In the summer of 1982, after a decade of uneven economic growth with an accumulation of significant imbalances and inflationary tensions which were difficult to control, the world economic situation entered a period of severe financial crisis when efforts were made to renegotiate the external debt of an increasing number of countries, especially in Latin America. The gravity of the situation has once again put to the test the role and operational capacity of the International Monetary Fund (IMF) and, in a broader context, the principles and instruments of international economic cooperation established at Bretton Woods after World War II.
In this situation, it seemed timely and advantageous to hold a conference on “The Role of the International Monetary Fund in the Adjustment Process.” which took place April 5–8, 1983 in Viña del Mar. Chile.
The seven papers which appear in this volume are either original texts presented by the authors, or, in some cases, edited versions prepared for inclusion herein.
This summary seeks to fulfill three objectives. The first part offers an overview of the international economic situation which served as a framework for the conference and of the principal events which led up to it. The second part presents a summary of the discussions. Finally, the third part describes the major conclusions which could be drawn from the two and one-half days of sessions which made up the conference.
ECONOMIC ENVIRONMENT
The international economy over the last ten years has been characterized by a series of phenomena which have given it a very distinct shape and which have at the same time led to a series of problems culminating in the financial crisis of 1982.
The most notable characteristics of the period 1973–82 are the following: (a) extreme fluctuations in the rates of economic growth, but with slower overall growth than that of the postwar period, particularly from 1963 to 1972; (b) the continuation and aggravation of the inflationary pressures which had started to develop in 1970–73; and (c) the appearance of severe current account imbalances in the balance of payments, with sharp variations in total amounts over relatively short periods of time (see Table 1).
The period under consideration can be divided into two cycles, both of which are characterized by a phase of substantial increase in petroleum prices and by the process whereby the various groups of countries adapted to the new circumstances. From this perspective, the first cycle covers the period 1973–78; the second begins in 1979 and actually has not ended, as we shall see.
The differences between the two cycles explain, to a great extent, the difficulties faced by numerous developing countries and which, for many of these countries, have led to a crisis in debt servicing. The basic element which differentiates the two cycles is that the adjustment process in the industrial nations when petroleum prices were first increased (1973–74) was largely completed by 1974–75, so that the growth of this group of countries as well as world trade development in 1976–78 reached levels comparable to those in the period immediately preceding 1973 (Table 1, Section A). In contrast, the industrial nations adjusted more slowly to the second increase in petroleum prices (1979–80), with a slower growth rate in output which continued through the three-year period 1980–82 and, despite the change in trend beginning in 1983, cannot yet be said to have ended.1 On the other hand, in contrast with the preceding adjustment cycle, world trade in 1980–82 ceased to grow in volume, and the average dollar value of world trade decreased during the last two years of this three-year period (Table 1, Section C).
Faced with the situation which began in 1973–74, the overall strategy of the non-oil developing countries2 was to maintain a maximum growth rate with the least possible fluctuations. Social, economic, and even political factors explain why this type of approach was taken. As can be seen from Table 1, Section A, here also there are two distinct phases in reaching this objective: one phase which extends to 1978, and another phase which begins in 1979.
In the first phase (1973–78), the average growth rate of the non-oil developing countries reached 5.2 percent—just slightly lower than the average for the preceding five-year period, during which it reached 6 percent a year. This effort led to an increase in the current account balance of payments deficit for this group of countries, from $11.3 billion in 1973 to $41.3 billion in 1978 (Table 1, Section B). The fundamental characteristic of this period—particularly up to 1977—from the perspective of financing this growing deficit, is that the cost represented by the additional debt taken on by this group of countries grew at a rate which on the average was equal to the value of exports of goods and services, so that the total burden of debt service, measured as a percentage of exports, showed little variation up to 1977 (Table 1, Sections C and D). On the other hand, although the level of reserves as compared with the value of imports of goods and services was lower in 1978 than the percentage in 1973 (25.9 percent compared with 31.4 percent), this ratio improved in the period 1975–78 (Table 1, Section E).
From 1978, the non-oil developing countries were affected by a substantial deterioration in the real terms of trade and by a significant increase in interest rates. This last factor combined with a debt composition in which short-term debt and debt to private financial institutions accounted for a growing share of total debt. This process substantially raised the cost of total active debt, but the importance and immediate impact of this fact were masked by the spectacular increase in exports of this group of countries during the two-year period 1979–80, which reached an annual average of 27.5 percent.
