Discussion of Fund Policy at Second Joint Session1:
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1979
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 have pleasure in making this report to the Boards of Governors on the work of the Development Committee. But before doing that, the Committee expresses its sincere appreciation to the Yugoslav Government for their most generous hospitality and for the excellent arrangements made in connection with their meeting.
Our Annual Report for the year ended June 30, 1979 has already been presented to you, so I will confine myself in these remarks in the main to the Committee’s work since then.
The Committee met three days ago on September 30. Its discussions took place against the background of a serious and deteriorating economic situation. The current account deficits of the non-oil producing developing countries are increasing very sharply as a result of a significant deterioration in their terms of trade and in 1980 are likely to exceed $53 billion as compared with $21 billion in 1977. They are therefore faced with particularly serious problems of adjustment, and in many ways they are less able to deal with the situation than they were at the time of the economic crisis of 1974-75. The main focus of the Committee’s discussion was therefore to examine how the international community could best assist them.
The Committee reached some important conclusions on this subject. First, the Committee was of the view that in dealing with the situation full use should be made of the existing international financial institutions and mechanisms and that the setting up of new institutions would not help the situation, at any rate at this stage. Members stressed the need to adapt the policies of the existing institutions to the new needs and to enlarge the resources at their disposal to the maximum extent possible. In this context, particular emphasis was placed on the speedy conclusion of legislative measures to effect the doubling of the capital of the World Bank, as well as the early implementation of the increase in quotas in the International Monetary Fund under the Resolution on the Seventh General Review of Quotas, on increasing the capital resources of the regional development banks, and the early conclusion of negotiations for the Sixth Replenishment of the International Development Association at a level showing a substantial increase in real terms.
The Committee then considered a number of specific suggestions by the Bank and the Fund for improving the capacity of the two institutions to help developing countries in the present situation. Accordingly, they endorsed the suggestion that the World Bank should be requested to consider a substantial increase in its program and sector lending and that the regional banks should also examine their lending policies to meet the new circumstances. This expanded program and sector lending would usefully complement the assistance for balance of payments adjustment provided by the Fund. They also endorsed the suggestion for the maximum possible use of cofinancing—that is, the association of private commercial loans with loans from the multilateral development institutions. On the IMF side, the Committee fully endorsed the suggestion that the Executive Board should be asked to examine the possibility of extending the repurchase period of the extended Fund facility from eight to ten years, and of developing ways and means of lowering the interest cost for drawings made under the supplementary financing facility. These are, I believe, very significant steps whose implementation could be of substantial benefit to the developing countries.
The Committee welcomed the second World Development Report from the World Bank focusing particularly on the problems of the middle-income countries. They took note of the very large external capital requirements of these countries over the next decade to support a tolerable rate of growth and recognized that the main source of these funds would have to be the private sector. Speakers therefore stressed the need for all countries to pursue sound economic and financial policies which are necessary to attract such flows, and they reiterated the need for countries to avoid protectionist trade measures that would adversely affect the exports of developing countries.
Inevitably in an economic recession such as we are experiencing today it is the low-income countries which fare the worst. They are not in the main able to borrow at commercial rates of interest, and they are critically dependent for their external capital requirements on the availability of concessional capital flows—that is, official development assistance (ODA). The Committee noted with concern the continuing decline in ODA flows from OECD countries expressed as a percentage of GNP and regretted that despite encouraging efforts by a few donors only a very modest growth is projected over the next few years. The Committee, while recognizing the difficulties facing some donor countries, stressed the importance of increasing the volume of ODA flows, particularly from those countries whose ODA represents a relatively low percentage of their GNP. The Committee also called for improvements in the quality of ODA, such as quick-disbursing assistance, the untying of aid, more local cost financing, and a greater concentration of ODA on the countries most in need.
The Committee gave further consideration to the problem of stabilizing earnings from the exports of developing countries. The recent improvements in the Fund’s compensatory financing facility were unanimously welcomed, though a number of speakers considered that further measures such as a global Stabex scheme or a commodity window in the compensatory financing facility were desirable. Bearing in mind the difficulty of financing such measures, however, it was agreed to look at the problem again in a year’s time in the light of the experience in operating the improved compensatory financing facility, the progress of negotiations on the setting up of a Common Fund for commodities, and a study of a complementary facility for export earnings stabilization which is to be undertaken in UNCTAD in cooperation with IMF staff.
A number of proposals were put forward for the Committee’s future work, particularly in the light of the proposals by the Group of 24 endorsed by the Group of 77 for a Program of Action on International Monetary Reform. We shall be considering all these suggestions as a matter of urgency, and I will then put some proposals to my colleagues in the Committee.
The Committee decided that, in view of the short period which had elapsed since the introduction in April of this year of new working arrangements, they would recommend that the review of the Committee which is due to be carried out in 1980 should be deferred to 1981. It should be understood, however, that the procedure for selecting the Chairman of the Committee in 1980 will not be disturbed by this deferment of the review. Draft resolutions to this effect will be submitted to the Boards of Governors for their consideration.
As I have already said, the world economic situation is menacing and the outlook is somber. It is clear, however, that the problems of any one country or group of countries cannot be solved at the expense of other countries. The economic interdependence of developed and developing countries, of capital exporting and capital importing countries, and of primary producing and manufacturing countries is manifest and is increasing. It will go on increasing. Only by cooperative action, carefully worked out in international discussion with due regard to the interests of all nations, can we expect to make progress. I believe that the Development Committee is well placed to assist in this process and I believe that at its meeting on September 30 it took a number of useful steps, mostly related to the international financial institutions and to the World Bank and the International Monetary Fund in particular, which will be of considerable help to the developing countries. But this is only a start. In my view, the best strategy with which to tackle the present problems is a step-by-step approach, adapting the existing institutions and their policies to meet the changing circumstances, and maximizing the resources which they have at their disposal. It is along this path that I see the work of the Development Committee progressing in the future. In this important task I am sure we can count on the support of all the member governments of these two institutions.
Finally, I would like to echo the thought which President Tito expressed during his inspiring address to us this morning. Development is an essential aspect of security. Peace cannot exist in a world torn by economic conflict and inequality. If only a small proportion of the vast resources that are used today for defense and security were to be diverted to economic and social development, the world would be a safer, more stable, more prosperous and just society.
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System
Filippo Maria Pandolfi
Since the last Annual Meeting of the Boards of Governors, the Interim Committee has met twice, once in Washington in March 1979 and again yesterday. These were the twelfth and thirteenth meetings of the Committee, respectively.
At the meeting yesterday, I had the honor to be selected Chairman of the Committee, in succession to Mr. Denis Healey, who guided the Committee’s deliberations with distinction for two years. One of the first actions taken by the Committee yesterday was to send to Mr. Healey a message expressing the Committee’s gratitude for the skill, wit, sense of purpose, and personal enthusiasm with which he conducted the Committee’s proceedings.
As Governors well know, an important aspect of the Committee’s work is to discuss the world economic outlook and the working of the international adjustment process. In recent years, discussions by the Committee have been held against a background of serious worldwide economic problems.
At its meeting last March, the Committee had found that the international economic picture had remained unsatisfactory, but looked for an improvement among the industrial countries in 1979. In most industrial countries rates of growth were not sufficient to reduce the prevailing high levels of unemployment and to stimulate investment.
Indeed, prospects had deteriorated from the time of the Committee’s meeting six months earlier. The problem of inflation had become even more difficult, the expansion in the volume of world trade was slowing, pressures for protectionist trade measures were spreading, and there were renewed uncertainties over the supply and price of oil. The developing countries were then, as they are now, a source of special concern to the Committee. One favorable development noted by the Committee at that time was the prospect of a better distribution of current account balances among the major industrial countries, reflecting the effects of past exchange rate changes and shifts in the growth rates of domestic demand.
In the face of these worldwide economic difficulties, the Committee called for coordinated efforts on the part of member countries to implement a medium-term strategy for growth, inflation, and the balance of payments. It urged the industrial countries to make every effort to improve market access for the exports of developing countries and to expand the flow of official development assistance.
At its meeting yesterday, the Committee’s discussion covered much of the same ground as the earlier discussions against the background of a world economic outlook that was deteriorating still further under the double impact of substantial increases in the prices of oil and other primary commodities and of an emerging U.S. recession.
Events in recent months pointed to a period of reduced economic growth in the industrial countries. Signs of a recession in the United States became stronger, and some slowing of economic expansion in other industrial countries was in prospect.
A major concern of the Committee was that inflation throughout the industrial world had intensified. In view of this grave threat to economic and financial stability, the Committee emphasized that the main task of economic policy was to contain inflationary pressures and to reduce inflationary expectations. One of the immediate problems was to prevent the recent surge of price increases for oil and other primary products from adding to the strength of inflationary expectations and thus being built into underlying rates of increase in wages and prices. The Committee noted with satisfaction that reduction of inflation was being given priority in the economic policies of industrial countries, and it reiterated its view that in many countries progress in reducing inflation was an essential precondition for the resumption of vigorous economic growth.
On the external side, the Committee noted the very large shifts in current account balances that were occurring both among and within groups of countries. The current account surplus of the major oil exporting countries was expected to rise sharply and a corresponding deterioration in the combined current account balance of the oil importing countries as a group was obviously in prospect.
The industrial countries were expected to account for most of this deterioration in 1979. As had been noted by the Committee at its meeting in March, the problem of the distribution of current account surpluses and deficits among the major industrial countries now appeared to be receding. This improvement was seen by the Committee as important evidence of a better working of the international adjustment process. In this connection, the Committee welcomed the closer cooperation in intervention policies in the exchange markets.
The Committee noted that the combined current account deficit of the non-oil developing countries was expected to increase from about $32 billion in 1978 to $45 billion in 1979 and to well over $50 billion in 1980, and expressed concern that this development would lead to an increase in external financial difficulties among these countries.
The Committee also noted with concern the fact that the worsening of the external position of the non-oil developing countries was occurring at a time of growing internal strains. While economic growth in the developing world was in general being fairly well maintained, it remained modest in relation to population growth and developmental needs. Moreover, the problem of inflation, already quite serious in many developing countries, had intensified in 1979.
The situation of the non-oil developing countries, the Committee observed, called in many cases for an improvement in domestic financial policies. It also underlined the need for a larger flow of external resources. It was especially important, in the Committee’s view, that the industrial countries, in the design of their economic policies, pay particular attention to the economic needs of developing countries. In this connection, a wide range of policies was seen to be relevant, including the reduction of protectionist measures; the opening of import markets to exports of manufactures and commodities from developing countries and of capital markets to outflows of funds to such countries; and measures to give new impetus to the flow of official development assistance, which had stagnated in recent years.
Both at its March meeting and at its meeting yesterday, the Interim Committee has devoted considerable discussion to the possibility of establishing a substitution account. Such an account, administered by the Fund, would accept deposits of U.S. dollars from members of the Fund and certain other official holders in exchange for an equivalent amount of SDR-denominated claims.
At its meeting in March, the Committee expressed broad support for the active consideration in the Executive Board for such an account.
At its meeting yesterday, the Committee considered the report on the substitution account submitted by the Executive Board as a result of the March meeting of the Committee. In the light of the report submitted by the Executive Board, the Committee concluded that such an account, if properly designed, could contribute to an improvement of the international monetary system and could constitute a step toward making the SDR the principal reserve asset in the system.
