Discussion of Fund Policy at Fifth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1980
Statement by the Governor of the Bank for Nepal—Yadav Prasad Pant
It is my pleasure to address these Thirty-Fifth Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund after a lapse of nearly half a dozen years when I had had the opportunity of attending the Annual Meetings in my capacity as Governor of the Fund for Nepal. At the outset, on behalf of the Nepalese delegation and myself, I would like to express my sincere appreciation to the Government and the people of the United States of America for the warm and generous hospitality extended to me and members of my delegation. I would also like to thank the management and the staffs of the World Bank and the International Monetary Fund for the excellent arrangements made for the Meetings.
I am also pleased to welcome the People’s Republic of China, our great and friendly neighbor, for the first time in this august body, and I hope that China’s participation in the Bank/Fund activities will further expand the operations of these institutions. I also join my fellow Governors in welcoming the new members of the Bank.
We are all aware that the decade of the 1970s has been marked by turbulence in the financial and economic fields. The fixed exchange rate was replaced by the floating of major world currencies. The developed countries were characterized by recession, high rates of unemployment, widespread and persistent inflation, lagging investment, and declining productivity. On the other hand, oil importing developing countries experienced low levels of economic activity, deteriorating terms of trade, adverse balance of payments positions, and mounting debt servicing. The decade was also marked by the phenomenal rise in the price of petroleum products, which resulted in a huge balance of payments surplus for oil exporting countries. The impact of these developments was experienced by various groups of countries in different magnitudes. Accordingly, the developed countries took recourse to tightened fiscal and monetary policies to adjust to the changing situation, and were also in a position to transfer their burden, in one way or another, to the developing countries. Recessionary tendencies in the industrial countries, coupled with inflationary pressure and energy price hikes, have adversely affected the external position of the developing countries, particularly in the areas of capital flow and export trade of non-oil producing developing countries.
Since we met in Belgrade in 1979, the overall economic outlook in the world has changed for the worse. The situation of oil importing developing countries has presented a worrisome picture in many ways, and various studies have pointed to gloomy prospects for the 1980s. The real price of petroleum products and other imported goods has shown a rising trend, whereas the price behavior of non-oil primary commodities is both erratic and generally weak, resulting in a marked increase in the current account deficit. Huge, uneven, and persistent payments imbalances have come at a time when there is limited scope for the expansion of the export trade of developing countries in view of the deteriorating terms of trade and protectionist barriers raised by industrial countries. Any encouraging sign of improvement in this situation is hardly visible as yet. Against the growing needs of these countries for external resources, the net disbursement of official development assistance (ODA), which makes up a significant portion of the concessionary assistance to the least developed countries, has not increased on an adequate scale. In fact, the net disbursement of ODA, as a proportion of the aggregate GNP of Development Assistance Committee members, has virtually remained constant at less than half the committed target of 0.7 per cent of GNP. To cope with such an unfavorable and disappointing situation, the flow of real resources to the developing countries in general, and to the least developed countries in particular, must be accelerated on a massive scale, and the quality of such an aid flow should also be improved accordingly.
The fundamental problem of the world community is to face the challenge of poverty and disease prevailing in the developing countries. The successive World Development Reports and the Brandt Commission Report, to name a few, have clearly presented the problems and prospects facing mankind. The Commission Report, which provides a comprehensive analysis of global issues, has rightly emphasized the interdependence and mutual interests of the world community. The Report has come out with far-reaching proposals and recommendations which deserve serious attention from the concerned parties….
The other leading financial institution, the International Monetary Fund, has a much larger responsibility in transferring resources to the developing countries. In view of the large payments deficits of the low-income developing countries and the resultant difficulties in their adjustment process, the need for large and regular annual allocations of SDRs and the frequent review of the Fund’s quotas cannot be overemphasized. However, an increase in quota limits for Fund facilities, relaxation of conditionality, and provision for subsidizing charges on the supplementary financing facility and extended Fund facility will go a long way in meeting the resource requirements of the member countries. Furthermore, the Fund should also decide whether it would be more expedient to use the Fund facilities and avoid the possible balance of payments problems in preference to the present practice of providing resources only after the problems have arisen.
However, there is some concern about the availability of resources for the Bank and the Fund that are needed to finance the program on an expanded scale. The general capital increase of the Bank, the Sixth Replenishment of IDA, and the quota increase under the Seventh General Review of Quotas of the Fund have yet to materialize. I urge fellow Governors to expedite the legislative process and make adequate funds available to these institutions in good time.
I have already mentioned the deteriorating external position of the developing countries due to rising energy prices, the large balance of payments deficits, the marginal increase in the external capital flow, and so on. Nepal, a least developed and landlocked country, is naturally affected by international economic events. The trade gap has widened by almost 53 per cent compared with last year because of the fast growth in import expenditure and a decline in export earnings in 1979/80. The aggregate agricultural production in the Fifth Plan period (1975-80) declined by 3 per cent per annum due to adverse weather conditions in the first three years of the Plan period, whereas the population increased by 2.6 per cent per annum despite the efforts to slow down the population growth rate. In fact, food production declined by almost 13 per cent last year due to drought in the western parts of Nepal. As a result, the exportable rice surplus has dwindled further, and jute, the country’s major exportable commodity, has suffered from an uncertain and volatile international market. On the other hand, the import bill for petroleum products, which accounted for a little less than 50 per cent of export income in 1979/80, has continued to increase. All the economic indicators suggest that it will be a difficult task to manage the Nepalese economy in the years ahead.
The phenomenal increase in oil prices has generated interest in both the developed and developing countries in exploring and developing alternative energy sources. Hydropower, inter alia, is an important alternative source of energy. Fortunately, Nepal is endowed with abundant water resources. The proper harnessing of water resources for hydropower will not only benefit Nepal but will also solve the critical energy problems of its neighboring countries. In this connection, we in Nepal have taken note of the Bank’s timely initiative in launching a new lending program for energy development. I urge the Bank to utilize such resources in the development of renewable energy sources which will enlist genuine cooperation between the developed and developing countries.
Under the dynamic leadership of His Majesty King Birendra, Nepal continues to focus its attention on eradicating the problems of poverty and achieving all-round development. We have launched the Sixth Five-Year Plan this year with the basic objectives of gradually eliminating absolute poverty through the generation of employment opportunities, fulfilling the minimum basic needs of the people, raising the socioeconomic conditions of the rural and low-income groups, and conserving and developing water and natural resources. Of course, we are determined to pursue vigorously an integrated rural development approach with the broad participation of the people. The public sector financial outlay has more than doubled in comparison with the Fifth Plan outlay. A significant amount of funds has been allocated to the development of the productive sector without, of course, neglecting the development of social and economic infrastructure. Moreover, we have emphasized the development of our water resources, particularly hydropower and irrigation systems, which are vital for extending and sustaining the future economic growth of Nepal. In order to fulfill the basic objectives of the Plan, we are determined to mobilize domestic resources as much as possible, but the need for more and more external support in the form of concessionary assistance to meet the Plan target is quite obvious….
Mutual trust, cooperation, and understanding among all the countries in the world are preconditions for the solution of the complex and diverse problems with which the world is plagued. Present realities and future prospects in the international monetary, financial, and economic outlook are extremely grim, necessitating a common front and joint attack on the part of all the developed, oil exporting, and non-oil exporting developing countries for the creation of a bright and happy new world.
Statement by the Governor of the Fund for Pakistan—A. G. N. Kazi
The present Annual Meetings of the Fund and the Bank are of unique significance since, at long last, a quarter of the world’s population has been given true representation on the Boards. On behalf of my Government and the people of the Islamic Republic of Pakistan I extend the heartiest congratulations and warmest welcome to the Government of the People’s Republic of China on assuming its lawful rights in the International Monetary Fund and the World Bank. The Government of the People’s Republic of China is the sole legitimate Government that can represent China, one of the original members of these international financial institutions. I would also like to extend a cordial welcome to Zimbabwe, St. Lucia, St. Vincent and the Grenadines, who have recently joined the Fund and the World Bank. I regret that the PLO has not been given observer status at this session, and I would like to associate myself fully with the views expressed by the distinguished Governor of Saudi Arabia on this issue.
The developing countries are currently passing through a dismal international economic environment that not only darkens their immediate prospects but also casts a shadow on their future hopes and expectations. The period since we last met in Belgrade has seen the intensification of stresses and strains to which the world economy in general and the non-oil developing countries in particular have been subject in recent years. Opportunities and resources for development have critically narrowed. The time has come to candidly reassess traditional strategies, approaches, and institutions for growth and development, especially of the low-income countries in which the mass of the world population resides.
The Fund’s Annual Report and the Bank’s World Development Report analyze, between them, the current problems and the near-term and more distant prospects of the world economy. It is evident that inflation, recession, and protectionism have seriously undermined the capacity of low-income countries to sustain a development path that holds promise of substantial gains within the time span of one or two decades. While inflation has multiplied the cost of their imports, recession and protectionism have barred expansion in the volume of exports. Moreover, capital flows to developing countries have not kept pace with their growing current account deficits. In particular, growth in official development assistance has lagged far behind other forms of capital transfers, severely affecting the low-income developing countries which have only marginal access to nonconcessionary finance.
The impact of the latest round of inflation, recession, and protectionism on the balance of payments of non-oil developing countries is before us. The combined current account deficit of non-oil developing countries increased from $36 billion in 1978 to $55 billion in 1979 and is projected at $68 billion in 1980 and $78 billion in 1981. A more than doubling of the external imbalance within the short span of three years is obviously disquieting, the more so because the manner in which these deficits have to be financed will sharply increase indebtedness and debt servicing burdens. And yet the scale of the deficit would have been much larger but for the strong measures that developing countries have been compelled to take to cut down expenditures essential to their development. The adoption of these measures meant a major setback to the plight of low-income countries living under stark conditions and striving for meager improvements in living standards.
The deterioration in external circumstances is not a passing phenomenon; it clouds the prospects of low-income countries for several years. Even in the optimistic scenario—the high-growth case of the World Development Report—export volumes of non-oil, low-income countries are anticipated to expand at the feeble annual rate of 2.3 per cent during the current decade. Thus, Tokyo Round notwithstanding, export demand is unlikely to provide much of an impetus to growth in output of low-income countries or improve the balance of payments outlook. Although import growth is forecast at a fairly low rate of 2.4 per cent per annum, only marginally above the growth in exports, the current account deficit of the low-income countries is expected to triple, from $10 billion in 1980 to $32 billion in 1990, due largely to worsening terms of trade. Again, on past experience, it is far from certain whether concessionary aid flows will keep pace with the enlarging current account deficits.
The high-growth case, it needs to be noted, calls for considerable effort and efficiency on the part of the low-income developing countries. They have to maintain savings rates in the region of 20 per cent of GDP, which calls for heavy sacrifices, given the low levels of income and the magnitude of poverty that prevail in these countries. Furthermore, the World Development Report states that in order to raise efficiency of resource use, these countries will also have to adjust and restructure their programs, priorities, and economic management. Finally, even the sacrifices and efficiency improvements required of these countries will not be enough. It will be necessary, as well, for developed countries to grow at a fast rate so that demand is created for exports from the developing world, protectionist tendencies are contained, and development assistance continues to stay around its present proportion of GDP in developed countries. According to the scenario, the per capita GNP of non-oil, low-income countries will increase by about $50 in 1980 prices during the decade; but if developing countries are to aspire to this order of increase, the per capita income of industrial countries will have to increase by $3,500.
