive response from the IMF and the World Bank so as to sustain the momentum of growth in the developing countries and to reduce somewhat the harshness and rigor of the cruel adjustment they are being asked to undergo under current conditions. Practical solutions must be found to the problems I have outlined. But a crisis is also a turning point, and we must examine with an open mind whether more fundamental reforms are not needed so as to enable the Fund and the Bank to cope effectively with the fast-changing economic and social conditions in the world. The distinguished group of persons who have led these institutions have made efforts to promote the evolution of these institutions with changes in underlying economic conditions in the world. However, there is a growing feeling in the world that, in view of the vast political and economic changes that have taken place since the establishment of the Bretton Woods institutions, a time has come for a new overall examination of the international trade and payments system as a whole. In particular, there are questions relating to the adoption of more effective measures for the reduction of instability, for an improvement of adjustment processes, and for more orderly patterns of liquidity provision and financial flows. All these questions demand that there should be a systematic re-examination of the underlying issues with a view to a comprehensive reform of the system. It was for this reason that the heads of states and governments of the nonaligned countries at their summit meeting in New Delhi called for an international conference on money and finance for development to consider these issues and to evolve a more symmetrical and more equitable international system of trade and payments, which would be more responsive to the needs of developed and developing countries alike. I sincerely hope that this proposal will invoke a positive response from our meeting.
I have laid so much emphasis on improving the international economic environment for development not because we want to shift primary responsibility for development to the international community. We have always recognized that the peoples and governments of the developing countries themselves have the basic responsibility for their own development. We are committed to maximum possible self-help and maximum possible self-reliance. The bulk of resources for India’s development has, therefore, always been mobilized domestically. Currently, our domestic savings rate is about 23 percent of gross national product, and the draft on foreign savings is only about 2 percent. However, in an interdependent world, effectiveness of domestic policies is, we are convinced, greatly affected by developments abroad. It is in this context that I have stressed the importance of promoting a congenial international environment for development. Our belief in the evolution of a cooperative world order is, of course, much deeper and is rooted in India’s freedom struggle. Years ago, long before India became independent, Mahatma Gandhi wrote about the India of his dreams, and I quote:
I do not want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any. I refuse to live in other people’s houses as an interloper, a beggar or a slave…. Mine is not a religion of the prison-house. It has room for the least among God’s creation. But it is proof against insolence, pride of race, religion or color.
This is the heritage bequeathed to us by Mahatma Gandhi and his great disciple Jawaharlal Nehru. It beckons us to remain steadfast in our deep commitment to international cooperation and understanding for the ushering in of a new world order free of the fear of war, want, and exploitation. To survive, mankind today needs a new global concord. That is a measure of the challenge and of the opportunity before our two institutions.
Statement by the Governor of the Fund for Finland—Rolf Kullberg
I have the honor to make this statement on behalf of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden—on matters relating to the International Monetary Fund.
The world economy is now at a watershed. Either we shall see the tendencies toward recovery and financial stability reinforce each other— gradually creating a process of moderate and sustained expansion—or we shall witness a petering out of the recovery and an intensification of all our recent economic and financial problems.
There is an obvious need to ensure that the recovery is sufficiently strong and sustained. This is the single most important precondition for safeguarding progress in the areas of trade policy, employment, debt management, and development. Unfortunately, considerable uncertainty is attached to the strength and sustainability of the current recovery. First, the IMF forecast of an annual growth rate of roughly 3 percent for the industrial countries is contingent upon demand actually expanding on a broader base than at present. Second, it is based on the assumption that the combination of fiscal and monetary policies will provide both space for and create a climate of expectations that would make a noninflationary expansion possible. In this connection, the policy mix in the United States is, of course, of central importance.
These notes of caution need to be struck, given the fragility of the current international environment. It is an environment in which there is room for expansion, but in which each country’s contribution has to be carefully tailored to its special circumstances. Forecasts for some major countries, such as the Federal Republic of Germany, Japan, and the United Kingdom, hold out the promise of continuing success in combating inflation and also indicate surpluses in their current accounts. Economies in such circumstances might be considered to be in a position to take a somewhat more expansionary stance without exerting inflationary pressures. Even modest stimulatory measures, taken simultaneously in a number of countries, might reinforce and broaden the basis of a recovery that until now has been quite narrow.
