Opening Address by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for New Zealand1

International Monetary Fund. Secretary's Department
Published Date:
November 1979
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R. D. Muldoon

We are greatly honored by President Tito’s presence here today. We accept his warm welcome with thanks and consider ourselves privileged to have been invited to share this week Yugoslavia’s ancient tradition of hospitality.

Under President Tito’s remarkable leadership, Yugoslavia has found and forged the strength that comes from interdependence based upon a full respect for the individuality of the Federal Republic’s different peoples. The task has not been easy. I know all here will join me in saluting the determination brought to nation-building by the Yugoslav peoples. And I know that I speak for everyone here in extending our compassion to those who have suffered from the earthquakes that shook the country earlier this year.

Like Yugoslavia, the World Bank and the International Monetary Fund bring together many different peoples, united in common purposes. We have widely varied histories, economic situations, and national characters; we do not always agree on everything. Yet we share a realization of our interdependence, and a belief in international economic cooperation for development and progress. It is this sharing that brings us together for our Thirty-Fourth Annual Meetings.

Our group has expanded since last we met in Washington. On behalf of all our members, I should like to welcome Cape Verde, which has become a member of the Bank and the Fund, and Djibouti and Dominica, which have become Fund members and Bank applicants. St. Vincent is also welcomed as an applicant to both institutions, St. Lucia as a Fund applicant, and Seychelles as an applicant to the Bank. From my own country’s South Pacific viewpoint, it is a particular pleasure to see these signs that the island membership is growing.

New Zealand is honored to have been chosen to chair these meetings, to which my country brings a perspective that is, I feel, unusual. New Zealand is distant, geographically, from this center of old Europe, yet its association with Europe through both its history and its trading relationships is strong. New Zealand also has strong ties to its neighbors in the Pacific basin, a broad area of very great diversity in history, in peoples, and in economic development.

New Zealand, at the far end of the world’s shipping lanes, is a land that has mountains and grasslands that could be a part of Yugoslavia—as well as the pelagic fish and blue penguins that mark it as a part of the South Pacific.

It is significant that in the year in which these meetings are being held in Yugoslavia under the chairmanship of a Governor from New Zealand, the Yugoslav community in New Zealand is celebrating the 100th anniversary of its first settlement in our country. We owe them a particular debt of gratitude in that they played a major role in establishing the wine industry in New Zealand, which I am happy to say is flourishing.

While New Zealand is a predominantly agricultural producer and trader of primary products, we do have a highly developed and sophisticated economy. We can therefore understand both sides of the North-South dialogue on international cooperation that has been so actively pursued over the past few years. We have close historical ties to the newly independent developing island states of the South Pacific and growing links with the newly industrializing countries of Asia.

We in New Zealand, in common with most of our fellow primary exporting countries from the developing world, believe very strongly in free commodity trade. It is a belief rooted both in necessity and in the economic theory of comparative advantage as a basis for dynamic international growth. We are, therefore, most disturbed by the recent surge of protectionism referred to by the World Bank President and the Managing Director of the Fund at the UNCTAD meeting in Manila.

We who live by our exports have not been greatly encouraged by trade developments over the past few years. After difficult and prolonged negotiations, the Multilateral Trade Negotiations were concluded in Geneva earlier this year and now await full and effective implementation. The results are mixed. The outcome signals a useful liberalization of trade in manufactures, the principal result being an average reduction of about one third in the level of industrial duties. For trade in farm products, however, the outcome is far less satisfactory. Also, for many developing countries, the progress made has been far below their expectations and there is a genuine fear that the spreading pattern of unofficial trade barriers that are being maintained outside the GATT framework—in distinct contrast to the spirit of the Agreement—will nullify what progress has been made. A disturbing message seems to be emerging: that the burden of adjustment for changing factor prices and demand patterns will have to be borne by the smaller and poorer countries that have, in fact, the least room to maneuver. The major developed economies must bear a bigger share of this burden. In addition, the developing countries may wish to give further thought in future to increasing their trade among themselves, to both increase world economic growth and decrease to some extent their dependence on the performance of industrial countries. This will help but it will not be a solution for their problems.

