Discussion of Fund Policy at Second Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1981
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Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System—Allan J. MacEachen

I would like to report to you briefly on the recent meeting of the Interim Committee but before commencing, I would like you to know that it has been an honor and a privilege for me to have been called upon to be the Chairman of the Interim Committee. It is a pleasure to make this report to you. The communiqué issued at the end of the meeting, held on September 26 and 27, covers the principal topics considered by the Committee. I shall only elaborate a little on some of the issues discussed.

As you are all too aware, the world economic outlook continues to be extremely difficult, suffering from the multiple problems of high inflation, sluggish economic growth, unemployment rates that are already high and in some countries rising, massive imbalances in external payments, interest rates that are high in nominal as well as real terms, and swings in the exchange rates among major currencies. A few encouraging signs are, however, beginning to be discernible, and some success in the control of inflation is one of them. The Committee took note of this but nevertheless re-emphasized that the battle against inflation must continue to have the first priority—most of all because a victory in that battle convincing enough to break the vicious circle of inflationary expectations would pave the way for a lasting reduction in interest rates and the resumption of economic growth on a lasting basis. Anti-inflationary policies must rely on a suitable mix of monetary and fiscal policies. The key role of the control of monetary aggregates was emphasized but it was noted that sufficient support from the fiscal front, involving in many countries a pruning of budget deficits, was also essential. Such an appropriately complementary fiscal policy could also contribute toward an easing of the high rates of interest and the consequent revival of productive investment. The Committee cautioned that a premature easing of firm aggregate demand policies was likely to rekindle inflation without making a lasting dent on unemployment. Attention to supply-oriented measures, such as those improving the mobility of resources, strengthening the incentives for saving and investment, and promoting the effective use and development of energy sources, would strengthen the long-term basis of economic growth.

The difficult external payments situation of the non-oil developing countries has now been staring us in the face for some time. The combined current account deficit of this particularly vulnerable group of countries, after more than doubling in just two years, had exceeded $80 billion in 1980 and further deterioration is expected in 1981. The Committee recognized that the main causes for this adverse turn of events were largely beyond the control of these countries—namely, stagflation in the industrial world, deterioration in the terms of trade, and the sharply higher level of interest rates in the international financial markets. However, it is also true that while some of these exogenous factors could be expected to ameliorate over time, others would not—and meanwhile the magnitude of the external imbalances is such that a determined implementation of comprehensive adjustment measures has become a necessity. Of course, many developing countries are already implementing determined adjustment programs, several of them with the support of stand-by arrangements or extended arrangements with the Fund. The number of such arrangements in support of adjustment programs with upper credit tranche conditionality has increased greatly in the last year. The Committee strongly supported this role of the Fund in the promotion of balance of payments adjustment. In this connection, the Committee also emphasized the crucial importance of the Fund’s surveillance role in connection with balance of payments and exchange rate policies of members and the need for a uniform and symmetrical implementation of this role vis-à-vis all members of the Fund : applicable equally to those with external deficits or with surpluses and equally to those using Fund resources as to those not doing so.

As for the source of finance for the Fund itself, there was a strong consensus that quotas must remain the basic source. As you know, the Executive Board has already begun its work on the Eighth General Review of Quotas. It has for some time been agreed, and this was reaffirmed in the Committee’s deliberations, that this Review of Quotas should remedy the present situation in which the quotas of a good many members do not reflect their relative positions in the world economy. While the Eighth General Review of Quotas is in progress, the Fund’s liquidity position would continue to be kept under review in the light of the demands on its financial resources. Efforts by the Fund to mobilize resources from official sources will continue and, as regards an approach to the private markets, the Committee reaffirmed its view that this possibility should remain open in the light of the evolution of the Fund’s commitments and available resources.

The question of possible further allocations of SDRs was discussed by the Committee on the basis of the provisions of the Fund’s Articles of Agreement and in the light of the various relevant factors, including the importance of strengthening the role of the SDR as a reserve asset, and the need to avoid an undue increase in international liquidity. The Committee agreed to ask the Executive Board to continue its deliberations on whether there should be a further allocation of SDRs at the present time. It also recommended that the scope of such deliberations should include the proposal to extend the third basic period and continue the rate of allocations established in 1978.

Finally, I should like to mention that, at its meeting in Libreville, the Committee had been pleased to accept the gracious invitation of the Government of Finland to hold its next meeting in Helsinki. It has now been agreed that the meeting would be held on May 12–13, 1982.

Statement by the Governor of the Fund and the Bank for Canada—Allan J. MacEachen

I would like to say a few words as Governor for Canada. Before doing so, let me extend a warm word of welcome to Bhutan and Vanuatu. I am in broad agreement with the Interim Committee’s assessment of the international economy. I agree also with its conclusions about ways of dealing effectively with inflation, slow growth, and balance of payments difficulties. I will be weighing these ideas in the weeks ahead as I prepare a budget to deal with the specific problems of the Canadian economy.

Canada recently has had a stronger record on employment growth than most other industrial countries, but we have had to wage a constant fight against inflation, both imported and homegrown. Inflation has imposed a heavy cost on all members of society and contributed to the high interest rates. We cannot expect to reduce those very real hardships until we have come to grips with the underlying inflationary pressures and the expectations that fuel them. That is why our monetary policy has been geared to reducing gradually the rate of growth of our monetary aggregates, and why our fiscal policy has aimed at a reduction over time of the Government’s deficit.

It is clearly our objective to bring interest rates down in order to reduce hardships for families and businesses and to promote growth. However, lower interest rates and better growth depend first of all on lower inflation. Any retreat from a monetary policy aimed at combating inflation would have only short-lasting benefits and would soon compound our difficulties. Similarly, the reduction of budgetary deficits is a necessary companion to monetary policy and also one of the steps we have to take to ease pressures on interest rates. To the extent that all major industrial countries achieve a better balance between monetary and fiscal policy, our individual efforts will be reinforced and the strain of high interest rates will be reduced.

Given our openness, international economic cooperation is particularly important for Canada. The summit that Canada hosted last July strengthened the commitment of the major industrial countries to such cooperation. Evidence of this renewed commitment was the undertaking by the seven summit leaders to resist protectionist pressures, a position that has also been endorsed by the Interim Committee. We hope that new initiatives within the framework of the GATT will confirm this opposition to protectionism.

The Fund and the Bank, of course, have key roles to play in promoting a better international environment. The Fund has been very active in the past year, and its operations have been of great assistance in correcting serious payments imbalances. This has been achieved through programs that provide an appropriate blend of financing and adjustment. It has been especially helpful in encouraging oil importing countries to make the necessary structural changes that are called for, given the current difficult situation. In this context, I fully support the emphasis placed by the Interim Committee on the Fund’s surveillance role and the need for timely and frequent consultations with member countries whose policies impact on the orderly functioning of the international monetary system. This is particularly important at a time of major payments imbalances and turbulent international financial and exchange markets.

If the IMF is to continue to play this central role in promoting adjustment, it must be assured of the necessary financial resources. In the past year, it has received very substantial funding from Saudi Arabia, and it has also arranged for short-term lending facilities from a number of industrial countries, including Canada. I would hope that more countries with favorable underlying prospects for their balance of payments and reserves will find it possible to provide additional resources over the medium term. While I agree with all those who prefer that the Fund rely on its traditional method of borrowing from members, in the light of the somewhat disappointing experience to date, we must leave open the possibility of borrowing from private sources. In this context, I am concerned that, because the Fund has had in recent years to rely quite heavily on borrowed resources carrying market rates of interest, the financial burden of low-income countries that draw on the Fund has increased substantially.

May I express my regret that we have not yet been able to reach agreement on further allocation of special drawing rights. However, I am glad to see that the Interim Committee has invited the Executive Board to give the matter further study and that the possibility of compromise remains through the extension of the current basic period. This is a matter the Board should address on an urgent basis.

The Eighth General Review of Quotas will also have important consequences for international liquidity in the 1980s. There is a general consensus that quotas should remain the fundamental source of Fund resources. If we are to succeed in achieving this, there must be a better balancing of the sources and uses of funds. This is why, in my view, a major restructuring of quotas is in order, based more closely on economic criteria. This would be the most effective way of ensuring that the IMF has the means to continue to play its full role in the international economy. . . .

The international economic picture continues to be a matter of serious concern for all countries, and particularly for the oil importing developing countries. But we can improve that picture. The Fund’s World Economic Outlook and the Bank’s World Development Report offer balanced and pragmatic approaches to do so. They strike a suitable note of guarded optimism for achieving satisfactory noninflationary growth worldwide. Appropriate policies at home and a strengthened commitment to international cooperation by us all will make this goal a reality.

Statement by the Governor of the Bank for the Federal Republic of Germany—Hans Matthoefer

We meet at a time of worldwide transition and structural change, a time of major challenges and major opportunities. The objectives of economic policy—adequate and self-sustaining growth, reasonable price stability, full employment, and equilibrium in international exchange relations—are increasingly difficult to attain. Large imbalances persist in many countries. Abrupt rises in energy prices have compounded our difficulties.

Together we must work toward a more stable world economy, lay the groundwork for renewed noninflationary growth, and provide employment for the labor force of our countries. In view of many unmet needs we cannot afford idle resources. Economic growth helps to achieve a fair distribution of economic resources and opportunities—within our countries and worldwide.

Understanding the interdependence of our economies is basic for any evaluation of our present situation. We must increase the awareness that each of our nations stands to gain from the progress of all others. We must develop opportunities to cooperate across natural, political, and ideological borders, to further confidence, and to shape an economic and political framework for lasting peace.

The Fund and the Bank—each in its respective field of competence—have demonstrated that cooperation between nations of widely differing economic and political beliefs is possible. Their record is proof of a common will to avoid any kind of a beggar-my-neighbor policy which had such devastating effects on the world economy in the 1930s. It is important to strengthen these institutions and to intensify their cooperation while preserving their integrity and specific responsibilities.

The interdependence of the world economy shows clearly in the development of our respective balances of payments in recent years. No doubt the recycling process has once again worked better than initially hoped. The distribution of current account deficits has helped in their financing, since a large share of the deficits fell on countries with undiminished credit standing. Banks have been willing and able to play a major role in the recycling process. The growing involvement of the Fund has been a major stabilizing element in the financial markets.