The close interrelation between the recovery in the industrial world, on the one hand, and the international debt problems, on the other, is frequently underlined and rightly so. Without a resumption of economic growth, the debt problems may get out of hand; conversely, unless the debt problems are eased, the recovery cannot be sustained. Various scenarios like the IMF forecast for the evolution of the world economy and the debt situation in the years ahead are informative. They indicate what will be required of domestic and international economic policies to keep the debt problems under control.
A lasting recovery is a necessary, but not a sufficient, condition for an improvement in the debt situation. Thorough structural economic reforms are needed in many developing countries. However, when the world economy is stagnant, only limited steps can be taken to correct the underlying disequilibria. In this context, it is important to ensure that the developing countries have access to sufficient financial resources from both public and private sources so that they may carry out the needed structural adjustment in an orderly fashion. Moreover, and not least, the developing countries must have improved access to markets in the industrial countries.
The growth of protectionism is a very disturbing feature in today’s world. It is most unfortunate that one important objective, maintaining employment, has partly been pursued by protectionist measures that in the longer run are bound to be counterproductive. Protectionism, if not resisted, could seriously impair the recovery. Trade barriers that have been erected during the recession tend to remain in place even though growth revives.
When severe debt problems began to threaten the stability of the world financial system, the Fund undertook to play a much more forceful role in many debt rescheduling negotiations. This has led to constructive collaboration between the Fund, governments, and central banks on the one hand and commercial banks on the other. A sound and efficient framework for managing the world financial system is needed in these times of great uncertainty. Confidence within the international financial community would assist in assuring adequate private flows to debtor countries. The Nordic countries continue to support the increased efforts of the Fund to help members that are implementing programs of realistic economic adjustment. We also endorse the increased surveillance that the Fund is paying to the debt problems of its members.
The Fund should be provided with sufficient resources to enable it to fulfill its responsibilities and to engage in financing the adjustment process. A rapid ratification of the Eighth General Review of Quotas in all member countries is necessary. I have pleasure in noting that all five of the countries in my constituency have already either given their consent to the quota increase or are in the final stages of completing approval. To have the quotas increased within the agreed time limits is in the interest of the entire international financial community.
We welcome that the Interim Committee was able to reach an understanding on the policy of enlarged access. We sincerely hope that the Fund will have financial resources available for implementing this understanding in a reasonably flexible manner.
It would appear that demand on Fund resources will remain large in the years ahead. There will obviously be a need for the Fund to establish new lines of credit from official sources. Moreover, to ensure the solidity of the Fund’s financial base, other means to supplement resources may have to be considered. An early start of deliberations on the Ninth General Review of Quotas is, in our view, an option to be considered. It may also be necessary to approach private capital markets for finance. This alternative should therefore be further explored.
The question of new allocations of SDRs has been pending for quite some time. My constituency continues to support the allocation of SDRs on a moderate scale. There is now clear evidence of a need to increase the availability of reserves to facilitate adjustment and to sustain the recovery. Together with the steps already taken to improve the financial characteristics of the SDR, there is an urgent need for new allocations that would enhance the role of the SDR as a reserve asset.
In closing, I would like to turn again to the challenges we face in the period ahead. In bringing the world out of recession, achieving compatibility between economic policies of individual countries and the needs of the world economy is extremely important. In this connection, the Nordic countries continue to stress the importance of the surveillance function of the Fund. We welcome the recent agreement reached by the leaders of the major industrial nations to consult more closely on policies affecting exchange markets and to promote the much-needed exchange market stability. These undertakings have subsequently resulted in some, albeit limited, concrete action. We hope this indicates a shift in attitude toward meaningful cooperation both in the field of exchange rates and monetary and fiscal policies at large in the near future.
Statement by the Governor of the Fund and the Bank for Trinidad and Tobago—CA. Jacelon
I speak on matters related to Fund activities. I speak not only on behalf of my own country, Trinidad and Tobago, but have the honor to speak also on behalf of the other countries of the Commonwealth Caribbean, namely, Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Lucia, and St. Vincent and the Grenadines. I would first of all like to extend a warm welcome to Malta on its admission to membership in the World Bank and to thank members for their expression of welcome to Antigua and Barbuda, the latest member of our subregional group to join these important financial institutions.
