Chapter

Presentation of the Seventeenth Annual Report1 by the Chairman of the Executive Board and Managing Director of the International Monetary Fund

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1962
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Author(s)
Per Jacobsson

In the year that has passed since we met in Vienna, the Fund has experienced a substantial increase in its membership. Eight countries have become members—Cyprus, Kuwait, Liberia, Senegal, Sierra Leone, Somalia, Tanganyika, and Togo, making a total of 82, and we are very glad to welcome them all here as members of our institution. Moreover, applications for membership are pending from a further 17 countries, so that the likelihood is that at the next Governors’ meeting the membership will be nearly 100. It is, I believe, recognized by the newly independent countries that membership in the Fund and the Bank will ensure to them, quite apart from the financial and technical assistance which they may obtain, a degree of participation in the economic and financial life of the world which they could not otherwise achieve. For the Fund itself, this large membership opens up a wide field of action; but the Fund will, I am confident, continue to adapt itself to the changing circumstances, and be in a position to undertake the manifold new activities which this will involve.

But before looking forward I would like, for a moment, to look back and say something about recent activities of the Fund. I want first to review the development of the Fund’s policies and practices, which have been the object of intensive work in the Fund over the past few years.

It was at the end of 1958 that 14 Western European countries decided to establish nonresident convertibility. The Governors’ meetings in 1959 and 1960, as well as the Executive Board and the staff of the Fund in these years, devoted a great deal of energy to examining the implications of the move to convertibility for the international monetary system and for the activities of the Fund. Intensive discussions were held in 1960 with a number of countries that were considering the assumption of formal Article VIII status. These resulted, in February 1961, in 10 member countries in Europe accepting the obligations for convertibility of their currencies as set forth in Article VIII, which meant that thereafter the great bulk of international transactions were being conducted in currencies which were convertible under the Fund’s Articles of Agreement. The Governors, particularly at the 1960 Annual Meeting here in Washington, had directed great attention to the new conditions arising from the return to convertibility. In the months following that Annual Meeting, the whole complex of problems referred to in the speeches by various Governors was very closely examined by the staff of the Fund, and on February 10, 1961 I made a statement in the Board of Executive Directors on the future activities of the Fund as affected by these new conditions. The problems discussed in that statement related to (1) access to the Fund’s resources; (2) policies on the use of the Fund’s resources; (3) currencies to be drawn; (4) replenishment of the Fund’s resources through borrowing; and (5) capital transactions. In the year and a half that has passed since that statement was made, decisive progress has been made under each of these headings, as I shall now briefly report.

As regards access to the Fund’s resources, I believe that there has by now been sufficient experience to show that a country facing balance of payments problems, whether or not of an emergency character, can confidently turn to the Fund for assistance, and that financial institutions and, indeed, the exchange markets regard this as an appropriate course of action and an effective basis for the support of the country’s currency. The Fund has not been reluctant in such circumstances to take the lead in assessing the country’s economic and financial situation, and thus to provide an internationally recognized form of initiative and decision. On a number of occasions its own assistance has been supplemented by credits made available from other sources, and this has certainly been welcome. But, however useful the Fund’s initiative may be, each contributor must form its own judgment of the adequacy of the measures proposed by the country concerned, and determine what credit facilities it is willing to extend.

As to the use of the Fund’s resources, the policies and practices laid down for the use of those resources have stood the test of practical application. It was specifically stated in the Report on the Enlargement of the Fund’s Resources in 1958 that the principles and practices on the use of the Fund’s resources should not be changed as a consequence of the increase in quotas then envisaged, and these same principles and practices, after a further test of time, have been reconfirmed in the provisions of the borrowing arrangements, adopted by the Executive Directors in January 1962, to which I shall presently refer. The 1958 Annual Report emphasized that the Fund’s policies must, at the same time, be alert to the needs of changing circumstances. As an example, I might mention that, whereas until recently financial assistance from the Fund had not gone beyond a total amount equal to 100 per cent of a member’s quota, the Fund has now in several cases granted, or agreed to grant, assistance beyond that amount, up to 125 per cent. In this and in other matters under the Fund’s charter, I am reminded of what an English Lord Chancellor, Lord Sankey, said of the Canadian Constitution. It was, he said, “a living tree capable of growth and expansion within its natural limits.”

