Chapter

Discussion of Fund Policy at Third Joint Session 1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1979
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Statement by the Governor of the Fund for South Africa—Owen P. F. Horwood

I wish to begin by congratulating Mr. McNamara, Mr. de Larosière, and the Executive Directors of the World Bank Group and the Fund on their outstanding achievements during the past year and on their excellent Annual Reports. . . .

In maintaining a large current payments surplus during the past two years, my own country has been able to move against the general trend for both developing and so-called more developed primary producing countries and has, in fact, reduced its external public debt through large loan repayments. Moreover, as a percentage of exports of goods and services, the gross interest payments on South Africa’s total foreign debt have declined from 6.4 per cent in 1976 to 4.7 per cent in 1978, and this process has continued further in 1979.

In the field of energy, South Africa is fortunate in being dependent upon liquid fuel for only 22 per cent of its energy consumption, by comparison with 44 per cent for the world as a whole. Considerable progress has also been made during the past year with the further expansion of South Africa’s successful oil-from-coal project, an undertaking which will have involved capital outlays of nearly US$8 billion by the time it is completed. . . .

Turning to the Fund’s Annual Report and its incisive analysis of the world economic situation and outlook, it is clear that most member countries remain confronted by the “economist’s nightmare”: inflation, unemployment and payments imbalances all at one and the same time. The precise “mixture of gains and disappointments,” as it is called in this year’s Fund Report, has changed in important respects during the past year. But what we have gained on the swings, we have lost on the roundabouts, and the overall economic situation remains unsatisfactory.

As we meet in Belgrade this year to search for answers to seemingly intractable problems, it is encouraging to note that there have been certain favorable developments during the past year. These include the improvements in the pattern of current account balances for the major industrial countries in 1979. Unfortunately, these gains have been offset by rising inflation, continued high unemployment, and a sharp resurgence of the combined current account deficit of the non-oil developing countries—problems which have been greatly aggravated by the recent oil price increases.

What makes the picture more disconcerting is that on several fronts the world economy now appears to be moving in the wrong direction. Inflation rates are accelerating virtually everywhere, most major industrial countries appear set to enter a new phase of recession and higher unemployment, and the expected increase during the next year of about US$75 billion in the oil import bill of countries other than the major oil exporters seems certain to cause serious payments problems for many oil importing countries.

Part of the explanation for the world’s present economic predicament clearly lies in the substantial increases in the oil price during the 1970s. But that is not the whole story. Long before these increases occurred, the problems of inflation, unemployment, and payments imbalances had already reared their ugly heads and had led to the collapse of the Bretton Woods system and the subsequent inability of the Committee of Twenty to reach agreement on international monetary reform.

Increasingly the evidence suggests that the underlying cause of these unfavorable developments was a lack of national and international financial discipline. Our present problems can to a large extent be traced back to the demand inflation of earlier years, which was aided and abetted by the excessive increase in world dollar holdings. It was on this expanded liquidity base that an inordinate amount of domestic bank credit came to be created in many countries, leading, in turn, to an excessive increase in the money supply. Cost-push influences, of course, also came to play a major part in many countries and at present the cost-raising effects of the higher fuel prices constitute a crucial part of the inflationary process. But in searching for answers to our present difficulties, we should keep in mind that monetary permissiveness was one of the root causes of the unfortunate economic events of the past decade.

Against this background, the Fund Report is right in stating that “the present array of problems … precludes simple prescriptions offering promise of early success. . . .” One can also agree with the Report’s broad policy recommendations, particularly the call for “determined and skillful use of the traditional monetary and fiscal instruments. . . .” The experience of my own country during the past three years has shown once again that orthodox fiscal and monetary policies have a habit of producing extremely effective results, if only they are applied.

Nevertheless, it would be naive to believe that the Fund’s good advice is about to be followed to an extent which would contribute materially to the solution of the world’s economic problems. Nor can we expect too much from the present series of meetings here in Belgrade. In this regard, I fear that we have to contend with a credibility gap. The international financial markets and the general public are no longer influenced to any significant extent by well-drafted communiqués issued by Committees of Twenty or Groups of Ten or even summit meetings. Rather, they are impressed by the actual implementation of appropriate policies and by results.

If further proof of this were needed, it has been provided by the substantial increase in the price of gold since the last Fund-Bank meeting. This increase must be viewed as a symptom of the present deep-seated economic problems in the world and of the general lack of faith in the ability of monetary authorities to deal with these problems effectively. Once again people have reacted to inflation and currency turmoil by turning to gold as a proven store of value. Gold has accordingly outperformed not only the weaker but also the strongest currencies. Indeed, the real value of gold in terms of goods is at present more than four times that of fifty years ago.

Gold remains an important subject on the international monetary agenda. Often it is printed in invisible ink, so as to avoid giving embarrassment to those who choose to deny its relevance. But, in effect, it is always there. And judging by the attention devoted to it in financial journals and at press conferences, it is becoming more, and not less, important. Certainly, in view of what has happened in the gold markets during the past year, it would be irresponsible of us as Fund and Bank Governors to ignore or brush over the subject of gold in our present deliberations. The gold issue has not been finally resolved and needs to be faced squarely.

It is generally recognized today that both the role of gold in the monetary system and the nature of the gold controversy have changed. The kind of gold debate which was fashionable a decade ago is dead. But gold itself is alive and well, and clearly performing important monetary functions.

The U.S. dollar is still the world’s most important reserve currency. But the depreciation of the dollar in terms of the stronger currencies during the past decade has set in motion a movement toward a multi-component international reserve system, in which gold, together with currencies like the deutsche mark, the Swiss franc, the Japanese yen, and the new European Currency Unit are playing an increasingly important role, both as reserve assets and as means of payment. It is this increasing realization that a single inconvertible dollar standard is not going to prevail, which has presumably led to the proposal to establish a special SDR “substitution account” in the Fund, which would purportedly accommodate the desire of some countries to change the composition of their reserves without potentially disturbing transactions in foreign exchange markets. Whatever the merits of such a substitution account, it clearly cannot make any real contribution at this stage to the solution of the world’s economic difficulties. And I would suggest that the thinking behind it could with benefit be transposed to an open recognition of the important monetary role still being performed by gold.

The inescapable fact is that the attempts to demonetize gold have collapsed. The alliance formed between the proponents of the dollar standard and the SDR to attain this objective has not succeeded in improving either the working of the international monetary system or the world economic situation—it has succeeded only in creating conditions favorable to a strong upward trend in the price of gold.

In these circumstances gold has in recent years steadily reasserted itself as a factor in international monetary affairs:

  • (1) It has been used as collateral for large balance of payments loans to Italy and Portugal.

  • (2) It has been used in gold “swaps” by South Africa.

  • (3) It has been “realized as reserves” by the United States Treasury, in the form of gold auctions, to help finance a current account deficit and to support the dollar.

  • (4) It has been revalued to market-related levels by many important central banks, including those of France, the Federal Republic of Germany, the United Kingdom, the Netherlands, and Austria.

  • (5) It now constitutes more than 50 per cent of world official reserves. Realistically, the gold component of total official reserve assets is valued in this year’s Fund Report (Table 14) not only at SDR 35 per fine ounce as before, but also at the London market price.

  • (6) It has been given a central monetary role in the pool of monetary reserves backing up the European Monetary System.

Taken together, these facts show that, although gold is no longer the legal numeraire of the system, its quantitative and qualitative importance as a primary reserve asset has in recent years been greatly enhanced. In the face of these developments, there is little to gain, and much to lose, by persisting stubbornly with attempts to demonetize gold, whether such attempts are inspired by national self-interest or international idealism, or should I say mysticism!

The markets have passed a clear verdict as to the relative status of the main reserve assets. The realistic and wise course now would be to accept this verdict and turn it to advantage. I would therefore submit that, as part of a broader program of dealing with the present and expected economic difficulties worldwide, we should now reconsider ways and means, within the Fund’s Articles of Agreement, of making the best possible use of gold as an official reserve asset and an international means of payment. The role given to gold in the new European Monetary System was a significant step in the right direction. We should now move further along this road.

I need hardly point out that this is not a plea on behalf of gold producers—they are doing extremely well under the present arrangements. What is at stake here is the extent to which we could improve the international economic situation by new internationally agreed steps on the gold front.

My contention is that by clarifying and normalizing the monetary role performed by gold, we can improve confidence in international monetary arrangements and contribute to the success of our efforts on other fronts to counteract inflation, reduce unemployment, and improve living standards all over the world.

Statement by the Governor of the Fund and the Bank for Mexico—David Ibarra Muñoz

On behalf of the Government of Mexico, I wish to express our most sincere gratitude to the people and Government of Yugoslavia for their friendly and cordial hospitality, and in particular to thank President Tito for words which rekindle feelings of human solidarity in a world fraught with inequities and discontent.

The Group of 77, at its Arusha meeting last February, underscored the imperative need for systematic efforts toward a reform of the international monetary system that will have as one of its main concerns the needs of the developing countries.

That decision is explained by the recognition that there has been a new reorganization of the world economy since the beginning of the 1970s, but that up till now the governments of the developing world have had little influence on its orientation and shape.

The Group of 24 took up the challenge in its capacity as the body representing the industrializing countries in the financial and monetary areas. After several months of vigorous work it completed the “Outline for a Program of Action on International Monetary Reform.” 1

I have the great honor of presenting this document to you. It is the result of a joint and highly constructive exchange of ideas and viewpoints. The document reflects the consensus and expresses the solidarity of the members of the Group of 24, and the unanimous support of the Group of 77, regarding circumstances and problems that affect all of our peoples. Thus, the representatives of the industrial centers should respond—and respond constructively—to this explicit manifestation of the unity of the developing countries. This was the sense of the resolution on transmittal of the document to the Interim and Development Committees for consideration, as well as to other international forums.

The Program of Action is pertinent and valid not because of the originality of its individual elements, but rather because it brings together for the first time, in a consistent and structured way, the principles, objectives, and actions that will have to be embodied in the reform of the international monetary and financial system.

The Outline for a Program of Action is an overall statement which integrates and harmonizes various monetary and financial measures with those relating to trade and sectoral development, without losing sight of the diversity of the situations of the developing countries. It naturally goes more deeply into financial and monetary matters, emphasizing that short-term balance of payments credit cannot be separated from credit to meet development needs. The two are strictly complementary, and the absence of one nullifies the effectiveness of the other.

The document does not attempt to set goals to be met in precise time periods, for it realistically recognizes that the arrangements will have to be made with a series of adaptations in which the most disparate and powerful interests must be reconciled. But it does aim to provide guidelines that will serve all of the developing nations in integrating and unifying their proposals in the various international forums, and in meeting their responsibilities to their people and to history.

The first part of the document “Outline for a Program of Action on International Monetary Reform” presents an evaluation of the fulfillment of the initial objectives of the process of monetary reform.

As the document clearly states, the long-standing hope that decisions of worldwide impact would be decisions of all, and would reflect common interests, has been realized in only a very modest degree.

For a variety of reasons the international community has paid little heed to the needs of the developing world, whether in regard to monetary matters, trade, or the transfer of real resources.

Moreover, as the second part points out, the outlook is for a low rate of growth, unemployment, and instability in the world economy. All of those factors will have an adverse impact on the less developed countries and make it more urgent to achieve their effective participation in the creation of the new international economic order.

The mention of only one problem will provide a vivid illustration. Whereas world trade in this decade has grown only half as fast as in the previous decade, protectionism against the developing countries has been intensified, world inflation has worsened, and in many cases allocations of official aid have declined. Thus, it is not surprising that by 1980 the balance of payments deficit of the non-oil developing countries will have doubled in two years, exceeding US$50 billion. They are now faced with the dilemma of whether to incur a burdensome and excessive debt or to endure a standstill in the development of peoples who are still at very low levels of income.

For this reason, the international community should undertake structural adjustments that will bring about the expansion of productive potential in both the developing and the industrialized countries. These requirements, while urgent, are nonetheless difficult to meet as long as disunity and misunderstandings persist.

The third part of the document sets forth the principles of an international monetary reform that will be acceptable to the developing countries and will not entail unmanageable costs for the group of advanced economies. It is hoped that its contents will afford a framework for the formulation of specific actions aimed at the improvement of the international monetary system, without prejudice to complementary decisions that might be taken in other forums dealing specifically with matters of trade or sectoral development.

I repeat that many of the basic proposals are not new. Indeed, they reaffirm the viewpoints that the great majority of the developing countries have been reiterating for years in various international forums. Now the hope is that we can achieve, without imposing or being forced to accept, a consensus that will guarantee the solidarity of all in the process of reform of the world monetary system and can find ways of solving problems that, far from being overcome, have been getting worse.

That is why the document insists on the establishment of and full respect for several basic principles: the implementation of an effective, symmetrical and equitable process of adjustment; support for a system that, while regulating and producing adequate international liquidity, will serve as a mechanism for its equitable distribution in accordance with the special needs of the developing economies; affirmation of new and old commitments for the net transfer of resources to the developing countries on a large scale; and assurance for all governments of genuine participation in the adoption of schemes that transform national economies.

Let us take, for example, the application of rules aimed at achieving a convergence of adjustment processes which entail a minimal sacrifice of the national development objectives of the countries concerned. Such a plan would lead to the prescription of obligations applying, without any distinction whatever, to debtor and creditor countries; alternatively, to examining international liquidity both as a worldwide aggregate and from the point of view of its adequacy and its distribution among groups of countries or geographic areas. Otherwise, the reduction of international liquidity surpluses, a goal which no one disputes, could become a new cause for constraint in the already weakened economic relationships between developing countries and industrial economies.

It seems to us, then, something like progress to recognize the need for a “substitution account,” because of what this might signify for the stability of the international monetary system, by granting explicit financing for the main reserve currency and in the long run strengthening the SDR as a reserve asset. But it is a problem to define the best means of achieving this result, who would bear the cost of maintaining the value of the claims to be issued, and what the features of their negotiability and interest rate would be. In any case, it seems unfair that this should occasion a new burden on the developing economies or that it should engender factors prejudicial to their reserves, already really or potentially diminished on account of feebler trade flows, the evolution in the terms of trade, and the protectionist tendencies of the world’s chief industrial centers. Therefore the substitution account, in whatever form it is adopted, must form part of a coherent package of measures.

