First of all, on behalf of the Australian Government, I warmly welcome the new members—the Solomon Islands, Suriname, and Maldives. Our congratulations go to Mr. de Larosière on his appointment as Managing Director of the Fund.
Statement by the Governor of the Fund and the Bank for Australia—Eric L. Robinson
First of all, on behalf of the Australian Government, I warmly welcome the new members—the Solomon Islands, Suriname, and Maldives. Our congratulations go to Mr. de Larosière on his appointment as Managing Director of the Fund.
Our meetings are considering a wide range of issues, but the general world economic situation is the central factor underlying all issues. It would be easy to be despondent about the situation. Economic growth in major countries over the past year has been moderate rather than rapid. Unemployment and inflation have remained too high. Protectionist trends are a worry. The external positions of a number of countries are still of some concern. The tendency still exists for short-term solutions without regard to longer-term implications. Some improvement is nonetheless emerging. We should not be deceived into thinking that some progress is no progress at all.
The Australian Government has always believed that correction of imbalances within and between economies would take time. Results have been achieved, yet there is a considerable way to go. The need for firmness in adhering to anti-inflationary policies is crucial. Of course, it should not be overlooked that economic growth in many countries is continuing at a rate not so far below the 1960 and early 1970 averages. Unfortunately, this growth has not been accompanied by a reduction in unemployment. This is a problem for us all. The Australian Government believes that a reduction in inflation is a precondition to a sustainable reduction in unemployment. Real wages must be brought into better balance with productivity. Private enterprise must be encouraged. This inevitably means for many of us that government expenditures have to be reined in. The extravagances of the past cannot be allowed to continue. Policies designed to raise private investment must be pursued.
This is a world gathering and success can only come from mutual understanding and cooperation. If we can reduce inflation and overcome the associated distortions, the foundations for stronger growth will be laid, and when this occurs a more balanced international monetary situation and an easing of protectionism can be expected.
Policy settings will, of course, have to take account of the differing circumstances of individual countries. However, internal decisions, if pursued in a spirit of cooperation, should not be to the detriment of other countries. In many ways, Australia shares certain characteristics with both industrial countries and developing countries. Perhaps we are an interesting case to study.
Our efforts to overcome the severe economic problems of recent years have been based on the fundamental belief that the control and reduction of inflation provide a foundation for better times. We do not pretend that this approach provides an easy answer. There is no easy answer. We are convinced, however, that we are restoring the preconditions needed for sustained economic growth. Australia’s policies embrace firm control and reduction in the rate of growth of government expenditure, restricting the growth of the money supply, being responsible in the wages area, external policy which is consistent with the thrust of domestic policy, and, above all, not sacrificing economic temperance for short-term political advantage.
These policies have reduced inflation from an annual rate in excess of 13 per cent to about 7 per cent. This is below the present average for OECD countries. An even stronger position will be achieved by the middle of 1979. This progress against inflation has led to a start in the reduction of interest rates and a clear revival in business investment spending. We are seeing also an improved rate of private capital flows to us. Further progress is needed on the wages front to correct the imbalance in the labor market, but we are moving in the right direction.
I turn now to specific Fund and Bank matters. The past year has seen some notable advances in the Fund. Yesterday we reached an important consensus on quotas and the allocation of SDRs and changes in the characteristics and uses of SDRs. The proposed general increase of 50 per cent in Fund quotas, encompassing a limited number of quota readjustments, should enable the Fund to continue to play a strong role in financing and correcting external imbalances. We attach importance to the fact that the proposed SDR allocation will go hand in hand with improvements in the character of the SDR. In particular, the agreement on a higher SDR interest rate is an essential step in improving the attractiveness of the SDR relative to other international reserve assets. Nevertheless, areas of concern to Fund members still remain. Adjustment is still lagging and we are still suffering from imbalances in external positions and instability in exchange markets. . . .
Aid continues to be vital, particularly for the poorer countries. Australia’s official development assistance will increase by close to 9 per cent in 1978/79, despite the stringent restraints imposed on our total budget outlays. Furthermore, the kind of aid is probably as important as its volume. The Australian Government is acutely conscious of the need for quality in its development assistance. Our aid allocation is given as grants and some 80 per cent of it is untied. Recently we have made further innovations with respect to meeting local costs and in untying.
The Development Committee has just completed a useful discussion on the World Development Report, 1978. The report makes an important contribution by identifying the major issues that will bear heavily on the development prospects in the future. We welcome the report’s recognition of the crucial role of domestic policies in developing countries. About 80 per cent of resources devoted to development within developing countries is generated by them.
Sound domestic policies also maximize benefits from improvement in international trade. Australia knows well the frustrations of exporters where there are unreasonable restrictions on trade, and consistently subscribes to the need for restrictions on all trade to be reduced. This would benefit both developing and developed countries.
It is natural and proper that we devote a good deal of attention to institutional issues in our search for improvements in welfare of our member countries. Both developed and developing countries stand to benefit greatly if we combine our own national efforts with continuing cooperation in institutions such as the Fund and the World Bank Group. Meetings such as this provide an excellent opportunity for us to have frank discussions and hopefully find the right solutions. This year we have certainly made real progress. Australia will continue to cooperate actively in an enthusiastic and energetic way.
Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System, Denis W. Healey
Since the last Annual Meeting of our two Boards, the Interim Committee has met twice, once in Mexico City on April 29–30, and again yesterday. These were the tenth and eleventh meetings of the Committee since it was set up four years ago.
The meeting in Mexico City was held at a time when the pace of recovery was disappointingly slow and uneven. The world economy was suffering from widespread unemployment and inflation, large imbalances on current account, exchange rate instability, and slow growth in world trade. The Committee noted with concern that these circumstances risked increasing resort to protectionist action of all kinds. It agreed that national and international efforts were urgently needed to stop the drift toward protectionism and to reduce trade barriers and that these efforts must include measures to remove the underlying causes of protectionism. The Committee gave considerable attention to the special problems of the developing countries, including their need for faster domestic growth, for faster growth of their markets in the industrial world, and for freer access to those markets. It stressed the desirability of measures by the developed countries to assure an increasing flow of real resources to developing countries.
It was in Mexico City that the Committee first agreed on the general outlines of a coordinated strategy to promote noninflationary growth of the world economy. It urged that the implementation of this strategy over the period through 1980 should take account of the wide differences in the domestic and external situations of industrial countries. It argued that the resulting improvement in the underlying economic conditions would contribute to greater stability of exchange markets which, in turn, would help to encourage the higher growth rates desired and to improve the prospects of the developing countries.
At its meeting yesterday, the Committee returned to its discussion of the world economic outlook and the working of the international adjustment process. It recognized that progress had been made on various fronts in recovering from the world recession of 1973–75, but noted that the situation was still unsatisfactory in several important respects. In most member countries prices were still increasing much too fast and economies were still operating well below capacity. Wide differences in rates of inflation and the growth of domestic demand had contributed to the continuation of large deficits and surpluses on current account among the industrial countries. These imbalances had produced instability in foreign exchange markets and this, in turn, had made it more difficult to formulate and implement the necessary policies. The Committee emphasized that the exchange markets would not return to stability unless governments adopted policies to reduce inflation and to achieve more convergent rates of growth in domestic demand.
The Committee repeated its concern about the risk of increasing resort to protectionism and stressed the importance of an early and successful completion of the Multilateral Trade Negotiations.
The Committee noted that a welcome change in international trade flows was emerging, which reflected the effects of exchange rate changes that had already taken place. These shifts in trade flows were likely to increase and, over time, could lead to a substantial improvement in the current account balances of industrial countries, provided that the pattern of price increases and growth rates in domestic demand among countries was appropriate.
The Committee reaffirmed its conviction that present circumstances required a coordinated strategy for policy, including measures with respect to energy. It emphasized that implementing such a strategy for the medium term would require each country to contribute to growth of the world economy in relation to the strength of its external position and the success of its anti-inflation policy.
Successful pursuit of a medium-term strategy in the industrial countries would lead to marked improvement in the global environment for trade and development, with substantial benefits for the developing countries and other primary producing countries. Such an improvement would help to arrest the recent ominous tendency toward use of protectionist trade measures. At the same time, the Committee emphasized the desirability of measures on the part of the developed countries to open their markets more widely to products of the developing countries, to give those countries more generous access to their capital markets, and to assure the developing countries an adequate inflow of real resources, including a higher level of official development assistance.
Both in Mexico City and here yesterday the Committee considered a number of questions relating to special drawing rights, including an allocation of SDRs, improvements in the characteristics of the SDR, and the broadening of its uses under the provisions of the amended Articles. The Committee reached conclusions on them yesterday on the understanding that they were interrelated and must be adopted in their entirety, together with conclusions reached on the Seventh General Review of Quotas. In the view of the Committee, therefore, decisions on all these issues relating to SDRs and on the Seventh General Review should be taken at the same time. It was agreed that action on an SDR allocation and quotas should be taken by the Executive Board by November 1, 1978 and by the Board of Governors by the end of the year.
