Discussion of Fund Policy at Fourth Joint Session 1

International Monetary Fund. Secretary's Department
Published Date:
November 1979
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Statement by the Governor of the Fund and the Bank for Malaysia—Tengku Razaleigh Hamzah

It is a great honor and privilege for me to address distinguished fellow Governors at these Thirty-Fourth Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund. I wish to thank the Government and people of Yugoslavia for the excellent arrangements made to host the Meetings here in Belgrade and for the warm hospitality extended to all of us.

At the last Annual Meetings, Governors expressed deep concern over the prospective deterioration in the world economic situation and its detrimental impact on the economic performance of the developing countries. Much of this has come to pass and we are now in the midst of an economic malaise characterized by high rates of inflation and unemployment. Even the 1979 Annual Report of the Fund has admitted that “… with respect to several of the most fundamental economic problems, little visible progress has been made in the period since the 1978 Annual Report.”

The experience of the 1970s has led to a widespread recognition that no country can afford to ignore the impact of international developments on the management of its economy. Given this development and the need to cooperate with each other, consultations have been proceeding to foster greater international coordination and cooperation to resolve the many complex and pressing problems. The world economic outlook is still clouded with uncertainties, with slow growth, high inflation rates, and pervasive instability in the international monetary system. Latest efforts by the national authorities to deal with these basic problems and the spread of protectionism have fallen far short of expectations.

In the context of interdependence, the destinies of the North and South are closely linked to each other, irrespective of differences in political ideologies and economic systems, through the flow of trade, financial resources, and direct investment. The stark realities are that we cannot progress in isolation. It is therefore important that remedial actions and solutions be taken urgently, failing which the consequences can be disastrous to both the developed and the developing countries. In the absence of real and effective cooperation, the economic and social disparities already existing between rich and poor nations are bound to widen. This will result in increasing dissatisfaction and disenchantment on the part of the world’s poor. In this circumstance, one cannot avoid sharing the consequences of further international economic disorder, which will threaten the harmony, peace, and liberty of the world. In sheer desperation, the developing countries could well be pushed to resort to radical changes in the existing conduct of their commodity exports, with serious implications for the maintenance of living standards in the developed countries. In such an event, the developed countries, which have the most, might well end up the principal loser.

Memories still remain fresh on the serious consequences of the 1974/75 oil crisis and its wide-ranging dampening impact on growth, employment, and living standards throughout the world. One could well imagine the seriousness of the situation, if in addition to energy, supplies of essential raw materials—which are important inputs for industry in the developed world—were seriously affected as a result of drastic measures taken by these producers. Such a development which has the most serious consequences for all of us must be avoided at all costs.

Be that as it may, I am by nature an optimist and a firm believer in international cooperation. As I see it, what we lack is a firm political commitment to actively work together for global progress. The political will must be forthcoming to ensure that the welfare of our people will be promoted and safeguarded at all times. This must be accompanied by the spirit of give and take and willingness to make sacrifices for the good of all.

On the international monetary system, it is clear to me that there is considerable scope for improvement in the working of the international adjustment process. We badly need a stable international monetary system, fully equipped to adequately meet balance of payments needs and promptly contribute positively toward an equitable international adjustment. Given the current international environment, the Fund has a clear role in assisting developing member countries in particular to deal effectively with the adjustment problems that loom ahead. It must continue to adapt its policies and facilities to meet changing needs in varying circumstances. On the substitution account, because of its critical importance and wide implications, any proposal would have to be carefully conceived to ensure that it would truly promote stability in the international payments system and safeguard the particular interests of developing countries. Of fundamental importance is the character of the principal elements of such a proposal, including, to my mind, the vital provision of an adequate guarantee to ensure the maintenance of capital value as well as the usability, liquidity, and yield of the new SDR claims on this account. Furthermore, such a scheme would need to be so structured as not to hamper the efficient flow of resources in capital markets and the smooth functioning of the international monetary system.

Growing interdependence exerts a certain responsibility on the developed countries to coordinate their policy objectives over the medium term. Certainly, all of us have a stake in seeing that the major developed countries are fully committed toward coordinated growth and payments adjustment, an early return to relative price stability, the removal of protectionist measures, and the maintenance of orderly exchange markets. Furthermore, the developed countries must improve the quality and quantum of their official development assistance. . . .

Whatever the international environment, the welfare of our people depends ultimately on self-reliance and the pursuit of sound domestic economic policies. In formulating these policies, we sometimes have to adopt tough and unpopular measures, to ensure that the vast majority of our peoples enjoy the fruits of development. This approach requires prudent management and financial discipline on the part of governments in the developing countries. We must shoulder the responsibility to meet the challenges ahead with dignity and a resolve to promote growth with stable economic and financial conditions in our own economies.

The decade of the 1970s has been characterized by economic and financial turbulence. As we come to the end of this decade, we are yet to see the light at the end of the tunnel. Obviously more initiative and innovation as well as political will and commitment are needed to ensure that the social and economic turbulence of the 1970s is reduced or minimized as we enter the decade of the 1980s and in the years ahead.

Looking back, I consider that the dissatisfaction with many aspects of the international monetary, development, and trade issues, particularly problems related to primary commodities, has compelled the developing countries as a group to adopt the Program of Immediate Action on International Monetary Reform. Much time has been spent in discussing these issues, but unfortunately the willingness to act positively on the part of the developed countries in the interest of the world community is sadly missing.

Given this depressing scenario in the world economic scene and the prevailing lack of political will to take remedial action, the question is where do we go from here?

Statement by the Governor of the Bank for Yugoslavia—Petar Kostić

It is a great pleasure and honor for me to welcome you on behalf of the Yugoslav Government and myself, to wish you a pleasant stay in Yugoslavia, and to express the hope that your work here will be fruitful.

I hope that our deliberations will indicate the measures required to enable the Bank and the Fund to contribute adequately and effectively to international monetary and financial cooperation and to the goals of development.

On this occasion I should like to welcome Cape Verde, which has become a member of the Bank and the Fund, and Djibouti and Dominica, which have become Fund members and Bank applicants.

I would also like to take this opportunity to extend gratitude, on behalf of the Yugoslav Government, to the management of the Bank and the Fund for their successful cooperation during the preparations for the Annual Meetings.

The President of the Socialist Federal Republic of Yugoslavia in his speech at the opening of the Annual Meetings indicated the seriousness of the problems we face today, and the consequences that could result if acute problems in international economic relations, especially the dramatic position of developing countries, are not solved in a more rapid and effective manner. It is evident that in the course of the last 12 months, the already unfavorable world economic situation became even worse. The growth of developing countries was slower than anticipated by modest forecasts. The sluggish growth in the developed countries and their protectionist measures are seriously affecting the export growth of developing countries. The position of the least developed countries is particularly difficult.

Attempts to seek a way out of this critical situation in the framework of coordinating the demand and exchange rate policies among developed countries, without a real reform of the system of relations, have not resulted in a satisfactory outcome.

This further strengthens our conviction that the establishment of the New International Economic Order is the only sound way to overcome the acute development problem and critical situation of the world economy.

The Sixth Summit Conference of Nonaligned Countries, held recently in Havana, set forth the request for faster progress toward the establishment of the New International Economic Order, and adopted the Economic Declaration containing the specific proposals and solutions in the interest of the whole world, and not only of one group of countries. We consider this to be an unavoidable process. The capacity of our institutions to play an important role in tomorrow’s order depends on the readiness of the Governors representing the member countries to cooperate and render their support.

On the basis of the proposal worked out by the Group of 24, the Group of 77 at its first meeting of Finance Ministers which took place in Belgrade on September 29, endorsed the “Outline for a Program of Action on International Monetary Reform.”1

In my capacity as Chairman of the Group of 77 meeting, I was requested to convey the Program to the Chairman of the Annual Meetings, the President of the Bank, and the Managing Director of the Fund. It represents the position of member countries of the Group of 77 on many important issues on the agenda of our institutions and in other forums of the United Nations organizations. The document clearly shows that our efforts are directed toward progress in the reform of the monetary system which—as we strongly believe—will be in the interest of both developing and developed countries.

The principles of this system, as we all remember, were accepted by a large number of developed countries during the 1973-74 negotiations within the Committee of Twenty. The developing countries state with deep regret and disappointment that, among other things, the crucial problems of principle in the adjustment process, including the exchange rate policies, remain unsolved. Furthermore, there are no arrangements to ensure that the creation and distribution of international liquidity are not unjustifiably affected by the balance of payments situation of any one country or group of countries. The arrangements for promoting the transfer of resources to developing countries, which were meant to be the integral part of an effective system, have not been implemented. Developing countries are still unable to play an adequate role within the Bank or Fund in the process of decision making on monetary and financial issues.

All this indicates that the pace of activity in the elaboration of the new system is quite unsatisfactory. It is for this reason that the Group of 77 is calling on developed countries to agree that the IMF should contribute new and fresh initiatives, and carry out further work with the objective of enabling a broadly based reform of the international monetary system to be negotiated at a political level.

We cannot accept the forecasts that the growth of official development assistance will be slow. It is urgent that the concessional flows be accelerated. We therefore call upon major donor countries, particularly those lagging considerably behind the internationally agreed target of 0.7 per cent of GNP, to substantially increase ODA disbursements in real terms during the next three years, whereby the ODA volume for the least-developed countries would double. During the preparations for the Third Development Decade a strategy should, in our view, be agreed by which faster, more stable and predictable growth and quality improvement of ODA would be ensured during the next decade.

The proposal for the establishment of a substitution account is the only current initiative which could evolve into a lasting element of the monetary system. For this reason, we are attaching great attention to it. However, in order that the substitution account could enhance the role of the special drawing right and increase the symmetry in the position of countries in the adjustment process, it should have certain features. These should include especially the arrangement on asset settlement of future balances. Unlike the SDR, which is an internationally created asset, claims on the account denominated in SDRs would be a reflection of the reserve asset created by the monetary authorities of a country.

This raises a doubt as to whether the scheme could impede further development of the SDRs proper. We cannot support the present narrow approach which does not take into account the need to increase the role of SDRs on the basis of regular annual allocations, and the establishment of a link between SDRs and the transfer of resources. A balance of benefits and disadvantages from the point of view of developing countries can only be achieved through progress in other desirable elements of the Program of Action submitted by the Group of 77.

I note with concern that the proposals for immediate additional measures in the IMF/IBRD for financing the balance of payments deficits, or for promoting the transfer of resources to developing countries, are grossly disproportionate to the size of acute problems and to the necessity for urgent international action. It was rightly pointed out in the communiqué of the Development Committee that there is “a clear need for broad multilateral efforts, including an increasing role for the Bank and the Fund, to assist member countries in coping with the very difficult situation ahead.” Particular measures, however, are limited to actions, the nature and dimensions of which are determined on the basis of regular needs. The Yugoslav Government supports and will contribute to the early completion of various recurrent actions: implementation of the Seventh Review of Quotas of the Fund, the effectiveness of the General Capital Increase of the Bank, and an expeditious completion of the Sixth Replenishment of IDA resources, which would enable its lending to increase significantly in real terms. Additionally, we support all the proposals for extending the maximum repayment period for the IMF extended facility and to subsidize the interest rate for low-income countries making use of the supplementary financing facility.