If I may depart from the order of the points I mentioned earlier, I would now like to refer to the relation of the Fund’s assistance to capital transactions. While the experience of many countries has shown that capital movements may be substantial even under systems of exchange restrictions, such movements can naturally assume even greater proportions under conditions of convertible currencies. Although the Fund’s resources had been used in situations involving capital transfers, there had been some uncertainty as to the extent to which, or the circumstances in which, the Fund’s resources could be used for helping to meet those deficits in the balance of payments of members that go beyond the current account and are attributable in whole or in part to capital transfers. This uncertainty had arisen largely because of doubt as to the implications of an early Fund decision on this matter. I recall that it was following a very useful suggestion of yours, Mr. Chairman, that the Executive Directors decided that it was necessary to clarify this whole matter. By a decision of July 1961, they were able to eliminate any doubt which had not already been dissipated by the practice of the Fund, that the Fund’s resources can be used to alleviate pressures brought about by capital transfers, in accordance with the criteria of Article VI and other relevant provisions of the Fund Agreement. Thus, if a country facing a disequilibrating outflow of capital were to turn to the Fund for assistance, one of the criteria which the Fund would apply would be to satisfy itself (in accordance with accepted principles) that the appropriate measures were being taken to overcome the balance of payments difficulties, and that the assistance provided by the Fund would be repaid at the earliest opportunity, and in any event not later than three to five years after the drawing.

It has, in fact, proved very useful that this matter was clarified, since in some recent important transactions of the Fund, capital transfers have been responsible for a considerable part of the pressure on the currencies which were supported. I need only mention the important Fund transactions in 1961 and 1962 with the United Kingdom, South Africa, Mexico, and Canada. In each of these cases the outflow has proved to be speedily reversible, thus confirming the Fund’s judgment that the conditions laid down in the Articles of Agreement were entirely fulfilled.

Turning now to the question of the replenishment of Fund resources by borrowing, the negotiations which were conducted after the Annual Meeting in Vienna last year led to arrangements under which the Fund will be entitled to borrow, under Article VII of the Fund Agreement, supplementary resources in the currencies of ten member countries, amounting to the equivalent of $6 billion in all. The decision taken by the Executive Directors on January 5, 1962 laid down the terms and conditions for such borrowing; and in an exchange of letters among themselves, the ten lending countries have set down the procedures they will follow in making the supplementary resources available to the Fund for the financing of particular Fund transactions for which such resources are considered necessary. The terms of the Fund decision provide for such matters as the procedure for making calls, the payment of interest, the issuance and transferability of evidences of indebtedness, repayment by the Fund, and the renew-ability of the arrangements.

The borrowing arrangements will become effective when adherences are received from not less than seven participants representing maximum commitments totaling the equivalent of $5.5 billion. To date seven of the ten participants—the Governments of France, Italy, Japan, the Netherlands, and the United Kingdom, and the Deutsche Bundesbank and the Sveriges Riksbank—have communicated to the Fund their acceptance of maximum commitments totaling $3,650 million. The United States Congress has adopted the authorizing legislation for U.S. participation, and the appropriation is at this moment being considered by the Congress. In the remaining two countries—Belgium and Canada—the Governments are submitting requests for the necessary legislation to their respective Parliaments. I am glad to be able to report that the acceptance of the proposals for participation in the borrowing arrangements in the various Parliaments has been virtually unanimous, and this, I think, may be regarded as a recognition of the importance of these arrangements as a significant means of strengthening the world’s monetary structure. The ten industrial countries which are partners to these arrangements are among the countries most likely to be affected by substantial short-term capital movements, and it is therefore natural that they in particular should have wanted these supplementary resources to become available in case of need. However, all Fund members have a fundamental interest in these arrangements because they are designed to enable the Fund to fulfill more effectively its role in a world of more and more convertible currencies. Moreover, the possibility of using supplementary resources to help to finance large Fund transactions will enhance the Fund’s liquidity, and enable it to cope with other transactions within the framework of its basic policies. As soon as the borrowing arrangements have entered into force, which I am confident will be a matter of only a few days or weeks, the Fund will be even more clearly in a position to meet requests for financial assistance from all its members—large and small—even in situations when there are very substantial capital movements. It will thus be able to provide the time for the proper policy measures to be taken and to take effect in individual countries. Already, it seems, the knowledge that substantial resources may promptly be mobilized if and when required has had a calming effect on the exchange markets, so that the coming into force of the borrowing arrangements, together with other useful measures and developments, has cast its shadow before it.

