Barbara Owen and Patricia Bickerton
The declaration made by President Ford in his opening remarks to the Boards of Governors of the International Monetary Fund and the World Bank, assembled in Washington, D.C. for their 1974 Annual Meetings—“We want more cooperation, not isolation”—struck a note echoed by most of the speakers who followed him.
Four dominant themes for the annual discussion were clearly stated by Mr. John N. Turner, Governor of the Fund and Bank for Canada, who was selected as Chairman of the newly established Interim Committee. These were inflation, reduced economic growth rates, payments disequilibria, and the crisis situation in many developing countries.
Inflation and recession
There was broad agreement with the opinion of Mr. Yong Hwan Kim, Governor of the Fund and Bank for Korea, that “one of the most serious problems facing the world today is inflation. The rate of inflation we are currently experiencing not only creates grave economic, financial and social problems on a global scale, but also hinders the stable and efficient operation of the international monetary, trade and payments systems and impedes the steady growth of the world economy.” Mr. H. Johannes Witteveen, Managing Director of the Fund, warned that the major industrial countries would have to prepare themselves for an extended period of reduced growth if they were to overcome inflation, although “the necessary elimination of excess demand must not be allowed to generate international repercussions resulting in severe and prolonged recession.” He believed the time to be opportune for the implementation of effective incomes policies to restrain demand.
For Mr. Simon, Governor of the Fund and Bank for the United States, and Mr. Apel, Governor of the Bank for Germany, the desirability of economic stability justified policies of monetary and fiscal restraint even at the expense of some what lower growth rates and increased unemployment, until inflation rates decreased. Governor Simon, however, was sufficiently optimistic to say that he did not believe that the world was entering a period of recession.
Such optimism was not shared by many other Governors. Mr. Healey, Governor of the Fund for the United Kingdom, together with Governors for developing countries, commented on the dangers of trends toward “stagflation” or even “slumpflation” should policies of reduced demand be pursued by industrialized countries to a great extent. These speakers thought some inflation preferable to mass unemployment, if the latter were the price to be paid for price stability. Mr. Incer B., Governor of the Fund for Nicaragua, speaking on behalf of 20 Latin American countries, warned of anti-inflationary policies which might lead to a “zero sum game” in which some countries benefited from price stability at the expense of the impaired welfare of others.
Mr. De Clercq, Governor of the Bank for Belgium, was similarly concerned that “there is a real risk of an excessive slowing down of activity in the industrial countries. … It is to be feared that after letting excessive demand pressures build up in 1973 we may cut back demand too much in 1975. We must at all costs avoid adding the specter of mass unemployment to the existing injustices of inflation. Thus, our room for maneuvering is limited, and in terms of cyclical policy what is required is improved coordination between the leaders of the developed countries.”
Moreover, as Mr. Coore, Governor of the Fund and the Bank for Jamaica observed, “The point has been made that the present inflationary situation hurts the developing countries even more gravely than it does the developed countries. This is true. It is equally true that a world recession would cause hardship and distress in the developed world, but in the developing world would lead, in many instances, to total disaster at the individual human level and vast social and political upheavals at the national level.”
Putting forward one view of the causes of inflation, Mr. Ansary, Governor of the Bank for Iran, maintained that some of the factors leading to the rise in prices were, first, the loss of confidence within the international community since August 1971 in the stability of the world monetary system; second, the introduction of floating exchange rates; third, the unusually high rate of growth in the industrial countries in 1972 and 1973; fourth, unfavorable climatic conditions which adversely affected the world food and feedstock supply, and, fifth, manipulations by major international firms.
Many Governors found the external imbalances in their countries’ accounts as alarming as the domestic price changes. Most of those who spoke stressed the difficulties caused by rapidly rising commodity prices, especially those connected with energy. The developing countries in particular foresaw hardships ahead. As Mr. Ahmad, Governor of the Fund for Bangladesh, stated: “From the natural process of recycling the less developed countries have very little to gain, because surplus funds naturally flow to developed industrial countries. But unless a substantial part of the surplus funds is diverted to developing countries, the promise of a better life will be nothing more than a mirage.”