We consider, however, that these propositions represent quite insufficient and unsatisfactory responses to the urgent need for increased volume and softer conditionality for the IMF balance of payments support to member countries. They cannot be considered alternatives for the establishment of a medium-term balance of payments facility proposed in the Program of Action of the Group of 77. As the objective of the proposed facility is to finance deficits caused by the disequilibrium created by external factors, its conditionality should be minimal. The Executive Board of the IMF should prepare a report for the next meeting of the Interim Committee which could serve as a basis for recommending the establishment of such a facility.

The balance of payments deficits are increasing, and a growing number of member countries are facing difficulties in external financing. On the other hand, it is already the second year that repurchases have exceeded purchases from the IMF. One of the important reasons for this unsatisfactory situation is that the availability of a disproportionately greater part of the resources available in the Fund is subject to high conditionality. My opinion is that existing IMF facilities should be adapted so that the Fund’s increased financial capacity could be utilized to overcome the present difficulties. Besides the proposed extension of the repayment period, it is especially important to increase the resources available under softer conditionality. The simplest way to do that would be to increase the first credit tranche to 50 per cent of the quota.

Both developed and developing countries are aware of the need for urgent structural adjustments to their economies. Progress is hampered by the very slow growth of demand in developed countries and by the lack of resources in developing countries. It is evident that a scheme for a substantial increase in the volume of long-term financing of developing countries would broaden the possibilities on both sides. Even after the capital increase, World Bank funds will not be sufficient and adequate to the needs. The development of cofinancing should not be the only way for mobilizing additional funds. For that reason, I cannot accept the recommendation that our consideration be limited to possibilities of utilizing the present capacities of our institutions. I consider it necessary to mobilize additional funds, and that this can be achieved by new arrangements which the existing institutions can administer. I therefore propose that a report be prepared for the next meeting of the Development Committee, recommending a mechanism for considerable additional mobilization of long-term capital for development. . . .

This year, for the second time, the World Bank staff prepared the World Development Report. We consider regular publication of such a study to be very useful. It helps to keep public opinion informed and aware of development problems. The report provides a useful background for the process of formulating national policies of developing countries, thus assisting member countries. We expect that the authors of this study will in future make an adequate selection of issues to be analyzed. In addition to analytical work and diagnosis, we would like to see various ideas and suggestions leading to the improvement of the international sense of direction toward a broader participation of the world community on a longer-term basis. This would represent a significant contribution to broader international efforts in overcoming the development problems. . . .

I consider the composition of the nationality of the staff of our institutions should reflect more adequately their international character, while maintaining high professional standards. In my opinion, we cannot be satisfied with the results achieved so far. For this reason, I welcome new initiatives to elaborate an adequate long-term program which should be considered by the Executive Boards of the Bank and the Fund.

In summing up, this Annual Meeting precedes the Special Session of the United Nations General Assembly, as well as intensive work on preparation of the Third Development Decade. Our financial institutions are an integral part of the system of world organizations. That is why the obligations of these institutions with respect to objectives of development are very important and quite specific. Assessment of our future performance will depend on our response to the challenge posed by the Third Development Decade. Today’s world is characterized by the growing economic interdependence of interests of developed and developing countries, and by the urgent development needs of the undeveloped world. One hopes that the efforts toward cooperation without confrontation will be justified, and strengthened and encouraged by positive results. Therefore, we, the Governors representing member countries of our institutions, have a great responsibility—both national and international—in directing and deciding the future role of these institutions.

Statement by the Governor of the Fund and the Bank for Romania—Paul Niculescu-Mizil

I should like to briefly present Romania’s observations on the international financial and monetary situation.

The analysis of the state of the international economy contained in the reports that have been presented to us points out, along with some gains, the constant presence and the worsening of certain adverse factors in the economic, financial, and monetary spheres. In many countries—including the developed nations—slow rates of economic growth and even some contraction have continued to be experienced, together with high unemployment, unsatisfactory development of international trade, and an increase in protectionism. The steady rise in inflation is having an especially harmful impact, as are the abnormal and unjustified increases in world prices—particularly that of oil—severe disequilibria in balances of payments, and the extreme instability of exchange rates.

Present instability and disequilibria in the monetary and financial spheres are a reflection of certain deeper economic and social phenomena—mainly the manifestations of economic crisis, the energy and raw materials crisis, changes in the balance of power, accentuated divergences in the interests of different countries and different groups of States, intensification of the struggle to divide the world into new zones and spheres of influence and domination, and not only the persistence but also the widening of the gaps between developed and developing, rich and poor countries.

The burden of these phenomena weighs heaviest on the non-oil developing countries, whose economic growth rates, export revenues, and exchange reserves have diminished at the same time their current account deficits and external debt have risen. In varying degrees, these same phenomena also affect the developed countries, and indeed all nations of the world; they fuel the sources of tension and conflict and represent a serious threat to global peace and security.

In such circumstances, we regard with all the more satisfaction the increasingly firm determination of the different peoples to be masters of their own national resources and their own destiny, to follow a new policy of cooperation among States and to introduce a new international economic order founded on absolute equality of rights, respect for national independence and sovereignty, noninterference in the internal affairs of others, and reciprocity of advantage.

The principal conclusion to be drawn from analysis of the serious problems affecting international economic development is that of the need for wide-based collaboration and economic cooperation among all States, whatever their size, economic power or type of social system, so that the combined force of all may be brought to bear on present-day adverse phenomena. Given the nature of the existing state of world affairs, it is the view of Romania that efforts should be directed toward:

First, sustained growth in national economies, the creation of new production capacities in the developing countries, the full utilization of existing capacities in the developed countries, and the utilization of all means for the effective increase of export and import activities within a framework of equitable international economic relations.

Second, a concerted effort by all countries—developed or developing—to establish a rational long-term policy in the energy sphere, based primarily on the elimination of fuel wastage, particularly hydrocarbons, on the increased utilization of substitute energy sources, and on the development of new types of energy—nuclear, wind, geothermal, and bioenergy.

Third, as far as priorities are concerned, a primary emphasis should be placed on halting the inflationary spiral and to the implementation of an equitable policy on the prices of oil, raw materials, and industrial products—a policy designed to stimulate the efforts of all countries, and especially the developing nations, to ensure their economic progress, improve the exploitation of their national resources, and respond to the need to strengthen international economic stability.

Fourth, steps must be taken as early as possible to eliminate protectionist policies, artificial barriers, and discriminatory practices of the sort which, far from facilitating the solution of present problems, only reduce that free exchange and cooperation among nations which is based on equality. What is of greatest importance is increased access for developing country exports—particularly of manufactured products—to the markets of the developed nations.

Fifth, it is necessary that member countries take steps to promote greater exchange rate stability, especially for the currencies most utilized in international payments, to reduce current account deficits, and to make use of available capital market liquidity for economic, but not speculative, ends. As has already been stated in this forum, it is the view of Romania that the international monetary system must be set on new and equitable foundations, and that this is an integral part of the new international economic order.

Sixth, an imperative, indeed absolute, necessity at this time, is the elimination of underdevelopment.

In the opinion of Romania, the decisive factors in development are clearly the work of each people, the focusing of all human energy and all material and financial resources toward the rapid increase in production forces, the expansion of economic exchanges with the exterior, the extension of means of communication, and the formation of skilled national staff. This obviously requires, among other essentials, the allocation of a substantial proportion of national revenue to development.

At the same time, Romania wishes to emphasize that the individual effort of each country should have the broad support of a program of international actions. The most important element would be increased economic aid from the developed countries.

While expanding its collaboration and cooperation with the developing countries, Romania continues to encourage the introduction of the type of practical measure that will allow implementation of the programs formulated at the meetings of UNCTAD and the Group of 77 as a means of ensuring the more rapid closing of the gaps between developed and developing countries. In this regard, President Nicolae Ceauşescu put forward a series of constructive proposals in his address to the Fifth United Nations Conference on Trade and Development in Manila.

We wish to see a common development fund set up as soon as possible, with the participation of the industrial countries and with the savings effected by all States by means of a reduction in their military expenditure by some 10 to 15 per cent; half of such reduction would be allocated as aid to developing countries, particularly to those whose per capita national income is lower and to those who themselves allocate a significant percentage of their national income to their own development and do not spend excessive amounts on armaments.

We are also in favor of specific measures leading to acceleration of the development of the less advanced countries, through the financing on favorable terms of investments in industry, agriculture, and other economic sectors, with a view to increasing economic efficiency and access to modern technology.

I am particularly pleased to inform this meeting that, thanks to the sustained work of its people, thanks to its socialist organization, Romania has all these years steadfastly pursued its march toward economic and social progress; and that it has achieved remarkable success in developing the forces of production, in the area of industry and agriculture, and in all other sectors, insofar as raising the standard of living is concerned. The high rates of growth of the national economy, reflected in the course of the first four years of the current Five-Year Plan by an annual average of 9 per cent for national income and 11 per cent for industrial production, are first and foremost the result of our own national efforts, for we allocate more than one third of our national income to development. However, Romania still has much to do to ensure its own economic development and to match the developed countries in per capita national income, labor productivity, proportion of the population employed in nonagricultural sectors, as well as in other fields. While struggling to avoid the adverse impact of the phenomena now upsetting international economic and financial life, we must also combat our own weaknesses in order to maintain the rate of economic growth, balance of payments equilibrium, and the stability of our currency, as well as to ensure the country’s progress and prosperity.

That is why the efforts of the Romanian people continue to focus on intensive development and the creation of a modern, competitive economy capable of high technical and economic performance and able to guarantee ongoing growth in the country’s material and spiritual welfare. It was with this in mind that the directives on economic and social development for the five-year period 1981-85 were formulated and published, as well as the country’s guidelines for the period up to 1990, its long-term energy program of measures designed to make Romania self-sufficient in energy in the course of the next decade, its long-term program for scientific research and technological development, and its program for raising the standard of living.

The Romanian Government views collaboration with the International Monetary Fund and the World Bank as positive, and hopes it will continue with equally satisfactory results in the years to come.

Romania has always taken a stand in favor of more active steps and measures by these institutions, as specialized UN organizations to restructure international exchange relations, ensure financial and monetary stability, enlarge and improve the sources of financing for the development of less advanced countries, and balance current accounts.

Romania, which firmly supports the process of democratization of international relations, pronounces itself in favor of the participation of all countries in solving financial and monetary problems, and of enlarging the role of developing countries in directing international financial and exchange organizations, that is to say in consultation, negotiation, and decision-making procedures.

In conclusion I should like to thank our hosts—our Yugoslav neighbors and friends—for the excellent setting they have provided for this meeting and for the hospitality accorded us.

I also wish to thank the Managing Director of the International Monetary Fund, Mr. Jacques de Larosière, and the President of the World Bank, Mr. Robert McNamara, as well as the Executive Directors and staff of these two organizations, for the dedicated work that is being done.

At the same time I should like to welcome Cape Verde, Dominica, and Djibouti as new member countries.

Statement by the Governor of the Fund and the Bank for Australia—John W. Howard

Mr. Chairman, I join previous speakers in congratulating you warmly on your election as Chairman of these important meetings. I also extend to the people and Government of Yugoslavia our appreciation of the magnificent efforts they have made to ensure the successful conduct of these meetings. I welcome also the representatives of those countries—Cape Verde, Djibouti, and Dominica—who are attending these meetings for the first time as members of the Fund.

At this, our final Annual Meeting of the 1970s, it is appropriate to review the experience of the past and to try to assess how we might improve our performance in the future. Let me start by referring to some figures.