In fact, it is still imperative to apply simultaneous solutions in the fields of monetary policy, trade policy, and the transfer of resources for development. Otherwise, if the solutions brought to bear are mainly partial ones, it could be difficult to change patterns leading to frictions and frustrations of every kind.

With regard to the transfer of resources for development, once again it is recommended that net flows of financing to developing countries be increased and—of course—maintained. We thus come up against the problem of concessionary aid, and fixed annual pledges of official development assistance are recommended. Other claims that are once again insistently raised are those for a link between SDR allocations and financial assistance for development, an increase in the program lending of the international credit institutions, and the formulation of more suitable or more flexible strategies to avert the problems of debt servicing in certain developing countries. On this last topic, the better course is to face up to a rapidly growing problem that will become increasingly acute if world trade flows decrease.

In the monetary area, while alternate solutions are not discarded, measures are suggested to improve and facilitate balance of payments adjustment and to regulate the volume and distribution of world liquidity (increased and regular SDR allocations for the purposes of financing or reconstituting reserves), replenishment of the resources of the multilateral financing organizations, medium-term balance of payments financing service, and relaxation of the terms in respect of the conditionally and maturities of the Fund’s credit.

It is considered that only by such means will it be possible to take account of development financing needs and the special cases of shortfalls in export receipts or emergency situations that frequently accumulate and that aggravate external payments disequilibria.

The proposals made with regard to international trade are designed to combat the new protectionism, accelerate the growth of North-South trade in goods and services, and increase access to industrial countries’ markets for developing countries’ exports.

The proposed “Program of Immediate Action” is an attempt to present in harmonious and ordered form the essential proposals that the developing countries have been putting forward not only here, but in various United Nations agencies.

It is reflected, particularly, in the position adopted by these countries at UNCTAD V, where a full-consensus decision was reached on the transfer of real resources for development.

The last part of the document contains suggestions for the Group of 24’s work program and suggests mechanisms for evaluating the effectiveness and coordination of future tasks.

In my opinion this work constitutes a step forward toward the establishment of a viable monetary and financial system that can satisfy the needs of all, those of the developing economies in particular. For the first time a course is being charted, a program of action is being designed, which means that the initiative has been taken and passivity has been rejected.

The accomplishment of the proposed objectives requires the resolute support and active participation of the nations represented here. This might be one of the last opportunities for the developing countries’ views to be taken into account as a new economic organization of the world is formulated, thus averting a new breakdown affecting an unforeseeable number of nations.

Let us hope that consideration of the Program of Action will not be eluded and that a spirit of solidarity among all peoples, rich and poor, will prevail. I trust it will be recognized that the economic interdependence of the world and the presence of a worldwide crisis are making our era a time to unite, to achieve reconciliation, rather than a time to hold on to privilege or to strive for the supremacy of hegemonic interests.

The developing countries have organized their thoughts and their aspirations on these matters that we are considering. Now the industrial countries have the chance to unite in the common task of working out a global strategy that shall benefit all, excluding no one.

Statement by the Governor of the Fund and the Bank for Canada—John C. Crosbie

Mr. Chairman, first I would like to thank our host country for their hospitality and the arrangements they have made for this conference, and also to thank Mr. McNamara and the Managing Director of the IMF for their reports and for the fine work they have done during the year.

As the new Minister of Finance for Canada, representing a new Government, I have had several opportunities in recent months to meet a number of my colleagues from countries around the world. Despite the differences in our systems, size, and situations, I have been struck by the similarity of our problems. It is also apparent that solutions to these problems depend in many instances on what happens beyond our own borders. But if we share the same difficulties, we also share an opportunity. We can work together through these two great institutions that brought us to Belgrade to find mutual solutions to our mutual problems.

The single issue that has most dominated the economic news, the conference table, and the cabinet table has been energy. The recent oil price increases have boosted inflation, reduced growth prospects, and added to international payments imbalances. Key indicators of the world’s economic health were already highly unsatisfactory. These added impacts have made the situation even more difficult. The key question is what our response should be, and it is clear at least in my country that a first step is more realistic energy policies.

Canada, though a net energy exporter, is short of oil. While we have been able to avoid many of the short-run problems other countries have faced, we also must reduce our dependence on oil. The Canadian Government is firmly committed to that goal. To date, Canada has artificially protected its population and industry from the full impact of international oil prices. This has had some benefit, but short-term only. Reducing our dependence means restraining demand as well as finding alternatives to conventional oil as an energy source, and for both we will have to increase prices toward international levels more rapidly than before.

As I begin to prepare my first budget I have little room in which to maneuver. I am faced with continuing inflation, a large and growing current account deficit, and a budgetary deficit this year alone of over $11 billion in a country of only 23 million people. The United States, to which we sell over 70 per cent of our exports, is in recession. Our situation demands fiscal and monetary policies that will lead over time to noninflationary growth. We must also accept that in the short term significant real growth is unlikely. We plan to apply a combination of fiscal restraint and monetary discipline to reduce inflation. At the same time, we intend to encourage market forces to play a more effective role in allocating resources and dealing with structural adjustments.

Many other countries are in similar circumstances. In fact, there are very few whose budgetary position and performance on inflation will allow them to pursue expansionary policies. In my view, it is essential to reduce inflation to strengthen our capacity for growth. Otherwise the expansion will not only be short-lived, but will actually worsen the problems we now face. It is clear from the world economic outlook that payments imbalances, especially among the nonindustrial countries, will be substantial in the period ahead. The Fund, as always, has an important role to play in promoting adjustment. However, I believe that because of the additional flexibility provided by the supplementary financing facility and the imminent quota increases, the resources of the Fund are adequate in the present circumstances. This is especially true when we consider the extent to which private sources of capital have complemented the activities of the Fund and the Bank.

The value of Fund assistance is to a large extent a function of its ability to ensure that its members implement sound adjustment policies. If that is removed, then the value of the Fund is largely removed. In negotiating stabilization programs, the Fund must continue to be sensitive to both the priorities of members and their domestic constraints. In addition, its assistance has to be directed toward helping members achieve balance of payments positions which can be sustained, within a reasonable period of time.

I raise this because Canada is concerned that the suggestions which have been coming from various quarters about the Fund could endanger the central role it was designed to play—in providing temporary balance of payments support in return for more disciplined economic policies. Canada remains committed to the Seventh General Review of Quotas, and we supported the latest round of SDR allocations. Beyond that, we oppose further moves to add to existing liquidity. Adjustments and extensions to Fund operations already provide for easier access to its resources, and longer-term assistance through the extended Fund facility and the supplementary financing facility. At the meeting of the Development Committee, Canada supported the instruction to Executive Directors to study the question of extending lending terms of the extended Fund facility beyond eight years. While these areas will be examined again at a later date, for the present I believe the needs have been met.

As I said in Malta last week at the Commonwealth meeting, I do not agree with the call for some new facility to finance medium-term or longer balance of payments support. Current account deficits are to be expected in rapidly developing economies. They cause concern only if they consistently exceed the foreign exchange resources provided by private capital inflows or official development assistance. If there is a continuing balance of payments deficit, then clearly either the wrong sorts of projects are being financed, or the country concerned is trying to expand its economy too rapidly. The key point is that this is a development gap, not a matter of temporary balance of payments assistance, and it should be treated as such. If international institutions are to be called in to help, it should be the development banks not the Fund. Fundamental alterations to the role of the Fund would do us all a disservice. Sudden emergencies are one thing. They can occur for any nation. Continuing balance of payments deficits imply a need for a more fundamental re-examination of economic policy. If we are to emerge from these difficult times with strengthened economic capacities, some stringent measures of economic self-discipline are required. That is one of the first priorities of the new Canadian Government.

On one other matter of Fund business, the substitution account, it is our position that further study is needed. There are some very important technical issues to be resolved before the matter can be decided. . . .

I wish to expand briefly—and bluntly—on the constraints I face at home. Concern about the gap between the industrialized nations and the developing world is shared by us all. We want to narrow this gap as quickly as possible. Our commitment to that goal is evidenced not only by words, but by deeds. I face two problems. The first is economic. While our problems in Canada of inflation, unemployment, and severe budgetary and current account deficits may seem insignificant when compared with the magnitude of the task facing any or all of the developing countries, nevertheless they are serious indeed in any economic context. They are viewed seriously by the average Canadian. Further increases in the transfer of resources are difficult to justify to Canadians until our own economic situation improves. We accept the obligation that exists to closing the North-South gap. But we are of no assistance if our own economy does not expand and increase in strength so that we can purchase more from the rest of the world and increase our development assistance. The second problem is a serious political one. Our support for other nations depends on support for these goals at home. I tell you frankly that the support of our people in Canada is not enhanced by artificial confrontations here or elsewhere. I think it is time this was said publicly. As a politician I must live with these realities. They may be less visible internationally than the realities of life in a developing country but they are not less real.

Canada remains convinced that our destiny is inextricably linked with that of every other nation here. Together we face substantial problems, but we also marshal substantial resources to deal with them, not the least of which is our shared human ingenuity. The World Bank and the International Monetary Fund are institutions that have served us well. They have evolved over time to meet changing conditions, and will continue to do so if permitted. Both institutions are real demonstrations of our commitment to international cooperation. That commitment has led to substantial progress over the last 30 years, and as we return to our capitals, it is a commitment we must not lose sight of.

In Malta, one of my Commonwealth colleagues expressed the hope that frequent references to the term “realism” did not disguise a defense of the status quo. It does not, but neither do unrealistic demands provide a solution. If we wish to be optimistic about the future, then we must have the courage to be realistic about the present. While realism may set limits on what we can do today it will expand the limits of what we can do tomorrow.

Statement by the Governor of the Bank for Peru—Javier Silva Ruete

It is a great honor for me to address this Annual Meeting of Governors of the International Monetary Fund as spokesman for 22 countries in Latin America and the Caribbean area, and for Spain and the Philippines. Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, and Venezuela, together with Spain and the Philippines, once again want to combine their thinking and unify their position, thus emphasizing the traditional ties that bind them. On behalf of those countries and my own, I wish to associate myself with the distinguished speakers who preceded me in expressing our most sincere thanks to the Government and the people of Yugoslavia for the warm welcome accorded us.

This conference is being held in special circumstances: the common denominator is our countries’ profound concern at the tendencies toward economic stagnation and inflationary pressures now to be noted in the industrialized world, phenomena which show signs of worsening over the next year and a half. They are also phenomena which have arisen following the recent years of lower growth rates and higher rates of both inflation and levels of indebtedness than those that preceded the earlier crisis of 1973-74. Moreover, in terms of their financial situation many developing countries have not yet finally overcome the negative effects of that crisis.

Given this state of affairs, Latin America and the Caribbean area, which in overall terms are showing a recovery in their rate of economic activity, will experience the recessive and inflationary influence of the industrial centers, which will make it more difficult for them to achieve growth levels in keeping with the urgent needs of their growing populations. In addition, the new crisis is coming at a time when some of our countries are beginning to experience the first positive results of the application of stabilization policies which, unfortunately and inevitably, have signified great sacrifices. Especially alarming is a new increase in the balance of payments deficit on current account in relation to 1978. It should also be pointed out that the deterioration in the terms of trade, as well as the inadequacy of private and public financing, together with a slower rate of imports by the industrialized countries, will accentuate the financial pressures of external origin which our countries are facing.

The gravity of the situation makes it imperative that the international community adopt modes of solution which take account not only of the interests of the developed countries, but essentially those of the developing ones, within the setting of international financial reform. From this point of view, even if the industrial economies do not attain suitable growth levels and greater price stability, an increase in the transfer of real resources to the developing countries is fundamental. It is therefore also imperative at this time to increase official development assistance substantially, so that it reaches at least the levels broadly accepted in the context of the United Nations—a commitment very few countries have lived up to. As part of this effort, it is necessary at the same time to improve and expand the present financing facilities of the international financial institutions, provide greater ease of access for the developing countries to private capital markets, and improve the operating efficiency of the financial markets in recycling capital by keeping them free of restrictions so that funds can be attracted in the amounts required and on satisfactory terms. In addition, we wish to stress, as on previous occasions, that an increasing proportion of our countries’ financing needs should be met through an increase in exports, which requires that the industrialized countries reduce significantly their protectionist stance, thus eliminating from world economic developments this disturbing element, which frequently frustrates the production efforts of developing countries.

In the quest for a solution to the financial problems of the developing countries, we must recognize the importance of the oil exporting countries’ recycling of their surpluses, both directly and through international financial institutions, as well as that of the role played by the private financial institutions, especially the commercial banking system, which in Latin America has displayed considerable dynamism.

The International Monetary Fund, in the context of its responsibility to promote a satisfactory development of the world economy and to provide support in solving balance of payments problems, should face the present situation with creativity and courage and, above all, with great flexibility, so that a just and equitable international economic order may be achieved.

On this subject we feel that the surveillance of exchange rate policies laid down in the Articles of Agreement should concentrate basically on countries that are of major importance to the world economy, since their policies affect the international community the most. Once again we must mention our concern at the Fund’s failing in practice to bring the same influence to bear on all member countries to participate in the adjustment process. Reserve currency countries as well as surplus countries escape effective and timely surveillance, the result being the marked fluctuation of exchange rates observed in the last two years between the currencies of the principal industrial countries. This situation creates a challenge to the Fund in seeking convergent monetary and fiscal policies that can be adopted by the industrial countries.

In the course of this last year several decisions were adopted which we believe represent some progress in mobilizing the Fund’s resources. We would mention with regard to conditionality greater emphasis on ensuring uniform and equitable treatment for all member countries, and the explicit affirmation that due regard will be paid to the social and political objectives, the economic priorities, and the special circumstances of members; these special circumstances should signify the abandonment of an excessively automatic criterion as regards the application to different realities of uniform techniques and formulas, which frequently become unrealistic and forced. We would point out, therefore, that the new rules on conditionality will be useful only to the extent they are correctly interpreted at the application stage. As we know from our own experience in the case of some of the countries in our group, it has been difficult in the past to make domestic needs and realities compatible with the Fund’s practices. Hence it should be borne in mind that the flexibility and impartiality with which conditionality is applied will be a major factor in encouraging countries to have recourse to the Fund at the initial stages of external disequilibrium.

The new liberalization of the compensatory financing facility is welcome inasmuch as it permits more substantial and timely assistance in the case of export shortfalls. It seems incongruous, however, that the net use of the Fund’s resources should record a decline and that the institution should show a high level of liquidity at a time of growing payments disequilibria among its members and serious external difficulties in the developing countries. This situation calls for greater efforts to make the conditions on which credit is granted more flexible in the present circumstances.

