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Finance & Development, March 1977
Article

Views & comments: McNamara on a new approach toward the problem of international assistance for developing countries; Witteveen on world stabilization policies

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1977
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A new approach toward a “global compact”

Extracts from a talk given by the President of the World Bank, Mr. Robert S. McNamara, in Boston in January 1977.

… As I pointed out recently in Manila, there is one central issue which more and more is affecting the thought and actions of peoples all over the globe. Equality of opportunity among men, both within nations and between nations, is becoming a major concern of our time.

It is an issue that has been gathering momentum for a century or more. The rise of the labor union movement, the drive against racial discrimination, the expansion of civil rights, the enhancement of the status of women—these and similar movements have all had an ingredient in common: the surge toward greater social justice and more equitable economic opportunity.

This broad thrust is growing more insistent today in all nations. It is searching for new solutions to the intolerable problems of poverty ….

Although the formula for economic advance in the middle-income countries differs from that applicable to the poorest nations, the action required is similar in one important respect: both groups of nations need additional support from the developed world if they are to achieve acceptable rates of growth.

It is the recognition of this fact which led a year ago last September to the Seventh Special Session of the General Assembly; to the meeting of UNCTAD [United Nations Conference on Trade and Development] in Nairobi last spring; and to the North-South Dialogue which continues in Paris.

And yet, to date, after more than a year of intense debate, there has been no agreement on the level of additional assistance to be provided to the developing nations.

The reason for the lack of agreement is, I think, obvious: the discussions have focused far too much on details rather than on fundamentals.

What is needed is a basic understanding among the parties as to:

  • The nature and magnitude of the problem.

  • The action required to address it.

  • The relative responsibilities of the parties for taking such action.

  • The costs and benefits to each of doing so.

Once the broad limits of such a meeting of minds have been established—a global compact, if you will—then the specific form of assistance to be provided by individual developed nations to particular developing countries could be examined. It would then become apparent very quickly that it is relatively unimportant whether the assistance is to take the form of commodity agreements, debt relief, trade concessions, bilateral aid, or multilateral financing—or any particular combination of these—provided the overall total is adequate.

In view of the continuing impasse at official levels, it seems to me that the chances of reaching such an understanding might be improved if a high-level, but deliberately unofficial, commission were organized to analyze the problem, and to recommend action to be taken by both developed and developing nations.

Such a private commission should clearly be drawn from individuals—from both the rich and poor nations—who have either had practical political experience in dealing with development issues, or who have demonstrated outstanding professional competence in development economics.

The chairman and convener of such a commission ought to be a person of the great political experience and stature, say, of a Willy Brandt, the former Chancellor of the Federal Republic of Germany.

The chairman and members of the commission would have the advantage of collaborating not as official representatives of particular countries, or blocs of nations, but rather as international figures of recognized competence and independent judgment, whose mandate it would be to formulate those basic proposals on which global agreement is both essential and possible.

The funding required for the commission’s work would be modest, and to ensure the commission’s independence the cost could be shared by a number of governments, international institutions, and private foundations. I have already received indications from Minister Pronk of the Netherlands, and Mr. David Hopper, President of Canada’s International Development Research Center, that they would be willing to consider participating in such financing.

Such a commission cannot be expected, of course, to provide an instant, comprehensive, all-purpose solution to the problems of development—for none exists.

But what one could realistically expect from such a private, high-level, independent group is the careful identification of those political decisions which can command public and legislative support in rich and poor countries alike, and hence enable the international community to break out of the current impasse.

There will be some critics who say that it is fanciful to suppose that the rich and poor nations—all of them politically sensitive over their own national prerogatives—can come to any meaningful understanding over development issues.

I do not believe that is true.

What I do believe is that such an understanding is unlikely to come about in the current international climate of contentious debate.

And I want to stress again that what is essential is to determine the overall volume of additional financial and trade support that the developed nations should supply; the additional policy reforms and structural changes the developing nations should undertake; and how these two mutual efforts can be more effectively applied to meeting the needs of the two billion people in the developing world.

It would be the commission’s role to help make that happen.

It is true that the world today is divided on a whole spectrum of issues: political, economic, ideological, cultural.

It would be naive to pretend otherwise.

But surely there is one issue on which none of us can disagree.

And that is that a greater degree of equity must be achieved both within nations and among nations.

The commission’s task, the international community’s task—indeed, the task of all of us here in this room—is to help move that forward.

Copies of the full text of this speech are available in English from The Publications Office, The World Bank, 1818 H. Street N.W., Washington, D.C. 20431, U.S.A.

