13 The H. Johannes Witteveen Years, 1973–78
- Margaret De Vries
- Published Date:
- June 1986
In the period of a little less than five years, from September 1973 to June 1978, in which H. Johannes Witteveen was the Fund’s fifth Managing Director, the Fund was faced with problems that were possibly the most difficult of its then 30-year history. In 1973 double-digit inflation set in. Then, later in the year, oil prices were raised substantially, creating massive payments imbalances. In 1974–75 the world economy was plunged into deep recession. Thereafter, recovery proved to be slow. These developments, moreover, took place when the main currencies had floating exchange rates, giving rise to fears of wide fluctuations in exchange rates, especially since the Second Amendment of the Fund’s Articles had not yet been agreed to.
In these circumstances, Mr. Witteveen took several important initiatives, spoke out candidly on current economic problems, gave the Fund new functions in a critical period, and helped to ensure that the Second Amendment of the Articles of Agreement, laying the basis for the Fund’s future, came into being.
PROBLEMS FACING THE FUND
In the years 1973–78 a new international monetary system emerged. Intensive efforts to plan a fully reformed international monetary system also were undertaken and then abandoned. For most of the period, the monetary authorities of the major industrial members intensely disagreed on the exchange rate arrangements for any new system: U.S. officials advocated floating exchange rates that would move freely with market forces, while others, most notably French officials, argued for fixed rates and even for a return to par values. In addition, sharp differences persisted regarding the role of gold in a new system, between those wanting to phase out gold and those wanting to give it a key role.
The Fund, established to implement the well-defined Bretton Woods system of par values, thus found its traditional functions with respect to exchange rates abruptly at an end. Instead, it had been assigned the much more difficult function of surveillance of exchange rate policies. In a world burdened with inflation and fears of excessive liquidity in the international monetary system, Fund officials were frustrated also with respect to the new international liquidity functions acquired in 1969 under the First Amendment of the Articles of Agreement—to supplement existing reserve assets and to bring global liquidity under international control through the use of SDRs.
Consequently, in the term of Mr. Witteveen, just as in the period after World War II, the Fund had to define and establish the means of best achieving its purposes in the international monetary and financial fields amid unusually troubled world economic conditions. This task was harder in 1973–78 than in the early years, since even the basis for action—a revised Articles of Agreement—had to be negotiated.
Other more immediate economic problems, too, confronted the Fund and its members during these five years. After the members of the Organization of Petroleum Exporting Countries (OPEC) announced sharp increases in the price of oil from October to December 1973, oil exporting nations developed payments surpluses and oil importing countries payments deficits on a scale never before experienced. Inflation, which by the end of 1972 had already become the primary economic problem of many of the Fund’s members, was exacerbated by a rapid upsurge of prices of oil and of other commodities, and, in an increasingly interdependent world economy, the international spread of inflation made it difficult to control. At the same time, the world economy slumped into the deepest and most prolonged recession since the Great Depression of the 1930s.
By 1977–78, economic and financial conditions in many parts of the world were distinctly better than those of the recession period, 1974–75, but they were still far from satisfactory. Economic growth rates of several industrial members continued at a subnormal pace, with high unemployment, excess plant capacity, and lagging investment. Inflation, though moderating, continued at high rates of increase in many member countries and was frequently coupled with balance of payments deficits. “Stagflation” was the term coined to describe this unprecedented combination of economic problems. Because of the constraints imposed by inflation or balance of payments deficits, the fiscal and monetary policies customarily used for stimulating employment and growth, controlling inflation, and curbing payments imbalances no longer proved adequate.
A further complication in working out solutions to world economic problems and to the problems of the Fund was the increasing politicization of economic and financial relations among countries. In the period of Mr. Witteveen’s leadership of the Fund, it became more commonplace for members with similar economic interests to take group positions on economic and monetary questions. Meanwhile, as economic conditions worsened, the domestic political implications of economic policies also became of heightened concern. As a result, members frequently found themselves in more basic and persistent disagreements. This politicization meant also that, although international cooperation in monetary and financial arrangements continued, the Fund had to consider seriously, for the first time in its history, the possibilities of competitive exchange depreciation, intensified restrictions on payments, and enhanced protectionism.