The increasing debt service of the developing countries made them very sensitive to any significant and continuous worsening in their export market situation. Unfortunately, as we have seen, this possibility started to become reality in 1980 with the beginning of the phase of slow growth in the industrial economies, a phase which continues today.
The financing mechanism of the current account deficit in the non-oil developing countries which prevailed since 1978 continued in 1981 and the first half of 1982. However, the increasing burden of debt service payments and the stagnation of exports reduced the ability to import and with it growth rates, which decreased significantly in the two-year period 1981–82. The failure of domestic policies to adapt to the new circumstances was translated into a drain on international reserves for many of these countries.
In mid-1982, the level of foreign reserves of several important debtor countries reached minimum levels. The reaction of private lenders, especially banks, was to reduce drastically the net flow of new funds.3 This lack of confidence was transferred to domestic sectors of the economy, and capital flight then aggravated the situation. The combination of these factors exhausted the maneuvering room of many of the economies affected and made it impossible for them to meet all debt service payments promptly. This situation was particularly severe in Latin America.4
Evolution of Some Basic Economic Variables During the Period 1973–82 for Principal Groups of Countries1
For the criteria and composition of the groups, see note 1.
Average for 1968–72.
Rate of interest in the Eurodollar market for six-month offerings. Average of daily data.
Evolution of Some Basic Economic Variables During the Period 1973–82 for Principal Groups of Countries1
| Average 1963–72 | 1973 | 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Percentage change over preceding year) | ||||||||||||
| A) | Growth of GNP | |||||||||||
| Industrial nations | 4.7 | 6.2 | 0.5 | –0.6 | 5.0 | 4.0 | 4.1 | 3.4 | 1.3 | 1.2 | –0.3 | |
| Oil exporting countries | 9.02 | 10.7 | 8.0 | –0.3 | 12.3 | 6.1 | 2.0 | 3.1 | –2.3 | –4.3 | –4.8 | |
| Non-oil developing countries | 6.02 | 6.1 | 5.4 | 3.3 | 6.0 | 5.2 | 5.4 | 4.6 | 4.3 | 2.4 | 0.9 | |
| (In billions of U.S. dollars) | ||||||||||||
| B) | Current account balance of payments | |||||||||||
| Industrial nations | 20.3 | –10.8 | 19.8 | 0.5 | –2.2 | 32.7 | –5.6 | –40.1 | 0.6 | –1.2 | ||
| Oil exporting countries | 6.7 | 68.3 | 35.4 | 40.3 | 30.2 | 2.2 | 68.6 | 114.3 | 65.0 | –2.2 | ||
| Non-oil developing countries | –11.3 | –37.0 | –46.3 | –32.6 | –28.9 | –41.3 | –61.0 | –89.0 | –107.7 | –86.8 | ||
| (Percentage change over preceding year) | ||||||||||||
| C) | World Trade | |||||||||||
| Volume | 8.5 | 12.0 | 4.5 | –3.5 | 11.0 | 5.0 | 5.5 | 6.5 | 2.0 | 0.5 | –2.5 | |
| Value in U.S. dollars | 3.0 | 23.5 | 40.0 | 9.5 | 1.5 | 8.5 | 10.0 | 18.5 | 20.0 | –1.0 | –4.0 | |
| Non-oil developing countries | ||||||||||||
| • Terms of trade | 0.3 | 5.3 | –5.9 | –8.5 | 5.9 | 5.9 | –3.7 | –0.3 | –6.2 | –3.9 | –2.7 | |
| • Value of exports of goods and services | 37 | — | 18 | 19 | –18 | 28 | 27 | 5 | –2 | |||
| D) | External debt of non-oil developing countries | (In percentage) | ||||||||||
| Long-term debt service as a percentage of exports of goods and services | 15.9 | 14.4 | 16.1 | 15.3 | 15.4 | 19.0 | 19.0 | 17.6 | 20.4 | 23.9 | ||
| Eurodollar rate of interest3 | 9.3 | 11.1 | 7.8 | 6.2 | 6.4 | 9.3 | 12.2 | 13.9 | 16.9 | 13.6 | ||
| E) | Non-oil developing country reserves | |||||||||||
| As a percentage of imports of goods and services | 31.4 | 21.6 | 19.1 | 23.6 | 25.2 | 25.9 | 22.3 | 17.5 | 16.2 | 16.3 | ||
For the criteria and composition of the groups, see note 1.