The Committee, noting the progress that has been made and recognizing that a number of issues remain to be resolved, asked the Executive Board to continue to direct priority attention to designing a substitution account plan, and to report progress to the next meeting of the Interim Committee.
In addition to discussing the major items of the world economic outlook and the substitution account during the two meetings this year, the Committee has dealt with a number of other items that have enhanced, or are designed to enhance, the Fund’s ability to provide balance of payments assistance. These topics are fully set out in the communiqués issued after the meetings and do not require elaboration here.
I am pleased to remind my fellow Governors that the Federal Republic of Germany has graciously offered to host the next meeting of the Committee, and this will be held in Hamburg on April 25, 1980.
Finally, perhaps I may be permitted to end on a personal note. To have been selected as Chairman of the Interim Committee is for me not only a great honor but also a great responsibility. In fulfilling my duties, I know I can count on the support of my fellow members and I would like to thank them most warmly for the friendly and cooperative attitude they have already displayed in the past 24 hours. For my part, I can assure you, as I have my fellow members of the Committee, that I am fully and personally committed to work to the best of my ability to promote the close international cooperation and understanding which is the prerequisite for any lasting contribution to the stability and growth of the world economy.
Statement by the Governor of the Fund and the Bank for Ireland—George Colley
As Ireland currently holds the Presidency of the Council of the European Communities, I would like first to make a statement on behalf of the Community and then to follow with a few remarks as Governor for Ireland.
Speaking on behalf of the member States of the European Community, I will begin by referring to the current economic situation and prospects. At this time last year there was some optimism concerning the immediate outlook for the international economy. This was due in large measure to the program of concerted action agreed on at Bonn, supported by the coordinated effort agreed by the member States of the Community at the European Council at Bremen. There was hope that the economic recovery then under way could be strengthened with a further easing of inflationary pressures and a general improvement in the pattern of payments imbalances. There was, moreover, the expectation in some countries of entering upon a period of sustained and balanced growth which held out the prospect of getting to grips with the problems of high unemployment and inflation—problems that have been particularly persistent features of this decade.
It is disappointing, therefore, that the problems of low growth and high inflation have been exacerbated this year. While a number of factors have been at work, it is clear that developments in oil supplies and prices since the beginning of the year have contributed significantly to these problems. There can be little doubt that the outlook for growth is bleaker as a result of the increase in energy costs. The collective external balances of the oil importing countries, and especially the balances of the non-oil developing countries, will also be adversely affected, while international inflationary pressures will be accentuated.
As far as the European Community is concerned, our growth expectations for this year have now dropped back to about 3 per cent, while the average rate of inflation is moving up to 9 per cent or more and the favorable balance on external account is being significantly diminished. Furthermore, the level of employment in the Community is not being improved to the extent needed to accommodate the anticipated growth in the labor force. While the outlook for next year is still far from clear, recent events could have considerable negative repercussions. Nevertheless, we expect, and will seek to achieve, at least a moderate rate of growth next year, continuing the positive trend of recent years.
The response to the difficulties induced by the changed energy situation must above all be positive. A first step is general acceptance of the need for a reduction in the current level of reliance on imported oil. As was recognized at the Strasbourg European Council and the Tokyo Summit meetings a few months ago, it is imperative that all the oil consuming countries move together and take effective measures to ensure that moderation in energy usage is brought about at the earliest opportunity. The European Economic Community will play its full part in this and it looks to other countries to do likewise. For this is a matter where—especially when measures are to be taken to curb private consumption and industrial needs—it is very difficult for any particular country or group of countries to stand alone on the side of virtue. Over the medium term, a reduction in oil imports will require, as well as improved energy conservation programs, the development of alternative energy sources.
In the management of our economic affairs, there are valuable lessons to be drawn from experience gained during the upsurge in oil prices five years ago. Externally, countries must realize that any attempt to shift the payments imbalances resulting from the increased costs of oil imports on to other countries can only serve to aggravate and compound the adverse effects. Internally, action will be necessary to win understanding and acceptance of the fact that there has been a real transfer of purchasing power to the oil producing countries. Attempts to compensate for this by increases in money incomes can only have the undesirable effects of further fueling inflation and eventually causing even greater unemployment, real losses in wealth, and postponed growth possibilities.
It is obvious that a continuation of the coordinated international approach to economic policy is required if an effective response is to be forthcoming to the present difficulties. Within this approach there will necessarily be room for flexibility and differentiation between countries. For most countries, the curbing of inflation is a paramount issue. For many countries, however, this issue cannot be viewed in isolation from the pressing need to ensure that economic activity is on a sufficient scale to avoid unemployment reaching proportions that would threaten social and political stability. Those countries that have a relatively strong balance of payments position together with a low level of inflation may be better placed to maintain the momentum of domestic demand in their respective economies thus benefiting their trading partners.
While we are faced with considerable problems, the outlook for the future has some important positive features. We have learned in recent years how resilient the international economy is. We can also be fortified by the reflection that, instead of undermining international cooperation, our most difficult period in recent decades has served to ensure a more concerted and determined international response than might have been expected. This follows from the growing recognition, stressed at the United Nations Conference on Trade and Development meeting in Manila, of the interdependence between all our countries. Our task in the period ahead, in the effort to ward off serious recession, is to broaden and extend the scope of international cooperation. All sections of the international community have a contribution to make. In the worsened economic climate, the developed countries should strive to maintain financial flows to the developing countries and should not yield to the temptation to take protectionist measures. On the energy front, the producing and consuming countries must now more than ever be acutely conscious of their mutuality of interest and how any abrupt change in prices or supply can upset the delicate international balance.
The international financial markets continue to have a vital part to play in the recycling of financial flows. But the European Community would also stress the essential role of the International Monetary Fund in the present situation in promoting balance of payments adjustment through programs tailored to the specific needs of the countries concerned. Full and effective use should be made of the resources already available to the Fund and, in order to increase the Fund’s potential to assist member countries, we should try to ensure the entry into force of the Seventh General Review of Quotas as soon as possible.
Notwithstanding the renewed disturbances that emerged in recent weeks, the period since the March meeting of the Interim Committee has seen, in general, the maintenance of more orderly conditions in the foreign exchange markets. Two important contributory factors in this were the implementation of the measures agreed on November 1, 1978 for the support of the U.S. dollar and, within the European Economic Community, the coming into operation of the European Monetary System (EMS) on March 13, 1979. Developments over recent months—in particular, the latest round of oil price increases—have made the pursuit of the objective of exchange rate stability at once more difficult and more desirable. A return to the disorderly conditions of earlier years would strike yet a further blow at the prospects for economic growth.
The European Monetary System has now been in operation for some six months. The principal features of the system were outlined by my predecessor in office as President of the Council on the occasion of the Interim Committee meeting in March. The basic objectives are to create a zone of monetary stability in Europe in order to facilitate a return to sustained noninflationary growth and to strengthen European integration, and to contribute to greater stability worldwide. To this end, participating countries maintain the values of their currencies within specified margins in relation to each other. The system has at its center a European Currency Unit, the ECU, which serves as a settlement and reserve asset and also as an indicator of the divergence of each currency from the Community average. The EMS will, in time, entail the creation of a European Monetary Fund which will provide a fuller role for the ECU. The Community’s credit facilities are at the disposal of the system and have been strengthened for this purpose.
I am pleased to be able to report that, since its inception last March, the EMS has been working well. The technical adjustments in central rates that took place on September 24 were necessitated mainly by the renewal of tensions on the international foreign exchange markets. The system does, of course, make provision for changes in central rates and it was agreed from the outset that, where such changes become necessary, they should be made in good time so as to avoid the building up of pressures in the system. The recent adjustments were designed to make a positive contribution toward a more orderly development of the EMS exchange markets, at the same time as helping the stability of currencies not in the system. In looking to the future we are quite aware of the potential difficulties posed by the inflationary implications of the recent rise in oil prices. At the same time, we are confronted with internal inflationary forces which lately, in some countries, have been gaining in strength. This underlines the urgency of common efforts to reduce inflation rates in the Community. There is full recognition in the Community of the importance to the success of the EMS of greater coordination of economic and monetary policies. This is something to which we are giving close attention. We are also conscious of the need for coordination of exchange rate policies vis-à-vis third countries and for concertation with the monetary authorities of those countries. While it would be too early to make any complete assessment of the operation of the system we remain confident that it can achieve the basic objectives to which I referred.
The European Community has taken an active part in the discussions on the question of establishing a substitution account. In principle, we are open to the idea of setting up such an account on a voluntary basis and we supported the approach, now approved by the Interim Committee, that the Executive Board carry forward its work with the aim of designing a substitution account plan. As I indicated in the course of the discussion in the Interim Committee, the Community takes the view that the successful transformation of the idea of a substitution account into an actual mechanism will require a satisfactory solution to a number of questions to which we attach importance and we look forward to the outcome of the Executive Board’s further discussions.
Let me now say a few words to you as Governor for Ireland. The Irish Government has been making determined efforts to tackle effectively the two major world problems so far as they affect our economy—inflation and unemployment. In our circumstances only an approach that deals with these two problems together is valid. With the present high level of unemployment and the increase in the number of young people seeking work, it would not be realistic for us to concentrate exclusively on measures to reduce inflation without regard to their implications for employment. Equally, we realize that, in the long term, our efforts to provide employment will be frustrated unless inflation is contained and reduced. Our growth rate this year, although not as high as our original targets, will still be high by international standards and our unemployment figures show a welcome improvement. These trends have been achieved against the background, not only of slow growth of world trade and increases in import prices, but also of our first half year of successful participation in the EMS, membership in which represents a major change in our exchange rate arrangements.
We are determined to press ahead with action on the two fronts of unemployment and inflation. The task for 1980 is, of course, made more difficult in view of the less favorable outlook for growth in the world economy. We hope therefore that the discussions here this week will help to bring agreement on policies directed toward achieving the maximum sustainable increase in growth.
I should like to take this opportunity to reaffirm Ireland’s wholehearted support for the principle of international cooperation which is the driving force behind the great family of institutions that exists in the International Monetary Fund and the World Bank. In this context, I would like to focus my remaining comments on three aspects: first, the need to strengthen the role of the IMF; second, the need to set our face firmly against protectionism as a panacea for some of the problems now facing us; and third, the importance of the activities of the World Bank.
The Fund continues to play a major role in diagnosing the problems connected with international economic developments and in promoting a coordinated approach to the solution of our common difficulties. In addition, through its general resources, as well as the facilities which it has established for specific purposes, it has helped countries to finance payments imbalances. Its success in these areas is not something which should be taken for granted. The Fund can only be as strong and effective as members wish it to be. Its resources must be commensurate with the scale of the problems with which it is expected to deal. This involves speedy implementation of the Seventh General Review of Quotas. We also look to the Fund to help chart a way for the international economy through the difficult years ahead. It is indeed appropriate to pay tribute to the Executive Directors and staff of the Fund for their work in adapting its policies and procedures to a constantly changing international environment. For the future we must look to the Fund to display that same openness and responsiveness to change.
I would like to turn to my second point. The low growth of the world economy in recent years and, in particular, the sluggish growth of world trade have been associated with increased pressure for protectionist trade measures. These pressures, which are, of course, contrary to the spirit of the IMF’s Articles, must be strongly resisted. Protectionism is a negation of international economic cooperation, impedes necessary structural changes, and, of course, has a particularly adverse effect on the developing countries. We welcome the renewal earlier this year of the OECD Trade Pledge to which Ireland is a signatory. This Pledge together with the substantial conclusion of the Tokyo Round of the Multilateral Trade Negotiations last April holds out the promise of a more open and equitable world trading system. . . .