World stabilization policies should promote confidence

The following comments have been taken from an address given by the Managing Director of the Fund, Mr. H. Johannes Witteveen, to the Georgetown University Bankers Forum in Washington, D.C., in November 1976.

The views I expressed in Manila on economic policy in the industrial countries were focused on the objectives of policy over the medium term, that is, over the period of a few years or so. In this medium-term perspective, I suggested the adoption of an approach based on the central proposition that policies in the industrial countries should give priority to the reduction of price inflation. It is an important lesson of recent experience that nothing can be gained by attempts to combat unemployment through expansionary policies that intensify inflationary expectations. Indeed, in the current inflationary environment it would be dangerous to shade policy risks—as often happened in the latter 1960s and early 1970s—so as to extract additional output in the short term. As stated in the Fund’s Annual Report, and as testified by the record of the industrial countries over the whole period since the mid-1960s, restoration of a reasonable degree of price stability will be necessary in order to establish a durable basis for better economic performance.

One major difficulty in achieving better price stability is that, primarily because of inflationary expectations, inflation can continue for a long time through cost-price interactions, even after demand pressures have disappeared. Attention should thus be given to various forms of incomes policy, which could be very useful in breaking or reducing this price-spiraling effect. But experience has shown that incomes policies may require time to develop and become effective, and that, in any event, they cannot work successfully unless demand pressures are kept or brought under control.

“…it is necessary to reduce fears of inflation”

Therefore, I have concluded that demand management policies of the industrial countries should remain cautious and restrained over a considerable period until inflation has been brought down to acceptable levels. More specifically, I have suggested that, over the medium term, these policies should aim for an expansion of nominal gross national product encompassing, along with a declining trend of inflation, a rate of economic growth not much above the estimated rate of growth in economic capacity.

Here, let me caution that the present growth of capacity cannot be assumed to be as high as it was in, say, the 1960s. It may, in fact, be considerably lower because of the effects on supply capabilities of structural shifts in relative prices and the severe slump in business investment during the recession, as well as demographic changes and various other factors. A related difficult question concerns the actual extent of available slack, apart from the rate at which capacity may be growing. These matters have to be carefully assessed in the determination of policy.

Fundamentally, the interests of the rest of the world will be well served if the industrial countries succeed in conquering inflation and finding the path to sustainable economic growth. Nevertheless, the cautiousness of demand management embodied in the approach I have just outlined may mean a slower growth of imports than would have been visualized a few years ago, and this change may have an unfavorable impact on the developing countries. In these circumstances, as I suggested at the Annual Meeting, the industrial countries should adopt measures to improve market access for the exports of non-oil developing countries and to expand the flow of development assistance.

Notwithstanding the signs of possible weakness in some of the indicators of domestic activity, the seven major industrial countries as a group have experienced a continuing sizable expansion in imports during 1976. The volume of their imports increased at an annual rate of some 13 per cent from early in the year to the summer months. This is a very encouraging sign. Import volume of the oil exporting countries is now estimated to increase by about 15 per cent from 1975 to 1976, and should show a further substantial rise in 1977. For the large and heterogeneous group of other primary producing countries, the aggregate volume of imports declined markedly in 1975 and has apparently risen little in 1976, despite a substantial pickup in exports. This is the usual type of cyclical development, and one would expect it to be followed by an expansion in the import demand of the primary producing countries in 1977. There will, however, be a certain constraint on import demand stemming from the priority that some members of this group have to give to adjustment of their balance of payments positions.

Because of the irregularity of short-run changes in demand and output, together with the considerable lags with which policy measures take effect, authorities of the industrial countries should be cautious about deciding to provide more stimulus to demand in the present inflationary environment. In this regard, it is particularly important not to confuse a short “pause” in recovery with underlying weakness. But if weakness in economic activity is adjudged to occur, the appropriate response, at least in part, might be the application of carefully directed measures of a specific character, rather than a simple resort to the expansion of aggregate demand.

In several of the industrial countries, economic policy in the next few years may need to place particular emphasis on the strengthening of business investment. For this may be the crucial factor in improving economic capacity, avoiding bottlenecks and renewed inflation, and achieving both sustainable economic expansion and satisfactory levels of employment.

A general objective of policy in the industrial countries should be the promotion of confidence—for which purpose it is necessary to reduce fears of inflation. This conclusion brings me back to my starting point. In present circumstances, the first imperative for successful economic stabilization is return to reasonable price stability.

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