Discussion of Fund Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1982
Statement by the Governor of the Fund for Belize—George C. Price
The privilege of a new member enables a brief statement in the name of the people and Government of Belize to thank the Boards of Governors for admitting Belize to the Fund and the Bank, and for the welcome you give to us. We thank you.
Belize, like the rest of the world, is weathering the economic financial storm that ravages our countries and our peoples. In time it must blow over, and a new and better order will dawn to gladden us all. We recognize what is required of oil importing countries. We must pursue policies of more production, diversification, processing, and improved marketing of raw materials. We must apply good husbandry.
The poor developing countries call for an increase of financial resources—not as charity but in equity. In the past three years Belize has had a net decline in trade and has suffered the economic ills we want to cure. A newly independent democracy in the Caribbean Central American region, we strive to maintain a climate of peace and stability in our region. Pope Paul VI pointed the way to peace. He said: “Peace is another word for development. Without human development there can be no peace.” Our work will be in vain and all economic strategies will be frustrated if they do not satisfy basic human needs: water, food, shelter, employment, health care, and education.
We live in an age of extraordinary creativity. Science and technology have made giant forward leaps. In our world of interdependence, this historic success challenges us, rich and poor nations alike, to share the work of continuing creation for the welfare of peoples everywhere.
Allow me, please, to place on record my delegation’s gratitude to the people and Government of Canada for their hospitality, and pray God’s blessing on our work here and in the days ahead.
Statement by the Governor of the Bank for France—Jacques Delors
Each year the Bretton Woods institutions give the world economic and financial leaders a chance to compare their analyses of the economic and financial situation and to discuss measures to strengthen the international community.
We are confronted this year by the same types of problems as in 1981, though our worries have obviously intensified to the point that there is a growing feeling that the situation is becoming less and less manageable.
In fact, this does not come as a surprise to me. Last year, on behalf of my Government, I advocated a comprehensive approach to world economic problems. This viewpoint was shared by numerous participants, who tended to be regarded by others as incorrigible pessimists. Today the facts are clear: we are all caught up in a cumulative process of recession. We must accept the challenge.
Last year I joined with those who tirelessly urged that the role of the international organizations be strengthened. At times the debate tended to turn into an ideological confrontation, though my own opinion was based solely on concrete analysis of world realities and on the need for a step-by-step, pragmatic response through the activities of the International Monetary Fund and the World Bank. Now that the international financial system appears threatened by even greater risks, the role of the major international institutions must be further expanded to a level commensurate with the problems we face.
Finally, last year I proposed an increase in official development assistance. The French Government has already taken steps along these lines; commitments have been made in this area and are being fulfilled. While the poorest countries are suffering tragically from the crisis, this appeal for increased official assistance takes on even greater significance.
I. Meeting the Challenge of Recession
Disturbing signs are multiplying. In the industrial countries there is almost zero growth, unemployment is growing rapidly, and business bankruptcies are multiplying. As a result, the contribution of the richer countries to the expansion of foreign trade, to the financing of official assistance to developing countries, and therefore to world economic recovery, is insufficient. In the developing countries, economic growth is generally at a very low level, and is quite inadequate, even if viewed only in relation to population growth. Their borrowing hardly covers their debt service charges.
It will obviously take time to emerge from such a deep-seated and disorienting crisis. Certainly, we must not give in to the easy temptations of unrestrained public expenditure or the deceptive, transient attractions of inflation. In this connection, we should welcome the progress made in the internal reorganization of national economies. However, we must ensure that the application of “virtuous circles” at work in individual countries does not produce a totally vicious circle worldwide. We indeed face the threat of being caught up in such a spiral, as is shown by the world trade situation and the constraints on private financial flows.
Let me be clear: I believe there can be no economic dynamism without rigorous management. But what would be the effects of a policy intended solely to fight inflation without due, regard, domestically, to investment and employment and externally, to solidarity among nations?
We are applying this principle first of all to ourselves. The fight against inflation is being carried on with a fierce determination to achieve significant results as quickly as possible. A strict limit has been placed on the budget deficit, the social accounts are in balance, monetary policy is under control, and collective discipline is inducing a gradual moderation in the growth of nominal incomes. But at the same time we are striving to channel an increasing proportion of savings toward risk capital; we are stepping up our research effort and our productive investment; we are introducing special programs for employment and for increasing the efficiency of the labor market. The structure of our public expenditure attests to this desire to reconcile discipline and dynamism: current expenditure has been reduced, while future-oriented spending has been increased.
We are relying primarily on our own efforts to improve the basic indicators of our economy. This is essential. But, like any other country, France knows that such efforts would be useless if they were not backed by an improvement in the world economic situation. And what is true for a developed country is even more true for a developing country. For this reason we support every pragmatic and balanced approach to the world’s problems. This was the thrust of the resolution adopted at Versailles during the summit conference of industrial countries, and this could be the most significant line of action to emerge from our work here.
II. Strengthening the International Financial System
Without being obsessed by the ghosts of the past, we must remember the 1930s. It is apparent that certain countries, including some of substantial economic weight, are experiencing very serious difficulties. The same is true of firms, whatever their size. Even the financial system itself is showing disturbing signs of strain.
How could it be otherwise, at the end of a period affected by two oil price shocks, then by a soaring dollar and sustained high interest rates? Even though these rates have been coming down in the last few weeks, which is gratifying, this does not mean that they are not still too high in real terms. Moreover, the instability and volatility of exchange rates merely add to the confusion.
A return to a more stable base is therefore more necessary than ever. Although repetition may be tiresome, it should be stressed once more that the world economy would be strengthened by the launching of a new effort of international cooperation, as a prelude to the introduction of a new monetary and financial order, governed by sensible rules respected by all and based on a renewal of the role of the specialized international institutions.
It is in this spirit that we should welcome another resolution that emerged from the Versailles summit, inviting those countries whose currencies make up the SDR basket to cooperate more closely in monetary and exchange market matters. A common process of reflection has been initiated; let us hope that it will lead to effective cooperation between the nations having paramount responsibility.
But until substantial results materialize in this area, it is essential that we provide the international organizations with the means to at least bring an end to the deterioration in the international situation.
In this respect, we want the International Monetary Fund to have adequate resources to carry out its responsibilities. We must start now to speed up the process of increasing quotas. All calculations agree in pointing to the need for a substantial increase, of the order of 100 per cent, in Fund resources.
A decision to increase quotas is, in our view, a prerequisite for any other initiative, and should therefore be taken as soon as possible. If we agree on this point, we could then study any other formula for increasing the Fund’s financial weight at a time when the international community needs to be reassured about and strengthened in its ability to meet possible payments difficulties.
I need hardly add that for our part we remain firmly attached to the cooperative spirit that should characterize the Fund’s activities. We regard this as a guarantee that borrowers will enjoy the safeguards that are essential for the presentation of their case and for the success of their recovery policies.
In a more fundamental way, going beyond the vital problem of financial resources, it is always worth recalling that conditionality should be applied realistically. By this I mean that behind all the temporary economic difficulties a country may experience lie structural problems that must be solved in order to achieve satisfactory and lasting adjustments. It is hardly necessary to add that to change structures is time consuming. Both these concepts, of structural change and of the time required for it, must be recognized as essential features of the activities of the large official institutions.
III. Restoring Hope to the Poorest Countries
Reading the World Bank’s Report made me shudder. Despite extremely optimistic assumptions regarding growth prospects in the industrial countries, it is highly likely that per capita income in the poorest countries will stagnate, or even, in a great many cases, decline in the 1980s.
We cannot remain indifferent to this tragic situation, the essentials of which were presented at the 1981 Paris Conference on the Least Developed Countries.
The Conference showed that, over and above their own specific problems, those countries are highly vulnerable, even more so than others, to changes in the world economy. The latest figures demonstrate how much they have been affected, to some extent cumulatively, by the stagnation of world trade, the fall in—and in some cases the fluctuations of—raw material prices, and the caution—understandable in itself—of private investors and banks. The poorest countries are of course always the ones that suffer most from any deepening of the crisis in the world economy and from the many disturbances that beset it.
For this reason, above and beyond efforts to stimulate the world economy, specific policies must be adopted for the benefit of the LDCs, both multilaterally and bilaterally.
First of all, there can be no substitute for the indispensable increase in official aid, especially in the form of concessional flows. France, for its part, has assumed precise commitments—to achieve a rate of 0.15 per cent of GDP for the least developed countries by 1985 and an overall rate of 0.70 per cent for the developing countries by 1988. We are moving progressively toward this goal; specifically, the level of our aid, which was 0.46 per cent in 1981, is to reach 0.52 per cent in 1983.
An expansion of official aid is called for especially in view of the fact that new borrowing by the developing countries has at best kept up with their debt service burden. In other words, the financial operations carried out in 1981 and 1982 have not released any additional funds for development….
Meeting the challenge of recession, strengthening the international financial system, and restoring hope to the poorest countries—running through these three objectives for our common action is a central thread: the idea that the world economy must organize itself around certain rules of the game, combining the proper functioning of the market and of trade with the growth of multilateral cooperation and development on the part of the major international institutions. Our chances of dispelling the specter of crisis lie in this equilibrium, however difficult it may be to acknowledge and to achieve.
What we need is to bring about a state of mind—the same state of mind that animated the meeting at Bretton Woods, where the institutions that bring us together today were born and the framework for the growth of the 1950s and 1960s was established.
I will of course be told that times have changed and that circumstances are no longer the same. But the need remains the same—to return to the path of true and living solidarity, in the interests of all. May the alarms sounding around us strengthen our awareness of our duty.
Statement by the Governor of the Fund and the Bank for Jamaica—E. P. G. Seaga
I have the honor of speaking on matters related to the International Monetary Fund on behalf of my own country, Jamaica, and for the other Commonwealth Caribbean countries: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago.
May I take this opportunity to welcome to membership in the Fund two Commonwealth Caribbean countries: Antigua and Barbuda and Belize. I also wish to add my welcome to the Hungarian People’s Republic.
The 1982 Annual Meetings of the Fund and the Bank are of fundamental importance to charting directions for the future, and if there is one common issue on which all are agreed it is concern for the future direction of the world economy. The period through which we are passing is acknowledged to be the most critical of the last 50 years. This has given rise to views that portray scenarios of economic apocalypse.
One scenario of global trends would certainly support the “judgment day” forecasts prevailing in a large section of world opinion today. Taken as a whole, the prospects for oil importing developing countries are grim:
—Current account deficits are escalating at a frightening rate. The deficit for these countries in 1981 reached the $100 billion mark—increasing by an astounding 150 per cent from $40 billion in 1978 as a percentage of exports of goods and services. Deterioration in current account balances is equally disturbing, moving from 15.2 per cent in 1978 to 22.4 per cent in 1981.
—Analysis clearly indicates that the sharp buildup of the current account deficit is principally a result of slow growth of export earnings and rapid growth of import costs. The index of commodity prices in developing countries, in real terms, is currently at its lowest point in nearly 40 years.
—The recourse for recovery has been to borrow substantially more to compensate for reduced earnings. Predictably, the long-term debt service ratio has moved from 17.3 per cent to 21 per cent over the period 1978–81, or in money terms, from $44.7 billion to $92.3 billion, more than doubling in a mere three years.
—It is equally predictable that oil importing developing countries cannot sustain this widening gap for a prolonged period.
The scenario that foresees grim conclusions is, therefore, well founded.
Another scenario exists, however, in spite of the predicament of the Western industrial world and economies that depend on them. For notwithstanding the general sluggishness of the world economy in the 1970s, a number of developing countries registered substantial economic gains. Some 20 of these, mainly in Southeast Asia, experienced expansion in their economies that was more than double that of the developed countries. This expansion largely occurred in their export manufacturing sector. The Caribbean Group too continued to show positive developments despite adverse circumstances.
The Caribbean economies for which I speak fit into both these scenarios—victims of deteriorating terms of trade and escalating debt service, on the one hand, while poised for dynamic expansion on the other, given the transfer of resources now focusing on the Caribbean and the growth capabilities demonstrated by past performance.
My own country effected a spectacular turnaround last year amid adverse global conditions under the umbrellas of both a new IMF three-year agreement and a structural adjustment program with the World Bank:
—We reversed eight years of negative growth to positive;
—six years of balance of payments deficits to a surplus;
—established 100 new investments in one year;
—reduced unemployment marginally; and
—drastically reduced the rate of inflation from 28 per cent to 4.7 per cent.