On present indications, the performance of the OECD countries during the 1970s will show:

  • —a growth rate a little above 3 per cent per annum, compared with 5 per cent per annum in the 1960s;

  • —inflation averaging over 8 per cent per annum, compared with 3 per cent per annum in the 1960s.

It would be wrong to suggest, of course, that the 1960s provide a perfect model: indeed, there is little doubt that the seeds of the troubles of the 1970s were sown in that earlier decade. Nevertheless, there have been policy failures in the 1970s which made a major contribution toward the poorer performance.

However, there are now signs of a greater understanding of the basic causes of the current economic problems and particularly of the dangers of allowing high rates of inflation to continue unchecked. As noted in the Fund’s Annual Report, “the wider recognition that inflation not only leads to instability but also over the longer run adversely affects growth and employment opportunities constitutes an important first step on the road to a more stable international monetary system.”

It is encouraging also that the Annual Report should acknowledge so frankly the failure of the “gradual” approach to the reduction of inflation which was advocated a few years ago. As the Report puts it, “‘gradualism’ as an approach to the reduction of inflation and inflationary expectations has been too ‘gradual’—in many countries, to the point of no reduction at all.”

The Annual Report points out that the basic reason for the unsatisfactory economic performance of the international economy has been the “pursuit of policies that have failed to make a dent in inflationary expectations,” and it goes on to suggest that:

It is evident that governments have felt severe economic and political constraints in launching an effective anti-inflation program, since in the short run this would be bound to have adverse employment effects whose timing and magnitude would depend primarily on the ability to reduce inflationary expectations and hence would be difficult to predict.

These meetings have produced a major level of agreement that defeating inflation is the fundamental precondition to sustained improvement in growth and lasting reductions in unemployment. There is now greater recognition that beyond the very short run, lower unemployment and higher growth cannot be purchased through measures which lead to higher inflation. Lasting solutions to the unemployment problem are not to be found in temporary palliatives nor policy approaches which do not give prime importance to the fight against inflation.

I believe that, as we approach a new decade, it is time to reaffirm the importance of economic growth: to recapture something of the spirit of the 1960s, though without the shallowness of “growth at any price” that was too often a feature of that era. Sustainable economic growth is achievable at higher rates. And it would make a very significant contribution not only to improved living standards in both developed and developing countries, but also, I believe, to social cohesion and to political stability.

But if we are to achieve higher growth we must adopt and pursue policies that remove the many constraints and barriers that have been erected in recent years.

I believe we have sufficient evidence to show that there is no real alternative to the adoption and sustained application of responsible fiscal and monetary policies if we are to reduce inflation and inflationary expectations, and I would emphasize here the importance of consistency in application of policies and the avoidance of sudden changes in response to short-term developments. That approach has been steadfastly pursued for several years by my Government in Australia. It has not been an easy task but it is now bearing fruit.

Inflation has been sharply reduced, and the benefits of that are showing clearly in the greater confidence with which the private sector is approaching new investment and employment decisions. Output is again beginning to grow at rates more comparable with those of the past, and unemployment, though still high, has stopped rising. We are determined, through the maintenance of responsible fiscal and monetary policies, to limit the effects on inflation generally of the recent increases in oil and other commodity prices. The process is necessarily a long one, and we do not expect miracles. But we do expect to make continuing progress, and we strongly urge other countries, particularly the major industrial countries, to continue their own efforts in the same direction.

As many speakers have noted, the most recent oil price rises have aggravated inflation and inflationary expectations. The problem will be made all the worse if correct policy responses are not pursued in the energy area. As the Fund’s Annual Report suggests, a prime requisite in our response must be the adoption of realistic pricing policies for energy. In this regard, I fully agree with the view expressed by the Managing Director at the Interim Committee meeting that, “realistic policies would require the 1979 increase in oil prices to be passed on in full to consumers.” Equally, we must use all means available to ensure that the oil price rises are not passed on in generalized price and wage increases. As Mr. de Larosière again emphasized at the Interim Committee meeting, there is a clear need to exclude oil price rises from wage indexation mechanisms if we are to avoid self-defeating wage-price spirals. We must recognize the unique status of oil in the world economy and, with that, recognize that appropriate pricing policies for oil are necessary if we are to achieve more rational energy use and encourage the development of alternative energy resources.

At the same time, oil producers have a responsibility not to restrict supplies of oil so as to limit growth in developed countries. That would not only harm those countries, but it would also have adverse effects, direct and indirect, on the economic welfare of developing countries.

I would like to take this opportunity to congratulate the President of the World Bank for focusing our attention, through his own speeches and the most valuable World Development Reports, on the importance of action to reduce protectionism. While emphasizing that a major force for economic development must come from within the developing countries themselves, Mr. McNamara has, I believe, correctly identified the importance of developed countries making room in their markets for the products of developing countries. And, as the recent OECD report on newly industrializing countries has confirmed, this can be accomplished with net benefits to income and employment on both sides. What is often overlooked is that increased imports from developing countries also lead to increased exports to those countries, and vice versa. That is only another way of saying that trade can and normally will be a mutually beneficial process.

More generally, there is a need to ensure a resumption of the great progress toward freer trade that was made throughout most of the postwar period, but which has slowed down markedly in recent years.

Another important barrier to growth is the myriad policies that are adopted, in both developed and developing countries, which prevent or inhibit the most efficient use of resources of capital and labor.

There is no doubt that the Fund and the Bank can provide valuable assistance in the resolution of these and other problems, both by providing external financial assistance and by providing advice on the policies and development strategies needed to achieve higher growth. Certainly flexibility in application of Fund policies and procedures is necessary, and I believe that the Fund has shown that flexibility in the past—including in the past 12 months. The same flexibility was evident at last Sunday’s meeting of the Development Committee and is reflected in the suggestions contained in the communiqué distributed following that meeting. Australia is very ready to join with other member countries in giving further active consideration to those suggestions.

Fundamental to the Fund’s approach, of course, is a recognition that the provision of external financial assistance cannot itself overcome underlying economic problems. There also needs to be adjustment in the domestic economy, and that requires the pursuit and adoption of appropriate domestic policies. Similarly, in addressing ourselves to attempts to institutionalize the control of liquidity, we should take particular care to ensure that institutional arrangements, such as the proposed substitution account, take account of the basic economic considerations and do not remove some of the discipline on domestic economic policies which applies under the present arrangements.

In short, I see the Fund’s most important role as one which assists countries with their short-term balance of payments problems and, as part of that process, assists them in adopting appropriate domestic policies. It has ample means at hand to further that role, and I have confidence in its ability to adapt to the needs of its member countries. . . .

In conclusion, I wonder whether, when we meet in a year’s time for our first meeting of the 1980s, we will have left behind not only the 1970s but also the worst features which plagued the world economy throughout most of that decade. I am far from pessimistic about the prospect. Collectively, we have learned much in recent years, and we have seen, in individual countries of both the developed and less developed world, the fruits of that experience. But too often in recent years we have encumbered ourselves with unrealistic ambitions, and we should be cautious about doing so again. What I would hope to see, in 12 months’ time, is that we have moved somewhat further down the long road toward creating the conditions which are necessary for a return to a sustainable rise in world economic growth and living standards.

Statement by the Governor of the Fund and the Bank for the Dominican Republic—Eduardo Fernandez P.

First of all, I should like to state what an honor and responsibility it is for me to address this Annual Meeting of the Board of Governors of the World Bank as spokesman for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Spain, Suriname, Uruguay, Venezuela, and my own country, the Dominican Republic.

It is especially gratifying to express our sincerest thanks for the warm hospitality shown us by the people and Government of Yugoslavia, a country geographically a long distance from all of ours but with which we identify, since we pursue with equal effort the search for a distinctive and independent solution to our particular problems. . . .

For those of us with responsibilities in the economic sphere in our own countries, it is essential to be able to analyze in an international forum such as this a situation characterized by the increasingly apparent absence of just international economic cooperation, the reappearance of protectionist barriers and the growth of economically threatening dependency situations, a state of affairs which affects our daily life and accounts for the disquiet that pervades our search for a better future. . . .

It has frequently been pointed out, even in the Annual Report the Bank has submitted at these Meetings, that one of the central problems in our economies is the growing protectionism encountered by our exports. We therefore feel justified in our view that the industrialized nations should eliminate the protectionist barriers raised against our countries, and that the Bank should make a close examination of new means to channel resources to the developing countries for the precise purpose of export financing.

Although great hope was originally vested in its ability to contribute to a solution of the problems involved in financing development, the Development Committee has not fully lived up to expectations. Since this may be ascribed essentially to a lack of political support from the industrialized countries, it is necessary that the newly organized Committee engage in an analysis of the Program for Immediate Action approved by the developing countries in the Group of 24 and endorsed unanimously by the Group of 77. We also take the view that the Committee should reinstitute its meetings of high-level technical specialists. . . .

Almost all the matters I have raised have already been discussed at these Annual Meetings. The plain fact is that they are problems which confront us today with an urgency which calls for the rapid making of decisions and agreements that will translate into actions and achievements which respond to our countries’ economic and social realities.

We are at a juncture that could very well nullify much of what has been accomplished. Today, when there exists widespread awareness of the gravity of international economic problems, when it has been demonstrated to what point the external sector can prove one of the most dynamic elements in the whole development process, certain industrialized countries are giving marked signs of a tendency to repudiate any long-term community of interests. That is a very telling reason why, at this particular moment, the work of the international community should be directed with greater intensity toward achieving compatibility between the actions of the developing world and those of the industrialized countries.

In closing this address, I should like to remind you that we have stated what our aspirations are as regards the volume of, and the conditions attached to, the financial resources needed in the countries for which I act as spokesman, and as regards the manner in which we wish to continue participating in the management of the Bank. I have also made clear what importance this group of countries places on an international economy in expansion which responds to the economic and social realities of their particular situations. But above and beyond these considerations lies our firm commitment to dedicated, honest and effective work, the essential underlying element in any wholehearted attempt to achieve that degree of development and welfare to which we believe we are entitled and which will be the foundation for more just and more prosperous societies.

Statement by the Governor of the Bank for Belgium—Gaston Geens

First of all I wish to thank the Government and authorities of Yugoslavia for the hospitality they have given to our Meetings and the warmth of the welcome that our various delegations have received.

I would also like to take this opportunity of telling Mr. de Larosière how much we appreciate the way in which he has exercised the leadership of the IMF in the past year, in frequently difficult circumstances. Once more I wish to assure him of our willingness to contribute our full cooperation to the work of the Fund, whose importance can hardly be overemphasized.

Mr. Managing Director, you have given us a lucid and unvarnished account of the world economic situation.

I do not intend to dwell at length on this subject: in this regard I can only support the remarks made by Mr. Colley on behalf of the European Economic Community. I merely wish to stress three trends that seem to me to augur progress in the efficacy of the economic policies we intend to implement, in order to resolve the immense economic and social difficulties confronting us. Again we must show ourselves capable of seizing the opportunities open to us.

First of all, the dangers of excessive fluctuations in exchange rates and the illusion of a restoration of autonomy in economic and monetary policies by means of floating, which we have denounced in the past, have only been confirmed. Not only countries with substantially open economies, but other leading countries have learned, sometimes to their cost, that the exchange rate is not just the residual variable that adjusts all other disequilibria: it can be a driving belt whose effect is to amplify disequilibria of internal origin.

