Presentation of the Thirty-Seventh Annual Report1 by the Chairman of the Executive Board and Managing Director of the International Monetary Fund, J. de Larosière

International Monetary Fund. Secretary's Department
Published Date:
November 1982
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I should like to join you and the Governor for Canada in greeting the delegates and guests assembled here in Toronto for the Thirty-Seventh Annual Meetings. Let me extend special welcome to the Governors for Antigua and Barbuda, Belize, and Hungary. These countries have become members since the Annual Meetings last year. We have been most honored by the participation of Prime Minister Trudeau in these Meetings. I listened with keen interest to his statement which cast such a perceptive light on our Meetings.

Mr. Chairman, the world economic situation is very complex and difficult, perhaps more so than at any time in the postwar period. It is clearly the main issue for our discussions.

In the first part of my remarks, after recalling the dominant features of the current situation, I will set forth the policies that, in my view, must be pursued in order to restore world economic growth. Next, I will turn to certain aspects of external payments imbalances and the behavior of the international capital markets. Finally, I will describe the mission of the International Monetary Fund in the very difficult situation we face today.

I. Policies to Restore World Economic Growth

1. State of the world economy

a. Growth in the industrial countries

Economic growth in the industrial world has stagnated during the past three years in an environment of severe inflation in most countries. For the industrial countries as a group, growth of real GNP amounted to only about 1 per cent in both 1980 and 1981 and, according to our projections, will be approximately zero in 1982. Because of this prolonged slump in economic activity, unemployment rose dramatically from 1979 to 1981 and is continuing to rise further during the current year. By the middle of 1982, about 8 per cent of the labor force was unemployed in industrial countries.

b. World trade

Primarily because of the weakness of economic activity in the industrial countries, growth in the volume of world trade fell to a very low rate in 1980 and since then has come to a halt. The slump in trade makes it more difficult for countries to adjust their balance of payments positions. This adjustment problem is also aggravated for exporters of primary products by the weakness of commodity prices. For primary commodities other than oil, the overall average of prices declined sharply during 1981 and the first half of 1982. In real terms, these prices are currently lower than at any other time for more than three decades, and about 20 per cent lower than in the recession year 1975.

c. Plight of the developing countries

In view of the international environment, the economic and financial difficulties being experienced by non-oil developing countries come as no surprise. The environment has been particularly unfavorable in recent years, not only because of recession in the industrial world but also because of the steep rise in oil prices during 1979–80 and the surge of interest rates in international financial markets. The harsh impact of external developments has often been aggravated by inadequate domestic policies in many countries. The estimated average growth rates of the non-oil LDCs for 1981 and 1982 are the lowest in several decades. For the first time in the postwar period, real per capita income for so many of these countries has fallen.

2. The anti-inflationary policy stance remains as valid as ever

As one looks at the world economic picture, the immediate question is how can the current situation be turned around and sustainable growth be restored in the world economy. The present high level of unemployment is a source of great concern; beyond the economic effects of unemployment are the social costs and hardships, which, to my mind, are potentially much greater. In what follows, I shall focus on the industrial countries because of their dominant weight in the world economy.

a. The present problems are the legacy of years of inadequate policies and will take time to overcome

Let me emphasize the need for historical perspective in diagnosing the current economic problems of the industrial countries. These problems are a legacy of the 1960s and 1970s, when the prevailing conditions of “stagflation” were gradually built up. Over a period of many years, the economic performance of industrial countries deteriorated substantially, in large part because of mistaken policies. The economies of these countries generally became much less flexible and efficient. Inflation rose to successively higher levels from one business cycle to another, while economic growth rates tended to decline and rates of unemployment moved upward. With market mechanisms becoming more inflexible, wages and prices tended to be rather sticky. Large budget deficits were carried over from the mid-1970s. Differentials in inflation rates among the industrial countries grew very wide. Inflationary expectations became deeply entrenched, and there was a clear-cut loss of public confidence in the efficacy of national economic policies.

