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Discussion of Fund Policy at Fifth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1982
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Statement by the Governor of the Bank for Iran—Hossein Nemazi

I would like to express my gratitude to the people of Canada for hosting this gathering, and to the Fund and the Bank staff for their endeavors to prepare this well-organized environment for our meetings. This is a great setting which provides an opportunity for a large number of members of the world community to be represented here—those who are expected to be primarily concerned with economic problems faced by the masses of the poor and underprivileged countries. In spite of all the glory and magnificent setting of our gathering, unfortunately there are countries represented among us whose policies do not seem to be oriented toward helping the oppressed masses of the world.

It would be naive to expect a better future when we accept, as full members of our institutions, the representatives of a regime which has embarked on total destruction of another country and annihilation of a whole nation, while we do not accept representatives of those people who are being ruthlessly uprooted by that regime to sit among us, even as observers. We are surely being observed and judged by the oppressed people of the world. Their judgment is always just, for it rests only on tangible and harsh realities of their lives, realities that have become even harsher during the initial years of the new decade. The last two years have not given them any comfort, and the prospect for the years ahead is even bleaker.

Our failure to move toward a better arrangement for the world economic relationships has contributed greatly to this discouraging future. We began the present decade with a year in which the growth of the real output in developing countries dropped to almost one third of the preceding year’s level. It appears to be followed by profound stagnation in 1981, which seemingly is more severe than in any previous year in the postwar period. Last year was one in which the development of the world economy as a whole came to a virtual halt. Once again it was the poor who bore the brunt of the burden, as the per capita output of most of the developing countries experienced a decline for the first time during the period after World War II.

The first year of this decade witnessed a halt to the growth of world trade, while last year it started a decline in real terms. The prospect is hardly better for the current year. All who have studied the recent developments in trade policies of major countries conclude that “the rise in protectionist pressures is worrisome” and increasingly so, especially during the last 18 months. All fear a protectionist vicious circle, which is highly probable in a setting of slow economic growth and highly interdependent economies. It is obvious that the group of countries suffering most from those prohibitive trade barriers are low-income nations with a relatively large share of their national income linked to foreign trade and with near total reliance on the export of one product as their main source of foreign exchange earnings. This is even more crucial in view of their worsening terms of trade.

The recent moves toward protectionist policies were partly due to exchange rate movements, since unfavorable rate changes in an environment where there is virtually no control over speculative dealings forces the deficit countries to apply trade restrictions. The main victims of exchange rate instabilities are developing nations with little or no influence over their international foreign exchange markets. This not only complicates the management of their economies but also leads to uncertainties in their foreign trade, results in higher inflationary pressures, and causes inefficient allocation of their resources.

The exchange rate instability originates in the industrial countries as a result of currency manipulation by international speculators and central banks of major economic powers, while developing countries suffer the consequences. They are further penalized under the so-called surveillance policies once they come to us asking for help. The system of floating exchange rates was heralded as one of the triumphs of the effort to reform the international monetary system. After relatively long experience with this system, however, it has become increasingly clear that even if there are benefits to derive from this textbook panacea, there are none for typical developing countries. They are basically unable to gain from exchange rate movements. This is primarily due to the rigidities of supply and low demand elasticities for their internationally traded goods. Devaluation of their currencies therefore usually triggers a new wave of inflationary pressures, while revaluation makes their already difficult task of marketing their goods even more troublesome.

The basic question here is why in the last decade could the underdeveloped countries more easily cope with recessions, trade barriers, and exchange rate fluctuations, and yet maintain their growth momentum? That was only because of the fact that relatively more generous sources of easy-term finance were available to help them through the difficult periods. Now, in the last three years, not only have the value of official flows in real terms declined considerably and the conditions attached to the Fund loans become more stringent but also the resources of money and capital markets have grown out of less developed countries’ reach. This is because the borrowers are faced with mounting debts—which make further borrowing difficult and costly—while at the same time an unprecedented rise in the interest rates during the last two years has made their new borrowings tremendously expensive. One study shows that each percentage point increase in LIBOR adds about $2 billion to the developing countries’ burden of yearly interest payments. One of the major factors creating such a heavy burden is the policy of funneling these funds into the most unproductive and destructive of all human activities, that is, arms production and purchases.

One positive and urgently needed step is a comprehensive reform of international monetary and financial relations. Any effort toward this end, however, will be countered by developed nations as long as the truly needy countries have such little voice in the decision-making process of the two most important financial institutions, that is, the Fund and the Bank. We still distribute seats and voting power in these institutions in such a way as to ensure that no decision could be made without the consent of the industrial powers of the West. No example is more typical of an oligarchic and unjust system.

And all oligarchies have historically shared the same fate. If such systems are not corrected internally, there will certainly be external forces to change them. The Islamic Revolution in Iran was just an example of such a move by the masses of oppressed people in a society that had suffered for ages from the intransigence and arrogance of a ruling class. This regime, backed by the imperialist powers of the East and the West, had turned a blind eye to the call for economic and political independence and religious and other freedoms by our underprivileged people. Our oppressed people vividly demonstrated that no matter how well-equipped the oppressors are with sophisticated and modern weaponry, they will not be able to stand against the will of the masses.

The Islamic Revolution in Iran from its very inception has been facing tremendous obstacles and hindrances that were created primarily by those who saw in the collapse of the former regime an end to their satanic powers and illegitimate domination over the human and natural resources of our country. They have, in fact, faced the bitter reality that the popular movement in Iran not only heralded the end of the human exploitation within the country but it has also ushered in a message of salvation for all the oppressed masses of the region and of the world. They have, as expected, resorted to all possible artifices to recapture their lost interest and maintain their exploitative positions in other countries. This was not the first time, however, that the heroic Iranians have been put to a historic test of withstanding immense economic and political pressure to save their identity, though it was one of the few times that they relied on their true inner strength emanating from their profound faith in Islam.

The political turmoil that prevailed during the first year after the Islamic Revolution was aggravated by the application of a host of punitive economic and other measures against our nation to the extent of an illegal blockade of our financial assets. We were supposedly protected by virtue of our membership in an organization whose charter discourages and prohibits the application of discriminatory financial measures among its members. Regrettably, however, the Executive Board of the Fund refused even to hear our grievances against the illegal actions of the U.S. Government. This may be regarded as a clear proof of our earlier claim that the Fund, in its present composition, is unable to take any effective measure against the will of its major industrial shareholders.

The punitive actions of the imperialist powers against our Islamic Revolution finally culminated in an all-out military invasion of Iranian territory on September 22, 1980. The Iraqi aggression, backed by its accomplices in the region, and with the implicit support of both superpowers, has brought substantial damage and destruction to our country in terms of both human and material losses in the vain hope of destroying our Islamic Republic. The committed Muslim people of Iran—in much the same way as they stood against the former regime which was armed to the teeth—have put up such a heroic resistance against the invading Iraqi forces that they have astonished the outside world and made the enemy flee in such haste that it has left its army in total disarray.

With the help of Almighty ALLAH, the decisive leadership of Imam Khomeini, and the ceaseless efforts of our determined people, we will shortly conclude our defensive actions. The task of economic reconstruction before us, which we have already started to tackle, is one of such gigantic dimensions that it calls for the deployment of all our financial and human resources.

Amid all these problems and difficulties, and in spite of them, we have succeeded in concluding vast numbers of development projects, particularly for the most economically neglected regions of our land. Government organizations and revolutionary institutions are involved in thousands of development projects ranging from a vast expansion program of provincial road networks to electrification of a great number of remote villages and the rapid improvement of our post and communication facilities. These have all become possible through putting all of our financial resources, including the oil income, into the service of the most underprivileged people of our nation. We follow an independent oil export policy which refrains from dumping this depletable, valuable resource into the markets for the sake of accumulating highly vulnerable liquid assets.

Our foreign trade policy is not any different. We are totally aware of the fact that for our development projects, and to supplement our domestic supply, we need to trade with the outside world. We are therefore ready to expand our trade relationships with all those partners who may be willing to deal with us on a just and equitable basis, free from the kind of exploitative relations formerly experienced.

A great number of world financial community leaders, some of whom may be present here, will testify—as did the esteemed President of the Bank in a public comment—to the effect that in spite of all the problems and hardships we have been facing during recent years, we have never failed, even in one instance, to honor our financial commitments abroad. This was done despite all the unfair, negative, and damaging credit reports occasionally published by some aligned international media and credit institutions.

May ALLAH give us, and everyone around us, the strength to do our duty toward all His creatures, independent of any and all worldly corrupt powers, and relying solely on His SUPREME POWER!

Statement by the Governor of the Bank for Belgium—Willy De Clercq

1. I should like at the outset to thank the Government and authorities of Canada warmly for the hospitable welcome extended to our many delegations.

I should also like to say how pleased I am to welcome here the representatives of the new member countries joining the Fund and the Bank since our last Annual Meetings, in particular the delegation of the Hungarian People’s Republic, whose presence serves to stress, if it were necessary, the universal nature of our institutions.

2. Our Annual Meetings are once again marked by a significant absence, that of economic recovery, impatiently awaited by all.

Underemployment has worsened in almost all the industrial countries. Most of the non-oil developing countries are experiencing significant balance of payments deficits, and several of them have an alarming level of indebtedness.

Efforts to control inflation, which must succeed if there is to be a return to sound, lasting economic growth, have continued during this year of continuing world economic stagnation.

Nevertheless, while inflation rates have declined to some extent in several industrial countries, including the largest ones, this decline is unfortunately not always sufficient and certainly not widespread enough. Therefore, cautious monetary policies are still required. Any premature or excessive relaxation would only jeopardize the results which have thus far been obtained with such difficulty.

For many countries, adjustment must take the form of an in-depth economic reform, aimed simultaneously at restructuring and improving the efficiency of the productive sectors, reducing government budget deficits, and restoring external equilibrium without recourse to protectionism. The required measures are particularly painful because of the fact that they have to be implemented during a period of extremely weak economic growth. Each of the countries concerned bears the major responsibility for the required adjustment effort, and, unfortunately, the most disadvantaged cannot escape it.