Fitting into both these scenarios of some gloom and some boom, the Caribbean Group offers a particular perspective which forms the basis of our position. The Commonwealth Caribbean economies are by structure open economies, heavily dependent on trade in a narrow range of basic commodities supplied to the industrial world. Reduction of global trade, culminating in zero growth in 1981, has resulted in a slowdown of growth in the economies of these countries. Predictably for the non-oil group, current account balances have deteriorated and, equally predictably, borrowings have increased.
We understand and appreciate the need for anti-inflationary measures by the industrial countries. Success in this drive will reduce the high interest rates that now inhibit trade, investment, and borrowings in our Group. We support those measures because we critically need the cure.
But a good part of the world finds itself in the position of the Caribbean Group—hurting as much from the medicine as from the cure. The reason is obvious. Unlike the industrial countries, we have no cushion to rest on while we wait for adjustments to the trade and payment system to correct the distortions. A prolonged adjustment process would inevitably have the effect of diminishing much of the sparkle remaining in the world economy to pinpoints of light receding over the horizon. We must face critical and fundamental options which confront us now to cope with stagnation in order to ensure that when the lights come on again in the industrial world the rest of the world will not be in darkness. If not, the job of adjustment and recovery then will be a different, bigger, and decidedly more difficult one.
What are these options?
It must be recognized at the outset, as a first option, that a slowdown of the adjustments being made in industrial countries, particularly at a time when signs of recovery are appearing—inflation being brought under control and interest rates falling—cannot be an acceptable path to the revival of growth. Indeed, one view is to look more deeply at the extent of structural adjustment being pursued in the major industrial countries. In-depth analysis will conclude that these structural adjustments are not fundamental enough, with the result that protectionist policies are being revived by some industrial producers to protect areas in which they are no longer competitive and which they are reluctantly yielding, with great anxiety, to producers in the developing world. Labor-intensive, low-technology manufacturing, is a suitable description of this category, of which textiles, garments, leather work, and the assembly of appliances are the most prominent examples.
If protectionism is not to grow, there is an inevitable second round of adjustments facing some major producers of the industrial world in the near future as inevitable displacements in production occur from the failure to hold competitive advantages. The question that remains is whether this further adjustment should be planned, timely, and orderly—or disorderly, untimely, and executed in industrial anguish?
A second option retains the strategies of adjustment now being pursued, but seeks in addition, meaningful noninflationary production as a means of restarting the engine of growth by transferring unutilized resources to areas of unutilized capacities.
It is the marketplace and the workplace of the developing world which hold the best solution for reflation without inflation. The unsatisfied and growing demands of the consumer market, unsatisfied and growing capabilities of the work force of a growing number of countries in the developing world, of which the Caribbean nations for which I speak are examples, need only the catalyst of expanded credit resources to fuel an expansion of trade through export-led growth.
Proposals have been advanced for an urgent expansion of resources in the world credit system. Of these, the Fund’s Eighth General Review of Quotas readily recommends itself as a mechanism to serve the needs for necessary credit to expand trade. Accordingly, we fully support the early conclusion of the General Review of Quotas in 1983 as called for by both the Group of Twenty-Four and the Interim Committee. We fully support, too, the need for selective allocations and a substantial, not token, increase of quotas, certainly not less than 50 per cent.
Increased liquidity for trade expansion could also be accomplished by the expansion of trade credits, utilizing excess liquidity in the commercial banking system accumulated through the increased savings which have resulted from current anti-inflationary strategies. Logically, these savings are likely to be available only for short-term financing. The concern by commercial banks about current levels of credit exposure to developing countries indicates that an intermediary to trigger a meaningful flow of these underutilized resources may be necessary.
One such intermediary mechanism already exists in the Bank’s lending program through an export development fund for export trade credit. With appropriate modifications, this mechanism could fulfill the purpose of a ready and available instrument, to mobilize ready and available resources, to be utilized by ready and available capacities, to expand trade, growth and employment on a basis consistent with the objectives of the adjustment process.
The specific mechanism to serve the end of revitalizing trade may be a matter of debate. What should be less debatable is the need to urgently review the policies which are precipitating stagnation without recognizing the critical need to maintain elements of momentum for growth—if not survival.
This Conference should not conclude without speaking to the problem of the threat of economic stagnation by assuming that if the industrial countries succeed in current adjustment programs everything else will fall into place. The evidence is that things are beginning to fall out of place.
I make a special plea in the review of Fund policies and programs for the numerous small island-states of which the Caribbean Group, on whose behalf I speak, is a principal example. This Group, which numbers 11 states, with further members likely in the near future, is typical of the strength and vulnerabilities of small nations. While the resource needs of these countries are comparatively small, the open nature of their economies exposes them to the vagaries of international trade and investment flows, which leave them especially vulnerable to swings.
To these countries, in particular, the conditionality of Fund programs needs less rigidity in application to enable them to even out what may only be rough patches to larger states but are often peaks and valleys in the economic lives of the smaller states.
It may well be that next year, when these Annual Meetings of the Fund and the Bank reconvene, hindsight may be adjudged better than foresight. Prevailing trends, nonetheless, tell us today that the massive forces of change now at work in the adjustment process can achieve the results desired given time, patience, and understanding. The real world of people which we face, however, is not wealthy in these commodities, and in the poverty of such circumstances there is a powerful voice calling for “change without chaos” as the most reasonable course.
We would all be well advised to heed that voice of reason.
Statement by the Governor of the Fund for the United Kingdom—Sir Geoffrey Howe
I should like at the outset to join my colleagues in extending a very warm welcome to our three new members—Antigua and Barbuda, Belize, and Hungary.
We are meeting at a time of economic transition. Important gains have been made in the fight against inflation, but recovery remains elusive. The world economy is under strain: unemployment in the industrial world is high and rising; falling commodity prices and high real interest rates combine to squeeze the developing world; and financial stresses on companies and countries are all too evident.
It is not only national economies that are experiencing the stresses of transition. There is also a new set of issues which the major international institutions are having to analyze and assess. There is a clear parallel between the global and the national implications of the issues that we face.
The question is: are we in the grip of a worsening disease, or has its progress been checked? We need to remember that treatment and cure can initially seem as painful—indeed more painful—than the disease, and that convalescence can be frustrating and testing. We need continually to check our diagnosis and be sensitive in our prescription.
Preconditions of Economic Success
There are two preconditions for economic success, nationally and internationally, which are valid without regard to the state of the cycle or even the most fashionable set of equations. They are stability and flexibility.
The words “fixed but adjustable” are, of course, familiar from the founding tenets of the Fund, but it is not only in the foreign exchange markets that the need for both stability and flexibility is evident.
By stability I mean a firm economic framework, founded on fair political systems securely rooted in the rule of law, and a currency that maintains its value. I mean, too, an international exchange rate structure which offers a reasonable measure of stability, while allowing freedom for rates to reflect differential economic performance.
By flexibility, I have in mind a willingness to promote and adjust to economic change, and a willingness and capacity to challenge market rigidities: a willingness too to check and reverse any tendency toward protectionism.
The Causes of Decline
Both of these conditions for economic success have been inadequately met in recent years. The stability of the Bretton Woods system was eroded as inflation built up in many countries. In particular, the value of the dollar was put at risk, and finally destroyed, by the inflationary consequences of simultaneous commitment to the space program, the Great Society, and the Viet Nam war. And around the world flexibility has been more and more stifled by the entrenchment of inflationary expectations, the fossilization of many market structures—particularly rigidity in labor markets—and the spread of protectionism.
The oil price shocks owed something to the growing strength of inflationary pressures. But they were reinforced by the scale of OPEC’s action. The disposition of many countries was to seek to print and float their way out of trouble. It is easy to see why. But the outcome, as we all know too well, has been high inflation.
With what consequences? In the industrial countries, high unemployment. And in the developing countries, the inevitable setback to forecasts of growth that relied upon a continuation of high commodity prices and low interest rates.
The Common Objectives
Faced by these mounting problems, the international community has, during the three years that have passed since the second oil shock, moved toward a large measure of agreement on the strategic objectives we should follow to obtain a sustainable recovery. This is no mean achievement.
This agreement rests upon an increasingly clear understanding of the need for a sustained and successful fight against inflation, and for the policies that this implies. It rests on the firm control of monetary growth, and of public deficits and public spending—themes that the Managing Director has stressed frequently. It rests on the better working of markets, the reduction of costs, and the improvement of profits. It points the way perhaps to a new Fund role in surveying countries’ policies, which would not be unlike its old position in relation to exchange rates. I shall have more to say about this later.
But we should note first that we have held to the objectives on which we agree. The historians will record that at Helsinki, at Versailles, and now in Toronto, commitment to the central strategy has been restated and reconfirmed.
Such continuity of strategy is crucial. But its maintenance also presents great difficulty. This is partly because the process of secure recovery is slow. Even where appropriate policies have been adopted there is no early payoff. And none of us can avoid the tensions of transition, though they express themselves in different ways in different countries.
Tensions of Transition
For the industrial economies the greatest tension concerns the adjustment of pay and inflationary expectations to the monetary framework. This is crucial, but progress has been painfully slow. As a result, profitability has been severely squeezed, and output and employment sharply reduced. Today’s high levels of unemployment are the sad price, in social as well as economic terms, which we pay for past failures to tackle inflation, and for the rigidities of the labor market. The industrial economies now require a boost to profit expectations and thereby to investment. Progress is being made, but much more is required. It must be recognized more widely that the level of real wages is crucial to recovery, that excessive pay increases only delay the process. The success of some of the newly industrialized countries, where transition has been achieved with less loss of output and employment, demonstrates the resilience which greater adaptability allows.
For the non-oil developing countries a major tension of transition arises from high oil prices combined with the impact of disinflation on other commodity prices. Such prices have carried much of the initial burden of adjustment. Unrealistically high pay settlements in the industrial countries not only destroy jobs there, they also, through lost markets and weak prices, reduce developing country incomes already hard hit by rising energy costs. But this too is a transitional problem: as adjustment proceeds in the industrial countries, some of this burden on non-oil developing countries should be reduced.
Further tensions arise from the consequences of the indebtedness whose origins lie in years of imprudence. The impact of this problem has been before our eyes day by day in recent weeks. For developing countries the burden of debt has become greater through the combination of falling incomes and high interest rates—and, for some, of past overborrowing. Clearly there is scope for flexibility in determining the rate of necessary structural change, taking account of developments elsewhere in the world. But it is essential to recognize the inevitable implications of changes in the balance of demand and relative prices for products and commodities. Consequent structural adjustment is unavoidable.
Transitional difficulties are of course uneven in their impact. The justice is certainly rough. But we have all seen examples of developing countries which, in spite of all the problems, have maintained a steady course by able management. I hope it is not presumptuous to refer in this connection to the particular example of India. In other cases a deteriorating situation has been effectively corrected: I have in mind Jamaica, where after years of falling living standards and steep inflation, a firm policy of monetary restraint—coupled with denationalization—has halved inflation and created conditions for attracting foreign investment.
Success Against Inflation
The tensions of transition can perhaps be seen as global withdrawal symptoms. For across the world the inflationary fever has been checked.
Inflationary expectations in most of the major industrial countries are changing significantly. Given the predominant weight of the United States in the world economy, and the importance of its currency in international financial markets, the progress registered there is particularly important.
And in the United Kingdom we have brought inflation down to around one third of the peak rate suffered two years ago. And the prospect, with Government borrowing following the downward path we set then, is for further falls. Elsewhere too there has been progress.
But of course there is justified worldwide anxiety about the pain of the process. We need not only strong nerves but also the determination to persuade our people that the course on which most of us here agree really is the best, and that a turnaround in policy now would only plunge us back again into rising inflation and still worse unemployment. Defeating inflation may be profoundly uncomfortable, but to be defeated by inflation would have been disastrous.
The Way Ahead
But agreement on the diagnosis, and on the proper course of treatment, does not absolve us from the need to be sensitive in our precise prescription. How can we best help each other and our common interest? Can we, without losing sight of the agreed objective or slowing the adjustment process, ease the tensions of transition?
First, we must foster both the stability of our system and its ability to adapt to change. We need more than ever the international financial institutions that we have inherited from the Bretton Woods era, and we need to defend and develop their tried and familiar roles in contributing both to stability and to change: in the one case to adjustment, in the other to development.
From time to time there are calls for new institutions. What their roles would be, and how they would be defined, is not clear. What is clear, in my view, is that this is not the time for a fundamental reappraisal of a tested institutional structure which has served us well, and never more so than at the present juncture.
