Chapter

Discussion of Fund Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1978
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Report to the Boards of Governors of the Bank and the Fund by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee), Cesar E. A. Virata

I am pleased to be able to report on our common endeavors in the Development Committee. As our Annual Report has already been presented to you, I do not propose to offer any detailed review of last year’s activities.

The Committee held its last meeting on Saturday, September 23, in the background of the world economic situation. Progress has been made in overcoming some of the serious difficulties created by the crisis of the events of 1973, but we are still left with problems arising from the slow recovery of the industrial countries, high rates of unemployment, increasing protectionism, widespread inflation, fluctuations in export earnings, stagnation of aid flows, and uncertainty on the required volume of private capital on which the developing countries are critically dependent for their future growth prospects.

The Committee at our recent meeting had concentrated discussion on two substantive items on its agenda, namely, the World Development Report and the study on stabilization of export earnings.

There was great appreciation for the initiative taken by the World Bank in presenting an extremely valuable report and members welcomed the idea that such an analysis would be presented annually to provide a framework for their discussion on major policy issues of concern to them which require attention.

The Committee focused its discussion on some four key policy areas arising from the analysis of the World Development Report, including: (1) trade and the importance of resisting protectionist pressures, while instituting structural adjustment measures; (2) the need to increase concessional resource transfers to the poorest countries; (3) the requirements for commercial flows of capital and other resources; and (4) the role of developing country domestic policies to assure sustained growth and the effective use of resources.

The analysis of the report reveals the close and growing interdependence of the industrial and developing countries and the mutuality of interests among them. This recognition makes it imperative that their policies be harmonized and be made fully responsive to the needs of the world as a whole.

There was recognition of the role of international trade in maintaining a healthy world economy. In this context, great concern was expressed by members on the growing trend toward protectionism and the urgent need to resist such pressure and progressively reduce the barriers which are now in existence. Politically appealing and offering short-term advantages, protectionism can indeed in the end prove extremely harmful to all insofar as it inhibits structural changes, fuels inflation, and restricts growth of the world economy.

The future growth of developing countries is dependent as much on their own domestic policies as it is on the availability of concessional and nonconcessional external capital flows on appropriate terms and scale consistent with their requirements. As was described in my summary at the conclusion of our meeting, all the critical elements of development were discussed and duly stressed for the attainment of the growth objectives which we all share. In this context the role played by international financial institutions was warmly acknowledged and it was stressed that decisions should be reached quickly on an appropriate increase of the capital of the World Bank and the regional banks. The members also pressed for early commencement of negotiations for IDA VI with the objective of increasing its resources substantially in real terms.

There were expressions of deep concern that despite the projected rapid growth in middle-income developing countries, and a potential acceleration of growth in the low-income countries, the most disquieting projection in the report was that almost 600 million people would still be living in absolute poverty by the end of this century. This is an unacceptable waste and an affront to the international community’s obligation to humanity. We must move forward together with major changes by the industrial countries—in such areas as trade liberalization, industrial adjustment measures promoting growth, increased financial assistance, and capital flows—and by the developing countries in such areas as mobilizing savings, efforts to accelerate agricultural growth, stimulating exports, and formulating specific programs to alleviate poverty.

The Committee also considered a Fund-Bank staff report on the subject of stabilization of export earnings, which reviewed the current compensatory facilities, especially the compensatory financing facility of the Fund and the EEC stabilization of export earnings scheme designed to help countries maintain foreign exchange receipts which are adversely affected by fluctuations in commodity prices. The Committee endorsed proposed improvements in the compensatory financing facility of the Fund and agreed to study the scope for additional measures, especially a globalized stabilization of export earnings on the lines proposed by the Federal Republic of Germany and which was broadly supported by the Committee.

In our discussion of the Committee’s future work program, it was agreed that for enhanced effectiveness of the Committee it should concentrate on a limited number of topics, vital for development, with prospects of achieving positive results for both developed and developing countries and where the Committee had a comparative advantage to deal with them. The details of this program will be discussed during this week, but the topics which seem to meet with these criteria will include the World Development Report, official development assistance flows, nonconcessional private capital flows, including foreign private investment, the role of multilateral development institutions, some aspects of the global Stabex scheme, and the development of energy resources.

We live in a fast changing world with its new demands and pressing complex problems which require resolution. I am sure that we cannot afford to miss the opportunity to influence the future in a positive and progressive way. If we are to look for a smooth working of this increasingly interdependent world economy, we all need to act in unison and with strong political commitment before the problems are compounded through neglect or delay. It is here that a high level political forum such as the Development Committee can be a focal point in the structure of international economic cooperation and provide a political impetus to the resolution of the financial problems associated with the various facets of economic and social development.

Statement by the Governor of the Bank for Turkey—Ziya Müezzinoglu

It gives me great pleasure to participate once again, after a lapse of six years, in the Annual Meetings of the Bretton Woods institutions. During the interval, I am happy to note that the activities of both the Fund and the Bank Group have expanded greatly. However, I also note from the theme that emerged so effectively out of the mutually reinforcing and complementing statements of Messrs. McNamara and de Larosière, and from the documents presented to our committees, that there is a lot more to be done by our institutions.

One other issue is whether or not our agreements and communiqués can really be effectively promoted by our institutions and by our committees. For, I also note today with great apprehension and concern that the asymmetries in the rights and obligations of member countries that existed six years ago are continuing against a worldwide economic background which renders such asymmetries more harmful than ever for all countries. Can we promote adjustment in surplus countries? Can we, or should we, advocate adjustment for deficit countries when the facilities available to them are insufficient for a dynamic stabilization concept? What is truly at stake is the effectiveness of our institutions to pursue their objectives.

Let me now expand briefly on these points. Consider the present state and prospects of the world economy: Not only is the pace of the recovery extremely slow, but also the international adjustment process is not working well. The report on the world economic outlook provides an excellent analysis of the long-term implications of the present outlook.

These conditions certainly do not leave sufficient scope for reasonable optimism for a Minister of Finance, representing a semi-industrial middle-income country, who believes in the interdependence between the welfare of his own people and that of the rest of the world. Take, for instance, the Turkish case: In the last six months, the Turkish economy has effectively entered into a period of economic stabilization. Economic trends, which had been steadily worsening until the end of 1977, were arrested. This is precisely what the immediate objective was. However, I am not going to pretend here that it has not been painful for both the Turkish people and therefore also for its Government. It is also a somber fact that we have just reached the end of only the first of three phases. The objective which lies immediately ahead now is to maintain and consolidate the present trends of declining inflationary pressures and decreasing payments imbalance. The next, and the third objective after this is the resumption of a high rate of growth without inflation, which, the record shows, the Turkish economy is capable of, and which it cannot do without in the long run. Let me underline the fact that the most important objective and phase is the second one. The inflationary spiral, once created, takes a lot of effort to arrest and to eliminate. But, above all, it takes patience, a lot of patience.

The overall success of this program, therefore, depends upon how swiftly the second and third objectives can be reached. This, in turn, depends upon a number of variables, of which only two are not under my Government’s control. First and foremost among the two is the urgent need for resumption of a high rate of growth of the world economy. Our export prospects for both goods and services depend upon the growth performance and strength of the protectionist tendencies of our trading partners. Recovery abroad should also facilitate recovery at home through significantly less financing difficulties for our diminishing current account deficit. Therefore, and this is the second variable beyond our control, our performance at home depends also on the global prospects for the capital movements.

It is precisely for these reasons that my Government noted with great interest the medium-term scenario of coordinated growth in the Fund’s Annual Report, as well as the Bank staff’s thoughtful analysis in the World Development Report. The central themes of both reports are similar.

First, the short-term and medium-term policies of the member countries do not amount to a sum total which is sufficient to steer the world economy clear out of recession. Second, the slow pace of recovery in the industrial countries threatens also the welfare of the developing countries with serious implications on the future magnitude of the absolute poverty. Third, some of the adjustments needed for the industrial countries are structural in character and their response so far has not been exemplary. Finally, short-term and long-term interests of all countries require a swift readjustment of the policies of the surplus and the deficit countries, as well as of the developing and the industrial countries.

What should we do? Considering the present economic circumstances of the world economy, I will not advocate today what is on the agenda of tomorrow. However, I hope we all agree, for instance, that the need to improve on the official development assistance of DAC members, the need for developed countries to permit market penetration both in industrial and agricultural products, and the need for all countries to agree on a code of conduct for the transfer of technology represent some of the significant steps toward a true international economic interdependence. My Government strongly hopes that a more effective Development Committee, after improvements are made in its work methods and procedures, will be able to discuss these and other issues which are so central to the development task.