We hail with satisfaction, therefore, the concerted efforts that have been made to contain erratic exchange rate movements and to create a more orderly environment for the development of international economic activity. We are convinced that such an environment, controlled by a discipline commonly accepted and observed by all, will be considerably more auspicious for the introduction of effective policies than the disorderly movements that formerly predominated.

This desire for stabilization was manifested, in particular, by the U.S. authorities in November 1978. In Europe it was reflected in the inauguration, on March 13, 1979, of the European Monetary System. The new system is the development of a long succession of endeavors made within the European Community toward the achievement of economic and monetary union. Its aim, through a necessary concordance of economic and monetary policies, is the creation of a permanent zone of stability. The experience of its first six months of operation—a rather short period on which to base a judgment, to be sure—has nevertheless proved satisfactory. And furthermore, it has made a special contribution to the acceptance of a greater measure of discipline at the domestic level, the basis for improved policy coordination.

This is particularly true with regard to Belgium, where my Government, manifesting its willingness to follow stricter discipline, very recently adopted a series of rigorous budgetary measures.

Secondly, as the Fund stresses in its report on the world economic situation, it appears that the second wave of oil price increases has found the importing countries—the industrial importing countries at all events—more united than before in the choice of appropriate strategies: conserving energy, passing on price increases to consumers, but at the same time averting a generalized flare-up of inflation.

The concern to contain inflation is reflected in a general tightening of monetary policy. Such a concordance of objectives may be one means of consolidating greater stability in exchange rates and of avoiding the recurrence of underlying payments disequilibria, accompanied or succeeded by abrupt deflation, that occurred as the aftermath of the previous oil crisis. But it is important to supplement this concordance with a deliberate coordination of interest rate increases, to avoid any useless escalation prejudicial to the development of economic activity. In fact, any increase in interest rates is liable to engender correlative increases in other countries in the interests of maintaining a stable relative relationship between these rates. In conjunction with this, any feeling of autonomy is equally illusory, in view of the growing interdependence of national economies: it would be desirable if cooperation between monetary authorities were to be further reinforced in this respect.

Thirdly, we need to be attentive to the preservation of a worldwide exchange and payments system that is essentially open and free of restriction. The conclusion of the Tokyo Round augurs well in this connection, but we cannot disregard the warnings coming from some quarters with regard to the expansion of protectionism. In this domain, our policies will be of vital importance for the developing countries and for the sake both of these and of the industrial countries, ample access to the markets and to the available financial resources should be maintained. Particularly as regards the needs of the developing countries, whose external situation has deteriorated further in recent months, the foreseeable increase in their indebtedness could prove critical for some of them and will most certainly pose a troublesome financing problem. In this case we believe, though, that increased access to the Fund’s resources, accompanied by appropriate adjustment measures, could strengthen the credit rating of the countries concerned vis-à-vis private sources of financing.

In the coming months the Fund will have a leading part to play both in the adjustment process and in the management of international liquidity. We welcome the increased influence of the Fund in these areas, and hope for a continuance of the endeavors it is making.

Among the decisions taken in recent months which are very satisfying to us are the introduction of the supplementary financing facility and the decision, in principle, on the Seventh Review of Quotas. In this matter, Belgium has set in motion the ratification procedure which, I hope, will soon be successfully concluded.

We particularly hope that the studies on the introduction of a substitution account can soon be intensified and, if possible, brought to the negotiation stage. We have studied with great interest the Executive Directors’ report on this subject. We approve the scheme in broad outline and firmly support this project as an essential element in the consolidation of the international monetary system and as a contribution to strengthening the role of the SDR.

The crux of the problem is how to reconcile the voluntary nature of participation in the account with the need for as wide and numerous a participation as possible. In this connection, the quality of the SDR-denominated claims acquired as counterpart of the dollar deposits will be of prime importance.

Their yield, therefore, will need to be as close as possible to market terms and their liquidity assured by a flexible functioning of the system, which, however, must not open the door to speculative conversions of SDR-denominated claims against dollars in the account. However, if necessary, it should always be possible to mobilize the claims by drawing on the liquid holdings in the account, if no other course is possible. Members should be entitled to the maximum benefit of the doubt in the event of their claims being mobilized in this way.

Another matter that should be taken into consideration when the Fund’s gold sale policy is reviewed is the possibility of reinforcing the financial situation of the account by earmarking for this purpose a fraction of the profits from gold sales. Such reinforcement could help to solve problems posed by yield, liquidity, and the protection of the capital value of the SDR-denominated claims.

I should now like to make a few observations on the problems of development.

The 1978 World Development Report gave a first global analysis of the main aspects of development. The report drawn up for 1979 is a worthy successor to the first one by reason of its exhaustive analysis of some of the more specific aspects of the economic development of Third World countries, such as the struggle for employment and appropriate industrialization, and the phenomenon of rapid urbanization.

To us, one of the great merits of the reports is their eloquent demonstration of the complex interdependence of economies, the interaction of policies, and the need for international cooperation.

The multilateral institutions whose members are countries at all stages of development are first-class forums for concerting the transfer of real resources to developing countries.

The financial and nonfinancial roles that they can play, especially the World Bank, make them unique instruments in the development process of the most disadvantaged countries. . . .

Despite the encouraging results we have just mentioned, the fight against underdevelopment in the world is far from ended. Too many countries are still facing serious growth problems, especially the poorest: these have to cope with substantial disequilibria in their current accounts and are not in a position to mobilize their often inadequate domestic resources fully. For many years to come, these countries will need substantial contributions of foreign capital on appropriate terms. Belgium is prepared to participate in the effort of the international community in this matter. . . .

These efforts are in keeping with the goals that have been set for aid purposes and with the Belgian Government’s determination to devote 0.70 per cent of its national product to official development assistance.

Besides the country’s contributions to multilateral institutions, which are growing rapidly, I must also mention that the credits to be devoted to bilateral financial assistance in 1980 will reach a new high level (of half a billion francs).

I should like to conclude on a hopeful note. Despite the difficulties affecting the international situation, wider and improved international cooperation has developed. I feel that the will to cooperate, and the recognition that the interdependence of the nations can lead to mutual understanding, represent the opportunity to create a more just world characterized by an equitable distribution of wealth.

This will to cooperate has already taken concrete form, within the Bretton Woods institutions, in certain measures leading in the direction of improved equilibrium.

The Belgian Government is happy to be able to make the greatest possible contribution to this endeavor.

Statement by the Governor of the Fund for Greece—Xenophon Zolotas

The international monetary system continues to function in a disorderly manner. Despite all the efforts made to redress its destabilizing tendencies, no way has yet been found to control it effectively. One fact has clearly been established, and repeatedly stated in this forum: the dollar is, and will continue in the coming years to be, the pillar of the international monetary system. This implies that, when the dollar is strong, the international monetary system is in a stable state. Conversely, when the dollar is weak, the international monetary system is destabilized. This became clearer when, after the U.S. measures to support the dollar were undertaken on November 1, 1978, a period of relative calm prevailed in the international foreign exchange and financial markets, lasting for several months. This state was disturbed again after the recent increases in the price of oil and the acceleration of the rate of inflation in the United States.

Essentially, the dominant factor in bringing about this development is the continuing higher inflation in the United States in comparison to the inflation prevailing in other major industrial countries, principally the Federal Republic of Germany and Japan. If these inflation differentials were not adverse to the dollar, then the problems of the international monetary system would be minimal.

As it happens, the differential rates of inflation have had a marked destabilizing effect and the restoration of sound international financial relations cannot be attained unless the dollar becomes, once again, a strong and stable currency. The experience of the first two postwar decades when the “gold-dollar standard” prevailed, despite its relative asymmetry has proved that, under a system of fixed parities and through the external discipline it imposes, inflation rates can be kept at low levels and inflation differentials can be maintained within narrow limits, thus ensuring relative balance in international payments. This climate has contributed to the attainment of high growth rates and to an impressive expansion of world trade. The difficulties began from the moment price rises started accelerating in the industrialized countries, followed by persistent disequilibria in their balances of payments, a fact that ultimately led to the abandonment of fixed parities and the adoption of floating rates. It was thought for a while that floating rates would quickly contribute to the solution of the problem and that proper functioning could once again be restored to the international financial system. These expectations, however, have to a large extent failed to materialize. It is true that, initially at least, floating rates averted a potentially chaotic state which could have occurred in international payments. In the absence of external discipline, they permitted the perpetuation of high inflation differentials, which in turn have tended to dichotomize the world into weak and strong currency areas.

I believe that under present conditions, a wisely managed floating can certainly make a significant contribution; perhaps the new international financial system might be based on such a scheme, provided that the major industrial countries exercise the proper monetary discipline, so that extensive bursts of inflation would be avoided. At present, and in particular after the recent acceleration of world inflation, we find ourselves in a situation which differs little from that prevailing in 1973, regarding both the actual economic developments and prospects. We should therefore undertake two efforts with reference to the international monetary system: a short-term and a long-term one.

The major short-term objective is a stronger dollar. This implies that the U.S. should continue its efforts to fight inflation and eventually reduce its rate to that prevailing in the other major industrial countries. This cannot be accomplished overnight. However, the firm commitment to such a target will contribute to the stability of the dollar, which is a prerequisite for maintaining order in the international monetary system. A key role in this effort will be played by the psychological climate induced by such a commitment which will help to constrain destabilizing capital movements and speculation. These phenomena tend to stimulate excessive fluctuations in exchange rates which are often unjustified by the economic fundamentals. We are increasingly faced with a situation where, instead of having the foreign exchange rates adjust to the economic fundamentals, the fundamentals themselves tend to conform with the exchange rates.

The repeated statements and measures taken by the U.S. monetary authorities confirmed this morning by Secretary Miller, manifest a determination to persist in an all-out fight against inflation. I am convinced that a continuation of such policies will result, in the not distant future, in a reduction in the rate of inflation and in the restoration of an equilibrium in the U.S. balance of payments and, thereby, in a more stable dollar. In the short run, however, I believe it is essential for such policies to be reinforced by additional measures, because the persistence of inflation differentials and balance of payments deficits, even on a reduced level, is likely to continue to exert a downward pressure on the external value of the dollar. Such a development, amplified by speculation, could result in unfounded depreciations of the dollar, thus overshooting the rates corresponding to the prevailing economic fundamentals. These fluctuations would have two consequences: the first is that disorder and uncertainty in the international monetary system are perpetuated; the second is that domestic inflationary tendencies are exacerbated, leading to a vicious circle. The U.S. Government, acting within the framework of its November 1978 decision to support the dollar, is taking a number of measures which permit intervention in the foreign exchange markets to dampen excessive fluctuations of the dollar rate and, in particular, to avert unwarranted depreciations. These measures include swap agreements, gold sales, loans in foreign currencies, as well as agreements with major central banks for coordinated intervention in the foreign exchange markets. The above measures have proved to date to be insufficient in bringing relative order in international financial relations corresponding to the underlying real magnitudes of the major trading partners. This insufficiency is reflected in recent spectacular rises of the price of gold, which exacerbate further the vicious circle of uncertainty, speculation, and inflationary expectations.