External imbalances of prevailing dimensions are hardly sustainable for very long periods. One way or the other they have to be reduced: either by deliberate adjustment efforts of deficit countries themselves—if necessary with the support of the Fund—or by a nonvoluntary adjustment process, caused by financial constraints. This underlines the critical importance of the conditionality of Fund lending. The major part of Fund lending is now on terms of full conditionality, which stands in welcome contrast to the period after 1973–74.

For many countries, however, the main part of financing will have to come from other sources, including private financial markets. Supervisory authorities, therefore, need to continue close monitoring of these markets in order to maintain their good condition. Determined adjustment policies—including early recourse to the Fund—will increase the confidence of financial markets. This will facilitate the role of the banks in the recycling process.

Timing and shape of the recovery process of the world economy are, of course, hard to predict. Huge investments are needed to increase efficient energy use, to diversify energy supplies, and to develop, modernize, or reshape our economies. I am confident that, if we all do the right thing, this restructuring process will soon gain momentum and bring about a strong push to growth and employment.

In the industrial countries the fight against inflation begins to show some results at last. However, inflation levels and inflation differentials remain unacceptably high. There is no real alternative to a continued pursuit of credible, consistent, and internationally coordinated anti-inflation policies.

The level of interest rates must be commensurate with prevailing rates of inflation and the need to break inflationary expectations. It is precisely for this reason that our efforts to reduce inflation rates and inflationary expectations must succeed as quickly as possible in order to bring down interest rates and interest rate expectations.

Recently, some countries have relied to a large extent on monetary measures in order to fight inflation. To be successful, monetary policy must not be left alone. A broader-based approach is needed, comprising mutually supportive instruments and policies, the mix of which will have to reflect the circumstances of each individual country.

In most countries this includes, first of all, the need to review critically public budgets so as to reduce deficits and to strengthen incentives for investment, innovation, and economic restructuring.

I appreciate the production efforts made by major oil exporting countries, which constitute a valuable contribution to our endeavor to avoid the danger of a large-scale recession of the world economy. In the medium and long run, the energy situation clearly remains difficult. Oil importing countries must not relax their efforts to save energy and to diversify supplies.

In the prevailing environment of slow growth and high unemployment, protectionist pressures remain active—despite the evidence that our economies have benefited immensely from the postwar expansion of world trade on free markets. All in all, governments have so far withstood these pressures reasonably well. We cannot yet afford to drop our guard. Continued vigilance is needed to preserve and strengthen free trade. It seems appropriate to warn against tendencies to take an exclusively bilateral view of international trade. Restrictive and protectionist practices would most certainly delay economic recovery. They would thwart adjustment efforts by developing and industrial countries alike. We must meet the challenge of structural change rather than run away from it.

Let me now say a few words on the situation in my own country, the Federal Republic of Germany. This year again the current account of the Federal Republic will be in deficit. Relative to the size of the German economy, the deficit is smaller than that of many other countries. It is, nevertheless, very large in absolute terms.

A major factor in the negative swing of our current account is the increase in our oil bill. From 1978 to 1980, our oil bill has doubled from 30 billion deutsche mark to 60 billion deutsche mark, even though we consumed less oil. This year we expect to have to pay DM 70 billion for our oil imports. However, adjustment to the energy situation is well under way and is gaining momentum. Between 1973 and 1980, oil consumption in the Federal Republic fell by 10 per cent, while real GNP grew by 17 per cent.

There will be a further significant reduction in oil consumption this year. These improvements in our real oil imports have come about by our reliance on the price mechanism to produce the desired result. And we will continue along this course of policy. In addition, the Government encourages energy saving and the diversification of energy supplies through a variety of fiscal incentives, supplemented where necessary by regulatory measures.

Reducing our dependence on imported energy is only part of the answer to our current account problem. Since our non-oil imports have also grown at a rate appreciably faster than our exports, we aim at a gradual and steady improvement of our overall external position. We will maintain our competitiveness by encouraging modernization and innovation efforts and by improving our price performance.

Though the Federal Republic of Germany may finance a limited current account deficit more easily than many other countries, we cannot, of course, get accustomed to a deficit of the present size. But our current account is showing significant and encouraging signs of improvement. Seasonally adjusted, the deficit has declined from a peak of DM 9–10 billion in each of the two winter quarters to DM 5 billion in the second quarter of this year. Apart from the reduction in imports, this favorable result has been caused by a substantial improvement in our exports, to a large extent due to the comparative price advantage and the appreciation of the dollar. Since our export orders show sustaining signs of this marked improvement, I expect our exchange rate to reflect this improvement in due course, thereby further reducing our oil bill.

Only the reduction of our current account deficit and, going along with this, the expected renewed rise in confidence in the deutsche mark will give us the necessary monetary independence and will help to achieve lower interest rates in the Federal Republic. As in other countries, our economy does suffer heavily from the lasting high interest rates, imposed upon us from outside. Any marked reduction in the interest rate level will bring a strong push to business activity, thereby promoting investment and lowering our level of unemployment.

Since all our efforts must be directed at achieving a lasting increase in the number of jobs, the Federal Government is making a determined effort to support the adjustment process of our economy. We will keep a tight rein on public expenditure growth, particularly on consumption expenditures.

We will limit the increase of federal expenditure for 1982 to 4.2 per cent, which will be below the expected rate of growth of nominal GNP, and we will reduce net borrowing by more than 20 per cent. In this way we will put an effective brake on the deficit of public budgets and will help to lower capital market rates; this will also help in our efforts to stabilize the price level in our economy.

Although these budgetary measures will not go without some sacrifices for all sectors of society, they will not impair the essence of our system of social safeguards which serves us well in maintaining social peace and promoting public willingness to accent structural change. We will maintain and, if need be, increase outlays aimed at improving the efficiency, productivity, and potential for long-term growth of our economy.

To speak of sacrifices to be borne by people in the industrial countries sounds grossly overstated when compared with the situation in many developing countries. Worldwide, hundreds of millions remain deprived of the barest necessities of life. Giving them new hope is a moral obligation and an economic challenge at the same time. Mass poverty cannot but breed conflict and harm the cause of world peace.

Progress achieved so far would have been greater but for the sharp rise in world population, maybe by another two billion people by the turn of the century. Environmental and resource pressures are bound to rise. These very disquieting prospects underscore the need to stabilize world population, to husband the resource base of the earth, and thus to preserve the long-term potential for humane living standards all over the world.

There is a clear need to reinforce the adjustment efforts of developing countries through increased official aid. A larger share will have to be channeled to the poorest countries with little or no access to private sources of finance. The Federal Republic makes great efforts to step up its financial and technical assistance ta developing countries although we ourselves face some difficulties in financing our budget deficit on the capital market. Development assistance is not the pursuit of political alliances by other means. Development cooperation must rest on respect and support for the self-reliance, independence, and nonalignment of developing countries. And we should not presume to know better than the people concerned themselves how to develop their economies and try to export policies of doubtful value even in our own countries. . . .

As in the past, Germany will continue to base its balance of payments policies on principles of free trade. We will not resort to measures detrimental to international trade. We will not solve our problems at the expense of our partners. We are closely tied into a network of international cooperation in which we will strive to play a responsible role. And we will continue to play our part in the efforts of the World Bank and the International Monetary Fund.

Statement by the Governor of the Fund and the Bank for Ireland—John Brut on

. . . I listened with interest this morning to the comprehensive and lucid review of the world economy by the Managing Director of the Fund. As Mr. de Larosière indicated, there are some encouraging features in the economic outlook. Nevertheless, the overall picture still remains dismaying. There are, as yet, no unambiguous signs of worthwhile recovery. Output remains sluggish, inflation is still high, and unemployment continues to increase. The present level of unemployment in the world could be tolerated with, perhaps, less concern if it were to hold out early and significant prospects of lower inflation and, consequently, of recovery in employment. Unfortunately, there appears to be little prospect of this. In fact, world unemployment seems destined to rise again sharply in 1982 and possibly even in the medium term. The economic and social implications of this should be constantly before our minds.

Perceptions are, of course, influenced by circumstances, and the circumstances of my own country are now particularly difficult. The unemployment rate in Ireland at present exceeds 10 per cent and our population and labor force are both growing at exceptionally rapid rates. A fast rate of increase in employment would be required for the foreseeable future to stabilize unemployment at its present high level. At the same time, we have, like other countries, to grapple with the problem of serious imbalances in the current budget and on the external account. Shortly after my Government assumed office just a few months ago, I introduced a series of measures designed to reverse the rapid deterioration that was occurring on both of these fronts. I was careful, in doing so, not to cut public investment, because of its importance for employment in the short run and for growth in the medium term. My Government intends to use its 1982 budget to build on the progress we have already made.

The position in Ireland graphically illustrates some of the difficulties that the smaller industrial countries have to grapple with in adjusting to the changes of recent years. Some of our problems may be more serious than the average for these countries, since we entered the process of industrialization later than most, and our demographic pattern is unusual in that we have a very large young population. Nevertheless, our position is not untypical. Like a number of the other smaller industrial countries, we are particularly dependent on imported energy, and the rise in world energy prices, aggravated by movements in exchange rates, has hit us very severely. The restrictive stance of international economic policies has had a greater contractionary effect on small open economies, like Ireland’s, than on the larger developed countries. The rise in international interest rates also hits us hard, both because it increases the cost of the investment capital that we need to develop our economy and because, whatever its original purpose, it has the perverse effect in the short term of increasing prices and depressing investment and growth. The key decisions in all of the fields I have mentioned have been taken in other countries without, I feel, sufficient concern in all cases for their impact on either the smaller industrial countries, like Ireland, or on the developing countries whose position is, indeed, far more serious.

We are not, of course, seeking to lay all the blame for our problems on others. This would be far from the truth and would represent a form of self-delusion. We fully recognize that adjustments have to be made at home—not least of which is in the public’s perception of present realities—and we are equally fully determined to make these adjustments. But I stress that our ability to make progress in that direction is often constrained by external decisions over which we have no direct influence.

I urge my colleagues to approach policy questions with flexibility and open-mindedness, and consciously to seek to help the process of adjustment that many countries are going through. I fully endorse the call made in the Fund’s Annual Report for greater international cooperation in economic policy. This is the objective of the Bretton Woods Agreements. Such cooperation is no luxury. It is a necessity if we are to regain the path of growth and defuse the pressures for protectionism around the world. Increased international cooperation is particularly important in regard to interest and exchange rates, given the marked volatility of the past year.