Surely it is time to pause and consider whether we should perpetuate the prevailing inequitable economic order. Evidently what is required is a new development strategy for the poor countries in the context of a new and more equitable framework of international economic relations. When obstacles in the form of recession and protectionism surface frequently, export-led growth ceases to offer a meaningful opportunity for rapid development of poor countries. When import prices are highly volatile in international markets and require speedy adjustment on the part of government, wider exposure to such an environment may be prejudicial to the interest of low-income countries which are poorly equipped for fine tuning their economies or making anticyclical adjustments. When terms of trade decline secularly, considerations of current comparative advantage alone may misdirect investment decisions which affect long-term prospects.
As the low projections of exports from low-income countries even under the “high-growth case” indicate, the developing countries are being forced, owing to international economic conditions, into adopting import substituting strategies, the high costs of which have been often measured and documented. The dangers of an insular and inward-looking approach do not lie in the sphere of economics alone. Such an approach affects cooperation and accommodation in other areas as well. International economic programs and policies should be based on far-sighted vision and should foster international cooperation, which is clearly in the larger interests of the world community.
Such vision has not been altogether lacking. This year, the Brandt Commission issued its report subtitled A Programme for Survival This was a Commission whose members were drawn from diverse disciplines and country groups, including eminent politicians from the developed world. The conclusions and recommendations of the Commission strongly supported the Program of Immediate Action worked on by the Group of Twenty-Four last year and went on to make further far-reaching proposals for bringing about improvements in the international economic order. It is essential for the economic well-being of the world community that these recommendations receive urgent and sympathetic consideration for early implementation; in particular, I would stress action in the following spheres.
For ensuring rapid and orderly growth of developing countries, it is of foremost importance that their exports should be encouraged and not smothered under tariff and nontariff barriers. The absence of secure and growing markets inhibits steady and planned growth in developing countries. The removal of impediments to exports of manufactures from developing to developed countries is the most essential requirement of international economic cooperation.
The level and form of concessional capital flows are of particular importance for the growth of low-income developing countries. At the beginning of the Second Development Decade ten years ago, the international community had set a target of 0.7 per cent of GNP for the official development assistance to be provided by developed countries. It has been an unfortunate experience that instead of moving toward this target the realized flows receded from the levels of 1970. But that is now history. More relevant and disheartening are the current attitudes and future expectations in this regard. The first edition of the World Development Report issued in 1978 had projected that the net flows of official development assistance from DAC countries would increase from 0.36 per cent of their GNP in 1975 to 0.39 per cent in 1985. Two years later, the latest version of the World Development Report forecast that aid flows from DAC countries, which had fallen below 1975 ratios during 1978 and 1979, will regain the 0.36 per cent level in 1980, stay at that rate in 1985, and fall to 0.35 per cent in 1990. Even this would probably be regarded as wishful thinking by many. The Brandt Commission has forcefully reiterated the necessity of moving toward the 0.7 per cent target and has called for prescribing a timetable for it. It is essential that this recommendation of the Brandt Commission be accepted and the schedule for implementation of the target be mutually agreed upon during the next round of the North-South dialogue at the United Nations.
Along with an increase in the level of concessional aid inflows, a major change is required in the form in which such assistance is rendered. Much of the aid flows are currently tied to purchases from donor countries or to projects having the approval and reflecting the concern of donors. The former restriction often results in a steep increase in prices charged, and the latter tends to prevent developing countries from pursuing a development strategy which fully reflects their needs and priorities. There is a pressing need for routing a much larger proportion of assistance through multilateral development institutions. In turn, these institutions should provide larger assistance on reasonable terms as program rather than project lending. In this context we welcome the steps taken by the World Bank and the Fund for providing financing facilities under the structural adjustment lending program and the extended Fund facility.
The advantage that developing countries derive from these facilities will, however, depend upon the flexibility with which they are administered. The conditionality attached to these loans should take account of the extraordinarily difficult period of adjustment that most developing countries are going through, a period in which their performance is vulnerable to and at the mercy of external conditions. Moreover, the structural adjustment required from developing countries should pay due regard to the historical evolution of policies in each country, to the commitments embodied in its development program, and to its economic management capability. It would be wrong to insist upon doctrinaire approaches, especially those meant for advanced countries operating under stable equilibrium conditions. Thus, while we have hopes that these facilities will assist in the adjustment process, their success will be minimal if they make very stringent demands on developing countries; demands that these countries may be forced to accept but would never be able to fulfill.
Turning to international monetary issues, I would like to emphasize that monetary reform measures taken so far have ignored the aspirations of developing countries. The Second Amendment of the Fund’s Articles failed to convey a sense of direction and did not incorporate many amendments that were considered vital by the developing countries for the improved functioning of the international monetary system. In this context I would like to refer to the Program of Action on International Monetary Reform prepared by the Group of Twenty-Four during the Belgrade Meetings in which the new international monetary system has been envisaged to include an effective, symmetrical, and equitable adjustment process, with access to official credit facilities on terms and conditions responsive both to the nature of the balance of payments problems and the level of development of the country concerned; greater access to the capital markets in the developed countries; a flexible but stable exchange rate regime; equitable and symmetrical Fund surveillance over the exchange rate and balance of payments policies of both surplus and deficit countries; the creation of international liquidity by international action in line with the needs of an expanding world economy and with the SDR as the principal reserve asset; the promotion of the net flow of real resources to developing countries and in this context an SDR-development assistance link; and greater participation by developing countries in the decisionmaking process. The increasingly difficult economic situation faced by the non-oil developing countries, particularly the low-income ones, calls for adoption of immediate steps to alleviate these problems and I therefore stress the importance of taking speedy action by the Fund-Bank management in this regard.
I attach particular importance to an early decision with respect to the establishment of a link between SDR allocation and development finance. This would augment the flow of resources required for additional balance of payments financing, provide much-needed reserves to developing countries, and contribute to the solution of the global recycling problem. Besides, an SDR link would also be beneficial to the developing countries on the grounds of improving their reserve composition, with respect both to the division between conditional and unconditional liquidity and to reserve diversification.
I would also like to emphasize that a substantial and uninterrupted annual allocation of special drawing rights is the need of the moment for meeting the requirement of expanding world trade. Regular SDR allocations would not only contribute to the stability of the international monetary system by making a primary reserve asset available and by improving reserves composition but would also help in making progress toward the objective of making the SDR the principal reserve asset in the reformed international monetary system. This would, hopefully, lead in due course to an effective control on international liquidity which requires that the use of national currencies as international reserves be markedly reduced….
Statement by the Temporary Alternate Governor of the Fund for Iran—E. Rashidzadeh
May I first offer my sincere thanks to the Fund and the World Bank for their excellent arrangements and splendid efforts to organize this important meeting. I would also like to take this opportunity to add my voice to those of other distinguished delegates in welcoming all new members of these two institutions.
For some time we have been witnessing gloomy indicators and listening to dire warnings about the state of international economic relations. There is, I believe, general agreement that the world economy is entering into a most difficult and critical phase, and all the elements of a profound and widespread crisis are present. For some years economic and financial problems within the framework of international economic relations used to be discussed individually on their own merits, while now we observe that such questions are intermingled with political considerations. The emerging crisis, therefore, is a crisis of confidence, brought about by recent events and a widespread belief that the present system is severely deficient to deal with urgent economic problems.
The basic weakness lies in the structure and the organization of the international monetary system which is not well suited to cope with present problems.
A fundamental issue is whether international institutions, in whose decisions and deliberations developing countries have relatively little voice, can effectively deal with problems of payments imbalances and capital shortages. Similar arguments were voiced by both the Brandt Commission and the Group of Twenty-Four Ministers who, in their communiqués, have consistently proposed an increase in the share of developing countries in Fund quotas to accord them more voting power. This is essential if frustration and the sense of helplessness on the part of developing countries toward international institutions is to be avoided. Unfortunately, it has been repeatedly observed that this legitimate demand has been consistently denied.
Based on the most recent experience, events have explicitly shown that what was once said about the dangers of a system based on effective domination by one single reserve currency is now apparent. Thus emerge malfunctionings of the system which are harmful both to the issuer of such currency and to the users.
There is a need therefore to move away from such arrangements. Indeed the world needs a comprehensive monetary and financial order based on a pluralistic criterion that considers a multitude of factors and is free from inclination toward a single currency. Recent events have also shown that when political considerations are brought in to play a role in the international monetary system, severe disturbances in the functioning of the system may result and the confidence in the viability of the whole arrangement may be shaken. The financial markets, those that cater to and finance international trade, must not be subject to political considerations and must be accorded a measure of independence.
This is specially clear in the case of the U.S. action of freezing Iranian Government assets. There could be no economic or even political reason to justify manipulation of the international monetary system. It was a dangerous weapon that affected not only those against whom it was aimed but also had global repercussions which have resulted in undermining the world confidence in the international banking system. The Iranian Government at all times before and after the freeze honored its obligations. But after the formal declaration of the freeze, all efforts by Iran to pay interest and principal of Iranian Government loans became futile. Iran has always honored all its financial commitments, but U.S. banks ignored repeated instructions, sent days before the date of the freeze, to pay interest on outstanding loans, and declared default on such loans and accelerated repayments.
U.S. bank branches abroad followed suit, in total disregard of the banking laws of the host countries, and legal actions taken by Iran to oppose such moves are pending in those countries. It is appalling that in some cases the American banks based their argument for disregarding the host country’s banking laws on the Fund’s Articles of Agreement.
Another harmful development brought about by such measures was the wide-scale use of reserve currencies and also the international network of banks for political aims. The U.S. measures provided an illegal precedent for any country issuing an international reserve currency to deny the holder at any time the right of usage of such currencies. A very serious implication of such an action is the vulnerability of developing countries in the face of similar measures taken by the government of an industrial country. When a single government could stop the free use of a so-called freely usable currency, this would seriously lessen the credibility of the Articles of Agreement. The immediate effects of such measures were to deny a sovereign state and an original member of the Fund its assets and to inflict economic hardship upon Iran. The wider implications go far beyond national boundaries and indeed threaten the very foundation and purposes of the Fund. The proper functioning of the international monetary system, the stability of the world money and capital markets, and the safety, security, and free movement of assets are at risk. These concerns led the Third Meeting of the Governors of the Central Banks and Monetary Authorities of Muslim Countries, which was recently held in Riyadh, to oppose the freezing of Iranian assets and to call for their immediate release.
Therefore, any new international economic order should be devised in a manner that does not leave any room for manipulation by any single country.
Article VIII of the Fund’s Articles of Agreement specifically prohibits a member from imposing restrictions on current payments and international transactions. The United States in trying to justify the freeze resorted to a Fund Executive Board decision of 1952 and claimed it had imposed the restrictions for reasons of national and international security. No one can take that claim seriously. One fails to see how such measures by the United States, that in fact inflicted serious damage to public confidence, could possibly enhance security. Even outside the context of the 1952 decision, such actions were not designed to preserve the financial and monetary security of the United States, which was in no way endangered. Rather, it was merely an excuse to put pressure on a nation.
However, the Executive Board of the Fund failed to give an injured member sufficient time to present its case. We deplore that decisions and deliberations of international financial institutions should be affected by political motivations of a few influential members. Curiously, we observe that demands for the maintenance and integrity of our two institutions are made by the very circles that use them for political aims. As you have witnessed, the political maneuvering by some industrial countries prevented the presence of the PLO representatives as observers in this meeting, in disregard of the accepted rules and regulations of the Fund. The events as I have described can hardly help to enhance the prestige and impartiality of the Fund.