As I said last year, new institutions are not the key to a better future. But we must certainly encourage the evolution of the Fund and the Bank in response to changing needs. And it is to this that I now turn.
The Development of the Multicurrency System
Last year I spoke about the network of our joint responsibilities toward each other and toward the world monetary system. I suggested that the special drawing right (SDR) could not be a worthwhile asset unless its component currencies retained their value. I spoke also of the reciprocal obligations that would arise if the countries whose currencies are represented in the SDR in fact discharged that responsibility.
I was very glad this morning to hear my colleague from the European Community, Monsieur Jacques Delors, reminding us of the way in which this theme was taken up in the statement issued at the seven power economic summit at Versailles, acknowledging a joint responsibility toward the world monetary system. That statement recorded the agreement of the leaders of seven industrial nations that greater stability in the system depended on convergence of policies, which would maintain the internal and external value of the currencies of the signatory countries. And it laid special emphasis on the role of the Fund. There was special reference too to the currencies constituting the SDR, and to developing multilateral cooperation in relation to them which would reinforce the Fund’s role.
We need to carry forward our thinking about how a multicurrency world monetary system can best be made to work to the advantage of us all. Floating rates absolve none of us from our responsibilities toward others. It is unlikely that we shall return to a system wholly dominated by one currency. But the Versailles undertakings could prove a major step toward a more stable multicurrency system, with countries sharing the responsibility for providing the asset base of the system, and working together to ensure that currencies maintain their value.
The Versailles undertakings rightly put the emphasis on major countries following noninflationary policies and on international cooperation. Monetary stability in a multicurrency system depends first on principal currencies—let us say for this purpose the five SDR currencies—gaining and retaining a reputation as low inflation currencies. The more important a currency is in the world, the more important this becomes in the interests of the system. There is a special reciprocal obligation among the Five. They have as well an obligation, recognized at Versailles, to other nations. Within the Five there is a particular need for cooperation on policy, a recognition by each of an international obligation and a right to urge the needs of the system on its partners.
The policymakers responsible for these currencies are the main custodians of the world money supply. Collectively they have an important role in guarding the world from inflation, though the scale of their individual responsibilities differs. Each owes it to the others, and to the whole membership of the Fund, to facilitate the exercise of this responsibility and not to make it more difficult.
A multicurrency system cannot succeed by simple resistance to change. Arguably the Bretton Woods system suffered from being too inflexible for too long. The system will have to accommodate changes in relative currency values, and the operation of markets in bringing about those changes. But the purpose of policy, reinforced by cooperation, should be to reduce volatility and instability by fostering confidence. The necessary exchange rate changes ought, with such confidence and with lower inflation rates, to be more gradual, smaller, and less feverish.
I have spoken so far of the obligations of the major currency countries. But they in turn have a right to look to others to undertake reciprocal obligations. At Versailles the major countries undertook not to make competitive devaluations and undertook not to use currency manipulation for trade advantage. The counterpart of that ought to be a progressively more open trading system not only between them but in the rest of the world. This has a special relevance to newly industrializing countries which benefit greatly from the rapid growth of world trade.
An orderly multicurrency system has implications for the worldwide management of reserves, a matter of legitimate interest to the Fund. Reserves are there to be used in need and to ease the process of adjustment. But sharp swings in the currency composition of reserves, whether as a result of diversification or intervention, could in some circumstances add undesirably to instability.
The SDR would be more likely to be held in reserves on its own merits as a strong unit if the value of its component currencies were better maintained. SDR assets would also be increasingly attractive in the private sector. Both developments should be mutually reinforcing and would help international stability.
The Intervention Study
I have spoken about one theme taken up at Versailles. A second initiative was the decision to undertake a study of exchange market intervention. We must take care that the study does not become a purely academic exercise in analysis. It would be regrettable if each country regarded it simply as a device for justifying its present practice. The object of the exercise should not be to achieve, or justify, a widening of differences, but a meeting of minds.
The U.S. Economy: Key to the Timing of Recovery
I have emphasized already the importance of the policies of the major countries in guarding the world against inflation.
The U.S. Administration’s firm and public commitment to prudent monetary and fiscal policies should be a reassurance that inflationary pressures will not once again be allowed to undermine the recovery. As many of us know from our own national experience, however, the implementation of these policies is far from easy.
The effort to control monetary growth and deficits has been accompanied by high, and at times volatile, interest rates. These not only put immediate pressure on borrowers, whether persons or companies. They also put at risk investment for the future. And they pose special problems for developing countries. We have seen, too, how they have been accompanied by a sharp rise in the dollar’s exchange rate. This has reinforced the pressure on U.S. companies, leading to calls for protectionism and increasing the risk of trade warfare.
Our own experiences have taught us how complex is the operation of monetary policy. Monetary conditions need to be assessed in the light of a range of indicators: the growth of the various monetary aggregates, progress on inflation, the exchange rate, and liquidity pressures on companies.
Experience in the United States is pointing to similar conclusions. I welcome, therefore, the flexible but firm approach of the American authorities. And, of course, we all welcome the reduction in U.S. interest rates in recent weeks. We can all welcome, too, the passage by Congress of the U.S. President’s tax package. My own country had to take hard decisions last year in the course of carrying through our own medium-term financial strategy. Firm monetary policies do have to be supported by stringent fiscal control if a reduction in interest rates is to be sustained. This will be particularly important as the U.S. economy picks up and private demand for credit revives.
If a sympathetic outsider may offer a view, it seems clear that an important battle has been won. But a long campaign may still lie ahead. The deficit needs to be clearly set on a declining trend for the medium term. Convincing success in that direction would bring immeasurable benefit not only to the U.S. economy but also to the rest of the world. It would give economic agents and governments everywhere the confidence that recovery, at least in the world’s largest economy, was likely to be sustained and noninflationary. The medium term starts now.
Of course, if other countries are to share the benefits fully, then they, too, need to follow prudent policies. For some, the need to cut budget deficits is urgent. In others, particularly Japan, where good progress has been made on inflation and on the budget deficit, the short-term room for maneuver may be greater. A recovery of activity that is coupled with lower interest rates should ease some of the global pressures on non-oil developing countries. Renewed growth should help to increase the volume of their exports and halt the decline in commodity prices which has so worsened their terms of trade. High export earnings and lower interest rates should in turn ease the problem of servicing their debts. Some continuing, and all too often painful, adjustment of the economies of developing countries will, however, still be unavoidable. This is particularly the case for those who have overborrowed in the past.
The International Banking System
There is concern at present about the effects of such overborrowing on the international banking system. I need hardly stress the importance of sustaining its stability. In the past decade international banking has grown apace. A bigger share of savings has been made available through the major financial centers for international lending, both to companies abroad, and to sovereign borrowers. This process, made more necessary by the two oil shocks, has helped to carry the world economy through them. Technological development, especially in communications, inevitably also played a part in increasing international lending. We are moving toward a single global market.
There is little prospect that this process will be reversed or that the intermediation discharged by the banking system will be substantially transferred to international financial institutions. Their share in the total transfer of resources is likely to remain a relatively modest proportion of the total. So we all have a powerful interest in the health of the international banking system.
This is one of the contexts in which a return to more normal levels of interest rates will be valuable. Very high interest rates have helped to produce accumulations of debt of shorter and shorter maturity.
Equally valuable in this context will be our full support for the international financial institutions. An effective Fund is part of the framework within which the banking system operates: we need to demonstrate that the international community remains determined to restore the creditworthiness of its members by a judicious combination of help and programs of adjustment. And, of course, adjustment by borrowers who have problems, whether they be companies or countries, is as essential to the banks as it is to the Fund. Creditworthiness maintains the flow of resources to borrowers. It also maintains the flow of interest and repayments to banks.
In these ways we can help to underpin confidence. But there is certainly work to be done at the level of the banking system itself. The first oil shock produced tremors which gave a salutary impetus to international cooperation in banking supervision. There has been steady improvement in such cooperation and in national standards of banking supervision, covering risk assessment, prudential standards, monitoring and control. But I am sure central banking colleagues would agree that there is further progress to be made. Some recent developments testify to that. In particular it is important that there should be a watertight allocation of supervisory responsibilities, and that when agreement has been reached on a principle such as the consolidation of the accounts of banking groups, priority is given to the legal or administrative steps needed to give effect to it.
Recent events will have brought home to banks that they alone are responsible for the assessment of credit risk, and that credit risk applies to sovereign borrowers as well as to others. Proper risk analysis is a responsibility which no banking management can abdicate. What cannot be accepted is the charge that the authorities should not have allowed commercial banks to lend as much as they have. This assumes that the authorities can be better judges of credit risk than banks themselves. I can think of many actions by public administrations around the world which put a very large question mark over that proposition.
There is no alternative to tackling each problem case, whether it is a country, a corporation or a bank that is in trouble, on its merits. There can be no general and automatic system of debt relief which will spare banks the costs of imprudent lending or debtors the pain of adjustment. Rescheduling of debt can be neither automatic nor painless. Capital markets have long memories and may for a long time be reluctant to provide funds for development if borrowers take hasty decisions for the sake of temporary relief. Banks should not withdraw credit indiscriminately from a whole region because one or two countries in that region are suffering payments difficulties. But equally, borrowers should not regard rescheduling as an easy way out: that could only be counterproductive.
My conclusions on current banking issues are that they must therefore be tackled in several ways. Governments have to face the need for adjustment, press home policies that reduce inflation and interest rates, and sustain confidence in the international institutions. And we must try to see to it that both the banks’ own risk assessment and the fabric of banking supervision recognize that the free world is increasingly one single market with a common thread of risks and responsibilities.
Financing of the Fund
This brings me to the financing role of the Fund itself, in providing an orderly framework within which private capital flows can take place. I do not subscribe to the view that the Fund should be confined to a role of lender of last resort. During the last decade many countries, both developed and developing, have tended to treat it as such. When they have already exhausted the credit available from other sources, they have had eventually to seek Fund support for an adjustment program which has necessarily been much more painful than if the difficulties had been acted upon earlier. This should not be seen as an argument for increasing the access to the Fund’s resources, but rather, as the Managing Director has indeed urged, for encouraging members to approach the Fund at an early stage.
On the other hand, as he has also pointed out, members may be disinclined to make a timely approach to the Fund unless it clearly is in a position to offer resources in sufficient volume. Moreover, the structural nature of much of the maladjustment—in both developed and developing countries—tends to take longer to correct than problems of excess aggregate demand. The Fund’s facilities have rightly evolved to reflect this, but the objective of adjustment supported by the Fund should still be the restoration of a member’s economy over a reasonable period to a position that can be sustained from other sources of finance. We must not lose sight of the revolving character of the Fund’s resources.
These considerations suggest to me that quotas will need to be increased substantially, particularly if the Fund’s borrowed resources are to be gradually displaced as they mature. In my view a doubling of quotas would be excessive. A 50 per cent increase could however be regarded as the minimum required. Some of the arguments for a much larger increase seem to be based on the assumption that severe global imbalances may recur throughout the 1980s. If adjustment is successful, the scale of imbalances should however fall. If unexpectedly severe imbalances do recur, it would be more appropriate to augment the Fund’s resources by borrowing.
As for the distribution of the quota increase, it should be achieved in a way that is uniform, fair, and systematic. It should allow quota shares to change in an orderly way over time to reflect more clearly members’ positions in the world economy. The allocation of any increase in quotas according to calculated quota shares seems to meet these criteria in a straightforward and transparent fashion….
For the majority of developing countries the maintenance of an open world trading system is far more important than official aid flows. All the evidence shows that it is those countries that have followed a policy of outward orientation (concentrating on export production rather than import substitution) which have been most successful in attaining their development objectives. Their major need is to retain the widest possible access to world markets for their goods. This will be one of the main issues for discussion at the ministerial meeting of GATT later this year….
The Bank management, in response to the recommendations of the Development Committee’s Task Force on Non-Concessional Flows, has recently circulated new proposals on cofinancing with commercial banks. It remains my view that increased cooperation between the multilateral development banks and the private sector is the best hope for increasing financial flows to the developing countries in the short term. The proposal for a new multilateral investment insurance agency is an interesting one which deserves further study. I know also that dicussions are continuing on the best means of attracting additional funds to finance energy projects in the developing countries. I hope that this will indeed prove possible….
