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Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1982
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Statement by the Governor of the Fund for South Africa—O. P. F. Horwood

I wish to begin by paying tribute to Mr. de Larosière, Mr. Clausen and the management and Executive Directors of the Fund and the Bank for their contribution, under exceedingly difficult circumstances, to world economic stability and advancement during the past year. The twin institutions of Bretton Woods have proven their worth once again.

This is not to deny that most Fund-Bank member countries have experienced economic conditions during the past year which have been, to quote the Fund’s Annual Report, “troublesome”—a masterly understatement! Neither 1981 nor 1982 will go down in economic history as a vintage year. The inescapable fact is that the present international economic situation is almost too bad to be true. Neither the Keynesian economists of yesterday nor the “monetarists” of today could have expected that we would end up with the present unenviable combination of low growth, high unemployment, payment imbalances, declining world trade, increased protectionism, debt servicing problems, and the threat of international banking failures hanging over our heads.

And yet we must not lose heart. The present parlous state of the world economy must not blind us to the fact that fundamental changes for the better have occurred in some of the major industrial countries during the past two years—the full benefits of which will only become apparent to the world community in the years ahead. I refer in particular to the success achieved in the fight against inflation by the United States, the United Kingdom, the Federal Republic of Germany, Switzerland, Japan and a number of other industrial countries. These countries have had the courage to apply restrictive market-oriented monetary and fiscal policies, involving curbs on government spending and money creation, and they have accepted the inevitable rise in real interest rates which has resulted from this fundamentally sound approach. In this way they have curbed both excess demand and inflationary expectations, and have significantly reduced price and wage inflation. Equally important, they have begun to restore faith in at least certain currencies and in the ability of monetary authorities to implement effective stabilization policies.

Admittedly, a price has had to be paid, and is still being paid, for these gains—in the form of low growth and high unemployment. But it would be superficial and wrong to view these negative developments as the result of the financial discipline of the past two years. On the contrary, they are the direct consequence of the lack of financial discipline of the preceding years—a period which was characterized by excessive government spending and regulation, undue money creation, unrealistic interest and exchange rates, and the excessive use of mandatory price, wage, import, and exchange controls. It is in these earlier misguided policies that the root causes of the world’s present economic difficulties are to be found. And it will inevitably take some time before the corrective process has run its full course. But if the United States and the other major industrial countries persist with their present policies of financial discipline, making the necessary adjustments to changing conditions as they go along, the concomitant strains involved will prove to have been well worthwhile.

The “mix” of fiscal and monetary policies may not always have been ideal, and at one stage the resultant high real interest rates and strong U.S. dollar certainly added to the economic difficulties of the rest of the world. But this should not blind us to the fact that the hardships we have suffered have not been in vain, and that considerable success has already been achieved in putting the world economy back on a more even keel.

My own country is one of the Fund-Bank members which has suffered from the adverse impact on primary exports of the recession in the industrial countries. And, of course, the decline in the gold price between 1980 and the middle of 1982 added to our difficulties. But we have made the necessary adjustments by tightening our own monetary and fiscal policies, by keeping a firm rein on government spending, and by accepting high interest rates and realistic market-determined exchange rates. And even before the latest upward movement in the gold price, we were already reaping the benefits of that approach.

The way out of the world’s present economic difficulties is therefore not to be found in a return to the old ways of undue money creation, high government spending, and artificially low interest rates. That would be a recipe for disaster. The answer lies in persisting with appropriate fiscal and monetary policies, and in that way laying a solid foundation for the next upswing in the world economy.

In the meantime, it is evident that steps should be taken to increase the Fund’s ability to provide short-term balance of payments assistance to member countries. Provided that strict conditionality in Fund lending is maintained, I believe that an increase in Fund quotas of perhaps 50 per cent would be justified. I would also support the U.S. proposal to set up a special Fund emergency lending facility to assist nations with severe financial difficulties. What I would not recommend, however, would be another issue of special drawing rights at this stage. That would be creating “unconditional” liquidity of the worst kind. It would retard balance of payments adjustment and facilitate inflation.

My strong belief in the principle of “conditionality” in Fund lending in no way indicates a lack of understanding for the problems of deficit countries, including many developing countries. To an extent these countries are today suffering because a number of the major industrial countries first contributed to world inflation through their unduly expansionary policies, and were only converted at a later stage to monetary and fiscal discipline. Similarly, the non-oil producing developing countries cannot be blamed for the structural upheaval in the world economy which followed the large increases in fuel prices in the course of the 1970s. But three wrongs won’t make a right. To distribute Fund finance now on a lavish scale and without conditionality would only exacerbate matters.

The Fund, under its successive distinguished Managing Directors, not least the present incumbent of this high office, Mr. de Larosière, has built up a proud tradition of adhering to sound money precepts. It should continue to build on that foundation. If countries want Fund money, they must accept the good advice and conditions which accompany it. In the long run the advice and the conditions will do them even more good than the money.

… I have some knowledge of the present plight of many developing countries, and I support their case for increased development assistance. I would argue that rekindling the fires of inflation by means of national and international liquidity creation is not the proper way to bring about the required transfer of real resources to developing countries. But then more effective and appropriate ways of doing so should be found.

On the subject of gold, I have two comments this year. The first is that the recent report of the United States Gold Commission has once again focused attention on the widely divergent views that still exist on the present and future role of gold in the international monetary system. Not surprisingly, the Commission does not recommend the restoration of a traditional-type gold standard either in the United States or internationally. But neither does it favor any steps to demonetize gold. It even recommends the minting by the United States Treasury of a new gold coin. The future monetary role of gold, it seems, is a subject which simply will not go away. My own position is, I believe, well known. It is that the sooner gold’s monetary function is generally recognized and normalized, the better for the international monetary system.

My second comment is that the behavior of the gold price in recent years tells us a good deal about the state of the world economy. During most of the 1970s, after the collapse of the Bretton Woods par value system, the rapid rise in the gold price reflected to a large extent the lack of faith in paper currencies during a period of excess liquidity, low real interest rates, and accelerating inflation. At that time gold simply outperformed the U.S. dollar and currencies in general. However, during the latter part of 1980, 1981, and the first half of 1982, the successful anti-inflationary policies applied in the United States, the United Kingdom, and certain other industrial countries contributed to the decline in the gold price during this period.

The recent new upsurge in the gold price appears to be a different phenomenon. Again people are turning to gold in times of trouble. But this time the trouble is not inflation—not yet anyway. This time the problem is the fact that the existing world recessionary conditions and the heavy debt burdens of many governments and companies might result in countries or banks defaulting on an increasing scale. In such circumstances there is a strong tendency to move out of paper debt instruments into gold—the ultimate liquidity.