Last year in this forum, I ventured to suggest a supplementary scheme which, I believe, has the advantage of greater effectiveness both in achieving the desired objective and in fostering an improved psychological climate, while it may prove less burdensome for the American economy.1

This time I will limit myself to a brief outline of this scheme. The U.S. Treasury borrows substantial sums each year from the domestic money markets to meet budget needs. According to this scheme, a part of these borrowing requirements of the U.S. Treasury would be met by borrowing abroad from Eurobanks, which would in return be offered nonmarketable, dollar-denominated, floating interest-rate securities with an appropriate mix of maturities. To avoid the possibility that U.S. domestic funds were exported for the specific purpose of investing in such securities, the U.S. Treasury could negotiate special agreements with the Eurobanks concerned. These agreements would specify that only funds from existing deposits in Eurodollars could be invested in the said securities. The issuing of these securities would then absorb excess dollars, alleviating the pressures on the foreign exchange markets directly rather than indirectly through the use of foreign currencies borrowed on the occasion by the United States. The size and timing of such borrowing by the U.S. Treasury would depend on the conditions prevailing in the foreign exchange markets.

This proposal does not eliminate the need for occasional market intervention by the sale of foreign currencies, but it would reduce such interventions to a minimum. Regarding the interest rate, the prevailing Eurodollar rates (LIBOR) would suffice to induce Eurobanks to accept the securities proposed. Consequently, such borrowing would not be costlier to the U.S. Treasury if the small interest rate differential between the Eurodollar and the U.S. money market is taken into account. On the contrary, it might eventually prove cheaper, if foreign exchange risks are taken into consideration.

With this scheme, the problem is dealt with at its root, since its essence is to absorb surplus dollars directly before they cause havoc in the foreign exchange markets. After all, the dollar is used as the main intervention currency by foreign central banks. Why should it not be used as such by the United States itself?

This scheme could attain three targets: First, it would alleviate pressure on the dollar in the foreign exchange markets; second, it would provide the Treasury with a part of its borrowing requirements; and third, it would establish a means to control liquidity, to a certain extent, in the Eurodollar market. The latter is significant in view of the rapid expansion of the Eurodollar market, whose control—with a view to lessening volatility of international capital movements—has been frequently but fruitlessly discussed. I believe that my proposal, given its similarity to open market operations by the Federal Reserve in the U.S. money market, could provide an effective mechanism to control, to some degree, the Eurodollar market.

I am aware, of course, that my proposal for direct U.S. borrowing from the Eurodollar market is not a panacea for the structural problems facing us all. It is a supplementary measure and not a substitute for the basic monetary, fiscal, and incomes policies necessary to address and correct the current state of economic affairs. I add that such necessary policies are not the exclusive responsibility of one country alone. Without the cooperation of the major trading partners and the coordination of their economic policies, no plan can possibly work. Interdependence implies cooperation. My proposal simply buys time to put such policies in place and contribute, in the meantime, to a more stable foreign exchange market.

Let me now turn to the long-term objective of the reform of the international monetary system. A long-term perspective would include the gradual reduction in the role of the dollar in international transactions and its eventual replacement with other means of payment.

This perspective is in line with the proposal for the creation of a substitution account which has been placed before this Assembly. Although this account would at first only be available to official agencies, it was proposed that it might eventually be opened to private dollar holders as well. The substitution account as is put forth, is a voluntary device, which has no direct connection with the foreign exchange policy of the dollar nor with the control of the Eurodollar market. It is of course a step in the right direction as a means of support for the establishment of the SDR as the major international reserve medium.

In this context, I would like to point out that since the initiative for the substitution of SDRs for dollars through the IMF lies with the foreign central banks and treasuries, the role of the United States in the above device is a passive one. This is so because the United States is simply obliged to accept the exchanged dollars through the IMF, while it is deprived of any initiative to defend its own currency within this scheme.

Thus, the substitution account could possibly be of assistance in the alleviation of pressures originating from the excess supply of dollars, but I do not believe that its role will be a substantive one, given that the scheme is voluntary, occasional, and is not supplemented by a concrete and coordinated policy. Conversely, my own proposal is directed toward a rational policy to influence the foreign exchange markets through a systematic siphoning-off of excess dollars; I believe that it would prove to be effective, and would contribute to a stronger dollar.

There are several proposals aimed at the creation of a more stable international monetary system. Their common feature is the gradual reduction of the role of the dollar as the main international and reserve currency, either through SDRs or through a multicurrency system. In the past, during the first years of the crisis, the Committee of Twenty was nominated to plan the reform of the international monetary system. Since then, in spite of the successive shocks suffered by the international monetary system, no systematic effort was directed to this end. I believe that the time has now come for the establishment of a new ad hoc committee, composed of representatives of the main central banks and the IMF and of international experts in the field.

On this occasion, I would like to say a few words on the issue of financing the balance of payments deficits of non-oil developing countries, following the rapid rise of oil prices. When this situation first occurred in 1973, the Eurodollar market contributed significantly to the financing of these deficits. Now the problem has become even more acute, because the LDCs have already assumed a heavy debt burden, and commercial banks seem reluctant to increase their exposure to these countries. It is true that international organizations, including the World Bank and the Fund, are prepared to help. This is not, however, sufficient. A way must be found to induce private banks to proceed with the recycling of funds to the LDCs. Private banks need some form of security. I feel that the creation of an International Loan Insurance Fund, which I proposed two years ago, is still relevant.2 Such a fund would assume, up to a certain degree, the risks involved in private lending to the LDCs. I understand that some private banks expressed interest in this proposal, which is also being considered by UNCTAD. For the poorer countries with expanding deficits, however, this device would not suffice to solve their problem. In this case, therefore, special measures should be taken by the governments of the industrialized countries and the surplus oil countries to aid them directly to overcome the crisis.

In conclusion, I would like to commend the President of the Bank and the Managing Director of the Fund, and their dedicated staffs, for the Annual Reports which have substantially contributed to our knowledge of the world’s economic and financial problems. I wish them continued success in their difficult assignments. I would also like to express warm thanks to the Government of Yugoslavia for the hospitality extended to us in this beautiful city, as well as our appreciation to President Tito for his inspiring welcoming address.

Statement by the Governor of the Fund for Luxembourg—Pierre Werner

Let me first warmly thank the Yugoslav authorities for their cordial hospitality extended to this assembly.

The optimism displayed at our meeting last year has not been confirmed by the general economic evolution, and a less positive and even somewhat gloomier assessment of the world economic outlook is made today—an assessment already anticipated by the Interim Committee in March this year in Washington.

The increase of oil prices has been unexpectedly important. Despite some progress reached during the past two years, it has not been possible to eliminate inflation, although the use of the existing production capacities has not been satisfactory. International imbalances not only are still persisting, but they tend to become more marked, and the long-term energy supply is not yet guaranteed at a cost that is reasonably foreseeable.

I am speaking on behalf of a small country which until now has managed to keep its unemployment and inflation at a relatively low level, but which is also very vulnerable to influences originating from other countries. Therefore, I strongly hope to see that the search for solutions of all these problems will be undertaken on the basis of reinforced concertation and with regard to the legitimate interests of all the parties involved. This approach has proved to be the proper way, especially in the framework of institutions like the International Monetary Fund and the World Bank. Thus it has been possible to improve the functioning of the adjustment process, to increase the level of financial flows toward developing countries, and to preserve up to now the principle of freedom of international trade. However, protectionist trends are increasing and present a major danger for smaller industrialized and for developing countries. In past years world economic growth developed parallel to the internationalization of trade; and thus the reappearance of protectionism, which some consider as a possible remedy, can only be a step away from the road of economic progress.

In this context I would like to draw your attention to the fact that the Luxembourg economy is closely linked to the evolution of the world steel market, which for the moment is seriously depressed. This has forced my country into a thorough restructuring of the production equipment, which raised a series of delicate social problems. Faced with different kinds of choices, we tried to resort only to measures counting basically on competitive abilities and on the free play of international market forces.

In this sense we are glad to see that the IMF makes use of the surveillance powers given by virtue of the amendments of the Fund’s Articles to enhance and monitor the adjustment process.

On the other hand, it is my hope that the creation of a substitution account, which is designed to constitute a real and stable alternative for the diversification of official reserves, will give the IMF a new dimension. The conversion into SDRs of an important part of dollar assets, which presently venture to unbalance the currency markets, might diminish to a certain degree the concerns which have arisen by the quick growth of the Euromarkets. However, this result could only be achieved if the new mechanism could be conceived in such a manner as to avoid a new influx of additional dollar liquidity into the domestic and international markets. Furthermore the substitution could not reach its aim if it were not attractive enough to be comparable to the alternatives offered by the markets. The creation of a substitution account should strengthen the role of the SDR. In the long run, the dollar, which experiences increasing difficulties in fulfilling the role it has played in the past, could be gradually relieved by the use of the SDR.

The necessary complement to this is the continuing help of the Fund to those member countries which have a precarious balance of payments situation. During the last year some important progress has been made to reinforce and improve this help. I would like to mention especially the new formulation of the rules of conditionality, the coming into operation of the supplementary financing facility, and the liberalization of the compensatory financing facility.

Considering this last item, I am particularly glad to see that the liberalization of this very important facility was possible without setting up another new mechanism. The Fund is right in trying to avoid the proliferation of ad hoc financing facilities which have already diminished the relative importance of the regular and statutory drawings on the Fund’s resources, and which impede the flows of resources and the conditionality linked to them.

My country will continue its full and active participation in the Bretton Woods institutions. It is in this spirit that we agreed in March 1979 to be included in the designation plan.

All this is in complete conformity with the policy of monetary integration traditionally followed by my country.

As the Luxembourg Government has for many years been promoting the idea of realizing more tight and structured monetary links between the member countries of the European Community, I strongly hope that the European Monetary System, which entered into operation in March 1979, will work out as a permanent success. Besides being an important step toward monetary union in the European Community, advocated by my. Government, the creation of a zone of stability in Europe can be considered as a significant contribution to the worldwide economic equilibrium and to the realization of the aims the International Monetary Fund is promoting.

The European Monetary System entails a wider financial solidarity than former schemes, and it is sufficiently flexible regarding its operational functioning as shown by the last technical adjustment of the parity grid. Thus it should be able to meet the tensions induced by external and internal imbalances resulting from the present economic and social difficulties. If the system manages to maintain its credibility—and this can be achieved by an increased effort for convergence of the basic policies—it will be a strong support toward an in-depth reform of the international monetary system as a whole.

Regarding the problems of development aid, I would like to mention that the Luxembourg Government decided to strengthen further during the fiscal year 1980 its aid to developing countries. The budgetary credits to be used for financing aid to developing countries will show an increase of 31 per cent, while the total increase of the draft budget is only 7 per cent. Beside some bilateral aid measures, Luxembourg traditionally had a preference for multilateral aid: we think that this form of aid is best appropriate for reaching a closer coordination of transfers of resources and for getting the highest possible yield of the effort carried out. Thus I endorse the philosophy the World Bank tried to develop in its two Reports on World Development, which stress the basic needs of the underprivileged categories of population. . . .

Although the Luxembourg domestic capital market has a relatively small size, it has always been open, within its limits and without any discriminatory treatment, to the capital needs of multilateral development institutions. The liberal framework of the international financial center of Luxembourg allows it to contribute to the financing of deficits in balance of payments. Monetary authorities feel uneasy about the strong growth of the Eurocurrency markets and some call for control of these markets. I think, however, that this problem must be tackled with caution and moderation. We must be aware that the Euromarkets play an irreplaceable role, at a time of great need for capital flows, in the interest of growth and development, when no national financial system is able to take up a similar role in a satisfactory way.