Recent trade movements have not provided us with particularly encouraging news. Worldwide trade volume is estimated to have grown by 5 per cent in 1978, a very modest gain over 1977. The price of manufactures rose by about 15 per cent; those of the non-oil primary products exported by the developing countries fell by 5 per cent. For the non-oil developing countries, the terms of trade worsened by some 4.5 per cent in 1978. Invisibles, such as insurance and freight, increased sharply—by an estimated 16 per cent in 1977 and 21 per cent in 1978—siphoning still another layer of potential net earnings away from the many who can least afford it toward the few who dominate these fields.

These aggregations, of course, mask wide variations across countries and across commodities. Generally, however, those of us who export non-oil primary products have seen export revenues stagnating or declining in real terms. When the direction has been upward, prices and volume movements have been so volatile as to put us in continual uncertainty of what the morrow may bring. This instability disrupts economic planning.

The growth undertakings welcomed after last year’s Bonn Summit have come to disappointingly little. This year’s Tokyo Summit adopted a more conservative stance, with the focus on inflation and energy. Real GNP growth in the industrial countries is estimated at about 4 per cent in 1978. Preliminary estimates for this year point to an increase of somewhat less than 3 per cent.

It is clear that the world economy has entered another period of transition, in which favorable trends may well be reversed and unfavorable ones exacerbated. The better coordination of growth rates in the last year or two, the improving pattern of external payments among industrial countries, and the greater stability in exchange markets are threatened. Inflation and unemployment are already unacceptably high; we expect they will get worse under the double impact of a likely U.S. recession and the sharp increases in oil prices, which have now been restored, in real terms, to 1974 levels. This oil price rise, unlike that of 1974, has come at a time when the world economic problems are acute and widespread. There is substantial and widespread underutilization of capacity; inflation is rampant and inflationary expectations are becoming entrenched; structural problems within and among national economies remain unsolved. The medium-term impact will be to increase the upward pressure on prices with the risk of lowering economic activity still further. We are in for a renewed bout of “stagflation,” a problem to which there is not yet an adequate answer.

I draw two conclusions from these developments. The first is the indivisibility of the world economy. The second is the futility of domestic economic policies, particularly on energy, protection, and prices, that are governed by domestic political expediency to the detriment of wider international interests.

In its Annual Report, the Fund estimates that the 1979 oil price increases will raise, in a full year, the aggregate import bill of countries other than major oil exporters by $75 billion. The additional cost for the developing countries that are net oil importers will amount to $12 billion. Obversely, the current account surplus of major oil exporters will rise dramatically to more than $50 billion in a full year.

The adverse repercussions of the oil price increases and a recession in the United States will leave no country untouched, but particular concern must be focused on that group of countries that is least able to bear the additional burdens—the non-oil developing countries. For these countries, the annual current account deficit is projected to double to $43 billion from 1977 to 1979 and to exceed $50 billion in 1980, reflecting a sharp adverse movement in their terms of trade and a continuing increase in debt servicing payments, brought about by a growing volume of debt repayments and rising interest rates. For a growing number of low-income developing countries the situation is becoming critical.

There is, therefore, an added need for further progress to be made on debt relief for the poorest of the developing countries. So far, 12 creditor nations have agreed to cancel more than $6 billion in loans owed them by their poorest debtors. New Zealand is among the vanguard of this company, having canceled loans to the Cook Islands as early as 1975. This March, we canceled the remaining development assistance loans that were outstanding to Western Samoa, Fiji, and the Cook Islands, thus placing all of New Zealand’s bilateral aid on a grant basis.