Average for 1968–72.
Rate of interest in the Eurodollar market for six-month offerings. Average of daily data.
Evolution of Some Basic Economic Variables During the Period 1973–82 for Principal Groups of Countries1
| Average 1963–72 | 1973 | 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Percentage change over preceding year) | ||||||||||||
| A) | Growth of GNP | |||||||||||
| Industrial nations | 4.7 | 6.2 | 0.5 | –0.6 | 5.0 | 4.0 | 4.1 | 3.4 | 1.3 | 1.2 | –0.3 | |
| Oil exporting countries | 9.02 | 10.7 | 8.0 | –0.3 | 12.3 | 6.1 | 2.0 | 3.1 | –2.3 | –4.3 | –4.8 | |
| Non-oil developing countries | 6.02 | 6.1 | 5.4 | 3.3 | 6.0 | 5.2 | 5.4 | 4.6 | 4.3 | 2.4 | 0.9 | |
| (In billions of U.S. dollars) | ||||||||||||
| B) | Current account balance of payments | |||||||||||
| Industrial nations | 20.3 | –10.8 | 19.8 | 0.5 | –2.2 | 32.7 | –5.6 | –40.1 | 0.6 | –1.2 | ||
| Oil exporting countries | 6.7 | 68.3 | 35.4 | 40.3 | 30.2 | 2.2 | 68.6 | 114.3 | 65.0 | –2.2 | ||
| Non-oil developing countries | –11.3 | –37.0 | –46.3 | –32.6 | –28.9 | –41.3 | –61.0 | –89.0 | –107.7 | –86.8 | ||
| (Percentage change over preceding year) | ||||||||||||
| C) | World Trade | |||||||||||
| Volume | 8.5 | 12.0 | 4.5 | –3.5 | 11.0 | 5.0 | 5.5 | 6.5 | 2.0 | 0.5 | –2.5 | |
| Value in U.S. dollars | 3.0 | 23.5 | 40.0 | 9.5 | 1.5 | 8.5 | 10.0 | 18.5 | 20.0 | –1.0 | –4.0 | |
| Non-oil developing countries | ||||||||||||
| • Terms of trade | 0.3 | 5.3 | –5.9 | –8.5 | 5.9 | 5.9 | –3.7 | –0.3 | –6.2 | –3.9 | –2.7 | |
| • Value of exports of goods and services | 37 | — | 18 | 19 | –18 | 28 | 27 | 5 | –2 | |||
| D) | External debt of non-oil developing countries | (In percentage) | ||||||||||
| Long-term debt service as a percentage of exports of goods and services | 15.9 | 14.4 | 16.1 | 15.3 | 15.4 | 19.0 | 19.0 | 17.6 | 20.4 | 23.9 | ||
| Eurodollar rate of interest3 | 9.3 | 11.1 | 7.8 | 6.2 | 6.4 | 9.3 | 12.2 | 13.9 | 16.9 | 13.6 | ||
| E) | Non-oil developing country reserves | |||||||||||
| As a percentage of imports of goods and services | 31.4 | 21.6 | 19.1 | 23.6 | 25.2 | 25.9 | 22.3 | 17.5 | 16.2 | 16.3 | ||
For the criteria and composition of the groups, see note 1.
Average for 1968–72.
Rate of interest in the Eurodollar market for six-month offerings. Average of daily data.
The magnitude of the financial crisis brought on by this series of events and policies is far-reaching. In 1982, 18 countries were forced to renegotiate their external debt; this clearly indicated the widespread nature of the problem. Renegotiations affected 7 countries in 1980 and 13 in 1981. Moreover, the list of countries renegotiating their external debt has been growing in 1983, and most of the principal countries in Latin America are now being affected in one way or another. It can be said that through 1982 and up to April 1983, the international financial crisis has forced renegotiation upon countries whose debt represented between 45 and 50 percent of the external debt outstanding at the end of 1982.5 In addition, since 1982, seven of the ten largest borrowers have been involved in renegotiating their debts.