In the five years of Mr. Witteveen’s term, world economic circumstances also considerably aggravated the position of the Fund’s developing members. These members were forced to cope with unusually large balance of payments deficits in the face of depressed markets for their exports in the industrial countries, in the face of greater restrictions on imports by industrial countries in an effort to protect their own employment, and, often, in the face of falling prices for many commodities. To finance large oil-related payments deficits, many developing members also accumulated very high levels of external debt, including debt to private commercial banks. Moreover, in a world in which both international monetary and trade arrangements were subjected to the most thorough examination in 30 years—the latter in the Tokyo Round of Multilateral Trade Negotiations that began in 19731—the developing countries acting in unison called for a new international economic order. They wanted international monetary, trade, and financial arrangements redesigned so that they would receive a larger—and fairer—share of the world’s goods and services. These objectives were hard enough to achieve in the rapidly expanding world economy of the 1950s and 1960s. In the economic circumstances of the 1970s, the stronger push by developing countries to improve their relative status brought about sharp differences between industrial and developing countries on a number of international financial questions.
WITTEVEEN’s INITIAL ACTIONS
Appointed on September 1, 1973, less than a month before the 1973 Annual Meetings were to be held in Nairobi, Mr. Witteveen was immediately plunged into the midst of these difficult problems. From his opening address to the Board of Governors at the Annual Meetings on September 23, 1973, it became apparent that he was a fresh thinker on the world economic scene, who was prepared to speak out forcefully and candidly. He urged the Fund’s members to make a strong cooperative effort to bring inflation under control through national economic policies, including, if necessary, the use of incomes policies to supplement monetary and fiscal policies, and he stressed the need for internationally agreed rules and procedures with respect to exchange rates. He urged Fund surveillance of exchange rate policies, even prior to the completion of the negotiations for a reformed international monetary system, and advocated new forms of consultations between the Fund and members to consider their exchange rate intervention policies and monetary policies which influence exchange rates.
His ideas were quickly transformed into action. Within a month the Executive Board had inaugurated a new procedure for special consultations with members whose external policies had major international impact. These consultations, which supplemented the Fund’s regular annual consultations under Articles VIII and XIV, were informal, voluntary, and oriented toward discussions of exchange rate policy, and required an unusually high degree of confidentiality. Various groups of members were to be consulted as circumstances required. The first of these consultations, with the Fund’s major industrial members, was begun in the middle of November 1973. Such special consultations started to play an important role in furthering the Fund’s influence over the actions of its members. The specific members consulted changed with almost every round; consultations with some large developing members and some of the leading oil exporting members were added, while consultations with some industrial members were discontinued.
The Oil Facility The new Managing Director’s leadership was dramatically exemplified after the international “oil crisis” of December 1973. Speaking to the World Banking Conference in London in January 1974, three weeks after the OPEC members had announced sharply higher oil prices, Mr. Witteveen warned that the international monetary system was facing its most difficult period since the 1930s. He predicted that, as a result of the rise in oil prices and the shortages in oil supply, 1974 would almost certainly be a year of staggering disequilibrium in international payments—the higher oil prices would give a sharp upward twist to the inflationary spiral, while energy supply shortages might accentuate the anticipated slowdown in economic activity. He stressed that, coming at a time when no agreement had yet been reached on international monetary reform, these developments would place strains on the monetary system far in excess of any experienced since World War II. He also formulated a role for the Fund in the new crisis: Fund members were to refrain from competitive depreciation of exchange rates and the proliferation of mutually frustrating restrictions on trade and capital; the Fund would be a forum for the working out of an effective international coordination of policies, and the new forms of consultation would be expanded. Most important, Mr. Witteveen advocated that the world’s monetary authorities should be innovative in seeking new methods, including ones in which the Fund would act as intermediary, to help finance the enormous imbalances which had arisen so suddenly. Thus, he conceived the Fund’s oil facility.