Gold remains a haven in times of general uncertainty and of serious international monetary problems-whether of the inflationary or the deflationary kind. For that reason alone, I believe that in our attempts to deal with present international monetary problems, we shall be forced to reconsider certain aspects of gold’s role in the period ahead.

Statement by the Governor of the Bank for Bangladesh—A. M. A. Muhith

For well over a decade, I have been attending the Fund-Bank Annual Meetings as a member of my country’s delegation. Never before have we met under such adverse conditions as those through which the global economy is now passing. The deterioration in the international economic environment is unprecedented and alarming. I am told by my friends, and I agree with them, that at this time to try to manage the finance and planning functions of a country in dire straits like Bangladesh is overly ambitious, if not impossible. But because of our firm conviction that the global community collectively will rise to the occasion, I have been prompted to exercise this unique privilege of taking the podium in this august gathering.

The spirit of international cooperation has suffered an alarming eclipse. Sound domestic economic and financial management is undoubtedly central to good global economic health, but conducted oblivious to global impact many of these policies are proving to be counterproductive. Deepening recession in the industrial countries leading to high levels of unemployment, the decline in world trade and especially depressed market conditions for the exports of the developing countries, severe deterioration in their terms of trade, historically high interest rates, volatile exchange rates, and declining levels of development assistance have struck at the roots of global economic interdependence and growth. There is deterioration all around:

  • —The growth rates of the developed countries are in progressive decline;

  • —For the third successive year, they have declined;

  • —For the developing countries growth has declined to a point where for the first time in three decades there is a fall in per capita income;

  • —Growth in world trade for the first time since World War II has disappeared;

  • —Aid flows have gone down from 0.38 of GDP to 0.35 of GDP to exactly half of the accepted global target;

  • —Adverse terms of trade are taking severe tolls of the purchasing power of developing countries. Primary commodity prices are said to be at their lowest in 50 years.

The World Development Report 1982 highlights the depressing scenario of growth in developing countries more grimly than ever before. And the low-case scenario projected in last year’s Report seems to be coming true. The Reports of the Fund and the Bank outline some reasons for optimism, dim as they are, such as a decline in oil consumption, a decline in oil prices, and a declining trend in the rates of inflation in the industrial world. Some decline in interest rates, though volatile, is also noticeable. These developments are largely due to the prolonged slowdown in economic activities and the marked decline in commodity prices.

These indeed, are of little comfort to the low-income countries. The latest Fund study on the world economic situation as well as the World Development Report make it quite clear that the sharp fall in the growth rate of the non-oil developing countries over the past several years and the dramatic increase in their combined current account deficits are attributable primarily to external influences and changes in the external environment. Weak demand in industrial countries, severe deterioration in the terms of trade of developing countries, and very high interest rates are obviously beyond the control of the developing countries. Even maximum improvement in domestic economic management cannot obviate the difficulties stemming from these factors. This is not to imply that domestic factors are not responsible for a deterioration in economic performance. In the wake of the second oil shock, there seems to have been a dramatic change in the overall scenario. Whereas in the mid-1970s growth could be maintained, and it helped adjustment, now such a process has been negated by inward-looking policies of nations and institutions. The ugly head of protectionism is protruding, and investment is lagging behind. The developing countries are trying hard to make structural adjustments in their economies and to adopt effective and realistic domestic policies. But such adjustment efforts can bear fruit only in a favorable international environment and in the context of much stronger international support.

The staggering current account deficits of the developing countries, which rose to almost $100 billion in 1981 and are unlikely to come down this or next year, would indicate the need for stepping up capital flows to the developing countries. This invariably involves acceleration in the flow of concessional assistance to the low-income countries and particularly to the least developed countries. All of the speakers at the inaugural function have underscored this point and yet flow of official development assistance is alarmingly inadequate. It remains to be appreciated that a slowdown in growth in these countries entails much heavier sacrifices than what is demanded by near stagnation in high-income countries. It is in this context that we are alarmed by the deterioration in the flow of ODA. In 1981, the ODA of the DAC countries declined 4 per cent in real terms. The UN Conference on the Least Developed Countries last year in Paris adopted a Substantial New Program of Action which focused attention on actions by the least developed countries and also pointed out the areas of international action specifically in terms of quantum of aid and its modalities. Most of the developed countries participating in the Conference agreed to provide a minimum of 0.15 per cent of their gross national product as ODA to the LDCs during the period 1981–85, and to increase it to 0.20 per cent during the second half of the decade. It was expected that the effect of these commitments would be a doubling of ODA to the least developed countries by 1985 compared with the period 1970–80. It is most unfortunate that there is no indication of any movement in that direction.

The Cancún Conference stressed the importance of promoting closer international cooperation and confirmed the desirability of supporting, at the United Nations, a consensus to launch global negotiations. At the Versailles summit, there has been further underscoring of the need for launching global negotiations. Global negotiations indeed have assumed a great urgency as we see the erosion in international cooperation at a time when its need is so compelling. The GATT ministerial meeting in the coming months is a welcome development, but there must be faster progress on global negotiations. . . .

We have listened to the Managing Director of the Fund very carefully and are thankful to him for his forthright statement. For the developing countries there is very little encouragement or hope. Our domestic policies perhaps are not always the most appropriate. Indeed if they were, we would perhaps not be developing countries. We need to adjust and many of us are doing so rather valiantly. But the burden of adjustment seems to have shifted disproportionately on us. It is difficult to avoid the impression that the Fund has not been able to exercise effective surveillance over the policies of many countries, especially the developed ones, which in fact are destabilizing our economies and dimming our prospects. It also looks as if, with its policy of strict conditionality, the Fund is shying away from helping countries who have encountered difficulties due to reasons beyond their control. It is distressing to note that Fund assistance in 1981 marked a significant decline. I shall, however, be failing in my duty if I do not place on record our appreciation of the prompt response the Fund has made in many cases of compensatory financing assistance.

Action in two areas in the Fund brooks no further delay. The allocation of SDRs for the fourth basic period must be made immediately. The argument about inflation impact has lost its force even for those who refused to listen to objective reasoning. We are faced now with an emerging liquidity shortage. We are also aware that SDRs, instead of making some headway as the principal reserve asset, have lost considerable ground to national reserve currencies. A new allocation in this context will serve the dual purpose of contributing to world economic recovery and the diversification of reserves.

The other point is about the Eighth Quota Review. We note the progress made in the Board of Executive Directors of the Fund. We believe that quotas should be the primary source of Fund financing. They should bear some relationship to the financing needs of members. And a balance between the size of quotas and world trade on the one hand, and international liquidity on the other, should be established. It will be unfortunate if the resource squeeze were to induce escalation in Fund conditionality or an increase in Fund charges. We urge an early and urgent agreement on the doubling of Fund quotas.