On the other hand, the decrease in oil prices which began last year has extended the debt renegotiation problem to some oil exporting countries, so that the sequence of events described here is to a great extent also applicable to them.
SUMMARY OF DISCUSSIONS
The presentation of the seven papers which made up the conference led to a wide-ranging and interesting discussion on each of them. The following summary includes the most important points made in the initial remarks of the speakers and during the discussions which followed. The content is based on notes taken during the discussion and, to a great extent, upon the final summary which I presented, as conference moderator, at the final session. This summary is in no way intended to be an official, exhaustive report of everything discussed, in the sense of minutes of a meeting. It is basically an effort to organize the ideas and opinions expressed during the conference according to the author’s perception of their interest and importance. The informal nature of the discussions and the grouping of remarks around different points of view make it advisable to omit the names of the individuals who took part in the discussion on each subject, which, at any rate, could not be faithfully recorded in what must of necessity be a very condensed summary of many hours of debate.
The first paper is entitled “Recent Developments in the World Economy and in Non-Oil Developing Countries of the Western Hemisphere” and was presented by Ms. Linda M. Koenig, Deputy Director of the Central Banking Department of the IMF. Its purpose was to provide background on recent developments in the international economy and in non-oil developing countries of the American continent. The author stressed first the general environment of slow economic growth, especially in the industrial nations, against a background of sluggish international trade and lessening inflationary pressures. The indicated decrease in petroleum prices has caused a noticeable improvement in the world outlook for a gradual recovery throughout 1983, a view which met with general agreement although it was stated that the effects of this renewed activity may be less in Latin America than in other areas.
With regard to the economies of non-oil developing countries in the Americas, Koenig emphasized in her paper the decrease in the region’s total output in 1982, the increase in inflationary pressures, and the major changes in the various elements of the balance of payments for the period 1980–82. Particularly noteworthy were the decreases in capital inflows and exports, which forced a marked reduction in imports, the stagnation of the region’s growth rate, and a loss of approximately $11 billion in the region’s international reserves.
The gravity of the Latin American situation reflected in Koenig’s presentation, about which there was no serious disagreement, led to an interesting discussion, revolving around three different subjects: the causes of the drastic deterioration of the economic situation in this area of the world; the nature of the adjustment made in 1982; and the outlook for the future.
Regarding causes, some of the participants were inclined to stress the role of exogenous factors; particular mention was made of the unfavorable developments in petroleum prices, high interest rates on debt, the worldwide recession, and the protectionist tendencies of the industrial nations. Another group of participants put more emphasis on internal factors—a lack of economic discipline, mismanagement of some basic elements such as the rate of exchange, and the maintenance of unmanageable levels of global demand based on a growing external debt. It was generally agreed that the two points of view were complementary rather than mutually exclusive, and that proper management of the domestic economy was essential in recent years, although it would have been difficult to avoid completely the negative effects of the international situation.
With regard to the second topic—the nature of the adjustment made in Latin America—emphasis was placed upon the abruptness and intensity of the adjustment in 1982 in response to the basic factor which arose in the region in that year: the crisis in the level of indebtedness. It was generally agreed that this adjustment was inevitable, and several participants stressed the role of the Fund in the effort to make the adjustment orderly.
The third topic discussed with reference to Koenig’s paper involved the possibility of maintaining an adjustment of this size in the future, even while recognizing the necessity for it. Several participants expressed the fear that the drastic decrease in production could lead to serious social and political tensions in Latin America. Others expressed doubts as to the success of the effort unless there was a substantial drop in real interest rates on debt, a significant worldwide recovery, and a curbing of protectionist tendencies. There was even open reference to the specter of debt repudiation which hangs over the whole situation. It can be said in general that there was a belief the present situation could be overcome if everyone involved—governments, banks, and international organizations—made an effort to cooperate and continued to lend their support to the Latin American economies.