The Committee’s recommendations on these issues were as follows:
(1) The Fund should make an allocation of 4 billion SDRs in each of the next three years 1979 to 1981.
(2) In connection with other aspects of SDRs—
(a) The interest rate on the SDR should be increased from 60 per cent of the weighted average of short-term interest rates in five member countries with the largest quotas to 80 per cent of that average, and the rate of remuneration should be set at 90 per cent of the interest rate on the SDR. Further considerations relating to the rate of remuneration and the level of charges on the Fund’s currency holdings were spelled out in the Committee’s communiqué.
(b) The Executive Board should complete its work with regard to additional types of uses of SDRs (namely, for loans, collateral security, and the direct settlement of obligations), take the necessary decisions in the near future, and report on them to the Committee at its next meeting.
(c) The requirement of reconstitution of SDRs (i.e., the obligation to maintain a minimum average balance of SDRs over specified periods) should be reduced from 30 per cent to 15 per cent of net cumulative allocations and this requirement be considered further in the light of experience.
(3) As regards the Seventh General Review of Quotas, the overall size of quotas should be increased by 50 per cent and there should be selective quota increases for 11 member countries. Participants in the Special Drawing Rights Department should pay 25 per cent of the quota increase in SDRs and nonparticipants should pay the equivalent of 25 per cent of the increase in foreign exchange.
At its meeting yesterday, the Committee again stressed the importance it attached to the entry into operation of the supplementary financing facility at the earliest possible date, and urged all members who are expected to contribute to the financing of the facility to take the action necessary to bring it into operation. Earlier in the year, at its meeting in Mexico City, the Committee had welcomed additional contributions to the facility, bringing the total number of lenders to 15 and the total of financing to be supplied to approximately SDR 8.75 billion.
At the meeting of the Committee in Mexico City members from developing countries asked that the Executive Board review the conditionality attaching to the facility and also to drawings under regular credit tranches. The Committee noted at yesterday’s meeting that the Executive Board had begun a review of the conditionality attaching to the use of the Fund’s resources and that it intended to resume its consideration of the subject as soon as possible after this Annual Meeting of the Board of Governors.
This has been a fruitful year for the Interim Committee. We have tackled difficult problems on which sincere differences of judgment and interest are bound to arise and have reached conclusions on them in the conviction that the world is interdependent and that only concerted action by all countries can achieve lasting benefits for any. I believe the readiness to meet one another halfway, which we demonstrated at our meeting yesterday, reinforces the role of the Fund at the center of the international monetary system and augurs well for our success in a coordinated strategy for overcoming the formidable problems of the world economy which still remain.
Statement by the Governor of the Bank for the Federal Republic of Germany—Hans Matthoefer
I have the honor to take the floor on behalf of the European Community—since my country currently holds the presidency of the Council of Ministers—and as Governor for the Federal Republic of Germany as well.
Before turning directly to matters of our annual discussion I would like to make one short remark concerning the basic condition for any solution of the economic problems we face: the preservation of peace and the diminishment of the risks of war in all parts of the world. I would like to thank President Carter for his efforts in this field and particularly for helping Egypt and Israel toward a peaceful solution of the problems in the Middle East.
On behalf of the European Community I would like to inform you of our common view of the present economic situation, our efforts to cope with them, and to add some words regarding the concrete problems we are dealing with during this conference. Assessing the present state of the world economy and its prospects is not easy.
Despite some signs of revival, growth has remained unsatisfactory. We are worried about persisting unemployment. It hits hardest at the disadvantaged segments of society. Its costs in economic and human terms are too high. Unless growth picks up, major inroads on unemployment will hardly be achieved.
As for prices, there are some encouraging signs. In the Community inflation lessened particularly in those countries where previously it was highest. On the whole, however, worldwide inflation rates and inflation differentials remain unacceptably high. For too many countries price stability is still an elusive goal, with inflation showing a rising trend in some cases.
As regards the adjustment of payment imbalances, a number of countries succeeded remarkably well. Last year the deficit countries within the Community recorded a favorable shift in their current accounts of about $11 billion. This is not just a reflection of still unsatisfactory economic activity. It is the result of deliberate stabilization efforts. This success contrasts, however, with a disturbing increase in the external imbalances of other major economies of the world.
Further progress in the adjustment process will crucially depend on developments in the energy field. The Community will continue to contribute its share to a stable energy situation. We are committed to reduce our dependence on imported oil, to save energy, and to develop new sources of energy. We need, however, the cooperation of the other major energy importing and energy producing countries. Unless there is adequate assurance about future energy supply and prices it will be difficult to sustain a favorable investment climate. We also hope that, here in our host country, effective energy measures will soon be adopted. We welcome the initiatives taken by President Carter in this field. An improvement in the U.S. balance of payments would strengthen the external value of the dollar; it would enhance confidence in the exchange markets, which is a prerequisite for investment and growth.
The monetary and economic problems which have been discussed at last year’s Annual Meetings have changed little. The basic issues are as pressing as before. In one respect, however, progress has been made: the consensus on our common strategy for more growth and more employment has been filled with a good deal of substance. On various occasions we have witnessed the determination of governments to solve our problems in a spirit of cooperation rather than in isolation. For the Community the Bremen Summit has given an impetus that will shape the Community’s policy for some time to come. There is now a large measure of agreement about the sharing of responsibilities in our common efforts. The agreement has been followed by policy action in a good number of cases. This provides a sound basis to support reasonable confidence for the time ahead.
With integration between the countries of the European Community becoming closer, the interrelationship between internal stability and the situation in exchange markets is increasingly felt. In July the Community therefore discussed a scheme for tightening monetary cooperation. This scheme—the European monetary system—is to provide for a zone of greater stability in Europe, contributing to greater stability worldwide.
The technical details of the system are under examination. The European Council will consider the system at the beginning of December. We are well aware of the implications of such a system for international monetary relations. We are keeping in mind the interests of our partners in setting up the system and we will continue doing so in operating it. It is obvious that a smooth functioning of the system will require an even closer coordination of economic policies between the participating countries.
The problems we face do not lend themselves to quick solutions. We must approach them in a long-term perspective. We need patience and stamina. We still bear the legacy of inflationary strains. More than in previous business cycles economic recovery has to contend with problems of structural change. We must allow our economies to adjust themselves to these changing conditions. Speed and means of this adjustment must, however, not jeopardize our social achievements and aspirations, which we can be proud of and should not abandon in times of economic difficulties.
The Second Amendment of the Articles of Agreement requires the Fund to exercise firm surveillance upon the exchange rate policies of members. We welcome this enhanced role for the Fund and are confident that it will help in improving underlying conditions for orderly and stable exchange markets.
The Managing Director of the International Monetary Fund has made valuable proposals on quotas, on SDR allocation, and on SDR terms which we have examined carefully. In the light of the discussions in the Interim Committee we consider that these proposals point in the right direction and we are very ready to draw positive conclusions from them.
Let me now turn to my own country, speaking as Governor for the Federal Republic of Germany. We have repeatedly—and again in recent months—adapted our economic and financial policies to the needs resulting from the world economic situation. Following the strategy adopted at the Bonn Summit meeting in July, we have prepared measures to accelerate demand and to promote growth in our country. In effect, last week I presented the 1979 budget to the German Parliament and I trust it will be supported and speedily passed. We expect the new fiscal program to give our economy an additional boost of over $6 billion. Tax reliefs and additional fiscal expenditures amounting to 1 per cent of our GNP will give sustained encouragement to industrial investment and stimulate consumption by private households.
This new program has been preceded by a series of public investment programs, tax reliefs, and other stimulatory action since 1974/75. The impetus given to the economy can easily be read from the deficits of the public sector (including regional and local authorities) which went up from 2.7 per cent of GNP in 1977 to 3.9 per cent in 1978 and will rise to 4½ per cent of GNP in 1979. The size of our deficit has already given rise to serious concern in all political quarters back home. The limit has clearly been reached.
But fighting unemployment, especially unemployment among young people, is our primary concern. We are also aware of the importance of price stability, knowing that inflation would not help to reduce unemployment.
In order to achieve more growth the Federal Republic of Germany most urgently needs a higher rate of investment. This presupposes confidence, cost stability, and also budgetary incentives for those of our industries which have difficulties to cope with structural problems and to stand the risks of adjusting themselves to future conditions.
In addition to internal stability we need stable external conditions. The adjustment process has been under way for many years now. The appreciation of the deutsche mark as a trade-weighted average came up to almost 60 per cent compared with early 1970 and has exceeded the inflation differential. The improvement of our partners’ competitive position has considerably affected our trade flows in real terms. From 1974 to the first half of 1978, real imports rose by some 34 per cent, while exports increased only by some 10 per cent, and real GNP by 8.8 per cent over the same period. Imports of manufactured goods, which grew by about 43 per cent from 1974 to the first half of 1978, now account for over half of our total imports. The demand effects arising from this import performance must undoubtedly have contributed to sustain employment and growth in other countries.
