Discussion of Fund Policy at Third Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1981
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Report to the Boards of Governors of the Bank and the Fund by the Chairman ad interim of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee)—Manuel Ulloa Elias

The current international economic scene and the development prospects of the world economy in the decade of the 1980s are matters of deep concern and anxiety to the world community. The situation is complex, and there are no easy solutions in sight. The industrial countries face a marked slowdown in their growth, persistent inflation, rising unemployment, near-record high interest rates, volatile exchange markets, and budgetary constraints. Whereas their problems are serious, the plight of the developing countries and, particularly, of the low-income countries is indeed grim and critical. In the shadow of the stagflation in the industrial world, the growth prospects of the developing countries are diminished, their export expansion is threatened, their development imports slashed, their deficits becoming unmanageable, their debt burden is mounting, their poverty profile is accentuated, and their aid prospects show few signs of real expansion. I do not wish to dwell on this scene in greater detail as it is now well recognized; nor do I want to burden you with voluminous statistics that are well documented and analyzed in the Bank’s World Development Report and in the Fund’s World Economic Outlook, both widely circulated.

It is against this grim background that the Development Committee in its two meetings held during the year—one in Gabon in May and the other concluded in Washington this Monday—concentrated its attention on a variety of measures that need to be pursued to meet the serious challenge we all face. The main thrust of our work during the past year has been capital flows to developing countries, both concessional and nonconcessional, bilateral and multilateral. The role of the World Bank and of the regional development banks and the need to increase their lending capacity and programs in the period ahead and, in particular, for the energy sector and for structural adjustment have received special attention. The Committee also gave consideration to the proposals made by the Group of Twenty-Four in their Program of Immediate Action and by the Brandt Commission. Both the Bank and the Fund have considered in detail and have, in fact, in some cases, implemented the recommendations emanating from these two bodies, while others will receive due regard in the future development of their policies.

Another matter of special concern to the Committee was the delay in bringing into effect the Sixth Replenishment of IDA, which had run out of new commitment authority in April this year. It appears now that these problems have substantially been resolved since IDA VI, which represents the most important single source of concessional assistance to the poorer countries, has become effective. The Committee has now requested the World Bank to initiate preparatory discussions for IDA VII as soon as possible.

The Committee also welcomed the coming into effect of the $40 billion increase in the World Bank’s general capital and urged all countries to make subscriptions as early as possible.

The global nature of the energy problem also received the close and serious attention of the Committee. There is a pressing need for expanding exploration for, and development of, domestic oil, gas, coal, and other energy sources in addition to adoption of all possible measures of conservation. While the World Bank and others have been able to provide for some expansion in the lending operations—and they intend to increase them—the search for other means, both public and private, to meet admittedly massive requirements of investments for this critical and high priority sector is continuing.

During the year, the Committee also noted with deep concern, and turned its attention to, the serious situation in sub-Saharan Africa and its growth prospects for the 1980s. This part of the continent already accounts for two thirds of the least developed countries where, in the preceding two decades, output per person rose more slowly than in any other part of the world and where per capita incomes in the current decade are projected to decline. This situation is clearly unacceptable both to the African governments and to the international community. The potential for growth exists, and measures will have to be initiated to realize it through appropriate adjustments in domestic economic policies, efficient use of resources, and increased flows of resources from the international community and institutions. The Committee urged the World Bank to take the lead in carrying forward a dialogue with a view to promoting joint action by African governments, donors, and international agencies with a view to accelerating growth and development through effective financial and technical assistance support, appropriate policy changes, and expanded investment programs.

The growing uncertainty in regard to the volume and terms of non-concessional flows and the magnitude of the financing needs, particularly of the middle-income developing countries facing large balance of payments deficits, prompted the Development Committee to establish a task force for an extensive and in-depth study of the problem. The task force quickly agreed on an extensive program of work and has already presented two valuable reports to us. It is reviewing a whole range of measures for increasing the flow of funds to developing countries, and we await with interest its final report at our spring meeting in Helsinki.

In the critically important area of concessional assistance, the Committee has agreed to establish a task force to carry forward and widen the continuing study of the problem affecting the volume, quality, and effective use of concessional assistance. Consultations in regard to its composition and terms of reference are in progress, and we expect this new task force to start its work before our next meeting.

There have been expressions of some disappointment on the performance of the Committee. In this regard, while we continuously search and adopt measures to enhance its effectiveness, it is perhaps relevant to remember that it was not conceived as a decision-making body. Rather, it is a forum—the only one that exists—where finance and development ministers from the developing countries can discuss broad problems of development and resource transfers with their counterparts from the developed countries and with the participation of all the main multilateral organizations concerned with development issues. The expectation was that discussion at this high political level would facilitate decisions in the appropriate operative bodies. It is not easy to measure the Committee’s contribution in very concrete terms. Few will, however, dispute that the objective for which the Committee was established is still valid. Indeed, the need for such a high-level political forum is greater today than when it was created. If the results achieved so far appear meager and do not measure up either to needs or to expectations, we should engage ourselves in a serious search to identify and analyze the factors responsible for the lack of full success in the past. Do they lie in its structure, its mandate, its procedures, or, perhaps more likely, in the absence of political support that the Committee must command and should receive for its success?

A large part of the human family today lives in absolute poverty. This silent humanity is not decreasing in numbers. It cannot be expected to remain silent for too long. We owe it to them and, indeed, to ourselves to meet this greatest challenge of the century with vigor and determination. Let us keep their hopes alive and invest our time and resources to ensure the progress we all wish to achieve and pass on to the generations that follow.

Statement by the Governor of the Fund for the United Kingdom—Sir Geoffrey Howe


I join my fellow Governors in welcoming to the Bank and the Fund the new members, Bhutan and Vanuatu. . . .

The Search for Stability

As the British Chancellor of the Exchequer, representing a country that is among the founding members of our institutions, I am fortunate to come to this gathering, this year as always, direct from a meeting of the Finance Ministers of the Commonwealth countries, which have so much in common, not least their concern with the problems of development. I also have the privilege, on this occasion, to represent the presidency of the European Community which itself embodies the continuing European aspiration for greater common achievement, combined with an outward-looking concern for the problems of the world economy.

My position is thus, in a sense, a privileged one. It does not, of course, enable me to offer an insight that is in any sense unique. But I can certainly identify the issue that has now come to dominate every occasion at which any group—Community, Commonwealth, or still wider—of finance ministers are called together. It is the instability of the economic conditions in which we all have to do our work. This environment is hostile to our desire to improve the welfare of our peoples. So more and more powerfully there is emerging a common desire to promote greater order in the economic and monetary framework.

This greater stability that we seek is not something which can be imposed. It will not, in any circumstances, come easily. For today’s uncertainties have many causes. They have their origins in the long period of gathering inflation that finally destroyed the Bretton Woods exchange rate system; then two enormous increases in energy prices; and finally, the effects of the fight against this inflation itself. The return to stability will require hard and sustained effort from us all, backed up by these institutions, which we must also sustain.

But stability by itself is not, of course, enough. We need at the same time to foster the dynamics of the marketplace and to cherish those principles of economic liberalism that are essential to the fruitfulness of our interdependence. So there is a crucial balance that has to be struck.

The Role of the Private Sector

The best of governments, and the best of institutions, are not able to take upon themselves the whole responsibility for achieving this balance. Domestically, governments have a prime duty to make room for, and to encourage, all the dynamic and productive elements in their own societies. At the same time, they must take account of the needs of the poorer and weaker among their people. Both requirements hold true internationally as well. Government aid programs and the international institutions have their part to play in promoting help for those in need. It should, however, be a mark of success when countries, like individuals, find themselves able to dispense with direct support from others (whether this support takes the form of ODA to a middle-income developing country or of balance of payments support to an industrial country from the Fund). Internationally, as well as in our national economies, we need to allow the wealth-creating private sector all the room it needs to fulfill its role.

I make no apology for this emphasis on the importance of individual enterprise. A major characteristic of the remarkable recovery and vigorous growth of European economies after the Second World War was the encouragement of the market sector. The so-called economic “miracles,” which occurred in so many of the world’s liberal democracies in the 1950s and 1960s, reflected the efforts of millions of individuals to produce and sell more goods and services and to do so more efficiently. In the process, they achieved a truly remarkable rise in their standard of living.

It is this same dynamic that is helping today to secure rising living standards around the world—particularly, perhaps, in the countries of East Asia and the Pacific basin. Many of these newly industrializing countries have few material natural resources, but they make up for that by the resourcefulness of their peoples. In the past five years, the most successful have been increasing their industrial production by 10 per cent a year or more—and this in spite of the external difficulties caused by successive oil price rises and the slow growth of world trade.

Flows of private capital for investment should have a key role in facilitating this kind of growth. Yet it must be acknowledged that inward private investment is not always welcome; not always, for example, even in some countries in Europe. But it is my firm conviction that it brings great benefits in transferring technology, developing markets, and bringing in new expertise.

The flow of private capital needs to be encouraged. Industrial countries must provide access to their capital markets. The United Kingdom has played its part here by lifting exchange controls two years ago. It is vital too for recipient countries to establish and maintain a climate conducive to investment. The need for enterprises to be profitable means that they must have the prospect of freedom to adopt reasonable pricing policies. Fears of expropriation need to be allayed. In some cases, joint ventures have provided a good solution. I do urge the value and importance of seeking out ways of making private investment capital work to the best advantage.

The private markets have also served us well in the continued success of the recycling process. The international capital market has continued to function in a practical and pragmatic way, in spite of the uncertainties of recent years. Increasing numbers of middle-income countries are now beginning to tap the market. The success of both newly industrializing and middle-income countries in attracting private capital, particularly bank lending, reflects their ability to offer opportunities for profitable and productive investment. This has enabled them both to finance their external payments and to raise their living standards, and is surely the best form of recycling.

We can continue to rely on the banks to fulfill a major role here. They have, however, found that their efforts need to be supplemented by full use of all the Fund’s facilities, including the policy of enlarged access. Most, though by no means all, private capital flows go to the middle-income countries. This is another reason why official aid is rightly concentrated on the poorest. But, that said—and it is important—it is the free market system that has recycled the surpluses and continued to deliver some growth worldwide; a better achievement than in 1975, when world output fell.

But we still face low growth, high unemployment, high inflation, and high and volatile interest rates coupled with great volatility in exchange rates. And high interest rates are adding to the debt burdens of developing countries. This brings me back to the wider outlook for the world economy—the importance of stability, and the discipline that can help us to achieve this.