The second paper, “The Process of Balance of Payments Adjustment,” was presented by Professor John F. O. Bilson of the University of Chicago. After making explicit the technical aspects of the monetary approach to the balance of payments, his paper developed the asset market approach to the balance of payments, which studies the transmission of financial disturbances in a world with integrated financial markets but segmented product markets. This transmission causes considerable instability in small countries when unstable conditions exist in the country which issues the reserve currency. If, in addition, the relationship among exchange rates in the industrial nations is extremely volatile, an even greater impact is felt in peripheral countries with regard to instability of real interest and exchange rates and of real prices for raw materials, partly because their residents have substantial debts denominated in various foreign currencies.
These difficulties inspire the author to seek a procedure which would permit small countries in particular to insulate their exchange rates as much as possible from disturbances emanating from the reserve currency countries. This is achieved by adjusting the exchange rate to maintain at all times the equality of central bank assets and liabilities computed in dollars (for example, in the absence of a change in the monetary base, the receipt of interest on the central bank’s foreign assets would require an appreciation of the exchange rate in order to maintain this equality). The author believes that, through proper management of the asset portfolios of the central banks, two desirable objectives could be achieved: a greater stability in the exchange rate, on the one hand, and a lower cost of indebtedness, on the other.
Two different aspects of Bilson’s presentation were discussed: first, the implications and technical consistency of the model, and, second, its usefulness in the real world in which we live.
With regard to the elements of the model, some participants disagreed with various aspects of the characterization of the monetary approach to the balance of payments. Others expressed reservations as to the credibility of the proposed exchange rate management. Doubts were also expressed as to the ultimate composition of the central bank assets which would support the proposed exchange rate policy.
The second group of questions was addressed in genera) to the practical difficulties of allowing variables such as exchange rates and money supply to be dependent upon the adjustment aimed at equalizing central bank assets and liabilities. For some this would establish relationships which cannot be realistically maintained in a world in which governments have assumed overall economic responsibilities.
In conclusion, Bilson’s paper had the great merit of suggesting an instrument which, while admittedly still in the experimental stage, would improve exchange rate policies and lower the cost of indebtedness. His contribution is to look for logic and automatic procedures in areas which the author sees as being increasingly arbitrary and interventionist.
The third paper, entitled “The IMF’s Conditionality Re-Examined.” was presented by Mr. E. Walter Robichek, Advisor to the Managing Director of the IMF. The paper examined the conditionality of the Fund as one of the basic elements in its programs.
In the first section, Robichek analyzed the legal basis for the Fund’s conditionality and justified and documented at length the institution’s jurisdiction in this area. There was virtually unanimous acceptance of the Fund’s legal right to establish some form of conditionality. The scarcity of resources and the need to discipline economies, as well as the Fund’s statutory mandate, were the elements most frequently mentioned as justifications for its conditionality.
In the second section, Robichek analyzed the limitations which the Fund must face in its adjustment programs. In the author’s opinion, the Fund’s limited resources and the very nature of the magnitudes it deals with make greater flexibility in its programs impracticable. On this point, several participants expressed their judgment that the duration of Fund programs is exceedingly short under the present circumstances, but it was ultimately agreed that the Fund cannot avoid a difficult trade-off between resources and flexibility.
The third section of Robichek’s presentation examined the policy instrumentation of the Fund’s adjustment programs, concentrating on two aspects: the performance criteria and the supply and demand policies of the Fund’s programs. In this section, several observations were made regarding issues such as: what some participants considered encroachment by these instruments on national autonomy, the acceptance in the Fund’s programs of the automaticity of the market, and the priority given to objectives over the means of attaining them. Those who expressed these views generally felt that these problems hamper the full incorporation of the Fund’s programs in the different and changing realities of individual countries. Other participants pointed out that the Fund has demonstrated its ability to use its influence and instruments pragmatically and flexibly.
In the fourth and final section of his paper. Robichek addressed the implications of the worldwide economic recession for the Fund’s conditionality, particularly in light of the magnitude of the present difficulties. This section of the presentation led to observations regarding the adequacy of the Fund’s capacity to face the present conditions. Some participants questioned whether the Fund was prepared or equipped for a world crisis like the present one; others stressed the importance of exogenous factors, such as the rate of interest of the debt, which are outside the Fund’s control. It can be generally concluded that the majority agreed that the performance of the Fund would be strengthened by a widening of its capital base, which some believed could be obtained in the international markets, and through the Fund’s close and continuing cooperation with governments and banks.