For most of the developing countries, however, the past year has not been very good. Inflation remains a serious problem: it sometimes seems their major import item. The projections contained in the World Development Report, 1979, seem largely to consist of downward revisions from the 1978 Report. Thus, the developing countries’ recovery in 1976-77 turns out to have been slower than anticipated, and 1975–85 GDP growth estimates have dropped from 5.7 per cent to 5.2 per cent a year. Similarly, flows of official development assistance from the developed economies for 1985 have been reduced from last year’s projection of 0.39 per cent to 0.35 per cent of GNP—half the target set for the second United Nations Development Decade. The projection for the growth of net private lending to the developing countries for the decade from 1975 has also been revised downward, from 12 per cent to 10 per cent a year.

The prospect that the World Bank will be assigned the resources and the authority needed to increase its impact is, therefore, to be welcomed. New Zealand very much supports the doubling of the Bank’s capital stock; it is our hope that the support of the Governors will be unanimous and speedily forthcoming. We also recognize the importance of a Sixth Replenishment of the International Development Association’s resources, and hope that negotiations on this will soon be successfully concluded.

The Bank and the International Finance Corporation are in a position now to assume new importance as financial intermediaries, promoters, and catalysts in their support of the large number of middle-income developing countries that are moving rapidly toward increasingly sophisticated industrialization. A sizable Bank loan earlier this year to support the Republic of Korea’s emerging electronics industry was a good example of the openness that institution has had toward recognizing that “appropriate” technology can involve higher, as well as lower, levels of industrial sophistication.

The Bank’s growing, and welcome, initiatives in the energy sector are another part of the process of evolution that is likely to imply larger and more capital-intensive projects. This will require a larger capital base for the Bank if other sectors of assistance are not to suffer. Plans for expanding operations in this sector are also welcome as a step toward decreasing the dependence of so many countries on a handful of suppliers.

One indicator of the Bank Group’s ability to focus on the human face of development, as well as its technical and financial aspects, has been the increasing emphasis it has placed on training as a means of promoting the expansion of human capital that is so necessary for countries working to build a basis for self-sustained development.

Training is usually neither a high-cost, nor a high-visibility item in the development armory; it is an easy thing to lose sight of among the hardware. In New Zealand’s aid programs, we have found, however, that training gives excellent returns and we have made it one of the largest components of our bilateral assistance. We have been pleased, therefore, to see that the Bank has greatly increased its involvement in project-related training in the past few years. The number of projects with training components has nearly tripled since 1972, with the percentage of total lending for training—while still small—increasing sixfold.

I also welcome the Bank’s continued emphasis on rural development and general agricultural development through both projects and support for international agricultural research. New Zealand’s own development experience has taught us the importance of a strong agricultural sector and establishing proper internal terms of trade between city and countryside. The Bank’s attacks on poverty through assistance to the small farmer and small industrial entrepreneur deserve our fullest support.

Another welcome trend has been the IFC’s increasing involvement in its poorer member countries, particularly in Africa. To us, this shows an important recognition that a strengthened private sector can be a strong force for growth quite early on in the development process.

Turning to the International Monetary Fund, it is reassuring to note that, as the world economy enters a new period of added uncertainty and a deterioration in the pattern of external payments, the Fund has been active in developing its policies on the use of its resources by members and in strengthening those resources.

During the year almost all quota increases proposed under the Sixth General Review of Quotas have come into effect, thereby raising the total of Fund quotas from SDR 29 billion to SDR 39 billion. Moreover, after intensive deliberations, both by the Executive Board and the Interim Committee, the Board of Governors adopted last December a resolution proposing further increases in quotas for members that will, if all members accept their proposed quotas, raise total quotas in the Fund to SDR 59 billion.