In conclusion, I should like to thank President McNamara and Managing Director de Larosière for the excellent work they are doing and for their dedication.
Statement by the Governor of the Bank for Finland—Pirkko Työläjärvi
Speaking on behalf of the five Nordic countries on matters related to the World Bank Group, I first wish to thank our host country for its warm hospitality and the excellent arrangements for the Annual Meetings. It gives us particular pleasure to meet in the capital of Yugoslavia, a country which retains a key role in the North-South dialogue.
The present economic difficulties must bring into an even closer focus the two fundamental objectives of the international development efforts: the acceleration of economic growth in the developing countries and the reduction of absolute poverty. While the basic responsibilities regarding policy choices remain with the developing countries themselves, the economic health of the industrialized countries is a vital factor determining growth prospects for developing countries. Therefore, decisions and measures by the industrialized part of the world should be shaped in such a way as not to hamper the policy options of the developing countries. At the same time, it is evident from the adjustment difficulties of all countries that the international community must be able to respond to the needs arising from the changing circumstances. In order to achieve this, dialogue is needed—a continuous and closer dialogue.
Development efforts now take place against the background of the recent rise in oil prices and the concurrent slowdown in the rate of growth in the industrial countries. The non-oil producing developing countries will be most adversely affected and for many of these countries prospects are alarming. Quite a few of them may in the near future be faced with serious financing problems, which will leave them no other choice than to curtail their investments and development plans. This will, in the end, mean a deterioration in the welfare of their citizens, already at an unacceptably low level.
We know that there is a compelling need for a major increase in the transfer of resources to the developing countries. Poverty and human suffering remain basic problems for a substantial part of mankind. This is neither acceptable, nor tolerable. Thus, every means available should be explored in order to assist the developing world in finding the human, financial, and technical resources necessary for them to improve the standard of living of their people.
The central issue in this context remains to bring official development assistance by the industrialized countries up to the target of 0.7 per cent of their GNP. A special responsibility rests with the major donor countries with a low ODA share, particularly with those in basically strong balance of payments positions. It would greatly enhance the prospects for attaining the 0.7 per cent target if these countries were prepared to commit themselves to a specific annual increase in their ODA.
Furthermore, a smoothly functioning international capital market, as well as monetary policies conducive to capital outflow from surplus countries, would also be important elements in the financing of the LDCs’ deficits. . . .
Regarding Bank-Fund collaboration, we would welcome any improvements in order to deal with balance of payments, as well as long-term adjustment problems. In this respect both organizations have their specific roles, which are complementary. . . .
We are preparing for a New International Development Strategy. We are faced with growing difficulties in the international economy. We need rational and creative policies. We must all share in the development effort.
Statement by the Governor of the Fund and the Bank for the Republic of Korea—Woun Gie Kim
It is indeed a great pleasure to be meeting in this beautiful and historic city of Belgrade. I would like to begin by expressing my sincere gratitude to the Government and people of Yugoslavia for their gracious welcome and to His Excellency, President Tito, for his inspiring opening address.
Several new members have joined the Fund and the Bank since last year’s meeting, and it gives me great pleasure to join with earlier speakers in extending my Government’s warmest congratulations and welcome to these nations.
We are meeting at a time when the world economy is suffering from sluggish trade expansion and low levels of economic growth, coupled with high inflation and the energy problem. And it is difficult to see any glimmer of hope that the situation will improve in the near future. In a word, the international economic situation is surrounded by uncertainties and gloom. Some of the troubles we face are short term in nature, while others appear to be long-term structural problems. Accordingly, it is clear that both long-term and short-term solutions must be found, if we are to deal with the situation effectively.
It is, inevitably, the developing countries which are being most seriously affected by the current difficulties in the world economy. Their balances of payments are certain to suffer as the export climate deteriorates and their import bills continue to rise. Certainly, the Fund has made a useful contribution to moderating their problems by implementing supplementary financing facility lending, improving the compensatory financing facility, revising the guidelines on conditionality, and by its effective surveillance over exchange rates.
Nevertheless, in view of the increasingly difficult international economic situation, it will be necessary for the Fund to exert still greater efforts to support developing member countries experiencing balance of payments problems. For instance, the quantitative limits on drawings from the Fund facilities should be greatly increased and conditionality should be further eased.
In addition, we should recognize that the developing countries urgently require structural development. I believe, therefore, that the actual volume of long-term and concessional capital flows to the developing countries must be increased. . . .
Furthermore, I would earnestly request that the large donor countries make every effort to raise their bilateral official development assistance so as to reach the internationally agreed target. Moreover, in view of the growing dependence of the developing countries on the private capital markets, we should attempt to avoid imposing any restrictive measures on these markets which might adversely affect them.
We cannot, of course, attribute all the world’s economic problems to the recent oil price increase. Nevertheless, it is a major destabilizing factor and each country must devote maximum priority to coping with the energy issue. I am greatly heartened to see that not only individual countries but also the international institutions have become deeply involved in the quest to ease the problem.
However, I would like to emphasize that still more investment must be directed to the expansion of energy supplies, including the exploration and development of alternative and potential energy resources. And I would also note that the investment needed for these kinds of projects must be undertaken primarily by the industrial countries, because it is they which have the necessary technology, experience, and capital to do so. . . .
Another major task which confronts us is the removal of protectionism, not only as a means of promoting the developing nations’ exports, but also to bring about a more efficient global pattern of industrial activity. In recent years, the progressive trend toward greater economic interdependence has accelerated. It is now vitally important that we redouble our efforts to ensure that our world’s limited resources are allocated in the most efficient manner possible, on the basis of comparative advantage. This would serve the multiple purpose of expediting economic growth, increasing world trade, creating a more balanced pattern of wealth, and eliminating poverty.
The first step toward this goal is clear and unequivocal. The protectionist measures which have been adopted by the advanced nations as a means of protecting their inefficient industries must be abolished.
These countries must recognize that their artificial trade barriers merely delay the industrial adjustments which will enable their economies to grow more rapidly in the future. I would stress most strongly, therefore, that they should be adopting a positive approach by devoting their full efforts to structural adjustments without further delay.
In this connection, I find it most disappointing that despite the declared intentions of the advanced countries to make such adjustments, very little has actually been done. Just one example of this lack of action is the decision to extend the Multifiber Arrangement.
I would now like to comment upon one or two of the matters currently under consideration in the Fund. I recognize that the establishment of a substitution account would have some merits, on the basis that it should contribute to international monetary stability by easing the extent to which a single national currency dominates reserve assets. Nevertheless, it is a subject which requires a great deal of further study to ensure that the use of SDR-denominated claims as reserve assets will be technically feasible. In this connection, additional measures must be taken to promote the wider use of SDRs.
Furthermore, in order to expand the Fund’s capabilities for assisting its developing members, I hope that the Seventh General Review of Quotas will be effected as soon as possible. . . .
As we approach the end of the 1970s, it would be pleasant to be able to look forward with confidence to a brighter start to the new decade. Unfortunately, this is not the case.
In our present situation, we have no option but to halt the trend toward a polarization of economic views based on narrow short-term self-interest. What we urgently need is a spirit of cooperation rather than confrontation, of concession rather than conflict. The IMF and IBRD, as truly international bodies, can exert an immense influence by taking a lead in this respect. They deserve our fullest support and cooperation in the challenging years ahead, and I believe we are fortunate indeed to have men such as Mr. de Larosière and Mr. McNamara to guide us through these turbulent times.
Individually and collectively, I call upon all member nations to strive together to ensure that, through the restoration of a reasonable and equitable rate of growth and full employment, the 1980s will end on a brighter note than the current decade.
Statement by the Governor of the Bank for the Federal Republic of Germany—Hans Matthoefer
This week, it is for us a great personal pleasure to enjoy the hospitality of the Yugoslav Government. We appreciate that Yugoslavia, through its independent policies, contributes to political stability in Europe and to the moderation of tensions and the strengthening of peace in the world.
Since we met a year ago, the payments imbalances among industrial countries have been reduced more rapidly than most of us had expected, and with them an important source of exchange market instability. Economic activity has accelerated in some countries—notably Italy, Japan, and the Federal Republic of Germany. On the other hand, the world has once again realized the risks involved in our heavy reliance on oil as a source of energy. This year’s oil price increase will affect all sectors of the world economy. It has increased inflation, decreased the prospects for growth, and imposed new burdens on external payments, especially of developing countries.
It worries us extremely that after four years of relative success in fighting inflation, prices are rising more rapidly again in many parts of the world. We must make sure that these price pressures do not lead to an escalation of worldwide inflationary expectations.
Stability is an elusive goal. It is founded, among other things, on the collective confidence of individuals and economic groups. Such confidence is hard to win and easy to lose. It must be earned—with steady, consistent policies aimed not only at the maintenance of global demand, but also at improving the basic conditions of healthy long-term growth: sufficient incentives for private productive activity, competition, adequate public investment, social justice, policies to solve the problems of different regions and branches, and publicly financed research and development activities.
The uncertainties which cloud the economic outlook as we approach 1980 make the fight against inflation more difficult. We cannot afford to leave resources idle, in view of the many unfilled needs on our globe. We must pay great attention to the desires of those who want to be able to work for a decent living. We should see to it that those who are still unemployed should get work as soon as possible. But whereas this seems a realistic goal in most industrialized countries there is practically no hope to reach it in other parts of the world. Economic structures are very different throughout the world. What may be necessary and helpful in one country may be detrimental in another. Though it is very important and often helpful to discuss developments in international bodies, we should be very careful to pass judgment or give advice on strategies and measures in different countries and different situations that we do not really know well enough.
It is fortunate that the international payments system is now in a better position than it was in 1974 to absorb the strains from this year’s oil price increase. The current account positions of many industrial countries have come rather close to what could be called equilibrium. This is particularly true for the United States, the Federal Republic of Germany, and Japan. The combined deficits of primary producing countries had also declined, in 1977 and 1978, to a level not excessive in relation to the financing available and to the transfer of resources already under way.
Of course, this year’s oil price increases will result in new imbalances. The surpluses of the low absorbers among the oil exporting countries will rise sharply, the deficits of many non-oil LDCs will increase. These deficits will be particularly onerous for those countries which are already in a difficult debt situation.
A significant part of private capital flows is channeled through the Euromarkets. We think that these markets fulfill a very useful purpose. They satisfy the financial needs of many countries in a highly efficient way. It should be a common task to maintain and to secure their functioning. But the growing volume of uncontrolled flows in these markets is also a matter of concern. First, we should have a better understanding of the risks involved in this type of international lending. Secondly, the national legislation of banking supervision varies among countries and leaves too much room for evasion. We should, therefore, come to a minimum standard of prudential control which should be accepted by as many countries as possible. Thirdly, countries whose currencies are used as Eurocurrencies might have lost a certain part of their ability to control money supply. The main reason for this is the exemption of Eurodeposits from minimum reserve requirements. We should find a solution allowing every country to control the monetary aggregates in its currency irrespective of whether these aggregates are part of the national or the international market.
This imposes added responsibilities on the international finance system. The financial markets as well as our international financial institutions are well equipped to supply the needed resources. The Fund, in particular, has substantial means at its disposal, which will rise by another SDR 20 billion when the new quotas agreed under the Seventh Review come into effect. The chief constraint is the growing debt burden of many countries, notably LDCs.