The Role of Government

The greatest discipline, which we all now recognize, is the need to fight inflation. Success in this fight is essential, and not only for the developed countries. Success is particularly important in the United States. It is crucial to the stability of the world monetary system, on which hinges the prosperity of us all, that the value of the world’s leading currency should be maintained. This U.S. Administration is right, for all our sakes, to give priority to beating inflation.

But, as I know our U.S. friends recognize, such policies cannot succeed simply through high interest rates. These are an index of the extent to which the battle is still being fought. We acknowledge and welcome further efforts just announced by the President of the United States to reduce present and future budget deficits and, thus, the Government’s demands on the capital markets. My own experience teaches me how painful and difficult these efforts are. But it is essential for the rest of the world that the United States should succeed in its efforts to reduce its budget deficit, with consequent benefit to the level of interest rates.

There are similar requirements on all of us. As the Managing Director of the International Monetary Fund has said, budget deficits in the industrial countries in terms of GNP have doubled since 1973. We face the demands of increasing social security programs and of rising defense expenditure caused by international tension. These have come at a time when the increases in the oil price have imposed on the world a great new demand for capital. If interest rates are to come down, it is essential, as the Managing Director said, to reduce public deficits and the demands they make on capital markets. In the United Kingdom, as elsewhere, we are seeking to achieve this by the containment of public expenditure, but in my last budget I also accepted the disagreeable necessity to raise taxes—rather than allow a higher deficit.

The defeat of inflation is not only an end in itself. It is also the essential foundation for sustained growth. The discipline has to apply to all of us. There is no real distinction in this respect between industrial and developing countries, though I well understand that treatment that is difficult for the rich can be painful for the poor. But a cure for the inflationary disease is equally necessary for both. Certainly, the treatment should be applied with as much sensitivity as possible. But our commitment to it must be clear, credible, determined, and persistent.

The Role of the International Monetary Fund

This brings me to the role of the Fund. The IMF has its own part to play, by providing the bridging resources with which to finance well-judged plans of adjustment. We must preserve our balanced approach to the Fund, which recognizes the realities of the present state of the world economy, but does not distort this role. Our support for the international financial institutions should be unquestioned. But we must not transform the Fund into a source for an endlessly expanding transfer of resources. It is first and foremost an instrument for providing balance of payments support in a framework of adjustment. We must preserve this essential character.

It is perhaps worth recalling an address given by Dr. Arthur Burns almost five years ago.1 Fund lending, he said, must not become a substitute for an adequate adjustment policy by borrowers. I particularly commend his key insight, that the adjustment process will remain unsatisfactory,

[U]nless broadly shared agreement develops that international financial affairs require a ‘rule of law’ to guide us through the troubled circumstances that now exist. Such a rule cannot be codified in detail, but it is essential that there be broad agreement that parochial concerns will be subordinated to the vital objective of working our way back to more stable conditions in international finance. . . . Governments also—indeed governments especially—must be prepared to forego their own quite frequent inclination to do things inconsistent with the effective pursuit of Fund objectives. . . . If the rule of law in international monetary affairs is ultimately to prevail, all countries—there can be no exceptions—must fully respect the IMF’s integrity.

This exactly reflects my own approach. The Fund is not some detached entity with an independent existence. Its objectives are—or should be—a manifestation of the collective will of its member states. Its management and staff can, and do, contribute greatly to its effectiveness and success. But in the last resort, the Fund can and will achieve the required objectives only if we allow it, and indeed encourage it, to do so. We must give it our full support.

One feature of our discussions which I have found very striking is the general wish that the Fund should deepen its activity in carrying out surveillance of our national policies. This could help toward a more orderly evolution of the floating exchange rate system. It certainly provides an expert forum in which the problems I have been discussing can be examined and perhaps moved toward solutions.

The cooperative nature of the Fund and the shared expertise on which it draws enable it to speak with genuine authority. The Fund can draw the attention of members to the international repercussions of their domestic policies. The Fund is uniquely well placed to point to the need for more prudence and greater compatibility between national policies if excessive volatility in exchange rates is to be avoided. In this way the Fund can carry out a crucial role in encouraging and overseeing an improvement in the underlying stability of the world monetary system. Certainly, it is right to encourage us all to wind down the inflation that has so savagely attacked the system and threatened the value of some of its principal currencies.

So the significance of the Fund’s potential role is hard to exaggerate. As I have said, this does not, however, entitle any of us to take a detached view, leaving any of these areas to the Fund alone. We must all be ready to accept fresh mutual obligations for the system in a world in which economic strength and responsibility are more widely diffused than in the 1950s and 1960s. We all have a common interest in preventing further oil price shocks. In whatever forum—and why not this one—this is a proper subject for discussion between producing and consuming nations. We all need to pursue medium-term policies that will improve the stability of our economies. Above all, perhaps, we all have to moderate excessive expectations.

I ought to add a word about the Eighth General Review of Quotas, which is now beginning. Some lessons from recent experience should help us in determining what should be the total size of the Fund, in the light of its prospective responsibilities for the rest of this decade. We may find that we have troublesome and sensitive issues to resolve, when we come to consider members’ quota sizes and voting power. For the present, I wish only to reaffirm my belief that the founders of the Fund were right in their view that, in an institution that underpins the international monetary system and so indeed the global economy, quota size and voting power must broadly relate to the stake of member countries in that world economy.

Special Drawing Rights

I turn now to the question of the SDR and its future. We have all subscribed to the long-run objective of making the SDR the principal reserve asset of the system. But we did so at a time when the discipline of fixed exchange rates was still in place and when it was natural to recall the possibility of a shortage of reserves over a large part of the world. The situation today is quite different. We have floating exchange rates and there is no global shortage of liquidity; rather the reverse. The SDR has remained an adjunct of the system, not its center.

The SDR cannot be transformed into the principal reserve asset of the system simply by creating more SDRs and distributing them as unconditional liquidity. If the SDR is to make progress as a reserve asset then it has to be made as attractive as possible to hold in national reserves. Holding the SDR must be seen as a prudent alternative to switching between the main currencies. The five-currency basket for the SDR and the improvement in the interest rate are steps in that direction. There may be others we should explore or reconsider. We should perhaps make it possible to purchase an SDR asset with national currencies, and encourage the transferability or even marketability of such an asset. These are complex questions, but the thrust of our studies should be designed to increase the attractiveness of the SDR as an asset and a unit of value.

But the future of the SDR, like so much else, crucially depends upon the network of all our joint responsibilities, toward each other and toward the world monetary system. The SDR cannot be a strong unit and a worthwhile asset unless those responsible for its component currencies ensure that those currencies retain their value. If, however, they indeed do that to the best of their ability, then there should be a developing obligation on central monetary institutions to consider holding SDRs, or SDR-denominated assets, and to avoid, as far as they can, destabilizing movements between major currencies. This is an important area for study and possible development in the IMF. We should be ready to support any efforts they are able to make in this direction.

The Fund is, of course, playing an important role in recycling, particularly through the policies we approved a year ago relating to enlarged access to its resources. In many cases the adoption of an adjustment program supported by the Fund has led to more substantial inflows of capital from the private markets than would otherwise have been forthcoming. This is a good example of how an orderly institutional framework can help promote the operation of a liberal capital market. It also shows how the Fund can help in providing just such a framework.

The Managing Director is rightly seeking to match the calls on the Fund’s facilities with the proceeds of the borrowings that are financing them. He will make proposals for further borrowing when the need arises. For my part I would not object to some market borrowing, if there is an unavoidable gap to be bridged. Such borrowing must, how-eyer, be seen as essentially a temporary expedient. . . .


The Bank and the Fund both share our common concern over the need to prevent any deepening of protectionism. Each year, we refresh our commitment to the further liberalization of trade, through the multilateral trade negotiations. And if that by now sounds trite, indeed optimistic, we must be ready to struggle to prevent moves in the opposite direction. Pressures for protection are understandable during a recession that coincides with a period of drastic structural change. But it is the first lesson of economic history that these pressures must be kept at bay.

Trade remains the most effective means of strengthening the partnership that is necessary between developed and developing countries. When world growth is slow, there must be risks of increased strife among countries over their share of it—all the more reason to approach the GATT ministerial meeting next year in a positive spirit. Above all, we must not lose our nerve.

All this underlines how important it is for developing countries themselves to open up the channels of trade. The World Development Report has drawn attention to the success achieved by those developing countries which have followed a policy of “outward orientation.” On the one hand, this has involved structuring their economies toward export production. And, on the other, it has involved avoiding excessive concentration on import substitution. Their export producers have thus been able to buy intermediate inputs at the best world prices. The Report notes that countries with outward orientation policies have typically been the most successful, because of the increased flexibility of their economies in adjusting to external shocks. I am sure that there are lessons here for us all.


In the perspective that I have sought to describe, the role of aid certainly remains important. But comparatively, it is far from being the central instrument of development. There is still a tendency to exaggerate what official aid can do—and still more to exaggerate its likely availability. This makes it all too easy to see the road to development primarily in terms of increased international transfers, carried out by governments on concessional terms. This view is based on a misunderstanding of how the world economy actually works. . . .

The countries which most need official aid are the low-income countries, especially those with only limited access to private capital. Britain’s aid program has long been heavily weighted toward the poorest. Roughly two thirds of our aid goes to these countries. This compares with an average of about one third for all OECD and OPEC countries. So I welcome the stress, in the World Development Report, on the need to look carefully at the direction and distribution of aid. . . .

U.K. Aid

The United Kingdom’s aid program is a very large one. This is despite the fact that our economy, like many others, has been going through a particularly difficult period of adjustment, which has been taking place alongside our crucial fight against inflation. As a consequence, and alone among the major industrial countries, we have suffered reductions in national income both last year and this. Our own people are having to make real sacrifices in the cause of restoring the strength of our own economy. In these circumstances, some reduction in the volume of our total aid was inevitable.

Even so, the United Kingdom’s aid program this year exceeds £1,000 million. It is the fifth largest aid program in the world, and each of the four countries with larger programs is substantially richer than the United Kingdom. Relative to the average income of our people, which is about the fairest measure of how well off one country is compared with another, the British aid program ranks very high indeed.

Practically all of our bilateral aid is in the form of straight grants, rather than loans. This is clearly right, for our aid is heavily concentrated on those most in need. We have pledged ourselves to the target of giving 0.15 per cent of our GNP to the least developed; this only puts into the form of a new international target an aim which we have already virtually achieved. In 1980 our proportion was 0.14 per cent.