In the context of the present world situation we must emphasize the need to create additional medium-term financing facilities to face the balance of payments problems caused by the adverse effects of fluctuations in the developing countries’ exports.

The Fund should also, and as quickly as possible, re-examine the other financial facilities, adapting them to the needs that are arising in the developing countries as a result of the deterioration of the world economy to which I referred earlier. Specifically, the periods allowed for repurchase should be extended, conditionality should be applied in light of the causes of the deficit, and consideration should be given to increasing the first credit tranche to an amount equivalent to half the member’s quota.

Following the Seventh General Review of Quotas, the activation of the supplementary financing facility, and the resumption at the beginning of the year of the distribution of SDRs among participating members, the Fund will be able, on the one hand, to enlarge its resources to meet the growing need for balance of payments financing, and on the other hand, to advance toward the objective of making the SDR the principal reserve asset in the international monetary system; however, this objective will be fully achieved only when global long-term liquidity needs are met through regular, annual allocations of SDRs and when their reserve-asset features are improved, thus contributing to their more general use.

Of interest in this context is the Interim Committee’s pronouncement to the effect that a detailed proposal on the substitution account be studied. We feel that for purposes of application of such an account, detailed studies on its impact on international financial markets, and on the supply of and demand for international liquidity, should be available. Moreover, a solution should be found for the problems of liquidity, yield, and use of the new SDR-denominated assets. Then, too, the establishment of this account—if decided upon once the problems and unknown factors involved have been resolved—should in any case be effected within an overall scheme for reform of the international monetary system. Only in this perspective could the effects of the substitution account be positive to the extent that the reserve currency countries would reduce their balance of payments disequilibria. Lastly, the substitution account can only be acceptable as a strictly voluntary mechanism, on the understanding that this qualification indicates the firm intention not to use pressure of any kind to persuade countries to participate in it.

We would refer with special satisfaction to the “Outline for a Program of Action on International Monetary Reform” prepared by the Group of 24, which contains ideas for an integrated approach designed to give the developing countries an effective role in world financial and monetary reform, a program which has the enthusiastic support of our group.

Among the regional mechanisms that can help promote areas of greater stability and confidence, while entailing positive effects on economic growth and employment, we take an optimistic view of the establishment of the European Monetary System. We trust that its work will be carried out in coordination with that of the IMF, without weakening the universal character of the existing system.

Summing up, we believe that the problems the world is currently facing call for immediate adoption of a program of action in the context of an international monetary reform in which the interests of the developing countries are fully taken into account. In addition to the increase in the transfer of real resources, an effective strategy should be followed to ensure that the external public debt of some relatively less developed countries does not become an insurmountable obstacle in their growth process.

For this reason it is imperative that the International Monetary Fund makes progress in adapting the financial services and facilities it provides to the difficult circumstances facing the developing economies by making the existing ones more flexible and taking steps to set up others, so as to attend in a timely and effective fashion to the external sectors of our economies.

Before concluding, may I be allowed in my capacity as Governor for Peru, to make a digression which I consider pertinent, as it relates to the matters this important meeting has before it. As you know, the Peruvian economy experienced serious disequilibria between mid-1976 and May 1978, in which a virtual halt occurred in foreign payments. During that period, negotiations were carried on with Fund authorities which unfortunately were initially characterized by lack of comprehension and flexibility. Subsequently, there was a change for the better in the attitude of the Fund, which accepted a program whose main lines and period of application came within the limits of Peru’s economic, social, and political realities.

The successful implementation of this program, and hence the accelerated recovery of our financial situation, are the result of measures put forward by the Peruvian Government and sensibly accepted by the international financial community, but above all of the sacrifice made by the Peruvian people who are carrying them out.

At the express request of my fellow Governors, and as a personal note in recognition of a fruitful relationship from the time I undertook my present responsibilities, I wish to express our appreciation of the work done by Mr. de Larosière in directing the Fund.

We are sure that under his leadership, the IMF will firmly support the efforts of the Governments of the Dominican Republic and Dominica, which have suffered serious losses in their productive processes, and of Nicaragua, which is in a serious financial situation characterized by a total lack of liquidity of international means of payment.

The Fund should consider expeditiously, and with flexibility, such proposals as the Government of Nicaragua may submit to it, especially those that would enable it to solve its pressing balance of payments difficulties and lighten its high external debt service obligations to the extent necessary.

I believe that changing world economic realities and the recent manifestations of inflation combined with recession urgently require revision of the conceptual basis that has served as the support for the explanatory schemes and the adjustment mechanisms of the international economic system.

The IMF should respond to this challenge by re-examining models and practices used until now in the monetary and fiscal spheres, in order to seek new solutions for present economic problems.

We are sure that this challenge will not remain unmet, because the magnitude of the problems and the urgent demands of the millions of human beings in the developing world make it imperative to undertake the effort on a grand scale in keeping with the historic nature of the moment.

Statement by the Governor of the Fund for the United Kingdom—Sir Geoffrey Howe

I join my fellow Governors in thanking the Federal Government and people of Yugoslavia for their invitation to hold our Annual Meetings in their country—and in expressing my grateful and genuine admiration for the arrangements they have made. I join too in offering greetings to the new members of our institutions.

It is the purpose of our presence and endeavors here to promote the welfare of our peoples. As a new Chancellor of the Exchequer of a recently elected Government, addressing my first IBRD/IMF meeting, I hope I may begin with a word or two about my cautiously restrained approach to that ambition. Very briefly it is this. Whether I am seeking principles to guide our international relations or looking for ways of improving my own country’s economic performance, I am predisposed to favor what has been called the libertarian approach. By this I mean the philosophy which allows the maximum freedom to develop economic potential, within the necessary framework of order. This concept of freedom within the law can, I believe, provide as sound a foundation for economic policy as it does for human and social relations. It is the basis of policy by which our new Government intends to set the British economy on to a better path.

The necessary framework of order has to include, as almost its highest priority, the provision of a currency that is a reliable store of value. A sound and stable medium of exchange is a prerequisite of economic order. For this reason, I welcome most warmly the plain statement by the Fund’s Managing Director that the most troublesome aspect of the economic situation in the great majority of member countries is the persistence or worsening of inflation. If we are to have any firm prospect of resuming steady, sustainable growth this fundamental problem needs to be tackled with the firmest possible resolve. High inflationary expectations are now dangerously entrenched. We need both to reduce inflation significantly from current levels, and to convince people that such a reduction will be sustained. In the words of the GATT report for 1978/79, “any policy which does not have price stability as its primary objective is fraught with fearful risks.”

During the postwar years, in Britain as in many other countries, much emphasis has been placed on “demand management” as making the major contribution to steady, sustained growth. Whatever success may have been attributed to demand management in times of low or moderate inflation, it has been seen to be a less and less appropriate response in situations of low growth but high inflation. In the conditions of earlier periods, there may or may not have been a case for emphasis on demand policies. The need today is that we should all concentrate much more on the fight against inflation and on improving the performance of the supply side of our economy. I suspect that if Keynes himself were still alive, he would long since have reached that view.

In retrospect we can see that the 1970s were the years in which inflation really established its malign grip upon our system. We all know that inflation was moving sharply upwards even before the 1973/74 oil price increases. It was moving upwards again before the oil price increases this year. For a time, it looked as though some of the most severe apprehensions about developments after the oil price quadrupled in 1973/74 were not justified. The financial system did at least survive. But the situation called for adjustment to a long-term worsening in the terms of trade of many industrial countries. Sometimes there was too much financing of deficits and not enough adjustment. That weakened the impulse to adjust domestic costs, and so helped to accommodate inflation. This must not be allowed to happen again. We must sever the link between oil and inflation. Individuals must accept that energy price increases have to be met by cutting spending on other things and not by demanding ever higher incomes.

Experience has varied from country to country. But this year’s IMF Annual Report also suggests that the main reason why policy in recent years has not produced satisfactory results is that governments have often paid lip service to the need for monetary restraint without actually implementing it. Monetary expansion in the main industrial countries has remained in double figures in every year since 1975.

Another damaging influence has been the belief in some quarters that a regime of floating exchange rates in some way immunized countries against external constraints; that it reduced the need for domestic financial prudence. This was never the case. The idea that we could spend our way out of trouble, or that there was some relatively painless way out, meant, not surprisingly, failure to see or to accept the crucial need for realism.

It is national failures of this kind that have been the most significant cause of international instability in the exchange markets. Inflation has a large share of the responsibility for this instability and for the rush, internationally as well as domestically, into assets regarded as a good store of value. The fight against inflation is at heart the fight for greater currency stability.

The present U.K. Government is firmly committed to policies designed to reduce inflation and inflationary expectations. It is committed to a strict monetary policy in the form of a target increase in the money supply for the current financial year and to a progressive reduction in the size of that target in the years ahead. We are making it clear that pay bargaining, if it is to be realistic and not simply to lead to unemployment, must be conducted with full regard to those monetary limits. We are taking care to bring the fiscal stance into line with our monetary policy. The burden of adjustment to a slower rate of growth of the money supply in the form of high interest rates will not then all fall year after year on the private sector. We have set ourselves the target of a substantial reduction in the borrowing requirement of our public sector for the current financial year. And for future years we shall see that it is set at a level consistent with our monetary policy—and which does not imply excessively high interest rates, with consequent “crowding out” of private sector borrowing.

This means that we have had to undertake a full scale revision of our public spending plans. The burden of public expenditure should be determined by what the nation can afford. Higher expenditure on public services should follow and not precede, and thus prevent, growth in the private sector.

Alongside the crucial fight against inflation, we have recognized the need for positive action to improve the supply side of our economy. This has been disregarded for far too long. Indeed in a number of important respects governments in the United Kingdom have in the past taken action or adopted attitudes which have positively hindered our economic performance. I suspect that our country is far from being alone in that experience. We have neglected, in favor of excessive governmental intervention, the principles of economic freedom in a framework of order—which surely contributed to the remarkable material success of most industrial countries in earlier years. The same principles often seem to guide the most successfully developing countries of the present time.

In the United Kingdom we are now making a major and radical effort to restore this approach, to enlarge the role of the market, and so to allow our economy to develop its potential. For example:

  • —We are dismantling regulations which have outlived their usefulness, such as exchange controls; or which produced severe distortions for little lasting benefit, such as controls on pay, prices and dividends.

  • —We are changing our tax structure to reduce taxes on income and thus to improve incentives and rewards for risk-taking and innovation.

  • —We are rolling back the frontiers of the public sector from those areas where it has been most burdensome, incompetent, or counter-productive.

There has, of course, been intense debate about the implications of North Sea gas and oil for our economy. It has been hailed by some as a savior and by others as a curse. It has been claimed on the one hand that it insulates us from the world’s energy problem, and on the other that its “artificial” impact on the value of our currency will destroy our export industries. Both views are exaggerated. The more balanced conclusion is that the North Sea makes a useful but by no means decisive contribution to our economy. It offers an uncovenanted opportunity to restore our economy to health. Whether that opportunity is taken or wasted depends to a very large extent upon the way in which we in the United Kingdom respond. Certainly the Government intends, through the policies that I have outlined, to make good use of that opportunity.

I have spoken at some length about the British economy, because that is my own most immediate responsibility. But I have done so too because I am convinced that the greatest contribution which each of us can make to world economic success is to do all we can to develop the stability and the potential of our own economies. Of course, we must take account of the impact our actions may have on each other, and recognize the international aspects of the problems we face. But our principal and most achievable purpose must be the orderly encouragement of national potential, within a framework of international order.

That is the basis upon which I am disposed to consider our responsibility for the management and use of the international institutions which are represented at this meeting. Throughout the difficult periods of the late 1960s and 1970s those institutions—coupled with that other pillar of our international economic order, the GATT—have displayed a prudent and effective combination of flexibility and tenacity. By standing by the principles of ordered economic liberalism they have served the international community well. I am confident that they will continue to do so.

Nowhere is the work of the international financial institutions more important than in adjusting economic relationships between the industrialized and the less developed countries. At no time has that task been more important than it is today.

The word “interdependence” is often used. It serves to emphasize on the one hand the extent to which the industrialized countries can and should contribute to the economic vitality of the developing world—and, on the other hand, to underline the way in which economic growth in the Third World adds to prosperity in the industrial world. In that sense interdependence is clearly a two-way street.

But it is not just a two-way street. It is a two-way bet as well. For there can be no doubt that better economic performance in the industrialized countries is a precondition for the significant improvement of living standards in the Third World. As the World Development Report recognizes, low growth in the industrialized countries will add to the risk of poverty in the Third World. The creation of wealth is not a process in which the gains of one country or individual are at the expense of others. This is not just an economic matter. It is a matter of political importance as well. It has been said many times at this conference that the ability to increase aid programs is “a matter of political will.” That is no doubt true. But that will is not easily mobilized, even in favorable economic circumstances. It is, I should judge, impossible to mobilize that will, even in advanced economies, where prosperity is itself in doubt.

That is why I have emphasized the responsibility of each developed country to do what it can to promote its own prosperity—among other things by an appropriate response to the effects of oil price increases. Obviously these sharp price adjustments have caused great difficulties for the poorer countries of the world as well. Meanwhile the ability of the industrialized countries to help the poorer countries has been, at least for the time being, diminished.

It is against this background that the institutions have such a pivotal role to play. Fortunately ample facilities are at present available to the Fund. Substantial increases in lending facilities have now been achieved or are in prospect. Last year’s decisions to increase quotas by 50 per cent will, I hope, be ratified before too long and come into force. The supplementary financing facility is now in place, doubling the amounts available to be borrowed by members under the credit tranches. As yet this has been scarcely drawn on. Access to the compensatory financing facility has just been eased. That too will be increased with the new quotas. Finance on this scale should be adequate. These facilities should certainly be more fully used. Now that the rules governing conditionality have been liberalized, I hope that developing countries will find it acceptable to work closely with the Fund and exploit to the full the resources now available to help them overcome their problems. . . .

It is in this context too that we have considered proposals for the establishment of a substitution account in the Fund. Provided that the practical problems involved in setting it up can be overcome, a substitution account of the kind proposed could in principle make a limited but useful contribution to the stabilization of exchange rates. The problems are certainly difficult—and may prove intractable—but my hope is that we can approach them constructively in a genuine attempt to find a set of arrangements which will work well. Though the benefits of a substitution account may be worth having, because even modest benefits are always worth having, it serves no one’s interests to pretend that the availability of such an account will make a dramatic contribution. Certainly it should be seen as fortifying rather than reducing the need for discipline in each nation’s monetary policy.