Nevertheless, a significant part of the financing needs can and must be covered by private capital flows. Private direct investment can make a contribution, since it is usually accompanied by a transfer of technical know-how and carries no fixed repayment obligation.
A few days ago I proposed to our German legislature to increase official aid by 12.5 per cent in 1980 and by another 12.5 per cent annually in the following three years, a rate of growth more than twice as high as for our total Federal expenditures. The major oil producing countries—who have already provided significant resources to non-oil LDCs—will participate in such an increased aid effort.
Many of the least developed countries will face the greatest difficulties. The Federal Republic of Germany, together with other donor countries, has canceled its aid claims on—up to now—16 countries in this group; we now provide official aid to these countries in the form of grants only.
But even if the readiness and capability of the industrialized countries to help the countries of the Third World in their development efforts grow substantially, problems of deficits of payments and debt burdens will remain. Development aid is related to development projects. Development projects—if successful—may in the long run alleviate important problems, for instance, in the energy sector. Nevertheless, it is not likely that import demands of developing countries may in the foreseeable future fall to the level of their own exports. Nor is it realistic to assume that developing countries may steadily finance a sharp imbalance of payments by the aid of international finance institutions.
The Fund has a unique role to play: it combines its balance of payments support with advice and assistance in the field of economic policy, in order to ensure that the need for assistance by the international community to countries with balance of payments difficulties remains temporary. The Fund is quite sensitive to the particular circumstances of a country. As a rule, it does not ask for more than what a country would have to do anyhow in the absence of the Fund—namely, to balance its external accounts.
Even the strongest countries do not escape the need for adjustment. Structural change is an essential condition of economic progress. A look at the international economic scene shows that countries which have opened their markets to free trade and international competition enjoy higher rates of growth, healthier economic structures, and fewer balance of payments difficulties than those which try to protect their producers from international competition. Developing countries need access to the markets of the industrialized nations. It would be self-defeating if we assisted these countries in the development of their productive capacities, but failed to buy their products. If trade has to be a two-way street, this is particularly true of trade with developing countries: they can almost be counted on to spend any extra export earnings on additional imports. During the last five years the Federal Republic of Germany has doubled its imports of manufactures from developing countries, while our domestic demand rose by only 40 per cent.
It is in this light that we have been extremely gratified at the conclusion, earlier this year, of the Multilateral Trade Negotiations. The reduction of trade barriers agreed in these negotiations will give new impulses to world trade at a time when they are particularly needed. It is important to ensure that these agreements enter into force, as scheduled, from the beginning of 1980 onward.
The exchange rate movements of recent years have certainly contributed to the improved payments structure among industrialized countries. Their greater willingness to use exchange rate adjustment as a tool of economic policy—which is also reflected in the amended Articles of Agreement of the Fund—has been successful. Excessive fluctuations are, of course, undesirable. It will be a continuing task of economic policy to maintain orderly conditions on the exchange markets while permitting rates to respond to “fundamental” factors. The experience with the EMS and with last year’s program to defend the U.S. dollar against unwarranted speculation has been encouraging. I expect that the recent unrest on the exchange markets will turn out to be a temporary phenomenon. The markets will soon realize how close to equilibrium the balance of payments of the United States and other industrial countries really are. Then the inherent strength of the dollar will reflect itself in the international exchange rates. The EMS has been and will continue to be a stabilizing element on the international monetary scene.
One of the reasons why the world economic outlook is probably less gloomy today than after the oil price increase in 1973 is the strength of demand in several European countries.
For a year or so, business activity in the Federal Republic of Germany has been remarkably buoyant. Economic expansion in the Federal Republic of Germany continues. During the second quarter of this year industrial production was 7.5 per cent higher than a year ago, and new orders were 8.5 per cent higher. For 1979 as a whole a GNP growth rate of 4 per cent is now certain. Unemployment has been reduced to 3.5 per cent, the lowest rate since 1974. Our main concern is the reappearance of inflationary tendencies. We are making every effort to contain them. Price stability in the Federal Republic of Germany should also assist our trade partners in their struggle against inflation.
It is now likely that the current account of the German balance of payments will be very close to equilibrium this year. Our imports continue to rise faster than exports, in volume terms by 11 and 9 per cent, respectively. The exchange rate changes of recent years and the healthy growth of our economy have obviously produced their expected effects. I believe this represents a significant contribution to the international adjustment process and to the maintenance of the momentum of the world economy.
We fully accept the reduction in our current balance. Indeed, we have deliberately tolerated the appreciation of the deutsche mark. Smoothing temporary exchange rate fluctuations while accepting the effect of fundamental market forces will continue to be the central guideline of our exchange rate policy. We shall make every conceivable effort to increase and improve our cooperation with the U.S. monetary authorities.
The proposal to create a substitution account responds to the valid concern about the potential instability of a reserve system based on national currencies. We have always shared this concern, and we have actively participated in past efforts to move toward a more internationally oriented system. The Fund’s Executive Directors have still a difficult task before them. They will not only have to work out a mechanism which is sound and attractive in itself. They should also seek to ensure that the account actually achieves its purpose: to gain better control over international liquidity and to avoid destabilizing shifts in the composition of reserves. It would be desirable if we could reach an international consensus
—that the composition of reserves is a matter of mutual interest;
—that to the extent that there is a desire to change the composition of reserves, substitution is an internationally accepted avenue;
—and that policies should be pursued to avoid the replacement of “substituted” foreign exchange holdings by newly created currency. . . .
Instruments of development financing are under steady review. New mechanisms may seem desirable and should carefully be tested, like program financing. World Bank program credits in conjunction with IMF measures may help to eliminate severe balance of payments difficulties. . . .
Mr. Chairman, I do not want to close without once again expressing our appreciation that the Interim Committee has chosen Hamburg for its next meeting. I look forward to welcoming many of you there next April.
Statement by the Alternate Governor of the Fund and the Bank for Japan—Teiichiro Morinaga
Since the Annual Meetings of the Fund and the Bank last year, we have witnessed improvements and progress in several aspects of the world economy. World trade has continued to expand, though at a moderate pace, payments imbalances have been reduced, and the exchange markets have been relatively calm since around the turn of the year.
Prospects for the world economy, however, suggest that we might face new difficulties, that is, inflation coinciding with stagnation. The declaration of the Tokyo Summit Conference last June pointed out that inflation, which had been subsiding in most countries, has begun to regain momentum, and that changes in the energy situation have reduced the room for maneuver in economic policy, and may accelerate inflation and decelerate growth in all countries. In addition, a rapid increase in payments imbalances between oil producing and oil consuming countries is considered inevitable.
Since the oil crisis six years ago, each country has been making the utmost effort to adapt its national economy to higher oil prices. Some observers consider that the recent increases in oil prices will not have such a great adverse impact on the world economy for the time being.
However, certain aspects of the world economy suggest that the current situation is more serious than that of six years ago. Unemployment remains at a high level in a large number of countries. Prices are rising in many countries at a double-digit rate, and incipient signs of worldwide inflation can be observed. Furthermore, prolonged sluggishness in investment has caused problems on the supply side, including the slowdown of productivity growth. Little progress has been made in the improvement of fiscal balance; in some countries, fiscal deficits have even widened.
All in all, the world economy has not recovered from the damage left by the prolonged recession following the oil crisis; its ability to respond flexibly to economic difficulties has been reduced. On top of this, the energy situation has become increasingly uncertain as both higher prices and limited supply impose additional constraints. Under these circumstances, the choice of economic policies open to member governments is severely limited.
In view of the growing interdependence of national economies today, coordinated actions among nations have become increasingly important to their handling of these problems that confront the world economy. During the past few years we have made efforts to coordinate our actions aiming at a well-balanced world economic development. Now we see new problems arising which require a new type of coordinated action.
In this context, the Annual Report of the Fund for this year makes some important suggestions. First, the problems confronting us today preclude any simplistic prescriptions offering promise of early success. Second, in view of the medium-term and long-term prospects, increased emphasis should be placed on measures to facilitate effective structural adjustments and to improve supply capabilities, including adaptation to the new energy situation of lower availability and higher prices.
With these suggestions in mind, I believe that the difficulties we are now facing must be overcome by steadily pursuing effective coordinated actions as required by the development of the economic situation.
With respect to energy problems, it is greatly to be desired that the oil consuming countries will strengthen their efforts to conserve energy and promote development of alternative energy sources, and that the oil producing countries will carry on reasonable oil pricing and supplying policies.
On trade policy, we must proceed to faithful implementation of the agreements effectively reached in Tokyo Round negotiations with renewed determination to preserve the free trade system and fight protectionism.
The need for coordinated action on fundamental economic conditions is paralleled by the great importance of cooperation in exchange market policies. The example which springs to mind is the cooperative measures to defend the dollar taken by four nations on November 1, 1978, which have contributed significantly to the stability of the international monetary situation. We have long maintained that, if the present floating exchange rate system is to serve a proper regulatory function, close consultation and coordination in exchange market policies among the national monetary authorities are essential. This perception has been reconfirmed and strengthened by the efficacy of the measures taken.
On the international monetary developments, it should also be noted that, at the Interim Committee meeting, active discussions were held and progress was made on the question of a substitution account. This scheme is expected to contribute to the improvement of the international monetary system.
In relation to the importance of international coordination, I would like to comment on the role of the International Monetary Fund. I believe that the Fund should be guided by a philosophy befitting its status as a core of the international monetary system. This is particularly true at this time, when the threat of stagflation cannot be ignored. In other words, the Fund is expected now more than ever to take a resolute stance toward preserving monetary stability and containing inflation.
In this relation, it is becoming increasingly important to seek the adjustment of balances of payments in such a way that inflation will not be spread internationally. I sincerely hope that the Fund will direct all its powers of judgment and insight toward the solution of this problem.
In the context of the said observation on the world economy, let me turn briefly now to the policy stance of our Government. The basic stance of our policy management has been to expand domestic demand and equilibrate the external balance, based on the spirit of international coordination. In fiscal 1978, which ended last March, the Japanese economy can be said to have broadly followed the desirable course of growth envisaged in our basic policy stance. In other words, in fiscal 1978 domestic demand increased steadily, due to the effects of fiscal and monetary policies, mainly through expansion of public investment, solid growth of private investment, and recovery of consumption reflecting stable price conditions. This increase in domestic demand enabled us to realize a real GNP growth of 5.5 per cent, in spite of a substantial decline in foreign demand.
The economic expansion, underpinned by domestic private demand, is still continuing to date. However, wholesale price rises have recently accelerated due to such factors as price increases for oil and other international commodities, weakening of the yen value, and the steady expansion of domestic demand. Accordingly, the current price situation requires careful watching. We intend to pursue appropriate economic management in order to ensure continuous growth of the domestic economy, while paying close attention to price stability.
On the other hand, the surplus in our balance of payments has rapidly diminished due to factors such as the expansion of domestic demand and the substantial appreciation of the yen. Around the beginning of this year our current account became more or less balanced and has been recording deficits recently. Needless to say, we will pay continuous close attention to the developments in our balance of payments.
We have learned several valuable lessons from our experience in the recent adjustment process of the balance of payments. On this occasion, I would like to discuss three of them in particular. First, the importance of the relationship between the vitality of the private sector and the stability of prices. It is particularly noteworthy that the price stability seen during the adjustment process has fostered confidence in the private sector and thus made a significant contribution to the autonomous economic recovery led mainly by the private sector.