Finally, on the question of currencies to be used in Fund operations, I would like to refer you to pages 36 to 41 of the Annual Report, where there is reproduced the statement adopted by the Executive Directors on July 20, 1962 on the appropriate currencies to be used in Fund transactions and in the repayment of sums drawn from the Fund. This statement is a considered recognition of a very important development over recent years, in which the spread of convertibility has made possible a broadening of the range of currencies usable for drawings and repurchases, and has thus led to a great increase in the liquidity of the Fund. At the moment, after large repurchases by the United Kingdom and a very substantial net inflow of dollars into the Fund, the Fund’s holdings of dollars and sterling are close to 75 per cent of these countries’ quotas, which means that the Fund’s transactions now outstanding have their counterpart (apart from net sales of gold over the years) mainly in creditor positions of European currencies. By paying close attention to the balance of payments developments of the countries concerned, the Fund has increasingly been able so to arrange the currency composition of drawings and repurchases as to take account of these developments and, for example, to offset short-term and sometimes speculative capital movements over the exchange markets. In this way it has contributed significantly toward achieving a more balanced over-all reserve position. Since the amount moving in and out of the Fund over the last two years has amounted to $5.5 billion, the aggregate effect has been not inconsiderable.

The statement of the Executive Directors on currencies to be drawn and to be used in repurchases represents, to a great extent, a confirmation of practices which had been developed over the past few years. It is, however, expressly noted that “these practices are still in a state of evolution as increased experience is being gained.” It is my belief that the same observation can be applied to a wider range of Fund activities, and even to the Fund as a whole. There has been and will continue to be in the Fund a lively awareness of changing world conditions as they affect monetary practices and policies, and I believe the Fund will continue to show the ability to cope with new developments as they emerge. Care has been taken to ensure that the arrangements made and the practices that have evolved have been consistent with the provisions and purposes of the Articles of Agreement; experience has shown us that these Articles, to a greater extent than is perhaps generally realized, serve as a basis for progressive action. Thanks to this experience and to the good will which has been shown by member countries, the effectiveness of the Fund has been greatly increased. For this to be done, much work and painstaking negotiations have been necessary, but results have been achieved which are within the range of practical politics.

In the meanwhile, within the framework of these developing principles and practices, the Fund has continued to engage in a large number of transactions with member countries. In the 12 months preceding the opening of this meeting, no fewer than 26 members have received financial assistance, either through direct purchases of currencies or in the form of stand-by arrangements: 13 in Latin America, 4 in Europe, 2 in the Middle East, and 5 in the Far East, together with Canada and Ghana. Total purchases of currencies amounted to the equivalent of $678 million, while total repurchases were equivalent to $1,749 million. Under new stand-by arrangements granted by the Fund in the period, an amount of $1,579 million remains undrawn. The high figure for repurchases is largely explained by the fact that the drawing of the equivalent of $1.5 billion by the United Kingdom was repaid in full to the Fund within less than a year from the date of the drawing. As a precautionary measure, a new stand-by arrangement of $1 billion for one year was agreed to at the end of July, but it has not been drawn upon. Also as a precautionary measure, Japan in January entered into a stand-by arrangement of $305 million, no part of which has so far been utilized. A third industrial country which turned to the Fund in the course of the past year was Canada. First, early in May, it sought the Fund’s concurrence in the establishment of a new par value for the Canadian dollar, after a period of ten years during which Canada had maintained a fluctuating rate system; and then in June, at a time of great pressure on its currency, it obtained a drawing from the Fund equivalent to $300 million. Simultaneously, Canada obtained from other sources the equivalent of a further $750 million, and all this assistance, together with the domestic measures taken, proved sufficient to reverse the trend on the exchange market, and has enabled Canada to replenish its foreign exchange reserves in an impressive way.

