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Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1980
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Report to the Boards of Governors of the Bank and the Fund by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee)—Cesar E. A. Virata

Within this year we had two meetings—one in Hamburg in April and, last Monday, we had the fourteenth meeting of the Development Committee in Washington. The communiqué issued indicates the range of issues discussed and the conclusions reached by the members. I wish to take this opportunity to apprise you of our work in the past and the task ahead of us.

This particular meeting of the Development Committee was held at a time of extreme difficulty and uncertainty for the world economy. Since our meeting in Belgrade last year, the global economic situation has deterioriated seriously and, in particular, prospects for the low-income developing countries look very grim and bleak. The main features contributing to the gloomy situation are sustained high real costs of energy and of other factors, prospects of a sharp curtailment of growth in the industrial countries threatening the expansion of world trade, a severe worldwide problem of inflation, instability of exchange rates, increased indebtedness, and uncertainty in regard to the volume and terms of capital market flows. There is also actual decline and threatened stagnation in levels and prospects of concessional flows for the poor developing countries whose current account deficits are expected to rise to $80 billion in 1981—representing an increase of over 100 per cent from the 1978 levels.

How do we meet this situation? What is it that the developing countries need to undertake on their own? What is it that the international community needs to do to meet the situation both for its own sake and in the interest and welfare of their developing country partners? What is the role which the Fund, the World Bank, and other international and regional institutions must play in the crisis which we all face? These are some of the questions to which the Development Committee addressed itself in its deliberations on the basis of several papers and studies prepared by the Bank and the Fund.

We obviously have not resolved these issues, but there were clear indications of the directions in which we need to move—and move quickly—if the situation is not permitted to be aggravated by our inactivity or inadequate and late response.

There was recognition in our Committee of the serious situation we all face and the speed with which we need to move to resolve our common problems. There is a prolonged period of major structural adjustment for both developed and developing countries ahead of us—a harsh period with its exacting demands of strict discipline and sacrifice. While the developing countries embark on measures to make new investments required in agriculture, in infrastructure, in stimulating their exports, in expanding new production of energy sources, and in improving the efficient use of capital, human resources, and imports, they will need the understanding and strong support for a liberal trading policy and for increased capital flows—both concessional and nonconcessional—from the international community. This support in their efforts is a critical element in the successful completion of the adjustment process.

At the international level, therefore, a variety of measures were considered to be necessary by the Committee. These included

  • —increased flows of resources from capital surplus and industrial countries, and liberal trade policies;

  • —substantial increase of concessional assistance to low-income countries—today they receive, less aid per capita than the middle-income developing countries;

  • —examination of the suggestion that a small proportion of future GNP increases be set aside by donor countries to facilitate more rapid progress toward the 0.7 per cent GNP target for official development assistance;

  • —mobilization of public opinion in favor of official development assistance;

  • —completion of legislative action to make the IDA-VI Replenishment effective at the earliest possible date;

  • —in the meanwhile, bridging arrangements should be accelerated to provide IDA intermediate commitment authority pending effectiveness of the replenishment;

  • —the capital base of the multilateral development institutions and particularly of the World Bank be increased to meet new and unanticipated needs arising from the change in the representation of China, the need for larger investment in energy development, provision for structural adjustment loans, and to compensate for the higher sustained rate of inflation;

  • —the lending program of the Bank in the next fiscal years be expanded above presently planned levels which were based on assumptions that are no longer tenable;

  • —the setting up of an energy affiliate or facility to promote the expansion of Bank lending operations in the energy sector;

  • —a larger role by the Fund through increased quotas, allocations, and appropriate implementation of its various facilities—existing and planned—to the current balance of payments and structural adjustment problems;

  • —early completion of the work assigned to the Task Force on Non-concessional Flows to strengthen the functioning of international capital markets and the flow of resources to developing countries;

  • —continuation of the work to seek a solution to the Group of Twenty-Four and Brandt Commission proposals on the reform of a monetary and financial system.

These are some of the important measures discussed and agreed to which the Committee desires to be pursued vigorously in the period ahead and which hopefully on completion would contribute significantly to the resolution of the difficult problems we face today.

The Committee’s work in the past year, in fulfillment of its mandate for transfer of real resources to the developing countries, is fully detailed in our annual report which is being presented to the Boards of Governors and will soon be available as a public document for general distribution.

As to the future, I believe that the 1980s will shape up as a decade of profound change in national and international economic structures. Despite temporary setbacks, developing countries must persevere in their march toward their twin goals of accelerated growth and reduced poverty. The developed countries must also adjust their own policies to permit an equitable sharing of the world’s resources and an unrestricted access to economic opportunities by the disadvantaged nations of this world. In this process, it is inevitable that all aspects of the relationship between developed and developing countries will be re-examined and the workings of international financial institutions will come under increasingly close scrutiny. I believe that the real challenge for the Development Committee in the 1980s will be to anticipate these areas of adjustment and change, to discuss them in a spirit of goodwill and cooperation, to provide adequate resources for carrying them out, and to arrange a process of orderly change—and arrange it in time before it becomes too late. The Development Committee must become one of the main forums and play an important role in the restructuring of international financial policies and institutions within the framework of the UN global negotiations. We will await the outcome of the agenda and procedures of these negotiations.

The Committee will next meet on May 22, 1981 in Libreville, Gabon.

Before I conclude, I would also wish to place on record my own deep appreciation and that of my colleagues to Mr. de Larosière, Mr. McNamara, and their staffs for their cooperation and invaluable assistance which they have provided to the work of the Committee….

Statement by the Governor of the Bank for Spain—Jaime García Añoveros

For a number of years now, it seems that the statements made at these Annual Meetings have inevitably been worried commentaries on the difficult and serious problems of the world economy. What is new this time is that these difficulties have become significantly worse over the past 12 months.

The sizable new increases in oil prices have had a severe impact—both inflationary and recessionary—on some economies that had still not adjusted fully to the new conditions created midway through the past decade.

The outcome of the efforts made to curb inflation and to enable economies to embark on a path of stable economic growth has been seriously compromised: inflation has been fueled afresh while real expansion rates have slowed markedly. The world economy has entered a sluggish phase, aggravated by the effects of the recession in the United States. At the same time, pronounced balance of payments disequilibria have reappeared which will perhaps take longer to eliminate than after the first increase in oil prices and which pose formidable problems in financing the deficits involved.

The recrudescence of these difficulties has served to remind us—if we had ever succeeded in forgetting—that we are in the midst of a period of serious problems which could persist for some considerable time and which need to be dealt with from a medium- and long-term standpoint. There is an increasingly widespread conviction that policies for managing overall demand are not sufficient for grappling with the problems that have arisen in the majority of countries. The progressive reduction of today’s high inflation rates must, unquestionably, be given highest priority; and external current account deficits have to be kept within limits that can be financed. But these are not, at the present time, problems that can be dealt with solely on the demand side, because they are today also influenced by major pressures on the supply side, substantial changes in the structure of relative prices, and considerable capital renewal and resource reallocation needs. The excellent reports prepared by the International Monetary Fund and the World Bank appropriately emphasize, each from its own viewpoint and as regards its own sphere of action, the peculiar problems economic policies must address at this time.

Spain has been one of the countries profoundly affected by the events of recent years on the supply side, by higher energy prices, and by the maladjustments resulting from changes in relative prices and in the structure of world supply and demand.

All of this has caused high and mounting unemployment that cannot be passively accepted by my Government or its economic policymakers. However, the Government is also perfectly aware that a lasting and stable solution to the unemployment problem can only be found to the extent that it succeeds in keeping inflation in check and effecting significant reallocations of productive resources, which calls for an increase in the economy’s saving and investment rates.

This is precisely the strategy recently outlined by the Prime Minister to the lower house and accepted by that chamber. And the General State Budgets for 1981, which I submitted only yesterday to Parliament, are consistent with that strategy.

However, it is not so much my intention to discuss the content of Spanish economic policy as to note that this policy, like those of many other countries, implies actions that will need time to come to grips with problems that can only be solved over the medium- and long-term. For this feature of the present problems and of the policies designed to solve them has significant consequences for the subjects that concern us at these Meetings.

The International Monetary Fund could be viewed in the past as an institution charged with facilitating the short-term adjustment of economies whose problems stemmed basically from the pressures of overall domestic demand. It was, of course, possible that the problems were deeper and more persistent; but in that case they were viewed as being outside the Fund’s own purview. The Fund could link its cooperation to relatively short-term adjustments, chiefly in the areas of demand and exchange rates. Today, as the Fund itself recognizes, such an approach would be simplistic and inappropriate. Today’s maladjustments originate largely outside the economies themselves, implying a greater international responsibility for the adjustment processes. The difficulties that arise are due in significant degree to supply-side influences; as a result, they cannot be corrected solely by conventional measures relating to aggregate demand, and the complex supply and demand policies that are required cannot be seen as short-term adjustments. Hence, the Fund’s assistance today must be governed by greater flexibility than in the past, and its conditionality, while no less demanding, must reflect different, broader criteria than those applied in past years, because the adjustment processes will necessarily take longer, be more complex, and cut deeper, and the countries cannot be asked to accept rapid, far-reaching changes in response to outside influences that are beyond their control. Today, as it happens, the adjustment problems that have arisen are leading to closer collaboration between the two institutions—the Fund and the Bank—since the Bank’s assistance must be designed to promote processes of change and growth that will help, in time, to solve the problems of transfers abroad which are closer to the Fund’s concerns. The separate spheres of the Fund and the Bank can no longer be demarcated today as clearly as in the past.