I welcome the call in the Annual Report for an integrated policy approach. In particular, I endorse the recommendation that incomes policy and positive encouragement to investment should feature in that approach. Both of these figure prominently in the program that my Government has adopted. I recognize, of course, that official encouragement to investment is most effective if industrialists expect that there will be market growth to absorb the resultant output. A major deficiency of overrestrictive policies is that, if they stunt market growth, they will also deter investment, thus building in inefficiencies and potential bottlenecks in the economy which will pose a major question mark over their long-term effectiveness.

The Fund itself has had to deal with difficult problems over the past year. We can all take great heart from the success with which our institution has met the challenge. The huge increase in the Fund’s lending activities speaks for itself. By enlarging member countries’ access to its resources, the Fund is making a major contribution to the adjustment process and is helping with the task of recycling funds from surplus countries. I hope that rapid progress can be made toward the completion of the Eighth Review of Quotas, so as to increase the Fund’s own resources. In the meantime, it should continue to borrow as necessary in order to allow its vital lending program to be maintained. It may well be that borrowing from the private markets will prove necessary at some point. Recourse to the private markets should, of course, be accompanied by adequate safeguards to preserve the character of the Fund.

I was disappointed that it was not possible at the Interim Committee to reach agreement on the question of a further allocation of SDRs. The issue is complex, and there are many valid concerns about the different signals that a further allocation might give at this time, for example, as regards inflation. It seems to me, however, that many of these concerns are out of proportion to the effect that a modest further allocation would actually have. I would accord considerable weight to the objective of promoting the role of the SDR in the international monetary system—a role whose potential has been significantly increased by the simplification of the SDR basket and the increase in the interest rate. I hope that, as a result of further consideration by the Executive Board, the Managing Director will soon be able to make a formal proposal for a further modest allocation. . . .

The developed countries themselves must also try to improve their overall assistance programs. My Government intends to increase official development assistance so that the UN target of 0.7 per cent of GNP will be reached by 1990. In addition, at the UN Conference on the Least Developed Countries in Paris earlier this month, my Government stated its intention to devote at least 0.15 per cent of GNP to the least developed countries by the same date.

In conclusion, I hope that, by the time of next year’s Meetings, member countries, as well as the Fund and the Bank, will be able to report improved performance and growing optimism for the future.

Statement by the Governor of the Fund and the Bank for Korea—Seung-Yun Lee

In the 36 years since the Bank and Fund were founded during the last months of World War II, the world economy has come through numerous ups and downs, while the world economic community of nations has continuously been enlarged and diversified.

Yet the problems we face today together as members, and the goals to which we aspire jointly, remain unchanged in their fundamental nature: our objective is to help foster and unleash man’s productive energy wherever its potential may lie and direct it toward a peaceable world, where one country’s actions do not undermine the efforts of the others.

Today, as then, we are gathered here to pull our strengths together in order to overcome various difficulties that, unattended, will most certainly diminish our hopes, not to mention our immediate well-being.

During the past three decades, the value of these meetings has sometimes been questioned. Currently, the very concept of multilateral financial cooperation is being reviewed critically by some, while others find it irrelevant to their future, as they have long suspected it would be. It is therefore no exaggeration to say that what we do at these Annual Meetings to strengthen the concept and make it more relevant to our development efforts will be vitally important in deciding the whole future of these two institutions. . . .

During the past year, two new members have joined the Bank and the Fund, and my Government has great pleasure in welcoming both the Republic of Vanuatu and the Kingdom of Bhutan.

The Bank and the Fund and the World Economy

The year just past has posed a formidable challenge to the Bank and the Fund. The full impact of the second energy crisis that had begun in early 1980 was thrust upon the two organizations. Growth in industrial countries slowed, and the structural imbalances in the oil importing countries from the developing world further eroded their ability to meet their urgent financial needs.

Against this background, I am pleased to observe the positive attitude taken by the management of the Bank and the Fund in addressing the manifold problems the world economy has faced and to note the effective measures they have initiated in order to alleviate the plight of the helpless. The Bank’s operation of structural adjustment lending and the Fund’s handling of enlarged access to Fund resources are cases in point.

I believe that a hopeful lesson can be drawn from the past year, in that the converging and mutually supportive roles of the various international institutions, the private sector, and individual governments went a long way toward minimizing the negative effects of the international recession. Specifically, the Bank and the Fund played an admirable role in defending the case for development; the private sector financial institutions made a major contribution through their recycling activities; and many governments adopted appropriate and timely adjustment policies. The outcome of this individual and collective effort is that the world now appears to have emerged from the depths of the recession.

Nevertheless, the situation is not so bright as to allow us any complacency. The price, physical and spiritual, that all of us had to pay in order to overcome that crisis is simply too great to enable us to risk a repetition. The problems that lie ahead are still enormous and, what is even more alarming, are potentially divisive in nature.

  • —Not only has there been no improvement in the global balance of trade disequilibrium, but also those countries experiencing persistent deficits are suffering the double blow of deteriorating invisibles balances due to rising external debt-servicing costs.

  • —Inflationary pressures have not dissipated despite stringent demand suppression policies that are proving costly both to the countries that adopt them and to their trading partners.

  • —The primary energy situation, while temporarily showing signs of stability, remains uncertain. Long-term supply constraints are still operative. The incremental capital-output ratio for investments in primary energy development continues to increase, while resources available for energy conservation are hard to obtain.

  • —There is the chronic problem of absolute poverty. The least developed countries’ per capita income has not improved over the past decade and the prospect for the next is equally pessimistic.

Although these fundamental problems are apparent to all, the very concept of multilateral assistance is currently under fire in many countries. Some question the efficacy of past approaches, others doubt whether the multilateral approach has ever been relevant to the task, and many in the developing world see such aid as being largely cosmetic. If we fail to develop a closer dialogue on these matters, our organizations will be reduced to a small picture in the world development scene. . . .

The Fund and Its Expanded Role

Innovation, flexibility, and adjustments of policy to reflect the changing environment have characterized the management of the Fund during the past year. My Government notes with satisfaction that the operation of the Fund’s regular facilities supplemented by policies with respect to the supplementary financing facility, and to enlarged access, have all served to almost triple the amount of the resources committed to Fund members over the year. We applaud the management and the Executive Board for having decided to use part of the repayments of the Trust Fund loans to finance the supplementary financing facility subsidy account.

My Government also regards the decision to provide compensatory financing to cover the excess in cereal import costs as constituting a significant improvement in assistance to members.

These innovative policies clearly illustrate that there is no justification for the criticism that the Fund management has not been responsive to the changing nature of the world’s payments problem. Without the progressive attitude of the Fund’s Board and management, the problems faced by many nations during the year would have been greatly aggravated. We must also acknowledge the fact that the Saudi Arabian Monetary Agency and central banks or official agencies of 16 industrial countries generously provided the Fund with resources. My Government for one wishes to pay tribute to the cooperative spirit displayed by the governments concerned.

As well documented in the recent World Economic Outlook, payments imbalances are large and widespread among both broad groups of countries and individual nations. Given their structural nature, these imbalances will remain sizable in the medium term.

For the middle-income countries, in particular, the prospects are not sanguine unless broadly-based adjustment efforts are taken up promptly.

The Korean economy, for example, experienced a reduction in per capita real income due to externally derived inflationary pressure. Despite strong adjustment measures including demand management and structural adjustment, the payments imbalance has not improved, necessitating recourse to sizable commercial borrowing.

This by no means is an isolated case. Nevertheless, the medium-income countries will not give up easily. We shall overcome our present difficulties as we did in 1975–76 by further tightening our belts. But, there is a limit to this policy. If interest rates keep climbing as in the past few years, if protectionism keeps our low value-added exports down, and if medium-income countries are prematurely left to fend for themselves by multilateral agencies, our belts will snap and the painstaking progress of recent years will quickly unravel.

Against this background, the role of the Fund in promoting sound adjustment policies among member countries will prove invaluable.

The Eighth General Review of Quotas

To pursue this objective effectively, the Fund must expand its role in the world’s financial arena. It must assume a larger share of recycling than in the past. In order to do this without continued recourse to borrowing over the long term and to achieve better balance in access to Fund resources, a substantial increase in quotas seems justified. No less important is the need for a substantial adjustment in relative quotas, because many members’ representation in the Fund is far out of line with their positions in the world economy.

In this context, we believe that it is of utmost importance that the Eighth General Review of Quotas gives top priority to bringing about significant adjustments in the relative quota levels, and fully reflects in quota calculations the recent improvements in the economic positions of developing member countries.

My Government fully endorses the management proposals and we especially welcome

  • —The proposal that the increase in quotas should be substantial,

  • —The plan to reduce the intolerable variance between calculated and actual quotas, and

  • —The approach taken, by which the general increase is made in quotas in parallel with the special increase. Moreover, in view of the urgent need to tackle effectively the growing payments imbalances of developing countries, we strongly urge that the review process be expedited and brought to an early conclusion.

World Development and Multilateral Assistance

In reviewing the development experiences of the less developed countries during the past decade, the Bank’s World Development Report singled out several countries, including my own, as something of a model case. Comprehensive and thorough as the study may have been, the Report is conspicuously silent about the Bank’s own contribution to the development process which, I believe, should not be underestimated.

As the representative of a country that is known as a success case, I must emphasize this point. While my country’s credit standing was still low, the Bank and the Fund recognized our potential and channeled to us valuable resources that we could not have secured on our own. The staff of the two organizations have maintained a continuing dialogue with our policymakers. When they have agreed with us on economic policies, they have given us encouragement; when they have differed, their criticisms have invariably been constructive and helpful.

It is clear to us that the unique contributions of the Bank and the Fund to Korea’s development process can be attributed to two factors above all: firstly, the concept of multilateral aid itself and, secondly, the human resources that have been groomed over the years within the two institutions.

Multilateral aid is one of the noblest experiments of our generation. Never before in human history has mankind been more successful in translating abstract ideas into functioning international institutions as it has in the past three decades with the establishment and development of such organizations. In an age of nationalism, functioning organizations with their feet firmly on the ground will surely safeguard the world from the self-centered pursuit of narrow interests.