On the other hand, this remarkable import penetration—and quite a number of other factors—has subjected the German economy to structural change. An economy which for more than two decades became accustomed to produce external surpluses cannot easily adjust to current account equilibrium. As everywhere, structural changes take time and organizational imagination. Excessive and rapid exchange rate changes would undermine confidence, which still is the main basis for investment and growth. More external stability would greatly support our chances of achieving a better rate of economic growth while accepting and even fostering structural change.
For the time being, our current account surplus still persists but has been more than offset by long-term capital exports in 1977. During the first seven months of 1978 we have continued to export long-term capital on balance. The low level of interest rates in the Federal Republic of Germany led to extraordinary differentials to major foreign financial markets and, thus, has considerably improved the conditions for international payments equilibrium.
I wish and hope that our major partner countries will strive to take advantage of their improved competitive position. Without effective action on their side, all our efforts will be of no avail. No country, big or small, can be exempt from the unwritten code of behavior for international adjustment. We greatly welcome the recent measures of the United States to dampen inflationary pressure. Action on fundamentals is of utmost importance for the dollar as the major trading currency.
A prudent but clearly positive attitude toward the process of restructuring economies is crucial if we want to prevent the emergence of a new wave of protectionist measures. Former periods have seen protectionism because of balance of payments difficulties. Today we have learned how to finance somewhat better our balance of payments needs. In these days, the roots of protectionism can be found rather in widespread concern about production and employment. Certain sectors are particularly affected. My Government continues to believe in free trade. To sever the ties of world trade would benefit neither strong nor weak economies. The countries represented in this room would unavoidably drift apart. The joint declaration against protectionism by the countries taking part in the Bonn Summit and their commitment to bring the Multilateral Trade Negotiations to a successful close are of major significance for world economic recovery.
I am glad to see that a good number of developing countries have achieved a promising improvement in their trading position and a higher degree of wealth. Industrialization in the Third World is to be welcomed, even if this adds to structural problems in highly industrialized countries. Again, protectionism cannot be of any help. On the contrary, industrial countries should support efforts made by developing countries to increase their exports; this would increase their purchasing power, which in turn would be beneficial to the world economy.
Turning to Fund policies, I think that drawings by member countries should be a means of helping borrowers to solve their own problems. A drawing on the Fund is often a decisive first step toward economic and monetary stability. Early recourse to the Fund could serve the cause of borrowing countries better than incurring excessive debts in money and capital markets. The Fund should not be considered as a fire brigade when the house is ablaze; it should rather protect it from catching fire.
Its credit mechanism should serve to strengthen confidence in the borrowing country’s capacity to keep its house in order. My country has never hesitated to support sound lending operations of the Fund, and this will be our attitude in future as well. We insist on the element of reasonable conditionality as applied by the Fund. Any weakening of conditionality would harm both the Fund and borrowing countries by discouraging private and official lenders.
It is needless to repeat that we fully support the supplementary financing facility of the Fund. We have made a very substantial commitment to it. The Fund will greatly benefit since this facility, as we hope, will be put into effect soon.
The ability of the Fund to help to finance payments disequilibria has been further enlarged by the quota increases under the Sixth Quota Review. In considering a further review, I am not so sure whether the global liquidity situation would necessitate another large quota increase and a further SDR allocation. We realize, of course, that other members of the Fund hold different views. After having considered all the arguments presented, we are willing to contribute to an agreement at this meeting on an increase of Fund quotas by 50 per cent and a moderate allocation of SDRs. The efficiency of the Fund in carrying out its functions of promoting adjustment, of giving financial support to countries in their adjustment efforts, and in exercising surveillance over the economic, financial, and exchange rate policies of its members has been strengthened by the entering into force of the new Articles of Agreement during the past year. The new provisions take into account the profound changes that have occurred in international monetary relations in the last decade. In future, the Fund will be better equipped to promote international cooperation in the field of internal and external economic relations and to monitor the symmetrical adjustment mechanism. My country is prepared to cooperate fully, as we have done in the past.
As to the increased capital transfer through multilateral development institutions, we have repeatedly stated, as we did again recently at the Bonn Summit meeting, our willingness to contribute to a replenishment of funds. . . .
I wish to thank President McNamara, Managing Director de Larosière, and their staffs very much indeed for the excellent work and for their dedication.
I may refer also to the World Development Report. This study is of great advantage to all of us. The next report will appear at a time when preparations for a new international development strategy of the UN will be in its decisive phase. We hope that the report can make a substantial contribution toward the discussions on the UN strategy.
Statement by the Governor of the Fund for Italy—Filippo Maria Pandolfi
I wish to begin by joining previous speakers in expressing our sincere thanks to the Government of the United States for its hospitality and courtesies and to the management and staff of the Fund and the Bank for the efficient organization of our Thirty-Third Annual Meetings. I would also like to welcome Maldives, the Solomon Islands, and Suriname, which have recently joined our institutions, and to express to Mr. de Larosière our best wishes of success in his important and difficult task. I am grateful both to him and to President McNamara for their opening addresses, which contain a clear and stimulating appraisal of the world economic situation and provide valuable suggestions for our discussions.
Economic Outlook in Industrial Countries
The pace of economic recovery in the industrial countries since the recession of 1975 has been on the whole insufficient to restore the basis for full-employment growth and our economic systems still experience unacceptably high levels of unemployment and idle capacity. The resurgence of inflationary pressures in the United States and in other countries is particularly worrying. Some of the major deficit countries have succeeded in restoring equilibrium in their balances of payments, but with foreign demand growing at a slow rate, this has been achieved mostly by a severe containment of domestic output and of imports. The OPEC surplus has been falling, and is now smaller than the surpluses of a few industrial countries. Under these circumstances, instability has prevailed in exchange markets.
The unsatisfactory evolution of the world economy is why the major industrial countries came together at the Bonn Summit and agreed upon the main features of a concerted strategy designed to achieve, through the adoption of mutually reinforcing policies, a substantial improvement in the entire range of issues affecting the working of the world economy. Since then, some of the measures envisaged to implement the strategy have been introduced. Nevertheless, the latest available forecasts seem to suggest that the stimulus imparted by countries with favorable balance of payments position will be limited.
Thus, in a climate of inflationary expectations, I see the risk that instead of a coordinated effort to sustain the growth of our economies there will be widespread recourse to policies of domestic demand containment. I believe that if we limited ourselves to such an approach, we would only worsen our problems, since at present inflation derives mostly from cost pressures, and therefore specific measures designed to curb such pressures are likely to be more effective than aggregate demand policies. To be credible and to elicit the necessary consensus among the social partners, policies of containment of the growth of prices and incomes should be coupled with measures to bring about a strong revival of investment activity, which is essential to absorb structural unemployment. Since private investment is likely to continue to be sluggish, it would be appropriate for governments to take the lead in promoting investment, particularly in industrial sectors where restructuring is needed to meet shifts in demand patterns, in the energy field, and in the area of environmental protection.
I believe that the approach I have suggested is entirely consistent with the spirit of the Bonn Summit declaration. In fact, the goals of the concerted strategy include the establishment of a new climate in the international economic scene: a climate of predictability in policymaking, of determination in the pursuit of higher growth rates, and of greater consideration for the medium-term implications of the structural imbalances that have emerged over the last few years. The temptation to revise the objectives of the strategy whenever the behavior of economic aggregates differs from the forecast pattern looms large these days as we have unfortunately become increasingly afraid of losing control over the evolution of our economic systems. But the temptation should be strongly resisted, as it would sow uncertainty and mistrust among investors, trade unions, and consumers regarding the ability of our countries to lift themselves from the doldrums of stagnation, unemployment, and inflation.
Exchange Rate Management and International Liquidity
Over the last 12 months exchange rates have been characterized by widespread instability. The conduct in major countries of economic policies that fall short of the requirements of the adjustment process, unclear signals given by policymakers to the markets, and largely uncoordinated foreign exchange interventions have probably added to short-run exchange rate variability. The risk of such a state of affairs is a negative influence on trade and investment flows and on inflation.
There is widespread agreement that exchange rate management cannot replace corrective action on “fundamentals.” I share this view and believe that the concerted strategy aims at doing precisely that, inasmuch as it makes the achievement of a better structure of international payments dependent upon the pursuit of mutually reinforcing and coordinated policies by industrial countries.
Today, such a concerted strategy will have to compensate for the expected lowering of the growth rate in the United States. Short of this we fear that large current account surpluses in industrial countries will continue. Even if such surpluses were to be accompanied by long-term capital outflows to industrial and less developed nations, exchange rates would continue to play an excessive role in the adjustment process, with all the difficulties that are associated with it for all countries.
These problems are not new. Today, however, there is an institutional framework within which it should be possible to pursue a coordinated management of exchange rates. The new powers of surveillance given to the Fund by the amended Articles provide the opportunity for member countries to check the viability of their exchange rate policies in a broader context, where due attention is paid to the objective of “continuing development of the orderly underlying conditions that are necessary for financial and economic stability.”