3. As far as Belgium is concerned, the Government introduced a policy early in the year designed to restore securely the country’s economic health. Our basic objectives are:

  • —to restore the profitability and competitiveness of our enterprises, for only then can we expect a revival of investment and a lasting improvement in employment;

  • —to reduce steadily our budget deficits;

  • —to restore the current balance of payments to equilibrium rather rapidly.

The chief measures taken in pursuit of these objectives include budget restrictions introduced in 1982 and planned for 1983, income restraints and partial disindexation of income, and adjustment of our currency’s central rate within the European Monetary System, accompanied by various supporting measures. Introduced in a very unfavorable economic context, and requiring sacrifices which will be equitably distributed, this policy must be firmly pursued for the next several years if it is to yield its promised benefits. This is the clearly expressed intention of the Belgian Government.

4. In an increasingly interdependent world, individual efforts must be undertaken in a framework of international cooperation, particularly at a time when economic growth is weak or nil.

The persistence of extremely high real interest rates has, without doubt, curtailed investment and severely aggravated the debt burden of many countries. Fortunately, the rates have declined in the last few weeks in the United States. It is vital not only that this trend take on significant breadth, but that it be lasting, thus enabling other countries as well to move in the direction of a de-escalation of interest rates, though of course with all necessary caution. The steps taken or planned in several major countries to reduce budget deficits and inflationary expectations will facilitate the adoption of a new, somewhat less restrictive orientation of monetary policy. We can only welcome these developments.

5. On the multilateral plane, the Fund must be in a position to help strengthen international cooperation and assist its members, especially the most disadvantaged among them, in their adjustment efforts.

Four specific areas demand special attention, in my view:

a. First, the Fund must have sufficient resources. The quotas must, I repeat, continue to supply the major part of these resources. I am pleased to note that the technical analysis required for the Eighth General Review of Quotas has reached an advanced stage and that discussion in the Board is well under way.

I believe that work should now continue in a more sharply defined framework, with more precise policy guidance.

The latest developments in world finance strengthen my belief that the quota increase must be substantial—certainly much larger than previously thought. In the present situation, a doubling of the total quota might thus be deemed reasonable, justified both by the level of members’ needs and by the need for the Fund to play effectively the role assigned to it in adjustment financing.

In determining the division between the proportional and selective segments, we should take into account both the need for a large selective adjustment, recognizing the changes that have taken place in the different economies, and the need to continue providing adequate representation for the different country groups. The Board must press steadily ahead to achieve agreement in principle on all important questions within the next few months. We could then be in a position to meet the end-1983 deadline we set in Helsinki.

b. Second, the surveillance of exchange rate policy remains an important task.

Whether because of very short-term fluctuations or because of large-scale cyclical changes, exchange rate developments in recent years have been a cause of constant concern to many countries.

I am convinced that such variability generates inefficiency and reflects an overly emotional attitude on the part of the exchange markets. Belgium strongly favors a more conscious, coordinated international effort in this area. It unreservedly supports the efforts of the Fund’s management to strengthen and expand surveillance of exchange rate policies.

In this connection, Belgium welcomes the readiness expressed by the major countries at the Versailles summit to strengthen their cooperation with the Fund in the exercise of its surveillance and to expand that surveillance on a multilateral basis. It is vital that this statement be given concrete effect, leading to the establishment of a more stable system that reduces uncertainty and thereby, I believe, greatly stimulates international trade.

c. Third, the length of the economic crisis cannot help but strengthen protectionist pressures which, if they should intensify and spread, would entail an irremediable loss for the international community. The Fund must play a part in the effort to liberalize trade, paying special attention to commercial policy in the course of its consultations. I am convinced that it would be highly beneficial to strengthen cooperation with GATT in this area.

d. It should be possible to carry out the three foregoing tasks, which I deem important and urgent, without neglecting the problem of the role and status of the SDR. The examination of this subject, already started by the Board, should continue in the future.

Any improvement in the quality of the SDR, chiefly with respect to its liquidity, must be judged in light of the future role desired for it in the international monetary system.

Belgium continues to support strongly an enlargement of the SDR’s role, and thus an improvement in its financial characteristics and an expansion of its usability, particularly by the Fund itself.

6. In these difficult times, especially for the low-income oil importing developing countries, it is crucial that the Fund’s activities be supplemented by maintenance of the World Bank’s work in the development field and by its unflagging efforts. . . .

7. In 1981 Belgium, despite its budgetary and balance of payments problems, increased the level of its disbursements of official development aid from 0.50 per cent to 0.59 per cent of its gross national product. In addition, the initial results of execution of its aid program give grounds for hope that its performance will improve in 1982.

Though Belgian aid to the developing countries traditionally focuses on the poorest among them, we also attach great importance to so-called nonconcessional flows, which have grown remarkably in both absolute and relative terms.

8. The time has come to conclude my statement.

The crisis facing our economies is of unparalleled intensity and duration.

Despite a few noteworthy exceptions and the lessons of the past, growth rates are and will remain unsatisfactory. As the persons responsible for our countries’ economic and financial policies, we must reject the idea that the crisis is inescapable. There exist methods and instruments to attenuate the worst effects.

It is up to us to pursue the needed adjustment measures unswervingly and to maintain our support for the multilateral institutions, such as those of Bretton Woods, so that they can play fully the role for which they were created.

I hope that by the time of our next meeting next year we will be able to point to convincing evidence of a recovery.

Statement by the Governor of the Bank for Israel—Moshe Y. Mandelbaum

I deem it an honor and a privilege to address this distinguished assembly on behalf of Israel and join with my fellow Governor both in welcoming new members to the Bank and the Fund, and in expressing our appreciation for the gifted leadership of Mr. Clausen and Mr. de Larosière.

As the recent World Economic Outlook indicates, the industrial countries are, for the most part, making some progress in containing inflation. Unfortunately, this is being achieved at the cost of diminished economic growth and mounting unemployment, so that, if I may coin a phrase, “stagdisflation” appears to be replacing stagflation.

Declining rates of economic growth and mounting unemployment in many instances are reflected in a contraction of tax revenues at a time of expanding government expenditure for social programs. Budget deficits are leading governments into competing with the private sector for available funds. And, as a corollary, there are fears that deficits will be monetized and that interest rates will remain high. These factors, coupled with rigidities in the labor market and inflexibility in wage structures, preclude the environment necessary for reactivating private investment and revitalizing economic growth. Confronted with this situation, many governments find themselves in a vicious circle. It is vicious not only because it perpetuates problems, but especially because the price of unemployment paid for abating inflation is socially unacceptable.

We have always believed in Israel that unemployment should be avoided as much as possible. In almost all the years of its existence Israel enjoyed low rates of unemployment. (In the year 1981 the unemployment rate was only 5.1 per cent.)

To overcome three-digit inflation without recourse to unemployment we have embarked on a long-term policy of gradually reducing budgetary deficits. We do this by reducing government expenditure and at the same time encouraging the growth of the private sector. The monetary and fiscal policies have been modified to meet these ends.

The growth of the business sector (which in 1981 amounted to 5.3 per cent) will broaden the tax base of the economy and will increase tax revenues.

There are good chances for this policy to succeed, as Israel enjoys an exceptionally high rate of private savings (in 1981 it was close to 30 per cent). Israel maintains such a high rate of savings because of its comprehensive system of indexation.

In the year that has elapsed since our last Meeting, the problems confronting developing countries in general and oil importing developing countries in particular have become more acute. Although oil prices have declined recently, they are still six times higher than a decade ago. While developing countries’ oil bills remain excessively high, declining demand for their exports has rendered their balance of payments problems even more serious. It is important that the size of the Fund be adequately adjusted to assist these countries. It is, therefore, all the more important that the Eighth General Review of Quotas is rapidly completed and results in their substantial increase. . . .

I should like to take this opportunity to reiterate my country’s readiness to place its development experience—in agriculture, training, and alternative energy—at the disposal of all other developing countries.

I should now like to express my conviction that our own and other embattled regions of the world will soon attain peace. Because so many areas of the world are torn by strife, human and material resources continue to be diverted from social and economic development, where they are truly needed. Let us hope that the day is not too distant when all peoples will live in peace and harmony.

In closing may I say that we are most fortunate in the choice of Toronto as the site of this year’s Annual Meeting. Its scenic and architectural beauty is amply matched by the hospitality of its people and we are grateful for their warm welcome.

Statement by the Governor of the Bank for Nepal—Yadav Prasad Pant

It is my pleasure and honor to represent my country once again in the Annual Meetings of the International Monetary Fund and the World Bank held in this beautiful city of Toronto. I would like to express my delegation’s sincere appreciation to the Government of Canada for the warm hospitality extended to us, and for the excellent facilities provided for the Meetings. I should like to take this opportunity to welcome and greet the distinguished representatives of Antigua and Barbuda, Belize, and the Hungarian People’s Republic who have become members of our two institutions.

Before I proceed further, let me express my profound gratitude to His Excellency Prime Minister Pierre E. Trudeau for his inspiring address to this Meeting calling for concerted action by all member countries to overcome current economic, monetary and trade problems. May I offer to you, Mr. Chairman, my delegation’s sincere thanks for your opening address which set the tone of our deliberations, and to Mr. A. W. Clausen, President of the World Bank, and Mr. J. de Larosière, Managing Director of the Fund, for their untiring efforts for the cause of economic development and cooperation among the member nations.

The world economic situation continues to be afflicted with serious problems, such as slow or negative economic growth, high inflation, a high level of unemployment, and large external payments imbalances. The Annual Report 1982 shows that real growth in the aggregate GNP of developing countries suffered a setback in 1981, dropping to 2.2 per cent from the 5 per cent level in 1980. A decrease in net disbursement of ODA coupled with declining prices of major exports of developing countries has further aggravated their problems. As a result, the combined current account deficit of the developing countries amounted to $110 billion and the debt service ratio of oil importing developing countries increased to 19.3 per cent in 1981. The effect of sluggish growth of demand and output in industrial countries has had an adverse impact on the economies of the developing countries. The industrial countries are also experiencing markedly slow growth. In fact, 1982 is likely to be another year of slow growth which would make the 1980–82 period the most prolonged economic slowdown in the industrial countries since the 1930s. The World Development Report 1982 has rightly stressed the responsibility of the major industrial economies for bringing about a recovery in the world economy by raising their own investment and output, eschewing increases in trade barriers, allowing capital to move more freely among nations, and raising their contributions of aid to low-income countries. . . .