Furthermore, despite our difficulties we have maintained an open economy—indeed the most open of the major industrial economies—with imports amounting to about one third of our GNP. This figure is higher than most of our European partners of similar size and more than twice as high as those of Japan or the United States. We are also highly dependent on the state of world trade, since we export over one third of our GNP.

And London continues to be one of the most important sources of finance for investment. The British contribution to the development of the Third World, taken in its widest sense—as well as in the rather narrow context of official aid—is substantial and will remain so.

It will not, I hope, be thought immodest if I mention one further contribution of the United Kingdom to the work of development. Our membership in the Commonwealth links us with many developing countries and perhaps gives us a particular sympathy for, and understanding of, the problems such countries face. We are well placed to make, and I hope we do make, a constructive contribution to the dialogue.

For us indeed it is not easy to recognize the alleged difficulties of communications between so-called North and South. As I said in my speech on the occasion of the Annual Meetings last year, I find the North/South division itself both false and misleading. I see no single sharp division, but rather a spectrum of countries at different stages of development. Moreover, it is a spectrum blurred by oil, for sharp changes in the price of oil have created new categories of the very rich, and increased the poverty of some of the very poor.

The concept of a sharp division serves only to obscure the most important questions. How we should transfer resources is a matter of great concern to the poorer among us, and rightly so; since we are all in a real sense interdependent, it must concern us all. But the central question, and this too must be shared, is and must be this: how best to restore growth to the global economy. Growth is what will secure long-term prosperity which can be diffused among us all, to the benefit of those most in need, within our own national societies and in the international community as a whole. But the check has been severe, and is proving hard to overcome. Are there lessons that can be learned from the past? What is the path ahead?

Lessons from Earlier Decades

Looking back again on the decades of the 1950s and 1960s, which can now be seen as something of a “belle époque,” one is struck by the strength of the economic relationships established after the Bretton Woods Conference in 1944. The world was then able to enjoy a stable international monetary system. Progressive liberalization of tariffs and payments systems produced a rapid expansion of growth. Increased technological innovation accelerated the engines of growth. The freeing of international investment flows supported a sustained rise in living standards which could be shared with others.

Our two institutions, together with the GATT, played an important part in these achievements. They have continued to develop flexibly to meet changing needs. I am sure that they can, and should, continue to evolve to the mutual benefit of all their members. We should build on them, not supersede them or change their basic nature. New institutions are not the key to a better future.

But stresses were developing even during those years which, with hindsight, now seem so successful. It seemed then that we had found the key to running the world economy effectively—and could relax. That sense of relaxation subsequently proved to have been seriously misjudged. Governments became overambitious about their role and their ability to shape their economies. Their people were led to expect too much. There was increased government spending, financed by deficits and monetary expansion. Inflationary tendencies were already very strong even before oil prices made their first sharp and dramatic jump. This jump was in part the consequence of past inflation, in part the cause of more. It helped to generate the payments surpluses and deficits and the capital flows which have made exchange rates so volatile, and it further complicated economic management. The second, no less dramatic, jump made things cumulatively even worse.

But at least these developments and their consequences have helped to show that we must try to recapture the more disciplined approach that contributed to the successes of the “belle époque.” It is now widely understood that there are no quick and easy solutions, no painless formulas, no instant victories. The battle we are all fighting, in our own and the common interest, is bound to be a long one.

These are reasons for persistence and determination, not despair. It is encouraging that we are all now more aware of the need to change attitudes. In the industrial countries, we must strive to achieve growth within a framework of stricter financial policies. The fight against inflation must be sustained. We have to pay particular attention to the control of monetary growth, of budget deficits, and public spending. The right monetary and fiscal policies must be matched by sustained moderation in the growth of incomes. By every means we must restore the flexibility of our economies. And in the developing countries, too, there can be no escape from the patient search for policies that will secure the necessary adjustment, hard and painful though the prescriptions may be. All these lessons from the past are becoming more widely understood.

There are still some critics in all our countries who seek to question this analysis. I can understand, of course, why they might like to find a more comfortable approach. But it is part of our task, as finance ministers, to explain that there is no such option. That is the clear message which has emerged with increasingly widespread support, from developed and developing countries alike, from every gathering of this kind that I have attended in the last three years. The government that I have the honor to represent accepts this analysis, which identifies the only way in which we should be able to achieve national or world growth, to overcome the appalling poverty of the least advantaged countries, or to restore hope and dignity to the millions now without work.

We ignore the lessons of history at our peril. History proves that sustained success requires sustained effort. Learning from the history of the institutions we here represent, we need to continue the movement toward greater economic liberalization, at the same time as we restore and strengthen the framework of stability and order. Within our own countries, we are directly and obviously responsible for that good order. Internationally, that responsibility is less direct—but no less real. The institutions we here represent have in the past shown their ability to maintain the international framework. We are responsible for ensuring that they remain able to do so. Let us be sure that we do not fail in that task.

Statement by the Governor of the Fund for Yugoslavia—Ksente Bogoev

The world economic situation and immediate prospects for a great number of member countries continue to be very unfavorable. The slowing down of inflation and the decrease of external imbalances in the developed countries are assessed in some forums as encouraging. These partial results, however, have been achieved on account of the economic growth, unemployment increase, slowing down in international trade, and strengthening of protectionism without precedent in the period after World War II.

As underlined by the Chairman, now more than ever an unproportionately large part of the adjustment burden of the world economy falls upon the oil importing developing countries. These countries are suffering from lagging development aid and worsening terms of trade on the one hand, and on the other, from reduced possibilities of increasing their exports and the increased costs of interest rates on their external debt. It is not only that the growing number of oil importing developing countries must accept a slowing down of their development and losses in income; simultaneously, a further reduction of their foreign exchange reserves and an exceptional increase of short-term debt are taking place.

There are no prospects for the oil importing developing countries to offset by their own efforts the consequences of errors committed in managing the world economy, for which they are least responsible. The world economy is entering an increasingly deeper crisis in the development process, due to exclusively self-oriented policies in some very influential developed countries.

The intensity and duration of the critical situation in the world economy only affirm that the existing system of international economic relations is not adequate to overcome the difficulties. A more symmetric sharing of the burden is necessary on the grounds of recognition of the economic and financial implications of interdependence in the modern world. Therefore, the approach to global negotiations on the system of international economic cooperation in the framework of the UN, to include also monetary and financial relations, should not be delayed any further. We expect the Cancún meeting to mobilize the political will and open the way to commence global negotiations. The success in these negotiations would allow adjustment in our institutions, thus affirming their vitality and ensuring a more active role in the promotion of international economic collaboration in shaping the new international economic order.

The Bank’s World Development Report provides a welcome basis for considering economic measures to be undertaken by countries in different situations. These measures are aimed at the adjustment of their economies, and should contribute to the creation of a more favorable international environment for the development of developing countries. Excessive reliance of adjustment programs on monetary policies in the developed countries resulted in an historically high level of nominal and real interest rates. The burden of external debt servicing of developing countries increased dramatically. This unfavorable environment, together with the decline in the demand from developed countries for imports from developing countries and consequent loss of income, is making the adjustment process in the oil importing developing countries a long and grave one. The Report emphasizes the primary importance of proper domestic economic policies. It rightly indicates, however, that the adjustment process in developing countries is, to a considerable extent, under the impact of external factors, such as the approach to the markets of developed countries and the availability of development aid and credits. Agreement on the key role of the international financial institutions in reducing economic sacrifices in the adjustment process would be insufficient, if not supported by the political will to strengthen the funds and evolving policies of the Bank and the International Monetary Fund in line with the nature and size of the problems. . . .

The projections in the World Economic Outlook indicate a persistence of exceptionally high balance of payments deficits for the oil importing developing countries. Even the optimistic assessments on the readiness of the banking system to resume intermediation in recycling funds toward the oil importing developing countries envisage that developing countries, relying substantially on this source of financing, will have difficulty in providing the necessary inflow. An increasing number of developing countries will face these difficulties even after adopting and implementing a strong adjustment program supported by the IMF. It is significant, therefore, that an important part of the financial needs of these countries be provided through officially supported bilateral loans and recourse to the Fund. It is of exceptional importance that the developed countries, and other countries with available liquidity, support the role of the IMF in alleviating the international adjustment process.

Subscriptions should remain the main source of the liquidity of the IMF. Thus, we are inviting the Board of Executive Directors to intensify its efforts at providing a considerable and timely quota increase through the Eighth General Review of Quotas. In the meantime, Fund borrowing is inevitable as temporary action for bridging the liquidity gap. We strongly support the borrowing from official lenders, stemming from the position that the IMF should remain the institution for international monetary cooperation of governments and central banks. In this connection, I wish to express our recognition to Mr. Jacques de Larosière, Managing Director of the Fund, for all the efforts he has made to provide official borrowing. I wish to stress that the increased portion of funds borrowed at interest rates close to the market rate increases the cost of using these funds. Thus we reiterate the request of the Group of Twenty-Four that the low-income developing countries should be able to use these funds on concessional terms.

We are disappointed by the outcome of the discussions held so far on further SDR allocations. We consider that the quantitative analysis by the staff of the Fund has shown that the effect of the allocation in the proposed order of magnitude would be marginal from the point of view of the addition to total world liquidity increases, and that its possible impact on the money supply and prices in the world would be quite irrelevant. Given that only about 20 per cent of each allocation would go to deficit developing countries, it cannot be argued that the allocation would alleviate their need for the balance of payments adjustment. The allocation rests on the political will of the most influential countries to improve, at least partially, the relationship between the unconditional and borrowed liquidity in the countries unable to rely on creating liabilities in their own currencies. More important, it is up to the political will to enable a continuous process of SDR allocations, without which one cannot claim to support the objective of increasing the role of the SDR as reserve asset. We hope the arguments in favor of resumption of allocations will prevail and that the Managing Director will be in a position to submit the proposal for an allocation of SDR 12 billion annually, commencing January 1982.

Finally, we are conscious that member countries and our institutions, pressed by immediate economic difficulties, are in the process of taking important decisions in an unfavorable international environment that has reduced the number of alternatives. The need for positive effects in the short run must not deter us from fully assessing the important principles of international political and economic behavior, which were the bases of social and economic progress achieved in the past several decades. Among these principles, the respect for national sovereignty in shaping domestic economic priorities and institutional arrangements is of special significance.

Our institutions are an important example of the international economic collaboration among countries at different levels of development, and with different economic systems. Recognition of these differences and creative adjustments to the altered needs will be the best guarantee for increasing the role of our institutions in the emerging international economic order. The summit meeting at Cancún and the initiation of global negotiations should give an important political impetus to this process. A better understanding at this gathering of Governors can encourage developments in that direction.