We must take urgent steps to rectify such developments, and if we fail to take action, serious difficulties will arise. In this day and age, countries of the world are being awakened to their rights and obligations. They want to control their own political and economic fate and destiny. I therefore strongly endorse, Mr. Chairman, your call for immediate structural changes within these two institutions, bearing in mind that any postponement will waste precious time and opportunity, to the detriment of all.
I hope that the problems I have discussed, specifically our grievances relating to the freezing of our assets, will be reflected in the Chairman’s report so as to show that there is at least a world forum where such legitimate voices of discontent can be attentively heard.
Statement by the Governor of the Fund and the Bank for Jamaica—R. H. P. Small
Before I begin, Jamaica wishes to pay two special tributes. Our first tribute is to Mr. Robert McNamara for his leadership of the World Bank over the past 12 years. We sincerely hope that he will continue to serve humanity after he demits office next year. Our second tribute is to you, Mr. Chairman, for the forthright way in which you set the tone for this meeting in bringing to our attention the urgency of the need to reform the Bretton Woods system to make it responsive to the changed conditions of today’s world.
We join other delegations in welcoming the new members of the institutions, especially our fellow Caricom States, St. Vincent and the Grenadines, and St. Lucia, as well as Zimbabwe and China.
These Annual Meetings of the Bank and Fund take place at a time of deep crisis in the world economy, which is only matched by the disorder which at present afflicts the international monetary system.
As serious as this is for the developed market economies, the implications for the developing countries are little short of disastrous. The International Monetary Fund has characterized the economic situation for developing countries as “frightening”—strong language for that institution. According to the Bank’s World Development Report, 1980, the prospects are at best for slow or even negative growth for the first half of the decade of the 1980s. Only two years ago the World Bank envisaged that rates of growth and the volume of resource transfers would need to be greater than those attained in recent years if the number of absolute poor in the world were to be reduced from 800 million to 600 million by the end of the century. In the low-growth scenario the number of absolute poor in the world will rise to nearly 2,000 million souls by the end of the century—and it is this latter scenario which confronts us at present.
In this context, the challenges facing the international community are awesome. And there is a correspondingly heavy responsibility on those of us—the political leaders and the top officials in finance and development of the greater part of the world—to respond to this challenge. And as we seek to find answers to the problems with which these Meetings have been preoccupied, we should remember that behind the sometimes abstract problems of payments imbalances, the financing of deficits, adjustment and conditionality, and inflation, there lies the real world of human beings. We should remember that the poor and suffering majority of humanity looks to us to provide some hope for the future which would make more bearable the grim and somber conditions of the present to which delegates to this meeting have referred.
My delegation has listened with great care and attention to the reports on the efforts being made by the Bank and Fund to reinforce existing measures and facilities and to introduce new ones so as to address some of these problems. We would be lacking in frankness if we were to express optimism and satisfaction at the adequacy of the measures which have been established at these Meetings. If we feel some sense of dissatisfaction, it is not because we are unaware of the efforts which have been made but rather because of a sense of the enormity and the urgency of the tasks that the present situation requires, and the very real impact that these have on the lives of our people.
Let me give you just one example. In dealing with the problem of payments imbalances, the need for greater equitableness and symmetry in the process of adjustment has been continually stressed not only by national delegations but also by the Group of Twenty-Four, by the Commonwealth Finance Ministers in their recent meeting in Bermuda, and by the report from the Interim Committee. Indeed, the need for this has been accepted by this Board of Governors for many years. It is, therefore, difficult for a people like ours to understand why the burden of adjustment continues to be thrown almost entirely on the weaker deficit countries of the developing world who neither have access to private capital markets nor possess the special privilege of using their own national currencies to finance their payments gap—a privilege that is enjoyed by some of the leading members of the International Monetary Fund.
This has been brought home forcibly to the people of my country in our recent experience at attempting “adjustment” within the framework of an extended facility with the Fund. It has been asserted that in per capita terms Jamaica was among one of the highest recipients of Fund lending through the extended Fund facility of 1978, which was augmented in 1979. But one should always remember that in small, open island economies such as those in the Caribbean, there is a much higher ratio of foreign trade and external payments to the size of the economy and the population of the country than in other countries. In per capita terms, the external payments gap is correspondingly much greater, as is the quantum of external finance which is needed to fill that gap. Moreover, it is a fact that the private capital inflows which were projected as a result of our stabilization program failed to materialize, so that we experienced continuing difficulties in financing our payments gap. In addition, our export performance, although positive, did not experience the upward surge which we were led to expect would be the logical result of a devaluation of over 50 per cent.
At the same time, let us review the “adjustment” that the Jamaican economy and the Jamaican people undertook in 1978 and 1979. In addition to steep devaluation, domestic prices were substantially liberalized to improve the incentives for savings, investment, and production. There were large increases in indirect taxes, and reductions in subsidies, in order to reduce the fiscal deficit. Major new programs to provide credit for private sector exports were introduced. The result of all this was that the average real wage in Jamaica is estimated to have fallen by 35 per cent in 1978 and a further 10 per cent in 1979. According to a distinguished report prepared by the UNCTAD Secretariat for the Group of Twenty-Four, such a reduction in real wages would be “unthinkable” in the developed industrial democracies. Which of the developed countries that are the leading members of the Fund and the Bank could contemplate a reduction in real wages of nearly 50 per cent over a period of two years?
In addition to all this, my Government inevitably had to cut back on a number of social programs which had been introduced to correct the social and economic inequities of the past and to make provision for the basic needs of our people. These are programs which are precisely of the type which are being vigorously promoted by the World Bank and the international community as being necessary for the alleviation of poverty and the improvement of the human condition, which are the ultimate objectives of development. Indeed, we have noted with interest and approval that the World Bank has given special attention to this aspect of development in the current issue of its World Development Report. But the adjustment required of developing deficit countries like Jamaica by the stabilization programs of the Fund is in direct contradiction to the development of education, training, health, and nutrition so comprehensively discussed in the World Bank document.
By the end of 1979, Jamaica was unable to meet some of the performance criteria under the second year of the extended Fund facility. This was due largely to factors outside the country’s control—especially the unanticipated severity of international inflation and rising interest rates, the rising costs of imported energy, and the inadequate level of capital inflows—all related to problems of a worldwide nature which have occupied most of the time of these Annual Meetings. However, at one stage we were told that the further “adjustment” required of our country should take the form of a reduction of about J$300 million—approximately 16 per cent of our fiscal budget—and that this should include the laying off of about 11,000 public sector employees at a time when our rate of unemployment had increased to over 30 per cent. According to our calculations, if the United States was asked to make an “adjustment” of this relative magnitude, it would need to reduce the federal budget for 1980/81 by some US$103 billion. There would also have to be retrenchment of some 1,700,000 employees from the federal and state administrations. We cannot think of any better way to dramatize the asymmetry of adjustment and the problem of conditionality as it affects the developing countries, in real human terms.
That is why Jamaica has associated itself with a recent statement known as the Arusha Initiative—which calls for the establishment of a new international monetary system. Such a system should be universal in character and participation, democratic in decision making, and capable of accommodating the needs of different social and economic systems and alternative paths of development. Above all, it should be able to respond to the evident need for the transfer of resources to developing countries on a stable long-term basis, and within that context to secure real symmetry and equitableness in the process of adjustment to payments imbalances.
Jamaica places special emphasis on certain transitional measures which are needed as steps toward such a system. We emphasize particularly the critical importance of the positions taken by the Ministers of the Group of Twenty-Four in relation to (1) increasing the share of developing countries in the total quota of the Fund from approximately 33 per cent to 45 per cent, in order to increase their weight in the decision-making process; (2) lending at low conditionality the increases in the resources of the Fund secured through quota increases and additional borrowing; and (3) the establishment of a medium-term balance of payments facility carrying minimum conditionality and providing support that is significant in relation to the present levels of deficits. We record our regret that these proposals have not been agreed to at this meeting.
Nonetheless, Jamaica will continue to discharge its responsibilities and obligations of membership in the Fund and Bank. We will continue to support the ongoing efforts and initiatives at reforms in the international monetary system. We will continue to support the expansion of the lending operations of the World Bank to meet the evident needs of developing countries.
Statement by the Governor of the Bank for Egypt—Mohamed Ibrahim Dakrouri
This is indeed a momentous and memorable occasion, and it is my pleasure to take part in these Annual Meetings of the World Bank and the International Monetary Fund. No doubt, such Meetings should pool our thoughts and ideas, thus leading to the interaction of problems and solutions to the world economy.
We also convey our compliments to the Executive Directors for the comprehensive and thorough Annual Reports of the Bank and the Fund. The reports reflect clearly the state of the world economy. We also appreciate the efforts exerted in the preparation of the valuable third World Development Report, which contains an excellent analysis of major development issues.
I would like to join previous fellow Governors in extending a special welcome to the Governors of the Fund and Bank for the People’s Republic of China. I would like also to welcome the distinguished representatives of St. Vincent and the Grenadines, which has joined the Fund, and of St. Lucia and Zimbabwe, which have joined the Fund and the Bank during the course of the year.
At the same time the Egyptian delegation urges the admittance of the Palestine Liberation Organization as an observer to the Fund and World Bank Meetings.
Various honorable Governors have just eleborated on topics of utmost importance for the developed and the developing world. Yet I feel, to solve our economic problems, greater understanding and effective, concerted action are seriously needed. The year 1979 was marked by three salient features that have directly disturbed the functioning of our global economy, namely, accelerated and persistent high inflation; slackening of growth in industrial countries, which, if not eliminated, would turn into an international recession that would affect world trade expansion; and the large surpluses and deficits of the external balances on current accounts of most countries, which threaten their possibilities, especially those of non-oil developing countries, to sustain the financing of these deficits according to the projected plan.
Truly, inflation was the prime cause of economic disturbances, for its widespread acceleration in industrial countries last year was more evident in terms of final product prices, which are part of domestic expenditures, than in terms of overall GNP prices, which do not have a direct effect on price increases of imported commodities. Other factors are inclusive of inflation such as expansionary fiscal policies, compounded by structural rigidities and periodic external shocks.
However, there is a stress on demand management policies to contain inflation, which reveals the fact that depressing the current high inflation is a condition for renewing domestic growth and achieving international equilibrium.
Nevertheless, the average rate of expansion of economic activity in the industrial countries did not exceed 4 per cent, but dropped below that figure in 1979, reflecting the cyclical downturn of economic activity in the United States and most Western countries. Yet their expected average output increase in 1980 may be 1 per cent, and for 1981 a similar rate is expected. However, there is no way to gauge the balance of expansionary and contractionary forces in the period ahead, and the prospects of recession cannot be ruled out.
Events have followed as a repercussion of the escalation of oil prices during 1979 and the first half of 1980. On one side, the unbalanced pattern of external balances on current account has emerged among major countries, resulting from the rise in the current account surplus of oil exporting countries, whose surplus has again been building up rapidly from $68 billion in 1979 to an expected high of $115 billion in 1980.
On the other side the combined current account balance of industrial countries shifted from a surplus of $33 million in 1978 to a deficit of $10 billion in 1979, and still continues in deep deficit. For the non-oil developing countries with a capital-importing economic structure, they incurred a $53 billion deficit in 1979, which will approach $70 billion in 1980. Yet their ability to finance such deficits is questioned, and this major issue has yet to be resolved. Reconciliation of the above deficits may be brought about through recycling surplus funds of oil exporting countries.