While the large industrial economies are struggling through the recession, its impact on export earnings as well as the effect of high interest rates on the debt burden of the developing countries has led to severe deterioration of their economic capabilities. The current account deficit of the oil importing developing countries is mounting to almost unsustainable levels, and even the oil exporting developing countries moved from a balance on current account in 1980 to a deficit in 1981. The deficit of the developing countries will continue to remain high in coming years if the volume and prices of their primary commodity exports continue to decline. In the face of such a difficult situation, the low-income countries need all the more net capital flows of official development assistance in support of their development efforts. I would like to stress that the proportion of official concessional lending to total external debt of low-income developing countries should not be allowed to decrease, instead, it needs further enhancement in the coming years. No doubt, investment and economic growth are liable to be obstructed by a shrinkage of concessional development assistance, in addition to several other emerging problems in recent years. . . .

The World Development Report 1982 has given the grim warning that prospects of most of the least developed countries remain bleak and many of them are in a situation even more desperate than that of the previous year. It deserves to be noted that their main escape route from the poverty trap could only be the intensive development of agricultural output and productivity and an increase in farm income. In this context, I would like to recall the recommendations of the UN Conference on the Least Developed Countries held in Paris which adopted the Substantial New Program of Action. In order to implement this Program, concessional assistance should be made available on a priority basis.

At a moment when many of us are facing economic difficulties, the role of the Fund to promote international monetary cooperation and help its member countries cope with the difficulties generated by the substantial increase in the magnitude and complexity of payments imbalances becomes all the more important. The Fund should continue to improve its liquidity and resource position to enable the Fund members to obtain resources at comparatively low cost, especially in the light of changes in the international economic circumstances and the resulting growth in demand for Fund drawings. There is an urgent need to reach agreement on the expansion of Fund resources on a permanent basis because financing through borrowing provides only temporary relief. Therefore, I would like to reiterate that the total quota should be raised to a level at which the Fund’s liquidity position would enable it to meet the challenges of the 1980s in terms of financing the balance of payments needs of its members. The Eighth General Review of Quotas should also be used as an opportunity to achieve a more equitable and balanced distribution of the voting power and representation among major groups of countries.

It is disheartening to note that we have not yet reached a consensus on further allocation of special drawing rights. The current recessionary trends in the world economy have thrown a disproportionate burden on the payments position of the developing countries’ economies. In respect of the conditionality on Fund borrowing, I would like to stress that it must be relevant to the need of the present situation. It has to move away from its traditional, almost exclusive, focus on instruments of short-term stabilization.

Much has been said of the need for adjustment by developing countries themselves. But, I believe that adjustment is not a prescription merely for developing countries alone; all countries must adjust in a positive way to the ever-changing economic environment. The developing countries are greatly concerned about the unfortunate effects on adjustment programs, particularly of those countries whose economies depend on the export of primary commodities.

The steady expansion of output and reduction of unemployment can be achieved only when necessary measures are pursued on a sustained basis to reduce inflation, interest rates, and similar impediments. The importance of structural policies and special programs designed to encourage production and employment is well recognized.

Before I conclude, I would like to briefly touch upon some aspects and problems of the current economic situation of Nepal.

This is the third year of our Sixth Plan. The Plan envisages a substantial increase in development outlays—the ratio of investment to GDP is expected to reach about 22 per cent. The Sixth Plan also places more emphasis on the promotion of private investments through liberal economic and industrial policies. The Sixth Plan has emphasized investments in programs designed to increase production at a faster rate, to promote productive employment, to ensure the availability of basic needs, and to promote health services, primary education, rural development, and population planning. The target of the Plan is to achieve a GDP growth of 4.3 per cent per annum. We are making strenuous efforts to mobilize additional resources internally. In the process of resource mobilization we could increase government revenue by 21 per cent in fiscal year 1981/82, and it has been estimated to increase by 38 per cent in the current year, that is, fiscal year 1982/83.

His Majesty’s Government has recently launched a special economic program which is designed to increase production on one hand and meet the basic needs of the people on the other. This will be brought about by channeling the flow of resources toward the productive sector and mobilizing people’s participation in development works. In addition, determined efforts will be made to ensure speedy implementation of development projects. Under this program, a new trade policy has been adopted, which seeks to promote export trade and encourage domestic and foreign private investment in the industrial sector.

The year 1981/82 was comparatively a good year. GDP increased by 4.1 per cent, the urban price index by 10.4 per cent, and government revenues by 21 per cent in the year. The overall balance of payments remained favorable despite a huge trade deficit. However, the difficult topography and land-locked position of the country have caused a slow process in our development efforts. The sharper increase in the prices of our imports than those of our exports has had an unfavorable impact on our trade. Apart from these shortcomings, natural calamities such as drought and flood in the past have seriously handicapped the speed of our economic development.

Unexpected delay in the monsoon this year has become a matter of serious concern to us as expressed by other neighboring countries of this subcontinent. Delay in the monsoon has already created a drought situation in the hilly region of the country where the main food products are harvested before the winter season. This situation is bound to create imbalances in our food supplies. His Majesty’s Government has taken several measures to deal with the situation, which include a crash program to augment winter crops, a complete ban on export of foodgrains, and institutional arrangements to procure and distribute foodgrains in deficit districts. To cope with this drought situation in the country, His Majesty’s Government, in addition to procuring internally, this year has been seeking food assistance from external sources.

Despite these natural adversities, Nepal’s development strategy, under the wise and dynamic leadership of our Sovereign King Birendra Bir Bikram Shah Dev, is aimed at benefiting the people through fundamental and structural changes and enhancing development programs which are manifest in the Sixth Plan. Nepal is making efforts to improve its growth rate, decrease inflationary pressures, and bring stability in the economy through effective fiscal and monetary policies.

In conclusion, I would once again like to pledge our support and cooperation to further strengthen the constructive role of the Fund and the Bank in improving the economic welfare of all the member countries.

Report to the Boards of Governors of the Fund and the Bank by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee)—Manuel Ulloa Elías

The world economic outlook and the development prospects for the international community have worsened significantly over the past year. In the industrial countries unprecedented inflation and very high interest rates resulting from large fiscal deficits forced tight monetary policies to curb the inflationary forces. The resultant constraints in growth averaging less than 1.0 per cent annually in the 1980–82 period have produced conditions of lingering world recession with high and still rising unemployment. This unfavorable external environment is having a profound effect on the performance of the developing countries.

The recession in industrial countries has reduced export earnings of the developing countries both from manufactures and, in particular, commodities that have recorded their lowest levels in the last three decades. The resultant severe deterioration in their terms of trade, the dramatic increase in their combined current account annual deficits of around $100 billion for the third year running, reduced aid flows, and excessive short-term foreign borrowings have limited the possibility of commercial bank financing in the context of high and volatile interest rates. The large debt repayment burden plus the above-mentioned factors have all combined to create a crisis of very serious dimensions in their development efforts and growth prospects. In fact, the 1981 growth average of developing countries is the lowest in several decades and signifies an exceptional situation of decline in real per capita income in many developing countries.

It is against this grim background that the Development Committee in its two meetings held during the year—one in Helsinki in May and the other concluded here in Toronto this Sunday—considered a number of important development issues and some urgent matters relating to the improvement in capital flows to, and their efficient use in, developing countries. The level of lending operations of the multilateral development institutions and the need to increase their lending capacity, IDA’s difficulties, additional lending for energy, increased cofinancing with public and private sectors, the serious economic situation in the sub-Saharan African countries, and the follow-up on the Group of Twenty-Four and the Brandt Commission proposals are the important specific issues which received special attention.

The Committee noted with special concern that the situation and prospects for the poorest developing countries are particularly bleak in the period ahead. While it was important that they review their adjustment and domestic policies and programs, there is no denying the fact that they will also need additional outside assistance on concessional terms. It is to be remembered that the net capital receipts of the low-income oil importers did not increase at all after 1975 in real terms. Real ODA receipts by this group of countries in 1980 were lower, in fact, than the level reached in 1975. In the circumstances, urgent measures to reduce strains on their economies are required. It was in this context and in the context of the requirements for structural adjustments, energy development, and the needs of new members, particularly China with its large population, that the Committee devoted special attention to the crisis now faced by IDA-VI and to the problems of the period beyond. IDA is the single most important multilateral source of concessional assistance to the poor developing countries and the recent Bank study, IDA in Retrospect, has shown the invaluable contribution it has made in the development of this group of countries.

In the critically important area of concessional flows, a significant decision by the Committee relates to the establishment of a special Task Force composed of industrial donor countries, OPEC, and developing countries to carry forward and widen the continuing study of the problems affecting the volume and quality and the effective use of concessional flows in the shorter and longer terms. I trust member governments will take special interest in the work of this important Task Force which is scheduled to have its first meeting around the middle of next month. We all hope that its work will contribute to the attainment of the objectives for which it has been established.

During the year the Committee concluded its deliberations on the Bank study for accelerated development in sub-Saharan Africa, which accounts for 20 of the 31 least developed countries. The main focus was on the policies and financial issues facing the sub-Saharan countries. The Committee urged the Bank to move expeditiously to assist these countries to form special programs of action and, taking account of the Dakar Memorandum of March 1982, to continue its dialogue with donor countries in order to mobilize the flow of aid in real terms necessary to support the agreed programs of action.

In the area of nonconcessional flows, the Committee considered the final report of its Task Force which had extensively covered this subject in all its aspects. It recommended a number of measures that could be taken to stimulate additionality in the flow of nonconcessional resources to the developing countries. These included recommendations for increasing the future lending capacity of the Bank and other multilateral development institutions through an increase in their capital with small or no paid-in element or through carefully managed changes in their statutory lending limits, resumption of portfolio sales, provision of various techniques of guarantees, and higher priority to commercial cofinancing.

The Committee has asked the Executive Directors of the Bank and the regional banks to consider the recommendations of the Task Force, taking into account the legal and procedural implications, and report the outcome to the Committee in due course.