Of course, none of these initiatives can do more than provide an institutional framework that is favorable to the development process. The contribution that multilateral organizations and governments (whether inside or outside the developing world) can make is limited. Real development depends on the skills, enterprise, and dedication of individuals. The real progress that has been made in recent years is to be attributed mainly to the governments and peoples of developing countries themselves: the same will be true in the future.
I have spoken today about some of the tensions in this period of economic transition: stresses on companies, banks, and nations. I have spoken of the need for both stability and flexibility, a need never greater than in such a transitional period. And I have described the nature of the generally-agreed strategy to defeat inflation, the progress that has been achieved, and the particular actions that ought in my view now to be taken. They can be summarized under five headings.
First, and most obviously, we must maintain and sustain the central institutions, the Fund and the Bank. That means support for their key roles, in surveillance and advice on adjustment policies, and in providing development finance. And it means support through the assurance of adequate additional resources, for example, by reaching early agreement on a substantial increase in Fund quotas, and through the timely release of agreed contributions to IDA-VI.
Secondly, and hardly less obviously, we must continue to pursue responsible financial policies. This means a firm but flexible approach to monetary policy, taking into account all monetary indicators and avoiding excessive tightness or easing of financial conditions. And it means that we must continue to reduce budget deficits, putting further downward pressure on interest rates. In this respect we look particularly to the United States. For companies—or countries—facing difficulties at present, lower interest rates are an urgent requirement.
Thirdly, we must work for greater exchange rate stability. This certainly means building on the joint responsibilities recognized at the Versailles summit, which could involve a fuller and more secure expression of the original purposes of the Bretton Woods agreement than we have seen for many years.
Fourthly, governments of almost all industrial countries, including my own, need to persuade their peoples of the need for pay restraint, permitting labor costs to adjust and profitability to increase. We must also remove unnecessary controls, encourage flexibility in goods and labor markets, and avoid resort to protectionism.
Finally, countries with excessive debts must like the rest of us follow appropriate adjustment policies, and private sector banks will need to show a matching responsibility. The former should accept that rescheduling can only be effective if accompanied by the right policy changes; the latter that adequate supervision and prudent individual risk assessments are essential components of a stable system.
It is not, I hope, immodest to commend these five points to the attention of all our countries. The more closely we are able to observe them during the months ahead, the more we shall succeed in shortening the transition and abating its pain. And the more we are able to adhere to them in the years beyond that, the sounder will be the foundations of the recovery for which we are striving together.
Statement by the Governor of the Bank for the People’s Republic of China—Wang Bingqian
We in the delegation of the People’s Republic of China are pleased to come to this well-known Canadian city, Toronto, to participate in the Thirty-Seventh Annual Meetings of the International Monetary Fund and the World Bank. Allow me first of all to extend, on behalf of the Government of the People’s Republic of China, a warm welcome to Antigua and Barbuda, Belize, and Hungary, three new members that have joined the IMF and the World Bank since our last Annual Meetings.
I would also like to extend our high regards to His Excellency Abdlatif Al-Hamad, Chairman of the Boards of Governors for this year’s Annual Meetings. I am confident that under his chairmanship and with the support of all participants, our Annual Meetings this year will achieve the goals set for them. I would also like to take this opportunity to express deep thanks to our host, the Canadian Government, for the considerate arrangements they have made for the Meetings.
I listened with great interest to the greetings of the Prime Minister of Canada, Mr. Pierre Trudeau, and to the opening addresses of Mr. Abdlatif Al-Hamad, Chairman of the Boards of Governors, Mr. de Larosière, Managing Director of the IMF, and Mr. Clausen, President of the World Bank, and to the previous speakers. On behalf of the Chinese delegation, I would now like to make some comments on the present world economic situation and on the operations of the International Monetary Fund and the World Bank.
Like many previous speakers, I share the view that the present state of the world economy is still very grim, and the harshness of the situation is about the same as last year. The developed countries have experienced another year of recession. Unemployment has been unusually high. Inflation remains at a high level, though its momentum has slackened somewhat. Production is still declining or only picking up sluggishly. A matter of particular concern is the fact that the measures to shift their economic crisis onto other countries by some developed countries have affected in a very adverse manner the economies of the developing countries. In the past year, the developing countries, especially the least developed countries, have met with serious economic difficulties. Prices of their export commodities have declined sharply, and their export earnings have been reduced drastically. Their drive to export manufactured goods continues to be hampered by all sorts of protectionist obstacles from some developed countries. In 1981, the per capita real income of developing countries as a whole declined in absolute terms for the first time since the end of World War II. The combined current account deficit of the oil importing developing countries is still projected to be close to $100 billion in 1982. Moreover, the high interest rates in the international capital markets and volatile exchange rates have not only added to their debt service burden but made it all the more difficult for them to borrow new funds or roll over their debt.
The serious downturn in the economies of the developing countries is mainly due to a series of exogenous factors. While the developing countries do need to adopt adjustment measures to overcome their economic difficulties, the developed countries are also duty-bound to give them economic assistance. The significance of helping the development process of the developing countries in the context of the current international situation has become increasingly apparent, for not only the recovery of the entire world economy, but also global peace and stability, are at stake.
Regrettably, at a time when the developing countries are facing greater economic difficulties, there has been no progress toward the establishment of a new international economic order during the past year. Negotiations between the North and the South remain deadlocked, and the cause of international economic cooperation is beset with obstacles. Despite the efforts of parties concerned, the global negotiations of universal interest have yet to be launched. Meanwhile, a number of countries have strengthened trade protectionism against the developing countries and significantly reduced their ODA flows, which contributed to a lowering in the previous level of multilateral assistance through the international financial institutions….
This state of affairs should be ended, for it has not only disappointed the developing countries and aroused their dissatisfaction, but also wrought concern and dismay among most developed countries. To bring about such a change has become a major task of great urgency on the agenda of the international community. The flexible attitude of many developed countries is a welcome development. There have been signs of a change in attitude on the part of other major developed countries. We hope that the latter will soon adopt more flexible policies and thus give due strategic significance to the cause of promoting international economic cooperation and development.
Both the International Monetary Fund and the World Bank have a key and special role to play in the cause of promoting international economic cooperation. I concur in the view expressed by some speakers that these two international financial institutions, confronted as they were last year by difficulties created by some major developed countries, did nonetheless try to provide funds to developing countries to cover their balance of payments deficits or help them borrow needed capital for development. However, we are all aware that these efforts fall far short of what needs to be done in the current situation and the specific requirements of the developing countries. We hope that these two international financial institutions will continue to move in the direction of promoting international economic cooperation and development and work for more and greater improvements and reforms. Progress in this direction will surely receive the strong support of the developing countries. Moreover, we hope that these improvements and reforms may also be supported by an increasing number of developed countries.
An issue of utmost importance before us is the Eighth General Review of Quotas of the IMF, which must be undertaken in an appropriate manner as soon as possible. Quotas are the principal source of funds for the IMF. Since available quotas are quite inadequate compared with the needs, naturally the issue of a quota review has drawn widespread interest. We endorse the view that, through a new General Review, quotas would not only be approximately doubled, but the overall share of quotas held by the developing countries would also be increased, or at least not reduced. We also agree that this issue should be resolved appropriately before the 1983 Annual Meetings. Another matter that should be dealt with is the allocation of SDRs during the fourth basic period….
Now let me touch briefly on recent developments in China’s economy. When I addressed the Thirty-Fifth Annual Meetings of the IMF and the World Bank in my capacity as head of the delegation of the People’s Republic of China in September 1980,1 gave a comprehensive description of China’s economic development, emphasizing in particular the enormous economic difficulties caused by the “decade of turmoil.” I also told you about our policy of “readjustment, restructuring, consolidating, and improving” designed to cope with these difficulties. After implementing this readjustment policy during the last three years, there has been a marked improvement in correcting the serious imbalances in our economy. The ratios between the various sectors of our economy are being gradually brought into harmony. The economic situation in China is stable. The fiscal deficit has closed dramatically. Personal incomes have increased. Markets are brisk in both town and country. Savings accounts have continued to grow. Prices are stable by and large. We have weathered our hour of utmost hardship. Our endeavors in every field have embarked on the road of steady progress toward a dynamic economy. Of course, there are still some problems and difficulties in our national economy. Our economic base is still modest and fragile. Energy production, transportation, and certain parts of the infrastructure cannot adequately meet the needs of our economic development. Our per capita output value is very low. Our financial resources are limited. Yet enormous investments are needed in energy development, in expanding transportation facilities, and in developing human resources. Under this set of circumstances, we will continue to follow the principle of self-reliance, to further implement our policies of readjustment and growth, and to strive to improve economic results. At the same time, we will actively try to make good use of foreign capital and import advanced technology and equipment. I have just outlined our major tasks for the further development of our economy. With self-reliance as our mainstay, supplemented by foreign assistance where available, developing our foreign trade and expanding economic and technological exchanges with other countries—such an approach is bound to accelerate our drive to achieve the four modernizations. Therefore we will firmly adhere to the policies of outward orientation and of loosening the rigidities in our economy. We extend a welcoming hand to all foreign economic organizations, whether official agencies or nongovernmental institutions, willing to cooperate and have economic dealings with us on the basis of equality and mutual benefit.
China shares similar experiences with many developing countries and faces many identical problems. We all face the important task of transforming our poor and backward economies into modern and advanced economies. The similarity of our circumstances impels us to support and help each other in developing our economies. China will continue to do what it can in this direction.
Finally, I would like to express China’s desire to further the understanding and cooperation with the International Monetary Fund and the World Bank on the basis of the good cooperation we have been evolving.
Statement by the Governor of the Fund and the Bank for Ireland—Ray MacSharry
May I begin by welcoming the new members who have joined since the last Annual Meetings—Hungary, Belize, and Antigua and Barbuda. I wish them all well in their membership of the Bretton Woods institutions.
The world recession has now lasted for over three years, yet we find that previous recessionary experience gives little reliable guidance on how to cope with present economic difficulties. There seems no immediate, or even reliable, prospect of a measure of recovery which would give firm hopes of stemming the rise in unemployment. Admittedly, stabilization measures are having an impact: inflation is coming down, and both domestic and external imbalances are improving in many countries. But these changes have been achieved at considerable and largely underestimated costs, in terms of lost output and employment. The ability of national and international policymakers to lead the world to recovery is on trial now to a greater extent than at any time since the 1930s.
Against this background the Fund has, in recent papers, reviewed the appropriateness of present restrictive policies and the reasons why these policies have proved so costly in human and economic terms. Despite the discouraging prospects, no change in the general policy is seen to be necessary. I do not quarrel with this basic conclusion: certainly, generalized expansionary policies offer no lasting solution to our problems and could well unleash a new wave of inflation.
Nevertheless, the gravity of the international recession, and the improvement that has taken place in the economies of some of the major industrial countries, call for some review of the dosage of the adjustment medicine. Strengthening a noninflationary recovery in the major countries would go a long way toward restoring the international foundations of confidence which are themselves so essential to world recovery.
The Fund has, certainly, recognized that there is room for difference of emphasis in the choice of economic priorities and policy instruments, while still maintaining that the needs of economic adjustment are almost universal. I welcome the strong emphasis that the Fund places on maximizing international cooperation. We all must take account of the interests of other countries in the formulation and conduct of our own economic policies, if we are to keep open and strengthen the free trading system.
The international policy environment is of particular importance to small, exposed countries such as my own. Because of its high degree of openness to external influences, Ireland is suffering, in a particularly acute form, the impact of global recession, especially on unemployment.
For us, the policy to be followed is clear and unambiguous. Since coming to office, my Government has indicated its determination to restore better balance in our economy by progressively reducing the current budget deficit. We have already made a start on this path and we have recently taken further steps to bring greater discipline into our public finances.
In other respects, the Irish economy is making significant improvement—inflation is showing encouraging signs of coming down and the external trade deficit is improving dramatically. One reason for the better trade performance is the impressive growth in our exports, which is one of the highest in the OECD area. Regrettably, the benefits have so far been partly offset by the burden of external debt servicing created by the high interest rates of recent years, but recent developments on the interest rate front give some encouragement in this respect.
We intend to continue with this progress in the framework of our medium-term economic plan, which is currently in preparation. This will set out the more comprehensive measures we propose to take, on the lines generally regarded as necessary to rectify imbalances while, at the same time, being designed to accomplish structural change and increase employment. But these efforts to achieve balanced growth and higher employment will, of themselves, be inadequate unless we can look to an upturn in international trade. I am sure that many of the other small industrial countries, and even more so the developing countries, are in the same position.