The hardening of Fund conditionality and the growing number of inoperative programs raise serious doubts about the adequacy of the Fund as an institution entrusted with the management of world monetary affairs. Large purchasing power losses of countries are only marginally tackled by the compensatory financing facility despite the initiation of cereal import financing. Mechanical application of numerical targets and set conditions tends to neglect the volatility of global economic conditions, not to speak of the social realities of economies under strain. Relaxation of conditionality should be symmetrical to developments in external factors affecting an economy. The Fund’s present preoccupation with short-term flows is completely out of tune with the economic realities of today. In the mid-1970s the Fund wisely emphasized medium-term adjustment programs but now there is a clear move away to year-to-year programs. Nothing could be more retrograde and more inopportune. The exercise initiated in 1972 to put in place a reformed monetary system was abandoned due to the volatility of the payments situation in 1974. That exercise began in the wake of a fundamental change in the Fund system when fixed exchange rates were given up in 1971. Today, other fundamentals of the Fund system are under serious question. Perhaps the incomplete reform exercise should begin once again.

Before concluding I believe it would not be out of place to take a couple of minutes to give an idea of the attempt that is being made in a least developed country to adjust to the difficult economic environment. In the hopeful environment of 1979, we planned our development efforts for the following years. In fiscal year 1981, partly assisted by good weather, partly by the momentum of the past, and substantially by improvement in domestic policies, we moved forward steadfastly. However, we faced serious difficulties due to the trade and aid environment. In the period 1981–82, the unit value of jute goods, our largest export item, declined by as much as 34 per cent and that for nonjute goods by 26 per cent, whereas the volume of jute goods exported in the same period rose by 10 per cent and nonjute exports rose by nearly 50 per cent. The cumulative impact of the deterioration in the terms of trade is estimated to be equivalent to roughly 4 per cent of the gross domestic product in each of fiscal year 1981 and fiscal year 1982, resulting in an income loss of nearly $1 billion in these two years. Aid flow stagnated even in nominal terms and its composition changed to our disadvantage. As a result an annual growth rate of over 6 per cent was quickly replaced by one of 0.3 per cent in the following year, meaning a decline in per capita income.

Undaunted we have moved forward. For fiscal year 1982 we have adopted a policy package consisting of:

  • —Austere demand management in a country where most people already survive below the margin of subsistence;

  • —Bold domestic resource mobilization efforts covering the limited assets in land and capital;

  • —Hefty price adjustments to pass on the cost of imports to the consumers and to ensure profitability of public enterprises;

  • —Stringent measures cutting down transfer payments and current expenditure even where they are socially not undesirable;

  • —Deliberate fiscal and monetary adjustments to enhance utilization of domestic capacity and promote exports;

  • —Investments focused on priority areas like agriculture and population planning and aimed at quick yields;

  • —Opportunities providing for private initiatives in production, trade, and service sectors;

  • —Steps for a regulated and limited public sector development program based on realistic resource estimates and an efficient implementation mechanism.

This is an illustration of the abstract concept of adjustment that we so freely talk about. Adjustment we must make, but adjustment is a multilateral process. The adjustment effort of my country will not succeed if we do not receive a minimum level of external support and if the external environment does not turn at least mildly hospitable.

Let me conclude now with a prayer that in this worst year since World War II, nay the Great Depression, we take the vow to build an interdependent world economic order based on equity and consideration for the less fortunate among us.

Statement by the Governor of the Fund for Indonesia—Ali Wardhana

May I first of all, on behalf of my Government and myself, extend to His Excellency Abdlatif Y. Al-Hamad, Minister of Finance from Kuwait, our warm congratulations on his election as Chairman of our Meetings. He is taking over the Chairmanship of the Boards of Governors at a most difficult time. Due to the position of his country and his experience, he is familiar with the financial operations of the developed world, and coming from a developing country he knows the problems of the Third World. We have confidence that our Meetings are in excellent hands.

The documents which the Fund and the Bank have prepared for us, namely, their respective Annual Reports, together with the Bank’s World Development Report 1982 and the Fund’s analysis of the world economic outlook, continue to paint a gloomy picture of our present economy and its immediate future. The recession that set in a few years ago continues, and the Fund has been compelled to scale down its estimates and projections of rates of growth in the industrial and nonindustrial world. It is true that due to courageous monetary policies aimed at controlling the money supply, inflation has been reduced, especially in the United States, Great Britain, Japan, and the Federal Republic of Germany, but the cost is high in the form of unemployment, high rates of interest, instability in exchange markets, and the threat of increasing protectionism. Lately, rates of interest have begun to come down, but it is too early to know if they will continue to do so. On the whole the improvement of economic growth has hardly emerged.

I believe that it is time for the industrial countries to consider implementing additional measures besides the monetary restraint which they have introduced. Inflation, although reduced, is still high, and its control remains mandatory in order to create the necessary conditions for the resumption of balanced growth. It seems that governments are still hesitant to tackle their fiscal deficits, which have been the result of a number of factors relating, inter alia, to social considerations which their economies can finance no longer. It is understandable that cuts are difficult to make because the beneficiaries of course will resist any reduction. However, they have to be looked into. A reduction of fiscal deficits will strongly support monetary policy and bring nearer the time of more appropriate interest rates and therefore the moment of recovery.

Also, it seems that in the matter of the need to restructure their economies, governments in the industrial countries have not yet done enough. Unprofitable production should be replaced by industries with more potential for growth and profit, instead of being protected by direct and indirect means.

It is in the interest of the industrial countries themselves to implement the measures that they know should be undertaken because the millions of unemployed people in their societies cannot be left waiting too long.

The impact of the stubborn stagnation and inflation in the industrial countries on the rest of the world has become increasingly serious, and many of our governments look forward to next year with great anxiety.

Prices of primary commodities have plummeted, and manufactures have been hit by protectionism. All this causes a drop in the external and internal revenues necessary for the financing and continuation of a balanced economic growth. Many countries have not been able to implement the necessary adjustment; others have depleted their reserves, stepped up their borrowings, of which the burden in the form of interest rates is increasing, and all of us have been compelled to accept lower rates of growth. The situation in the developing countries, hit by recession and inflation with its corollary of worsening terms of trade, is nearing desperation.

The Fund and the Bank are doing their utmost to assist countries in their balance of payments and development needs, but their resources are limited. Also, a number of countries have not been able to execute the programs agreed with the Fund for a number of reasons. Along with a better appraisal by the Fund, they will have to make more efforts to stabilize their economies.

Whatever the case may be, the multilateral institutions need resources. Unfortunately, at present the mood in a number of industrial countries concerning an increase in resources is not favorable. Partly because of their own situation but partly also, in some of them, for ideological reasons, the willingness to provide more resources through multilateral channels has diminished. This means that at a time when, due to the weakening position of many developing countries, more resources are needed from official sources, these resources will not be available. Developing countries are therefore at present caught in a kind of pincer, one arm of which is continuing recession, and the other the reduced flow of official resources through multilateral and bilateral channels.