The Fund’s experience with surveillance has been too short for a comprehensive assessment of its effectiveness to be made. However, we wish to stress the need to avoid relying too heavily on a case-by-case approach so as not to focus more on the exchange rate policies of individual countries than on the effects these policies have on the international adjustment process. It is unlikely that such an approach would lead to a compatible structure of exchange rate relationships. The agreement on a comprehensive strategy of economic policies by major countries is therefore all the more necessary, as it would provide the Fund with the objective parameters against which to assess the appropriateness of exchange rate management with respect to the aims of the international adjustment process.
When assessing the viability of any agreed set of exchange rates, account should be taken of the relationship between exchange rate management and international liquidity creation. We are all aware of the fact that in the last few years the supply of liquidity has continued to originate from uncontrolled sources, such as the intermediation of the international banking system and, more recently, the payments deficit of the major reserve center. One can hope that recent changes in the value of the dollar and the expected shift in the cyclical position of the United States will contribute to contain the excess supply of dollars, and we are most encouraged by the assurances we have now received from the highest U.S. authorities regarding policies to reduce U.S. dependence on imported energy and to control inflation.
The amended Articles of Agreement have given the Fund new powers of surveillance over the evolution of international reserves, but it must be recognized that for the effective use of those powers far-reaching changes should be introduced in the mechanisms that determine at present the creation, composition, and distribution of liquidity. This is perhaps too ambitious an objective for the immediate future, but we should not lose sight of it when considering liquidity problems, nor take actions that would make it more difficult to achieve this goal. I believe, therefore, that an increase in the volume of Fund-controlled liquidity is needed and for this reason I have supported the proposals of the Managing Director to increase Fund quotas by 50 per cent and to strengthen the role of the SDR by resuming adequately large allocations and improving its attractiveness as a reserve asset. I welcome the agreement reached on these proposals by the Interim Committee, as they represent a significant step toward a more effective adjustment process and a better functioning international monetary system. . . .
The Situation of the Italian Economy
Before turning to the problems and prospects of the Italian economy, I wish to dwell briefly on the resolve of the EEC countries to create a zone of greater monetary stability, which might lead eventually to monetary union. The Minister of Finance of the Federal Republic of Germany has already spoken on this subject in his capacity as Chairman of the EEC Council, but I think it is not inappropriate for me to outline the Italian position on this matter.
Italy, as a member of the European Community, has pledged its support and is actively participating in the preparatory work. Its contributions to the definition of the scheme are guided by the awareness that greater European monetary stability and cohesion can, and should, be achieved in a way that helps to strengthen the international monetary system as a whole. With this end in view, Italy believes that regional arrangements should not, in their basic philosophy, conflict with, or neglect, worldwide arrangements which EEC countries themselves have, of course, a part in defining and managing. Concurrence in the basic philosophy should be reflected in the technical features of the European monetary system. If I may illustrate, it would seem to me that interventions in third currencies should not be barred, especially when intervening in EEC currencies would risk creating problems within the EEC itself. To be efficient and realistic the approach should not overlook the fact that the dollar is the currency most used in international transactions and will in all probability supply the link to unite regional monetary areas.
Concerning economic conditions in Italy, I should like to begin by recalling the results achieved through the stabilization measures introduced by the Government since the autumn of 1976. The current account balance of payments has recorded a remarkable turnaround from a deficit of $2.9 billion in 1976 to a surplus of $2.3 billion in 1977 and prospects for 1978 point to a surplus of around $5 billion. Official reserve holdings have risen to a more satisfactory level and foreign indebtedness has considerably declined. In other areas, however, the results have been less satisfactory as the effects of those measures are wearing off. The rate of inflation, after the marked drop from 22 per cent in early 1977 to 13 per cent in recent months, does not show a clear tendency toward further rapid declines, and unit labor costs are still rising at a faster pace than in other industrial countries.
These results have been achieved at a price. Manufacturing production continued to fall until the fourth quarter of 1977 and has only risen slightly since then; unemployment, the socially most important problem, shows no signs of decreasing; and the prospects of attaining better regional equilibrium seem still remote.
If we do not change the stance of our present policies, the rate of unemployment would remain at the present level, which is the highest for the past 15 years; inflation would continue at a rate of between 12 and 14 per cent. Owing to the trends in raw materials prices and the changes in the exchange rates of major currencies, 1978 seems to be a year in which the competitiveness of our products has not been fully eroded. But similar developments are not likely in the future. For, should prices and costs continue to rise faster in Italy than abroad, it would be difficult to avoid in the future a negative impact on the exchange rate and the balance of payments. Thus, instead of the hope of stable growth, these prospects carry with them the threat of a new upsurge of inflation.
A radical change is therefore necessary to correct slowly but steadily the structural conditions of the economy. To achieve this goal, the Government has proposed a strategy for the three-year period 1979–81. The program is designed to achieve a GDP growth rate sufficient to permit an increase of employed workers of between 500,000 and 600,000 during the three-year period, preponderantly in the south of the country, together with a gradual reabsorption of the balance of payments surplus on current account and a steady fall in the inflation rate, which in the course of 1979 would already be measured by a one-digit figure.
To this end, we plan first of all to reduce both the current deficit and the total financing requirement of the enlarged public sector in relation to gross domestic product. At the same time, we intend to bring about an increase in public investment as a ratio of GDP, so that on balance the expansionary effect of public finances will not be weakened. Indeed, for 1979 we envisage a reduction of Lit 6,100 billion in the borrowing requirement of the enlarged public sector despite an increase in cash expenditure on public investment of Lit 2,250 billion. The total financing requirement as a proportion of GDP would thus fall from a tendential 18.2 per cent to 15.7 per cent in 1979. Second, the program calls for a labor policy during the three-year period that would not allow real increases in wages. Third, we plan to bring about greater mobility and flexibility in the employment of the labor force.
The proposals made for 1979, which will be incorporated in the Budget and the Finance Law to be submitted to Parliament by the end of September, are the start of a longer-term action. Whether the results of the program will turn out to be better or worse than expected will depend to a large extent on the strength and determination with which the Government and the whole country abide by the strict requirements of the strategy and endeavor to improve the performance of our economic system.
The success of our program, however, depends also on a positive evolution of the international economic environment. In this forum, many have advocated faster growth of world demand in a context of relative price stability as the necessary precondition for the expansion of sustained flows of trade and investment and the elimination of the painful waste of human and capital resources. It only remains for me to add my voice to theirs and to suggest that the time has come for us, through our deliberations, to maintain our undertaking and ratify the desire for action and change which has grown up during the recent years of stagnation and instability.
Statement by the Governor of the Fund for France—René Monory
For the international monetary community, the entry into effect of the Second Amendment of the IMF Articles of Agreement is certainly the most significant event of 1978. It marks an important step toward the rebuilding of the international monetary system. But what I find striking and a cause for concern is the continued presence of the problems with which we have been faced for some years: the slowdown in the growth of world economic activity, the persistence of excessive inflation, the massive unemployment, the existence of profound disequilibria in balances of payments, and the continuance of wide disparities in levels of economic development.
I should like today to discuss some of the means that should enable us to progress toward the three main objectives we should set for ourselves: a more sustained and more generalized economic recovery, a better adjustment of international payments, and a more equitable and effective organization of the international economy.
I. Our first objective must be more sustained and more generalized economic growth. This objective, which our country’s economic policy is designed to achieve, calls for immediate concerted action to stimulate economic recovery, coupled with the adaptation of economic structures.
(a) In the last two years the growth of economic activity and world trade has been disappointing. Furthermore, marked disparities have become apparent between the rates of growth of different countries.
This situation poses grave dangers. It could obstruct the continued adaptation of productive structures and loom menacingly over the open system of international trade which has prevailed for more than 30 years and which has been chiefly responsible for the widening of prosperity.
Every effort must therefore be made to bring our economies out of the slow-growth stage they have been in since the energy crisis. The need for broad concerted action has been recognized. Specific commitments have been made to this end; their implementation must be pursued until the desired results are achieved.
This concerted action should be on as wide a scale as possible and geared to the situation of each participant. It seems to me essential that the developing countries be able to join forces with the industrial countries in the endeavor. The industrial countries must help the less developed nations to shake off the constraints that would hinder them from sharing in accelerated growth.
The countries’ roles in this joint effort should be in accordance with the particular economic conditions of each one. In any event, the measures taken in our concerted endeavor must not entail any relaxation of the struggle against inflation wherever it continues to be a threat.
(b) The second comment I should like to make to this meeting concerns the need for a policy of structural adjustment aimed at restoring the conditions for more rapid and enduring economic progress. This effort should be focused on three aspects in particular:
First, the productive apparatus must be adapted to the new circumstances of the world economy. This calls for the development of new activities, especially in the geographical areas most affected by unemployment.
Second, business must be allowed to find the sound financing conditions it requires, which can be done by ensuring an appropriate distribution between wages and self-financing. Such a policy is vital for the lasting recovery of investment.
Finally, we must continue all our efforts to conserve energy and develop new energy sources.
(c) Since March of this year, French economic policy has been formulated in this context and in the light of these needs. I should like to mention briefly some key elements of the active policy to improve basic economic and financial conditions that the French Government has been implementing since September 1976.