Of the subjects dealt with by the Task Force, cofinancing in fact was already receiving special attention by the Bank. The Bank’s paper on the subject is to be considered by the Bank Board in the near future. It presents a trial program to test out in the private financial markets a range of new instruments for cofinancing with commercial banks to provide for an increased and more stable flow of private capital on improved maturities for the borrowing countries. This will be, hopefully, one of the new additional sources of financing to supplement existing and other possible new sources.

The lending operations of the Bank, the regional banks, and other multilateral development institutions and their future role in the changed circumstances of the 1980s was another important subject which engaged the Committee’s attention during the year under review. There was general recognition that the strengthening of the multilateral development institutions (MDIs) had become indispensable to supplement the flow of private capital to the developing countries to help meet their increased financing needs and to support their internal structural adjustment policies and development programs. The Committee has asked the Bank and other MDIs to continue their study of the scope for expansion in real terms of future lending on reasonable terms to developing countries through the decade of the 1980s.

The importance of equity financing, in the light of existing conditions, especially in Latin America, becomes more evident, and we believe efforts should be made by developing countries to encourage equity participation in those areas where local capital cannot meet their development requirements or in order to obtain technology or managerial transfers which are essential to their growth. In this context, the International Finance Corporation, which has already made an important contribution, can play a more significant role in identifying projects and acting as a catalyst among local, public and private, and foreign investors.

The Committee’s discussion of energy at the Helsinki meeting reflected the global nature of the problem and the international community’s keen interest in a general approach to the subject encompassing conservation and the development of both conventional and nonconventional sources of energy. The Bank has been able to increase the percentage of its total lending to energy from 15 per cent in fiscal year 1977 to 25 per cent in fiscal year 1982. This percentage cannot be increased or perhaps even sustained without cutting into other priority sectors. The search for new approaches to provide additional funds for this critical area has failed so far to attract broad support from some of the members expected to contribute the bulk of the capital. The Bank, however, continues to explore whether additional sources of finance can be identified to meet the pressing development needs for this important sector.

The recommendations contained in the report of the Brandt Commission and in the Group of Twenty-Four’s Program of Immediate Action to enhance the flow of resources to developing countries have received considerable attention by the Committee over the past two years. The Committee noted that both the Fund and the Bank had already implemented some of the recommendations applicable to them and are continuing their consideration of other issues relevant to the Committee’s work.

These in brief are some of the important development issues to which the Committee addressed itself during the year and of which details are provided in its Annual Report. Some progress has been made, but much, much more needs to be done in view of the very serious economic and financial situations which we all face today. The pessimism surrounding the current recession should not obscure the achievements of the developing countries over the past 30 years. We can repeat and, indeed, improve on that performance.

There are some regions, Latin America for instance, that face special problems today. It has a very large foreign debt, concentrated in some of the larger countries. In many cases, it is poorly structured and could not be met under present conditions if the availability of new adequate financing were to be severely curtailed, thus severely crippling the minimum requirements of their populations.

There is no question about the creditworthiness of these countries; they have ample resources of solid basic value in the foreseeable future. At the same time they are ready and willing to take corrective measures to adapt their growth to the realities of their economies. They have learned the painful lessons of the recent past.

It is time for prudence, and the situation requires intelligent, serious thinking, and imaginative approaches with a view to finding a fair and rapid solution to the crisis. Realism is indispensable; no one should expect miracles or that there is a possibility of stopping the normal lives of their populations without creating the real danger of social upheaval and political storms that could affect the stability of an area which is vital to the well-being of the world.

I am convinced that the Fund, as well as the Bank, the Inter-American Development Bank, the principal developed countries, as well as the international community, can play a key role in the negotiations of solutions that need to be found soon for the region. They can create the environment and the circumstances which could help Latin America to resume its growth and progress in a framework of sounder and stable economic policies.

The present world situation is obviously unacceptable and need not be endured. We clearly have the duty, but we have yet to demonstrate that we have the political will, to correct it and accord due priority to development. We need to remind ourselves that it is through an interplay of national and international policies that a strong and durable foundation can be laid for the good of all. The sacrifice of today is the investment of tomorrow, and we have to take care of our tomorrows now. Together we should exert every effort, bear any burden, accept any sacrifice to banish poverty and misery from the face of the earth and usher in an era of peace and prosperity for all.

Statement by the Governor of the Fund for Iceland—Johannes Nordal

I have the honor to speak on behalf of the five Nordic countries—Denmark, Finland, Norway, Sweden, and Iceland. I join my fellow Governors in thanking our hosts, the Government and people of Canada, for their gracious hospitality, and in welcoming the three new members, Antigua and Barbuda, Belize, and Hungary.

Since we last convened at the Annual Meetings in Washington a year ago, we have lived through another year of disappointing performance of the world economy. The anti-inflationary policies which have been pursued by most industrial countries since the second round of oil price increases have brought about a fall in the inflation rate. However, wide differences remain between countries in this respect, and it is still difficult to judge how long-lasting the progress on the inflation front will prove to be.

At the same time it is clear that the cost of the counterinflationary effort has been much higher than most of us had foreseen. It has further depressed the rate of economic growth that had already slowed down over the last decade under the influence of other factors. Unemployment has reached record levels for the postwar period and is still rising in most countries. There are signs that economic stagnation may be becoming a chronic state draining the financial resources of enterprises and governments. This impairs the will and power to invest in new capacity and is one of the reasons for the budgetary impasse many countries have reached. The longer this situation persists the more difficult it will be to break out of.

There has been some improvement with respect to the size and distribution of payments imbalances. This has, however, been mainly confined to a decline in the surplus of oil exporters and a swing from deficit to surplus in the major industrial countries as a group, while most of the smaller industrial countries and, in particular, the developing countries still wrestle with high deficits.

Conditions in the world economy have been particularly harsh for the non-oil developing countries in recent years. Their economic aspirations have been dashed by the slump in world trade and sharply deteriorating terms of trade as well as by high interest rates on their foreign debt. These adverse conditions, together with shortcomings in domestic policies, have led to sharply falling growth rates and serious external payments deficits for those countries.

The problems facing the world economy clearly present policymakers with a difficult dilemma. While recognizing the importance of the fight against inflation, the costs of present policies in terms of rising unemployment are alarming. Persistent unemployment is not only an economic ailment but also has serious social and human consequences. A reassessment of economic policies is therefore becoming increasingly urgent.

While a return to growth is everyone’s stated objective, many of the public policies being followed have at least until recently been pulling the world in the opposite direction. This contradiction springs both from a lack of coordination of economic policies and from too heavy a reliance on monetary policy. In order to come to grips with the problems of high and unstable interest rates and fluctuating exchange rates, major industrial countries must continue to strive for a better balance between monetary and fiscal policy in their efforts to control inflation. Incomes policies suited to each country’s particular circumstances could in many cases help to resolve this contradiction. The industrial countries must also endeavor to make their policies consistent and conducive to orderly global adjustment. We cannot all rely on export-led growth to lead us simultaneously out of stagnation to prosperity.

The Versailles summit statement on international monetary undertakings, where the major industrial countries accepted a joint responsibility to work for greater stability of the world monetary system, was encouraging. It is particularly welcome to note in this forum the major importance the summit statement attaches to the role of the Fund in this regard and the fact that the five countries whose currencies enter the SDR basket have declared themselves ready to strengthen their cooperation with the Fund in its work of surveillance and to develop this on a multilateral basis. We look forward to seeing these declarations turned into effective action.

There is a need for the industrial countries to reallocate their productive resources, bringing them into line with structural changes that have recently taken place in the world economy. The most important of these are the drastic rise in energy prices, increasing competition from newly industrialized countries, and the growth of new high-technology industries. At the same time, many deep-rooted social and political factors have reduced the flexibility of the production system and the labor market in responding to these challenges and ensuring the necessary shift of resources. This rigidity is undoubtedly one of the reasons for the high cost of anti-inflationary policies in terms of output and unemployment in recent years. The problems that this entails are an important element in the grave economic situation facing the world economy. What is needed to deal with them is a comprehensive policy, relying both on market forces and on government efforts to develop an industrial strategy suitable to the challenges before us. For the success of such a strategy, the responsible cooperation of labor and management, and indeed all sectors of society, is of key importance.

It should not come as a surprise in the present situation that protectionist tendencies are gaining momentum in many countries. The objective of preserving employment—often invoked to justify protectionism—is not in question, but it has been demonstrated over and over again that protectionism is counterproductive. It is therefore vitally important to resist these tendencies and seek solutions to the pressing problems of unemployment and stagnation within the framework of liberal and open trading policies. Protectionism in all its forms must be resisted. It breeds inefficiency, invites retaliation, and retards the structural changes on which economic growth and high employment ultimately depend. Expanding trade is an important potential source of economic growth for all countries.

This brings me to the role of the Fund and the private capital market in financing deficits and promoting adjustment—and thereby preserving the conditions for the free flow of trade.

The importance of the recycling undertaken by the international banking system should be clearly recognized, but its limitations have also been demonstrated by recent events, underscoring the need to strengthen the Fund. We must, of course, continue to rely on the banks in a major way, but their efforts need to be supplemented by the full use of the Fund’s facilities. Not only is the role of the Fund in extending credit to finance well-designed programs of adjustment important, but of equal importance is its role of surveillance of exchange rate and related policies of its members, and, in general, as a monetary institution promoting economic adjustment.

I have already noted the statements of policy relating to the Fund’s surveillance that came from the Versailles summit meeting. This is important, but the Fund has an even wider role in helping to counteract exchange rate fluctuations and sudden changes in perceived credit risk that may have little to do with the economic fundamentals involved. These two elements mar the financial markets, causing volatility and creating problems for the orderly financing of sustainable payment imbalances in an uncertain world. An important task for the Fund is to help solve these problems, and in this it should have our unquestioned support.

This leads me to the Eighth General Review of Quotas. An increase in quotas is the most effective and equitable way of strengthening the financial position of the Fund. Regardless of the yardstick chosen to measure financial developments, it is indisputable that the payments needs of members have far outpaced the growth of the Fund’s usable resources. In the opinion of the constituency which I represent it is essential that the Fund continue to play a leading role in the adjustment and financing of balance of payments deficits in the 1980s. Furthermore, we have repeatedly emphasized the view that quotas should be the primary source of the Fund’s resources. On the basis of these principles, it is our view that the total of quotas should be raised to a level of SDR 100–125 billion. The quota review is a priority task for the Fund. Recent proposals for a special Fund-administered facility to deal with exceptional financial strain are certainly worthy of study and consideration, but should under no circumstances be seen as a substitute for an early increase in quotas.