No new SDR allocation is contemplated; the amount of resources to be made available to the Fund and the Bank is still being disputed by a number of the stronger countries; and the prospect of so-called official development aid is bleaker than ever. No acceptable alternative has been given so far. Countries needing resources are being referred to private investment and private capital from the market. The problem is that a great number of countries have access neither to private investment nor private capital.

If this mood in the industrial countries persists, the expected recovery may bring some improvement in the developed world and in some middle-income countries, but the agonizing question is how, in particular, the weaker economies will survive. I cannot believe that this is an acceptable situation for the world community. Some serious rethinking on the part of the relevant stronger countries is necessary, and a way out must be found.

For my part, the increase of quotas of the Fund in a meaningful manner is essential for the working of the Fund …. As far as SDRs are concerned, the negative attitude of some of the major countries is disappointing. If inflation is being reduced, the argument that SDRs would contribute to inflation does not make sense. But, moreover, either we are serious in allowing the SDR to play a role in the monetary system, with a view to enhancing its working and operation, or we should frankly recognize that we do not see such a role for it.

I would like to make an urgent appeal to the relevant major countries to enable the Fund and the Bank to function as they should. Quotas and capital subscriptions, as well as IDA contributions, should be meaningful. As far as ODA is concerned, if the mood to curtail it persists I would like to ask what meaningful and practical alternatives are contemplated?

We are living in a difficult situation. We cannot afford to let it last. Through greater understanding, willingness to compromise, and international cooperation, we must be able to solve our problems.

Let me now end by thanking our Canadian host for the hospitality which we are all enjoying in this great country.

Statement by the Governor of the Bank for Austria—Herbert Salcher

I would like to welcome as new members of the Fund and the Bank: Antigua and Barbuda, Belize and, in particular, Hungary, Austria’s neighboring country joining our constituency.

Since the last Annual Meeting, the world economy has not seen significant signs of an upward trend, though I believe these signs have become more noticeable lately. Or, to put it in another way, it seems that we are slowly creating the preconditions for an upswing.

Much has been said and will be said on those problems we have been facing in the last two years. I do not want to elaborate too much on them. Essentially, they are reflected in four problem areas that will require our full attention. These basic four problem areas are:

  • —stagnation of economic activities;

  • —inflation;

  • —external imbalances; and most alarming,

  • —increasing unemployment.

Associated with these problems are some others, such as stagnation of world trade combined with strong tendencies toward protectionism, a still high level of interest rates, volatile exchange rate markets, structural problems in national economies, and, most recently, imbalances in the international financial markets.

The lack of growth and increasing unemployment give us reason to question the economic policies pursued by some leading industrial countries and to look for appropriate policies to re-establish economic growth.

I think the warning of a possible flare-up in inflation is appropriate, as has been indicated in the IMF Annual Report. However, I feel that the danger of an overly hasty move to expansionary policies seems to be exaggerated. There is not much leeway for global deficit spending strategies. Despite these limitations, there seems to be room for a number of governments of industrial countries for financing economic structural changes, which are increasingly necessary in our times. However, there are other countries, especially in the developing world, which are not in such a position. They need, therefore, full assistance from the whole international community, in which the IMF and the World Bank play a key role. Given the fact that developing countries are severely affected by the existing worldwide deflationary policies, it would be an act of international solidarity to assist these disadvantaged countries.

A sensible way for the industrial countries to show solidarity with the poor countries is to end “restrictive” economic policies and to set the world economy on a new course toward sustainable growth. This would be the best contribution industrial countries could make to help the developing world. In this connection, we thankfully recall in Austria an outstanding example of international solidarity and understanding: the European Recovery Program of the United States, the Marshall Plan.

Solidarity should also be seen in connection with big debtors in the international financial markets. At this crucial point in time creditors should have a flexible attitude. Too much is at stake: a possible economic recovery and the soundness of the financial system. Thoughtless actions on the part of the creditors could have severe results for many economies.

The task ahead of us is a troublesome one. But the present world economic situation also contains some positive features such as:

  • —a slight rebound of economic activities;

  • —declining inflation;

  • —a downward trend in interest rates; and

  • —more efficient use of our energy resources.

Therefore, it would be counterproductive to continue with pessimistic expectations which have resulted in a prolonged deflationary economic policy stance. This could easily lead to self-fulfilling effects and would multiply restrictive forces. What we really need is a guarded optimism that could reinforce those few positive signs mentioned before.

I would now like to make some remarks from the viewpoint of a smaller country that is unavoidably exposed to policy decisions made by others.

In addressing the twin problems of high unemployment and inflation, it would be desirable to apply a better policy mix between fiscal, monetary, incomes, and structural policies. In principle, I agree that one aspect, but not the most important one, is that policies should be geared toward elimination of inflationary expectations. However, in view of the very high unemployment and the reduction in real income in many countries, I wonder whether or not too much emphasis is placed on demand restraint. I believe more emphasis on supply measures, or what I just called “structural policy,” together with selective demand management, could alleviate the hardship of unemployment. The fight against inflation is important, but it should not have overriding economic priority in a time of high worldwide unemployment. Such an attitude is not only a question of economic strategy but one of human values as well. Fifty years ago, Austria experienced the unbearable social consequences of prolonged high unemployment. It brought despair upon the Austrian people and endangered freedom and democracy.

I would like to say now a few words about the current economic situation in Austria.

Austria is a relatively small country with an open economy making it very susceptible to economic developments abroad. Nevertheless, Austria’s economic performance is quite satisfactory. In August, we had an unemployment rate of only 2.4 per cent; for the whole year of 1982, we expect an inflation rate of 5.5 per cent and a real growth in GDP of 1.5 per cent.

The Austrian Government has done much to combat the shocks coming from abroad. Priority is assigned to full employment or to an employment situation that comes close to this target. An immediate consequence of this policy is the willingness on the part of the trade unions to accept more moderate wage increases. This, on the other hand, contributes substantially to reducing inflationary expectations.

In the monetary field, it is the exchange rate policy that has to be considered as a precondition for our incomes policy. By maintaining a stable relationship vis-à-vis the low inflation currencies of its most important trading partners, Austria’s exchange rate policy aims at curbing imported inflation. By pursuing such a policy, incomes in the exposed sector are kept under control. At the same time, such a hard currency policy stimulates adjustment and thereby fosters the competitiveness of the domestic economy. Thus, exchange rate policy in Austria creates monetary conditions that facilitate the adjustment process in real terms. Structural changes, as a result of this policy, have contributed to a remarkably better performance of the current account this year.

I would like to deal now with the role of the Fund under the present worldwide economic circumstances. The Fund cannot provide development finance because this is outside the scope of its functions, but as a monetary institution, it can help to promote economic adjustment in its member countries.