The first evaluation of this effort, which can be made today, is positive and encouraging. In 18 months the balance of trade has been restored to equilibrium. We may expect that for 1978 as a whole, the French balance of trade and current payments will be nearly in equilibrium. The year 1979 should show surpluses.
The gradual improvement in the financial situation of France is also reflected in the strength of the franc in foreign exchange markets. This steadiness of the franc has, furthermore, contributed to an appreciable replenishment of our foreign exchange holdings.
This return to equilibrium in the foreign accounts of France was made possible by the efforts made in the last two years to slow the pace of price and wage increases. The success achieved has given us enough leeway to make a significant contribution to the collective endeavor of reviving the international economy and world trade, by allowing a doubling of the 1978 budget deficit.
But it was advisable to go further and to embark on the structural reforms required to foster greater freedom, responsibility, and competition in our country. In this regard, the year 1978 will be noted above all for the total deregulation of industrial prices that has taken place in recent months. It is aimed at restoring to executives full responsibility for management, thereby improving the efficiency of our enterprises.
The French Government has also adopted key fiscal measures aimed at channeling savings into the purchase of corporate stocks.
France has, then, taken a number of important steps to ensure sustained and lasting economic growth and the noninflationary development of our economies in the years ahead. However, these efforts cannot yield their full effect unless progress is made in improving the functioning of the international monetary system.
II. Progress can be made toward improving the international adjustment process if we manage to reduce instability in foreign exchange markets and to improve conditions for the financing of deficits.
(a) Reduction of instability in foreign exchange markets: Since our last meeting, the foreign exchange markets have been disrupted by wide fluctuations, not all of which can be explained solely by the underlying economic conditions. It is now increasingly evident that the system of floating rates is incapable of preventing such erratic movements and that it cannot spontaneously restore balance of payments equilibrium.
Moreover, instability in exchange rates hampers the internal adjustment policies pursued by the deficit countries and creates further risks of spreading inflation and upsetting the stability of economies.
Finally—and this is a matter of grave concern—the sharp and erratic exchange rate fluctuations of recent months have impaired the confidence of economic agents, made all their forecasting extremely hazardous, and led them to adopt a “wait-and-see” attitude. These uncertainties act as a check on investment and are a serious hindrance to growth.
It is not surprising, then, that more and more countries, both industrial and developing, are showing a desire for greater stability and opting for an exchange system in which their currency is pegged either to another currency or to a group of other currencies.
In view of all this, the member states of the European Economic Community undertook last July to strengthen their monetary cooperation. My colleague, Mr. Matthoefer, has described the main features presently envisaged for the mechanism decided upon. I should just like to add here a few remarks of my own.
My first comment is that the sole aim of the system is the establishment, on realistic and durable bases, of a zone of monetary stability in Europe. The EEC scheme will be in accordance with the general purposes and the Articles of Agreement of the International Monetary Fund.
Second, the European monetary system will in itself be complementary to the existing international institutions.
Third, it will be necessary to weave this European monetary system into the pattern of existing exchange relationships. For this reason, the Council of Ministers of Economy and Finance of the EEC has clearly emphasized that the system should not be prejudicial to third currencies. In principle, interventions to limit fluctuations between European currencies will be effected in EEC currencies.
My fourth comment is that this European monetary system, by establishing a zone of monetary stability, should contribute to the recovery of the European economies and to the adjustment of world payments. Within this system, in fact, efforts will be symmetrically shared by deficit countries and surplus countries.
So, by this venture, the member states of the European Economic Community intend to make a positive contribution to the building of a more stable exchange system, one that is more propitious to economic growth, the development of trade, and the adjustment of world payments.
(b) To achieve a better adjustment in international payments, we must not only reduce instability in foreign exchange markets but also improve the conditions for financing balance of payments deficits.
Since last year the world payments situation has shown some noteworthy improvements. Yet substantial payments disequilibria persist. Concerted action should help to improve balance of payments adjustments. However, it will not cause the present disequilibria to disappear overnight. Financing needs will continue to be great, and we must see to it that they can be met in a satisfactory manner.
The International Monetary Fund must, therefore, be capable of playing its full part in assisting countries with temporary balance of payments difficulties. That is why I welcome the agreement we reached yesterday in the Interim Committee; the remarkable alacrity with which it was obtained is an unmistakable sign of our will to cooperate.
This agreement, which reflects a constructive compromise between the concerns of all parties, causes me only one regret: the present basis for SDR allocations, which is solely quotas in the IMF, means that the developing countries receive too small a share. I express this regret in the hope that it will lead to a consideration of political and technical aspects in time for the next meeting.
III. I come now to the third essential task to which we must devote ourselves—that of moving toward the establishment of a new international order.
France regards this as an essential objective, and it was with such an end in mind that we proposed the Conference on International Economic Cooperation. I should like today to discuss three aspects of this endeavor: official development assistance, stabilization of raw materials prices, and the role of the multilateral development institutions, particularly the World Bank Group.
(a) Official development assistance is a matter of overriding concern. The economic growth of the developing countries, and especially that of the poorest among them, depends greatly on the volume of official development assistance.
Recent developments in this regard have been doubly disappointing. For one thing, total official assistance declined in 1976 and 1977. Furthermore, differences in the assistance efforts made by the various countries, instead of narrowing, have tended to widen. For its part, France wishes to affirm its support of the international target of allocating 0.7 per cent of GNP for official development assistance. It is fundamental, in our opinion, that the countries with the highest per capita incomes make a special effort to attain this international objective, and thus guarantee a more equitable sharing of the collective assistance effort.
(b) With regard to stabilization of raw materials prices, it is our sincere hope that the negotiations now in progress for the establishment of a Common Fund and the finalization of commodity agreements will come to a rapid conclusion. . . .
. . . Furthermore, the World Bank might also be called upon, in conjunction with the IMF, to make a medium-term contribution to the problem of shortfalls in export earnings.
These, then, are the general guidelines proposed by the French Government. If they are to be implemented, it will be necessary for each member government to agree to make the necessary efforts in a spirit of solidarity and collective accomplishment.
If we recall the situation that prevailed in 1974 and the gloomy forecasts made at that time, we may take the measure of the progress achieved in the last two or three years. These achievements can be carried further if we persevere in our cooperative effort, overcoming our inevitable differences and searching tenaciously for courses of action and measures that we may undertake together for the common good.
Statement by the Governor of the Fund and the Bank for Korea—Yong Hwan Kim
Our fellow Governors have already expressed their deep concern about the various problems which confront the world economy and have suggested some laudable solutions. For my part, I would like to focus my address today on three specific aspects of world trade and finance which call for priority action from the international economic community at this time. They are worldwide trade protectionism, exchange rate instability, and the pressing need for equitable growth in the developing countries.
Four years after the worldwide resources crisis, unemployment remains widespread and inflation continues to threaten the growth and stability of the world economy. Furthermore, recent forecasts indicate that world economic growth this year will not exceed last year’s unsatisfactory performance, while the prospects for 1979 are similarly unpromising.
In the light of these unfavorable economic conditions, there has been a tendency for many countries to concentrate exclusively on their internal problems without regard for the implications of this shortsighted policy on the world economy as a whole. This tendency has given rise to the so-called new protectionism, characterized by nontariff trade barriers, such as import quotas and voluntary export restraints.
In particular, these nontariff barriers discriminate specifically against the exports of the semi-industrial developing nations, with the effect that the latter are being forced to restrain their own growth in order to sustain uncompetitive industries in countries much richer than themselves.
Let there be no misunderstanding. This increasing protectionism not only contravenes the spirit of the international organizations—not only discriminates specifically against the developing countries—not only slows down the growth of world trade to the detriment of all countries, but also these trade barriers quite simply fail to provide any permanent solutions to the structural and employment problems they are designed to solve. I exhort member nations, therefore, not to let short-term expediency take precedence over long-term good judgment.
Many semi-industrial countries have made rapid progress through an export-oriented economic strategy. In the process, they have provided a model which has inspired many other developing countries. However, if this proliferation of protectionism continues, it will arrest the continued development of these middle-income nations, and inhibit the many countries which aspire to break out of the vicious circle of poverty by following this same pattern of export-led growth. I would also ask the advanced countries to acknowledge that the application of protectionist measures, without prior consultation with the exporting nations, is unnecessarily unfair.
The message is quite clear. All nations must cooperate with one another and coordinate their policies to turn back this tide of protectionism. The failure to do so could lead to consequences reminiscent of the dark experience of the 1930s. In particular, I look to the developed countries to assume a leadership role, because, after all, they share the bulk of world trade. For their part, the semi-industrial developing countries should accelerate their own import liberalization programs and, thereby, not only improve their industrial efficiency but also contribute to world trade expansion.
As you may be aware, my own Government has already taken several important steps in this direction and we intend to pursue this policy in parallel with our economic development. Through close cooperation among all nations, I am confident that we can bring the Multilateral Trade Negotiations which began in 1973 in Tokyo to a successful conclusion.