Second, the length of the time lag before balance of payment adjustment can materialize. In our experience, the adjustment was brought about by various factors including the sharp and rapid appreciation of the yen, expansion of domestic demand, and the effects of import promotion measures. The effects of these factors did not become visible for a considerable time. In the meantime, a phenomenon known as “overshooting” has occurred in the foreign exchange market. Our experience of this phenomenon last autumn suggests that coordination among monetary authorities in the field of foreign exchange policies, which I mentioned earlier, must be called for as a measure to cope with this problem.
Third, the process of economic recovery and restoration of external balance has left scars on the domestic economy, and complete rehabilitation is a major issue for the future. The huge deficit in our fiscal balance, which has resulted from the expansive fiscal policies of the last several years, will be a major constraint on our economic management in future. The Government has been forced to make massive public bond issues to finance this deficit. In fiscal 1979, we have reached the highly abnormal situation of depending on these public bonds for 40 per cent of government expenditure. Unless something is done, inevitably the fiscal sector will cease to be able to play its proper role. We must act without delay to restore fiscal soundness and improve the flexibility of fiscal policy. We are determined to continue our utmost efforts to achieve this objective, though it may require some length of time.
Let me now turn to the task of development in the developing countries and the activities of the World Bank. There is a growing fear that the turn recently taken by the energy situation will increase the difficulties facing developing countries. Not only will it increase the current account deficit of non-oil producing developing countries, it could also adversely affect the industrialized countries’ ability to extend aid, and slow down their economic growth, thereby reducing the market for the exports of developing countries.
Nevertheless, I have deep confidence in the ability of developing countries to cope with the situation. Even in the face of the severe economic difficulties which followed the 1973 crisis, the developing countries as a group managed to expand their trade and maintain a high rate of growth. I am particularly impressed by the economic and social progress made by the countries which, through a comprehensive approach of expanding their trade, introducing foreign private capital and training their workers, have made dedicated, concerted efforts for economic development.
I believe that if both developing and developed countries continue to make a steady cooperative effort we will again overcome these new difficulties. In line with this belief, Japan has been taking the following measures: First, in spite of the domestic social and economic impacts, we have further opened up our market to the products of developing countries through tariff reductions and other measures. As a result, Japan’s imports of manufactured and semimanufactured goods from developing countries have more than doubled within the last three years. In addition, we have been actively participating in the joint work for establishing the Common Fund in order to help stabilize primary product prices and contribute to the economic advancement of the developing countries. We have made a contribution to the agreement successfully reached last spring on the fundamentals of the Common Fund.
Second, we believe that private investment and technical assistance are essential for the developing countries to maintain self-sustained growth through effective mobilization of human and natural resources. In this respect, it should be noted that in fiscal 1978 Japan’s direct investment to developing countries increased by 59 per cent over the previous year.
Third, we intend to double the annual amount of our official development assistance within the three-year period up to 1980, with a firm belief that concessional official flows should be increased especially for the poorer developing countries. I am pleased to report that our official development assistance in 1978, the first year of that period, reached $2.2 billion, 56 per cent above the previous year’s figure of $1.4 billion.
Fourth, judging from our own experience of economic development, we believe deeply that developing technical skills and tapping the talent of the people are essential for the successful social and economic development of a country. Along this line, we intend to expand our educational and technical assistance to the developing countries. . . .
The Danube, which links Belgrade with the rest of the world, has historically played a vital role in the exchange between the Orient and the Occident. And Yugoslavia today is making valuable contributions to mutual understanding, as well as mutual well-being and prosperity, between the North and the South. I see a historic significance in the fact that this Annual Meeting, here in Belgrade, has offered us a good opportunity to deepen our awareness of the globe as a single community.
In conclusion, may I express my sincere gratitude to President Tito and the Government and people of Yugoslavia for the warm and generous welcome we have received in Belgrade.
Statement by the Governor of the Fund for Indonesia—Ali Wardhana
Since we met last year the development of the world economy has followed a path leading to greater convergence of the economies of the major countries. Economic growth, employment, inflation, deficits and surpluses, and exchange rates began to move closer to each other, raising the hope that at long last the recovery from the 1974-75 recession might reach a more satisfactory as well as a more stable level.
As it turns out, the Annual Reports of our two institutions and their reports on the world economic outlook and world development reveal a situation which is less promising. The prospects for the remainder of 1979 and for 1980 seem to point to a slowing down in economic activity in the largest economy, while at the same time inflation continues to increase. Fortunately, in some other industrial countries the cyclical phase is different. Economic growth has increased, with inflation under reasonable control and the balance of payments showing signs of moving toward a lesser degree of disequilibrium. But the emerging slowdown in the largest economy together with a rising rate of inflation must have an impact on the situation elsewhere, in particular in the developing countries.
The World Development Report of the Bank, issued for the second time, draws a picture which is far from bright. A decrease in economic activity in the industrial countries would reduce international trade, already burdened by protectionist measures. As a consequence, revenues derived from exports will decrease. If the momentum of growth is to be maintained, larger external resources derived from investments, loans, and official assistance are required. A reduced rate of growth in developing countries would retard progress and consequently it would also keep a great number of human beings trapped in poverty, including absolute poverty. Unfortunately, it is not sure whether the flow of external resources would be increased because the industrial and richer countries are in the process of protecting their own economies.
The important question before us is how to handle the present worsening situation. The policies of the relevant industrial countries, with their overwhelming impact on the rest of the world, are crucial. As far as we see it, the problem of inflation should receive top priority. Inflation in the largest economy, in particular with its impact on growth and the exchange market, if permitted to continue would generate unsettled conditions not only domestically but also elsewhere.
I would like to draw attention in particular to the psychological effects of inflation. It is difficult to reduce inflation by appropriate policies; it is far more difficult still to remove expectations related to inflation. When people begin to expect that prices will increase, they start to dissave, and the velocity of money increases even if liquidity is kept stable. That expectation is not only related to domestic prices but to international prices as well. I realize that it is difficult for any government to set priorities and then to adopt policies on a continuing basis to resolve the identified problem, in this case inflation. But without containing and reducing inflation the world will not be able to develop its economy in an appropriate manner.
Meanwhile, we in the developing countries are similarly confronted by agonizing problems. It is clear that we too should be extremely vigilant with regard to inflation although part of it is beyond our control insofar as it seeps into our economies through the higher price of imports and the weakening of the value of our revenues and reserves. But as far as it is in our power, our policies also should be geared toward combating inflation. I believe that the relative success of Asian countries in terms of growth, internal and external stability, alluded to in the Fund’s reports, is attributable to the deep concern of the relevant governments with regard to the development of the price level. They have adjusted their fiscal, monetary, and exchange rate policies at an earlier stage than perhaps elsewhere.
It seems to me that under the circumstances in which we are presently living with the prospect of lesser export revenues and uncertainty with regard to the availability of external resources, we should rely even more on domestic policies than in the past. Savings from abroad are necessary to amplify our limited resources, but in the face of doubts regarding the size of the flow of foreign resources it seems mandatory that we husband our own resources in the first place by creating, domestically, the best possible climate for developing them to the maximum possible. For that purpose adequate demand and supply policies as well as exchange rate policies consistent with underlying conditions have to be adopted. We remain, of course, still dependent on external factors because our products need markets, and markets are at present not free from protectionist measures. If we can run a sound and viable economy, even with limited resources which temporarily may not enable us to expand to the desirable limits but would not be plagued by inflation and balance of payments problems, I do believe that we would qualify better for external assistance and make resistance to it less tenable and justified.
Given the availability of resources, the Fund and the Bank are the institutions which do not make their assistance for balance of payments and development purposes dependent on the vicissitudes of political or narrow economic views. On the contrary they base their judgment on the need of the relevant countries, provided, of course, that domestic policies are adequate. . . .
As far as the Fund is concerned, in the days ahead it would have to exercise more firmly than before its surveillance, stressing the need for adequate policies to be followed by developed and developing countries alike. It has ample resources now to give financial assistance. In this respect I would like to plead that in determining the requirement of need, the Fund should not only look at the overall balance of payments of countries, of developing countries in particular, but also at the underlying conditions revealed in their current account and net reserve position. This relates not only to normal drawings but perhaps in particular, with the prospects of weaker export markets, to drawings under the compensatory financing facility.
It is clear that the Fund and the Bank cannot satisfy the need of developing countries to finance their rising current account deficits and their development requirements. Official development assistance should continue to flow adequately, and capital markets should remain open. President McNamara in his foreword to the World Development Report expressed it in a clear and compelling manner: “The success of developing countries will very largely depend on their domestic programs and policies. But their task can be greatly aided by improved access to markets in the industrialized nations and by more generous flows of concessional assistance from these countries.”
These are the observations which I would like to make in the light of the worsening situation of the world economy. There are reasons to be concerned, but we should not despair. With self-help on the side of the relevant countries and the recognition that we are living in an interdependent world in which assistance is beneficial for both donors and recipients, we should be able to ride out the gathering storm.
It remains for me to encourage both Mr. de Larosière and Mr. McNamara to continue exercising their imaginative leadership of our two institutions. I am sure that we all would wholeheartedly support them in their difficult task.
Finally, allow me to express my delegation’s deep appreciation to the Government and people of Yugoslavia for the magnificent arrangements and warm hospitality which we all enjoy in this great and fascinating country.
Statement by the Governor of the Fund for France—René Monory
Mr. Chairman, in beginning, my statement, I should like to say to Marshal Tito, to the Yugoslav people and the Yugoslav Government, my best thanks for this welcome and the perfect arrangements for our meeting, and to say that the holding of these Annual Meetings represents a symbol, which we have particularly appreciated.
Since our last Annual Meetings, the face of the world has changed. We parted in an optimistic mood, but meet again in dejection. We had believed that the courageous measures adopted—more or less rapidly—by most countries since 1974, to adjust to the new circumstances of the world economy, would make a new growth gradually perceptible. Today many of us are dubious, wondering whether the international community is capable of rising to a new challenge: by which I mean the deterioration in the world economic outlook of which Mr. de Larosière has just reminded us. The poorest countries in particular fear that they may be forced to abandon the hopes of development they were nurturing for their peoples. I understand their anguish.
To counter these threats of a slowdown in growth and the reappearance of disequilibria, there needs to be a reinforcement of international solidarity. This is accomplished by the introduction of economic policies adapted to the situation and mutually compatible, by the adoption of specific measures to benefit the most seriously affected countries, and by the stabilization of the international monetary system.
Our world has to be snatched from the vortex of monetary disorder and poverty. Shall we be clear-sighted enough to realize this?
Can we act with sufficient generosity and energy to take the measures that are needed?
The state of the world and of France
The results for 1978 and the early months of 1979 should reassure us as to our capacity for action. They demonstrate that a policy judiciously chosen, and implemented by concerted effort, can effectively redress economic trends.
In that period growth became more regular and more sustained, the rate of inflation slowed, trade was intensified, and the most acute of the balance of payments disequilibria were attenuated. These developments also allowed us to hope that the situation of the developing countries would continue to improve.
Today these prospects are again open to question, given the new rise in oil prices—60 per cent in dollars since the beginning of 1979, the U.S. recession, and the increase in interest rates. The present situation of the world economy inevitably reminds one of that which characterized the years 1974 and 1975. Experience of that former crisis shows that the new oil shock will be reflected in an acceleration of inflation, a slowdown in growth, and a deterioration in international payments equilibria. This is indeed the IMF staff’s forecast for 1979 and 1980.