The fourth paper, “The Role of Economy-Wide Prices in the Adjustment Process,” was presented by Mr. Claudio Loser, Division Chief in the Exchange and Trade Relations Department of the IMF. In the first section, Loser analyzed three basic aspects of the role of economy-wide prices in the adjustment process. He considered, first, the effects on the functioning of the economy in general; second, the need for coordination with other economic policy measures; and third, the practical rather than ideological desirability of using economy-wide prices in the Fund’s programs. In this context, the following were considered economy-wide prices: exchange rates, interest rates, wages, and administered prices.
In the second part of his paper, Loser examined actual experience with economy-wide price policies in Fund programs. He stressed that the existence of price distortions was one of the most common problems in countries which undertook programs with the Fund and that, for this reason, measures to correct these distortions were characteristic of practically all of the programs. The author concluded that these pricing policies had generally been successful when accompanied by the prescribed policies which were necessary to support them.
In the final part of his presentation, Loser reviewed experiences with preannounced or fixed exchange rates which had been used in recent years in four Latin American countries (Argentina, Chile, Mexico, and Uruguay). Although the objectives of these policies were sound, the particular applications under study led to overvaluations of the exchange rate and had to be abandoned. A severe devaluation then occurred in all cases, giving reason to believe that the reaction was one of overshooting. The author concluded that this all happened principally because the exchange rate policy followed was not consistent with other governmental policies.
Loser’s presentation led to a considerable number of remarks, which fall into several categories. First, several participants accused Loser of being excessively macroeconomic in his approach. They felt that it was important to know how prices affected the different sectors of the economy and how they were transmitted throughout the economy. It was their view that this aspect was so important that its effects could not be separated from the overall effect of macroeconomic policies.
Along the same lines, some participants emphasized the complexity of the relationship between prices and other economic variables. An example of this was the relationship between real exchange rates and real wages, regarding which there were several interpretations. Also, the fact that the Fund’s programs seek to maintain a real exchange rate was a concern of some participants who felt that, given the difficulty of determining its equilibrium level, this policy could lead to competitive depreciations. It should be concluded from this discussion, for those who are of this opinion, that great care is required in dealing with economy-wide pricing policies at the global level.
A second group of participants included those who objected to the view of the markets involved in Fund programs. As an example, mention was made of the inflexibility existing in the labor market and of the incompatibility of this fact with the Fund’s view of wages in its programs as a residual variable.
A third group of remarks referred to the increasingly difficult situation faced by the private sector in national economies and to the fact that the Fund’s programs may not make sufficient allowance for this situation when they prescribe policies focusing more and more on problems in and of the public sector which, in many cases, cause serious difficulties for private sector financing.
There was general agreement regarding the significant negative effects which price distortions, particularly in exchange and interest rates, have had upon the economies of Latin America. It was felt that a price policy to correct these distortions was necessary, but that such a policy could be effective only if accompanied by parallel measures to support it. The need to coordinate the economy-wide price policies of Fund programs and national objectives and priorities was also mentioned.
The fifth paper, written by Mr. Vito Tanzi, Director of the Fiscal Affairs Department of the IMF, and Mr. Mario Blejer, economist in the same department, was presented by Mr. Blejer and entitled “Fiscal Deficits and Balance of Payments Disequilibrium in IMF Adjustment Programs.” In the First section, the authors examined different views of fiscal deficits. In the second section, they reviewed the various sources of deficit financing, studying, in order, external sources, noninflationary internal sources, and, finally, inflationary sources. Under each of these categories, they examined existing arrangements and their specific impact on the deficit.
In the third section, Tanzi and Blejer considered the effects of expansionary fiscal policies on the balance of payments. They felt that the genera) effect of this type of policy was inflationary when it was not followed by an equal contraction in private sector financing. Next, they analyzed the financing of an expansionary fiscal policy, which could be achieved through monetary expansion, private sector loans, or external loans. They concluded that the first method was the most harmful because of its greater inflationary impact.
In the final section of the paper, the authors referred to the treatment of fiscal deficits under Fund programs. They justified the inclusion of these variables by reason of their effect on the balance of payments and concluded that the balance of payments had generally improved under those programs whose fiscal targets had been met.