Among nonindustrialized countries, comprehensive stabilization programs have been supported by the Fund in the Philippines, the Syrian Arab Republic, and the United Arab Republic, involving, in each of these countries, considerable progress toward a unified rate of exchange.

Among the Latin American Republics, 11 made drawings on the Fund in the past 12 months and 2 concluded new stand-by arrangements which have not been drawn upon. It is perhaps not always realized what a variety of economic and financial conditions is found in Latin America, as in other developing countries, and this is noticeable not least in the monetary field. The Fund has been prompt in responding to requests for missions which have discussed with the authorities the problems of each particular country. The largest operation there this year has been the conclusion of a stand-by arrangement of $100 million with Argentina in June, since when close contact has been maintained with the authorities in that country. There is, I believe, in these countries as in others, a growing realization of the advantages of maintaining monetary stability at realistic rates of exchange, which more than anything else arrests and reverses flight of capital and attracts foreign resources for development purposes.

The variegated activities of the Fund are, of course, by no means limited to the granting of financial assistance; they are all fully described in the Annual Report which is before you, but I would like to mention just a few.

In the first place, the Fund has jurisdictional powers with regard to par values and rates of exchange. I have just mentioned Canada’s new par value. Israel in January this year, after detailed discussions with the Fund, also adopted a new par value, discarding its previous system of complex multiple rates. It did so without requesting the financial assistance of the Fund, being confident, as developments have borne out, that its reserves would steadily increase after the new par value had been fixed.

Secondly, the annual consultations under Article XIV of the Fund Agreement, as well as those which are now conducted with Article VIII countries, form a very considerable part of the Fund’s work. I think I can say that these consultations are welcomed by the countries with which they are conducted, not least because they provide an occasion for the members of the various government departments to make a comprehensive review of the country’s economic and financial problems in close contact with internationally trained experts. At the same time, the consultations provide the Fund with up-to-date information about developments in its various member countries and about the policy intentions of the authorities. It is difficult to imagine how the Fund could act so speedily, as it has repeatedly done in response to requests from its members, including requests for financial assistance, if it were not in possession of the information obtained through these annual consultations. Moreover, the consultations make it possible to form an over-all view of the world’s economic and monetary problems, which is as essential for the proper policy decisions by governments as it is for the proper conduct of the Fund’s work, not least in furthering the general purposes laid down in Article I of the Fund Agreement.

Finally, in the field of technical assistance, in addition to the annual consultations the Fund has over the last year provided technical advice and assistance to a large number of countries through resident advisors and in other ways. Such assistance has, indeed, in several cases been extended to countries which have applied for membership but have not yet become members of the Fund—one important case being that of the Congo, where the staff has been frequently consulted on a wide range of financial problems. In this connection, too, I should mention the Fund’s expanding training program, under which officials from member countries attend courses of instruction provided by the Fund in its special spheres of activity. The contribution which the Fund can make in the field of training is a considerable one and capable of further extension in years to come, to the particular advantage, I think, of many new members.

It is one of the advantages of the Fund that its financial assistance can be pinpointed precisely to those situations where difficulties in the balance of payments occur. The assistance helps the countries to take corrective measures and also helps to avoid the emergence of a chain reaction, which could set in if the situation were not taken in hand. These are both real contributions toward ensuring stability in the world’s monetary system and toward the maintenance of an adequate level of liquidity.

The twin problems of exchange stability and adequate liquidity have continued to be widely discussed in economic circles over the past 12 months. In these discussions I think it has been widely recognized that at the moment the facilities available for the financing of world trade, and the use made of these facilities, have been broadly satisfactory. After all, the value of world trade in the first half of this year was no less than 6½ per cent higher than in the corresponding period of last year, and this could surely not have happened had adequate financing not been forthcoming. World trade is of course financed by credit in national currencies—very largely in the two reserve currencies, the dollar and sterling, but also in other currencies. It may be mentioned in passing that the so-called Euro-dollar and Euro-sterling markets have certainly made a contribution to the financing of transactions in the field of foreign trade, and from that point of view have been distinctly useful.