The bulk of the Fund’s recent lending has taken the form of commitments in support of adjustment programs. The Fund’s assistance should be large enough to mobilize funds from other financial sources. To accomplish this task, conditionality should be reasonably flexible to take account of the special circumstances of individual member countries.

Recently, the financial means available to the institution were increased to an important extent by borrowings, but I believe that the Fund should primarily be put in a position to draw on a sufficient stock of its own resources. Therefore, we would like to see the Eighth General Review of Quotas completed on time. A doubling of the present size of total quotas, in conjunction with reasonable adjustment of individual quotas on the basis of simple economic criteria, would provide the Fund with sufficient resources to cope with the problems of the 1980s.

Another important issue is the evolving role of the SDR in the monetary system that is now under consideration by the Executive Board of the Fund.

There are some doubts in certain circles as to whether we need SDRs at all under present circumstances. However, we should not lose sight of the fact that we still live in a monetary system of multireserve currencies characterized by massive currency movements and volatile interest rates. International liquidity creation depends almost exclusively on the imponderable developments in the balance of payments of reserve currency countries. I believe that we should continue in our endeavors to rationalize the monetary system by promoting the SDR. I fully support the envisaged improvements of the SDR to make it a truly acceptable reserve asset, but it should go hand in hand with new allocations. . . .

In concluding, I believe that the IMF and the World Bank Group, in view of their increasing importance as instruments of international cooperation and solidarity, will play a major role in the struggle for world economic and social programs. Finally, I would like to convey my gratitude to the Canadian Government for its warm welcome and hospitality in Toronto.

Statement by the Governor of the Fund for Senegal—Ousmane Seek

On behalf of my fellow African Governors I would like to welcome the new members of our institutions—Antigua and Barbuda, Belize, and Hungary.

It is clear from the 1982 Annual Reports of the Fund and the Bank that the global economic situation today is worse than it was at the time of our last meeting in Washington, D.C. The large external payments imbalances have persisted and the prospects of an early recovery remain bleak. While inflationary pressures in the industrial countries are expected to ease, the rate of output growth in these countries is expected to decline further from 1.2 per cent in 1981 to 0.3 per cent in 1982.

The persistence of recession in industrial countries has adversely affected world trade with depressive effects on exports and growth of the developing countries. The growth of output of non-oil developing countries in 1981 was 2.8 per cent, compared with a rate of growth of 4.8 per cent in 1980. For Africa, the growth rate which was only 2.7 per cent in 1981, is projected to decline further to 2.2 per cent in 1982. For lower-income countries of the continent, the growth in output was 0.9 per cent in 1981, considerably below the growth in population. These developments mean that the gap in living standards and economic performance that separates Africa from other regions has been widening. We therefore call upon the international community to assist African countries in the effort to arrest this trend which is intolerable and, in fact, dangerous for the stability of the region.

The deficits on current account of the non-oil developing countries rose sharply from $86 billion in 1980 to approximately $100 billion in 1981 and are expected to remain at about that level in 1982. The deficits reflected mainly the persistent worsening in the terms of trade. These deficits have in the main been financed by drawing down reserves and by increased borrowings on capital markets. This latter factor has added to the external debt of the developing countries, which was approximately $465 billion in 1981. The record high interest rates have aggravated the cost of debt service. Between 1980 and 1981, interest payments for debt service alone rose by more than $10 billion. The higher interest rates, shorter maturities, and increased proportion of tied loans are making it more difficult for the developing countries to manage their external debt. In view of the mounting difficulties, the African Governors would like to propose the establishment of an efficient institutional framework for debt refinancing and rescheduling to take better account of adjustment problems and the future financing needs of the LDCs. In this connection, the African Governors call upon the Fund and the Bank to give consideration to an institutional mechanism for dealing with the problems of debt refinancing and rescheduling. Furthermore, it would be desirable for all countries that have not already done so to move as rapidly as possible to cancel the debts of the least developed countries.

Of greater concern is the fact that Africa is the region in the developing world that recorded the greatest decline in both value and volume of its exports last year. As a result, the African countries were compelled to cut back their imports even further, despite the fact that these are already at a level that seriously jeopardizes growth. The decline in the volume of exports and commodity prices, as well as the marked worsening of the terms of trade, has contributed in large measure to the deterioration in Africa’s economic position. The African Governors wish to emphasize once again the fundamental importance of commodity price stabilization for the success of any economic policy in Africa, and remain firmly convinced that the conclusion of international agreements on commodities within the framework of the UNCTAD Integrated Program is one of the keystones for true international economic cooperation.

We recognize the economic difficulties and rising unemployment in the industrial countries, but we feel that these difficulties should not be used as a justification for the spread of protectionism. Trade restrictions have intensified since our last Meeting and have created tensions in the multilateral trade system. The industrial countries have adopted a number of restrictions. Experience shows clearly that these measures have an adverse impact on the global adjustment process. In view of this, it is imperative for the industrial countries to take decisive steps to open up all their markets to products from the developing countries.

Given the urgent requirements of development and the persisting problems of adjustment, the external capital needs of the LDCs will continue to grow. In this connection, the current volume of official development aid and the future prospects for this category of assistance are a source of great concern to African Governors, as a number of donor countries have indicated that economic difficulties at home compel them to cut back their aid programs. According to the Development Assistance Committee of the OECD, official development aid fell from 0.38 per cent of the gross national product of the industrial countries in 1980 to 0.35 per cent. The volume of aid fell from $27.3 billion in 1980 to $25.5 billion in 1981. It is discouraging to note that this weakening of aid efforts has not spared the multilateral development institutions. . . . While aid finances only a small proportion of the investments undertaken in the LDCs, we must not underestimate its significant impact on the overall development effort. Africa’s dependence on external assistance is even greater, given that most African countries have very limited access to international capital markets. We feel that a substantial increase in the flow of aid to the poor nations of the region will complement their efforts to undertake meaningful adjustments. In this regard, the international community should give consideration to implementing the recommendation put forward by the World Bank, calling for a doubling of official aid in real terms to the countries of sub-Saharan Africa during the 1980s as a minimum to be exceeded. We are also highly appreciative of the efforts of those donor countries that have achieved or even exceeded the target of 0.7 per cent in GNP, and we urge the other countries to reach this target as rapidly as possible. Finally, the African Governors welcome the establishment by the Development Committee of a task force on concessional flows.

We wish to reiterate our views on the World Bank’s sub-Saharan African Report as reflected in the Dakar Memorandum of African Governors which was presented to the Helsinki meeting of the Development Committee last May. We commend the Bank for the efforts so far to implement the accepted recommendations of the Report and urge the international community to vigorously support those efforts in view of the dismal economic prospects of the subregion.

