Kenneth S. Friedman and Balwant S. Garcha
The principal themes of the 1984 Annual Meetings of the Boards of Governors of the Fund and the Bank
The mood at the 1984 Annual Meetings (held in Washington, DC, on September 24–27 and chaired by Noburu Takeshita, Minister of Finance of Japan) reflected the progress since the 1982 Toronto Meetings in reviving the world economy. Yet there was clear recognition that even though the deepest and longest recession since the 1930s was over, a number of the problems in both developing and developed countries had yet to be addressed.
The tone for the Annual Meetings was set at the meetings of the Fund’s Interim Committee and the joint Bank-Fund Development Committee on September 22 and 23, respectively. In their reports to the Committees, Fund Managing Director Jacques de Larosiére and Bank President A. W. Clausen indicated that in 1984 U.S. economic growth would be substantially stronger than expected, and that the economies of the rest of the industrial world were continuing to revive. While consumption spending had earlier provided the main impetus for economic expansion, there had recently been a welcome resurgence in expenditure on fixed investment in the major industrial countries. Inflation had been contained, and international trade had rebounded strongly. Moreover, in 1984 the combined current account deficit of the non-oil developing countries was expected to fall to less than half of the 1981 level. This development, together with an increase in exports, suggested that the import-compression phase of the adjustment process in developing countries was winding down and attention should now shift to improving the prospects for renewed growth and balanced development.
However, there were also areas of continuing and growing concern. In many industrial countries, particularly in Western Europe, the process of recovery was fragile and unemployment continued to be very high. The persistence of high real interest rates could endanger a sustained and more broadly based recovery and compound the financial constraints faced by the heavily indebted developing countries. Concern was also expressed about the current account imbalances of some industrial countries and the sustainability of the present pattern of international capital flows. Finally, the present drift toward protectionism could hinder the world recovery and impede the smooth functioning of the international trading and financing system.
Economic growth in much of the developing world had been severely stunted. Among the poorest countries in Africa, per capita income continued to decline alarmingly. And the widespread need to adjust seemed to have slowed down the development process in indebted developing countries. There was concern also that the extent of progress that could be made by developing countries would depend on the policy measures taken by developed countries in fiscal, monetary, and trade areas.
In their plenary statements, Governors reaffirmed the strategy to sustain recovery by maintaining steady medium-term policies designed to contain inflation, restore economic and financial balance, improve the functioning of markets and allocation of resources, and preserve a stable economic environment for private sector decision making. A number of Governors also expressed support for the Fund’s flexible case-by-case approach to the debt problem.
Speakers stressed the importance of reducing the fiscal deficit in the United States to relieve pressure on interest rates and to sustain noninflationary growth. Other industrial countries were urged to maintain policies to boost private sector confidence and vitality, provide adequate markets for developing country exports, and sustain the world economic recovery when the recent very high U.S. growth rates started to decelerate. Moreover, improved economic efficiency would help the industrial countries resist protectionist pressures.
Governors welcomed the encouraging progress in developing countries that had undertaken courageous and determined adjustment programs. It was generally acknowledged that support for those programs by the Bank and the Fund had helped members restore confidence, discourage capital flight, and attract foreign capital, thus laying the foundation for renewed and sustainable growth. Other countries, however, still suffered from unacceptably high inflation rates, stagnant export earnings, and inadequate new capital inflows.
In this context, Governors urged the Bank and the Fund to work even more closely together, within their respective areas of competence, to restore the creditworthiness of debtor countries and encourage a policy environment conducive to economic growth.
Many Governors expressed concern that pervasive and persistent poverty was still smothering the hopes of millions. The situation not only suggested the urgency of domestic reforms but also underlined the need to strengthen the mechanisms for spreading the recovery to the developing world. Against these considerations, the trend signaling declining net transfers between developed and developing countries was an alarming development to many Governors, who stressed the need to reverse it by encouraging voluntary private capital flows, mobilizing official development assistance from bilateral donors, and increasing the flow of concessional and nonconcessional resources through multilateral channels, especially the World Bank. In addition, emphasis was placed on mobilizing direct private investment and on creating an appropriate policy environment for that purpose in developing countries. Many Governors noted that the burden of adjustment had fallen most heavily on the developing countries in the form of cutbacks in national incomes and imports. While all countries had been forced, in one way or another, to accommodate to the new evolving environment, it was recognized that there was some room still for sharing the burden of global adjustment more equitably.
On trade, a number of Governors welcomed the suggestions for a new round of multilateral negotiations under the aegis of the GATT to address the question of non-tariff barriers and other matters of concern to developing countries. In the meantime, all countries were urged to roll back existing protectionist barriers and eliminate trade distortions. It was generally agreed that the Fund and the Bank could play an important role in encouraging trade liberalization.
