Abstract

Ivar Rooth

By the Chairman of the Executive Board and Managing Director of the International Monetary Fund1

Ivar Rooth

It is symbolic of the world-wide scope of the activities and the interests of the International Monetary Fund that we meet in this old and famous city which for centuries has been the focus of great movements in world history and is today the center of the business life of a young and energetic republic. I am happy to express our gratitude to the Government of Turkey for their unbounded hospitality.

The Annual Meeting of the Board of Governors is the occasion when our members come from all parts of the world to express their views on the work of the Fund. With the recent adherence of Afghanistan and the Republic of Korea, the Fund’s membership has risen to 58 countries. It is a distinctive feature of our Annual Meetings that they bring together so many Ministers of Finance and Governors of Central Banks to discuss world financial problems. In the friendly atmosphere of the Annual Meeting, such public and private discussions promote international collaboration in the solution of these problems.

The Fund is based on the assumption that the economic objectives of its members are in harmony with each other and that the attainment of these objectives will contribute to their common well-being. No doubt, there are occasions when a country, pursuing a restrictive nationalist policy, may secure some benefit for itself at the expense of other countries. But the greater and wider benefits that come from a prosperous world economy far outweigh any temporary advantage from a restrictive policy. Nevertheless, it was recognized that most countries could not avoid temporary recourse to restrictions and discrimination in trade and payments during the period of postwar transition.

Although they continue under the transitional arrangements, most countries have substantially moderated the use of such measures as their payments position has improved. The annual consultations of the Fund have been helpful in encouraging members to reduce restrictions and discrimination. The reduction of such restraints on international trade and payments is not a favor conferred by one country on another. Rather, it is a logical and necessary step through which a country secures for itself the widest participation in an expanded volume of world trade.

We can confidently look forward to further progress in this direction. The conditions that necessitated the postwar transitional arrangements have been gradually passing away. The reconstruction of wartime damage and the resumption of disrupted trade have been virtually completed in most countries that were hard hit by the war. The adaptation of the economy to postwar conditions is progressing rapidly. A far better recovery has been made this time than after the First World War. We have good reasons to believe that both internal and international economic problems are being dealt with and will continue to be dealt with in a broad and constructive way.

The extent to which the world economy has recovered from the effects of the war is indicated by the postwar growth in production and trade. The countries that were directly affected by war destruction did not generally succeed in attaining their prewar levels of output until after 1947 and, in the case of Germany and Japan, after 1950. In most of Europe outside the Soviet bloc, industrial production is now about 50 per cent above the prewar level; and in some countries, such as Turkey, industrial production has risen even more. In other regions directly affected by the war, the recovery has, unfortunately, been less satisfactory, in some because of the difficulty in establishing peace and order, and in others because of large military expenditures. While progress has been made in expanding production in many underdeveloped countries, the development has not always been as great as was hoped and it has sometimes been accompanied by the distortions of inflation. The balanced development of the economy must be the central objective of economic policy in these countries.

An even greater recovery has taken place in world trade. In 1954, the volume of world trade was about 65 per cent larger than before the war. Most of this increase has taken place since 1948. At the same time, the abnormally large proportion of world exports supplied by the United States and Canada has gradually declined, from 30 per cent of the total in 1948 to 25 per cent of the much larger total in 1954. This shift in the regional pattern of exports has been accompanied by a corresponding shift of imports. The consequence of the expansion in world trade and of the readjustments in the direction of exports and imports has been the emergence of an approximate balance in international payments.

The recovery in world trade is, of course, reflected in an improvement in dollar payments. The great difficulties in meeting dollar payments immediately after the war were temporarily overcome by use of reserves and to a larger extent through generous grants and loans provided by the United States and Canada. The situation has changed markedly in recent years. The rest of the world added about $2.5 billion to gold and dollar reserves in 1953 and about $1.7 billion in 1954; and the replenishment of reserves is continuing in 1955, but on a more limited scale. In a few countries all, and in others part, of the increase in reserves is matched by the aid. Nevertheless, an important reason for the improvement in reserves is the greater strength of the payments position of the rest of the world.

The strength of the postwar recovery in production and trade is shown by the capacity of many countries to resist the adverse effects of the 1953 recession in the United States and Canada. In 1949, a minor recession in the United States had serious repercussions on the payments position of a number of countries. That recession precipitated a payments crisis in many countries. The recession of 1953 in the United States was of nearly the same magnitude as that of 1949. The effect on U.S. imports was also about the same—a decline of just over 6 per cent. The percentage decline in the dollar earnings of non-dollar countries was greater in 1953 than in 1949 because of the decline in Canadian imports. Nevertheless, the world economy did adjust itself successfully to the 1953 recession because the economic position of nearly all countries was far stronger than it had been in 1949.