When the ministers of the Committee of Twenty held their fifth meeting, on January 17 and 18, 1974, in Rome, they endorsed Mr. Witteveen’s proposals for a temporary facility in the Fund to assist members in meeting oil-related payments deficits and asked the Executive Board to explore the proposal immediately. Resources for the oil facility were to be borrowed especially for the purpose, primarily from the oil producing members. From February to May 1974, Mr. Witteveen traveled personally to the capitals of Algeria, the Islamic Republic of Iran, Kuwait, the Libyan Arab Jamahiriya, Saudi Arabia, the United Arab Emirates, and Venezuela to seek funds for this facility. By June 13, the Executive Board took a decision providing for the facility, and by August 22, the oil facility was established and the Fund was ready to meet requests for purchases. Intense negotiations had occurred meanwhile to achieve a formula relating drawings to the portions of members’ payments deficits attributable to higher oil prices and to define the terms of borrowing agreements with lenders.
The oil facility for 1974 proved useful immediately for both developed and developing members. By early September 1974, nine members had already made purchases, and it was obvious that another and enlarged oil facility would be needed for 1975. The 1975 oil facility was also temporary and was terminated in May 1976, by which time 55 of the Fund’s members had made drawings for a total of SDR 6.9 billion from the oil facility since its inception.
The Fund’s oil facility is often regarded, in retrospect, as extremely small, considering the enormous balance of payments deficits that had to be financed. Nonetheless, by realizing at the onset of higher oil prices that huge payments imbalances would continue to plague international financial life, and by expeditiously developing a technique for what was soon to become known as the recycling of petrodollars, the Managing Director showed that countries were prepared to cooperate in the emergency. Furthermore, the expansion of official financing made possible by the oil facility lent encouragement for the necessary enlargement of private financing.
Subsidy Account The developing members were also of special concern to Mr. Witteveen. He recommended that the oil facility be supplemented with a Subsidy Account, which was set up on August 1, 1975 and was designed to assist the Fund members on the United Nations list of countries most seriously affected (MSA) by the unusually difficult world economic conditions. The aim was to help these members meet the cost of using the oil facility for 1975 by reducing the effective rate of annual charges payable on drawings under the facility by about 5 percent a year. The MSA list included 39 members, of which 18 made purchases under the 1975 oil facility. Contributions to the Subsidy Account were solicited from all other Fund members—including oil exporting and industrial members. As of June 10, 1978, contributions of SDR 66 million had been received from 25 members and total contributions of SDR 160 million were anticipated.
THE FUND’s RESOURCES
The oil facility stimulated an upsurge in drawings after relatively little use of the Fund’s resources in the early 1970s. In fact, in 1973, when Mr. Witteveen assumed office, use of the Fund’s resources had dropped to the lowest level in ten years. In the Fund’s financial year ended April 30, 1975, drawings rose to SDR 5.1 billion, an amount substantially exceeding the previous record of SDR 3 billion of 1969/70 and contrasting sharply with drawings of just over SDR 1 billion in 1973/74. In the financial year ended on April 30, 1976, drawings were even larger, aggregating to SDR 6.6 billion. Even in the next financial year, after the oil facility had been terminated, the drawings of SDR 4.9 billion still reached the third highest amount in the Fund’s history.
Other important changes in the Fund’s policies on resources also stimulated these record drawings. In September 1974 an extended facility was introduced to enable members with structural or long-term payments problems to make use of the Fund’s resources for longer periods of time and for larger amounts than they could under the usual credit tranche policies; under this facility, the Fund’s resources were made available for four to eight years as compared with three to five years under the other facilities. (Later, drawings were extended to ten years.) But the greatest factor responsible for increased drawings was a liberalization, in December 1975, of the compensatory facility for financing export shortfalls; the maximum entitlement of members in terms of quota was increased and the method of calculating export shortfalls in real terms was changed to take into account the effect of inflation in concealing such shortfalls.