Even on a more modest scale of aspiration, dictated by a sense of realism, however, the agenda of today remains impressive.

First, I fully agree with the view that the responsibility for the world’s economic welfare rests on all countries, developed and developing alike. I also agree that pleas for responsible behavior of others should follow, not precede, the domestic policies of self-help. These points, however, have nothing to do with the one real issue confronting our institutions today. I think it is the special responsibility of our institutions to advocate the recommended policies to surplus countries as persistently and strongly as they advocate stabilization policies to deficit countries. This is the first item on today’s agenda.

Second, my Government hopes that the governments of the industrial countries will start to make earnest efforts to permit structural adjustment in their economies and to resist the demands for more protection. I was surprised to note that the World Development Report, while exaggerating the structural adjustment difficulties of the industrial countries, seems to take for granted the ability of the developing countries’ governments to make the same type of adjustment.

Finally, an important area of uncertainty for the developing countries is the prospects for capital inflows. Even with a lower growth rate projection, yielding a slower rise in the capital requirements of the developing countries, the availability of supply is far from being reasonably assured. This is true for flows of official development assistance, and especially true for private short-term and medium-term capital. Even the future magnitudes of the multilateral assistance are in doubt. . . .

On the Fund side, I welcome the seventh quota increase, the SDR allocations, and the relaxation of the reconstitution requirements. Moreover, my Government is looking forward to the activation of the supplementary financing facility.

These steps, however, even in combination, offer marginal relief to the deficit countries. The prospective quotas, after the seventh increase, do not respond sufficiently to the present and future needs of member countries. The simple truth is that the facilities available to the deficit countries are grossly insufficient in magnitude for the purpose of a more dynamic stabilization concept. If the deficit countries have an obligation for balance of payments adjustment, they also have a right for a reasonably sufficient amount of financing. There is a clear international responsibility in this area. I want to conclude my remarks by sharing this final thought with you.

Statement by the Governor of the Bank for the Netherlands—F. H. J. J. Andriessen

The world economic situation is still far from satisfactory. We are still faced with problems of too high inflation, too low growth, too large payments imbalances, and too sharp exchange rate fluctuations. We should continue to tackle these problems with a common strategy.

I do not want to dwell at length upon this strategy. Several speakers, in particular the Managing Director of the Fund, Mr. de Larosière, have already explained to us its elements very forcefully. It is quite clear that we still have a long way to go and that we need to continue and even strengthen our strategy of noninflationary growth in order to reach a more balanced world economy.

Although growth prospects seem to be somewhat brighter in Europe, underutilization of capacity outside the United States will remain very substantial, and not enough progress will be made in the reduction of unemployment. The continuance of this situation entails a serious threat to free world trade.

Although the rate of inflation has slowed down, especially in Europe and Japan, the differences in price performance between major countries give rise to concern, especially in view of its consequences for balance of payments adjustment and exchange rate stability.

This disparity in price and growth performance has resulted in unstable foreign exchange markets. There is an urgent need to promote more stability in these markets. The recent developments, in which the dollar plays a major part, are detrimental to confidence, to world trade, and to investment. Here is a new challenge for the Fund, since its new Articles contain a specific responsibility in this field.

This surveillance task of the Fund is complicated by diverging views among members as to exchange rate policy. This is no surprise, as the effects of changes in exchange rates differ from one country to the other, and depend for a large part on the degree of openness of the economy. The Fund surveillance should avoid a biased approach and recognize that members should in their exchange rate policies take into account their own particular economic circumstances. Both misguided exchange rate management and the free play of market forces may lead to undesirable results. Recent experience has shown clearly that we cannot rely on market forces only to ensure that exchange rates continue to reflect competitive positions. In my view, exchange rate policies by means of monetary policies and temporary market interventions are indispensable, in particular For open economies. Of course, appropriate underlying domestic policies are indispensable for a more lasting exchange rate stability. The establishment of a European monetary system shall have to be based on both elements.

The second part of the strategy I want to emphasize is that we should base our policies more than in the past on the fact that there is a vital interdependence between the economic developments of developed and developing countries. Until now, developing countries have generally been able to sustain relatively high economic growth rates despite their depressed export markets by slow growth in the industrial world. The resulting balance of payments deficits of the non-oil developing countries could until now in general be financed without much difficulty. We should, however, prevent these imbalances from becoming even larger. Adequate growth and anti-inflationary policies in the developed world are not only essential to alleviate the unemployment problem of the industrial countries, but also enable non-oil developing countries to continue their growth policies. In my opinion, we will have to shift our attention from the surpluses of oil producing countries, which seem to be decreasing, to the deficits of the non-oil developing countries, which may grow to unsustainable levels if the developed world does not succeed in promoting noninflationary growth and—I hasten to add—if we do not succeed in avoiding protectionist policies.

In ending my remarks on IMF policies, I want to praise the Managing Director for his imaginative package of proposals, which fortunately resulted in a consensus. In this context I would like to elaborate on the control of international liquidity and the role of the SDR. The new Articles clearly stipulate that members should aim at making the SDR the most important reserve asset. We should make a serious effort to reach this goal. The sharp rise in the quantity of international reserves during the past years has gone hand in hand with an undesirable increase in the dollar component.

Under present circumstances I would have much preferred an SDR allocation which would not entail a net creation of international liquidity. I am referring to the proposal for a substitution account. It is a fact that dollar substitution raises complicated political and technical problems, but this should not prevent us from continuing our efforts in this direction. On the contrary, I trust that the forthcoming discussions in the Executive Board on this subject will result in a report containing specific proposals to be discussed during the next Annual Meeting in Belgrade.

We very much welcome the new Managing Director, Mr. de Larosière. We have great expectations of his contributions to the work of the Fund, and we are convinced that his personal efforts already have contributed greatly to the successful outcome of the negotiations on quotas and SDRs. . . .

Finally, I would like to pay tribute to the staff of the Bank for the preparation of the very valuable World Development Report, 1978. The report spells out some of the main uphill tasks which still lie before us in the field of development. Even under optimistic assumptions, as many as 600 million people will live in absolute poverty in the year 2000. We all agree that this number is unacceptably high, but we are still groping for effective policy solutions. I would like to suggest that the World Bank staff make a special effort during the coming years to answer the important question as to which policies can contribute effectively to solve this most crucial element of the development problem.

Statement by the Governor of the Bank for Uruguay—Valentin Arismendi

I would first like to say what a great honor it is for me to address this Annual Meeting of Governors of the International Bank for Reconstruction and Development as spokesman for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Venezuela, and my own country, the Republic of Uruguay.

I should also like to join previous speakers in expressing our thanks to the Government of the United States, which is once again our host. . . .

Another matter of concern to the countries I represent, and which we find it necessary to raise again here, is the reappearance of protectionist policies in the industrial countries, a problem we referred to at last year’s meetings. In the 12 months that have elapsed since then, the world community has seen a resurgence of commercial and financial protectionist practices and of pressures for their extension. Intensification of such policies by the industrial nations can only harm both the countries they are designed to protect and the countries they discriminate against, a fact that has been proclaimed on numerous occasions already.

Neoprotectionism of this type—reflected in tariff and nontariff restrictions, such as the introduction of countervailing duties, negotiation of bilateral agreements arbitrarily limiting trade, additional requisites as to quality and size, new health requirements, etc.—will obviously not solve the unemployment problems faced by the countries referred to or remedy their current account deficits; on the contrary, it can only perpetuate them.

For the developed countries, a protectionist policy may result in short-term alleviation of unemployment problems among semiskilled workers, but to the detriment of the employment situation in the highly skilled sector, with the consequent decline in revenues. In this regard, it would be prudent if the countries in question, at the time they took measures to mitigate their protectionist tendencies, were also to adopt policies to effect the necessary reallocation of resources in their economies.

As far as the developing world is concerned, these obstructions to international trade close off one avenue of economic growth and add to its external financing needs. The less advanced countries hope to see such protectionist practices eliminated so that world commercial and financial dealings may be conducted in a manner that guarantees the self-sustaining growth of international trade.