In the face of these new dangers, we must define national economic policies adapted to the situation and in harmony with one another. This means that at times it will be necessary to rise above nationalistic egoisms. Naturally, however, all these efforts will be effective only if there are no further underlying disturbances that would again endanger the equilibrium we wish to attain.
These mutually compatible policies adapted to the situation should first and foremost emphasize a reduction of each country’s dependence on foreign sources of energy. I can assure you that, where France is concerned, this goal will be most resolutely pursued. Thanks to efforts that were made immediately following the 1973-74 crisis, it has been possible to reduce France’s oil imports by some 10 per cent in volume, as compared with 1973. This policy was reinforced in the first half of 1979, when at EEC meetings and the Tokyo Summit, France pledged itself to adhere to specific, ambitious objectives in reducing its dependence on foreign energy. I am more than ever convinced that the main priority in the importing countries’ economic policies must continue to be given to energy conservation and to prospecting for new sources and forms of energy. But, as my Irish colleague said in his statement on behalf of the EEC, particular care should be taken to ensure that every country, to the extent of its means, participates in this joint, long-term effort designed gradually to reduce our dependence on petroleum. In this regard I welcomed the parallel action taken by the Bank with a view to reducing the developing countries’ energy dependence.
I think the lesson we can draw from the 1973-74 crisis is that the countries which surmounted that crisis most successfully were the ones that adjusted most rapidly to the changes in the international environment. France is pursuing a policy whereby that adjustment can be made as quickly as possible. This policy is aimed essentially at three objectives.
The stability of the franc
The franc has exhibited remarkable stability since March 1978; the French Government intends to make every effort to ensure that this continues. For this purpose, it will pursue a rigorous domestic monetary policy, acting not on interest rates but by means of a quantitative restriction of credit granted. In 1980 as in 1979, the money supply will increase appreciably less rapidly than the national wealth. In addition, every effort will still be made to keep the French balance of current payments slightly in surplus. Although dearer energy imports represent an extra burden for France of 20 billion francs in 1979 and 35 billion francs in 1980, we expect to attain this objective both this year and next.
The pursuit of balanced growth
While it is essential to recoup rapidly the real outflow of funds suffered by our economy, it is nonetheless desirable to reduce as far as possible the depressive effect that this exerts. For this reason, the French budget for 1980 has been submitted with a deficit of 31 billion francs, an amount compatible with the observance of the monetary objectives I have just mentioned.
This balanced growth should therefore be based upon an expansion of productive investment. Certain indicators lead us to think that this advancement in investment could soon take place. It will be made possible by the net improvement in the financial situation of the French business sector, which has benefited in particular from a moderate increase in the wage bill and the adoption of strong incentives for the French public to channel their savings into the business sector.
The adaptation of economic structures
Adapting the structures of the economy to the new facts of world economic development is an imperative for all industrial countries. For this reason, France, after using all necessary means to effect a lasting restructuring of the sectors that are in difficulty, intends, through the introduction of innovations, to prepare its industry for the challenge of the future.
I now come to the consequences for the rest of the world of the new steep rise in petroleum product prices, which will clearly entail severe disequilibria.
This deterioration of the world economic situation poses particularly serious problems for the non-oil developing countries. These countries will have to finance an additional oil bill estimated at $12 billion on an annual basis, and their overall foreign payments deficit will rise from $32 billion in 1978 to $45 billion in 1979. Other projections bring this deficit to $55 billion in 1981, and the World Bank presents even more alarming figures for 1985.
However, overall figures do not say everything and may be misleading. Countries are not equal in the face of this new crisis.
The distribution of the overall deficit among the countries concerned will be very uneven. Many of them will in addition have to face large debt repayment obligations. Not all of them have been able to increase their reserves during the last three years. Not all of them will be able to continue borrowing large amounts from private sources of capital, if they have access to them at all. The recent rise in interest rates merely aggravates these difficulties, despite the fact that these markets will probably receive additional placements of funds from the oil exporting countries. The non-oil developing countries, which have often contracted large debts at variable rates, are now hard hit by the excessive rise in interest rates. Is there any hope, then, that they will be able to continue borrowing enough capital on international markets to increase their growth rates, or even merely to maintain them?
The development of these countries is at stake, that is to say the chances of hundreds of millions of human beings to achieve the breakaway from poverty for themselves or for their children. But we should recognize that it is also, at least in part, our levels of activity and our levels of employment as industrialized countries that are at stake here. We should therefore consider most carefully what is to be done in the dual area of money and development.
International monetary problems
I shall start with the monetary problems, for there can be no lasting growth unless money is under firm control and the exchange markets function in an orderly manner.
If the low growth rate of the most seriously affected developing countries is not to be placed in jeopardy once again, the international community must have a stable monetary system.
Significant progress has been made in this area since last year. The establishment of the European Monetary System was a significant step toward more orderly international monetary relations. Its first few months of operation have made two things clear: first, countries whose situations are similar and which make an effort to coordinate their economic policies can jointly pursue a realistic policy of stable but adjustable exchange rates; and second, necessary adjustments can be made free from the pressures of speculation.
We wanted to establish a European area of stability. But this monetary community does not look inward only—it is constantly open to dialogue and prepared to cooperate eagerly in any endeavor to establish a better world monetary order.
It is in this spirit of seeking means to facilitate a better functioning of the international monetary system that I have examined the report on the substitution account.
I believe we should spare no effort to ensure that this account, if it materializes, will make a significant contribution to the international monetary order, the functioning of the exchange markets, and the long-term development of international liquidity. The decisions taken yesterday are a step in that direction.
But allow me to dwell today on the monetary problems of the non-oil developing countries and the role the IMF can play in regard to those countries.
Results for the last two IMF financial years demonstrate that recourse to Fund credit has remained very moderate; indeed, for two years repurchases have actually exceeded drawings. Now, the possibilities of access to the Fund for countries in difficulty have been expanded: conditionality has been eased so as to take better account of the adjustment problems peculiar to developing countries. The rules and the ceilings of the compensatory financing facility have been modified and expanded. Lastly, the supplementary financing facility has entered into effect.
Even if we take account of the present unavailability of U.S. dollars from the General Resources Account, the IMF has sufficient resources today to double or triple the annual volume of its assistance. In the present situation, it therefore has the necessary resources to play a central role in financing developing countries’ balance of payments deficits. What it should do is mobilize all these resources, with all the energy and imagination we know that its leaders possess, so as to meet the expectations of the international community as fully as possible. With this in view, I suggest first of all that the Executive Directors give priority in the year ahead to examining measures that would make recourse to the Fund’s credit more extensive and more effective. It is a principle of the IMF to impose orthodox rules of economic reform on the countries receiving its assistance; but it should not simultaneously fix for them overcostly, and above all discouraging, terms of repayment. It has been suggested that the duration of the extended facility be lengthened, to make it yet more responsive to the present size of deficits. As you know, I am in favor of that. The supplementary financing facility has moreover become very costly, bearing in mind the rules that determine the interest rate. Means must be found to correct this unforeseen distortion.
Secondly, the IMF should seek means of playing a more active part in recycling capital toward the deficit countries. We know that the private markets, especially commercial banks, are going to have to exercise greater caution, in the light of the risks already assumed. By reason of their high security, the forms of assistance given by the Fund may provide a good point of departure for the intervention of other lenders and have an important locomotive effect. Let us therefore encourage these joint forms of intervention.
Finally, I shall allude to the question of the link between SDR allocation and official development assistance which is, in my view, important. I was sorry that last year the SDR allocation we decided upon could be distributed only in proportion to quotas, a formula which allows the developing countries a particularly small relative share. I request that this suggestion not be discarded out of hand, but be attentively studied at the earliest opportunity. But I now come to the problems of development properly speaking.
The problems of development
As I said a moment ago, the pursuit of development is our common concern; it must also be our common task.
Our efforts must extend in several directions. In the monetary sphere, we are striving to correct balance of payments disequilibria. But this is not all. For the poorest nations, official development assistance is the sine qua non of growth, while for the richest nations it is a fundamental duty of solidarity.
Indeed, the additional oil bill to be met by the non-oil developing countries in 1980 will represent nearly half of total official development aid from the OECD and OPEC countries.
In order that many countries, especially the poorest ones, may cope with this deteriorating situation without being forced to sacrifice their development, an increase in official development assistance is essential. But we must be realistic: under present circumstances, such aid should come chiefly from countries whose official assistance is now at an abnormally low level. I believe that international solidarity demands a special effort on the part of countries whose official aid falls farthest short of the international aid objective of 0.7 per cent of GNP. Furthermore, I am sure that the oil countries which will benefit from additional annual export earnings of US$75 billion will not shrink from their new responsibilities.
As far as France is directly concerned, we have signed international commitments in the matter of aid, and we shall keep them. . . .
But efforts of cooperation in favor of the neediest must be situated within a setting of global cooperation. Indeed, in the present context, ways of giving new impetus to the dialogue between rich and poor nations must be found.
This dialogue, in which all must participate henceforth, should be kept open and given new impetus. In my opinion, its strengthening requires first of all that we endeavor to preserve what has been accomplished, especially as regards the opening of frontiers, and also that the international environment should be reasonably stable, or rather that changes in it should be gradual and thus relatively foreseeable. Shocks such as those we have just felt with the rise in oil prices cannot make the formulation of long-term programs any easier.
We cannot finally be satisfied with the results of the last development decade, or claim that the difficult circumstances in which we are beginning the decade of the 1980s justify any relaxation of our efforts. On the contrary, our ambition to do better must remain as firm as ever.
These are the few thoughts that I wish to proffer today. They are reflections that spring from a desire to make the very best of existing institutions and procedures, although that may not suffice. It will probably be necessary to push further ahead along the same path by modifying the mechanisms of financing more profoundly so as to effect a better concentration and flow of resources toward the most disadvantaged.
You have undoubtedly noticed my disquiet. Despite that feeling, however, my view is not a pessimistic one, and I should like to regard these meetings as an occasion for hope. Each one of us here will, I trust, carry away a heightened perception of the problems the world must face, and therefore bring to their resolution a stronger will to action.
Let us assist one another in seeing more clearly, in not being blinded by our day-to-day concerns. It is less a question of overcoming our egoisms than of curing our short-sightedness: what might be taken for generosity is no more than clarity of vision, and the effort toward solidarity is in fact only a matter of worldly wisdom.
Statement by the Governor of the Bank for Spain—Jaime García Añoveros
These Annual Meetings are being held at a moment of grave difficulty and increasingly worrying prospects for the world economy. As the year draws to its end, growth rate estimates are being revised downward for all groups of countries, while inflationary tensions, which at the beginning of the summer were expected to ease slightly, have again tightened noticeably. In addition, the recent increases in oil prices have further compounded the problem of balance of payments disequilibria and have exacerbated their distribution among the groups of countries. In particular, as is the case with Spain, the low-income and medium-income countries are going to see their external position deteriorate considerably.
Growth rates in 1980 will continue to be very low, lower even than the unsatisfactory rates noted for 1977 and 1978. This can only aggravate the unemployment problem and the underutilization of production capacity. The economic, social, and political cost of this state of affairs is clear to all of us, both as regards the welfare of each country represented here and the likelihood of harmonious and fruitful international economic relations.