Policy for promoting investment is an essential element of an international recovery strategy. The decline in new investment in recent years and the low level of capacity utilization due to the recession carry a real danger that the capital stock of many countries will be dated when the recovery eventually appears. This could cause the world economy to be ensnared for a long time in a trap of low growth.
If investment is to grow, our policies must generate the necessary confidence. This in turn requires a positive slant to policy within an overall anti-inflation framework. Since demand management policies of general expansion are not appropriate, structural measures to encourage growth and investment must be given increased emphasis. These would help to increase confidence now and, by dealing with bottlenecks that might arise when economic activity picks up, help also to keep inflation under control.
In present circumstances, I would see public investment playing a vital role in this process because public policy can still exert a beneficial influence on overall investment—provided it forms part of a consistent and credible medium-term strategy for economic recovery and price stability.
Recent developments suggest that there is scope for action in this field, although, depending on the fiscal situation, the room for maneuver will vary from country to country. Given the reduction in inflation, and the improvement in fiscal and external balances, particularly in some of the major countries, a less restrictive attitude to public investment seems warranted. This would help to support recovery, relieve the pressures of rising unemployment on current budgets, and improve the potential of our economies in the medium term.
The recent fall in interest rates internationally is to be welcomed. The level and volatility of interest rates over the past couple of years have been greatly damaging. As well as stifling economic growth, they have imposed a major burden—both directly, through interest costs, and indirectly, through their effects on exchange rates—on foreign debt-servicing payments of many countries, including my own. This has made even more difficult the task of those of us who are trying to reduce excessive budget deficits.
It is essential that the fall in nominal interest rates should be sustained and that real rates should come down to more acceptable levels. The bigger countries have a major part to play in this by ensuring that they strike the right balance in their own policies. Perhaps the Fund could also assert itself to a greater extent in influencing the stable development of international interest and exchange rates. It is well placed to do so.
All the indications are that the Fund will continue to have a major role in smoothing the adjustment process for the remainder of the decade and in fostering the confidence to which I referred earlier. But the Fund must have adequate resources to do the job properly. There seems little consistency in general agreement, on the one hand, that the Fund’s structure and mechanisms are satisfactory, and finding ourselves, on the other hand, confronted with proposals for new mechanisms to cope with our problems, when at the same time the Fund itself is running low on the resources it needs to do its own job. I hope, therefore, that, in the light of the progress made at the Interim Committee meeting a few days ago, rapid agreement can be reached on a large-scale increase in quotas under the Eighth General Review. In the meantime, no barriers should be placed to the Fund’s borrowing, in whatever forms may be necessary, so as to maintain its lending program.
The international community must continue to focus its attention on the developing countries. The bleak prospects of the low-income group are a challenge to us all—a challenge whose dimensions are well documented in the World Development Report. The relative per capita income figures are a standing reproach to the rest of us. We are in many cases faced with a reality of human deprivation—a reality of people living at or below subsistence level.
A combination of national and multinational efforts, official and private, will be needed to make any progress. The scale of the problem is such that an increase in the help coming from one source, for example private investment, does not reduce the need for other forms of assistance. A maximum effort on all fronts is needed if this blot on the conscience of mankind is to be removed….
There are many aspects to these meetings, but what they come down to is an annual stocktaking of the economic and financial situation in the world economy. This year the picture, on the face of it, does not inspire great optimism. The basic issue is whether we can cooperate sufficiently with each other in these institutions to achieve a significant improvement. Our view on this cannot be confined to 1983. We must have a vision of the longer-term road we are traveling. But we must be seen to make a tangible start within the next year. I hope when we reassemble in 12 months’ time, we can record better progress toward our goals. If not, the ability of our whole economic system to cope with our problems may come under severe strain.
Statement by the Governor of the Fund and the Bank for India—Pranab Kumar Mukherjee
Let me begin by extending a hearty welcome to Belize, St. Vincent and the Grenaidines, Hungary, and Antigua and Barbuda, the new members in the Bank- Fund family. Let me also place on record our appreciation to the Government and people of Canada for their hospitality and for making our stay in this beautiful city of Toronto so pleasant.
At the meetings of the Interim Committee and the Development Committee, the world economic situation has been reviewed at great length. There is little that one can add to the exhaustive analysis of the gathering gloom. Suffice it to say that the crisis of the world’s economic and financial system has deepened.
Adverse developments in the world economy have affected different groups of countries differently. I would like, however, to focus on the situation in the oil importing developing countries. It is generally recognized that their present plight is, in large part, due to external factors over which these countries have little control. Their growth rates continue to decline; their terms of trade are at a postwar low; and their external deficits have reached almost unsustainable levels. Even these indicators do not capture adequately the social and economic distress of these societies as they struggle to adjust to the changed environment.
We in the developing countries have to tackle these problems ourselves. However, in an interdependent world our efforts alone will not bear fruit without an adequate response from the international community. It is becoming increasingly clear that revival of the world economy is a precondition for the success of the massive effort being undertaken by developing countries to restructure their economies. In this context, the present policies being pursued by industrial countries need to be reviewed. Indeed there is an increasing awareness of the fact that the present policies are not working satisfactorily. As we see it, the critical and mutually reinforcing elements of a world recovery program are:
—a revival of the growth process in industrial countries;
—removal of protectionist barriers; and
—a rapid step-up in concessional and other flows to developing countries.
The role of the Fund and the Bank in the 1980s is to be viewed in the context of this qualitatively new economic and financial environment. It is not an environment where problems can be solved by withdrawal from obligations. A crisis demands solutions that go to its root causes. The Bretton Woods institutions have to help in the search for remedies for an ailing system.
Fortunately, a set of policies and programs has been evolved over the years, both in the Fund and in the Bank, that provide a part, an important part, of the solution to the problems confronting the world economy. Let me remind my fellow Governors that these policies were the result of a cooperative effort between the developed and the developing countries. True, they did not go far enough in meeting the aspirations of developing countries. But at least the general direction was right. It is important that this sense of direction be preserved.
Let me deal first with issues connected with adjustment. In India we are implementing a wide-ranging adjustment program as an integral part of our overall development plan. We believe that for adjustment to be meaningful it has to be within the framework of growth. The program, therefore, recognizes the national objectives of growth with social justice in a democratic polity. I am glad to say that this program, which is being supported by the Fund, is working as well as can be expected in the present difficult situation in the international economy. In fiscal year 1981 we were able to reduce substantially the rate of inflation in our economy. In August 1982, prices were only about 1 per cent higher than a year ago. What is more, the reduction in inflation was accompanied by a strong growth performance. Agricultural output was at a record level. Industrial production increased by more than 8 per cent. Performance of the infrastructure improved, and output levels in key sectors, especially in the crucial energy sector, rose significantly. A high level of investments was maintained, with special emphasis on restructuring the energy base to reduce dependence on imported oil. Exports grew by 7 per cent in real terms.
Despite these achievements, our overall balance of payments situation remained difficult due to a further deterioration in our terms of trade. I have dwelt on our experience only to stress the point that even a strong adjustment effort will not be sufficient to overcome the present difficulties of oil importing countries unless the international environment improves.
If the global economy has to escape the trauma of deflationary adjustment, a high level of external financing, including that from the Fund, for developing countries will be required for some years. Even as finance without adjustment may be inadvisable, adjustment without financial support is unsustainable.
The Fund can play its role in the adjustment process only if it has adequate resources. In this context, discussions on the Eighth General Review of Quotas have special relevance. Quota subscriptions have to be the main source of financial resources for the Fund’s operations. Accordingly, they must bear a meaningful relationship to the needs of the 1980s. In our view a doubling of the present quotas is the minimum consistent with the role and objectives of the Fund. It is a matter of satisfaction that many developed countries are also supporting a substantial increase in quotas. This is a matter of the highest priority. There can be no effective substitute for a straightforward increase in quotas. Ideas regarding special arrangements must not dilute this objective or detract from the integrity and authority of the Fund.
Advocates of a smaller increase in the size of the Fund have also argued that the Fund should be regarded as the lender of last resort. We see no justification for this view. The Fund has rightly encouraged members to approach it at an early stage of balance of payments difficulties so that the situation can be tackled in an orderly manner. The benefits of this policy in terms of carefully structured adjustment programs hardly need elaboration. We are concerned that there are pressures that the Fund give up this well-established practice with a view to forcing the countries to exhaust all other avenues of balance of payments support before turning to it. We must resist such pressures as they would impair the role of the Fund in the adjustment process.
On the question of distribution of quotas, our approach is that this should be managed largely on an equiproportional basis. However, we recognize that some measure of selective increases is necessary though it is our view that such selective increases should be kept to the minimum. As the question of deciding on individual selective increases is likely to be time consuming, and in view of the urgency of augmenting the Fund’s resources, I would like to suggest that we move toward an early decision for a large equiproportional increase as an interim step. I am aware that the Executive Board has devoted a good deal of attention to numerous statistical calculations for the purpose of determining formulas for distribution of quotas. But quota decisions are more than exercises in technical virtuosity. I could not agree more with the observation made by the Managing Director that one cannot expect an organization that gears its voting power and other functions to quotas to agree to a radical shift only because a shift is suggested by some statistical elements. Along with all other developing countries we believe that the developing countries’ share in the quotas and voting power should be increased, and that the share of no individual developing country should be reduced.
For the first time in several years, we are witnessing a decline in international liquidity. There is, therefore, an added urgency for resuming the allocation of SDRs. I regret that there has been no progress in this matter. The fourth basic period has started as an empty period. I do not have to refute once again the argument that such an allocation would give inflationary signals, especially as the Managing Director himself spoke yesterday of progress toward disinflation. In view of the objective conditions of the international economy which have been convincingly analyzed by the Fund staff, there is no warrant for denying the resumption of SDR allocations, at least on the modest scale at which it was in the last basic period, pending a consensus on a larger allocation.
It is not surprising that in an overall environment of scarcity of resources, the Fund’s ability to come to the assistance of the developing countries has been weakened. Recent pressures for tightening of conditionality should be seen in this light.
It has been suggested that there has been no basic change in the thrust of Fund conditionality, but the degree of severity of the problems of external imbalances confronting developing countries calls for a greater stringency in domestic policy. By the same token, the very fact of the worsening of the external environment would suggest that the Fund should respond by giving more time and more room for maneuver to these countries to adjust.
We in the developing countries recognize that domestic policy must continue to play a crucial role in making a successful adjustment to the deterioration in our external account owing to factors of an irreversible nature. Precisely because the adjustment has to be structural, it calls for time and patience. When more fundamental factors are at work, mere stringency in domestic policies cannot bring about adjustment—in fact, it may make matters worse by undermining the productive foundations of the economy.
Finance for adjustment is not the only area of scarcity. Development assistance suffers the same fate. Both concessional and nonconcessional flows through multilateral development institutions are either stagnant or are declining. Future prospects appear at best to be uncertain. At a time when development needs of oil importing developing countries have increased manifold, the resource squeeze in the World Bank and in the regional banks is pushing the developing countries inexorably toward the low-case scenario of the World Development Report….
The Bretton Woods institutions were created in the aftermath of a breakdown of the international system of trade and finance. They have done much to nourish the concept of international cooperation. Much more needs to be done in these troubled times. We have no doubt that, under the leadership of Mr. de Larosière and Mr. Clausen, the Fund and the Bank would respond positively to the new challenges. The task calls for vision and courage. It is a task in which we cannot afford to fail.
Statement by the Governor of the Fund and the Bank for the United Arab Emirates—Sheikh Hamdan Bin Rashid Al Maktoum
I have the honor to speak on behalf of the Arab Governors of the International Monetary Fund and the World Bank. Allow me to start by expressing our sincere thanks to the Government and people of Canada for their warm reception and excellent arrangements. I join other speakers in welcoming the new members of the Fund and the Bank. I also wish to express our appreciation, Mr. Chairman, for your thought-provoking opening address and for the informative and thoughtful statements by Mr. de Larosière and Mr. Clausen.
This year’s Annual Meetings take place in a global economic setting that is not fundamentally different from that at the last year’s Meetings. The world economy continues to be afflicted by slow growth of output and trade, growing unemployment, large external imbalances and high rates of inflation. The persistence of these problems points clearly to the continuing need for strong adjustment efforts, both in industrial and developing countries.