Statement by the Governor of the Fund and the Bank for India—R. Venkataraman

Let me begin by extending a hearty welcome to our new members—Bhutan and Vanuatu. India has close geographical, cultural, and economic ties with Bhutan and it gives me great pleasure that Bhutan has joined the Bank-Fund family. . . .

The world economic situation presents a picture of continuing crisis characterized by inflation, stagnation, unemployment, and large payments imbalances. The problems are deep-seated and no country has escaped unscathed. But the position of the oil importing developing countries is particularly serious and I will concentrate my remarks on those problems, and what can be done about them.

These countries, which include most of the low-income countries, face a grim situation. Their terms of trade have deteriorated sharply at a time when their export markets are stagnant and protectionism has increased. Their combined current account deficit has risen from $37 billion in 1978 to $84 billion in 1980. And this has happened when financing has become much more difficult. Aid flows are stagnant, and in some cases declining, while commercial borrowing has been made prohibitively expensive. Thus, the oil importing developing countries face the daunting task of adjustment in an external environment that is far from favorable. It is natural that they should look to the Bank and the Fund for greater support in this situation.

External assistance is not, however, a substitute for adjustment. The high cost of energy is a fact of life and each country must adjust to it. We in India have already taken strong measures in this direction. We are giving high priority to measures to reduce our dependence on imported energy, which is a major source of our balance of payments problems. In order to contain the growth of demand for oil products and to raise resources for our investment programs, we have raised prices substantially. We have systematically passed on all increases in the prices of imported crude. We have also raised the price of domestically produced crude effectively to international levels. Fertilizer prices have been raised by over 60 per cent. The total burden of these price adjustments in the short period of eighteen months amounts to over 3 per cent of GDP. This would be austere under any circumstances. It is all the more so at our low level of per capita income.

We have also undertaken an ambitious program to increase domestic exploration and production of oil. These measures will have a significant impact over the medium term, and we expect to reduce the proportion of imports in our total oil requirements from 70 per cent to 40 per cent in the next four years. At the same time we are engaged in a broad-based structural adjustment in the economy. Large investments are planned to expand non-oil energy supplies such as coal and hydro power, and also to build the capacities needed to achieve efficient import substitution and export expansion.

This effort needs both time and money for the adjustment measures to have their full effect. In the intervening period, it will be necessary to finance a substantial balance of payments deficit. This is the crux of the problem facing the oil importing developing countries. They must adjust, but if adjustment is to be accomplished in an orderly manner without sacrificing growth, it must be supported by additional finance. This is the perspective in which we must look at the role of the Bretton Woods institutions in the coming years.

The Fund has a crucial role to play in providing much-needed balance of payments support to oil importing developing countries. We note with appreciation that the Fund’s support to countries with balance of payments difficulties has grown substantially under the dynamic leadership of Mr. de Larosière. Fund resources have been made available in substantial amounts for longer periods to member countries. The enlarged access policy is particularly important from this point of view.

I am aware that the expansion of the Fund’s activities has given rise to concern that there should be no relaxation of conditionality. There can be no dispute that the use of Fund resources should be accompanied by, and should support, the adoption of appropriate adjustment measures and that we should keep in mind the revolving character of the Fund’s resources. In this sense, there is a role for conditionality, but it should be appropriate to the needs of the situation.

In the present situation effective adjustment depends not only on the traditional demand management measures but even more upon supply-side responses, which need heavy investment programs. Yet the traditional approach to stabilization focused too much on short-term measures, often jeopardizing investment objectives. We cannot afford to do this today.

If the Fund is to play this expanded role, which the current situation demands, we must also ensure systematic augmentation of its resources and, in the long run, this must come from members’ subscriptions to quotas. There is today an overwhelming case for an increase in Fund quotas. Even with the recently concluded Seventh Quota Increase, Fund quotas are much lower in relation to world trade today than they were ten years ago. The preliminary exercises in respect of the Eighth General Review of Quotas have not come a day too soon. At the same time, we need to give fuller consideration to the basis on which quotas are determined. Quota calculations should not be based solely on variables such as national income and reserves, which in effect determine the relative economic strength of members and their ability to contribute to the Fund. They should also give due weight to variables that reflect need.

The issue of SDR allocations is also important in view of the tremendously unequal distribution of surpluses in the world economy and, consistent with the objective of making the SDR the principal reserve asset, it is necessary to continue the process of allocation. I hope that the consideration of this question will proceed rapidly and a consensus will emerge for a fresh allocation of SDRs.

Pending the increase in Fund quotas, it may be necessary to supplement the Fund’s resources by borrowing. I would support the Fund’s resort to borrowing, preferably from official sources supplemented to the extent necessary from the private markets. In this connection I would like to express my appreciation to the Government of Saudi Arabia for their substantial support to the Fund’s borrowing program. However, the impact of a larger recourse to borrowing will raise the cost of using Fund resources for its members. I would urge that serious consideration be given to the institution of a subsidy account for the low-income countries using the enlarged access policy on the lines of the imaginative example of the subsidy account for the supplementary financing facility.

. . . We are all aware that official development flows in the past have fallen well below internationally accepted targets. I note with appreciation that the Governments of Canada, France, Japan, and the Federal Republic of Germany have recently announced their intention to step up their ODA flows, but the prospect for overall ODA flows remains discouraging. The urgent need to augment ODA flows, as well as redirecting these flows in favor of low-income countries, has been well documented in the latest World Development Report. . . .

I have spoken of some of the initiatives that could be taken in the Bretton Woods institutions in the coming years. They need only a deep commitment to international economic cooperation. In a few weeks a summit meeting will be taking place in Cancun. Let us hope that it sets the tone for renewed and greater cooperation in future.

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

I would like to join my fellow Governors in welcoming the new members of the Fund and the Bank. . . .

Let me give a brief and general review of the past year. What has happened and what has changed? We had some improvement in the inflation rate. But we faced another increase in unemployment and little progress has been made toward solving fundamental worldwide problems. Though the problems of the industrial countries appear marginal to the developing countries, their solutions nevertheless have definite effects on all of us.

It cannot be our task here to evaluate decisions that affect the national sovereignty of any given country. But since domestic decisions are being made under increased international interdependence, their effects are becoming more far reaching and, to some extent, more compensating for each other. A policy of protectionism of one country then implies shrinking markets and less growth to others. In addition, the fluctuations in financial markets of large countries are felt in one day around the world.

Some countries are concentrating their efforts on reducing the rate of inflation, an important endeavor, but with side effects being a hindrance to others—for example, to those who are primarily interested in fighting unemployment.

Then there are countries that stand in between, who try to dampen the external shocks by harmonizing their national economic policies in the form of a more balanced mix of income, monetary, and fiscal policies. Austria belongs to the latter group. Although, like many other countries, we are confronted with the current high level of interest rates and the high prices for energy, we managed to combat the recession fairly well.

We believe that too much burden should not rest on one institution—the central banks alone cannot save us from inflationary tendencies. A multi-instrumental strategy does offer more possibilities to solve conflicts without too much frictional loss. This implies, though, that the interests of all social groups have to be taken into consideration.

In Austria priority on full employment has brought about the willingness to accept a more moderate incomes policy; as a result, inflationary expectations could be dampened.

The Austrian way has distinguished itself not only by fulfilling its main goal of full employment, but also by implementing a stabilization policy. As a result, Austria today is among those countries with the lowest inflation rates. We believe that a more policy-mix-oriented strategy could also be utilized on an international level and it seems to be necessary to continue and even increase global coordination efforts.

We strongly support the harmonization of economic policies on the national and international level, and we also consider endeavors to discuss global strategies to be very important. In this context, we welcome the forthcoming Cancún meeting.

Let me now turn briefly to the main problems facing the Fund.

Some time ago, the Fund introduced a policy of enlarged access to its resources to cope more effectively with the serious and often structural problems of the world economy. At the same time, the Fund had adopted a more flexible approach in applying conditionality in order to promote adjustment.

The Fund has become considerably more involved in the recycling process than before by concluding sizable loan agreements with a number of lender countries. Although this development may be welcome under present circumstances, we should not ignore its possible long-term effects on the Fund, which makes its resources available on more favorable terms than the markets.

Therefore, the Fund should basically be in a position to cover its members’ financing needs from its own resources. For these reasons, we should speed up the Eighth General Review of Quotas and agree on an overall increase commensurate with the magnitude of prospective imbalances in the world economy. Since the discussions about selective quota adjustments could delay the review, I support very much the idea of a two-step approach, with an appropriate proportional increase in quotas, followed by selective increases.

Furthermore, I should like to say a few words about the Fund’s role as a generator of liquidity, both conditional and unconditional. The present monetary system is characterized by multireserve currencies, volatile interest rates, and massive capital movements that sometimes defy all stabilization efforts. Therefore, we should actively consider measures to free this system from the dependence on the imponderables resulting from today’s multicurrency reserve system. For these reasons, I would not only recommend an allocation of SDRs in the fourth basic period in an amount that will not trigger further inflation, but I also invite the Executive Board of the Fund to re-examine the possibility of setting up a form of substitution account. . . .

Finally, I would like to express my appreciation to the management and the staff for the results which they achieved. I am confident that the Bank and the Fund will continue to successfully meet the challenges of the 1980s.

Statement by the Governor of the Fund for Jordan—Mohammad Said Nabulsi

I have the privilege to speak on behalf of the Arab Governors of the International Monetary Fund and the World Bank. The Arab world, while a part of the Third World, is a diverse group of countries; it includes both important lenders to the Fund and the Bank as well as some of the neediest users of resources of these institutions. My remarks, therefore, are a reflection of the views of a fairly broad cross-section of developing countries.

Allow me to start by joining the others in welcoming the new members of the Fund and the Bank. I would also like to express our appreciation of the Chairman’s opening address. It serves to focus the attention of this meeting on some of the major problems besetting the world economy. I would like also to extend a cordial welcome to Mr. Clausen, and wish him all success in his new capacity, and thank him and Mr. de Larosière for their informative and thought-provoking statements yesterday.

This year’s Annual Meetings take place at a time of considerable economic difficulty and uncertainty. The world economy continues to suffer from high inflation, slow growth of output and world trade, and large external payments imbalances. The persistence of these problems points to a widespread need for adjustment of a broad economic character both in industrial and developing countries.