The kind of liquidity so far referred to is in terms of national currencies. There is, however, another concept associated with the term liquidity (economic terms are unfortunately rarely unambiguous), and that is the concept of international liquidity, which is concerned with the magnitude of monetary reserves, that is, the holdings of gold and foreign exchange by the various monetary authorities.

For some time there has been much discussion whether or not there is an adequacy of monetary reserves, and the fear has been expressed that there might be competitive efforts on the part of many countries to increase their reserves, which would give rise to what has been called “a scramble for reserves” or “a scramble for international liquidity.” I think that these fears are exaggerated out of all proportion to reality. It seems to me that after the redistribution of reserves which has occurred in the last few years, very much as a result of the deficit in the U.S. balance of payments, one industrial country after the other is beginning to think that its monetary reserves are sufficient from its balance of payments point of view. This change in attitude may prove to be very important, for it gives an increasing number of these countries the opportunity to shape their fiscal and credit policies without feeling a need to strengthen their reserve positions.

It is true that many developing countries have very low reserves, but what these countries need most is long-term capital to finance their development programs. Although many of them would no doubt be wise to pay some attention to building up their reserves to a safer level, whatever efforts may be made by them to do so will presumably not cause any appreciable difficulties from a general liquidity point of view.

But returning to the position of the industrial countries, there are certain basic developments which point to the restoration of a more enduring equilibrium between the economies of most of these countries. After the convulsion brought about by a world war, intensified in some cases by the changes in the postwar reconstruction period, it is not easy to establish a harmony between costs and prices, or a proper money supply, or the appropriate conditions in the long- and short-term capital markets in the domestic economies of individual countries; it is even more difficult to attain this kind of equilibrium between the economies of different countries. Such an equilibrium was never really attained after the First World War; and after the Second World War there have been several periods of intense monetary tension, indicating the continuance of an unbalanced position. There have been certain indications, however, that we are now approaching what may well become a state of equilibrium solid enough to withstand the impact of such pressures as will never be wholly excluded. Thus, as far as changes in costs are concerned, resulting from the interrelation of wage rates and productivity, there has recently been little if any cost increase in most sectors of the U.S. economy, while in several European countries wages have risen noticeably more than productivity, with a consequent pressure on costs. The difference has been sufficiently important to have an impact on the balances of payments. As the realization of these facts spreads in ever-widening circles, confidence in currencies recently under pressure will be reinforced. Such a tendency is, I believe, being confirmed by the evolution of the foreign exchange markets, which, with the exception of brief disturbances, have this year been characterized by greater calm than over any similar period since the war.

Those who are in the habit of analyzing the significance of these various indicators are, I think, beginning to feel increasingly reassured that the present monetary structure can be effectively maintained on a foundation of stable exchange rates, thus providing a reliable basis for further economic development and for the shaping of official policies. I do not want to imply that continued efforts are unnecessary, but I think that they can be pursued in an atmosphere of greater confidence. And I also think that what has been achieved already may well come to exercise an influence on government policies and actions in a number of ways.

Firstly, since a much better balance has been attained in the international payments situation, it follows that the extent of the remaining maladjustments in the cost and price and interest rate relations, as reflected in capital movements between individual countries, has been greatly reduced. Therefore, there is reason to believe that further corrective policies, insofar as they are still needed, will not have to be so extensive that their effects should prove too disturbing, nationally or internationally.

Secondly, I believe that the efforts already made, and those which may still be required, will prove successful in assuring a stable exchange rate structure without any alteration in the present price of gold. The now ample monetary reserves of so many individual countries, together with possibilities of resorting to reciprocal central bank credits and ready access to the increased facilities of the International Monetary Fund, provide formidable lines of defense against any pressures that might arise in the future.