Another difficulty faced by the developing countries—an everlasting problem—is the debt service obligations, which are already large; and the capacity and willingness of some countries to withstand the costs of larger debts are questioned. The expansion of lending to developing countries by private financial institutions may not continue for the simple fact that lending is tending to be selective in character. Unless satisfactory movements of loanable funds to developing countries take place, curtailment of import growth by such countries is likely to appear, with its depressive influence on international trade, in addition to hindering domestic investment and growth. Hence, instant financial assistance from the Fund is of prime importance, and a requirement, especially for countries that need time to effect the necessary structural adjustments.
Needless to say, longer concessional assistance is fundamental as well, especially that provided by international institutions and national governments. Thus close cooperation between these institutions is imperative at this juncture to secure adequate coordination between the specialized assistance of development lending institutions and aid granting agencies, and the overall approach of the Fund.
Industrial countries have to resolve issues of trade, energy, and capital flows, which are the links that bind the world together, for inflation in those countries, owing to upward movements of prices, exerted an unsettling influence on economic activity and policy formulation the world over. The generally high and uneven rates of inflation among major industrial countries have been a source of difficulty in the conduct of policies relating to external payments positions and to the maintenance of instability in exchange markets.
The rapid growth of developing countries depends on the efforts exerted to increase exports, boost investments, and improve efficiency in using new and existing investments, as well as the ability to service their debts, which requires buoyant export markets and increasing capital inflows.
The ability of developing countries to afford the imports they need for growth depends crucially on their exports to the industrial countries, which currently constitute two thirds of their market. On the other hand, industrial countries determined to combat inflation by restraining growth must minimize the effects their deceleration will have on the developing world. Liberalization of trade will pay off in faster productivity growth and lower inflation. In this regard, exporting nations can also help by rapidly expanding their imports from developing countries.
As regards energy, I would say that the oil importing developing countries have been hard hit by the price increases of the previous year, and their energy costs would be expected to rise further in real terms. At the same time, modernization of their economies will spur demand for energy, so they will be faced with a continuing need to adapt to the rising costs of imported oil. It is sincerely hoped that a quick and just settlement of the Iraqi-Iranian dispute could be reached for the welfare of the Iranian and Iraqi peoples and in order to avoid any possible energy problems.
With respect to current account imbalances, it is observed that they will be large in the next few years, again requiring efforts to recycle finance to developing oil importing countries. Reluctance or inability to finance large external deficits will lead to lower levels of trade, investment, and economic efficiency, and hence, to lower growth rates.
Even in the later years of the 1980s, when the severity of payments imbalances is expected to diminish, the growth of developing countries will “continue to depend on inflows of foreign capital. Under such circumstances donor countries, in their own long-term interests as well as those of developing countries, should do their utmost to expand their aid in relation to GNP, and should concentrate their aid even more on low-income countries.
There is no doubt that commercial capital, mainly from banks, private direct investment, and official sources, will be available to help middle-income countries. However, there is not enough long-term program financing to support the structural changes required in many countries. Some will undoubtedly benefit from the structural adjustment lending of the World Bank and Fund assistance; enlarged official flows of this sort, particularly from multilateral agencies, should play an ever-increasing role.
We have also to keep in mind that economic growth comes about in two ways which can be powerfully influenced by government policy: first, building up an ever-increasing stock of productive assets and human skills; and second, increasing the productivity of these assets, skills, and the country’s natural resources, which involves capital and labor mobility among sectors, developing new institutions, new techniques of production, making decisions, etc. Growth thus involves continuous change. It is a process of perpetual disequilibrium.
We cannot envisage any substantial improvement of the world economy so long as the industrial countries do not put into practice the necessary measures to stimulate a vigorous and noninflationary recovery of their economies. Needless to mention, the protectionist measures adopted by industrial countries are of a major concern and a deterrent to the policy of export diversification of developing countries. No doubt, such a policy will have an adverse impact on our earnings, growth, and development prospects.
On behalf of my country, I feel we are burdened by the increasing cost of imports, by restrictive and protectionist measures which hamper our export potential, and by the instability of the international monetary system.
May I reiterate that diversification of the export base of developing countries will give them the opportunity to compete effectively in an ever-increasing wide range of manufactured goods. Attention should be drawn to the fact that growth in our economies and strengthening our export capacity mean a growth to our import capacity from the industrial countries.
However, the agreement of the Group of Twenty-Four, adopted by the Group of 77, to reform the world monetary system is certainly a boon, added to the targets of the Tokyo Round on Multilateral Trade Negotiations for the diversification of the range of developing countries’ export products.
Egypt has made great strides and relentless efforts to build a sound economy. Our five-year economic plan (1980/81-1984/85) indicates the Government’s target to achieve an annual average growth rate of 10 per cent. Toward that objective, investments of the order of LE 20 billion have been allocated to the public sector.
It gives me pleasure to announce that for the first time, the current budget in the State budget has produced a surplus of LE 218 million, while the overall deficit has decreased by 17.5 per cent.
The increase in proceeds of oil exports and Suez Canal revenues, in addition to savings of Egyptian workers abroad, has contributed to the improvement of the balance of current transactions. The increase in foreign currency resources with the Central Bank and the commercial banks amounted to 79 per cent and 38 per cent, respectively. Accordingly, the balance in current transactions and current transfers revealed a slight deficit during the first half of 1980.
This situation reflects the expansion of available resources, which would bring about prosperity and set Egypt on its path toward achieving the welfare and better standard of living for its people. Hence, an average annual growth of 10 per cent would bring about increased productivity which is an indigenous factor to our economic growth.
Moreover, our economic plan envisages less dependence on the outside world to finance its investments, i.e., from around LE 437 million, or 10.7 per cent of total financing during the year 1980/81, to about LE 360 million, or 5.8 per cent, at the end of the plan period.
The foregoing is a glimpse of the enormous achievements of my country in a short period.
An important feature of our times is the economic interdependence among nations, hence universal cooperation is imperative under conditions commensurate with development requirements.
The improved supplementary financing facility has reinforced the Fund’s potential to assist countries. Yet, we propose that conditionality to drawings should be more pliant. In using Fund resources, it is perceived that severe conditionality made use of the upper tranches difficult, so a few countries resort to commercial financing. Therefore, efforts should be directed to create an expedient balance between protecting Fund resources and assistance to members experiencing balance of payments difficulties.
The substitution account should allow for a more stable international payments arrangement through structuring within a framework of a balanced program of immediate action. In this respect the Program of Action on International Monetary Reform adopted by the Group of 77 provides important guidelines….
Gentlemen, what should be done to improve the economic conditions of the world, especially of the poor developing countries? It may be suggested that coordination of the economies of industrial countries is the first remedy, so that they would bear a larger part of the deficit in their balance of payments.
Secondly, the expansion of international trade is basic and fundamental, because it is the prime effective factor to enhance and push forward growth ratios and economic efficiency in developing countries, which would generate more imports to industrial countries from developing countries. This would dislodge and remove the protective policies lately adopted by the latter.
The last but not least remedy is the guarantee of the continuity of capital flows to developing countries, in addition to the expansion of ODA and private assistance on a concessionary basis. It is unlikely that developing countries will import from technologically advanced industrial countries, unless the latter extend their aid to them….
Finally, let me mention that Egypt has chosen the road to peace, and peace it will be. Its target is the economic prosperity of its people, and that is exactly what it is performing already….
Statement by the Governor of the Fund and the Bank for Trinidad and Tobago—Mervyn de Souza
I have the honor to speak on behalf of the following member countries of the Caribbean Community who are members of the Fund, namely, the Bahamas, Barbados, Dominica, Grenada, Guyana, St. Lucia, St. Vincent and the Grenadines, and my own country, Trinidad and Tobago. As you are aware, Mr. Chairman, two of these countries—St. Lucia, and St. Vincent and the Grenadines—have only recently been accepted into membership of the Fund and I take this opportunity to welcome them as well as two other new members—Zimbabwe and the People’s Republic of China. I wish to associate myself with the remarks made by other delegations with regard to your election to the chair and to the able and competent manner in which you have been presiding over these proceedings.
We are meeting at a time when the world economic situation can at best be described as difficult. In the major industrial countries, production continues to be at a depressed level with a consequential underutilization of human and physical resources. Inflation rates are persistently high and external imbalances continue to be an intractable problem. The high degree of interdependence of national economies has led to the early transmission of these adverse conditions to the developing world. For these countries, particularly the non-oil developing countries, the problems are, however, of a more fundamental and deep-seated nature.
In addition, the growing protectionism which appears to have become an inherent feature of the commercial policy of developed industrial countries, the reduction in both concessional and nonconcessional flows, and the rising cost of borrowing have all tended to aggravate the situation. You will recall that in the difficult 1974-75 period, funds were recycled more easily than was expected because the surpluses of the OPEC countries were quickly converted into financial and real assets. Today, the dimension of the problem and the scale of the financing necessary have assumed unprecedented proportions. The deficits on current account of non-oil developing countries, which amounted to $53 billion in 1979, are projected to be as high as $70 billion in 1980 and much higher in 1981. This, combined with the already high level of external indebtedness of these countries, raises serious doubt about the capacity of these economies to meet their financing needs through further borrowing. Thus, the implementation of appropriate adjustment policies has become one of the key challenges confronting these countries today. Since these imbalances are for the most part structural in nature, we are convinced that adjustment will necessitate the adoption of programs requiring considerable resources on concessional terms and with appropriate conditionality.
Accordingly, the recent initiative in the area of financing through Fund/Bank cooperation is a most welcome development. However, I wish to voice a word of caution on the nature of this cooperation. We should ensure that in formulating programs designed to correct balance of payments disequilibria and facilitate structural adjustment, there should be no automatic adoption of the types of conditionality which now govern Fund disbursements.
Furthermore, cooperation in the process of adjustment and recycling will only be meaningful if the resource base of these institutions is significantly enhanced. We recognize that the recent decision of the Fund to enable countries to draw up to 200 per cent of quota annually with a cumulative limit of 600 per cent of quota over a three-year period represents an important addition to the resources available to borrowing countries. However, this development in no way eliminates the need for quota increases which, in our view, must be the principal means of enlarging Fund resources. Accordingly, we exhort those countries which have not yet fulfilled their obligations with regard to the Seventh General Review of Quotas to do so as a matter of urgency. In addition, we urge that preparatory work on the Eighth General Review of Quotas should commence without delay. In the interim, it may be necessary to supplement Fund resources through the medium of a cautious borrowing program designed to avoid the disruption of international capital markets and not to frustrate the efforts of individual countries to borrow directly.
SDR allocations have been an important vehicle for augmenting world liquidity. We share the view of the Group of Twenty-Four that the unforeseen major developments in the world economy justify a supplementary allocation; thus, we support the proposal for an allocation of SDR 6.0 billion in the final year of the third basic period and for an annual allocation of SDR 10 billion over the fourth basic period.
There is no doubt whatever that these increased allocations of SDRs would go a long way toward making the SDR the principal reserve asset of the international monetary system in accordance with the objectives of the amended Articles of Agreement.
Since the early days of discussion on international monetary reform, developing countries have been proposing a link between SDR allocations and development finance. It is heartening to note that there now appears to be some acknowledgement of the technical soundness of the proposal, and it is our fervent hope that this long-advocated mechanism would be established in the very near future. We strongly urge that the link should be direct, with minimum conditionality, and not tied to the use of Fund resources.
An area of particular interest to the countries on whose behalf I am speaking is the need for the continuing liberalization of the compensatory financing facility. To date, the recent initiatives have been of considerable benefit but consideration should now be given to further liberalization.