In conclusion, I should like to say that the countries I represent hold the view that the Development Committee should retain its present joint structure, revitalizing its political will so that it may continue to serve as the appropriate forum for questions dealing with the transfer of real resources to the developing countries, questions which transcend in importance the specific activities of either the World Bank or the International Monetary Fund.

Statement by the Governor of the Fund for Finland—Mauno Koivisto

I have the honor to speak for the five Nordic countries—Denmark, Iceland, Norway, Sweden, and Finland.

This is our first meeting with Mr. Jacques de Larosière serving as Managing Director of the Fund. On behalf of the Nordic constituency, I would like to extend our very best wishes to Mr. de Larosière.

I would like to start by presenting some comments on the world economic situation.

In doing so a year ago, in the Nordic statement, my fellow Governor from Sweden pointed to the unsatisfactory outlook for economic growth, persistent inflation, and severe problems in the balance of payments area. Unemployment was widespread, signs of new mercantilism and protectionist tendencies were emerging, and the level of development aid was stagnating. It was generally thought that determined policies were needed to bring about a shift in these adverse trends.

How far have we progressed since the last Annual Meeting in tackling these problems? It is fair to state that there has been progress in certain areas. Although the rate of inflation is still too high, it has declined on an average. The fiscal policies pursued in many of the externally strong economies have turned in a more expansionary direction. A number of countries previously defined as externally weak have fairly successfully carried out the financial stabilization of their economies, thus laying the domestic preconditions for the resumption of economic growth.

Having said this, however, I have to point out some basic disequilibria of the global economy which are still very much with us. Differences in the relative rates of economic growth and inflation have persisted, some of them seem in fact to be worsening, and consequently, balance of payments patterns have continued to be lopsided, with repercussions ensuing in the exchange markets. The adjustment process has not been accompanied by economic expansion to the extent that it was hoped for a year ago.

Slow growth in some externally strong countries has subjected national policies in a number of other countries to severe external constraints, regardless of their possible success in domestic financial stabilization. I would especially like to underline the problem of the high level of unemployment that has resulted in both groups of countries. Moreover, it is possible that the growth rates of the last two decades in the industrial countries may not be forthcoming for some time to come.

With such bleak prospects we must carefully evaluate the implications for economic policy.

Some of these implications have been outlined for us by the Managing Director of the Fund, in his scenario for coordinated growth and payments adjustment. Also, the guidelines for economic policy agreed upon in top level meetings in Paris, Bremen, and Bonn are encouraging steps in the right direction.

We fully support the general direction of the Managing Director’s propositions. The scenario is both modest and ambitious. It is modest in terms of capacity utilization and employment levels, but ambitious in terms of the policy changes required. The goals of the scenario cannot be attained without a major shift in the policy stance in certain key countries.

Let me also say, from the point of view of small open economies, that they cannot substantially improve the utilization of productive resources by domestic adjustment efforts alone. Financial stabilization has already been carried out in many of these countries. The stimulus for renewed growth now has to come, to a large extent, from world trade. We believe that, with concerted stimulative action to bolster confidence and to dampen cost and price pressures, the world economy can be brought to a phase where a more satisfactory growth of production and trade will resume.

As I said, however, we cannot expect very high rates of economic growth as a basis for employment creation. Therefore, we must also be prepared to actively design our employment policies in a way that would ascertain sufficient employment opportunities despite lower rates of growth. If we do not succeed in this, unemployment will become a structural phenomenon, with unpredictable consequences in the long run.

The large differences between countries’ growth and price performance is one of the basic underlying problems. I wish to underline the strategic importance of getting to grips with these disparities, not least because I think this is the most efficient way to cure the instability in foreign exchange markets, which in many quarters has been experienced as harmful. It would be unrealistic, and indeed undesirable, to try to isolate the real and financial performance of countries from their exchange rates. At the same time, it is clear that pronounced instability in the exchange rates of major trading currencies has for some countries had adverse effects on investment, growth of output, and international trade. Moreover, if major countries whose currencies have moved significantly are not willing or able to offset through internal measures the subsequent effects on domestic demand, the underlying disparities in growth and price performance are likely to get worse.

From a global point of view it is of special importance that the rate of the major international reserve and trading currency develops in a stable way with as little fluctuation as possible. Determined energy policy in the United States, as in all countries, is a vital element in bringing about the confidence that is needed for attaining the path to better economic and financial stability.

These basic problems of the global economy must largely determine the focus of the Fund’s activities in areas such as exchange rate surveillance, international liquidity, and balance of payments financing.

The Second Amendment entrusts the Fund with special responsibility in overseeing the international monetary system. In accordance with the new Article IV and the accepted principles for surveillance, each member has undertaken to collaborate with the Fund and other members to ensure orderly exchange arrangements and to promote a stable system of exchange rates. We attach particular importance to the Fund’s surveillance being carried out on a uniform basis for all member countries. The Fund should concentrate on the actual rather than the formal foreign exchange policy of its members and, in so doing, promote stability and cooperation.

I turn now to financial issues of major importance for the Fund. The Nordic countries place emphasis on the central role to be played by the Fund in the international monetary system. In view of this and also considering the likelihood of continued large payments imbalances, the seventh quota increase and new SDR allocations are questions of high priority. Consequently, the Nordic countries welcome the compromise solution reached in the Interim Committee concerning these two important issues. We feel that the compromise is an encouraging major achievement.

I would like to conclude by emphasizing the severity of the problems we are facing in the world economy. We all recognize them and we probably largely agree on how we should approach them. It is true that such agreement has existed before without leading to appropriate action. This time, however, the need for action appears to be so generally recognized that there should be ground for optimism.

My colleague from Denmark will, in a later intervention related to the activities of the Bank, give the views of the Nordic countries on these matters.

Statement by the Governor of the Fund and the Bank for Ireland—George Colley

I would like at the outset to add my voice to those of my fellow Governors in welcoming Mr. de Larosière on his taking office and in expressing the confident expectation that his contribution to our work will be able, creative, and significant.

The 12 months since our last Annual Meetings have seen only a slow abatement of the serious problems which have beset the global economy for several years now. Slow growth, high unemployment, sluggish trade, and depressed investment have been facts of life for many countries.

However, the situation as it is now emerging is showing promising signs of improvement. This is due to a significant degree to the consensus and agreements reached by the Interim Committee last April, by the European Council in Bremen, and by the leaders of the seven major economies in Bonn in July last. The policy initiatives that have followed have created a climate in which the objectives of growth and stability can both be pursued with some confidence for the period ahead.

That confidence could be considerably strengthened. Last year when I had the honor to preside at these proceedings, I took the opportunity in my closing address of putting forward a point of view which I was interested to note was stressed yesterday by President Carter and by some of my fellow Governors in their contributions. It was this. Every country, however great or small it may be, has an obligation to strive for the maximum growth rate consonant with its economic situation. Apart from the actual addition to the growth in world trade which this would represent, the climate of confidence so created would itself constitute a further substantial increment in that growth.

We in Ireland have practiced what I am preaching. It is my view that no government is entitled to demand greater efforts to achieve growth from the major economies in the world—vitally important as this is—while itself failing to make such efforts. It is too easy to adopt a very cautious approach while blaming other governments and external conditions generally for the consequences of one’s own failure to act.

Since the efforts to arrive at a coordinated international approach to economic recovery and growth are now beginning to bear fruit, it is opportune to thank the various international bodies—the Commission of the EEC, the OECD and, more particularly, the International Monetary Fund, which helped, through careful analysis and patient advice, to promote a consensus and translate it into a plan of action. It is vital that implementation of the common strategy should lead to lasting recovery. There has been a heartening note in many of my fellow Governors’ contributions over the last few days of a determination that this recovery will be successful and sustained.

This spirit of cooperative determination is most welcome to a small and open economy like Ireland’s. Despite the unfavorable international environment, we in Ireland have, of late, been able to achieve a high rate of growth and a lowering of unemployment, while simultaneously registering a marked deceleration in inflation. The pursuit of our domestic policy objectives will be less difficult in the better external conditions in prospect for the coming year. In this context, the scenario sketched by the Fund is relevant. It envisages policy action to sustain growth, and at the same time to pursue the adjustment process into the medium term. I believe that the end-1978 review of progress, envisaged by the Bonn Summit participants, should have regard to this analysis.