Statement by the Governor of the Fund for France—Jacques Delors

Despite the serious problems confronting the world economy, it is not too late for us to go beyond the usual confrontations between optimists and pessimists, partisans of laissez-faire and advocates of internationalism.

Since, notwithstanding these divergences, everybody agrees on the importance of making significant progress in the areas of development and expanding trade, it is all the more necessary to take a global rather than a piecemeal approach to the problems of the world economy.

It is on this attitude that France bases its arguments in favor of strengthening the role and resources of the large international organizations. Without this return to the spirit of Bretton Woods, no proper balance can be achieved. It is in this same spirit that France supports an expansion of official assistance, which is a prerequisite for a sound and realistic development policy for individual countries, basing themselves on their own characteristics but forming part of a more interdependent world.

I. Toward a global view of world economic problems

Although I risk being judged a pessimist, I am prepared to recognize that economic trends show some encouraging signs. The world economic picture at this time reveals contrasting features, namely:

  • (1) In general, economies have adapted better to the second wave of oil price increases;

  • (2) Energy consumption is tending to fall, and at the moment the rise in the prices of oil products is moderating; but the positive aspects of this situation are counterbalanced by the fact that we are in the middle of a real recession, and, for a large number of countries, real stagflation;

  • (3) World inflation has begun to slow down, and many industrial countries are making efforts to improve their control over public finances, the liquidity of their economies, and their revenues and prices; and

  • (4) The distribution of current account deficits among the industrial countries has become more balanced. For this reason, among many others, the fears expressed last year for the proper functioning of the private financial markets have not so far been borne out. But what will happen tomorrow?

This being said, it is still no less true that the world economy not only has not emerged from the recession but seems to be more than ever affected by a growing disorder, especially in the monetary and financial spheres.

The most painful indications of this malaise are the considerable increase in unemployment in all our nations and the truly serious position in which the poorest countries find themselves.

This heartbreaking situation shows that we cannot be content with the classical remedies for stimulating world economic activity; nor can we call on the poor countries to meet, with their own resources alone, the requirements imposed by conditional loans. This meeting, therefore, provides an opportunity for critical self-analysis and should lead us to assume comprehensive responsibility for the problems of the world economy.

This comprehensive approach is all the more necessary because inflation remains persistent, and is higher than it was at the end of the adjustment process following the first oil price shock. The fight against inflation must be relentlessly pursued. But how, in honesty, can we avoid asking ourselves about the effectiveness of the means traditionally used to attack inflation, since they have not produced the desired results? A critical spirit and a creative approach are essential, especially if we wish to reconcile financial wisdom with the recovery of investment that is essential to the improvement in productivity which all our economies need. In this sense we have everything to gain from frank discussion and exchange of our respective experiences.

If inflation has not been overcome despite the high social costs of the policies introduced to combat it, what might then be said about balance of payments disequilibria! Adjustment is taking longer than we anticipated last year. Above all, the deficits of the developing countries, in particular the least advantaged of them, are becoming worse: their combined 1981 deficit is estimated at roughly US$100 billion. Clearly the capacities of these countries are not and cannot be sufficient to deal with difficulties accumulated year after year.

The fact is that the now traditional—and perhaps simplistic—distinction between North and South veils significant disparities among the members of each group. According to Fund staff estimates, it is the smallest industrial countries that are sustaining that group’s 1981 deficit in its entirety and nearly three fourths of its 1982 deficit. At the other extreme, those industrial countries with oil resources naturally enjoy a comfortable current payments position. Among the developing countries, there are few points in common among the oil producers, whose surpluses are still considerable, the middle-income countries, which have access to the international capital markets, and the low-income countries, which are unable to resolve their problems without assistance from other governments and international institutions. Paradoxically, the international institutions are providing more resources to middle-income countries than to low-income countries. Hence, the significance of the Conference on the Least Developed Countries in Paris early this month, where commitments were made with respect to increasing official assistance. . . .

When we consider the general conditions for creating an environment conducive to world economic progress, to my mind stress must be laid on the following two requirements:

  • (1) creating the conditions for a relative stabilization of exchange markets;

  • (2) eliminating the temptations of protectionism in all its forms, however well disguised.

Indeed, the disturbances affecting the world monetary and economic order have not been dissipated and are fueling stagflation. Since our last meeting, the exchange markets have been characterized by great disorder. The sole exception has been the European Monetary System, which France continues to support firmly. World trade is continuing to expand, but at an even slower pace than in 1980.

While stressing the urgency of concerted action with respect to exchange rates, I by no means wish to obscure the negative impact of high interest rates, especially when they have effects beyond the borders of one country and influence all money markets. In this area, however, the countries of the European Economic Community, including France, have as yet been unable to convince their U.S. partner of the seriousness of the resulting risks to the international community. These risks include a dangerous destabilization of the developing countries, crushed by their debt burden, and of the industrial countries, undermined by unemployment, the accentuation of inequalities, and the desperation of the younger generation knocking in vain at the door of the labor market. In other words, we are still faced by the interest rate problem in all its breadth and with all its consequences.

For all this, France is not discouraged. It will continue to seek realistic means of promoting a concerted approach followed by coordinated action. Nothing will be overlooked within the framework of what might be called a policy of taking one small step at a time, for lack of alternatives.

In view of this outlook, our country is engaging in a wide-ranging effort to provide its own economy with the resources to meet the challenges of our day. We are expanding the public sector to take full advantage of the opportunities offered by the new industrial revolution and strengthening our productive capacity. We are thus taking measures aimed at having a direct impact on the supply of goods as well as a direct impact on unemployment through an active jobs policy. It is important that economic activity and demand be revived by means of a policy of economic regulation, fully utilizing our unused reserves in deficit spending. This public expenditure deficit, limited by the way to less than 3 per cent of GNP, will be concentrated on investment and job creation. Within the framework of a new policy mix, the implementation of deficit spending will be accompanied by tighter controls over incomes, prices, credit, and the money supply. This policy should make it possible to reduce the fixed costs of the economy, to alter expectations, and to attack the deep-seated causes of inflation. At all events, its success will not be compromised by the external imbalance, since the latter continues to be moderate because of the marked growth of our exports and the reduction in our energy dependence.

We wish more than ever to conduct this policy in a framework of full cooperation with other countries, first within the European Community, of course, but also with the international community as a whole. In other words, we should like to contribute to greater solidarity both on the regional level and on the level of relations between groups of nations. Thus, the “Penelope’s cloth” of a new world economic order could be woven.

II. Toward strengthening the role of international organizations

It is our hope that France’s firm commitment to the international community will be reflected in particular by support for a strengthening of the role of international organizations. In this regard, the balance sheet for the recent past gives us cause for some hope.

Indeed, the Fund, under the leadership of its Managing Director, has increased its assistance in a positive manner and found the resources needed to do so. It is now a significant and irreplaceable net lender to the developing countries affected by the second oil shock and by the increase in interest rates on international capital markets.

We note with pleasure the creation of the subsidy account for the supplementary financing facility, to which France is a contributor, as well as the creation of the food facility which, while more restrictive than we might have desired, is nevertheless beneficial.

The more flexible terms of the extended facility and the first steps toward a more positive form of conditionality and toward collaboration between the two Bretton Woods institutions have made it possible, without in any way departing from the discipline required for adjustment, to adapt requirements more intelligently to the actual situation of borrowing countries, first and foremost to their structural problems. There should be further movement in this direction, which has been quite fruitful, as shown by the initial results obtained in countries receiving a variety of Fund assistance, often supplemented by the efforts of individual countries, including France, and of banks and private investors.

To supplement its own resources, the Fund has borrowed from Saudi Arabia and from the central banks of several countries, including France. We would like other countries to participate in this effort in proportion to the important responsibilities they exercise within the Fund.

The Fund must be in a position to continue and expand these activities. Indeed, the Fund stands as insurance against the inadequacy, or even the failure, of the capital markets. The Fund is also an irreplaceable channel for concessional financing in conjunction with the difficult but necessary exercise of conditionality, designed to restore the borrower’s external equilibrium. For these reasons, France firmly supports a large International Monetary Fund.

However, the growth of the Fund, desirable as it is, must not become uncontrolled expansion. To my mind, Fund recourse to borrowing, which is inconsistent with its calling as a mutual association of governments and an international monetary authority, must remain exceptional and temporary and be limited to approximately its present order of magnitude.

Such recourse must be confined to public borrowing, as borrowing on the market can only deprive the Fund of its special character, transforming it into a kind of Eurobank. This cautious approach is consistent with the nature of the Fund, which is to finance temporary balance of payments deficits of certain members by calling upon the resources of members with surpluses. It is also necessary in order to preserve the concessionality of Fund assistance; the difficulties encountered in creating the subsidy account indicate clearly that this concessionality would be threatened if the proportion of resources at market rates were to become excessive.

In my view, resorting to international monetary creation through new SDR allocations is not justified either, because of the current abundance of international liquidity. Moreover, SDR allocations do not address the true problem so long as no significant progress has been made with respect to the criteria for the distribution of such allocations. If, as France would like, these criteria were to be revised so that the developing countries would receive at least three fourths of the proceeds from the allocation, a new SDR allocation would be justified as a complement to the financing of the developing countries’ adjustment programs. France requests that a study of such new criteria for allocating SDRs be undertaken as soon as possible.

As we agreed in Libreville last May, Fund assistance must therefore be based essentially on quotas. I advocate an Eighth General Review of Quotas that is selective and sizable. Indeed, only a sizable increase in the Fund’s own resources will enable it simultaneously to take into account the relative economic development of each of its members when calculating quotas and to meet the increasing financing needs of the developing countries on manageable terms and as part of a process that encourages efforts to achieve satisfactory economic and social equilibria.

Because of the time requirements and the difficulties of such an operation, I firmly hope that the preparatory work will get under way rapidly and be carried out expeditiously. The agreed date for completing this increase, late 1983, should hence be moved forward as far as possible.

III. Toward a recovery of official development assistance

Is it not clear that the temptation to concentrate exclusively on one’s own problems, so strong in periods of grave crisis, together with the selfishness of the rich, can only lead the whole of humanity into an impasse?