But it is not just a matter of broadening the Fund’s conditionality criteria and making them more flexible in response to the nature of today’s problems. It is also important that the Fund take an active part in the process of refinancing external imbalances, expanding the resources it can make available to deficit countries. Given the large size of the imbalances involved and the advisability of not leaving the refinancing mechanism to the private financial markets alone, it would be desirable for the Fund to expand quota-related drawing rights on its own resources and to seek access to more outside resources, primarily from the surplus countries directly, but without abandoning the possibility of turning to the markets if it deems this desirable. To the extent this tends to make the cost of money higher, thought should be given to subsidizing the loans made to the lowest-income countries….

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

Managing Director de Larosière, President McNamara, members of the Boards of Governors, and distinguished delegates and guests, I feel most honored today to address these Annual Meetings. Since our last Meetings in Belgrade, the world and its economy have undergone a number of significant changes that challenge our wisdom and determination. With you, Mr. Chairman, presiding over this important meeting, I am confident that we will not fail to take necessary actions to restore faith in the vitality and resilience of the world economy.

I would like to welcome the members who have joined the Fund or the Bank since the last Annual Meetings—St. Lucia, St. Vincent and the Grenadines, and Zimbabwe. It is also my hope that the participation of the People’s Republic of China as an important member will contribute to further strengthening the fabric of these financial and monetary institutions….

Considering that the past decade presented the Fund with equally taxing and difficult-to-achieve tasks, I must express my gratitude and appreciation of the performance of the management of the Fund under Managing Director de Larosière. The strains placed on the Fund as a result of the abrupt transformation of the Bretton Woods system in 1971 and consequent movements to redefine its proper roles and structure indeed called for a dynamic and sagacious leadership, which we were fortunate to find in the Fund’s Executive Board and management. Thanks to them, the International Monetary Fund is being adapted continuously to the new environment while providing basic stability at the daily working level.

The Fund’s efforts during these past few years to help facilitate the recycling of the oil surplus and its approaches to reviewing the quota reallocation deserve our support and encouragement as they represent necessary steps toward the direction which is desired by an overwhelming majority of the membership.

Prospect for the World Economy

During the recent past, a number of painstakingly prepared analyses of the world economy have emerged. A widely shared consensus seems to characterize their conclusions on how the triple straitjacket of rising unemployment and concurrent inflation in developed as well as developing countries, the severe and apparently unabating current account deficits of the oil importing developing countries, and the increasing entitlements gap both within and between nations has come to us. Whatever conceptual tools or analytical methods may have been employed to produce such a large consensus, the studies convince us again that the fundamental cause of this near calamity is none other than our failure to reduce the gap between our perception of the problems and willingness to act accordingly. We have long been aware of the theoretical limitations of neoclassical economics that place the pivotal role on demand management. When requirements for growth and full employment of resources compromise those for stabilization and distributional justice, as they do now, national authorities alone do not possess too many effective tools to revive their economies. Whether we like it or not, the extent of economic interdependence among our members counsels us to think and act in unison, boldly forsaking convenient truths and comfortable choices.

In today’s world, we all know that the shape of the world’s and individual nations’ economies are being forged by multipolarized and mutually dependent economic forces, many of which did not even exist only 20 years ago. The values and aspirations they seek are diverse; their commitment to these goals is high; and they possess adequate means to initiate actions which, due to the fragile nature of the interdependence, can cause tremendous repercussions. The homogeneity of values and assumptions and the clear-cut understanding of respective roles that underlay the previous international economic order do not apply to the current order.

On the physical side, we must not fail to observe new facts and reorder our priorities accordingly. The ratio between population and economically available natural resources has turned unfavorable to our established ideas on development with an accelerating speed. Savings and capital available for development investments have not been increased in parallel with the human potential to promote growth, let alone with the need for it. And most important of all, the available time span for introducing necessary adjustments to changing environments is being reduced while the consequences of failing to take actions are becoming increasingly heavier.

Second Resources Crisis and Its Consequences

I do not wish to present you with a merely historical survey. Rather, I hope to underscore the urgent need to reduce the gap between our rational perception and inadequate action so that we may together fulfill the expectations of our respective peoples. My own perception of the future world economy is such that we, the member governments and the Fund and Bank, must now act together in order to prevent certain situations from arising which otherwise are highly likely to develop. Foremost of them all is the probability of a disruption in the flow of international financial resources.

Since the beginning of last year, the average price of imported oil has increased by more than 120 per cent. Today close to 30 per cent of total exports from oil importing developing countries must be diverted to the suppliers of this crucial raw material. The full consequences of this sudden change, including its secondary impacts channeled to us through newly intensified protectionism and thinly spread resources of commercial lending facilities, are beyond any imaginable capability of the developing countries to bear by themselves alone, as is well documented in various Fund and Bank studies. What is therefore needed is that the organizations concentrate their efforts on strengthening their roles as responsible and effective intermediaries for the flow of financial resources to oil importing developing countries….

International Credit Insurance

While recognizing the importance of implementing these proposals, allow me to introduce here one more aspect of the international financial market. Official development assistance alone would not fulfill the growing need for short- and medium-term capital requirements of developing countries. The role of the international banking system, which recently has become the major source of development capital, will realistically continue to be the key factor.

As was well pointed out by the Task Force on Nonconcessional Flows, the present payments imbalances also present a constraint on the international banking system. Understandably, international banks and their regulatory agencies are nervous about their capital adequacy and portfolio concentration. Although the prudential aspects of bank lending have not so far brought about a reduction of lending to an intolerable degree, there are clear indications that it may in years ahead.

In view of this, my Government wishes to request the management to initiate immediately a procedure through which the feasibility of establishing a credit insurance institution as an affiliate of the Bank or Fund could be investigated.

Quota Allocation of the Fund

My Government fully endorses the recommendations made by the Brandt Commission regarding the necessity to expand the quota of international financial bodies. We are also of the opinion that a new approach to allocations is needed. The results of the Seventh General Review of Quotas, we feel, will not reflect effectively the relative positions of many member states in the world economy.

The apparent gap between the calculated quota and the actual allocation still remains to be corrected. The time gap between the years in which the ingredients to the equation are produced and the quota becomes effective further distorts the picture, particularly against those countries that increase their role in the world economy during the intervening period. What is needed, therefore, is a new approach to allocation. Rather than going through the conventional process we must devise a new method that would embody the role changes of member states as they occur.

It is for these reasons that my Government wishes to request the Fund management to commission an action to take these views into account in the forthcoming Eighth General Review of Quotas.

Protectionism and Structural Adjustments

Our concern over the capital flow and our painstaking efforts to devise methods to facilitate it should not blind us to the simple fact that ultimately it is only the normal flow of trade and current account balances that can bring the world economy into equilibrium. Recent proliferation and intensification of protectionism by developed countries therefore must be reversed if we are to achieve any long-term stabilization.

In spite of the two GATT rounds negotiated during the past two decades, quantitative restrictions aimed chiefly at manufactured exports from developing countries multiplied in number almost parallel with their economic advancement. New acronyms like MFA, OMA, and VER have now established a firm place in trade lexicon, indifferent to the basic principles of GATT. In 1979, for example, nearly 50 per cent of Korea’s exports to industrial countries was thus subject to these regimes, a figure almost double that for 1975.

We do not need to cite here numerous studies that clearly showed how protectionism poses boomerang effects against the very countries that practice it. What is not appreciated sufficiently is the fact that the practice also disrupts the process of global economic development, as it prevents the newly industrializing countries from vacating markets for labor-intensive products for more capital and technology-intensive products.

My Government obviously welcomes the structural adjustment loans of the Bank and intends to do its best to use them in order to make necessary adjustments. Yet, this approach cannot bear its well-deserved fruit unless the current trend in protectionism is arrested. We are here in agreement with the Brandt Commission recommendations. Our hope is that developed countries will find it politically possible to commit their own resources to positive adjustments. In the meantime, we should not lose the momentum for trade liberalization generated by the Multilateral Trade Negotiation Agreements and resist the abuse of the notion of unilateral safeguard. Developing countries also need to upgrade their communication and transportation capacities for trade among them.

Conclusion

The world economy and our ability to manage it are now being put to a test. We cannot shy away from our responsibility to make choices that will redistribute benefits as well as burdens. In meeting this task, we should neither ignore political variables nor allow them to dictate to us. The strength of our two organizations always has been the high professional standards of the men and women who have guided their courses. They specialize in finding the least imperfect answers from the imperfect world of ours. And these pathfinders usually saw in crises the two elements that any crisis is made of: the danger of inaction and the opportunity to act.

Today my faith and trust in their collective judgment remain intact.

Statement by the Governor of the Fund and the Bank for Saudi Arabia—Sheikh Mohamed Abalkhail

I am speaking to you on behalf of the Arab Governors of the 21 member countries of the Arab League and would like at the outset to welcome all new Governors who have joined the Fund and the Bank. The rate of expansion in world trade has declined substantially, largely as a result of reduced growth of output in industrial countries, but reinforced by sluggish demand in most developing countries, uncertainties in exchange markets, and increasing protectionist tendencies. And the world economy continues to be characterized by high rates of inflation, a slowdown in output, uncertainties in the international oil market, and persistently large external imbalances.