Most Governors welcomed the institutionalization of the process of recycling under the auspices of an international organization, and commended the efforts of Mr. Witteveen in establishing the Fund’s oil facility. Several Governors expressed concern that private markets would be unable to continue to absorb the whole of the financial flow as adequately as they had done previously. Mr. Colombo, Fund Governor for Italy, for instance, referred to problems which had recently arisen within commercial banks, “inter alia, because of the different maturity structure of their liabilities and assets and of their inadequate capital base.” Governor Healey had a similar reservation: “We can already see difficulties arising in Euro-currency markets.” He therefore proposed a supplement to the Fund’s existing arrangements for recycling oil surpluses. “My concept is of a new facility in the IMF for the investment of petro-dollars attracting an interest rate which would reflect the strength of the obligation offered by the IMF without being concessionary like the rate in the present facility at the time when it was negotiated.” However, that was not intended to preclude other approaches to the problem. Mr. Healey expressed support for the proposal of the German Government to establish an international investment bank which would channel funds into specific projects, and remarked that both direct bilateral borrowing from oil producers and the private market would continue to fulfill valuable functions.
Many Governors spoke in favor of Mr. Healey’s proposal in principle, with some difference on the precise magnitude of the fund to be available. Governors for developing countries in particular favored measures which could ameliorate the difficult position in which many such nations found themselves. Governor Coore suggested that the Fund consider amending the existing oil facility to provide assistance at three different levels: “At the first level, it would lend at market-related rates, as the Chancellor has suggested; at the second level, it would lend at its present rate; and at the third level, which will be available to the very poor countries, it would lend at a concessionary rate of, say, 3 per cent.” Such a facility, based on more flexible criteria than the present one, would, he believed, make a genuine contribution to providing a significant recycling mechanism. Governor Ansary of Iran went further in suggesting that the benefits of the Fund’s oil facility should be limited to the developing countries. In order to make such a proposal compatible with the fundamental tenet of equality for all Fund members, he suggested that “any legal difficulty which may exist in this respect should be overcome with necessary administrative or other arrangements.”
Governor Simon was less certain of the present need for official machinery to handle recycling. He felt that the “existing complex of financial mechanisms, private and intergovernmental, has proved adequate to the task of recycling.…” Markets in the United States had responded well and were channeling very large sums of money from foreign lenders to foreign borrowers. “Our banks have increased their loans to foreigners by approximately $15 billion since the beginning of the year, while incurring liabilities to foreigners of a slightly larger amount. This is one kind of effective recycling.” Nevertheless, while he remained confident in the stability of the international financial markets, Governor Simon noted that there was considerable feeling in favor of increased governmental monitoring of private financial intermediaries. He would support the establishment of additional international lending mechanisms should the need for them become clear.
Interests of less developed countries
The particular plight of the developing countries was a theme which constantly recurred throughout the meeting. Mr. Sommai Hoontrakool, Governor of the Bank for Thailand, believed that “if the situation for industrial countries is as Mr. Witteveen has stated, that ‘short-term growth trends in the industrial economies prove to be weaker than expected,’ the future of developing countries, then, is grim indeed; attainment of even a minimum growth rate would be no small achievement if indeed we can maintain our economies at the present level which we have already achieved over a decade.”
Widespread support was expressed for the Resolution establishing the Joint Ministerial Committee on the Transfer of Real Resources to Developing Countries (Development Committee), which was felt to be a timely product of the deliberations of the Committee of Twenty on monetary reform. The need of the most seriously affected countries for an infusion of real resources was described by many speakers as having ceased to be a precursor to economic development, and as having become a question of the very survival of millions with low per capita incomes. For this reason, “joint efforts by traditional donor nations and oil exporting countries are required here and now,” in the words of Mr. Zolotas, Bank Governor for Greece.