How will the developing countries be able to continue their efforts, how will the least developed nations manage gradually to extricate themselves from poverty, if they are the victims simultaneously of a slowdown in the growth of international trade, which restricts their markets, a deterioration in the terms of trade, which disrupts their external finances, and a deliberate reduction in official development assistance?

I would add that the industrial nations would be revealed as particularly shortsighted if they gave way to this selfish temptation. We are well aware that the principal threat hanging over all countries, whether they belong to the industrial world or to the Third World, is that of an even greater slackening of world economic growth. From this point of view, the reduction in official development assistance is not only a moral offense but an economic mistake.

We must not let the trees hide the forest. Each of our nations could carry out its own separate search for the ways and means to return to the path of growth, by respecting the major budgetary and financial equilibria. But the sum of these policies could very well produce an even more serious situation, and worsen a perverse cycle in which attempts to outflank recession merely feed recession.

It is for this reason that France is committed to a quantitative and qualitative growth in its development assistance.

In our next development plan, we intend to respect strictly the overall targets for official assistance adopted by the United Nations, particularly the target of 0.7 per cent of GNP. This will lead to a considerable increase in France’s assistance to both the least developed countries, to which we have undertaken to allocate approximately 0.15 per cent of GNP, and the other developing countries.

Likewise, France is more than ever in favor of organizing the major international markets for primary products. It is essential that the developing countries be able to count on more stable and foreseeable export revenues. . . .

Allow me in conclusion to refer briefly to the question of the necessary cooperation between the International Monetary Fund and the World Bank. During the last year it has become apparent that it is essential for Bank and Fund activities to be more closely coordinated, so as to make the Bretton Woods institutions even more efficient. France will follow the progress made in this area very attentively, given its concern that this coordination should effectively serve the development of the countries of the Third World.

It is these countries that have the responsibility for choosing and then implementing their own path to development, in accordance with their own characteristics and in the light of their particular advantages and handicaps.

Solidarity is required from all, but particularly from those countries that are wealthier or better endowed by nature. Responsibility is required of all, including the poor countries, which are accountable for their own efforts. These are the simple and obvious principles which, beyond analytical nuances and the diversity of policies, must inspire the international community to transcend its divisions and discover the path of cooperation and freedom. To invoke the spirit of Bretton Woods is precisely to invoke this blend of solidarity and responsibility. In economic and financial terms, this philosophy presupposes a judicious combination of concerted action by nations, and the play of market forces. France intends to work with all its strength to bring about this new synthesis, appropriate for our time, in conjunction with all those who, like her, believe in a more just and more effective international order.

Statement by the Alternate Governor of the Fund and the Bank for Japan—Haruo Mayekawa

. . . I would also like to extend my warmest congratulations to the Republic of Vanuatu and the Kingdom of Bhutan, our newest members from the Pacific and Asian regions, respectively.

World Economy and Japan

1. We are now confronted with severe challenges to the management of our national economies. The world economy continues to suffer from inflation, unemployment, and balance of payments imbalances.

The price of oil has increased more than ten times in the past eight years. This oil price hike has brought about radical changes in both relative prices and the supply-demand relationship of all kinds of goods and services. Moreover, price and wage rigidity is observed to a greater or lesser degree in each economy and the functioning of market mechanisms is becoming insufficient. The excessive growth of the public sector is also progressing. The structure of each economy has not yet fully adjusted to the changes in domestic and international situations.

Under these circumstances, we must give first priority to the containment of inflation. By stabilizing prices, we ought to regain the public confidence in the economic future, thereby achieving sustained economic growth. Disciplined fiscal and monetary policy should be maintained, for the time being, to control aggregate demand at an appropriate level. However, in order to cope with the difficulties that the world economy faces today, the usual aggregate demand control policy alone would be insufficient, and more fundamental measures to improve the economic structures are required. Namely, it is necessary to promote active adjustment of the industrial structure from a medium-term or long-term point of view and to allocate more resources to sectors with high productivity. For this purpose, it is of importance to foster competitive discipline and to secure efficient functioning of market mechanisms. As for the public sector, we must reconsider the role of the Government and make its activities more effective and more efficient.

The structural adjustment of a national economy is difficult to accomplish. The economic order, which has been shaped by historical and social factors, is hard to change. It cannot be reformed without the understanding and cooperation of the public. In order to revitalize the world economy, however, we cannot evade this task. Recently, the international organizations, such as the Fund and the Bank, have strongly emphasized the importance of positive structural adjustment in each economy.

2. In the adjustment process of the world economy, it is feared that the tide of protectionism may become more prevailing. Although protectionism may temporarily ease the pains of unemployment, it preserves the more fundamental cause of illness and thus weakens economic vitality. We should not forget the experiences of the 1930s. Protectionism in one economy spread to others and became an international practice. It reduced the volume of world trade and made the economic difficulties all the more intense. Reflecting such experiences, the free trading system, embodied in the IMF and the GATT, was established after World War II. Rapid increase in the volume of trade within the framework of free trade has been the major vehicle for the stabilization and development of the world economy.

We are now required to make laborious efforts to promote economic adjustment, while maintaining and promoting the liberal trading policy. In particular, in order for the developing countries to develop their economies and to stabilize and enhance their standards of living, it is of extreme importance that we promote international transactions under the free trading system.

Although Japan is already one of the most liberalized markets in the world, we will make further efforts toward a more open economy. It has been proposed that the GATT Contracting Parties convene a ministerial level meeting during 1982. Japan is to support positively this proposal because we believe it will give a new impetus to promoting world trade in the 1980s.

3. Since we depend on imports for more than 80 per cent of our energy requirements, we were forced to face the serious difficulties caused by the first and the second oil crises. However, we have managed to overcome such difficulties as accelerated inflation, economic slowdown, and large balance of payments deficits. This success is, on the one hand, attributable to the appropriate and flexible management of fiscal and monetary policy. On the other hand, it must also be emphasized that there have been strenuous efforts made in the private sector to rationalize business management, conserve energy, create innovative industrial technologies, and determine wages flexibly in accordance with employment conditions. As a result, the rate of productivity growth in Japan has been relatively high in comparison with that in other countries. Since the GNP of the Japanese economy accounts for about 10 per cent of the aggregate GNP of the world economy, I believe that the stability and development of our economy also contribute to the world economy.

In the process of such a severe economic adjustment, government expenditures were positively expanded, while the tax revenue dropped substantially. As a result, we have been suffering from large and accumulated budget deficits. In fiscal year 1979, the ratio of bond financing to total government revenue rose to the extraordinary figure of 35 per cent. In order to promote the sustained noninflationary growth of our economy and to ensure the stability and enhancement of public well-being, we must fundamentally reform the structures of public administration and finance so that they can be flexibly adjusted to changes in social and economic circumstances. From such a point of view, we are tackling the structural reformation of administration and budget as our most urgent and important task. Because of our strenuous efforts toward restoring fiscal soundness during the past two years, the ratio of bond financing to total government revenue has now been lowered to 26 per cent, but we will still have to issue more than US$53 billion, a huge amount of government bonds, during this fiscal year. Further drastic reduction in government expenditures will be made in fiscal year 1982.

International Finance

1. The worldwide payments imbalances between oil exporting surplus countries and oil importing deficit countries still continue to be the most important problem in the field of international finance.

In particular, non-oil developing countries are burdened with stagnant economies and with large accumulated external liabilities. In addition, their current account deficits are forecast to persist on a large scale in the foreseeable future. Success of their economic policy management will depend upon smooth financing of these external deficits. Therefore, it is becoming more and more important to create a favorable climate for channeling funds from surplus to deficit countries.

Japan is not only expanding economic cooperation using official funds but is also contributing positively to the recycling of private funds. With growing confidence in the Japanese economy, the inflow of funds from oil exporting surplus countries to the Tokyo financial market is increasing. The World Bank, other international development financial institutions, and developing countries also are raising more funds in the Tokyo market. The totally revised Foreign Exchange and Foreign Trade Control Law of Japan came into effect last December. It made clear the principle of free external transactions and laid the ground for enlarged international capital transactions.

2. It goes without saying that the role of the International Monetary Fund is extremely important in the field of recycling.

I welcome the establishment of the new facility in the Fund this year, which is financed by borrowings from oil exporting surplus countries and industrial countries. The Government of Japan greatly appreciates the role of this facility and has committed itself to make an appropriate contribution. When the Fund authorizes a drawing, conditionally is imposed to assure the proper implementation of economic adjustment measures in the borrowing country. This practice is helpful in order to increase the confidence of the private market in the borrower, facilitating the inflow of private funds into that country. I believe that the “catalyst” effect in the recycling process which the IMF financing provides should be more properly appreciated.

3. The Fund was originally created as a cooperative institution based on contributions from its members for the purpose of supporting each other among the monetary authorities. Therefore, the principle that the Fund’s quota increase is the legitimate way to replenish its resources should be firmly maintained. Borrowings by the Fund should be considered only as bridging actions between quota increases. If there is a necessity to raise additional funds at an earlier date, judging from the present liquidity position of the Fund, it should be realized by advancing the Eighth Quota Increase.

Because of the insufficient adjustment of quota shares during the previous General Reviews of Quotas, the present quota does not necessarily reflect the changes of the economic realities of member countries. Appropriate adjustments of quota shares should be an integral part of the coming Eighth General Review of Quotas. If such adjustment is made, the function of the Fund will be improved further through the increase in its usable resources.

4. The special drawing right (SDR) was first introduced as a supplement to the insufficient international liquidity. It was not anticipated that there would be an abundance of international liquidity, as we see at present, which has been brought about mainly by the evolution of international financial markets. On the other hand, the present Articles of Agreement of the Fund clearly stipulate that the SDR is to be made the principal reserve asset in the international monetary system. The problem is, then, how to realize this principle under circumstances where the condition of international liquidity has undergone a great change.

5. The exchange rates of major currencies have shown greater fluctuations this year. This has greatly affected the economic policy management of individual countries.

Under the present variable economic conditions, however, it would not be realistic to expect that we will be able to come up with a new scheme that would replace the floating rate of exchange. For the time being, it is appropriate to maintain the present floating system and to improve its management when necessary.

In order to have stability in the international monetary situation, improvement of the economic fundamentals in each country is essential. However, if the developments in exchange markets show excessive volatility not reflecting the economic realities, it is desirable that we take coordinated measures to cope with the problem.