The state of the world economy and its near-term outlook are the consequence of a number of different factors. I shall comment on these factors, and on the role of the major country groups, and on what the Fund and the World Bank can do to reverse present trends.

In the industrial countries, the continued fight against inflation—a necessary step to revive domestic growth and to achieve international equilibrium—although aggravating unemployment, is beginning to show results. Restrictive monetary policy in a number of countries has not only squeezed domestic credit, but has also contributed to a slowdown in global economic activity and to the widening of interest rate differentials, with important repercussions on exchange rate movements and capital flows.

While restrictive demand management policies in industrial countries are in the right direction, there is a clear need for both changing the emphasis on these policies and complementing them with other measures to stimulate the supply side of the economy. In particular, the need to reverse the recent deceleration in productivity growth requires a variety of measures over the medium term, including investment incentives, increased research and development, and measures to increase competition and eliminate market imperfections.

Sustained growth of productivity needs to be viewed in relation to investments associated with global structural adjustment programs. In many industrial countries, resistance to such unavoidable adjustment remains strong, allowing uncompetitive industries to continue operating through subsidies, tariffs, and other protectionist measures. Increased efficiency of resource allocation in the present circumstances can be greatly facilitated through the immediate recognition and gradual adoption of necessary structural changes. I need hardly emphasize that in these efforts to increase productivity and to restructure various sectors energy conservation should be given particular attention. Energy prices should be appropriately adjusted to induce the development of energy-efficient machines and efficient industrial processes. The reorientation of industrial countries’ policies in this direction, while beneficial to themselves, would also be globally constructive and helpful to developing countries.

The continued state of sluggish economic activity and disruptive inflationary expectations have had particularly serious consequences for developing countries. The primary objective of maintaining satisfactory growth in developing countries has been made all the more difficult because of persistent deterioration in the terms of trade, stagnation in aid flows, reduced import capacity, rising protectionist tendencies, and an unfavorable foreign debt profile. High rates of inflation in these countries have not only acted as a deterrent to domestic savings, but the resultant restrictive measures have led to severe constraints on investment, production, and consumption.

Both the actual and prospective growth of the low-income countries remain disheartening. GNP per capita grew at an average annual rate of 2.9 per cent during the decade of the 1970s for all developing countries. The performance of economies of low- and middle-income countries in Africa, Asia, and the Middle East was even more unsatisfactory. The total external public debt of developing countries grew fourfold during 1972-78, with a greater percentage of earnings from their exports going toward debt service payments.

The latest World Development Report projects a per capita growth rate of 2.5 per cent after 1980 in industrial countries, compared with 1 per cent per annum in low-income countries. It should be realized, however, that in 1980 the industrial countries have a per capita income of $9,684, while the average per capita income of low-income countries is $216. Therefore, the per capita income of the first group would increase by $242 a year, while that of the other would increase by a mere $2. The expected annual incremental increase of per capita income in the industrial countries is by itself larger than the basic level of per capita income of the poor countries.

These are only statistical aggregations and averages which hide the shocking fact of 800 million people living in absolute poverty in Asia, sub-Saharan Africa, Latin America, and the Middle East. This condition of life is characterized by malnutrition, illiteracy, disease, high infant mortality, and a short life expectancy so as to be beneath any rational definition of human decency. We consider the existence of a large number of human beings in this state of poverty as a stigma on the conscience of the international community. Yet, unfortunately, the response of the international community to the challenge has been far from satisfactory.

There is clearly a need for adjustment in most of these countries to achieve a viable external position. However, because of the magnitude of the task, a meaningful and effective adjustment, without sacrificing development goals and lowering consumption even further, would be possible only with a substantial increase both in financing and in the transfer of resources.

In this context, it is estimated that countries with per capita incomes below $520 will need annually about $40-50 billion (in 1980 U.S. dollars) in the 1980s to achieve the United Nations Second Development Decade’s target of 3.5 to 4 per cent growth in per capita income. These required financial flows are far in excess of expectations.

Official development assistance is one of the most effective instruments for transferring resources on concessional terms to support the development programs of low-income countries. The performance of the developed countries in this area continues to be dismal. Official development assistance from OECD countries has declined from 0.49 per cent of GNP in 1965 to 0.34 per cent in 1979 and is projected to stagnate at about this level through the 1980s. There are also qualitative limitations in OECD aid. Most of the aid is tied to procurement from OECD countries. Only 40 per cent of OECD aid goes to the poor countries. Such aid performance is unfortunate given the fact that each dollar of tied aid from major industrial countries results in a $2-3 increase in the GNP of OECD countries.

In contrast to this, the development assistance from Arab countries is untied and far exceeds the UN target of 0.7 per cent of GNP. As a proportion of GNP, the OECD estimates that aid from Arab oil exporters accounted for 2.55 per cent in 1978. For some individual donor countries, the proportion was substantially higher. Most of this aid goes to the poorer countries and in turn is largely directed to accommodate purchases from industrial countries.

These contributions by Arab countries become even more impressive when it is noted that their per capita income is approximately one third that of the OECD countries. Moreover, in assessing our aid contributions, the nature of our economies should be kept in mind. On the one hand, for most Arab oil producers, oil and associated gas are the only significant natural resources. Agricultural potential is limited by geographic, climatic, and human factors. We are confronted with the uncertain outcome of transforming oil wealth into productive assets with which to sustain our economies, while satisfying world energy requirements.

In the short and medium terms, depletion of oil wealth will, in terms of traditional accounting methods, result in oil revenues and thus in high levels of current GNP and depreciating foreign exchange reserves. However, if the depletion of oil does not result in the development of a productive non-oil sector, then current GNP will be derived from a depletion of oil wealth: a process which is unsustainable in the long run. In other words, exports, GNP, and the external position of oil exporters are not comparable to that of economies where output is a flow derived from a sustainable productive base with exports and external position being by-products.

In the case of oil exporters, exports and external surplus are not a flow but are instead derived from an exchange, or transformation, of a nonrenewable asset. Thus, potential GNP is maintained if oil is not extracted, or if extracted oil is transformed into other capital. A satisfactory transformation requires the condition that the present discounted value of the transformed capital (net of depreciation) is equal to the discounted value of the oil had it not been transformed. On the other hand, the industrial countries have diversified economic bases, with the ability to produce output on a sustainable basis. Yet, these countries, which face a more certain and prosperous economic future, provided a much lower proportion of their GNP in aid.

The Arab countries are faced with the same difficulties as other developing countries. The Arab oil producers have made a sacrifice by exporting more oil than is needed to satisfy domestic financial requirements. Although we have done so in a cooperative response to the challenge of international energy requirements, we have become an easy target for blame.

Inflation in the world is blamed on oil exporters. This is a misleading simplification. Inflation is by definition the change in the price level as opposed to the price level itself. Thus, an increase in the price of oil could only affect inflation over a limited time period. Undoubtedly, inflation in the industrial countries was at a substantial rate before the oil price increases of 1978-80. It is noted in the 1980 Annual Report of the Fund that inflation in industrial countries was at 7 to 8 per cent per annum from 1976 to 1978, a period during which oil prices were declining in real terms.

Although the 1978-80 increases in oil prices have had an effect on inflation, it has been a small one. However, political rhetoric has exaggerated the effect. The Fund, in its 1980 Annual Report, estimates that the 1978-80 oil price increases will add roughly 2¼ per cent to inflation in 1979 and in 1980. This estimated 2¼ per cent contribution to inflation is due to price increases of oil from all sources, OPEC and non-OPEC, whether domestic or imported. In fact, on this basis, the inflationary contribution of OPEC oil would be around 1 per cent in 1979 and 1980. It should be noted that this is a one-time effect; namely, inflation in 1981 cannot be attributed to oil price increases during the preceding years.

This limited impact of around 1 per cent is to be compared with an annual rate of inflation of about 14 per cent in the industrial countries in the first half of 1980. The high rate of inflation is in large part due to a fall in the growth of productivity below its historical trend. This development is unrelated to oil prices but is due, among other factors, to a general decline in the ratio of investment to GNP, changes in the composition of the labor force, and changes in work practices.

Oil price adjustments have also been isolated by the industrial countries as the source of the increase in the deficit of the developing countries. Developing countries have historically experienced a shortage of foreign exchange due in part to their own limited capacity to produce exportables, to their low level of income, to protectionist measures, and to the ever-increasing cost of imported machinery and manufactured goods. At the same time, exports of developing countries have suffered as a result of economic conditions and policies of the industrial countries. Since 1974, although the current account of developing countries has deteriorated, its causes should be seen in a multilateral trade setting; isolation of one item on the import account is of little economic significance. Oil imports, even in 1980, are a fraction of the total imports of developing countries.

The Fund staff in their 1980 World Economic Outlook estimated that oil imports, even after the recent increases of oil prices, represent on average roughly 20 per cent of all imports for developing countries in 1980. For the vast majority of developing countries, this ratio is in fact under 10 per cent. Nonetheless, oil price increases clearly add a burden to oil importing developing countries; but as mentioned earlier, oil price increases can be moderated by market forces if the industrial countries, the largest consumers of oil, reduce their demand. Moreover, over the period 1978-80, the Fund estimates that the price change component of non-oil imports of developing countries is expected to be around $50 billion—a figure substantially in excess of the impact of oil price increases on these countries. This proves that oil imports have had a limited impact. In fact, export price increases from industrial countries are the major contributing factor to the deterioration of the external position of these developing countries.