This historical background demonstrates that current problems in the industrial world are the product of long-term forces and may take some time to resolve, and it can serve as a guide to the policies that are required.

b. The problem of unemployment cannot be solved by “quick fixes”

Let us focus directly on unemployment in the industrial countries. As I mentioned earlier, unemployment in these countries has increased sharply since 1979. But it is important to recognize that the problem is deeply rooted—that unemployment in the industrial world has been on a rising trend since the mid-1960s. Apart from demographic and sociological changes that have added greatly to the growth of the labor force, rising real wage rates and growing rigidities in labor markets have also contributed to the long-term rise in unemployment.

There are no “quick fixes” to the problem of unemployment. Such approaches would be counterproductive. For instance, compulsory work-sharing measures, such as reduction in hours of work, are often inflationary and tend to increase rigidities in labor markets. When not offset by a reduction in wages, schemes of this sort are best avoided. Also to be avoided are measures that call for unproductive job creation in the public sector or in subsidies to firms for retaining labor. Schemes like these can be very costly in the long run, not only in terms of additional government expenditures but also in terms of productivity.

On a more general plane, it would be a grave mistake for national authorities, in the present inflationary climate, to try to bring down unemployment through a shift to expansionary monetary and fiscal policies. Recent experience shows that when this approach was tried it was unsuccessful. Such a shift runs the serious risk of aggravating inflationary expectations and ratcheting the economy to an even higher rate of inflation that, in due course, can only lead to a still more costly process of adjustment in terms of unemployment.

In contrast to these superficial approaches, three broad types of fundamental measures are called for. First, priority should be given to a reduction of rigidities that contribute to inflexibility in the cost of labor. Such rigidities are particularly detrimental at this time because of the sharp decline in the share of gross profits in national income that took place in many industrial countries, especially in Europe, during the 1970s and is now exerting a severe drag on investment and growth. Second, steps should be taken to redress the lack of flexibility in labor markets, since this has impeded shifts in the allocation of resources among industries in response to structural economic changes. Third, it may also be necessary to ensure that incentives for seeking employment are adequate. Unless measures along these lines are taken to deal with its fundamental causes, unemployment is likely to remain a serious problem in the future even with inflation under control.

c. Countries in which firm anti-inflationary policies have been pursued are showing better results

Essentially because monetary policy has been set right and adhered to, a number of industrial countries have made important progress on the prices front. The performance of Japan and the Federal Republic of Germany, in keeping their inflation at relatively low rates, has been outstanding. Price performance has been impressive in the United States, where the increase in the GNP deflator is expected to come down to 6½ per cent this year from 9½ per cent in 1981. Encouraging progress has been made by the United Kingdom in reducing inflation from a very high level, and further gains are expected this year.

Also impressive are the efforts on the part of a number of non-oil developing countries to carry out programs of adjustment. Rates of inflation have been easing in many of these countries, and progress toward adjustment is becoming evident even though the external environment has been harsh. For example, in spite of an estimated decline in the volume of imports of the industrial countries over the three years 1980–82, the volume of exports of the non-oil developing countries is estimated to grow by 14 per cent, reflecting their success in increasing their market shares in the industrial world and developing new markets elsewhere.

It would be most unfortunate if the hard-won progress already achieved in a wide range of countries were not to be consolidated and extended. Monetary restraint must continue to form a central element of national economic policy in order to combat inflation.

3. Much remains to be done

a. There is a need for closer convergence of price performance

Progress has been made, but the battle against inflation is not won. Inflation is still unacceptably high in most industrial countries, and performance among them in tackling this problem has varied considerably. In a setting of monetary restraint, large budget deficits, and widely differing inflation rates, balances on current account have diverged and real interest rates have risen very sharply. The uneven pursuit of anti-inflation policies in the major industrial countries has so far been associated with more, rather than less, exchange rate variability.

What is truly important in the search for convergence of inflation rates is that they converge toward a lower level that is acceptable for the longer term, and not merely that they converge. This means that determination must be maintained among the good performers, and further decisive progress must be made by those countries where high inflation still prevails. This is essential for a reduction of interest rates, for a revival of growth, and for greater stability in the exchange markets for the major currencies.

b. Fiscal policy is still a source of weakness

The effectiveness of the strategy of monetary restraint has been hindered by a lack of support on the part of fiscal policy—more particularly, by the prevalence of large budget deficits.