Economic Cooperation

1. According to the World Development Report, the future seems gloomy for non-oil developing countries, especially low-income countries, facing enormous payments imbalances and stagnation of growth. This is the time when more strengthened international cooperation among industrial countries, oil exporting surplus countries, and developing countries is required.

Japan is currently making strenuous efforts, as I mentioned earlier, to reconstruct government finance. However, the Government of Japan continues to give most favorable consideration to the expansion of economic cooperation. This year the Government has set a new target of more than doubling in the next five years the total budget expenditures for ODA over the last five years.

In the process of its postwar economic development, Japan received World Bank loans and other official and private funds. Making effective use of this experience, we intend to cooperate steadily with the developing countries so that the living standards of the public in these countries will be stabilized and improved. From this point of view, let me stress the following points.

First of all, the objective of economic assistance should be the support of self-help efforts by developing countries. It is imperative that, based on the mutual understanding between the developed and developing countries, the efforts of the provider of economic assistance and the self-help efforts of the recipient nation should proceed in harmony.

Second, at the stage of actual implementation, careful consideration must be given to the effective use of funds. In Japan today, every expenditure item in our budget is strictly reviewed. In order to get the support of the taxpayers, it is essential that economic assistance should be proved actually useful for life in the recipient countries.

Third, in formulating the policy for economic cooperation, overall consideration of the appropriate balance and role of ODA, private flows, and transfer of technology is necessary. Especially, in view of the very important role played by private funds in the financing of existing worldwide payments imbalances, it is indispensable to make more use of these funds. For this purpose, I think it very important to prepare, through close cooperation between industrial and developing countries, the necessary conditions for promoting private investment and finance for the developing countries, including improvement of the investment climate in the host countries. In addition, it should be noted that the industrial countries are confronted with large payments deficits and difficult economic and fiscal situations, and are not in a position to increase their ODA substantially.

Fourth, considering the importance of human resources for the social and economic development of developing countries, it is our intention to further intensify our efforts in this field. . . .

Concluding Remarks

It has recently been decided to issue a newly designed Bank of Japan note in 1984. The portrait of Yukichi Fukuzawa will appear on the new Bank note. Mr. Fukuzawa was one of the leading intellectuals at the time when Japan took the first step toward its modernization about a century ago after a long period of isolation. He wrote in one of his most reputed books, An Encouragement of Learning, that the nations of the world

. . . are peoples who live between the same heaven and earth, feel the warmth of the same sun, look up at the same moon, share the same oceans and air, and possess the same human affections. Therefore, nations which have should share with those which have not. We should mutually teach and learn from each other. . . . We should promote each other’s interests and pray for each other’s happiness. We should associate with one another following the laws of heaven and humanity.

The world economy is now in a difficult adjustment process. In the face of the present difficulties, I would like to follow in the spirit of Mr. Fukuzawa and do my utmost, through international solidarity and cooperation, for the realization of balanced growth of the world economy and stability of the international society.

Statement by the Governor of the Fund for Sweden—Lars Wohlin

It is an honor for me to address the Annual Meetings on behalf of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden.

The problems with which we were concerned when we met last year are still with us. Global inflation rates continue to run at a high level, economic growth is slow, and unemployment is still rising and has become a major problem. On the other hand, some progress has been made in the combat against inflation, the overall payments imbalances have been reduced, and achievements have been made with respect to conservation of energy and substitution of oil. The structural adjustment of our economies nevertheless has a long way to go as there simply is no easy and rapid solution to our problems.

We cannot expect that these can be solved one at a time. The industrial countries must shoulder a responsibility with respect to fighting simultaneously against inflation and unemployment. For this reason, macroeconomic policies will have to be supported by measures to reduce market imperfections, to provide incentives for productive investment, and to increase the flexibility of our economic systems. This is needed to strengthen the productive base of our economies and to help pave the way for a sustainable, noninflationary growth. What is at stake is our ability to provide opportunities for the young generation to find its place in society.

Current interest rates on most international markets remain at a high level. More emphasis on fiscal policy would ease pressure on international interest rates. For the five small and open economies in the Nordic area—as indeed for all small nations—developments on the international scene are important indeed. We are well aware of the necessity to keep our own houses in order. But the problems we see in the global economic picture will not be helped by smaller nations applying even more restrictive policies. It is therefore a source of concern that, broadly speaking, small nations do carry and will have to go on carrying a much too high share of the combined external deficit of the industrial countries.

The need for global adjustment stands out as especially vital when viewing the medium-term scenarios recently discussed in the Fund’s analysis, the World Economic Outlook. It is essential that we do our utmost to arrive at a development path close to the more favorable scenarios. Such development is indeed also needed, if we, in the industrial world, are to be able to properly assist the developing nations.

It should be an essential element in the adjustment process to maintain a liberal trade and payments system. Let me join the speakers who have expressed great concern over the re-emerging protectionism as a means of easing the pains of external and internal imbalance. Protectionist measures are no solution. In a longer-term perspective we shall all be losers.

The Fund will have a vital role to play by providing balance of payments financing in support of programs for economic adjustment. It has recently expanded its facilities to give support to member countries, that is, through its policy on enlarged access. This can contribute to a better functioning of the adjustment process.

The expanded Fund assistance to individual members has again brought the question of conditionality to the forefront. There seems to be almost general agreement that conditionality continues to be a necessary element in the stand-by and extended arrangements concluded with the Fund. As to the design and implementation of conditionality there are in my opinion three important requirements. Firstly, conditionality must be strict enough so as to foster real adjustment which is in the long-term interest of the borrowers. Secondly, the economic policy conditions must be reasonably flexible to take account of the specific circumstances of member countries. Furthermore, the conditions for Fund lending should be implemented so as to secure the revolving character of Fund resources. This is a precondition for the optimal use of the scarce funds available. The present guidelines on conditionality, which have recently been reviewed, seem to fulfill these requirements.

An enlarged role in the financing of balance of payments deficits presupposes that the Fund in the coming years can obtain the resources needed for the higher scale of activity envisaged. To the Nordic countries it seems important that the Fund’s liquidity be primarily founded on member quotas. This would also be in line with the cooperative spirit of the Fund. Consequently, we wish to express the hope that work on the Eighth General Review of Quotas could be speeded up as much as possible. We also believe that the review ought to result in a substantial increase in total quotas as well as an adaptation of individual quotas on the basis of economic criteria.

In the meantime, in view of the substantial technical and political complications involved in that review, the Fund has a need for bridging financing on a rather large scale. It is therefore to be hoped that countries in satisfactory balance of payments and reserve positions will be prepared—in addition to the substantial amounts already agreed upon—to extend new loans to the Fund.

As to market borrowing, the prospective liquidity needs of the Fund make it necessary to maintain a proper degree of preparedness. We support the management’s view that the Fund should, in principle, seek to have its outstanding loan commitments covered by its own resources and lines of credit. This, in turn, implies that the Fund should stand ready to borrow from the private markets, if other forms of financing cannot be arranged.

Alongside with supplying conditional liquidity the Fund may provide unconditional resources, that is, in the form of special drawing rights. The objective of enhancing the role of the SDR in the monetary system has been reiterated on many occasions. The functioning of the SDR has gradually been made smoother through the simplification of regulations pertaining to the use of the asset. This has led to a more general acceptance and use of the SDR. However, on the quantitative side the development has been less encouraging. The cumulative amount of SDR allocations today represents a much smaller ratio of global reserve assets than after the first basic period. In my view, allocations of modest amounts should take place during the coming basic period in order to maintain the position of the SDR as a reserve asset.

Finally, regarding the question of subsidizing the use of the supplementary financing facility, I am now in a position to anounce that those Nordic Governments that have been approached by the Fund have decided, subject to parliamentary approval where required, to contribute the amounts calculated for them. We hope that a broader international support for the subsidy account will develop in the near future.

The present economic situation calls for an active role for the Fund in promoting the adjustment effort by supplying balance of payments assistance. The Nordic countries support the Fund’s expanded activities in this regard. However, the present emphasis on financing should not imply that the Fund reduce its efforts in other areas, in particular concerning the surveillance of members’ exchange rate policies. The recent volatility in exchange rates confirms once again that there is a need for increased cooperation and consultation not only between the major currency countries but also within the framework of the Fund.

Statement by the Governor of the Bank for the Netherlands—A. P. J. M. M. van der Stee

. . . World economic developments are far from reassuring, although there are some positive signals and developments.

  • —Inflation is slowing down gradually due to weak commodity prices, an easing of the upward pressure on oil prices, and moderate wage growth.

  • —The prospects for the balance of payments deficit and structure of the OECD area are improving too. None of the major countries seems likely to run a substantial deficit in the year ahead.

  • —At the same time, real growth will pick up gradually to some 2.5 per cent in the second half of 1982.

So the nonaccommodating monetary and fiscal policies, adopted last year, start to show their first payoffs. It would therefore be most unfortunate to abandon them at too early a stage.

Unfortunately, there are also less encouraging developments.

  • —As far as inflation is concerned, the divergences between individual countries remain considerable and even tend to increase in Europe.

  • —Many of the smaller OECD countries as well as the non-oil developing countries are facing serious payments imbalances.

  • —Almost all countries have in common steadily rising unemployment rates to disturbing levels.

These unfavorable economic developments take place against the background of uncertain exchange market conditions and unusually high interest rates.

In this situation a policy of increasing government deficits, rising incomes that exceed increases in productivity, and a monetary policy that fuels inflation should be avoided at all costs. Public opinion has to be convinced of the need for restrictive financial and economic policies to bring about a structural recovery of our economies and a firm base for increased employment.

In particular, the economic development of and projections for the non-oil developing countries cause anxiety. There is no reason for optimism as regards their balance of payments position. Substantial improvements in their current accounts cannot be expected in the short run. Thus they are faced with the question of the appropriate mix of financing and adjustment. It is self-evident that financing and adjustment are closely related, but the decision on the mix should not be determined exclusively by the financing that is available through official bilateral and multilateral channels and through the private markets. In the interest of the countries involved, it has to be based also on a realistic estimate of their longer-term debt-carrying capacity. Apart from that, real adjustment policies of the non-oil developing countries can only be promising if industrial countries pay due regard to their interests in the formulation of trade policies. Until now, liberalization of trade has suffered no fundamental break, but alternatives to traditional protectionist measures are on the rise, endangering the adjustment process.