The best approach seems to me to deal with the sources of the funds providing the market’s liquidity, in order to assure a better equilibrium of balances of payments. Moreover the banking control authorities of those countries with international financial centers must keep an eye on the observance of the banking profession’s golden rules as regards, among other matters, liquidity and maturity.

I listened with great interest to the inspiring speeches of the Managing Director of the Fund and of the President of the World Bank. The Luxembourg Government, within the limits of its capabilities, will give its support to the fundamental aims of the Bretton Woods institutions, set before us with such talent and persuasion by Mr. de Larosière and Mr. McNamara.

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

It is a great pleasure and honor for me to join fellow Governors in expressing our sincere appreciation for the warm welcome and hospitality accorded to us by the Government and the people of Yugoslavia during our memorable stay in beautiful Belgrade. I would also like to congratulate the Chairman of the Annual Meetings and his staff for the efficient and successful conduct of the meetings.

This year’s Annual Meetings mark a crucial turning point for the world economy and the international monetary system. The Second Development Decade which draws to a close has fallen short of expectations. Future prospects for the world economy appear bleak and uncertain. While we are heartened that short-term prospects are somewhat more favorable than the post-1973 period, there is ample room for concern that the process of economic recovery could be delayed and the hard-earned fruits of development could suffer a serious setback. The international community is faced with the difficult task of sustaining world production and trade at a satisfactory level while at the same time containing and reducing inflationary pressures. My delegation fully subscribes to the Program of Immediate Action presented by the Group of 77, particularly the urgency of reversing the growing protectionist trend, strengthening the machinery for coordinating adjustment and growth policies during the next Development Decade, and providing adequate medium-term financing facilities to ease the adjustment burden of non-oil developing nations.

We welcome the Fund’s recent adoption of a new set of guidelines on use of the Fund’s resources and the improved features of the compensatory financing facility. Early and adequate recourse to the Fund facility will prevent disruption of the development process and ensure timely adjustment of payments imbalances. . . .

Thailand’s present development policies coincide closely with the strategy proposed in the World Development Report, namely, accelerated agricultural and export growth, increased mobilization of domestic savings and structural changes necessary to increase productivity, eliminating rural and urban poverty, and providing for basic needs. The World Bank and Fund are therefore urged to program their financial and technical support to meet the specific needs of our economy. Formulation of adjustment programs and performance criteria related to use of Fund and Bank resources should make adequate allowance for special problems and needs generated by the oil crisis as well as other external and unforeseen factors. . . .

The task that faces us during these difficult times is indeed arduous. However, armed with the valuable lessons of the past and a clear perspective of the direction and objectives of future development strategy, we must start now to act jointly and with determination to overcome the challenges which lie ahead. Under the able leadership of the World Bank and the Fund, I am confident of our success.

Statement by the Governor of the Bank for Portugal—António de Sousa Franco

It is my great pleasure to participate in these Annual Sessions of the Board of Governors of the World Bank Group and the International Monetary Fund. I wish to join my fellow Governors in extending our warmest thanks to the people and Government of Yugoslavia for the kind hospitality shown to us. We are delighted that these meetings bring us into further contact with the people and culture of Yugoslavia.

I must also thank Chairman Muldoon for his enlightening speech reviewing the tangible progress already made by the Fund and the World Bank Group and reminding us of the magnitude of the tasks to be accomplished.

The year since we last met has been marked by important accomplishments in the field of international economic cooperation: the successful conclusion of the Tokyo Round, the close consultation among leading industrial countries, and the UNCTAD V, where some progress was made toward a convergence of views on several issues of interest to both developing and developed countries. The Fund and the World Bank have made important additions to the stock of means available to them, and therefore strengthened their ability to assist members in solving their payments and development problems.

Yet recent and prospective economic developments are a cause for serious concern. Unemployment continues unabated in many countries, and the high rates of inflation seem in some cases to accelerate. We are already witnessing some slowing down of the rate of economic growth in the industrial countries and forecasts for the near future are still more disquieting. The rate of growth of non-oil developing countries has shown a relatively better performance. This however has been possible only at the cost of higher rates of inflation and increasing external debt.

One positive development in 1979 is the better distribution of external surpluses among the large industrial countries. But the current account imbalance between these countries and the developing countries is expected to widen further, owing to insufficient growth in world trade, rising protectionism, and declining terms of trade.

In Portugal, like in many other countries, this adverse international climate added to the difficulties of domestic origin. Following the stabilization program adopted since last year, GDP growth is expected to slow down from 3.2 per cent in 1978 to 2.5 per cent in 1979. Because of weak domestic demand prospects and tight credit conditions, fixed investment was almost stagnant. The sluggish rate of activity in 1979 made impossible any progress in the employment situation and the prospects for inflation appear worse than in 1978. Real wages may decline for the third consecutive year.

On the bright side, the contribution of the foreign balance to economic growth remains at a high level. In 1978 Portugal entered into a stand-by arrangement with the Fund and the measures taken on the lines of that arrangement to achieve a better payments position have led to the desired results. The current deficit was reduced by more than 50 per cent in 1978, and the overall balance of payments showed a surplus for the first time in several years. The improvement of the external position continued in 1979 and the deficit on current account will fall below the $500 million level, representing only 2 per cent of GDP. At the same time, due to the surplus on the overall balance and the increase in the price of gold, our reserves are now 1.5 per cent higher than our total external debt and cover about 18 months of imports. This was possible without Portugal’s having introduced any payments restrictions. Merchandise exports in volume went up by 13 per cent, while imports stagnated. Following that remarkable performance, exports in 1979 are expected to proceed at a brisk pace given the good competitive position of Portuguese goods brought about by the crawling escudo devaluation. However, a negative element conditioning the growth of Portuguese trade is the existence of quotas on some of my country’s most important exports.

The growing wave of protectionism is one of the main causes of concern in present days. This is mainly the case in sectors particularly sensitive to the developing countries, such as textiles, footwear, and shipbuilding. It is, thus, very necessary that the industrial countries endeavor to maintain a liberal attitude toward world trade. There is no justification for the new barriers that have been imposed in recent years by several industrial countries on imports of manufactures from developing countries. The obligations of liberalization of payments for current transactions, as provided by the Articles of Agreement of the Fund, will lose much of their meaning if countries impose restrictions on trade transactions. Industrial countries should allow that those changes entail the structural adjustments in their economies which are made necessary by the emergence of new producers in good competitive positions.

I should now like to refer to the activities of the Fund and the Bank and express our views on them. Since the last Annual Meeting, the Fund took some important steps to improve the conditionality attached to the use of its resources, the compensatory financing facility was liberalized, several measures were taken to promote the role of the SDR in the international monetary system, and the Fund’s liquidity was increased.

We welcome the recent adoption by the Fund of the revised directives on conditionality. Conditionality is a necessary aspect of the Fund’s operations, but it has excessively restricted the recourse by members to the Fund’s resources in the upper credit tranches. The new guidelines, as we see them, represent some progress in the demarcation of the area of application of conditionality and allow for greater flexibility of policies in the process of adjustment. It is to be hoped that in the future the design and content of the stabilization programs in stand-by arrangements will correspond to the spirit of the new guidelines and thus encourage the timely recourse to the Fund facilities.

Adjustment programs aimed at stabilization have often generated low growth rates, unemployment, and significant social costs. Now this does not seem to correspond to the aims of the Fund, which are the correction of maladjustments without resorting to measures destructive of both international and national prosperity. Specifically, the Fund should be sensitive to the needs of its members which have to make strong efforts of adjustment, adapt its financial assistance to each particular set of situations, and make a distinction between internal and external factors influencing the imbalances.

The recent liberalization of the compensatory financing facility offers new possibilities of access to it by member countries with balance of payments difficulties arising from temporary export shortfalls. The Fund should further explore the possibility of improving the conditions of the facility, namely, along the lines proposed in the Arusha program. We would also welcome an early consideration and successful decision on the possibilities for the Fund to provide additional balance of payments support in order to cope with the increase in the price of foodstuffs in the low-income countries.

We want to join other speakers who have expressed satisfaction at the entry into force of the supplementary financing facility and appreciation of those member countries willing to contribute to it. In this connection we should like to support the proposals submitted to the Fund for the establishment of an interest subsidy account in favor of the less developed member countries who may use this facility. The financing of the account could draw its inspiration from the action taken in the case of the oil facility.

With the new resources provided by the supplementary facility and the 50 per cent increase in quotas within the Seventh General Review, the liquidity available to the Fund will be more adequate to its task.

Before closing these few considerations of the Fund’s activities, I should like to refer to SDR developments and the proposed substitution account. We are in agreement with those many member countries who claim that the amounts of SDR allocations should be more in line with the objectives defined for this asset. The share of SDRs in total international reserves has been too low for too long, if we take into account those objectives, and the amounts of the allocations for the current basic period do not represent a great progress in that direction.

The measures taken this year by the Executive Directors to improve the financial qualities of the SDR and to widen its usability, namely, in the settlement of financial obligations, in loans, and as collateral, represent an important step to enhance the role of the asset. The role of the SDR would also be enhanced by the establishment of a substitution account.

We support the creation of this account. In our view, the substitutions should be entirely voluntary. Consequently, we hope that the conclusions of the further studies to be carried out will be that the SDR assets of the substitution account should have a yield closer to the market rate and offer an adequate liquidity.

International monetary cooperation should be reinforced by new steps that are both courageous and careful.

The new authority of the Fund as supervisor and coordinator of economic policies of its member countries and the efforts within the European Economic Community to strengthen monetary cooperation among its members offer the best possibilities of an orderly operation of the international monetary system and of greater balance in the economic relations of the world. . . .

The continued improvements in the functioning of these institutions are certainly to be praised. They may have to face, however, in the near future, new problems, arising from the need to adapt their activities to a changing world in which economic crisis is part of a deep cultural and social change, and the building of a new economic order represents the only chance for more wealth, development, and justice.

As the Governor for a country undergoing profound economic and social changes, the pace of which largely depends on the international environment, I put much hope in the success of the World Bank Group and the IMF in meeting their challenges.

Statement by the Governor of the Bank for Iran—Ali Ardalan

On behalf of the delegation of the Provisional Government of the Islamic Republic of Iran and on my own behalf, I welcome the opportunity of participating in these meetings for it enables us to remind representatives of the World Bank and International Monetary Fund member countries of the many problems and difficulties being faced by various countries in the world in their endeavor to implement an equitable, balanced, and all-inclusive system of the international economy. Certain speakers have already alluded to certain of these problems and difficulties, but the matters which need to be studied in greater depth, and for which rapid decisions need to be taken in today’s troubled world, can be resolved only by a greater unity of word and action and a resolute desire to reach a common solution.

First, I must express my delegation’s satisfaction that these meetings are being held in Yugoslavia, and thank both the Government of Yugoslavia and the authorities of the Bank and the Fund for their hospitality and their highly efficient organization of the meetings program.

Since it is the first time that representatives of the Provisional Government of the Islamic Republic of Iran have participated in these important meetings, I should like to outline for you briefly the revolutionary changes that have taken place in Iran in the last seven months.

As you are aware, the Islamic Revolution of Iran is characterized by certain unique features. In fact, since the victory of the Revolution, the Provisional Government of the Islamic Republic of Iran has maintained its relations with foreign countries and abstained from allowing its policy to be based on any specific model. It has been able to provide everyone with an accurate presentation of the country’s real resources and, taking these resources into account, seen to it that realistic programs are drawn up.