This year’s Annual Meetings take place in a global economic setting which is not fundamentally different from that of recent years, although some evidence of an economic upturn is emerging in some industrial countries. The extensive economic analyses undertaken this year by the Fund in the World Economic Outlook, by the Bank in the World Development Report, and by UNCTAD in the Trade and Development Report have all portrayed a less than satisfactory performance.
I will not dwell at length on the economic performance of the major industrial countries; suffice it to say that the policies pursued by those countries have struck at the very roots of global economic interdependence and growth. Let me briefly summarize the scenario:
—We have witnessed the longest and deepest recession since the 1930s, and though some signs of recovery are emerging it is too early to conclude that a strong, durable, and sustainable recovery is on the way.
—Growth in world trade declined by 2½ percent in 1982 after having stagnated in 1981. Rising protectionism and the intensification of inward-looking policies in the developed countries, together with depressed commodity prices, are taking a severe toll on the purchasing power of developing countries.
—Aid flows have not shown any appreciable increase in nominal terms and in fact have declined in real terms. At present, such flows amount to about 0.35 percent of gross domestic product, that is, to only half of the internationally agreed target.
—Volatility in and the seeming misalignment of exchange rates have had a deleterious impact on the performance of developing countries.
—The external debt of developing countries amounted to well over $600 billion in 1982 and external debt service to over $100 billion, which is equivalent on average to about 20 percent of export earnings.
On the positive side of this scenario there are the abatement of inflation and the incipient economic recovery in the industrial world during the last year. We must not be unmindful, however, that inherent in the process of recovery is the possibility of the re-emergence of inflationary forces. Further, unless the success on the inflation front is accompanied by more appropriate levels of nominal and real interest rates, the recovery process will be jeopardized.
During the same period, the vulnerability of developing countries to those factors over which they have little or no control has been brought into sharp focus. This vulnerability has been manifested in unduly large current account deficits which have become costly and very difficult to finance. Even in the case of the petroleum-based economies, the recent decline in oil prices as well as in production levels has resulted in a marked erosion of their financial position, and they have been forced to cut back on their development programs. Their ability to sustain the substantial flow of financial assistance to other developing countries has also been impaired. The limited ability of the international banking system to alleviate the financial problems of developing countries was increasingly apparent during the past year. This, together with the stagnation of aid flows, has had an adverse impact on growth and on employment in developing countries. Growth rates have declined to a point where, for the first time in three decades, per capita income growth has been negative. The burden of adjustment is therefore being borne by those least able to do so, namely, the developing countries. It is clear that the basic asymmetry in the international adjustment process is being compounded.
In this situation, and in view of the high degree of interdependence of the world economy, the modest economic recovery now emerging must be put on a firm and sustained footing. We should not be lulled into complacency because of the initial signs of recovery in some of the industrial countries. We note with some concern that business investments in industrial countries are recovering very sluggishly and could be further retarded if the high rates of interest were to persist.
The interdependence of the world economy is too often overlooked; developing countries will derive only limited benefits from the recovery process if there is too great a reliance on the “trickle down” effect. Much more is required. Nor should it be forgotten that the stimulation of growth in the developing countries will itself facilitate the growth process in the developed countries.
The existing exchange rate system has resulted in extreme fluctuations in the major international currencies. Such volatility in the rates has seriously impaired the functioning of the world economy and in particular the performance of developing countries. The promotion of exchange rate stability in an environment conducive to economic growth is an objective which is enshrined in the Articles of Agreement of the International Monetary Fund. It is clear responsibility of the Fund therefore to take the lead in formulating a solution, a central aspect of which must be the coordination of the macroeconomic policies of the major industrial countries. In any such exercise the interests of developing countries must be taken fully into consideration.
The Fund, in the application of its surveillance policies, has been more influential in respect of the developing countries, the major users of its resources. The prescriptions for use have become harsher and in some cases unrealistic, judging from the increasing number of Fund programs which have been suspended. It cannot be overemphasized that adjustment for developing countries has become extremely onerous. Not only have they embarked on severe adjustment programs on their own volition, but they have had increasingly to cope with difficulties resulting from the monetary, financial, and trade policies of industrial countries. Accordingly, in formulating adjustment programs the Fund should give due consideration to the implications for growth.