It proves increasingly difficult to draw a sharp line between the activities of the Bank and those of the Fund. In the past, the Fund took care of temporary balance of payments difficulties, whereas the Bank supplied capital for specific investment projects and for development programs.

This simple distinction no longer fully reflects reality. Yet we must not allow the distinction between the Bank and the Fund to be blurred. The two institutions are financed by different resources. The use of savings permits the Bank to give long-term credit for development. The Fund relies on monetary means of financing, and it should continue to watch over the revolving nature of its resources.

The activities of the Fund and the ways in which these activities can be financed are at the center of our attention, and rightly so. I completely endorse the increased role of the Fund in the international supply of credit which was made possible by the enlarged access policy that we established last year. Until now, however, we paid in my view insufficient attention to the consequences this policy could have for the Fund. The question is whether the Fund borrowing, as it has recently taken place, has to be regarded as a temporary bridging operation or whether it means that we are moving in the direction of a Fund that will always be at least partially financed by borrowing. The latter possibility would imply a fundamental policy change.

  • —First, there are consequences for the liquidity position of the Fund. Whereas quotas are, in principle, permanently at the disposal of the Fund, borrowings have fixed maturities. The matching of the maturities of Fund credits with those of borrowings can create problems.

  • —Even more important is whether member countries see their quota claims deferred with respect to bondholders. Uncertainty on this point could weaken the willingness to accept quota increases. In this way a vicious circle may be created: because of insufficient quota means one resorts to borrowing, and borrowing decreases the willingness to accept quota increases.

  • —A third consequence of borrowing is that the interest charges on credits financed in this way will be close to market rates.

According to me, only one conclusion can be drawn: quotas have to be and remain the main source of financing of the Fund. Borrowing is only acceptable as a temporary bridging operation. In the longer run the lending activities of the Fund have to be tailored to the means that members are prepared to put at its disposal in the form of quotas. An early conclusion of negotiations on the Eighth General Review of Quotas, therefore, is necessary.

After what I have said thus far you will not be surprised to learn that I favor a speedy conclusion of negotiations on the Eighth Review of Quotas. That the negotiations have to be finished before the end of 1983 does not mean that we should not try to finish them earlier. In this connection I attach great importance to selective increases. Such increases strengthen Fund liquidity and would cause the relative shares to correspond better to the economic strength of the member states. Therefore, proposals as to the size and distribution of such increases should be discussed in the Executive Board as soon as possible.

Sufficient quota means and, of course, an appropriate policy as to conditionality can help the Fund to maintain or even expand its role in the financing of balance of payments deficits in the longer run. Equally important as the quantitative role of the Fund, however, is its qualitative role—that of giving the green light to other lenders. This role has been somewhat underexposed because of the large attention given in recent years to the increase of the available amounts and, therefore, to the size of the Fund itself. It is desirable that now the cooperation between the Fund and the commercial banks gets the attention it deserves.

The Netherlands is in favor of a positive decision on a new SDR allocation. One cannot deny that in the past SDR allocations came on top of an uncontrolled supply of other reserves, in disregard of the criterion of global liquidity need. At present the situation is different, in that for the first time in many years the U.S. balance of payments is not in deficit, and thus does not lead to additional dollar creation through U.S. balance of payments deficits. It would not be logical if precisely in this situation the allocation of SDRs were to be stopped. There would be merit in extending the present basic period and, in two years, deciding on allocations for a new period in the light of circumstances then prevailing. . . .

Let me conclude by asking for your attention on the extremely difficult situation of the low-income countries. Most of these countries have limited possibilities of adjusting to the new situation. Therefore, both the Bank and the Fund should be continuously aware of the specific problems these countries are facing. Also, a larger share of total ODA should be directed toward these countries, as recommended by the Paris Conference on the Least Developed Countries. . . .

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

The world has not yet recovered from the effects of the great increase in energy prices in 1979–80. Such large changes in relative prices alter the structure of demand and the conditions of production; require massive transfers of income between nations; stimulate cost and price inflation; and ultimately create internal and external imbalances whose absorption is inevitably slow and painful. A year ago we were expecting a modest recovery of the industrial economies in 1981, but since then we have seen that this hope has had to be deferred. Today we trust that we are now past the trough of the recession and that next year will see a recovery that will lead us to reasonable rates of growth by the middle of the decade.

It is difficult to describe as satisfactory forecasts that are so hard to reconcile with the impatience aroused by the serious problem of unemployment affecting many of our economies. However, as the excellent Annual Report prepared by the Fund shows, not everything has been negative in the last two years: the persistence of difficulties has led to a better understanding of the dimension of the problems facing us and to a clarification of the economic policies needed, as regards both avoiding dangerous, uncoordinated initiatives and eliminating simplistic, partial solutions.

The Fund’s Annual Report speaks of the need to develop integrated economic policies. I believe that this term signifies economic policies that are concerned with both regulating the nominal demand for goods and services and promoting the necessary adjustments on the supply side; policies aimed at achieving a gradual reduction in the rate of nominal growth of demand, and capable of moderating inflation and combating inflationary expectations through an appropriate combination of monetary and fiscal instruments; policies that by containing the rise in money incomes seek to avoid the negative effects of a decline in demand on production and employment in the short term, and facilitate the adjustments in relative costs and prices required for sustained long-term growth; economic policies, in fact, that facilitate the adjustment of supply, beginning with the production and efficient utilization of energy, to the new conditions of the world economy.

These integrated policies have begun to make their appearance in recent years, naturally with variations and different degrees of difficulty from one country to another. We should attribute to them the improved economic performance after the second oil price increase, in comparison with what happened in the aftermath of 1973–74, and we must rely on them to establish a solid foundation from which we can take advantage of the opportunities offered by the anticipated recovery in the world economy from next year onward. The problems we have referred to cannot be solved by simple monetary and fiscal manipulation, however impatient we may be with the present unemployment, but only through coordinated policies aiming at restoring profitability and the capacity for growth to our economies.

It is these considerations that guide the economic policy being followed by the Spanish Government. The budget deficit, inevitable in a period of declining activity, has been kept within limits which, despite the effort made in the area of public investment, have been compatible with an underlying tendency for a gentle reduction in the growth of the money supply. The National Employment Agreement, which emerged from free negotiations between labor unions, employers, and the Government, ensures, in the light of planned monetary and financial policies, that the growth of nominal salaries will be contained in such a way as to create the possibility of a real short-term expansion in the economy, and provides a framework for the relative prices of factors of production that is compatible with long-term growth. The National Energy Plan aims to achieve significant results, which are already starting to appear, in terms of expanding domestic energy production and reorienting demand away from oil toward other sources of energy. At the same time, substantial investments are being made in such sectors as the railways, where considerable improvements in efficiency and energy utilization should be achieved. Finally, the Government is supporting and encouraging reconversion programs in various industrial sectors especially affected by the crisis.

Inertia and friction are such that the changes we are demanding of our economies inevitably cannot take place rapidly. But it is only through these slow and difficult adjustments that we will be in a position to benefit from the opportunities that will be offered by the recovery and expansion of the world economy in the years ahead, opportunities that are fundamental for a modestly-sized economy such as that of Spain, whose sustained growth is difficult to imagine except in the context of stable expansion in the industrial countries.

However, one cannot ignore the scale of the problems currently weighing upon the world economy, which may frustrate these opportunities for expansion.

The Spanish Government shares the view that reducing the present rate of world inflation is a prerequisite for overcoming these problems. If reasonable stabilization is not achieved in the industrial countries, the world economy will continue to be subject to the recessionary influences and the high degree of uncertainty that have affected it in recent years. The major industrial nations, however, must pay attention to the coherence of the various policy instruments—monetary, fiscal, etc.—used to articulate the stabilization policy of each country, and must be concerned with harmonizing their separate national economic policies. Otherwise, the effort to bring about stabilization may lead to a world depression, thus nullifying and rendering purposeless the high associated costs of stabilization, the effects of which we must try to make as shortlived as possible.

Significant problems and risks also threaten the world financial structure as a result of deep-seated international payments disequilibria and the need to finance the deficit countries. Although the private markets have so far responded to these needs in an extremely satisfactory manner, it seems obvious that the major international financial institutions must continue to play a major role in the channeling of loan resources to the deficit countries.

At present, there are clearly no international liquidity problems that might justify SDR allocations. Nor should the creation of SDRs be used to deal with the problems of the deficit countries. However, we have proposed making the SDR the international reserve asset; having made substantial progress in that direction, it would be distressing should these advances now come to a halt. The Spanish Government therefore favors continued issues of SDRs, but in modest quantities.

There is, on the other hand, a liquidity problem within the Fund, which is now under extreme pressure as a result of the more extensive use of its resources as a consequence of worsening international payments imbalances. It is the Spanish Government’s desire in this connection that the basic source of Fund resources continue to be the quotas of member countries. Consequently, the Eighth General Review of Quotas should be completed more rapidly, thereby simultaneously ensuring that the quota structure objectively reflects the relative weights of the various economies in overall international activity. Even so, the increased use of Fund resources makes recourse to additional financing channels necessary. In this connection, Spain has participated with the Bank for International Settlements and member central banks in the recent financing operation concerted by the Fund. Spain has no objection to Fund recourse to private markets in seeking financing provided that, when and if there is a genuine need for such operations, they are temporary in nature and involve moderate amounts and, hence, cause no disruptions or displacement of financing on private markets.

In extending financing to the deficit countries, the Fund plays a dual role: on the one hand, it lends funds directly; on the other, it facilitates the access of those countries to financing from private markets—insofar as these markets have faith in the effectiveness of the conditionality imposed by the Fund and its supervision of the economies in question. In this connection, the relaxation of the conditionality criteria followed by the Fund could entail serious risks and could, in fact, have results contrary to the ones sought by those who would like to see these criteria relaxed.

At the same time, however, the special nature of the current imbalances, their external character stemming from their relation to pronounced shifts in relative prices and relative terms of trade, and the importance of complex and slow-acting supply-side actions in overcoming them have resulted in an alteration of the Fund’s conditionality criteria. This change deserves to be well received since, in most cases, the existing disequilibria cannot be eliminated by simple monetary deflation, the social costs of which may be severe and have a particularly negative impact on developing countries.