Meantime we must all hope that flows from the private sector to many LDCs will continue to grow. These should include not only lending for development through the private banking system—but also a much wider range of private investment from the industrial countries. I have the impression that several of the most successful LDCs have benefited most from encouraging investment of this kind. The United Kingdom has recently made a further contribution in this direction by the relaxation of exchange controls on direct investment overseas.

Any policy changes which the developing countries may have to make in the difficult period ahead should not be more severe than is absolutely necessary. I hope that they will use to the full the facilities available to them, in the Fund in particular. Taking together official bilateral aid, the resources of the international organizations, and the money available through the intermediation of the private banking system, I believe that the need can be met in large measure.

But we shall need to get the mix right. After the first oil price increases at the end of 1973, the commercial banking system, as we all know, played a major, and indeed an invaluable role. But there was perhaps too little coordination between flows of funds raised in the private markets, and those from the official institutions. Money from private sources may sometimes become available almost too readily, and in some cases the domestic policies of recipient countries were not changed when they should have been. The later problems of adjustment thus became much more serious.

In the months and years ahead the commercial banking system may well be more cautious because of the existing burden of indebtedness from the earlier round of lending. Even so the role of the private sector will continue to be essential. I believe that in the interests of developing countries both the Bank and the Fund should be looking for more ways of cooperating with the commercial banks and of facilitating responsible lending by them.

But I end as I began. The resources which the industrialized countries can provide for development aid are conditioned by their economic strength and capacity to pay. As long as the world is rightly putting the fight against inflation first, the less developed countries will suffer not just because the markets for their products are depressed, but also because the strength of the donor countries is growing more slowly. The less developed countries, like the rest of the world, need the resumption of sustained economic growth. The prerequisite for this is that the inflation constraint which is holding us all back should be removed.

My insistence on the need to give first priority to fighting inflation does not for one moment mean that we are turning our backs on the LDCs, or on the deeply serious problem of unemployment in our own countries. It simply means, as the Managing Director has said, that we see no alternative way of getting back to sustainable growth. Monetary “stimuli” simply will not work in the world in which we now live. Inflation produces more inflation and more unemployment, not more growth.

So this is the best course in the interests of developing and developed countries alike. I do not underestimate the political difficulties. It is a course which calls for patience, and for politicians, patience is the scarcest resource of all. But there is no other way.

It would be wrong to end on too grim a note. The world prospect is disappointing, the difficulties great. But there are still reserves of strength and resilience in the world economy. This has been demonstrated in the face of oil shocks and vast payments imbalances. There is great strength in the forces sustaining activity in many of our economies. The market place has shown its resilience. There is great strength too, demonstrated in the disturbed decade now ending, in the international institutions whose Annual Meetings we are now attending and in the contribution they make to world economic order. In the framework of order which they help to provide let us do our utmost to liberate and so mobilize the talents of our people.

Statement by the Governor of the Fund for Liberia—Ellen Johnson-Sirleaf

It is a great honor and privilege for me to speak before this august gathering and to express, on behalf of the African Governors, Africa’s collective views and assessment of the recent developments in the world economy as well as the operations of the Bank and the Fund. Before I touch on the difficulties that have afflicted the world economy in the recent period, allow me, Mr. Chairman, to convey the African Governors’ warm welcome to Cape Verde, Djibouti, and Dominica taking part in these deliberations for the first time.

When we met in Washington a year ago, the Honorable Minister of Finance and Governor of the Fund for the Republic of Cameroon, His Excellency Marcel Yondo, expressed the views and concerns of the African Governors about the unsettled state of the world economy. The distinguished Governor noted, in particular, the disquieting effects on the economies of our countries, of the low rate of growth in the world.

Since our last Annual Meetings the state of the world economy has deteriorated further. The economic crisis is deepening, inflation is accelerating, and the public debt of the developing countries is continuing to widen. Preliminary indications are that economic growth in the industrial countries was below 4 per cent in 1978, for the second year in a row, and the current year will even fall short of the low 1977 and 1978 rates. The volume of international trade expanded in 1978 by some 5 per cent, slightly above the average of 4 per cent for the preceding five years.

As regards the developing countries, their economic problems, taken as a whole, remain substantial. Their economic growth rate has remained stagnant at the 1977 level of about 5 per cent. The export volume of the non-oil developing countries expanded in 1978 by some 7 per cent, but this was accompanied by an appreciable deterioration in the terms of trade. The current account deficit of the developing countries worsened again in 1978 and in 1979, reaching $32 billion and $45 billion, respectively. These deficits were largely financed through foreign borrowing, which resulted in a substantial increase in the external debt—of the order of 20 per cent—of the non-oil LDCs.

I should now like to speak more particularly of the problems of the African countries. In 1978 Africa once again had the lowest rate of economic growth among the developing countries, a mere 2.9 per cent, which was about one half that of 1976. Even more disquieting are the prospects confronting our countries in the period ahead. In the World Development Report for 1979 estimates of the growth of per capita income in the low-income African countries of only 0.2 per cent for the period 1970-80 fall far short of the target set for the United Nations Second Development Decade, with no appreciable improvement expected in the next ten years.

The growth of the African countries’ exports in 1978 of 9.6 per cent was well below that of international trade as a whole (16.5 per cent). Moreover, their export receipts were curtailed by the substantial deterioration in the terms of trade of their major export commodities. The main reason for the decline in export performance was the instability of the prices of our export products and the considerable rise in the prices of manufactured goods. In the case of Africa, the current account deficit reached $8.4 billion in 1978, and, in contrast to the other developing countries, many of our countries were obliged to substantially run down their reserves. This disturbing situation would have been even more worrisome if a number of African countries had not substantially reduced their imports, often to the detriment of their growth and of the economic and social progress of our people.

Looking at the evolution of the deficits of the developing countries over the period 1974-78, we find that the situation of the African countries deteriorated while that of the other developing regions improved. While the share of African countries in developing countries’ exports remained unchanged over 1974-78 at around 17 per cent, their total current account deficit rose from $2.4 billion in 1974 (8 per cent of the aggregate current account deficit of the developing countries) to $8.4 billion in 1978 (27 per cent).

The projected worsening of the current account deficit of the African countries calls for intensified efforts to increase and diversify our exports. However, the recent increase in protectionism in the industrial countries has become a serious obstacle to our diversification policy. As a World Bank study has shown, the protectionist measures taken by certain developed countries will restrict the growth of exports not only of the main exporting countries but also of the smaller and less advanced developing countries. It is, therefore, desirable that the measures taken by the developed countries to protect their industries be abolished as soon as possible and that other action in this field be subjected to suitable international surveillance in order to avoid excessive recourse to protectionism.

African Governors believe that the time has come for all countries to recognize that interdependence has become a reality in the world economy. In this connection, we share the view that the industrialized countries should realize that they depend as much for their economic growth on the developing countries as the latter do on access to developed countries’ markets. We deeply regret the position taken by the industrialized countries at the Fifth UNCTAD Meeting in Manila. At that meeting, we lost a unique opportunity for devising a collective solution to the crisis by which the world is beset. The meager results achieved in the context of the recent Multilateral Trade Negotiations also reflect the indifference of the industrialized countries to the problems facing the developing countries.

In the view of the African Governors, a large part of the solution to the world economic crisis lies in increased transfers of real resources to the developing countries, as this will enable them to increase the level of imports from the industrialized countries. A substantial increase in ODA has the advantage of contributing to the utilization of idle production capacities of the industrialized countries, to reduction of unemployment in those countries, to the restoration of growth to acceptable levels, and to the expansion of world trade.

It is for these reasons that we are very concerned about information that some governments of major aid donor countries plan to reduce their aid targets below past levels, which have themselves been unsatisfactorily low. Of even greater concern are measures periodically proposed in the legislatures of some member countries of our institutions to make conditional contributions, all of which threaten the very existence and contradict the very principles of the Bank and IDA. In the interest of the development needs of the developing countries, and for the mutuality of interest to which we have already referred, we call on all the members of the international community to respond in a manner that will not only maintain the progress we have already achieved in international cooperation, but will also enhance our joint efforts. We once again call on the rich members of the international community to take steps which will bring official aid to the United Nations target of 0.7 per cent of GNP of these countries in the shortest time possible.

The need to increase official aid applies particularly to the African countries. According to provisional DAC figures, the official development aid of the OECD countries rose from $14.7 billion in 1977 to $18.3 billion in 1978—that is a real increase of about 7 per cent. Although this level represents only 0.32 per cent of the GNP of the industrial countries, we are pleased to note that several DAC members have made an effort to improve loan conditions by increasing the grant portion. It must not, however, be forgotten that debt service presents a serious problem for a number of developing countries. Consideration must be given to the need to mitigate the debt-service burden of the developing countries.

The African Governors, while recognizing the efforts made by some developed countries to provide debt relief for developing countries, deplore the fact that such measures were not extended to all the poorer developing countries. We urge the developed countries which have not yet done so to take steps as soon as possible to assist in alleviating the debt burden of the poorer developing countries and, in particular, the African countries.

African Governors continue to attach great importance to their regional development institutions, especially the ADB and the ADF (African Development Bank and African Development Fund). In our statement last year we informed you of the decision of the ADB Board of Governors to open its capital to nonregional members. The enabling legal steps are now in the process of being finalized. We expect and appeal to non-African members to expedite their own ratification procedures so that the ADB may be able to play its legitimate role as a major agent for economic development in Africa.

With regard to the ADF, the second replenishment period is under way. We regret to say that these contributions have fallen short of our expectations. We hope our partners will continue to assist in the strengthening of the resource base of the ADF.

I should like now to turn to the question of the resources and operations of our two institutions. . . .

Turning to issues of concern within the International Monetary Fund, I would like to start by saying a word or two on the matter of exchange rates. After five years of widespread floating, many of our countries are still adapting to a system in which wide fluctuations of exchange rates continue to occur. The recent marked variations in the value of major currencies have created serious difficulties for the developing countries. One consequence of the very large movements of the rates has been to complicate the management of our international reserves and to increase unduly the cost of our debt servicing. Another consequence has been the increase in the risk of uncovered foreign exchange operations of developing countries.

In these circumstances, developing countries have found it increasingly difficult to predict developments with respect to the terms of trade and, as a result, our task in the area of development planning has become increasingly burdensome. In view of these constraints, we continue to press for the concerted action necessary to discourage disorderliness in the exchange markets. In this connection, I should like to emphasize the importance we attach to the work of the Fund in the area of surveillance. Under the amended Articles of Agreement, the IMF has acquired the power it needs in order to become more effective in overseeing the promotion of orderliness in the exchange markets. In this regard, we expect the IMF to continue exercising “firm surveillance” over the exchange practices and policies of members and to facilitate the development of orderly exchange rate behavior. Still on this question of exchange rates, African Governors would like to appeal to all countries, particularly the reserve currency countries, to make a greater effort to ensure that their exchange rate policies contribute to the development of trade and the growth of incomes in the context of exchange rate stability. In this connection, I must reiterate the importance that we attach to the recent efforts in Europe toward the creation of a zone of greater monetary stability. We recognize that the European Monetary System is at an early stage of development and we also know that experience will have to be gained before an assessment can be made of the relative merits of the system. Nevertheless, we consider the implementation of the system as a useful and major step in the effort to improve the climate for exchange rate stability. In this regard, it is our hope that the European Monetary System will evolve in a way that will permit Europe to make a positive contribution to the restoration of stability in foreign exchange markets.

In expressing our serious concern at the prospects facing the world economy, I find this a good occasion to emphasize once more the importance that we attach to the role of the IMF in seeking solutions to our problems and in lending support to our adjustment efforts. On this basis we have followed closely issues and policies governing the use of the Fund’s resources as well as discussions leading to improvements in the various IMF facilities. With the recent revision of the guidelines for conditionality, the Fund has taken a further step toward a better understanding of our economic concerns and we therefore look to an improved framework of relationship that is implied in the decision establishing the new guidelines for conditionality.

We are encouraged by the slowly increasing cooperative attitude and response that the IMF has shown in dealing with the many problems confronting our countries. One encouraging feature in recent activities of this institution has been the increase in the number of countries in Africa to which the Fund’s assistance has been available. Another aspect of interest to us has been the recent increase in quotas which has helped to enhance the Fund’s ability to lend. In this connection, we note that the Fund’s potential to assist countries has been considerably strengthened by the recent entry into force of the supplementary financing facility. I must stress that we attach special importance to this facility. Regarding the potential usefulness of this facility, we continue to reiterate our view that conditionality attached to drawings should be applied with appropriate flexibility.

On the application of conditionality, we are encouraged by the outcome of the recent review of the guidelines for conditionality. In that review the Fund has recognized that there are indeed circumstances in which the application of its policies in respect to conditionality would not be appropriate. In its decision, the Executive Board has affirmed that in order for conditionality to be evenhanded, it must take into account the domestic political and social objectives of members, as well as their economic priorities. We support this new line of approach and suggest that every effort should be made to ensure that the intended flexibility is indeed practiced by the Fund staff in their dealings with members.

On the question of external debt policies, we notice that the Fund continues to stress the importance of debt ceilings. We also notice that the Fund has tended to place restrictions or ceilings on even long-term debt incurred in the case of some stand-by arrangements. In this regard, we have in the past voiced the opinion that automatic application of performance criteria on debt may, in certain circumstances, impose a negative bias, particularly in the case of poor developing countries. It is still our belief that restrictions on foreign debt may be counterproductive and especially harmful to the development plans of the developing countries. Thus, in advocating a relaxation of performance criteria on borrowings, we suggest that all loans with maturities of more than five years be viewed as resources intended for development purposes. In this context, we welcome with satisfaction the clause included in the “general guidelines” for external debt management which prescribes that when countries are using credit with maturity lower than what is indicated in the “general guidelines,” but which are tied to concessional loans, the Fund will not include those credits in the ceiling for external borrowing. In addition, we urge the Fund to examine further the question of the concessionary element incorporated in certain loans, and to adopt a definition such as the one used by the Development Assistance Committee countries. If the Fund is to be consistent with the purpose and goals of the Development Committee, it must endeavor to encourage concessionary financing.