While several Governors commended the Fund for establishing both the oil facility and the extended Fund facility, the need for concessional capital and grant assistance was seen to remain great, and several speakers urged further liberalization of the Fund’s operations to afford special assistance to the developing countries. Moreover, as Mr. Crean, Governor of the Fund and Bank for Australia, commented: “It is one thing to make facilities available to developing countries for financing oil deficits. It is another thing for developing countries to produce the additional real resources required to service such financial transfers”—a problem exacerbated by the erosion in the real value of existing aid by present inflation.
The prices of primary products were of particular concern in the establishment of a new global equilibrium. Mr. Malikyar, Head of the Delegation of Afghanistan, observed that “the historical terms of trade in this respect have been inequitable and we welcome the recommendations of the Committee of Twenty for the undertaking of further work on commodity regulation and price stabilization.” Governor Incer B. (speaking on behalf of 20 Latin American countries) commented that “… anti-inflationary measures in the industrialized countries are having a greater effect on the prices of primary products than on their own manufactured ones. … It would be unacceptable for the world economy to return to its former trend of stable prices if the new conditions of equilibrium implied a structure of relative international prices involving an even more unfair deterioration in the terms of trade of the majority of the developing countries.”
On another issue of importance to developing countries, the implementation of the “link” between the SDR and development finance, several Governors regretted the failure to take more positive action, despite the favorable technical studies on the subject. Mr. Kodjo, Governor of the Fund for Togo, speaking on behalf of the members of the West African Monetary Union, voiced the sentiments of many Governors representing developing countries in this respect when he said: “Reform of the international monetary system, with all its highly interesting aspects… will be of even more interest to us if the problem of the link is settled. We shall only subscribe to this reform if this matter, which is of vital importance to us, is not relegated to oblivion. …”
Mr. Fourcade, Governor of the Fund and the Bank for France, thought that the Outline of Reform prepared by the Committee of Twenty “is not sufficiently explicit on the practical implications of the increased solidiarity it professes. Over and above my … remarks on the link and on special credit mechanisms I wish to stress the need to take the special problems of the developing nations more comprehensively and more effectively into account.”
The Board of Governors established two Committees, the Interim Committee and the Joint Bank/Fund Ministerial Committee, to further the work begun by the Committee of Twenty and to enable Governors to meet in smaller groups between Annual Meetings.
The Committee of Twenty and its Deputies were commended for the work they had undertaken during the Previous two years under circumstances of extreme difficulty. Some Governors felt that the final Report and Outline of Reform contained realistic measures for the future of the international monetary system both in the interim period and in the longer term. “The uncertainties of the economic and financial world outlook have led the Committee of Twenty to propose neither a. full reform nor extensive amendment of the Articles of Agreement at the present time, but a gradual process of reform as circumstances permit. I am in full agreement with that approach…”observed Mr. Duisenberg, Governor of the Bank for the Netherlands. Many Governors agreed that there had been concrete and substantive proposals for the immediate future, but were concerned at the number of issues that remained unsolved, particularly those relating to developing countries. However, Mr. Diederichs, Governor of the Fund for South Africa, noted that there remained serious divergences of opinion on several important aspects of monetary reform. The Committee had placed undue emphasis, he believed, upon the adjustment process and-little on convertibility or asset settlement, and the documents embodying the outcome of its work lacked realism.
The establishment of the Interim Committee was universally welcomed as conducive to the consultation and international collaboration which would undoubtedly be required in the future. The Committee, intended to become a permanent Council of the Fund under amended Articles, would have the task of supervising the management and adaptation of the international monetary system and of dealing with sudden disturbances that might threaten the system. Mr. Saili, Fund and Bank Governor for Western Samoa, hoped that it would “become a meaningful, flexible and dynamic body effectively working toward international monetary reform and the solution to other factors inhibiting the transfer of real resources to developing countries.” Mr. Silva Lopes, Governor of the Bank for Portugal, saw the Committee as performing two essential tasks in the management of the international monetary system: “consultations on the functioning of the adjustment process and the control and management of global liquidity.”