Turning to monetary and financial matters, the Irish Government welcomes the recent institutional and other developments that could help to bring about greater stability in exchange rates. I have in mind in particular the coming into effect of the amended Article IV of the Fund Agreement and its associated principles and procedures for surveillance of exchange rates, while taking account of underlying economic trends. I attach major importance to the Fund’s role in helping to promote an exchange rate pattern which will be more conducive to the welfare of all member countries. As a member of the EEC, Ireland welcomes and is participating actively in the study of the proposals for the establishment of a European zone of monetary stability, as outlined to you already by Mr. Matthoefer. I would hope that by this time next year these various developments, coupled with an improvement in underlying economic conditions, will have helped to bring about a discernible increase in exchange rate stability.

I, like others before me, would like to refer to the outstanding progress made in the Interim Committee in the contentious areas of quotas and SDRs. This progress has been made as a result of a positive willingness to submerge individual preferences in order to bring about an acceptable consensus on these issues.

So far as the SDR is concerned I hope that the Fund Executive Board will continue to come forward with proposals for widening and strengthening the uses of this asset. We are all committed to promoting its role as the principal reserve asset of the international monetary system and, therefore, it behooves us to keep up the momentum of our recent progress. . . .

. . . the publication of the World Bank’s World Development Report, 1978 has been timely. The report is a significant addition to the excellent analytical work previously undertaken by the Bank.

All the reports before us highlight the magnitude of the tasks facing our two institutions. I trust we have the resolution to accomplish them. May I conclude by wishing the distinguished heads of the institutions, the President of the Bank and the Managing Director of the Fund, and their staffs, continued success in their difficult assignments.

Statement by the Governor of the Bank for Thailand—Chanchai Leetavorn

I am pleased to join previous speakers in extending a warm welcome and best wishes to Mr. Jacques de Larosière, the newly appointed Managing Director of the Fund. I also extend a cordial welcome to the new members of the Fund and the Bank, Maldives, Suriname, and the Solomon Islands, and the new member of the Fund Executive Board; Saudi Arabia.

I have noted with satisfaction the growing consensus on economic interdependence and the urgent need for concerted efforts to achieve a more balanced growth with stability, by all countries large or small, rich or poor. We are heartened to learn from the highest authorities that the necessary measures have been and will be taken to redress the immediate problems of unsatisfactory world economic recovery and adjustment process, as well as the recurrent problem of exchange rate instability. The agreement reached at these meetings on the increase of Fund quota and SDR allocation should contribute to a smooth adjustment process. It is hoped that early action will be taken by the relevant authorities to give effect to these decisions.

On the long-term structural problems of growth and poverty, I also discern a growing awareness of the need to promote the transfer of resources to less developed countries which comprise a major market for the export of manufactured goods and capital funds from developed countries. Clear recognition of long-term economic interdependence through linkages of trade, capital, and technological transfers should be translated into meaningful and concrete policy measures and action programs in the immediate future. In particular, steps should be taken by the industrial countries to reverse the growing protectionist trend through accelerated multilateral trade negotiations, through more effective rules and procedures for GATT surveillance, and through intensive research into the economic costs and benefits of industrial restructuring on the basis of comparative advantage. . . .

Turning now to the Fund, I wish to reiterate the calls of other fellow Governors for a more flexible and innovative approach in the Fund’s financing operations. Conditions for drawings by less developed countries, particularly in the lower tranches, should be sufficiently liberal to encourage members to make an early recourse to the Fund’s financial and advisory assistance. Due consideration should also be paid to the developing member country’s prevailing economic and social conditions and growth aspirations. Conditionality in use of the compensatory financing facility and the buffer stock financing facility should be relaxed to enable the Fund to play a more meaningful and relevant role in stabilizing export earnings. Thailand strongly supports the increase in quota limits on drawings on the compensatory financing facility and the optional inclusion of food imports for shortfall purposes. Repayment of compensatory financing facility drawings should also relate to improved export earnings and should in any case not be automatically linked to foreign reserve holdings. Finally, both the Fund and the World Bank are urged to re-examine their respective roles in support of international commodity arrangements, including the Common Fund and the proposed global Stabex scheme. I am confident that the Fund and the Bank will take up the challenge and prove more responsive to the needs and aspirations of developing member countries.

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

Let me at the outset join my colleagues in extending a warm welcome to the Governors for Maldives, Suriname, and the Solomon Islands. I would also like to avail myself of this opportunity to congratulate Mr. de Larosière on his appointment as Managing Director of the Fund.

The essential purpose of this forum of the Annual Meetings of the Fund and the Bank, apart from reviewing the performance of these institutions, is to identify the current and long-term problems confronting the world economy and to consider ways and means of finding adequate solutions for them. In keeping with the complexities of the world economic order, these problems range over a wide field covering the whole gamut of national and international policies affecting the development prospects of both the developed and developing countries. These issues have been comprehensively covered in the two reports of the Fund and the Bank and these reports provide an excellent basis for our deliberations. Proceeding on the assumption that the broad conclusions of these reports are by now already widely enough known not to need recapitulation, I intend to focus my remarks on the central issue of the development prospects and strategy for the majority of people living in the developing world.

As we approach the close of the 1970s and enter the final decades of this century, it is appropriate that the World Bank, which was originally conceived as an institution for the reconstruction of the war-torn economies and development in general, should devote its fullest attention to the longer-term problems of the three fourths of mankind, crippled by poverty and deprivation, in certain respects even more severely and in a more lasting manner than those caused by a physical war. I regard the World Development Report, 1978, prepared under the auspices of the Bank, as an initial step in this direction. It is a comprehensive study of what has been achieved during the past 25 years and what can be expected to be accomplished on certain given assumptions by the close of the century. It has served a useful purpose by outlining a scenario of the likely course of events in the absence of fundamental changes in international economic policies, relations, and institutions.

The real challenge for the international community begins where the World Development Report leaves off. It is projected in the report that even by the end of this century the number of people living in absolute poverty will be as high as 600 million. President McNamara in his speech described this as a shocking result, and rightly characterized absolute poverty as a condition of life which defies human decency. The practical task before us then is to devise a plan of action that would ensure that global poverty on such a vast scale does not prevail and at least the most cruel aspects of poverty are eliminated by the turn of this century.

I would invite you, therefore, to consider seriously the formulation of a world plan on poverty. This plan should spell out the concrete policies and programs through which absolute poverty can be progressively reduced and substantially eliminated by the year 2000. It should also indicate the respective responsibilities of the developing countries, the developed nations, and the international financial institutions in implementing such a bold program. The plan would, of course, need endorsement at the highest political and economic level but it should be conceived and initiated and should have the operational support of the World Bank. In fact, I would suggest that the next development decade strategy should cover the 20-year period from 1980 to 2000 and should be squarely based on a perspective of this kind which can bring renewed hope for a better life to millions of people in the Third World. This also appears to be the only way to bring the whole of mankind together and ensure peace and stability on earth, to which President Carter so wisely referred in his address to the forum.

In making this suggestion it is not my intention that the developing world should pass on its own responsibilities to others, even though it may be possible to demonstrate on the basis of an objective historical analysis that most of the present difficulties in many of our countries are not entirely of our own making. We in the developing world should be fully prepared to assume our own obligations in carrying out such a plan of action. We should commit ourselves to undertake all such policy changes as would accelerate national growth in support of a direct attack on absolute poverty. The World Development Report outlines some of these policy actions and we fully accept our own responsibility in carrying them out.

But, in a world as interdependent as ours, this must be a shared responsibility of the international community, if only for the reason that no amount of effort on the part of the developing countries to eradicate poverty will succeed on its own, given the present world economic order and relations. The burden-sharing will also need to be on a more equitable basis—roughly proportional to the relative economic strength of the various constituents of the world community—than has been assumed in the present World Development Report. There appears, for example, no justification for the asymmetry assumed in the report between the effort required on the part of the developed and the developing countries.

In general, the expectation from the developed countries is merely to resist further increases in protectionism. No significant progress in dismantling trade barriers and improving access of the developing countries to the markets of the developed countries has been assumed. At the same time no significant improvement in the ratio of official development assistance from DAC countries has been projected. At 0.39 per cent in 1985, this ratio would be one quarter less than what it was in 1960. The projections of resource transfers in money terms look impressive, but when note is taken of the fact that they include the impact of inflation at a persistent rate of 7 per cent per annum, they represent no more than a money illusion. The overall significant indicator is merely a negligible change in the ratio of official development assistance to GNP in the developed countries, which means that the developing countries will not only have to reduce their dependence on outside resources but will be required at the same time to intensify their efforts to improve their performance in terms of growth and social justice. This cannot be the way to eradicate poverty if, indeed, such eradication is the real objective to which the world community subscribes.