One of the reasons I have dwelt on the protectionism issue at such length is because its damaging influence on world trade adversely affects the developing countries’ prospects for economic advancement. The unilateral aid and financial cooperation extended to these nations by the advanced countries is, of course, immensely important, and I will be referring to it again shortly. However, the most effective and lasting contribution which the better endowed nations of the world can make to the developing countries is through the vigorous promotion of world trade. It is this which will allow them the dignity of standing on their own feet and of earning the foreign currency they need to pay for their own vital imports.
I turn now to the prevailing instability among the major currencies which continues to plague international finance and business. Clearly, this situation must not be allowed to persist, since the uncertainties associated with monetary instability have a crippling effect on world economic growth. Hand in hand with these exchange rate fluctuations, we have seen the development of an increasingly uneven distribution of international liquidity. The overall improvement of the industrial countries’ balance of payments deficit masks considerable and growing disparities among the individual countries. Furthermore, the external payments difficulties of the non-oil producing developing countries are far from being resolved.
Among the leading economic powers, both the surplus and deficit countries must concert their efforts to find a solution. In addition, the IMF itself must also bear a large share of the responsibility for eliminating the damaging influence of exchange rate fluctuations. In exercising its surveillance function over the international monetary system, in accordance with Article IV of the Articles of Agreement, the IMF must become a more visible and vocal protagonist in the quest for currency stability. However, in order to reflect the special circumstances and specific difficulties of the developing countries, this surveillance should be conducted in a flexible manner.
I also believe we must extend the role of the IMF by supplementing its existing institutional arrangements in certain areas. Specifically, I would like to stress that the rapid conclusion of discussions on such matters as easing the present conditions for drawing upon IMF resources and on extending the use and characteristics of SDRs is absolutely essential. I also look forward to the early implementation of the supplementary financing facility, one of the many outstanding achievements of Mr. Witteveen’s distinguished term of office as Managing Director.
Furthermore, in the light of present circumstances, it is my firm belief that the IMF simply cannot afford to delay its deliberations on the matter of the Seventh General Review of Quotas. In this connection, I am indeed glad that we can count on the leadership of a man of Mr. de Larosière’s wisdom and stature.
In the past, we have devoted much attention to the urgent need for equitable growth in the developing nations through the effective exploitation of their growth potential. We must, nevertheless, face the fact that we have so far failed to achieve significant visible results.
The realization of the economic potential of the less developed member countries is vital for the elimination of absolute poverty from the world. In addition, however, in order to ensure an equitable and balanced pattern of development, the weight of our efforts should be directed to rural development, education and manpower training, economic infrastructure projects, and the expansion of health and social services.
To accomplish these tasks, it is essential that the donor countries make an increasingly large proportion of their gross national product available as official development assistance and that the international financial institutions enlarge their credit facilities. In this respect, I would note the outstanding contribution of the World Bank under the imaginative leadership of Mr. McNamara. In addition, however, I look forward to a further increase in lending and co-financing directed at long-term manpower development and the exploration of natural resources.
In closing, I would again like to stress the need for closer cooperation between nations in the determination of economic strategy and in the resolution of economic problems. Although the recent cooperative efforts of the international organizations and industrial countries have been impressive, and will no doubt contribute to restoring the health of the world economy, much still remains to be done. The adoption of a coordinated strategy for steady noninflationary growth and trade expansion at the Bonn Summit is especially welcome. The IBRD should also be congratulated for producing the World Development Report, 1978, and for its excellent analysis of the world’s economic problems during the period up to 1985. Good resolutions, however, are of no avail unless they are acted upon promptly by all parties concerned. All nations must work together to promote the positive development of the world economy.
Statement by the Governor of the Fund and the Bank for Japan—Tatsuo Murayama
Let me first express our deep appreciation to Mr. Witteveen, the former Managing Director of the Fund. He contributed greatly to the Second Amendment of the Articles of Agreement of the Fund, the creation of the oil facility, and other improvements in the Fund’s credit facilities. I wish also to extend our warm welcome to Mr. de Larosière. I believe the Fund will gain much benefit from his excellent leadership.
The Japanese Economy
Now let me turn to the subject of the Japanese economy—its present conditions and our policy stance.
Thanks to the concerted efforts of our people and sound economic management by the Government, we successfully recovered from the economic difficulties encountered in the autumn of 1973. We quickly overcame the problems of severe inflation and large balance of payments deficits. Since 1976, our economy has been growing at high rates. Our balance of payments has recorded a large surplus since 1977; and, realizing our international responsibility, one of our major national goals has been to promptly correct this imbalance. In order to achieve this goal, we have been carrying out the following policy measures, with major emphasis on reducing the imbalance through the generation of domestic demand.
First, we set our real growth target for the fiscal year 1978 at 7 per cent—exceptionally high among industrial countries—and have been employing expansionary fiscal policies to achieve this target. More precisely, we dared to resort to an extraordinarily large amount of public bond issues equal to almost 10 per cent of GNP, and to increase government expenditures significantly. We have also substantially relaxed our monetary policy and reduced our official discount rate to 3.5 per cent, the lowest level since the end of the war.
Second, we are trying to expand imports by opening up our domestic market further. For this purpose, we have taken such measures as advanced tariff reductions and import quota increases.
Third, we have been encouraging such capital outflows as overseas investments and loans, and yen-denominated bond issues, and have been significantly intensifying our aid efforts.
Fourth, we have been further liberalizing our foreign exchange controls. We are also in the process of preparatory work for changing the present legal framework for controlling foreign exchange transactions from the present system of “banned in principle, free in exceptional cases” into a system of “free in principle, banned in exceptional cases.”
Finally, we have been conducting our foreign exchange market policy in line with the agreed principles of the IMF. I would like to emphasize the critical implication of the recent sharp yen appreciation. The yen has appreciated by about 36 per cent against a basket of currencies of our major trading partners since the last Annual Meeting. Such yen appreciation must eventually bring about a substantial equilibrating effect on our payments position.
As I have explained thus far, Japan has been making maximum efforts for balance of payments adjustment. In view of the growing interdependence of the world economy today, however, corresponding efforts on the part of our trading partners are also called for in order to make our efforts effective.
First, we need monetary stability, particularly the stability of the key currency. The adjustment process normally requires a fairly long time to work itself through, but the exchange market is impatient, and tends to show short-term speculative movements. Such movements could have a damaging effect on business confidence and economic recovery.
Second, price stability in our trading partners’ home markets is called for. If an inflationary trend continues in these markets, our exporters can easily mark up their export prices denominated in foreign currencies. Thus the desired effects of the yen appreciation for the balance of payments adjustment will be substantially curtailed.
Third, we hope that the trading partners will increase their export efforts. They should fully study our market characteristics and distribution system, and adjust their export strategy to suit them.
I will now explain to you the situation of the Japanese economy since the start of this year in the light of the foregoing policies. I am pleased that our economy has recorded a reasonably solid growth for the first half of 1978 mainly through domestic demand expansion—which accelerated from an annual rate of 7.4 per cent in the first quarter to 9.5 per cent in the second quarter, owing mainly to increased public investments. On the other hand, the current external surplus decreased substantially because of a significant fall in exports. The export volume started to show a decline last April—5.8 per cent below April last year— and a further decline in recent months. On the other hand, the import volume recorded a 5.3 per cent increase last April over the same month last year, and has been gradually increasing since. The import value of manufactured products has recently shown a remarkable increase. Although these changes in trade volume have not yet been fully reflected in our trade balance on account of the reversed J-curve effect, we expect their full effects to take place in the coming months.
Finally, we have been recording long-term capital outflows at the rate a little above $1 billion per month since last April. We expect this trend to continue. Thus, the effect of the policy measures which we took this year is gradually emerging.
On September 2, the Government decided upon a package of additional economic measures. The major component of this package is an additional public investment program totaling about 2.5 trillion yen. The package also includes other measures to stimulate domestic demand, promote imports, and expand our aid program. We expect that this package of stimuli will push up GNP by about 1.3 per cent, and will further ensure the achievement of our growth target for this fiscal year.
The World Economy and the Balance of Payments Adjustment Process
Now, let me present my views on the world economy and the balance of payments adjustment process. I am pleased to note that many countries have shown a significantly improved performance in economic growth, price stability, and balance of payments. Particularly encouraging are the achievements in these areas by several deficit countries which took proper adjustment measures. However, there are still some major problems left.
First, we can observe some disturbing signs of renewed inflationary pressures in several countries.
Second, in many countries, business investment, housing construction, and private consumption have not fully recovered; thus their governments are forced to resort to a substantial deficit financing to stimulate their economies.
Third, the employment situation has not improved in many countries, and, against this background, the pressure for protectionism remains very strong.
Fourth, we have witnessed erratic and excessive fluctuations in exchange rates before the adjustment process works itself through. Monetary instability has been detrimental to the steady recovery of the world economy. It has also made economic management in developing countries more difficult.
I believe that the points just indicated imply that stimulative measures by a few surplus countries and exchange rate changes alone cannot solve our present problems; they should be supplemented by other adjustment measures. Therefore, I believe that it is necessary for all of us to jointly implement the following strategy.