Several Governors remarked upon the need to find a solution to the problem of international liquidity equitable to all members of the Fund, by international collaboration rather than by unilateral decision. Mr. Chavan, Governor of the Fund and Bank for India, observed that “on the role of gold and its price, it is clear that a policy should be evolved that will serve harmoniously the interests of members of the Fund, those holding gold as well as others.” Governor Fourcade remarked that “today’s payments imbalances direct us more clearly than ever to examine the international liquidity problem in a more pragmatic than doctrinaire manner and with a will to succeed. This concern is especially applicable to the question of gold.”
Governor De Clercq commented that the proposals of the Common Market countries “call for freedom in gold transactions at prices close to market price. Not only are these proposals compatible with the decision to make special drawing rights the pivot of the system, but they should also help to achieve this goal by depriving gold of its ‘special’ status.” Governor Fourcade added that the desire for freedom in central bank transactions did not extend to Fund transactions and he believed that it would not be desirable for the Fund to sell gold received from members. Governor Simon, however, believed that “… the Articles should be amended so as to remove inhibitions on IMF sales of gold in the private markets, so that the Fund, like other official financial institutions, can mobilize its resources when they are needed.”
Governors believed that any solution should be consistent with the agreed objective of making the SDR the principal reserve asset. Nevertheless, Mr. Diederichs warned of the danger to monetary confidence of moving too quickly toward that goal: “… whatever one’s view on the ultimate monetary role of gold, it is … important to recognize the present reality, namely, that gold is an important monetary asset which commands confidence.” He thus found it difficult to see the “rational justification” for proposals “providing for sales of gold by the Fund on the private market and for the virtual elimination of gold from the Articles of Agreement.”
The need for a further allocation of special drawing rights was remarked upon by several Governors. Mr. Chaves Bareiro, Governor of the Fund for Paraguay, was concerned at the possibility of increasing international liquidity by a rise in the gold price, which would be disproportionately favorable to industrialized countries, and therefore wished “to state categorically that the increase in international liquidity should be achieved through proper allocation of special drawing rights.” While Governor Apel was concerned that a general increase in international liquidity could engender new inflationary pressures, others felt the apparent recent growth of global liquidity was largely illusory and concealed an actual liquidity squeeze in real terms. “A reserve stringency seems to be emerging which may call for action by the Fund, including the possibility of a new allocation of SDRs,” commented Mr. Zandou, Governor of the Fund for Egypt. Mr. Cemovic, Governor of the Bank for Yugoslavia, considered the agreement on the valuation and interest rate of the SDR in the interim period to be a useful one. His expectation that it would “contribute to the relative strengthening of the role of the special drawing right” was widely shared by Governors. Governor Colombo believed that the SDR’s “attractiveness could be further enhanced if anachronistic provisions such as the reconstitution obligation and the acceptance limits were abolished.”
A significant though minor proportion of global liquidity takes the form of “conditional liquidity,” governed in total by the size of the Fund and for individual members by the size of their quotas. Most Governors agreed that increases in quotas would be required in the Sixth General Review of Quotas presently under consideration by the Executive Directors, and due for action by Governors before February 8, 1975. Moreover, increasing the size of the Fund would make it possible to arrange for more effective participation by developing countries and particularly by oil exporters. As Mr. Abela, Governor of the Fund for Malta said, “the method of allocation of the additional quotas must not be the old, highly unsatisfactory method,” a view supported by Mr. Abdallahi, Bank Governor for Mauritania (speaking on behalf of many African countries), who believed that “the Fund should revise its methods of calculating quotas and should adapt itself to the new political realities.”