While discussing the difficulties facing multilateral development institutions, I would like to underscore the importance the African Governors attach to the African Development Bank. This institution has set up a program of activities for the period 1982–86 which requires resources in excess of what is currently available. We hope that this program and the decision of the AfDB’s Governors to open the capital stock to nonregional members will receive the necessary support from the international community. We also welcome the continuing collaboration between the Bank and the AfDB in the areas of cofinancing, training, and exchange of information. We hope that this cooperation will be strengthened and broadened to include new areas in the future. . . .

In reflecting on the role of the Fund, I wish on behalf of the African Governors to pay tribute to the Managing Director and the Executive Board, not only for the establishment of the supplementary financing facility but also for ensuring the takeoff of the facility early this year. We are also grateful to those countries whose contributions have made the facility a reality. However, the burden of interest payments on drawings under the enlarged access policy remains as heavy as under the supplementary financing facility. In order to ensure that low-income countries, most of which are in Africa, take maximum advantage of Fund financing, we believe that the possibility of a subsidy account along the lines of the supplementary financing facility to help reduce the costs of using the Fund’s borrowed resources under the enlarged access policy should now be explored.

We appreciate the efforts and initiatives made by the Managing Director and the Executive Board to conclude new borrowing agreements in order to ensure the successful implementation of the Fund’s enlarged access policy. The factors that led to the enlargement of access to the Fund’s resources are still with us today on an even greater scale. Given the smallness of quotas of many member countries in relation to the size of their external payments imbalances, it is important that the present access limit of 150 per cent of quota a year and 450 per cent of quota over a three-year period be maintained at least until quotas are increased to an appropriate level. The Fund should therefore not relent in its efforts to explore all borrowing avenues to make this possible pending the coming into force of the quota increases under the Eighth General Review of Quotas.

We believe that the Fund can still play a much greater role in the adjustment process if the hardening in conditions attached to the use of its resources is removed. We do not share the notion that the Fund should be a lender of last resort either. We encourage the Fund to continue its current policy of consultation to strengthen cooperation with member countries, so that those countries wishing to do so can have early recourse to Fund resources to avert serious consequences of delayed action.

We cannot but remind fellow Governors that in view of the expected persistence of large payments imbalances in the foreseeable future, the need for external financing will continue to be high. For the Fund to be able to play a significant role in the financing of payments imbalances, it will have to increase its lending capacity to a level compatible with the magnitude of expected imbalances, which means that the resources at its disposal must be increased. In this regard, the African Governors are agreed that, while Fund borrowing could provide an element of flexibility, it should not become a permanent or primary source of financing.

The occasion of the Eighth General Review of Quotas should be used to restore quotas as the primary element in the financial structure of the Fund. As a consequence, we share the view that quota increases should be large enough to make the Fund sufficiently strong financially so that it plays an effective role in the adjustment process during the 1980s, without necessarily relying on borrowed funds. While the African Governors strongly support a quota size of the order of SDR 160 billion, we are prepared to go along with a quota size in the range of SDR 120–125 billion in order to make progress and facilitate completion of the Eighth Quota Review exercise. Furthermore, the share of developing countries in total quotas should be increased substantially in order to reflect their financial needs and allow them a meaningful voice in the decision-making process, thereby enhancing the cooperative spirit of the Fund as an international organization. In this connection, quota formulas should not be concocted to jeopardize the interest of developing countries. I also wish to highlight the benign neglect of the question of basic votes during the current as in the previous quota review exercises. The importance of basic votes has been eroded with successive quota increases with adverse impact on the share of countries with small quotas in total votes. The matter should be taken up as part of the Eighth General Review of Quotas, which at any rate should be completed not later than December 1983.

The African Governors regret that there was not sufficient support for the Managing Director of the Fund to propose an allocation of SDRs for the fourth basic period which began on January 1, 1982. We note, however, that the Executive Board is considering all aspects concerning the role of the SDR in the international monetary system. While welcoming the content of such deliberations, we believe that all technical studies on the subject to date have established the case for further SDR allocations and that further allocations should not be sacrificed at the altar of further studies.

In view of the overwhelming arguments in favor of further allocations of SDRs, the African Governors strongly support the call by the Group of Twenty-Four for annual allocations of the order of SDR 12 billion during the fourth basic period. In lending our support for this modest annual allocation, we take into account the efforts that have been and are being made to improve the quality of the SDR and enhance its attractiveness as a reserve asset. Unless the declining trend in the share of SDRs in total nongold reserves is stemmed through new SDR creation, we might be giving the wrong signal that the objective of making the SDR the principal reserve is being abandoned.

Statement by the Governor of the Fund and the Bank for Sri Lanka—Ronnie de Mel

On this my sixth consecutive appearance before this assembly, I wish to express Sri Lanka’s appreciation to all those who have worked tirelessly to organize these Meetings. I also extend our thanks to the Government and the people of Canada for their kind hospitality and excellent arrangements which have made our sojourn here both pleasant and rewarding. In the same spirit, we welcome Antigua and Barbuda, Belize, and the Hungarian People’s Republic to our midst. Our tributes are due to the Managing Director of the Fund, Mr. de Larosière, and the President of the World Bank, Mr. Clausen, for their stewardship of the institutions they head.

For over four decades of the postcolonial period, developing countries have toiled to overcome their disadvantages. Our record of achievement is substantial. Undoubtedly, there is poverty, malnutrition, ill-health and all the other characteristics of a disadvantaged condition in most of our countries. But there is more than ample evidence to show that in agriculture, education, housing, health, population planning, institution building, financial management, and so on, we have both attempted and achieved a great deal. What is more, we have often—too often—done so in an adverse international environment.

As the World Development Report 1982 has said, my country, Sri Lanka,

. . . provides a dramatic example of adjustment to external shocks, and of the elusiveness of success in the face of continued deterioration of the international environment…. In 1980 Sri Lanka found itself with a volume of per capita GDP almost 70 percent higher than in 1960, a fourfold increase in real per capita investment … yet reduced per capita consumption. Sri Lanka represents an extreme, although perhaps not a unique, case of the terms of trade loss that can affect a specialized, raw-material-exporting economy. It also shows the difficulty of adjusting to continuous terms of trade losses despite considerable success in reducing consumption and increasing production.

In other words, for no fault of ours, we have found ourselves continuously condemned to shooting at a moving target. We would like the international community to recognize the record of countries like ours, and adopt new policies and measures that do not perpetuate our disadvantages.

Pessimism has become permanent in assessments of the international economic outlook. Faced with an unprecedented recession and inflation, the industrial countries have adopted deflationary policies, in the hope that their economies will revive to grow in an orderly manner thereafter. The downturn in economic activity and slow growth have resulted in unattractive export prices for many largely primary producing developing countries. As a result, the current account deficits of non-oil developing countries grew to an estimated $100 billion last year, and are at about the same level this year. High interest rates that result from deflationary policies have seriously raised the debt servicing burden of the developing countries, pre-empting more than one fifth of their export earnings. At the same time, official development assistance has declined. In practical terms, support for multilateral lending institutions has varied. Protectionist measures have blossomed at a time when the developing countries after years of sustained effort have begun to build a rudimentary export base. . . .