Similarly, the report assumes that the net foreign resource inflow to the developing countries would decline as a percentage of their gross domestic product from 4.2 per cent to 2.6 per cent. In other words, the major burden of improving performance is placed on the low-income developing countries themselves, which will have simultaneously to accelerate their growth rates to improve distribution, to increase domestic savings, and to adjust to a decline in net foreign resource inflows relative to the income levels. This again does not appear to be a workable strategy. At any rate, it appears somewhat strange that the political constraints on action required by the developed countries are given much greater weight in arriving at assumptions regarding aid flows and reduction in the level of protection. On the other hand, such constraints are assumed to be virtually nonexistent in formulating likely effort for mobilizing domestic resources consistent with the objective of reducing absolute poverty and improving consumption standards of the lowest-income groups.

In particular, we view with concern the underlying notion in the World Development Report that we should rule out the possibility of reaching the internationally accepted target for official development assistance at 0.7 per cent of GNP. The evidence of the realism of this target lies in the fact that a number of countries, not necessarily the richest in terms of per capita income, have already attained this target in their aid policies, and in the case of the OPEC countries, the ratio is more than 2 per cent. The absence of political will in certain countries reflected in the current aid policies should not be regarded as permanent.

In the context of the global plan on poverty that I am proposing, alternative sets of projections will need to be made on the basis of more equitable assumptions. Assumption will also need to be made regarding other changes in the policies of the rich nations which are considered essential for the success of such a plan. These should include a concrete timetable for dismantling existing tariff and nontariff trade barriers, operationally enforceable targets for concessional assistance, a liberal and widening access to the capital markets of the developed nations, and a fundamental restructuring of international economic relations and institutions so that the benefits of future growth and trade can increasingly flow to the poor nations. It is important to ensure that pledges for action on these fronts do not become a matter of mere diplomatic pronouncements but are regarded as a binding political commitment to act. . . .

Apart from these problems concerning the Bank, there is also need for considerable improvement, meanwhile, in the availability of short-term and medium-term financing of the type being provided by the International Monetary Fund. The adjustment process of the major changes in the balance of payments position of the various groups of countries has shifted the deficit largely to the non-oil developing countries. Their current account deficit is estimated to rise from $22 billion in 1977 to $32 billion in 1978. Arrangements to finance such deficits remain inadequate and are circumscribed by stringent conditionality disproportionate to the financing which the Fund can provide.

Though the accord reached in the Interim Committee on the issues of new allocation of SDRs and increase in quotas under the Seventh General Review will go some way to meet the needs of the existing international monetary situation, it falls short of the expectation of the developing countries. The amount of the new allocation of SDRs provided in the accord is neither commensurate with the needs of global liquidity nor does it sufficiently promote the objective of making the SDR the principal reserve asset of the international monetary system. The projected growth in the value of international trade transactions over the next few years and the magnitude of existing and prospective payments imbalances warranted a minimum allocation of SDR 6 billion. To improve the reserve characteristic of the SDR it would also be necessary to completely abrogate the reconstitution obligation.

As regards the increase in Fund quotas, it will help improve the Fund’s liquidity and its capacity to finance the balance of payments deficit of the member countries without taking undue recourse to borrowing. However, I must stress here that the increase in Fund quotas will be of real help to the developing countries only if the strict conditionality in the use of Fund resources is modified and the emphasis in conditionality shifted to broad economic magnitudes from the existing microeconomic variables. The multiplicity of performance criteria accompanying the use of Fund resources, particularly in the upper credit tranches, has strongly inhibited members’ access to Fund resources. It is satisfying to note that the Fund’s Executive Board is giving consideration to the problem and I hope that before long suitable modification would be made in the conditions that govern the use of Fund resources. The measures decided upon by the Interim Committee were long overdue but they cover only a part of the ground. We earnestly hope that additional measures which are necessary to improve the functioning of the international monetary system would continue to engage the attention of the Interim Committee and appropriate decisions will be taken in the interest of the entire international community.

Statement by the Governor of the Fund and the Bank for the Solomon Islands—Benedict Kinika

I come before you today, representing the newest member of the Fund and the Bank. We completed the formalities for joining at 5:30 p.m. on Friday. You could not be any newer than that.

Mr. de Larosière and Mr. McNamara, I want to thank you, along with all those who have welcomed us during this meeting, and all those on the staff of the Fund and the Bank who have helped in smoothing our path to become a member. Of course, I fully realize that very few of you, and indeed not many of the staff of the Fund or the Bank, know very much about my country. I will tell you a little now, so that those of you who want to, can be better informed.

We are a small nation of just over 200,000 people, mainly Melanesians, in the Western Pacific Ocean. The Solomon Islands has a total land area of about 29,000 square kilometers, of which about 25 per cent can be cultivated. The chain of islands stretches over 1,500 kilometers from northwest to southeast. After 85 years as a British colony, we became independent on July 7, 1978.

The economy of my country is undergoing expansion and diversification, in accordance with the National Development Plan drawn up by the elected government that has taken the country into independence. Our main exports are copra, palm oil, timber, fish, and rice. Key points in our development strategy include (1) diversified and increased export industries in agriculture, forest products, and fisheries to provide a secure balance of payments base for domestic growth; (2) self-sufficiency in basic foodstuffs (root crops, rice, meat, and fish); (3) improved internal transport by land, sea, and air between islands and between agricultural areas and ports; (4) a strong base of smallholder farming and food production for local markets; (5) major commercial projects, such as joint ventures by the Solomon Islands Government and overseas partners of proven capability and integrity; (6) technical and vocational education for the rural and urban population; (7) decentralized basic health services easily accessible to all; (8) an advanced form of local government in provinces, with wide powers to administer, plan, and execute developments and services at island level; and (9) government budgetary policy that redistributes incomes between groups and islands, by provision of economic and social services, without removing the incentive to work and generate economic growth.

My country has benefited from substantial bilateral aid from the United Kingdom and Australia, and we have recently concluded an aid agreement with Japan. We have been a member of the Asian Development Bank for several years. And now we have joined the IMF and the World Bank Group. We have had access to the European Development Fund, as a British overseas commonwealth territory, and we are now joining the ACP group of countries under the Lomé Convention, in our independent right. Aid from all these sources is necessary and welcome in view of our historically low level of domestic savings and investment, our lack of infrastructure, and the shortage of experienced technical staff in the Solomon Islands.

We understand very well the need to do all we can to help ourselves. We have to put our own house in order, mobilize our own people, land, and savings, devise policies and programs that are in keeping with the resources we can expect to have, and that both fit with and help to shape our people’s aspirations for the world we have to live in. We have to exercise the greatest care about increasing our recurrent costs and about increasing our financial liabilities faster than our economy and our incomes can be expected to grow. We have to live within our means. We define “our means” to include the wide range of assistance we believe may be available to us from multinational institutions, friendly nations, and commercial investors of skill and integrity who are prepared jointly to undertake important strategic projects with us. Though we have made a good start in our national development, we recognize how long, and how full of dangers, is the road ahead. I think we are coming to realize the importance of sound economic and financial policies, and how much our future is in our own hands, especially in this first year or two after independence.

As we join the Fund and the Bank, let me be honest and say that we are very conscious of the splendid array of distinguished people, the quality of thought, and the amount of work, and not least the cost, which goes into running the Fund and the Bank, and to holding these meetings. The administrative budget of the Bank alone is ten times my Government’s total annual expenditures.

We are keenly aware of having heard, in several important speeches in the last few days, opinions and promises from great and wise men; we shall remember these things. How far all this will benefit my own small country remains to be seen. I suppose we are hopeful, but cautious.

But let me make one thing clear. We in my country, all of us, live the problems of development in our daily lives. We are face to face with economic realities every day. We have no very rich people in my country, and at present nobody is starving. We live through the extended family. We believe in interdependence, in this sense, that in our society nobody can cut himself off and pretend that the others do not exist. If he does, he will wither away and die.