Industrial and developing members alike had greater recourse to the Fund, not only under the new and liberalized facilities but also under regular stand-by arrangements. A stand-by arrangement with the United Kingdom, amounting to SDR 3,360 million, was approved on January 3, 1977, for 24 months rather than for the customary 12 months. Mr. Witteveen personally participated in the negotiations. A few months later, in April, a stand-by arrangement with Italy for SDR 450 million was approved.
Quota Increases These heavy drawings caused a squeeze on the Fund’s liquidity. To obtain more resources, the Executive Board turned its attention first to quotas. During his term in office, Mr. Witteveen guided the Fund through the Sixth General Quota Review and most of the way through the Seventh Review.
The Sixth Review began formally on April 15, 1974 when the Executive Directors, assembling as a Committee of the Whole, held their first meeting on the subject. Because the Articles required a quota review at intervals of not more than five years and the Fifth General Review was completed early in 1970, the Board of Governors had to adopt an appropriate resolution by February 8, 1975. The negotiations for the Sixth Quota Review, however, proved even more difficult and more prolonged than those for the Fifth Review. It was well recognized that there should be not only a general increase in all members’ quotas but also selective increases which would give substantially larger shares of total quotas to the major oil exporting members. At the same time, the share of the developing members, as a group, was not to be reduced. Hence, it was necessary to adjust the relative shares of quotas for the industrial and the developed members. Because of the voting majorities needed in connection with many important provisions of the Articles, a rearrangement of the relative shares of members required a great deal of deliberation. In January 1975, the Executive Directors asked for more time to produce proposals, and more than a year later, on March 22, 1976, the Board of Governors finally approved a resolution on Increases in Quotas of Members—Sixth General Review.
These increases in members’ quotas enlarged the resources of the Fund from SDR 29.2 billion to SDR 39 billion. Having been consented to by members with the required 75 percent of quotas as of February 19, 1976, and the Second Amendment of the Articles of Agreement having entered into force, the increases were just taking effect in mid-1978 as members made the necessary payments. Even before increases under the Sixth Review became effective, the Seventh Review was begun. Mr. Witteveen made special appeals regarding the Seventh Review to the Governors both in 1976 at the Annual Meetings in Manila and in 1977 at the Annual Meetings in Washington. This review remained under discussion when Mr. Witteveen left the Fund in June 1978, but the Interim Committee decided at its tenth meeting, in April 1978, in Mexico City, that increases in quotas under the Seventh Review should be adequate to meet the expected need for conditional liquidity over the next five years. The Committee concluded that this increase in quotas would strengthen the available sources of balance of payments financing by enhancing the ability of the Fund to provide such financing without heavy recourse to borrowing and would further the process of international adjustment.
A “WITTEVEEN FACILITY”
To ensure, in the meantime, that sufficient resources were immediately available to assist members with balance of payments adjustment, Mr. Witteveen proposed in the spring of 1977 a new temporary supplementary facility. This was again an arrangement under which the Fund would borrow, this time from any members willing to lend to the Fund, at market-related rates of interest. Access to assistance under the supplementary financing facility would be available to all members, would normally be provided under stand-by arrangements covering a period longer than one year, and would be subject to adequate conditionality to induce members to pursue suitable adjustment policies.
The proposed supplementary financing facility was endorsed by the Interim Committee at its eighth meeting, in Washington, in April 1977. It was so personally identified with the Managing Director that monetary officials and the financial press at first informally called it the “Witteveen facility.” Indeed, Mr. Witteveen in August 1977, to advance the facility, invited ministerial representatives of 14 potential lender countries to meet in Paris to discuss the terms and conditions of lending, as well as their specific commitments. On August 29, 1977, decisions on the establishment of the facility were taken by the Executive Directors, and early pledges by 13 Fund members (or their institutions) and the Swiss National Bank amounted to about SDR 8.6 billion. The facility was to enter into effect when actual loan agreements totaled SDR 7.75 billion, including at least six agreements amounting to SDR 500 million each.