While it is encouraging to note that the rate of inflation has fallen significantly in some major industrial countries, inflation remains a serious problem in most of these countries. Furthermore, the lowering of the rate of inflation has entailed a further deepening of the recession in their economies. While we agree that bringing inflation under control is a necessary step in creating conditions that are conducive to resumption of sustained growth at a satisfactory pace, we would also stress that this objective needs to be pursued through a balanced mix of policies that would minimize the cost of inflation control in terms of accentuation of the economic slowdown. An appropriate degree of monetary restraint needs to be combined with improvements in fiscal discipline in order to bring down the present high interest rates that are not only thwarting economic recovery within the relevant industrial countries but are also having serious international repercussions. Furthermore, an appropriate mix of demand management policies needs to be supplemented with measures to alleviate the many structural imbalances and rigidities which have developed over the years, undermining efficiency, productivity growth, and the ability of these economies generally to adjust to changing circumstances.
I may note here en passant that after the oil price adjustments in the early 1970s—which, incidentally, followed decades over which the price of oil had been kept artificially depressed—it became quite common to place a large share of the blame for the ills of the world economy on the higher cost of oil. However, the course of the world economy in recent years, in particular the persistence of stagflation and large payments imbalances, has shown that this view was grossly exaggerated and simplistic. It is now recognized that the causes of the current global economic ailments are both complex and deep-rooted—having cumulated over a number of years—and that they encompass both weaknesses in the conduct of financial policies as well as problems and imbalances of a structural kind, of which the energy problem is but one.
The situation in the industrial countries has had a grave impact on developing countries. The prolonged recession has greatly depressed the demand for their exports. It has also contributed to a further deterioration of their terms of trade: for many primary commodities the current real prices are the lowest in the postwar period. Their debt servicing burden has increased substantially on account of the high interest rates in international financial markets. Largely as a result of these adverse external developments, the average rate of growth in these countries has fallen to its lowest level in several decades—resulting in declines in per capita income for a number of them—and their overall external deficit has remained extremely high.
We agree with you entirely, Mr. Chairman, that the difficult economic challenges facing the world at present call for a maximum degree of international cooperation. The need for this derives from the high level of economic interdependence that exists between countries today and which you so rightly emphasized in your opening address. In essence, international economic cooperation requires that countries pay due regard to the interests of other countries in the formulation and conduct of their economic policies.
In present circumstances, the economic situation in developing countries cannot be expected to improve much without an improvement in the external economic environment facing them. Thus, the pursuit of sound adjustment policies in major industrial countries is necessary not only for a return to higher sustainable growth rates within their own economies but also for the success of the adjustment process globally.
As part of the adjustment measures, the industrial countries should allow freer access to their markets. The array of tariff and nontariff barriers maintained by these countries on agricultural products and relatively labor-intensive manufactures has a particularly damaging effect on the exports of developing countries, thereby seriously hampering their adjustment and growth efforts.
The developing countries recognize that, while the severity of the problems currently being faced by them would be eased considerably by a less harsh external economic environment, improvement in their situation also depends on their own efforts. Accordingly, adjustment-oriented policies have been undertaken in many of them. Indeed, the World Development Report 1982 of the World Bank concludes that most developing countries have adjusted better than the industrial countries in recent years. However, the task of adjustment has been rendered even more severe by the deepening of the recession in the industrial countries. The task is especially difficult and painful for the low-income developing countries, where the scope for further belt-tightening is already limited. Evidently, there are limits to the extent these countries can implement adjustment with their own resources. If economic adjustment is to take place in these countries on the required scale without involving undue hardships for their peoples, their own efforts will have to be supported by an adequate flow of external resources, concessional as well as nonconcessional.
Clearly, the present circumstances call for a more substantial role by the Fund and the Bank. At a time when official development assistance is shrinking and access to international financial markets is becoming more costly and difficult, the Fund’s role in financing adjustment has acquired much greater importance. In this regard, the recent increase in the incidence of interruptions in Fund-supported programs gives cause for concern. While adverse exogenous developments have made orderly adjustment more difficult, a widely shared view blames this outcome in part also on a toughening of Fund conditionality. It is true that conditionality is an integral adjunct of the financial assistance provided by the Fund. However, it is also true that the effectiveness of Fund-supported adjustment programs would be greater the better attuned the conditionality of these programs to the special characteristics and circumstances of the economies in question. The approach in this respect should be pragmatic rather than doctrinaire. Furthermore, structural deficiencies and supply bottlenecks that impinge on the balance of payments should be given due weight. The Fund should avoid too narrow a focus on demand restriction; instead, adjustment needs to be pursued through a broad mix of policies which also aims at strengthening productive capacity and fostering satisfactory growth. In addition, countries should be encouraged to approach the Fund at an early stage before their position deteriorates excessively.
The present state of the world economy also calls for a firmer exercise of the Fund’s surveillance function. As a guardian of the international monetary system, the Fund needs to give particular attention to the policies of major industrial countries which have a pervasive effect on the world economy. The foremost objective of Fund surveillance should be to help achieve a closer convergence of the policies of these countries and to bring them into greater harmony with the demands of international economic and financial stability.
The effectiveness with which the Fund can play its role in promoting international adjustment depends, among other things, on the magnitude of its resources. Over the years, the Fund’s quotas have lagged considerably behind growth in the world economy, necessitating increasing recourse to borrowing. The aggregate of Fund quotas would need to be increased substantially under the Eighth General Review if the Fund’s resource base is to be raised to a level commensurate with its role and members’ financing requirements in the 1980s. We support the view that quotas should be the primary financial source for the Fund. The distribution of quota increases under the Eighth General Review should include significant selective adjustments in actual quotas so as to bring them better in line with the changing relative positions of members in the world economy. Another objective of the Eighth General Review should be to bring about an effective increase in the overall share of developing countries in Fund quotas, and—hence—also in their participation in its decision making; strengthening the representative character of the Fund would serve to enhance its effectiveness.
It is regrettable that no agreement has yet been reached on the question of allocation of SDRs in the current basic period. The case for a further allocation has been established in many technical studies. Furthermore, the continued interruption of allocations is clearly at variance with the provision in the Fund’s Articles of Agreement to make the SDR the principal reserve asset in the international monetary system. We reiterate our support for an early resumption of SDR allocations at a reasonable rate….
We are pleased to state that Arab development assistance continues at a high level despite the recent substantial decline in oil revenue. In fact, some of the capital surplus countries have started borrowing to meet their development requirements, while others are experiencing a significant budget deficit. In terms of their GNP, development assistance in 1981 amounted to approximately 4 per cent. This is more than ten times as great in relative terms as the performance of the industrial countries. It is effectively higher if account is taken of the fact that aid from the Arab countries is untied unlike assistance from the DAC countries. Arab aid to developing countries has become increasingly diversified. Non-Arab recipients of aid account for a significantly higher proportion than was the case five years ago. Among the non-Arab recipients, sub-Saharan African countries have received, and will continue to receive, special attention in terms of volume and quality of aid….
Statement by the Governor of the Fund for Italy—Beniamino Andreatta
I wish, first of all, to thank the Canadian authorities and the city of Toronto for their warm hospitality and for the excellent organization of our Meetings. I also wish to welcome Antigua and Barbuda in the Fund and St. Vincent and the Grenadines in the Bank, as well as Hungary and Belize who have joined both institutions.
World Economic Situation
As we gather here in Toronto, the signs of the much-expected recovery are not yet clearly in sight, although progress has continued to be made during the past year in reducing inflation and external payments imbalances. The prolonged stagnation of economic activity has brought the number of unemployed in industrial countries to over 30 million. Economic conditions of the developing world have worsened dramatically. International financial markets have come under pressure, as major debtors seek rescheduling of their external obligations. Depressed world demand and trade are compounding external financing difficulties and feeding a new wave of protectionism. Excessive oscillations of exchange rates aggravate the general climate of uncertainty and hamper international adjustment.
Against this background, the relevant question we should be addressing is to what extent present policies can be regarded as adequate to solve current difficulties.
After a protracted period of rising inflation in the aftermath of the second oil shock, major countries adopted strict monetary policies, for it was recognized that deceleration of monetary growth was a precondition for eradicating inflation from the fabric of society. However, excessive confidence in the monetary tool combined with the difficulties encountered in checking government deficits and wage growth placed the burden of stabilization almost entirely on monetary policy. As a consequence, nominal and real interest rates have been extremely high for more than two years.
The progress made in reducing inflation, although initially slow, has now become substantial. However, in a world of extensive rigidities in relative prices and of scarce mobility of resources, a high cost had to be paid in terms of output and employment. Moreover, the unprecedented experience of a very long period of severe monetary restraint, even after recession spread, has seriously strained the capacity of enterprises and individuals to service debt obligations. Internationally, the problem has been compounded by the high level of debt accumulated following the oil shocks, particularly by developing countries. The balance sheet of financial intermediaries is thus coming under strain, as the liquidity and quality of assets are reduced by important debt rescheduling operations. The scale of the problem and the danger it poses for the entire world economy can be hardly overestimated; it raises the specter of financial crisis and spiraling deflation.
For these reasons the recent easing of interest rates in the United States must be seen as a most welcome development. Real interest rates however are still too high, given the current state of recession, and further declines are badly needed, especially on the long end of financial markets. The fiscal package recently approved containing the federal budget deficit should pave the way to easier and more stable monetary conditions. Nevertheless, given the great uncertainties that still remain, a clear commitment by the U.S. authorities to maintain and strengthen the recent policy changes would help to improve business confidence worldwide and to stimulate economic recovery.
In countries where inflation is being brought under control and wage moderation has prevailed, governments should be in a position to offer brighter growth prospects. This would bring a much-needed relief to an already unbearable unemployment situation. Overall budgetary discipline can be made consistent with a selective use of fiscal incentives to promote capital accumulation in key areas and sectors. Indeed, a higher level of investment to correct structural weaknesses and promote energy conservation is required in both developed and developing countries. In the latter, the investment effort requires a sustained inflow of real resources through official bilateral channels, multilateral development institutions, as well as private markets.
The Italian Economy
A resumption of noninflationary growth of the Italian economy hinges on adjustment in two areas, namely, public finances, and wages and incomes. At the end of July, the Government adopted a fiscal package, centered on higher indirect taxes and tariffs, of the order of 2 per cent of GDP. The main policy problem is still that of checking the expansion of spending, particularly in the fields of social security and health services, where there exist strong built-in mechanisms and widespread indexation. The aim of the financial law for 1983, now before Parliament, is to bring about adjustment in these areas as well.
The deceleration of inflation and the recovery of investment also require wage moderation. The Government has announced a target path for inflation and is requesting that wage settlements should not exceed stated guidelines. A change is also being sought in the extensive indexation system of wages, which introduces distortions in wage differentials, reduces the effectiveness of macroeconomic policies, and perpetuates inflationary pressures.
As regards monetary policy, changes in the present restrictive stance can be envisaged only to the extent that concrete progress is made in reducing inflation along the targeted path. Lately, some decline in interest rates has taken place, partly because of easier conditions in international markets, but also as a consequence of the deceleration of inflation from the peaks reached in mid-1981.
We are aware that it is our task to reduce and possibly eliminate the imbalances existing in the Italian economy, but, even if we succeed, we would be unable to set in motion by ourselves an economic recovery which would bring relief to soaring unemployment. Our economy is heavily dependent on foreign demand and we want to maintain it free from the lures of protectionism. Only a concerted action on the part of those industrial countries that have already brought inflation under control will bring to an end the longest recession since the war before it turns into something dangerous for the life of democracies.
International Monetary and Financial Issues
We are convinced that the adjustment process requires a strengthening of international monetary relationships.
The progressive convergence of inflation rates and of policies in major countries makes it more realistic to seek to reduce exchange rate instability. Owing to slow response of trade flows to exchange rate changes and high integration of capital markets, exchange rates, in the short run, become dominated by interest rate differentials. Divergent monetary policies in major countries have thus led not only to high exchange rate volatility, but also to prolonged periods of overshooting. Protracted deviations of exchange rates from fundamental economic conditions introduce distortions in the relative price structure and can feed inflationary pressures in the presence of downward price rigidities. The costs of such developments are difficult to quantify, but are certainly substantial. Greater cooperation in this area is therefore desirable. The usefulness at times of concerted intervention to counter disorderly market conditions and the buildup of speculative psychology should not be underestimated. Over time, a reduction of exchange rate oscillations through an agreement on target zones by major countries could also be sought.