Increased production outside the United States and Canada, and larger trade with non-dollar countries, made it possible for other countries to meet their needs for home consumption and investment without fear of critical shortages arising from a decline in their dollar imports. Their dollar export earnings were 50 per cent higher in 1953 than in 1948 and, therefore, a modest reduction in their exports to the United States and Canada did not result in serious hardship. The decline of dollar export earnings during the brief recession merely reduced the amounts that other countries added to their gold and dollar reserves.

U.S. aid and military expenditures are still an important element in total dollar receipts. That cannot hide the basic fact that international trade is steadily approaching a much better pattern. Nearly all the great trading countries are able to pay their own way. For practical purposes, the currencies of several of these countries may be regarded as having almost de facto convertibility. This improvement in the world economy shows why it is possible to say that the conditions that necessitated the postwar transitional arrangements are passing away. It should be remembered, nevertheless, that the trade of many countries with the dollar area is still held in check by exchange and import restrictions.

Although the world economy has almost fully recovered from the disruptions of the war, there are still a number of countries with payments difficulties. These difficulties are often the result of inflation arising from excessive public expenditure and private investment. In a few instances, these difficulties may be caused by unusual fluctuations in prices for agricultural products. More recently, the attempt to dispose of agricultural surpluses has increased the uncertainties in world markets. In several countries, wage increases greater than the increase in productivity seem to be weakening their competitive position in world trade.

These payments difficulties are of great importance. They are, however, not transitional problems arising from wartime destruction and postwar distortion in trade and payments. They are the ordinary problems of a dynamic world economy in which national policies are difficult to adapt to the changing circumstances with which they must deal. Countries have, as a rule, not yet learned how to maintain high levels of employment without giving rise to the inflationary dangers of overemployment.

Payments difficulties are no longer world-wide in scope, necessitating severe exchange restrictions and special currency discrimination. In a few countries, an important reason for the continuing discrimination in trade and payments is that the currencies in which they are paid cannot be used for payments to all countries. Some countries with nearly convertible currencies are afraid that, with convertibility of their currencies, their trade will become vulnerable to restrictions and discriminations imposed by others. They are also afraid that their reserves may not be adequate to meet, for example, the immediate impact of convertibility.

Restrictions and discriminations have much less positive value as a trade and payments policy today than immediately after the war. There are few opportunities to exploit positions of bilateral strength in a prosperous world economy in which international trade is large and growing. There is little need for mutual support of weak competitive positions in a world that has rebuilt its capacity to produce and trade. There may still be isolated situations which may seem to justify the temporary use of bilateral agreements. There are other instances in which countries seem to seek discriminatory trade advantages through such agreements. The Fund is aware that most countries, and especially those contemplating convertibility, need assurance that they will not be hampered in competing for world trade by such discrimination directed against them.

As you have seen from the decision of the Executive Board and from my letter to members (reproduced in Appendix I of the Annual Report), the Fund is urging the full collaboration of all countries in reducing and eliminating as rapidly as practicable their reliance on bilateralism. During this coming year, we will discuss with our members their plans and intentions in this respect. As a matter of fact, in our consultations with members, we have since April been undertaking a complete examination of their bilateral arrangements. We are glad that progress in reducing bilateralism has lately been made with countries both in Europe and Latin America.

At last year’s Meeting, as you will recall, there was a discussion of whether the transitional arrangements under Article XIV should be brought to an end. This would mean that thereafter the rules of Article VIII would have to be applied and no member could then, without the approval of the Fund, impose restrictions on payments for current transactions, nor could any discriminatory currency arrangements or multiple currency practices be used by a member unless authorized under the Articles of Agreement or approved by the Fund. As you know, this problem has been discussed actively during the year. So far, no decision has been taken on whether all members should be brought under Article VIII more or less simultaneously or whether the shift to Article VIII should be carried out only by members that had substantially eliminated their restrictions and discriminations. I look forward, therefore, in the coming months to continuing discussions on this topic, which is assuming greater importance as the present progress toward elimination of restrictions and discriminations continues.

In a world economy with expanding production and trade, a country is ready for convertibility when its payments position can be reasonably well balanced under fully competitive conditions. Nevertheless, even some countries with a strong payments position may need additional reserves to meet the initial impact of convertibility and to give confidence that convertibility will be maintained. The Fund is ready to provide additional resources if they are needed to enable such countries to establish or to maintain the convertibility of their currencies.

The Fund has engaged in transactions with its members for more than eight years and its experience has been encouraging. The members of the Fund know that its resources are not long-term capital to be used to raise a country’s imports above the average level of its receipts from current transactions and capital inflow. They have shown that they regard the Fund’s resources as reserves, to be used in periods of stress and to be repaid in periods of ease. Of total Fund transactions of more than $1.2 billion, over $800 million has already been repaid.

The amount of transactions at any given time is not a good test of the importance of the Fund’s resources to the world economy. By their nature, the Fund’s resources, like other reserves, will be needed and used intermittently. So long as world payments are well balanced, countries will have less need to use the Fund’s resources, just as they have less need to use their own reserves. In fact, under such circumstances, countries will repay the Fund, just as they increase their own reserves. When countries do use their own reserves with greater boldness, as they appear more willing to do at present, it is partly because they can have access to the Fund’s resources if the need should arise.