The Fund, meanwhile, has a fundamental role to play in smoothing the adjustment processes of many countries. It is disconcerting however to observe that the Fund’s role in the world economy has tended to decline progressively. For instance, whereas the sum of current account imbalances multiplied sevenfold between 1962–65 and 1976–80, Fund resources have expanded less than fourfold. The ratio of the average size of Fund resources to average current account deficits has fallen by one half.

We have always maintained that quotas should be the primary source of Fund resources. However, since the 1960s, quotas relative to world trade have declined sharply. The implications of this decline are far-reaching for balance of payments financing and for promoting international adjustment through the Fund’s programs. There is a very strong case for the restoration of the former relationship between quotas and world trade. We are aware that a very substantial quota increase is needed to restore the former balance. Given the need to reach an early consensus, we would urge that the quotas be at least doubled to about SDR 125 billion. As the Fund is basically an instrument of international cooperation, it should borrow only under extraordinary circumstances.

We have also maintained that the existing allocation of quotas, and the formulas for determining such distribution, have a built-in bias against developing countries. The distribution of quotas should take into account the case for maintaining a proper balance between industrial and developing countries. It is especially important to increase the share of non-oil developing countries, because their need for Fund resources is considerable. We would strongly urge a substantial equiproportional increase in quotas, with some selective increase to gradually redress the disparity between quotas and relative economic significance of countries.

The most fundamental innovation since the establishment of the Fund has been the creation of the SDR, a step toward the realization of the bancor and Unitas proposals of the founding fathers. The SDR was seen as the cornerstone of the international monetary system, but the recent interruption to allocations has seriously undermined the realization of this goal. The share of SDRs in total world reserves has declined very sharply in recent times. We would, therefore, join other members in urging those countries which are hesitating on this issue to agree on an early allocation for the fourth basic period, which will at least be equal to allocations of the previous period in real terms, pending a final resolution of this matter.

The current and emerging problems of balance of payments deficits, especially of the non-oil developing countries, underscore the urgent need to further enlarge access to the Fund’s resources in order to promote positive and sensible economic adjustment. In the past, we have urged that the current limits of enlarged access of 450 per cent of quotas be increased to meet the resource needs of developing countries. We would further urge that, pending a decision on the quota review, the enlarged access facility be further liberalized to meet emerging needs.

We are extremely concerned that several of the Fund’s stabilization programs, under the extended Fund facility and enlarged access policy, have recently been interrupted or canceled because countries have been unable to meet performance criteria. When countries fail to meet some performance criteria, largely on account of external factors that are virtually beyond their control, it is surely necessary to adjust the criteria appropriately so as to keep these countries within the fold of international structural adjustment, rather than drive them to the wall.

We in Sri Lanka, like many other developing countries, have benefited from the support provided by both the Bank and the Fund. We appreciate this. These institutions are not independent entities living and moving in a world apart. They are creatures of the international economic environment. And it is policymakers and politicians who shape and reshape that environment. The response, the toil, the hopes, the expectations, and the destinies of the world’s disadvantaged dictate that our reshaping of that environment should be creative and constructive. For the finance ministers of the world to do less would be for them to fail the people they represent.

Statement by the Governor of the Fund and the Bank for Greece—Gerasimos Arsenis

First of all, I should like to express our deep appreciation to the Government of Canada, to the authorities and the people of Toronto for their kind hospitality. I should like also to welcome the new members of the Fund and the Bank, and then I should like to thank very much the Chairman of this assembly, the Managing Director of the IMF, and the President of the World Bank for their invaluable contribution to the success of this Meeting.

This Meeting—as many other of our Meetings in recent years—is overshadowed by persistent and unresolved economic problems. Once again, this Meeting gives us the opportunity of expressing our deep concern about the state of the world economy, as well as our disappointment that we have not been able so far to agree upon a concerted program of action to get the world economy moving forward.

As regards the world economic situation, I need not dwell on recent developments since they are adequately discussed in the Reports of the Fund and the Bank. I should like only to stress that the near stagnation of economic activity and the unprecedentedly high levels of unemployment in developed countries, the virtual stagnation of world trade, the continuous decline in growth rates of developing countries, and debt servicing difficulties in several developing countries are all manifestations of a deep-rooted malaise, which this year has produced the worst economic crisis since the establishment of the Bretton Woods institutions.

To be sure, there has been some progress in several areas. For one thing, the inflation rates in several of the major industrial countries have been reduced. Furthermore, interest rates have recently declined. It is an open question, however, whether these welcome developments reflect successful adjustments in the underlying structure or whether they are transitory features associated with the depressed level of economic activity.

While there is widespread agreement about the seriousness of the situation, we have not as yet managed to converge on a coordinated program of action. Under the circumstances, small and medium-sized countries have no choice but to pursue their policies, taking the unfavorable conditions prevailing in the world economy as given. For those countries that experience persistent inflationary pressures and large external deficits there exists no real alternative other than to pursue vigorous adjustment policies which should place emphasis on reducing the government deficits and keeping labor costs and prices in line with those of competing countries. There is no doubt that adjustment in this direction must be pursued, but there are limits as to how far countries can go on depressing the levels of domestic activity. There is also another danger with this approach that I should like to stress. If each country is to pursue vigorously such policies we may witness a synchronized downturn, which could possibly lead to worldwide depression.

We all know that the only viable solution to our problems is to secure an investment-led noninflationary growth. As I said, in an interdependent world, it is difficult for a country—acting on its own—to succeed in this task when the world economy is in the doldrums. Yet what is difficult for a single country can be manageable if all countries act together in the framework of an international concerted action to promote investment and growth. I am fully aware, of course, that such a concerted effort presents a number of technical problems and issues of coordination, but I do not believe them to be insuperable if we are really committed to the cause of growth. After all, the Bretton Woods institutions were established in spite of the technical difficulties that surrounded their functioning, and because there was a moral determination that economic growth should be restored and that the financial and economic disaster of the 1930s should not be allowed to repeat itself.

In the face of the high risks that the present situation contains, I believe that it is necessary for the international community to pull together and design a concerted program of action to surmount our difficulties. The Development Committee or an appropriate body in the United Nations system could take up—with a sense of urgency—the question of working out an international plan for investment-led growth.

If international cooperation is to play a significant role in the search for an effective solution to the problems that besiege the world economy, we must equip the multilateral institutions with the required resources and mechanisms to carry out their tasks; viewed in this light the resources of the Fund and the Bank are grossly inadequate.