OTHER ASPECTS OF WITTEVEEN’s LEADERSHIP
The Managing Director’s leadership in the economic and financial world during his term of office took the form also of identifying the serious economic difficulties as they arose and of speaking out in favor of specific policies at Annual Meetings and other forums. For example, in September 1973, just after the exchange rates of the major currencies began to float, he called for greater exchange rate stability to be achieved partly through the Fund’s consultations. Throughout 1974, as oil deficits swelled, he emphasized the need for greater recycling of funds through official channels. In addition, in 1975 when the combined problems of recession, inflation, and external payments disequilibrium deepened, he appealed to the major members to pursue a coordinated strategy. Also in 1975, as world liquidity and reserves swelled appreciably, he looked ahead to the need to develop effective control over international liquidity by basing the monetary system ultimately on an international asset such as the SDR, by reducing the role of gold in the monetary system, and by regulating the aggregate volume of national currencies in reserves.
To be in a position to suggest solutions, the Fund gave increased attention to the world economic outlook. This was an important development of Mr. Witteveen’s tenure. This review of recent economic trends, relevant economic indicators, and policies being pursued led to a forecast of the likely changes and problems in the world economy and gradually evolved into a detailed, comprehensive analysis by both the staff and the Executive Board. The Fund’s report in the spring of 1977 on the world economic outlook and the international adjustment process also became the background for consideration by the Interim Committee, at their eighth meeting in Washington, of the policy options open to members in coping with the problems of unemployment, inflation, and external disequilibrium. And, a few weeks later, in an economic summit meeting in London on May 7–8, the heads of state of Canada, France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States, having had the benefit of the Fund’s assessment and the recommendations of the Interim Committee, were able to agree on cooperative action (1) to help create more jobs while still restraining inflation, (2) to facilitate international adjustment of external imbalances, (3) to avoid the tendency toward protectionist measures, and (4) to support the supplementary financing facility.
In a further step to facilitate the coordination of policies, Mr. Witteveen presented a report, which he also made public, on the economic outlook to the Interim Committee’s meeting in Mexico City in April 1978. This report, including a scenario for the world economy through 1980, became the basis for the general outline of coordinated strategy on which the Interim Committee reached a consensus.
These developments reflected an enhanced awareness of the need for groups of members to coordinate their economic policies. The introduction of special consultations in the years from 1973 to 1978 and the Fund’s intensified assessment of the world economic situation placed it in a prime position to assist in such coordination in the future, both in the monetary and financial fields.
THE INTERNATIONAL MONETARY SYSTEM
The most difficult task for the Fund in the years 1973–78, of course, was to find ways in which to oversee the emerging international monetary system in which some exchange rates floated independently, some floated jointly, and some were pegged, and in which the Fund had little formal authority. Under the direction of Mr. Witteveen, the Fund continuously kept the monetary system under review and repeatedly evaluated evolving experiences with floating exchange rates. In addition, the Managing Director frequently pointed out the need for Fund surveillance of exchange rate policies. He stressed, too, the danger of measures that move away from the liberal trade and payments system of which the Fund is an integral part. The major reason that he emphasized official recycling of oil funds and recommended the oil facility in 1974 was his concern that in the immediate aftermath of the sudden new oil deficits, countries might adopt restrictions or engage in competitive exchange depreciation in order to reduce their deficits. Members using the Fund’s oil facility were, in fact, required to avoid resorting to restrictions. Following the lead of the Managing Director’s remarks six months earlier on the importance of avoiding the escalation of restrictions on trade and payments for balance of payments purposes, the Committee of Twenty in June 1974 issued a Declaration on Trade Measures, to which members of the Fund might wish to subscribe voluntarily, affirming that they would not introduce or intensify trade or other current account measures for balance of payments purposes without a finding by the Fund that there was balance of payments justification for such measures.