We appreciate that the Executive Board has made considerable progress toward agreeing on a uniform method for distributing the enlargement of quotas—in a uniform way—more in line with the relative economic positions of members, while taking account of the case for maintaining a degree of stability in the structure of quotas and an appropriate balance in the composition of the Executive Board.

Understandably, there are differences of opinion between countries concerning important aspects of the quota review. We should now seek to agree on some of the main aspects and narrow the range on others with the goal of completing the review by next April as agreed by the Interim Committee. May I also say a few words on the question of the SDR’s future development. Once again, we reiterate our support for efforts to enhance the role of the SDR in the international monetary system. These efforts must, however, be related to the evolution of international liquidity. The question of allocations of SDRs in the fourth basic period should be kept under consideration and a convergence of views sought in order to allow a definite proposal to be made as soon as possible.

The question of the increased use of SDRs in the Fund’s activities deserves further study. The Executive Board should continue its work on improving the financial characteristics of the SDR.

I have emphasized the urgent need to reassess present economic policies. The primary responsibility for economic policy rests, of course, squarely with each individual country. This certainly applies to the smaller industrial countries facing, as they are, pressing problems of adjustment, but there is also a strong case for questioning the international compatibility of the economic policies presently conducted by the major countries. In particular, unduly restrictive policies must be avoided in countries that have already brought down inflation, have reached a comfortable external position, and have ample unused productive capacity.

In the present troubled state of the world economy, the Fund should direct its efforts to bringing about a better coordination of economic policies of its members. Our aim must be to lay the foundations for renewed economic growth without sacrificing the hard-won gains already made by stabilization policies.

Statement by the Governor of the Fund for Egypt—Mahmoud Salah el din Hamed

It is my pleasure to address these Thirty-Seventh Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank on behalf of the Arab Republic of Egypt.

I would like to join the previous speakers in extending our appreciation to the people and Government of Canada for the gracious hospitality and the excellent arrangements for this Meeting. I would like also to welcome the new members who joined our institutions during this year.

We meet this year at a very difficult time. High levels of inflation, unemployment, and interest rates are undermining the prospects for growth and development.

The deep and prolonged recession is having a profound impact on developing countries. The slowdown in growth of the industrial countries is reflected in the slackening of demand for imports. As a consequence, developing countries are confronted with a significant reduction in export growth, a sharp decline in the prices of primary commodities, and a severe deterioration in their terms of trade. The current account deficits of oil importing developing countries have reached record levels, amounting to about $100 billion in 1981–82, more than three times the level in 1978.

The current crisis underscores the important role that the International Monetary Fund should play in the management of the international monetary system. The adjustment process is imposing a heavy burden on the deficit countries. Adjustment should be consistent with maintenance of high rates of growth, improvements in income distribution, and effective control over inflation. These objectives can only be attained when the burden of adjustment is shared equitably among all countries. In exercising its surveillance function, the Fund should pay special attention to the policies of the industrial countries. The Fund should ensure that these policies are formulated and implemented with due regard to the interests of the world economy. We should be careful not to revert to beggar-my-neighbor policies entailing competitive devaluation, restrictive trade policies, and large disparities in interest rates among major industrial countries. These policies failed in the interwar period. Today, with a much higher degree of interdependence, they are bound to fail and to cause greater damage. The responsibility falls first and foremost on the major industrial countries which dominate the world economy and whose policies could make the difference between prosperity and depression for us all. World recovery depends on the ability of these countries to control inflation, reduce interest rates, and apply the appropriate mix of monetary and fiscal policies. It also depends on their willingness to liberalize their trade policies and give strong support to the Fund, the World Bank, and the IDA. Failing this, the world economy could be heading for a depression.

Developing countries are being asked to adjust under conditions that are extremely difficult. It is an illusion to think that by a simple policy of demand management, developing countries can extricate themselves from the crisis situation in which they find themselves. The problems underlying our deficits are, to a very large extent, structural in nature. The rectification of these structural imbalances cannot be effected within a year or two. They call for a reorientation of investment priorities, a reformulation of our institutions, and a basic change in the framework within which production incentives operate. These are medium-term and long-term factors which require a much longer period than that attached to the use of Fund resources. Moreover, our deficits are mainly due to external factors beyond our control. This is evident from the fact that many of the difficulties are due to the recession in the industrial countries and to the rising tide of protectionism. We are being asked to shift our investment priorities from import substitution to export orientation. However, our efforts are being thwarted by an ever expanding arsenal of tariff and nontariff barriers. Evidently, it is difficult to carry out a policy of adjustment in this climate unless we are prepared to pursue external equilibrium at the expense of growth and even social peace.

The adjustment process raises the issue of conditionality in the use of Fund resources. There can be little doubt that conditionality in itself performs an important function. What is at issue, however, is not the principle of conditionality, but its content and adaptability to the specific situation in each country. Admittedly, the Fund has made significant progress in its approach to conditionality. However, the present situation leaves much to be desired. There is still need for greater flexibility and for better understanding of the forces at work. Above all, there is need for heightened awareness of the social and political context to which adjustment policies apply.

It is clear that the ability of the Fund to ease conditionality depends on the resources at its disposal; hence, the great importance attached to the forthcoming Eighth General Review of Quotas. By consensus, the present level of quotas falls far short of requirements. As a proportion of world imports and in relation to the size of current deficits, Fund quotas have witnessed a constant relative decline during the last years. We believe that a substantial increase in Fund quotas is essential for the attainment of the objective we all support.

The Eighth General Review will also provide the opportunity for recognizing the new economic realities and the change in the relative economic positions of member countries. This recognition should be reflected in selective increases in favor of some member countries and in increasing the voting power of developing countries to reach 45 per cent of the total.

The present system for the creation and distribution of international liquidity is far from satisfactory. We believe that the management of international liquidity should be a global responsibility and should be vested in the Fund as the guardian of the international monetary system. This is only possible if SDRs become the principal reserve asset as envisaged in the Articles of Agreement. There should also be a balance between conditional and unconditional liquidity. This balance has been seriously disturbed by inadequate SDR allocations. . . .

Allow me to say a few words on some of the development problems and prospects of the Egyptian economy. We have just embarked on a new five-year development plan covering the period from 1982/83 to 1986/87. The principal objectives of our development policy are to stimulate the rate of growth and achieve a better distribution of income while maintaining a reasonable balance of payments position. Like many other developing countries, we have been adversely affected by the current recession in the industrial countries. This is reflected in the decline of foreign exchange receipts from our four major earners, namely, commodity exports including oil, tourism, remittances, and Suez Canal dues. To counteract these developments, we are trying to improve the productivity of agriculture so as to reduce reliance on food imports. We are also taking steps to encourage the private sector and to promote the inflow of private foreign investments. At the same time, we are following a policy of support for the export-oriented industries and of strengthening the incentives for a higher level of efficiency. We are conscious of the need to control inflation and increase productive employment. Special effort is being made to reduce the budget deficit, rationalize our foreign exchange and import policy, and achieve a balanced mix between fiscal and monetary policies.

In our case, as in the case of other developing countries, our success will depend in no small measure on the trade and aid policies of the industrial countries and on the effective role that the World Bank and the International Monetary Fund can and should play in support of our development effort.

We do hope that this Meeting will represent a landmark on the road toward greater cooperation and understanding among nations.

Statement by the Governor of the Fund and the Bank for Barbados—J. M. G. Adams

It is a great pleasure for me to have this opportunity to address you, not only on behalf of my own country, but on behalf of other Governments of the Commonwealth Caribbean for whom I shall speak on matters related to the activities of the Bank, namely, the Bahamas, Belize, Dominica, Grenada, Guyana, Jamaica, St. Lucia, Trinidad and Tobago, and St. Vincent and the Grenadines.

First, I wish to thank our hosts for the excellent arrangements they have provided in this great city of Toronto and the Province of Ontario for the 1982 Annual Meetings of the Fund and the Bank. My colleagues and I very sincerely wish to express our feeling of appreciation to the Government and people of Canada for the friendship and hospitality they have extended to delegates, guests, and visitors to these Meetings.

I should also like to take this opportunity to extend a warm welcome to our sister Caribbean states, Antigua and Barbuda, Belize, and St. Vincent and the Grenadines who are represented at this joint meeting for the first time. I also extend a sincere welcome to the Hungarian People’s Republic.

Many speakers have emphasized the fact that we are living in troubled and difficult times. Indeed even when the world is not in recession, the Annual Meetings of the Fund and the Bank tend to be a forum for a recital of what is wrong rather than what is right in the economies of our members. No one listening to the speeches made at Meetings five years ago would consider that we would now be looking back to those years as a period of relative economic well-being.

What perhaps has happened in the interval is that the industrial countries have joined Third World countries, as never before, in facing massive unemployment, falling output, expectation of continuing recession, and the need for making severe changes in their economies comparable to the “structural adjustments” for so long pressed on Third World countries as conditions, not only for balance of payments assistance from the Fund but even for some forms of development assistance from the Bank. Indeed, the effects of the monetarist policies now voluntarily being undertaken by some industrial countries have been every bit as disruptive of their economies (however beneficial in the long run) as the effects on developing economies of the policies enjoined in the course of Fund programs.

But, although this may mean that the industrial countries which accept remedies similar in kind to those that they urge on developing countries are demonstrating the courage of their convictions, there is a major difference in situation. In the large economies of the world there is a much wider choice of policies than is available to the small developing countries such as those on whose behalf I now speak. In open, fragile, and above all tiny and dependent economies, we are not free, for example, to choose inflation as against unemployment and still enjoy the development strategies on which our hopes are pinned. Except in rare cases our need for development assistance is so central to our economic planning that we must conform to prevailing doctrines. But in return for our recognition of this, there is one prerequisite that we can reasonably expect, namely, that significant amounts of development assistance will in fact be forthcoming from the international community. We therefore hope that there will be no break in the replenishment of funds to the multilateral institutions, no hesitation in retaining these institutions at the center of world development initiatives, no retreat from the principles of community as well as bilateral effort in international assistance. In this context, I particularly welcome the encouragement given by the Managing Director of the Fund to the industrial countries when in the opening plenary session he indicated that cutting back on overseas aid is of little assistance to donor countries in dealing with their budgetary problems. I sincerely hope that this argument, which has repeatedly been put with varying degrees of diffidence by representatives of smaller countries to their principal donors, will now be treated with the same regard as we have to treat the injunctions of the Fund on how to view our own fiscal arrangements. . . .