In the industrial countries, the problems of inflation and recession have stemmed from a set of factors that are rooted fairly deeply in the structure of these economies. As a result, productivity growth has been weakened and the rates of saving and expansion of productive capacity have been low. Accordingly, a set of policies to deal with the problem of stagflation in these countries should include, in addition to demand restraint, measures on the supply side to enhance economic capacity and efficiency by alleviating the structural rigidities and imperfections that impede capital formation and productivity growth.

Although anti-inflation policies have lately begun to show some positive results in some industrial countries, inflation remains a very serious problem and inflationary expectations remain deeply entrenched. Therefore, priority should continue to be given to the fight against inflation. However, the depressive effects of inflation control on output and employment in the short run need to be minimized by a balanced use of monetary, fiscal, and other instruments for economic policy. Too much emphasis on monetary policy has produced excessively high interest rates that are seriously disrupting the development process in developing countries.

In this regard, it is important that the recent upsurge in pressures for additional protectionist measures in the industrial countries must be resisted firmly and that the existing restrictions also be reduced. This was duly emphasized by the Managing Director of the International Monetary Fund yesterday. Trade barriers constitute an important obstacle to the structural adjustments that are currently needed in many industrial countries. They have a particularly damaging effect on the exports of LDCs. Labor-intensive products in which developing countries have a clear comparative advantage are still subject to a great number of tariff and nontariff barriers. Agricultural products are so highly protected in many developed countries that access to their markets is severely restricted. Reduction of trade barriers and stabilization of commodity prices would go a long way toward alleviating the balance of payments problems faced by LDCs.

Turning to the situation in the non-oil developing countries, the problems remain formidable. In most of these countries, the growth rates continue to be low, the external deficits have grown larger, and the financing of these deficits remains difficult. The problems of these countries have been substantially aggravated by the developments in the international economic environment in recent years. These include the depressed demand for their exports as a result of slower growth in industrial countries, a substantial decline in the prices of a number of major primary exports, large and persistent increases in the prices of a wide range of imports, and an increasing burden of external debt servicing.

It is realized that, alongside improvements in the international economic situation, comprehensive adjustment programs are needed in these countries. In addition to conventional measures for short-term stabilization, such programs would include policies designed to address the structural deficiencies that underlie the balance of payments problems.

This raises the question of external financing. While no major difficulties may be envisaged for the middle-income countries among the LDCs, this is not true of the low-income ones. Thus, even if increased claims on the international capital markets did not unduly restrict the flow of funds to LDCs, though doubts have been expressed in some quarters as to the continuing willingness of these markets to assume greater risks, the low-income countries, it seems, would still need to rely to a large extent on the flow of resources through official channels.

Not only have the low-income countries been experiencing much greater difficulty in raising funds on the international capital markets, but they are also the ones that have been most seriously affected by the strains of recent developments in the world economy. Given their low levels of income and the pressure on their meager resources, many of these countries might have to put up with a further slowdown of growth, unless the process of adjustment is facilitated by adequate external financial assistance.

Like other low-income developing countries, the low-income Arab countries have also been affected by the unfavorable developments in the world economic environment. While the problems of the region as a whole have been compounded by the unsettling effects of political uncertainty, for some of the countries this has been further aggravated by the continued foreign occupation of large parts of their land. As regards the Arab oil exporting countries, they are engaged in the difficult task of using the financial resources derived chiefly from the depletion of a single nonrenewable asset to lay the foundations for diversified economies and sustained growth in the long run. At the same time, these countries have pursued policies aimed at easing the world’s economic and financial problems. Their liberal external trade and payments policies have allowed a substantial absorption of imports, thereby contributing to the international adjustment process. Their immigration policies have generated large financial transfers to other developing countries and have strengthened cooperation with these countries. This has been accompanied by substantial aid flows on highly concessional terms. Finally, the Arab oil exporting countries have contributed to easing pressures on exchange markets through a cautious and responsible management of their reserves.

After these general remarks on the current world economic situation, I turn to some specific issues relating to the Fund and the Bank.

In the present circumstances, the role of the Fund in assisting the LDCs in the formulation and financing of appropriate adjustment programs has become even more urgent. The effectiveness of Fund-supported adjustment programs depends greatly on the adaptability of the Fund’s lending policies and conditionality to the special problems and specific structural features of the economies in question. Several changes have been made in this regard over the years. However, many developing countries still feel reluctant to come to the Fund at an early stage of their balance of payments difficulties and continue to consider it as a lender of last resort. There are, therefore, cases in which there is a need for a greater understanding by the Fund of specific conditions confronting individual countries in matters such as the size of financing, the mix of adjustment policies, and performance criteria. Clearly, a greater understanding by the Fund of the economic as well as social realities in member countries would serve to enhance its cooperative character and promote its role in the world economy.

Further, in exercising surveillance over exchange rate and balance of payments policies, the Fund should treat all members equitably and symmetrically. In this regard, it is important that attention should not be focused on borrowing countries alone. The major industrial countries, even when they do not have to resort to Fund financing, should also be at the center of Fund surveillance, since their policies have a great influence on the international economic situation. This important aspect of surveillance is not fully reflected in the communiqué of the recently concluded meeting of the Interim Committee.

For the Fund to perform its role effectively requires that it be supplied with adequate resources. It is generally agreed that the Fund should meet its requirements primarily through its ordinary resources. Increases in the Fund’s quotas in the 1970s have lagged considerably behind the growth of the world economy. The increase in the total of Fund quotas under the Eighth General Review of Quotas will, therefore, have to be substantial if quotas are to remain the primary source of Fund resources. Besides, quotas of many members are far out of line in relation to their positions in the world economy. To make the structure of quotas reflect better the changing global economic realities will, therefore, require substantial relative adjustments in the framework of the Eighth General Review. This review should also be used as an opportunity to achieve a more equitable and balanced distribution of the voting power and representation among major groups of countries. A corresponding adjustment in the relative shares is also called for in the World Bank. The effectiveness of global institutions such as these is undermined if decision making in them is too dependent on the policy stance of a few members. In this regard it is disturbing to note that some major members are calling for limitations on the size of the Fund and the Bank at a time of growing needs of LDCs.

On the question of the allocation of SDRs in the fourth basic period, there is in our view a strong case for a positive and significant allocation as it would be consistent with the three relevant elements provided in the Fund’s Articles of Agreement, namely, meeting a long-term global need to supplement existing reserve assets, while at the same time avoiding both stagnation and inflation, and serving the objective of enhancing the role of the SDR in the international monetary system. We are aware of the apprehensions expressed by some that an SDR allocation might give a wrong signal under the current inflationary circumstances. However, the nature and strength of the signal would depend primarily on the size of the allocation itself. Considering the possible order of an allocation of a reasonable size, and comparing it with the volume of international liquidity generated by other sources, these apprehensions appear to be exaggerated. Besides, there is overwhelming evidence that inflation in industrial countries is primarily a result of domestic financial policies. It is also worth noting that a zero or insignificant allocation could give the signal that the Fund is no longer committed to promoting the role of the SDR in the international monetary system. It should be hoped that further deliberations by the Fund Executive Board on this matter, as urged by the Interim Committee, will produce a positive and early result. . . .

The Arab donor countries have been acutely aware of the growing needs of the poorer countries for concessional aid. The resources available to nine Arab development aid institutions have increased over the past two years from $12 billion to $26 billion. As a result of these increases and the expansion of government-to-government bilateral assistance and contributions to regional and international development institutions, aid by the Arab donor countries on concessional terms alone accounts for nearly 4 per cent of their GNP. In the case of some donor countries, the proportion is higher than 6 per cent of GNP.

We are disappointed to note that official development assistance from the industrial countries is still lagging far behind the modest United Nations target of 0.7 per cent of GNP. Although some of these countries have increased their contributions in recent years, a great deal has yet to be done, and all donor countries should strive to reach at least the United Nations target before the mid-1980s. In this regard, I should also mention that the Arab countries support the establishment of a task force on concessional flows and hope that the task force will come into being before the Helsinki meeting of the Development Committee. . . .

In this context, it is noteworthy that Arab financial institutions have already played an important role in cofinancing with the World Bank. Besides, the Arab financial institutions are getting increasingly involved in the floating of loans to developing countries. Gradually they are emerging as an important vehicle for the recycling of surplus funds alongside the traditional institutions of the industrial countries. It is estimated that, between January 1980 and May 1981, the Arab financial institutions have taken the lead in floating and syndicating over $20 billion in loans and bonds for developing countries.

In conclusion, I would like to say a few words on the PLO issue. The Arab countries are disturbed by the way this issue has been handled in the Bank and the Fund. When the PLO made its application for observer status in 1979, it was not done with the idea of injecting a political controversy in these institutions. It should be recalled that at that time the PLO had already been accepted as an observer in the United Nations and all its specialized agencies, including the UNDP—which is a financial institution. Moreover, in 1979 the UN General Assembly and ECOSOC passed a resolution calling upon all international organizations including the World Bank and the Fund to cooperate with the PLO for the benefit of the Palestinian people. Aware of these considerations, the Group of 77 unanimously endorsed the application for PLO observer status in the Bank and the Fund. The fact that the Group of 77 accounts for 80 per cent of the total membership of these institutions should have carried weight in the granting of observer status to the PLO.

The developments during the last two years came as a surprise to the Arab countries. This is particularly true of developments following the invitation extended to the PLO by the Chairman of the 1980 Annual Meetings, Governor Amir Jamal, in exercise of his legal authority under the By-Laws. It is with a deep sense of disappointment that we note that the laws of these institutions have been bent and twisted so as to block the observer status of the PLO. The principles of legality in the Bretton Woods institutions were seriously compromised, as confirmed by the findings of the Muldoon Report.

The issue for us is not only whether or not the PLO becomes an observer, it is also the extent to which the laws of these institutions will apply to all cases without discrimination. I submit that the answer to this basic question cannot be separated from the integrity of these institutions and their future standing.

Statement by the Governor of the Fund and the Bank for the United States—Donald T. Regan

It is a great pleasure for me to address these Meetings for the first time as U.S. Governor of the Bank and the Fund. I want to join others in expressing a special welcome to Bhutan and Vanuatu as new members, and to Tom Clausen as the new President of the World Bank. I look forward to working with him, with Jacques de Larosière, Managing Director of the Fund, and with my fellow Governors in advancing the work of these vital institutions.

The English author Charles Dickens started his classic novel A Tale of Two Cities by pointing out that these are “the best of times, the worst of times. . . .”

There are similar contradictions in the domestic and world economies at the beginning of this decade. Here in the United States, we are confident and enthusiastic about the prospects inherent in our Economic Recovery Program. And we are emerging from a period of months in which the Government has examined its goals and objectives more thoroughly than anytime in the last 40 years.