The burden of financing and servicing the deficits of developing countries has been further aggravated by inflation and by increasing rates of interest in the Western world, with the six-month LIBOR dollar rate, which accounts for the bulk of the funds in the international capital market, rising from 5.5 per cent at the end of 1976 to over 20 per cent in April 1980. The negative effect of higher debt service payments in 1979, resulting from higher interest rates, was on the order of 8 per cent of export earnings of a large majority of developing countries. This figure is of the same order of magnitude as that of the effect of oil price increases on these countries.

Current economic difficulties call for cooperation. The Fund and World Bank can and should, in this regard, play a decisive role. On the one hand, the Fund should support adjustment programs of members on a larger scale within a medium-term context, while coordinating its recommendations, where appropriate, with the Bank. On the other hand, the Bank should step up its support for structural adjustment lending and for the long-term development of its members.

The Fund has shown more awareness of the need for policy changes and a readiness to assume a greater role as warranted by changing conditions. The proposed enlarged access to Fund resources, with the introduction of more flexible conditionality, is an important step to supplement the efforts of national authorities in tackling the problem of payments imbalances, through an appropriate mix of financing and adjustment. The emphasis, in coordination with the Fund, on supply-oriented structural adjustment programs with larger resources, a longer time framework, and gradual implemention of such programs, together with a degree of relaxation in preconditions, is welcomed. In this process, developing countries should share a part of the burden of adjustment. But, while financing and adjustment have to go hand in hand, particular consideration should be given to the special circumstances of individual members.

Enlarged access will become more meaningful when the resources of the Fund are enhanced. In this regard, the Seventh General Review of Quotas will hopefully become effective immediately. Moreover, advancing the date and the expeditious completion of the Eighth General Review of Quotas, with realistic selective adjustment in quotas, should also make a positive contribution to the overall liquidity of the Fund.

We welcome the proposed Subsidy Account and hope that the sources of financing will soon make the Subsidy Account operational. There is broad agreement that a part of the proceeds from Trust Fund repayments would be a major source of financing for the Subsidy Account. It would have been our preference to continue the operation of the Trust Fund for the benefit of low-income developing countries and to finance the subsidy from widespread donations. However, in view of the unsatisfactory response from the industrial countries, we would like to emphasize that the balance of Trust resources, as a second-best solution, should be used for the exclusive benefit of the low-income countries on the same criteria as those governing the Trust Fund.

The developing countries have stressed the need for Fund assistance to members adversely affected by higher food import costs. It is encouraging to note that this request is receiving sympathetic consideration. This proposal should be supported by the entire membership of the Fund. An early finalization of arrangements to meet such a request would be most helpful. In our view, an appropriate solution must incorporate a significant element of additionality, without conditionality.

The Program of Immediate Action signifies the concerns of the Group of Twenty-Four for a fundamental reform of the international monetary system, particularly those features which are of basic interest to developing countries: (1) to effectively control the creation of international liquidity; (2) to ensure symmetrical adjustment; (3) to promote more stable exchange rates; (4) to enhance the transfer of real resources; and (5) to give developing countries an effective voice in decision making at the Fund and at the Bank.

Since Bretton Woods there has not been any sustained and comprehensive effort to reform the international monetary system to cope with new situations and emerging problems. Instead, the process of reform has been replaced by ad hoc measures. It is time to resume the unfinished task of fundamental international monetary reform. As the Program of Immediate Action of the Group of Twenty-Four is a serious attempt in this direction, we strongly support its implementation. While all the action areas contained in the Program are important, I shall limit my remarks to a few.

At the time of the initial allocation of SDRs, it was hoped that continuous efforts would be made at the international level to make the SDR the centerpiece of the international monetary system. Unfortunately, these hopes have not materialized. In our view, regular allocations of SDRs and improvements in its characteristics are necessary for progress in this direction. The need for increased allocation of SDRs is clearly indicated by the declining ratio of SDR holdings to total reserves, by the general increases in prices, by the expansion of world trade, and by the magnitude and distribution of existing and potential payments imbalances.

The question of the link has been with us for a number of years. The case for an SDR link is predicated, among other things, on (1) supplementing the process of resource transfer to developing countries; (2) improving the quality of aid; (3) promoting trade and development; (4) contributing to the adjustment process; and (5) on grounds of fairness and equity, arriving at a better distribution of SDRs than that based on unrealistic quotas. Because of the trends and prospects of aid flows, the present and likely size of payments deficits of many developing countries and the poverty facing a large number of countries, the case for an SDR link has never been stronger. The fears that an SDR link would undermine confidence in the SDR and erode its monetary character have been exaggerated, especially after improving the quality and the yield of the SDR.

To enhance the role of the SDR, improvements in its characteristics are needed. Foremost is an increase in the SDR rate of interest and the elimination of the remaining reconstitution requirements. If the SDR rate of interest is increased toward the market level, a modified system for distributing SDRs should be acceptable to industrial countries as they would no longer be subsidizing net users of SDRs. However, from the viewpoint of developing countries, even with an increase in the SDR rate of interest, they would still benefit through a larger allocation of SDRs. Many developing countries have little or no access to international capital markets. Thus, they are unable to borrow to supplement their reserves. For other more fortunate developing countries, who have access, the cost of borrowing may be substantially higher than that of the full basket rate of the SDR.

Thus, an increased allocation of SDRs to developing countries would implicitly permit these countries to have access to borrowed reserves on a basis approaching that available on international capital markets to developed countries. An increase in the SDR rate of interest should be coupled with measures to enhance the Fund’s income position in order to hold down the level of charges, an inducement for members to approach the Fund at an early stage.

The International Monetary Fund has not evolved to reflect the changing economic and political circumstances of members. Improvements in the overall size of quotas and their distribution deserve priority attention. It is regrettable that, over the years, the increase in the overall size of quotas has not kept pace with relevant economic indicators. Changes in the quotas of member countries do not reflect corresponding changes in the world economic situation. Over the years, the basic formulas to determine a member’s quota have essentially remained unchanged. Furthermore, the resistance to any downward adjustment of quotas, even when indicated by the application of such formulas, has made the present quotas increasingly unrepresentative of members’ relative positions. It is, therefore, imperative that at the time of the Eighth General Review of Quotas, which should be advanced, the relevant formula and the basis for determining the quotas should be revised to reflect the changes in the world economy. In particular, selective adjustment should be made to reflect the economic position of individual countries.

In considering the appropriate level of quotas for developing countries, it should be kept in mind that most of these countries do not have easy access to commercial credit. Therefore, higher quotas and con-commitant larger drawings on Fund resources would encourage these countries to approach the Fund at an earlier stage and to adopt necessary adjustment policies.

For many members, particularly for the Arab oil exporters, quotas are seriously out of line with their economic position. The ratio of their actual to calculated quota is significantly less than that of all other countries. Several countries within this group have expressed their dissatisfaction with this state of affairs. Raising the quota share of major oil exporting countries will (1) promote a desired and necessary balance; (2) increase the overall quota share of developing countries; and (3) add significantly to Fund resources, thus enhancing its ability to provide balance of payments assistance….

The Arab countries stand ready to participate in any concrete program of action designed to eradicate poverty, develop energy resources, and accelerate development. Such contributions can be effective only if industrial countries bear a fair share of the burden. To effectively implement these policies in a cooperative approach, a greater role for developing countries in the decision making at the Fund and the Bank is necessary and must be viewed in the wider context of the desired reform of the international monetary system. Although representing 85 per cent of the membership, the developing countries have no effective say in policies and, in fact, continue to be on the receiving end of, and at times victimized by, the outdated structure of economic and financial relationships.

In this regard, I would like to highlight some areas that deserve immediate attention from the Boards of the Fund and the Bank:

(1) In the view of many, including ourselves, it is neither necessary nor desirable—as a matter of principle—that a single country should have veto power on the important decisions of the Fund or the World Bank. Therefore, special majorities need to be reformulated so that no single member can exercise veto power. While at present the special majority requirements can enable the developing countries to exert some influence, it does not enable them to translate their initiatives to programs or policies that they consider to be in their interest, as well as in the interest of the international community.

(2) The importance of basic votes has greatly diminished over time. More importantly, the provision for basic votes was adopted as a compromise, but basic issues were not resolved. The diminution of the basic votes, in relation to total votes, has in fact worked to the advantage of those favoring a voting system based on shareholding. Indeed, whenever a reduction in the voting power of major shareholders occurred, the level of special majority requirement was raised so as to preserve the special privileges enjoyed by those major shareholders. It is necessary to increase substantially the number of basic votes.

(3) Regarding the representation of developing countries on the staff, we endorse the two principles embodied in the Articles of Agreement with respect to the allegiance of the staff to their institution, and the recruitment of personnel on as wide a geographic base as possible. The strict adherence to law and the impartiality of the management and the staff are the major guarantees for the rights of the small and weak members. While the number of staff from developing countries has increased over time, the association and participation of individuals from developing countries in the process of policy formulation have not been sufficiently promoted. It would be imperative to increase the number of appointments from developing countries at middle and upper levels, to bring in staff with several years of work experience in developing countries, and to widen representation of differing educational backgrounds.

Before I end my statement, I would like to refer to the subject of inviting the PLO to attend the Annual Meetings as an observer. The Arab countries have asked to include this item on the agenda. It is important to point out that this issue would have been included on the agenda by other members had the PLO been allowed to attend.