The paper provoked several comments. Some referred to the political nature of budget deficits and, as a consequence, to the strong political impact which the Fund’s actions could have in this area. Others commented that the Fund was concerned with the macroeconomic effect of the deficit and not its use, which could be beneficial, in their opinion, when it served to stimulate investment. Other participants expressed their conviction that private sector deficits could sometimes be equally harmful and could lead, as seemed to have been the case in Chile, to a crowding out of the public sector.
In general terms, it can be said that no one doubted the generally harmful effects of public sector deficits which, in the best of cases, were liable to cause serious difficulties for the private sector. The Latin American experience in this area was mentioned frequently as a case in point.
The sixth paper, entitled “The Role of International Reserves and External Debt in the External Adjustment Process,” was prepared and presented by Professor Sebastian Edwards of the University of California at Los Angeles. He investigated various aspects of the external adjustment process in the developing countries by using theoretical models and a broad, complex system of interrelationships. The analysis, based on a sample of 19 countries, led the author to state that, during the period 1975–80, these countries used reserves and indebtedness as substitutes in the adjustment process, an aspect frequently ignored in economic literature on policies for overcoming external disequilibria. Again on the basis of an empirical analysis, the author concluded that the international community considered reserve and debt levels to be basic strategic variables in evaluating the level of risk faced by each country.
In his study, Edwards integrated a dynamic analysis of demand on reserves with that of conditions of equilibrium in the monetary sector of the economy. His conclusion, based on a study of an historical period, was that the reserve level was a function of the effort to eliminate discrepancies between desired and actual reserves and also of excess supply of money. According to this author, this made it necessary for economic authorities to give particular consideration to monetary aspects when managing international reserves.
With regard to recent external debt problems especially in the Southern Cone countries, this paper raised various topics of interest. Concerning the cases of excessive external borrowing, especially in those countries where there was a parallel process of financial liberalization, he suggested the need to improve the domestic system of banking supervision and to determine an optimum level of external indebtedness for the private sector based on the creation of a tax on foreign lending operations. The paper also alluded to the significance of recent Latin American experience with the failure of savings to respond favorably to the increasing level of external debt, which would indicate that it has to a great extent been directed toward the financing of consumption.
Finally, with regard to Latin America, Edwards concluded that future difficulties in increasing the debt would inevitably make it necessary to have a greater volume of international reserves if the confidence of the international community was to be maintained.
It was generally felt that Edwards’s model and conclusions were very interesting. Some criticisms stressed possible deficiencies of the model. In this context, mention was made of the model’s failure to include the demand on reserves by other economic agents or to distinguish among the various types of debt. Reference was also made to the fact that the relationship between the demand on reserves and that on money was not properly described in the model.
Other participants commented that the model was unrealistic in some ways or gave superficial treatment to some element which they considered essential, such as banking supervision. In this respect, several comments were made criticizing the disorderly process of borrowing in Latin America and the inability of the authorities to control it. The participants agreed that, although not designed to answer all these questions, Edwards’s model was interesting and deserving of refinement in several areas, a task on which the author promised to follow through.
The final paper, “The Role of Commercial Banks in the Adjustment Process,” was presented by Mr. Jack D. Guenther, Vice President of Citibank. The author’s first section analyzed the borrowing rate of the developing countries during the 1970s and reached the conclusion that indebtedness grew parallel to the ability to service it. It was the author’s opinion that, since 1980, the indebtedness of the developing countries had come to be of greater concern for three reasons: (1) their exports have stagnated; (2) interest rates have exploded and are very high in historical terms; and (3) the internal policies of the major countries have been inappropriate. The author concluded that these circumstances require that debt rise over the next five years by about three points below the rate of exports, which he estimated at about 10 percent. This led Guenther to propose, as reasonable and desirable, an annual increase over the next five years of 7 percent in net international bank commitments in the developing countries.
The second section discussed the balance of payments in the non-oil developing countries and considered the possibility that the period 1981–83 would produce an adjustment process that would reduce the overall current account balance of payments deficit from $102 billion to $65 billion. The author believed that this effort was possible, comparable with the effort achieved in 1975 and 1977, and compatible with the net increase in credit from the banks to these countries of 7 percent a year, which is proposed for the next five years.