So we are ready to take our place in the interdependent world family. If we can sell our products on reliable markets for a fair price, if we can have access to private capital investment of the right kind, and if our developed friends continue to help us, with official aid, to fill the gaps left by history, then I promise that we shall be positive, friendly, and constructive actors on the international stage. We are, of course, very small on a world scale, but we are the third largest independent state in the Pacific. You will hear from us only very rarely on the world stage. But in the Pacific region we shall be very influential. The South Pacific is destined to grow rapidly in economic and political importance; so you will be hearing from us, if not directly, then indirectly through our regional influence, and the terms and conditions of the South Pacific’s commitment to world development.

Mr. Chairman, I am pleased and proud to be here today. I thank all those who have helped us to get here. I pledge that the Solomon Islands will be as independent, as honest and hard-working, and as positive and responsible a member of the international community as the nations of the world will allow us to be by their treatment of us.

Statement by the Governor of the Bank for Afghanistan—Abdul Karim Meesaq

It is an honor for me to represent the Government of the Democratic Republic of Afghanistan at the 1978 Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund. My delegation and I take this opportunity to express our deepest appreciation to the United States as the host country for the cordial and warm hospitality accorded to us, and for making such excellent preparations and furnishing the necessary accommodation and facilities for the meetings of the World Bank and the Fund. Our sincere thanks are also due to Mr. H. Johannes Witteveen, former Managing Director of the Fund, who, until the very last moment of his tenure in office, pursued on our behalf his heavy and highly important assignment for the benefit of all countries. Likewise, we are grateful to Mr. McNamara, the President of the World Bank, and the Executive Directors and staffs of both of these organizations who, within the context of their authority and responsibility, rendered valuable services to member countries last year. On this occasion we extend our congratulations to Mr. Jacques de Larosière, who has assumed recently the position of Managing Director of the Fund. We wish him all luck and success in pursuing his important assignment in the years to come.

At this important economic meeting we speak not only for a poor and developing nation but also for a landlocked and least developed country. We regret to say that the majority of our people still do not have the benefits of good education, medical care, food, clothing, and shelter, which are minimally required by man in our era. It is further regrettable that these resentful and unacceptable characteristics are not exclusive to our society in Afghanistan, but they also characterize millions of other people who live in dire poverty in other parts of the world. Mr. McNamara has rightly stated in the Foreword to the World Development Report, 1978 that

. . . some 800 million individuals continue to be trapped in what I have termed absolute poverty: a condition of life so characterized by malnutrition, illiteracy, disease, squalid surroundings, high infant mortality, and low life expectancy as to be beneath any reasonable definition of human decency.

It is imperative for human society to eradicate these problems with serious and earnest effort. Our efforts to this end must be practical, and not solely verbal, marked by eloquent language and slogans. Decisions that were taken in the First Development Decade (1960–70) by the international community should have, in fact, narrowed the gap between the rich and the poor countries. But, the rich and the industrial countries, contrary to the international decisions in which they themselves participated, instead of devoting 1 per cent of their gross national product to assist the developing countries, allotted only ⅓ of 1 per cent of this amount. As predicted in the World Development Report, 1978, this percentage may not alter until 1985. In other words, the assisting industrial countries are not willing to allocate more than ⅓ of 1 per cent of their gross national product to help developing countries, while the demands of the developing countries for foreign assistance continue to increase very rapidly.

As predicted in the World Development Report, despite optimism expressed with regard to the rising volume of exports of developing countries, the demand for external financing by these countries will increase from $63 billion in 1975 to $276 billion in 1985, and half of these funds would be used for the repayment of loans and interest to advanced countries, while another 15 per cent would be used to meet additional costs of imports caused by higher prices in the industrial countries. Therefore, it seems clear that the volume of investment in the developing countries will have to remain at an abysmally low level for years to come.

Another problem that the developing countries are faced with, which makes the implementation of their economic plans all the more difficult, is the absence of price stability for their exported raw materials. The unpredictable and severe fluctuations of foreign exchange rates of hard currencies in recent years make these problems even more acute, and according to the prediction made by the IMF, deficits in the balance of payments of the developing countries will reach a high point of $30 billion by the end of 1978. Although there have been prolonged and heated debates in the past several years with respect to all these issues—i.e., the flow of additional capital on easy terms to developing countries, price stability of their raw materials, and stability in foreign exchange rates—unfortunately, no firm decisions or practical measures have been taken. Consequently, the world economic situation is deteriorating further. Poverty, disease, and illiteracy still remain at their previous high levels all over the world, and the gap between the rich and poor countries in terms of their standards of living is still widening. It is now time for us to make a joint effort toward establishing such a world economic system as will ensure social justice and will bring about a complete eradication of poverty, disease, and illiteracy in the developing countries. Such a system, moreover, should reduce the heavy burden of foreign loans on the developing countries and accelerate their pace of capital investment in order to achieve a rapid economic growth. Undoubtedly, the developing countries have the duty of improving their administrative, accounting, social, and judicial arrangements so that funds which could be made available to them within the new world economic system would ensure maximum benefits to the majority of people and would minimize waste and abuse.

With respect to my own country, as all of you know, the victory of the glorious revolution of April 27, 1978 resulted in the transfer of political power to the People’s Democratic Party of Afghanistan, based on which the present People’s Government, representing the authority of the various strata of democratic people of Afghanistan, came into existence. The aim and objective of this Government is the class struggle of the toiling and working people against the exploiting groups in the hope that the exploited class will ultimately decide their own fate. The main duty of the Government is to create an independent and national economy to accelerate economic growth, to promote and modernize agriculture and animal husbandry, to establish and develop industry, and to raise the people’s standard of living. This latter aim doubtless calls for dramatic changes in the social and economic spheres, such as the following:

(1) Land reform with the active participation of the peasants themselves for their own benefit, cultivating land that now lies fallow, expanding and improving irrigation networks, and finding a solution for the problem of pasture land; (2) taking necessary and effective measures with respect to internal and external trade for the benefit of the people and the national interest of our country; (3) strengthening the public sector by practical planning and by maintaining effective command over our national resources and natural endowments; (4) protection of domestic production against foreign competition; and promotion, protection, supervision, and guidance of private investment in small and medium-scale industries; (5) promoting economic cooperation with friendly countries and attracting foreign loans without constraints for accelerating economic growth; (6) fundamentally revising the government budget with respect to government revenues and expenditures with a view toward achieving better production, housing, educational, medical, and social welfare services; (7) revising the existing tax systems with a view to shifting the emphasis from indirect taxes to progressive direct taxes; (8) establishing and controlling prices at suitable levels for the benefit of the people; (9) providing free and obligatory general elementary education for all children of school age and creating necessary conditions for the elimination of illiteracy; (10) expanding free intermediate and advanced education as well as free vocational training necessary for the creation of the scientific and professional cadres needed by the economy; (11) providing free medical services and engaging in an organized battle against various diseases, and expanding the level of preventive and curative medication; (12) maintaining equality between the rights of men and women in all social, economic, political, educational, and civil areas; and (13) taking necessary and effective measures to eliminate unemployment, bribery, red tape, speculation, usury, and smuggling, and also fighting against hashish, opium, and other narcotics and harmful drugs.

Although only four months have elapsed since the date of the glorious revolution in our country, within this brief period of time a number of important activities have been undertaken in a revolutionary spirit in all facets of life. These activities are now moving in various directions in a sound and effective manner and with all possible speed.

Our economic condition prior to the transfer of power to the People’s Democratic Government was deteriorating and was heading toward absolute failure. With regard to the most important section of the Seven-Year Development Plan of the previous Government, which relied 80 per cent on foreign loans and assistance during the first and second years of plan execution, even 50 per cent of the needed revenue was not provided and, naturally, not spent. For example, in the year 1355 (1976/77), out of Af 14.027 billion allocated for capital investment, only Af 7.957 billion was actually spent. Similarly, in the year 1356 (1977/78) out of a total expenditure of Af 20.033 billion which was envisaged, only Af 9.2 billion was actually realized. Consequently, one can say that the previous Seven-Year Plan was essentially no more than an imaginary and impractical exercise. At present, however, a group of experts and advisors has been assigned to formulate as rapidly as possible efficient plans that will be implemented without undue delay. The Ministry of Planning Affairs has already held fruitful discussions with various ambassadors and representatives of friendly nations regarding the possible flow of foreign assistance. . . .

While some other friendly countries have also promised their cooperation, the Five-Year Plan of the present Government is based on actual facts and realities with very little reliance on mere promises.