First, economic discipline is called for on the part of deficit countries; they should intensify their fight against inflation, reduce their oil imports, and promote their exports. At the same time, countries less constrained by their balance of payments position and inflationary pressures should pursue higher economic growth without rekindling inflation.
Second, we should strengthen business confidence and revitalize the private sector. For this purpose, we should enhance our efforts to solve energy problems, expand our activities to develop new technology, and expedite structural changes of our economies.
Third, we should cooperate with each other to maintain and strengthen the open trade system. In this regard, the successful conclusion of the Multilateral Trade Negotiations within this year is crucial.
Fourth, along with the foregoing efforts in the area of economic fundamentals, we should, together with the IMF, intensify our joint efforts to maintain monetary stability.
Based on such perception of the present situation of the world economy as I have stated so far, I would like to make some observations on the international monetary system.
Given the present situation of the world economy, we are bound to live with the floating exchange rate system. We need, however, to improve its working to secure greater stability in the exchange market. To this end, IMF surveillance under the new Articles should be carried out in a fair and proper way. At the same time, our monetary authorities should further intensify consultation and coordination in such areas as monetary and intervention policies. In this context, I highly appreciate the series of actions recently taken by the U.S. Government for the defense of the dollar. I sincerely hope and believe that there will be further cooperative efforts along this line.
It remains vividly in our memory that the Second Amendment of the Articles of Agreement was effected to make the minimum changes necessary to cope with the difficult economic situation after the autumn of 1973.
After several years, since the floating exchange rate system became a fact of life, we have now become keenly aware that the problems inherent in the system cannot be overlooked. In my judgment, therefore, along with the improvement in its operation, we need to intensify our search for a more stable international monetary system on the basis of our past studies and accumulated experience. The IMF would, I believe, guide us as our able pilot in our efforts both to improve the operation of the current system and to search for a more stable system.
The cooperative spirit among member countries enabled us to reach a basic agreement on the Seventh General Review of Quotas and a package of proposals on SDRs at yesterday’s meeting of the Interim Committee. The successful conclusion of the Seventh Quota Review will, I believe, contribute to the strengthening of the foundation of the IMF and a more effective working of the balance of payments adjustment process. We strongly feel that there should be fair and equitable quota adjustments at the Eighth General Quota Review. The agreed package of proposals on SDRs, including a modest allocation and an increase in the SDR interest rate, is fully in line with the stated objective of the Articles to make the SDR a principal reserve asset in the international monetary system.
I should like to express my views on development assistance. The persisting unfavorable conditions of the world economy have had particularly serious impacts on developing countries. Japan, as a country of Asia where more than a half of the population of the developing world lives, has deepened its understanding of the problems of the developing countries through its experience in that region. The takeoff of developing countries will not succeed without aspiration and efforts for economic development by their own people. At the same time it also requires further expansion of development aid by industrial countries.
Our Government recently announced its intention, based on this belief, to double its official development assistance within three years ending in 1980.
Difficult conditions prevailing in poorer developing countries deserve special consideration. In accordance with the international resolution on debt relief for these countries adopted in March, 1978, we decided to take the following policy measures.
We will extend new, untied grant aid equivalent, in principle, to (a) annual debt service payments, in the case of the least developed countries, and (b) a part of annual interest payments in the case of the most seriously affected countries. We have already incorporated this fiscal year’s requirements into our supplementary budget.
These measures will cover about 20 countries, including 11 of the least developed countries, and the maximum total cost is estimated at about $1.2 billion. . . .
It is vitally important for developing countries to start raising funds by themselves in the world capital markets. The Tokyo market’s recent contributions in this field are remarkable. Especially this year, partly helped by favorable market conditions, the yen-denominated bond issues by developing countries have rapidly increased. They have already recorded about $1.1 billion, more than twice last year’s actual figures.
In recent years, we all have tended to look at economic situations and our ability to manage our economies with overly pessimistic eyes; this, I am afraid, can have an adverse impact on business confidence. Actually, we should rather be encouraged by the fact that our sound economic management and our concerted actions are gradually showing their full effects, and that the world economy is beginning to show signs of recovery. What is most called for today is to regain confidence in ourselves, and to further intensify our concerted efforts. This is why we in Japan are doing our best in reducing our balance of payments imbalance and in expanding our development assistance.
I am looking forward to seeing you all again next year in world economic conditions that have been further improved through our joint efforts.
Statement by the Governor of the Bank for Yugoslavia—Petar Kostić
This is the fourth consecutive year that the world economic situation has been burdened by slow and uneven growth, high unemployment, inflation, large payments imbalances, and instability in foreign exchange markets. Clearly we are not faced with temporary difficulties of a cyclical nature, but with deeper structural problems in the world economy. It is regrettable that differences in the appraisal of the nature of these problems and in the approach to their solution have not yet been overcome.
The basic feature of the situation is, in our view, that the existing system of international economic relations has become inadequate and inconsistent with the requirements of the world today, with the aspirations of a great number of countries for an accelerated growth through equitable cooperation.
The present economic situation, unfavorable for all countries, exerts particularly serious negative effects on developing countries. They have all experienced severe deterioration in their terms of trade. The most seriously affected were the least developed among them, which due to the relative weakening of official development aid efforts by a large number of developed countries, had to slow down their development and suffer even greater poverty. The more developed of the developing countries continued to expand their economic activities, but at the cost of heavy external borrowing. By the import demand thus expended, they reduced the severity of recession in the world economy. Today, however, they find themselves in the extremely difficult position of carrying a heavy debt burden incurred because of unfavorable market terms, and of rising protectionism against their exports by the markets of developed countries. If such a situation were to continue it would pose a threat of even greater disturbances. Therefore, extension of development finance on more favorable terms and a reduction in protectionism are in the best interests of the world economy as a whole, and also of the developed countries.
Allow me to refer to the role and activities of our organizations in this situation.
A very short time has elapsed since the coming into effect of the Second Amendment of the Articles of Agreement, and the Fund has not yet been able to implement all the new prerogatives in practice. Nevertheless, it should be remembered that when the compromise agreement was adopted it was clear that it fell short of effecting the changes necessary for a stable international monetary system.
The amendment has set a goal to attain a balanced economic growth together with satisfactory price stability as a way of reaching a stable exchange rate system. However, the IMF is not yet equipped with effective instruments to achieve this goal. The balance of payments adjustment process is still asymmetrical, with the pressure to adjust concentrated more on deficit countries than on the reserve-currency country. Neither the effective means to create conditions for more stable exchange rates, nor the mechanism for the intervention system applicable to all member countries, have been agreed upon.
Another goal set by the amendment is to establish control over the creation of international liquidity and to make the SDR the principal reserve asset of the international monetary system. Again, the IMF was not empowered with specific authority in this respect, and the growth of international liquidity in the form of reserve currency remains uncontrolled.
It is in the interest of the whole international community, and not only of smaller and developing countries, that the IMF initiates the resumption of negotiations on a broadly based reform of the international monetary system. Otherwise, the accumulated problems in this sphere will cause a growing tension and give rise to solutions within smaller monetary blocks, which in the world of interdependence cannot be optimal for wider international monetary cooperation.
This presents a challenging task for the IMF and the Managing Director, Mr. de Larosière, to whom I wish all success in his new post.
The achieved consensus on the new allocation of SDRs is a step in the right direction. However, we consider that the amount agreed upon is below the level appropriate for a meaningful progress toward making SDRs the principal international reserve asset.
The agreed increase in the IMF quotas is the minimum that we could agree to. We regret that this opportunity has not been used to initiate a process of raising the share of developing countries in the IMF quotas.
We are of the view that the actual role of the IMF in the balance of payments adjustment process depends on the manner in which the conditionality for the use of its resources is implemented. Therefore, we strongly support the proposal of the Group of 24 that appropriate guidelines and other institutional procedures be established. These should be conducive to the elimination of arbitrariness in the implementation of conditionality, and to ensuring that financial programs for the balance of payments adjustment be more supportive of long-term development efforts of the countries using the Fund’s resources.
The valuable World Bank study, World Development Report, 1978, reveals the unfavorable economic environment for the developing countries and a multitude of problems that they face. The prospects for developing countries, especially for those least developed, with its implications on the world economy as a whole, cause our deep concern.
The unsatisfactory attitude of the majority of developed countries toward the transfer of resources provokes a great deal of anxiety.
Official development assistance continuously declines in relative terms. Instead of reaching an internationally set target of 0.7 per cent of GNP for developed countries by 1980, it declined from 0.34 per cent in 1970 to 0.31 per cent in 1977. At the same time, due to the deterioration in the terms of trade of developing countries and the reduction of opportunities for their exports to developed countries, export receipts of developing countries are depressed, their indebtedness is growing rapidly, and debt servicing presents a growing burden on their resources and available foreign exchange. All this adversely affects development prospects and the international economy.
This is why we urge measures conducive to a substantial increase in the transfer of real resources through bilateral as well as multilateral channels.