In addition to this strengthening of the Fund’s own resources, the Fund’s access to fresh resources under the borrowing agreements associated with the supplementary financing facility became operational in February this year. This new facility, which is designed to assist those members that would require balance of payments financing in larger amounts and for a longer period of time than could be available under the regular credit tranches, is a most timely reinforcement of the Fund’s capacity to help to meet the financing requirements of its members in the difficult period ahead. The borrowing agreements with 14 lenders provide a total of SDR 7.8 billion under the facility, and bring the amount that the Fund has borrowed, or has made arrangements to borrow, since 1974 to a total of SDR 20 billion or about 50 per cent of total quotas.

An important aspect of the Fund’s operations that has been the subject of particular comment by many fellow Governors at these Annual Meetings for the past two years has been the conditionality attached to the use of the Fund’s resources in the credit tranches. Following a request by the Interim Committee in April 1978, the Executive Board has completed a comprehensive review—the first for ten years—of conditionality and has established a new set of guidelines on the use of the Fund’s resources. These new guidelines, which include many of the conclusions reached after the earlier review in 1968, assure members that the Fund will respond in a flexible and nondiscriminatory manner to requests for financial assistance. The new guidelines make it clear that in drawing up adjustment measures, due regard will also be paid to a member’s economic priorities and its domestic and social objectives.

During the year, the Fund’s Executive Board has also considered the problems of stabilization of export earnings referred to it by the Development Committee and in this context has reviewed the working of the Fund’s compensatory financing facility. As a result of this review, the usefulness of the facility has been improved by a decision taken last August under which members’ access to the facility and the total amount that they may draw under it have been further enlarged.

Other important developments during the year related to a group of actions taken in respect of the SDR. Following understandings reached in the Interim Committee just one year ago, the Fund has renewed allocations of SDRs under a Board of Governors Resolution that provides for an allocation of SDR 4 billion as at the first of January, in each of the years 1979, 1980, and 1981. At the same time, a number of decisions have been taken by the Executive Board that move the SDR closer to the position of the principal reserve asset. These decisions include improvement in the yield of the SDR, provisions for wider use of SDRs, and a reduction in the reconstitution requirements. In this context, the deliberations that have taken place in the Executive Board during the past few months and again in the Interim Committee yesterday on the possibility of establishing a substitution account are potentially of great importance to the future stability of the international monetary system.

It is clear that the world economy faces stormy weather ahead. We can be thankful, however, that both of our institutions are active, able, and imaginatively responsive to our needs. In the past few years, when we have been confronted by an extraordinary array of problems, our institutions have shown creativity and flexibility in adjusting their policies and procedures to meet the changing needs of members.

During the past six years, the Fund has been particularly active in monitoring and coordinating national economic policies and in forging new policies and facilities. These initiatives have included the 1974 and 1975 oil facilities; the Subsidy Account; the liberalization of the compensatory financing facility (in 1975 and 1979); the Trust Fund and the gold sales program; and the supplementary financing facility and related borrowing arrangements. The period has also seen a comprehensive overhaul of the Fund’s Articles of Agreement, along with the implementation of surveillance over exchange rate policies, new consultation procedures, and a thorough modernization of the Fund’s operations. In addition, we have a resurgence of the SDR, with the decisions to make more of them available, improve their status and widen their range of permitted uses, as well as the consideration that is being given to the possibility of establishing a substitution account.

From the World Bank we have had a no less remarkable succession of new initiatives each of which—rural development, urban development, energy—has been a significant addition to the development effort. We have been impressed by the prudence and careful preparation that have gone into each new launching and by the high level of professionalism and performance we have come to expect from the Bank Group. It is a commendable record of careful innovation, openness to new concepts, and increasing recognition of, and ability to act upon, the human aspects of development without in any way compromising the quality of the Bank’s portfolio.

Our thanks go therefore to the leaders of our two institutions, Mr. McNamara of the World Bank and Mr. de Larosière of the Fund, and also to the Executive Directors and international staffs for all their hard work, dedication, and expertise.

I welcome you on behalf of the Bank and the Fund to our Thirty-Fourth Annual Meetings.

Delivered at the Opening Joint Session, October 2, 1979.

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