Admittedly, this process has caused some uncertainty about the attitude of the United States toward the Fund and the World Bank group.

But let me clear away the fog. The United States spearheaded the establishment of these institutions at Bretton Woods. Our commitment to them, their objectives, and their central role is undiminished.

The Fund and the Bank have key roles to play in fostering economic adjustment and promoting policies that will catalyze the energies of the private sector in promoting investment and trade to foster long-term sustainable development. The United States is deeply aware of the wrenching difficulties facing many of the countries represented here, and we are conscious of our responsibilities for shaping and supporting the efforts of the Fund and the World Bank.

Yet, like Dickens, I must point out both sides of our economic situation.

The world faces serious problems—of inflation, of unemployment, of large payments imbalances and financing needs, and of desperate poverty and hardship in many of our member countries.

At the same time, there are many encouraging signs in our economic future. Inflationary pressures appear to be receding. There is reason to expect gathering economic strength in many industrial countries over the coming year. And the pressures of external imbalances should begin to ease.

In particular, the current account surplus of the oil exporting countries is likely to decline more sharply than expected earlier, with parallel improvement in the current account positions of the oil importing nations as a group.

Soft oil markets and economic recovery in the industrial countries should create a more favorable environment for adjustment by developing countries. With appropriate domestic policies, this group of countries should experience a reduction in its aggregate current account deficit next year—the first reduction since 1977.

It is important that these developing trends be strengthened, and that the opportunities for domestic economic stabilization and adjustment be realized.

As I mentioned, the United States is embarked on a comprehensive new economic program. It rests on the fundamental premise that market mechanisms and individual effort, operating with a minimum of governmental impediments, are the driving forces behind sustainable economic growth.

We are determined to achieve strict control over government expenditure and reduce government involvement in the economy. We are reducing taxes to restore incentives for capital formation and investment.

We are eliminating regulatory impediments that needlessly hinder business efforts to be productive.

And we are firmly committed to stable, disciplined monetary growth. This program is designed to bring inflation under control and revitalize the private sector of our economy.

This is a long-term program designed to meet a long-standing inflationary problem. But it is just beginning, and as the ship of state begins its slow turn, we are bound to feel some strains on the system. Most notably, we feel the impact of high interest rates on our economy—and we recognize the impact on others.

These rates reflect a heritage of inflation and of inconsistent monetary and fiscal policies; they do not reflect any deliberate effort on the part of this Administration or the Federal Reserve. Our aim is to get inflation under control and interest rates down. We intend to persevere and to succeed in restoring monetary and financial stability to the U.S. economy.

The principles underlying the U.S. economic program—encouragement of growth and stability, investment, and the removal of barriers to competition—are, in essence, the principles of the international economic system established in the early postwar years.

The world’s recovery and progress in the decades since World War II owe much to the growth of international trade and investment, responding to market incentives. This could not have occurred without the dismantling of widespread restrictions on trade and investment, and the establishment of an open, multilateral payments system, imbedded in the philosophies of the Bretton Woods institutions and accomplished under their auspices.

As we assess the world’s economic problems, we should absorb the lessons offered in the Bank’s World Development Report and the Fund’s World Economic Outlook.

The lesson of both reports is that those member countries that have recognized the need to adjust, that have allowed market signals to guide that adjustment, and that have pursued open trade and investment policies have, in fact, fared well. Their growth performance and prospects—and thus their ability to meet aspirations of their peoples—are enviable. These countries are acting in the knowledge that getting their own economic houses in order is a job only they can do—and a job that is the prerequisite to economic recovery and growth.

These reports provide a helpful basis for evaluating the activities of the Fund and the World Bank group and for guiding their future efforts. Let me describe the U.S. view of these institutions.

The International Monetary Fund

By facilitating international flows of goods, services, labor, technology, capital, and money, a well-functioning international monetary system serves all of our national interests. In this context, the International Monetary Fund plays a key role by providing the institutional and legal framework for governments to collaborate on these matters.

First, we believe that Fund surveillance of members’ exchange rate arrangements is vital not only to ensure that governments are not manipulating exchange rates to prevent adjustment or gain competitive advantage, but also to enhance our understanding of the factors that influence exchange rates and thus help nations avoid differences over exchange rate policies and exchange rate developments.

The United States believes that exchange rates must be allowed to adjust to changing economic and financial conditions. We are not, however, pleased with the degree of exchange rate instability experienced during the past decade. In our judgment, such exchange rate instability reflects unstable economic and financial conditions within countries. The remedy is not a change in institutional arrangements.

Rather, these conditions should be viewed, as recognized in the IMF’s surveillance provisions, as evidence of the need for restoration of stable domestic economic and financial conditions.

Second, we believe the IMF must continue to be a major stabilizing force for the international monetary system by standing ready to provide temporary financing to countries confronted with serious balance of payments problems. With the sudden large shift in balance of payments financing needs during the last two years, the IMF moved dramatically to increase its resources and expand members’ access to those resources. This was a prudent response given that most countries were confronted with the need to obtain additional financing and undertake balance of payments adjustments.

Not surprisingly, a large number of countries encountering difficulties have turned to the Fund. During the next year or so, no doubt, other countries may need to do so. In our judgment, it is critically important—to the IMF as an institution, to individual borrowing countries, and to the world economy in general—that Fund financing be used only in support of sound and effectively implemented economic adjustment programs.

Before seeking to borrow from the Fund, countries should make every effort to adjust at an early stage in the emergence of their balance of payments problems. In such instances, close and active cooperation with the Fund’s surveillance efforts would be in order.

When a country does turn to the IMF for support, the balance of payments need should be clear; its adjustment program should be designed to restore a sustainable balance of payments position.

Third, the Fund also has responsibility to monitor world liquidity developments and, when necessary, to supplement or restrict the provision of liquidity by the Fund through the Special Drawing Rights Department. In our judgment, world inflationary conditions mirror an excess of world liquidity. A decision to allocate SDRs would contrast sharply with the efforts to restrain money growth in our respective countries and would serve to weaken public confidence in the commitment of governments to achieve price stability. Thus we believe that it would be unwise to allocate additional SDRs at this time. We concur with the Interim Committee’s decision to keep the question of further allocations under review.

In sum, the United States attaches great importance to the IMF’s responsibilities for the international monetary system. We have every confidence that the Fund will meet those responsibilities. . . .


Our commitment to the International Monetary Fund and the World Bank group is consistent with the United States’ steadfast belief that we are on a rising tide of world economic achievement. We are putting our own house in order. President Reagan’s Economic Recovery Program officially begins on October 1. And, as the President told the American people on national television last week, we will not cure our problems overnight, but we are firmly committed to a program of vision and strength that gives us a quiet confidence in the future.

I believe that our accomplishment in this country will be measurable in the rest of the world.

The great American Supreme Court Justice, Oliver Wendell Holmes, once wrote that, “The great thing in this world is not so much where we stand, as in what direction we are moving.”

In the many sessions we have held over the past few days, in my personal discussions with many of you, and in the official statements of this meeting, I have found one overriding impression : that we are moving in the direction of encouraging steady economic growth throughout the world.

The United States is moving in that direction, and we stand ready to provide energetic support to the IMF and the World Bank in the months and years ahead.

Statement by the Governor of the Fund for the People’s Republic of China—Li Baohua

May I begin by extending, on behalf of the Government of the People’s Republic of China, our warm welcome to the new members Bhutan and the Republic of Vanuatu that have been admitted to the International Monetary Fund and the World Bank since our last Annual Meetings. . . . We also wish to express our appreciation to Mr. J. de Larosière, Managing Director of the Fund, for his effective performance over the years.

The economic outlook in the world today is still very grim. The widely shared concerns that preoccupied us at our Meeting here a year ago remain unresolved. Developed countries are still plagued by economic “stagflation.” Most of the developing countries, the low-income oil importing countries in particular, are faced with even greater economic difficulties. Their growth rates have slowed down and in some cases turned negative. Their terms of trade have deteriorated. Their current account deficits have grown larger. Their debt-service burden is increasing. The gap between the “haves” and the “have-nots” continues to widen.

The economic downturn in the developing countries has grave consequences not only for these countries alone, but also for the process of economic recovery in the developed countries as well. In the developing countries, improvement in the people’s livelihood will be adversely affected, which might lead to social and political unrest and provide openings to hegemonistic expansion—a development that cannot but cause grave concern to the international community.

The reports issued by the Fund and the Bank on the state of the world economy affirmed that all countries, the developed and the developing alike, have to undergo structural adjustment to adjust to the changing economic world. Many developing countries have, since their political independence, endeavored to carry out some adjustment in their economic structure to the extent that was necessary and possible in order to promote the development of their national economy. But we all know that the deterioration of their economies is in large measure the result of external factors and, in particular, the trade protection and high interest rate policies adopted by industrial countries. The old international economic order is clearly hampering their economic development. Unless the old international economic order is transformed, it will be quite difficult for them to effectively carry out structural adjustment.

Regrettably, however, no substantial progress has been made toward the establishment of a new international economic order, and an agreement on the agenda and other procedural matters relating to the global negotiations envisaged by the United Nations has yet to be reached, owing to the negative attitude of a few developed countries. It is our hope that the forthcoming North-South Summit to be held in Cancún will yield positive results vis-à-vis an improvement in North-South economic relations and give an impetus to the global negotiations.

A very important point in connection with the effort to establish a new international economic order is to secure a transfer of resources for the economic development of the developing countries, particularly the least developed countries. The IMF and the World Bank are major international financial institutions. They have a unique role to play in promoting economic cooperation among nations and supporting the economic development of the developing countries. Multilateral economic cooperation, which is complementary to bilateral economic cooperation, is viewed highly by the developing countries. Therefore, while promoting global negotiations, the developing countries entertain the hope that the Fund and the Bank will continue as hitherto and, moreover, play a greater role in providing concessional resources and otherwise helping the developing countries to finance their current account deficits, meet their economic development needs, and implement their structural adjustment.

At present, both the Fund and the Bank face the serious problem of a growing discrepancy between limited lending capacity and a rising demand for funds. We hope the major countries in the developed world fully appreciate the urgency and gravity of this problem and make their due contribution toward its solution.