We also believe that Fund conditionality places undue emphasis on rigid compliance with its performance criteria. While we acknowledge the need for some form of conditionality, there must be greater flexibility in the application by the Fund of such criteria, especially in cases where the thrust of the economic performance in the country undertaking a Fund program is in the right direction and the divergence from the key variables is not significant.
In this context, the Fund should re-examine the existing facilities with a view to their improvement and extension. Consequently, there should be an immediate reassessment of the extended Fund facility with a view to increasing its operational flexibility, extending its scope and coverage, and improving the terms and conditions attached to the use of such resources.
The compensatory financing facility has special significance for small island economies, many of which are generally open and have narrow production and export bases and are extremely vulnerable to external influences and natural disasters. We therefore urge the Fund that, in providing any resources under the compensatory financing facility and indeed under all its other facilities, due consideration be given to the particular circumstances and needs of small island economies. In this respect, we are happy to note that a Fund study on small island economies is nearing completion, and it is our hope that on completion a meaningful dialogue will ensue with such countries and indeed with the entire membership of the Fund, such that the peculiar circumstances of such economies will be placed in better perspective.
We are also concerned with the high cost of borrowing, particularly as it affects the least developed countries and other internationally agreed disadvantaged groups. We believe that for such countries an interest subsidy account should be established to provide relief when such borrowing is at market rates.
I now turn to one of the major issues facing the world community today—the size of Fund resources and access to such resources. All members of this institution have stressed ever since its creation that the Fund has a key role to play in the adjustment process and adequate access to Fund resources must be maintained if effective financing and durable adjustment are to be promoted. This is even more the case today. It has also been accepted that quotas should be the primary source of financial resources for the Fund. Despite the fact that both technical and operational considerations supported a doubling of quotas, the increase under the Eighth General Review of Quotas was limited to only 47.5 percent. As a result, the capacity of the Fund to discharge its responsibility in an effective manner has been greatly circumscribed. We therefore urge that the Eighth General Review come into force by the end of 1983 and, in addition, strongly recommend that the Ninth General Review be advanced. In this review, the minimum quota policy should be reinstated as was recommended, and regrettably not implemented, in respect of the Eighth General Review.
Let me emphasize at this juncture that, until such time as quotas bear appropriate relationships to world trade and current account deficits, the policy of enlarged access and existing multiples should be retained.
Pending the Ninth General Review of Quotas, it may become necessary for the Fund to supplement its resources by borrowing so that real access to Fund resources is maintained. We urge that all efforts be made to explore official sources, and, in this context, the General Arrangements to Borrow should be activated. It would be regrettable should the Fund find it necessary to have recourse to private market borrowing in order to fulfill its legitimate function.
We regret the interruption in the allocation of SDRs following the third basic period. We are of the view that the trends in the levels of international liquidity, the shrinkage in private market flows, and the current economic recession have strengthened the case for an allocation. Accordingly, we strongly recommend a resumption of SDR allocations in the fourth basic period, and we support the Group of Twenty-Four recommendation for an allocation of SDR 15 billion per annum for the next four years. Moreover, in order to achieve the objective of making the SDR the principal reserve asset in the international monetary system, it is imperative that SDRs should be allocated on a regular annual basis, and the case for a link between the allocation of SDRs and development assistance also continues to be strong.
The world economy has lurched from crisis to crisis. Indeed, we are in the throes of yet another crisis which cannot be effectively dealt with by ad hoc measures. The challenge which faces us is to rekindle and expand that spirit of international cooperation without which world recovery will remain elusive. If only we can muster the necessary political commitment to forge this spirit, temporary solutions will give way to lasting and durable ones. We should then be able to build an economic order based on principles of equity and justice. This would require the active participation of developing countries in the decision-making process. The convening of an international monetary conference will be an important and essential step in this direction.
