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Opening Address by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Kuwait1, Abdlatif Y. Al-Hamad

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1982
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Fellow Governors, Ladies, and Gentlemen:

Let me begin by expressing my deep thanks to the Government and people of Canada for their warm reception and excellent arrangements for our Meetings in this beautiful city of Toronto.

A special welcome is extended to the Governors and delegations for Antigua and Barbuda, Belize, and Hungary who are participating as members in our formal proceedings for the first time.

I. Kuwait: Development Strategy

Allow me to mention a few words on my own country and our region. Kuwait is a small country with a population of one and a half million. It is blessed with oil wealth which—in relation to the small size of its population—may be regarded as bountiful. From the very early days of our independence, our development strategy has been greatly influenced by the fact that oil—the principal source of our income and wealth—is a depleting asset. Accordingly, the major aim of our development strategy has been—and still is—the diversification of our economy so as to create new sources of income. In this respect—needless to say—Kuwait is no different from most of the oil exporting countries in our region.

Diversification had to take place within the framework of certain constraints peculiar to the economy of the so-called capital-surplus oil-exporting countries. While capital is relatively abundant, our development policy has to contend with the relative scarcity of domestic labor, limited size of the local market, and, above all, the virtual lack of natural resources other than oil. Furthermore, development policy has to be carried out in a difficult natural environment with limited water resources and agricultural potential.

However, looking over the past twenty years, I have reason to take satisfaction in the accomplishments of the Kuwaiti economy. To be sure, there is still a long way to go. Nonetheless, significant progress has been made in the development of non-oil sources of income with special emphasis on the development of professional and managerial skills.

II. The Recycling Process

Following the oil price increases of 1973 and 1979–80, Arab capital exporting countries were able to accumulate a significant surplus on their current account. The recycling of these surpluses has been at the center of international discussion and controversy. In view of the special importance accorded to this issue, allow me to make a few observations.

The absorptive capacity of the capital exporting oil countries has proved to be much greater than was generally assumed. This is largely due to the vast development programs mounted by the oil countries as well as the relatively high marginal propensity to import. As a consequence, the post-oil boom era witnessed a remarkable expansion in our imports, making trade between members of the Organization of Petroleum Exporting Countries (OPEC) and the outside world one of the most dynamic flows. In addition, development at a high pace was made possible by the inflow of large numbers of migrant workers and expatriates. This gave rise to an outflow of remittances which came to play a significant role in the foreign exchange earnings of some countries. The combination of these two factors—imports and remittances—has been instrumental in reducing the size of surpluses and in stimulating the growth of our trading partners, including a large number of developing countries.

Arab oil countries have been keenly conscious of their responsibilities in the world economy. Well before the oil boom of 1973, these countries had already a sizable development assistance program. The last two decades saw the establishment of a number of national development institutions such as the Kuwait Fund for Arab Economic Development, the Saudi Fund for Development, the Abu Dhabi Fund for Arab Economic Development, and the Iraqi Fund for External Development. These were soon followed by the creation of, or increased participation in, a wide range of regional and international institutions such as the Arab Fund for Economic and Social Development, the Arab Monetary Fund, the Islamic Development Bank, the Arab Bank for Economic Development in Africa, the African Development Bank, the OPEC Fund for International Development, the International Fund for Agricultural Development, and last but not least, the International Monetary Fund, the World Bank, and the International Development Association. For the period 1973-81, official development assistance from these countries accounted for an average of about 4 per cent of their gross national product (GNP). For some donors the proportion was more than twice that level. In relative terms, the overall average is about ten times as much as the average for the Development Assistance Committee (DAC) countries. To put our development assistance in perspective, if official development assistance (ODA) for DAC countries were to be on the same scale in relation to their GNP, it would have risen from its present level of about $30 billion to $300 billion per annum. This indeed would have made our world a different place.

In the area of nonconcessional flows, a large number of financial institutions were established; ranging from commercial banks to investment and development banks, underwriting and capital market institutions. The scope of their operations extended beyond the domestic market to cover the major financial centers of the world. These institutions are playing an increasingly important role in the recycling process. However, the bulk of the recycling process in nonconcessional flows continues to be handled by financial intermediaries and institutions in the industrial countries.

III. Global Interdependence

Much has already been said about the fact that the different parts of the world economy are inextricably intertwined. Every day we are reminded that global interdependence is very much a reality and not merely a slogan. Our planet is becoming ever smaller. The prosperity in one part soon radiates in ever-widening circles. Similarly, the malaise in one part cannot but have repercussions on others. This is particularly true of the relationship between the industrial countries on the one hand and the developing countries on the other. Dr. Prebisch, the founding father of the United Nations Conference on Trade and Development (UNCTAD), once described this relationship as one between center and periphery. At one stage in the development of the world economy, the center-periphery model was an apt description of reality. This is no longer the case. That the South is dependent on the North is obvious enough. It is much less recognized that the North is becoming increasingly dependent on the South. The following facts serve to illustrate the point: in 1980, Japan, the United States, and the European Community (EC) sent more than one third of their exports to the Third World, with the proportion reaching a little less than 50 per cent in the case of Japan. U.S. exports to the developing countries were more than 4 times those to Japan, and nearly twice those to the EC. The EC exports to the Third World were more than 3 times those to the United States and more than 20 times those to Japan. The importance of this trade to employment is illustrated by the fact that one job in 20 in the United States is in production for export to the Third World. For some sectors and industries in the developed countries, employment dependence on exports to the Third World is as high as 20 per cent.