Many of the economies of our region depend on a single agricultural crop as the primary source of foreign exchange earnings, and these economies face the grim threat of a dramatic reduction in such earnings in the event of natural disasters, such as hurricanes, which are an annual seasonal feature. The restoration of some of these crops is a lengthy and difficult process, and consequently, in addition to full compensation of export shortfalls, consideration should be given to longer repayment periods.
An obvious corollary to the compensatory financing facility would be a mechanism to assist low-income developing countries which are adversely affected by crop failures to cope with increases in the price of essential food items, especially cereals. In this regard the comments of the Managing Director are particularly encouraging.
Economic diagnoses of the current world situation point to the serious problems facing the developing countries. For the absolute poor, the picture is even more desperate. Accordingly, the availability of Trust Fund resources for these countries has been a critical requirement. We therefore strongly urge the continuation of the Trust Fund and the enlargement of its resources. We do not, therefore, support any proposal to redirect funds generated by the Trust Fund to finance other facilities which do not focus primarily on this particular group of countries.
The establishment of a medium-term balance of payments financing facility is another mechanism which will assist developing countries in the process of structural adjustment. To meet the requirements of the situation the facility should have minimum conditionality and provide support which is significant in relation to the present levels of deficits. The facility should have an interest subsidy account for low-income developing countries.
We note with satisfaction and interest the growing degree of sensitivity on the part of the Fund to the problems of the developing world, but we wish to emphasize that there is still much to be achieved. A critical issue in this regard is the decision-making process of the institution. For this reason, we therefore support the call for a thorough review of the formula currently applied to the distribution of quotas and stipulate that in any such review, the share of developing countries should rise from 33 per cent to 45 per cent.
Another area requiring further attention in the reform of the international monetary system is the adoption of an effective, symmetrical, and equitable adjustment mechanism. We feel strongly that the process of adjustment is not operating in an appropriate manner and stress that the nature of the imbalances makes it mandatory that the burden of adjustment be shared in a more balanced fashion. In the absence of such an approach, the non-oil developing countries will continue to bear the brunt of the adjustment burden.
An important vehicle for private capital flows to developing countries is the transnational corporation. There is no doubt that such flows could make a considerable contribution to the adjustment process, particularly since they do not affect the net debt positions of the host countries. In this connection, it is to be noted that after declining in absolute terms in the period 1974-77, there has been an acceleration in the growth of such flows in subsequent years. However, some of the activities of transnational corporations are of considerable concern to the countries in which they operate.
The recently published Brandt Commission Report has dealt at some length with the stake of these corporations in the countries of the Third World and the impact for good or ill which they can have on the economic destinies of these countries. The developing countries desire most desperately to break out of the cocoon of underdevelopment. They do not, however, wish to do so by destroying the very fabric of their societies, which is a very real possibility if the activities of transnational corporations remain unregulated.
I wish to take this opportunity to make a few remarks on the energy situation. It is obvious that the significant increases in the price of oil have served as a deterrent to the adoption of technically sound and flexible programs in developing countries. Trinidad and Tobago is in a somewhat more fortunate position than most developing countries in that it produces a limited amount of petroleum. Notwithstanding the pressing development needs of the country, we have sought to make an appropriate contribution to the adjustment process mainly with respect to territories within the Caribbean Community, a regional grouping of which we are an integral part.
Our major focus was initially on the provision of direct balance of payments support immediately following the early rounds of petroleum price increases in 1973-74. However, in recognition of the basic structural adjustments required by these countries our emphasis later shifted to the financing of development-oriented projects, principally related to food production and processing, housing, industrial development, and basic infrastructure requirements. This aid mechanism has existed as a source of concessionary finance since 1978. It was subsequently found, however, that loan approvals and disbursements under this facility were only modest, primarily because of factors relating to the project-oriented nature of lending.
Meanwhile, the new round of significant petroleum price increases in 1979 further intensified the balance of payments difficulties of potential beneficiaries. The Government of Trinidad and Tobago therefore created an additional facility to provide financing for the incremental cost of petroleum products, fertilizers, and asphalt exported to member states of the Caribbean Community. The effective date of the facility is January 1, 1980, and it will be operative for three years in the first instance. The degree of support will be the difference between the current market prices and the prices prevailing as at January 1, 1979, the date chosen for the base year. Thus, in view of the escalation of prices of these products since 1978, the facility provides immediate financing to eligible countries in an amount equivalent to some 50 per cent of their current costs.
The loans are concessionary with a maturity of 15 years including a three-year moratorium on both capital and interest payments. The rate of interest is 3 per cent in respect of the more developed members of the regional grouping and 2 per cent for the less developed members. Moreover, in order to ensure early disbursements under the facility, cash advances are to be made to beneficiary countries on a quarterly, retroactive basis. These advances will be converted into a loan at the end of each calendar year and will only attract interest from January 1 of the following year.
The Government of Trinidad and Tobago considers that this mechanism fills a critical financing void in the region and we are already processing applications. In addition, the Government continues to allow access to the domestic capital market by individual countries as well as international financial institutions.
I would like to reiterate that the problems we face over the rest of this decade are severe and that it will take the maximum goodwill and flexibility to successfully overcome them. I urge the Fund staff, Mr. de Larosière, and my colleagues on the Board of Governors to ensure that these conditions are met….
Statement by the Governor of the Fund and the Bank for Sri Lanka—Ronnie de Mel
It is a great privilege to be associated with these Annual Meetings of the Fund and Bank. They usher in the decade of the 1980s. Sri Lanka welcomes the representation of the People’s Republic of China. It brings into our fold nearly a quarter of humanity and a country with a long and distinguished history and civilization with which Sri Lanka has had close and friendly relations at all times. We also extend a warm welcome to Zimbabwe, St. Lucia, and St. Vincent and the Grenadines….
We are painfully aware that new difficulties and new problems confront us, particularly affecting Third World non-oil producing countries. Though the Fund and the Bank have responded to certain difficulties, solutions to most of the pressing problems of our times seem to still elude us. The grim and bleak world economic outlook of today will leave many Third World countries in a hopeless and helpless situation….
I wish to consider certain Fund matters first. I agree that the possibility now exists for a country to obtain a much larger amount of resources than at any time in the past. With balance of payments deficits in non-oil producing developing countries projected to rise to $80 billion in 1981, simplistic solutions based on quotas cannot meet the financing requirements of our times. In this respect, we welcome the willingness of the Fund to relax the artificial restraints on the amount it can lend. However, it is a matter of concern that the attention paid to improving the supply side of a member’s economy has been inadequate in relation to needs. An overdose of demand management policies will only create further social problems and adversely affect the poorest of the poor. While appreciating the inclination of the Fund to depart from tradition, appropriate and pragmatic solutions to balance of payments problems should also protect the long-term development strategy of a country. Development and employment are very often the first priorities in Third World countries. Otherwise, the remedy can sometimes prove worse than the disease.
The objective of granting enlarged access to Fund credit has to be viewed in the context of the degree of structural adjustment which has to be undertaken by borrowing countries. The balance between adjustment and financing must be judged in relation to several other contributory causes of the balance of payments deficits of our countries apart from rising energy prices. The prices of manufactured goods, intermediate goods, capital goods and transport equipment, and all other imports have also increased. In addition, the situation is further complicated by our inability to export not only due to the slowdown in world trade but also due to the protectionist and restrictive practices of developed countries. When structural adjustment is beginning to show results by the development of export-oriented industries, we find the demand structure moving against us, causing further hardship. Should the response be successively large doses of structural adjustment as the only policy option available for low-income countries? How far can we adjust without creating new problems? How far can we adjust without creating political and social upheavals?
Assessment of the adequacy of a structural adjustment program in low-income countries should be flexible so as to accommodate rapidly changing circumstances. I agree that there is certainly a need to reorder investment priorities in these countries in the light of new challenges confronting them, particularly in the light of higher costs and world inflation. Admittedly, it is important to continue to increase the efficiency and productivity of investment. But at the same time, it is necessary to be conscious of the limitations in the short run of this process of revising investment priorities and composition of investments. Commitments to on-going projects have been made. Work has started. It is difficult to abandon them, and new projects inevitably involve a longer time between initiation and the emergence of economic benefits. Should we de-invest just at the moment when we have started our Investment Program, carefully planned and carefully thought out, after many years of economic stagnation?
This is the situation in which Sri Lanka is placed. In 1978, an Investment Program was drawn up to put the balance of payments on a viable footing while providing employment for youth, land for agriculture and resettlement, and the quick development of hydroelectric power. Radical policy measures were implemented: on the monetary side to mobilize domestic savings; on the fiscal side to cut back consumption and welfare expenditure in order to release resources for investment; on the exchange front, a realistic exchange rate and liberalization of controls to give appropriate incentives for production and export. The entire program was endorsed by both the Fund and the Bank. The people endured the widespread hardships consequent upon the enforced cuts in consumption, welfare, and subsidies as they could see the prospect of economic growth, development, and employment.
Yet the unprecedented cost increases last year and this year due to world inflation and due to circumstances beyond our control have undermined the entire program and upset the most careful calculations. Within the space of two years since 1978, the costs of our Investment Program have increased beyond recognition. As far as we could go, we have taken into consideration the emerging resource constraint and readjusted our priorities. Then cost escalation has taken place once again. The entire additional burden of these new cost increases has been cast on our slender internal resources. Under current interpretation of Fund policies, there seems to be no alternative but to strictly tailor the Investment Program to reduce availabilities and to cut our coat according to our cloth, but the fact of the matter is that most Third World countries do not have enough cloth even to cover their nakedness.
The burden of adjustment in such a situation should not be placed on a country alone. Instead of limiting economic growth by cutting down investment, the Fund must come up with a solution to bolster economic development and balance of payments stability by augmenting resources to support an accepted and well-designed program of investment.
Our concern with conditionality attached to credit which the Fund itself has borrowed from surplus countries comes on top of other shortcomings vis-à-vis recycling by commercial banks. It may be recalled that surplus funds arose in the first instance as a result of a transfer of resources from deficit to surplus countries. Yet when recycled through Fund intermediation they provide only balance of payments financing. In recycling through the banking system, apart from foreign exchange support, local cost financing too was a feature. Without this complementary counterpart finance, improvement of the supply side through adequate investment would be severely handicapped. Of course, Fund involvement has traditionally been limited to balance of payments financing. In an inflationary situation provoked by supply shortages, adoption of policies directed toward raising supplies is urgently called for Together with the fact that a large part of its operations are on the basis of borrowed funds, rules and procedures should be suitably amended to permit these countries to make maximum use of resources. The Trust Fund, which granted soft loans to low-income countries, is a healthy precedent.
I have similar observations on the proposals to assist members adversely affected by higher food import costs. Let there be no doubt at all that this response to the FAO initiative is highly appreciated by us. In the face of adverse developments beyond a country’s control, no country should adjust cereal consumption below survival levels. The objective of this facility, which is to maintain a certain level of consumption of food, especially cereals, fits in with the basic human needs approach which we all support.
But Fund finance only for balance of payments support has certain limitations. If the sudden increase in the import bill is due to a harvest failure, mere balance of payments support will not ensure that cereal consumption levels could be maintained. A harvest failure would leave a category of the population without adequate means of support. Their buying power should be maintained. Alternatively, the higher import bill can be due to a sudden price increase abroad. At the national level, to maintain consumption norms, imports should continue. At the household level the price increase has to be cushioned through counterpart local financing. This dual character of the financing requirement should be ensured if the full benefits of the new facility are to be realized.