Of course, fiscal deficits can have beneficial effects when the economy is in recession, when price stability prevails, and when the deficits are not large enough to crowd out productive investment. However, the distinctive feature of the fiscal situation in industrial countries during the past decade is that large-scale deficits have proved persistent even in the upswing as most countries failed to withdraw the fiscal stimulus imparted during the 1975 recession. In retrospect, much of the present fiscal problem can be traced to inadequate restraint in the latter half of the 1970s.

In many industrial countries, chronic budget deficits have created fears on the part of private market participants—fears that the absorption of private saving by the government might keep real interest rates high and fears that the deficits might sooner or later be monetized, with a result that inflationary expectations have remained high. Both types of market attitude have contributed to the rise in nominal and real interest rates and, therefore, to the negative impact of monetary restraint on output and employment. A more decisive commitment to budgetary discipline and smaller fiscal deficits would reduce market uncertainties, help to reverse inflationary expectations, and contribute to greater stability of exchange rates.

The persistence of large budget deficits is the main issue of economic policy in the United States. And the adoption by the United States of measures aimed at strengthening the budget over the medium term, while the targets for monetary growth remained unchanged, would result in a better policy mix. The tax measures recently approved by the U.S. Congress are clearly a step in the right direction. More needs to be done, however, to put the budget back on a sound footing over the medium term and to reduce future pressure on the credit market. The lasting reduction of interest rates that would result from an improvement in the budgetary situation would enhance capital formation and economic growth—not only in the United States itself but also in other countries where domestic conditions would permit a similar lowering of interest rates. The sharp drop in short-term interest rates during recent weeks is a welcome development. But it does not make the need for continued efforts to restore fiscal discipline any less important. Because of its international implications, this aspect of U.S. economic policy is clearly at the heart of the surveillance process.

This applies not only to the United States, but to all countries with excessive budget deficits. Closer convergence of fiscal action among the major countries is essential. Given the mobility of international capital flows, progress made by some countries in improving their budget positions could be undermined if it were to result in substantial capital outflows to those countries whose fiscal adjustment was lagging behind.

c. Rigidities and structural imbalances must be tackled

In addition to the provision of better fiscal support for monetary policy, there is also a need for governments to tackle rigidities and structural imbalances. Examples of these are to be found not only in wage bargaining and price setting, as I have already mentioned, but also in government subsidization or protection of ailing industries, in various aspects of government spending and taxation, and in the burden of government regulations. Because of these rigidities and structural imbalances, inflation tends to be stubborn and economic growth to be sluggish. Measures that effectively reduce them could help significantly to reduce inflation with less cost in terms of unemployment, and would enhance the longer-run potential for economic growth.

In this regard, let me say a word on the possible use of incomes policy in some countries. This is, of course, a controversial area of policy and the success with incomes policy has varied considerably from country to country in the past. I would, however, make three points. First, incomes policy can be a useful device in some countries, depending on the individual circumstances, if it is seen by the authorities and by the social partners as a means of reducing the rigidities in wage bargaining. Second, incomes policies should always include appropriate wage restraint in the public sector itself: the authorities themselves should give the right lead. Third, incomes policies should never be seen as a substitute for proper demand management policies. Let me add that the recent easing of wage pressures in many industrial countries and the progress by some in modifying or dismantling rigid indexation schemes are encouraging developments.

* * * * *

I am fully conscious that these policies of adjustment are by no means easy to carry out. Being addressed to problems that have developed over a period of many years, their implementation requires time and patience. Calling for measures that often are politically sensitive, they also require determination and courage. But I see no satisfactory alternative to the general strategy of exercising monetary restraint, improving the balance between fiscal and monetary policies, and reducing market rigidities. The prevailing difficult problems facing member countries can only be dealt with through these fundamental measures. Let me emphasize that any recourse to short-sighted policies—such as reflating demand or protectionist trade measures—could in no circumstances offer a shortcut to the essential adjustment process.