In this context, at the recent meeting of Commonwealth Finance Ministers held in Port of Spain last week, the Ministers, including those from the countries on whose behalf I now speak, considered the report Towards a New Bretton Woods: Challenges for the World Financial and Trading System. This report had been called for at the previous meeting of Commonwealth Finance Ministers against a background of what they considered the urgent need, in view of the vast politicoeconomic changes which had taken place since the establishment of the Bretton Woods institutions, for a new overall examination of the Commonwealth trade and payments system as a whole and of the role of the international economic institutions in particular. Indeed, they felt that the short-term issues identified in the report should be taken up by us at these meetings and requested further that the Chairman of the meeting, the Prime Minister and Minister of Finance and Planning of Trinidad and Tobago, convey to the Commonwealth Heads of Government, at their forthcoming meeting in November in New Delhi, the essence of the discussions in Port of Spain. In our view, the necessary preparation for the international monetary conference to which I have just referred and which is envisaged by the report should commence immediately.
Statement by the Governor of the Bank for Austria—Herbert Salcher
Since our last meeting in Toronto, the world has changed somewhat—in at least two areas, for the better. First, pessimism prevailed at the last meeting about the financial system’s ability to handle the world’s debt problems of a limited group of countries. So far, with few exceptions, the financial community has demonstrated its efficiency in dealing with a large number of reschedulings that we did not even dare think about in Toronto. Second, last year the recession was at its worst and the outlook rather worrisome. Today the recession has bottomed out in many industrial countries, particularly in the United States, and the economic forecast seems to be more promising. There is a saying that goes: “When economists are wrong, it’s likely to be just at the critical time when we most desperately need them to be right.” At least this time I hope they are right.
Clearly, we need internationally better-coordinated approaches toward economic policy, particularly in four areas:
—first, continued rising unemployment;
—second, monetary and fiscal policies;
—third, in fighting inflation;
—fourth, in the commitment to increase development aid, bilateral and multilateral, and, in doing so, emphasizing solidarity with developing countries.
Let me now say a few words on unemployment, because it is the most worrisome aspect of the current evolution of our economies in the industrial as well as in the Third World countries. Today we face structural unemployment with a dangerous secular rise in unemployment.
Apparently, traditional or conservative economic policies do not satisfactorily solve this problem, because the number of unemployed is looked upon as a “residual variable,” as a result of decisions taken in other economic areas, such as in the field of fiscal and monetary policies. It should be considered rather as one of the factors that could possibly contribute, in a positive way, to the restoration of economic policies. Since we cannot count on high growth rates, we have to find new ways and means to cope effectively with the pressing problem of unemployment. We should be more aware that, if we do not succeed, this could have far-reaching consequences for the fabric of our societies in the long run.
In this respect, I believe that several larger industrial countries have acquired some leeway and could adopt somewhat more expansionary fiscal policies and somewhat less restrictive monetary policies.
Expansionary measures in countries where they seem to be possible should be selective and should take into account structural adjustment in the industrial countries. I believe a reasonable balance between selective expansionist measures and careful inflation-dampening measures can be established.
We have pursued this policy in Austria and, I think, rather successfully. We have followed this economic policy of compromises between traditionally contradictory goals, and we believe that suitable trade-offs were found. In terms of fiscal policies, we realized that, to the extent that the execution of the budget influences the economic situation, it again has repercussions on the budget. With expansionary measures, this “rate of return” reduces the increase of budget deficits; with restrictive measures, it reduces net savings. That is the essential reason why, in Austria, despite the priorities given to labor policy, the federal budget deficit is low compared with other countries. Furthermore, in those countries where drastic and painful programs to reduce spending were followed, the results were comparatively modest.
Monetary belt tightening alone, with its well-known repercussions on employment and on interest rates, is not an acceptable solution. Moreover, the still-prevailing real interest rates are counterproductive with respect to investment activities and increase also the already high burden of debt service.
We also believe that economic policy implies more than just monetary and fiscal policies. Under current circumstances, it is necessary to use the full range of policy instruments in support of financial policy, such as incomes policy, labor market policy, and structural adjustment policy.
Let me now say a few words on the relation between industrial and Third World countries. As a result of the worldwide economic interdependence, we must all closely cooperate, and the industrial world must show solidarity vis-à-vis developing countries. Governments must fight protectionism, and the financial community must assist countries in solving their debt problems and promoting economic and social programs.