The regular procedures that were followed previously to invite observers should have been adhered to but this was not the case. These two institutions were, unfortunately, used as a political tool which transformed ordinary procedures of inviting observers into a series of political pressures. This was done in order to reach the minimum number required. This practice leads to the weakening of the legal structure of the overall relationships among members, which have been created in the framework of these institutions. Our concern for the legal foundation and well-being of these two institutions leads us to draw attention to the dangers of these practices.

The Arab Governors take this opportunity to express their sincere appreciation and gratitude to the more than 65 countries who have not participated in the adoption of this politically inspired resolution. Those countries have confirmed their intentions to protect the legal foundations of the Fund and the World Bank.

In conclusion, the prevailing economic conditions demonstrate one undeniable fact on which we can all agree. We live in an interdependent world where our destinies are inextricably linked. These generally dismal conditions and prospects in our fragile world require cooperation on an unprecedented scale. A special responsibility rests with the industrial countries who, by controlling inflation, countering recessionary trends, reducing protectionist barriers, and by increasing the outflow of direct investment, as well as official assistance, can contribute to a reduction of the hardships of developing countries. The spirit of cooperation demonstrated by the Arab countries reflects their conviction that the overall deterioration in the world economic situation and the grim prospects for the near future call for a joint effort from the various country groups, with mutual reinforcement of policies as well as an underscoring of the need for effective cooperation at the international level.

I have tried to paint a broad picture of our interdependent problems and to present appropriate policies for members and our two institutions in order to reverse prevailing and projected dismal economic conditions. Instead of political rhetoric, international understanding and cooperation are called for on an unprecedented scale if we are to improve economic conditions for all. These meetings provide us with one avenue. Other channels also exist. Unfortunately, it is not the lack of appropriate forums for such deliberations that limits the international progress. It is, instead, an absence of political will and of a statesmanlike approach to the long-term survival of our planet. Today, we urge the entire membership to commit themselves to a cooperative endeavor to achieve sustained progress for all. For our part, we are willing to pursue any and all available channels to achieve this elusive goal.

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

… I also want to welcome the new members of our institutions, and the People’s Republic of China that, with a population of nearly one billion, represents about a quarter of the world’s population. Its accession clearly reinforces the universal character of our institutions.

There are two topics I would like to address today. The first one is the urgent financing problem of the non-oil developing countries in the coming years; the second one is the role the Bretton Woods institutions can play in the solution of this problem.

I want to place these topics in the context of the World Economic Outlook. Economic recovery will depend heavily on private investment and innovation, particularly in the field of energy. As to macroeconomic policy, we have to continue to give top priority to the containment of inflation. The recent slowdown in consumer price increases in some of the larger industrial countries is encouraging, indicating that the monetary and fiscal policy stance is on the right track. In this context, I want to emphasize the possible contribution of incomes policies in the present circumstances. One of the lessons from the first oil crisis is that terms-of-trade losses eventually will have to be reflected in incomes.

Large inflation differentials are projected for the near future, as is usually the case when inflation is high. These discrepancies, together with the current account deficits of a number of OECD countries, give rise to concern about the potential consequences for the exchange markets, which have experienced a remarkable stability this year. Underlying pressures may be built up which cannot be checked by interest rate policies in the long term.

Sizable balance of payments imbalances are likely to persist in the period ahead. It is important to realize that future developments in this field depend to a large extent on the absorptive capacity of oil producing surplus countries. There may be reason for some optimism about their absorptive capacity. Nevertheless, substantial adjustment in deficit countries will remain necessary. Speaking about adjustment I would like to draw your attention to the position of the smaller industrial countries, where inflation and current account deficits are still increasing. Developments after the first oil crisis indicate that adjustment is an especially difficult process for these countries.

Let us now turn to the first topic I mentioned: the problem of the very substantial deficits on current account of the oil importing developing countries. These deficits are accompanied by very substantial surpluses for OPEC countries, surpluses that are not likely to vanish rapidly. At the same time, economic developments in the industrialized world are characterized by a low rate of growth and a high rate of inflation. A rapid improvement in the situation does not seem likely. The current account deficits of the non-oil developing countries are expected to remain substantial in the coming years. An appropriate combination of adjustment and financing will be called for. Unlimited financing of the deficits is neither possible nor desirable. It is not possible because the commercial banks are neither able nor prepared to do so. It is not desirable because a further increase in the debt burden would gravely endanger future economic development. Too heavy a stress on adjustment is undesirable as well, however. This would lead to an unacceptable decline in structural economic growth as well as to an unacceptable decline in the standard of living which in many countries does not allow the satisfaction of even the basic human needs. Therefore, a combination of adjustment and financing has to be found that will allow the necessary adjustment process to be spread over a longer period of time. The result has to be a gradually declining balance of payments deficit. Clearly, such a process will require time and, therefore, financing, for an appropriate period will have to be found. This financing will have to be partly concessional, partly nonconcessional.

An important contribution to concessional financing has to be made by additional official development assistance, both bilateral and multilateral. The Government of the Netherlands urges a rapid expansion of the flow of concessional aid to developing countries, as has been requested in the Program of Action of the Group of Twenty-Four. Especially in view of the extremely difficult position of many developing countries, it is of utmost importance that the generally accepted target for ODA of 0.7 per cent of gross national product be realized as soon as possible. Low-income countries that have only limited access to international capital markets depend to a large extent on an increase in this form of aid.

Apart from an increase in the flow of concessional aid, an increase in the flow of nonconcessionary capital to developing countries is also needed. The Task Force on Nonconcessional Flows, appointed by the Development Committee at its meeting in Belgrade, has made a useful study of the ways in which these flows could be increased. The Task Force noted that the main problem in the coming year will be to assure the proper distribution of these nonconcessional capital flows. A solution to this problem can be sought in three directions: increased cooperation between commercial banks and international financial institutions, the creation of mechanisms to guarantee the borrowings of developing countries on international capital markets, and an enlargement of the role of the international financial institutions.

Regarding the first possibility, increasing risks have made the commercial banks more cautious in their lending operations in developing countries. In such circumstances, cofinancing arrangements between multilateral development institutions and private banks may give an important boost to the recycling process. However, I am aware that many complicated rules and procedures that often accompany co-financing arrangements frequently deter potential co-lenders. It is therefore important that the Task Force develop proposals to remove such bottlenecks.

The second possibility is the creation of some form of guarantee mechanism to improve the access of developing countries to international financial markets. Several interesting mechanisms have been proposed, but they remain to be worked out before decisions on their implementation can be taken. I hope the Task Force will soon be able to produce an evaluation of these mechanisms.

The third possibility is an enlargement of the role of the Bretton Woods institutions.

This brings me to my second topic. At the outset, let me point out that the constructive contribution of the Bretton Woods institutions to the solution of global monetary and development problems has been and remains possible only on condition that they are not politicized.

It is gratifying to learn that there is a general desire to expand the role of the Bretton Woods institutions, and that these institutions have already made progress in that direction….

The Fund as well has taken important initiatives to expand its role. I am glad to note that drawings on the Fund in 1980 so far exceed those in the whole of 1979, and I understand that substantial further drawings by developing countries are in the pipeline. The Seventh General Review of Quotas will provide additional resources for these expanded activities. Moreover, the Managing Director has taken steps to temporarily increase the liquidity of the Fund in order to satisfy the present financing needs.

The costs of using Fund resources under the supplementary financing facility can be alleviated by giving interest subsidies to low-income countries. I am in favor of financing subsidies by using part of the repayments of Trust Fund loans that will start to flow from 1982 onward. If enough OECD and OPEC countries are prepared to contribute to an interest subsidy account, the Netherlands is in principle prepared to pay its share, the form of the contribution being still under discussion.

In this context, I note that the present structure of interest rates and charges of the Fund is the result of several historic and incidental factors. I would like to ask the Managing Director to prepare a general review of this structure. For myself, I would be in favor of a structure of rates that, besides taking into account the level of market rates, is inversely related to the degree of conditionality. Such a structure would promote a just and equitable supply of Fund credit. However, the review as such should not lead to an increase in the average charge.

Initiatives have also been taken to expand the role of the Fund by increasing the quota limit to 200 per cent a year for a maximum of three years in a row, by lengthening the adjustment period through consecutive stand-by arrangements, and by giving more attention to the supply side of the economy. An important advantage of these measures is that, by increasing the size of the potential drawings, they enhance the possibility that more members will turn to the Fund with their financing problems at an early stage. In principle, the Fund should finance larger drawings out of its own means, that is, by quota increases. However, under the present circumstances, borrowing by the Fund would be appropriate. This package also entails certain risks. The increase in the use of Fund resources through higher quota limits raises the question of whether it would be possible to adjust these limits downward again in the future. If this were not done, it would mean that the Fund would become permanently dependent on borrowed resources. This would change the role of the quotas in an important way.

The Fund is further considering a special support for countries suffering from increases in the cost of imported food. I would prefer incorporating a possible scheme into the existing framework of the compensatory financing facility, in order to prevent a further proliferation of special facilities.

I have commented on the short-term aspects and solutions of the problems we face today. As I indicated, a solution must also be found for deficits of a more structural character that cannot be resolved in one or two years. Initiatives in this field have already been taken. Both the Fund and the Bank, in fact, now give medium-term balance of payments support. As such, these new activities have, of course, to be welcomed as a reinforcement of the role of the two institutions in the recycling process. But we must preserve the specific characters of the Fund and the Bank.