As regards the Fund, quota increases should remain the main source of its financing. Greece favors doubling of quotas so as to enable the Fund to play its role. It should be noted that the doubling of quotas will only help restore the historical relation of quotas to world trade.

The increase in the Fund’s resources should be accompanied by a more flexible and development-oriented approach to conditionality. In the past, heavy emphasis on short-term and domestic demand management has discouraged deficit developing countries from turning to the Fund. If there is no change in this approach, increases in resources could hardly help make the Fund the focal point of balance of payments financing and adjustment. I do wish to make it very clear, however, that what I am questioning here is not conditionality as such, but conditionality that may be applied inflexibly and without regard to the development needs of the borrowing countries.

A significant contribution toward meeting the liquidity requirements would be to pursue in a more determined manner our own commitment to make the SDR the principal reserve asset. It is indeed disappointing that no consensus has been reached on an allocation of SDRs in the present basic period.

One of the main inadequacies of the functioning of the international economic system has been that it has permitted a widening gap to emerge between the richer and the poorer countries. Moreover, the present economic crisis has placed an unduly heavy burden on the poorer countries. Such a situation puts an extra strain on the already unacceptable level of mass deprivation and human suffering among hundreds of millions living in absolute poverty.

It has been recognized by all that these countries would need an increased flow of concessional aid to help them undertake a program of economic transformation. Yet, the actual performance of the donors, taken as a whole, has been rather disappointing. The pressure to cut back government spending to reduce fiscal deficits in a period of crisis should not dampen the political will and commitment to assist the poorest among the less developed countries and their peoples. . . .

Statement by the Governor of the Fund and the Bank for Australia—J. W. Howard

At the outset, I join other Governors who have welcomed Antigua and Barbuda, Belize, and Hungary as new members since the 1981 Annual Meetings.

I need not attempt to describe here the sad state of the world economy. Few countries have escaped the onslaught of slow or even negative growth, rising unemployment, and stagnation in international trade. And, in many ways, the current world economic situation is even worse than that of the mid-1970s. All this raises the question as to why the world economies have not recovered more quickly from this, our second recession within a decade.

Of course, we have made progress in the sense that it is now generally agreed inflation must first be tamed if we are to establish a base for sustainable economic recovery. Indeed, some countries have made excellent progress in reducing their rates of inflation in the last two years. The peak inflation rate in 1980 was significantly lower than the previous peak in 1974. The signs are that the long-term upward trend of inflation, with the level being ratcheted up through successive business cycles, is being broken.

Australia believes that inflation is the fundamental enemy of sustainable economic recovery. The lower the rate of inflation any country has, the easier it will be for it to join in the world economic recovery when it comes, and, the lower and more uniform are rates of inflation across the board, the more robust and manageable that recovery will be. I strongly endorse the view of the Fund and the Interim Committee that it would be a grave mistake to relax now the efforts of recent years in controlling and reducing inflation.

The failure to date of the major economies to recover more quickly is not an indictment of anti-inflation policies. It is more a reflection of the fact that inflation has become so entrenched in our economies that we have to pursue our policies over an extended period of time before we can hope to peg inflation back, Inflationary expectations built up over many years cannot be eliminated overnight.

Another factor limiting economic recovery has been the failure to control wage pressures. Much remains to be achieved by virtually all countries in this regard if inflation is to be further reduced, and if the maximum benefit is to be gained for profitability, investment, growth, and, hence, employment.

Greater wage restraint is a critical challenge for many governments. It is so important because of the great danger that economic recovery, once it comes, will be quickly aborted by a resurgence of wage pressures. It is so difficult not only because it requires firm settings of fiscal and monetary policies—a necessary condition, as the Managing Director has said—but also because in some countries it calls for major changes in deeply entrenched institutions of wage determination and in the attitudes of all the participants in the wage determination processes.

I very much agree with the view of the Interim Committee that moderation of wage and salary increases has an important role to play in restoring profit margins, encouraging investment, and so promoting employment.

We can take heart, however, from the fact that in many countries monetary growth in recent years has been more subdued and less volatile than during the inflationary boom and bust of the 1970s. It is disappointing, however, that in the related area of fiscal policy, progress in reducing deficits has been slow. Admittedly, in present circumstances, enlargement of the fiscal deficit tends to follow automatically from the slowdown in economic activity. Nevertheless, it remains true that large fiscal deficits are counterproductive in restoring economic activity over anything but the short term. They can add to the height and volatility of interest rates, disrupt private sector economic activity, compound the debt servicing problems facing capital importing countries, and add to the volatility of exchange rates.

Rising trade protection has also been limiting economic recovery. A round of increased protection would only compound the world’s already serious economic problems.

Earlier this year, the Australian Government formulated proposals for international action to effect a standstill on all trade-distorting assistance to industry, and, following that, to wind back gradually the level of such assistance. We have been taking every appropriate opportunity to advance these proposals, and we shall go on doing so.

There is a general point here. Microeconomic policies are as important to sustainable recovery as are macroeconomic policies. We cannot expect our economies, even apart from the constraint of inflation, to perform well when their market sectors are gradually diminishing in relation to their nonmarket sectors, and when those market sectors are increasingly burdened by regulations, controls, and constraints over their operation.

The Fund is uniquely placed to encourage sound economic policies through its surveillance and financing activities. The world’s economic problems often manifest themselves in the balance of payments difficulties of individual countries and the Fund’s financing role then comes into play.

But its role is not just financing: it is financing and adjustment. The Fund has to judge, in discussion with the authorities of member countries and, as appropriate, with other providers of finance, what time can be afforded for adjustment, what needs for finance are associated with adjustment, what domestic policies best promote adjustment, and how much debt can prudently be carried while adjustment is proceeding.

In today’s difficult external environment, those can be painful judgments. There is encouraging evidence that adjustment programs worked out with the Fund, where adhered to, have been successful in restoring members’ external positions without notable detriment even to the short-term growth of output and consumption—while helping to establish the conditions for a fundamental improvement in the longer term.

The commercial banks have been expanding their role in the international financial system. It is important that their lending should be consistent with the adjustment programs of countries in deficit.

In the last year or two, private international lenders have increasingly associated their own lending with Fund adjustment programs. The Fund has also been asked more frequently to assist both creditors and debtor governments in debt rescheduling negotiations. Such coordination can contribute to the stability of international financial flows at the same time as it encourages sufficiently determined external adjustment.

It is therefore crucial for the Fund to have sufficient resources, through quotas, for it to continue assisting members in temporary balance of payments difficulties. It is arguable what numerical increase in quotas will be sufficient to sustain this role over the later years of this decade.

It is not necessarily a case of making the increase as large as possible; but my Government believes that a sizable increase in quotas in the Eighth General Review of Quotas is called for. . . .

September 7, 1982.

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