An issue which has not been satisfactorily resolved concerns the future of the Trust Fund. The proposal to use repayments to the Trust Fund to subsidize interest costs is in conflict with the views of the Group of Twenty-Four. It is our firm conviction that the interest subsidy should be financed out of resources additional to current availabilities. It should be financed out of contributions from the developed and capital-surplus countries. It is not beyond the ingenuity of the international community to agree on a method. It was done in 1974. The 1980 situation is even more adverse. With increased Fund credit now related to high conditionality, an interest subsidy financed from grants and other means should be considered a small act of mercy.
This brings me to the question of SDR allocation and the SDR link for development assistance. There is no need to repeat the advantages which would accrue both for developed and developing countries from such an allocation. The objective of making the SDR the principal reserve asset and improving its use and its characteristics will bring us closer to a more meaningful reform of the international monetary system. In addition, it would ensure a reverse flow of funds, thereby assisting the recycling process….
Greater involvement by the Bank and Fund in financial intermediation can give the much needed stabilizing influence in the international capital market. The reduction of exchange and political risks will itself be conducive to a lowering of interest rates relating to such market borrowings by the Bank and Fund….
The Fund and Bank have all the potential to make a direct and substantial contribution to the process of international development. The Fund, in particular, could do much more, considering that in each of the last three years repayments to the Fund exceeded credits granted by considerable margins. A year or two from now, there should be no cause to say: the Fund had finance, but conditionality prevented its utilization; the World Bank had policies and procedures which encouraged members to come to it, but having come there, they languished for want of funds. Let us not create a scenario of disillusionment and despair in these difficult times….
Balance of payments assistance and development financing are interlinked. Some developing countries have made great strides in the adjustment of their economies by pursuing bold and imaginative policies. These well-designed development plans have been supported by the multilateral organizations and by the international community. It is only by implementing these plans that developing countries could hope to achieve a better quality of life and relieve the majority of their people from conditions of abject poverty and deprivation. Uncertainties about future development assistance to carry through these programs to completion would not only be costly but counterproductive, and destroy the climate of confidence and stability. Pruning investment programs from time to time will not help the developing countries to expand economic growth to fight the problems of unemployment and low growth that continually beset them. The fact that both the Fund and the Bank have not been able to devise an emergency program of assistance in these changing circumstances is a serious shortcoming in the present international economic situation. Until they can come up with such a solution, those programs that have already been accepted by them should not be allowed to falter for lack of adequate financial assistance. This would be tragic for countries that are trying their utmost to put their house in order and achieve self-sustained economic growth.
This is not the best of times so far as the world economy is concerned. This is also not the worst of times. What is required is a new orientation, a new outlook, in the Bank and the Fund. What was good enough for the Bretton Woods era is certainly not good enough for the 1980s. The world has changed and changed considerably. The Bank and the Fund have made many changes in recent years, but they must adapt themselves much more to changing conditions. They must evolve new methods of borrowing and new methods of lending to suit the new needs and new aspirations, particularly of the low-income developing countries. What is required is not rhetoric, but a new political will and political action to reform the international monetary system and the international economic order to fulfill the needs of all the peoples of the world, both developed and developing. Above all, we require a new flexibility—a practical and pragmatic approach to world problems. We believe that there is an increasing role for the Bank and the Fund to play in the future. We from Sri Lanka also believe in cooperation, not confrontation, in an increasingly interdependent world. We hope that this new cooperation will gradually emerge in the 1980s.
Statement by the Governor of the Bank for Viet Nam—Le Hoang
It is a great honor for me to address the Governors on behalf of the delegation of the Socialist Republic of Viet Nam at these Thirty-Fifth Annual Meetings of the Governors of the International Monetary Fund and the World Bank. May I begin by expressing our sincere thanks to the Chairman of the Meetings and to the staffs of the Fund and the World Bank for the good organization of these 1980 Meetings.
In this first year of the 1980s, the world is already confronted with numerous pressing economic and social problems. Over the past year inflation has become increasingly serious and the energy situation and the world monetary system more and more unstable. The steadily worsening balance of payments disequilibria have slowed the pace of investment and economic development in most nations.
This world situation has had heavy repercussions for the underdeveloped and developing countries. In particular for those which are beset with a multiplicity of difficulties, the economic woes of the time coupled with natural disasters have had a seriously detrimental effect on food production and the lives of their peoples.
As we know, these problems cannot be resolved for each country in isolation, at a time when the economies of the developed, underdeveloped, and developing nations are interdependent. Cooperation and mutual assistance are becoming highly important factors in the relations between countries. The Fund and the Bank will only be able to carry out the role assigned to them through promoting cooperation and assistance for countries that are still experiencing difficulties. In this connection, we are most appreciative of the recent efforts by the Bank and the Fund to find new formulas for helping member countries in difficulty.
After 30 years of bitter but glorious war, the people of Viet Nam have regained their independence and freedom and have begun the task of rebuilding their homeland under very trying circumstances. They are doing their best to remedy the prolonged consequences of the destruction wrought by a protracted war and military pressure, and at the same time to overcome the difficulties caused by natural disasters, in order to raise production and improve the well-being of the population. Many nations and international organizations have demonstrated their goodwill in supporting and helping Viet Nam. I would like to take this opportunity to repeat our sincere thanks for their invaluable assistance in building up our country’s economy.
While the people of Viet Nam are devoting themselves to the peaceful reconstruction of their homeland and concurrently making immense sacrifices to provide effective aid to the fraternal people of Kampuchea in escaping extermination and rebuilding their country, the forces of imperialism and reaction have launched frenzied movement aimed at sabotaging and encircling Viet Nam’s economic activities…. It has also had an impact on the relations between Viet Nam and the international financial and monetary organizations of the Bretton Woods system, which has thus entered into a critical phase. We have increasingly demonstrated our desire to cooperate. We hereby call on these organizations to meet the legitimate requests of a member country….
Our position in the matter is clear: the reciprocal rights and obligations between a member country and the Bank and Fund have to be strictly observed. The Socialist Republic of Viet Nam wishes to have closer equal and cooperative relations with the Bank and the Fund. We believe that this is also the wish of all the member countries. It is our opinion that if the international financial and monetary organizations pursue their fundamental goals unswervingly, they will be able to eliminate the harmful influences of the forces opposed to the independence and sovereignty of their member countries, forces which are doing their utmost to subject the activities of the international organizations to political conditions and to whittle away their independence.
We consider that only by strict observance of their fundamental goals and preservation of their independence can the role and reputation of the international monetary and financial organizations be safeguarded.
We would like to see IDA able to mobilize an even larger volume of resources for the financing of its underdeveloped and developing member countries, and we would like the Fund to consider simplified measures and procedures for effective assistance to member countries in balance of payments difficulties. It is our desire, in short, that the Bank and the Fund make great efforts to reserve low-interest financing for their underdeveloped and developing member countries so that these will be able to develop their national economies and raise the well-being of their peoples. By doing so, the Bank and the Fund will be able to ensure that the independence of their organization is maintained.
We are here in Washington in a spirit of sincerest goodwill and motivated by a desire for constructive cooperation. We are awaiting a positive response from the Bank and the Fund to Viet Nam’s legitimate requests.
We warmly greet and heartily thank the representatives of the member countries and international organizations who have asked the Bank and the Fund to satisfy the legitimate requests of the Socialist Republic of Viet Nam, a country that has suffered so much from the prolonged aftermath of war and successive natural disasters.
May I use this opportunity to thank the Chairman of these Meetings, the Governors, and the representatives of the international organizations for their deeply appreciated aid and support to our country.
Statement by the Governor of the Bank for Bolivia—José Sánchez Calderón
The importance of these Thirty-Fifth Annual Meetings of the International Monetary Fund and World Bank compels me to express, on behalf of Bolivia, the concerns voiced by the developing world in various international forums on numerous occasions.
The current world economic situation is not at all promising for the developing countries. First, the most optimistic growth forecasts for the industrial countries show rates ranging from 3 to 4 per cent in real terms. Second, worldwide inflation will reach levels which governments and individuals both find intolerable. Third, balance of payments maladjustments are clearly imbalanced to the detriment of the non-oil primary producing countries. What is even more discouraging, despite the role played in the past by the private international financial sector with respect to recycling surpluses, is that although we can see on the horizon the mechanisms and resources needed to move development programs ahead, there is no certainty that they will come into being.
The President of the World Bank and the Managing Director of the International Monetary Fund have described in their respective statements the living conditions that future generations will be facing and the assistance that will be provided by the developed countries. But it is not enough to adjust economies within the realistic frameworks based on various concepts of economic and social growth; it is urgently necessary to bring about a real change in the attitudes of all nations toward the needs of the poorest.
Several years of political stability have enabled Bolivia to achieve significant advances in economic and social areas: it has moved from a deficit position to a situation wherein small surpluses are generated by its agricultural outputs and by natural gas; it has become self-sufficient in most foodstuffs and is a traditional exporter of minerals and metals. However, this process of transformation has been slowed in recent years, giving rise to sizable and deep-seated disequilibria in the economic, social, and political structure of the country In 1978, the country called for general elections. Thereafter, management of the economy was paralleled by a marked deterioration in the productive and financial base of the country. In a brief, three-year period, there were three general elections, four revolutions, five different interim governments, about eighty political parties, more than a thousand strikes, wage increases not counterbalanced by efforts in the productivity area, and a virtual paralyzation of the savings and investment process, which resulted in a lack of confidence on the part of the international financial community.
Late last year, in cooperation with the World Bank and the International Monetary Fund in particular, an economic adjustment program was initiated. Its two major components were a stand-by arrangement with the International Monetary Fund and a structural adjustment loan from the World Bank intended to help re-establish the country’s domestic and external equilibrium. Bolivia is complementing the program by renegotiating its external public debt with the private international banking community.
The continuing process of economic and social growth in Bolivia is based on the restructuring of the national economy as regards institutions, customs duties, production, investments, and administration.
In 1980 Bolivia’s economy will expand at a rate of 1.2 per cent, well below the average for Latin America and other less developed countries. If this rate of economic and social growth persists, it will take a century to double current levels of savings and investment.
Some of the objectives relating to reducing the budget and balance of payments deficits have been reached at the cost of totally eliminating the country’s investment expenditure and by increasing wages and, as a result, accelerating inflation. The expansion of government credit in the absence of the cover anticipated from tax revenues will result in a 66 per cent rise in net government credit this year.
The Government will shortly introduce a soundly based national reconstruction program with clear objectives in the political, economic, social, and international domains: politically, this means establishing the basis for an arrangement wherein there can be peaceful coexistence among Bolivians and full observance of the Constitution and laws; economically, it involves defining and implementing an overall economic adjustment program within the dictates of sound economic reasoning. This process will take time, effort, and dedication. Nevertheless, we are resolved to press on and to achieve the goals of economic and social development.
This program is based upon fulfilling the agreements already entered into with international financial organizations while adapting our institutions to the requirements of those agreements.
This program consists of obtaining an extended facility arrangement with the International Monetary Fund; making disbursements of resources from the existing loans with the World Bank, the Inter-American Development Bank, and other financial institutions; arranging a second structural adjustment loan with the World Bank; and endeavoring to move forward with a number of realistic projects designed to stimulate exports and productive capacity.
These projects will deal in particular with the mining, agricultural, and hydrocarbon sectors. The rationalization of expenditure, and increasing investment in the education and health sectors will be emphasized. We are confident that these efforts will be understood by the international financial community; what is more, we are convinced that we will be able to count on international financial cooperation.
In this connection, we think that the roles played by the International Monetary Fund and the World Bank must be substantially increased in the future, and to that end we offer them our full support and trust.