We note that, since the last Annual Meetings, the International Monetary Fund has completed its Seventh General Review of Quotas, increasing its total quotas by 50 per cent, and that preparatory work on the Eighth General Review of Quotas has begun. In implementing the Decision on Enlarged Access to the Fund’s Resources and to supplement the source of its financing, the Fund has adopted the decision on borrowing and entered into borrowing agreements with several member states. . . . All the progress that has been made in these respects, however, falls considerably short of the actual needs. Judging by the nature of the Fund and its experience over the years, we endorse the view that the main source of Fund financing should continue to be the quotas subscribed by member states, and that the Fund should not count on borrowings to sustain its operations. Therefore, we think positive action should be taken in respect of the Eighth General Review of Quotas. In the same vein, the allocation of SDRs for the fourth basic period as a supplementary resource to international liquidity should be implemented on schedule. . . . We support the setting up of a task force on concessional flows and stepping up the work of the Task Force on Non-Concessional Flows, so that these two bodies may study and work out various means for increasing resources and thus cope with the problem of matching the supply of resources with the demand for additionality.

Since the restoration of the legitimate representation of the People’s Republic of China in the International Monetary Fund and the World Bank last year, we have actively participated in the activities of these two institutions. It has helped to enhance mutual understanding and broaden international economic cooperation. . . .

Now I would like to make some brief remarks about economic developments in China during the past year. We have carried forward the adjustment of our national economy in line with our policy of readjustment, restructuring, consolidation, and improvement, so that our economy may develop in a more harmonious manner, the main proportions become more balanced, the structure more rational, and the groundwork prepared for faster growth of the national economy, coupled with a more rapid improvement in the living conditions of the people. Our economy has developed satisfactorily in the past year. In agriculture, the picture for the country as a whole is that the summer harvest was good and the autumn harvest is expected to be better than that of last year; there were, however, severe floods and droughts in some provinces, such as Sichuan and Hebei. Light industry has grown at a faster rate than heavy industry. The neglected service sector has developed at a fairly quick pace. The long-standing imbalance in the proportions between agriculture, light industry, and heavy industry is being corrected. The fiscal position has improved markedly as a result of the cutback in appropriations for capital construction and the exercise of strict control over budgetary expenditures. Foreign trade is expanding continuously. The domestic market is brisk. Prices are stable by and large. Savings in towns and in the country have continued to grow, and the rate of increase in the money supply has been brought under control. All this means that China’s economy is developing soundly and steadily along a correct course.

We are, of course, fully aware of the fact that our task of structural adjustment is an arduous one and will take several years. In this period, we will make further efforts to promote the development of energy, transportation, and other weak links in our economy. A major problem we face is the insufficiency of funds for economic development. In the next few years, in particular, we expect to continue to have considerable payments deficits. We are determined to rely mainly on our own efforts and, through a variety of feasible means, accumulate domestic funds to support our production and construction. At the same time, we seek cooperation with and assistance from international financial institutions and friendly countries to help us complete our economic adjustment in a satisfactory manner over the next few years. The outward-oriented policy is the set policy of the Chinese Government. As in the past, we shall continue to implement the policy of expanding ties of international cooperation and exchange, enhancing mutual understanding and friendship, and learning from the good experience of other countries.

Being a socialist developing country, China is ready to work together with other countries in a spirit of friendly cooperation and consultation aimed at promoting better economic relations between the developing countries and developed countries and at resolving pressing international economic issues.

Statement by the Governor of the Fund for Italy—Beniamino Andreatta

I wish to welcome among us Bhutan and Vanuatu, who joined our institutions since we last met a year ago. . . . I also wish to thank the host country for the warm hospitality extended to us, and President Reagan for having honored our Meetings with his presence. Finally, I want to congratulate the Fund and Bank management and staff for the excellent organization of these Meetings.

World Economic Outlook

In the two years following the second oil shock our economies have been afflicted by slow growth, inflation, rising unemployment, and large external imbalances. Although some progress is being made, major improvements on all these fronts cannot be expected in the period immediately ahead.

Confronted with a drain of real resources in the order of 2 per cent of GDP, most industrial countries have been able to contain domestic inflationary repercussions by pursuing policies of demand restraint; the decision to pass on to consumers the higher oil costs and the slowdown of activity, along with reduced oil demand, have led to softer oil market conditions. Although, with moderate growth of domestic incomes and some recovery of world trade, the external deficits of industrial countries as a group are expected to decline considerably in 1982, unrelenting efforts to adjust our economies to changed world conditions are required.

Greater determination to reduce external deficits and inflation will generally be needed also on the part of developing nations. It is vital, however, to maintain an adequate level of investment in these countries to avoid the re-emergence of today’s difficulties. To facilitate their adjustment effort, it is of the utmost importance that we all strive to maintain a liberal trade system and to increase the flow of official financial assistance, especially to the needier countries.

We share the view expressed by the Interim Committee that premature expansion of aggregate demand could generate new price pressures without necessarily contributing to a sustained reduction of unemployment. In this regard, it is important that monetary restraint be accompanied by policies designed to reduce the size of budgetary deficits. There is in fact the risk that excessive reliance on monetary policy could result in the persistence of high interest rates, likely to hamper the recovery of investment and growth.

In our view, recent gyrations in exchange rates of major currencies call for greater cooperation at the international level with a view to reducing erratic movements and overshootings in foreign exchange markets. The IMF should be prepared to exercise firmer surveillance over exchange rate policies, for it is imperative that member countries give adequate consideration to the international repercussions of their domestic policies. As a means of restoring greater exchange rate stability, thought could be given anew to agreeing on reasonably broad target zones for major currencies to be progressively narrowed as conditions permit.

Although world financial markets have been effective in recycling the oil surpluses and in accommodating the enlarged financial needs of deficit countries, signs of strain begin to appear. Debt-service ratios have increased considerably, partly as a consequence of the appreciation of the U.S. dollar and the high level of interest rates. Moreover, in certain instances prudential considerations may be limiting new lending to a number of countries. It is, therefore, difficult to escape the conclusion that greater emphasis must be placed by many countries on the reduction of external deficits rather than on their financing.

A distinct contribution to reducing tensions in financial markets is being made by the enlarged role of multilateral institutions in financing external deficits, notably with the implementation of the Fund policies for enlarged access and those for structural adjustment of the World Bank. For the success of these policies it is essential that an appropriate degree of conditionality be maintained.

The Italian Economy

The impact of the second oil shock proved especially serious for the Italian economy, not only because of Italy’s high energy dependence, but also as a consequence of its interaction with the sustained pace of growth in domestic demand, considerably above that of other industrial countries. The external accounts showed a sharp deterioration, and inflation rose to more than 20 per cent, reflecting also the indexation of wages and pensions, which tends to amplify external shocks on domestic prices.

As in other countries, our adjustment process was to take place through a policy mix based mainly on the tightening of fiscal and monetary policies, with a view to restraining demand and avoiding the secondary repercussions on prices of the new oil price hike. However, as the economy started to slow down toward the end of 1980, the public sector deficit resumed its rise as a result of larger expenditures previously approved by Parliament, of less rapid increase in fiscal revenues, as well as of a growing public debt burden stemming from higher interest rates.

The Bank of Italy responded to the new circumstances through the enforcement of stricter credit ceilings. However, the effectiveness of this direct method of control was to a certain degree blunted by the reactions of banks and market operators. The Bank of Italy thus came to rely increasingly on indirect methods of control, thereby accepting the necessary consequences in terms of interest rates, which rose substantially. In March 1981, the discount rate was raised by 2.5 percentage points, to 19 per cent and the banks’ marginal reserve requirement was simultaneously increased from 15.75 to 20 per cent. Moreover, the central rate of the lira in the EMS was devalued by 6 per cent; this was only a partial adjustment to the inflationary differential accumulated vis-à-vis other EC countries. Our policy remains that of using the exchange rate as an instrument to force greater efficiency and readjustments in the manufacturing sector through the pressure of international competition.

These measures were to be accompanied by sizable cuts in government expenditure, a particularly difficult task since a major share of state spending in Italy consists of transfers to local authorities and social security systems, which have considerable scope to expand expenditure outside the direct control of the Government. We have come to realize that the reduction of the large public sector deficit requires among other things a fundamental change in the relationship between Central Government and local authorities so as to re-establish budgetary responsibility at all government levels. This applies also to public enterprises which have so far avoided major restructuring by relying on government to cover their deficits.

The appreciation of the dollar in 1981, in a context of unsettled international financial markets, the liquidity creation resulting from growing Treasury financing requirements, and the continuing relative strength of domestic demand thus combined to create a very difficult situation. In the first five months of 1981, the current external account on a cash basis recorded a deficit of some $7 billion. This was reflected in a substantial decline of official foreign exchange reserves. In the absence of prompt and effective measures, speculative movements against the lira might have led to a full-fledged foreign exchange crisis. This was regarded by the Italian authorities as an unacceptable risk, mainly because of the adverse repercussions on inflation. Therefore, at the end of May, the Government introduced a 30 per cent 90-day deposit requirement on purchases of foreign exchange.

In the four months from June to September, the balance of payments recorded a substantial improvement, although a large deficit is still expected for the year as a whole. While a more favorable evolution in both relative cyclical and competitive positions has made for positive changes in the real components of the balance of payments, the main factors behind the improvement must be related to the deposit scheme itself and the further tightening of credit policies.

The Italian Government is determined to foster adjustment by reducing in 1982 the overall financing requirement of the public sector by some 2 per cent of GNP, and by continuing restraint in monetary management. It is worth noting in this respect that recently the Bank of Italy was released from its obligation to purchase Treasury paper. This has considerably increased the Bank’s autonomy and has made it possible to speed up the attainment of our goal to abandon, as soon as circumstances permit, credit ceilings, and to shift to indirect control of the evolution of monetary aggregates. Furthermore, the Government is actively encouraging employers and labor unions to agree on moderate wage settlements and on measures to improve labor productivity.

We are confident that the balance of payments will improve substantially in the year ahead; the deposit scheme will be phased out gradually and terminated in February 1982. Inflation is also expected to decline to about 16 per cent, from almost 20 per cent in 1981. But there is not much cause for rejoicing if these improvements are merely the consequence of a decline in income and total demand. Thus, our main problem beyond that of facing current difficulties is how to speed up structural adjustment in the economy that will prevent the re-emergence of high payments deficits and the acceleration of inflation in a new expansionary phase. Given the already high level of unemployment, we cannot rely only on monetary and fiscal policies. We are convinced that a broader social agreement is needed to lessen the impact on wages of external price shocks and to foster noninflationary mechanisms of income distribution.

Fund and World Bank Policies

As a result of the second oil shock, our Bretton Woods institutions have been called to play a much greater role in the recycling process and the promotion of external adjustment. We can be satisfied that the Fund and the World Bank have responded well to this challenge.