It is the common task of the Fund and its members to explore the manner in which proper use of the Fund’s resources will contribute to greater reliance on sound financial policies. Although the world payments situation is now generally strong, some countries still seem to have persistent payments difficulties. In some instances, these difficulties are the consequence of the country’s own policies. That does not, of course, absolve the Fund from responsibility for trying to help that country to help itself. The Fund is willing to assist such a country in diagnosing its problems and in working out a program to enable it to move from inflation to stability and from disorder to balance in its international payments.

Even countries with sound financial policies may from time to time need the help of the Fund. The value of world trade at present is nearly four times the prewar amount. In this same period, there has been only a modest increase in the gold and dollar reserves of many countries outside the United States. A few countries have reserves which are still below the amounts they had before the war. For these reasons, countries whose trade has increased very considerably may off and on find it necessary to engage in transactions with the Fund.

Some other countries have difficulties in meeting their obligations promptly. The custom of a few countries of allowing obligations on current imports to accumulate unpaid is costly to them and is contrary to the Fund’s objective to eliminate restrictions on payments and transfers for current transactions. The Fund is eager to collaborate with any country in developing a financial program to stabilize its economy and to help it to establish and maintain an exchange system with prompt payment and transfer of current remittances.

The Fund’s resources of gold and currencies are a significant part of the world’s monetary reserves and they have a unique function to perform. The importance of these resources will become not less, but even greater, as world trade expands and the leading currencies become convertible. The Fund is aware of the importance of giving members greater assurance regarding the conditions under which they can count on using the Fund’s resources. Much has been done and more can be done to provide such assurance.

In this year’s Annual Report, you will find on pages 84 to 86 a statement on the use of our resources to which I draw your attention. The Fund is equipped to help members in maintaining or establishing convertibility of their currencies, in meeting temporary balance of payments difficulties, and, together with measures undertaken by themselves, in ensuring exchange stability as well as relaxation and removal of restrictions and discrimination. There is, as you know, practically complete freedom to draw the amount of gold subscribed to the Fund—what we call the gold tranche. Members can also, when needed, draw beyond the gold tranche. The amount will, of course, depend upon the policies that they are following. Our attitude toward drawings in the first credit tranche, i.e., where the Fund’s holdings of a currency would be between 100 and 125 per cent of the quota, is a liberal one. In several recent cases, the Fund has, under a waiver, permitted members to draw beyond the annual limit of 25 per cent of the quota. Members need not doubt that such drawings will be permitted if the justification for a drawing is substantial.

There are, undoubtedly, numerous instances in which the quotas of members appear to be inadequate in relation to their present trade and payments. You know that at intervals of five years we have to review the quotas of our members. We have been studying the matter during the past months, but the review has not yet been completed.

The world has made great economic progress in the ten years since the end of the war. This progress reflects the hard work and the great sacrifices of the people in all regions of the world. It also reflects the generosity of the United States and other countries that have helped to meet the extraordinary needs for consumption and investment, not only in the immediate postwar period but also at present. And yet, neither their own sacrifices nor the help of their friends could have brought these countries from the edge of economic distress to their present increased stability without the benefit of sound financial policy. The indispensable element in a strong balance of payments is a fiscal and monetary policy designed to avoid inflation.

We are glad that during the last few years a flexible monetary policy has been adopted in many countries. A change in monetary policy, however, is sometimes not enough to deal with acute economic problems. Monetary measures must then be accompanied by stronger fiscal measures—cutting down central and local government expenditures and increasing revenues. To avoid inflation, restraint on public expenditure must be exercised not only in investment, but even in the ordinary functions of government and in the provision of social services. Monetary and fiscal policy cannot be regarded as effective unless it succeeds in maintaining a proper balance between increases in wages and increases in productivity. Otherwise, the economy will be undermined by a steady cost inflation.

Despite trouble spots here and there, we have every reason for expecting a continuation of the progress in world payments. The volume of world trade is greater than at any time in the postwar period. With imports in the United States and Canada rising again, with wider use of fiscal and credit policies to protect their payments position, the environment for convertibility is becoming more favorable in many countries. Throughout the world, governments have come to recognize that stability of the internal economy is essential not only for maintaining a strong international payments position but also for encouraging economic development and greater productivity. The resurgence of financial policy as the primary instrument for guiding the economy is itself an indication of how far ahead the world has moved from the direct controls of the war and early postwar years.

Economic conditions, financial policy, and international cooperation are moving the world steadily forward to a multilateral system of payments based on the convertibility of currencies. While some governments are preparing to make their currencies convertible, international markets are already giving practical recognition to their de facto convertibility. Little by little, governments are narrowing the real differences between currencies already convertible and currencies still to be made convertible. The Fund welcomes every such move. The Fund is prepared to help countries to take such new steps toward realizing the common objectives of all the members of the Fund.

1

Session No. 2, September 13, 1955.