The Iranian Revolution took place at a time when, as the result of a deceitful economic and social policy that had been pursued for many years, the country was experiencing profound crisis conditions. The permanent economic factors resulting from this policy, in which the bad far outweighed any good points there might be, have caused numerous losses in our economy with the result that our country’s exchange and production systems have had to endure very heavy pressures. Fortunately, under the guidance of the superior principles and laws of Islam, new economic targets have been set for Iran, and in the light of these principles the country has seen transformations in its economic, social, and political infrastructure that are conducive to the foundation of a sound, coordinated economy.

One of the important measures adopted by the Provisional Government of the Islamic Republic of Iran has been to cancel the overcostly projects originated by former governments. I will add that the Government’s policy is to lead the country toward a balanced economy by implementing the projects of greatest importance and by cutting out all unnecessary expenditure.

In the sphere of international relations, as I have already mentioned, the Government has maintained open frontiers since the Revolution: not only has it not broken off relations with foreign countries, but it has still continued to encourage international cooperation and the development of dealings between countries, based on mutual respect, which is in accordance with the traditional principles of Islam.

In recent months the Provisional Government of the Islamic Republic of Iran has faithfully observed all reasonable obligations to foreign nations, and it continues to do so. In other words, the Provisional Government of the Islamic Republic of Iran has no intention of withdrawing from present-day civilization or hermetically sealing its frontiers. We are trying to reap the maximum advantages of modern technology, so that our people and our native soil can benefit thereby.

As regards international cooperation, we favor such cooperation as long as it is not controlled by blocs and is exercised on terms of strict equality between the different countries. This may make it possible to foster a more stable situation in some developing countries. On this latter question, we believe the international development organizations should be reinforced, particularly the World Bank and the International Monetary Fund; we shall comply in full with all our obligations in this respect. We propose that all countries in the world devote at least 1 per cent of their national income to the development of the disadvantaged countries.

Oil problems in various countries are frequently discussed at these meetings and perhaps it is not necessary to allude to them here. The important thing for the oil producing countries is to make rational use of these resources, which are in fact relatively modest and will soon be depleted. With regard to the decrease in the oil producing countries’ incomes, it should be borne in mind that the dollar rate against the SDR has been declining from the beginning of 1979 to the present, and there is every reason to believe that this decline will continue. On the other hand, in the same period the price index for industrial countries’ exports has increased, so that a double burden is imposed on the oil producing countries. This is why we, in common with other countries, are trying to industrialize and to expand our economic and social development, but always with this difference—that our funds are derived solely from that nonrenewable resource, petroleum.

The Provisional Government of the Islamic Republic of Iran is of the opinion that the increase in the price of oil is inevitable, as in the present world situation the industrial countries are unable to control their inflation, which they export to the countries that buy their products; but it should be acknowledged that this oil price increase is not the ideal solution. It should be stressed, however, that the only purpose of the oil price increase is to enable the oil producing countries to restore their purchasing power vis-à-vis the industrial countries. Obviously, non-oil developing countries should not suffer from the oil price increase. This problem can be solved by granting them loans and credits on favorable terms.

The Bretton Woods system, as you know, was established during the last war, with the aim of facilitating signatory countries’ development, trade among them, and a fixed parity between their national currencies. Eventually, however, the system established fell short of expectations, due to complicated worldwide changes in the monetary and financial spheres. Indeed, parallel to the countries’ economic development and the emergence of economic groups with distinct unilateral interests, protectionist trade policies have been adopted, to the detriment of economic assistance.

Moreover, the Bretton Woods system did not involve all the countries of the world; consequently, a number of them remained outside the framework of economic cooperation. Then, too, in the Third World many nations have since been born whose economies are based mainly on exports of raw materials. As we all know, raw materials are usually subject to very wide price fluctuations on world markets, which may entail heavy losses for the producing and selling countries. Hence, it is necessary to resort to a sound trade policy, far removed from protectionist practices.

The economic situation of the Third World countries should not be discussed as a separate issue, for it results from their past and from the excessive exploitation of their resources, throughout their history, by the more advanced countries; that explains their present situation.

The fact is that it is imperative to set up an international monetary system in keeping with the requirements of this day and age. That system should be based on the cooperation of all of the world’s countries, taking into account the opinion of each one—be they capitalist, socialist, or Third World countries—within the framework of the International Monetary Fund, in which the participation of other countries should be secured. This will result in an increase in international trade, a rise in employment opportunity, acceleration of economic growth, and the disappearance of inflation and stagnation.

It should be emphasized that economic stagflation is due to many deficiencies in the labor market, insufficiencies in certain economic sectors, differences in economic growth between countries, conflicting policies in international agreements, the rise of wages and prices, and the rise of prices on raw material markets and other markets.

It should be stressed, however, that the basic reason for the problems mentioned lies in lack of confidence in the world monetary system.

Furthermore, within countries separated by political and ideological frontiers, political and industrial powers are present, but side by side with these powers and beyond these countries we are witnessing the birth of new powers which do not concern themselves with political and ideological frontiers and which exist and develop because they are able to accumulate their resources and profits. These are the multinational corporations, which view the world as a market for investment, production, and trade. The emergence of these new entities is not specifically linked to the capitalist system, for the socialist countries also recognize their importance and are not afraid to pursue in respect of these corporations a policy of peaceful coexistence with the creation of their industries.

It should be added that the fixing of parity relationships between currencies at the Bretton Woods Conference was for a number of reasons not based on a correct valuation of the various currencies. In some cases, because of the economic importance of certain countries, their currencies were overvalued; in regard to other countries, balance of payments surpluses were taken into account for purposes of these valuations, whereas those surpluses arose mainly from the unduly protectionist policies pursued by these countries in order to develop their exports to the maximum extent and reduce their imports as much as possible. This critical situation will endure until such time as the industrial Western countries throw their markets and their doors wide open to the manufactured products of other countries, particularly those coming from the Third World.

The negotiations and discussions held on this subject at the international level clearly prove that there is a profound difference in terms of conception, as was brought out quite recently at the UNCTAD conference in Manila. It is essential that the credit granted by the International Monetary Fund, and the terms of such credit, take account of the economic situation of borrowing countries, so that the conditions imposed by the Fund in granting the credit are in keeping with the policies pursued by the borrowing countries, and do not penalize them. Obviously, if this line of action is adopted there are grounds for optimism about the future economic situation.

As regards the elimination of gold from the international monetary system, we all know that the Fund’s first objectives relating to the demonetization of gold have not yet been attained. Indeed, the price of gold is rising from day to day—which is proof of a worldwide lack of confidence in the mechanism of the world monetary system and highlights the need to find a solution for fighting inflation effectively. However, the fact that one of the world’s major producers and exporters of gold, the Union of Soviet Socialist Republics, is absent makes this task even more difficult. In other words, any decision that does not take account of all the factors involved may fail to produce the hoped-for results; and the provision of supplementary financial resources in the form of special drawing rights, now made available to certain countries, will not help matters. Not only does this fail to resolve any problem, it even aggravates inflation, for most of the time SDRs are resorted to for the sole purpose of improving balances of payments that are in disequilibrium.

In the face of these problems, the major international monetary and financial institutions, such as the International Monetary Fund and the World Bank, have always adopted a benevolent attitude, but one based on a realistic view of things, taking account of existing limits and possibilities. It should be possible to make improvements here, by various types of action. These institutions’ policies should be based on promoting cooperation and understanding among the countries of the world, and particularly, insofar as developing countries are concerned, with greater understanding for the special difficulties of those countries. It should be borne in mind that, while loans granted temporarily resolve certain problems, the difficulties these countries have in repaying the principal and the finance charges, which are often too burdensome for them, push them a little further into the abyss of debt every year.

In this area the International Monetary Fund should undertake in-depth studies in order to play its part properly as an assembling agent. We are in full agreement with the International Monetary Fund’s efforts toward elimination of exchange rate fluctuations, and hope that with the plans presented, the disturbances noted will at least be greatly alleviated. In our opinion, the assistance granted by the International Monetary Fund and the World Bank should be reflected not only in loans but also in the seeking of solutions to the fundamental and most pressing difficulties of certain countries, such as balance of payments disequilibria; in this case, experience has often taught that one cannot really solve the problem by way of temporary changes in the parity of currencies, or the adoption of policies restricting imports, or the granting of loans. On the contrary, these measures often affect the economic structure of the countries concerned.

This consequently leads to a general distrust in the stability of currencies and a total lack of confidence in investments. In those circumstances, whatever measures are taken to improve the system are bound to fail. What has been done in this area so far is not sufficient. This is why the delegation of Iran proposes that a second conference, similar to the Bretton Woods Conference, be held, bringing together the industrial countries, the socialist countries, and the Third World countries, so that a decision may be taken on the general principles of the international monetary system. A system should be based on equality of rights of all countries of the world, taking account of the difficulties of each one. At that conference all aspects and details of new international monetary schemes should be examined and discussed.

With a view to improving the provisions governing the world monetary system, the delegation of Iran supports the following proposals. The assets making up each country’s reserves (gold, foreign exchange, the special drawing right) would be combined so as to constitute a new asset called “reserve unit” (the Reserve Unit Plan). Next, all countries would deposit their existing reserves into a special reserve liquidation account, maintained with the International Monetary Fund, and against each dollar of the above-mentioned asset they would receive one dollar of the reserve unit. Of course, since all the assets making up members’ reserves would actually be converted into a single common, usable unit, no country could have the benefit of a special asset (such as gold) at the expense of other assets (such as the special drawing right), which is not the case now—hence the present weakness of monetary regulations and laws in effect. As a result of these measures, the units making up each country’s reserves would increase or decrease in a fixed manner, and the role of gold would be much less important than it is now.

In addition, the considerable fluctuations to be noted at present in currency parities should be eliminated; this means that, while maintaining the very small and permanent variations between currencies, their parity regime should be determined in terms of fixed but adjustable rates and within the margin of fluctuation of those rates. Naturally, they will have to be revised as needed, so as to improve balance of payments adjustment and prevent the emergence of difficulties as regards the liquidity requirements of the Third World countries. Then, too, in order to control volatile capital, unnecessary transfers should be avoided. The mechanism allowing international currencies to be exchanged among themselves should be amended and their parities should be fixed in light of their real value without regard to their economic predominance. Lastly and above all, the question of world economic development and monetary requirements and the liquidity problem should be given priority consideration in the new system.

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

First, I would like to express my gratitude and sincere thanks to the people of Yugoslavia for the warm hospitality they have extended to us, as well as to the Government of Yugoslavia for the excellent arrangements they have made.

The Annual Meetings gave us all an opportunity to observe once again the great achievements the Yugoslav people have been making in economic and social development. The past as well as the present rate of progress in Yugoslavia is visibly striking and impressive. I bring the best wishes of the Turkish people for the continuing welfare of the Yugoslav people.

The Annual Meetings should give us an opportunity to review and coordinate the efforts of member countries as well as those of international organizations with the principal objective of shaping a better world. The excellent World Development Report prepared by the World Bank, as well as the Managing Director’s and President’s illuminating speeches, has underlined so well where we are in terms of problems and the prospects of the world community as a whole.

Getting down to the essentials of international cooperation, each member state and government of our institutions has a clear responsibility to adjust its economy to the changing world economic conditions. This is our individually declared responsibility to our people as well as to the rest of our member governments. This is also, in essence, what our great institutions advocate daily to our member governments. This is the sum total of their present nonfinancial role.