The role of the Fund
The need to strengthen and broaden the world economic recovery was clearly reflected in Governors’ comments on the role of the Fund. Many concurred with one Governor who stated that “it is essential that the Fund be enabled to carry out its surveillance function more effectively. This is all the more important in that the future path of the recovery may be very much affected by policy choices in the industrial countries.” The major industrial countries, many speakers stated, should appreciate that their policies were instrumental in creating an international environment in which developing countries could increase their exports and smoothly service their foreign debt. The Fund should, therefore, encourage industrial countries to maintain a steady policy stand with a medium-term focus designed to achieve noninflationary growth, expand markets for developing country exports, and eliminate protectionist measures, while reducing inflationary expectations and real interest rates.
Noting that debtor countries themselves would invariably have to bear the main burden of adjustment, a number of Governors stressed the importance of Fund-supported programs in helping those members to make a variety of crucial policy changes. It was also important, some speakers added, to recognize the considerable social and political difficulties faced by borrowing countries in meeting the conditions placed on the use of Fund resources. Others stressed that the adoption of adjustment programs approved by the Fund had been instrumental in assisting members facing critical debt problems to restore confidence and move into a position to regain positive economic growth. Some Governors underscored the need for the Fund to maintain the case-by-case approach to debt problems in coming months, and to continue to play its role in coordinating the efforts of debtors and creditors in tackling the serious debt problems that remain in a number of developing countries. The recent progress in multiyear reschedulings, which the Fund had actively supported as an important step toward a medium-term approach to the debt problem, was generally welcomed by Governors. Speakers stressed that the Fund itself would have to continue to make its own financial resources available to members making crucial adjustments. They therefore welcomed the significant improvement in the Fund’s liquidity since the 1983 Meetings, as a result of the increase in quotas under the Eighth General Review, the modification and enlargement of the General Arrangements to Borrow, and the completion of an associated arrangement with Saudi Arabia and other major borrowing arrangements.
Speakers devoted considerable attention to the Fund’s policy on enlarged access to its resources, adopted in 1981 as a temporary response to the particularly difficult circumstances in a number of member countries. At its September meeting the Interim Committee agreed that, since many members continued to face difficult payments problems and serious uncertainties remained about the prospects in the medium term, the enlarged access policy should be continued in 1985 with somewhat lower access limits than in 1984.
Some Governors stressed that, as one of them said, “the modest reduction in the access limits [for 1985] underscores the temporary character of the enlarged access policy but is not in practice expected to affect materially the Fund’s ability to provide appropriate amounts of balance of payments support to member countries.” They also stressed that the cumulative access limits would be sufficient to permit members that had used large amounts of Fund resources relative to quota to use additional resources, if necessary. The access limits, and the enlarged access policy itself, are to be reviewed annually in the light of all relevant factors, including the magnitude of members’ payments problems and developments in the Fund’s liquidity position.
There was general support for the Interim Committee’s view that the access limits for the special facilities should remain unchanged in 1985. Some Governors, noting the recent decline in most commodity prices, stressed the importance of the compensatory financing facility as a source of rapid financing for countries facing temporary export shortfalls due to factors beyond their control.
Most Governors considered that there was a long-term global need to supplement existing international reserve assets through an allocation of SDRs. In their opinion, an allocation would not only strengthen the world economy and the international monetary system—in part by bolstering the reserves of countries facing debt-servicing problems—but also be consistent with the objective of enhancing the role of the SDR as a reserve asset. Some speakers, however, felt that the existence of a global liquidity shortage had not been demonstrated, ard an allocation would, therefore, not be permissible under the Fund’s Articles of Agreement. While recognizing that some members’ reserves were inadequate, they stressed that the problem should be dealt with through adjustments in economic policies and the provision of conditional financing rather than through an allocation of SDRs. Governors agreed that the issues involved in an allocation should be further examined by the Executive Board.
Role of the Bank, IDA, and IFC
As Governors took stock of the role of the Bank, the International Development Association, and the International Finance Corporation in a changing environment, the needs of the developing world and the resources that could be made available for meeting those needs were uppermost in their minds.
The Bank, in their view, had shown considerable flexibility in responding to the new situation. It had reoriented its lending through special action programs, increased support for structural adjustment and policy reforms, and provided more technical assistance.