If I may turn from the general trends of development assistance to matters more specific to the countries on whose behalf I speak, I would like first to focus attention on our particular problems as countries of very small size. It must be regarded as a matter of some regret that the structural dynamics of the economies of very small countries seem not to be well understood by those who provide assistance to us whether on a bilateral or a multilateral basis. Indeed, it is only very recently that the international financial community has awakened to the realization that such entities have problems which cannot be measured by per capita income and the other indicators used in the World Development Reports. Two of the countries on whose behalf I speak had per capita incomes last year of between $3,500 and $3,800, yet it cannot be thought that the Bahamas and Barbados, with our slender resource bases, small areas, and tiny markets, really have less need for development aid than the economic giants of Latin America or the successful economies in Africa and Asia whose per capita incomes may be $ 1,000 less than ours. The debt service ratio for Barbados is only 4 or 5 per cent of the value of our exports of goods and services. But we import $2,500 per capita annually in capital, intermediate, and consumer goods, and our foreign reserves virtually never exceed three months of imports, and all that implies for vulnerability in the face of recession in world demand for our exports and tourist services.

The small countries of our subregion are faced with problems similar to those that confront developing countries everywhere, but the relative deficiency in resources and capability implicit in small size imposes greater difficulties on us in achieving greater self-reliance. What is more, the assumption, even apart from the special cases to which I have just referred, that the relatively high per capita incomes of these countries translate into a capacity to sustain such policies without access both to concessional and conventional development aid is clearly unfounded. There seems little doubt that one major feature of small size is that states in this category require relatively small increments of positive assistance to procure dramatic results, but the paradox of economic reality in very small countries seems to be that vulnerability to external shocks is increased, rather than reduced, at higher levels of income….

In concluding my argument in this area, I should like to thank the Development Committee for adverting so positively at its meeting on September 5 to the problems which I have been reviewing. In paragraph 22 of its communiqué the Committee noted the problems of small island and landlocked states, and recognized the urgent need to review the mechanisms and adjustment prescriptions appropriate to the particular circumstances of such states. The Committee has thus joined the Commonwealth Ministers of Finance who at this year’s meeting in London also supported the concept of such a review. I hope that the Board will give early and sympathetic attention to the problem.

I turn now to the problem of structural adjustment, which has been of the greatest mutual concern to developed and developing countries alike, and wish briefly to refer to four major issues.

In the first place a process of balancing domestic expansion against available external resources has to be undertaken by developing countries, particularly those which pursue a strong outward orientation, and this must be done in the face of external economic circumstances over which we have no control. Second, we agree that to achieve the desired adjustment we need appropriate macroeconomic fiscal and monetary policies and carefully designed institutional reforms. However, lending institutions must resist the temptation to require that all such policies be applied in a package without reference to time, place, or circumstance. Third, lending agencies should recognize that structural adjustment policies, and loans in support of such adjustments, should be applied as a preemptive measure to a balance of payments crisis and not after such a crisis has developed. Finally, I must stress that structural adjustment lending by multilateral agencies presently bears no true relationship to the severity of the problem being addressed. . . . The specific concern of the multilateral agencies must therefore be exercised by consideration of that blend of program and project financing which will give effect to the larger purposes of general adjustment as distinct from sectoral reform.

It is well recognized that very small countries require a liberal international environment in which to pursue strategies of development based on export-led growth. Structural adjustment for these economies, therefore, must be predicated on improvements in the efficiency of their domestic enterprises to penetrate foreign markets. But such domestic efforts must be matched by a commensurate effort on the part of developed market economies to maintain an open trading system. We must, therefore, regard with alarm any sign that as a reaction to domestic economic difficulties the developed market economies may be preparing to impose qualitative or quantitative restrictions on imports.

Equally, developed market economies should not succumb to the malady of “aid fatigue.” while they may understandably have wished to avoid the contradiction of sharply increasing foreign aid while implementing programs of domestic expenditure restraint, they now have the sensible advice of the Managing Director of the Fund to inform their policies. Over and beyond this advice, they should not lose sight of the role of aid in contributing to the growth in demand for their own goods and services. More pertinently, a shift to emphasis on private investment must recognize the continuing importance of aid-financed investment in social infrastructure which makes private investment feasible. . . .

The work of the Caribbean Group for Cooperation in Economic Development has served to improve the coordination of both country and regionally focused development assistance, and has facilitated the formulation of new regional programs particularly in the area of energy. It has assisted member countries in clarifying both the scope and range of external development assistance and the domestic framework within which that assistance could most effectively be applied.

Likewise, the Bank has supported the growth of the region’s development finance institutions, namely the Caribbean Development Bank. We have always held the view that a reasonable proportion of the inflow of external financial resources into our countries should be made available to us through the Caribbean Development Bank, our regional financial institution which serves both the public and private sectors of our economies. We note with satisfaction the continuing amicable financial cooperation between the World Bank and the Caribbean Development Bank. We hope that this relationship will continue to be strengthened and that steps will continue to be taken with a view to making the transfer of both World Bank and IDA funds to the CDB smooth and flexible and, as far as possible, in conformity with the Caribbean Development Bank’s own policies and procedures. Not the least of the reasons for the desired smoothness and flexibility in the flow of resources is the need for speedy aid delivery to the countries of our region, particularly the less developed countries which, it should still be firmly emphasized, require most of their external aid on highly concessional terms.

The World Bank was founded on the belief that collective international action could be applied even in the least propitious circumstances to redress the problems of poverty, unemployment, and inequitable resource distribution. The current trend in the industrial countries is to accord the highest priority to counterinflationary monetary problems, even if the price of qualified success in this direction is paid for in levels of unemployment unknown in those countries since the Great Depression. Such policies are sustainable only because the social costs are minimized through the well-established social security systems that exist in those countries. Inadequate domestic resources preclude this option in poor developing countries although we have suffered from high levels of unemployment for most of our histories. The accepted prescription has always been the generation of employment and income through high levels of economic growth. This has proved effective in the past when the Bank’s imaginative programs have received the ready support of its members. Our countries as members will continue that support. We expect that the whole international community will do no less.

Statement by the Governor of the Fund for Spain—Juan Antonio Garcia Diez

For almost a decade the Annual Meetings of the Fund and the Bank have noted the persistence of imbalances and stagnation in the world economy. It is already clear that the problems we face have a basic long-term dimension and that short-term measures must not delay adjustments that can only be achieved over a longer period of time.

The persistence of these difficulties has given rise to the conviction that the current situation can be improved only through slow adjustments growing out of a collective effort. Our cooperation must extend to trade policies as well as financial and monetary policies.

The need for this cooperation has recently been demonstrated by significant financial and exchange rate alterations that have delayed the desired recovery in economic activity. For, although it is of fundamental importance for the international community that the major industrial countries restore their basic equilibrium, it is important that they do so in the least unsettling way for the rest of the world.

In the area of trade the current difficulties constitute a continuous temptation to intervention and protectionism. However, flexibility is needed if economies are to adapt to new relative prices, and this flexibility must prevail not only within national economies but at the level of the world economy as well. The adjustments required extend beyond national boundaries; to give way to protectionist pressures thus amounts to delaying adaptation to the new structure of comparative advantages and hinders world economic recovery.

When this protectionism is practiced by the major industrial countries, it impedes adjustments in the less developed nations and aggravates the problems that they face. I fear, however, that the prevailing trend at this time is toward protectionism. In this connection, 1 would like to stress my country’s interest in the GATT ministerial meeting in November and our conviction that both the Fund and the Bank must continue to combat and denounce protectionist tendencies.

Although economic policies in several countries are moving in the right direction to correct imbalances, it is clear that the adjustment process will be slow and that the economic crisis will persist. Meanwhile, its long duration is having very serious consequences.

One issue affecting economic policy in many countries is the control and reduction of the public deficits, which in many cases is an essential step in the adjustment process. However, we believe that this policy should not be pursued dogmatically; there have been public deficits in many economies over the years of the crisis in clearly depressionary situations. In our opinion, the right approach is necessarily a gradual one, which must take into account the stimulating effect of public deficits in economic situations such as those many of our countries have experienced or are experiencing.

There are also the consequences for the international economy.

First, although current economic conditions are difficult for everybody, recent trends and the forecasts that can now reasonably be made indicate that the paths of the industrial countries and the developing countries are diverging. The prospects for the latter appear a good deal more gloomy.

Second, the protracted nature of the crisis has affected the international capital markets. Since the first energy crisis in 1974, funds have been recycled in the international markets basically by private institutions. While they have performed this task very effectively and with excellent results, the time has come for the multinational institutions to contribute more decisively to the adjustment process.

In recent years the Fund has demonstrated its capacity to deal effectively with balance of payments problems. However, it has found that member countries’ quotas are increasingly inadequate in the face of current problems. It would seem indisputable that quotas must again fulfill their role as the basic source of resources. While it is always difficult to put forward figures, in light of the size of the current imbalances in the international economy, Spain would be gratified if the Eighth General Review of Quotas raised total resources to over SDR 100 billion. At the same time, the Eighth Review must lead to a distribution of quotas more in line with the respective financial responsibilities of the member countries in the world economy. . . .

We are living through a lengthy period of difficulties that our errors may aggravate and prolong. The excellent reports prepared by the Fund and the Bank clearly indicate the need for national policies to be directed toward restoring basic equilibria and promoting the adjustment process. But we must also concern ourselves with the risks entailed by the persistence of the crisis and work to remove them by strengthening these two demonstrably useful and effective institutions.