With the rapid reabsorption of the OPEC surplus, international payments positions are changing significantly. Imbalances, however, remain large: in fact, aggregate deficits in the current year will not differ significantly from those of 1981. Heavy concentration of bank exposure vis-à-vis developing countries, and debt servicing difficulties of some of the larger among them, require prudent lending policies. However, the danger of overreaction should also be avoided in order not to aggravate further the situation.
The network of consultation and cooperation among central banks offers a framework to cope with temporary liquidity needs that may impinge on the stability of international financial markets. However, soundness of the system would not be favored by granting indiscriminate central bank support to bail out private banks involved in international activities. Indeed, any such decision would encourage imprudent behavior.
In a situation characterized by a slowdown of lending from private markets, the strained external position of developing countries and still large international payments imbalances clearly call for a substantial expansion of the role of our multilateral international institutions in support of rigorous adjustment programs. First and foremost, we must make sure that the Fund has sufficient resources to meet the financing needs of its members. In light of recent developments, additional borrowing may become necessary in the period before the new quota increase becomes effective; thus countries in a position to do so may be called upon to contribute to such a financing effort. Also, new urgency is added to the ongoing General Review of Quotas, which we would like to see completed well ahead of the established deadline of December 1983. The amount of the increase should be such as to restore quotas to a central role in Fund operations and to provide the Fund with sufficient resources to perform its functions through the 1980s. In our view, a doubling of present quotas would be fully justified in light of these objectives. We also welcome the U.S. initiative for the creation of an additional borrowing facility to cope with extraordinary situations in international financial markets….
To conclude, greater cooperation in crucial policy areas among major countries and fuller support of our international institutions can do a great deal in pulling the world economy out of its present slack and restore sustained growth.
The attainment of this goal is not outside the realm of our own human capabilities: failure will not be forgiven.
Statement by the Governor of the Bank for Portugal—João M. F. Salgueiro
I should like to associate myself with my fellow Governors’ words of appreciation and thanks to all those in Canada who have been responsible for the arrangements made for our Meetings. It gives me particular pleasure to meet in this country that is the host of hundreds of thousands of my compatriots. I know that here in Canada, as in so many countries on different continents, these individuals demonstrate fully their capabilities as hard workers and dynamic entrepreneurs, and have easily integrated into the national economy.
I would also like to extend my Government’s congratulations and welcome to the new members that have recently joined the Fund and the World Bank.
If the forecasts for 1982 made by the International Monetary Fund and the World Bank are confirmed, 1980–82 will be the longest period of slackening of economic activity in the industrial countries since the recession of the 1930s. The continuous increase in unemployment, which worries us so much, is therefore no surprise. This trend is certainly the result of the monetary and fiscal policies adopted to fight the high levels of inflation, which were fueled by the oil shocks and the less strict policies followed in the past.
Nevertheless, difficulties encountered by governments in implementing the necessary rigorous budgetary measures have led to excessive use of monetary policy to fight inflation. This has resulted in high interest rates, which reached top levels both in nominal and in real terms, especially in the United States. Exchange markets have been strongly affected and the behavior of the dollar has had enormous repercussions on the world economy, especially on the developing countries.
In these circumstances, I am glad to see the considerable efforts made recently by the U.S. Government aimed at reducing the public sector deficit. It is too soon to assess the exact scope of the measures that have been announced but, taking into account the initial reactions of the markets, it seems that the right path has been chosen. Nevertheless, even if the drop in interest rates proves to be a lasting one, we should not rely too much on it. It will not be the panacea for all the evils of our economies.
Major difficulties in balance of payments felt by a growing number of countries, including some oil exporters, will not be overcome just by the reduction of interest rates. There is clear need for a consistent set of policy actions backed by the whole international community that effectively address the core of the crucial problems now at stake.
The industrial sectors are undergoing a crisis from which they will not recover overnight: adjustment efforts will have to be pursued. The fact that even some prestigious corporations, not operating within the so-called “traditionally sensitive sectors” in the industrial world, are facing very serious difficulties is a clear indication that we still have a long way to go to overcome the crisis and that great efforts will have to be made.
Each and every one of our countries will have to pursue these adjustment efforts internally, but the achievement of positive results will depend, to a large extent, on an intensification of international cooperation. Actually, for the required adjustments to be effective implies that structural solutions will be implemented over the medium term.
The existence of stable institutions in our countries is a fundamental prerequisite to the successful implementation of adjustment policies. In this respect, 1982 has been a particularly important year for Portugal. Eight years after the abolishment of the nondemocratic regime, a wide consensus among the main democratic parties both in the government and in the opposition made it possible for the constitution to be revised in such a way as to provide the country with the institutional framework I have mentioned. We are now in a position to fully address the major problems our economy is facing.
The first priority of our economic policy is to regain a suitable pace for the development of our country. Therefore, one of our main targets in the near future will consist of reducing the current account deficit to a sustainable level over the medium term. To this end, both fiscal and monetary policies will continue to be directed toward the re-establishment of the main macroeconomic equilibria.
On the budgetary front a major effort is being undertaken to reduce expenditure, namely, subsidies of prices and state-owned enterprises, and also to rationalize government administration. At the same time, a tax reform directed toward a reduction in the excessive burden still placed on investors will continue to be implemented.
Particular attention will continue to be given to measures concerning public and private investment so as to guarantee channeling of resources to internationally competitive projects and to sectors bearing great influence upon external imbalance, such as agriculture and energy.
On the other hand, monetary policy will continue to be designed so as to avoid an excessive expansion of credit and, simultaneously, to maintain the attractiveness of financial assets denominated in escudos.
Simultaneously, we will continue to implement a strategy that aims at making the Portuguese economy less rigid and more capable of reacting to exogenous shocks. This is the aim of the measures for the modernization of the financial, monetary, and exchange markets, for the clarification of the role to be played by government enterprises, and for the liberalization of foreign direct investment.
This policy gives rise to considerable interest in the international financial community as demonstrated by the growing presence of foreign institutions in Portugal, including the opening of bank representative offices and the equity participation in investment and leasing companies….
Portugal will pursue an active presence in the international financial markets, oriented toward a greater diversification of the currencies and the instruments utilized.
Along with the growing presence of foreign institutions in Portugal, Portuguese banks are making a great effort to modernize in order to be able to face future challenges, such as the opening of this sector to private initiative, the accession to the EC, and the strengthening of their position in the international financial markets.
Our concerns with short-term difficulties should not divert us from the search for durable solutions. International cooperation is particularly important in this respect.
The need to reduce balance of payments disequilibria and to prevent higher unemployment should not lead us or the major industrial countries to adopt protectionist measures. These will only contribute to increasing the difficulties others are facing and make the inevitable adjustments more painful.
Portugal attaches great importance to the development of clear and stable relationships with its main partners. We believe that clear and unbiased international relations will provide a sound framework for economic agents to avoid uncertainty from becoming a permanent threat. It is within this perspective that we have been conducting negotiations with the EC, to be concluded by the end of the year, and also strengthening our cooperation with the Portuguese-speaking African countries. These are two fundamental guidelines of Portuguese policy. These two orientations do not hinder but rather reinforce my country’s willingness to take an active part in the reinforcement of cooperation with other countries. A confirmation of this can be found in our recent decisions to join the African Development Fund and the African Development Bank….
Let me now turn to the activities of the International Monetary Fund. The Fund promotes adjustment and fosters stability in the international monetary system through the conditionality attached to the use of its resources and through surveillance over the economic policies that influence exchange rates.
As regards conditionality, it is fair to note the progress made by the Fund in dealing with situations that, in most cases, need very close cooperation with the countries involved as they require continued effort over a period of years.
Unfortunately, the performance of the Fund in the area of surveillance over the economic policies that influence exchange rates has been rather disappointing. Exchange rates in the leading financial countries have been too volatile, and they have been diverging too much for too long from the trends set by real economic developments.
This situation calls for strengthening surveillance through more active consultations with member countries so as to achieve a more equitable distribution of responsibility in the adjustment process among its members.
Adjustment is a painful process in itself and conditions in the world economy today make it even more difficult for developing countries. The tide of the world economy runs counter to those countries that are dependent on the economic performance of the big nations. It would be too much to expect the Fund to reverse this tide, but it is equally excessive to ask small countries to fight alone against the tide.
The provision of resources by the Fund should thus be designed so as to help the implementation of adjustment policies and not to make them even more painful. This calls for less costly terms and for the translation into facts of the guidelines on conditionality that permit that consideration be given to the social, political, and economic priorities of member countries, as well as to their particular circumstances. The Fund has, in recent years, devised several innovative approaches to this problem. This, however, must not lead us to forget that there is still much to be done.
One other matter of the Fund’s activities that I would like to mention is the position of its lending capacity which is under pressure owing to the extensive use of its resources. In spite of the borrowing policies of the Fund, members’ needs outpace the growth of the Fund’s usable resources, and, consequently, there is a liquidity problem that has to be solved. The Fund has to expand its lending capacity, primarily by increasing its own resources. The considerable progress that has already been made by the Executive Directors on some important issues of the quota revision, which I note with much satisfaction, warrants the expectation of a timely completion of the forthcoming increase in members’ quotas.
Finally, I should like to associate myself with the many speakers who have expressed disappointment and concern that no consensus has yet been reached on the question of allocations of SDRs in the current basic period. The international financial situation—and in particular the deterioration in the level of international liquidity—has been a priority question. The allocation would not exert inflationary pressures and would contribute to easing some of the burden on the financial system, in particular as regards those countries with difficult access to the capital markets.
I am confident that the Fund will succeed in overcoming the present difficulties by bringing about a consensus which would permit the Managing Director to submit a proposal for an SDR allocation in the present basic period.
Early solutions of the two main issues that concern the Fund at the present moment—the quota review and SDR allocations—are indeed essential for world monetary stability and for the strengthening of the role of the Fund.
Statement by the Governor of the Bank for Nicaragua—Joaquin Cuadra Chamorro
I have the honor of addressing these Meetings of Governors of the International Monetary Fund and the International Bank for Reconstruction and Development and its affiliates, the International Development Association and the International Finance Corporation, on behalf of 22 countries—Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Panama, Paraguay, Peru, the Philippines, Spain, Suriname, Uruguay, Venezuela, and my own country, Nicaragua. May I first express our pleasure at the appointment of Mr. Abdlatif Y. Al-Hamad, Minister of Finance and Planning of Kuwait, as Chairman of the Meetings of Governors. I am certain that under his direction we shall succeed in our work. We extend cordial greetings to Mr. A.W. Clausen, President of the World Bank, and to Mr. Jacques de Larosière, Managing Director of the International Monetary Fund. A warm welcome as well to all the Governors and delegations here, and to Belize, Hungary, and St. Vincent and the Grenadines, the new members of the Bank.
We are grateful to the Federal Government of Canada, the government of the Province of Ontario, and the authorities of the city of Toronto for the warm hospitality they have given us. We especially appreciate the words of Mr. Pierre Trudeau, the Prime Minister of Canada, in the opening session. His message to us on the present problems and future prospects of the international economy confirms the capacity of this great country for contributing solid, clear ideas on the most significant matters of concern to our countries in connection with the world’s socioeconomic development.
At this point in time, the international economic picture is truly discouraging—far worse than the pessimistic forecasts that have been coming out since the Belgrade meetings in 1979. And we are concerned not only about the persistence of the major adverse factors, but, even more, about their growing intensity. It need only be pointed out that world trade stagnated in 1981, leading to an increase of only 1.5 per cent in the gross domestic product of the developing countries and, hence, to a decline in real per capita income in many of them. This unfavorable trend is likely to extend into the future, aggravating the recessive tendencies and external imbalances of the developing countries and causing the adjustment process to depend more and more on external borrowing. The dilemma facing the international community in the present economic situation is how to continue the fight against inflation without generating unacceptable levels of unemployment, while initiating a process of economic recovery that does not reverse the progress achieved in controlling inflation.
The difficult international economic situation has at least three main consequences or implications. In the first place, it tells us that the global adjustment process that has been taking place in the early 1980s is far from satisfactory. For one thing it has been extremely slow, and for another it has taken place at the cost of large-scale external indebtedness and considerable economic stagnation. At the same time, the maintenance and intensification of the industrial countries’ protectionist measures, including new and more subtle forms in the area of nontariff barriers and those taken for noneconomic purposes which affect the sovereign rights of the developing countries, are cause for growing concern. We therefore call for the earliest possible halt to this harmful, unfair trend, since the international economy cannot recover at an acceptable pace in the coming years unless world trade is permitted to expand.