Therefore, I would like to formulate some principles for the further development of medium-term balance of payments support within the framework of the Bretton Woods institutions. The first principle is that financing requirements of a structural character cannot be satisfied by means of money creation, be it in the form of monetarily financed credits or in the form of allocation of SDRs. The international problems would never have been as large as they are, were it not for the runaway inflation we continue to experience. The Annual Report of the Fund, therefore, rightly gives priority to combating inflation.

Only nonmonetary means can be used to finance balance of payments deficits of a more structural character. This implies financing these deficits either by borrowing from countries in a favorable position that do not ask for a liquidity clause or by borrowing on the capital markets. Both have their own specific advantages and disadvantages that will have to be carefully studied. The conditionality of this form of financing will differ clearly from the usual conditionality of the Fund.

Support for structural adjustment, therefore, has to be distinguished clearly from the traditional activities of the Fund. We will still have to review which institutional arrangement will best guarantee such a distinction.

I have dwelt at some length on the separate tasks I see for the Fund and the Bank in the near future. But precisely because their areas of activity are closely related, I feel that increased cooperation between the two institutions is of the utmost importance.

I believe that an even closer cooperation between the Fund and the Bank will be possible without either institution losing its own specific character. This means that the Fund will remain concerned with general macroeconomic conditions, whereas the Bank will concentrate on development and on the microeconomic aspects of the economies of its member countries.

Statement by the Governor of the Fund for Greece—Xenophon Zolotas

Once again our meeting is overshadowed by persistent stagflation. High rates of inflation continue to be with us, unemployment is increasing, investment is at a low ebb, and productivity is falling. The recent increases in the price of oil have served to make matters worse.

I will not dwell on these developments, since they are well examined in the Annual Reports of the Fund and the Bank, two documents of high quality. In this regard, I would like to express my appreciation to Mr. de Larosière and Mr. McNamara for their illuminating opening addresses.

In the past, I had the opportunity to stress in this forum that we would not be able to achieve rapid recovery and get out of the stagflation deadlock through demand management alone. Investment management is also required in conjunction with demand management. The developments that took place after 1973, such as the dramatic increase in the cost of energy, the intensification of inflation, the fiscal drag, and the growing cost of pollution control, have discouraged productive investment, with adverse effects on employment, productivity, and inflation. In contrast, prior to 1973 economic recovery was achieved mainly through new investment, which increased productive capacity and reduced unemployment without generating inflationary pressures.

If inflation is to be combated effectively on a permanent basis, investment on a large scale will be needed in order to increase and modernize productive capacity and raise productivity. To this end, investment disincentives should be removed and new incentives to boost fixed productive investment should be granted for as long as is needed.

The second problem we are facing is the persistent international payments imbalances, especially in the developing countries, following the successive oil price increases.

The question of recycling surplus oil funds has been discussed at the Fund and the World Bank, as well as in other international organizations. As far as the Fund is concerned, according to the recommendations of the Interim Committee and the proposals made by Mr. de Larosière, its role is to be expanded so that it can achieve “a balance of payment adjustment and financing both by lending a greater amount in relation to members’ quotas and through stretching adjustment and financial assistance over longer periods.” I am happy to note that the Managing Director has already initiated discussions with potential lenders on the terms and conditions under which the Fund could borrow to increase its resources.

Parallel to the greater activation of the Fund and the World Bank, serious efforts should be made to ensure continuous and adequate recycling through the private financial institutions which in the past have been the main channels for recycling surplus oil funds. We should not be content with piecemeal measures. We should proceed to the creation of a mechanism which will ensure the uninterrupted recycling of surplus funds. A way must be found to encourage private banks to step up the recycling of funds, particularly to the developing countries. Private banks need some form of security. I feel that the creation of an International Loan Insurance Fund, which I proposed in 1977, is now urgently needed.

This insurance fund, apart from enabling the developing countries to bring about the structural changes and readjustments that would allow them to keep expanding their economies, would permit the deficit countries to service their outstanding foreign debts and avert the creation of liquidity problems for lending banks that could trigger chain reactions and disrupt the international financial system.

These arrangements may not suffice to solve the problem of the poorer countries with expanding deficits. For them, special measures should be taken by the governments of the industrial and surplus oil countries in the form of grants or concessional loans.

With regard to the new valuation of the SDR, I would like to make a few remarks on the SDR itself and on the need for the creation of a stable international monetary standard.

At its meeting in Hamburg last April, the Interim Committee recommended the simplification of the valuation of the SDR. Following this request, the Executive Board decided two weeks ago to reduce the number of currencies in the valuation basket from 16 to 5. Although this decision is certainly an improvement of the SDR, it does not eliminate its inherent weaknesses. The SDR was designed to serve as an international monetary unit and gradually become the main reserve asset. However, since it is based on the weighted average of a basket of currencies, in practice it tends to reflect the average inflation in the countries whose currencies are included in the basket. Therefore, it suffers from the same disease as these currencies. The considerable erosion that the purchasing power of the SDR has undergone since its inception shows that it does not provide the firm foundation needed for a sound international monetary system, which would create a climate of confidence and stability.

This is the main reason why the SDR has been unable to improve its position as a reserve asset and has prevented its wider acceptance as a unit of value in international transactions. I doubt that it will achieve these objectives in the foreseeable future. Suffice it to mention that, although it has been ten years since the SDR was introduced, reserves in SDRs amount to only 6 per cent of world foreign exchange reserves. It is, therefore, doubtful whether the SDR will ever manage to live up to the expectations associated with its creation.

The international monetary system needs a stable inflation-proof monetary standard, particularly in the present phase of high and widely differentiated rates of inflation in the main trading countries. It needs a unit of value with constant purchasing power, which would help to combat inflation in individual countries, expand international trade, and reduce destabilizing speculative capital movements. In other words, it needs an international unit capable of serving as a genuine international currency and the main reserve asset in the system.

The question of creating a standard of stable value has been the concern of economists since the nineteenth century. The various schemes that were proposed over the years were complicated and difficult to apply. Most of these schemes relied on a composite commodity basket to which the international monetary unit would be linked. A solution along these lines was considered during the discussions in the Fund leading to the creation of the SDR, but was abandoned as impracticable.

In my opinion, the problem of creating an international currency of stable value could be tackled by seeking a solution on the basis of price indices? which are in use in all countries for measuring the purchasing power of national currencies and the respective rates of inflation. On this basis, I would like to submit today a scheme, the principal features of which would be as follows:

1. The Fund would introduce a new monetary unit that could be called “metron.”

2. The Fund would issue metrons to central banks and eventually to commercial banks as well, in exchange for any one of the currencies of the five major trading countries, namely, the dollar, the deutsche mark, the pound sterling, the Japanese yen, and the French franc.

3. The metron would be linked separately to each of the five currencies. At the outset, the parity between each of these currencies and the metron would be determined on the basis of the prevailing exchange rates, adjusted for likely overvaluations or undervaluations. This is an important question which needs detailed elaboration.

4. When this scheme gets under way, the parity of each of the five currencies to the metron would be adjusted at short intervals, say, monthly, according to the changes that would have occurred in the purchasing power of each currency calculated on the basis of, say, the consumer price index, which is used today in measuring the rate of inflation in each country. It might be found preferable, however, to compile special price indices better adapted to the needs of the proposed scheme.

5. The metron’s stability would be ensured by the fact that it would be readily convertible in any of the five currencies at a rate adjusted to reflect the changes, up to the time of the exchange, in the purchasing power of that currency. For instance, if the initial metron/dollar parity had been fixed at 1:1 and in the meantime the rate of inflation in the United States was 10 per cent, then the new metron/dollar parity would be 1:1.10. The same would apply to each of the other four currencies.

6. The proceeds of dollars, deutsche mark, pounds sterling, etc., accruing to the Fund from the issue of metrons, would be placed in interest-bearing deposits and treasury bills in the five respective countries. The Fund would thus have sufficient resources to exchange any amount of metrons presented to it for any of the five national currencies at rates determined on the basis of changes in their purchasing power. This would be possible because, with the exception of certain periods, interest rates are generally higher than the corresponding rate of inflation. Moreover, the interest proceeds accruing from the above-mentioned placements would be redeposited, thereby generating additional revenue. In addition, it should be borne in mind that if the metron becomes accepted on a wider scale by central banks and enters into commercial transactions—and I believe that this will happen because of its stable value and the confidence it will create—then the largest part of the metrons will remain in circulation and only a small part will be presented from time to time to the Fund for exchange. Thus, there would not be any problem of liquidity regarding the exchange of metrons for national currencies.

7. The metron would be used as a reserve currency by central banks, which are constantly concerned at the erosion of the purchasing power of their reserves in key currencies. They would, therefore, be willing to convert a large part of their currency reserves, and eventually of SDRs, into metrons. Consequently, unlike the SDR, the metron would soon become the main reserve asset. In addition to central banks, commercial banks would be allowed to acquire metrons on the same terms. They would also be able to accept interest-bearing deposits and to extend loans in metrons. Thus, the metron could be used as a means of payment in commercial and financial transactions.

8. The Fund would accept deposits in metrons from central banks, but would not pay interest on them. When the metron penetrates commercial transactions, central banks would have the opportunity to place part of their reserves in metrons in interest-bearing deposits with international commercial banks or in metron-denominated treasury bills issued by other countries.