Concerning the use of Fund resources under the various upper tranches and the extended arrangements, we continue to be disturbed by the fact that many countries continue to resort to commercial sources of financing at a time of substantial balance of payments disruption. We adhere to the view that lack of adequate borrowing from the Fund’s higher tranches and extended arrangements has been caused by the harshness of conditionality and the general dissatisfaction among most Fund members with some particular aspects of conditionality. We urge, therefore, that in application of conditionality in the period ahead every effort be made to strike an appropriate balance between the protection of the Fund’s resources and assistance to members experiencing balance of payments difficulties. By allowing for greater flexibility, the Fund should be able to encourage more of our countries to take advantage of the financial assistance available under higher tranches and extended arrangements.

Concerning the use of Fund resources under the compensatory financing facility, we are encouraged by the larger number of countries to which benefits of this facility have been available in the period following its liberalization in 1975. In consideration of the importance of this facility the IMF conducted a review in April of this year to determine the adequacy of the compensatory financing facility. Prior to the compensatory financing facility review, the amounts made available to the developing countries through this facility had covered less than one half of the export shortfalls of the developing countries. This finding was clearly indicative of the inadequacy of the compensatory financing facility and suggestive of the need for an immediate further improvement.

We note with satisfaction, therefore, that the Executive Board has agreed recently to a relaxation of quota limitations and to the inclusion of tourism and workers’ remittances in the calculation of export shortfalls. In welcoming these improvements in the compensatory financing facility, we earnestly hope that the Fund will not increase conditionality in connection with this facility since it is designed to compensate countries for export shortfalls which are temporary and result from circumstances that are beyond the control of member countries.

While we recognize that the compensatory financing facility has played an important role in mitigating the effects of export earnings instability, we have been disappointed to see that little use has been made of the buffer stock financing facility which is also oriented toward the needs of the developing countries. Developments regarding the use of Fund resources under this facility have depended to a large extent on the scope of available commodity agreements. Although international agreements are now in force for tin, sugar, coffee, and cocoa, we notice that the buffer stock facility decision applies only to three commodities, namely, tin, cocoa, and sugar. In view of the importance of coffee in the export trade of our countries we urge the Fund to examine the possibility of extending benefits of the buffer stock facility to coffee as a first step toward an improvement in the usability of this facility.

Concerning the instability of primary commodity export earnings, we have followed with keen interest recent negotiations leading to the establishment of the Common Fund. We consider the Common Fund to be of paramount importance to countries that depend heavily on only a few commodities for their export earnings and therefore are hard hit by export fluctuations. The magnitude of the problems these countries face as a result of the frequent and sharp shortfalls in commodity earnings must be seen in relation to the effects of these fluctuations on not only the balance of payments, but also on investment and government revenue which are essential for their economic development. In this connection, it is our firm belief that the IMF can make a further contribution by improving the performance of the buffer stock facility and by supporting additional facilities complementary to the compensatory financing facility such as the Common Fund.

African Governors recognize, however, that the stabilization of prices through commodity agreements cannot deal fully with problems which arise for individual countries. A great number of commodities quite important in the export trade of our countries are not covered in commodity agreements approved under the Integrated Program for Commodities. Many of our commodities are perishable in nature and therefore not suitable to buffer stocking. For a great number of our other commodities stocking arrangements may not be possible or practicable for a variety of reasons. It is clear that in these cases, and in situations of non-price-induced shortfalls, the compensatory financing facility will continue to have a major role to play. In this context, we look forward to further improvements in the compensatory financing facility and hope that this facility will in the future provide greater assistance than is presently made available.

Concerning the administration by the IMF of the Trust Fund, we are satisfied with the way in which the IMF has proceeded to auction gold for the benefit of the least developed countries. The resources provided through gold sales have been useful in helping many of our countries to avoid aggravating their already onerous burden of external debt. We hope, therefore, that the Trust Fund assistance will continue to aim at helping our member countries on the basis of their balance of payments needs. For the purposes of this facility, we would urge that the Fund, in the period ahead, take steps to enhance the usefulness and adequacy of the Trust Fund. In this regard we look forward to possible improvements, particularly with respect to the operational requirements of this facility. In our view, the balance of payments need, coupled with an acceptable broad direction of policy, should be taken as adequate criteria for purposes of eligibility to use Fund resources under the Trust Fund.

I should like next to address another issue which is of vital interest to African Governors. It is the need to promote the SDR and to endeavor to make it the main reserve asset of the international monetary system. Since our last meeting in Washington, three more uses of SDRs have been approved by the IMF Executive Board. Thus, in addition to the use of SDRs in settlement of financial obligations and for loans, it has now been made possible to use SDRs as security for financial obligations. We welcome the introduction of these new operations and hope that they will lead to a wider usability of the SDR and greater willingness of members to hold SDRs. Regarding the possibility of further widening the use of the SDR, we encourage the Executive Board of the IMF to consider other avenues including the use of SDRs in donations and swaps.

As an outgrowth of the general desire to promote the SDR as the principal international reserve asset, and partly as a result of the need to streamline the functioning of the international monetary system, the Managing Director of the IMF has made a proposal for a new approach to the establishment of a substitution account. Generally, the international community appears to express broad support for active consideration of this novel concept.

The African Governors note the progress made toward the establishment of an internationally based and voluntary substitution account. While this is a step in the right direction, we consider that further studies would have to be done taking into account matters of interest to developing countries such as:

  • (1) the voluntary character of the account at all stages of the mechanism;

  • (2) the liquidity, yield, and usability of the new SDR-denominated asset;

  • (3) the impact on IMF charges, on the international capital markets, and on the stability of exchange markets; and

  • (4) the effect on the preservation of the capital value of reserves.

With regard to continuing oil price developments, I should like to propose on behalf of the African Governors a reactivation of the oil facility in the International Monetary Fund. Given the present sharp increase in the price of oil and the consequential balance of payments burden on the economies of the non-oil developing countries, the African Governors believe it is appropriate at this time to advocate the creation of a 1979/80 oil facility. We hope that the creation of such a facility would assist in alleviating cost pressures in our balance of payments and cushion the hardships of adjustment during this period of major uncertainties in the world economy.

By way of winding up my brief remarks on the activities of the International Monetary Fund, permit me to congratulate both the Executive Board and the management of this august institution for the support which they have given us during this most difficult period in the adjustment process. This institution is endowed with a dynamic leadership and the Board has continued to be equally consistent and increasingly responsive to the needs of our changing circumstances. Over the past year, we have followed with great interest developments as they have taken place in the world and are happy to commend the ability of the Fund in coping with the difficult tasks that stand in the way of progress toward a better world economy for all.

Among some of the key problems that the IMF must continue to address in the period ahead, I wish to single out the importance of continuing to strive for a coordinated growth strategy among the industrial countries and the need for introducing greater symmetry in the application of surveillance by the Fund over the exchange practices and policies of members. In carrying out its work in these important areas, we hope that every effort will be made to apply evenhanded policies to all member countries irrespective of geographical size or economic growth strength. The need for equal treatment is all the more necessary considering the desire to broaden the scope for the achievement of the major objectives of the international community, namely, to promote adequate and balanced growth in the world and to ensure success in the adjustment process.

In speaking of the problems that beset the international community and in highlighting the particular set of difficulties that are peculiar only to our countries, we lend our support to the Board and management of the Fund and the Bank and hope that our views and policy position will be given due consideration in the course of the day-to-day exercise of decision making in the Board of the International Monetary Fund.

Before concluding, I would like to draw the attention of the meeting to a problem of great concern to the African Governors, a problem which requires a lasting solution. As you know, several African territories have recently gained their independence, or are in the process of doing so, and have become—or will become—members of these Bretton Woods institutions. There are currently 39 countries electing two African Executive Directors, or between one fourth and one third of the entire membership of the Fund and the Bank. These Directors represent from 16 to 23 countries, as compared with an overall average of 6.5 countries per Director. This disparity is likely to grow in the future.

This structure places an excessive burden on these African Executive Directors. As a result, it has become extremely difficult and onerous for them to devote adequate attention to the interests of all their constituents. This situation prevents our Executive Directors from efficiently performing their duties in the Board, especially when the interests of the member countries concerned are involved.

The Fund has, in fact, anticipated a situation of this sort, as evidenced in the text of the Executive Directors’ Report to the Board of Governors on the Second Amendment, to the effect that the Fund, when exercising its powers under Section 3 of Article XII, would be guided by the following objectives:

  • —to ensure that the number of the membership in the Executive Board will contribute to its proper functioning;

  • —to maintain a suitable balance in the membership of the Executive Board;

  • —to ensure that the size of the constituencies electing Executive Directors does not impose an excessive burden on these Directors and hamper the smooth operations of the Executive Board. . . .

Although the situation described was anticipated by the Fund—which is not the case with the World Bank—it will not be resolved by increasing the total number of elected Executive Directors, but rather by ensuring that any such increase would provide adequate representation of our countries in the Executive Board of the International Monetary Fund. We, therefore, urge the Fund and the Bank Executive Boards to study the matter without delay and propose a solution to reach that objective at our next Annual Meetings in Washington in September 1980.

In concluding, I should like, on behalf of the African Governors, to congratulate the Executive Boards and staff of the Fund and the Bank for their efforts, support, and progress during this most difficult period in the adjustment process.

Statement by the Governor of the Fund and the Bank for the United States—G. William Miller

On behalf of the United States, I want to express our appreciation to the Government of Yugoslavia for inviting us here. Yugoslavia’s energetic and independent spirit has long attracted the world’s admiration and respect. And Yugoslavia’s full participation in the work of the International Monetary Fund and the World Bank has shown how nations with different economic and political systems can cooperate to mutual advantage. We join the other participants in thanking the Government of Yugoslavia for its warm hospitality to us here in Belgrade.

My remarks today are addressed to one central theme. Restoring balanced growth to the world economy will require purposeful domestic adjustment on the part of all nations—large and small. The two international institutions whose work we are reviewing at this meeting can help us make these adjustments in effective and mutually reinforcing ways. We must make sure they are in a position to do so. We must make sure they have our support to do so. In the last analysis, however, the responsibility rests with each of us. My country, as the largest economy in the system, is determined to carry out that responsibility in full. Only when balance is regained, will it be possible to resume the steady economic advance we all desire.

This is the final Annual Meeting of the Bank and the Fund during the decade of the 1970s. It has been a decade marked by troublesome strains in the world economy. The will and ability of nations to cooperate internationally have been severely tested. The underlying strains might easily have led individual countries to the pursuit of inward-looking policies—to self-defeating efforts to protect their own limited interests at the expense of the broader interests of the community of nations. That this did not occur is convincing testimony to the vision of the architects of the Bretton Woods institutions, and to the maturity and wisdom of their successors—the representatives of the governments gathered here today.

The difficulties of the 1970s are all too familiar. The gains that have been achieved despite those difficulties are less widely appreciated. In the face of unprecedented payments imbalances, severe inflation, and high and persistent unemployment, international cooperation has been strengthened in important ways:

  • —Agreement was reached on far-reaching trade liberalization;

  • —Flows of official development resources continued to expand;

  • —Private financial markets successfully channeled huge flows of funds from surplus to deficit countries, and developing countries gained access to these private capital markets on a substantial scale;

  • —Intergovernmental cooperation in exchange markets became stronger and closer;

  • —The IMF Articles of Agreement underwent comprehensive revision, laying the basis for orderly evolution of the international monetary system.

This progress was not accidental. Nations might have responded to the problems of the 1970s by imposing trade and capital controls, by cutting back aid, and by aggressive competition in exchange rate policies. If that had happened, the world would have suffered staggering economic losses. Instead, we chose deliberately to seek cooperative solutions, recognizing that the pervasive links among our economies made cooperation essential to our individual as well as our collective well-being.

We must not forget that lesson. Once again the world economy has been destabilized by a large oil price shock, almost equal in dollar amount to that of 1973-74. On an annual basis, the jump in oil prices will increase the import bill of the developed countries by almost $75 billion and of the developing countries by $15 billion. This action is disrupting international payments balances and adding greatly to the problems of containing inflation and reducing unemployment. Furthermore, uncertainty about the availability and price of energy seems likely to persist. Inflationary pressures, building up over a period of years, have become so virulent as clearly to require resolute, sustained countermeasures. In this uncertain international economic environment, the prospects for world economic progress are less promising. And that is a particularly harsh prospect for the one fifth of the world’s population facing absolute poverty.

These problems are worldwide. They are shared in common, to varying degrees, by all our societies. They can be successfully overcome only through persistent national action, augmented by intensified international collaboration. And that means relinquishing a degree of autonomy in national action.

It is in this context that we must examine the present and future work of the International Monetary Fund and the World Bank Group. These two institutions provide the infrastructure for world cooperation in economic policy, in finance, and in development. The degree to which we support them represents the central measure of our willingness to support more effective global economic management.

Intensified collaboration is the course we must choose for the 1980s. It is therefore essential that the Fund and the World Bank Group be strong enough to do the job—strong enough in authority, operations effectiveness, and resources. I propose, therefore, to outline my views on the future direction of policy in these two institutions and on the tools they will need to do the job.

International Monetary Fund

Financially, the Fund is in a strong position to face the new testing period that lies ahead. The supplementary financing facility has been activated and remains almost fully available. The quota increase scheduled to take effect next year will add a large and timely infusion of resources. The compensatory financing facility, which proved so valuable during the cyclical downturn of the mid-1970s, has recently been substantially liberalized and will provide an important element of security to primary producing nations. Furthermore, the IMF has revised its guidelines on conditionality so that it can foster orderly balance of payments adjustment in ways that meet the needs and circumstances of members.

Nonetheless, there is more to be done to assure the adequate utilization of the Fund’s financial resources and to strengthen its capacity to manage the monetary system. Three areas deserve early attention.

First is surveillance. Under the amended Articles, Fund surveillance—surveillance over members’ general economic policies as well as exchange rate policies—is the centerpiece of international monetary cooperation. Without effective surveillance, there is no system. The Fund has moved cautiously and prudently in implementing its surveillance procedures. Bolder action is now required.

One possibility would be for the Fund to assess the performance of individual countries against an agreed global strategy for growth, adjustment, and price stability.

Another possibility would be to provide that any nation with an exceptionally large payments imbalance—deficit or surplus—must submit for IMF review an analysis showing how it proposes to deal with that imbalance. Now, only those countries borrowing from the Fund have their adjustment programs subjected to such IMF scrutiny. Greater symmetry is needed.