They were gratified that agreement had been reached on an $8.4 billion selective capital increase for the Bank, a $9 billion Seventh Replenishment for IDA (IDA7), and a $650 million capital increase for IFC. But there was general disappointment with the size of the Seventh IDA Replenishment, especially considering the increased needs of sub-Saharan Africa and the need to accommodate China in the list of eligible IDA recipients. From the $16 billion originally proposed, the replenishment was whittled down to a level that was 25 percent below IDA6 in nominal terms and even lower in real terms. Efforts to raise an additional $3 billion through a Special Fund had thus far been unsuccessful because of burden-sharing concerns. Nonetheless, a number of Governors lent their support to reviving the case for supplementary financing at the time of the mid-term review of IDA7, as suggested by Canada.
Governors were concerned about the Bank’s own capital requirements as well. Many thought that while the selective capital increase was timely, it was below the level called for under the principle of parallelism with the Fund’s quota increase under the Eighth General Review. As they saw it, while the selective capital increase had permitted a partial adjustment of the relative standing of member countries in the IBRD’s shareholding, it did not provide a basis on which the Bank’s operations could grow at an appropriate pace. Therefore, it was time, in their view, to start discussions on a general capital increase as a natural outcome of the current examination of the Bank’s future role. One view, however, was that the central objective of the latter exercise should be to explore how the Bank with its existing capital base could have a greater impact on the development process, and not necessarily to make the case for additional capital. Many Governors noted that the selective capital increase had resulted in a diminution of the voting powers of developing countries and suggested that the situation ought to be corrected in the course of a general capital increase.
Against this background, Governors took a close look at the immediate tasks ahead for the Bank Group and sought to provide some tentative guidance on the Bank’s future role, with emphasis on two areas for priority attention. It was generally agreed that (1) the Bank should continue to play a central role in addressing the problems of sub-Saharan Africa; and (2) the Bank must continue to play an important role—in coordination with the Fund—in helping the debtor countries regain creditworthiness and resume economic growth.
Governors expressed grave concern about the situation in Africa, the subject of a new World Bank report entitled Toward Sustained Development in Sub-Saharan Africa: A Joint Program of Action (see page 29 of this issue). The proposed program received widespread support, and the Bank was urged to explore with other donors the mobilization of additional resources for sub-Saharan Africa, as soon as possible. Governors noted that concessional assistance continued to be the only significant source of financing for the region’s low-income countries. Moreover, many were now facing growing debt-service payments on loans contracted earlier. In the absence of an increase in fresh transfers, their debt-service requirements would result in a decline in their net resource flows. The Bank’s Action Program for Africa had brought this situation into sharp focus, and the need now was to seek ways to ensure that the net flows to the region are maintained at least at their 1982 levels.
Concerning the still ongoing adjustment process and balance of payments difficulties in a number of heavily indebted developing countries, Governors made several suggestions, including the possibility of extending the Special Action Program beyond its originally proposed time frame, raising the 10 percent ceiling on the share of nonproject lending, and continuing the present emphasis on outward-oriented policies in the Bank’s dialogue with developing countries. It was further suggested that the Bank should introduce country loans both for five-to-seven year balance of payments support, as well as for addressing long-term constraints in agriculture, health, and population.
There was general agreement among Governors on the need to focus Bank lending on the poorest and the least developed countries, as well as for a shift to a medium-to long-term country strategy. Several Governors also stressed that the Bank, the IFC, and the developing countries themselves should do more to attract direct private investment and that, to that end, the Bank should continue its work on a multilateral investment guarantee agency.
Several Governors referred to the population issues raised in the latest World Development Report and commented that unless rapid action were taken on population growth, vast numbers of people in African and other developing countries would remain locked in poverty.
As the Meetings drew to a close, it was clear that the past two years had been marked by considerable success in reviving growth in the industrial world. The rapid deterioration in the debt situation had been checked, too, and some non-oil developing countries had halted the decline in their living standards. The Fund and the Bank had played an important role in that process.
It was recognized that further progress in resolving the major problems still facing member countries would depend on the policies pursued by national and international policymakers. The final outcome would also depend on the political will of the international community to support balanced global economic growth with the needed capital flows—a task that would require ever greater support of the multilateral development and financial institutions. Ongoing consultations at the highest ministerial levels would facilitate a positive outcome in both respects.
Recognizing the need for such a dialogue on the key policy issues confronting the world economy, Governors looked forward to the meetings of the Interim and Development Committees in the spring of 1985, when discussions are due to be held on the monetary, financial, trade, and development aspects of international cooperation—through the Fund and the Bank—to support sound global economic growth within a medium- to long-term framework.
As the Chairman of the 1984 Annual Meetings, Mr. Takeshita, summed it up: “We have confirmed the need to come to grips with the tasks remaining before us with as progressive a spirit as ever and further cooperation in order to translate the brightening prospect for the world economy into reality.”