The wide variety of attitudes to a generalized system of floating rates expressed by the Governors makes the Fund’s achievement in establishing the Guidelines as a voluntary code of conduct all the more valuable. Governor Simon considered that “flexible exchange rates during this period have served us well. Despite enormous overall uncertainties, and sudden change in the prospects for particular economies, exchange markets have escaped crises that beset them in past years. The exchange rate structure has no longer been an easy mark for the speculator, and governments have not been limited to the dismal choice of either financing speculative flows or trying to hold them down by controls.” For Governor Fourcade, on the other hand, “The experience of the last few months demonstrates that floating, in present circumstances, adds an element of instability particularly unfavorable to the development of world trade. When it does not paralyze transactions, generalized floating encourages transactors to cover themselves to an increasing extent against exchange risks and hence to incorporate [additional amounts] in their costs. …”
The intermediate view, held by many speakers, was clearly put by Mr. Wardhana, former Chairman of the Committee of Twenty and Governor of the Fund for Indonesia, who believed that “what we need is to establish as much order and stability as possible in the present situation of floating rates and to gradually probe our way toward a more permanent and better system as, for instance, envisaged in the Outline of the Committee of Twenty.” The Guidelines for floating, to which the Executive Directors and the Deputies of the Committee of Twenty had afforded much thought during the year, were generally praised. Governor Duisenberg, for instance, believed that the Guidelines for the Management of floating Exchange Rates provided “a basis for a constructive dialogue between the Fund and individual member countries on their actual exchange rate policies and in particular on their objectives for the exchange rate beyond the short run. A dialogue between the Fund and individual countries, centered on the concept of a target zone of rates, could be very fruitful. …”
Just as no one wished to see a return to the competitive exchange depreciation which preceded Bretton Woods, neither did they wish for a return to direct restrictions on international trade in the present situation. Several Governors, including those of Japan, the Netherlands, Germany, the United States and Belgium, thus expressed their support for the proposal made by the Commitee of Twenty that member countries should not impose restrictions on current transactions for balance of payments purposes. Governor Cemovic welcomed the voluntary pledge by developed countries but urged that its adoption should remain voluntary in order to allow room for maneuver by many of the developing countries, who were not in a position to undertake such a pledge.
Amendment of the Articles of Agreement
Draft amendments of the Articles of Agreement, Governor Zandou noted, had resulted from “the sheer necessity of accommodating the steps taken for the interim period as well as of adapting the Articles to vast changing conditions compared with the time when the Bretton Woods structure was first erected.” In particular, he commented that “the application of uniform rules to all Fund members is not equitable to developing countries and runs counter to their interests. For this reason, we suggest the insertion of a new section in the Articles, dealing with the special status of developing countries, so that the application of the rules and practices of the Fund would not strain them with further burdens.” Mr. Kleppe, Governor of the Bank for Norway, speaking on behalf of five Nordic countries, wished “to underline the desirability of avoiding excessively detailed provisions in the Articles … [they] should rather be included in other instruments that could be adjusted more easily.”
Governor Duisenberg distinguished “a minimum package of interim amendments” from “a package of amendments intended to form part of the reform of the international monetary system in the longer term.” For the former he felt there need be little difference of opinion, particularly having in mind alternatives to the obligation to deposit gold in the event of quota increases or on accession to the Fund. For the latter, it would be undesirable to implement such amendments until a balanced and harmonious combination of flexibility and discipline could be obtained.
In his concluding remarks, Mr. Witteveen once again emphasized “the strategic importance of international cooperation in the current difficult situation,” which he believed to be “absolutely essential for overcoming the range of serious problems that now confront the world economy.” The existence of problems such as balance of payments disequilibria and the need for concessional aid to developing countries only served to emphasize that “it is the exercise of international cooperation—and this alone—that can give effect to the excellent speeches we have heard this week and lead to the necessary action at both the national and international level.” Putting the matter in more general terms, Mr. Konan Bédié, Governor of the Fund and Bank for Ivory Coast and Chairman of the Boards of Governors, stated at the conclusion of his opening address that “the international community, by greater use of reason, intelligence, continuing dialogue, and diplomacy, and also by showing more concern for the principles of justice and mutual respect among nations, has the means to meet the challenge. To do so, it must have the active participation of each of us in strengthening the solidarity between peoples, so as to achieve at last the aspirations of thousands of millions of human beings: prosperity, peace and happiness.”