What we face is nothing short of a fundamental challenge to the welfare and progress of the peoples of the world. Many of them have not yet overcome the most adverse consequences of the crisis they have been forced to deal with since 1973-74; others are in a delicate period of convalescence; and only very few show any reasonable degree of recovery from the series of economic problems of recent years. This diversity of situation and opportunity makes it abundantly clear that the present grave circumstances must be faced in a spirit of greater international understanding. Without a broad-based and concerted effort for cooperation in the monetary, trade, and financial areas, and without an attitude of understanding and solidarity, it will be difficult to get the better of such a serious and complex set of problems. It is with this in mind that world dialogue must be extended to cover such fields as energy and to include the need for sectoral adjustments which the great majority of countries find themselves forced to make and which, for lack of adequate coordination, lead to increasingly rigid protectionist attitudes.
The excellent reports put out by the International Monetary Fund and the World Bank have examined the problems I refer to with realism and sobriety. The international community expects and needs much from institutions like the Fund and the Bank in moments such as these. We cannot stop at a mere identification of our problems, but must confront their challenge with all our resources and potential. It is in this regard that I wish to affirm our satisfaction with the progress made recently in liberalizing the compensatory financing facility, with the modifications introduced in the guidelines for conditionality attached to the use of Fund resources, and with the recommendation made by the Development and Interim Committees for lengthening the repurchase period associated with the Fund’s extended facility from eight to ten years. But there are new paths that the Executive Directors of the Fund should take promptly—namely the introduction of a subsidy for utilization of the supplementary financing facility by developing countries and the liberalization of this facility along the lines proposed recently by the Managing Director up to 300 per cent of quota.
The Fund possesses abundant liquidity, which will be increased by that deriving from the increase in quotas now at the ratification stage. On the other hand, the demands of the present world economic situation require that these funds be put to rapid use in response to the needs of member countries. In this regard, it is Spain’s view that the Executive Directors should give prime importance to examining the possibility of reducing the degree of conditionality attached to the second credit tranche.
Spain is also convinced of the usefulness of proceeding with the attempt to set up a voluntary substitution account, which would assist in strengthening the international monetary system, and with an associated upgrading of the SDR; we wish to be certain that the rate of return, liquidity, and transferability will make it attractive, although, by the same token, we would not regard it as advantageous if it had an adverse effect on international financial markets. . . .
… We are equally gratified at the Development Committee’s recommendation for a substantial increase in program lending. . . .
Spain’s efforts to adjust its economy to the demands of the international economic situation have also been considerable, especially since 1977, when its full achievement of a democratic system enabled it to institute a program of economic reform. The results of that effort have proved fairly satisfactory in the external sector, as is indicated in the IMF Annual Report, since our deficits of over $4 billion in 1976 and over $2.5 billion in 1977 were converted into a surplus of $1.5 billion in 1978. Despite the new increases in oil prices, which are having a profound effect on economies like that of Spain, poor as it is in energy resources, we will still show a modest current account surplus in 1979 and are confident that our deficit next year will be an eminently manageable one. It must be emphasized that Spain has achieved this radical ordering of its external accounts without recourse to competitive devaluations or increases in the level of its trade protection. On the contrary, the country, in the last year and a half, has reduced its trade barriers considerably, introducing notable measures for liberalization in the spheres of services and capital movements, and accepting an appreciable revaluation of the peseta on the exchange markets.
Important results were also achieved in the sphere of prices. The inflation rate, which had risen to 26 per cent in 1977, fell to 16.5 per cent in 1978 and will show a further reduction for the current year, despite the new inflationary pressures affecting the world economy. In fact, Spain’s inflation differential with respect to the average inflation rate for the industrial countries has dropped substantially this year.
My Government has decided to pursue its rationalization and reform of the national economy, and in this regard has just won parliamentary approval for a program which allows increased liberalization and streamlining of the economy and restructuring of the industrial sectors at present in crisis, and gives a clear mandate to deal with the tensions associated with unemployment, which is our gravest problem at the present time and is the subject of special attention in the form of an additional budgetary effort. We are confident that our program will enable the Spanish economy in the coming year to grow at a rate slightly higher than the average projected for the industrial countries. We hope to achieve these objectives despite an adverse international environment and the fact that the Government proposes to avoid any artificial monetary stimulus and to limit the expansion of current public expenditures.
All this will involve significant national effort and sacrifice which should receive the support of more dynamic external demand than that foreseeable today. It is to be hoped it will not be hindered by protectionist movements on the part of the industrial countries. In the present-day world, the interdependence of national economies is so marked that it is futile to claim that problems can be dealt with from a strictly national viewpoint. Spain places such importance on the value of these meetings in the hope that they will lead to that increased will to cooperate which the grave problems now affecting the world economy demand from all of us.
I would not wish to close this address without expressing our appreciation of President Tito’s appearance here today and our thanks for the welcome extended to us by the Government and people of Yugoslavia, which has made possible the agreeable and efficient conduct of these meetings.
Statement by the Governor of the Bank for Israel—Arnon Gafny
It is, indeed, a pleasure for the Israel delegation to come to Yugoslavia. Israel and Yugoslavia have long cooperated as members of the same constituency, both in the Bank and in the Fund. We would like to thank the Government and the people of Yugoslavia for their hospitality.
The world stands today on the threshold of a new decade, to be entered with both apprehension and hope. The sense of apprehension is readily understandable, considering the events of the 1970s. The decade which is drawing to a close has seen serious world economic disequilibrium, perpetrated by energy crises, severe inflation, and a slackening pace of development.
The sense of hope is also understandable. The Bank and the Fund have, in recent years, devised several innovative approaches aimed at alleviating, even if only partially, the grave economic problems confronting many member countries. Their efforts to foster recycling, the creation of the oil facility, the supplementary financing facility, the extended Fund facility, the Third Window, and the liberalized access to the compensatory financing facility have provided timely economic support for the member countries in need.
Nevertheless, for all the justifiable pride to be taken in these achievements, I believe that this distinguished forum, together with the Bank and the Fund, fully recognize that for many members the economic prognosis for the coming years is bleak.
At the outset of this decade, the late David Horowitz, first Governor of the Bank of Israel and Israel’s first Governor of the World Bank and Fund said, in his address to the 1970 Annual Meetings:
Civilization is today complacently sitting on a time bomb—a confrontation between the two thirds of humanity in the underdeveloped nations and the third in the developed nations. This confrontation is inevitable because of the disparity in incomes, the population explosion, the investment gap, and the debt explosion—all of which, by setting into motion a self-perpetuating, self-propelling set of forces, is increasing differentials in standards of life and cultural levels and engendering attitudes fraught with grave dangers for the future of humanity.
It is a sobering thought that today, almost a decade later, these words still constitute a valid description of the world in which we live.
The economic outlook for the years ahead is, indeed, a grim one. This is especially so for the middle-income developing countries who have been particularly hit by the energy crisis. These countries are unable to generate domestic savings on a scale sufficient to maintain adequate economic growth. Yet, despite their growing needs, they find themselves ineligible for many forms of development assistance. Their payments deficits have soared, while the scope of their external debt has reached most serious proportions. All possible measures should be taken to prevent their economic situation from deteriorating still further.
The second half of the 1970s saw a partial readjustment in some non-oil economies, but this proved to be only a temporary respite. Today, once more, following the latest increases in energy costs, numerous developing countries are confronted with severely aggravated balance of payments problems. Many are in no position to cope with these problems without external assistance.
We believe, therefore, that the Fund should give serious consideration to establishing a special facility aimed at aiding member countries to cope with energy cost-induced balance of payments difficulties. Considering their source, these difficulties will, in all likelihood, be of a protracted nature, so that, to facilitate adjustment, such assistance should be of medium term.
We also believe that the appeal to create such a facility is not incompatible with the postulate to utilize fully the existing facilities, since no tool exists at present in the Fund that could provide large and low conditionality balance of payments assistance that might soon become a necessity. . . .
Mr. Chairman and fellow Governors, I would like to take this opportunity to recall that just one year ago, as you may remember, the Annual Meetings coincided with the first major steps taken toward peace in the Middle East. Since then, Egypt and Israel have signed a peace treaty and we are moving along the road to its full implementation. It is our hope, shared, I am sure, by many here today, that peace will ultimately come to the entire region, bringing with it prosperity and security for all.
Statement by the Governor of the Bank for Afghanistan—Abdul Karim Meesaq
It is a renewed privilege for me to represent the Government of the Democratic Republic of Afghanistan at this distinguished assembly.
At the outset, my delegation and I would like to take this opportunity to convey our sincere appreciation to the Government of the Socialist Federal Republic of Yugoslavia for the very warm and cordial reception and the generous hospitality extended to us, and for the excellent arrangements made for the conduct of these meetings. Also, we would like to express our gratitude to Mr. McNamara, President of the World Bank and Mr. de Larosière, Managing Director of the International Monetary Fund, the Executive Directors, and the staff of these organizations for their untiring efforts in promoting and expanding the activities of their respective organizations for the benefit of our member countries.
The year that has concluded was marked by stresses and strains, especially for the poorer countries. Contrary to the expectations entertained earlier, there was no significant improvement in the stagnant world economic conditions. Economies of developed countries, by and large, were characterized by low output and growth rates, with high levels of unemployment and underutilization of resources. These coexist with high inflation rates. Despite several measures adopted, the international adjustment process has not been satisfactory and large payments imbalances have persisted. Wide fluctuations in exchange rates and high inflation rates and other disruptive forces including protectionist policies adopted by developed countries have added to the problems of the developing countries.
The rate of growth in the volume of world trade which averaged about 9 per cent a year during the years 1965 to 1973 decelerated to just over 4 per cent a year between 1973 and 1977. During the same periods, the growth of exports of developing countries declined from 6.4 per cent to 3.6 per cent a year. Recent trends have also not been encouraging. Export price trends have on balance been adverse for the developing countries. In 1978, it would seem that the deterioration in the terms of trade suffered by these countries more than offset the growth in the volume of their exports. There does not appear to be any hope for improvement in the situation in the immediate future. As the Annual Report of the Fund indicates, the current account deficit among non-oil exporting developing countries raised their combined deficit from $21 billion in 1977 to $31 billion in 1978, and is projected to rise markedly further to $43 billion in 1979. As we can see, a deficit of this magnitude will significantly hamper the economic development of these countries. To compensate for this unfavorable situation, the flow of resources to these countries must be accelerated.
While it is true that success in getting over manifold problems facing the developing countries will, to a large extent, depend on their own domestic policies and programs, their efforts can be greatly assisted by policies of the more fortunate developed countries. In this connection, I would like to commend and join in the earnest plea made by the distinguished President of the World Bank, Mr. McNamara (in his foreword to the World Development Report, 1979). The task of the developing countries, to quote Mr. McNamara, “can be greatly aided by improved access to markets in the industrialized nations and by more generous flows of concessional assistance from these countries. The uncertainties in the world economy could be much reduced, and the dynamism of world production and trade restored, if countries were to act in recognition of their growing economic interdependence.”
The problems connected with alleviation of abject poverty in the developing countries are deep-rooted and many-sided. It will take many years of concerted and determined effort to make adequate progress in the eradication of the basic problem. The different facets of the problem and the measures which are called for in the solution have been discussed in several international forums by both the developed and developing countries. What is urgently required on the part of the rich and developed countries are positive measures that will promote and augment the transfer of resources to the poorer countries. At the same time, the developed countries should desist from adopting protectionist and other restrictive measures, however attractive these might appear in the short term, for the solution of their problems, but which have adverse implications for the developing countries. Long-term and lasting solutions to the problems of developed countries are beneficial to the poorer countries also, since growth of their respective economies is interdependent. It is by pursuit of such policies that poorer countries will be assisted in their primary task, namely, the eradication of abject poverty and human misery among the large segment of humanity.