It is pleasing to note that this group of countries has managed to maintain real rates of growth rather higher than those recorded by the industrial countries in the current phase of widespread economic recession. However, this relatively favorable experience is not universal; nor should we overlook the serious problems besetting some economies that are struggling to improve their low standards of living in the context of deteriorating real terms of trade, contraction of exports, pronounced external disequilibria, and high real rates of interest that increase the burden of financing their deficits. . . .

To summarize, we have before us several possibilities for improvements that are based on the effects of difficult and slow-acting policies and that could be thwarted, as a consequence of our own errors, resulting in increasing social costs. We trust we shall be able to avoid these risks and that, in an atmosphere of true international cooperation, the world economy will be back on the path of lasting expansion and prosperity in the years to come.

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

Once again, according to the analysis of both the Bank and the Fund and our own experience, the year behind us has not given us much comfort. Stagnation, inflation, unemployment, and current account deficits were the main features of the economies of industrial countries. At the same time their economic weight necessarily influenced the situation in the rest of the world, comprising mostly the less developed countries, which in their struggle toward stability and growth found themselves caught in a whirlpool of conflicting and destabilizing forces.

Some glimmer of light has been detected by the Fund’s staff in its World Economic Outlook, also reflected in the Fund’s Annual Report. Inflation has been somewhat reduced, and the current account situation also showed some improvement. Moreover, the energy problem and that of wages seemed to have been relatively less pressing. But economic growth and unemployment have still to show clearer signs of recovery, and meanwhile new problems are arising. High rates of interest and the weakness of some currencies against the U.S. dollar are creating difficulties for a number of countries, developed and developing alike, requiring new solutions and new adjustments.

Presently, the largest economy in the world, that of the United States, has embarked on a set of new policies, besides the earlier efforts undertaken in the United Kingdom, with a view to achieving a better and more sustainable equilibrium between supply and demand. We do not know what the results will be. We can only hope that the efforts to increase investment and production will succeed, which would reduce inflation, improve the balance of payments, bring down interest rates, and contribute to stability in the exchange markets. Also, with a more balanced growth, the industrial countries are expected to be less tempted to resort to protectionism, which we consider a self-defeating policy.

While the industrial countries are in the process of restoring growth and stability through a variety of supply and demand policies, they should realize that their action or lack of action necessarily has repercussions on the rest of the world which in turn will have an impact on themselves. In varying degrees, industrial countries must sell their products and import raw materials, and this external side of their economies will suffer and therefore affect their domestic situation if less developed countries are so weakened that they cannot function properly. Policies mainly aimed at domestic objectives will ultimately threaten exports and imports of the industrial countries, and of course the less developed countries will also suffer. Even the strongest among them, the large oil producing countries, would presumably be compelled to reduce their activities in the form of purchases from the industrial countries. There is a relationship of interdependence between the interests of developed and developing countries. They need each other for the sake of higher and sustainable growth. It is on this notion of complementarity that the relations between North and South should be based, instead of on compassion or moral justice, however noble they may be in themselves.

The majority of the less developed world, especially those countries with low incomes, deserves attention. A flow of resources into them is necessary in order to keep their economies going and their people alive. As a result of enhanced activity, they will in turn assist the economies of the developed countries. The recycling process has developed smoothly, but the weaker countries cannot benefit from it because they do not have access to capital markets. They are dependent on bilateral and multilateral assistance on easy terms. It is somewhat alarming to hear lately that, instead of concessional and official resources, more private resources should be attracted and tapped by these poorer countries. I believe that, to the extent possible, large numbers of developing countries are doing just that, but as yet many less-privileged countries without natural resources of their own, plagued moreover by the vagaries of nature, simply are not yet in a position to attract private capital to play a role. The survival of their economies and their people is dependent on concessional aid. What is reasonable to expect and necessary for their own benefit is that developing countries should adopt appropriate domestic policies to make an efficient and maximum use of resources made available to them. Over time, as their economies grow stronger, resources from the private capital market would become more available, but at their present stage they need financing on easier terms.

In this respect we welcome the efforts made by the World Bank and the Fund to ensure a continuing flow of resources to developing countries in general and the weaker among them in particular. . . .

As far as the Fund is concerned, it has decided to enlarge the access of members to its resources. Besides its own resources it has decided to borrow. By doing so it participates in the recycling process, and at that it fills the gap between the most needy countries and the capital market. Resources made available by the Bank and the Fund are of course subject to agreed programs of action ensuring the efficient use of the financial means lent to the recipients. With regard to the Fund, its own resources should also be strengthened, which can be done by increasing its quotas and by allocating new SDRs. As it stands now, it appears that substantial quota increases are necessary, including special increases that will have to be carefully balanced against general increases. A new SDR allocation within the framework of need and prudence would promote the objective of gradually making the international monetary system less dependent on national currencies.

Both Mr. Clausen and Mr. de Larosière deserve the strong and unequivocal support of all of us in trying to assist countries to promote economic development and strengthen their balance of payments. Their institutions are vital channels for multilateral assistance.

But bilateral assistance also remains necessary, and again, this assistance should be seen in the light of mutual interest. With the growth of the economies of less developed countries, markets will become larger, and this is an essential prerequisite for continuing expansion of the economies of the industrial countries.

But even with an ensured flow of resources from bilateral and multilateral sources, serious problems remain to be faced and solved. The world cannot continue living with inflation, high rates of interest, disrupted balance of payments, volatility of exchange rates, and high unemployment. Inflation seems to remain the paramount target to be removed with a view to eventually increasing employment. It is the Fund that, according to its Articles of Agreement, should function as the guardian of monetary and financial stability as prerequisites for balanced and sustained economic growth. It is the Fund that should in its contacts and consultations with member countries remind them of the need for adequate policies for the sake of a speedy adjustment. It is the Fund that, based on its surveillance function, should urge countries, especially the major ones, to harmonize policies so that the international community would benefit from their actions. Mitigating high interest rates may require a more balanced mixture of fiscal and monetary policies, and the volatility of exchange rates should be carefully watched in the light of the guidelines on intervention agreed by member countries.

We strongly encourage the Fund to discreetly but firmly exercise its role as the representative of all countries since the weaker among them do not have influence on the major countries to take their interests into consideration.

The world has lived for too long in the shadow of recession and of internal and external instability. It is time for our two institutions and their members to make vigorous efforts to return to a more normal situation. No adjustment is painless. Sacrifices will have to be made, but the longer they are postponed, the more serious they will become. Adjustment has now to be vigorously undertaken not only in developing countries but more importantly in the developed countries. Instability in developing countries mainly has an impact on the relevant countries, but if it occurs and is permitted to continue in the developed countries, the whole world suffers. The developed countries, through bilateral and multilateral channels, have often, and often rightly so, reminded developing countries to make adjustments. For a number of years they have been faced with the same need of adjustment. They should now practice what they have preached to others. . . .

Finally, on behalf of my delegation, I would like to thank most warmly the Government and the people of the United States for the gracious hospitality extended to us and the excellent arrangements that enable our meetings to take place in such a smooth and efficient manner.

Statement by the Governor of the Fund and the Bank for Grenada—Lyden Ramdhanny

It is my honor and privilege to address you today not only on behalf of my country, Grenada, but also on the behalf of my Commonwealth Caribbean colleagues from the Bahamas, Barbados, Dominica, Guyana, Jamaica, St. Lucia, and Trinidad and Tobago. . . .

. . . We are forced to raise the perennial question of protectionism. It is even more vital today, as countries struggle to meet the cost of their energy imports, that they have the freedom correspondingly to expand their exports without undue hindrance. We, therefore, urge industrial countries to liberalize their existing tariff and non-tariff barriers. Only in this way can the structural adjustment that so many are urging on non-oil developing countries be achieved.

I turn to a subject that is of great concern to all developing countries, but which has touched the Caribbean region in a special way. That is the subject of political influence on lending policies of international financial institutions. It is a matter of grave concern to the governments of Commonwealth Caribbean countries that transfers to some of these countries have recently come under such influence. We feel strongly that the lending policies of international financial institutions should not be influenced by political and ideological considerations but should be based on and be in accordance with the principles enshrined in their charters.

We in the Caribbean are, and always have been, prepared to approach our relations with others in a spirit of understanding and cooperation. . . .

I want now to make reference to an issue which, although specific to Grenada and its relationship with the World Bank and the International Monetary Fund, can offer general lessons to many developing country members seeking to transform their economies. In making these brief remarks, however, I speak solely on behalf of the Government of Grenada.

Over the last six months, Grenada has been made a virtual victim of attempts by certain elements to manipulate the procedures and policies of the Bretton Woods institutions. It is our view that political considerations were allowed to override objective operational criteria and lending guidelines, which have delayed Grenada’s access to development financing.

In the face of such blatant manipulation of these institutions to serve the narrow political interests of others, the Government of Grenada acted with great restraint and at tremendous sacrifice both to itself and to the people of Grenada. Our reasons were first, to protect the professional integrity of the staff; second, to forestall a bitter battle within the political directorate of the institution; and third, perhaps most importantly, to obviate friction between the institution itself and certain of its smallest and weakest member states.

In terms of both potential and actual development finance foregone, the cost to us was a significant setback of our ongoing program for structural adjustment, diversification, and recovery of the economy. It is quite likely that, for the next few years, Grenada will pay the price through high unemployment, accelerated depreciation of physical infrastructure, and increasing inability to satisfy the basic human needs of our people.

Our sacrifice came at a time of worsening export prices, drastic increases in import prices, and continuing contraction in tourism receipts. The economy was further affected by unusually bad weather over the last two years, resulting in damage estimated at one third of our total GDP.

However, we take small comfort in the fact that the settlement may allow Grenada eventually to overcome its economic problems. We therefore look forward to a speedy fulfillment of the obligations undertaken by the institutions.

I have taken the opportunity to bring to the attention of this Annual Meeting this matter of major concern not only to Grenada but to all assembled here. I wish on behalf of the Government of Grenada to place on record my country’s appreciation for the understanding and support extended by Governors on this matter.

And finally I would like to remind the international community that the People’s Revolutionary Government of Grenada strongly believes that international economic relations should be based on the principles of nondiscrimination, respect for sovereignty, independence, and the inalienable right of a people to determine their own destiny as enshrined in the UN Charter.

September 29, 1981.

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