The economic recovery envisaged in our projections is a modest and gradual one. And the outlook certainly does not give grounds for expecting an early decline in unemployment. But the underlying situation is sounder because inflation is being brought under control. This progress, if consolidated, should lead to stronger growth over the medium term.

II. The International Payments Situation and Policies

So far, I have focused my remarks on the basic issue of restoring growth in the world economy. Let me now turn to the international payments situation—the problems of balance of payments adjustment and financing.

1. Developments in balance of payments positions

The structure of international payments has undergone large and rapid changes during the past four years. From 1978 to 1980, because of the more than doubling of oil prices, the combined current account surplus of the oil exporting countries surged from $3 billion to $116 billion. Meanwhile, the current account positions of oil importing countries the world over showed a corresponding deterioration. From 1980 to 1982, however, the surplus of the oil exporting countries will plunge to an estimated $15 billion as a result of the large drop in demand for oil following the steep price rise and the recession in the industrial countries.

The main counterpart to the fall in the surplus of the oil exporters has been a strengthening in the combined current account balance of the major industrial countries. But the combined current account position of the industrial countries masks a wide diversity in the positions of individual countries. The greater part of the strengthening that has been taking place has been concentrated in two countries—Japan and the Federal Republic of Germany—the countries that have, incidentally, achieved the best performance on the inflation front. The deficits of a number of the major industrial countries—and many of the smaller ones too—remain high or, in some cases, have actually increased. The marked difference in the current account positions of individual industrial countries is a manifestation of the lack of policy convergence among those countries and a key factor in exchange rate instability.

Finally, the external payments position of the non-oil developing countries remains a cause for concern. Their combined current account deficit is expected to decline from a peak of about $100 billion in 1981 to some $90 billion this year, and this entails a sharp reduction in growth for these countries. Nevertheless, this deficit remains historically very high, not only in nominal terms but in real terms as well. For the non-oil developing countries as a group, the average current account deficit in 1982 is likely to be in excess of 20 per cent of their exports of goods and services—more than double the level of their deficit a decade ago. Of those developing countries that are net importers of oil, half of them will have a current account deficit equivalent to more than 40 per cent of exports of goods and services.

2. Deficit countries are caught in a crosscurrent of high interest rates and recession

Faced with huge and sudden shifts in payments balances in recent years, the international financial markets have been active and the commercial banks in particular have taken on a greatly expanded role. From 1973 to 1981, they increased their international lending at an average annual rate of more than 20 per cent. By the end of the period private commercial banks were playing a dominant role in financing payments imbalances and capital flows—functions that, even as recently as ten years ago, had been handled, though on a smaller scale, primarily by government agencies and official institutions.

The sharply higher deficits and the pattern of their financing have produced a substantial increase in the external indebtedness of many countries and in the share owed to commercial banks. For example, for the non-oil developing countries, outstanding medium- and long-term debt over the three years to the end of 1981 rose by about 60 per cent to some $440 billion. To this must be added short-term commercial indebtedness of the order of $100 billion, which has grown rapidly over the past few years as loan maturities have shortened. About three fifths of the aggregate debt was owed to private financial institutions.

The large increase in commercial debt, soaring interest rates, and the impact of world recession on their export earnings have led to a considerable increase in the debt service burden of the non-oil developing countries. Total debt service payments for these countries will probably account for some 23 per cent of export earnings in 1982, compared to 17 per cent in 1978, with more than half of the increase due to higher interest payments. Interest payments in 1982 will be $3 billion higher than last year; this alone represents 1 per cent of the combined export earnings of these countries.

With continued weakness of export prices and rising import costs, the terms of trade of the non-oil developing countries are expected to fall again this year—for the fifth successive year—bringing the total decline in their external terms of trade since 1978 to 12 per cent.