There are many topics which might be brought up on an occasion such as this, and some points, of course, which simply must be stressed. We have come to the end of the first decade during which there has been a cooperative strategy among the industrial countries based on principles of cooperation. It had been assumed that at least 0.7 per cent of the gross national product of the developed countries would be devoted to multilateral assistance for the decade. We are greatly disappointed to note that the majority of donor countries have not fulfilled their commitment.
For the decade of the 1980s, we shall rely not only on the excellent reports on world economic development and the international financial situation prepared by these two organizations but also on the Brandt Commission Report, which sets forth with precision the magnitude of the problems confronting the developing countries.
At these Annual Meetings, particular support must be given to initiatives which have been studied by the Executive Directors of both institutions. Noteworthy among these are decisive support for the general increase in World Bank capital and other measures tending to increase the amount of resources available; and decisive support for the use of and increases in the resources of the International Monetary Fund. Our country will not only fulfill its own commitments, it will cooperate fully to see that such goals are reached….
Another matter which concerns us greatly is the introduction of political considerations in the granting of loans. The multilateral nature of these institutions has been based on compliance with realistic economic policies and programs. But this year, to our great disappointment, we have seen that political considerations, which formerly had no direct impact, are now much more evident, raising the possibility that they might become even greater. It is essential that economic considerations alone be taken into consideration when examining lending to member countries. This is not a new criterion and has been proposed in the past by Latin America, Spain, and the Philippines. On this occasion our representatives at the Bank and the Fund will propose it anew.
Other matters of interest to us involve the accentuation of the inflationary process and the Development Committee initiatives to establish measures which might reduce inflationary pressures in the developing countries, in turn calling for adjustment policies in the developed countries. We have reached the point where the international financial community has laid the foundations for interdependence between the industrial and the developing countries.
The price of oil has certainly been one of the factors contributing to the rise in international prices, but expansionary spending policies, low productivity, and low growth in the product of the industrial countries have also been responsible for these rates of inflation, while some prices for various raw materials have undergone increases which are not sufficient to fill the needs of developing countries for external financial resources.
Some while back, the need became apparent for the introduction of arrangements tending toward a reform in the international monetary system. We feel that there is still time. Putting off this reform will only make the problems more acute and cause the precursors of crisis that we detect in international financial relations to become real pressures in the developing countries. Another matter of vital importance is the maintenance of international trade flows on the terms we have stressed in different trade forums; protectionist trends and controls on exports from the developing countries will in no way solve the problem. Furthermore, in the special case of Bolivia, we have expressed our resolute opposition to the implementation of measures that would result in a decline in our export proceeds, such as those being promoted by consumer countries that are members of the International Tin Agreement. The introduction of protectionist policies in industrial countries will only add to existing imbalances….
Finally, I wish to reiterate the decision of the Government of Bolivia to conduct the development process on a realistic basis, founded on principles of professional and human integrity, an approach that the international financial community will in due course be able to evaluate. The image of my country has been distorted in recent months. In no way does this image correspond to reality. The Bolivian armed forces took on the difficult task of government when faced with the inability of civilian groups to reach agreement in the political process and the institutional chaos into which Bolivia was sinking. We will receive with open arms all those countries and organizations that understand the problems we face and who are prepared to enter into a dialogue with us that will enable us to show Bolivia’s potential. Export projects will become reality; changes in the structure of imports and related instruments, together with strengthening of the financial structure, are among the objectives of the Government of National Reconstruction over the next few years. This process will be accompanied by better distribution of income, and the people will share in the benefits that development will bring to the country.
Statement by the Governor of the Fund for Fiji—Allan E. Gee
I join colleagues who preceded me to this podium in thanking the President of the United States for his words of welcome to us. I would also compliment the Bank and Fund for the excellent arrangements under which we meet this week.
The current and prospective world economic situation has been documented in great detail in the Annual Reports of the two organizations and in the World Economic Outlook of the Fund and World Development Report of the Bank. The Managing Director, the President of the Bank, and Governors who have spoken also reviewed the subject in detail. So on this subject I shall be brief.
The industrial countries, upon the robustness of whose economies the rest of the world depends, face difficult economic problems. Most of these countries are saddled with high inflation rates, large payments imbalances, slow growth, persistent unemployment, and falling productivity. Over the past two decades they have embarked upon heavy outlays, particularly in social security services. While such a policy is certainly laudable, it has exerted upward pressures on public sector deficits leading to escalating growth in the money supply. This factor, together with declining productivity in a number of industrial countries, has contributed to persistent inflation.
Inflationary expectations have unfortunately become entrenched. But inflation will have to be eradicated if consumer and investor confidence are to be promoted. Upon this depends the future growth in savings and investments that are vital ingredients for steady long-term growth in the world economy. So the solution of inflation appears to be deserving of primary priority.
The situation in the developing countries is critical. Inflation in these countries is rampant. I should, however, point out that Southeast Asia presents a happy exception to this depressing picture. The developing countries are now heavily saddled with large external indebtedness. For some of them negative income per capita growth rates are projected.
The total current account deficits of the non-oil developing countries rose from $36.6 billion in 1978 to an expected unprecedented $80 billion in 1981. Current account deficits have, of course, to be financed. It is here that the challenges of the months ahead will have to be met.
An assessment of the prospects in the world economy cannot be complete without taking into account the important variable of energy. It is probably wise to take a global view of this issue: organic energy sources are of necessity limited. Although the thought of it is undoubtedly unpalatable, a sound working hypothesis suggests that we may have to brace ourselves for future price increases which are positive in real terms. Given this kind of possibility, it becomes imperative that the issue of increased energy production and conservation be addressed and accorded the highest priority.
The world economic problems we face are structural in nature. As such, economic adjustments by our various countries would certainly be unavoidable. For some countries these adjustments would be politically and socially painful. So the issue in front of us is one of finding and promoting a delicate balance between financing and adjustments that would be the optimal position between what is economically desirable and what would be politically and socially digestible.
In 1970 and 1975 the Fund floated the oil facilities. These were purely financing windows. At that time the Fund thought that the large payments imbalances which followed the oil price increase of 1973 would be temporary. Now the situation appears somewhat different as the large surpluses of the oil exporting countries are expected to be a persistent feature of the global economy in the immediate years ahead. This situation points to the inevitability of adjustments in the coming months.
The developing countries will be able to implement the necessary adjustments with diminished social pain within a world economic climate characterized by:
(i) the readiness to adopt growth policies by the industrial countries as soon as the abatement of inflation has been achieved;
(ii) increased private capital flows to the developing countries;
(iii) increased ODA, particularly for the weakest developing countries experiencing difficulty in gaining access to the capital markets;
(iv) a drastic reversal of the current trend toward protectionism;
(v) future on-price increases, which, although they may be positive in real terms, are executed gradually over time;
(vi) an efficient recycling process, predominantly carried out by the private banking system but with the World Bank, the regional banks, and the Fund playing a more significant role than in the past.
While we must collectively ensure that the world economic climate is not hostile toward the developmental efforts of the developing countries, we must not undermine the importance of appropriate domestic policies in the difficult months ahead.
The international private banking system played a commendable and critical role in the recycling process over the last six years. In the difficult years ahead the burden of recycling will again fall heavily upon the private banks. Understandably they are now increasingly more cautious about their exposure in a number of developing countries. Indeed, it is likely that they will become more and more selective about the developing countries to which they lend. So for those who find access to the capital markets difficult or impossible, the Bank and the Fund would more and more become foreign exchange sources of both first instance and last resort.
Balance of payments must be financed if the world economy is to avoid the present trends toward deepening recession. The Fund will have to accept a much enhanced role in this area.
On the subject of recycling, the Executive Board of the Fund has already accepted the following broad approach:
(a) much enlarged access to the resources of the Fund would be allowed to members that have a carefully constructed adjustment program in place;
(b) adjustments, because of the structural nature of current payments imbalances, would be pursued over relatively longer periods;
(c) appropriate blending of financing and adjustments, reflecting the circumstances of members, would be established and implemented.
I support this proposed Fund approach. The recent decision to increase the annual rate of purchases to an average of 200 per cent of quota, up to overall outstanding purchases equal to 600 per cent of quota, is welcome. But I am of the opinion that this guideline must be employed with flexibility. The Executive Board should regularly review it in the light of experience and be ready to make it more liberal when considered justified by changing economic circumstances.
We are all in agreement that adjustments must now be undertaken over longer periods than hitherto. This suggests that future programs of members should, in the main, be supported through a three-year extended Fund facility.
Lengthening of the extended Fund facility repurchase period from eight to ten years was a move in the right direction. It is, I believe, desirable to examine this matter further. A further increase in the repurchase period would be called for in the light of the difficult adjustment period that we now face. I do not share the concern of those who fear that this proposal introduces a developmental function for the Fund. As we all know, the early repurchase policy of the Fund ensures that repurchases are undertaken as soon as the balance of payments and reserve positions of a purchasing member improve. So purchases under the extended Fund facility that remain outstanding until the end of the repurchase period tend to be the exception rather than the rule.
The background papers to these Annual Meetings have all emphasized the critical role of a smooth recycling process in the difficult months ahead. Such a process would be greatly assisted by increased allocations of SDRs. As we all know, the SDR is simply a mechanism allowing access to the resources of surplus countries by those experiencing balance of payments and external reserve difficulties. Such transactions are reversed when the external position of the borrowing member improves. If the external position of the borrowing member remains difficult, the transfer of resources under the SDR mechanism continues as a relatively long-term loan.
A number of proposals immediately flow from this observation. First, there should be substantial allocations of SDRs in a fourth basic period beginning in 1982. I would consider appropriate an annual allocation of not less than SDR 10 billion in such a period. Second, we shall have to make the SDR more attractive to creditors if it is to help promote the recycling process. In this connection I feel that the reconstitution provision should be repealed. I, therefore, welcome the recent decision of the Interim Committee to recommend this to the Executive Board.
It is also time to consider an increase in the SDR interest rate. I should, however, caution that such an increase should not at this point increase the level of charges which may become pressing consequent upon the attendant increase in the level of remuneration.
I believe that the world economy has changed significantly since 1978, when the decision regarding the SDR allocation in the current basic period was made. The Articles of Agreement provide that the rate of allocation could be varied in such circumstances. I would, therefore, feel that increasing the rate of allocation in the third year of the current period would be well justified.
At its meeting in April of this year, the Interim Committee encouraged the Managing Director to examine the possibility of raising loans for purposes of promoting the recycling process. The Managing Director has already embarked upon this important exercise. It is my view that if the Managing Director were to experience difficulty in raising loans from official sources, the Fund should immediately gear itself toward entering the private capital markets. This is a course which the Fund has not to date followed. But it is one which it may have to do if the Fund is to discharge the growing role which we all expect of it.
The Seventh Review of Quotas was approved in 1978 by the Board of Governors of the Fund. To date, this decision remains to be effected. Members commanding 75 per cent of quota have to accept the proposed increases in their quotas before this exercise can be completed. As the implementation of the Seventh Review of Quotas is a vital component of the recycling process that needs to be undertaken, I appeal to members that have yet to complete the required legislative authorization to do so expeditiously.
I support the establishment of a Subsidy Account for the supplementary financing facility and for future purchases from borrowed resources of the Fund. The decision by the Executive Board to allow part of the repayments from outstanding Trust Fund loans to flow into this account is welcome. It is clear that we shall need voluntary contributions and soft loans in this Account if it is to have an impact. I therefore appeal to members experiencing strong balance of payments and reserve positions to support this Account.