Our external financial position has noticeably improved in the past few months, and our international reserves have been further strengthened. Our aim of strengthening our foreign exchange reserves is based on our policy of stabilizing the value of the Afghani. This policy has already been put into effect by our Government, and through direct intervention of the central bank in the foreign exchange market we have been able to prevent the value of the Afghani from rising further. Thereby, we have been able to eliminate the adverse effects of foreign exchange depreciation on our exports, which have already suffered due to lower prices of primary raw materials in the international market.

It should be mentioned that our international reserves in comparison with previous years have risen in relative terms. However, if we keep in mind our country’s foreign indebtedness, which amounts to Af 95 billion, and the fact that each year we will pay nearly Af 2½ billion in interest and loan repayments, then it is clear that the adequacy of even the entirety of our foreign exchange reserves to meet even a small portion of our international obligations is highly questionable.

In view of our rising commitment for the repayment of loans, and considering the possibility of there being no improvement in the international prices of our major export commodities, it appears that the prospect for our balance of payments is gloomy for the coming years. Furthermore, due to unfavorable climatic conditions, such as floods and untimely rains which have inflicted heavy damages on our agricultural output, we are obliged to make additional payments for the import of foodstuffs. These additional elements force us to rely to an even greater extent on foreign technical and financial assistance on favorable terms from friendly countries and international agencies. Of course, these additional sources by no means release us from the already heavy burden of providing-food, clothing, and shelter for all the people of our country in the context of our domestic programs and through our revolutionary efforts.

Because countries of the world nowadays are more than ever before tied to and related with each other, no country in the world can survive in dire isolation and autarchy. Recognizing this fact, we earnestly appreciate the efforts and help of international agencies, notably the World Bank and the IMF, to solve the economic problems of our countries. Needless to say, on our part, we are prepared to support all sincere and tireless efforts of these international bodies to this end.

Statement by the Governor of the Fund and the Bank for Luxembourg—Jacques F. Poos

As at previous Annual Meetings, the prevailing sentiment in the minds of most representatives of Fund and Bank members seems to me to be an ambiguous feeling of hope and of disappointment, as regards both past developments and prospects for the future.

There is disappointment that in spite of continued efforts over the past years, the objectives of economic growth, full employment, stabilization of exchange rates, and promotion of Third World development have not been attained. There is hope because of the slowing of inflation in 1977 and early 1978, and above all, because of the success of the recovery plan worked out by the members of the EEC and the OECD.

Nevertheless, with the exception of the United States, the industrial countries have not achieved the gradual rate of expansion that they intended for their economies. This being so, their aim—albeit a modest one—of a return to satisfactory levels of employment toward the end of the present decade remains problematic. On the other hand, inflation rates have continued to decline, as was expected by most industrial countries. At the same time, the gaps between actual and potential production in the manufacturing sector continue to be sizable, as Mr. Witteveen again noted at the tenth meeting of the Interim Committee held in Mexico.

These results, which vary widely among countries, are determined by the approach and the means used by each nation in light of its own problems of domestic stabilization and adjustment at the international level. These differences in assessment and policy implementation are manifested in part in the place assigned under national economic policies to the three overall objectives: the struggle against inflation, reduction of unemployment, and external adjustment. But they are likewise reflected in the importance attached to the role of regulating demand, the deliberate stimulation of which has often run into difficulties. In any event, governments have continued to experiment with new forms of economic policy, in terms of both ideas and techniques, to achieve moderate growth while curbing inflation.

Nevertheless, government officials have become fully aware that in seeking solutions for problems in a necessarily narrow domestic context, they risk a loss of momentum in the recovery. Consequently, there has gradually emerged a broad consensus to study the possibility of implementing a concerted growth strategy. This agreement is reflected in the implementation of the joint recovery strategy for the world and European economies decided upon by the European Council in Bremen on July 6 and 7, 1978, and by the Bonn Summit on July 16 and 17.

The renewed economic growth of Luxembourg’s major economic partners, which I trust will result from these decisions, will bring about an increase in Luxembourg’s exports of goods and services. This increase, combined with a substantial recovery of our investments, should lead to a growth in our GDP of slightly over 3 per cent for 1978.

As Luxembourg is a large exporter of industrial products, it is particularly sensitive to any re-emergence, whether veiled or manifest, of protectionist practices. That is why it fully supports the Fund’s efforts to prevent the introduction of such practices and to preserve fair competition in international trade.

In the area of prices, owing to the struggle waged by the Government against inflation, Luxembourg’s consumer price index will probably show an increase (December 1977 to December 1978) of approximately 3.5 per cent for 1978, against 4.3 per cent in 1977. Should it prove possible to step up the economic growth expected of the major industrial countries in 1979 without thereby rekindling inflation, Luxembourg could expect even more moderate price increases in that year.

My Government likewise expects a stimulating impact on the employment level. In this regard, the concerted efforts of the Government and other elements of society have thus far made it possible to reduce the unemployment rate to less than 1 per cent of the labor force, despite the reorganization and rationalization efforts made by the steel industry, which employs nearly one third of Luxembourg’s industrial labor force. This result has been achieved thanks to a wide variety of measures adopted by the Government: early retirement, improved training for young people, programs to bring young workers into the mainstream of economic life, etc. Finally, certain developing service sectors have also helped to maintain employment at an acceptable level.

As regards the guidelines for the 1979 proposed budget, these were set in accordance with the recommendations made by the European Council, which defined in particular the contribution that each member country is to make in the area of budgetary policy to the concerted recovery of the European economies. Luxembourg will share in this concerted action through a budgetary contribution equal to more than 1 per cent of GDP, by means of tax reductions, increased transfers to certain kinds of activities, as well as assistance for investment and for industrial conversion.

On the whole, the economic situation of my country has therefore remained satisfactory from the standpoint of prices, employment, and government finances, but its future will depend basically on the recovery of the European and world economy, as well as on international trade unburdened by protectionism.

However, beyond measures of economic stimulation, the proper functioning of the monetary system holds major interest for Luxembourg. For this reason, we reaffirm our preference for a monetary system involving stable, though adjustable, exchange rates which are capable of checking erratic fluctuations of exchange rates and waves of monetary speculation. We expect to cooperate fully in the future European monetary system which, in our view, should be as solid as the European agreement on floating (the snake). The latter will need to be maintained until the new European system becomes operational and has proven itself.

In addition, the Government of Luxembourg favors an expanded role for international financial markets, and particularly Euromarkets, in covering balance of payments deficits. It congratulates itself on the growing role played by Luxembourg’s financial market in this regard. Accordingly, Luxembourg reiterates its initial position in favor of establishing an international system to centralize data on risks and increased cooperation between the authorities responsible for control.

Quota increases continue to be of crucial importance to the operation of the Fund. Their size must be determined by both the financing needs and the adjustment goals of Fund members. This is why Luxembourg also favors a fifth quota increase of about 50 per cent.

It welcomes, as well, the possibilities of increased utilization of SDRs which tend to bolster their role as an international reserve asset. In this regard, Luxembourg is preparing to establish the legal framework that will enable it to participate fully in the increased utilization of SDRs. A new allocation of SDRs in accordance with the Seventh Review of Quotas would have our approval. At all events, the yield on SDRs should be improved and the 80/90 formula seems to us to be an appropriate compromise.

Before concluding, I should like to add a number of observations on the situation of the developing countries and the activities of the World Bank Group. . . .

It seems to me superfluous here to give detailed statistics illustrating the precarious situation in which the developing countries find themselves or to emphasize the necessity of providing a remedy. In its 1978 Annual Report, the World Bank once again calls attention to “the 800 million individuals who continue to live in absolute poverty—with incomes too low to allow them an adequate diet and without access to such essential public services as education and health—and who are the inescapable indicator of what remains to be done.”

Development strategies have been the subject of innumerable debates and since the beginning of the 1970s ideas have appeared in extraordinary profusion. The path leading to the New International Economic Order is not an easy one. It is essential that we define our priorities and remain aware of the commonality of certain interests between the developing and industrial countries. Obstacles impeding the flow of trade between the two groups of countries must be progressively eliminated if there is to be a better equilibrium. For instance, the value of developing country exports to the industrial countries was about $26 billion in 1975, while that of the flow in the other direction was $123 billion.

The complexity of the world economic development process calls for a multitude of coordinated actions. It is essential that we formulate our policies so that they complement one another. And may I say here that I agree with Professor Tinbergen’s assertion that planning is an example of parallelism of interests; in other words, our national plans will meet with no success unless they form part of a more general world plan for prosperity.