Statement by the Governor of the Fund for Luxembourg—Pierre Werner

Let me first express my gratitude to the Canadian authorities for the warm hospitality that they have extended to us and that tends to compensate, as far as possible, for the still rather gloomy outlook of the world economy. As the Managing Director of the Fund, Mr. de Larosière, and the President of the World Bank, Mr. Clausen, have pointed out in their brilliant speeches, the current and prospective situation of the world economy confronts both national policymakers and international financial institutions with new and complicated challenges.

Comparing our own forecasts of these last years with actual performances, we have to admit that, in general terms, we have been too optimistic about the chances of a quick recovery of the world economy. This lesson should draw our attention particularly to the structural aspects of the world economy and to the major impediments to a better performance.

Inflation remains, of course, a most serious problem, and a high priority must continue to be placed on policies to bring down inflation and inflationary expectations. In this respect, both a correct functioning of market mechanisms and a responsible behavior by social partners in fixing labor costs are essential. In the same vein we have to acknowledge that in many countries the public sector deficits have currently attained excessively high levels and thus have induced higher interest rates, higher tax burdens, and higher prices. Therefore, efforts to better control public expenditure and budget deficits must be vigorously continued. Finally, positive adjustment policies for the new features of the world economy should also include measures to stimulate investments in innovative technologies, to improve productivity, and to reinstall a normal profitability of production. We think that this strategy offers the best chance, in the long run, to reduce unemployment, which we consider an unacceptable human cost, especially for our youth who otherwise risk being deprived of the chance to become fully integrated into community life.

The above-described strategy inspired the Luxembourg Government’s special program, enforced by law in April this year, to improve internal economic equilibrium after the February adjustment of the exchange rate of the Belgian and Luxembourg franc and to strengthen the efforts of our industry, especially the steel industry, to overcome the problems of structural adjustment. Efforts toward this goal will be continued in the coming year and will also include a significant moderation of public expenditure in 1983. But we are, of course, aware of the fact that the impact of these measures on the economic development of our country will depend largely on the overall recovery of the world economy.

A particular point of concern, especially for small countries with a heavy dependence on foreign trade, is the growing protectionist pressure and the spreading of practices that hamper international trade and disrupt free trade and competition between countries of different sizes. Therefore, we hope that the joint efforts of governments and international institutions to resist protectionist pressure and to resolve urgent short-term problems within the framework of the multilateral trading system will preserve our international cooperation, which is based on open markets and open trade.

The serious economic problems that have been mentioned by many speakers have continuously marked the monetary scene, and they have had repercussions on the Fund’s activities. The evident progress accomplished by a certain number of countries in their fight against inflation has contributed to the progression and maintenance of real interest rates at too high a level.

The substantial external indebtedness of those countries that have suffered most from the rise in the prices of oil products and the slowness of adjustment policies, as well as the high cost of debt service, has been highly detrimental to the financial situation of a large number of member countries. The Fund has faced this situation by increasing its financial support which, with a volume of SDR 15 billion, has reached a record level. With few exceptions, these funds benefited developing countries.

The private banking system, which, a few years ago, was in a position and was ready to ensure the major part of recycling, is now faced with serious limitations as to the geographical distribution of credits and is therefore somewhat reserved in its relations with sovereign debtors. The reason for this caution is well founded; indeed a worldwide bank crisis would have disastrous effects, inter alia, upon countries in need of funds. Representing a country with an important financial sector, I have to point to the fact that the growing number of countries asking for a rescheduling of their external debt service bears the risk of drying up the flow of private funds toward developing countries.

The increased intervention of the Fund in the financing of deficits, though strengthening the role of the institution, raises the problem of its liquidity. In this context, Luxembourg supports the idea of a substantial and selective increase of quotas in the Fund, insofar as the evolution of economic realities has to be taken into account. My country is ready to assume an increase of its quota above the relative average increase, with respect to its recent financial and economic evolution.

The conduct of current affairs and the urgent problems with which the Fund has to cope should not divert our attention from the long-term structural problems of a satisfactory functioning of the international monetary system. These two aspects should not be considered as separate issues. The importance and the seriousness of our present problems are linked in a significant way to the absence of a coherent international monetary system and hence to the use of only a few currencies, if not one currency—namely, the U.S. dollar.

The international fallout of a restrictive U.S. monetary policy, which was justified from a U.S. domestic point of view, emphasizes the need for a better functioning of international monetary arrangements and for a search for a system better protected against the ups and downs an individual currency may experience from time to time. Such a system would have to take account of the financial multipolarity in the world. In such a system the Fund ought to play an increased role of supervision and coordination.

My Government considers that the consolidation and development of the structures and means of the European Monetary System and a larger use of the ECU as a currency unit could contribute, to a fundamental extent, to building a system of international payments presenting better equilibrium and efficiency. As a matter of fact, as one of the poles of a more balanced and rationalized monetary system, the ECU zone could prove a valuable partner in the sharing of monetary policies on a world level. . . .

When I attended for the first time an Annual Meeting of the Governors of the Bretton Woods institutions, in 1946, the world was only beginning to heal the wounds of prewar autarchy, monetary disarray, and war destruction. Much hope was placed in the new twin institutions for restoring the economies and world trade, with some doubt whether they would be able to live up to the magnitude of the postwar problems.

Today, 36 years later, I can say that the institutions’ contribution to the restoration and expansion of the world economy has been essential, due to the fact that, especially up to the beginning of the 1970s, they warranted a decent monetary stability and convertibility, a growing liberalization of foreign trade, and a substantial flow of capital to the developing world. Now, however, confronted as we are with tremendous economic and financial troubles, together with large shifts in national income between countries, we must admit that the pursuit of the fundamental goals just mentioned puts us in a defensive rather than an offensive position. This different environment does not allow us to stand back from these fundamental goals for which every member country bears responsibility.

Statement by the Governor of the Bank for Pakistan—Ghulam Ishaq Khan

Mr. Chairman, I would like to join those colleagues who have preceded me in expressing our deep appreciation for the hospitality extended by Canada and the excellent arrangements the Government has made for this Meeting. Let me also welcome Antigua and Barbuda, Belize, and Hungary as members of this community. We are fortunate, in view of the formidable challenges faced by the world community today, to have the benefit of the inspiring inaugural address of Prime Minister Trudeau and your presence, Mr. Chairman, to conduct our deliberations.

We have also listened with close attention to the statements made by the President of the World Bank and the Managing Director of the International Monetary Fund. These statements and the excellent and thorough reports on the world economy produced by the Fund and the World Bank convey the same depressing message: economic recession and lack of proper coordination of policies by the industrial countries have cast a shadow on the world economy and in particular on the non-oil developing countries. Things have never been worse for this group and the world economy remains strapped in a crisis. Their current account deficits have multiplied two and a half times over the last three-year period. Initially, this resulted from higher import costs and rising interest payments and, more recently, from a slump in commodity prices and stagnation in world demand. The quantum of international trade has averaged an increase of only 1.3 per cent over the last three years. Meanwhile, commodity prices have registered the steepest annual decline over three decades with the exception of the 1975 recession. The commodity price index in 1982 has slumped below the level of five years ago, while in the corresponding period the prices of manufactures rose by over 45 per cent and of oil by even more.

As a consequence of these forces, over which the non-oil developing countries exercise virtually no control, their economic growth plummeted to around 2.5 per cent, trailing for the first time in decades behind the population growth in the majority of these countries. As long as the world economy remains trapped in its current crisis, the prospects for the developing countries are exceedingly sombre.

The central dilemma we confront today is the progressively increasing current account deficits of the oil importing developing countries and the existence of no automatic or properly designed international mechanism to finance these deficits in the short run or to correct the fundamental imbalance in international payments in the long run. The events in the last few years have created an extraordinary international monetary situation, calling for extraordinary measures and unparalleled vision. It would be simply defeatist on the part of the international community to sit on the sidelines, watch this situation with calm detachment, and let the burden of this extraordinary adjustment pass on entirely to the developing countries—in fact, to the weakest members of the international community. And yet this is precisely what is happening at the moment.

The Managing Director of the Fund presented an in-depth analysis of the current international monetary situation to a meeting of ECOSOC in July this year. According to this analysis, current account deficits of the oil importing developing countries have increased by about $50 billion in 1981 over the level of 1978. Toward this deterioration, about $60 billion was contributed by the rise in the price of oil and higher interest payments on long-term foreign debt. Lack of harmony and coordination in economic policies pursued by developed countries compounded the oil price increase and the two factors taken together were entirely responsible for the worsening deficits. As pointed out by the Managing Director

…the increase in the oil deficit and in interest payments exceeded—by some $10 billion—the total deterioration in the current account deficit of the oil importing developing countries during 1979-81. This indicates that other elements of the current account strengthened—a finding that is all the more significant in view of the recessionary conditions in the world economy that constrained the growth of international trade and depressed commodity prices.

This conclusion is quite startling and has profound policy implications. It means that external factors have accounted for the recent deterioration in the current account deficits of the oil importing developing countries. As far as their own internal efforts are concerned, they reduced these deficits by $10 million by import substitution efforts, and by improving their export performance despite a prolonged world recession during which the GDP growth rate of developed countries has averaged around 1 per cent for the last three years. If, despite their own determined efforts, the developing countries are still facing a deteriorating balance of payments situation, the question naturally arises: what can the international system do about it?

There is not only a shortage of liquidity in the international system, it is grossly maldistributed. Every deficit of the developing countries surfaces in a corresponding surplus of another country in the international system. What is lacking are the mechanisms that would keep the global liquidity at an adequate level and make the adjustment process operate smoothly and equitably.

The fatal flaw in the IMF operations at the moment is that despite its formal mandate for surveillance, it is in no position to place any conditionality on the surplus countries and, as such, is obliged to place the entire burden of adjustment on the borrowing developing countries. A situation, therefore, prevails where some of the rich nations, with their own national reserve currencies, virtually carry an international credit card and can finance unlimited deficits merely by printing their own currency. They can, therefore, either postpone real adjustments or shift the burden of adjustment to other countries who have no reserve currency of their own and who must earn their foreign exchange through hard efforts by trying to increase their exports in an increasingly protectionist world. The international monetary system in a sense, therefore, is no longer a regulated system but is getting badly out of control. It goes through periodic cycles of global inflation and global deflation, depending on the national interest and policies of countries with their own reserve currencies. In the absence of the previous restraints on national action imposed through the link of their currencies with gold or through fixed exchange rates, the reserve currency countries are now enjoying the privilege of power without corresponding responsibility, adequate checks and balances or international monitoring. Certainly, this was not the original conception of the Fund when it was brought into existence to police the international monetary situation. A policeman does not merely advise the victim how to adjust his many bandages; he must try to prevent the injury in the first instance.