When the Committee of Twenty ended its work of planning a reformed international monetary system in June 1974, and it became apparent that a new system would emerge from the prevailing exchange rate arrangements, Mr. Witteveen worked with the Executive Board on a decision setting forth a detailed statement on the Guidelines for the Management of Floating Exchange Rates. Furthermore, on April 29, 1977, the Executive Board took a decision setting out the principles and procedures for the guidance of members’ exchange rate policies and for the implementation of the firm surveillance through which the Fund was to implement the new Article IV of the Second Amendment of the Articles of Agreement.
With regard to restrictions, circumstances were ripe for increased protectionism. As observed in the Fund’s Annual Report on Exchange Restrictions, published in July 1977, although members had generally avoided imposing across-the-board trade restrictions, there had been a drift toward some restrictions, especially an increase in nontariff barriers on imports and in so-called voluntary export restraint agreements. At the 1977 Annual Meetings, Mr. Witteveen stressed again that such measures were likely to provide only very short-term relief.
Mr. Witteveen presided over the Fund in the years during which much of the framework for a new international monetary system was worked out. Important decisions were taken concerning the role of the SDR, including changes in its valuation. Significant decisions were taken to demonetize gold in the monetary system, to abolish the official price for gold, to eliminate the use of gold in the Fund’s transactions, to sell one sixth of the Fund’s gold (25 million ounces) and to place the proceeds in a specially created Trust Fund to be administered by the Fund to provide additional highly concessional resources to meet the balance of payments needs of developing members, and to sell another 25 million ounces to all members at the official price. The development of procedures for selling gold involved very sensitive negotiations, but by June 1976, for the first time, the Fund began to hold gold auctions. And after U.S. and French officials in November 1975 at Rambouillet reconciled their differences concerning exchange rates and the role of gold in the monetary system, it was possible to draft a revised Articles of Agreement. The Second Amendment, including the often cited Article IV on exchange rates, entered into force on April 1, 1978, providing the legal foundation for the emerging international monetary system. Among other changes, the Amendment introduced new and flexible provisions for dealing with exchange arrangements, directed the Fund to exercise firm surveillance of members’ exchange rate policies, provided for a gradual reduction in the role of gold in the international monetary system, and made changes in the characteristics and expanded the uses of the SDR to enhance its status as an international reserve asset. Also, during Mr. Witteveen’s term, a Joint Ministerial Committee of the Boards of Governors of the [World] Bank and the Fund on the Transfer of Real Resources to Developing Countries (the Development Committee) was put into operation.
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As his term ended in June 1978, Mr. Witteveen was leading the Fund in an examination of a number of difficult economic questions that continued to persist. How could more rapid world economic growth be achieved? What type of measures were most likely to end the chronic inflationary spiral? How serious were the large continuing disequilibrium in world payments and a large U.S. deficit that had again emerged in 1977? How could the adjustment process be made to work satisfactorily so as to prevent large payments imbalances? What criteria should guide the Fund in evaluating exchange rates? What specific conditions should the Fund apply to the use of its resources? What attitude should the Fund take toward the large external debts of many of its members, including their debts to private commercial banks? Also near the end of his term, to help solve the problem of excess liquidity in the world, Mr. Witteveen suggested that an allocation of SDRs be combined with a reduction in the amount of reserve currency outstanding through a substitution account administered by the Fund. The Executive Board began to prepare a report on this subject for the Interim Committee.
In sum, Mr. Witteveen was a driving force in shaping the Fund at a very critical time in its history. His initiatives and innovations gave the Fund new functions and new directions when they were needed. And, in an environment in which monetary officials frequently expressed conflicting national points of view on the difficult economic problems of the day, Mr. Witteveen provided an overall perspective and an understanding of what was in the best interest of the international community.