A major increase in official development assistance is primarily expected from the largest donor countries which fall behind in the implementation of internationally set targets. . . .
We expect the Development Committee to be more active in devising ways and means to improve the access of developing countries to long-term capital markets. International finance institutions can assist in the process through the promotion of different forms of cofinancing, and supporting other schemes for cooperation in development financing. . . .
Yet experience has taught us that the transfer of financial resources alone cannot ensure satisfactory results if it is not accompanied by a fuller activation of domestic economic resources of developing countries.
Hence, my country attaches great importance to the establishment of the commodity fund as an instrument for the improvement and stabilization of the terms of trade for raw material exporting countries, as well as to the substantial improvement for developing countries in international trade through the current Multilateral Trade Negotiations. Along the same lines, we see an important role for improved compensatory financing.
The world remains in need of the establishment of a new, more equitable, universal financial and monetary system which would decisively contribute to the termination of excessive fluctuations in exchange rates and of uncontrolled growth in international liquidity and inflation, which would ensure equality between developed and developing countries in the decision-making process, and which would be more adequate to the financial needs of developing countries.
We expect that the recognition of the interdependence of all countries in solving the problems of the world economy should be translated into specific measures for accelerating development and a more comprehensive integration of developing countries in the world economy. The carrying out of this objective implies a more determined effort of the international community in the transformation of the existing system and the establishment of a new system of international economic relations that would effectively improve the position of developing countries in world production, trade, and finance. Special responsibility rests with the most economically advanced countries, which, to date, have not demonstrated the necessary willingness to transform existing international economic relations.
In conclusion, may I emphasize that my observations and suggestions reflect the wish of my Government that our financial institutions even more effectively play the important role which they have in present international economic relations. We are confident that with the full support of all of us they will be capable of adjusting themselves to the rapidly changing world of today.
We believe that we shall be able to note a meaningful progress in the implementation of our conclusions by the time we meet in Belgrade next year. In referring to our next Annual Meetings, Mr. Chairman, I wish to assure you of the warm welcome that will be accorded to this assembly in Belgrade.
Statement by the Governor of the Bank for Austria—Hannes Androsch
I wish to join my fellow speakers in welcoming the Governors of Maldives, Suriname, and the Solomon Islands to our community. I am also very glad to greet Mr. de Larosière as the new Managing Director of the Fund and to extend to him our warm good wishes for the performance of his difficult task. Also, I should like to express my gratitude to the Government of the United States for the hospitality offered to us and my appreciation of President Carter’s inspiring address.
Analyzing the present economic situation we have to admit that only little progress has been achieved since our last year’s meetings. Economic performance has continued to differ widely—not only among industrial countries—with inflation rates ranging from almost zero to double digit figures, real growth between 1½ and 6 per cent, still far too high external imbalances and, above all, an intolerably large number of unemployed.
However, trends in jobless rates in industrial countries are showing significant differences that can be mainly attributed to cyclical factors. Although taking into account the difficulty of the task and realizing that some progress has been achieved, I cannot but observe that for the past five years we have expressed our concern about the adverse economic developments, yet the situation has not improved, either in the industrial or in the developing world. The existing unemployment, especially, is not only a deplorable waste of resources, but above all, it deprives millions of people of basic human rights. As a consequence, we have to face a serious threat to our political institutions from those who rightly do not feel themselves properly represented within this system.
It is very probable that serious mistakes in the political and economic decision making have added to, if not caused, the difficulties we have been experiencing since the increase in the oil price.
In addition, misconceptions about the usefulness and scope of certain instruments have also contributed to it. In this context, we have to recognize the limited effects of global fiscal policies, especially in view of the fact that the disaggregated entities such as costs, prices, and profits do no longer correlate to each other. Politically speaking, historical evidence leads to the assumption that the lack of convincing leadership may also have had its share in the present situation. I am, therefore, particularly glad about the unanimous political decisions reached in the Interim Committee on Sunday. They not only are important for the international community per se but constitute an important follow-up to the decisions reached in Bremen and Bonn.
The 50 per cent quota increase will put the Fund into a better situation to help to finance the large external deficits that could very well stay with us for the foreseeable future. The decision to allocate 4 billion SDRs per year over the next three years will, together with the adoption of the 80/90 formula, certainly add to the attractiveness of this reserve asset and therefore help to strengthen the Fund’s position. I would like to express the hope of a small member country that the Fund might be able to play a more determined stabilizing role in international monetary affairs, on the basis of its amended Articles of Agreement. The test of the Fund’s ability to cope with the present problems will be whether it can exert its authority not only vis-à-vis the smaller member countries but whether it will also be able to induce countries, whose currencies play a dominant role in the world monetary system, to live up to their international responsibilities.
Of great interest and importance will be the application of Article IV, which entrusts the Fund with the surveillance of members’ exchange rate policies. This is a matter of considerable delicacy and one has to bear in mind that the adjustment process is an extremely complex phenomenon. Exchange rate changes are only one possible means of adjustment and not necessarily the most important one. The most appropriate policy mix will be determined by the specific social, economic, and political institutions of the country concerned. An abstract doctrinal approach might prove counterproductive.
Speaking about my own country’s economic performance, I may say that developments—not only since last year—have not been unsuccessful. Although last year’s forecast for the economy in 1978 was not encouraging, by the end of the year we shall, in fact, have achieved considerable improvements in nearly every respect: The growth of GNP in real terms will be about 2 per cent, employment has reached the record high of 2.8 million, with a constantly low rate of joblessness of 2.1 per cent and, what seems to me of utmost importance, with complete absence of youth unemployment. Inflation rate is down at 3.5 per cent and the prospects for 1979 do not look any worse.
In 1977, the external imbalance, which had occurred after successfully fighting recession, certainly constituted Austria’s most urgent problem, stemming mainly from two factors: (1) geopolitically, Austria is located in the periphery of both the Western industrial countries as well as the Comecon states, and (2) unlike most of the industrial countries within the OECD, Austria’s economic policy has been primarily aimed at maintaining full employment. Thus, my country’s internal demand has been quite strong over the past years. This trend was aggravated by the fact that foreign producers stepped up their efforts to sell their goods on Austrian markets to offset losses they suffered from weak demand in their own countries. This buoyant Austrian demand contributed to the international economic recovery without having an adequate increase in exports of goods and services.
Trade figures for the first seven months of this year tend to indicate that at the end of 1977, not least because of far-reaching measures to influence the underlying economic conditions, the downward trend in our external balance may have been reversed. In terms of volume, exports are up by 8 per cent, compared with 4 per cent on an international average. Thus we are confident that we shall be able to reduce our trade deficit by one fifth and the current account deficit by almost two thirds.
In view of this development, we must not overlook the fact that Austria’s monetary policy has been directed to maintain the schilling as a strong currency. The results can now be seen in a low inflation rate, structural changes, and, therefore, a satisfactory export performance.
Thus, Austria welcomes and supports the recent efforts of the large European countries to create a European monetary system which, in fact, will bring greater exchange rate stability for the whole region. This will be an important step toward establishing sounder economic conditions in Europe. Austria is prepared to play its appropriate role under such a system.
Austria’s satisfactory national economic and political development is clearly reflected in its contributions to the needy nations. It is in this context that the growing interdependence of industrial and developing countries calls for more and better cooperation rather than purely financial aid. . . .
Austria is greatly interested in the new plans to combat mass poverty and economic stagnation in many parts of the developing world. We are aware of the fact that an increased net transfer will alleviate the debt burden of the most needy developing countries. Preparations for debt reductions of three such countries are currently under way in Austria. Developed countries are expected to augment their official development assistance. This is also the intention of Austria. Between 1976 and 1977 Austria’s official development assistance has been increased by 100 per cent to $117.8 million (0.24 per cent of GNP), raising total aid (official development assistance and private aid) to 1.04 per cent of our GNP.
First priority should be given to the objective of meeting the basic human needs, i.e., to create new jobs, provide adequate food, decent housing, and medical care. This would require an improved infrastructure with priority given to rural areas, as well as to the development and application of appropriate technologies.
My country also takes great interest in the negotiations concerning a new Fund for Economic Cooperation and Structural Improvement and has made several proposals in this connection. We are confident that the group of outstanding experts under the distinguished chairmanship of Mr. Willy Brandt will give a new impetus to our efforts for more effective cooperation in international development activities.
It is in this context that we come to realize and accept that today’s problems of global interdependence require joint action and can by no means be solved through nationally isolated actions or policies alone.
A number of factors have been leading to growing unemployment in the industrial countries and continuing mass poverty in the developing world. Such factors are in the field of energy consumption as well as production, rising protectionism, unstable and/or erratic exchange rate changes, and external disequilibria. Consequently, the international community cannot but opt for concerted actions to alleviate these unsatisfactory situations. Success will not come easily and time will be needed to implement promising measures. But the problems we are confronted with are not imposed on us by some supernatural forces. They are man-made, hence lending themselves to and requiring common and concerted rational actions under a determined leadership. In this field, the IMF and the World Bank should continue to play a decisive and leading role.