In the final section, Guenther examined accusations that private banking was overexposed in the developing countries and had concentrated its lending on too few countries. The author provided data to refute these views.
All the participants’ comments reflected the great interest with which Guenther’s paper was received and, in general, discussions followed a number of lines of thought. Thus, some emphasized the fact that the study’s predictions could not be realized without a worldwide expansion and a significant reduction in interest rates, aspects which in their opinion were not given sufficient emphasis in the paper. Others felt that the powerlessness of the debtors in the debt renegotiation process was the basic point to be made. For these individuals, the present situation obliged these countries to assume a very heavy burden, which, in their opinion, may have been underestimated by the optimism pervading Guenther’s presentation. With respect to the events which led to the present situation, several participants pointed to the lack of coordination among all the parties involved in financing the developing countries and the insufficiency of the data utilized. In general, the Fund’s work in renegotiating debt and its role as a catalyst for joint efforts were viewed favorably, but some of those who spoke demonstrated their concern over the risks which this relationship implies. Considering the gravity of the situation, some referred to the need to think about developing an emergency solution in case present arrangements failed. Finally, it was considered fundamental that banks not withdraw their confidence from Latin America, and Guenther’s paper was considered to have made a very positive contribution to the reasoned attainment of this objective.
CONCLUSIONS
The conference did not propose to arrive at specific conclusions, but it seemed interesting to me to extract from all the discussions the more important points about which there were no serious differences of opinion and to incorporate them in the final report which 1 delivered as moderator of the sessions. In a sense, these points—of which there are five—can be considered the fundamental nuclei around which the ideas and opinions, developed during the two and one-half days of sessions, took shape.
First, there was a consensus that the economic situation in Latin America is very difficult. Koenig’s paper illustrated perfectly the severity of the situation and described the international context in which this deterioration developed as well as the different specific ways in which this crisis has manifested itself in the context of Latin America.
Second, the adjustment needed in Latin America must seek to achieve simultaneously the recovery of financial solvency and the re-establishment of a balance of payments situation which is consistent with sustainable short-term and long-term debt levels and conducive to lasting growth.
Third, it was considered particularly important that the private international banking system continue to assist in the financial effort necessary to achieve the goals outlined by the adjustment programs. Should this source of financing become unavailable to any significant extent, it would pose a practically insurmountable obstacle.
Fourth, it was generally agreed that the efforts of the Fund in the adjustment process have been fundamental and would continue to be so. The examination of the fiscal and price policies which the Fund incorporates in its programs led to the conclusion that success depended on the consistency of these policies with other necessary supportive economic policy measures.
Fifth, the conference was clearly unanimous in the belief that the ultimate feasibility of the adjustment programs is intimately linked to two elements: an international economic recovery and a decrease in real rates of interest to levels more consistent with historical experience.
The underlying conviction throughout the conference was that just as endogenous and exogenous factors had necessarily combined to create the present state of affairs so too would the present adjustment require a combination of internal efforts and minimally favorable external circumstances.
The most recent IMF projections estimate that the expected overall growth rate for the industrial nations in 1983 will be about 1.5 percent. The average annual rate for 1980–82 was 0.7 percent.
The country classifications used by the IMF and in most of the papers discussed here are as follows: The industrial nations are Australia, Austria. Belgium, Canada. Denmark, Finland, France, Federal Republic of Germany. Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand. Norway. Spain, Sweden. Switzerland, the United Kingdom, and the United States. Oil exporting countries are those which meet the following two criteria (applied to the period 1977–79): petroleum exports (net of imports of crude oil) represent at least two thirds of the country’s total exports and are at least 100 million barrels a year (equal to approximately 1 percent of annual world petroleum exports). The countries classified in this group are Algeria, Indonesia, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. The non-oil developing countries are the remaining developing countries. See World Economic Outlook: A Survey by the Staff of the International Monetary Fund, IMF Occasional Paper No. 9 (Washington, May 1982) pp. 140–41.
The data on this development are contained in the paper by Mr. Jack D. Guenther.
The mechanics of this process in Latin America are reflected in the overall balance of payments for the region as shown by Ms. Linda M. Koenig in her presentation.
Obviously, this does not mean that this amount was renegotiated. Renegotiation normally involves the short-term and part of the medium-term debt.