We should also consider inviting the Managing Director to take the initiative more often in consulting members directly when he has concerns about the appropriateness of policy. Any such approaches must, of course, be fully in accordance with the fundamental principle of uniform treatment for all members. For its part, the United States welcomes and values the Fund’s views and advice, and would see merit in a more active role on the part of the Managing Director in initiating consultations with members.

As a further step, we might now give serious consideration to the establishment of the Council, as successor to the Interim Committee, and give it a more specific and direct role in the surveillance process. There would be value in such a move, both substantively and symbolically, and I urge that each of us give fresh consideration to this idea.

A second area for improvement is that of international liquidity. There has been solid progress over the past twelve months in enlarging the role of the SDR in the monetary system. A more fundamental move, the establishment of a substitution account is now under consideration. If, working together, we can resolve the problems involved in setting up that account—and I am hopeful that with goodwill it will be possible to resolve them in due course—the result would represent an important new approach toward greater reliance on an international reserve asset and a more centrally managed international monetary system.

A third area in which it may be possible to strengthen the system and make the IMF more useful and influential is in the field of cooperation with the private financial markets. This is not a new idea. But the arguments in favor of it have become more compelling.

We all recognize that the private markets will, in the future as in the past, have to play by far the major role in channeling financing from surplus to deficit nations. Official institutions, including the IMF, play a vital role in this process, but it is essentially catalytic in nature.

We must ensure that the International Monetary Fund is doing all it appropriately can and should do in order to ensure that private financing flows smoothly and efficiently. We should re-examine ways in which the Fund can encourage the availability of better information on international bank lending, with greater uniformity with respect to potential borrowers. This could facilitate the process without jeopardizing the Fund’s close and confidential relationships with members. We should also explore ways of encouraging earlier recourse to the Fund by countries facing difficulty, in the interests of maintaining overall financial stability and avoiding the need for more severe adjustment measures at a later stage if problems are left unaddressed. . . .

Private Financial Markets

Strengthening the capacity and effectiveness of the IMF and the World Bank is also necessary to enable private markets to function smoothly and effectively. The latest increase in oil prices will place new demands on these markets to move funds from surplus to deficit countries. The actions of the two Bretton Woods institutions serve to strengthen the adjustment process, economic prospects, and credit positions of borrowing countries—all of which are necessary as a foundation on which private lending can take place on a sustainable basis. This process also emphasizes how the work of the two institutions reinforces each other.

More generally, a strengthened cooperative approach, looking toward a more orderly management of the world economy, provides a framework within which each nation can address common problems in a mutually supportive way. The United States recognizes its role in this system and will continue to act to carry out its national and international responsibilities.

U.S. Progress and Policies

Economic growth in the United States during the past four years has been strong, and has made a major contribution to world economic recovery. Output has increased by 22 per cent in real terms. Thirteen million new jobs have been created. At the same time, our rapidly growing market has provided a major economic stimulus for other countries recovering from world recession. Most notably, this has benefited the developing countries, which have increased their exports of manufactured goods to the United States much more rapidly than to other countries.

The United States is well aware of the important role of the dollar in the international monetary system. We are determined to maintain reasonable balance in our external accounts and to assure that the dollar is sound and stable. We have acted vigorously to meet that obligation, with policies to strengthen underlying economic conditions, and with forceful exchange market operations to counter market disruption.

The U.S. balance of payments has improved markedly. Our current account deficit will be reduced from $14 billion in 1978 to a few billion in 1979, despite an increase of $16 billion in the cost of oil imports. Next year, 1980, we expect a substantial current account surplus. Continued strong export performance, a rising surplus on services, slower import growth, and U.S. determination to respond forcefully to unwarranted exchange market pressures, all provide a firm basis for dollar stability and strength in the period ahead.

We have already achieved important progress in strengthening the dollar exchange rate. The dollar has declined in terms of some currencies, moved higher in terms of others, and remained stable relative to most. Measured against the average of OECD currencies, the dollar is now about 5 per cent above levels prevailing last fall. From the viewpoint of the OPEC nations, in relation to the other currencies they use to purchase their imports, the dollar has increased about 8 per cent on average from a year ago.

Notwithstanding the favorable changes in the value of the dollar measured in terms of these averages, the United States is determined to maintain exchange market stability for the dollar in terms of individual major currencies, such as the deutsche mark.

The United States also recognizes the necessity of solving its energy problem. We are making substantial progress. Since 1973 the amount of energy required to produce a unit of real output in the United States has dropped by 7.5 per cent, and in the industrial sector, it has dropped by 20 per cent. The ratio of the increase in energy consumption to the increase in GNP has fallen by one third since 1973. That performance compares favorably with other industrial countries. Household energy consumption has leveled off. Our transportation fleet is rapidly becoming more fuel efficient—the average miles per gallon for new cars rose from 13 in 1973 to 19 in 1979, and will rise to 27.5 by 1985.

More must, and will, be done. President Carter has announced a series of measures, both administrative and legislative, which will sharply improve the overall U.S. energy position. Phased decontrol of domestic crude oil prices by September 30, 1981 will reduce oil imports by an estimated 1.5 million barrels per day by 1990. In addition, immediate decontrol of heavy crude oil prices will stimulate increases in production estimated at 0.5 million barrels per day. Creation of an Energy Security Corporation will provide the resources to help finance private sector development of synthetic fuel. Major emphasis is also being placed on developing renewable sources of energy. When fully in place, our energy program will cut oil import requirements by 4 to 5 million barrels per day.

At the recent Tokyo Summit, the United States agreed that from now through 1985, we would import no more than 8.5 million barrels per day of oil, the level that prevailed in 1977. The President established a lower goal, 8.2 million barrels per day, for 1979. We are firmly committed to meeting the import targets.

Inflation continues to be our country’s most serious problem. It threatens our ability to achieve full employment, it impedes investment, and it impairs productivity. We are determined to bring inflation under control and regain price stability.

Our recent record is not satisfactory to us. Food and energy prices have temporarily driven U.S. price indices into the double digit range. Energy alone accounted for more than one half the total rise in finished goods prices at the producer level in the latest three-month period. In coming months this pressure will recede as the effects of recent OPEC price actions work their way fully through the economy. Food prices have moderated in the wake of good harvests.

Special factors aside, the inflation rate is still much too high and must be brought under control. This cannot be done quickly or easily. It can only be accomplished by a firm application of sound policies which deal with the economic fundamentals.

All major instruments of U.S. economic policy are being directed toward this task. Fiscal policy is directed toward restraint. We have arrested the increase in government outlays in real terms and tax receipts are rising. The federal deficit has been reduced from 3 per cent to 1 per cent of GNP. The Federal Reserve is exercising monetary discipline and will continue to keep firm limits on the growth of money supply. Despite rapid increases in recent months, the increase in Ml over the past year was held to 4.9 per cent—less than half the increase in consumer prices. The Federal Reserve is committed to meeting its targets for limiting the rate of growth of money and credit.

These fiscal and monetary policies are supported by price and pay policies that will help moderate inflationary forces. On September 28, President Carter announced a National Accord with U.S. trade union leadership that provides for labor’s involvement and cooperation on important national issues. The National Accord confirms that top priority will be given to the war against inflation. It recognizes that the discipline essential to wring out inflation will mean a period of national austerity. As part of the Accord, labor leadership agreed to participate in the voluntary program of wage and price restraint. The involvement and cooperation of labor—and of management—in developing and implementing policies to control inflation is critical for success, and this cooperation has now been strengthened. The National Accord will add momentum to our comprehensive attack on inflation.

The United States intends to reinforce the foundation on which to achieve sustained economic growth with price stability. We are headed in the right direction and are determined to stay the course. We are also determined to work with the nations gathered here to strengthen the international economic system, both through our own actions and through support of the IMF and the World Bank.

Let me add a personal postscript. The curtain will soon fall on the decade of the 1970s. It has been a turbulent period for the world’s economy. Progress has fallen far short of our great hopes.

Facing, as we do, another period of major adjustment, we have heard few words of encouragement at these sessions. It is right that we should be realistic about our difficulties. It is right that we should not delude ourselves with false expectations.

It is possible, however, as we begin to prepare the agenda for the 1980s, to see some cause for hope.

In particular, we have not given in to the temptation to become self-centered. The institutions for international economic cooperation are alive and well. The International Monetary Fund and the World Bank are proving their resilience, rising to meet the challenges.

For its part, the United States is unequivocally dedicated to dealing effectively with its own inflation and energy problems. This is the single most important contribution we can make to our own economic health and that of the world community.

I assure you that we have the will, determination, and perseverance to succeed in this endeavor. You can count on it.

Statement by the Governor of the Bank for Austria—Hannes Androsch

Let me first express my sincere thanks to the Government of Yugoslavia for their hospitality and courtesy and to the management and staff of the Fund and the Bank for the efficient organization of our Thirty-Fourth Annual Meeting. I would also like to welcome the members who have joined the Fund since the last Annual Meeting—Cape Verde, Dominica, and Djibouti.

The 1970s have been years of great international turbulence and problems, characterized by a continuous struggle of individual nations and the international community against accelerating inflation rates, increasing unemployment, deteriorating external payments, and slowing of growth rates. I would like to stress that the contribution of international organizations was essential and competent in handling the consequences we are facing. The importance of our international organizations has grown significantly within this decade, and a further strengthening seems necessary and should therefore be accomplished.

This audience has been confronted with quite a number of analyses concerning the international economic situation, presenting a rather gloomy picture of the difficulties ahead of us. Needless to say, problems have to be identified when solutions are wanted and political decisions have to be taken on the grounds of fair international cooperation to meet our responsibilities vis-à-vis our nations but also vis-à-vis the world community as a whole. But one is concerned about the fact that throughout the 1970s rather pessimistic perceptions have dominated our discussions during the Annual Meetings and elsewhere, despite the fact that we were able, by and large, to overcome the major difficulties. It seems to me that in successfully coping with the problems, closer international cooperation and, above all, more confidence is warranted, in particular when inflated pessimism could all too easily fuel negative expectations in a self-fulfilling way.

Let me now turn to the present economic situation. The last increase in oil prices has added impetus to the far too high deflationary process already on the way. But this upsurge in oil prices has also added to the inflationary spiral and contributed to the deterioration of external payments particularly in developing countries. The problem is not one of inflation alone, but rather again of “stagflation” or even “slumpflation.” Furthermore, the effects on external payments are comparable to those in 1974. In 1979 we expect again an OPEC surplus of $45 billion, and this could well increase to $55-60 billion in 1980. In addition, a great majority of Fund member countries are still in the process of attempting to restore order to their economies in the wake of the serious and unprecedented disturbances of the period 1973-75.

We need a full range of policy action to avoid a recession accompanied by inflation. We have to pursue policies that would sustain an appropriate level of economic activity and employment, while minimizing inflation. Further, we should accept a strategy to solve gradually the necessary adjustment, supported by temporary financing and not by depreciation, deflation, or trade restrictions.

Generally, what is needed is a wider and broader approach for defining the problems and preparing and implementing the proper solutions. The ever-increasing global interdependence calls for internationally agreed-upon solutions. But, and let me stress this fact, sound economic policies in the national setting do have to lay the groundwork for proper international actions. In the national context, only a comprehensive policy mix comprising fiscal, monetary, and incomes policy and a strategy to foster structural changes is feasible. Everybody will agree that higher inflation does not create or protect employment. Therefore, no inflationary impetus should be accommodated from the monetary side. In fact, a reasonable monetary policy accompanied by appropriate exchange rate policies are the cornerstones of successful stabilization. Adjustment cannot be solved by reflation or depreciation. Needless to say, monetary action has to be supported by adequate fiscal and incomes policies. A cautious fiscal policy may serve as an instrument to stimulate selective growth and structural adjustment, thus contributing to a better utilization of resources. An incomes policy with due concern for regional, structural, and sectoral differences will certainly contribute positively to overcome the major difficulties.

A conspicuous role within this strategy will have to be played by a comprehensive energy policy resulting in an adequate supply of energy at reasonable costs. To be sure, the industrialized economies have far too long been accustomed to waste energy enormously, since it was abundant and cheap. The oil price hike of 1973 and the subsequent price rises have confronted us worldwide with a new situation. Broadly speaking, the resulting technological challenge consists in finding appropriate, safe, and certain ways of substituting oil by other forms of energy, developing alternative forms of energy, and conserving energy.

Globally, the economic policies applied to overcome the difficulties of the 1970s have led to different results. As to my own country, I should say that our economic policy has been aimed at maintaining “overall stability” and so far we have not been unsuccessful. Austria has responded to the new push of inflationary pressures in an early stage. Therefore, we have been able to reduce inflation below last year’s level in spite of the cost explosion in world markets. In pursuing a hard currency policy and an appropriate monetary policy, Austria was able to benefit from the so-called “virtuous circle.” This policy has helped in reducing inflation to 3.3 per cent, at present the lowest rate among the European OECD countries.

In 1979, real growth is expected to be as high as 5 per cent with virtually no unemployment. The external position which gave rise to major concern two years ago could be brought under control and, in fact, has improved considerably since. It goes without saying that the economic performance of any country is related to the international monetary system.

In this context, I want to emphasize the importance of two steps. First, I see the initiative to establish a substitution account can be a step forward in the evolution of the monetary system. It is a widely accepted view that a single reserve currency no longer serves the interests of the world as a whole, nor of the United States. And yet, a multiple-reserve currency system would probably put a severe strain on the reserve centers to coordinate their policies. Therefore, a substitution account, properly handled, could contribute to greater stability.

Second, the European Monetary System is exercising to a certain extent stabilizing effects on the exchange rates, but it is also important as an integrating factor in Europe.

We have just spoken of the risks and dangers inherent in increased oil prices, inflation, and speculative capital movements. But these are not only problems for what is often called the developed world. We have to see the scale of problems which less developed countries are now facing, in particular those which have been the most deprived or the most exposed to the present risks. We have to modify our policies in a way that we are able to respond better to the urgent need of the poorest countries. In view of recent developments, there is no doubt about the urgency of the ratification of the Seventh General Review of Quotas. I am happy to report that parliamentary procedures to implement Austria’s share in this operation are well under way. . . .