We shall continue to accept the need for such a role as long as two essential prerequisites are continuously met by the Bretton Woods institutions themselves:

First, these institutions should try to adapt themselves to the changing world economic conditions by taking great care in avoiding to ask the impossible from any particular group of member countries. What is being advocated by the institutions should, at all times, be economically feasible.

Secondly, the IMF and the IBRD have a clear responsibility to make underlying conditions feasible to adjust to and reasonably equitable for all countries. The recognition of this responsibility would, at the present, require forcefully advocating and spearheading policy changes in industrial countries as well as in developing countries.

If these preconditions are not met at all times then, as now, advocating not enough in industrial countries would result in asking for the impossible in developing countries. This is the essence of the world’s current economic dilemma.

Let us turn to the great institution that was originally established for advocating monetary stability and balance of payments adjustment. I am referring now specifically to the IMF. This is one institution that does not change sufficiently in this ever-changing world. Uninfluenced by time or circumstances, it recommends the same formula over and over again the way it was programmed some 30 odd years ago. This well-known formula which is simple and profound, while relevant during the distant past, no longer fits in with today’s realities.

Now I address myself to the membership and the management of both our institutions.

Let us all think for a moment about the nature of the conditions to which the non-oil developing countries are presently being asked to adjust. The oil price increases of 1979 alone represent a 60 per cent jump over 1978 effective oil price levels. Oil import bills of the developing countries rose, as a result, by $12 billion. These countries are also being asked to assume a large part of the increase in the oil import bill of the industrial countries by paying more for those countries’ exports, while the current recession and rising protectionism make it harder for any significant expansion of their own exports. In the meantime, these countries are urged to finance the greater part of their current account deficits through private channels of finance, which in turn requires an extraordinary export performance that is now being made impossible by protectionism. Some may be successful in borrowing for a while, but eventually debt-servicing bottlenecks show up. To sum up, protectionism limits the developing countries’ capacity to increase exports, thereby limiting their ability to borrow, while import prices that they pay are ever increasing due to the price war between the other two groups of countries. These are the external conditions to which the IMF and the IBRD are constantly asking the developing countries to adjust. This is why, as President Tito has so eloquently put it, we face now the prospect of calling developing countries stagnating, or even worse, the regressing countries.

Turkey, as a middle-income and non-oil developing country, represents an interesting example to which these conditions now apply. During the 1974-78 period, petroleum and other import price increases as well as stagnating workers’ remittances resulting from the recession, cost Turkey $15 billion. Despite a remarkable export performance in 1978 in excess of 30 per cent and the maintenance of that performance this year, the need for further adjustment still remains.

During the adjustment process, the reluctance of governments to agree to the Fund’s formula is often regarded by the IMF as being due merely to the domestic and political constraints as conceived by the so-called ambitious governments themselves. As the Minister of Finance of one deficit country, whose government has recently agreed to enter into a stand-by arrangement, I strongly suggest that, with import price increases and rising protectionism, it is not the political, but the economic viability of the Fund’s standard formula that must be seriously questioned now.

How long do we think that developing countries could be reasonably expected to continue trying to adjust to these conditions? We are willing to accept any argument that underlines the justification for any price increase, provided that others accept that their combined implications are simply intolerable for the non-oil developing countries. If they are part of today’s reality, then also is the $40 billion current account deficit of the non-oil developing countries.

We are also willing to listen to any argument that advocates new forms of self-help, be it on population issues or on the futility of the arms race. We also welcome any condemnation of protectionism. I thank Mr. McNamara and Mr. de Larosière for their advocacy of these issues. Above all, however, we would like to see both of our institutions really make a greater effort to change the world economic conditions into a more reasonable and tolerable mix for the non-oil developing countries.

It is high time for the IMF, IBRD, and IFC to effectively impress upon the industrial countries that

  • —more aid is, above all, good business for the industrial countries;

  • —protectionism may be good for domestic politics in the short run, but only at the expense of greater and long-term gains; and

  • —not only the survival of the rich, but also peace on earth, depends on the accommodation of the rich with the poor.

In other words, they should now really start advocating to industrial countries the counterparts of the arguments that they have been advocating to the developing countries for so long.

Of course, stressing what more needs to be done by our institutions does not mean at all that we do not appreciate what has been done so far. . . .

… We are also very much satisfied with the Seventh Quota Review exercise, the coming into force of the supplementary financing facility and the improvements in the compensatory financing facility. Last, but not the least, the Fund’s most recent approach to conditionality, in which due regard is now being paid to the social, economic and political priorities and circumstances of the member countries, has also our full support.

The gist of my message today, however, is that the present international economic order and the underlying conditions impose upon many countries an almost impossible task. There is now a structural disequilibrium that cannot continue. Sacrifices are needed, not by a few, but by all countries. The Bretton Woods institutions should now realize that the economic background of Bretton Woods disappeared a long time ago, and that they are no longer fulfilling adequately their roles. They should recognize that long before the positive results of the adjustment measures taken are realized, further burdens of adjustment arise. How can the governments of the developing countries explain to their people in such conditions that their sacrifices were not in vain?

We should accept the inevitability of gradualness, but not the inevitability of the postponement of these critical issues to an uncertain future. If we do, then the extremist tendencies in our societies will surely rise with dire consequences for all.

Statement by the Governor of the Fund for Malta—Joseph Cassar

Rarely, we feel, has the International Monetary Fund Annual Meeting taken place in an international economic environment as somber as this which prevails as we are meeting this year.

Notwithstanding the discussions and exhortations of the past years, aimed at realizing a cohesive restructuring in the closely interrelated fields of trade, development finance, and money to bring about a generally more just and effective new international economic order, many of the measures agreed to be essential to the achievement of such a desirable objective are still in cold storage. As if this, in itself, were not bad enough, the very problems we have long identified and which need to be eradicated not only remain with us, but are growing worse.

The victims of the lingering fundamental shortcomings in the existing international economic order and of the frightening deterioration of the state of the world economy are the developing countries, particularly the smaller ones among them.

Unsatisfactory trading arrangements, slowing down of global demand, persistent and rising inflation emanating from exogenous sources, great currency instability—all these factors hit small developing countries not merely mercilessly and directly, but also with disproportional effects. The vulnerability of such countries to the onslaught of external negative factors which they can neither influence nor protect themselves against is total and complete.

In circumstances such as these, to speak of the need for sound domestic policies by developing countries is, frankly, to add insult to injury. No matter how sound the domestic policies of these countries may be, they are all too often swept aside by the raging tide of an inimical external environment.

For example, developing countries have been and are trying to create an industrial base without which any claim to development must be weak indeed. Substantial real resources, which could have been used to seek to achieve other worthwhile objectives in other sectors, have been painstakingly channeled into the industrial sector.

Now what do we find? We find that instead of responding sanely and positively to the dictates of comparative advantage in the emerging world economic order, certain industrial countries, blatantly and illogically, resort to protectionism in the form of barriers against imports of those goods which developing countries can now produce more cheaply.

Such shortsighted protectionism in the end benefits no one, not even those industrial countries which practice it. Immediate sensible action, therefore, should be taken to end it.

Early measures need also to be taken to facilitate further the growth of trade from developing countries. Measures, for example, to improve export financing and all activities related thereto, as well as to enable developing countries to purchase such capital goods as are needed to help them develop and expand their trading capability.

To many of us, invisible transactions are a very important complement to merchandise trade. Like other small developing countries, my country depends heavily on receipts from tourism and, to a lesser extent, on emigrant workers’ remittances for its earnings of much needed foreign exchange. In this context, therefore, I welcome the Fund’s recent decision to extend the compensatory financing facility to cover shortfalls in earnings from travel and workers’ remittances. The liberalization of the compensatory financing facility, however, leaves room for considerable improvement, particularly with regard to medium-term shortfalls, and we look forward to early action in this regard. Such action, we feel, must be founded in a recognition of the fact that very often shortfalls experienced by developing countries are due to external factors, and as such cannot be corrected by adjustment of public spending targets or of development plans and programs. Indeed any such unwarranted adjustments could harm directly a country’s development process.

Another area where progress has been plainly lacking is that of the transfer of real resources through development aid. The need to accelerate, in real terms, the flow of concessional aid to developing countries is urgent and self-evident. We fully support the call to donor countries to raise ODA disbursements and to multilateral financial institutions to substantially increase program lending relative to project aid. . . .

In this same context we endorse the call for a revision of the criteria, both in terms of the variables used and the weights attached to them, for determining the quotas of the membership of the International Monetary Fund. Indeed, we feel that the whole decision-making mechanism should be urgently reviewed to take into account the changes that have occurred through the decades and the realities of the current situation. These realities call for increased representation of developing countries in the Executive Boards of both the Fund and the World Bank.

Finally, in this regard, we must express our disappointment that the idea of establishing a link between SDR allocation and development finance seems to have been discarded. A positive decision to establish such a link should be taken without further delay.

Turning now to money, let me record our utmost concern at what is happening in the international currency markets. There is a rapidly spreading fear over a widespread inflationary trend which had been allowed to go on far too long and now seems to be defying belated efforts to control it. The consequential collapse in confidence in paper currencies is gravely threatening the already dangerously cracked foundation of the international monetary system.

Movements in exchange rates and gold and commodity prices in recent weeks demonstrate once and for all the inadequacy of the present regime where one national currency still serves as the major reserve asset in the system. It has long been established, and proven by bitter experience that such a system carries in it the seeds of its own destruction. Destruction now seems to be taking place with a vengeance.

And once again, it is developing countries who are worst hit by the ongoing earthquake.

We are hit by inflation, which we are forced to import, but do not have the capacity to re-export fully. We are hit by the uncertainty and instability which turbulent exchange rates cause in trading arrangements. We are hit by the depletion in the value of our precious stock of currency reserves. These reserves in Malta’s particular case and, I am sure, in the case of other developing countries are not simply deficit-covering reserves. They are largely financial assets which we are seeking, within this hostile environment we have been speaking about, to transform into real productive assets. Yet these reserves, the life blood of our future, are being destroyed not only in real terms by inflation but also directly as the currency assets we hold depreciate steadily.

Urgent action is necessary to pull us all out of this terrifying situation. The establishment of the SDR as the major reserve asset could help; a substitution account could also be a step forward.

The fact remains, though, that when there is a crisis of confidence in paper currencies such as we are witnessing now, the SDR—itself, of course, a composite of paper currencies—may not be enough. Urgent consideration, therefore, should also be given to strengthening the SDR.

We are in a grave situation. No one can plead ignorance of the implications of the state we are in. Whether we respond to the situation by more rhetoric, or whether we take definite, purposeful action, is up to us.

In conclusion, we wish to record our appreciation to the Government and people of Yugoslavia who so ably and graciously hosted this Annual Meeting, and to President Tito who honored us all by opening the meetings.

October 3, 1979.

See pages 312–22.

Zolotas, X., “The Dollar Crisis and the International Monetary System—A Proposal.” Statement made on September 26, 1978 at the Joint Annual Meetings of the International Monetary Fund and the World Bank and published in The Dollar Crisis and Other Papers, Bank of Greece, Papers and Lectures No. 41 (Athens, 1979).

Zolotas, X., An International Loan Insurance Scheme, Bank of Greece, Papers and Lectures No. 39 (Athens, 1978). See also The Dollar Crisis and Other Papers, Bank of Greece, Papers and Lectures No. 41 (Athens, 1979).

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