9. It is conceivable that the exchange rates among the five currencies, determined by their individual relationships with the metron, may differ from the respective rates which are determined in foreign exchange markets. If this occurred, arbitrage through the metron would tend to eliminate such deviations. It is possible, however, that the Fund would be presented with large amounts of metrons for exchange against participating currencies at rates lower than those prevailing in foreign exchange markets. In such cases, if the Fund has a sufficient amount of the requested currency, demand would be automatically satisfied. If not, the Fund should have the right to offer metrons, up to a certain limit, to the central bank whose currency is being demanded, in order to obtain the amount of the currency required to satisfy the demand. This will require an agreement between the Fund and the central banks of the participating countries. If demand remained high, the Fund should have the power to exchange metrons for another currency in which it has adequate liquidity. Something analogous happens in a fixed parity system.

10. The operation of such a system would lead to the gradual replacement of the reserve currencies and the SDR and would permit a rational and effective management of international liquidity.

11. In the context of the proposed scheme, the Fund would be able to transfer to developing countries, in the form of financial aid, part of the surpluses resulting from the widespread use of metrons. Actually, the Fund would be in a better position to allocate funds to developing countries than under the SDR system. Needless to say, if this scheme is to become workable, it must be studied thoroughly in all its aspects. A crucial element for the functioning of the proposed scheme is close cooperation and solidarity between the Fund and the central banks of the five participating countries, based on adherence to the rules of the game, without which no international monetary system worthy of its name could function.

In conclusion, the success of the scheme will depend mainly on the penetration of the metron into international transactions. If this happens on a large scale, then the problems that may arise will be surmounted. Under the proposed scheme, the Fund would gradually become a world central bank, capable of intervening in the market to regulate international liquidity and safeguard international monetary order.

Statement by the Governor of the Bank for Yugoslavia—Petar Kostić

It gives me much pleasure to welcome the Republic of Zimbabwe as a new member of our institutions. I want to express our esteem to the brave people of Zimbabwe for the success of their just struggle against colonialism and racism. Our institutions can play an important and positive role in supporting the efforts for reconstruction and development of the economy of Zimbabwe.

It is also a great pleasure to welcome at these Annual Meetings the Governors of the People’s Republic of China. We believe that our institutions will become more representative and responsive to the needs of mankind, and especially those of developing countries, by the active participation of the People’s Republic of China.

We regret that the Palestine Liberation Organization has not received observer status in our institutions, in spite of the resolution which was unanimously adopted in the first meeting of 114 Ministers of Finance, members of the Group of 77, in Belgrade. The substance of this issue is not of a procedural nature and it cannot be resolved in that manner. Therefore, we urge that further efforts be undertaken in order to resolve the issue as soon as possible, as requested by the Group of 77.

The world economy and international economic relations are in a serious crisis. In the last 12 months economic conditions for development deteriorated even further.

Deflationary measures, while beginning to give certain results in fighting inflation in industrial countries, have slowed growth and are threatening to bring about a general recession in the developed world. This situation has led to the increase of unemployment and to a sudden slowing of growth in international trade, augmenting the danger of protectionism already noted in numerous developed countries.

These developments, together with the deterioration in terms of trade, represent a heavy burden for oil importing developing countries, bringing the poorest among them to an extremely difficult situation. This imperils the economic independence of developing countries and creates conditions for competition among great powers and blocs, thus augmenting international tension.

The available analyses suggest that the continuation of present economic policies would lead to unacceptably low growth in oil importing developing countries. It is clear that their faster development depends mostly on their own efforts to increase exports and on efficiency in their economic activities. However, the outcome of their endeavors equally depends on broader conditions in the world economy. There is a danger that the persistence of developed countries with tight demand policies beyond the need to restrain domestic inflationary pressures could deepen the recession and make its international consequences even more serious. This must be avoided. Industrially developed countries as a group should be ready to have larger deficits in a longer run. Enlarged and liberalized imports from developing countries would facilitate their fight against inflation and induce domestic reallocation of resources, thus contributing to the structural adjustment of the economies in both developed and developing countries.

It is of extreme importance that in the current difficult world economic situation our institutions respond as fully as possible to the needs of member countries. I am pleased to be able to note some initiatives which I consider are in that direction….

As to the activities of the International Monetary Fund, I would like to mention a welcome orientation toward enabling developing countries to use larger amounts in relation to their quotas. I am also satisfied that the adjustment programs will make allowances on the supply side, by maintaining conditions favorable to the necessary investments and growth.

For an increased role in financing balance of payments deficits, the Fund needs larger resources than those it will dispose of even after the delayed coming into operation of the Seventh Review of Quotas. Supporting the efforts of the Managing Director of the Fund, Mr. Jacques de Larosière, to provide additional resources through Fund borrowing, I want to stress here again that the basic way to increase the Fund resources should be a substantial quota increase under the Eighth Review, which should be advanced. I recognize the need that enlarged and longer-term financing should go hand in hand with the adjustment that will reduce the deficit. This is by no means contradictory to the consistent application of the principle adopted by the Fund that social priorities and resulting institutional arrangements in the countries using the Fund’s resources should be respected.

In this context, my country has adopted and is pursuing a comprehensive adjustment program. The implementation of this program requires exceptional efforts by the whole economy and people. The first results of these efforts are already evident.

In spite of the importance of and need for these initiatives, they reflect only partial efforts to alleviate the present serious consequences of the current system of international economic relations in monetary and financial areas. They are quite insufficient to overcome the crisis, as they do not eradicate the causes, which require more basic solutions toward establishing the New International Economic Order.

One year after the presentation of the Program of Action of the Group of 77 on the Reform of the International Monetary System, I must note that no substantial progress has been made toward accepting our propositions.

As a way to approach the implementation of the international target for official aid of 0.7 per cent, we urged every donor country to establish the binding program for the annual growth rate of ODA disbursement for each of the next three years, which would allow aid for the least developed and most seriously affected countries to double. The results are extremely disappointing, and the prospects very worrying. Official aid in 1979 stagnated in real terms; in DAC member countries it further decreased from 0.35 to 0.34 per cent of GNP. While some countries have announced their intention to continue their recent increases, the decision of others to reduce their programs will cause serious economic and political consequences in developing countries, particularly the least developed countries….

Democratization and the more favorable position of developing countries in our institutions require that their role increases in all stages of the decision-making process, including their representation on management and staff. Analysis of this issue identified a technical possibility to increase the share of developing countries in the voting power of the Fund, and the desirability of a larger representation of developing countries in the staff and management was recognized. However, discussions in the Executive Board suggest resistance by developed countries to these necessary changes.

We have proposed the establishment of a medium-term facility for balance of payments financing. Since then, changes have been introduced in the existing facilities, increasing the amount of available resources with partial extension of the period for their use. However, the essential element of the proposed facility is its first tranche conditionality, as it represents the response to externally imposed deficits that are the consequence of structural surpluses elsewhere. We agree that it is indispensable to reduce deficits to a sustainable level, regardless of whether the causes are internal or external. Nonetheless, the use of Fund resources with high conditionality in these cases represents the transmission of the adjustment burden to deficit countries. It has its deflationary impact on economic activity as a whole, and particularly impairs growth in deficit developing countries with or without limited access to capital markets. Without softer conditionality for financing externally imposed deficits, current financing policy does not respect the generally accepted principle that the burden sharing of the balance of payments adjustment should be equitable and the process itself consistent with maintenance of employment, growth, and international trade.

We are in strong support of a more decisive evolution in making the SDR a principal asset in international reserves. This is not possible without a substantial increase in the amount of allocated SDRs. In this context, I would like to draw attention to the new elements justifying enlarged allocation in the last year of the current basic period, and particularly the need to allocate not less than SDR 10 billion annually in the basic period starting 1982.

We welcome the comprehensive discussion in the Fund Board and the continuation of negotiations on establishing a link between the SDR allocations and the provision of additional resources to developing countries. New special circumstances enhance the need and urgency for an early decision on the establishment of a link.

Without progress on these issues there is no substance for a balanced package of measures which the Group of 77 considers as a frame for a positive evolution of the monetary system….

I am aware of the economic and social difficulties and uncertainties faced by developed countries. However, I cannot accept them to be a good reason for opposing and delaying more decisive changes in international economic relations. The crisis felt by all of us is of a structural nature, and this accumulation of difficulties makes more basic changes in the system even more indispensable and urgent.

By proposing global negotiations in the framework of the United Nations, nonaligned and other developing countries gave the initiative for an integral and interdependent approach to the solution of all the most important problems of international economic relations. Global negotiations would represent an important possibility to achieve a package of mutually supportive arrangements in different areas, which could mean a political breakthrough in solving major monetary and financial issues which in the past could not be solved in isolation. It is our deep regret that the Special Session of the UN reached no decisions on launching the global negotiations. However, there remains the hope that the avenues for international cooperation remain open for renewed efforts and initiatives. We, the Ministers of Finance and Governors of Central Banks, should endeavor to ensure that these discussions continue, particularly in monetary and financial fields.

Statement by the Governor of the Bank for Israel—Arnon Gafny

Three basic problems currently confront us: inflation, lack of growth, and international payments imbalance. Once again, many nations face serious difficulties as a result of recent, sharp increases in real oil prices.