Austria has not followed the trend to reduce its official development aid. On the contrary, in the past four years my country has increased its development aid to 0.53 percent of GDP in 1982. Despite budgetary constraints, we will aim at even higher levels in the future in order to achieve the goal of 0.7 percent of GDP. Austria’s commitment to ODA is reflected in increased bilateral aid efforts with an emphasis on low-income countries as well as strong support for multilateral aid agencies.
In the recent past, the financial community and the developing world could successfully reschedule large parts of their debt burden. This was done in the spirit of international solidarity. Within a very short time, it has been possible to establish effective cooperation between the Paris Club, the Fund, central banks of industrial countries—through the BIS— and the commercial banks. At the same time, it has been possible to coordinate economic programs for afflicted countries with the Fund and to negotiate and introduce coordinated programs of debt renegotiations and additional lending. Clearly, all this has been a great challenge. Although we did not reach a definite solution for the persisting problem, I am somewhat optimistic that future similar challenges can be met again. To prevent further burdening of the international financial system or to at least weaken the possibility of this occurring—or, in any case, to be able to deal with it better—one should bear in mind two important aspects:
—The expansion of world trade is a necessary precondition for the long-term solution of the debt problem. Therefore, we all have to fight protectionism.
—It is absolutely essential, for the positive development of our economies, that the financial system function. Therefore, it is necessary to strengthen, as much as possible, multilateral financial institutions such as the IMF and the World Bank.
In this context, one should be careful not to let political considerations play a part in it.
Let me now turn to the role the Fund ought to be able to play under present circumstances, which are still characterized by substantial structural payments imbalances, especially within the group of developing countries. The Fund is the only international monetary institution that extends financial assistance under conditions conducive to the restoration of a sustainable balance of payments position. In this respect, conditionality has to be applied in a reasonably flexible manner taking into account special circumstances of individual member countries.
Given the uncertainties of the current situation and the large prospective demands on the Fund in the years to come, it is essential to preserve the financial strength of this institution. However, as we all know, the Fund’s liquidity position is under considerable strain, and the eighth quota increase does not seem to be large enough to provide the Fund with the necessary resources. Therefore, to demonstrate the spirit of international cooperation, the Eighth General Review of Quotas, which constitutes a modest compromise accepted by all members, should be ratified as speedily as possible.
With respect to the question of whether the Fund should borrow in private capital markets, I would recommend that the Fund carefully consider this issue.
I furthermore would advocate advancing the Ninth General Review of Quotas to an earlier date. This would be all the more important because, as an intergovernmental agency, the Fund should rely mainly on its own resources, thereby also maintaining a concessional element in its lending activities. In this context, we should not forget that the reserve tranche positions and outstanding loan claims are part of the official reserves of member countries.
I regret that no sufficient support has yet been found for an allocation of SDRs during the current basic period. Under present economic and financial circumstances, an at least moderate allocation of SDRs would be fully in line with the requirements of the Articles of Agreement….
In conclusion, I call for economic policies which encourage higher growth to provide increased employment opportunities, strengthen the demand for exports from developing countries, and enable them to improve their financial position. I further urge donor countries to provide multilateral institutions with the necessary funds to fulfill their growing role in the development process.
Statement by the Governor of the Fund for Luxembourg—Pierre Werner
The enlightening introductory reports by the Managing Director of the Fund, Mr. de Larosière, and the President of the World Bank, Mr. Clausen, have pointed out that the current international economic and financial situation provides elements both for optimism and concern:
—On the one hand, economic indicators show a significant decrease of the inflation rate in major economies and a moderate recovery of growth in some important industrial countries, which show that the strategy recommended by the Fund during these last years has succeeded.
—On the other hand, the number of countries that face critical payments problems has rapidly increased since our last meeting, and thus the international monetary and financial system has to sustain an unusual strain.
It is a challenge to the Bretton Woods institutions to propose and induce policies that give countries and policymakers a chance to cope successfully with the new and complicated challenges.