Thirdly, with the improvement in the general situation, it should be possible to avoid policies which reflect a distrust in that situation and which might detract from the efforts to solve real problems. For this and other reasons I can, for instance, see no merit in building a system of extensive gold guarantees.

Fourthly, in view of the improvement which has taken place, it seems that in many countries the monetary authorities could now regard fluctuations in the level of their monetary reserves with growing equanimity. The causes of whatever movements do occur in the reserves should, of course, continue to be analyzed and explained, but the fluctuations from week to week and month to month should no longer excite opinion to the same extent as they have done in recent years.

The policies I have mentioned so far are primarily concerned with the maintenance of exchange stability, but what about the question of ensuring a sufficient degree of liquidity? As I have already mentioned, the liquidity required to finance world trade (as well as domestic trade) is in terms of national currencies. Thus the expansion of international trade is financed through the credit mechanism in individual countries. Under the old gold standard, the creation of credit in the individual countries was closely linked to movements of gold, and in quite a number of countries changes in the volume of credit have continued to depend to a large extent on changes in their balances of payments. But this link should not be so interpreted as to imply, for instance, that no increase in the credit volume could occur without an addition to monetary reserves. Here in the United States, credit has been expanding over the last ten years despite a considerable decline in the gold stock. In Germany, too, credit has expanded over the last two years without an increase in reserves. In many countries, modern techniques, not least through the initiation of open market operations, have given greater flexibility to credit management than was possible previously. These techniques can of course be further adapted, and new instruments may be needed. The Fund is continuing to examine this matter as part of its general study of questions connected with liquidity.

But in matters of credit policy there are limits to the extent that countries can safely move alone; they have in a measure to keep in step with each other. Given present circumstances, in which there is a better basic balance in the world’s payments situation and more and more industrial countries feel that they have by and large a sufficiency of reserves, there are more than ever good reasons to intensify the useful cooperation which has been initiated among monetary authorities. This cooperation can be pursued in a number of ways, all of which should be welcomed. What may be needed may not always be policies aimed in the same direction. Situations may arise in which different countries have to pursue contrasting but complementary policies, involving a more cautious policy in one country or one group of countries and a more expansionary policy in others. The choice of the right combination of policies should be the subject of common discussion and coordination. But the object of all these efforts must be to provide in the individual countries, and thus for the world as a whole, the volume of credit creation required to meet the legitimate needs of growing economies.

I cannot help adding that as monetary confidence increases, and I have every reason to expect that it will, there should be less eagerness on the part of private individuals to hoard gold. One consequence of reduced hoarding would be that more and more of the current gold output, which has been increasing from year to year, would become available for monetary purposes, and this in turn would facilitate the pursuit of appropriate credit policies. Cooperation among monetary authorities does not, of course, mean that gold is discarded as a basis for currencies; it can still play a useful role in the pursuit of credit policies in the framework of a managed gold standard.

I want to stress that the endeavors to establish fiscal and credit policies answering the needs of growing economies will benefit not a limited group of countries but all countries. I have already pointed out that there is at the moment a sufficiency of liquidity, and in that connection I referred to the increase of 6½ per cent in the value of world trade in the first half of 1962 over the similar period in 1961. It is interesting to note that preliminary estimates indicate that the exports of the primary producing countries rose at about the same rate as those of the industrial countries; the imports of the primary producing countries as a group increased much less. There has thus been a welcome expansion of trade in primary products.

One of the most pressing problems confronting the developing countries, and not least the newly independent countries in Africa and elsewhere, is the need for them to pay particular attention, in the development of their economies, to the promotion of exports. Certainly these countries would all be greatly helped by a reduction of artificial barriers impeding the free flow of trade and payments with other countries, and by mutual arrangements designed to make the best possible use of the scarce resources at their disposal. For the newly independent nations there is a clear advantage in close economic and monetary cooperation among countries that historically have belonged to the same currency and trading area, and even among those that have belonged to different currency and trading areas. It is particularly important that these nations, whose economies have traditionally been joined in economic union with some of their neighbors, should not relinquish the very real advantages derived from the historical absence of barriers and from the existence of common currencies and institutions, which make it possible to pursue a coordinated development effort for the benefit of all the participants. But while it is the responsibility of the developing countries to pursue policies which facilitate exports, it is, at the same time, the responsibility of the industrial countries to pursue liberal trade policies, opening their markets to imports from less developed areas. By such policies they would in a constructive way contribute to the welfare of the developing nations, old and new.