A very widely accepted means for improving the conditions of life in the developing countries is naturally to accelerate their economic growth. The success of a policy for concerted growth in the industrial countries will have a definite effect on the growth rates of the developing nations, and more particularly on those of the middle-income countries.

As far as the poorest countries are concerned, it is of the utmost importance that they be assisted by real transfers and thus enabled to increase their purchasing power. Furthermore, their internal institutional conditions for development must take the forefront in their development strategies. Indeed, one may question the usefulness of growth in GNP if it does not affect the poorest strata of the national community. A plan for the distribution of economic gains and employment opportunities must therefore be an integral part of the development plan. . . .

. . . my own Government’s policies, . . . as far as aid to developing countries is concerned, tends to favor a multilateral rather than a bilateral approach. Luxembourg in fact allocates more than two thirds of its foreign aid budget to multilateral contributions, thus acknowledging both the importance of the role played by the large international agencies and the superiority, in many cases, of untied over tied aid.

Nevertheless, the fact remains that in financing their economic growth, the developing countries are obliged to rely increasingly on external capital. Over the period 1970–75, 90 per cent of this capital came from private sources, with a rapid rise in volume: loans made by private financial institutions to governments, or to the private sector under government guarantee, have increased by 50 per cent a year.

Yet one can only share the sentiment expressed by a member of the Brandt Commission at the North-South dialogue held recently in Istanbul, to the effect that these choices, favoring as they do the market economy and private enterprise, and being based on self-interest rather than solidarity, benefit three groups of countries in the main—those that export petroleum, those that are semi-industrialized and those that produce raw materials—while many others are left unaided. Official development assistance, especially that made available through IDA, should therefore focus as a matter of priority on countries not in a position to base their development plans on the exploitation of subsoil resources.

It is in this same context that one must hail the decision of some industrial countries to allow a remission of debts owed by developing countries.

I believe this is a suitable occasion to state that the Government of Luxembourg, conscious of its responsibilities, has included in its proposed budget for 1979 bilateral and multilateral aid appropriations to developing countries totaling Lux F 214.5 million. This figure is 10.6 per cent above the same item for 1978, an increase higher than that proposed in the budget as a whole, namely, 6.1 per cent.

In general, it may be said that the greatest development assistance effort has come from the industrial countries of medium size. Furthermore, the Managing Director of the Arab Development Bank was not mistaken when he declared that disarmament would release additional funds. As a first step in this direction, the international arms trade should be discouraged, and even limited, through recourse if need be to international agreements.

Since the Sixth General Assembly of the United Nations presented its 1974 action program for a New International Economic Order, an important change in attitudes has taken place. It is generally admitted by now that the time has come for basic changes in the international economic system and in the relationships that characterize it. It is with the greatest interest that we await the conclusions on this fundamental problem which the Brandt Commission is expected to announce in 1979.

My wish for these Annual Meetings is that they may help bring about a meeting of minds and lead us closer to those solutions without which we shall never rescue the neediest people of the world—more than a quarter of the population of our planet—from the absolute poverty in which they now exist.

Statement by the Alternate Governor of the Fund for Malta—C. Lino Spiteri

As we convene for our annual stocktaking exercise, a feeling of uncertainty overshadows the meeting once again. The recent performance of the world economy has been disappointing in several respects. Following the satisfactory rates of expansion in output and trade recorded during the period of initial recovery from the severe 1974–75 recession, the pace of economic recovery since about the middle of 1976 has been slow and uneven. In most countries unemployment has remained at the historically high levels reached during the recession or has even risen further. Growth in the volume of world trade has fallen considerably below historical standards. And, in spite of widespread underutilization of productive capacity, rates of inflation are still much too high to be considered acceptable in the great majority of countries.

This rather gloomy international economic scenario lends weight to the view, expressed among others by Malta at previous Annual Meetings of the Fund, that the 1974–75 recession was not merely a cyclical phenomenon but was the result of structural imbalances in the world economy which would lead to slower worldwide growth and increased barriers to trade unless appropriate corrective measures were taken. For, if the rich countries refuse to accept for themselves the logic of adjustment and an international division of labor inherent in the present world trading system, they cannot reasonably expect the developing countries to continue to support that system. Thus, any widespread restriction on markets in the industrial world would require most developing countries to cut back their own imports, and if developing countries are denied the opportunity of earning reasonable real incomes, they will be unable to offer the potentially gigantic market which they hold out for the future support of the world economy.

Such a development would be of no advantage to anyone—least of all to a small, export-oriented developing country like ours, which in the present hostile economic environment is struggling to restructure its own economy from one geared to the needs of a military base to one based on manufacturing industry and tourism. Clearly, however, the responsibility for effecting the changes necessary to break out of the vicious circle of economic stagnation or, at best, unacceptably low growth leading to restrictions on trade and to more economic stagnation, lies mainly with the developed industrial countries, if only because they are the stronger. The immediate and understandable preoccupation of their governments with safeguarding jobs must be weighed against the ominous long-term prospects for the world as a whole of the present drift toward protectionism. Moreover, there is little to suggest that exports from developing countries to the industrial countries have had more than a marginal effect on the employment levels in the latter.

In these circumstances the need to pursue more urgently the objectives of the New International Economic Order cannot be stressed too much. Moreover, it is our firm belief, in this regard, that such bodies as the International Monetary Fund must not merely reflect the existing state of the world economy, but must themselves supply the thrust for the necessary restructuring and reordering of international economic relations. Malta has supported the objectives of the New International Economic Order from the start, and will continue to do so. Nevertheless, we cannot but note with disappointment that even with respect to the establishment of a Common Fund (on which some progress now seems imminent) the special problems of those developing countries that are net importers of commodities have not received due consideration. Malta has consistently urged, and continues to insist, that any such arrangement should include built-in mechanisms to compensate, promptly and automatically, those developing countries which, being totally dependent on imports of commodities and raw materials, would be adversely affected should prices rise as a result of the establishment of such arrangements.

I now turn to the Fund itself and the international monetary system. The ratification of the Second Amendment to the Fund’s Articles of Agreement on April 1, and especially the adoption of a system of stable but adjustable exchange rates enshrined therein, together with the powers assumed by the Fund to exercise firm surveillance over members’ policies in order to promote this aim, was a welcome development in terms of the potential relative exchange rate stability it can help to create. This is especially so for small countries like Malta, who are price takers in international trade, invoicing mainly in fluctuating foreign currencies, and whose hard-earned external reserves are particularly vulnerable in a world of free floating and still unacceptably high world inflation. In this context I need hardly point out that the recent violent fluctuations of the world’s most widely used reserve currency, while it poses serious problems for all countries, is a particularly alarming development for weaker developing countries such as ours.

Also welcome was the recent quota increase under the Sixth General Review, and in this regard I feel I should express my satisfaction at the fact that Malta’s “relative” share was maintained. At the same time we are in agreement with those members who believe that increases under the forthcoming Seventh General Review should be substantial. On the other hand, we would like to stress that more important for developing countries than the mere quantum of facilities is ease of access to Fund financing. The conditionality attached to all Fund facilities, including those specially designed for developing countries, such as the compensatory financing facility, the extended Fund facility, and even the supplementary financing facility now soon to be established, often act almost as a deterrent to most developing countries, causing many of them to approach the Fund only when it is too late—a fact that was noted and commented upon by the former Managing Director, Mr. Witteveen.

We are disappointed that not much progress has been made in practice on the internationalization of control over liquidity creation and the establishment of the SDR as the primary reserve asset of the international monetary system, so important for the protection of developing countries’ reserves, while the establishment of a link mechanism between SDR allocation and development finance seems more remote than ever. And this in spite of the fact that the “transfer of resources” to developing countries was originally considered to be one of the objectives of international monetary reform.

Finally, I must point out that even the changes achieved so far are, and will continue to be, of diminished value for small, middle-income developing countries like Malta. This is because, as we have emphasized at every international meeting for several years, the continued use of GNP per capita and balance of payments performance as yardsticks of development and as the criteria of eligibility for concessionary treatment of any kind means that, for purposes of development assistance Malta is usually grouped, most incongruously, with the advanced primary producers and treated accordingly. Even the Fund’s compensatory financing facility is of no use to a country such as Malta where invisible exports form a large part of total exports, and which is in the process of restructuring its economy from one based on the negative exigencies of war to one based on the worthy objectives of peace.

September 26, 1978.

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