As I just mentioned, today the positive signs for the prospect of a real but moderate economic growth in major countries are more substantial than for some time past, and we can hope for a lasting improvement, under the important qualification that in decisive areas the right policies are adopted and implemented. We must, in this context, welcome the commitment of the major industrial nations to fight the threat of spreading protectionist pressures, as well as the growing awareness of the reserve currency countries that they bear a particular responsibility in the international monetary system and in the effort to foster greater stability of exchange rates. According to a U.S. economist, the realization begins to dawn “that money is not a national but a global commodity.” The maintenance of liberal trade rules and of free flows of capital is fundamental for the worldwide recovery in general: it is even more important for the developing world and for the smaller industrial countries with particularly open economies. There is a realization that the overshooting of exchange rate movements, which we have experienced in recent years, has contributed to the destabilization of the economies and of capital flows and, thus, to the proliferation of nontariff trade barriers. To a certain degree, the larger use of SDRs for the pricing of commodities could be a stabilizing factor.
To illustrate that this is not mere wishful thinking, I can point out more recent developments in the European Monetary System, where the ECU is gradually working its way through to a growing use by the corporate sector for intra-European trade. This trend, although tiny, is there and it will grow.
The fact that the European Monetary System does not provide for privileged positions for individual currencies has proven to be a major factor of discipline in economic, financial, and monetary policies. Discussions about a reform of the world monetary system can draw upon the experience of the European Economic Community.
As has been pointed out in the report of Mr. de Larosière and in the different documents issued by the Fund staff in the preparation of these meetings, one of the most important worries is the persisting structural problems in crucial fields of our economies, like the budget deficits, the tax burden, the labor costs, the inadequate industrial equipment, the unemployment level, the rigidity of incomes policies, and so on. These problems present different characteristics in the various countries and cannot be resolved by uniform recipes. The adjustment process might be more difficult for a given country than for another, given its economic and social structure. My country was particularly hard hit by the world recession in steel production which began in 1974, because steel production represented, in 1974, about 25 percent of the GDP in Luxembourg and about 60 percent of all exports of goods. We have been able to reduce the labor force in the steel industry from 26,200 people, or 17 percent of the active population in 1974, to about 15,600, or 10 percent at present, and we will have to reduce it further in the coming years. And I am particularly proud that we were able to perform the necessary restructuring without undue social hardship and without labor conflicts, and our unemployment rate remains below 2 percent of the active population.
One of the most important concerns in the present crucial phase of an incipient recovery is the problem of the debt burden of an increasing number of countries.
The resulting situation is most challenging for the official agencies, especially for the IMF and the BIS, which have to be congratulated for the effectiveness and the speed of their interventions during the past 12 months. It has been clearly and generally recognized that the maintenance of private financial flows is of paramount importance for the developing world, and thus a real crisis has been avoided. The policy of official lenders should not be directed toward taking over the responsibilities of the banks but should rather, given the amounts of private credit used, allow the banking system to maintain its existing commitments.
The access to the Fund’s credit mechanisms must be seen in the light of this situation, as well as the Fund’s credibility and the necessity to allow the Fund to play a major role in the adjustment process of the debtor countries. Therefore, the global amount of available liquidity must remain substantial, it being understood that the Fund continues to exercise, as in the past, an appropriate firmness in the credit conditionality. Given the potential problems in the liquidity situation of the Fund, I believe it would not be wise to preclude a possible recourse to the private financial markets by the Fund, for a given time period. One should recognize that official lenders are, in the present situation, more and more reluctant to immobilize their available assets and to lend generously to the Fund. As a matter of principle, we continue to adhere to the view that the Fund’s lending and borrowing activity should, in the longer run, be based on the quota mechanism, but the particular and, as everybody hopes, temporary needs in the present circumstances have required and continue to require particular solutions of a temporary nature, in order to avoid both an underequipped Fund at present and an overdimensioned Fund in the future.
As for the question of further SDR allocations, we consider that these would be economically justified and that, moreover, the strengthening of the SDR as a neutral reserve currency is essential for improving the functioning of the world monetary system.
Concerning the eighth quota increase, I want to confirm that my country is ready to subscribe and pay in its proposed share. The parliamentary procedures have been initiated and are expected to be finalized in due time….
To conclude my remarks, I want to express my belief and my hope that policymakers all over the world will understand that the respect of the principles of free trade and capital flows, as well as solidarity among all nations that govern the Bretton Woods Agreement and its institutions, is essential to face successfully the challenges of economic and social development and of financial stability which are our common goals.
September 28, 1983.