Moreover, I want to point out that the cooperation to which I have referred among the monetary authorities should, as one of its beneficial effects, ensure the avoidance of deflation at a time of greatly increased capacity in so many lines of production. The success of enlightened fiscal and credit policies in the industrial countries should indeed be very much to the advantage of the primary producing countries. There has been a growing awareness of the difficulties which a number of primary producing countries have experienced through the fluctuations in the prices of their main products, and the Fund has been connected in various ways with the examination of these problems. Assuming, as I think we may, that it will be possible to avoid any marked decline in the present general level of raw material prices, there may still arise acute difficulties for individual products, such as have occurred in the case of coffee, now being intensively discussed, and these difficulties will create serious problems for the producing countries. For those products, special commodity arrangements may well be necessary. Such arrangements should, of course, be designed to facilitate rather than to discourage the diversification of exports.

But even if all this is done, it is to be expected that wider problems arising from their over-all balance of payments position will affect a great many of the developing countries. Experience shows that the causes of such difficulties as can arise are of a great variety; it follows from this that there is great merit in analyzing each particular situation. When balances of payments are involved, naturally the Fund has a special responsibility, which will demand increasing attention; and I am sure that this will be given.

Over the years, the Fund has had increasingly intimate contact with the developing countries. While the Fund’s financial assistance is related to balance of payments problems, and is repayable within not more than three to five years, the requirements for the financing of development programs are, of course, of another character, long-term resources being needed, largely related to specific programs. But this does not mean that the Fund is not interested in the whole complex of these problems; to mention only one aspect, both internal and external financing of development have obvious monetary repercussions. Concentration on noninflationary sources of financing is more and more found to be the key to sound development; and fiscal and credit policies are therefore essential elements in development planning. As the Annual Report points out, experience has shown time and again that an attempt to promote development by inflationary financing almost inevitably brings in its wake a flight of domestic savings and diversion of investment into nonessential lines, a reduction in capital inflow, a decline in export earnings, and distortions in the economy, all of which lead to a discouragement rather than an encouragement of the healthy economic growth which is a basic objective of the Fund’s work.

One of the new forms for providing financial assistance to developing countries has been the formation of consortia under the leadership of the International Bank for Reconstruction and Development, and also the Organization for Economic Cooperation and Development. Fund officials have taken part as observers in meetings of these consortia. It seems natural that in the future the Fund, pursuant to its purposes, will become more closely associated with these endeavors, and generally with development efforts. In the whole of this area we are faced with many new problems, which will present many difficulties. But thorough examination of each situation in an international setting would seem to provide the greatest assurance that economic considerations will prevail; and thus waste will be avoided. In that way the great efforts now in train to ensure a steady expansion in individual countries, and therefore also in the world economy, would attain their maximum effectiveness.

In this review, I have touched on many difficult problems in the fields of action with which the Board of Governors meeting here today is concerned—mentioning some of the achievements and also some of the problems with which we are still faced. Whatever the difficulties that are already present or that may loom on the horizon, there is in my opinion no need to be pessimistic. Let us not overlook the very constructive developments that have taken place since we met in Vienna a year ago. The borrowing arrangements providing the Fund with supplementary resources will very shortly enter into effect, and cooperation in other ways among monetary authorities has been strengthened. Trade has continued to be liberalized, and world trade continues to increase. New consortia for financing development programs have been formed, and the flow of assistance is, I think, increasing. The possibilities of further action are certainly not exhausted. We can take heart at the progress that has been made, and again at this meeting give a demonstration of a firm resolve to mobilize and manage economic and financial resources internationally for the improvement of the conditions in our individual member countries, and therefore for mankind in general.

September 17, 1962.

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