Applying lessons learned in the mid-1970s, some industrial countries are implementing policies of fiscal and monetary restraint, increased taxation, and reduced growth. These policies, while they may reduce a given country’s rate of inflation and slacken the deterioration of its balance of payments, exact a high price in terms of unemployment and living standards. Furthermore, were these policies to be adopted by all nations, international trade would be sharply reduced and world recession ensue.

It is the oil importing developing countries (with a current account deficit totaling almost $70 billion) that will be hardest hit by combined inflation, stagnation, and payments deficits. Although in large measure, developing countries managed to weather the oil crisis of the mid-1970s, strong doubts now prevail as to their ability to cope with the new oil price shock. Particularly hard hit are the low-income developing countries, who are paying an enormous price in human terms. Unless a reasonable rate of growth is maintained in these developing countries, the repercussions—social, economic, and political—could be disastrous. Furthermore, it should be noted that the economies of the semi-industrialized, middle-income developing countries are highly vulnerable to oil price increases. Those who, after years of strenuous efforts, are attaining some success, are now in danger of losing what they have achieved.

Looking back on the 1970s, we find that the first oil price shock significantly slowed the development momentum in oil importing developing countries. For many of these countries, the recent oil price increases could mean not merely slowdown but stagnation, and even regression, in their socioeconomic development.

World economic disequilibrium in the 1970s should have made amply clear the interdependence of the economies of all nations. Unfortunately, recent intensification of restrictive trade practices in industrial countries clearly shows that many have not yet learned this important lesson. Contraction of developing countries’ export markets in industrial countries decreases not only their export earnings but their capacity to import as well. The industrial and the developing nations thus should have a shared interest in maintaining, and even expanding, world trade. However, because of a growing imbalance in international payments, barriers to world trade are rising.

Proposals for long-range amelioration of economic problems are currently under discussion. But short- and medium-term programs must be activated to meet the serious immediate needs. To cite a few examples of appropriate measures which could be taken promptly:

  • (1) creation, with the Fund, of a medium-term financing facility, geared to meet the needs of countries experiencing externally induced balance of payments difficulties;

  • (2) enlargement of access to the Fund resources;

  • (3) establishment, within the World Bank, of a “Fourth Window” aimed at expanding cofinancing, in which commercial banks and development institutions could meet;

  • (4) strengthening of the “Third Window” by the provision of large-scale interest subsidization;

  • (5) operation of an export credit guarantee facility to foster developing countries’ trade….

In closing, we are of the opinion that the economic problems evolving from recent oil price increases can and must be dealt with effectively on a world scale. However, this can only be achieved if all countries—and in particular the industrial nations—reach an appropriate balance between national needs and international considerations. While long-range solutions to basic economic problems would be welcome, adequate attention must be given now to essential and immediate needs.

Regrettably, I cannot conclude without referring to an issue which obviously does not belong either to the regular subject matter or to the priorities to which this distinguished forum has been accustomed. It was in recognition of the immense importance placed on the smooth functioning of the Bank and the Fund that by an unwritten agreement all their members observed the letter and spirit of their Articles, saving this unique forum from political issues. We are all well acquainted with the criteria implicitly derived from the Articles and explicitly applied in the long-standing practice of the two institutions with regard to the observer status. Acording to these criteria, such a status has been accorded to countries with pending membership applications and to international or regional organizations with continuing interest in, or significance to, the Bank and the Fund. The PLO does not meet any of the above criteria.

All of us, no doubt, share the view that the world today cannot afford diversion of its two most important economic institutions from their real purposes. Only a firm stance against the introduction of extraneous political elements jeopardizing the form and substance of the Bank and Fund functions will enhance the best interests of the international community as a whole….

Statement by the Alternate Governor of the Fund for Paraguay—Oscar Jacinto Obelar

On behalf of the authorities of the Government of the Republic of Paraguay, I have the high honor of conveying friendly and cordial greetings to the Chairman of these Annual Meetings, to the authorities and people of the United States, to the Managing Director of the International Monetary Fund, to the President of the World Bank, to the Governors and representatives of the participating countries, and to all those officials who directly or indirectly provide their most efficient support to the pursuit of the objectives of the International Monetary Fund and the World Bank.

At these Thirty-Fifth Annual Meetings of Governors, both institutions are in a position to show the results of fruitful labors in the financial and economic domains to the benefit of our peoples, a fact which reflects the steadily increasing importance of the organizations in the economic and financial relations between their member countries.

The interest placed in the economic and social development of developing countries imparts particular relevance to institutions which, like the International Monetary Fund, through their assistance promote the attainment of the important national objectives of our countries.

The assistance rendered by international organizations to the countries directing their efforts toward the achievement of better standards of living will have to be channeled toward strengthening those policy approaches found to be the most effective. In this regard, my country ascribes particular importance to the development of the agro-industrial sector so as to use its natural resources to better advantage; to developing productive investments in general; to perfecting technical and vocational education, science, and culture; to creating and developing projects involving physical infrastructure; to improving basic health services; to assisting the primary economic sectors; to steadily improving the public sector’s administrative services; and to strengthening the currency and keeping it stable.

The energy crisis is one of the most serious problems facing the entire world. Paraguay has proposed a national and regional solution for attenuating this crisis, taking part with Brazil and Argentina in the construction of two large hydroelectric projects—one at Yacyretá with Argentina and the other at Itaipú with Brazil.

Paraguay is working for the effective integration of all the regions within its territory and for the expansion of the agricultural frontier. In this connection we might point out the interesting agricultural and infrastructural development programs in the eastern, western, and Chaco Paraguayo regions; the last-named region is one of great economic potential where, through national efforts and international cooperation, the basic groundwork such as roads, bridges, and agricultural and livestock research centers, among others, has already been provided.

The delegation of the Republic of Paraguay would like to run down its major economic indicators, which provide eloquent testimony to the upward trend in its economy.

Paraguay’s gross domestic product was $2,092 million in 1977 and $2,319 million in 1978, an increase over the previous year of 10.9 per cent, and rose to $2,567 million in 1979, for an increase of 10.7 per cent in comparison with 1978, all in constant 1977 prices. This rate of growth was in excess of the average rise of 4 per cent in the combined gross domestic product in Latin America exclusive of the oil exporting countries.

The 28.2 per cent increase in consumer prices in 1979 was the highest annual rate in the last 25 years, higher than the other extraordinary increase of 25.2 per cent recorded in 1974. This rise resulted from the increased prices of oil-based fuels.

Exports increased by 18.7 per cent in 1979, rising to $305.2 million, and imports amounted to $431.8 million, increasing by 35.9 per cent over those of the previous year.

The net international reserves of the Central Bank of Paraguay rose to $594.4 million in 1979, for an increase of $156.4 million (36 per cent) over the amount of $439 million recorded in 1978. Reserves totaled $667.8 million as at June 30, 1980, exceeding the amount recorded on the same date in 1979 by $72.4 million (12 per cent).

The balance of payments registered a surplus of $166.5 million in 1979, nearly the same as the 1978 figure of $169 million.

Tax revenues have risen constantly under the impetus of the growth in economic activity and constant improvements in the tax administration and auditing systems. In 1979, tax revenues rose by 27 per cent compared with 1978, while the rates of increase in 1977 and 1978 were 36 per cent and 31 per cent, respectively. Tax receipts in the first half of 1980 rose by 20 per cent, to $205.49 million, which compared with $171.53 million in the first half of 1979. As revenues have been rising faster than public expenditures, the Government has recorded a surplus for the past eight years.

The first half of 1980 produced a notable rise in agricultural production, and also in industry, construction, services, and trade.

In the agricultural sector, the soybean harvest is estimated at 600,000 tons while the cotton harvest is estimated at 235,000 tons, representing increases of 33 per cent and 3 per cent, respectively. There were also increases of 48 per cent in maize production, totaling 600,000 tons; 10 per cent in rice production, totaling 75,000 tons; 10 per cent in sugarcane production; and 32 per cent in coffee production.

Private investment continued to grow in 1980. Investments authorized under Law 550/75 on the Promotion of Investment amounted to 0 9,258 million as at June 30, 1980.

In discussing the economic situation in Paraguay and recent trends in its economy, we have yet again shown the great work being carried out by the Government in its prudent and optimistic approach to problems of integral development.

In pursuing this line of action, the Government of my country is working with the International Monetary Fund and other international financial organizations to find solutions to the multiple problems raised by the need to achieve higher standards of living.

Paraguay shares the concern at the grave world economic situation characterized by high rates of inflation and unemployment, a slowdown in rates of growth, and a deterioration in the balance of payments of the vast majority of the countries brought about by the increased cost of imports and slow growth of exports, due in large measure to protectionist policies adopted by the developed countries and to the rise in oil prices.

My country will continue to support the work of the International Monetary Fund designed to counter and overcome such problems.

We are aware of the efforts of the Fund to contribute within its area of responsibility to solving world problems, which also affect my country; it is for this reason that we wish to congratulate the management of the Fund, in the person of its Managing Director, Mr. Jacques de Larosière, for the impressive work done by the institution.

In conclusion, I wish to express my sincere thanks for the kindness extended by the authorities of our host country and I reiterate my cordial greetings to the Chairman of these Meetings, to the Managing Director of the International Monetary Fund, to the President of the World Bank, to the Governors and delegates of countries represented here, and in general to all the officials and individuals whose work so magnificently and efficiently contributes to the success of these Meetings.

October 1, 1980.

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