Let me sum up and conclude my statement in saying that due to coordinated activities often initiated, supported and carried out by the international organizations, we were able to overcome the major difficulties of the past decade. We should be confident to be able to do so in the years ahead of us with firm political decisions and closer international cooperation, especially through our common organizations.

Statement by the Governor of the Fund and the Bank for India—I.G. Patel

It is a matter of particular gratification for the Indian delegation that we are meeting this year in this beautiful capital of Yugoslavia. Our two countries have a long history of friendship and shared endeavors; and I have no doubt this meeting will provide us with yet another opportunity of collaborating in the cause of world economic development. The city of Belgrade has been described as one of “tempestuous history and a dynamic present”; and if there is one thing which is most needed with regard to the world economic situation at present, it is the spirit of dynamism which seeks a way out of the present difficulties in a positive and mutually supportive manner.

As the documents before us outline vividly, there are many aspects of the current economic situation which cause serious concern. For us, in the poorest part of the developing world which does not enjoy adequate supplies of domestic oil, the coming years carry the prospect of a formidable set of difficulties. The poorer prospects of growth in the industrially advanced countries mean a lower demand for our exports and the acceleration in the pace of inflation in the richer countries spells a deterioration in our terms of trade. This latter tendency is accentuated by recent trends in oil prices. The combined result is a much greater need for resources from abroad to maintain, let alone improve, our low standards of living—and this at a time when the response of the developed world to their current difficulties is taking what appears to us to be a needlessly negative turn. Reluctance to increase concessional aid flows and further restrictions on our exports, particularly of manufactured goods, as also on the entry of our people, cannot but appear to us as responses which are as shortsighted from the point of view of the development of the world economy as they are detrimental to our own increasing efforts—and I venture to say, reasonably successful efforts—to remove mass poverty from our midst.

These immediate prospects become all the more worrisome when set against the grim outlines of the medium-term scenario sketched out in this year’s World Development Report. Even on fairly optimistic assumptions, we are left with the dismal prospect that at the end of the century there would still be 600 million people classified as absolute poor; and I need hardly add that it is a matter of particular concern to us that the majority of these would be residents of Southern Asia.

It is not merely good politics but sensible economics to spare the world a growing polarization and confrontation between the North and the South. We have therefore consistently pleaded in gatherings such as this that effective and energetic steps should be taken by the developed countries to maintain their economic activity at a level which will sustain a high rate of growth in international trade and to continue to discharge their obligation to the international community by way of liberal trade policies and concessional capital exports, particularly to the poorer developing countries. Even at the risk of saying the obvious, it is particularly relevant at the present juncture to stress the importance to all nations of policies that emphasize our growing interdependence. Larger capital exports to developing countries on terms which they can afford and in a manner which facilitates prompt utilization can spur world demand in general and offer a way out of sluggish growth to the developed countries as well. Larger production around the world of commodities which are in particularly short supply such as food, industrial raw materials, and energy can stimulate growth as well as counter inflationary pressures in all countries. The same is true of allowing the poorer countries to develop fully their export potential in low-cost manufactured goods, so that the structure of production everywhere gets better adjusted to the longer-term requirements of sustained growth in a relatively inflation-free environment. I for one feel that this is a vision, or a version if you like, of our common future which is as realistic as any other—and certainly more rewarding.

As things are, the performance of the developed countries in the matter of real resource transfers, continues to be less than satisfactory. ODA has declined from 0.35 per cent of GNP of DAC countries in 1975 to 0.31 per cent in 1977. Indeed, one discerns a move by the same countries even to question the universal acceptance of 0.7 per cent target! We are convinced that the growing requirements of low-income countries for external resources cannot be met adequately by reliance on private capital flows. Dominated as these flows are by multinational corporations, their contribution in terms of promoting technological and economic self-reliance in developing countries is seriously in doubt. It is precisely this awareness which has led to the international acceptance of the ODA target.

It is also a matter for concern that even in respect of official grants and concessional loans, low-income countries get a smaller share than would be justified by their population share. In fact, the share of low-income countries in net foreign capital inflow for financing development, which is already small, has been declining. Again, it is not only the quantum of ODA that is of importance; its quality is equally important. One cannot emphasize sufficiently the need to soften the terms of ODA. Several countries have set an excellent example of providing most of their assistance to low-income countries on a grant basis, and I would hope that more countries would follow their lead. We have always urged that there is a case for a retroactive application of such softening of the terms of assistance if developing countries are not to find the already heavy burden of debt servicing increasingly difficult to bear.

To say all this is not to question that the major part of development effort will have to be made by the developing countries themselves. For us in India, self-reliance is not a distant goal but an objective toward which we are progressing steadily. In per capita terms or in relation to the number of absolute poor, or in terms of the share in total investment effort, the draft that India makes on external resources is extremely low. If external assistance is to go to countries which need it most and which show a determination to help themselves, I venture to suggest that my country deserves it greatly.

Regarding trade, we pointed out even last year the deleterious effect on our trade of the restrictionist tendencies among developed countries. We notice with a great deal of distress that in the current year many developed countries have either intensified existing import restraints or introduced new ones. I need not emphasize the harmful effects these will have on the economic growth of developing countries particularly in a period of sluggish global growth. We earnestly hope that the Tokyo Summit Conference declaration to fight protectionism will be vigorously implemented by the industrial countries. As I stated earlier, an increase in the export earnings of developing countries implies an increased demand for the products of developed countries and a chance to remove workers from low-skilled jobs to occupations of higher productivity. A recent report of the OECD shows that exports of manufactures to the newly industrialized countries create around half a million more jobs than are lost due to imports from them. In the long run the cost of adjustment tends to be smaller than the benefits from trade liberalization, including lower rates of inflation and higher consumer welfare.

In this context I may mention that India has adopted a liberalized import policy consequent upon the improvement in our balance of payments and has thus contributed her mite to the international adjustment process. However, India’s balance of payments is threatened by recent economic events such as the increase in the energy import bill, slowdown in exports due to sluggishness in world trade and restrictions abroad, and the deceleration of foreign remittances. I am mentioning this only because I wish to highlight the fact that a favorable international climate is a prerequisite for the pursuit of positive and outward looking policies in developing countries.

I mentioned at the outset that the immediate outlook facing the oil-importing developing countries is particularly difficult. Their combined current account deficit which was around $24 billion in 1978 may rise to $37 billion in 1979 and is expected to worsen further to $45 billion in 1980. Nearly three fourths of the estimated increase in the deficit in 1979 is attributable to a deterioration in the terms of trade of these countries rather than to any surge in imports or slackening of export effort. The plight of the low-income non-oil developing countries is even more serious because in their case, the size of their deficits is severely constrained by the inadequacy of official development aid and their poor capacity to borrow in private capital markets. The result is that they have little alternative to adjusting to near-stagnation rates of growth unless additional means are urgently found to assist them. This group of countries accounts for more than 40 per cent of Fund membership in terms of population, but less than 3 per cent in terms of GNP. It stands to reason, therefore, that the policy prescriptions designed to correct the imbalances of this group should be such as not to frustrate even modest aspirations for development.

That is why we feel that there is sufficient justification now for the establishment of a medium-term balance of payments financing facility. This should be complemented by a further adaptation of the existing facilities in the Fund so as to meet adequately the requirements of its members in the changing world economic environment. We welcome, therefore, the recent decision of the Fund to improve the compensatory financing facility. We are also pleased that the Development Committee and the Interim Committee have generally favored the proposal to extend the period of repayment under the extended Fund facility and have reacted favorably to a lowering of the interest charges on drawing under the supplementary financing facility. We urge that any new interest subsidy arrangement which is adopted in the Fund should provide the maximum benefit to the low-income developing countries. Even if longer-term proposals of a link between SDR creation and development finance cannot find ready acceptance, is it too much to hope that at least some of the developed countries will forgo a part of their share in SDR creation for the remaining two years of the current allocation in favor of any proposals specifically designed to assist the most seriously affected countries?

To enable the Fund to assist member countries in the critical days ahead, we would urge early implementation of the increase in quotas agreed in the Seventh Review and perhaps early initiation of action for the Eighth General Review of Quotas. In regard to the latter, we are of the view that time has now come to undertake the task of fashioning a formula for determination of quotas which is more appropriate to present-day conditions and needs.

Regarding the substitution account, since the matter has been discussed at length in the Interim Committee only a couple of days ago, I would express here only our conviction that the account cannot claim widespread acceptance unless adequate care is taken to safeguard the interest of developing countries in vital areas like liquidity, rate of return, and maintenance of capital value. Nor can the establishment of such an account reduce in any way the need and desirability of regular and periodic allocations of SDRs—hopefully, and in the not distant future—on a basis more rational than in relation to Fund quotas as at present. It is not too early to begin thinking of SDR allocation beyond the current three-year period.

There are many other aspects of the international monetary system which deserve continuing attention with a view to improvement. That is why in the Group of 24 we undertook the preparation of an outline of a comprehensive program of action which has been endorsed by the Group of 77. We are happy that the Development Committee and the Interim Committee have agreed to keep this program in view in their continuing deliberations. . . .

Before I conclude may I join other Governors in welcoming our new members, Cape Verde, Djibouti, and Dominica. May I also express our gratitude to all those who make our two institutions such important instruments of international cooperation. To Mr. McNamara and his colleagues in the Bank, we owe an increasing debt of gratitude for their unstinting and imaginative efforts on behalf of the poorest people everywhere. In Mr. de Larosière we have not just an able and energetic Managing Director for the Fund but also an outstanding exponent of the cause of the developing world. To him and his colleagues also, we owe a special debt of gratitude.

Last but not the least, I wish to thank the Yugoslav Government and the friendly people of Yugoslavia for their generous and warm hospitality. They have spared no pains to make us comfortable and to ensure the smooth progress of our work. My delegation was particularly pleased to hear the inspiring address of Marshal Tito, statesman, world leader, and the only founding father of the nonaligned movement who continues to carry aloft the banner of peace and cooperation in an increasingly interdependent world.

I am sure all of us will carry back fond memories of this meeting.

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

Mr. Chairman and fellow Governors, let me first express the sincere appreciation of the Saudi delegation to the Yugoslav people, the Yugoslav authorities, and, in particular, to President Tito for the warm welcome that we have received.

The recent performance of the international economy has been far from satisfactory. This is a matter of concern to all of us. It is, however, the aggravation—now taking place—of the already difficult position of the developing countries that requires our most urgent attention.

The Fund, through its surveillance procedures, has suggested desired policies for major countries to achieve increased stability and a better distribution of economic growth and external balance. Some success has been achieved. There has been a reduction in the imbalance on current account among the industrial countries. On the other hand, growth rates in the industrial countries have been low and a recession has now emerged in the United States. As a result of this, there has been a marked slowdown in the growth of international trade. High levels of excess capacity, coupled with underlying inflation, have become a feature of much of the industrial world.

The industrial countries have historically experienced cyclical difficulties. However, in recent years these difficulties have taken on a certain permanency. Full recovery from recession never seems to be achieved. More disturbing is the decline in investment and productivity growth.

The difficulties of the majority of developing countries are at first glance most vividly reflected in the aggravation of their current account deficits. This, however, is only a symptom of deeper problems. It is largely due to slower growth rates and higher inflation in the industrial countries—thus affecting exports adversely and resulting in declining terms of trade.

These interrelated difficulties of industrial and developing countries are deep-rooted. Yet, in some quarters, blame has been directed toward oil pricing. Adequate consideration has not been given to the fundamental problems regarding the performance of the industrial economies—nor to the requirements for a satisfactory international energy policy.

The international oil market, in recent years, has been characterized by increasing demand with little or no net additions to supply. It is clear that higher oil prices were necessary to balance the market.

From 1974 through 1978, the real price of oil declined by more than 30 per cent. The price adjustment in 1979 has brought about a real increase of about 5 per cent since 1974. The current level of oil prices is a necessary minimum to bring new sources of oil and other energy sources on line.

The long-term solution for the energy problem must be based on conservation and more realistic pricing policies in certain industrial countries, together with the development of other sources of energy. If this fact is not fully appreciated, future difficulties will be even more pronounced than anything we have seen to date.

The world’s energy problem requires a coordinated approach. It is important that a worldwide understanding be reached concerning the use and valuation of oil. Such an understanding can be based on the simple fact that the use of oil is the use of an exhaustible resource. Thus, long-term considerations should guide our decisions concerning the use of oil. It is to the common interest of all that the period of transition to non-oil energy sources be extended as far as possible, and that this period be effectively utilized to develop these sources of energy.

Saudi Arabia has an overriding interest in the development of a satisfactory international energy policy. We are fully prepared to participate in a dialogue between producing and consuming countries. This dialogue should be aimed at strengthening the functioning of the market mechanism and promoting conservation of oil resources. From the viewpoint of the oil exporting countries, our legitimate interests in this dialogue should also include the transfer of technology.

We are concerned about the problems of developing countries, but we cannot agree that these difficulties are due primarily to the price of oil. Our attention must be, instead, directed to the more fundamental difficulties of developing countries. The objectives must be the more effective working of the adjustment process for the interests of the developing countries, a much larger flow of development financing, and a reduction of protectionism by the industrial countries.

The contributions of Saudi Arabia to the adjustment process are well known. In 1974, Saudi Arabia expanded its own development effort in a broad and deliberate fashion. As a result, our current account surplus including transfers has been reduced from a peak of US$24 billion in 1974 to a deficit of close to US$1 billion in 1978. Although the surplus will emerge again in 1979, it is expected to be absorbed rapidly. The maintenance of a large surplus position in our international payments is not an objective in itself and is inconsistent with our economic expectations.

Saudi Arabia has heavily contributed to various programs of concessional development assistance. As an overall indicator, we have, on average, committed annually since 1974 about 10 per cent of our GDP on a highly concessional basis and in the form of outright grants. Such resources have been disbursed both on a bilateral basis and through many international and regional institutions. In particular, through the Fund, we have been the largest contributor to the oil facility, the supplementary financing facility, and to the Subsidy Account. . . . In fact, since 1974, we have disbursed concessional resources far in excess of our proceeds from sale of oil at higher prices to developing countries. Some other OPEC countries have also made similar contributions to concessional development assistance.

The adjustment policies of the industrial countries, on the other hand, have been directed mainly at reducing imbalance among themselves. They have been, however, unable to achieve a reduction in the level of excess capacity and in the rate of inflation. Admittedly, these are difficult problems. But it is important to recognize the significance of their solution to the developing countries. As an example of this, from 1976 to 1978, while the trade deficit of non-oil developing countries with OPEC remained at a constant level, the overall trade deficit of these countries increased from US$28 billion to US$47 billion.