It is essential that both institutions be provided with the resources required to carry out their larger role in the adjustment process. Since Fund quotas have become increasingly inadequate to meet the growing financing needs of member countries, in recent years the Fund has had recourse to borrowing at market rates. While necessary in the short run, such a policy carries the risk of weakening the cooperative nature of the institution, besides creating disparities in the remuneration of Fund-related assets and making the Fund vulnerable to external pressures. For these reasons the forthcoming review of quotas should provide for a substantial increase in the size of the Fund and should be completed as rapidly as possible. It should also include selective increases to bring quotas in line with members’ relative weights in the world economy.

However, pending the completion of the quota review, the Fund should be assured of the resources necessary to finance reasonable adjustment programs. Our preference continues to be for the Fund to borrow from member countries in strong external positions. Should the resources raised in this manner prove insufficient, the Fund should be allowed, temporarily, to have recourse to private markets.

As for the SDR, we have noted the recommendation made by the Interim Committee urging the Executive Board to continue its deliberations on whether there should be a further allocation at this time. We would be sympathetic to the extension of the third basic period, perhaps by two years, and thus to continuing allocations at the current relatively modest rate. In this way, we would avoid giving a signal that the SDR scheme might be discontinued. However, more fundamentally, we consider it desirable to rethink the role of the SDR in the international monetary system in light of the changes that have intervened during the past decade. These include the growing role of private markets in international liquidity creation and the emergence of a multicurrency reserve system, which are calling into question the usefulness of an internationally issued reserve asset. As part of this study, consideration could also be given to the idea of an IMF fully based on the SDR, along the lines examined a few years ago within the Fund itself. . . .

Altogether, there is no doubt that the policies of adjustment and development that I have outlined pose new challenges to the Bretton Woods institutions. Their effectiveness can be greatly enhanced by closer cooperation between the Fund and the Bank.

Statement by the Governor of the Bank for Belgium—Robert Vandeputte

While history, despite what one might think, never repeats itself, it does sometimes drag on and linger, which sometimes makes the statements of its actors on the international stage sound like monotonous rehashings of things that have already been said. I think this applies today to the world economic situation.

The challenges facing us a year ago are essentially those we face today. Despite some improvement, inflationary pressures remain strong, and the prospect for real growth remains modest. At the same time, interest rates are at record levels, unemployment is growing alarmingly, and the exchange markets are even more uncertain. Finally, while the overall balance of payments position of the industrial countries as a group has improved, that improvement has been confined to a few large countries; the external position of the others—especially the small industrial countries and the oil importing developing countries—in general remains alarming.

Recovery will be neither easy nor rapid. On the international level, the fight against inflation must remain our main objective. Without some revival of monetary stability and confidence in the value of money, economic forecasts will continue to be distorted, and short-term speculative gain will continue to be preferred over long-term productive investments. Thus, the level of investment will be inadequate, labor productivity will continue to be hampered, and employment and growth will continue to stagnate. It is unrealistic to expect that we could revive sluggish economies for long by relaxing our struggle against inflation.

But the basic question is whether the means now being used to fight inflation will help in the long run to restore balanced growth.

Inflationary expectations are so deeply rooted in behavior that they cannot be easily overcome. Since progress against inflation has been slow and fragile, the struggle is becoming more painful and other adjustments—especially the promotion of productive investment—are becoming harder to implement. Use of the various instruments available must be carefully balanced, and it is difficult to place the whole burden of the fight against inflation on monetary policy alone. In addition, the rigidities inherent in any social or economic system must be eased gradually in pursuit of an equitable division of efforts.

These lessons, derived from recent experience, are of course easier to state than to apply. I should like, in this regard, to refer to the recent experience of Belgium.

Our performance on the anti-inflation front has been rather satisfactory. After the price jump in the wake of the first oil shock, which raised our inflation rate to over 16 per cent in late 1974, we managed to reduce the rate rapidly to a low of 3.7 per cent in March 1979. Since then, it has doubled from this low level as a result of the second oil shock, but our inflation rate is still relatively low compared with the average for the industrial countries.

This result has been achieved in the context of a monetary policy characterized by our attachment to stable exchange rates within the framework of the “monetary snake” and thereafter within that of the European Monetary System.

However, fighting inflation by setting an exchange rate objective instead of an objective directly related to the money supply in no way suggests that it is possible to relax the discipline required with respect to private income and public budgetary developments, a discipline which must accompany any anti-inflationary monetary policy. Belgium’s performance in this respect has been less satisfactory, and the country continues to be faced by sizable domestic and external disequilibria. These will have to be corrected by continuing efforts in the budgetary area, especially, but also in the area of industrial restructuring.

However, as a small country with a very open economy, Belgium is particularly sensitive to the international economic environment, which among other things is affected by policies carried out throughout the world. Adjustment efforts, both in the small industrial countries and in many developing countries, whose positions are often even more worrisome, may be doomed to failure if the external environment itself is subject to recurrent destabilizing factors.

That is why I would like to stress that the adjustment process and the battle against inflation cannot be looked on as the sum of the various individual efforts of each country. We meet here now to emphasize the international and cooperative dimensions of this difficult undertaking. In order for international disequilibria to be effectively reduced, rather than simply shifted from one region to another, we should together promote the greatest possible degree of cooperation in three areas of crucial importance:

  • —We must continue our efforts to promote smooth relations in the energy market, building on initial success and encouraging every effort to cooperate with producers with a view to maintaining a lasting stability of prices;

  • —We must rigorously oppose any temptation to set up new restrictions on international trade;

  • —And finally, we should work together to restore an environment more favorable to investment. The investment climate is suffering more than is generally believed from the record high levels of interest rates and from a chaotic development of the exchange rates between several major currencies.

Without investment, of course, there can be no lasting progress toward adjustment, nor can inflation be fought. In this regard, I should like the International Monetary Fund to be more active and vigilant in the exercise of its surveillance over members’ exchange rate practices and more attentive to the maintenance of orderly market conditions, as its amended Articles of Agreement expressly prescribe.

In this connection, the size of the U.S. economy and the dominant role of the dollar in international transactions and as a reserve asset make the United States an unquestioned leader in economic and monetary matters. In my view, this leadership implies special responsibilities. It is clear that the sizable fluctuations in the exchange rate of the dollar vis-à-vis the European currencies have imposed real setbacks on the European economies.

For its part, Belgium remains convinced of the beneficial effects of the relative stability it has achieved by virtue of its adherence to the European Monetary System. We trust that a strengthening of the EMS, and its entry into its second phase as envisaged at its creation, will reinforce the cohesiveness of the European economies and enhance their ability to meet the challenges posed by the international economic environment.

The Fund has demonstrated its awareness of the difficult circumstances in which the adjustment of imbalances must be carried out. We should welcome the step taken by the Fund to further adapt the volume and duration of its financing to the diversity of situations and the size of the recovery effort. To do this, the Fund has had to resort to additional and new sources of financing through operations, justified by the need of the moment, to which Belgium has been pleased to be able to contribute. In the future, the Fund must be able to exercise sufficient independence and the flexibility required to enable it to mobilize resources on the most suitable terms. In my view, the possibility of making a direct appeal to the international capital markets cannot be ruled out altogether, even though it should always be considered a solution of last resort.

Quotas, however, remain the source of financing best adapted to the activities of the IMF, and recourse to borrowing should be limited and if possible of brief duration. A rapid and significant increase in present quotas is thus necessary. In this regard I remain convinced that the earlier proposal of my predecessor is well founded. The Eighth General Review of Quotas could be carried out in two stages. During the first stage, a decision in principle would be reached on the size of the increase needed, as well as on the desired distribution between the equiproportional and the selective portions of that increase.

Should it emerge in the course of such negotiations that general agreement on the simultaneous implementation of these measures either cannot be reached or would endanger compliance with the agreed schedule, the equiproportional increase should take effect as rapidly as possible while discussions continue, if necessary, on the selective increase. While I do not wish to prejudge the outcome of discussions on the future increase, I must stress that, to my mind, it should be possible in the course of the next review to correct significantly the marked deterioration in the volume of quotas with respect to the growth in the major macroeconomic variables.

We must also reflect seriously on the role of the SDR and on possible ways of making it the principal reserve asset. The recent changes in its characteristics—its composition and rate of remuneration—are surely a necessary, but insufficient, step in this direction. A small new allocation of SDRs for a limited period would, in our view, entail no danger of creating excess liquidity or weakening the pressures for adjustment, while it would prevent further accentuation of the reduction in the proportion of SDRs in international reserves, which is contrary to our solemnly proclaimed purposes.

I believe, however, that the possibility of bringing the SDR more into the center of the Fund’s activities should be examined—for example, the possibility of setting aside all or part of an SDR allocation for the financing of drawings made under stand-by arrangements or extended arrangements.

The economic environment remains worrisome and its future evolution uncertain. All countries should take the steps required to improve their domestic positions, while avoiding recourse to inward-turning solutions that might prove globally devastating. Those whose policies have a direct and significant impact on the world economy must continue to be mindful of their responsibilities. As for the Fund itself, thanks to increased resources, it should continue to support and guide the adjustment efforts of those of its members that are experiencing difficulties and continue to make its voice heard with objectivity, and also with clarity, on all matters within its competence. . . .

The need of the developing countries for external financing is at least as great as it ever was, but many of them, because of difficulties in servicing their debt, will no longer be able to resort as massively to private borrowing as they did in the 1970s.

Alternative solutions are indispensable if resource flows large enough to maintain adequate growth rates in the developing countries are to be mobilized with as little risk for lenders as for beneficiaries.

One solution might be to increase the resources of multilateral development institutions such as the World Bank. On this point we await with interest the results of the Development Committee’s Task Force on Non-Concessional Flows, but we believe that the methods to be used should preferably remain within the existing legal framework, such as, for example, an increase in the callable capital or the development of cofinancing. This leads me to develop two ideas.

Most of the industrial countries that traditionally contribute to multilateral development organizations have introduced stricter budgetary policies out of their concern to prevent too rapid an increase in public expenditures. Sustained growth of official development assistance over the next few years therefore seems rather unlikely.

While of concern to the developing countries as a whole, this situation could become very serious indeed for the poorest countries, which must rely almost exclusively on official assistance to finance their development. In the absence of an overall increase in assistance flows, these countries must therefore be the beneficiaries of a redistribution of assistance in their favor. As announced at the recent United Nations Conference on the Least Developed Countries, Belgium will undertake to increase the already important percentage of its assistance allocated to countries in this category.

September 30, 1981.

Columbia University Graduate School of Business, New York, April 12, 1977.

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