This two-way interdependence was effectively illustrated by the oil price increase in the 1970s. There can be little doubt that the greatly increased cost of energy has had a profound and adverse impact on some countries, particularly those heavily dependent on imported energy, as well as many of the poorer countries. However, in the media as well as in many reports, the impact of oil price increases was blown out of all proportion. Any fair observer would have easily seen that the energy crisis is but one of many structural problems and imbalances. But oil and OPEC were conveniently blamed for all the ills of the world economy. Such an explanation was as simplistic as it was dangerous. This is not the occasion to embark on sterile controversy. Suffice it to cite the following quotation from the report, Energy for Development, prepared by the Society for International Development:

That the energy issue is a critical and important one for the entire world community is undeniable. But the present tendency to ascribe to energy the blame for most of our current ailments would be as wrong and misguided as the apathy and skepticism that characterised the attitudes existing before the advent of the energy crisis.

Global interdependence was once more brought out by the profound impact of the recession in the industrial countries. The low level of economic activities in these countries has been reflected in a low level of demand for the exports of the developing countries. This has led both to a marked slowdown in the growth of exports of the developing countries as well as to a sharp deterioration in their terms of trade. The current terms of trade of primary commodities other than oil are estimated to be the lowest in the postwar period.

The problem was compounded by excessively high levels of interest rates. The high cost of money is having a potent deflationary impact. It has impeded the access of developing countries to capital markets and has made their debt repayment obligations more burdensome. Contrary to a widely held belief, high interest rates have had substantial adverse effects on surplus oil countries. For instance, while the rate of return on liquid assets has risen, losses have been incurred in the yield and capital value of equity investment and the capital value of fixed-income financial assets. From the viewpoint of the domestic economy, high interest rates have aggravated inflationary pressures, discouraged private investment, induced capital outflows, and complicated the task of financing major development projects.

IV. Immediate Issues

The most urgent task facing the world community is to overcome the current recession in the industrial countries. With such high levels of unemployment and inflation, it becomes more difficult to follow liberal trade and aid policies, which are sorely needed to shore up the sagging economies of the developing countries. It was heartening to read in the communiqué of the Versailles summit that:

Growth and employment must be increased. This will be attained on a durable basis only if we are successful in our continuing fight against inflation. That will also help to bring down interest rates, which are now unacceptably high, and to bring about more stable exchange rates.

Developments since the Versailles summit, however, hardly give reason for optimism.

It is being increasingly recognized by both the Fund and the Bank that the payments deficits of developing countries cannot be reduced to sustainable levels by a simple policy of demand management. They are mostly due to some deeply rooted factors arising from structural imbalances. Moreover, a major part of these deficits is caused by external factors, beyond the control of the countries concerned. This diagnosis has important implications for the role of the Fund and the Bank as well as for global aid and trade policies.

More than any time in the past, the International Monetary Fund should continue to play a central role in the management of the international monetary system. To do so, however, the Fund quotas would need to be considerably increased above their present level. The forthcoming Eighth General Review of Quotas should provide the occasion to augment the quotas to a level commensurate with the role of the Fund and the financing needs of member countries in the 1980s. The distribution of quotas should reflect the change in the relative economic position of member countries and should provide for a significant increase in the voting power of developing countries.

Presently the burden of adjustment falls almost completely on deficit countries. We must share the burden of adjustment equitably if we are all to share in the worldwide goal of sustained, noninflationary growth. The Fund has an important role to play in this regard. In the exercise of its surveillance function, it needs to give special attention to the policies of major industrial countries, since they have such a pervasive effect on the rest of the world. The Fund should seek to ensure that these policies are not only in the interest of their domestic economies but are also internationally cooperative.

It is a matter for concern that so little progress has been made of late on the reform of the international monetary system, a matter that once received priority attention. It is of course understandable that more immediate issues have demanded resolution, but we must not lose sight of the importance of reforming the system so as to create a framework in which cooperation will be facilitated. The experience of the last 20 years has vindicated the conviction that the creation and distribution of international liquidity should be a global responsibility. It is now widely recognized that the present system is inequitable as well as unresponsive to the needs of the world economy. To rectify this situation, steps should be taken to make the special drawing right (SDR) the principal reserve asset in the international monetary system.

In the present crisis of the world economy, the poorer countries have been hardest hit. Their problem was compounded by a significant reduction in the commitment authority of the International Development Association (IDA). This is a most unfortunate development. The establishment of IDA is probably one of the most outstanding achievements of the postwar period. This is amply demonstrated by the study undertaken by the World Bank, IDA in Retrospect, to assess the accomplishments and shortcomings of that institution. This study shows clearly that, since its establishment in the early 1960s, IDA proved to be an effective vehicle for the mobilization of concessional resources on a multilateral basis. Moreover, available evidence suggests that IDA has been significantly more cost-effective than bilateral sources. It is incumbent upon all donor countries to preserve the integrity and effectiveness of this institution. The commitment authority of IDA must be restored to its originally planned levels, and the principle of burden-sharing must be maintained as one of the principal foundations of multilateral cooperation.

The need to mobilize additional resources to alleviate the plight of developing countries is still as pressing as ever. I welcome the initiatives that have been taken, and those being considered, by the World Bank for that purpose. I am confident, however, that in pursuing this goal the Bank will not lose sight of the fact that it is first and foremost a development institution. This imposes certain constraints which have to be taken into account in the formulation and implementation of the new policies.

Let me conclude by quoting Mr. Willy Brandt in his introduction to the report of the Independent Commission on International Development Issues:

The difficult and controversial subjects which divide richer and poorer countries, will certainly not be solved by prejudices, nor by wishful thinking. They must be approached with a will to overcome dangerous tensions and to produce significant and useful results for nations and regions—but, first and foremost, for human beings—in all parts of the world.

Delivered at the Opening Joint Session, September 6, 1982.

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