On the basis of these considerations, our countries support the proposal made last month in Geneva by Mr. Javier Perez de Cuellar, Secretary General of the United Nations, who, in addressing the UN Economic and Social Council, stressed the need to develop a coordinated, noninflationary economic recovery program which would have “as an integral element efforts to redress the excessive burden placed by the current crisis on the developing countries….” We wish to place special emphasis on the need for both the Interim Committee and the Development Committee to include this subject regularly on their future agendas, focusing on the draft action program for international monetary reform. Unless the adjustment process is coordinated internationally and promotes an equitable distribution of its costs and benefits between industrial and developing countries, it will be impossible to overcome the present difficulties within a reasonable time frame, that is, by the end of the current decade. We must not forget that much of the cost of the industrial countries’ adjustment policies has been borne by the developing countries.
The second implication of the gloomy world economic picture is that, despite the magnitude of the external disequilibria, international economic and financial cooperation has entered a critical phase in the last few years, characterized not only by a decline in official development aid in real terms, but also by a rapid rise in the cost of funds provided by the multilateral financial institutions, hardened conditionality, a rapid falloff of concessional financing, and, finally, questioning of the very importance of multilateral cooperation. We also wish to stress the growing difficulty of access to the capital markets, making the financing of external imbalances extremely costly.
The third consequence is almost a result of the first two. It is an emerging tendency to change gradually the concept of economic interdependence which had been developing in earlier years within the international community. We cannot but be disturbed by the virtual abandonment of the North-South dialogue and the poor follow-up to the recommendations made by the Cancún summit, for they seem to indicate a qualitative change in the conduct of international economic relations at the very time when the developing countries most need the cooperation of the international community. In short, we face the combination of an exceedingly slow, costly global adjustment with a decline of development cooperation in real terms and a gradual erosion of the basic principles of multilateralism and interdependence which are the very reason for being of our two major institutions of cooperation—the International Monetary Fund and the World Bank.
Latin America has not been able to escape this gloomy, discouraging picture and has, in fact, been directly affected by the overly prolonged international economic recession, despite the significant adjustment measures taken by our countries. According to estimates by the Economic Commission for Latin America (ECLA), the terms of trade, which registered a 30 per cent deterioration in the three-year period 1978–80, worsened by an additional 11 per cent in 1981. The economic growth rate in turn was only 1.7 per cent in 1981—the lowest in the postwar period, and per capita product declined for the first time in 30 years. We must add that preliminary estimates by the UNCTAD Secretariat point to a continued deterioration in the region’s economic growth rate this year. Similarly, the deficit of the balance of payments on current account rose from $28 billion to $38 billion in 1981, and the gross disbursed external debt reached $240 billion toward the end of 1981, meaning that it had doubled in the last three and one-half years. Finally, though some countries have made considerable progress in controlling inflation, consumer prices rose by an average of approximately 60 per cent in the region as a whole in 1981. As a result of this difficult economic situation, real wages decreased and there was an unusual rise in unemployment.
A situation like that sketched above must definitely not be permitted to continue in the coming years. Reducing and eventually halting these regressive tendencies will require an expanded international cooperative effort and a full return and updating of the original principles that inspired creation of the Bank and the Fund. To do otherwise would be to confirm in practice Keynes’s concerns regarding selfishness and irrationality as the main sources of international economic crises. The crisis in the international economic system is not irreversible. We are confident in the institutional capacity of our two organizations to react through concrete measures in the short term which will prevent the emergence of a crisis of still greater dimensions.
Although interest rates have moved favorably for the developing countries in recent weeks, they are still high in both nominal and real terms and their future behavior is still unpredictable. We must therefore also point out that the arrangement recently adopted by OECD countries on minimum interest rates for export credits has aggravated the situation. We support the recommendation of the Group of Twenty-Four that imports by developing countries financed by these credits should be exempt from the provisions of this arrangement….
With regard to structural adjustment loans, we wish to stress the importance of preserving the flexibility anticipated from the outset for this type of financing; hence, conditionality should not entail the setting of quantitative targets, but should consider the degree of commitment assumed by governments in their economic policies and the maintenance of those policies over time. Similarly, structural adjustment programs must be realistic and their basic contents must be shaped by the countries themselves. Finally, though coordination with the International Monetary Fund is essential, it is crucial that the granting of loans not be contingent on a country first having concluded an agreement or worked out a program with the Fund.
I wanted to leave my views on the Central American region and my own country for last. The Central American countries are going through an especially difficult socioeconomic period and are beginning to adopt the adjustment measures required for adaption to the new international economic circumstances and to their own internal economic realities. We therefore request the World Bank, the Inter-American Development Bank, and the rest of the international financial community to lend prompt, flexible aid to the individual and collective development efforts of these countries. In particular, the regional cooperation arrangement must be strengthened, and in that context such multilateral financing mechanisms as the Central American Bank for Economic Integration and the bodies connected with the Central American Monetary Council, especially the Central American Clearing House and the Central American Monetary Stabilization Fund, must be consolidated. These mechanisms have remained fully effective and operational, but they require a significant financial input in support of our own internal efforts to reinforce them.
As an integral part of Central America today, Nicaragua has been affected by the economic problems common to our five countries, problems which relate, inter alia, to the dissavings induced by the external sector owing to the deterioration in the terms of trade, inflation, and the increased severity of the world recession, all of which brought about sizable balance of payments disequilibria and affected the growth rates of economies in the region. In our own particular case, this has been compounded in the past decade by the effects of the earthquake which destroyed the city of Managua, the human, social, and economic costs of the War of Liberation, and, just three months ago, the effects of floods unprecedented in history in Nicaragua. The latter, according to ECLA estimates, inflicted direct damages valued at over $350 million. It also bears noting that in the two-year period 1978–79, Nicaragua’s gross domestic product declined by more than 30 per cent in real terms. In these circumstances, the economic recovery and the national reconstruction effort initiated in the last three years have proceeded at a slow but steady pace as part of a gradual consolidation of a mixed economic system. Other key aspects of our program are the effort to stimulate domestic production without neglecting social sectors, the protection of real wages, the strengthening of export capabilities, and the achievement of ever higher levels of efficiency in the public sector, especially in the state enterprises. We have also successfully renegotiated all the external debt contracted prior to July 1979 with the international banking community, as well as that contracted with various governments—except in the case of one country. External debt service payments have been met fully and without problems. Our relationships with the multilateral development institutions have been totally satisfactory and our dialogue with the World Bank has been far-reaching and fruitful. We are confident that this support from the international community will be maintained in the years to come.
Statement by the Governor of the Bank for the Netherlands—A. P. J. M. M. van der Stee
The world economy continues to be beset by many problems. The most serious of these are unemployment and inflation. The Fund’s Annual Report outlines in an excellent way how to cope with these problems: cautious monetary and fiscal policies seem to be the best tools to fight these evils. Because I agree with these policy prescriptions, I do not want to discuss them in detail now.
Instead, I would like to pay special attention to the Fund and the Bank as institutions and the roles they have to play—the Fund in restoring financial equilibrium and the Bank in stimulating economic development in the world. Let me start with the Fund.
As we all know, the balance of payments disequilibria have by no means disappeared. It is true that the huge payments surpluses of the oil exporting countries of the past few years have been reduced, but other imbalances remain. These include very large deficits in the balances of payments of many small industrial and developing countries. Particularly worrisome is the fact that several of these deficit countries are already heavily indebted and face high interest payments on their external debts.
In view of these payments imbalances the steep rise in Fund lending comes as no surprise. Most of this lending is presently in the upper credit tranches, indicating that the Fund is heavily involved in assisting member countries undertaking difficult adjustment policies. I think we all agree that it is of paramount importance that countries adopt policies aiming at adjustment and that the Fund should play an active role in the promotion of such policies, especially in view of the fact that the large payments imbalances seem to be rather persistent.
In this context, I am much concerned that a large number of credit arrangements are currently inoperative, in the sense that members cannot draw on their arrangements with the Fund because of nonobservance of the performance criteria. Moreover, a recent review of stand-by arrangements and extended arrangements approved during 1979–80 revealed that only about one third of these arrangements succeeded in achieving the desired adjustment.
These findings are very worrisome. They have a negative impact on the credibility of the Fund, and they may impede the function of the Fund programs as a catalyst for the inflow of long-term capital into debtor countries. Since the developing countries urgently need these capital flows to finance their development, it is very important that the Fund’s conditionality can perform its task.
Another ground for worry is that the room for delaying adjustment is extremely limited. This is clear from the World Economic Outlook projections; they show persistent and hardly decreasing current account deficits for the non-oil developing countries in the years ahead, deficits which in many instances are unsustainable from the point of view of financing.
I think, therefore, that it is important to improve the effectiveness of the Fund programs. In the years to come we need a strong and credible Fund that can cope effectively with the foreseen payments imbalances. I would like to outline what such an institution should look like. But first we should investigate the reasons for the problems of some Fund programs in promoting adjustment.
In my opinion, the first and foremost factor is that countries wait too long before turning to the Fund. Usually they borrow funds from private international banks to finance their deficits and delay their call on the Fund until things have run out of hand.
The consequence of this delay in turning to the Fund is that all the more drastic measures are needed. These measures are often painful and, although necessary, very difficult to implement.
A second factor that has impeded the success of Fund programs in the recent past is that the Fund has perhaps been inclined to give too often “the benefit of the doubt,” most notably in the context of multiyear extended arrangements. The staff review I mentioned before shows that, in general, one-year stand-by arrangements are more successful in bringing about the desired adjustment. Clearly, it is very difficult to formulate rather firm adjustment programs that stretch out over a number of years. Moreover, structural measures ask for longer-term financing, which the Fund cannot provide. The task of the Fund, as I see it, is to provide temporary resources to enable its members to return to a sustainable balance of payments position in the medium term.
How can the effectiveness of the conditionality of the Fund be improved? First of all, as I have often stressed in our meetings, I would urge members, including the industrial countries, to turn to the Fund at an early stage. This view is also expressed in the first guideline on conditionality.
Second, the Fund should be very cautious about multiyear arrangements. It would seem better to monitor the path of adjustment by means of a succession of one-year arrangements, whenever necessary.
Third, the emphasis given in some programs to supply-oriented policies should not be at the cost of the traditional measures aiming at monetary and fiscal restraint.
I think that the role of the Fund can be strengthened by action along these lines. However, this is only one side of the coin, albeit an important one. An adequate conditionality, in the way I just described, cannot be brought about if the Fund cannot offer sufficient financial support. Therefore, the other side of the coin consists of a strengthening of the financial position of the Fund. This is all the more necessary, because the liquidity ratio is decreasing to alarmingly low levels. Our discussion of the coming quota review points to a substantial increase in the quotas, part of which should be selective, in order to reverse this trend and so enable the Fund to play an important role in the solution of the problems in the 1980s. With a strengthened Fund that effectively promotes adequate adjustment and that has a sound liquidity position, we can look to the future with more confidence.
I fully agree with the Managing Director in his speech before the Administrative Coordination Committee of the UN that countries facing structural problems that cannot be solved without severe social damage should turn directly to the international community. The financing of structural policies should come from long-term flows, bilateral as well as multilateral. It is, therefore, very important that these flows not be reduced….
During the last decade or so, we see a growing awareness of global interdependence and, increasingly, governments have been recognizing that they have great interests in the maintenance of a viable global financial and economic system. In a lecture given recently at the Asian Development Bank, Professor Lewis, who will chair the Task Force on Concessional Flows of the Development Committee, observed that, while the integration of national economies has led to the growth of relatively large—in the perception of some, too large—national public sectors, the global financial and economic system has remained remarkably stunted. And, he continues, if national governments recognize interests such as maintaining an expanding, evolving system of trade, sustaining a workable and working system of international finance, and balancing global energy use and production at acceptable costs, the effective pursuit of these interests will require not only a more efficient but also a larger global system than we have now. It is my Government’s conviction that in this context the multilateral development institutions-—and among these especially the World Bank and IDA—have a major role to play. Therefore, it is with much regret that I observe that a growing number of governments seem satisfied with a more relaxed attitude toward their ODA performance, and especially toward their contribution to the multilateral development institutions. These institutions have proven to be efficient and cost-effective vehicles for the transfer of resources to finance economic and social progress in developing countries, thus leading to a more stable global financial and economic system. Therefore, they deserve the continued and further increased support of the wealthier and more industrialized member countries….
September 7, 1982.