The developing countries are thus caught in the crosscurrents of rising debt service payments, slack external demand, and deteriorating terms of trade. Progress by the major industrial countries toward revitalizing their economies and in bringing down interest rates—through the policy strategy I have described—would greatly ease the adjustment problems and the debt service burden of deficit countries.

3. Conditions for maintaining international financial stability

As we are all very much aware, the external liquidity position of some debtor countries has come under sudden and severe strain. In these circumstances, at least four conditions need to be respected to assure orderly economic development and the international financial stability necessary to support and foster that development:

  • —decisive action on the part of individual countries toward necessary adjustment,

  • —lending policies on the part of the commercial banks consistent with that adjustment,

  • —liberal and open international trading policies, and

  • —maintenance of concessional financing flows to the developing countries.

a. The need for strengthened adjustment efforts

Corrective policy measures are already under way in many countries, and external current account deficits are being gradually reduced. But considerably more adjustment is needed on the part of many countries if external deficits are to be brought down to a sustainable level and debt crises avoided. This means that countries must shape their economic policies in such a way as to keep their external deficits within manageable bounds in terms of their debt service capacity.

Of course, the process of orderly adjustment takes time—particularly in the present unfavorable international environment. And a high level of external financing will still be required by many of the industrial countries and most of the non-oil developing countries in the period ahead. But progress toward adjustment is a central requirement if the financial markets are to have the confidence to channel funds to deficit countries on the scale required. And the Fund, as the agent of adjustment in the system, has a vital role to play in helping member countries to put together and implement the adjustment programs that are needed.

b. Lending policies of the banking system consistent with adjustment

The commercial banks have played a rapidly expanding role in the international financial system. Banking practices should now conform to this wider role.

To begin with, bank lending that gives a country an unwarranted sense of financial ease is not sustainable over the medium term. Capital should be directed to countries where policies offer reasonable assurance that the resources will strengthen their productive base and with it their capacity to service the debt. When financing only has the effect of allowing a country to live beyond its means by, for example, supporting excessive consumption, it serves neither the interest of the borrower nor that of the financial community. In this regard, the Fund can play a helpful role in the context of its regular consultations and reviews of policies with member countries in counseling them as to how best to stay on a sustainable policy path.

There have been clear signs recently that the banks are becoming more selective in their international lending policies. This has involved increased attention to the economic potential and adjustment capacity of borrowing countries. But it has also led to the banks’ cutting back sharply on their lending to some countries where debt service problems and arrears have occurred. In a number of cases shifts in the direction of bank financing have been abrupt and very large in relation to the current account balances of the countries involved; they have created problems for domestic economic management, as well as for balance of payments financing in the borrowing countries.

It is in everyone’s best interests to prevent financing difficulties from occurring or spreading. The interested countries and the financial institutions, including the private commercial banks, all have a clear responsibility for achieving that goal. Parallel actions among commercial banks and monetary authorities have recently shown their potential. When debt problems do arise, however, there has to be close collaboration among all the interested parties. The need for close collaboration has been made strikingly evident by the current developments in Mexico. As you know, the central banks, the Bank for International Settlements (BIS), the U.S. Government, the commercial banks, and the Fund acted immediately, in full cooperation. The Fund is now working with the Mexican authorities toward a medium-term solution. In this manner, the Fund can play a key role in assisting the country to put its economic policies back on the right course, and to provide confidence to the financial community that adjustment will take place within a reasonable period of time and external obligations can be met. I would hope that the banks would continue to approach these cases, if and when they should arise, flexibly and pragmatically, keeping in mind that a cooperative international effort will best serve the interests of all the parties involved and, ultimately, the financial system itself. I would also hope that the banks will judge each debtor on its own merits and will not allow the emergence of debt financing problems in one country to cloud their judgment of the creditworthiness of neighboring countries.

c. Maintaining and extending liberal and open international trading policies

Open trade policies have been a key factor in contributing to the long period of postwar economic growth and the prosperity that came with it.