In the area of development assistance, the contribution of the OECD countries has in fact declined in real terms from earlier years. To achieve an adequate flow of development assistance, substantial increase in the contributions of the OECD countries is clearly required.

To be fully effective, flows of development financing must be supplemented by a reversal of protectionism and a recognition of the need for structural changes in international trade. Industrial countries have been reluctant to accept the entrance of developing countries into manufacturing areas where they now have a comparative advantage. Industrial countries should not resist the needed changes, but should instead adopt a deliberate policy to accommodate emerging changes in patterns of trade.

To achieve our mutual goals, we attach great significance to the role of the International Monetary Fund in the international adjustment process. It is essential to increase the use of Fund resources on terms which recognize that the increasing deficit of the developing world is for reasons substantially outside of their own control. Accordingly, we have strongly supported the increased access of developing countries to Fund resources through an easing of conditionality and the removal of quota limits from drawings under the compensatory financing facility. In order to achieve an adequate expansion of IMF credit, however, Fund lending policies need further review. . . .

Finally, we have watched with growing concern the renewed instability in exchange markets. We urge the authorities of these countries to take all feasible and necessary measures to restore stability to exchange markets and to support the longer-term reform of the international monetary system. It would be naive to pretend that a continuous erosion of our financial resources, through inflation and exchange depreciation, could not evoke reactions. We have undertaken to provide a larger supply of oil. We have done this to maintain more orderly conditions in the oil market and to promote a higher level of sustained growth of the world economy. Saudi Arabia has always formulated its policies with a high priority attached to international needs and requirements. But we are finding it increasingly difficult to continue our policies under prevailing instabilities in exchange markets coupled with high levels of inflation in industrial countries.

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

First of all, I want to extend our wholehearted gratitude to the Yugoslav Government for its hospitality during this extremely well-organized Annual Meeting. It is a great pleasure for us to be the guest of a country with which we have such a close cooperation within the International Monetary Fund and the World Bank.

Our Annual Meeting is taking place at a time when the recovery of the world economy, which became evident in 1978, has been disrupted by yet another sharp rise in oil prices.

I do not intend to elaborate on the policies to be pursued in order to get through the very difficult period that lies ahead. The strategy to be employed has already been admirably formulated by the Managing Director, Mr. de Larosière. Clearly, the control of inflation is of paramount importance. Care should be taken to avoid excessively restrictive monetary and budgetary policies, which would unnecessarily harm the employment situation. An appropriate policy mix is required. Because of the importance of exchange rate stability, external considerations will have to play an important role in shaping monetary policy. It is also necessary to prevent as far as possible the passing on of the increased oil prices to incomes. This is in the interest of both industrialized and developing countries.

Today, I want to emphasize the problems of the countries which will be hardest hit by recent developments, and to elaborate on possible solutions of these problems.

Provisional estimates indicate a deficit on the current account of non-oil producing developing countries in 1979 of nearly $50 billion. This collective deficit is, as a percentage of GNP, about as large as in 1974. Moreover, the figures conceal very great differences within the group. Another cause for concern is that the increased deficit in the past few years has been caused to a large extent by a deterioration in the terms of trade, and therefore makes no contribution to the development process.

Although the necessity for adjustment should have high priority in the developing countries as well, it will not always be possible to effect this in the short term. Therefore, substantial financing will be unavoidable. The commercial banks are in a position to play their part in the necessary financial recycling again, but this will not provide an adequate solution for all developing countries. The debt position of many countries is already serious and is reaching dangerous proportions for a growing number of them. In addition, if an excessive call is made on commercial sources the necessary adjustment may be jeopardized or deferred.

In present circumstances therefore, the Fund and the World Bank must play a vital role. The member states will have to enable the institutions to fulfill this role properly by adjusting and improving the existing facilities of the Fund and the Bank and increasing their financial base. It is the Bank’s role to cope with the structural deficit of long-term capital by means of a more frequent use of the instrument of sector and program loans. Joint financing with the commercial banks should be further encouraged. The Fund, on the other hand, should continue to provide financing in the case of temporary balance of payments deficits on an adequate scale. I consider it very important that the Fund make its credits subject to adequate policy conditions to achieve adjustment of the balance of payments in an appropriate time span. However, these conditions will have to be adapted to the specific situation in the country in question, as was laid down recently in the new guidelines.

The developing countries’ needs for assistance cover the whole range from long-term capital on concessional terms to short-term balance of payments credit. An expansion of the Fund’s credit facilities has been achieved this year by the entry into force of the supplementary financing facility. Another achievement is the recent improvement and expansion of the compensatory financing facility. These, it is hoped, will soon be followed by the implementation of quota increases under the Seventh General Review. . . .

In addition to what has been achieved in the past year, proposals which deserve our full attention are under discussion in both institutions. Of particular interest is an improved utilization of the substantial credit capacity already available. A lengthening of the maturity of loans under the extended Fund facility deserves serious consideration, although it is doubtful whether these maturities can be considered as temporary balance of payments financing. More study of this subject is required with due emphasis on closer collaboration between the Fund and the Bank. Here I am referring to the greater part which the Bank could play in the financing of adjustment programs extending over a rather long period. A combination of program and sector loans from the Bank with credits from the Fund has proved to be an instrument of great value in specific situations in the past. . . .

Turning now to the Fund, granting interest subsidies to low-income countries for drawings on the supplementary financing facility is an attractive possibility to reduce the burden of high interest rates. There will have to be further discussion on the financing of this proposal. It is important to encourage the use of the considerable funds which are available through this facility without encroaching upon its conditional character.

So far I have been talking mainly about the financing of balance of payments deficits. The necessary adjustment of the world economy will only succeed if we are assured of a sufficient stability in exchange rates. The establishment of the EMS in Europe has made an important contribution. Close collaboration with the Fund will be necessary. Stability of exchange rates is, of course, very much dependent upon the exchange rate of the dollar and, therefore, on the domestic policies of the United States. If movements toward stable exchange rates are to continue in the longer term, the volume and future creation of international dollar reserves will have to be controlled.

This brings me to the substitution account. Introduction of such an account might be a way of ensuring that SDRs acquire a more important place in the international monetary system, in accordance with the objectives laid down in the Fund’s Articles of Agreement.

During the last Annual Meeting in Washington I proposed that plans for a substitution account be submitted here in Belgrade. The principle now seems to enjoy support in a wide circle, though many important questions still remain to be answered. If substitution is to be made possible, it is—among other things—essential that the new SDR claims be made as attractive as possible. At the same time the various kinds of SDRs should not be too dissimilar. This could lead to amendments of the provisions concerning the SDRs proper. Moreover, the consequences, if any, for remuneration and charges in the General Department will have to be considered. Further important questions, still to be solved, relate to the provisions for the maintenance of value and for the burden-sharing of potential losses. Finally, I would like to stress that substitution has to be placed in the framework of a more symmetrical adjustment process. As long as future developments in this area are not sufficiently clear, opening of the account has to be regarded as a one-time operation, subject to adequate procedural safeguards.

I trust that we will be able to make progress on this subject during the next meeting of the Interim Committee in Hamburg.

Statement by the Governor of the Fund for Italy—Filippo Maria Pandolfi

Over the last twelve months we have seen our economic forecasts disproved by actual developments; our hopes of consolidating the positive results of a concerted strategy upset by the re-emergence of instability and uncertainty; our ability to diagnose economic illnesses frustrated by our inability to apply the therapy. Mr. de Larosière has given us a full account of these troubling events in his opening address, and his frankness deserves our full praise and appreciation.

World economic outlook

During 1979 the broad picture of the international economic situation has indeed deteriorated. Inflation has been accelerating worldwide. The deflationary impact of the oil shock and a cyclical downturn in the United States have tended to slow down the growth of the world economy. Exchange markets have come again under pressure, and a modern version of the gold rush seems to have started. Once again the real problem confronting us is not to be overtaken by events.

The new circumstances require an adjustment in the policies of developed and developing countries alike. The highest priority among policy goals will have to be assigned to fighting inflation. To contain the cost in terms of growth and unemployment, such policy should be accompanied by determined action to foster investment, improve resource allocation, and remove distortions in the price system. Moderate wage policies are also essential, if a new wage and price spiral is to be avoided.

The deflationary effects of the increase in oil prices will have to be accepted. The inflationary impact, on the other hand, can be minimized if the cost involved in terms of real resources and incomes is appropriately and equitably shared among the social partners.

An energy policy for the long run will have to be designed to reduce oil consumption and to enhance alternative sources of energy, since energy is going to represent a permanent constraint to world economic growth.

Let me now turn to the economic outlook in my own country. When I addressed this meeting last year I indicated that the Italian economy was staging a recovery, that the balance of payments prospects were favorable, and that progress was being made in reducing inflation. Developments since then have in many respects validated that prediction. Indeed, real GNP is expected to show an increase of more than 4 per cent in 1979, and the current balance of payments has remained in surplus. The exchange rate of the lira has been stable, and our participation in the EMS arrangements has been helpful in stabilizing expectations. However, our price performance has been disappointing, and inflation in Italy has continued to be higher than the average of the EEC countries. But with the considerable degree of adaptability displayed by enterprises in large sectors of the economy, exports have so far remained broadly competitive in world markets.

For 1980, Italy’s overall economic outlook has become less favorable, given our heavy dependence on imported energy and the role that exports play in the growth of our economy. Although changes in political circumstances have resulted in delays in the implementation of our Three-Year Plan, the Italian Government is determined to pursue policies of structural adjustment in line with the Plan. For 1980 our aim is to bring down the rate of inflation to that prevailing in 1978 (12 per cent) and to obtain an output growth of 2.5 per cent. To this end, the government budget will contain detaxation measures in favor of enterprises in order to reduce labor costs. It will also provide for higher taxes on energy consumption and for increased tariffs on public services. The intended effect of the budgetary policies for 1980 would thus be to stimulate both private and public investment without contributing to inflation.

Policy coordination for development

Recent events raise serious problems for developing countries, which are in no way addressed by global policy prescriptions. The 1979 oil price rise will aggravate the combined deficit of this group of countries, which is expected to reach the staggering figure of $53 billion in 1980. The impact of the new oil shock comes on top of an already unbalanced domestic and external financial condition for LDCs. We must be frank and admit that additional pressures for LDCs as a group are likely to result from the industrial countries’ adjustment effort, with adverse effects on both the growth of their export markets and their terms of trade.

The combination of unfavorable external developments and domestic factors has led to a substantial worsening of the development prospects for LDCs. To redress at least in part this situation a policy strategy should be designed to step up the flow of real resources toward non-oil exporting LDCs. In this regard, fresh consideration could be given, as part of a global strategy, to schemes of “triangular” cooperation, whereby capital goods and technology and human skills would be supplied by industrial countries while financial resources would be made available by surplus oil exporters. To the extent that inappropriate domestic policies are behind the disappointing results attained in recent years, forms and conditions should be studied under which an increased flow of real resources would be provided in order to favor the adjustment process. A long-term commitment by oil producers to such forms of cooperation would greatly contribute to the stability of international capital and foreign exchange markets.

We also expect international institutions, particularly the IMF and the World Bank, to play a larger role than in the past in harmonizing policies of member countries, through a strengthening of surveillance activities and the channeling of appropriate financial resources to LDCs. . . .

These initiatives, however, do not lessen the need for an increase in aid flows by all countries. As for Italy, following the cancellation of debts vis-à-vis ten developing countries early this year, the Government has presented to Parliament just two weeks ago a proposal for doubling the volume of ODA in 1980, and further increases in assistance to LDCs are envisaged.

Exchange rates and international liquidity

Since the last Annual Meetings the exchange rate system has gone through a period of relative calm for a few months. However, since mid-year 1979, currency unrest has become increasingly widespread and the dollar has come under renewed pressure.

The periodic re-emergence of this kind of disturbance is due to the presence of wide inflation rate differentials among major countries. Under these conditions sudden shocks, such as an increase in oil prices, can quickly upset the fragile equilibrium of exchange rates.

The perception that conditions are basically unstable and unsettled has led to a process of portfolio readjustment both by private and official dollar holders, which increasingly might lead to reserve diversification and in time to a multicurrency reserve system. Such a system would require a degree of monetary cooperation far greater than presently feasible, and would therefore be inherently more unstable than a dollar standard itself.

The search for a more rational reserve system has occupied economists and monetary authorities for years, but positive results have been hard to come. Although we agreed to include in the amended Articles of Agreement of the Fund the objective of making the SDR the central reserve asset, very little progress has been made in this direction. In trying to attain that goal, we should keep in mind the lesson drawn from the past, namely, that the evolution toward an SDR-based system can only be a gradual, long-term process. It is important, however, that we consider this process as irreversible and that we commit ourselves to make it workable. We should make it clear that we are not looking for yet another stop-gap measure, but that we are determined to lay the foundations of a new, internationally managed, monetary order. In this spirit, I welcome the agreement reached in the Interim Committee to continue to work toward the establishment of a substitution account.

The success of our endeavors will depend crucially on our mutual commitment and determination to back the new arrangements both financially and politically. A concrete way to provide such a backing is to make sure that the international adjustment process works effectively and symmetrically.

This is a difficult goal, as conflicts have often arisen on the appropriate strategy to deal with payments disequilibria. It is precisely to reconcile these conflicting interests that the Fund has been given powers of surveillance. Member countries have so far been reluctant to relinquish to the Fund some of the sovereignty that each government maintains in the conduct of external policies. But in a closely interdependent world economy such an autonomy has been more illusory than real.

It is therefore important that we make a renewed effort to enable the Fund to exercise its powers toward all of its members over the broad spectrum of adjustment policies in a framework of medium-term structural adjustment. If this is achieved, the substitution account will contribute to the stability of the monetary system.

I cannot conclude without saying how much we have appreciated and admired the efficiency and warmth of the hospitality of Yugoslavia and how much we have been honored by the presence here yesterday of her historical leader, President Tito.

I say this with deep conviction coming as I do from a neighboring country. Nations know the difference between neighborhood and friendship. And we are friends. The countries here represented know the difference between mere association and true solidarity. Indeed, true solidarity is needed, within the framework of our monetary and financial institutions, to meet the challenge posed by the state of the world economy.

October 3, 1979.

See pages 312–22.

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