It is appalling that today almost one billion people on our planet live in absolute poverty while many countries are wasting precious resources, and the gap between rich and poor countries is ever widening. Even with the unrealistic assumption, as stated in the World Bank Annual Report, “… if the developing countries were to manage to double their per capita growth rate, while the industrialized world but maintained its, it would take almost a century to close the absolute income gap between them. . . .” This situation is certainly unacceptable, and may be damaging to world stability and harmony.
For a determined and unrelenting pursuit of this task, external financing requirements of the developing countries, as is to be expected, are sizable and, what is equally notable, are expected to grow substantially. According to the World Development Report, 1979, published by the World Bank, external capital requirements of developing countries would, for sustaining a growth rate of around 5 per cent a year, increase to $283 billion in 1985 as against $64 billion in 1976. It is in this context that we view the recent performance of the richer countries in regard to channeling official development assistance to the poorer countries as woefully inadequate and disheartening. As I had occasion to point out at the last Annual Meetings, the actual disbursement of assistance by the richer countries fell significantly short of the target of 1 per cent of gross national product of developed countries set for the Development Decade (1960-70). In fact, between 1975 and 1977, the flow of such assistance, in real terms, has declined. As a proportion of gross domestic product, official assistance from these countries declined from 0.35 per cent in 1975 to 0.31 per cent in 1977. Prospects for the immediate years ahead are not encouraging.
Another distressing aspect is the lack of adequate financing possibilities. Many developing countries, especially my own, have been unable to utilize available external assistance to the maximum extent possible due to lack of adequate counterpart funds. As the World Bank indicates in its Annual Report, the average financing per project by the World Bank is about 34 per cent of the total cost. Although this percentage is higher for Afghanistan, we are still unable to utilize the project loans within a reasonable and desirable time due to lack of local money. Therefore, it is our sincere hope that international organizations and aid-giving countries would take this serious problem into consideration and increase the percentage of project financing.
As a representative of the Government of the Democratic Republic of Afghanistan, last year, while I participated in the joint Annual Meetings, I stated that the main objectives of our Government were to campaign on behalf of the majority laboring classes against the minority exploiting classes so as to enable them, that is, the exploited classes, to decide their own destiny by their own will. I further stated that, among our Government’s major aims, were the creation of an independent national economy, acceleration of the growth rate, improvement and modernization of agriculture and animal husbandry, industrialization of the country, and improving the living standards of the various classes of Afghan nationals.
It would be, perhaps, worthwhile if I here shed some further light on our Government’s significant activities, which were carried out during the last 16 months, after the advent of the Great Sawr Revolution. As you are well aware, Afghanistan is an agricultural country, with the majority of its population comprised of peasants and farmers whose livelihood depends on agricultural products.
Considering the country’s position, the Government decided to provide before everything else better working conditions and better living standards, for the majority of the people. In pursuance of this objective, the Government enacted Decree No. 6 which alleviated the heavy burden of mortgage, usury and unlawful interest, levied by feudals, from the shoulders of the 11 million farmers who suffered from abject poverty and consequently, their obligations for thousands of millions of Afghanis were removed by the Government and spectacular social changes ushered into their lives.
Shortly thereafter, Decree No. 7 was put into force and all the existing social injustice, inequality, and discrimination between men and women were eradicated, and instead their equality in social and civil life was proclaimed. Women are now able to work according to their choice any-where, and they can partake in any social affair, freely.
Decree No. 8 greatly helped the implementation of land reform. By enforcement of that decree, all the landless and those farmers with small holdings became owners of adequate land gratis. Lands from major landlords and landowners, who were unable to cultivate their lands, were given to eligible farmers and nomads free of charge. Implementation of land reform was completed successfully six months earlier than projected through the active and enthusiastic participation by the various agricultural organizations of the country, farmers-assistance funds, party associations and integrated and scientific planning. Now in Afghanistan, no one owns more than 15 acres of first-class land.
According to the provisional statistics of the Ministry of Agriculture and Land Reform, 3,280,000 gereebs in 28 provinces have been planned for distribution among 285,000 families and 200,000 gereebs (100,000 acres) for government farms, by the end of the land reform program. Actually, 3,328,402 gereebs were distributed to 295,988 families and 243,317 gereebs to government farms, and municipalities, and 125,000 gereebs to other institutions. Moreover, 2,049 nomad families, according to the settlement and land reform program in the various provinces of the country, were settled, and 20,800 gereebs of land were distributed to them. It is worthwhile to mention here that, until the time these nomad settlers are able to earn their livelihood, they are completely financed and helped by the Government.
Since most of the landless and small-landowning farmers and nomads are extremely poor, free distribution of land alone would not have been effective. Therefore, they are being assisted with seeds, chemical fertilizers, agricultural equipment and machines and, particularly, with money for their immediate requirements. Decree No. 8, dealing with this matter, instructed institutions such as the Afghan Seeds Company, the Afghan Fertilizer Company, the Agriculture Machinery Company, and the Agricultural Development Bank to provide the requirements of these farmers through their branches by giving credit and other assistance. These institutions, in their turn, have already taken necessary steps.
In order to channel this aid to the farmers and new landowners, promptly and effectively, their participation in the agricultural cooperatives has been fully organized, and good results were obtained during the very short period. The number of these cooperatives increased to 700 by March 21, 1979. By the end of the current year they will have increased to 1,500 and by the end of the Five-Year Plan, 4,500 cooperatives will come into being.
Considering the fact that developing countries need to effectively plan, manage, and implement their economic and social activities and to remove their backwardness, these aims will not be achieved successfully without having adequate statistics. Therefore, our Democratic Government, in addition to other patriotic and beneficial activities, launched, for the first time in our history, a complete census project which was very successfully completed in 20 days. The result of this census and the figures obtained from it are of superior quality and according to international standards. These statistics will be used by the Government in its future planning for development of the economic and social life of the nation.
Another significant step taken by the Government is the formulation of the first Five-Year Economic and Social Plan which was completed by foreign and local experts. After the acceptance by the Revolutionary Council of Ministers, the Plan was put into operation on March 21, 1979.
Recently, the Government’s ordinary and development budget for the year 1358 (1979/80), that is, the first year of the Five-Year Plan, was approved for Af 35.72 billion. This shows an increase of Af 2.04 billion or 6.04 per cent in comparison with the year 1357. The increase does not seem to be large, but this is because government revenues, during the one-year period after the Revolution, did not increase, and further, increased expenditures were made for the welfare of the laboring classes by the Democratic Government. In comparing the existing budget with the previous so-called budgets, it should be noted that only a small part of the previous budgets was spent; for example, although the year 1355 was not an exceptional year, the budget was estimated at Af 14.0 billion, but about Af 8.0 billion or 66 per cent was not actually spent. Likewise, in 1356, the second budget of the then existing Seven-Year Plan was announced at Af 20.0 billion but in actual fact more than Af 9.0 billion, or 45 per cent, could not be spent. However, regardless of everything else, the current year’s budget estimates are based on the country’s actual revenues from foreign and domestic sources, plus essential and productive projects, according to very accurate and scientific assessments.
In the Democratic Government’s Five-Year Plan, government investments would be Af 97 billion to Af 106 billion, out of which Af 40 billion would be financed from domestic sources and Af 60 billion from credits and assistance from friendly countries. The Plan will embrace agriculture, irrigation, transport, industry, energy research, geological surveys, and social services.
The essential objectives in the agriculture sector under the Five-Year Development Plan would be: first, the increase of agricultural production; second, the effective improvements of agricultural and pastoral activities in order to ensure food and raw material sufficiency and growth of export items from agricultural and animal resources and, generally, production of stocks to the extent of needs; third, the application of extensive agricultural services, and herbal research, including the search for improved species of plants and herbs; and finally, the introduction of better agronomical methods, a campaign against plant diseases and the eradication of agricultural pests and insects, under extensive schemes.
An irrigation system is an essential infrastructural basis for our agriculture and animal husbandry sectors. For better and modern management of the irrigation sector in general, supervision and protection of dams and the management of swamp water channels and the irrigation network would be carried out. For agricultural development during the Five-Year Plan, Af 26 billion will be invested, out of which Af 16 billion will be in the irrigation sector. However, for animal husbandry, which plays a magnificent role in our national economy, the Five-Year Plan includes an extensive plan for protection and insemination, and the establishment of pastures and subsidiary animal clinics.
In the forestry sector, special attention would be paid, particularly, to protection and improvement of forests and pastures. For the purpose of development of these projects, Af 300 million has been projected.
Industrial production in the country during the period 1979/80 to 1982/83 will increase by 160 to 170 per cent. Electricity output would increase by 150 to 160 per cent. A petroleum refinery factory will start production with a capacity of 100,000 tons.
A factory will be erected for processing up to 114,000 tons of copper and up to 110,000 tons of pure copper and its alloys from the Ainak copper mines. Also, another factory to exploit up to 23,000 tons of barite and up to 10,000 tons of powder barite will be established. Exploitation of natural gas, compared with the year 1357, will increase by 20 to 30 per cent, and exploitation of coal will be increased by twofold to sixfold.
Illiteracy from 9 to 51 years of age will be completely eradicated. Radio broadcasting capacity will be doubled and that for television will be boosted fivefold.
Sugar production, compared with the year 1357, will increase by 290 per cent. The output of wheat flour will increase by 200 per cent, and of processed meat to 10,000 tons, reflecting an increase of 240 per cent.
Foreign exchange revenues are apparently continuing an upward trend, but the rate of increase compared to past years has been slower. Recently, foreign exchange revenues from free trade sources decreased considerably. Factors which were causing the foreign exchange reserves to rise thus far may not continue to operate in the future. Meanwhile, by the implementation of the Five-Year Plan, the country’s foreign exchange requirements for increasing import needs will grow. Repayment of loan installments and interest due on these loans will result in more expenditure from foreign exchange reserves.
Considering these factors, our foreign exchange reserves will not be adequate at all. Also, in the near future, that is, before the receipt of the increased revenues following the implementation of the Five-Year Plan, we will suffer from a foreign exchange shortage. So, we are, from now on, expecting to benefit from IMF assistance whenever the need arises.
Recently, Da Afghanistan Bank, as the central bank of our country, was able to simplify the multiple exchange rates which had been in existence for a long time, by successfully unifying the exchange rate system. Da Afghanistan Bank, in the light of the recent changes in the international markets in foreign exchange and in the domestic free exchange markets, was able to fix this unitary rate which is now applicable to the exchange dealings in the banking system.
In the solution of our present banking problems and in bringing about improvement in banking services in the country and in improving the present standards of our banking staff, we have greatly benefited from the technical assistance given by the World Bank and IMF and other international institutions and friendly countries, and I hereby express my gratitude to all of them.
We are fully confident that, at this particular time when our country is on the verge of great, progressive and spectacular changes in various economic spheres of our life, international organizations and friendly nations should not leave us alone in our efforts to achieve our goals through the launching and implementation of our extensive programs and projects, and should not hesitate to give us their valuable assistance to a much greater extent than they did before.
October 2, 1979.