With the recent recession and rising unemployment, protectionist pressures and trade friction have been increasing among the industrial countries. There are clear signs of erosion in the liberal trading system. Recent protectionist tendencies affecting certain manufactured goods are a cause of serious concern. And growing calls for “reciprocity” in trade relations carry the seeds of the worst features of bilateralism. The Generalized System of Preferences has been weakened progressively, and a number of developing countries have become the victims of so-called voluntary restraint agreements that appear to be growing steadily more important.

Trade restrictions and mercantilist approaches to trade policy are seriously misconceived and out of place in today’s world economy: they can only retard the necessary adjustment and make it more painful in the end. None of the policy prescriptions the Fund offers to the developing countries—for adopting “outward-looking” economic policies, for diversifying their productive base, and so on—can be effective if access to world markets for these countries is restricted. Similarly, none of the prescriptions we are offering to the industrial countries—to fight inflation, to foster competition, and to reduce rigidities—can work if protectionism intensifies.

Trade policy is a crucial yet highly sensitive area. It calls for the utmost vigilance in government actions. Resort to protectionism must be firmly rejected as a policy option if the international adjustment process is to function and if we are to open the way to a lasting recovery. The Fund is determined to play an active role in fostering open trade through its surveillance procedures and in helping members to devise programs.

The General Agreement on Tariffs and Trade (GATT) ministerial meeting planned for November offers an important opportunity, at a critical moment in trade relations, to halt the drift toward protectionism and to define areas where progress toward more open trade can and must be made.

d. Maintaining flows of concessional assistance

In real terms, concessional assistance provided by the industrial countries has shown no growth over the past decade. Official development assistance has averaged no more than 0.35 per cent of GNP of the industrial countries. This represents only half the target recommended by the United Nations a decade ago and accepted by most of the industrial countries. Concessional aid to the neediest countries—the low-income group—that have little or no access to other forms of external finance remains very low in relation to their development needs.

Cutting back on aid is of little benefit to donor countries since aid programs typically form a small fraction of their budgets, and because such action does not address the fundamental weaknesses that have to be corrected. Moreover, it is important that governments keep in mind the wider and longer-term implications of a reduction in their external economic assistance programs for investment and growth in the developing countries and, hence, for the social and political stability of those countries.

III. Role of the International Monetary Fund

I come, now, to the mission of the Fund in the current difficult conditions.

1. The need for adjustment is today more important than ever

The Fund has a vital role to play in helping to cope with crises when they arise. However, a primary emphasis of the Fund’s work is in helping to forestall crises, in the interest both of the countries concerned and of the stability of the international financial system. To be most effective, adjustment programs have to be undertaken at an early stage of a country’s emerging payments difficulties. Indeed, our experience amply demonstrates that programs with members are most successful when the adjustment is brought about in an orderly way—through the timely adoption of corrective measures.

Our recent experience with adjustment programs also shows a great diversity in the performance of individual countries. On the one hand, some recent upper credit tranche and extended arrangements have been implemented successfully, and the countries concerned have made important progress in tackling their problems. On the other hand, a number of programs have had to be interrupted where performance fell short of target, and others could not be put back on course. But even in these cases, at least some progress was made by the countries concerned. Where programs were least successful, there were substantial shortcomings in implementing the policies to which the countries had agreed. One factor here was the lack of political commitment. Without such support, no program can realistically be expected to succeed. The unusually difficult external conditions also caused a number of programs to go off track.

The harsh international climate explains why adjustment has become more difficult, though the principles governing the conditionality underlying the Fund’s lending have not changed. The central purpose of conditionality continues to be that of ensuring that financial assistance provided by the Fund is used to support economic policies that promise to restore a viable balance of payments position within a reasonable period of time. With balance of payments deficits now much larger, and also given the difficult world economic situation, the national policies that are required to restore payments viability are of necessity more onerous than in earlier and more stable times.

2. The need for increasing Fund resources

The importance of the Eighth General Review of Quotas cannot be overemphasized. Fund quotas have been severely eroded in real terms in recent years. The present quotas are based on a decision taken in 1978, and the Fund has had to arrange lines of credit amounting to SDR 17 billion with official institutions since then. While we will have to borrow more before the next quota increase comes into effect, it is agreed that the Fund should rely primarily on quotas for its financing. Quotas are the manifestation of the spirit of intergovernmental cooperation which is at the heart of this institution. It is up to the member countries, especially in the present very difficult conditions and with the outlook for recycling uncertain, to respond clearly and decisively in this endeavor.