The challenge before the Fund and, in fact, before all of us is a major one. The private international banking system, with about two thirds of its credits concentrated in ten creditworthy countries, cannot assume the responsibility for recycling funds from surplus to deficit countries. It is necessary that the International Monetary Fund should respond to its original mandate and recycle this liquidity to the needy countries on appropriate terms and suitable policy conditionality. We must calmly review, therefore, the premises of the present international monetary system and find some fundamental solution to the creation and distribution of international liquidity, rather than keep refining and sharpening the conditionality for poor developing countries who have no other alternative but to keep protesting that such conditionality is inherently unfair since developing countries are being made to adjust to a grossly distorted international monetary system, without any attempt to correct the distortions themselves. Whether this would require a substitution account to begin with, or a world central bank at the end, may be a matter of debate.

But at least a serious search must start. As immediate measures, first, the Fund must be provided with adequate resources by doubling the quotas in order to enable it to better discharge its responsibilities; second, the question of the creation of SDRs for the fourth basic period and their allocation should be settled without further delay; and third, in the present economic environment the conditionality attached to the Fund’s assistance should be reviewed.

While conditionality is not without justification, and in fact to an extent is necessary, it should show some consideration to the cause of developing countries’ problems (whether they arose from internal or external factors) and the diversity in needs and capabilities of different countries. The application of the same policy medicine to all countries, irrespective of their stage of development, has little merit except to satisfy a particular orthodoxy. The best measure of successful policies lies in the improvements that the developing countries bring about in economic and financial performance. Consequently, conditionality should focus on indicators of “overall performance” rather than the use of “specific instruments.” The Fund should satisfy itself whether the central objective of growth with stability is being achieved rather than become mesmerized by preconceived means or instruments.

There is need for more than monetary reforms to rescue the developing nations from their current crisis. Among these, the question of concessional capital flows to poorer countries is of key importance in this forum. The ODA-GNP ratio, another victim of recession and unemployment, is once again receding from the 0.35 per cent of developed countries’ GNP, which itself was the halfway mark of the 0.7 per cent target established 12 years ago. Not just the levels of aid, the form that it takes and its relation to debt servicing are also of significance today. The Brandt Commission and the Program of Action prepared by the Group of Twenty-Four contain an extensive list of measures, each of which is significant and deserves support.

It is unfortunate that most international discussions are concerned with gross commitments of foreign assistance rather than with net resource flows to the developing countries. It is the latter that is critical for any policy analysis. If interest payments and amortization are deducted, the net flows of capital to oil importing developing countries have fallen in recent years to about one third of their gross flows. In my own country, the net flows have shrunk dramatically, from about 75 per cent of the gross flows six years ago to 20 per cent now, and are likely to fall further in the absence of decisive international action.

Serious questions of policy arise when a country has to pay back as much as 80 per cent of each dollar it receives, in free and flexible foreign currency, in order to obtain an additional dollar of assistance, which often comes tied to purchases in donor countries and to a good deal of project and policy conditionality. In other words, developing countries’ own payments of interest and principal are increasingly financing the so-called new assistance that they negotiate these days. We must seriously review whether this is either a fair or a lasting system. There must be greater focus in future on the trend in net resource transfers to developing countries and a major effort must be made to explore all avenues to increase these net transfers—whether by increasing the level of fresh assistance or by providing assistance in a quick-disbursing form, such as through program and sector loans, or by instituting unencumbered lines of credit particularly for the private sector, or by considering consolidation and refinancing of past foreign debts.

It is absolutely vital for low-income developing countries that the volume of concessional assistance be substantially enlarged, its terms improved, and the policy conditionality attached to it tailored to the objective realities in each country. The appointment of a Task Force on Concessional Assistance is an encouraging signal that this problem is receiving attention. I hope that the Task Force will make concrete recommendations on the manner in which net assistance flows must be increased, both in absolute real terms and as a proportion of gross assistance. In this context, the Task Force should also examine whether medium-term consolidation of debts of poorer nations is necessary for this purpose. . . .

The world economy currently faces a deep crisis, the kind of crisis not witnessed since the dark days of the 1930s. Our task is not to find faults but to find solutions. We need the birth of a new internationalism. We need the revival of a new spirit of global cooperation. Together, we can rebuild the world economy on sound and permanent foundations of economic efficiency and economic justice. This can be done by the full participation of developing countries in international economic decision making, not through their exclusion. Our markets and economic futures are linked together in an increasingly interdependent world. Let us respect the imperatives of this interdependence. And let us make a real effort to find realistic and practical proposals for fundamental reforms in the prevailing world economic structures and institutions.

Statement by the Governor of the Fund and the Bank for Vanuatu—Kalpokor Kalsakau

I would first like to join with other Governors in welcoming among us the Governors and delegates from Antigua and Barbuda, Belize, and Hungary who are with us for the first time. I also wish to thank the authorities and people of Canada for the warmth of their hospitality, and to congratulate the management and staff of the Fund and the Bank for their excellent organization of these Meetings.

The very great majority of the problems and concerns with which we were preoccupied a year ago are still with us today: continuing low rates of growth, still higher unemployment, a continued slowdown in the growth of world trade, and the threat of increasing protectionism. It is only in two areas, firstly inflation and secondly interest rates, that the picture has improved to any extent. We must hope that the reduction in the rate of inflation in industrial countries will help to encourage some recovery in demand and output—which in turn will allow some expansion in the developing countries’ exports of raw materials and other goods and, therefore, some small acceleration in their growth rates. As you, Mr. de Larosière, pointed out some months ago, the average growth rate of developing countries in 1981 was lower than their population growth rate for the first time since World War II. Positive growth in per capita terms is no longer assured. And it is therefore uncertain whether the low-income countries in particular can maintain rates of growth that can prevent a decline in real per capita incomes. The very profound social and political consequences that such a development could carry with it should not be brushed aside.

The recent decline in interest rates is, of course, to be welcomed. But lower interest rates alone will not, from the standpoint of developing countries, be sufficient to reverse the critical situation which many of them face. I mentioned just now the threat of increasing protectionism in trade. So far, pressures for across-the-board trade restrictions have been resisted. But recent protectionist tendencies are a cause for growing concern. From the developing countries’ point of view, it is essential that the industrial countries keep their markets open. It is vital too that, in dealing with their economic problems—and I admit that they are many and serious—the industrial countries resist pressures to reduce their external economic assistance. Several countries have announced cuts in their bilateral and multilateral aid programs. I understand the budgetary and other constraints which these countries face. But development assistance is a very small element in most countries’ budgets. I urge that the industrial countries bear in mind the grave implications of a reduction in their aid programs for growth in developing countries and, thus, for their social and political stability. Twenty years ago, the members of the OECD’s Development Assistance Committee gave over 0.5 per cent of their combined gross national products in overseas aid. By 1980, this figure had fallen to 0.38 per cent. In 1981, the figure had fallen still further—to 0.35 per cent. By cutting its contribution to multilateral agencies last year, U.S. aid fell from 0.27 per cent of its GNP to 0.2 per cent. As a result, some other major donor countries delayed or held back their own contributions. Aid from other sources, from private investment, and bank borrowing are not going to fill the resulting gap. The cushion of foreign currency reserves has now all but disappeared for many countries. Unless aid increases and commodity prices pick up, and unless there is an increase in the demand for their exports, then the only outcome for the poorest countries is even more dire poverty and a breakup of the political and social fabric.

It would appear that problems in several areas have, if anything, intensified since we met last year. A further deterioration in the world economy and the international financial system must be avoided. Tinkering with the present framework of international economic cooperation may not be enough. I therefore lend my support to those who have called in recent days, both in Toronto and elsewhere, for a re-examination of that framework and of the international trade and payments system. This can be done, in my view, without prejudicing the very important ongoing work or negotiations already being carried out in several areas.

I would like lastly to say a few words about the particular problems of small island economies. I believe that many small island economies have particular features that deserve special consideration. Nowhere is this more true, in my view, than in the South Pacific.

In the recent past, a number of seminars have been held by the Commonwealth Secretariat, with Fund and Bank participation, which have touched on the problems and policy issues in small island economies. These have been extremely useful, and I draw on at least some of the conclusions of those seminars today.

There are, I believe, a number of features which set the Pacific island countries apart from most small developing countries and many other island economies. Our problems may perhaps be summed up in the phrase “small is disadvantageous.” But it is not smallness by itself which is crucial, but rather it is smallness combined with isolation and, often, a scattered population on small, widely dispersed islands. Many of us are fragmented geographical entities with tiny populations. We tend to be more remote from the major countries of the world which are our market place. We face an inability to exploit economies of scale and a lack of necessary skilled human resources. We are often more vulnerable to adverse developments internationally.

It is in the agricultural sector—particularly in the transportation and marketing of goods—that the disadvantages of small size and scattered location are most obvious. Interisland transport and trade are particularly difficult to organize successfully at low cost—but without them the market is either too narrow or nonexistent. There are problems, too, in bringing together the factors of production in a way that releases enterprise and promotes more productive agricultural practices. We are very dependent on foreign trade. Our dependency on foreign trade is paralleled only by our dependency on foreign capital inflows. Even in the area of foreign capital, smallness has tended to be a disadvantage. Some international financing institutions have operation techniques that do not fit the small-scale needs of island economies. Project financing requirements tend to be much smaller than the average, yet small-scale projects require as much preparation, processing, and supervision as larger projects.

It is even less reasonable, in my view, to expect small island economies to adjust—for example to external shocks—in only one or two years. Fine tuning of our economies, particularly in the short term, is also a great deal more difficult to achieve.

I have suggested just a few features that I believe deserve special consideration. I should like to propose that the Fund and the Bank together join in making an in-depth examination of the features and problems which are peculiar to the island economies of the South Pacific. I believe that we have special problems and, therefore, that we have special needs.

September 8, 1982.

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