On the question of conditionality, the Fund “must now pay due regard to the political and social circumstances, the economic objective of members and the causes of their balance of payments difficulties.” This guideline was intended to be applied with flexibility. Many colleagues have addressed this important issue. I believe that the debate raging around this issue is not one of differences in philosophy but only of degree of emphasis. What I believe should be emphasized is that the Executive Board should ensure that both the spirit and the letter of this provision are carefully observed in the months ahead.
The recent review of the compensatory financing facility produced some welcome liberalizations of this important facility. This facility is important in that it adds to the volume of nonconditional liquidity. It is for this reason that I believe that an early review of this facility by the Executive Board should be undertaken.
Recently the FAO requested the Fund to examine the possibility of creating a financing facility for increases in food costs brought about by factors beyond the control of a member country. Malnutrition and starvation are fundamental issues deserving urgent attention by the Fund and Bank. I believe that the Fund should approach this important issue positively. I understand that some Governors feel this proposed facility brings with it a precedent undesirable in that it will involve the Fund in financing different components of the current account. I do not share this view. Food is so basic that I believe it should be treated separately. In addition, such a facility would promote a better Fund image; a matter deserving the closest attention at this point in time.
I would like to end on a general note. Interdependence among nations has never been greater. We shall have to learn that the collective welfare of mankind can only be promoted within an international economic climate of give and take. Sacrificing individual economic interest will be necessary in the short term if we are to promote world economic growth in the long term. But sacrifice needs political will and courage. Yet it must be done. Let us therefore have the courage of our conviction and sell this message to our various constituencies upon our return.
Statement by the Governor of the Bank for the Lao People’s Democratic Republic—Oudone Pholsena
Speaking on behalf of the Lao People’s Democratic Republic and the Laotian delegation, I should like to express my deep gratitude for the excellent arrangements made for these Meetings. My thanks are also extended to all those who have helped directly and indirectly in the preparation of these Meetings. May I take this opportunity to welcome the new members who have joined our institutions since our last meeting in Belgrade.
As many Governors have stated, the world economy has deteriorated further and the economic crisis is deepening. An accelerating inflation rate and widening deficit have caused the developing countries, especially the least developed countries and the landlocked countries, to suffer the most.
On this occasion, I should like to mention recent developments in my country. After 30 years of successful fighting, we are preparing to celebrate the fifth anniversary of the foundation of the young Republic and the achievement of reconstructing our economy after the disruption by a devastating war of aggression. Although we have devoted all our efforts to reconstructing our economy during the last five years, we still face economic difficulties following two consecutive years of natural calamities. Such difficulties are less threatening than the aggressive activities in the north, the closing of the western border areas, the continuing tactics of persuading the people to leave the country, and other activities aimed at the destruction of our new regime.
In spite of the problems facing us, the Government and the people have always been devoted to and have pursued the development of agriculture first so that we can achieve self-sufficiency in food resources as soon as possible and transform the economy into one founded on the principles of socialism.
Now, as never before in the past, agricultural cooperatives have been formed voluntarily and strengthened; the arable land area has been extended; irrigation systems have been built; new seed and new cultivation techniques introduced; and, together with an intensive agricultural program, we have been able to solve most of our food problems. At the same time, strong efforts have been made to increase exports of our main products, such as timber, coffee, tin, and others.
By our own efforts and also with the aid of socialist countries, the UN agencies and international organizations such as the World Bank, the International Monetary Fund, the Asian Development Bank, the OPEC Special Fund, the IFAD, and the EEC, and friendly countries such as Sweden and the Netherlands, we have been able under the most difficult circumstances to reconstruct our country; our people are deeply grateful for this assistance.
The increasing need for resources in the developing countries, especially the least developed and most seriously affected countries, such as the landlocked countries, means that the volume of the official development assistance to be assigned to them should bear special attention.
My delegation would like to mention our concern that the institutions will not attach political conditions to ODA. We firmly support the position of managements who oppose such conditionality as being contrary to the spirit of our institutions. Once again I would like to express our concern that all assistance to member countries should be based on the principles of respect for the independence, sovereignty, and the needs of the recipient countries. Moreover, we propose that the institutions re-examine and simplify their procedures in order to accelerate implementation of aid programs. Most important of all, such aid should be aimed at helping the recipient country to develop its economy.
Finally, I wish to express our appreciation of the cooperation we enjoy with the Fund and the Bank. We welcome the position that the two institutions have adopted in extending help and answering the needs of the poorest countries.
Statement by the Governor of the Fund for Malta—Joseph Cassar
On behalf of my Government I particularly wish to extend a most hearty welcome to our great friend the People’s Republic of China. We also extend a warm welcome to the representatives of Zimbabwe, St. Lucia, and St. Vincent and the Grenadines, who have joined the Fund during the past year.
The extended Fund membership should help in strengthening our determination and in ensuring greater cooperation in tackling the monetary and financial problems which are besetting most of our economies.
I need not expatiate on the grim prospects at present facing the world economy, as these have been amply documented by the Fund and others and commented upon by Governors who have taken the floor before me. Broadly speaking there are two sets of problems: those connected with the recycling of oil exporters’ surpluses, which have to be dealt with immediately and urgently; and the other, more basic, more long-term problems concerning that restructuring of the world economy (including energy) about which so much has been said in various international forums over the years, and so little been done. Schemes for recycling the OPEC surplus abound, and we hope that something positive will emerge from these.
With respect to the Fund’s role in this gigantic task, it is noteworthy that the Fund is now prepared to lend for longer periods and in much greater amounts than was previously allowed under established ceilings. Nevertheless, we cannot but observe that most of the increase in funds provided by the Fund so far stemmed from arrangements under the highly conditional supplementary financing facility. The prospects for increased Fund support for most countries still seem to be limited by their concern with its conditionality. The number of countries using the supplementary financing facility clearly is not going to be as great as was the case under the oil facility or other low conditionality arrangements. Thus, it would seem that for a large number of countries, an expanded financing role for the Fund would depend, effectively, on increasing the amounts of support available under relatively low conditionality arrangements and/or introducing further flexibility in Fund practices regarding higher credit tranches and other facilities.
The Fund itself has stressed the desirability of countries approaching it in the early stages of balance of payments problems instead of using it as lender of last resort. An enlargement of the first credit tranche would encourage countries to come to the Fund for support at an early stage of financial difficulty as larger amounts would be available under relatively low conditionality. Alternatively, a temporary enlargement of all the credit tranches, as in 1976, could be considered.
Another facility which could be liberalized further to provide more support with relatively low conditionality is the compensatory financing facility. With last year’s liberalization of the compensatory financing facility and the completion of the Seventh Review of Quotas, the amounts available under this facility will increase considerably. We feel, however, that there is room for further improvement of the compensatory financing facility, particularly with regard to medium-term shortfalls, and we look forward to early action in this regard.
Another arrangement which could be used by the Fund to provide further support with little or no conditionality is to make a supplementary allocation of SDRs following the last allocation scheduled for the period 1979-81, which is to be made in January 1981. This would help meet the extraordinary financing needs which could not have been anticipated when the present level of SDR allocation was agreed. Moreover, it should be possible to make further noninflationary allocations of SDRs on a significant scale even beyond 1981, particularly if the proposal to establish a “link” between such allocations and development needs is given serious consideration.
In any case, a solution to the conditionality problem is clearly crucial if the Fund is to play a truly substantial role in dealing with recycling and balance of payments deficits. The latest guidelines on conditionality do not appear to have made much difference in practice. For instance, one of the most important guidelines concerns what has been described as “paying due regard to domestic social and political objectives, the economic priorities, and the circumstances of members….” The Fund has interpreted this to mean accepting “beyond debate a member’s economic organization, such as the extent to which the economy is under government ownership or control.” What this approach does not take into account is what the Brandt Commission calls placing the question of adjustment in the context of maintaining long-term economic and social development. Without further flexibility in the interpretation and application of guidelines, countries are likely to continue to approach the Fund only as a matter of last resort.
One problem which neither the various schemes nor the Fund itself, we feel, has addressed sufficiently is that of charges. The cost of finance at market-related rates, at a time when interest rates worldwide are so high, has for many developing countries become prohibitive. We know that the question of subsidizing supplementary financing facility loans to developing countries is under active consideration. But we also know that for the purposes of concessionary treatment the Fund tends to classify countries into those which are starving and those which are not. The latter have to pay the same charges as any full-fledged industrial country.
Malta has for years been insisting on the establishment of an intermediate category of countries. This concept of “middle-income countries” seems to be gaining acceptance in some forums (though not at the Fund and World Bank) but seems only to include those with per capita incomes between $300 and $1,000, without taking account of other factors such as size, vulnerability, and openness of the economy to external shocks. Is it not anomalous that a small island like Malta, totally lacking in natural resources and still in the early stages of industrialization, should be expected, were it ever to need to have recourse to the Fund, to pay the same charges that large developed countries like the United Kingdom, the Federal Republic of Germany, or Japan would pay?
Finally, with respect to the second set of problems, it has always been our belief that the Fund must not merely reflect the existing state of the world economy, but must itself, in collaboration with other international institutions, supply the thrust for the necessary restructuring and reordering of international economic relations. In particular, we would like to see the Fund and the World Bank themselves take the lead in recognizing the special needs of middle-income developing countries, and of special categories of countries such as small islands. This is already recognized by other international agencies and the unanimous resolution adopted by UNCTAD V in Manila on Landlocked and Island Developing Countries should serve as a guide for such special treatment. Malta has supported the objectives of the New International Economic Order from the start, and will continue to do so. Nevertheless, here again, we cannot but note with disappointment that even in the various reports dealing with these problems (for example, the Brandt Commission Report, the World Development Report, and the Commonwealth Experts’ Report) countries are again still effectively divided into two categories—the fully developed and the extremely poor—with little consideration given to the wide spectrum of countries that lie in between. For this reason, Malta is not likely to receive any direct benefit from the changes that are being proposed, even should these be realized. For this reason, also, we must stress again, as we have done in the past, that the criteria of need currently in widespread use, such as GNP per capita and balance of payments performance, should not be adopted to the exclusion of other factors such as the size and openness of an economy, the import content of its exports, and the lack of raw materials. Small island economies like Malta, for instance are, by virtue of their size alone, structurally unable to achieve the economic transformation necessary for self-sustaining growth. Besides, they are often dependent on volatile sources for their modest surpluses, and are threatened by protectionist measures in the developed countries and have an inadequate technological base. As such they must in a sense remain permanently undeveloped—notwithstanding their apparent relative affluence when judged by the traditional criteria. We hope that our predicament, as well as that of others in a similar position, will in future get more consideration both within the Fund and elsewhere.
Only through a global policy which seriously assists developing countries, particularly small ones like Malta, to establish a sound economic basis which enables them to build up and sustain a decent standard of living for their people without entangling themselves in the tainting tentacles of war-related activities can the fortunes of the next generation be positively directed. The continued lack of such an effective policy will leave small countries exposed to man-made hazards which scandalously flourish in such conditions.
Malta, although small and weak in physical terms, and notwithstanding its economic disadvantages, stands solid in its resolve neither to be used by anyone as a pawn in the war game nor to be intimidated by anyone into forfeiting any of its objectives worked out in the interests of its people and, to a lesser extent, of mankind in general. But it bears reiterating that a move from mere enunciations of fine principles to effective direct international action to enable countries like ours to carve out a sound economic base for themselves in interdependence with the rest of the world community is essential to successfully attain our objectives.
October 2, 1980.