I am happy to be able to report that the progress made in the recent discussions of the Executive Board on the main issue of the overall increase in the size of the Fund has received considerable new impetus from the meeting of the Interim Committee that took place here during the weekend. Widespread support was expressed in the Committee on the urgent need for a substantial increase in quotas under the present review. The Committee has, furthermore, urged the Executive Board to expedite its work on the quota review as a matter of high priority so that the remaining issues on the size and distribution of the quota increase can be resolved by the time of the Committee’s next meeting in April 1983. The Committee also asked the Executive Board to assess the adequacy of existing arrangements to deal with major strains in the international financial system.

Only with a strong financial structure and adequate quota base will the Fund be able to fulfill its basic role as the spearhead of adjustment in the interests of all its members and of the stability of the international financial system.

3. The Fund’s role in surveillance

The Fund’s role in promoting payments adjustment is not limited to countries that seek access to its financing in support of adjustment programs As the guardian of the international monetary system, the Fund must oversee the policies of all its members that impinge upon that system. In exercising its surveillance function, the Fund encourages its members to implement sound domestic economic policies that are essential for achieving greater economic and financial stability internationally.

Effective and evenhanded surveillance has become even more necessary and urgent under present conditions. The Fund has therefore been endeavoring to strengthen its surveillance activity through more comprehensive, candid, and frequent consultations with member countries. The full cooperation and support of all members are essential to the success of these efforts.

In that connection, the statements of policy relating to Fund surveillance that resulted from the summit meeting at Versailles last June are encouraging. On that occasion, the major industrial countries stated an intention to strengthen their cooperation with the Fund in its surveillance work and to develop this on a multilateral basis. It is of great importance, not only for these countries themselves, but also for the rest of the world, that this commitment be carried out effectively. It is now up to the major industrial countries to take the necessary action. The Fund, for its part, will, of course, assist these countries in bringing about the desired closer convergence of their economic policies.

The recent strains in the international monetary system—particularly the considerable degree of exchange rate instability—have been a cause for concern. Such instability certainly has adverse implications for trade and investment and hence for economic growth. But the effectiveness and smooth operation of the system could be enormously enhanced through the implementation of well-conceived and internationally cooperative adjustment policies on the part of individual countries—especially the major industrial countries.

* * * * *

Mr. Chairman, I have covered a great deal of ground in these remarks. Now, let me conclude by drawing together the main threads while endeavoring, at the same time, to provide some general perspective.

The world at large is in a process of disinflation, the scope and effects of which are profound. This progress involves a transition

  • —from easy unconstrained expansion to more moderate rates of growth,

  • —from a situation in which borrowers could rely on inflation to wipe out their past mistakes to a situation in which the quality of investment counts again,

  • —from negative to positive real interest rates, with the result that savers are no longer the losers,

  • —from excessive and rising budget deficits to more sustainable fiscal balances and more realistic attitudes toward the role of government, and

  • —from unduly rapid increases in real wages to wage gains kept within the bounds of productivity growth.

This transition involves considerable hardships and strains, both domestically and internationally, because the problems themselves have built up over a period of many years, and because the eventual benefits of the process have not yet been felt.

But this process of transition to an environment free of inflation is now well under way. The basis is being laid for a restoration of confidence and the revitalization of economies—the conditions for a return to sustainable growth. The process will be completed successfully, in a timely and orderly fashion,

  • —provided that the adjustment effort is kept up,

  • —provided that the international financial community maintains a responsible attitude by supporting those borrowers endeavoring to implement necessary adjustments, and

  • —provided that the spirit of international cooperation is maintained and the International Monetary Fund is equipped to handle the situation.

The challenge confronting us is clear. I am convinced that the world’s financial leaders assembled here will show the wisdom, courage, and determination that are needed.

September 6, 1982.

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